-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UtvJNwTaAsLoZZloPspWRkbULuNYm22PH8qhfvcm6OXRUn1ssqd8JjuF2q/mqD+Q nRfvbZfkViPVhp8a50MMkw== 0000950135-97-001447.txt : 19970401 0000950135-97-001447.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950135-97-001447 CONFORMED SUBMISSION TYPE: 10-K CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AU BON PAIN CO INC CENTRAL INDEX KEY: 0000724606 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 042723701 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19253 FILM NUMBER: 00000000 BUSINESS ADDRESS: STREET 1: 19 FID KENNEDY AVE CITY: BOSTON STATE: MA ZIP: 02210 BUSINESS PHONE: 6174232100 MAIL ADDRESS: STREET 1: 19 FID KENNEDY AVE CITY: BOSTON STATE: MA ZIP: 02210 10-K 1 AU BON PAIN CO., INC. 1 This document is a copy of the Form 10-K filed on March 31, 1997 pursuant to a Rule 201 temporary hardship exemption. SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 --------------------- FORM 10-K (Mark one) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee required) For the fiscal year ended December 28, 1996, or [ ] Transition report pursuant to Section 13 or l5(d) of the Securities Exchange Act of 1934 (No fee required) For the transition period from ______ to ______ Commission file number 0-19253 ------- AU BON PAIN CO., INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 04-2723701 - -------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 19 FID KENNEDY AVENUE, BOSTON, MA 02210 - --------------------------------------- ---------- (Address of principal executive offices) (Zip code) (617) 423-2100 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK, $.0001 PAR VALUE -------------------------------------- (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- 2 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K Aggregate market value of the registrant's voting stock held by non-affiliates as of March 17, 1997: Class A Common Stock, $.0001 par value: $64,339,241. Number of shares outstanding of each of the registrant's classes of common stock, as of March 17, 1997: Class A Common Stock, $.0001 par value: 10,092,430 shares, Class B Common Stock, $.0001 par value: 1,632,947 shares. DOCUMENTS INCORPORATED BY REFERENCE: The registrant's definitive proxy statement for its Annual Meeting of Stockholders, to be held on June 12, 1997, which will be filed with the Commission on or before April 27, 1997, is incorporated by reference in response to Part III, Items 10, 11, 12 and 13; and certain exhibits to the registrant's Form S-1 Registration Statement (File No. 33-453219), Form S-l Registration Statement (File No. 33-40153), annual reports on Form 10-K for the fiscal years ended December 30, 1995 and December 28, 1996 and Form 8-K filed December 22, 1993, are incorporated by reference in response to Part IV, Item 14. 2 3 PART I ITEM 1. BUSINESS GENERAL Au Bon Pain Co., Inc. ("Au Bon Pain" or the "Company") was formed in March 1981 with three Boston area bakeries and one cookie store serving croissants, breads and cookies. As of December 28, 1996, the Company had grown to 231 Company-operated and 58 franchised bakery cafes operating under two concepts: Au Bon Pain, with 177 Company-operated and 48 franchise-operated bakery cafes, and Saint Louis Bread Company ("SLB"), with 54 Company-operated and 10 franchise-operated bakery cafes. Both concepts specialize in high quality food for breakfast and lunch, including fresh baked goods, made-to-order sandwiches on freshly baked breads, soups, salads, custom roasted coffees, and other cafe beverages. The Company's bakery cafes are principally located in Boston, other New England cities, New York City, Philadelphia, Pittsburgh, Washington, D.C., Columbus, Cleveland, Cincinnati, St. Louis, Atlanta, Chicago, Minneapolis, Los Angeles and Santiago, Chile. Systemwide sales, which include Company-operated and franchised restaurant sales, were approximately $259 million for the fiscal year ended December 28, 1996. CONCEPT AND STRATEGY Target customers of Au Bon Pain and SLB include urban office employees, suburban dwellers, shoppers, travelers, students and other adults who are time sensitive, yet desire a higher quality breakfast and lunch experience than is typically found at quick service restaurants. The Company's menu is focused on foods in the following categories: fresh baked goods, made-to-order sandwiches on freshly baked breads, soups, salads, custom roasted coffees and cafe beverages. The Company's strategy is to create distinctive food offerings at reasonable prices within these categories which are fresher, of higher quality and of greater variety than those offered by its competitors. In addition, the Company believes its operational excellence, speed of service and convenient locations further differentiate the Company from its competitors. Average revenue per Company-operated bakery cafe open for the full fiscal year ended December 28, 1996 was approximately $940,000 for the Au Bon Pain concept and approximately $1,096,000 for the SLB concept. The Company believes that excellence in execution is a key to success in the restaurant industry. The distinctive nature of the Company's menu offerings, the quality of its restaurant operations, the Company's high quality cafe design and the prime locations of its cafes are integral to the Company's success. The Company's 3 4 operating strategy is to increase overall sales by offering new products that will expand the current business and increase afternoon sales, and by continuing to expand in opening new bakery cafes of both concepts in existing and new markets on both Company-operated and franchise bases and to increase sales in existing bakery cafes through the continued introduction and promotion of distinctive, high quality menu items. MENU The menus of both concepts provide customers with popular food items which the Company believes are fresher, of higher quality and in greater variety than those offered by its competitors. The key menu groups are fresh baked goods, made-to-order sandwiches, soups and cafe beverages. Included within these menu groups are: a variety of freshly baked bagels, croissants, muffins, scones, breads, rolls and sweet goods; sandwiches made-to-order with specialty cheeses, smoked meats, roast beef, hot grilled chicken, albacore tuna and white meat chicken salads; hearty soups; custom roasted coffees and cafe beverages such as espresso and cappuccino. A primary difference in menu between the two concepts is the significant emphasis within the SLB concept on sophisticated European and sourdough breads. The Company regularly reviews and revises its menu offerings to satisfy changing customer preferences. New menu items are developed in corporate test kitchens and then introduced in a limited number of the Company's bakery cafes to determine customer response and verify that preparation and operating procedures maintain consistency, high quality standards and profitability. If successful, they are introduced in all Au Bon Pain and/or SLB bakery cafes. Under the terms of an agreement with Peet's Coffees and Teas, Inc. of Emeryville, CA, a gourmet coffee roaster, the Company offers fresh coffee beans and prepared brews in substantially all of the Company's Au Bon Pain and Saint Louis Bread locations. MARKETING The Company believes it competes on the basis of quality food and service rather than price. Pricing is structured so that customers perceive good value at both Au Bon Pain and Saint Louis Bread (high quality food at reasonable prices). The average customer purchase is approximately $3.06 at Au Bon Pain and $4.98 at SLB. Breakfast and lunch checks typically average $2.05 and $4.23, respectively, at Au Bon Pain and $3.41 and $5.80, respectively, at SLB. The Company attempts to increase its sales through menu 4 5 development, promotions and by sponsorship of local community charitable events. To date, the Company has not advertised extensively; rather, it relies on word of mouth, customer satisfaction and promotional programs to encourage trial by new customers and to make existing customers aware of new menu offerings. CATERING Au Bon Pain operates a catering program which offers a select group of delivered breakfast and luncheon food items appropriate for on-site consumption at corporate functions. Customers place orders by toll-free telephone with trained customer service representatives at the Company's Boston headquarters. Orders are immediately routed utilizing a computerized delivery support system to the most appropriate bakery cafe for preparation and delivery. In 1996, catering sales represented approximately 5.7% of the Au Bon Pain Company-operated restaurant sales. At present, SLB does not offer catering services. With the predominance of SLB cafes in suburban locations, the Company believes that the potential to develop significant catering business at SLB is lower than at Au Bon Pain. SITE SELECTION For both concepts, the Company seeks convenient locations in high-visibility, high-traffic, densely populated areas which are easily accessible to their respective target customers. The Company also operates in regional shopping malls, transportation centers, universities and hospitals. Examples of bakery cafe locations include Copley Place, Brigham and Women's Hospital, South Station and Harvard Business School in Boston; the Empire State Building and World Financial Center in New York City; Commerce Square in Philadelphia; the Pittsburgh Airport in Pittsburgh; 2000 Pennsylvania Avenue in Washington, D.C.; the Merchandise Mart and 200 West Adams in Chicago; the Galleria Mall in St. Louis; Lenox Mall in Atlanta and the Santiago Airport in Santiago, Chile. The Company believes that its menu, history of quality retail operations and bakery cafe designs enable the Company to access locations which may not be available to traditional quick service restaurants. The Company is able to cluster its Au Bon Pain bakery cafes within well defined urban markets, with minimal cannibalization of existing restaurant sales because each location typically draws the majority of its customers from within a two block radius. Clustering bakery cafes increases name recognition and provides significant operational and marketing efficiencies. In 1996, the Company opened a total of 3 Au Bon Pain bakery cafes, all in its 5 6 existing markets. The Company's Au Bon Pain franchisees also opened 12 new bakery cafes domestically and in Chile, the Philippines and Indonesia. During 1996, the Company expanded the number of Company-operated SLB bakery cafes by two to 54 locations. The two SLB franchisees expanded from four to five locations in the Springfield market and four to five locations in the Kansas City, Missouri market. In addition, the Company began a broad-based domestic franchising program in 1996 for the SLB concept. The first new franchise operated cafe under the new program will open in 1997. Both bakery cafe concepts rely on a substantial volume of repeat business. In evaluating a potential location, the Company studies the surrounding market, obtaining information and/or demographics within that area on quick service breakfast or lunch competitors. Management evaluates the Company's ability to establish a dominant presence within that area, in order to create entry barriers to other bakery cafe competitors. Based on this information, sales and return on investment are projected. In the bakery cafe design for both concepts, the Company uses sophisticated fixtures and materials. The design visually reinforces the distinctive difference between the Company's bakery cafes and other quick service restaurants serving breakfast and lunch. Many of the Company's restaurants also feature outdoor cafe seating. The current estimated construction and equipment costs for a typical Au Bon Pain bakery cafe outside of New York City are approximately $425,000 before any landlord construction allowance. The estimated construction and equipment cost for a typical Au Bon Pain bakery cafe in New York City is approximately $830,000 before any landlord construction allowance. The current estimated construction and equipment cost for a typical SLB bakery cafe is approximately $550,000 before any landlord allowance. The average bakery cafe size ranges between 2,500 and 3,500 square feet. Currently, all bakery cafes, including franchises, are in leased premises. Lease terms are typically ten years with one or two five-year renewal options periods thereafter. Leases typically have a minimum base occupancy charge, charges for a proportionate share of building operating expenses and real estate taxes, and contingent percentage rent based on sales above a stipulated sales level. PRODUCTION During 1996, the Company completed construction of its $9 million state of the art production facility in Mexico, MO. The new facility is 80,000 square feet and increases capacity three-fold from the 6 7 level at the production facility in South Boston. Frozen dough products are now produced at both facilities and are then distributed to Company-operated bakery cafes and franchised operations for baking. Baked goods prepared from the plant's frozen dough products represent approximately 30% of the Au Bon Pain business unit's total bakery cafe sales and approximately 20% of the SLB business unit's total bakery cafe sales. There are currently 152 employees at the plant in Mexico, MO. The centralized frozen dough production process provides economies of scale in both production and ingredients purchasing. This process enables the bakery cafes to offer consistently high quality, fresh baked goods throughout the day. Finally, centralized production allows the Company to expand its bakery cafe operations without dependence on highly skilled bakers at each location. At start-up, costs to bring the production facility on line decreased manufacturing margins, but margins began to increase toward their historic levels at the end of the year. In order to maintain the high quality of its bakery products, the Company maintains tight specifications for its ingredients. The Company is not dependent on any one supplier for its ingredients. Product consistency is ensured by inspection at critical flow points by quality assurance employees. Product sampling occurs both on the factory floor and in a test laboratory to ensure that products are consistent with the Company's high standards. Of the Company's 50 Boston-area Au Bon Pain bakery cafes, 32 are supported by a central commissary used for baking and for preparing meat and other menu items which are then delivered to these bakery cafes. These bakery cafes offer the same menu and customer experience as the Company's other Au Bon Pain bakery cafes, but have limited on-site baking capabilities. Each of the Company's SLB bakery cafes is supported by a regional commissary which daily provides principally various unbaked sourdough products for baking and sale within the SLB bakery cafes. MANAGEMENT INFORMATION SYSTEMS Each Company-operated bakery cafe has computerized cash registers to collect point-of-sale transaction data which are used to generate pertinent marketing information, including product mix and average check. All product prices are programmed into the system from the Company's corporate office. The Company's in-store personal computer-based management support system is designed to assist in labor scheduling and food cost management, to provide corporate and retail operations management quick access to retail data and to reduce managers' 7 8 administrative time. The system supplies sales, bank deposit and variance data to the Company's accounting department in Boston on a daily basis, with which the Company generates weekly consolidated reports regarding sales and other key elements, as well as detailed profit and loss statements for each bakery cafe every four weeks. Additionally, the Company monitors the average check, customer count, product mix and other sales trends. DISTRIBUTION The Company currently utilizes an independent distributor to distribute frozen dough products and other materials to Company-operated Au Bon Pain and SLB bakery cafes. By contracting with an independent distributor, the Company has been able to eliminate investment in distribution systems and to focus its managerial and financial resources on its retail operations. The distributor picks up frozen dough products throughout the week from the Company plants. Virtually all other supplies for retail operations, including paper goods, coffee and small-wares, are contracted for by the Company and delivered by the vendors to the distributor for delivery to the bakery cafes. The individual bakery cafes order directly from the distributor two to three times a week. Franchised bakery cafes operate under individual contracts with either the Company's distributors or other regional distributors. The Company's main commodities are coffee, flour and butter. The Company monitors current and future prices and availability of primary commodities in order to minimize the impact of price increases and shortages of supply. On a limited basis, when market conditions are advantageous, the Company may contract to purchase its main commodities for future delivery. All essential food and beverage products are available, or on short notice can be made available, from alternative qualified suppliers. JOINT VENTURES The Company currently operates 15 Au Bon Pain bakery cafes in New York City which are owned under a joint venture agreement between the Company and an independent investor group. Under the terms of this agreement, the Company has an obligation to offer the group up to 49% of the equity in each bakery cafe opened in the metropolitan tri-state area of New York City (New York City, Long Island, Westchester County (NY), Bergen County (NJ), and Fairfield County (CT)). The equity participation percentage is based on the cost of the initial construction upon opening of the bakery cafe. This equity percentage is fixed prior to the date of the respective bakery cafe openings. The group has no obligation to participate in 8 9 any bakery cafe, and the percentage participation must be elected by the group prior to the opening of the bakery cafe. Each joint venture bakery cafe must purchase all of its frozen dough products from the Company and is operated by the Company under a management agreement under which the Company receives a management fee of 6% of sales of each joint venture bakery cafe. The Company has agreed to provide a guaranty to one or more institutional lenders acceptable to the Company to assist the group in financing its acquisition of up to 5% of the equity in new bakery cafes opened after January 1, 1993. As of December 28, 1996, approximately $115,732 is outstanding under this arrangement. The Company also has a 75% interest in Pain Francais, Inc., which owns the bakery cafe located in the GE Building at Rockefeller Center, New York. The other 25% is held by the same joint venture partner. This bakery cafe operates under a management agreement similar to the agreement under which the joint venture bakery cafes are operated. ACQUISITIONS ABP MIDWEST, INC. On April 8, 1994, the Company acquired substantially all of the assets of its Midwestern franchisee, ABP Midwest, Inc. ("ABP Midwest"), which operated 19 franchised Au Bon Pain bakery cafes in Chicago and Minneapolis/St. Paul. The Company acquired approximately $4.8 million of ABP Midwest's assets and assumed approximately $2.8 million of ABP Midwest's liabilities in consideration for the issuance to ABP Midwest of 370,000 shares of the Company's Class A Common Stock, 20,000 shares of the Company's Class B Preferred Stock (Series 1) and $250,000 in cash, valued in total at $12.5 million. The shares of Class B Preferred Stock (Series 1) have the same rights and preferences as the Company's Class A Common Stock except that they are non-voting shares, and automatically converted to Class A Common Stock on January 1, 1996. Immediately following the acquisition, one of the acquired Chicago locations was closed by the Company. SAINT LOUIS BREAD COMPANY On December 22, 1993, the Company acquired substantially all of the assets of SLB for $24 million and expenses of $751,000, plus assumption of certain liabilities totaling $3.5 million. SLB owned and operated 19 suburban bakery cafes in the greater St. Louis area. The Company has expanded the number of SLB bakery cafes from the 19 locations existing at the date of acquisition to 54 Company-operated locations in principally the suburban St. Louis, Atlanta and Chicago markets. The Company's growth strategy for SLB is to continue to 9 10 expand SLB in suburban locations in existing markets and to explore opportunities to enter new markets elsewhere in the United States through Company owned units and a broad based domestic franchise program. SLB bakery cafes open for the full 12 month period ended December 28, 1996, averaged approximately $1,096,000 in revenues per unit. The current estimated average cost of construction and equipment for a new SLB bakery cafe is approximately $550,000 for the typical store of approximately 3,200 square feet. The Company believes that the acquisition of SLB has created a number of opportunities. The SLB suburban bakery cafe concept has proved to be well-suited for suburban locations and offers the Company greater access to these markets, thereby enhancing the Company's long-term growth prospects. In addition, significant opportunities to achieve operating efficiencies have been identified, particularly by providing SLB with frozen dough products produced at the Company's production facility, as well as certain general and administrative services. In connection with the SLB acquisition, the Company assumed two area development agreements pursuant to which SLB granted exclusive development rights to two franchisees, Original Bread, Inc. and The Traditional Bakery, Inc. The area development agreement for Original Bread, Inc. covers the cities of Kansas City, St. Joseph and Topeka, Kansas and Kansas City, Missouri. In order to maintain exclusivity, Original Bread, Inc. was required to open a minimum of four bakery cafes within specified time periods beginning July 1994 and continuing through July 1995. Original Bread, Inc. met the minimum opening schedule and has five franchised bakery cafes open to-date. The area development agreement for The Traditional Bakery, Inc. covers various counties in Missouri and includes the City of Springfield. In order to maintain exclusivity, The Traditional Bakery, Inc. must open a minimum of five bakery cafes from July 1994 through July 1996. To date, the Traditional Bakery, Inc. has opened five franchised bakery cafes. The SLB unit franchise agreements require the payment of an up-front franchise fee of $25,000 to $30,000 and continuing royalties of 4% on sales of products from each bakery cafe. The franchisees are required to purchase all of their frozen dough products from sources approved by the franchisor. As a part of the Company's strategy for SLB, the Company is testing a broad-scale domestic franchise program. To date, the Company has entered into franchise development agreements under this program for a total of forty-eight bakery cafes to be located in 10 11 specific sections of the Tulsa, Oklahoma, Columbus, Ohio, Iowa and the Louisville, Kentucky markets. FRANCHISES AU BON PAIN DOMESTIC The Company currently has domestic franchising agreements with eight organizations: Northern Bakers, Inc., CA One, ABP Southern California, Wayne ABP, Inc., R.C. Menzer, Romallso, Inc., The Lauren Group, Inc. and DoubleTree Hotels. At present, the Northern Bakers, Inc. and CA One franchises are the most substantial domestic franchising relationships, each with eight operating cafes. Northern Bakers, Inc. has limited development rights in Maine, New Hampshire, Vermont, Andover, MA, Amherst, MA and portions of northern New York and currently operates bakery cafes in six regional shopping malls in the Northeast, in the Dartmouth-Hitchcock Medical Center in Lebanon, NH and in a suburban shopping center in Shrewsbury, MA. The Company has retained the right to develop or franchise bakery cafes in these territories, subject to Northern Bakers, Inc.'s right of first refusal. CA ONE became a franchisee of Au Bon Pain in October 1986, for the purpose of operating Au Bon Pain bakery cafes in airport terminals. CA One operates bakery cafes in eight airports. The Company may itself or through other franchisees operate in any airport for which CA One does not hold a franchise. CA One will be considered for new airport franchises on a case by case basis. The Company must approve all franchise locations and bakery cafe designs. In general, the Company has three potential sources of revenue from its domestic Au Bon Pain franchisees: fees for new locations, royalties on sales by franchisees and revenue from the purchase of frozen dough products by franchisees. New domestic locations, other than airport locations, to be developed by franchisees typically require a $25,000 initial fee per location and a 5% royalty. Airport franchise fees range between $10,000 and $50,000, depending upon passenger traffic and the Company's assistance in obtaining the concession. All domestic franchisees are obligated to use Company-approved ingredients, including Au Bon Pain-produced frozen dough products. The Company is not seeking to extend its domestic Au Bon Pain franchise relationships beyond its current franchisees. 11 12 INTERNATIONAL The Company currently has international franchise development agreements with developers in Chile, Argentina, Brazil and certain other South American countries, Thailand, Indonesia, the Philippines and the Canary Islands. Bakery cafes have been opened to-date in Chile, Indonesia and the Philippines. Under these agreements, the Company has granted exclusive development rights to franchise and operate Au Bon Pain bakery cafes in the respective country or countries. The agreements generally require the payment of up front development fees, which have ranged from $250,000 to $750,000, a franchise fee, typically from $20,000 to $60,000 for each Au Bon Pain bakery cafe opened and royalties from the sale of products from each bakery cafe of 5% of sales. The developer is, in most instances, required to open bakery cafes according to a specific minimum schedule. The Company may also agree to provide advice, consultation and training for the development of a frozen dough plant. Currently, the Company considers international franchising and licensing arrangements as a means of business expansion for its Au Bon Pain concept and is actively pursuing additional international franchising relationships. SAINT LOUIS BREAD COMPANY In 1996, the Company began a broad-based franchising program. Through its acquisition of SLB, the Company assumed certain area development and unit franchise agreements of SLB. The Company is actively seeking to extend its SLB franchise relationships beyond its current franchisees; see "Acquisitions-Saint Louis Bread Company". 12 13 EMPLOYEES The Company has approximately 1,656 full-time employees, of whom approximately 199 are employed in general or administrative functions principally at or from the Company's executive offices in Boston, Massachusetts; approximately 119 are employed at the Boston frozen dough plant and the commissary; approximately 152 are employed in the Missouri frozen dough plant; approximately 51 are employed in the SLB corporate office in St. Louis, Missouri; approximately 88 are employed in the SLB production facilities in St. Louis, Missouri and Atlanta, Georgia; and approximately 796 and 251 are employed in the Au Bon Pain and SLB retail operations, respectively. The Company also has approximately 5,086 part-time employees, of whom 3,545 and 1,541 are employed in the Au Bon Pain and SLB bakery cafes, respectively. These totals include employees of Pain Francais, Inc. and at the joint venture locations in New York City. There are no collective bargaining agreements. The Company considers its employee relations to be excellent. TRADEMARKS The "Au Bon Pain" and "Au Bon Pain The Bakery Cafe" names are of material importance to the Company and are trademarks registered with the United States Patent and Trademark Office and in certain foreign countries. In addition, the name "Saint Louis Bread Company" is of material importance to the Company and applications to register as trademarks the name "Saint Louis Bread Company" and "Saint Louis Bread Company and design" have been filed with the United States Patent and Trademark Office. GOVERNMENT REGULATION Each Company-operated and franchised bakery cafe is subject to regulation by federal agencies and to licensing and regulation by state and local health, sanitation, safety, fire, alcoholic beverage control and other departments. Difficulties or failures in obtaining the required licensing or approval could result in delays or cancellations in the opening of restaurants. The Company is also subject to federal and a substantial number of state laws regulating the offer and sale of franchises. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises and may also apply substantive standards to the relationship between franchisor and franchisee. The Company does not believe that current or potential future regulations of franchises have or will have any material impact on the Company's operations. The Company is subject to the Fair Labor 13 14 Standards Act and various state laws governing such matters as minimum wages, overtime and other working conditions. The Company's Boston frozen dough plant, commissary and SLB dough plants are subject to various federal, state and local environmental regulations. Compliance with applicable environmental regulations is not believed to have any material effect on capital expenditures, earnings or competitive position of the Company. Estimated capital expenditures for environmental compliance matters are not material. The Americans With Disabilities Act prohibits discrimination in employment and public accommodations on the basis of disability. Under the Americans With Disabilities Act, the Company could be required to expend funds to modify its bakery cafes to provide service to, or make reasonable accommodations for the employment of, disabled persons. The Company believes that compliance with the requirements of the Americans With Disabilities Act will not have a material adverse effect on its financial condition, business or operations. ITEM 2. PROPERTIES All Company-operated bakery cafes are located in leased premises with lease terms typically for ten years with one or two five-year renewal option periods thereafter. Leases typically have a minimum base occupancy charge, charges for a proportionate share of building operating expenses and real estate taxes and contingent percentage rent based on sales above a stipulated sales level. The joint venture bakery cafes operate in leased premises under similar lease arrangements. In 1983, Au Bon Pain built its plant and headquarters in South Boston, Massachusetts. Manufacturing is now done at both production facilities. The executive offices occupy approximately 24,000 square feet. The Company owns the original building plus additions and leases land from the City of Boston. The annual rent is approximately $150,000. The lease expires, assuming exercise of renewal options, in 2017. In 1994, the Company purchased an office building in Woburn, MA, originally intended to become the Company's principal executive offices. The building occupies approximately 55,000 square feet, of which approximately 20,000 square feet are leased to third parties for differing periods of up to 10 years, including renewal options periods. The Company has decided to put this building up for sale and no longer intends to relocate the Company's headquarters to this location. 14 15 In 1996, the Company leased short term office space in Waltham, MA to house its Accounting and Development functions. In 1996, the Company completed construction of its central production facility on a 20 acre tract of land in Mexico, MO to increase the Company's production capacity. The new facility cost approximately $9 million and began operation in mid-1996. The cost of the facility has been financed primarily by an $8.6 million industrial development bond issued by the City of Mexico, Missouri in July 1995, secured by an $8.7 million letter of credit with a commercial bank through July, 2000, and by equipment lease financing. Au Bon Pain operates its commissary in leased premises in Chelsea, Massachusetts under a ten year lease expiring in 1998, with an option to extend for an additional five years. SLB leases office space in St. Louis, Missouri for its corporate offices. The offices occupy approximately 5,000 square feet. The annual rent is approximately $31,000. The lease expires, assuming exercise of renewal options, in 2001. The Company considers its physical properties to be in good operating condition and suitable for the purposes for which they are used. 15 16 BAKERY CAFE LOCATIONS AU BON PAIN BAKERY CAFES: - ------------------------ COMPANY-OPERATED: 177 total as of December 28, 1996 - ---------------- BOSTON MARKET AREA: 50 Arlington Center Hynes Auditorium Beacon Hill International Place Bowdoin Square Kendall Square 431 Boylston Street Kenmore Square 745 Boylston Street Longwood Galleria Brattle Street Longwood Medical Center Area Brigham and Women's Hospital 684 Massachusetts Avenue Burlington Mall 1100 Massachusetts Ave Cambridgeside Galleria 101 Merrimac Street Children's Hospital Milk Street Church Park Natick Mall Coolidge Corner New England Medical Center Copley Place 360 Newbury Street Davis Square One Newton Place Davis Square Train Stop Northeastern University Design Center North Shore Shopping Center Faneuil Hall Marketplace Park Plaza, Statler Building One Federal Street South Shore Plaza #1 75-101 Federal Street South Shore Plaza #2 176 Federal Street South Station Filene's, Hawley Street Square One Mall 15 Harvard Street 53 State Street Harvard Business School Winter Street Harvard Coop at MIT Woburn Business Center Harvard Square Wellesley Center CALIFORNIA MARKET AREA: 1 353 Sacramento Street, San Francisco PHILADELPHIA MARKET AREA: 11 841 Chestnut Street Mellon Independence Center Commerce Square Montgomery Mall The Court at King of Prussia 2 Penn Center Graham Building 10 Penn Center Liberty Place 30th Street Station 2 Logan Square 16 17 WASHINGTON D.C.-BALTIMORE MARKET AREA: 24 700 13th Street, N.W. L'Enfant Plaza 10 North Calvert 1850 M Street, N.W. 800 North Capital National Place Commerce Place 1001 Pennsylvania Avenue, N.W. Crystal City 1701 Pennsylvania Avenue, N.W. 1401 Eye Street, N.W. 2000 Pennsylvania Avenue, N.W. Gallery at Harbor Place Pentagon City 601 Indiana Avenue, N.W. Springfield Mall International Square Towson Town Center 1615 L Street, N.W. Union Station 1724 L Street, N.W. 1101 Vermont Avenue, N.W. 1801 L Street, N.W. Warner Building GREATER NEW YORK AREA: 41 1251 Avenue of the Americas Manhattan Mall 60 Broad Street 600 Lexington Avenue 222 Broadway The Mall at Short Hills 684 Broadway Metrotech Plaza Celanese Building Nanuet Mall Chanin Building 80 Pine Street Daily News Building Port Authority Bus Terminal 54 East 8th Street Riverside Square 16 East 44th Street Rutgers University Empire State Building One State Street Plaza 73 Fifth Avenue 600 Third Avenue 420 Fifth Avenue 875 Third Avenue Up GE Building at Rockefeller Center 875 Third Avenue Down 101 Hudson Street Time-Warner Communications J.F. Kennedy Airport 10 East Union Square J.F. Kennedy Airport/American Airlines 95 Wall Street LaGuardia Airport Westchester Mall 425 Lexington Avenue World Financial Center Long Island Jewish Medical Center World Financial Center/ Liberty St. 300 Madison Avenue World Trade Center 444 Madison Avenue 17 18 OTHER NEW ENGLAND: 14 1 Broadway, Pheasant Lane Mall, New Haven, CT Nashua, NH Avon Marketplace, Avon, CT Rockingham Mall, Salem, NH Buckland Hills Mall, Manchester, CT Rhode Island Hospital, Providence, RI City Place, Hartford, CT Thayer Street, Providence, RI Fleet Center, Providence, RI Warwick Mall, Warwick, RI Hartford Civic Center, Hartford, CT Westfarms Malls, West. Hartford, CT Mall of New Hampshire, Worcester Commons, Manchester, NH Worcester, MA MIDWEST: 27 3rd & Broad, Columbus, OH 30 North LaSalle, Chicago, IL Amoco Building, Chicago, IL 222 North LaSalle, Chicago, IL BP Building, Cleveland, OH 123 North Wacker, Chicago, IL Carew Tower, Cincinnati, OH 122 South Michigan, Chicago, IL Columbus City Center, Columbus, OH 125 South Wacker, Chicago, IL First Bank Tower, Minneapolis, MN 600 Superior Ave., Cleveland, OH Grand Avenue, Milwaukee, WI Tower City, Cleveland, OH IDS Center, Minneapolis, MN 200 West Adams, Chicago, IL Illinois Center, Chicago, IL 180 West Jackson, Chicago, IL Merchandise Mart, Chicago, IL 181 West Madison, Chicago, IL Minnesota Center, Minneapolis, MN 500 West Monroe, Chicago, IL 161 North Clark, Chicago, IL Woodfield Mall, Schaumberg, IL 33 North Dearborn, Chicago, IL World Trade Center, St. Paul, MN 180 North Michigan, Chicago, IL PITTSBURGH MARKET AREA: 9 Exton Square Mall Pittsburgh Airport-Airside Fifth Avenue Place Pittsburgh Airport-Landside Oliver Building Ross Park Mall Oxford Centre USX Tower 2 PPG Place 18 19 FRANCHISE-OPERATED/DOMESTIC: 31 total as of December 28, 1996 - --------------------------- NORTHERN BAKERS, INC.: 8 Big D Supermarket, Shrewsbury, MA Dartmouth-Hitchcock Medical Center, Lebanon, NH Cape Cod Mall, Hyannis, MA Fox Run Mall, Newington, NH Carousel Mall, Syracuse, NY Maine Mall, South Portland, ME Crossgates Mall, Albany, NY Silver City Galleria, Taunton, MA HOST MARRIOTT: 2 Hartsfield Airport, Concourse B, Atlanta, GA Hartsfield Airport, Concourse D, Atlanta, GA FORTUNOFF (WAYNE ABP, INC.): 1 Wayne Town Center, Wayne, NJ R.C. MENZER: 2 South Hills Village, Pittsburgh, PA Westmoreland Mall, Greensburg, PA ROMALLSO, INC.: 1 Roosevelt Field Mall, Garden City, NY THE LAUREN GROUP, INC.: 1 Crossing Factory Store, Tannersville, PA DOUBLETREE HOTELS: 3 Jacksonville, FL San Antonio, TX Tyson's Corner, VA 19 20 ABP SOUTHERN CALIFORNIA, LLC: 5 Brea Mall, Brea, CA North County Fair, Escondido, CA Laguna Hills Mall, Laguna Hills, CA South Lake Avenue, Pasadena, CA Montclair Plaza, Montclair, CA CA ONE SERVICES, INC. 8 Ft. Lauderdale Airport, Nashville Airport, Ft Lauderdale, FL Nashville, TN Greater Cincinnati Airport, Newark International Airport, Hebron, KY Newark, NJ Hancock International Airport, San Jose International Airport, Syracuse, NY San Jose, CA Logan International Airport, West Palm Beach International Boston, MA Airport, West Palm Beach, FL FRANCHISE-OPERATED/INTERNATIONAL: 17 total as of December 28, 1996 - -------------------------------- ABP CHILE: 12 Apoquindo/Hendaya New Providencia Bandera Museum of Pre-Columbian Art El Bosque Norte Santiago Airport, Counter El Bosque Sur Santiago Airport, Cart La Dehasa Santiago Airport, Duty Free Providencia World Trade Center ABP PHILIPPINES: 2 EDSA/Shangri-La Mall, Ortegas Taipan Building, Ortegas INDONESIA: 3 Landmark Building, Jakarta Plaza Senayan, Jakarta Setiabudi Atrium, Jakarta 20 21 SAINT LOUIS BREAD COMPANY BAKERY CAFES: - -------------------------------------- Company-Operated: 54 total as of December 28, 1996 GREATER ST. LOUIS MARKET AREA: 31 Ballas, Creve Coeur, MO Grand, St. Louis, MO Baxter, Ballwin, MO Kirkwood, MO Bogey Hills, St. Charles, MO Main, St. Charles, MO Brentwood, St. Louis, MO Market, St. Louis, MO Capriccio, Richmond Heights, MO Pine, St. Louis, MO Cape Girardeau, MO Rendezvous Cafe, Richmond Heights, MO Carondelot, Clayton, MO Soulard, St. Louis, MO Central West End, St. Louis, MO South 9th Street, Columbia, MO Chesterfield Mall, Chesterfield, MO South Central, Clayton, MO Columbia Mall, Columbia, MO Surrey Plaza, Florissant, MO Crestwood Plaza, St. Louis, MO Telegraph Road, St. Louis, MO Delmar, University City, MO Tesson, St. Louis, MO Esquire, Clayton, MO West County, Des Peres, MO Four Seasons, Chesterfield, MO Westport Plaza, Maryland Heights., MO Galleria, Richmond Heights, MO Winchester, MO Gateway One, St. Louis, MO ATLANTA MARKET AREA: 9 Briarcliff, Atlanta, GA Lenox Square, Atlanta, GA Dunwoody, GA Peachtree, Atlanta, GA Emory Village, Atlanta, GA Sandy Springs, Atlanta, GA Gwinnett Place, Deluth, GA Town Center, Kennesaw, GA Haywood Mall, Greenville, SC CHICAGO MARKET AREA: 14 Belleville, IL Orland Square Mall, Orland Park, IL Champaigne, IL St. Clair Square, Fairview Heights, IL Diversey, Chicago, IL Stratford Square Mall, IL Evanston, IL Vernon Hills, IL Fox Valley, Aurora, IL Wheaton, IL Halsted, Chicago, IL Wilmette, IL LaGrange Park, IL Winnetka, IL 21 22 FRANCHISE-OPERATED: 10 11319 West 95th St., 3265 Falls Parkway, Overland Park, KS Branson, MO Lawrence, KS East Sunshine, Springfield, MO 11022 Metcalf, Overland Park, KS 2401 East 32nd Street, Joplin, MO 8300 Mission Road, 1570 East Battlefield, Prairie Village, KS Springfield, MO 1605 North Rock Road, Wichita, KS 500 South National, Springfield, MO The following table sets forth Company-operated and franchise operated bakery cafes open at the dates indicated:
Dec. 26, Dec. 25 Dec. 31, Dec. 30, Dec. 28, 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- Company-operated 121 156(1) 213(1) 244(1) 231(1) Franchise-operated 34 40(2) 31(2) 37(2) 58(2)
(1)Includes 19, 31, 52 and 54 Company-operated SLB bakery cafes at December 25, 1993, December 31, 1994, December 30, 1995 and December 28, 1996, respectively. (2)Includes 1, 6, 8 and 10 franchise-operated SLB bakery cafes at December 25, 1993, December 31, 1994, December 30, 1995 and December 28, 1996, respectively. 22 23 ITEM 3. LEGAL PROCEEDINGS The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the consolidated operations or financial condition of the Company, and will not disrupt the normal operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 23 24 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS. (a) MARKET INFORMATION. ------------------ The Company's Class A Common Stock is traded on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol ABPCA. The following table sets forth the high and low sale prices as reported by NASDAQ for the fiscal periods indicated.
1995 HIGH LOW - ---- ---- --- First quarter............................... 17 1/4 12 3/4 Second quarter.............................. 14 10 1/4 Third quarter............................... 11 7 1/4 Fourth quarter.............................. 10 3/8 5 7/8 1996 - ---- First quarter............................... 9 5/16 6 3/4 Second quarter.............................. 9 6 7/8 Third quarter............................... 7 1/4 6 1/8 Fourth quarter.............................. 8 1/4 5 1/2
On March 17, 1997, the last sale price for the Class A Common Stock, as reported on the Nasdaq National Market System, was $6 3/8. (b) HOLDERS. ------- On March 17, 1997, the Company had approximately 1,527 holders of record of its Class A Common Stock and approximately 97 holders of its Class B Common Stock. (c) DIVIDENDS. --------- The Company has never paid cash dividends on its capital stock and has no intention of paying cash dividends in the foreseeable future. 24 25 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
FOR THE FISCAL YEARS ENDED ------------------------------------------------- Dec. 26, Dec. 25, Dec. 31, Dec. 30, Dec. 28, 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- (in thousands, except per share data) Revenues: Restaurant sales $89,686 $113,980 $173,436 $216,411 $225,625 Franchise sales and other revenues 7,230 8,935 9,450 10,055 11,309 ------- -------- -------- -------- -------- 96,916 122,915 182,886 226,466 236,934 Costs and expenses: Cost of food and paper products 31,684 39,695 60,535 77,250 85,631 Restaurant operating expenses 44,584 56,697 85,139 112,161 115,364 Depreciation and amortization 6,608 7,967 11,891 14,879 16,195 General and administrative 5,244 6,757 10,098 12,818 14,979 Non-recurring charge - - - 8,500 4,435 ------- -------- -------- -------- -------- 88,120 111,116 167,663 225,608 236,604 ------- -------- -------- -------- -------- Operating income 8,796 11,799 15,223 858 330 Interest expense, net 34 57 1,727 3,363 5,140 Other (income) expense, net (311) (28) 80 2,016 2,513 Minority interest 189 105 78 (94) (40) Income(loss) before provision for income taxes 8,884 11,665 13,338 (4,427) (7,283) Provision(benefit) for income taxes 3,604 4,844 5,497 (2,813) (2,918) ------- -------- -------- -------- -------- Net income(loss) $ 5,280 $ 6,821 $ 7,841 $ (1,614) $ (4,365) ======= ======== ======== ======== ======== Net income(loss) per common share $ .48 $ .60 $ .67 $ (.14) $ (.37) ======= ======== ======== ======== ======== Weighted average number of common and common equivalent shares outstanding 10,986 11,353 11,624 11,621 11,705 Comparable restaurant sales percentage increase for Company-operated bakery cafes 7.8% 6.7% 5.8%(1) 0.5%(1) 0.7% - ------------ (1) Fiscal 1994 included 53 weeks. The 1994 restaurant sales used in this computation have been adjusted downward to be comparable to fiscal 1993 and fiscal 1995.
25 26 FOR THE FISCAL YEARS ENDED
FOR THE FISCAL YEARS ENDED ------------------------------------------------- Dec. 26, Dec. 25, Dec. 31, Dec. 30, Dec. 28, 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- (in thousands, except per share data) Consolidated Balance Sheet Data: Working capital $ 6,619 $ 5,817 $ (3,439) $ 846 $ 2,696 Total assets 77,036 120,474 165,586 193,018 195,594 Long-term debt, less current maturities 299 274 19,095 42,502 49,736 Convertible Subordinated Notes 30,000 30,000 30,000 30,000 Stockholders' equity 68,296 76,098 94,164 93,238 90,056 Company-operated bakery cafes open 121 156 213 244 231
26 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth the percentage relationship to total revenues of certain items included in the Company's consolidated statements of operations for the periods indicated:
FOR THE FISCAL YEARS ENDED Dec. 31, Dec. 30, Dec. 28, 1994 1995 1996 -------- -------- ------- Revenues: Restaurant sales 94.8% 95.6% 95.2% Franchise sales and other revenues 5.2 4.4 4.8 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== Costs and expenses: Cost of food and paper products 33.1% 34.1% 36.1% Restaurant operating expenses 46.6 49.5 48.7 Depreciation and amortization 6.5 6.6 6.8 General and administrative 5.5 5.7 6.3 Non-recurring charge -- 3.7 1.9 ----- ----- ----- 91.7 99.6 99.8 ----- ----- ----- Operating margin 8.3 0.4 0.2 Interest expense, net 1.0 1.5 2.2 Other expense, net -- 0.9 1.0 Minority interest -- -- -- ----- ----- ----- Income(loss) before provision (benefit) for income taxes 7.3 (2.0) (3.0) Provision(benefit) for income taxes 3.0 (1.3) (1.2) ----- ----- ----- Net income(loss) 4.3% (0.7)% (1.8)% ===== ===== =====
GENERAL The Company's revenues are derived from restaurant sales and franchise sales and other revenues. Franchise sales and other revenues include sales of frozen dough products to franchisees and others, royalty income and franchise fees. Certain expenses (cost of food and paper products, restaurant operating expenses and depreciation and amortization) relate primarily to restaurant 27 28 sales, while general and administrative expenses relate to all areas of revenue generation. The Company's fiscal year ends on the last Saturday in December. The fiscal years from 1994 through 1996 ended on December 31, 1994, December 30, 1995 and December 28, 1996 and included 53, 52 and 52 weeks, respectively. The Company's fiscal year normally consists of 13 four-week periods, with the first, second and third quarters ending 16 weeks, 28 weeks and 40 weeks, respectively, into the fiscal year. RESULTS OF OPERATIONS 1996 COMPARED TO 1995 --------------------- Restaurant sales from Company-operated bakery cafes increased 4.2% to $226 million in 1996 from $216 million in 1995, due principally to several factors: incremental sales in 1996 over 1995 from the 15 Au Bon Pain and 20 Saint Louis Bread Company-operated bakery cafes opened throughout 1995, strong comparable restaurant sales in the Saint Louis Bread business unit and sales from the 3 Au Bon Pain and 2 Saint Louis Bread Company-operated bakery cafes opened throughout 1996. Company-operated restaurant sales decreased 2.9% in the Au Bon Pain business unit, as additional sales stemming from the new Company-operated bakery cafes opened in 1995 and 1996 were more than offset by the effect on sales of the disposition throughout 1996 of a series of underperforming bakery cafes under an initiative begun in late 1995. Company-operated restaurant sales increased 33.6% in the Saint Louis Bread business unit in 1996 over 1995, due to sales stemming from the new Company-operated bakery cafes opened in 1995 and 1996 and from strong comparable restaurant sales. Comparable restaurant sales in 1996 decreased 1.3%, or $1.96 million, in the Au Bon Pain business unit. In the Saint Louis Bread business unit comparable restaurant sales increased 10.2%, or $3.32 million, in 1996 over the previous year driven by a highly successful bagel product line introduction. Operating income declined to $330,000 in 1996 from $858,000 in 1995. Operating income was significantly affected by separate non-recurring charges recorded by the Company of $4.4 million ($3.7 million after-tax) in 1996 and of $8.5 million ($5.3 million after-tax) in 1995. The non-recurring charge recorded in 1996 related principally to the write-down of certain assets in accordance with FAS #121. The non-recurring charge recorded in 1995 related principally to the closure of certain under-performing bakery cafes. Before the non-recurring charges, operating margin decreased in 1996 to 2.0% from 4.1% in 1995, as operating margin improvements at the Saint Louis Bread business 28 29 unit were more than offset by lower operating margins in the Au Bon Pain business unit, driven primarily by costs associated with the start-up of a new frozen dough manufacturing facility opened during 1996 in Mexico, Missouri. Operating margin in the Au Bon Pain business unit declined by 4.3 points in 1996 versus 1995, due principally to start-up costs and inefficiencies related to the opening of the new manufacturing facility and significantly higher commodity costs for butter and flour in 1996 versus the previous year. In total, these manufacturing related costs constituted the majority of the 2.6 point increase to cost of food and paper costs as a percentage of revenues in the Au Bon Pain business unit compared to the prior year. Restaurant operating expenses increased by .4 points in 1996 versus 1995, as percentage increases in occupancy costs due to negative leverage stemming from the slight comparable restaurant sales decline more than offset percentage improvements in both labor costs and controllable expenses at the retail store level. Depreciation and amortization expense as a percentage of revenues increased by .4 points in 1996 due to incremental depreciation related to the new Missouri manufacturing facility and the negative leverage associated with the comparable restaurant sales decline. General and administrative expenses as a percentage of revenues increased by .9 points in 1996 versus 1995 due primarily to greater investment in infrastructure in the international franchise area, information systems and other overhead areas. At Saint Louis Bread, operating margin improved by 4.8 points in 1996 versus 1995, as the new management team established at the end of 1995 improved operational focus and control throughout 1996 and the significantly positive comparable restaurant sales increase in 1996 leveraged many of the largely fixed costs within the operations. Percentage food and paper costs decreased by .4 points in 1996 compared to 1995, despite higher allocated costs associated with frozen dough provided by the new manufacturing facility opened during the year. Percentage restaurant operating expenses decreased by 4.2 points driven by improved management controls surrounding labor costs and store-level controllable expenses. Depreciation and amortization expense and general and administrative expenses each decreased by .2 points versus the previous year due to leverage from the significantly higher sales in 1996. The lower operating income in 1996 versus 1995, combined with higher interest expense and other expense, net, resulted in a net loss of $4.4 million in 1996, as compared with a net loss of $1.6 million in 1995. The higher interest expense was due primarily to higher average long-term debt outstanding, as higher average interest rate due to the issuance of $15 million senior 29 30 subordinated debentures in July, 1996 which carry a significantly higher coupon rate than the other outstanding long-term debt. 1995 COMPARED TO 1994 Restaurant sales from Company-operated bakery cafes increased 24.8% to $216 million in 1995 from $173 million in 1994, due principally to sales from the 15 Company-operated Au Bon Pain bakery cafes and 20 Company-operated Saint Louis Bread bakery cafes opened throughout 1995, as well as incremental sales in 1995 over 1994 from the 31 Company-operated Au Bon Pain bakery cafes and 12 Saint Louis Bread bakery cafes opened throughout 1994. Company-operated restaurant sales increased 15.9% in the Au Bon Pain business unit and 81.7% in the Saint Louis Bread business unit, respectively, in 1995 over 1994. Comparable restaurant sales increased 1.2%, or $1.6 million, in the Au Bon Pain business unit in 1995. At Saint Louis Bread, comparable restaurant sales decreased 4.3%, or $1.3 million, in 1995 due to cannibalization stemming from the 37% growth in locations in the St. Louis market effected by the Company during 1994 and 1995. Operating income decreased to $858,000 in 1995 from $15.2 million in 1994. Operating income was significantly reduced by a non-recurring charge of $8.5 million ($5.3 million after-tax) recorded by the Company in 1995 principally related to the closure of certain under-performing bakery cafes. Before the non-recurring charge, operating margin decreased in 1995 to 4.1% from 8.3% in 1994, due to lower operating margins in both the Au Bon Pain business unit and at Saint Louis Bread. Operating margin in the Au Bon Pain business unit decreased by 4 points in 1995 versus 1994, due principally to higher corporate and field human resource costs and to poor operating performance at those stores in the process of being closed. Cost of food and paper products increased by .8 points, reflecting higher percentage food cost in 1995 for coffee, lettuce and flour, and also caused by slightly lower sales of baked goods as a percentage of retail sales. Baked goods have a relatively lower percentage food cost due to the internal production of the products by the Company. Restaurant operating expenses increased by 2.6 points in 1995 over 1994, due to several factors. First, restaurant operating expenses, particularly labor costs, in the underperforming stores in the process of being closed were significantly higher on a percentage basis than in the other Au Bon Pain units. Second, the Company initiated a substantial management transition within the Au Bon Pain field management, increasing human resource costs significantly. In addition, as part of the transition to and introduction of Peet's coffee during 1995, a substantial investment was made in the communication of 30 31 the product change. Depreciation and amortization increased .2 points in 1995 over 1994, reflecting the fixed nature of those costs in the underperforming units with unusually low sales volumes. General and administrative expenses increased .5 points in 1995, or 26.9 %, due to unusually high corporate human resource costs, as the Company broadened the corporate management group substantially during 1995, initiated new retail training programs during 1995 and increased expenditures in information systems. At Saint Louis Bread, operating margin also decreased by 4.0 points in 1995 versus 1994, primarily due to preopening and new market entry costs directly associated with the growth in Company-operated bakery cafes from 31 stores at the end of 1994 to 51 stores at the end of 1995, a 65% growth rate. The high growth rate had significant indirect effects on operating margin throughout 1995, as the earn-out management team in place at Saint Louis Bread throughout 1994 and 1995 was unable to maintain store-level margins at historic levels in the midst of the growth. With the earn-out period concluded at the end of fiscal 1995, the Company has broadened the depth of the management team at Saint Louis Bread. The increase in percentage costs in 1995, as affected by the level of growth in new stores, was in percentage cost of food and paper products and restaurant operating expenses, as both depreciation and amortization and general and administrative expenses decreased in 1995 on a percentage basis versus 1994. The decreases in these percentage costs reflect the fixed components within these cost areas, spread across significantly greater sales. The significantly lower operating income in 1995 versus 1994, combined with higher interest expense and other expense, net, resulted in a net loss of $1.6 million in 1995, as compared with net income of $7.8 million in 1994. The higher interest expense was due primarily to greater long-term debt outstanding, as the amount outstanding under the Company's revolving line of credit increased to $34.0 million at the end of 1995 from $18.0 million at the end of 1994. Other expense, net increased to $2.0 million in 1995 from $80,000 in 1994, primarily due to costs associated with a company-owned life insurance program initiated at the end of 1994. The provision for income taxes decreased in 1995 to a benefit of $2.8 million, versus a charge of $5.5 million in 1994. In addition to substantially lower pre-tax income in 1995, the provision for income taxes was reduced by fixed deductions associated with the company-owned life insurance program. 31 32 LIQUIDITY AND CAPITAL RESOURCES The Company's principal requirements for cash are capital expenditures for constructing and equipping new bakery cafes and maintaining or remodeling existing bakery cafes, working capital and acquisitions. To date, the Company has met its requirements for capital with cash from operations, proceeds from the sale of equity and debt securities and bank borrowings. Total capital expenditures in 1996 of $17.0 million were related primarily to the opening of three ABP and two SLB new Company-operated bakery cafes and to the construction of a second frozen dough production facility in Mexico, Missouri. The expenditures were funded by net cash from operating activities of $14.8 million, net proceeds of an $8.6 million industrial revenue bond issued by the City of Mexico, Missouri in connection with the construction of the new production facility and borrowings under the Company's existing lines of credit, described below. In April 1995, the Company obtained an $8.6 million industrial development bond to fund the construction of a second production facility in Mexico, Missouri. The bond was issued by the City of Mexico, Missouri, and secured by an $8.7 million letter of credit issued by a commercial bank. Interest accrues at a weekly floating rate, which was 4.3% on December 28, 1996. In December 1993, the Company acquired substantially all of the assets of the Saint Louis Bread Company of St. Louis, MO for cash of $24.0 million and expenses of $751,000 plus assumed liabilities of $3.5 million. The acquisition was financed through the sale and issuance by the Company of the 1993 Notes. In December 1993, the Company issued the 1993 Notes. The 1993 Notes are convertible into shares of the Company's Class A Common Stock, at a conversion price per share of $25.50, subject to adjustment. Beginning in December 1997, the Company may, at its option, redeem all or any part of the 1993 Notes upon the payment of the principal amount together with a premium based upon a declining percentage of the principal amount. In April 1994, the Company acquired substantially all of the assets of ABP Midwest which operated 19 franchised bakery cafes in Chicago and Minneapolis/St. Paul. See Item 1, "Business - Acquisitions". At December 28, 1996, the Company had a $28.0 million unsecured revolving line of credit which bore interest at either the commercial bank's prime rate or LIBOR plus an amount ranging between .75% and 2.0%, depending upon certain financial tests. At December 28, 1996, $22.0 million was outstanding under the line of credit and an additional $879,000 of the remaining availability was utilized by outstanding letters of credit issued by the bank on behalf of the Company. In addition, the Company had a $3.6 million term loan outstanding, collateralized by certain real estate written down in the third quarter of 1996. See Footnote 6. The term loan matures on March 15, 2000. On July 24, 1996, the Company issued $15 million senior sbordinated debentures maturing in July, 2000. The debentures accrue interest at varying fixed rates over the four year term, ranging between 11.25% and 14.0%. In connection with the private placement, warrants with an exercise price of $5.62 per share were issued to purchase between 400,000 and 580,000 shares of the Company's Class A common stock, depending on the term which the debentures remain outstanding and certain future events. The net proceeds of the financing were used to reduce the amount outstanding under the Company's bank revolving line of credit. With the senior subordinated financing and the Company's existing revolving line of credit, the Company's management believes it has the capital resources necessary to meet its growth goals through 1998. In 1997, the Company expects to spend approximately $19 million for capital expenditures, principally for the opening of new bakery cafes. The Company expects to fund these expenditures principally through internally generated cash flow and remaining net proceeds of the industrial revenue bond. 32 33 CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS Statements made or incorporated in this Form 10-K include a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include, without limitation, statements containing the words "anticipates,", "believes,", "expects," "intends,", "future," and words of similar import which express management's belief, expectations or intentionss regarding the Company's future performance. The Company's actual results could differ materially from those set forth in the forward-looking statements. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which is effective for fiscal years that end after December 15, 1997, including interim periods. Earlier application is not permitted. However, an entity is permitted to disclose pro forma earnings per share amounts computed using SFAS 128 in the notes to financial statements in periods prior to adoption. The Statement requires restatement of all prior-period earnings per share data presented after the effective date. SFAS 128 specifies the computation, presentation, and disclosure requirements for earnings per share and is 33 34 substantially similar to the standard recently issued by the International Accounting Standards Committee entitled International Accounting Standards, EARNINGS PER SHARE (IAS 33). The Company plans to adopt SFAS 128 in 1997 and has not yet determined the impact. 34 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following described consolidated financial statements of the Company are included in response to this item: Report of Independent Accountants. Consolidated Balance Sheets as of December 30, 1995 and December 28, 1996. Consolidated Statements of Operations for the fiscal years ended December 31, 1994, December 30, 1995 and December 28, 1996. Consolidated Statements of Cash Flows for the fiscal years ended December 31, 1994, December 30, 1995 and December 28, 1996. Consolidated Statements of Stockholders' Equity for the fiscal years ended December 31, 1994, December 30, 1995 and December 28, 1996. Notes to Consolidated Financial Statements. 35 36 QUARTERLY RESULTS OF OPERATIONS - ------------------------------- The following is a summary of the unaudited quarterly results of operations for the fiscal years ended December 30, 1995 and December 28, 1996:
Net income Operating Net (loss) per income income common For the years ended Revenues (loss) (loss) share - ------------------- -------- --------- ------ ---------- (Dollars in thousands, except per share data) December 30, 1995: First quarter $ 62,985 $ 3,528 $ 1,600 $ .14 Second quarter 51,489 1,409 330 .03 Third quarter 54,920 (6,780) (4,562) (.39)* Fourth quarter 57,072 2,701 1,018 .09 -------- ------- ------- ----- $226,466 $ 858 $(1,614) $(.14)** ======== ======= ======= ===== December 28, 1996: First quarter $ 69,441 $ 2,840 $ 797 $ .07 Second quarter 54,429 1,331 614 .05 Third quarter 54,969 (5,859) (6,015) (.51)*** Fourth quarter 58,095 2,018 239 .02 -------- ------- ------- ----- $236,934 $ 330 $(4,365) $(.37) ======== ======= ======= ===== - --------------- * Includes a $5.3 million after-tax charge related principally to the closing of certain underperforming restaurants. ** Due to rounding of quarterly earnings per share and the calculation of full year EPS independently from the quarterly calculation, the sum of the four quarters does not equal the full year. *** Includes a $3.8 million after-tax charge related principally to the write-down of certain assets.
The Company reports its quarterly results of operations on the basis of 13 four-week periods, with the first, second and third quarters ending 16 weeks, 28 weeks and 40 weeks, respectively, into the fiscal year. 36 37 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Au Bon Pain Co., Inc.: We have audited the accompanying consolidated balance sheets of Au Bon Pain Co., Inc. as of December 30, 1995 and December 28, 1996, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three fiscal years in the period ended December 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Au Bon Pain Co., Inc. as of December 30, 1995 and December 28, 1996, and the consolidated results of its operations and cash flows for each of the three fiscal years in the period ended December 28, 1996 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Boston, Massachusetts February 14, 1997 37 38 AU BON PAIN CO., INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
Dec. 30, Dec. 28, 1995 1996 -------- -------- ASSETS - ------ Current assets: Cash and cash equivalents........................... $ 6,420 $ 2,579 Accounts receivable, less allowance of $60 and $104 in 1995 and 1996, respectively..................... 6,596 7,730 Inventories (Note 3)................................ 7,776 8,997 Prepaid expenses.................................... 2,696 2,353 Refundable income taxes............................. 694 4,540 Deferred income taxes (Note 12)..................... 2,936 1,675 -------- -------- Total current assets........................... 27,118 27,874 -------- -------- Property and equipment, net (Note 4)................. 121,155 121,733 -------- -------- Other assets: Notes receivable (Note 5)........................... 2,254 2,291 Intangible assets, net of accumulated amortization of $3,765 and $5,223 in 1995 and 1996, respectively 35,110 32,657 Deferred financing costs............................ 479 1,382 Deposits and other (Note 13)........................ 4,789 9,110 Deferred income taxes (Note 12)..................... 2,113 547 -------- -------- Total other assets............................. 44,745 45,987 -------- -------- Total assets................................... $193,018 $195,594 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable.................................... $ 10,321 $ 11,141 Accrued expenses (Note 8)........................... 11,618 13,335 Current maturities of long-term debt (Note 9)....... 4,333 702 -------- -------- Total current liabilities...................... 26,272 25,178 Long-term debt, less current maturities (Note 9)..... 42,502 49,736 Convertible subordinated notes (Note 10)............. 30,000 30,000 -------- -------- Total liabilities.............................. 98,774 104,914 Commitments and contingencies (Notes 9 and 11) Minority interest.................................... 1,006 624 Stockholders' equity (Note 14): Preferred stock, $.0001 par value: Class B, shares authorized 2,000,000; issued and outstanding - 20,000 in 1995 and 1996............. - - Common stock, $.0001 par value: Class A, shares authorized 50,000,000; issued and outstanding 9,929,278 and 10,066,671 in 1995 and 1996, respectively............................ 1 1 Class B, shares authorized 2,000,000; issued and outstanding 1,706,878 and 1,647,354 convertible to Class A, in 1995 and 1996, respectively........ - - Additional paid-in capital.......................... 66,892 68,075 Retained earnings................................... 26,345 21,980 -------- -------- Total stockholders' equity..................... 93,238 90,056 -------- -------- Total liabilities and stockholders' equity..... $193,018 $195,594 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 38 39 AU BON PAIN CO., INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share amounts)
FOR THE FISCAL YEARS ENDED --------------------------------- Dec. 31, Dec. 30, Dec. 28, 1994 1995 1996 ------- -------- ------- Revenues: Restaurant sales.................$173,436 $216,411 $225,625 Franchise sales and other revenues....................... 9,450 10,055 11,309 -------- -------- -------- 182,886 226,466 236,934 Costs and expenses: Cost of food and paper products.. 60,535 77,250 85,631 Restaurant operating expenses: Labor.......................... 44,818 57,860 60,266 Occupancy...................... 21,045 26,709 28,529 Other.......................... 19,276 27,592 26,569 -------- -------- -------- 85,139 112,161 115,364 Depreciation and amortization.... 11,891 14,879 16,195 General and administrative....... 10,098 12,818 14,979 Non-recurring charge (Note 6).... - 8,500 4,435 -------- -------- -------- 167,663 225,608 236,604 -------- -------- -------- Operating income................... 15,223 858 330 Interest expense, net.............. 1,727 3,363 5,140 Other expense, net (Note 13)........................ 80 2,016 2,513 Minority interest (income) expense. 78 (94) (40) -------- -------- -------- Income (loss) before provision(benefit) for income taxes............................ 13,338 (4,427) (7,283) Provision(benefit) for income taxes (Note 12).................. 5,497 (2,813) (2,918) -------- -------- -------- Net income (loss) .................$ 7,841 $ (1,614) $ (4,365) ======== ======== ======== Net income (loss) per common share.$ .67 $ (.14) $ (.37) ======== ======== ======== Weighted number of common and common equivalent shares outstanding...................... 11,624 11,621 11,705 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 39 40 AU BON PAIN CO., INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
FOR THE FISCAL YEARS ENDED --------------------------------- Dec. 31, Dec. 30, Dec. 28, 1994 1995 1996 -------- -------- ------- Cash flows from operations: Net income (loss)................$ 7,841 $ (1,614) $ (4,365) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.. 11,891 14,879 16,195 Amortization of deferred financing costs.............. 67 77 308 Provision for losses on accounts receivable.......... 90 73 44 Gain on sale of asset.......... - 31 - Minority interest.............. 78 (94) (40) Deferred income taxes.......... 22 (4,234) 2,827 Non-recurring charge........... - 7,770 4,435 Changes in operating assets and liabilities: Accounts receivable............ (1,225) 119 (1,178) Inventories.................... (1,166) (1,779) (1,221) Prepaid expenses............... (45) (355) 343 Refundable income taxes........ (248) 289 (3,846) Accounts payable............... 4,952 (154) 820 Accrued expenses............... 683 771 453 -------- -------- -------- Net cash provided by operating activities....... 22,940 15,779 14,775 -------- -------- -------- Cash flows from investing activities: Additions to property and equipment.................... (39,396) (38,650) (17,062) Acquisition, net of cash acquired..................... (57) - - Payments received on notes receivable................... 56 59 82 Increase in intangible assets.. (1,302) (50) (73) Decrease (increase) in deposits and other........... (4,380) 1,450 (4,321) Funding of notes receivable.... - (951) (475) -------- -------- -------- Net cash used in investing activities................. (45,079) (38,142) (21,849) -------- -------- --------
The accompanying notes are an integral part of the consolidated financial statements. 40 41
for the fiscal years ended --------------------------------- Dec. 31, Dec. 30, Dec. 28, 1994 1995 1996 -------- -------- ------- Cash flows from financing activities: Exercise of employee stock options..................... 522 241 504 Issuance of warrants.......... - - 679 Proceeds from long-term debt issuance.................... 46,937 115,418 87,561 Principal payments on long-term debt.............. (28,763) (87,713) (83,958) Proceeds from issuance of common stock................ 294 346 - Increase in deferred financing costs............. (442) (152) (1,211) Decrease in minority interest. (322) (349) (342) -------- -------- -------- Net cash provided by financing activities...... 18,226 27,791 3,233 Net increase (decrease) in cash and cash equivalents............ (3,913) 5,428 (3,841) Cash and cash equivalents, at beginning of period............. 4,905 992 6,420 -------- -------- -------- Cash and cash equivalents, at end of period................... $ 992 $ 6,420 $ 2,579 ======== ======== ======== Supplemental cash flow information: Cash paid during the period for: Interest...................... $ 1,059 $ 4,097 $ 4,637 Income taxes.................. $ 6,056 $ 1,543 $ 370 Satisfaction of Note Receivable in exchange for PP&E......... - - $ 356 Reconciliation of assets acquired and liabilities assumed: Fair Value of assets acquired. $ 12,505 - - Stock Issued.................. $ 8,775 - - Cash paid for acquisition..... $ 250 - - Liabilities assumed........... $ 3,480 - -
The accompanying notes are an integral part of the consolidated financial statements. 41 42 AU BON PAIN CO., INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the fiscal years ended December 31, 1994, December 30, 1995 and December 28, 1996 (in thousands)
Common Stock Preferred Stock $.0001 Par Value $.0001 Par Value CLASS A CLASS B CLASS B Additional Total ------- ------- ------- Paid-In Retained Stockholders' SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY ------ ------ ------ ------ ------ ------ ------- -------- ------------ Balance, Dec. 26, 1993 9,155 $1 1,916 $- - $- $55,979 $20,118 $76,098 Exercise of employee stock options 95 522 522 Income tax benefit related to stock option plan 634 634 Issuance of common stock 24 294 294 Stock issued for acquisition of ABP Midwest 370 20 8,775 8,775 Conversions of Class B to Class A 184 (184) Net income 7,841 7,841 Balance, Dec. 31, 1994 9,828 $1 1,732 $- 20 $- $66,204 $27,959 $94,164 ===== == ===== == == == ======= ======= ======= Exercise of employee stock options 45 241 241 Income tax benefit related to stock option plan 101 101 Issuance of common stock 31 346 346 Conversions of Class B to Class A 25 (25) Net loss (1,614) (1,614) Balance, Dec. 30, 1995 9,929 $1 1,707 $- 20 $- $66,892 $26,345 $93,238 ===== == ===== == == == ======= ======= ======= Exercise of employee stock options 30 147 147 Income tax benefit related to stock option plan 37 37 Issuance of common stock 48 320 320 Warrants issued for debt financing 679 679 Conversions of Class B to Class A 60 (60) Net loss (4,365) (4,365) Balance, Dec. 28, 1996 10,067 $1 1,647 $- 20 $- $68,075 $21,980 $90,056 ====== == ===== == == == ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 42 43 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business Au Bon Pain Co., Inc. and its subsidiaries operate two retail bakery cafe businesses and two franchising businesses under the concept names "Au Bon Pain" and "Saint Louis Bread Company". Included in franchise sales and other revenues are sales of product to franchisees and others of $7.3 million, $7.4 million and $8.3 million for the fiscal years ended December 31, 1994, December 30, 1995 and December 28, 1996, respectively. Included in costs and expenses are charges related to franchise sales of approximately $1.8 million, $1.3 million and $1.9 million for the fiscal years ended December 31, 1994, December 30, 1995 and December 28, 1996, respectively. 2. Summary of Accounting Policies Principles of Consolidation The consolidated statements include the accounts of Au Bon Pain Co., Inc., ABP Holdings, Inc., a wholly owned subsidiary, Saint Louis Bread Company, Inc. ("SLB"), a wholly owned subsidiary, and investments in joint ventures in which a majority interest is held (the "Company"). All intercompany balances and transactions have been eliminated. Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with maturity at the time of purchase of three months or less to be cash equivalents. Inventories Inventories are valued at the lower of cost (first-in, first-out) or market. 43 44 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Property, Equipment and Depreciation Property and equipment are stated at cost. Upon retirement or sale, the cost of assets disposed of and their related accumulated depreciation are removed from the accounts. Any resulting gain or loss is credited or charged to operations. Maintenance and repairs are charged to expense when incurred, while betterments are capitalized. Depreciation is computed over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the terms of the leases (including available option periods) or over their useful lives, whichever is shorter. The estimated useful lives used for financial statement purposes are: Machinery and equipment................. 3-10 years Furniture and fixtures.................. 3-10 years Leasehold improvements.................. 10-23 years Signs................................... 10 years Interest is capitalized in connection with the construction of new locations or facilities. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. Capitalized interest amounted to $272,000, $792,000 and $581,000 in 1994, 1995 and 1996 respectively. Intangible Assets Intangible assets consist of goodwill arising from the excess cost over the value of net assets of joint ventures, businesses and stores acquired, as well as the original acquisition of the Company. Goodwill is amortized on a straight-line basis over periods ranging from twenty-five to forty years. Periodically management assesses, based on undiscounted cash flows, if there has been a permanent impairment in the carrying value of its intangible assets and, if so, the amount of any such impairment, by comparing anticipated discounted future operating cash flows from acquired businesses with the carrying value of the related intangibles. In performing this analysis, management considers such factors as current results, trends and future prospects, in addition to other economic factors. Income Taxes The provision for income taxes is determined in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under this method, deferred taxes are determined based on the difference between the financial statements and the tax bases of assets and liabilities using enacted income tax rates in effect in the years in which the 44 45 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) differences are expected to reverse. Tax credits are recorded as a reduction in income taxes when utilized. The Company's temporary differences consist primarily of depreciation and amortization and valuation reserves. Deferred Financing Costs Costs incurred in connection with obtaining debt financing are amortized over the terms of the related debt. Franchise and Development Fees Franchise fees are the result of sales of area development rights and the sale of individual franchise locations to third parties, both domestically and internationally. Fees from the sale of area development rights are 100% recognized as revenue upon completion of all commitments related to the agreements. Fees from the sale of individual franchise locations are 100% recognized as revenue upon the commencement of franchise operations. Capitalization of Certain Development Costs The Company capitalizes certain expenses associated with the development and construction of new store locations. Capitalized costs of $4.3 million and $2.4 million as of December 30, 1995 and December 28, 1996, respectively, are recorded as part of the asset to which they relate and are amortized over the asset's useful life. Advertising Costs Advertising costs are expensed when incurred. Pre-Opening Costs All pre-opening costs associated with the opening of new retail locations are expensed when incurred. Fiscal Year The Company's fiscal year ends on the last Saturday in December. Fiscal years for the consolidated financial statements included herein include 53 weeks for the fiscal year ended December 31, 1994, 52 weeks for the fiscal years ended December 30, 1995 and December 28, 1996. 45 46 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Income Per Share Data Income per share is based on the weighted average number of shares outstanding during the period after consideration of the dilutive effect, if any, for stock options and convertible debt. Fully diluted net income per share has not been presented as the amount would not differ significantly from those presented. Fair Value of Financial Instruments The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable approximated fair value as of December 30, 1995 and December 28, 1996, because of the relatively short maturity of these instruments. The carrying value of long-term debt, including the current portion, approximated fair value as of December 30, 1995 and December 28, 1996, based upon quoted market prices for the same or similar issues. 3. Inventories Inventories consist of the following (in thousands):
December 30, December 28, 1995 1996 ----------- ----------- Production....................... $ 1,878 $ 3,071 Retail stores.................... 1,983 1,762 Paper goods...................... 475 456 Other............................ 3,440 3,708 -------- -------- $ 7,776 $ 8,997 ======== ========
4. Property and Equipment Major classes of property and equipment consist of the following (in thousands):
December 30, December 28, 1995 1996 ----------- ----------- Leasehold improvements........... $ 81,897 $ 91,161 Machinery and equipment.......... 56,745 59,414 Furniture and fixtures........... 18,972 19,063 Construction in progress......... 16,351 19,585 Signage.......................... 3,577 3,634 -------- -------- 177,542 192,857 Less accumulated depreciation and amortization............... 56,387 71,124 -------- -------- Property and equipment, net...... $121,155 $121,733 ======== ========
The Company recorded depreciation expense related to these assets of $10.6 million, $13.4 million and $14.7 million in 1994, 1995 and 1996, respectively. 46 47 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 5. Notes Receivable Notes receivable relate to the sale of certain retail locations and to the funding for the opening of new locations of a franchisee. These notes bear interest of 8% payable in monthly installments of $16,800 including interest, with a final principal payment due on March 31, 2004. 6. Non-recurring Charges During the third quarter of fiscal 1996, the Company recorded a non-recurring charge of $4.4 million principally to reflect a write-down under Statement of Financial Standards, 121, "Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121, adopted at the beginning of fiscal year 1996, establishes accounting standards for recognizing and measuring the impairment of long-lived assets and requires reducing the carrying amount of any impaired asset to fair value. The charge was taken as a result of continued less than expected performance results at certain Au Bon Pain restaurants. The $4.4 million non-cash charge included a $1.4 million goodwill write-down, a $0.6 million fixed asset write-down and a $1.4 million write-down of an office building held for resale. At December 28, 1996, the residual value of the office building held for resale was $4.2 million.. The charge represented a reduction of the carrying amounts of the assets to their estimated fair values as determined by using discounted estimated future cash flows. In addition, the $4.4 million charge included a $1.0 million charge to write-down the book value of six restaurants whose leases expire in 1997 and which will not be renewed. For the fifty-two weeks ended December 30, 1995 and December 28, 1996 the restaurants included in the reserve had sales of $3,662,000 and $3,096,000, respectively and a pre-tax loss of $322,000 and $578,000, respectively. During the third quarter of fiscal 1995, the Company recorded a non-recurring pre-tax charge of $8.5 million principally to cover the expected costs of closing certain under-performing restaurants. The components of the non-recurring charge included cash costs of approximately $2.1 million for lease obligations, professional and consulting services, employee relocation and termination costs and non-cash charges of approximately $6.4 million related to fixed asset disposals. The store closures were completed in fiscal 1996 for a total cost of approximately $221,000. As of December 28, 1996, $257,000 was in accrued expenses. The Company anticipates that this amount is adequate to cover any remaining expenses to be incurred in connection with 47 48 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) this charge in fiscal 1997. For the fifty-two weeks ended December 30, 1995 and December 28, 1996 the stores included in the reserve had sales of $5,673,000 and $4,247,000, respectively and a pre-tax loss of $946,000 and $1,077,000, respectively. 7. Acquisitions In April, 1994, the Company purchased the assets of ABP Midwest, Inc. for 20,000 shares of the Company's Class B Preferred Stock (Series 1), 370,000 shares of the Company's Class A Common Stock, cash of $250,000, incurred expenses of $650,000 and assumed liabilities of $2.8 million; the total purchase price was $12.5 million. Goodwill arising from the transaction totaled $7.7 million and is being amortized over a twenty-five year period, which approximates the average remaining lives of the leases acquired, including option or renewal periods. The acquisition was accounted for as a purchase and the results of operations of the acquired entity are included in the consolidated statements of operations from the acquisition date. The following unaudited pro forma summary presents the consolidated results of operations as if the acquisition of ABP Midwest, Inc. had occurred at the beginning of the fiscal year presented, after including the impact of certain adjustments, such as amortization of intangibles, increased interest expense on the acquisition debt and related income tax effects. These results do not purport to be indicative of what would have occurred had the acquisition been made as of those dates or of results which may occur in the future.
1994 --------------------- (in thousands, except per share amounts) Revenues.................................. $179,274 Operating income.......................... 15,051 Income before provision for income taxes.. 13,089 Net income................................ 7,581 Net income per common share............... .65
48 49 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 8. Accrued Expenses Accrued expenses consist of the following (in thousands):
December 30, December 28, 1995 1996 ----------- ----------- Accrued insurance.................... $ 1,148 $ 1,310 Rent................................. 2,687 3,503 Payroll and related taxes............ 2,507 2,554 Other taxes.......................... 524 433 Other................................ 4,752 5,535 ------- ------- $11,618 $13,335
9. Long-term Debt Long-term debt consists of the following (in thousands):
December 30, December 28, 1995 1996 ----------- ----------- Revolving credit line at prime (8.25% at December 28, 1996)......... $34,197 $22,000 Term loan - variable rate (8.0% at December 28, 1996)..................... 3,800 3,533 Industrial development bond for Mexico, Missouri plant at weekly floating rate (4.3% at December 28, 1996)................... 8,600 8,300 Loan with Cigna Insurance at prime less .75% (7.5% at December 28, 1996)..... - 2,000 Term loan at 7.0% payable in annual installments of $50,000 including interest, due January 2001................................. 238 205 Senior Subordinated Debenture (11.25% at December 28, 1996)................ - 14,400 ------- ------- Total debt............................. 46,835 50,438 Less current maturities................ 4,333 702 ------- ------- Total long-term debt................... $42,502 $49,736 ======= =======
As of December 30, 1995 and December 28, 1996, the Company had a $38 million and a $28 million unsecured revolving line of credit, respectively. The revolving credit agreement contains restrictions relating to future indebtedness, liens, investments, distributions, the merger, acquisition or sale of assets and certain leasing transactions. The agreement also requires the maintenance of certain financial ratios and covenants, the most restrictive being a debt to net worth ratio. There is a fee of 3/8% of the unused portion of the revolving line of credit. Available unused borrowings totaled approximately $4.0 million at 49 50 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) December 30, 1995 and $5.1 million at December 28, 1996. At December 30, 1995 and December 28, 1996 the Company had outstanding letters of credit against the revolving line of credit aggregating $1.7 million and $0.9 million, respectively. Interest is calculated on the $3.5 million term loan at the lower of prime plus .5% or LIBOR plus an amount ranging from 1.25% to 3.0% depending on certain financial test. Interest-only payments are due under the revolving credit line and $3.5 million term loan monthly, in arrears, with principal balance payable at maturity, May 31, 1998 under the revolving credit agreement and March 15, 2000 under the $3.5 million term loan. In July, 1995 the Company obtained an industrial development bond issued by the City of Mexico, Missouri, secured by a $8.7 million letter of credit with a commercial bank. The bond matures in July, 2000 and interest is payable monthly at a weekly floating rate, which was 4.3% on December 28, 1996. On July 24, 1996, the Company issued $15 million senior subordinated debentures maturing in July, 2000. The debentures accrue interest at varying fixed rates over the four year term, ranging from 11.25% to 14.0%. In connection with the private placement, warrants with an exercise price of $5.62 per share were issued to purchase between 400,000 and 580,000 shares of the Company's Class A Common Stock, depending on the term which the debentures remain outstanding and certain future events. At December 28, 1996, 400,000 warrants were issued and outstanding, all of which were vested. The Company has recognized interest expense of $1.7 million, $3.4 million and $5.1 million as of December 31, 1994, December 30, 1995 and December 28, 1996, respectively. Maturities of debt outstanding at December 28, 1996 are as follows (in thousands): 1997........................... $ 702 1998........................... 22,704 1999........................... 2,806 2000........................... 15,110 2001........................... 713 Thereafter..................... 8,403 ------- $50,438 =======
10. Convertible Subordinated Notes In December 1993, the Company issued $30.0 million of its unsecured 4.75% Convertible Subordinated Notes due 2001 ("1993 Notes"). The 1993 Notes are convertible at the holders' option into shares of the Company's Class A Common Stock at $25.50 per 50 51 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) share. In December 1997, the Company may, at its option, redeem all or a part of the outstanding 1993 Notes upon payment of a premium. The note agreement requires the Company to maintain minimum permanent capital, as therein defined. 11. Commitments The Company is obligated under noncancelable operating leases for two production facilities, a commissary and retail stores. Lease terms are generally for ten years with renewal options at certain locations and generally require the Company to pay a proportionate share of real estate taxes, insurance, common area and other operating costs. Substantially all store leases provide for contingent rental payments based on sales in excess of specified amounts. Aggregate minimum requirements under these leases are, as of December 28, 1996, approximately as follows (in thousands): 1997........................... $ 20,076 1998........................... 19,095 1999........................... 18,031 2000........................... 16,494 2001........................... 14,822 Thereafter..................... 52,204 -------- $140,722 ========
Rental expense under long-term leases was approximately $17.7 million, $22.3 million and $29.3 million in 1994, 1995 and 1996, respectively, which included contingent rentals of approximately $2.2 million, $2.9 million and $3.0 million, respectively. The Company currently has international franchise development agreements with developers in Japan, Chile, Brazil, Argentina and certain other South American countries, Thailand, Indonesia and The Philippines. Under these agreements, the Company has granted exclusive development rights to franchise and operate Au Bon Pain bakery cafes in the respective country or countries. These agreements generally require the payment of up front development fees, a franchise fee for each Au Bon Pain bakery cafe opened and royalties from the sale of products from each bakery cafe. The developer is, in most instances, required to open bakery cafes according to a specific minimum schedule. The Company may also agree to provide advice, consultation and training for the development of a frozen dough plant. The franchisee is required to purchase all of its frozen dough products from the Company until the opening of its own frozen dough plant, subject to importation regulations and restrictions. 51 52 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 12. Income Taxes Payable Provisions(benefit) for income taxes in the consolidated statements of operations is comprised of the following (in thousands):
December 31, December 30, December 28, 1994 1995 1996 ----------- ----------- ----------- Current: Federal............... $3,645 $1,202 $(4,281) State................. 1,830 219 (281) ------ ------ -------- 5,475 1,421 (4,562) ------ ------ -------- Deferred: Federal............... 15 (3,597) 1,397 State................. 7 (637) 247 ------ ------- ------- 22 (4,234) 1,644 ------ ------- ------- Total provision(benefit) for income taxes...... $5,497 $(2,813) $(2,918) ====== ======= =======
A reconciliation of the statutory federal income tax rate and the effective tax rate as a percentage of pretax income is as follows:
1994 1995 1996 ---- ---- ---- Statutory rate (benefit)........... 34.0% (34.0)% (34.0)% State income taxes, net of federal tax benefit.............. 9.1 (4.0) 2.2 Utilization of tax credits......... (1.2) (2.8) - Charitable contributions........... (1.3) (4.0) (3.7) Company-owned Life Insurance (See Note 13)...................... - (28.8) (15.4) Non-deductible goodwill and meals and entertainment................ - 5.7 9.1 Other, net......................... .6 4.3 1.8 ---- ----- ----- 41.2% (63.6)% (40.0)% ==== ===== =====
52 53 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) The tax effects of the significant temporary differences which comprise the deferred tax assets are as follows (in thousands): 1994 1995 1996 ---- ---- ---- Current assets: Pre-opening expenses............ $ 19 $ - $ - Receivables reserve............. 41 24 42 Accrued expenses................ 379 402 368 Tax credit carried forward...... - 1,095 822 Net operating loss carried forward........................ - 1,070 161 Charitable contribution carried forward................ - 219 219 Other reserves................... - 126 63 ----- ------ ------ 439 2,936 1,675 ----- ------ ------ Non-current assets/liabilities: Property, plant and equipment... 285 1,964 799 Accrued expenses................ 634 1,080 1,073 Goodwill........................ (543) (931) (1,325) ----- ------ ------ 376 2,113 547 ----- ------ ------ Total deferred tax asset $ 815 $5,049 $2,222 ===== ====== ======
At December 28, 1996, the Company has net operating losses of $12,590,952 which can be carried back three years or carried forward for fifteen years to offset Federal taxable income. In addition, the Company has alternative minimum tax credit carryforwards of approximately $656,000 which are available to reduce future regular Federal income taxes over an indefinite period. 13. Deposits and Other During fiscal 1996, the Company established a $4.5 million deposit with its distributor. This financial arrangement allows the Company to receive lower distribution costs. The savings exceed the carrying value of the deposit. The deposit is flexible and the Company may at times decrease the amount on deposit, at its discretion. During fiscal year 1994, the Company established a company-owned life insurance program ("COLI") covering a substantial portion of its employees. At December 28, 1996, the cash surrender value and prepaid premiums of $69.3 million and the insurance policy loans of $69.0 million were netted and included in other assets on the consolidated balance sheet. The loans are collateralized by the cash values of the underlying life insurance policies and require interest payments at a rate of 10.02%. Tax law changes adopted as part of the Health Insurance Portability and Accountability Act significantly reduced the level of tax 53 54 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) benefits recognized under the Company's COLI program in the third quarter of 1996. The Company included $2.1 million of expenses in other (income) expense, net, relating to COLI in 1996. 14. Stockholders' Equity Class B Preferred Stock In April 1994, the Company issued 20,000 shares of Class B Preferred Stock (Series 1) as part of the ABP Midwest acquisition. Holders of these shares of Class B Preferred Stock (Series 1) are entitled to the same rights and preferences as the holders of Class A Common Stock, except that the preferred shares are non-voting. Common Stock Each share of Class B Common Stock has the same dividend and liquidation rights as each share of Class A Common Stock. The holders of Class B Common Stock are entitled to three votes for each share owned. The holders of Class A Common Stock are entitled to one vote for each share owned. Each share of Class B Common Stock is convertible, at the shareholder's option, into Class A Common Stock on a one-for-one basis. The Company had reserved at December 28, 1996, 5,434,277 shares of its Class A Common Stock for issuance upon conversion of Class B Common Stock and Class B Preferred Stock (Series 1) and exercise of awards granted under the Company's 1992 Equity Incentive Plan, Formula Stock Option Plan for Independent Directors and conversion of the 1993 Notes (see Note 10). Registration Rights Certain holders of Class A and Class B Common Stock, pursuant to stock subscription agreements, can require the Company, under certain circumstances, to register their shares under the Securities Act of 1933 or have included in certain registrations all or part of such shares, at the Company's expense. 1992 Equity Incentive Plan In May 1992, the Company adopted its Equity Incentive Plan ("Equity Plan") to replace its Non-Qualified Incentive Stock Option Plan. Under the Equity Plan, a total of 950,000 shares of Class A Common Stock was initially reserved for awards under the Equity Plan. The Equity Plan was amended by the Board of Directors and the stockholders in May 1994 to increase the number of shares available thereunder from 950,000 to 2,500,000. Awards under the Equity Plan can be in the form of stock options (both 54 55 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) qualified and non-qualified), stock appreciation rights, performance shares, restricted stock or stock units. Activity under the Equity Plan and its predecessor is summarized below:
Wtd. Avg. Option Exercise SHARES* PRICE* PRICE* --------- ------------ ------ Outstanding at December 25, 1993. 862,091 $ 3.33-25.88 $14.78 Granted........................ 699,037 $15.38-26.00 $20.79 Exercised...................... (94,307) $ 3.33-18.25 $ 5.56 Canceled....................... (59,508) $ 4.50-25.25 $14.70 --------- ------------ ------ Outstanding at December 31, 1994. 1,407,313 $ 4.17-26.00 $18.50 Granted........................ 1,543,052 $ 6.00-16.00 $ 7.47 Exercised...................... (45,425) $ 4.17- 6.25 $ 5.30 Canceled....................... (1,473,503) $ 4.50-26.00 $17.88 --------- ------------ ------ Outstanding at December 30, 1995. 1,431,437 $ 4.50-21.25 $ 7.32 Granted........................ 742,345 $ 6.00- 8.88 $ 7.67 Exercised...................... (30,200) $ 4.50- 6.25 $ 4.87 Canceled....................... (211,548) $ 5.67-20.00 $ 7.92 --------- ------------ ------ Outstanding at December 28, 1996. 1,932,034 $ 4.50-21.25 $ 7.42 ========= ============ ====== * Adjusted to reflect repricing.
Options vest over a five year period and must be exercised within ten years from the date of the grant. Of the options at December 28, 1996, 927,325 were vested and exercisable. Formula Stock Option Plan for Independent Directors On January 27, 1994, the Company's Board of Directors authorized the Formula Stock Option Plan for Independent Directors, as defined in the agreement. This plan authorized a one-time grant of an option to purchase 10,000 shares of the Company's Class A Common Stock at its closing price on January 26, 1994. The plan also allows for independent directors elected after that time to receive a similar option at the closing price for the day immediately preceding the individual's election to the board. Each independent director who is first elected as such after the effective date of the Directors' Plan shall receive, as of the date he or she is so elected, a one-time grant of an option to purchase 5,000 shares of Class A Common Stock at a price per share equal to the closing price of the Class A Common Stock as reported by the Nasdaq/National Market System for the trading day immediately preceding the date of the person's election to the board. 55 56 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) In addition, all independent directors serving in such capacity as of the last day of each fiscal year commencing with the fiscal year ending December 31, 1994 receive an option to purchase 5,000 shares of Class A Common Stock at the closing price for the prior day. Each option granted is fully vested at the grant date, and is exercisable, either in whole or in part, for 10 years following the grant date. The Company has granted 88,248 options under this plan as of December 28, 1996. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, which is effective for the Company's financial statements for fiscal years beginning after December 15, 1995. SFAS 123 allows companies to either account for stock-based compensation under the new provisions of SFAS 123 or under the provisions of Accounting Principles Board Opinion No. 25 ("APB25"), Accounting for Stock Issued to Employees, but requires pro-forma disclosure in the footnotes to the financial statements as if the measurement provisions of SFAS 123 had been adopted. The Company has elected the disclosure-only alternative and, accordingly, no compensation costs have been recognized for the stock option plans. Had compensation costs for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1995 and 1996 consistent with the provisions of SFAS 123, the Company's net loss for the years ended December 30, 1995 and December 28, 1996 would have been increased to the pro forma amounts indicated below:
1995 1996 ------------------------ ------------------------ Net Loss Net Loss Net Loss Net Loss (in thousands) Per Share (in thousands) Per Share As Reported $(1,614) $(.14) $(4,365) $(.37) Pro Forma $(1,819) $(.16) $(4,965) $(.42)
The effects of applying SFAS 123 in this pro-forma disclosure are not likely to be representative of the effects on reported net income for future years. SFAS 123 does not apply to awards prior to 1995 and additional awards in future years are anticipated. The fair value of the options granted during 1995 and 1996 is estimated at $341,000 and $1.0 million, respectively, on the date 56 57 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield 0%, volatility of 35%, risk-free interest rate of 6.0%, assumed forfeiture of 10% and an expected life of 6 years. The following table summarizes information concerning currently outstanding and exercisable options:
Options Options OUTSTANDING EXERCISABLE -------------------- -------------------- Weighted Average Range of Remaining Weighted Weighted Exercise Number Contractual Average Number Average PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ------------ ----------- ----------- -------- ----------- -------- $ 4.50- 6.75 269,328 6.13 $ 6.16 168,482 $ 6.06 $ 6.75-10.13 1,631,653 8.20 $ 7.51 758,255 $ 7.25 $10.13-15.19 29,877 8.36 $12.97 - - $15.19-21.25 1,176 6.92 $21.25 588 $21.25 --------- ---- ------ ------- ------ 1,932,034 7.93 $ 7.42 927,325 $ 7.04
1992 Employee Stock Purchase Plan In May 1992, the Company adopted its 1992 Employee Stock Purchase Plan ("1992 Purchase Plan") to replace its Employee Stock Purchase Plan. Under the 1992 Purchase Plan, a total of 150,000 shares of Class A Common Stock is reserved for issuance. The 1992 Purchase Plan gives eligible employees the option to purchase Class A Common Stock (total purchases in a year may not exceed 10% of an employee's prior year compensation) at 85% of the fair market value of the Class A Common Stock at the time the option is exercised. 57 58 AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Activity under the 1992 Purchase Plan and its predecessor is summarized below:
Option Shares Price ------- ------------ Outstanding at December 25, 1993.. 3,747 $ 19.34 Granted......................... 20,325 $13.60-17.21 Exercised....................... (18,137) $14.19-19.34 Canceled........................ (366) $14.19-19.34 ------- ------------ Outstanding at December 31, 1994.. 5,569 $ 13.60 Granted......................... 41,154 $ 6.59-11.58 Exercised....................... (35,715) $ 6.59-13.60 Canceled........................ - $ - ------- ------------ Outstanding at December 30, 1995.. 11,008 $ 7.01 Granted......................... 42,478 $ 5.53- 7.22 Exercised....................... (47,671) $ 6.07- 7.22 Canceled........................ - $ - ------- ------------ Outstanding at December 28, 1996.. 5,815 $ 5.53 ======= ============
15. Employee Benefit Plans Employee Savings Plan The Au Bon Pain Employee 401(k) Plan ("Savings Plan") was adopted by the Company in 1991 under Section 401(k) of the Internal Revenue Code of 1986, as amended. All employees of the Company, including executive officers, are eligible to participate in the Savings Plan. A participating employee may elect to defer on a pre-tax basis up to 15% of his or her salary. This amount is contributed to the Savings Plan. All amounts vest immediately and are invested in various funds as directed by the participant. The full amount in a participant's account will be distributed to a participant upon termination of employment, retirement, disability or death. The Company does not currently contribute to the Savings Plan. The Saint Louis Bread Company Employee 401(k) Plan ("SLB Savings Plan") was adopted by the former Saint Louis Bread Company in 1993 under Section 401(k) of the Internal Revenue Code of 1986, as amended. All employees of SLB, including executive officers, are eligible to participate in the SLB Savings Plan. A participating employee may elect to defer on a pre-tax basis up to 15% of his or her salary. This amount is contributed to the SLB Savings Plan. All participant contributions vest immediately and are invested in various funds as directed by the participant. SLB currently matches 25% of the first 5% of savings contribution. SLB has reserved the right to change the match percent from year to year at its discretion. Matching contributions vest over seven years. The full vested amount in a participant's account will be distributed to a participant upon termination of employment, retirement, disability or death. 58 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf on March 20, 1997 by the undersigned, thereunto duly authorized. AU BON PAIN CO., INC. By: /s/ Louis I. Kane ------------------------------- Louis I. Kane Co-Chairman Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the date indicated: SIGNATURE TITLE DATE --------- ----- ---- /s/ Louis I. Kane Co-Chairman March 20, 1997 - --------------------------- Louis I. Kane /s/ Ronald M. Shaich Co-Chairman and Principal March 20, 1997 - --------------------------- Executive Officer Ronald M. Shaich /s/ Francis W. Hatch Director March 20, 1997 - --------------------------- Francis W. Hatch /s/ George E. Kane Director March 20, 1997 - --------------------------- George E. Kane /s/ James R. McManus Director March 20, 1997 - --------------------------- James R. McManus /s/ Henry J. Nasella Director March 20, 1997 - --------------------------- Henry J. Nasella /s/ Joseph P. Shaich Director March 20, 1997 - --------------------------- Joseph P. Shaich /s/ Anthony J. Carroll Vice President, Treasurer March 20, 1997 - --------------------------- and Principal Financial Anthony J. Carroll and Accounting Officer 60 60 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. FINANCIAL STATEMENTS. -------------------- The following described consolidated financial statements of the Company are included in this report: Report of Independent Accountants. Consolidated Balance Sheets at December 30, 1995 and December 28, 1996. Consolidated Statements of Operations for the years ended December 31, 1994, December 30, 1995 and December 28, 1996. Consolidated Statements of Cash Flows for the years ended December 31, 1994, December 30, 1995 and December 28, 1996. Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, December 30, 1995 and December 28, 1996. Notes to Consolidated Financial Statements. 2. FINANCIAL STATEMENT SCHEDULE. ---------------------------- The following financial statement schedule for the Company is filed herewith: Schedule II - Valuations and Qualifying Accounts. All other schedules are omitted because not applicable or not required by Regulation S-X. 61 3. EXHIBITS. -------- Exhibit NUMBER DESCRIPTION - ------- ----------- 3.1 Certificate of Incorporation of Registrant, as amended to June 2, 1991. Incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 3.1.1 Certificate of Amendment to Certificate of Incorporation, dated and filed June 3, 1991. Incorporated by reference to Exhibit 3.1.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 3.1.2 Certificate of Amendment to the Certificate of Incorporation filed on June 2, 1994. Incorporated by reference to Exhibit 3.1.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 3.1.3 Certificate of Designations, Preferences and Rights of the Class B Preferred Stock (Series 1), filed November 30, 1994. Incorporated by reference to Exhibit 3.1.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 3.2 Bylaws of Registrant, as amended to date. Incorporated by reference to Registrant's registration statement on Form S-1 (File No. 33-40153), Exhibit 3.2. 4.1 Amended and Restated Revolving Credit and Term Loan Agreement, dated as of March 17, 1995, among the Registrant, USTrust, the First National Bank of Boston, Citizens Bank of Massachusetts and USTrust, as agent. Incorporated by reference to Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 4.1.2 First Amendment to Amended and Restated Revolving Credit and Term Loan Agreement, dated as of September 6, 1995, among the Registrant, Saint Louis Bread Company, Inc., ABP Midwest Manufacturing Co., Inc., USTrust, the First National Bank of Boston, Citizens Bank of Massachusetts and USTrust, as agent. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995. 4.1.3 Second Amendment to Amended and Restated Revolving Credit, and Term Loan Agreement, dated as of July 24, 1996, among the Registrant, Saint Louis Bread Company, Inc., ABP Midwest Manufacturing Co., Inc., 62 USTrust, The First National Bank of Boston, Citizens Bank of Massachusetts and USTrust, as agent.* 4.1.4 Third Amendment to Amended and Restated Revolving Credit and Term Loan Agreement, dated as of September 6, 1996, among the Registrant, Saint Louis Bread Company, Inc., ABP Midwest Manufacturing Co., Inc., USTrust, The First National Bank of Boston, Citizens Bank of Massachusetts and USTrust, as agent* 4.1.5 Fourth Amendment and Waiver to Amended and Restated Revolving Credit and Term Loan Agreement, dated as of November 22, 1996, among the Registrant, Saint Louis Bread Company, Inc., ABP Midwest Manufacturing Co., Inc., USTrust, The First National Bank of Boston, Citizens Bank of Massachusetts and USTrust, as agent* 4.2 Form of 4.75% Convertible Subordinated Note due 2001. Incorporated by reference to Registrant's Form 8-K filed December 22, 1993, Exhibit 4. 4.3.1 Investment Agreement dated as of July 24, 1996 by and between Au Bon Pain Co., Inc., Saint Louis Bread Company, Inc., ABP Midwest Manufacturing Co., Inc., Allied Capital Corporation, Allied Capital Corporation II, Capital Trust Investments, Ltd.* 4.3.2 Senior Subordinated Debenture dated as of July 24, 1996 in the amount of $3,600,000 from Au Bon Pain Co., Inc., Saint Louis Bread Company, Inc., and ABP Midwest Manufacturing Co., Inc. payable to Allied Capital Corporation.* 4.3.3 Senior Subordinated Debenture dated as of July 24, 1996 in the amount of $7,500,000 from Au Bon Pain Co., Inc., Saint Louis Bread Company, Inc., and ABP Midwest Manufacturing Co., Inc. payable to Capital Trust Investments, Ltd.* 4.3.4 Senior Subordinated Debenture dated as of July 24, 1996 in the amount of $3,900,000 from Au Bon Pain Co., Inc., Saint Louis Bread Company, Inc., and ABP Midwest Manufacturing Co., Inc. payable to Allied Capital Corporation II.* 10.1 Distribution Service Agreement between the Registrant and the SYGMA Network, Inc., dated December 2, 1994. Incorporated by reference to Exhibit 10.1.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 63 10.2 Lease from Economic Development and Industrial Corporation to the Registrant, dated December 14, 1982, as amended August 1, 1984 and July 1, 1985. Incorporated by reference to Registrant's registration statement on Form S-1 (File No. 33-40153), Exhibit 10.8. 10.3.1 Registrant's Non-Qualified Stock Option Plan For Employees and forms of option agreements thereunder. Incorporated by reference to Registrant's registration statement on Form S-1 (File No. 33-40153), Exhibit 10.10. 10.3.2 Registrant's 1992 Equity Incentive Plan and form of non-qualified option agreement thereunder. Incorporated by reference to Registrant's registration statement on Form S-1 (File No. 33-40153), Exhibit 10.13. 10.3.3 Registrant's 1992 Employee Stock Purchase Plan. Incorporated by reference to Registrant's registration statement on Form S-1 (File No. 33-453219), Exhibit 10.14. 10.3.4 Registrant's Formula Stock Option Plan for Independent Directors and form of option agreement thereunder, as amended. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995. 10.4 Amended and Restated Coffee Supply Agreement by and among Registrant and Peet's Companies, Inc., Peet's Coffee and Tea, Inc., and Peet's Trademark Company, dated as of the 26th day of October, 1994. Incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.5 Indenture of Trust dated as of July 1, 1995 by and between the Industrial Development Authority of the City of Mexico, Missouri and Mark Twain Bank, as Trustee. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995. 10.5.1 Loan Agreement dated as of July 1, 1995 by and between the Industrial Development Authority of the City of Mexico, Missouri and ABP Midwest Manufactuing Co., Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995. 10.5.2 Promissory Note issued by ABP Midwest Manufacturing Co., Inc. in the face amount of $8,741,370. 64 Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995. 10.6.1 Employment Agreement between the Registrant and Richard Postle. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995.+ 10.6.2 Employment Agreement between the Registrant and Robert Taft.*+ 10.6.3 Employment Letter between the Registrant and Maxwell Abbott.*+ 10.6.4 Employment Memorandum between the Registrant and Samuel Yong.*+ 10.7.1 Form of Stock Purchase Warrant from Au Bon Pain Co., Inc. to Allied Capital Corporation, Allied Capital Corporation II, and Capital Trust Investments, Ltd.* 10.7.2 Form of Contingent Stock Purchase Warrant from Au Bon Pain Co., Inc. to Allied Capital Corporation, Allied Capital Corporation II and Capital Trust Investments, Ltd.* 10.7.3 Form of Stock Purchase Warrant from Au Bon Pain Co., Inc. to Princes Gate Investors, L.P., Acorn Partnership I L.P., PG Investments Limited, PGI Sweden AB and Gregor Von Opel.* 10.7.4 Registration Rights Agreement dated as of July 24, 1996 among Allied Capital Corporation, Allied Capital Corporation II, Capital Trust Investments, Ltd., Princes Gate Investors, L.P., Acorn Partnership I, L.P., PGI Investments Limited, PGI Sweden AB, Gregor Von Opel and Au Bon Pain Co., Inc.* 10.8.4 Form of Rights Agreement, dated as of October 21, 1996 between the Registrant and State Street Bank and Trust Company. Incorporated by reference to the Registrant's registration statement on Form 8-A (File No. 000-19253). 11.1 Computation of Earnings per Share.* 21 Registrant's Subsidiaries.* 27 Financial Data Schedule.* - ------------------ * Filed herewith. + Management contract or compensatory plan required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c). (b) Reports on Form 8-K. During the last quarter of the fiscal year covered by this report, the Company filed no report on Form 8-K. EX-4.1.3 2 SECOND AMENDMENT TO REVOLVING CREDIT & TERM LOAN 1 - -------------------------------------------------------------------------------- SECOND AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT - -------------------------------------------------------------------------------- Second Amendment to Amended and Restated Revolving Credit and Term Loan Agreement dated as of July 24, 1996 (the "Second Amendment"), by and among AU BON PAIN CO., INC., a Delaware corporation ("ABP"), SAINT LOUIS BREAD COMPANY, INC., a Delaware corporation ("Saint Louis Bread"), ABP MIDWEST MANUFACTURING CO., INC., a Delaware corporation ("ABP Midwest", and, collectively with ABP and Saint Louis Bread, the "Borrowers"), and USTRUST, a Massachusetts trust company, THE FIRST NATIONAL BANK OF BOSTON, a national banking association, CITIZENS BANK OF MASSACHUSETTS, a Massachusetts savings bank (collectively, the "Banks"), and USTRUST as agent for the Banks (in such capacity, the "Agent"), amending certain provisions of the Amended and Restated Revolving Credit and Term Loan Agreement dated as of March 17, 1995 (as amended by the First Amendment to Amended and Restated Revolving Credit and Term Loan Agreement dated as of March 17, 1995, and as further amended and in effect from time to time, the "Credit Agreement") by and among the Borrowers, the Banks and the Agent. Terms not otherwise defined herein which are defined in the Credit Agreement shall have the same respective meanings herein as therein. WHEREAS, the Borrowers, the Banks and the Agent have agreed to modify certain terms and conditions of the Credit Agreement as specifically set forth in this Second Amendment; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SS.1. AMENDMENT TO SS.1 OF THE CREDIT AGREEMENT. Section 1 of the Credit Agreement is hereby amended as follows: (a) by inserting in the appropriate alphabetical order the following definitions: 4.75% CONVERTIBLE SUBORDINATED NOTES. Those certain 4.75% Convertible Subordinated Notes due January 2, 2001 issued by Au Bon Pain Co., Inc. in the aggregate principal amount of $30,000,000 pursuant to the terms of that certain Securities Purchase Agreement dated as of December 17, 1993 among Au Bon Pain Co., Inc. and certain purchasers named therein (as such notes are amended, modified and restated and in effect from time to time). INVESTMENT AGREEMENT. The Investment Agreement dated as of July 24, 1996 by and among the Borrowers, Allied Capital 2 -2- Corporation, Allied Capital Corporation II, and Capital Trust Investments, Ltd. SUBORDINATION AGREEMENT. The Subordination Agreement dated as of July 24, 1996 among the Banks, the Agent, the Borrowers, Allied Capital Corporation, Allied Capital Corporation II, and Capital Trust Investments, Ltd.. (b) by deleting the definition of "Commitment" in its entirety and replacing it with the following definition: COMMITMENT. With respect to each Bank, the amount set forth in the column labeled Commitment opposite such Bank's name on Schedule 1.1(a) hereto. (c) by amending the definition of "Consolidated Total Debt Service" as follows: (i) by inserting immediately after the words "one fifth of the" in clause (c) thereof the phrase "(i) "; and (ii) by deleting the period at the end of the aforementioned definition and substituting therefor the phrase " minus (ii) those Revolving Credit Loans equal to that portion of the deposit posted by Au Bon Pain Co., Inc. with The SYGMA Network, Inc. and/or The SYGMA Network of Ohio, Inc. at the relevant time of reference thereto pursuant to the SYGMA Distribution Service Agreement made as of December 13, 1994 among Au Bon Pain Co., Inc., The SYGMA Network, Inc. and The SYGMA Network of Ohio, Inc. which Au Bon Pain Co., Inc. can withdraw from The SYGMA Network, Inc. and/or The SYGMA Network of Ohio, Inc., as applicable, at any time at the sole option of Au Bon Pain Co., Inc. pursuant to such agreement." (d) by amending the definition of "Consolidated Total Liabilities" by inserting immediately prior to the period at the end thereof the phrase "less those Revolving Credit Loans equal to that portion of the deposit posted by Au Bon Pain Co., Inc. with the SYGMA Network, Inc. and/or The SYGMA Network of Ohio, Inc. at the relevant time of reference thereto pursuant to the SYGMA Distribution Service Agreement made as of December 13, 1994 among Au Bon Pain Co., Inc., The SYGMA Network, Inc. and The SYGMA Network of Ohio, Inc. which Au Bon Pain Co., Inc. can withdraw from The SYGMA Network, Inc. and/or The SYGMA Network of Ohio, Inc., as applicable, at any time at the sole option of Au Bon Pain Co., Inc. pursuant to such agreement." (e) by deleting the definition of "Subordinated Funding Event" in its entirety. SS.2. AMENDMENT TO SS.2 OF THE CREDIT AGREEMENT. Section 2 of the Credit Agreement is hereby amended by deleting ss.2.9 in its entirety. 3 -3- SS.3. AMENDMENT TO SS.6 OF THE CREDIT AGREEMENT. Section 6 of the Credit Agreement is hereby amended as follows: (a) Section 6.1(j) of the Credit Agreement is hereby amended by deleting the word "and" at the end thereof. (b) Section 6.1(k) of the Credit Agreement is hereby amended by deleting the text thereof in its entirety and inserting the following text therefor: (k) unsecured subordinated Indebtedness in an aggregate principal amount not to exceed $15,000,000 evidenced by Senior Subordinated Debentures dated July 24, 1996 issued pursuant to the Investment Agreement and subordinated to the Obligations pursuant to the terms of the Subordination Agreement; and (c) Section 6.1 of the Credit Agreement is hereby further amended by adding a new subsection (l) at the end thereof as follows: (l) unsecured Indebtedness owing to INAC Corp. in an aggregate amount not to exceed $2,000,000 at any one time outstanding under that certain Revolving Credit Agreement dated as of January 12, 1996 by and between Au Bon Pain Co., Inc. and INAC Corp.. (d) Section 6.6 of the Credit Agreement is hereby amended by deleting the text thereof in its entirety and inserting the following text therefor: ss.6.6. CONSOLIDATION, MERGER AND SALE OF ALL ASSETS. The Borrowers will not, nor will it permit any of their material Subsidiaries to, (a) merge or consolidate into or with any other Person or convey, sell, lease or otherwise dispose of all or substantially all of its assets to another Person, or permit any Person to merge or consolidate into or with the Borrowers or any such Subsidiary or convey, sell, lease or otherwise dispose of all or substantially all of its assets to the Borrowers or any such Subsidiary; PROVIDED that (i) any such Subsidiary may merge into, or convey, sell, lease or dispose of its assets to, the Borrower or a wholly-owned Subsidiary of the Borrower, (ii) a Person other than such a Subsidiary may merge into, or convey, sell, lease or dispose of its assets to, the Borrower if the Borrower is the surviving or acquiring corporation, and (iii) a Person other than the Borrower or another Subsidiary may merge into, or convey, sell, lease or dispose of its assets to, such Subsidiary if (A) such Subsidiary is the surviving or acquiring corporation or (B) the surviving or acquiring entity, if not such Subsidiary, becomes a Subsidiary of the Borrower; PROVIDED FURTHER that in any such transaction the rights and powers of the Banks will not, in their sole reasonable discretion, be materially adversely affected thereby and 4 -4- immediately after such transaction no Default or Event of Default shall exist hereunder; and PROVIDED, FURTHER that, in no event shall the Borrower become a Subsidiary of any other Person without the prior consent of the Banks, (b) take any action which results in a "Repurchase Event" (as defined in ss.3.5 of the 4.75% Subordinated Convertible Notes), or (c) take any action which results in a "Transfer of Borrowers' Business" (as defined in the Investment Agreement). (e) Section 6.7(a) of the Credit Agreement is hereby amended by inserting before the phrase " and except for sales" the phrase ", except for sales or other dispositions of property in connection with the closings of stores listed on SCHEDULE 6.7 (provided that, in connection with the disposition of such stores, the Borrowers shall not incur more than $1,250,000 in cash charges or $7,000,000 in total cash and non-cash charges) ". (f) Section 6 of the Credit Agreement is hereby amended by inserting at the end thereof the following new Section 6.11: ss.6.11. PREPAYMENT OF SUBORDINATED DEBT. The Borrowers will not, and will not permit any of their Subsidiaries to, (a) amend, supplement or otherwise modify the terms of any of the Subordinated Debt (including, without limitation, the Subordinated Debt evidenced by the 4.75% Convertible Subordinated Notes and the Subordinated Debentures issued pursuant to the terms of the Investment Agreement) to increase the principal amount of the Indebtedness evidenced thereby or the rate of interest applicable to such Indebtedness, or to alter the schedule of payments of principal or interest with respect to such Indebtedness, or to alter the maturity date thereof, or (b) prepay, redeem, or repurchase any of the principal of, or interest on, such Subordinated Debt; PROVIDED that so long as no Default or Event of Default exists or would result therefrom, the Borrowers may prepay such Subordinated Debt from the proceeds of the issuance of additional shares of capital stock or other equity securities. SS.4. AMENDMENT TO SS.7 OF THE CREDIT AGREEMENT. Section 7 of the Credit Agreement is hereby amended as follows: (a) Section 7.2 of the Credit Agreement is hereby amended by deleting the text thereof in its entirety and inserting the following therefor: ss.7.2. FIXED CHARGE COVERAGE RATIO. For any period consisting of four consecutive fiscal quarters, the Fixed Charge Coverage Ratio of the Borrowers and their Subsidiaries for such period shall not be less than 1.25 to 1.00; PROVIDED that (a) for the period consisting of four consecutive fiscal quarters ending on the last day of the second fiscal quarter of fiscal year 1996 and for the 5 -5- period consisting of four consecutive fiscal quarters ending on the last day of the third fiscal quarter of fiscal year 1996, the Fixed Charge Coverage Ratio of the Borrowers and its Subsidiaries for each such period shall not be less than 1.20 to 1.00 and (b) for the period consisting of four consecutive fiscal quarters ending on the last day of the fourth fiscal quarter of 1996, the Fixed Charge Coverage Ratio of the Borrower and its Subsidiaries for such period shall not be less than 1.23 to 1.00. (b) Section 7.3 of the Credit Agreement is hereby amended by deleting the text thereof in its entirety and inserting the following therefor: ss.7.3. CONSOLIDATED CAPITAL EXPENDITURES. The Borrowers will not permit Consolidated Capital Expenditures (other than Capital Expenditures incurred with regard to the acquisition and equipping of, and improvements to, the Borrower's facilities in Mexico, Missouri) to exceed $17,500,000 in the fiscal year of the Borrowers ending in 1996. SS.5. AMENDMENT TO SS.10 OF THE CREDIT AGREEMENT. Section 10 of the Credit Agreement is hereby amended as follows: (a) Section 10(b) of the Credit Agreement is hereby amended by deleting the phrase "fifth (5th)" therein and substituting therefor the phrase "third (3rd)". (b) Section 10(d) of the Credit Agreement is hereby amended by deleting the phrase "thirty (30)" therein and substituting therefor the phrase "ten (10)". (c) Section 10 of the Credit Agreement is hereby amended by adding immediately after subsection (j) a new subsection (k) as follows: (k) the occurrence of a (i) "Repurchase Event" (as defined in ss.3.5 of the 4.75% Subordinated Convertible Notes), or (ii) "Transfer of Borrowers' Business" (as defined in the Investment Agreement); SS.6. AMENDMENT TO SCHEDULES. The Schedules to the Credit Agreement are hereby amended by (a) deleting SCHEDULE 1.1(a) in its entirety and replacing it with SCHEDULE 1.1(a) attached hereto; (b) deleting SCHEDULE 1.1(d) in its entirety and replacing it with SCHEDULE 1.1(d) attached hereto; (c) deleting SCHEDULE 1.1(e) in its entirety and replacing it with SCHEDULE 1.1(e) attached hereto; and (d) inserting a new SCHEDULE 6.7 attached hereto. SS.7. CONSENT AND WAIVER. (a) Pursuant to ss.6.1(e) of the Credit Agreement, each of the Banks hereby consents to the amendment of the Letter of Credit Reimbursement Agreement by the First Amendment to Letter of Credit Reimbursement Agreement dated September 6, 1995, the Second Amendment to Letter of Credit Reimbursement Agreement dated November 31, 6 -6- 1995, and the Third Amendment to Letter of Credit Reimbursement Agreement dated July 24, 1996. (b) Each of the Banks and the Agent hereby consent to the (i) Modification Agreement (the "Modification Agreement"), dated as of the date hereof, among ABP, Princes Gate Investors, L.P. ("PGI"), Acorn Partnership I, L.P. ("Acorn"), PGI Investments Limited ("PGI Investments"), PGI Sweden AB ("PGI Sweden") and Gregor Von Opel ("Von Opel" and, together with PGI, Acorn, PGI investments and PGI Sweden, the "4.75% Convertible Noteholders") and (ii) the Amendment and Waiver dated as of the date hereof, among ABP, Saint Louis Bread and the 4.75% Convertible Noteholders (the "Amendment and Waiver", and together with the Modification Agreement, the "Amending Documents"), dated as of the date hereof, among ABP, Saint Louis Bread and the 4.75% Convertible Noteholders. (c) Each of the Banks and the Agent hereby waive the provisions of the Credit Agreement, including, without limitation, the provisions of Sections 6.7(c) and 6.11 thereof, to the extent, but only to the extent, necessary to permit the execution, delivery and performance of the Amending Documents by ABP and Saint Louis Bread and the modifications and amendments of the terms of the Subordinated Debt evidenced by the 4.75% Convertible Subordinated Notes effected by the Amending Documents. SS.8. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers hereby repeats, on and as of the date hereof, each of the representations and warranties made in ss.4 of the Credit Agreement as though such representations and warranties refer specifically to such Borrower, except to the extent of changes resulting from transactions contemplated or permitted by this Second Amendment or the Credit Agreement and changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse and except to the extent that such representations and warranties relate expressly to an earlier date; provided, that all references therein to the Credit Agreement shall refer to such Credit Agreement as amended hereby. No Default or Event of Default has occurred and is continuing under the Credit Agreement. SS.9. EFFECTIVENESS. The effectiveness of this Second Amendment shall be subject to the satisfaction of the following conditions precedent: ss.9.1. CORPORATE ACTION. All corporate action necessary for the valid execution, delivery and performance by each of the Borrowers of this Second Amendment and the other Loan Documents to which they are or are to become a party shall have been duly and effectively taken, and evidence thereof satisfactory to the Banks shall have been provided to each of the Banks. ss.9.2. LOAN DOCUMENTS. This Second Amendment shall have been duly executed and delivered to the Agent by each of the parties hereto. ss.9.3. SUBORDINATION AGREEMENT. The Subordination Agreement shall have been duly executed and delivered to the Agent by each party thereto and the agreement amending certain terms of the subordination provisions of those certain 4.75% Convertible Subordinated Notes due 2001 shall have been duly executed and a copy delivered to the Agent certified by the Borrowers. 7 -7- ss.9.4. INVESTMENT AGREEMENT. The transactions contemplated by the Investment Agreement shall have been completed substantially in accordance with its terms and the Agent shall have received a copy of the Investment Agreement, each Debenture issued thereunder, and all other documents executed in connection therewith including any intercreditor agreement entered into among the holders of such Debentures and the holders of those certain 4.75% Convertible Subordinated Notes due 2001, certified to be true and complete by an officer of the Borrowers. SS.10. RATIFICATION, ETC. Except as expressly amended hereby, the Credit Agreement and all documents, instruments and agreements related thereto, including, but not limited to the Loan Documents, are hereby ratified and confirmed in all respects and shall continue in full force and effect. The Credit Agreement and this Second Amendment shall be read and construed as a single agreement. All references in the Credit Agreement or any related agreement or instrument to the Credit Agreement shall hereafter refer to the Credit Agreement as amended hereby. SS.11. NO WAIVER. Except as set forth in ss.7(c), nothing contained herein shall constitute a waiver of, impair or otherwise affect any Obligations, any other obligation of the Borrowers or any rights of the Agent or the Banks consequent thereon. SS.12. COUNTERPARTS. This Second Amendment may be executed in one or more counterparts, each of which shall be deemed an original but which together shall constitute one and the same instrument. SS.13. GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICT OF LAWS). 8 -8- IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment as a document under seal as of the date first above written. AU BON PAIN CO., INC. By: /s/ LOUIS I. KANE ----------------------------------- Name: Louis I. Kane Title: Co-Chairman SAINT LOUIS BREAD COMPANY, INC. By: /s/ LOUIS I. KANE ----------------------------------- Name: Louis I. Kane Title: Executive Vice President ABP MIDWEST MANUFACTURING CO., INC. By: /s/ LOUIS I. KANE ----------------------------------- Name: Louis I. Kane Title: Vice President USTRUST INDIVIDUALLY AND AS AGENT By: /s/ ANTHONY WILSON ----------------------------------- Name: Anthony Wilson Vice President THE FIRST NATIONAL BANK OF BOSTON By: /s/ MARGARET RONAN STACK ----------------------------------- Name: Margaret Ronan Stack Title: Vice President 9 -9- CITIZENS BANK OF MASSACHUSETTS By: /s/ KATHRYN J. BACASTOW ----------------------------------- Name: Kathryn J. Bacastow Title: SVP 10 Schedule 1.1(a) --------------- REVOLVING CREDIT COMMITMENTS --------- ------ -----------
Commitment Lender Commitment Percentage - ------ ---------- ---------- USTrust $11,666,666.67 33-1/3% 30 Court Street Boston, Massachusetts 02108 Telefax Number: (617) 726-7380 Telex: 681752 Answerback: UST BSN Attention: Anthony G. Wilson, V.P. The First National Bank of Boston $11,666,666.67 33-1/3% 100 Federal Street Boston, Massachusetts 02110 Telefax Number: (617) 434-4426 Telex: 940581 Answerback: BOSTONBK BSN Attention: Margaret R. Stack, V.P. Citizens Bank of Massachusetts $11,666,666.67 33-1/3% 55 Summer Street Boston, MA 02110 Telefax Number: (617) 482-9730 Attention: Anne Forbes Van Nest
11 Schedule 1.1(d) -------- ------ Revolving Credit Applicable Margin --------- ------ ---------- ------
==================================================================================================================================== Consolidated Net Income for Most Recently Ended Consolidated Total Liabilities To Consolidated Total Liabilities To Period of Four Consecutive Fiscal Quarters Consolidated Tangible Net Worth Consolidated Tangible Net Worth If Such Ratio is Less Than 1.6 to 1.0 If Such Ratio Equals or Exceeds 1.6 to 1.0 ------------------------------------- ------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Greater Than $9,000,000 0.75% 1.25% - ------------------------------------------------------------------------------------------------------------------------------------ from $7,000,000 to $9,000,000 (inclusive) 1.00% 1.50% - ------------------------------------------------------------------------------------------------------------------------------------ from $5,000,000 to $6,999,999.99 (inclusive) 1.50% 2.00% - ------------------------------------------------------------------------------------------------------------------------------------ from $2,000,000 to $4,999,999.99 (inclusive) 2.00% 2.50% - ------------------------------------------------------------------------------------------------------------------------------------ Less Than $2,000,000 2.50% 3.00% - ------------------------------------------------------------------------------------------------------------------------------------ ====================================================================================================================================
12 Schedule 1.1(e) -------- ------ Term Applicable Margin ---- ---------- ------
==================================================================================================================================== Consolidated Net Income for Most Recently Ended Consolidated Total Liabilities To Consolidated Total Liabilities To Period of Four Consecutive Fiscal Quarters Consolidated Tangible Net Worth Consolidated Tangible Net Worth If Such Ratio is Less Than 1.6 to 1.0 If Such Ratio Equals or Exceeds 1.6 to 1.0 ------------------------------------- ------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Greater Than $9,000,000 1.25% 1.75% - ------------------------------------------------------------------------------------------------------------------------------------ from $7,000,000 to $9,000,000 (inclusive) 1.50% 2.00% - ------------------------------------------------------------------------------------------------------------------------------------ from $5,000,000 to $6,999,999.99 (inclusive) 2.00% 2.50% - ------------------------------------------------------------------------------------------------------------------------------------ from $2,000,000 to $4,999,999.99 (inclusive) 2.50% 3.00% - ------------------------------------------------------------------------------------------------------------------------------------ Less Than $2,000,000 3.00% 3.50% - ------------------------------------------------------------------------------------------------------------------------------------ ====================================================================================================================================
13 SCHEDULE 6.7 1995 Reserve Activity 5/18/96 Period 5, 1996
Revised Reserve --------- ------------------------------------------- Expiration/ Total Non Cash Other Other Assets Close Original Write Off Cash to Closing to be Date Reserve Expenses Landlord Expenses Wrtn Off (Leaseholds) - ----------------------------------------------------------------------------------------------------- Closing Stores Dewey #27 Closed 153,299 153,299 0 20,000 137,369 Kenwood Mall #84 Closed 263,274 163,274 94,600 20,000 114,103 Westmoreland #114 Franchised 475,103 285,103 150,000 0 156,770 Annapolis Mall #122 Closed 53,891 8,891 45,000 3,492 28,178 Annapolis Mall #123 28-Dec-96 418,465 363,465 84,000 20,000 227,695 Great Mall #158 Closed 743,507 480,001 263,506 6,108 0 Los Ceritos #157 Closed 287,688 122,688 82,576 2,391 150,467 SUBTOTAL: 2,395,227 1,576,721 719,682 71,991 814,582 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- California: Laguna #151 31-Jan-05 349,561 349,561 0 0 0 Lake Street #154 1-May-04 439,865 439,865 0 0 0 Brea Mall #156 31-May-04 444,702 444,702 0 0 0 N. County Fair #179 30-Apr-05 327,265 327,265 0 0 0 Montclair Plaza #181 31-May-05 259,969 259,969 0 0 0 Franchise Provision 0 0 (500,000) 0 0 SUBTOTAL: 1,821,362 1,821,362 (500,000) 0 0 353 Sacramento St. #159 30-Sep-09 592,175 592,175 0 0 0 Franchise Provision 0 (400,000) 0 0 SUBTOTAL: 592,175 592,175 (400,000) 0 0 Westside #150 28-Dec-96 402,951 402,951 84,000 20,000 0 Topanga #155 28-Dec-96 392,563 392,563 84,000 20,000 0 350 N. San Fernando #190 30-Apr-05 404,402 404,402 0 20,000 0 Franchise Provision (922,405) 0 SUBTOTAL: 277,511 1,199,916 168,000 60,000 0 CALIFORNIA SUBTOTAL: 2,691,048 3,613,453 (732,000) 60,000 0 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- New Additions: Watertown #12 Closed 0 103,863 0 10,000 0 Riverside #18 TAW 0 243,790 0 5,000 Crystal Mall #22 Closed 0 53,483 0 10,000 0 500 Wood Street #115 Closed 0 439,108 (400,000) 0 Stuart Street #129 30-Jun-10 0 964,124 400,000 20,000 0 SUBTOTAL 0 1,804,368 0 45,000 0 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- Non Store Write Offs SLB Transition Costs: 700,000 0 700,000 Balance Sheet Clean Up 684,191 684,191 Organizational Adj. 150,000 0 150,000 Other 0 0 SUBTOTAL: 1,534,191 684,191 850,000 0 0 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- TOTAL RESERVE: 6,620,466 7,678,733 837,682 176,991 814,582 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- Units in Original Reserve to Remain Open Kenmore Square #03 31-Dec-97 293,704 Rock Center #24 30-Dec-96 301,283 Pain Francais Goodwill 281,550 Graham #38 30-Jun-97 240,405 Hartford Civic #63 31-Jul-01 118,077 Springfield #68 31-Dec-03 331,077 Woodfield Mall #81 10-Jan-02 313,804 SUBTOTAL: 1,879,900 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- TOTAL ORIGINAL RESERVE: 8,500,366 - -----------------------------------------------------------------------------------------------------
14 1995 Reserve Activity 5/18/96 Period 5, 1996
Rolling 13 Periods ---------------------- Est. Value Recovered Total Company Cash Assets Reserve P&L Flow - ------------------------------------------------------------------------------------------------------------------- (54,931) 255,737 (183,079)* (106,744) Dewey #27 (50,039) 341,938 (104,023) (28,966) Kenwood Mall #84 (75,453) 516,420 (152,662) (38,826) Westmoreland #114 (29,476) 56,085 (3,302) 6,735 Annapolis Mall #122 (115,914) 579,246 (244,044) (130,680) Annapolis Mall #123 (36,556) 713,059 (180,511) (137,420) Great Mall #158 (56,787) 301,335 (149,984) (95,501) Los Ceritos #157 (419,156) 2,763,820 (1,017,605) (531,402) SUBTOTAL - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- 0 349,561 (16,519) 37,251 Laguna #151 0 439,865 (79,591) 8,078 Lake Street #154 0 444,702 (30,221) 3,460 Brea Mall #156 0 327,265 (4,937) 40,894 N. County Fair #179 0 259,969 (90,662) (50,536) Montclair Plaza #181 0 (500,000) Franchise Provision 0 1,321,362 (221,930) 39,147 SUBTOTAL: 0 592,175 (94,875) (22,861) 353 Sacramento St. #159 (400,000) Franchise Provision 0 192,175 (94,875) (22,861) SUBTOTAL: (77,337) 429,614 (184,443) (141,284) Westside #150 (84,523) 412,040 (150,536) (75,253) Topanga #155 (50,000) 374,402 (118,662) (57,782) 350 N. San Fernando #190 0 Franchise Provision (211,860) 1,216,056 (453,641) (274,319) SUBTOTAL: (211,860) 2,729,593 (770,446) (258,033) CALIFORNIA SUBTOTAL - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- (32,023) 81,840 14,267 38,471 Watertown #12 (40,328) 208,462 195,762 222,079 Riverside #18 (26,517) 36,966 104,031 115,851 Crystal Mall #22 (114,126) (75,018) (27,349) 42,263 500 Wood Street #115 (213,312) 1,170,812 (233,720) (158,733) Stuart Street #129 (426,306 1,423,062 52,991 259,931 SUBTOTAL - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- 700,000 SLB Transition Costs: 684,191 Balance Sheet Clean Up 150,000 Organizational Adj. 0 Other 0 1,534,191 0 0 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- (1,057,322) 8,450,665 (1,735,060) (529,504) TOTAL RESERVE: - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Kenmore Square #03 Rock Center #24 Pain Francais Goodwill Graham #38 Hartford Civic #63 Springfield #68 Woodfield Mall #81 SUBTOTAL: - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- TOTAL ORIGINAL RESERVE: TOTAL ORIGINAL RESERVE: - ------------------------------------------------------------------------------------------------------------------- * The rolling 13 period company P&L and Cash Flow for Dewey Square are based on the differential resulting from sales transfers to near by units.
EX-4.1.4 3 3RD AMEND, REVOLVING CREDIT & TERM LOAN AGREEMENT 1 THIRD AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT Third Amendment to Amended and Restated Revolving Credit and Term Loan Agreement dated as of September 6, 1996 (the "Third Amendment"), by and among AU BON PAIN CO., INC., a Delaware corporation ("ABP"), SAINT LOUIS BREAD COMPANY, INC., a Delaware corporation ("Saint Louis Bread"), ABP MIDWEST MANUFACTURING CO., INC., a Delaware corporation ("ABP Midwest", and, collectively with ABP and Saint Louis Bread, the "Borrowers"), and USTRUST, a Massachusetts trust company, THE FIRST NATIONAL BANK OF BOSTON, a national banking association, CITIZENS BANK OF MASSACHUSETTS, a Massachusetts savings bank (collectively, the "Banks"), and USTRUST as agent for the Banks (in such capacity, the "Agent"), amending certain provisions of the Amended and Restated Revolving Credit and Term Loan Agreement dated as of March 17, 1995 (as amended by the First Amendment to Amended and Restated Revolving Credit and Term Loan Agreement dated as of September 6, 1995, the Second Amendment to Amended and Restated Revolving Credit and Term Loan Agreement dated as of July 24, 1996, and as further amended and in effect from time to time, the "Credit Agreement") by and among the Borrowers, the Banks and the Agent. Terms not otherwise defined herein which are defined in the Credit Agreement shall have the same respective meanings herein as therein. WHEREAS, the Borrowers, the Banks and the Agent have agreed to modify certain terms and conditions of the Credit Agreement as specifically set forth in this Third Amendment; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. AMENDMENT TO SECTION 1 OF THE CREDIT AGREEMENT. Section 1 of the Credit Agreement is hereby amended as follows: (a) by deleting the date "April 30, 1997" occurring in the definition of "Maturity Date" contained in Section 1.1 and replacing it with "June 30, 1998". (b) by amending the definition of Consolidated Total Debt Service by deleting therefrom the clause "plus (c) one fifth of the Revolving Credit Loans outstanding as of the last day of the period for which Consolidated Total Debt Service is then being determined". 2 -2- (c) by inserting in the appropriate alphabetical order the following definitions: Consolidated Adjusted Cash Flow. For any specified period, the sum of (a) Consolidated Net Income for such period, plus (b) the aggregate amount of depreciation, amortization and other non-cash charges for such period, in each case determined on a consolidated basis for the Borrowers and their Subsidiaries in accordance with generally accepted accounting principles. Consolidated Free Cash Flow. With respect to the Borrowers and their Subsidiaries and for any period, the sum of (a) Consolidated Net Income for such period plus (b) the aggregate amount of depreciation, amortization and other non-cash charges for such period, plus (c) to the extent deducted in the calculation of Consolidated Net Income for such period, Consolidated Total Interest Expense for such period, less (d) the aggregate amount of Non-Discretionary Capital Expenditures for such period, in each case determined on a consolidated basis for the Borrowers and their Subsidiaries in accordance with generally accepted accounting principles. Consolidated New Cafe Capital Expenditures. With respect to new bakery cafes or stores which open in any relevant fiscal period, the aggregate amount of Consolidated Capital Expenditures of the Borrowers and their Subsidiaries which, in accordance with generally accepted accounting principles, are properly attributable to the acquisition, construction, or equipping of such new cafes or stores regardless of the fiscal quarter in which such Consolidated Capital Expenditures were incurred. Projected New Cafe Capital Expenditures. Those Consolidated New Cafe Capital Expenditures of the Borrowers and their Subsidiaries anticipated by the Borrowers and their Subsidiaries to be incurred in connection with the opening of new bakery cafes or stores. For purposes of determining Projected New Cafe Capital Expenditures, Consolidated New Cafe Capital Expenditures incurred with respect to each new bakery cafe or store will be deemed to be incurred in the earlier of (a) the fiscal quarter in which such new bakery cafe or store actually opens for business with the public regardless of the fiscal period in which such Consolidated Capital Expenditures were actually incurred and (b) six (6) calendar months after the date on which the lease of the property where such bakery cafe or store will be located is entered into by any Borrower or any Subsidiary of the Borrower, or in the case of the purchase of such property, the date of such purchase by such Borrower or such Subsidiary. 3 -3- SECTION 2. AMENDMENT TO SECTION 3.1(a)(i) OF THE CREDIT AGREEMENT. Section 3.1(a)(i) of the Credit Agreement is hereby amended by inserting the following language immediately before the semi-colon occurring at the end of Section 3.1(a)(i): "provided that if the Revolving Credit Applicable Margin which would be applicable to such Revolving Credit Loan if such Revolving Credit Loan were a Eurodollar Rate Loan is greater than or equal to three percent (3.0%), then such Revolving Credit Loan shall bear interest at a rate per annum equal to the Base Rate plus one-half of one percent (0.50%)". SECTION 3. AMENDMENT TO SECTION 5.4 OF THE CREDIT AGREEMENT. Section 5.4 of the Credit Agreement is hereby amended by adding the following new subsection (h) at the end thereof: (h) simultaneously with the delivery of the financial statements referred to in subsections (a) and (b) above, a report containing a summary of (i) all leases entered into by any Borrower or any Subsidiary of a Borrower and all property otherwise acquired by any Borrower or any Subsidiary of a Borrower for new bakery cafes and stores during the fiscal quarter ending immediately prior to the date of delivery of such report, (ii) the Projected New Cafe Capital Expenditures associated with each such bakery cafe and store, (iii) the total Projected New Cafe Capital Expenditures for all bakery cafes and stores to be opened in the current fiscal year, and (iv) together with the delivery of financial statements for the third and fourth fiscal quarters of each fiscal year of the Borrowers, the total Projected New Cafe Capital Expenditures for all bakery cafes and stores to be opened in the succeeding fiscal year. SECTION 4. AMENDMENTS TO SECTION 7 OF THE CREDIT AGREEMENT. Section 7 of the Credit Agreement is hereby amended as follows: (a) Section 7.1 of the Credit Agreement is hereby amended by deleting such section in its entirety and replacing it with the following new Section 7.1: Section 7.1 Maximum Allowable Leverage Ratio. The Borrowers will not, at any time, permit the Leverage Ratio to exceed 0.65:1.00. (b) Section 7.2 of the Credit Agreement is hereby amended by deleting such section in its entirety and replacing it with the following new Section 7.2: Section 7.2 [Intentionally Omitted]. (c) Section 7.3 of the Credit Agreement is hereby amended by deleting such Section in its entirety and replacing it with the following new Section 7.3: Section 7.3. Consolidated Capital Expenditures. With respect to each fiscal year of the Borrowers set forth in the table below, the Borrowers 4 -4- will not permit (a) Consolidated Capital Expenditures (other than Capital Expenditures incurred in such fiscal year in connection with the acquisition and equipping of, and improvements to, the Borrowers' facilities in Mexico, Missouri) to exceed the amount set forth in the table below opposite such fiscal year in the column headed "Maximum Consolidated Capital Expenditures" or (b) Consolidated New Cafe Capital Expenditures to exceed the amount set forth in the table below opposite such fiscal year in the column headed "Maximum Consolidated New Cafe Capital Expenditures"; provided that: (i) with regard to any such fiscal year (other than the fiscal year ending on December 26, 1998), if Consolidated Adjusted Cash Flow for such fiscal year exceeds that amount set forth in the table below opposite such fiscal year in the column headed "100% Consolidated Adjusted Cash Flow," Maximum Consolidated Capital Expenditures and Maximum Consolidated New Cafe Capital Expenditures permitted hereunder for such fiscal year shall be increased by the amount of such excess; and (ii) with regard to any such fiscal year (other than the fiscal year ending on December 26, 1998), if Consolidated Adjusted Cash Flow is less than that amount set forth in the table below opposite such fiscal year in the column headed "95% Consolidated Adjusted Cash Flow," Maximum Consolidated Capital Expenditures and Maximum Consolidated New Cafe Capital Expenditures permitted hereunder for such fiscal year shall be reduced by the difference between the amount set forth for such fiscal year in such column headed "95% Consolidated Net Income" and the actual Consolidated Adjusted Cash Flow for such fiscal year.
- ------------------------------------------------------------------------------------------------------------------ MAXIMUM CONSOLIDATED MAXIMUM CONSOLIDATED 100% CONSOLIDATED 95% CONSOLIDATED CAPITAL NEW CAFE CAPITAL ADJUSTED CASH ADJUSTED CASH FISCAL YEAR ENDING EXPENDITURES EXPENDITURES FLOW FLOW - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ 12/28/96 $17,500,000 $ 6,800,000 $18,600,000 $17,700,000 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ 12/27/97 $24,000,000 $15,000,000 $21,700,000 $20,600,000 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ 12/26/98 $26,000,000 $16,000,000 n/a n/a - ------------------------------------------------------------------------------------------------------------------
(d) Section 7 of the Credit Agreement is hereby amended by inserting at the end thereof the following new Section 7.5: 5 -5- Section 7.5 Projected New Cafe Capital Expenditures. With respect to each fiscal quarter of the Borrowers set forth in the table below, the Borrowers will not permit Projected New Cafe Capital Expenditures for the fiscal year specified opposite such fiscal quarter in the table below to exceed the amount set forth in the table below opposite such fiscal quarter in the column headed "Maximum Projected New Cafe Capital Expenditures"; provided that: (a) if, with respect to each fiscal quarter (other than the fiscal quarter ending on April 18, 1998) set forth in the table below, Consolidated Adjusted Cash Flow determined for the period of four consecutive fiscal quarters then ending exceeds that amount set forth in the table below opposite such fiscal quarter in the column headed "100% Consolidated Adjusted Cash Flow," Maximum Projected New Cafe Capital Expenditures permitted hereunder for such fiscal quarter shall be increased by the amount of such excess; and (b) if, with respect to each fiscal quarter (other than the fiscal quarter ending on April 18, 1998) set forth in the table below, Consolidated Adjusted Cash Flow determined for the period of four consecutive fiscal quarters then ending is less than that amount set forth in the table below opposite such fiscal quarter in the column headed "95% Consolidated Adjusted Cash Flow," Maximum Projected New Cafe Capital Expenditures permitted hereunder for such fiscal quarter shall be reduced by the difference between the amount set forth for such period of four consecutive fiscal quarters in such column headed "95% Consolidated Adjusted Cash Flow" and the actual Consolidated Adjusted Cash Flow for such period.
- -------------------------------------------------------------------------------------------------------------- MAXIMUM 100% 95% PROJECTED NEW CONSOLIDATED CONSOLIDATED FISCAL QUARTER FISCAL CAFE CAPITAL ADJUSTED CASH ADJUSTED CASH ENDING YEAR EXPENDITURES FLOW FLOW - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- 10/5/96 1997 $ 6,000,000 $18,200,000 $17,300,000 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- 12/28/96 1997 $ 9,000,000 $18,600,000 $17,700,000 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- 4/19/97 1997 $12,000,000 $19,100,000 $18,200,000 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- 7/12/97 1997 $15,000,000 $19,300,000 $18,300,000 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- 10/4/97 1998 $ 7,000,000 $20,600,000 $19,600,000 - --------------------------------------------------------------------------------------------------------------
6 -6-
- ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- 12/27/97 1998 $10,000,000 $21,700,000 $20,600,000 - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- 4/18/98 1998 $13,000,000 n/a n/a - ------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
(e) Section 7 of the Credit Agreement is hereby amended by inserting at the end thereof the following new Section 7.6: Section 7.6. Consolidated Free Cash Flow. The Borrowers will not permit the ratio of Consolidated Free Cash Flow to Consolidated Total Debt Service, determined at the end of each fiscal quarter of the Borrowers for the period consisting of the four (4) consecutive fiscal quarters then ending (after excluding from Total Debt Service to the extent otherwise included, all principal payments due at maturity, Revolving Credit Loans, maturities in respect of the Term Loan, and maturities in respect of that certain Letter of Credit Reimbursement Agreement dated as of July 1, 1995 among ABP, ABP Midwest and Citizens Trust Company) to be less than 2.7:1.0. (f) Section 7 of the Credit Agreement is hereby amended by inserting at the end thereof the following new Section 7.7: Section 7.7. No Net Losses. The Borrowers and their Subsidiaries will not permit Consolidated Net Income for each period consisting of two (2) consecutive fiscal quarters to be less than $1.00. (g) Section 7 of the Credit Agreement is hereby amended by inserting at the end thereof the following new Section 7.8: Section 7.8. Consolidated Adjusted Cash Flow. With respect to each period consisting of two consecutive fiscal quarters and ending on a date set forth in the table below, the Borrowers and their Subsidiaries will not permit Consolidated Adjusted Cash Flow for such period to be less than the amount set forth in the table below opposite the date on which such period ends:
-------------------------------------------------------- TWO CONSECUTIVE FISCAL CONSOLIDATED ADJUSTED QUARTERS ENDING CASH FLOW -------------------------------------------------------- -------------------------------------------------------- 10/5/96 $ 7,200,000 -------------------------------------------------------- 12/28/96 $ 7,800,000 --------------------------------------------------------
7 -7- -------------------------------------------------------- 4/19/97 $10,300,000 -------------------------------------------------------- 7/12/97 $ 9,900,000 -------------------------------------------------------- 10/4/97 $ 8,900,000 -------------------------------------------------------- 12/27/97 $10,000,000 -------------------------------------------------------- 4/18/98 $11,000,000. --------------------------------------------------------
SECTION 5. AMENDMENT TO SCHEDULES. The Schedules to the Credit Agreement are hereby amended by (a) deleting Schedule 1.1(d) in its entirety and replacing it with Schedule 1.1(d) attached hereto; and (b) deleting Schedule 1.1(e) in its entirety and replacing it with Schedule 1.1(e) attached hereto. SECTION 6. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers hereby repeats, on and as of the date hereof, each of the representations and warranties made in Section 4 of the Credit Agreement as though such representations and warranties refer specifically to such Borrower, except to the extent of changes resulting from transactions contemplated or permitted by this Third Amendment or the Credit Agreement and except to the extent that such representations and warranties relate expressly to an earlier date; provided, that all references therein to the Credit Agreement shall refer to such Credit Agreement as amended hereby. No Default or Event of Default has occurred and is continuing under the Credit Agreement. SECTION 7. EFFECTIVENESS. The effectiveness of this Third Amendment shall be subject to the satisfaction of the following conditions precedent: Section 7.1. Corporate Action. All corporate action necessary for the valid execution, delivery and performance by each of the Borrowers of this Third Amendment and the other Loan Documents to which they are or are to become a party shall have been duly and effectively taken, and evidence thereof satisfactory to the Banks shall have been provided to each of the Banks. Section 7.2. Loan Documents. This Third Amendment shall have been duly executed and delivered to the Agent by each of the parties hereto. Section 7.3. Amendment Fee. The Borrowers shall have paid the Agent, for the pro rata accounts of the Banks, an amendment fee in the amount of $45,000. SECTION 8. RATIFICATION, ETC. Except as expressly amended hereby, the Credit Agreement and all documents, instruments and agreements related thereto, including, but not limited to the Loan Documents, are hereby ratified and confirmed in all respects and shall continue in full force and effect. The Credit Agreement and this Third Amendment shall be read and construed as a single agreement. All references in the Credit Agreement or any related agreement or instrument to the Credit Agreement shall hereafter refer to the Credit Agreement as amended hereby. 8 -8- SECTION 9. NO WAIVER. Nothing contained herein shall constitute a waiver of, impair or otherwise affect any Obligations, any other obligation of the Borrowers or any rights of the Agent or the Banks consequent thereon. SECTION 10. COUNTERPARTS. This Third Amendment may be executed in one or more counterparts, each of which shall be deemed an original but which together shall constitute one and the same instrument. SECTION 11. GOVERNING LAW. THIS THIRD AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICT OF LAWS). 9 -9- IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment as a document under seal as of the date first above written. AU BON PAIN CO., INC. By: /s/ Louis I. Kane Name: Louis I. Kane Title: SAINT LOUIS BREAD COMPANY, INC. By: /s/ Louis I. Kane Name: Louis I. Kane Title: ABP MIDWEST MANUFACTURING CO., INC. By: /s/ Louis I. Kane Name: Louis I. Kane Title: USTRUST INDIVIDUALLY AND AS AGENT By: /s/ Anthony Wilson Name: Anthony Wilson Vice President THE FIRST NATIONAL BANK OF BOSTON By: /s/ Margaret Ronan Stack Name: Margaret Ronan Stack Title: Vice-President 10 -10- CITIZENS BANK OF MASSACHUSETTS By: /s/ Anne Forbes Van Nest Name: Anne Forbes Van Nest Title: Vice-President 11 Schedule 1.1(d) REVOLVING CREDIT APPLICABLE MARGIN
- ------------------------------------------------------------------------------------------------------------------------------------ Consolidated Net Income for Most Recently Ended Consolidated Total Liabilities To Consolidated Total Liabilities To Period of Four Consecutive Fiscal Quarters Consolidated Tangible Net Worth Consolidated Tangible Net Worth If Such Ratio is Less Than 1.7 to 1.0 If Such Ratio Equals or Exceeds 1.7 to 1.0 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Greater Than $9,000,000 0.75% 1.25% - ------------------------------------------------------------------------------------------------------------------------------------ from $7,000,000 to $9,000,000 (inclusive) 1.00% 1.50% - ------------------------------------------------------------------------------------------------------------------------------------ from $5,000,000 to $6,999,999.99 (inclusive) 1.50% 2.00% - ------------------------------------------------------------------------------------------------------------------------------------ from $2,000,000 to $4,999,999.99 (inclusive) 2.00% 2.50% - ------------------------------------------------------------------------------------------------------------------------------------ Less Than $2,000,000 3.00% 3.00% - ------------------------------------------------------------------------------------------------------------------------------------
12 Schedule 1.1(e) TERM APPLICABLE MARGIN
- ------------------------------------------------------------------------------------------------------------------------------------ Consolidated Net Income for Most Recently Ended Consolidated Total Liabilities To Consolidated Total Liabilities To Period of Four Consecutive Fiscal Quarters Consolidated Tangible Net Worth Consolidated Tangible Net Worth If Such Ratio is Less Than 1.7 to 1.0 If Such Ratio Equals or Exceeds 1.7 to 1.0 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Greater Than $9,000,000 1.25% 1.75% - ------------------------------------------------------------------------------------------------------------------------------------ from $7,000,000 to $9,000,000 (inclusive) 1.50% 2.00% - ------------------------------------------------------------------------------------------------------------------------------------ from $5,000,000 to $6,999,999.99 (inclusive) 2.00% 2.50% - ------------------------------------------------------------------------------------------------------------------------------------ from $2,000,000 to $4,999,999.99 (inclusive) 2.50% 3.00% - ------------------------------------------------------------------------------------------------------------------------------------ Less Than $2,000,000 3.00% 3.00% - ------------------------------------------------------------------------------------------------------------------------------------
EX-4.1.5 4 4TH AMEND, REVOLVING REDIT AND TERM LOAN AGREEMENT 1 FOURTH AMENDMENT AND WAIVER TO AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT Fourth Amendment and Waiver to Amended and Restated Revolving Credit and Term Loan Agreement dated as of November 22, 1996 (the "Fourth Amendment"), by and among AU BON PAIN CO., INC., a Delaware corporation ("ABP"), SAINT LOUIS BREAD COMPANY, INC., a Delaware corporation ("Saint Louis Bread"), ABP MIDWEST MANUFACTURING CO., INC., a Delaware corporation ("ABP Midwest", and, collectively with ABP and Saint Louis Bread, the "Borrowers"), and USTRUST, a Massachusetts trust company, THE FIRST NATIONAL BANK OF BOSTON, a national banking association, CITIZENS BANK OF MASSACHUSETTS, a Massachusetts savings bank (collectively, the "Banks"), and USTRUST as agent for the Banks (in such capacity, the "Agent"), amending certain provisions of the Amended and Restated Revolving Credit and Term Loan Agreement dated as of March 17, 1995 (as amended by the First Amendment to Amended and Restated Revolving Credit and Term Loan Agreement dated as of September 6, 1995, the Second Amendment to Amended and Restated Revolving Credit and Term Loan Agreement dated as of July 24, 1996, the Third Amendment to Amended and Restated Revolving Credit and Term Loan Agreement dated as of September 6, 1996, and as further amended and in effect from time to time, the "Credit Agreement") by and among the Borrowers, the Banks and the Agent. Terms not otherwise defined herein which are defined in the Credit Agreement shall have the same respective meanings herein as therein. WHEREAS, the Borrowers, the Banks and the Agent have agreed to modify certain terms and conditions of the Credit Agreement as specifically set forth in this Fourth Amendment; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. AMENDMENT TO SECTION 1 OF THE CREDIT AGREEMENT. Section 1 of the Credit Agreement is hereby amended by amending the definition of "Consolidated Net Income" as follows: (a) by inserting after the words "Consolidated Net Income" in the heading thereof the parenthetical phrase "(or Deficit)"; and (b) by inserting after the words "the net income" in the first line thereof the parenthetical phrase "(or deficit)". SECTION 2. AMENDMENTS TO SECTION 7 OF THE CREDIT AGREEMENT. Section 7 of the Credit Agreement is hereby amended as follows: 2 -2- (a) Section 7.3 of the Credit Agreement is hereby amended by deleting such section in its entirety and replacing it with the following new Section 7.3: Section 7.3. Consolidated Capital Expenditures. With respect to each fiscal year of the Borrowers set forth in the table below, the Borrowers will not permit (a) Consolidated Capital Expenditures (other than Capital Expenditures incurred in such fiscal year in connection with the acquisition and equipping of, and improvements to, the Borrowers' facilities in Mexico, Missouri) to exceed the amount set forth in the table below opposite such fiscal year in the column headed "Maximum Consolidated Capital Expenditures" or (b) Consolidated New Cafe Capital Expenditures to exceed the amount set forth in the table below opposite such fiscal year in the column headed "Maximum Consolidated New Cafe Capital Expenditures"; provided that with regard to any such fiscal year (other than the fiscal year ending on December 26, 1998), if Consolidated Adjusted Cash Flow for such fiscal year is less than that amount set forth in the table below opposite such fiscal year in the column headed "Consolidated Adjusted Cash Flow," Maximum Consolidated Capital Expenditures and Maximum Consolidated New Cafe Capital Expenditures permitted hereunder for such fiscal year shall be reduced by the difference between the amount set forth for such fiscal year in such column headed " Consolidated Adjusted Cash Flow" and the actual Consolidated Adjusted Cash Flow for such fiscal year.
---------------------------------------------------------------- MAXIMUM MAXIMUM CONSOLIDATED CONSOLIDATED NEW CONSOLIDATED FISCAL YEAR CAPITAL CAFE CAPITAL ADJUSTED CASH ENDING EXPENDITURES EXPENDITURES FLOW ---------------------------------------------------------------- 12/28/96 $14,000,000 $4,000,000 $15,300,000 ---------------------------------------------------------------- 12/27/97 $20,000,000 $9,000,000 $22,000,000 ---------------------------------------------------------------- 12/26/98 $26,000,000 $16,000,000 n/a ----------------------------------------------------------------
(b) Section 7.5 of the Credit Agreement is hereby amended by deleting such section in its entirety and replacing it with the following new Section 7.5: Section 7.5 Projected New Cafe Capital Expenditures. With respect to each fiscal quarter of the Borrowers set forth in the table below, the Borrowers will not permit Projected New Cafe Capital Expenditures for the fiscal year specified opposite such fiscal quarter in the table below to exceed the amount set forth in the table below opposite such fiscal quarter in the column headed "Maximum Projected New Cafe Capital Expenditures"; provided that if, with respect to each fiscal quarter (other than the fiscal quarters ending on October 5, 1996 and April 18, 1998) 3 -3- set forth in the table below, Consolidated Adjusted Cash Flow determined for the period of four consecutive fiscal quarters then ending is less than that amount set forth in the table below opposite such fiscal quarter in the column headed "Consolidated Adjusted Cash Flow," Maximum Projected New Cafe Capital Expenditures permitted hereunder for such fiscal quarter shall be reduced by the difference between the amount set forth for such period of four consecutive fiscal quarters in such column headed "Consolidated Adjusted Cash Flow" and the actual Consolidated Adjusted Cash Flow for such period.
------------------------------------------------------------ MAXIMUM FOR PROJECTED NEW CONSOLIDATED FISCAL QUARTER FISCAL CAFE CAPITAL ADJUSTED CASH ENDING YEAR EXPENDITURES FLOW ------------------------------------------------------------ 10/5/96 1997 $1,000,000 n/a ------------------------------------------------------------ 12/28/96 1997 $4,000,000 $15,300,000 ------------------------------------------------------------ 4/19/97 1997 $6,000,000 $16,200,000 ------------------------------------------------------------ 7/12/97 1997 $9,000,000 $16,800,000 ------------------------------------------------------------ 10/4/97 1998 $6,000,000 $20,000,000 ------------------------------------------------------------ 12/27/97 1998 $9,000,000 $22,000,000 ------------------------------------------------------------ 4/18/98 1998 $12,000,000 n/a ------------------------------------------------------------
(c) Section 7.7 of the Credit Agreement is hereby amended by deleting such section in its entirety and replacing it with the following new section: Section 7.7. Net Losses. The Borrowers and their Subsidiaries will not permit (a) Consolidated Net Deficit for the period of two consecutive fiscal quarters ending December 28, 1996 to exceed $2,700,000, and (b) Consolidated Net Income for each period consisting of two consecutive fiscal quarters commencing with the period of two consecutive fiscal quarters ending April 19, 1997 to be less than $1.00. (d) Section 7.8 of the Credit Agreement is hereby amended by deleting the table set forth therein in its entirety and replacing it with the following new table:
------------------------------------------ TWO CONSECUTIVE CONSOLIDATED FISCAL QUARTERS ADJUSTED CASH ENDING FLOW ------------------------------------------ 12/28/96 $ 5,100,000 ------------------------------------------ 4/19/97 $ 9,500,000 ------------------------------------------ 7/12/97 $10,500,000 ------------------------------------------ 10/4/97 $ 8,700,000 ------------------------------------------
4 -4- 12/27/97 $ 9,700,000 ------------------------------------------ 4/18/98 $11,000,000 ------------------------------------------
SECTION 3. AMENDMENT TO SCHEDULE 1.1(a). Schedule 1.1(a) to the Credit Agreement is hereby amended by deleting such schedule in its entirety and replacing it with Schedule 1.1(a) attached hereto. SECTION 4. WAIVER. The Borrowers have informed the Banks that they are not in compliance with the financial covenants under Section 7.7 and Section 7.8 of the Credit Agreement (prior to the effectiveness of this Fourth Amendment) as of the end of the fiscal quarter ending October 5, 1996, resulting in two Events of Default under Section 10(c) of the Credit Agreement (the "Existing Defaults"). The Borrowers hereby request that the Banks waive the Existing Default. In response to the Borrowers' request, the Banks hereby waive the Existing Default, provided that the waiver contained herein shall operate solely with respect to the Existing Defaults as in effect as of the end of the fiscal quarter ending October 5, 1996 and shall not impair any right or power accruing to the Banks with respect to any other Default or Event of Default which may now exist or any Default or Event of Default which may occur after the date hereof including without limitation any Event of Default with respect to Section 7.7 and Section 7.8 of the Credit Agreement. SECTION 5. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers hereby repeats, on and as of the date hereof, each of the representations and warranties made in Section 5 of the Credit Agreement as though such representations and warranties refer specifically to such Borrower, except to the extent of changes resulting from transactions contemplated or permitted by this Fourth Amendment or the Credit Agreement and except to the extent that such representations and warranties relate expressly to an earlier date; provided, that all references therein to the Credit Agreement shall refer to such Credit Agreement as amended hereby. No Default or Event of Default has occurred and is continuing under the Credit Agreement after giving effect to this Fourth Amendment. SECTION 6. EFFECTIVENESS. The effectiveness of this Fourth Amendment shall be subject to the satisfaction of the following conditions precedent: Section 6.1. Corporate Action. All corporate action necessary for the valid execution, delivery and performance by each of the Borrowers of this Fourth Amendment and the other Loan Documents to which they are or are to become a party shall have been duly and effectively taken, and evidence thereof satisfactory to the Banks shall have been provided to each of the Banks. Section 6.2. Loan Documents. This Fourth Amendment shall have been duly executed and delivered to the Agent by each of the parties to the Credit Agreement. 5 -5- Section 6.3. Amendment Fee. The Borrowers shall have paid the Agent, for the pro rata accounts of the Banks, an amendment fee in the amount of $15,000. Section 6.4. Amendment of Letter of Credit Reimbursement Agreement. The Banks shall have received a duly executed amendment and waiver to that certain Letter of Credit Reimbursement Agreement dated as of July 1, 1995 among ABP, ABP Midwest and Citizens Trust Company, as amended, in form and substance satisfactory to the Banks and the Agent. Section 6.5. Side Letter. A side letter concerning Consolidated Capital Expenditures shall have been duly executed and delivered to the Agent by each of the parties to the Credit Agreement. SECTION 7. RATIFICATION, ETC. Except as expressly amended hereby, the Credit Agreement and all documents, instruments and agreements related thereto, including, but not limited to the Loan Documents, are hereby ratified and confirmed in all respects and shall continue in full force and effect. The Credit Agreement and this Fourth Amendment shall be read and construed as a single agreement. All references in the Credit Agreement or any related agreement or instrument to the Credit Agreement shall hereafter refer to the Credit Agreement as amended hereby. SECTION 8. NO WAIVER. Except as otherwise expressly provided in Section 4, nothing contained herein shall constitute a waiver of, impair or otherwise affect any Obligations, any other obligation of the Borrowers or any rights of the Agent or the Banks consequent thereon. SECTION 9. COUNTERPARTS. This Fourth Amendment may be executed in one or more counterparts, each of which shall be deemed an original but which together shall constitute one and the same instrument. SECTION 10. GOVERNING LAW. THIS FOURTH AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICT OF LAWS). 6 -6- IN WITNESS WHEREOF, the parties hereto have executed this Fourth Amendment as a document under seal as of the date first above written. AU BON PAIN CO., INC. By: /s/ Louis I. Kane Name: Louis I. Kane Title: Co-Chairman SAINT LOUIS BREAD COMPANY, INC. By: /s/ Louis I. Kane Name: Louis I. Kane Title: Executive Vice President ABP MIDWEST MANUFACTURING CO., INC. By: /s/ Louis I. Kane Name: Louis I. Kane Title: Executive Vice President USTRUST INDIVIDUALLY AND AS AGENT By: /s/ Anthony Wilson Anthony Wilson Vice President THE FIRST NATIONAL BANK OF BOSTON By: /s/ Margaret Ronan Stack Margaret Ronan Stack Vice President 7 -7- CITIZENS BANK OF MASSACHUSETTS By: /s/ Anne Forbes Van Nest Name: Anne Forbes Van Nest Title: Vice President 8 Schedule 1.1(a) REVOLVING CREDIT COMMITMENTS Commitment Lender Commitment Percentage - ------ ---------- ---------- USTrust $9,333,333.34 33-1/3% 30 Court Street Boston, Massachusetts 02108 Telefax Number: (617) 726-7380 Telex: 681752 Answerback: UST BSN Attention: Anthony G. Wilson, V.P. The First National Bank of Boston $9,333,333.33 33-1/3% 100 Federal Street Boston, Massachusetts 02110 Telefax Number: (617) 434-4426 Telex: 940581 Answerback: BOSTONBK BSN Attention: Margaret R. Stack, V.P. Citizens Bank of Massachusetts $9,333,333.33 33-1/3% 55 Summer Street Boston, MA 02110 Telefax Number: (617) 482-9730 Attention: Anne Forbes Van Nest 9 November 22, 1996 Au Bon Pain Co., Inc. 19 Fid Kennedy Avenue Marine Industrial Park Boston, Massachusetts 02210 Attention: Mr. Anthony J. Carroll, Chief Financial Officer Re: Consolidated Capital Expenditures Ladies and Gentlemen: Please refer to that certain Amended and Restated Revolving Credit and Term Loan Agreement dated as of March 17, 1995 (as amended by the First Amendment to Amended and Restated Revolving Credit and Term Loan Agreement dated as of September 6, 1995, the Second Amendment to Amended and Restated Revolving Credit and Term Loan Agreement dated as of July 24, 1996, the Third Amendment to Amended and Restated Revolving Credit and Term Loan Agreement dated as of September 6, 1996, and the Fourth Amendment and Waiver to Amended and Restated Revolving Credit and Term Loan Agreement dated as of November 22, 1996, and as further amended and in effect from time to time, the "Credit Agreement") by and among the Borrowers, the Banks and the Agent. Terms not otherwise defined herein which are defined in the Credit Agreement shall have the same respective meanings herein as therein. This letter is being executed in connection with the Fourth Amendment and Waiver to Amended and Restated Revolving Credit and Term Loan Agreement dated as of November 22, 1996 among all the parties to the Credit Agreement pursuant to which the Credit Agreement is being amended. The undersigned hereby agree that at any time between April 30, 1997 and May 30, 1997, if Citizens Bank of Massachusetts ("Citizens") remains a party to the Credit Agreement as a Bank thereunder at such time, any Bank may unilaterally demand that the "Maximum Consolidated Capital Expenditures" permitted to be made by the Borrowers under Section 7.3 of the Credit Agreement for fiscal year 1997 be reduced to an amount of not less than $15,000,000 as specified by such Bank. Such demand may be made regardless of whether the Borrowers are in compliance with the covenants set forth in the Credit Agreement. The undersigned hereby further agree that upon any Bank making such demand, the Credit Agreement shall be promptly amended to evidence such reduction in the "Maximum Consolidated Capital Expenditures" permitted to be made by the Borrowers under Section 7.3 of the Credit Agreement. If the foregoing correctly sets forth our agreement, kindly execute this letter in the appropriate space below, whereupon this letter shall become enforceable as a sealed instrument under the laws of the Commonwealth of Massachusetts. 10 -2- Very truly yours, USTRUST INDIVIDUALLY AND AS AGENT By:/s/ Anthony Wilson Anthony Wilson Vice President THE FIRST NATIONAL BANK OF BOSTON By:/s/ Margaret Ronan Stack Margaret Ronan Stack Vice President CITIZENS BANK OF MASSACHUSETTS By: /s/ Anne Forbes Van Nest Name: Anne Forbes Van Nest Title: Vice President ACCEPTED: AU BON PAIN CO., INC. By: /s/ Louis I. Kane Name: Louis I. Kane Title: Co-Chairman SAINT LOUIS BREAD COMPANY, INC. By: /s/ Louis I. Kane Name: Louis I. Kane Title: Executive Vice President ABP MIDWEST MANUFACTURING CO., INC. By: /s/ Louis I. Kane Name: Louis I. Kane Title: Executive Vice President EX-4.3.1 5 INVESTMENT AGREEMENT 1 ---------------------------------------- ---------------------------------------- AU BON PAIN CO., INC. SAINT LOUIS BREAD COMPANY, INC. ABP MIDWEST MANUFACTURING CO., INC. $15,000,000 INVESTMENT AGREEMENT July 24, 1996 Funds Provided by ALLIED CAPITAL CORPORATION ALLIED CAPITAL CORPORATION II CAPITAL TRUST INVESTMENTS, LTD. ---------------------------------------- ---------------------------------------- 2 INVESTMENT AGREEMENT THIS INVESTMENT AGREEMENT (this "Agreement") is made as of the 24th day of July, 1996 by and among: (i) AU BON PAIN CO., INC., a Delaware corporation (the "Parent") (ii) Saint Louis Bread Company, Inc., a Delaware corporation ("SLBC") and ABP Midwest Manufacturing Co., Inc., a Delaware corporation ("Midwest") (the Parent, SLBC and Midwest are hereafter collectively referred to herein as "Borrowers"); and (ii) ALLIED CAPITAL CORPORATION and ALLIED CAPITAL CORPORATION II, each a Maryland corporation (collectively, "Allied") and CAPITAL TRUST INVESTMENTS, LTD., a Guernsey corporation ("Capital Trust") (collectively, Allied and Capital Trust shall be referred to herein as the "Lenders" and individually as a "Lender"). RECITALS: A. Lenders wish to invest the aggregate sum of Fifteen Million Dollars in Borrowers, in exchange for certain senior subordinated debentures and warrants to purchase shares of the Common Stock of Parent. B. The parties desire to set forth herein their understandings and agreements pertaining to this transaction. NOW, THEREFORE, in consideration of the foregoing Recitals and the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lenders and the Borrowers hereby agree as follows (Each Lender and its respective successors and assigns with respect to any of the Debentures or any of the Equity Interest (as these terms are hereinafter defined) shall be referred to herein individually as a "Holder" and collectively as the "Holders"): ARTICLE I: DEFINITIONS 1.01 DEFINITIONS. In addition to the terms defined elsewhere herein, when used herein, the following capitalized terms shall have the meanings indicated: "Act of Bankruptcy," when used in reference to any Person, shall mean the occurrence of any of the following with respect to such Person: (i) such Person shall have made an assignment for the benefit of his or its creditors; (ii) such Person shall have admitted in writing his or its inability to pay his or its debts as they become due; (iii) such Person shall have filed a voluntary petition in bankruptcy; (iv) such Person shall have been adjudicated a bankrupt or insolvent; (v) such Person shall have filed any petition or answer seeking for himself or itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future Applicable Law pertinent to such circumstances; (vi) such 3 Person shall have filed or shall file any answer admitting or not contesting the material allegations of a bankruptcy, insolvency or similar petition filed against such Person; (vii) such Person shall have sought or consented to, or acquiesced in, the appointment of any trustee, receiver, or liquidator of such Person or of all or any substantial part (20% or more) of the properties of such Person; (viii) an action shall have been commenced against such Person seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future Applicable Law without such action having been dismissed or without all orders or proceedings thereunder affecting the operations or the business of such Person having been stayed within 60 days or if the relevant court shall enter a decree or order granting the relief sought in such action, or if a stay of any such order or proceedings shall thereafter be set aside; or (ix) 60 days shall have expired after the appointment, without the consent or acquiescence of such Person of any trustee, receiver or liquidator of such Person or of all or any substantial part of the assets and properties of such Person without such appointment having been vacated. "Act of Dissolution," when used in reference to any Person (other than an individual) shall mean the occurrence of any action initiating, or any event that results in, the dissolution, liquidation, winding-up or termination of such Person. "Affiliate," when used in reference to any Person, shall mean any Person, other than a holder of the Junior Debt, that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Person in question including, without limitation, by reason of holding 10% or more of the equity interest of the Person in question or possessing the direct or indirect ability to manage the business and affairs of the Person in question. "Applicable Law(s)," when used in the singular, shall mean any applicable foreign, federal, state or local law, ordinance, order, regulation, rule or requirement of any governmental or quasi-governmental agency, instrumentality, board, commission, bureau or other authority having jurisdiction, and, when used in the plural, shall mean all such applicable foreign, federal, state and local laws, ordinances, orders, regulations, rules and requirements. "Applicable UCC" shall mean the Uniform Commercial Code, as enacted in the State of New York, as amended through the date hereof. "Borrowers' Business" shall mean the retail sale of high-quality, quick-service cafe food, bakery and related items, the production and sale of frozen dough bakery products, and the franchising of retail quick-service cafes operating under the names of "Au Bon Pain" and "Saint Louis Bread"; which currently are the only businesses operated by Borrowers. "Common Stock" shall mean any or all (as the context may require) of the shares of the authorized common stock of the Parent. -2- 4 "Equity Interest" shall mean, collectively, all of the Warrants and all of the Warrant Shares. "GAAP" shall mean generally-accepted accounting principles, consistently applied, for the period or periods in question. "Governmental Authority(ies)," when used in the singular, shall mean any federal, state or local governmental or quasi-governmental instrumentality, agency, board, commission or department or any regulatory agency, bureau, commission or authority and, when used in the plural, shall mean all such entities. "Indebtedness" of any person means without duplication (i) all indebtedness of such person for borrowed money or for the deferred purchase price of property or services (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured, but not including obligations to trade creditors incurred in the ordinary course of business), (ii) all obligations evidenced by notes, bonds, debentures or similar instruments, (iii) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (iv) all capital lease obligations, (v) all guarantees by such person of any Indebtedness and (vi) all Indebtedness secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any lien upon or in property (including, without limitation, accounts and contract rights) owned by such person, even though such person has not assumed or become liable for the payment of such Indebtedness. "Investment Documents" shall mean, collectively, this Agreement, the Debentures, the Warrants, and all other instruments and documents executed and delivered in connection with the investment. "Licenses" shall mean, collectively, all rights, licenses, permits and authorizations now or hereafter issued by any Governmental Authority in connection with the operation or conduct of Borrowers' Business. "Obligations" shall mean, collectively, all of the Borrowers' indebtedness, liabilities and obligations arising under this Agreement and each of the other Investment Documents and any renewals, modifications, and extensions thereof, including, but not limited to, the principal, interest, late charges and other sums due and owing under the Debentures and any other obligations of the Borrowers to any of the Holders, including such other or additional financing that any of the Holders may extend to the Borrowers at any time in the Holders' sole discretion. -3- 5 "Permitted Encumbrances" shall mean any lien, mortgage, security interest or other encumbrance that results from or secures any of the following: (i) taxes and assessments not delinquent or actively being contested in good faith by a Borrower and for which such Borrower has adequate reserves; (ii) deposits or pledges for goods or services made to secure the performance of such goods or services in the ordinary course of the Borrowers' Business; (iii) title of a bona fide lessor of tangible personal property to a Borrower (where the security interest is limited to the item as leased and the lease is not made in contravention of the terms of this Agreement); (iv) purchase money obligations (where the purchase money obligation is not undertaken in contravention of the terms of this Agreement) and where the security interest is limited to the items so acquired and the principal amount of the indebtedness secured by such security interest shall at no time exceed an amount equal to 80% of the lesser of the cost to the Borrower of the property so acquired and the fair market value of such property; and (v) the Permitted Secured Debt. "Permitted Secured Debt" shall mean, collectively, indebtedness of the Borrowers secured by mortgages or deeds of trust on real estate owned by the Borrowers in an aggregate principal amount not to exceed $12,400,000, including (i) the Secured Woburn Loan, and (ii) the Secured Letter of Credit Reimbursement Agreement. "Person" shall mean any individual, corporation, partnership, joint venture, limited liability company, unincorporated association, trust, or other legal entity. "Real Property" shall mean, collectively, all real property owned by any Borrower or in which any Borrower has a leasehold interest and all real property hereafter acquired by any Borrower in fee or by means of a leasehold interest, including all real property on which any of the Borrowers' Business is now or hereafter conducted, together with all goods located on any such real property that are or may become "fixtures" under the law of the jurisdiction in which such real property is located. "Secured Letter of Credit Reimbursement Agreement" shall mean that certain Letter of Credit Reimbursement Agreement dated as of July 1, 1995 among Midwest, the Parent and Citizens Trust Company, a Rhode Island commercial bank, and any modifications, renewals, extensions, and refinancings thereof (whether contemporaneous with payment in full, or subsequent thereto) permitted under this Agreement, relating to those certain industrial revenue bonds in an outstanding principal amount not to exceed Eight Million Six Hundred Thousand Dollars ($8,600,000), and secured by a mortgage on certain real property located in Mexico, Missouri. "Secured Woburn Loan" shall mean that certain loan from the Senior Revolver Lender in an outstanding principal amount not to exceed Three Million Eight Hundred Thousand Dollars ($3,800,000), pursuant to the terms of the Senior Revolving Credit Agreement and secured by a mortgage on certain real property located at 130 New Boston Street, Woburn, -4- 6 Massachusetts, and any modifications, renewals, extensions, and refinancings thereof (whether contemporaneous with payment in full, or subsequent thereto) permitted under this Agreement. "Senior Debt" shall mean, collectively, the Senior Revolver, the Senior INAC Loan and the Permitted Secured Debt. "Senior INAC Loan" shall mean the senior term loan from INAC Corp. in an outstanding principal amount not to exceed Two Million Dollars ($2,000,000), including any modifications, renewals, extensions, and refinancings of any such indebtedness (whether contemporaneous with payment in full, or subsequent thereto) permitted under this Agreement. "Senior Revolver" shall mean the senior (i) Revolving Credit Loans, (ii) Letters of Credit, (iii) Unlimited ABP Wisconsin Guaranty, and (iv) Unlimited Imperio Guaranty, each as defined in the Senior Revolving Credit Agreement, in an aggregate outstanding principal amount not to exceed Thirty-Five Million Dollars ($35,000,000), which may be increased on the terms set forth in Section 2.02(b), including any modifications, renewals, extensions, and refinancings (whether contemporaneous with payment in whole or part, or subsequent thereto) of any such indebtedness permitted under this Agreement. "Senior Revolver Lender" shall mean, collectively, the lending group led by USTrust, together with their respective successors and assigns and other parties who, in connection with a refinancing of the Senior Revolver shall become parties to the Senior Revolving Credit Agreement. "Senior Revolving Credit Agreement" shall mean that certain Amended and Restated Revolving Credit and Term Loan Agreement dated as of March 17, 1995, by and among the parties named therein, as amended through the date hereof, which sets forth the terms of the Senior Revolver and the Secured Woburn Loan, as such agreement may be amended, modified, renewed, extended or refinanced from time to time hereafter. "Transfer" shall mean the sale, assignment, lease, transfer, mortgaging, encumbering or other disposition, whether voluntary or involuntary, and whether or not consideration is received therefor. "Transfer of Borrowers' Business" shall mean one or a series of transactions undertaken by the Borrowers resulting in either: (i) the Transfer of all or a Substantial Portion (as defined below) of the assets of all of the Borrowers to any other Person, other than (A) transfers between or among the Borrowers, and (B) as permitted under Section 5.04 hereof; (ii) a merger or consolidation of the Parent with another Person where the Parent is not the surviving or successor entity (other than a merger or consolidation of the Parent into or with another Borrower); (iii) the acquisition in one or a series of transactions which results in one or more Persons either owning in excess of 50% of the outstanding capital stock of the Parent or any successor or being able to elect a majority of the board of directors of the Parent or any -5- 7 successor; or (iv) a Change in Control that constitutes a Repurchase Event, as such terms are defined in those certain 4.75% Convertible Subordinated Notes dated December 22, 1993 in the aggregate principal amount of $30 million, due January 2, 2001, made by the Parent. A "Substantial Portion" of assets as used herein shall mean assets of any of the Borrowers Transferred either having a fair market value or for aggregate consideration (in cash or fair market value of property received) equal to the greater of (i) 20% or more of the equity market capitalization of the Parent based upon the average price per share of Common Stock of the Parent for the five trading days preceding the asset disposition, or (ii) 20% or more of the net worth of the Parent, on a consolidated basis, determined in accordance with GAAP. The parties acknowledge and agree that, in calculating a Transfer of a Substantial Portion of the Borrowers' assets, any sale by the Parent of the facility located in Mexico, Missouri shall be excluded. "Warrants" shall mean, collectively, all those stock purchase warrants being issued to Lenders pursuant to the terms hereof. "Warrant Share(s)," when used in the singular, shall mean any share of Common Stock or any other securities acquired by a Holder pursuant to such Holder's exercise of its rights under any of the Warrants, and, when used in the plural, shall mean, collectively, all such shares and other securities. "Wholly-Owned Affiliate," when used in reference to a particular Person, shall mean an Affiliate of that Person, where the Person in question holds 100% of the legal and beneficial interests in the Affiliate. ARTICLE II: TERMS OF INVESTMENT 2.01 FUNDING. At the closing under this Agreement (the "Closing"), the Borrowers will borrow, and the Lenders will invest in the Borrowers, the aggregate sum of FIFTEEN MILLION AND 00/100 DOLLARS ($15,000,000), such indebtedness to be evidenced by, and to be repaid according to the terms of, three Senior Subordinated Debentures (collectively, the "Debentures") in form and substance acceptable to each Lender. The entire principal sum will be advanced at Closing. The principal indebtedness under the Debentures will be advanced by, and allocated among, the Lenders as follows: -6- 8 Allied Capital Corporation $ 3,600,000 Allied Capital Corporation II 3,900,000 Capital Trust Investments, Ltd. 7,500,000 TOTAL INVESTMENTS: $15,000,000 =========== Each Lender's obligations under this Section 2.01 shall be several and not joint. 2.02 SENIOR DEBT. (a) The Obligations shall be subordinate only to the Senior Debt, pursuant to the terms of the Senior Debt Subordination Agreement, as defined in Section 2.09(c)(iii). (b) The Borrowers may increase the maximum available principal amount of the Senior Revolver to an amount not to exceed Forty-Five Million Dollars ($45,000,000), provided that, regardless of the principal amount actually outstanding thereunder, the Borrowers comply, on a pro forma basis, with the financial ratios set forth in Section 4.08(c). Notwithstanding the foregoing, the failure of the Borrowers to comply with such ratios shall not effect the validity or enforceability of the Senior Debt Subordination Agreement with respect to such increased amount advanced by the Senior Revolver Lender, and such increased amount shall be treated as "Senior Debt" (under and as defined in the Senior Debt Subordination Agreement). 2.03 SUBORDINATED JUNIOR DEBT. All Indebtedness included without duplication within clauses (i), (ii) and (v) (to the extent related to any indebtedness described in (i) or (ii)) of the definition thereof outstanding as of the date hereof and owed to any party or parties other than the Lenders which is not Senior Debt (collectively, "Junior Debt") is completely and accurately described on EXHIBIT 2.03 attached hereto and made a part hereof. The Obligations shall be senior to the Junior Debt. At or prior to the Closing, the holder of the Junior Debt and the Lenders shall enter into a subordination agreement or appropriate modification of the existing arrangements in form and substance acceptable to each Lender (the "Junior Debt Subordination Agreement"). 2.04 PREPAYMENT. The Debentures may be prepaid at any time, in whole or in part, without premium or penalty upon 30 days prior written notice to each Holder. For each partial prepayment paid or to be prepaid, the principal amount of the Debentures to be prepaid shall be allocated (in integral multiples of $100,000) among all of the Debentures at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not called for prepayment, with adjustments, to the extent practicable, to compensate for any prior prepayments not made exactly in such proportion. 2.05 DUE ON SALE. The Borrowers' obligations under the Debentures and this Agreement are not assumable, and the Debentures and all of the other Obligations are payable in full immediately upon a Transfer of Borrower's Business. -7- 9 2.06 LATE PAYMENTS. Pursuant to the terms of the Debentures, any installment payment not received when due (after expiration of the three day grace period referred to in Section 7.01) shall be subject to an additional late payment charge equal to five percent (5%) of the amount overdue. From and after the 20th day following the date of such default, interest shall accrue on the Debentures at a rate equal to the default rate stated in the Debentures. 2.07 WARRANTS. At Closing, the Parent will issue and sell to the Holders the Warrants, such Warrants to be in form and substance acceptable to each Lender. The Warrants will entitle the Holders to purchase, in the aggregate, up to 430,000 shares of Common Stock, subject to adjustment as provided in the Warrant. The aggregate purchase price for the Warrants shall be One Hundred Dollars ($100.00), and the exercise price for the Warrants shall be Five and 62/100 Dollars ($5.62) per share, subject to anti-dilution and other adjustments as set forth in the Warrants (the "Exercise Price"). The Warrants will expire on that date which is three years from the date on which all Obligations with respect to the Debentures are satisfied in full. 2.08 CLOSING. Closing must occur on or before the close of business on the date hereof, unless extended in writing by each Lender, in each Lender's sole discretion. 2.09 CONDITIONS PRECEDENT TO LENDERS' OBLIGATIONS. The obligation of Lenders to make the investment is subject to the satisfaction of the following conditions precedent at or prior to the Closing (unless waived in writing by each Lender prior to Closing): (a) Each of the representations and warranties contained in this Agreement must be true and accurate in all material respects as of the date of Closing, and each Borrower must have performed all of its respective obligations hereunder, including execution and delivery of all of the documents, instruments, opinions and certificates required by this Agreement in such forms as are satisfactory to each Lender and its counsel; (b) Each Lender has completed a due diligence report that reflects favorably on the Borrowers, including the management and the market for the Borrowers' Business generally and that otherwise is satisfactory in form and substance to each Lender in its sole and absolute discretion. In this regard, each Borrower covenants and agrees to furnish to each Lender such information as each Lender may request in order to enable each Lender to complete the required due diligence; (c) Each Lender shall have received each of the following items: (i) the Debentures, duly executed by each Borrower; (ii) an opinion of counsel, duly executed by counsel to the Borrowers, in form and substance acceptable to each Lender; -8- 10 (iii) a subordination agreement, in form and substance acceptable to each Lender, by and between the Lenders, the Senior Revolver Lender and the other parties named therein (the "Senior Debt Subordination Agreement"), duly executed by the Senior Revolver Lender; (iv) the Junior Debt Subordination Agreement, duly executed by the holder of the Junior Debt; (v) the Warrants duly executed by the Parent; and (vi) an Officer's Certificate, certifying as to (a) the Borrowers' Constituent Documents, as defined in Section 3.01, (b) the resolutions of each Borrower authorizing the transactions contemplated in this Agreement and the other Investment Documents, and (c) the incumbency and specimen signatures of certain officers of the Borrowers. (d) Each other Lender shall have made the investment contemplated hereby. ARTICLE III: REPRESENTATIONS AND WARRANTIES A. To induce Lenders to enter into this transaction, the Borrowers, jointly and severally, represent and warrant to Lenders as follows (which representations and warranties shall survive the execution and delivery of this Agreement and the funding of the investment): 3.01 ORGANIZATION; GOOD-STANDING. Each Borrower is a corporation duly formed, validly organized and in good standing in the jurisdiction of its formation. True, correct and complete copies of the articles of incorporation, by-laws, all other constituent documents of each Borrower, and all amendments and supplements to any of the foregoing (collectively, the "Borrowers' Constituent Documents") have been previously delivered to Lenders by Borrowers, and all of the Borrowers' Constituent Documents are in full force and effect as of the date hereof. 3.02 QUALIFICATION. Each Borrower is duly qualified to conduct business as it is currently being conducted and is in good standing as a foreign corporation in all jurisdictions in which the nature of its business or location of its owned and leased property and assets requires such qualification, evidence of which has been previously delivered. 3.03 POWER AND AUTHORITY. Each Borrower has full power and authority to enter into this Agreement and each of the other Investment Documents, to incur the Obligations as contemplated hereby, and to carry out the provisions of this Agreement and each of the other Investment Documents. The Parent has full power and authority to issue the Warrants and Warrant Shares. Each Borrower has taken all corporate action necessary for the execution and -9- 11 delivery of this Agreement and each of the other Investment Documents and for the performance by such Borrower of each of its obligations hereunder and thereunder, as evidenced by corporate resolution or other authorization previously delivered. 3.04 ENFORCEABILITY. Upon execution and delivery by each of the other parties thereto, this Agreement and each of the other Investment Documents shall be the legal, valid and binding obligations of each Borrower, to the extent such Borrower is a party thereto and shall be enforceable against such Borrower in accordance with their respective terms. 3.05 LITIGATION. No Borrower has been made a party to or threatened by any suits, actions, claims, investigations by Governmental Authorities or any third party or legal, administrative, arbitration or mediation proceedings, except as set forth in the schedule of litigation attached hereto as EXHIBIT 3.05, other than litigation (i) for which the Borrowers have adequate insurance coverage, (ii) wherein the amount claimed is less than $50,000, or (iii) relating to workman's compensation claims (the "Litigation Schedule"). No Borrower knows of any basis or grounds for any such suit, action, claim, investigation or proceeding. 3.06 ORDERS; DECREES; JUDGMENTS. There are no outstanding orders, judgments, writs, injunctions or decrees of any court, Governmental Authority or arbitration or mediation panel or tribunal against or affecting any Borrower or any of the properties, assets or business of any Borrower. 3.07 NON-CONTRAVENTION. Except for matters set out in the Litigation Schedule, no Borrower is in breach of, default under, or in violation of: (a) any Applicable Law, decree, or order which either individually or in the aggregate may materially and adversely affect any of them; or (b) any deed, Lease, loan agreement, commitment, bond, note, deed of trust, restrictive covenant, license, indenture, Contract, or other agreement, instrument or obligation to which any of them is a party or by which any of them is bound or to which any of their respective assets are subject. Neither the execution and delivery of this Agreement and the Investment Documents nor the performance by any Borrower of its respective obligations hereunder and thereunder will cause any such breach, default or violation or will require the consent or approval of any court or Governmental Authority or any other person, except as expressly contemplated by the terms of this Agreement. 3.08 TITLE. Each Borrower has good, complete, indefeasible and marketable title to, and ownership of, all of the Real Property or personal property it purports to own (if any), free and clear of all liens, defects, claims, security interests and encumbrances other than the Permitted Encumbrances. 3.09 TAXES. Each Borrower has filed all federal, state and local tax returns which are required to be filed, and each Borrower has duly paid or fully reserved for all taxes or installments thereof (including any interest or penalties) as and when due pursuant to the filed returns or pursuant to any levy or assessment received by such Borrower. -10- 12 3.10 Financial Condition. ------------------- (a) Attached hereto as EXHIBIT 3.10(a) is a true and complete copy of the audited consolidated financial statements summarizing the financial condition and results of operations of the Parent, as consolidated, for the fiscal year ending December 30, 1995 provided to Lenders by the Parent at least 10 days prior to the Closing Date (the "Audited Financials"). The Audited Financials were prepared in accordance with GAAP, are true and correct in all material respects, and fairly present the Parent's financial condition and results of operations at such dates and for the periods then ended. The auditors have issued an unqualified opinion to the Parent concerning the Audited Financials, a copy of which is included with the Audited Financials in EXHIBIT 3.10(a) attached hereto; and (b) Attached hereto as EXHIBIT 3.10(b) is a true and complete copy of preliminary, unaudited consolidated financial statements summarizing the financial condition and results of operations of the Parent, as consolidated, for the year-to-date period ended April 20, 1996, and results of operations for the year-to-date periods ended June 15, 1996 (the "Interim Financials"). The Interim Financials were prepared in accordance with GAAP, are true and correct in all material respects, and (except for the results of operations for the year-to-date periods ended June 15, 1996) fairly present the Parent's financial condition and results of operations at such dates and for the periods then ended, subject to normal immaterial year-end adjustments. 3.11 SOLVENCY. As of the date hereof, giving effect to the transactions contemplated by this Agreement, the present fair salable value of the Borrowers' assets is greater than the amount required to pay the Borrowers' total indebtedness (contingent or otherwise), and is greater than the amount that will be required to pay such indebtedness as it matures and as it becomes absolute and matured. The transactions contemplated hereby were effectuated without actual intent to hinder, delay or defraud present or future creditors of the Borrowers; it is the Borrowers' express intention that they will maintain a solvent financial condition on a consolidated basis, giving effect to the Obligations incurred hereunder, as long as any of the Obligations remain outstanding. The Borrowers have sufficient capital to carry on their business and transactions as now conducted and as planned to be conducted in the future. 3.12 LEASES. Attached hereto as EXHIBIT 3.12 is an accurate and complete list of all leases of Real Property and all other material leases to which any Borrower is a party or by which any Borrower or any of the Borrowers' assets is bound, together with all amendments or supplements thereto provided to Lenders by the Borrowers at least five days prior to the Closing Date (collectively, the "Leases"). Each of the Leases is valid, binding and enforceable in accordance with its terms and remains in full force and effect. No Borrower is in default or alleged to be in default with respect to any of its obligations under any of the Leases (nor would be in default or alleged to be in default with the giving of notice, passage of time, or both), and, -11- 13 no party other than the Borrowers is in default with respect to such party's obligations under any of the Leases (or would be in default or alleged to be in default with the giving of notice, passage of time, or both). The Borrowers' possession of any property leased by them has not been disturbed, nor has any claim been asserted against any Borrower that is or could be adverse to such Borrower's interests under any of the Leases. None of the Leases is subject to any rights of set-off, recoupment or similar deduction or offset. No Borrower has assigned or encumbered any of its rights, title or interest in or under any of the Leases nor agreed to any oral modifications of any of the provisions of any of the Leases. 3.13 MATERIAL CONTRACTS. Attached hereto as EXHIBIT 3.13 is an accurate and complete list of all material contracts (including all those representing 20% or more of the Borrowers' total revenue, profit volume or expenses or with material suppliers) to which any Borrower is a party or by which any Borrower or any Borrower's assets is bound provided to Lenders by the Borrowers at least five days prior to the Closing Date (collectively, the "Contracts"). Each of the Contracts is valid, binding and enforceable in accordance with its terms and remains in full force and effect. No Borrower is in default or alleged to be in default with respect to any of its obligations under any of the Contracts (nor would be in default or alleged to be in default with the giving of notice, passage of time, or both), and, no party other than the Borrowers is in default with respect to such party's obligations under any of the Contracts (or would be in default or alleged to be in default with the giving of notice, passage of time, or both). No claim has been asserted against any Borrower that is or could be adverse to such Borrower's interests under any of the Contracts. None of the Contracts is subject to any rights of set-off, recoupment or similar deduction or offset. No Borrower has assigned or encumbered any of its rights, title or interest in or under any of the Contracts nor agreed to any oral modifications of any of the provisions of any of the Contracts. 3.14 DISCLOSURE. Neither (i) the Borrowers' Private Placement Memorandum, which Borrowers previously delivered to Lenders, as updated and supplemented through the Closing Date with the information set forth on EXHIBIT 3.14, taken as a collective; (ii) this Agreement and all Exhibits hereto; nor (iii) any reports or information filed by the Borrowers pursuant to the Securities Exchange Act of 1934 during the 18 months preceding the Closing Date (upon which each Lender is entitled to rely in making the investment pursuant to this Investment Agreement), contains any untrue statement of material fact or omits to state a material fact necessary to make the statements therein not misleading. 3.15 FINANCIAL MODEL. The Financial Model dated as of June 24, 1996, as set forth in EXHIBIT 3.15, is based upon assumptions which the Borrowers believe are reasonable and based upon the Borrowers' current business and prospects and reflect the best estimate of the Borrowers of the results of operations and other information projected therein. The Financial Model discloses all material assumptions made with respect to the operation of the Borrowers' Business in formulating the Financial Model. 3.16 OTHER DEBTS. Except for the liabilities listed in the Audited Financials and Interim Financials attached hereto as EXHIBIT 3.10(a) and EXHIBIT 3.10(b), respectively, and -12- 14 except for indebtedness, liabilities or obligations incurred in the ordinary course after the date of the Interim Financials, no Borrower has indebtedness, liabilities or obligations of any nature (whether liquidated or unliquidated, mature or not yet mature, absolute or contingent, secured or unsecured) including, without limitation, liabilities or obligations on account of taxes or government charges, penalties, interest or fines thereon or in respect thereof, and no Borrower knows, or has reasonable grounds to know, of any basis for any claim against any Borrower as of the date of this Agreement or of any debt, liability or obligation other than those described in this Section 3.16. 3.17 NO MATERIAL CHANGE. Since the ending date of the Audited Financials, except as specifically reflected in the Interim Financials, the Borrowers have not: (i) suffered any material change in their condition (financial or otherwise) or their overall business prospects; (ii) entered into any material transactions or incurred any debt, obligation or liability (whether liquidated or unliquidated, mature or not yet mature, absolute or contingent, secured or unsecured) other than the Obligations; (iii) sustained any material loss or damage to their Real Property or personal property, whether or not insured; (iv) suffered any material interference with their business or operations, present or proposed; and (v) made any Transfer, abandonment or other disposition of any of their Real Property or personal property or any interest therein or relating thereto, that is material either individually or in the aggregate to their financial position or prospects. 3.18 NO SIDE AGREEMENTS. There exists no agreement or understanding calling for any payment or consideration from a customer or supplier of any Borrower to an officer or director of such Borrower with respect to any transaction between such Borrower and such supplier or customer. Except as set forth on EXHIBIT 3.18, no Affiliate of any Borrower, directly or indirectly, transacts any business with any Borrower. 3.19 GENERAL LEGAL COMPLIANCE. No Borrower is in violation of any Applicable Law that would apply to it or to its business, the violation of which would have a material adverse effect either individually or in the aggregate on any Borrower, its business, or its prospects. 3.20 ENVIRONMENTAL LEGAL COMPLIANCE. No Borrower is in violation of any applicable Environmental Law, which violation would have a material adverse effect either individually or in the aggregate on any Borrower or its business or prospects, and no Borrower has been notified of any action, suit, proceeding or investigation which calls into question compliance by any Borrower with any Environmental Laws or which seeks to suspend, revoke or terminate any license, permit or approval necessary for the generation, handling, storage, treatment or disposal of any Hazardous Material. As used in this Agreement, the term "Environmental Law" shall mean, collectively, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. ss.9601 et seq. ("CERCLA"); the Solid Waste Disposal Act, as amended, 42 U.S.C. ss.6901 et seq.("SWDA") including the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. ss.6901 et seq. -13- 15 ("RCRA"); the Clean Water Act, as amended, 42 U.S.C. ss.1251 et seq.("CWA"); the Clean Air Act, as amended, 42 U.S.C. ss.7401 et seq.; any "superfund" or "superlien" law; and any other Applicable Law regulating, relating to, or imposing liability or standards of conduct concerning, any hazardous, toxic or dangerous waste, substance or material, and the term "Hazardous Material" shall mean and include any hazardous, toxic or dangerous waste, substance or material, the generation, handling, storage, disposal, treatment or emission of which is subject to any Environmental Law. 3.21 EMPLOYEE BENEFIT MATTERS. There is no existing single-employer plan defined in Section 4021(a) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") as to which any Borrower is an "employer" or a "substantial employer" as defined in Sections 3(5) and 4001(a)(2) of ERISA, respectively. Attached hereto as EXHIBIT 3.21 is an accurate and complete list of each plan described in Section 4021(a) of ERISA, as to which any Borrower is liable to make contributions or for the payment of benefits. The Borrowers have delivered to Lenders true and complete copies of each of the plans listed on EXHIBIT 3.21 attached hereto. To the best knowledge of the Borrowers, there have been no "reportable events" as set forth in Section 4043(b) of ERISA with respect to any such plan, and no termination of any such plan since the effective date of ERISA which could result in any tax, penalty or liability being imposed upon any Borrower. No Borrower has participated in, and the execution and delivery of this Agreement by the Borrowers will not involve, any "prohibited transaction" (as defined in Section 4975 of the Internal Revenue Code of 1986, as amended) that could subject any Borrower to any tax or penalty imposed by Section 4975 of the Internal Revenue Code of 1986, as amended. To the best knowledge of the Borrowers, no predecessor-in-interest to the Borrowers has participated in any "prohibited transaction" (as defined in Section 4975 of the Internal Revenue Code of 1986, as amended) that could subject any Borrower to any tax or penalty imposed by Section 4975 of the Internal Revenue Code of 1986, as amended. Since the effective date of ERISA, neither any Borrower, nor, to the best knowledge of the Borrowers, any predecessor-in-interest to the Borrowers, has incurred any "accumulated funding deficiency", as such term is defined in Section 302 of ERISA, to which any Borrower could be subject or for which it might be liable. No Borrower is a party to, and none of the operations of the Borrowers is covered by, a "multi-employer plan", as defined in Section 3(37) of ERISA. 3.22 COLLECTIVE BARGAINING. No Borrower is a party to or subject to any collective bargaining agreements or union contracts. There are no labor disputes pending or threatened against any Borrower or between any Borrower and its employees which have affected, or so far as the Borrowers can reasonably foresee may affect, materially and adversely the business or condition of the Borrowers or the Borrowers' business or prospects. 3.23 EMPLOYEES. Attached hereto as EXHIBIT 3.23 is an accurate and complete list of all employment and compensation contracts, including all retirement benefit agreements not disclosed on EXHIBIT 3.21 between the Borrowers and officers and executives of the Borrowers. The Borrowers have delivered to the Lenders accurate and complete copies of all such contracts. -14- 16 No officer, executive or other key employee of any Borrower has advised such Borrower (orally or in writing) that he or she intends to terminate employment with such Borrower. 3.24 INSURANCE. Attached hereto as EXHIBIT 3.24 is an accurate and complete list of all insurance policies and binders presently providing coverage to any Borrower or any of its assets. The Borrowers have furnished to Lenders appropriate insurance certificates and accurate and complete copies of the insurance binders or policies for all of the insurance listed in EXHIBIT 3.24. The coverage provided by such insurance is adequate for the conduct of the Borrowers' Business. 3.25 LICENSES. The Licenses held by the Borrowers constitute all licenses, permits, approval and authorizations needed to properly operate the Borrowers' Business. No Borrower is in default or in noncompliance with respect to any License. 3.26 BROKERS. None of the Borrowers has any knowledge of any investment banking, brokerage, or finders fees due for the transactions contemplated hereby, except for the fees due CIBC Wood Gundy Securities (all of which shall be paid by the Parent), and will indemnify the Lenders and their respective affiliates for any claims with respect thereto. 3.27 SUBSIDIARIES. Attached hereto as EXHIBIT 3.27 is an accurate and complete list of all direct or indirect subsidiaries of any Borrower. All shares of subsidiaries are owned by a Borrower and are validly issued, fully paid and non-assessable. 3.28 EQUITY. No Borrower has granted any pre-emptive rights relating to any of its securities. The shares issuable upon exercise of the Warrants have been duly authorized and reserved and, upon exercise, will be fully paid and non-assessable. 3.29 SECURITIES LAWS. The issuance and sale of the Warrants and the Debentures hereunder, and the issuance of shares issuable under the Warrants, complies and will comply, as the case maybe, with all federal and state securities laws and regulations. 3.30 NO FOREIGN ASSETS CONTROL REGULATION VIOLATION. The transactions contemplated by this Agreement will not result in a violation of any of the foreign assets control regulations of the United States Treasury Department, 31 C.F.R., Subtitle B, Chapter V, as amended (including, without limitation, the Foreign Assets Control Regulations, the Transaction Control Regulations, the Cuban Assets Control Regulations, the Foreign Funds Control Regulation, the Iranian Assets Control Regulations, the Nicaraguan Trade Regulations, the Libyan Sanctions Regulations, the Soviet Regulations, the Kuwaiti Assets Control Regulations and the Iraqi Sanctions Regulations contained in said Chapter V), or any ruling issued thereunder or any enabling legislation or other Presidential Executive Order granting authority therefor, and the proceeds of the Debentures and the Warrants to be issued and sold hereunder and the Warrant Shares will not be used by the Borrowers in a manner which would violate any such regulation. -15- 17 B. To induce the Borrowers to enter into this transaction, the Lenders represent and warrant to the Borrowers as set forth below (which representations and warranties shall survive the execution and delivery of this Agreement and the funding of this transaction). B-3.01 INVESTMENT INTENT. Each Lender: (i) is acquiring the Warrants and Debentures being purchased by it hereunder and will, upon conversion of the Warrants, acquire the Warrant Shares, for its own account for the purpose of investment and not with a view to or for sale in connection with any distribution thereof; (ii) understands that the Warrants, the Debentures and the Warrant Shares have not been registered under the Securities Act by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and may not be offered or sold except pursuant to an effective registration statement or an available exemption from the registration requirements under the Securities Act; and (iii) is an "accredited investor" as defined in Regulation D as promulgated under the Securities Act. Each Lender agrees that the certificates representing the Debentures, the Warrants and the Warrant Shares will bear restrictive legends to the effect of clause (ii) of the preceding sentence and that the Parent may require an opinion of counsel, in form and substance reasonably satisfactory to the Parent, to the effect that any proposed transfer will not result in any violation of the Securities Act and the rules and regulations thereunder. ARTICLE IV: AFFIRMATIVE COVENANTS Until the Debentures are repaid in full, each Borrower covenants and agrees with the Holders to do all of the following: 4.01 QUARTERLY FINANCIALS. The Borrowers shall forward, or cause to be forwarded to Holders, the Parent's consolidated (i) quarterly financial statements, prepared in corporate summary format (substantially in the form of EXHIBIT 4.01 attached hereto), and (ii) year-to-date financial statements, comparing actual to budgeted performance, prepared in accordance with GAAP, (including a year-to-date balance sheet, profit and loss statement and cash flow statement), in each case within 45 days from the end of each quarter, together with a quarterly one-page management summary description of operations. 4.02 CERTIFICATION OF NON-DEFAULT. The Borrowers shall provide to the Holders in writing each fiscal quarter an officer's certificate, signed by the chief financial officer of the Parent certifying that no Event of Default has occurred under this Agreement, or if any such Event of Default exists, stating the nature of such Event of Default. Such certificate shall explicitly reference and certify that it is made for the benefit of the Holders. 4.03 ANNUAL AUDIT. The Parent shall forward, or cause to be forwarded, to Holders the Parent's audited consolidated year-end balance sheet, profit and loss statement and cash flow statement, without qualification thereof, within 90 days of such accounting year-end, which shall be prepared at the Borrowers' sole expense by an independent accounting firm acceptable to the Holders according to GAAP, and explicitly referenced and certified as being -16- 18 made for the benefit of the Holders, together with calculations by the Borrowers showing conformance with financial covenants. For purpose of this Agreement, unless notice is expressly given to the contrary by any Holder, all national and major regional firms shall be considered acceptable to the Holders. 4.04 BUDGETS. Prior to that date which is 45 days following the start of each fiscal year, the Borrowers shall provide the Holders with an annual budget, by period, for the Borrowers for such current fiscal year, in the corporate summary format. 4.05 NOTICE OF FILINGS. Within 30 days of filing, the Borrowers shall provide the Holders with copies of all material documents filed by any Borrower with any Governmental Authority (other than the Internal Revenue Service), including, without limitation, the Environmental Protection Agency, the Occupational Safety & Health Administration, and the Securities & Exchange Commission. 4.06 NOTICE OF LITIGATION. The Borrowers shall notify the Holders of any litigation to which any Borrower is a party by mailing to the Holders, by U.S. registered mail, within 30 days of receipt thereof, a copy of the Complaint, Motion for Judgment or other such pleadings served on or by such Borrower; provided, however, that the Borrowers shall not be obliged by this Section 4.06 to give notice of suits (i) where any Borrower is a creditor seeking collection of one or more accounts receivable unless the amount such Borrower seeks pursuant to such litigation exceeds $50,000, or (ii) where the amount of damages claimed is less than $100,000. 4.07 NOTICE OF DEFAULTS OR JUDGMENTS. The Borrowers shall give the Holders notice of any default(s) declared (i) with respect to any Contract, (ii) with respect to any obligation constituting Senior Debt, Junior Debt, or other Indebtedness of any Borrower, (iii) with respect to any judgment entered against any Borrower, or (iv) in any 90-day window, with respect to any lease or group of leases relating to stores which, in the aggregate, constitute an amount equal to one percent (1%) or more of the total revenues generated during the preceding fiscal year (any such lease or leases shall be referred to herein individually as a "Threshold Lease" and collectively as "Threshold Leases"), in each case by mailing an accurate and complete copy thereof to Holders within ten days of receipt thereof by such Borrower. The term "Threshold Leases" shall not include any lease or leases identified on EXHIBIT 4.18. 4.08 FINANCIAL RATIOS AND COVENANTS. The Borrowers shall comply with and maintain the following financial ratios or financial covenants, measured on a consolidated basis in accordance with GAAP and using the information set forth in the financial statements provided by the Borrowers in accordance with Section 4.01 above: (a) Each financial ratio or covenant required by any holder of any portion of the Senior Debt pursuant to the terms and conditions of any instruments or documents entered into in connection with any portion of the Senior Debt; -17- 19 (b) The ratio of Free Cash Flow to Total Debt Service, determined for the four-quarter period ending on October 5, 1996 and at the end of each fiscal quarter thereafter, for the immediately preceding four-quarter period, shall be equal to or greater than 2:1, based upon results for such period; and (c) In connection with any increase in the maximum available principal amount under the Senior Revolver, and at all times from and after the date on which the maximum available principal amount available under the Senior Revolver exceeds $35,000,000, the following ratios: (1) The sum of the principal amount available under the Senior Debt (treating any contemplated increase under the Senior Revolver, up to a maximum of $45 million, as if such increase was available at such time) and the Debentures on the last day of each fiscal quarter, determined quarterly, shall be less than the product of (x) 2.75 and (y) the sum of net income plus interest expense, taxes, depreciation, and amortization for such quarter and the preceding three quarters (For purposes of calculating this ratio with respect to any quarter during which the Parent incurs a charge as a result of the issuance or exercise, without duplication, of Warrants by a Lender or warrants held by the holders of the Junior Debt, such charge shall be added to the sum in this subparagraph (y)); and (2) The ratio of (x) Borrowers' Free Cash Flow for the immediately preceding four-quarter period to (y) Borrowers' Total Debt Service on a pro forma basis for such four-quarter period, assuming the principal amount then available, together with such contemplated increase, under the Senior Revolver for such period had been the amount outstanding thereunder, shall be equal to or greater than 2:1. As used in this Section 4.08, the following terms shall have the meanings indicated: (1) "Free Cash Flow" shall mean (a) the sum of net income, interest, depreciation, amortization and other non-cash charges, less (b) amounts attributable to maintenance expenditures on capital assets; and (2) "Total Debt Service" shall mean the aggregate amount of interest and scheduled principal payments paid or payable in respect of the Debentures, the Senior Debt, the Junior Debt, all other Indebtedness permitted under Section 2.03 and capitalized leases, but excluding principal payments due at maturity of (i) any revolving credit facility included in Senior Debt, (ii) the Secured Letter of Credit Reimbursement Agreement, and (iii) the Secured Woburn Loan. (For purposes of the definition of Free Cash Flow set forth above, the non-cash charges added back to net income shall include, but are not limited to, (i) the one-time special charge of $8,500,000, incurred in fiscal year 1995 in respect of store closings and recruiting of new management for SLBC, and (ii) a charge as a result of the issuance or exercise, without duplication, of Warrants by a Lender or warrants held by the holders of the Junior Debt, in each case only if such event occurred within the immediately preceding four-quarter period.) -18- 20 4.09 INSURANCE. At all times until all of the Obligations have been satisfied in full, the Borrowers shall maintain all insurance identified in EXHIBIT 3.24 or equivalent replacement insurance in full force and effect. 4.10 USE OF PROCEEDS. The Borrowers shall apply the proceeds of the investment as follows, and for no other purpose or purposes: (i) toward expenses relating to the closing of the investment, and (ii) toward paying down the Senior Revolver. 4.11 PAYMENTS AND OBLIGATIONS. The Borrowers shall make all payments of principal, interest and other charges as and when due under the Debentures, shall timely make all payments of any other monetary Obligations, shall perform or comply with, as the case may be, all of the other Obligations, and shall perform and comply in all respects with all applicable terms, conditions and covenants of this Agreement and the other Investment Documents. 4.12 INFORMATION REQUESTS. The Borrowers shall furnish from time to time to any Holder all information such Holder may reasonably request. 4.13 CREDIT CHECKS; ACCESS TO RECORDS. The Borrowers shall permit any authorized representative(s) of any Holder and their attorney(s) and accountant(s) to obtain credit and other background information on each Borrower and its management, and to inspect, examine and make copies and abstracts of the books of account and records of such Borrower at reasonable times during normal business hours. The Borrowers shall allow Holders or their agent(s) to interview the Borrowers' outside accountants, who, by this covenant, are hereby irrevocably instructed to respond to such inquiries as fully as if made by the Borrowers themselves. 4.14 MAINTAIN EXISTENCE, PROPERTIES, INTELLECTUAL PROPERTY, LICENSES. Each Borrower shall take or cause to be taken all reasonable steps and perform or cause to be performed all reasonable actions necessary or appropriate to preserve and keep in full force and effect (i) its existence as a corporation and its right to conduct its business in a prudent and lawful manner in all jurisdictions in which it currently conducts business, (ii) its properties owned from time to time, (iii) its intellectual property rights, and (iv) its Licenses. 4.15 COMMON STOCK RESERVES. The Parent shall maintain such shares of Common Stock as authorized but unissued, as may be necessary to permit the Holders of the Warrants to acquire all of the Warrant Shares at any time. 4.16 REPLACEMENT OF WARRANTS. The Parent shall perform all acts required under the Warrants, including the re-issuance or replacement of Warrants to any of the Holders upon transfer, exchange, loss or destruction thereof. -19- 21 4.17 Board Meetings; Board Observation Rights; Investor Meetings. ----------------------------------------------------------- (a) The Parent will hold meetings of its board of directors at the Parent's offices not less frequently than once per fiscal quarter. Additional meetings may be held telephonically. Each of Allied and Capital Trust shall be notified of the date and time (i) for each quarterly board meeting, in writing at least two weeks prior thereto, and (ii) for each telephonic board meeting, by facsimile at least 24 hours prior thereto. (b) Each of Allied and Capital Trust shall have the right to designate a representative to attend and observe each board meeting, or to be joined telephonically, as the case may be, at its own expense. (c) At the option of the Lenders (acting jointly), their representative may request, and the Parent shall arrange, a meeting with Parent's senior management (an "Investor Meeting") in lieu of attending a board meeting. Investor Meetings may not be requested by Lenders more frequently than quarterly. 4.18 STORE CLOSING RESERVE. Prior to December 31, 1996, the Borrowers shall close, sell or franchise such number of the stores identified on EXHIBIT 4.18 (which shall be provided to Lenders by Borrowers at least five days prior to the Closing Date), or any substitutions therein, sufficient to achieve 75% of the anticipated cash flow savings set forth on EXHIBIT 4.18. In connection with the disposition of such stores, the Borrowers shall not incur more than (i) $1,250,000 in cash charges or (ii) $7,000,000 in total cash and non-cash charges. 4.19 DOCUMENTS PROVIDED TO HOLDERS OF SENIOR DEBT. Within 10 days of delivery, the Borrowers shall provide the Holders with copies of all material documents delivered to holders of the Senior Debt. ARTICLE V: NEGATIVE COVENANTS Until the Debentures are repaid in full, each Borrower covenants and agrees with the Holders not to do any of the following: 5.01 CONSOLIDATION, MERGER AND SALE OF ALL ASSETS. The Parent will not, nor will it permit any of its subsidiaries to, merge or consolidate into or with any other Person or convey, sell, lease or otherwise dispose of all or substantially all of its assets to another Person, or permit any Person to merge or consolidate into or with the Parent or any subsidiary or convey, sell, lease or otherwise dispose of all or substantially all of its assets to the Parent or any subsidiary; provided that (i) any subsidiary may merge into, or convey, sell, lease or dispose of its assets to the Parent or a wholly-owned subsidiary of Parent, (ii) a Person other than a subsidiary may merge into, or convey, sell, lease or dispose of its assets to, the Parent, if the Parent is the surviving or acquiring corporation, and (iii) a Person other than the Parent or another subsidiary may merge into, or convey, sell, lease or dispose of its assets to, a subsidiary if (A) such -20- 22 subsidiary is the surviving or acquiring corporation or (B) the surviving or acquiring entity, if not such subsidiary, becomes a subsidiary of the Parent; provided further that in any such transaction the rights and powers of the Lenders will not, in their sole reasonable discretion, be materially adversely affected thereby and immediately after such transaction no Event of Default shall exist hereunder, and provided further that, in no event shall the Parent become a subsidiary of any other Person without the prior consent of the Lenders. 5.02 SALE OF ASSETS; LIQUIDATION. (a) The Parent will not, nor will it permit any of its subsidiaries to, convey, sell, lease or otherwise dispose of any assets, directly or indirectly, in a single transaction or in a series of transactions occurring during any one fiscal year of the Parent, except (i) as permitted under Section 5.01 hereof, (ii) for sales or other dispositions of property in the ordinary course of business, or (iii) for sales or other dispositions of property in connection the closings of stores described in Section 4.18. (b) The Parent will not, nor will it permit any of its subsidiaries to, liquidate, dissolve or wind up its affairs nor institute, consent to or fail promptly to contest proceedings for any such purpose, provided however, that any such subsidiary may be liquidated into the Parent or into a wholly-owned subsidiary of the Parent in a transaction permitted by Section 5.01 or by this Section 5.02 and any inactive or immaterial subsidiary of the Parent may be dissolved by the Parent. 5.03 DISTRIBUTIONS. No Borrower shall make or cause to be made any redemption or repurchase of any capital stock or rights with respect thereto or securities exchangeable for any capital stock or any distribution of cash, capital stock or other property of such Borrower to any of its shareholders (whether such distribution would be characterized as a dividend or otherwise), other than (i) to Parent in its capacity as a shareholder of SLBC and Midwest, and (ii) to the holder of the Junior Debt in order to redeem the Parent's 4.75% Convertible Subordinated Notes due January 2, 2001, in accordance with the terms thereof. 5.04 NO ENCUMBRANCES. No Borrower shall permit to exist against any of its material assets any lien, mortgage, pledge, security interest, title retention device, or other encumbrance, except for (i) the Permitted Encumbrances and (ii) any lien, mortgage security interest or other encumbrance in favor of the Senior Revolver Lender relating to the Senior Revolver, provided, however, that in the event any such encumbrance is granted, each Borrower shall also grant to the Holders a junior lien, mortgage or security interest, as applicable, in the same collateral securing the Senior Revolver Lender and pursuant to security documents substantially identical to those granting such encumbrance to the Senior Revolver Lender and subject to the terms of the Senior Debt Subordination Agreement. 5.05 INSIDE TRANSACTIONS. Other than (i) meals granted to employees at a 50% discount, and (ii) loans to employees and directors that, in the aggregate do not exceed $250,000, no Borrower shall purchase or sell any property or services, or borrow or lend money or property -21- 23 from or to, or co-invest in, any transaction with any officer, director, shareholder, employee or Affiliate of such Borrower, except on terms no more favorable than a Borrower would offer to a third party. 5.06 JUDGMENTS. The Borrowers shall not permit any judgment in excess of $50,000, or any series of judgments aggregating in excess of $50,000, obtained against the Borrowers, and for which the Borrowers do not have adequate insurance coverage, to remain unpaid for over 20 days without obtaining a stay of execution or appropriate surety bond. 5.07 ADDITIONAL DEBTS AND LIABILITIES. No Borrower shall incur any additional Indebtedness or liabilities, or create or incur any contingent liability (including guaranties or endorsements) other than: (i) the Obligations; (ii) the Senior Debt; (iii) the Junior Debt noted on EXHIBIT 2.03; (iv) trade debt or short-term working capital debt incurred in the normal and ordinary course of the Borrower's Business; (v) contingent liabilities in an aggregate amount not to exceed $500,000; (vi) depositing checks and other instruments for the payment of money acquired in the ordinary course of business; and (vii) the Leases and other leases and purchase money obligations entered into in the ordinary course of the Borrowers' Business. 5.08 NO ADVERSE ACTIONS. No Borrower shall avoid or seek to avoid the observance or performance of any of the terms, covenants and conditions of this Agreement or any of the other Investment Documents, but shall at all times carry out in good faith all such terms and take all such actions as may be necessary or appropriate to protect the rights of the Holders hereunder and under each of the Investment Documents. 5.09 NO INVESTMENT. No Borrower shall make any investment in any other Persons (whether or not affiliated with such Borrower), except for an investment in an entity named as a Borrower herein. ARTICLE VI: FEES, EXPENSES AND INDEMNIFICATION 6.01 FEES AND EXPENSES OF LENDERS. The Borrowers shall pay: (a) A processing fee to Lenders, shared ratably among Allied and CT Capital Trust N.V., of Four Hundred Fifty Thousand Dollars ($450,000); (b) All reasonable fees and disbursements of legal counsel for each of the Lenders related to this transaction; and (c) An additional fee equal to all out-of-pocket costs and expenses incurred by any Lender or Allied Capital Advisers, Inc. or CT Capital International Inc. in connection with performing a due diligence examination of the Borrowers and the Borrowers' Business (including but not limited to amounts payable to Ernst & Young for due diligence services). -22- 24 All amounts described in this Section 6.01 shall be due and payable in full by the Borrowers at the Closing. Lenders acknowledge receipt of a deposit of One Hundred Thousand Dollars ($100,000) from the Borrowers, which will be applied at Closing to the fees and expenses described in this Section 6.01. 6.02 MONITORING FEES. The Borrowers shall pay to Holders or their designees, at the Closing and on each anniversary thereafter for so long as the Debentures remain outstanding, an annual monitoring fee in the aggregate amount of Fifty Thousand Dollars ($50,000), shared ratably among the Holders. 6.03 OTHER FEES AND EXPENSES. The Borrowers shall pay, as and when due, all of the following fees and expenses: (a) the fees and expenses of its own counsel; (b) any income, excise, franchise or other taxes incident to the transactions described herein; (c) all fees and expenses of any investment banker, broker or finder engaged by or through Borrowers, including all fees due to CIBC Wood Gundy Securities; and (d) all reasonable fees and disbursements of legal counsel for each of the Lenders related to this investment following the Closing Date. 6.04 INDEMNIFICATION. In addition to its indemnification provisions contained elsewhere herein and in the other Investment Documents, each Borrower agrees to indemnify, defend and hold harmless each of the Holders and each of their respective officers, directors, partners, shareholders, employees, agents and controlling persons (collectively, the "Indemnified Parties") from and against any and all losses, claims, damages, liabilities and related expenses, including attorneys' fees and expenses, incurred by or asserted against any of the Indemnified Parties arising out of, in any way in connection with, or as a result of: (i) this Agreement and the other Investment Documents, (ii) the performance by the Holders and each Borrower of its respective obligations hereunder and thereunder and consummation of the transactions contemplated hereby and thereby; (iii) the occurrence of any Event of Default hereunder or any event that would constitute an Event of Default but for the giving of notice and/or passage of time; (iv) any federal, state or local transfer or recording taxes or filing fees which may become payable in connection with this transaction; (v) the spilling, leaking, pumping, pouring, unsettling, discharging, leaching or releasing of any Hazardous Materials on any of the Real Property or any other property owned by any Borrower or to which any Borrower has sent or otherwise shipped any Hazardous Material; (vi) any violations by any Borrower of any other Environmental Law, regulation or ordinance; (vii) any fee or expense claimed by any investment banker, broker or finder engaged by or through Borrowers; or (viii) any claim, litigation, investigation or proceeding relating to or to which any Borrower has not or otherwise shipped any Hazardous Materials any of the foregoing, whether or not any of the Indemnified Parties is a party thereto; provided, however, any such indemnity shall not apply to any such losses, claims, damages, liabilities or related expenses arising from the gross negligence or willful misconduct of any of the Holders. 6.05 SURVIVAL; TIMING OF PAYMENTS. The provisions of this Article VI and any other indemnification provisions contained in this Agreement and the other Investment -23- 25 Documents shall survive and remain operative and in full force and effect regardless of the termination of this Agreement or expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of the Debentures and satisfaction and discharge of the other Obligations or the Debentures, or any investigation made by or on behalf of any of the Holders. Except as provided to the contrary, all amounts due under this Article VI shall be payable on written demand therefor. ARTICLE VII: DEFAULT PROVISIONS The occurrence of any of the events specified below in this Article VII (any such, an "Event of Default") shall constitute an immediate breach of, and default under, this Agreement entitling the Holders to exercise all of the rights and remedies specified in this Agreement, in any other Investment Document, and under all Applicable Laws, without the obligation to furnish any further notice or opportunity to cure (beyond that specified in the applicable sections of this Article VII), all of which are hereby expressly waived by each Borrower: 7.01 MONETARY DEFAULTS. Any installment payment of principal, interest or other charge under any of the Debentures is not received by the Holders within three business days of the due date thereof, or any other monetary Obligation is not fully paid and discharged within three business days of the due date thereof. 7.02 OTHER BREACHES. Any Borrower shall fail to comply with any of its respective affirmative or negative covenants, agreements and undertakings in this Agreement or the Debentures, and such failure shall continue for a period of 10 calendar days from the date of the delivery of written notice thereof from any Holder. 7.03 MISREPRESENTATION. Any representation or warranty made by the Borrowers in this Agreement, any of the other Investment Documents, or in any other writing supplied to Holders by such Borrower or on such Borrower's behalf shall be untrue in any material respect when made. 7.04 ACT OF BANKRUPTCY OR DISSOLUTION. Any Act of Bankruptcy or Act of Dissolution shall have occurred with respect to any Borrower. 7.05 OTHER INVESTMENT DOCUMENT DEFAULTS. Any Borrower shall be in default under any of the other Investment Documents (after taking into account the giving of any notice and the expiration of the applicable cure period (if any) required pursuant to the applicable terms of such other Investment Document or Investment Documents). 7.06 OTHER DEFAULTS GENERALLY. Any default shall have occurred and is continuing (after giving effect to any applicable notice and/or grace periods) under any Threshold Lease or -24- 26 Threshold Leases, Contract, obligation constituting Senior Debt or Junior Debt, or other material loan, lease, debt or material obligation of any Borrower. ARTICLE VIII: CERTAIN REMEDIES Upon the occurrence of an Event of Default under this Agreement, each of the Holders shall be entitled to exercise any or all of the following rights and remedies, in addition to such other rights and remedies as may be provided for in the other Investment Documents or as may be available at law or in equity: 8.01 ACCELERATION. Following the occurrence of an Event of Default, each of (i) Allied, or its successors or assigns as a group, and (ii) Capital Trust, or its successors or assigns as a group, shall have the right to accelerate the maturity of the Debentures held by such Holder and all other Obligations due and owing to such party and demand immediate payment in full of all amounts payable under such Debentures and such Obligations, without presentment, demand, protest, or further notice by such Holder to any Borrower, all of which are hereby expressly waived by each Borrower, provided that such Holder first has given two days telephonic notice (with confirmation by telecopy or overnight courier) to the other Holders and the opportunity for each other Holder to participate in such acceleration. 8.02 COSTS. The Borrowers shall pay all expenses of any nature, whether incurred in or out of court, and whether incurred before or after the Debentures shall become due at their maturity date or otherwise (including, but not limited to, reasonable attorneys' fees and costs) which Holders may deem necessary or proper in connection with the collection of any of the Obligations. The Holders are authorized to pay at any time and from time to time any or all of such expenses, to add the amount of such payment to the amount of principal outstanding under the Debentures, and to charge interest thereon at the rate specified in the Debentures. 8.03 REMEDIES NON-EXCLUSIVE. None of the rights, remedies, privileges or powers of the Holders expressly provided for herein shall be exclusive, but each of them shall be cumulative with, and in addition to, every other right, remedy, privilege and power now or hereafter existing in favor of the Holders, whether pursuant to the other Investment Documents, at law or in equity, by statute or otherwise. ARTICLE IX: REGISTRATION PROVISIONS [INTENTIONALLY OMITTED] ARTICLE X: MISCELLANEOUS -25- 27 10.01 NON-WAIVER. No course of dealing between a Holder and any other party hereto or any failure or delay on the part of a Holder in exercising any rights or remedies hereunder shall operate as a waiver of any rights or remedies of any Holder under this or any other applicable instrument. No single or partial exercise of any rights or remedies hereunder shall operate as a waiver or preclude the exercise of any other rights or remedies hereunder. 10.02 NOTICES. All notices or communications under this Agreement or the Debentures shall be mailed, postage prepaid, delivered by facsimile, or delivered by courier to the following addresses (or to such other address as shall at any time be designated by any party in writing to the other parties): To Allied: Allied Capital Corporation - and - Allied Capital Corporation II c/o Allied Capital Corporation 1666 K Street, N.W., Ninth Floor Washington, D.C. 20006 Attention: Gay S. Truscott, Vice President Facsimile: (202) 659-2053 With a copy to: Piper & Marbury L.L.P. 1200 Nineteenth Street, N.W. Washington, D.C. 20036 Attention: Anthony H. Rickert, Esquire Facsimile: (202) 223-2085 -26- 28 To Capital Trust Investments, Ltd.: c/o Capital Trust Limited 49 Mount Street London, England W1Y5RE Attention: Bassam Aburdene Facsimile: 011 441 71 499 0524 With a copy to: CT Capital International, Inc. 575 Fifth Avenue, 40th Floor New York, New York 10017 Attention: John P. Oswald, Managing Director Facsimile: (212) 490-6950 And a copy to: Morgan, Lewis & Bockius LLP 101 Park Avenue New York, New York 10178 Attention: Charles E. Engros, Esquire Facsimile: (212) 309-6273 To the Parent: Au Bon Pain Co., Inc. 19 Fid Kennedy Avenue Marine Industrial Park Boston, MA 02210-2497 Attention: Louis I. Kane Facsimile: (617) 423-7879 With a copy to: Gadsby & Hannah 125 Summer Street Boston, Massachusetts 02110 Attention: Walter Wekstein, Esquire Facsimile: (617) 345-7050 Rejection or other refusal to accept, or the inability to deliver because of a changed address of which no notice was given, shall not affect the effectiveness or the date of delivery for any notice sent in accordance with the foregoing provisions. Each such notice, request or other communication shall be deemed sufficiently given, served, sent and received for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt, the affidavit of the messenger or the answer back being deemed conclusive (but not exclusive) evidence of such delivery) or at such time as delivery is refused by addressee upon presentation. -27- 29 10.03 BINDING AGREEMENT. This Agreement shall bind and inure to the benefit of each of the Holders, the Borrowers, and except as otherwise expressly provided to the contrary herein, each of their respective heirs, successors and assigns. Without limiting the generality of the foregoing sentence, the rights of the Holders to cause the Parent to register Registrable Securities granted pursuant to this Agreement may be transferred or assigned by any holder to a transferee or assignee; provided, however, that the transferee or assignee of such rights assumes the obligations of such transferor or assignor, as the case may be, under this Agreement and that such transferee or assignee executes and delivers a copy of this Agreement to Parent. 10.04 ENTIRE AGREEMENT; INTEGRATION CLAUSE. This Agreement, the Exhibits hereto, and the other Investment Documents set forth the entire agreements and understandings of the parties hereto with respect to this transaction, and any prior agreements are hereby merged herein and terminated. 10.05 NO ORAL MODIFICATION OR WAIVERS. The terms herein may not be modified or waived orally, but only by an instrument in writing signed by the party against which enforcement of the modification or waiver (as the case may be) is sought. 10.06 RELATIONSHIP OF THE PARTIES; ADVICE OF COUNSEL. This Agreement provides for the making of an investment by Holders, in their capacity as investors, to the Borrowers, for the payment of interest and repayment of principal by the Borrowers to Holders. The provisions herein for compliance with financial covenants and delivery of financial statements are intended solely for the benefit of the Holders to protect their interests as lenders in assuring payments of interest and repayment of principal, and nothing contained in this Agreement shall be construed as permitting or obligating the Holders to act as financial or business advisors or consultants to the Borrowers, as permitting or obligating Holders to control the Borrowers or to conduct the Borrowers' operations, as creating any fiduciary obligation on the part of the Holders to the Borrowers, or as creating any joint venture, agency or other relationship between the parties other than as explicitly and specifically stated in this Agreement. A Holder is not (and shall not be construed as) a partner, joint venturer, alter-ego, manager, controlling person, operator or other business participant of any kind of the Borrowers; neither Holders nor any Borrower intend that the Holders assume such status, and, accordingly, the Holders shall not be deemed responsible for (or a participant in) any acts or omissions of any of the Borrowers. The Borrowers each represent and warrant to the Holders that they have had the advice of experienced counsel of their own choosing in connection with the negotiation and execution of this Agreement and with respect to all matters contained herein. 10.07 CONTROLLING LAW. This Agreement and each of the other Investment Documents shall be governed by, and interpreted and construed in accordance with, the internal laws of the State of New York (without regard to its conflicts of law principles). -28- 30 10.08 VENUE; PERSONAL JURISDICTION; FULL FAITH AND CREDIT; PERSONAL SERVICE. (a) Venue for the adjudication of any claim or dispute arising out of this Agreement or any of the other Investment Documents shall be proper only in the state or federal courts of the City and State of New York, and all parties to this Agreement and the other Investment Documents hereby consent to such venue and agree that it shall not be not inconvenient and not subject to review by any court other than such courts in New York; (b) The Borrowers intend and agree that the courts of the jurisdictions in which each Borrower is formed and in which each Borrower conducts its business should afford full faith and credit to any judgment rendered by a court of the State of New York against any Borrower under this Agreement and the other Investment Documents, and the Borrowers under this Agreement and the other Investment Documents each intend and agree that such courts should hold that the New York courts have jurisdiction to enter a valid, in personam judgment against such Borrower; (c) The Borrowers agree that service of any summons and complaint, and other process which may be served in any suit, action or other proceeding, may be made by mailing via U.S. certified or registered mail or by hand-delivering a copy of such process to the Parent at its address specified above, with a copy to its counsel at its address specified above; and (d) The Borrowers all expressly acknowledge and agree that the provisions of this Section 10.08 are reasonable and made for the express benefit of each of the Holders. 10.09 WAIVER OF TRIAL BY JURY. Each party to this Agreement agrees that any suit, action or proceeding, whether claim, defense or counterclaim, brought or instituted by any party hereto or any successor or assign of any party on or with respect to this Agreement or any other Investment Document or which in any way relates, directly or indirectly, to the Debentures or any event, transaction or occurrence arising out of or in any way connected with this Agreement, the other Investment Documents or the dealings of the parties with respect thereto, shall be tried only by a court and not by a jury. EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING, AND ACKNOWLEDGES THAT THIS IS A WAIVER OF A LEGAL RIGHT AND THAT IT MAKES THIS WAIVER VOLUNTARILY AND KNOWINGLY AFTER CONSULTATION WITH, OR THE OPPORTUNITY TO CONSULT WITH, COUNSEL OF ITS CHOICE. 10.10 COSTS AND FEES RELATED TO ENFORCEMENT OR A SUCCESSFUL DEFENSE. Without limiting the Holders' entitlements under Section 8.2 above or under the terms of any of the other Investment Documents, each Borrower, jointly and severally (each, a "Reimbursing Party"), hereby agrees to reimburse the Holders for any and all costs and fees, including reasonable attorneys' fees and expenses, incurred by any of the Holders or their Affiliates in connection with: (i) any suit, action, claim or other activity of the Holders to collect the Obligations or any -29- 31 portion thereof or to enforce any of the provisions of this Agreement or any other Investment Document against such Reimbursing Party; and (ii) any suit, action, claim or other liability asserted against any of the Holders or their Affiliates by such Reimbursing Party in any case in which such Reimbursing Party does not prevail with respect to substantially all of its or his claim. 10.11 INDEPENDENT COVENANT TO MAKE PAYMENTS. The payment and performance by any Borrower of all of the Obligations shall be absolute and unconditional, irrespective of any defense or any rights of set-off, recoupment or counterclaim any Borrower might otherwise have against any of the Holders, and each Borrower Party shall pay and perform all of the Obligations (to the extent applicable to him or it), free of any deductions and without abatement, diminution, recoupment, counterclaim or set-off. Until payment in full of all of the Obligations, the Borrowers shall: (a) not suspend or discontinue any payments required pursuant to the Debentures, this Agreement or any other Investment Documents; and (b) perform and observe all of the other terms and provisions of all of the Investment Documents. 10.12 NOTICE OF CLAIM. To allow the Holders to mitigate any alleged breach of this Agreement, the other Investment Documents, or Holders' other duties to any Borrower, the Borrowers each hereby agree to give the Holders written notice of any claim or defense any of them has against any Holder, whether in tort, contract or otherwise, relating to any act or omission by such Holder under this Agreement, the other Investment Documents or the transactions related thereto, or of any defense to the payment or performance of any of the Obligations for any reason. Each Borrower hereby agrees to provide such notice to Holders within 60 days after such Borrower first has knowledge of such defense. The Borrowers acknowledge and agree that any claim any of them may have with respect to one Holder shall not affect their respective Obligations to the other Holders. 10.13 HEADINGS. The headings of the paragraphs and sub-paragraphs of this Agreement and the other Investment Documents are inserted for convenience only and shall not be deemed to constitute a part of this Agreement or the other Investment Documents. 10.14 SEVERABILITY. To the extent any provision herein violates any applicable law, that provision shall be considered void and the balance of this Agreement shall remain unchanged and in full force and effect. 10.15 COUNTERPARTS. This Agreement may be executed in as many counterpart copies as may be required. It shall not be necessary that the signature of, or on behalf of, each party appear on each counterpart, but it shall be sufficient that the signature of, or on behalf of, each party appear on one or more of the counterparts. All counterparts shall collectively constitute a single agreement. It shall not be necessary in any proof of this Agreement to produce or account for more than a number of counterparts containing the respective signatures of, or on behalf of, all of the parties. -30- 32 10.16 DELIVERIES TO HOLDERS. To the extent the terms of this Agreement or any of the other Investment Documents requires the Borrowers to deliver any documents or other materials to any or all of the Holders, then the Borrowers may satisfy such requirement by delivering a single copy of the document(s) or other material(s) in question to each of Allied's notice party and Capital Trust's notice party, in each case identified in Section 10.02 above. Following a complete or partial Transfer by Allied or Capital Trust of any right, title or interest in and to any of the Debentures to one or more Persons that is not an Affiliate of such Lender, then the Borrowers shall be required to deliver copies of the document(s) or other material(s) in question to each of the additional Holders separately. 10.17 CONSENT OR APPROVAL OF HOLDERS. To the extent the terms of this Agreement or any of the other Investment Documents require the Borrowers to obtain the consent, waiver or approval of Holders, or if Borrowers wish to amend this Agreement, such consent, waiver, approval, or amendment shall be effective upon receipt by the Borrowers of written consent or approval from Holders of not less than two-thirds of the outstanding principal balance of the Debentures, provided that no such consent, waiver, approval, or amendment may be granted with respect to changes in the (i) principal amount, (ii) interest rate, (iii) schedule of payments, or (iv) maturity date of any Debenture without the consent or approval of the Holder of such Debenture, or if the Debentures have been repaid, the consent, waiver or approval of Holders of not less than two-thirds of the Warrants or Warrant Shares (as the case may be). {Signatures next page} -31- 33 IN WITNESS WHEREOF, the undersigned have executed and delivered this Agreement as of the date first above written. ATTEST: AU BON PAIN CO., INC. a Delaware corporation By: /s/ THOMAS R. HOWLEY By: /s/ LOUIS I. KANE (SEAL) -------------------------- ------------------- Assistant Secretary Co-Chairman ATTEST: SAINT LOUIS BREAD COMPANY, INC. a Delaware corporation By: /s/ THOMAS R. HOWLEY By: /s/ LOUIS I. KANE (SEAL) -------------------------- ------------------- Assistant Secretary Executive Vice President ATTEST: ABP MIDWEST MANUFACTURING CO., INC. a Delaware corporation By: /s/ THOMAS R. HOWLEY By: /s/ LOUIS I. KANE (SEAL) -------------------------- ------------------- Secretary Vice President ALLIED CAPITAL CORPORATION, a Maryland corporation By: /s/ KELLY A. ANDERSON By: /s/ GAY S. TRUSCOTT (SEAL) -------------------------- -------------------- Kelly A. Anderson Gay S. Truscott, Vice President -32- 34 ALLIED CAPITAL CORPORATION II, a Maryland corporation By: /s/ KELLY A. ANDERSON By: /s/ GAY S. TRUSCOTT (SEAL) -------------------------- -------------------- Kelly A. Anderson Gay S. Truscott, Vice President CAPITAL TRUST INVESTMENTS, LTD., a Guernsey corporation By: /s/ KATHERINE L. SUAVEY By: /s/ JOHN P. OSWALD (SEAL) -------------------------- ------------------- Katherine L. Suavey John P. Oswald, Attorney in Fact -33- EX-4.3.2 6 SENIOR SUBORDINATED DEBENTURE 1 THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR APPLICABLE SECURITIES LAWS. THIS DEBENTURE MAY NOT BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OF THE DEBENTURE UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS, OR UPON SATISFACTION BY THE ISSUER HEREOF THAT SUCH REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER. THIS DEBENTURE IS SUBJECT TO A SUBORDINATION AGREEMENT, DATED OF EVEN DATE HEREWITH, IN FAVOR OF USTRUST, THE FIRST NATIONAL BANK OF BOSTON, CITIZENS BANK OF MASSACHUSETTS AND INAC CORP. (THE "SENIOR DEBT SUBORDINATION AGREEMENT"). AU BON PAIN CO., INC. SAINT LOUIS BREAD COMPANY, INC. ABP MIDWEST MANUFACTURING CO., INC. SENIOR SUBORDINATED DEBENTURE $3,600,000 Dated as of July 24, 1996 FOR VALUE RECEIVED, the undersigned entities (collectively, the "Borrowers"), jointly and severally promise to pay to the order of ALLIED CAPITAL CORPORATION, a Maryland corporation (the "Holder"), at its offices located at 1666 K Street, N.W., Suite 901, Washington, D.C. 20006, the principal amount of THREE MILLION SIX HUNDRED THOUSAND DOLLARS ($3,600,000), together with interest thereon as set forth below, at its offices or such other place as the Holder may designate in writing. 1. INVESTMENT AGREEMENT. This Senior Subordinated Debenture (the "Debenture") is one of three senior subordinated debentures to be executed and delivered by the Borrowers in connection with an investment being made by the Holder and two other parties in the Borrowers in the aggregate original principal amount of FIFTEEN MILLION DOLLARS ($15,000,000) pursuant to the terms and conditions of an Investment Agreement among the Borrowers, the Holder and certain other parties named therein, dated of even date herewith (the "Investment Agreement"). This Debenture and the other two senior subordinated debentures evidencing the investment (collectively, the "Other Debentures") are each subject to the terms and conditions of the Investment Agreement. A copy of the Investment Agreement may be examined during normal business hours at the Borrowers' offices. Terms not defined herein shall have the meanings assigned to them in the Investment Agreement. 2 2. Interest Rate Provisions. ------------------------ 2.1 BASIC INTEREST RATE. Interest shall accrue on the principal balance of this Debenture outstanding as follows: (i) from the date hereof and thereafter until July 24, 1997, at the rate of 11.25% per annum; (ii) from July 25, 1997 and thereafter until July 24, 1998, at the rate of 13% per annum; and (iii) from July 25, 1998 until repayment of this Debenture, at the rate of 14% per annum. The interest rate applicable at any one time as set forth in this section shall be referred to as the "Basic Interest Rate". 2.2 DEFAULT INTEREST RATE. An Event of Default shall be deemed to have occurred if any installment payment of principal, interest or other charge under this Debenture or any of the Other Debentures is not received by the Holder thereof within three business days of the due date thereof, or if any other sums payable to Holder hereunder, under the terms of the Other Debentures, or under the terms of the Investment Agreement are not paid on or before that date which is three business days from the due date thereof. From and after the 20th day following any such default, interest shall accrue and be payable hereunder at the rate of two percent (2 %) per annum above the then applicable Basic Interest Rate from the date of the occurrence of the Event of Default until the earliest date upon which the Event of Default has been cured (the "Default Interest Rate"). 2.3 ADDITIONAL PROVISIONS. Interest shall be calculated on the basis of an actual 360-day year and shall be computed for each payment period on the basis of the actual number of days elapsed. 3. Payments. -------- 3.1 INTEREST ONLY PAYMENTS; LATE PAYMENTS. Commencing on October 1, 1996, and continuing on the first day of each calendar quarter thereafter up to and including July 1, 2000, the Borrowers shall pay to Holder quarterly installments of interest only on the principal amount outstanding hereunder. Any such installment not received by Holder within three business days of its due date shall be subject to an additional late payment charge equal to five percent (5%) of the amount overdue. 3.2 PRINCIPAL PAYMENT. The entire unpaid principal balance of this Debenture, together with all accrued, but unpaid, interest, and other sums owed hereunder shall be due and payable in full without further notice or demand on July 24, 2000 (the "Maturity Date"). 3.3 PREPAYMENTS; APPLICATION OF PAYMENTS. The Borrowers may prepay this Debenture in whole or in part at any time upon 30 days prior written notice to Holder without penalty or premium. All prepayments shall be applied as follows: (a) first, to accrued, but unpaid, interest at the Default Interest Rate; (b) second, to accrued, but unpaid, interest at the Basic Interest Rate; and finally, to principal, provided that the principal amount to be prepaid shall be allocated (in integral multiples of $1,000) among this Debenture and the Other -2- 3 Debentures at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not called for prepayment, with adjustments, to the extent practicable, to compensate for any prior prepayments not made exactly in such proportion. 3.4 DUE ON SALE. Notwithstanding anything herein or in the Investment Agreement to the contrary, the entire indebtedness hereunder shall become due and payable upon the earlier of the Maturity Date or the Transfer of Borrowers' Business. 4. ASSIGNMENT. This Debenture and the obligations hereunder may not be assigned by the Borrowers without the prior written consent of Holder. Holder may freely assign all or any portion of its right, title and interest in and to this Debenture. 5. JOINT AND SEVERAL LIABILITY. If more than one party signs this instrument, then all signatories shall be jointly and severally liable hereunder. 6. DEFAULT AND REMEDIES. The occurrence of an Event of Default under the Investment Agreement shall constitute a default hereunder and shall entitle the Holder to exercise the rights and remedies specified in the Investment Agreement, as well as those available at law or in equity. These rights and remedies include, but are not limited to, the right of the Holder to accelerate the maturity of this Debenture and all other Obligations. 7. WAIVERS. The Borrowers hereby waive presentment, demand, protest, or further notice of any kind (except such notices as may be specifically required by the express terms of the Investment Agreement). 8. WAIVER OF JURY TRIAL; SUBMISSION TO JURISDICTION. (a) EACH OF THE HOLDER AND THE BORROWERS HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS DEBENTURE. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE HOLDER TO ENTER INTO THE TRANSACTIONS PROVIDED FOR IN THE INVESTMENT AGREEMENT AND TO MAKE THE INVESTMENT. (b) FOR THE PURPOSE OF ANY ACTION OR PROCEEDING INVOLVING THIS DEBENTURE, EACH OF THE HOLDER AND THE BORROWERS HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ALL FEDERAL AND STATE COURTS LOCATED IN THE CITY OF NEW YORK AND CONSENTS THAT IT MAY BE SERVED WITH ANY PROCESS OR PAPER BY REGISTERED MAIL OR BE PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK IN ACCORDANCE WITH APPLICABLE LAW, PROVIDED A REASONABLE TIME FOR APPEARANCE IS ALLOWED. EACH OF THE HOLDER -3- 4 AND THE BORROWERS EXPRESSLY WAIVES, TO THE EXTENT IT MAY LAWFULLY DO SO, ANY OBJECTION, CLAIM OR DEFENSE WHICH IT MAY HAVE AT ANY TIME TO THE LAYING OF VENUE OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF THIS DEBENTURE IN ANY SUCH COURT, IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM AND FURTHER IRREVOCABLY WAIVES THE RIGHT TO OBJECT, WITH RESPECT TO ANY SUCH CLAIM, SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT, THAT SUCH COURT DOES NOT HAVE JURISDICTION OVER THE PERSON OF THE BORROWERS OR THE HOLDER, AS APPLICABLE. NOTHING CONTAINED HEREIN WILL BE DEEMED TO PRECLUDE THE HOLDER FROM BRINGING AN ACTION AGAINST THE BORROWERS IN ANY OTHER JURISDICTION. 9. CONTROLLING LAW. This Debenture and all matters related hereto shall be governed, construed and interpreted strictly in accordance with the laws of the State of New York, without regard to its principles of conflicts of law. 10. NO USURY. This Debenture is subject to the express condition that at no time shall the Borrowers be obligated or required to pay interest hereunder at a rate which could subject the Holder to either civil or criminal liability as a result of being in excess of the maximum rate which the Borrowers are permitted by law to contract or agree to pay. If, by the terms of this Debenture, the Borrowers are at any time required or obligated to pay interest at a rate in excess of such maximum rate, the rate of interest under this Debenture shall be deemed to be immediately reduced to such maximum rate and interest payable hereunder shall be computed at such maximum rate and the portion of all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been pre payments of interest on this Debenture. {Signatures on pages following} -4- 5 IN WITNESS WHEREOF, the undersigned entities have caused this Debenture to be executed and their corporate seals to be affixed on the day and year first above written. WITNESS/ATTEST: "BORROWERS": [Seal] AU BON PAIN CO., INC. Attest: /s/ THOMAS R. HOWLEY By: /s/ LOUIS I. KANE --------------------- ------------------ Thomas R. Howley Louis I. Kane, Co-Chairman [Seal] Assistant Secretary SAINT LOUIS BREAD COMPANY, INC. Attest: /s/ THOMAS R. HOWLEY By: /s/ LOUIS I. KANE --------------------- ------------------ Thomas R. Howley Louis I. Kane, Co-Chairman [Seal] Assistant Secretary ABP MIDWEST MANUFACTURING CO., INC. Attest: /s/ THOMAS R. HOWLEY By: /s/ LOUIS I. KANE --------------------- ------------------ Thomas R. Howley Louis I. Kane, Co-Chairman Secretary -5- EX-4.3.3 7 SENIOR SUBORDINATED DEBENTURE 1 THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR APPLICABLE SECURITIES LAWS. THIS DEBENTURE MAY NOT BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OF THE DEBENTURE UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS, OR UPON SATISFACTION BY THE ISSUER HEREOF THAT SUCH REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER. THIS DEBENTURE IS SUBJECT TO A SUBORDINATION AGREEMENT, DATED OF EVEN DATE HEREWITH, IN FAVOR OF US TRUST, THE FIRST NATIONAL BANK OF BOSTON, CITIZENS BANK OF MASSACHUSETTS AND INAC CORP. (THE "SENIOR DEBT SUBORDINATION AGREEMENT"). AU BON PAIN CO., INC. SAINT LOUIS BREAD COMPANY, INC. ABP MIDWEST MANUFACTURING CO., INC. SENIOR SUBORDINATED DEBENTURE $7,500,000 Dated as of July 24, 1996 FOR VALUE RECEIVED, the undersigned entities (collectively, the "Borrowers"), jointly and severally promise to pay to the order of CAPITAL TRUST INVESTMENTS, LTD., a Guernsey corporation (the "Holder"), at its offices located at 49 Mount Street, London, England W1Y5RE, the principal amount of SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($7,500,000), together with interest thereon as set forth below, at its offices or such other place as the Holder may designate in writing. 1. INVESTMENT AGREEMENT. This Senior Subordinated Debenture (the "Debenture") is one of three senior subordinated debentures to be executed and delivered by the Borrowers in connection with an investment being made by the Holder and two other parties in the Borrowers in the aggregate original principal amount of FIFTEEN MILLION DOLLARS ($15,000,000) pursuant to the terms and conditions of an Investment Agreement among the Borrowers, the Holder and certain other parties named therein, dated of even date herewith (the "Investment Agreement"). This Debenture and the other two senior subordinated debentures evidencing the investment (collectively, the "Other Debentures") are each subject to the terms and conditions of the Investment Agreement. A copy of the Investment Agreement may be examined during normal business hours at the Borrowers' offices. Terms not defined herein shall have the meanings assigned to them in the Investment Agreement. 2 2. INTEREST RATE PROVISIONS. 2.1 BASIC INTEREST RATE. Interest shall accrue on the principal balance of this Debenture outstanding as follows: (i) from the date hereof and thereafter until July 24, 1997, at the rate of 11.25% per annum; (ii) from July 25, 1997 and thereafter until July 24, 1998, at the rate of 13% per annum; and (iii) from July 25, 1998 until repayment of this Debenture, at the rate of 14% per annum. The interest rate applicable at any one time as set forth in this section shall be referred to as the "Basic Interest Rate". 2.2 DEFAULT INTEREST RATE. An Event of Default shall be deemed to have occurred if any installment payment of principal, interest or other charge under this Debenture or any of the Other Debentures is not received by the Holder thereof within three business days of the due date thereof, or if any other sums payable to Holder hereunder, under the terms of the Other Debentures, or under the terms of the Investment Agreement are not paid on or before that date which is three business days from the due date thereof. From and after the 20th day following any such default, interest shall accrue and be payable hereunder at the rate of two percent (2 %) per annum above the then applicable Basic Interest Rate from the date of the occurrence of the Event of Default until the earliest date upon which the Event of Default has been cured (the "Default Interest Rate"). 2.3 ADDITIONAL PROVISIONS. Interest shall be calculated on the basis of an actual 360-day year and shall be computed for each payment period on the basis of the actual number of days elapsed. 3. Payments. -------- 3.1 INTEREST ONLY PAYMENTS; LATE PAYMENTS. Commencing on October 1, 1996, and continuing on the first day of each calendar quarter thereafter up to and including July 1, 2000, the Borrowers shall pay to Holder quarterly installments of interest only on the principal amount outstanding hereunder. Any such installment not received by Holder within three business days of its due date shall be subject to an additional late payment charge equal to five percent (5%) of the amount overdue. 3.2 PRINCIPAL PAYMENT. The entire unpaid principal balance of this Debenture, together with all accrued, but unpaid, interest, and other sums owed hereunder shall be due and payable in full without further notice or demand on July 24, 2000 (the "Maturity Date"). 3.3 PREPAYMENTS; APPLICATION OF PAYMENTS. The Borrowers may prepay this Debenture in whole or in part at any time upon 30 days prior written notice to Holder without penalty or premium. All prepayments shall be applied as follows: (a) first, to accrued, but unpaid, interest at the Default Interest Rate; (b) second, to accrued, but unpaid, interest at the Basic Interest Rate; and finally, to principal, provided that the principal amount to be prepaid shall be allocated (in integral multiples of $1,000) among this Debenture and the Other -2- 3 Debentures at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not called for prepayment, with adjustments, to the extent practicable, to compensate for any prior prepayments not made exactly in such proportion. 3.4 DUE ON SALE. Notwithstanding anything herein or in the Investment Agreement to the contrary, the entire indebtedness hereunder shall become due and payable upon the earlier of the Maturity Date or the Transfer of Borrowers' Business. 4. ASSIGNMENT. This Debenture and the obligations hereunder may not be assigned by the Borrowers without the prior written consent of Holder. Holder may freely assign all or any portion of its right, title and interest in and to this Debenture. 5. JOINT AND SEVERAL LIABILITY. If more than one party signs this instrument, then all signatories shall be jointly and severally liable hereunder. 6. DEFAULT AND REMEDIES. The occurrence of an Event of Default under the Investment Agreement shall constitute a default hereunder and shall entitle the Holder to exercise the rights and remedies specified in the Investment Agreement, as well as those available at law or in equity. These rights and remedies include, but are not limited to, the right of the Holder to accelerate the maturity of this Debenture and all other Obligations. 7. WAIVERS. The Borrowers hereby waive presentment, demand, protest, or further notice of any kind (except such notices as may be specifically required by the express terms of the Investment Agreement). 8. WAIVER OF JURY TRIAL; SUBMISSION TO JURISDICTION. (a) EACH OF THE HOLDER AND THE BORROWERS HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS DEBENTURE. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE HOLDER TO ENTER INTO THE TRANSACTIONS PROVIDED FOR IN THE INVESTMENT AGREEMENT AND TO MAKE THE INVESTMENT. (b) FOR THE PURPOSE OF ANY ACTION OR PROCEEDING INVOLVING THIS DEBENTURE, EACH OF THE HOLDER AND THE BORROWERS HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ALL FEDERAL AND STATE COURTS LOCATED IN THE CITY OF NEW YORK AND CONSENTS THAT IT MAY BE SERVED WITH ANY PROCESS OR PAPER BY REGISTERED MAIL OR BE PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK IN ACCORDANCE WITH APPLICABLE LAW, PROVIDED A REASONABLE TIME FOR APPEARANCE IS ALLOWED. EACH OF THE HOLDER -3- 4 AND THE BORROWERS EXPRESSLY WAIVES, TO THE EXTENT IT MAY LAWFULLY DO SO, ANY OBJECTION, CLAIM OR DEFENSE WHICH IT MAY HAVE AT ANY TIME TO THE LAYING OF VENUE OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF THIS DEBENTURE IN ANY SUCH COURT, IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM AND FURTHER IRREVOCABLY WAIVES THE RIGHT TO OBJECT, WITH RESPECT TO ANY SUCH CLAIM, SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT, THAT SUCH COURT DOES NOT HAVE JURISDICTION OVER THE PERSON OF THE BORROWERS OR THE HOLDER, AS APPLICABLE. NOTHING CONTAINED HEREIN WILL BE DEEMED TO PRECLUDE THE HOLDER FROM BRINGING AN ACTION AGAINST THE BORROWERS IN ANY OTHER JURISDICTION. 9. CONTROLLING LAW. This Debenture and all matters related hereto shall be governed, construed and interpreted strictly in accordance with the laws of the State of New York, without regard to its principles of conflicts of law. 10. NO USURY. This Debenture is subject to the express condition that at no time shall the Borrowers be obligated or required to pay interest hereunder at a rate which could subject the Holder to either civil or criminal liability as a result of being in excess of the maximum rate which the Borrowers are permitted by law to contract or agree to pay. If, by the terms of this Debenture, the Borrowers are at any time required or obligated to pay interest at a rate in excess of such maximum rate, the rate of interest under this Debenture shall be deemed to be immediately reduced to such maximum rate and interest payable hereunder shall be computed at such maximum rate and the portion of all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been pre payments of interest on this Debenture. {Signatures on pages following} -4- 5 IN WITNESS WHEREOF, the undersigned entities have caused this Debenture to be executed and their corporate seals to be affixed on the day and year first above written. WITNESS/ATTEST: "BORROWERS": [Seal] AU BON PAIN CO., INC. Attest: /s/ THOMAS R. HOWLEY By: /s/ LOUIS I. KANE ---------------------- ------------------ Thomas R. Howley Louis I. Kane, Co-Chairman [Seal] Assistant Secretary SAINT LOUIS BREAD COMPANY, INC. Attest: /s/ THOMAS R. HOWLEY By: /s/ LOUIS I. KANE ---------------------- ------------------ Thomas R. Howley Louis I. Kane, Co-Chairman [Seal] Assistant Secretary ABP MIDWEST MANUFACTURING CO., INC. Attest: /s/ THOMAS R. HOWLEY By: /s/ LOUIS I. KANE ---------------------- ------------------- Thomas R. Howley Louis I. Kane, Co-Chairman Secretary -5- EX-4.3.4 8 SENIOR SUBORDINATE DEBENTURE 1 THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR APPLICABLE SECURITIES LAWS. THIS DEBENTURE MAY NOT BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OF THE DEBENTURE UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS, OR UPON SATISFACTION BY THE ISSUER HEREOF THAT SUCH REGISTRATION IS NOT REQUIRED AS TO SUCH SALE OR OFFER. THIS DEBENTURE IS SUBJECT TO A SUBORDINATION AGREEMENT, DATED OF EVEN DATE HEREWITH, IN FAVOR OF US TRUST, THE FIRST NATIONAL BANK OF BOSTON, CITIZENS BANK OF MASSACHUSETTS AND INAC CORP. (THE "SENIOR DEBT SUBORDINATION AGREEMENT"). AU BON PAIN CO., INC. SAINT LOUIS BREAD COMPANY, INC. ABP MIDWEST MANUFACTURING CO., INC. SENIOR SUBORDINATED DEBENTURE $3,900,000 Dated as of July 24, 1996 FOR VALUE RECEIVED, the undersigned entities (collectively, the "Borrowers"), jointly and severally promise to pay to the order of ALLIED CAPITAL CORPORATION II, a Maryland corporation (the "Holder"), at its offices located at 1666 K Street, N.W., Suite 901, Washington, D.C. 20006, the principal amount of THREE MILLION NINE HUNDRED THOUSAND DOLLARS ($3,900,000), together with interest thereon as set forth below, at its offices or such other place as the Holder may designate in writing. 1. INVESTMENT AGREEMENT. This Senior Subordinated Debenture (the "Debenture") is one of three senior subordinated debentures to be executed and delivered by the Borrowers in connection with an investment being made by the Holder and two other parties in the Borrowers in the aggregate original principal amount of FIFTEEN MILLION DOLLARS ($15,000,000) pursuant to the terms and conditions of an Investment Agreement among the Borrowers, the Holder and certain other parties named therein, dated of even date herewith (the "Investment Agreement"). This Debenture and the other two senior subordinated debentures evidencing the investment (collectively, the "Other Debentures") are each subject to the terms and conditions of the Investment Agreement. A copy of the Investment Agreement may be examined during normal business hours at the Borrowers' offices. Terms not defined herein shall have the meanings assigned to them in the Investment Agreement. 2 2. Interest Rate Provisions. ------------------------ 2.1 BASIC INTEREST RATE. Interest shall accrue on the principal balance of this Debenture outstanding as follows: (i) from the date hereof and thereafter until July 24, 1997, at the rate of 11.25% per annum; (ii) from July 25, 1997 and thereafter until July 24, 1998, at the rate of 13% per annum; and (iii) from July 25, 1998 until repayment of this Debenture, at the rate of 14% per annum. The interest rate applicable at any one time as set forth in this section shall be referred to as the "Basic Interest Rate". 2.2 DEFAULT INTEREST RATE. An Event of Default shall be deemed to have occurred if any installment payment of principal, interest or other charge under this Debenture or any of the Other Debentures is not received by the Holder thereof within three business days of the due date thereof, or if any other sums payable to Holder hereunder, under the terms of the Other Debentures, or under the terms of the Investment Agreement are not paid on or before that date which is three business days from the due date thereof. From and after the 20th day following any such default, interest shall accrue and be payable hereunder at the rate of two percent (2 %) per annum above the then applicable Basic Interest Rate from the date of the occurrence of the Event of Default until the earliest date upon which the Event of Default has been cured (the "Default Interest Rate"). 2.3 ADDITIONAL PROVISIONS. Interest shall be calculated on the basis of an actual 360-day year and shall be computed for each payment period on the basis of the actual number of days elapsed. 3. Payments. -------- 3.1 INTEREST ONLY PAYMENTS; LATE PAYMENTS. Commencing on October 1, 1996, and continuing on the first day of each calendar quarter thereafter up to and including July 1, 2000, the Borrowers shall pay to Holder quarterly installments of interest only on the principal amount outstanding hereunder. Any such installment not received by Holder within three business days of its due date shall be subject to an additional late payment charge equal to five percent (5%) of the amount overdue. 3.2 PRINCIPAL PAYMENT. The entire unpaid principal balance of this Debenture, together with all accrued, but unpaid, interest, and other sums owed hereunder shall be due and payable in full without further notice or demand on July 24, 2000 (the "Maturity Date"). 3.3 PREPAYMENTS; APPLICATION OF PAYMENTS. The Borrowers may prepay this Debenture in whole or in part at any time upon 30 days prior written notice to Holder without penalty or premium. All prepayments shall be applied as follows: (a) first, to accrued, but unpaid, interest at the Default Interest Rate; (b) second, to accrued, but unpaid, interest at the Basic Interest Rate; and finally, to principal, provided that the principal amount to be prepaid shall be allocated (in integral multiples of $1,000) among this Debenture and the Other -2- 3 Debentures at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not called for prepayment, with adjustments, to the extent practicable, to compensate for any prior prepayments not made exactly in such proportion. 3.4 DUE ON SALE. Notwithstanding anything herein or in the Investment Agreement to the contrary, the entire indebtedness hereunder shall become due and payable upon the earlier of the Maturity Date or the Transfer of Borrowers' Business. 4. ASSIGNMENT. This Debenture and the obligations hereunder may not be assigned by the Borrowers without the prior written consent of Holder. Holder may freely assign all or any portion of its right, title and interest in and to this Debenture. 5. JOINT AND SEVERAL LIABILITY. If more than one party signs this instrument, then all signatories shall be jointly and severally liable hereunder. 6. DEFAULT AND REMEDIES. The occurrence of an Event of Default under the Investment Agreement shall constitute a default hereunder and shall entitle the Holder to exercise the rights and remedies specified in the Investment Agreement, as well as those available at law or in equity. These rights and remedies include, but are not limited to, the right of the Holder to accelerate the maturity of this Debenture and all other Obligations. 7. WAIVERS. The Borrowers hereby waive presentment, demand, protest, or further notice of any kind (except such notices as may be specifically required by the express terms of the Investment Agreement). 8. WAIVER OF JURY TRIAL; SUBMISSION TO JURISDICTION. (a) EACH OF THE HOLDER AND THE BORROWERS HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS DEBENTURE. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE HOLDER TO ENTER INTO THE TRANSACTIONS PROVIDED FOR IN THE INVESTMENT AGREEMENT AND TO MAKE THE INVESTMENT. (b) FOR THE PURPOSE OF ANY ACTION OR PROCEEDING INVOLVING THIS DEBENTURE, EACH OF THE HOLDER AND THE BORROWERS HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ALL FEDERAL AND STATE COURTS LOCATED IN THE CITY OF NEW YORK AND CONSENTS THAT IT MAY BE SERVED WITH ANY PROCESS OR PAPER BY REGISTERED MAIL OR BE PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK IN ACCORDANCE WITH APPLICABLE LAW, PROVIDED A REASONABLE TIME FOR APPEARANCE IS ALLOWED. EACH OF THE HOLDER -3- 4 AND THE BORROWERS EXPRESSLY WAIVES, TO THE EXTENT IT MAY LAWFULLY DO SO, ANY OBJECTION, CLAIM OR DEFENSE WHICH IT MAY HAVE AT ANY TIME TO THE LAYING OF VENUE OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF THIS DEBENTURE IN ANY SUCH COURT, IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM AND FURTHER IRREVOCABLY WAIVES THE RIGHT TO OBJECT, WITH RESPECT TO ANY SUCH CLAIM, SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT, THAT SUCH COURT DOES NOT HAVE JURISDICTION OVER THE PERSON OF THE BORROWERS OR THE HOLDER, AS APPLICABLE. NOTHING CONTAINED HEREIN WILL BE DEEMED TO PRECLUDE THE HOLDER FROM BRINGING AN ACTION AGAINST THE BORROWERS IN ANY OTHER JURISDICTION. 9. CONTROLLING LAW. This Debenture and all matters related hereto shall be governed, construed and interpreted strictly in accordance with the laws of the State of New York, without regard to its principles of conflicts of law. 10. NO USURY. This Debenture is subject to the express condition that at no time shall the Borrowers be obligated or required to pay interest hereunder at a rate which could subject the Holder to either civil or criminal liability as a result of being in excess of the maximum rate which the Borrowers are permitted by law to contract or agree to pay. If, by the terms of this Debenture, the Borrowers are at any time required or obligated to pay interest at a rate in excess of such maximum rate, the rate of interest under this Debenture shall be deemed to be immediately reduced to such maximum rate and interest payable hereunder shall be computed at such maximum rate and the portion of all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been pre payments of interest on this Debenture. {Signatures on pages following} -4- 5 IN WITNESS WHEREOF, the undersigned entities have caused this Debenture to be executed and their corporate seals to be affixed on the day and year first above written. WITNESS/ATTEST: "BORROWERS": [Seal] AU BON PAIN CO., INC. Attest: /s/ THOMAS R. HOWLEY By: /s/ LOUIS I. KANE --------------------- ------------------ Thomas R. Howley Louis I. Kane, Co-Chairman [Seal] Assistant Secretary SAINT LOUIS BREAD COMPANY, INC. Attest: /s/ THOMAS R. HOWLEY By: /s/ LOUIS I. KANE --------------------- ------------------ Thomas R. Howley Louis I. Kane, Co-Chairman [Seal] Assistant Secretary ABP MIDWEST MANUFACTURING CO., INC. Attest: /s/ THOMAS R. HOWLEY By: /s/ LOUIS I. KANE --------------------- ------------------ Thomas R. Howley Louis I. Kane, Co-Chairman Assistant Secretary -5- EX-10.6.2 9 EMPLOYMENT AGREEMENT (R. TAFT) 1 EXECUTIVE EMPLOYMENT AGREEMENT This EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") is made this 5th day of October, 1996, by and between Robert Taft ("Employee") and Au Bon Pain, Co., Inc., a Delaware corporation with a principal place of business in Boston, Massachusetts (the "Company"). WHEREAS, the Company wishes to employ and engage the services of the Employee in an executive capacity for the Company, upon the terms, conditions and provisions of this Agreement; and WHEREAS, the Employee desires to provide services to the Company in accordance with the terms, conditions and provisions of this Agreement; NOW, THEREFORE, in consideration of the mutual covenants set forth herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the Company and Employee hereby agree as follows: 1. Definitions ----------- For all purposes of this Agreement, the following terms shall have the meanings specified in this Section 1 unless the context clearly requires otherwise: (a) "BASE SALARY" means the Employee's annualized base salary (including car allowance) set forth in Section 3(a) of this Agreement, and such increases thereto as may be established by the Company from time to time. In no event, however, shall Employee's Base Salary be less than the amount set forth in Section 3(a) of this Agreement. "Base Salary" shall not include any bonus, incentive compensation or employee benefits; (b) "BENEFITS" means all employee benefits provided to the Employee by the Company, including medical, dental, long-term disability, life insurance, and such other benefits as may be provided from time to time by the Company generally to its employees; (c) "INCENTIVE COMPENSATION" means any compensation provided to the Employee by the Company during the term of this Agreement, other than Base Salary and Benefits, pursuant to Section 3(b) of this Agreement; (d) "SEVERANCE" means payments made by the Company to the Employee after termination of employment, pursuant to this Agreement, at the rate of the Employee's annualized Base Salary (including car allowance) as of the date of Employee's termination. Severance is payable on a weekly basis in substantially equal installments following Employee's termination, in such increments and for such period(s) of time 2 -2- designated in this Agreement ("Severance Period"). Severance shall not include any bonuses or other Incentive Compensation. Except as set forth in the immediately preceding sentence, Severance shall also include the continuation of Employee's Benefits existing at the time of Employee's termination for the Severance Period. Employee shall be responsible for making all required contributions to continue Benefits during the Severance Period on the same basis as existed at the time of the Employee's termination. Severance shall be reduced (dollar for dollar) by any compensation and benefits Employee receives or earns during the Severance Period from any source other than the Company including, without limitation, salary, employee benefits, consulting fees, income from self-employment or otherwise. 2. Employment ---------- The Company agrees to employ the Employee to render services to the Company in an executive capacity. Effective as of the date hereof, Employee hereby accepts such employment subject to the terms and conditions set forth herein. Employee agrees to devote his full attention, best talents and abilities to the job and to perform faithfully his duties and responsibilities hereunder. 3. Compensation ------------ (a) Base Salary and Benefits The Company shall pay Employee a Base Salary at the rate of $250,000.00 annualized, a car allowance of $96.16 per week, Incentive Compensation, and Benefits, subject to federal and state withholdings and customary payroll deductions. The Company shall conduct a review of Employee's performance no later than March 15, 1998, and increases, if any, in Employee's compensation at that time shall be retroactive to January 1, 1998. (b) Incentive Compensation The Company shall pay Employee Incentive Compensation as follows: (i) 1996 The Employee will be included in the Company's Pay for Performance Program from the beginning of Employee's employment until December 31, 1996. Employee's 1996 Incentive Compensation will be contingent on Employee's continued employment by the Company through the payment date of March 15, 1997. The 1996 Incentive Compensation payment will be calculated by dividing $110,000.00 by 52 weeks ($2,115.00) and multiplying this number by the total number of full weeks Employee is employed in calendar year 1996. 3 -3- (ii) 1997 Employee's 1997 Incentive Compensation will be 5.0% of the calculated incremental ABP NBT. ABP NBT will be calculated as follows: 1. Net ABP Division store operating contribution, plus ABP production contribution on products manufactured by ABP Manufacturing, less: a) ABP Retail overhead expense; b) allocated corporate overhead expense calculated as ABP stores gross sales divided by total gross sales multiplied by corporate overhead expense; c) allocated ABP manufacturing overhead expense based on the proportion of the ABP manufacturing transfer sales to the total manufacturing transfer sales; and d) a 12% cost of capital charge or credit based on the fiscal year's net capital generation or usage versus the 1996 Base Year. Incremental ABP NBT shall be ABP NBT for the given fiscal year less ABP NBT for the 1996 Base Year. For the 1997 plan year (FY January through December), Employee is guaranteed a minimum Incentive Compensation payment, contingent upon continued employment with the Company until March 15, 1998. This minimum payment shall be equivalent to the difference between the 1996 Incentive Compensation payment, as set forth above, and $110,000.00. (iii) 1998 The Employee's Incentive Compensation will be reviewed for the 1998 plan year, and adjusted in the sole discretion of the Company in the context of the business. The Company reserves the right to change, modify or revoke the Employee's 1998 Incentive Compensation. 4. Term ---- Unless terminated as provided in Section 5, or as otherwise provided in this Agreement, this Agreement shall continue for a two-year period from the commencement of Employee's employment with the Company or the effective date of this Agreement, whichever is later; thereafter, this Agreement shall automatically renew for additional one-year periods, unless either party notifies the other in writing of its intent not to renew this Agreement at least twenty-six (26) weeks prior to its expiration. In the event the 4 -4- Employee gives notice of intent not to renew this Agreement, the Employee shall not be entitled to Severance. In the event the Company gives notice of intent not to renew this Agreement, at the expiration of the Agreement the Employee shall be entitled to twenty-six (26) weeks' Severance. 5. Termination ----------- (a) Termination for Cause --------------------- The Company may terminate Employee's employment at any time for cause, upon written notice specifying the reasons. As used herein, the term "cause" shall mean: (i) The commission by Employee of any act of embezzlement, fraud, larceny, theft, or other willful misconduct or gross negligence in connection with the performance of Employee's duties which adversely affects the affairs of the Company; (ii) Employee's conviction of a felony, or conviction of a misdemeanor involving moral turpitude; (iii) A material breach of the terms of this Agreement which continues for fifteen (15) days after the Company has given written notice to the Employee specifying in reasonable detail the material breach. (b) Termination Without Cause ------------------------- Notwithstanding any other provision of this Agreement, the Company may terminate Employee's employment, without cause, at any time, for any reason, effective upon thirty (30) days' written notice to the Employee. In the event of a termination without cause, the Employee shall be entitled to fifty-two (52) weeks' Severance. (c) Resignation ----------- The Employee may at any time during the term of this Agreement resign employment, effective upon ninety (90) days' written notice to the Company. Upon such resignation, the Employee shall not be entitled to any Severance, and, except as otherwise specifically set forth herein, the obligations of the Company to the Employee under this Agreement shall terminate upon the effective date of such resignation. Employee agrees to continue to perform his duties hereunder, and otherwise assist the Company in an orderly transition, during such ninety-day period. 5 -5- (d) Disability ---------- The Company may terminate Employee's employment if, at any time during the term of this Agreement, the Employee shall become disabled so that he is unable to perform the Employee's regular duties of employment, with reasonable accommodation, for a period of ninety (90) days in the aggregate during any 180-day period. The determination of the Employee's disability for purposes of this Section 5(d) shall be made by a qualified physician acceptable to both parties. In the event that the Company and the Employee are unable to agree upon a qualified physician, each party shall select a qualified physician, and in the event those two physicians are unable to agree upon a determination as to the Employee's disability, a third neutral physician ("Neutral Physician") acceptable to the parties shall be selected. The determination of disability by the Neutral Physician shall be final and binding for purposes of this Agreement. In the event this Agreement is terminated pursuant to this Section 5(d), the Employee shall be entitled to fifty-two (52) weeks' Severance. Such Severance shall be offset dollar for dollar by any payments made in the aggregate to the Employee under the Company's existing Salary Continuation and Long-Term Disability Plan(s). (e) Relocation of Employee ---------------------- Should the Company require the Employee's place of work to be relocated outside of the Greater Boston area, the Employee may elect to terminate his employment with the Company, upon thirty (30) days' written notice to the Company, and the Employee shall be entitled upon such termination to fifty-two (52) weeks' Severance. (f) Stock Options ------------- Should the Board of Directors of the Company fail to approve the recommended schedule of stock options to be awarded to the Employee set forth in Section 10 of this Agreement at the next Board of Directors' meeting following the Employee's date of hire, or each subsequent anniversary date, the Employee may within thirty (30) days of the next Board of Directors' meeting following Employee's date of hire or subsequent anniversary date, as the case may be, terminate his employment with the Company, effective upon thirty (30) days' written notice to the Company, and the Employee shall be entitled upon such termination to fifty-two (52) weeks' Severance. (g) Death ----- This Agreement and all obligations of the Company hereunder shall terminate upon the death of the Employee. In the event of a termination upon the death of the Employee, monies or compensation owed by the Company to the Employee up to the date of termination shall be paid to the Employee's estate or designee. 6 -6- 6. Confidential Nature of this Agreement ------------------------------------- Employee agrees to keep confidential the terms of this Agreement. A violation of this provision shall entitle the Company to terminate this Agreement immediately, for cause, as set forth in Section 5(a)(iii). Notwithstanding the above, the Employee may disclose the terms of this Agreement to his/her immediate family, bankers, accountants, attorneys, and other financial advisers, the Internal Revenue Service, the Massachusetts Department of Revenue, in the event that disclosure is necessary in litigation or arbitration involving this Agreement, or in the event that such disclosures shall be compelled by law. 7. Confidential and Proprietary Information ---------------------------------------- (a) The Employee understands and acknowledges that in the course of employment with the Company, Employee will have access to confidential and proprietary information of the Company and its Affiliates (which shall mean entities controlling, controlled by or under common control with the Company, including without limitation, Saint Louis Bread Company, Inc. and its Affiliates) which constitute valuable, special and unique assets of the Company and its Affiliates. For purposes of this Agreement, such confidential and proprietary information shall include, without limitation, the following: trade secrets; operating techniques; procedures and methods; product specifications; customer lists; account information; price lists; discount schedules; correspondence with customers, vendors, employees, partners or others; drawings; software; leads from suppliers; marketing techniques; procedures and methods; employee lists; internal financial reports of the Company and its Affiliates; sourcing lists; and recruiting lists (collectively, "Confidential Information"). (b) The Employee agrees that during the term of this Agreement and at any time thereafter, Employee will not, without the authorization of the Company: (i) disclose any Confidential Information to any person or entity for any purpose whatsoever; or (ii) make use of any Confidential Information for Employee's own purposes or for the benefit of any other person or entity, other than the Company and its Affiliates. (c) The Employee agrees that upon the request of the Company or upon termination of employment, Employee shall return to the Company all documents or other materials, including electronic or computerized data, containing or relating to Confidential Information, along with all other Company property. 8. Restrictive Covenant -------------------- During the term of this Agreement, and for one year after its termination, for whatever reason, the Employee shall not, directly or indirectly, either as an individual, employee, partner, officer, owner, director, shareholder, advisor or consultant, or in any 7 -7- other capacity whatsoever, on behalf of any person, firm, corporation, partnership or entity: (a) be employed by or retained as a consultant or advisor to a competitive entity in the bakery/coffee/deli business. For purposes of this Agreement, "competitive entity" includes, without limitation, the following companies doing business as: Wall Street Deli; Paradise Bakery, Inc.; Starbucks; Vie De France; Java City; Bruegger's Bagel Bakery; Finagle-A-Bagel; Le Boulangerie; Great Harvest; Einstein's/Noah's; Peet's; Corner Bakery; Big Sky, and their respective parents, subsidiaries, franchisees, affiliates, successors or assigns. Notwithstanding the above, "competitive entity" shall not include Paradise Bakeries of Tulsa, Inc. and any of its franchises or stores (collectively, the "PBT Franchises"). Additionally, "competitive entity" shall include, without limitation, any company which generates in the aggregate more than 25% of its revenues from the sale of baked goods and coffee, and their respective parents, subsidiaries, franchisees, affiliates, successors or assigns. Notwithstanding the above, the direct or indirect ownership of one percent (1%) or less of the stock of a competitive entity whose shares are listed on a national securities exchange or are quoted on the National Association of Securities Dealers Automated Quotation System or so-called Bulletin Board shall not, in and of itself, be deemed to be a violation of this Section 8(a); (b) recruit, solicit, hire, or assist any other person or party in recruiting, soliciting, or hiring any employee of the Company or any of its Affiliates or any of their respective franchises. In addition, Employee agrees that during the term of this Agreement, he shall not make any investment in or contribution to any of the PBT Franchises, except that he may invest money in the development of one additional franchise of the PBT Franchises. However, to the extent that the Employee maintains an ownership interest in any of the PBT Franchises during the term of this Agreement, he shall not exert any control or influence over the management of any of the PBT Franchises, and Employee's interest in the PBT Franchises shall be put into a trust for the term of this Agreement with a non-family member designated to represent his shares on any corporate matters. The Company may, in its sole discretion, waive enforcement of the provisions of this Section 8, which waiver shall be evidenced solely by the execution and delivery to the Employee of a written document setting forth the terms of such waiver, executed by an authorized representative of the Company. 9. Enforcement ----------- Employee agrees and acknowledges that a violation of Sections 7 or 8 of this Agreement shall entitle the Company to terminate this Agreement immediately, which termination shall be conclusively deemed to be a termination for cause, as set forth in Section 5(a) hereunder. In the event of a violation of Sections 7 or 8 of this Agreement, 8 -8- any further Severance, salary continuation, Benefits or other future compensation otherwise owed pursuant hereto shall be forfeited, and any Severance already paid or provided to the Employee shall likewise be forfeited and shall be immediately returned to the Company. The Employee acknowledges and agrees that the Company's remedies at law for a breach of Sections 7 or 8 of this Agreement are inadequate and that the harm caused thereby is irreparable. The Employee expressly agrees that in the event of a violation of Sections 7 or 8 of this Agreement, the Company shall be entitled to equitable relief enforcing the terms of this Agreement, including without limitation, specific performance, a temporary restraining order, preliminary injunction or permanent injunction to prevent any breach or attempted breach thereof. The provisions of Sections 7, 8 and 9 shall survive the termination of this Agreement, in addition to any others which may survive pursuant to the terms of this Agreement. 10. Stock Options ------------- The Co-Chairman and CEO of the Company agrees to recommend to the Board of Directors that the Employee be granted stock options in the Company at the next Board of Directors' meeting following Employee's date of hire, with vesting over a five-year period of time (25% vesting on each of the second, third, fourth and fifth anniversaries of employment start date). The price per share depends on the value per share from Employee's exact start date and the value per share on each subsequent anniversary of employment, provided Employee is still employed with the Company. Upon the first installment Employee will be awarded 50,000 shares of stock options subject to a five-year vesting period. In addition, and contingent upon continued employment on each of Employee's anniversary dates, consideration will be given by the Board of Directors based on the Company's performance, Employee's performance, and availability of stock in the option plan to award Employee additional stock options as follows. On Employee's 1997 anniversary date with the Company, Employee will be awarded options to purchase 20,000 shares of stock. For 1997 only, Employee will be granted an additional amount of stock options calculated as 20,000 times the difference in stock price as of that date and $8.00 divided by the stock option price as of that date. No additional stock options beyond the first 20,000 will be granted if the value of this calculation is less than or equal to zero. Example: Hire Date = 10/1/96 Anniversary Date = 10/1/97 Stock Price on 10/1/97 = $10.00 Additional Stock Granted beyond the 1st 20,000 = 20,000 times ($10.00-$8.00) -------------- $10.00 = 4,000 stock options 9 -9- On Employee's 1998 anniversary date with the Company, Employee will be awarded options to purchase 10,000 shares of stock; on Employee's 1999 anniversary date with the Company, Employee will be awarded 10,000 shares of stock options; on Employee's 2000 anniversary date with the Company, Employee will be awarded options to purchase 10,000 shares of stock. The price per share depends on the value per share on those exact dates, and all options described in this Section 10 are subject to a five-year vesting schedule (25% on each second, third, fourth and fifth anniversaries of the respective dates of grant). 11. Severability ------------ If any provision of this Agreement including, without limitation, Sections 7, 8 or 9 hereof, is declared or found to be illegal, unenforceable, void, overbroad, or unreasonable in scope, territory, or duration, in whole or in part, then both parties will be relieved of all obligations arising under such provision, but only to the extent it is illegal, unenforceable, void, overbroad, or unreasonable in scope, territory or duration. The intent and agreement of the parties to this Agreement is that this Agreement will be deemed amended by modifying any such illegal, unenforceable, void, overbroad or unreasonable provision to the extent necessary to make it legal and enforceable while preserving its intent, or if such is not possible, by substituting therefor another provision that is legal and enforceable and achieves the same objectives. The foregoing notwithstanding, if the remainder of this Agreement will not be affected by such declaration or finding and is capable of substantial performance, then each provision not so affected will be enforced to the extent permitted by law. 12. Arbitration ----------- Any controversy or claim arising out of or relating to this Agreement or Employee's employment with the Company, except for claims of violation by the Employee of Sections 7 and 8 hereof which may be enforced by the Company in a court of competent jurisdiction pursuant to Section 9 hereof, shall be settled exclusively by binding arbitration before a single arbitrator in the City of Boston, in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The provisions hereof shall be a complete bar and defense to any suit, action or proceeding instituted by the Employee in any federal, state or local court or before any administrative tribunal with respect to any matter which is arbitrable as herein set forth. This Section shall survive the termination or expiration of this Agreement. Nothing herein contained shall be deemed to give any arbitrator any authority, power, or right to alter, change, amend, modify, add to, or subtract from any provisions of this Agreement. The arbitrator shall have no authority to award punitive damages or attorney's fees to any party. The decision of the arbitrator shall be final and conclusive. Judgment on an award rendered by the arbitrator may be entered in any court of competent jurisdiction. 10 -10- 13. No Conflicting Agreements ------------------------- Employee hereby represents and warrants that neither the entry into this Agreement nor its performance by Employee will conflict with or result in a breach of the terms, conditions or provisions of any other agreement or other obligation of any nature to which Employee is a party, or by which he is otherwise bound, including, without limitation, any other employment agreement, non-competition agreement, or confidentiality agreement. Employee further represents and warrants that he will: (i) execute a letter agreement dated September 27, 1996 with Paradise Bakery, Inc. ("the Paradise Bakery Agreement"); (ii) deliver it forthwith to Paradise Bakery, Inc.; and (iii) take all steps necessary to discharge Employee's obligations under the Paradise Bakery Agreement capable of being fulfilled within two weeks of the date hereof. A copy of the Paradise Bakery Agreement executed by the Employee is attached hereto as Exhibit 1. In the event that the Employee fails to accomplish all obligations under the Paradise Bakery Agreement that are capable of being fulfilled within two weeks, this Agreement shall become null, void, unenforceable and without force or effect, and all copies of the Agreement held by the Employee shall be returned to the Company forthwith. Additionally, Employee agrees to use his best efforts to obtain a plain, clear and unequivocal waiver ("Waiver") of all competitive restrictions from Paradise Bakery, Inc., Paradise Bakeries of Tulsa, Inc. and all related or affiliated companies, including parents, subsidiaries, franchisees, successors or assigns (collectively, "Paradise Bakery"), in a form acceptable to the Company. Such Waiver shall be accompanied by the Certificates of the Secretaries of Paradise Bakery, Inc. and Paradise Bakeries of Tulsa, Inc., indicating the authority of the person(s) executing such Waiver. A form Waiver and accompanying Secretary's Certificate(s) acceptable to the Company are attached hereto as Exhibits 2, 3 and 4, respectively. 14. Indemnification --------------- In the event that the Employee is unable within two weeks of the date hereof to obtain a Waiver of competitive restrictions acceptable to the Company, pursuant to Section 13 above, the Employee covenants and agrees to indemnify, defend, save and hold the Company and each of its employees, officers, directors, stockholders, consultants, attorneys and agents (collectively, the "Company's Parties") harmless from and against one half (the other one half to be borne by the Company) of all claims, demands, causes of action, suits, judgments, debts, liabilities, loss, costs, expense, liability, or damages (collectively, the "Damages") including, without limitation, reasonable fees and disbursements of counsel and accountants and other professionals, and other costs and expenses incident thereto (collectively, "Defense Costs") arising out of or resulting from: (i) Employee's affiliation with Paradise Bakery including, without limitation, his status as a present or former employee, officer, director, shareholder or otherwise; (ii) any non- 11 -11- competition, conflict of interest or other agreements with Paradise Bakery; (iii) the failure of the Employee to perform or observe fully any covenant, agreement or provision to be performed or observed by him pursuant to the Paradise Bakery Agreement dated September 27, 1996 and attached hereto as Exhibit 1; or (iv) any actual or threatened claim, suit, action or proceeding arising out of or resulting from the employment of the Employee by the Company, prior to receipt by the Company of the written Waiver and accompanying Secretary's Certificate(s) pursuant to Section 13 of this Agreement. It is the intent of this Section 14 that the Employee and the Company shall bear an equal 50% share of all Damages and Defense Costs incurred by the Company as set forth above, and with respect to Defense Costs, such 50% share shall be paid by the Employee to the Company within thirty (30) days of receipt of monthly statements from the Company evidencing such Defense Costs incurred pursuant to this Section 14. The Employee shall remain solely liable for any Damages or Defense Costs incurred by him individually in connection with the matters identified in this Section 14. 15. Governing Law ------------- The terms hereof shall be governed by, and construed and interpreted in accordance with, the laws of the Commonwealth of Massachusetts, without giving effect to its conflict of laws rules which may otherwise require the application of the law of another jurisdiction. 16. Successors and Assigns ---------------------- This Agreement shall be binding upon and inure to the benefit of the Company and the Employee and their respective successors, assigns, heirs, legal representatives, executors and administrators. 17. Notices ------- (i) All notices to the Employee shall be addressed to Employee at: 24 Grand Hill Drive Dover, MA 02030 or to such other place(s) as may be designated by written notice to the Company. (ii) All notices to the Company shall be addressed to the Company at: 19 Fid Kennedy Avenue Boston, MA 02210 Attention: C.E.O. 12 -12- With copies to: Walter D. Wekstein, Esq. Gadsby & Hannah LLP 125 Summer Street Boston, MA 02110 Andrew L. Eisenberg, Esq. Palmer & Dodge LLP One Beacon Street Boston, MA 02108 or to such other place(s) as may be designated by written notice to Employee. (iii) Notice shall be sufficient if given by hand or by certified mail, postage prepaid, return receipt requested, addressed to the party at its address described above. Unless otherwise notified in writing, each party shall direct all sums payable to the other party at its address for notice purposes. 18. Headings -------- The captions and headings in this Agreement are for convenience and reference only, and they shall in no way be held or deemed to define, modify or add to the meaning, scope or intent of any provision of this Agreement. 19. Entire Agreement ---------------- This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, written or oral on the subject matter hereof including, but not limited to, offer letters, employment letters, and agreements concerning severance pay or stock options. 20. Amendments ---------- This Agreement may be modified only by written agreement signed by both the Employee and the Company. 21. Waiver ------ The failure of any party at any time to require the performance of any provision(s) hereof shall in no manner affect the right(s) of such party at a later time to require the performance of said provision(s), and shall not be deemed a waiver of any obligations hereunder. 13 -13- IN WITNESS WHEREOF, the parties to this Agreement have executed this Agreement under seal, as of the date first above written. AU BON PAIN CO., INC. By: /s/ RONALD SHAICH Date: October 16, 1996 ------------------ ----------------- Witness: /s/ MARIEL CLARK Date: October 16, 1996 ----------------- ----------------- [EMPLOYEE] /s/ ROBERT TAFT Date: October 5, 1996 - --------------- ---------------- Witness: /s/ ANDREW L. EISENBERG Date: October 5, 1996 ------------------------ ---------------- EX-10.6.3 10 EMPLOYMENT LETTER (M. ABBOTT) 1 April 7, 1995 Mr. Maxwell T. Abbott 1875 South Hillgate Drive Au Bon Pain Co., Inc. Lexington, KY 40515 19 Fid Kennedy Avenue Marine Industrial Park Boston, MA 02210-2497 (617) 423-2100 FAX (617) 423-7879 Dear Max: Based on your experience, background presented and the excellent impression that you have given us, Au Bon Pain Co., Inc. is pleased to offer you the position of Vice President of Technical Services. We would like you to start on or before June 5, 1995, you will report directly to Sam Yong, President, International. As part of your orientation process, we would like you to train extensively in our retail environment. A training schedule will be developed for you within the next couple of weeks and forwarded to you at your home. Your base salary for this position will be payable upon continued employment at the weekly rate of $3,076.93. Your next scheduled review, based on your performance and/or the profitability of the Company will be no later than, January 15, 1996. In addition, your compensation will include: A sign-on bonus of $25,000.00 paid out 3 weeks from your start date. You will receive a car allowance of $96.16 per week. We will provide you with a maximum of $100,000.00 to cover relocation expenses and any gross up applicable for taxes. This is intended to be used for relocation expenses such as the normal and customary move of household goods, closing costs, home purchase of your current residence through a 3rd party, househunting trips, temporary living and interest on any equity loans. Should your relocation related expenses and the applicable tax gross up be less than $100,000.00, we will issue you the balance between your expenses and $100,000.00 in a taxable payroll check. This 2 -2- relocation package will contain a provision that you reimburse Au Bon Pain a pro-rated portion of your relocation expenses should you voluntarily resign your employment with Au Bon Pain within one year of your start date. You will also be included in our incentive contingent Pay for Performance Program for 1995. This program incorporates both a dollar payout and stock option grant that rewards you for the completion and quality of agreed upon objectives. Your eligibility for the monetary portion is at a plan of 20% ($32,000) of your base rate and can be paid out in full or any portion thereof, including 0% according to the attached plan description highlights. This amount will be payable no earlier than 2/15/96, and no later than 3/15/96. For the plan year of 1995, you will be guaranteed a minimum of a double achievement level. In addition, per our agreement, Au Bon Pain will continue to pay you your prevailing base rate, car allowance, and medical benefits on a weekly basis should your employment be terminated by the Company, for reasons other than gross misconduct, for a period not to exceed 26 weeks from your termination date. If your employment is terminated with Au Bon Pain due to a significant change in control in which more than 50% of the company changes hands, Au Bon Pain will continue to pay you your prevailing base rate, car allowance, and medical benefits on a weekly basis for a period not to exceed one year from your termination date. Consideration for Stock Options valued at, $230,000, at the next Board of Director's meeting following your date of hire. The price per share and corresponding number of shares granted depends on the value per share on your exact start date. As a full-time Au Bon Pain employee, you will be eligible to participate in the following benefits: medical, dental, life insurance, short term disability, long term disability, Employee Stock Purchase Plan and a 401(k) Plan. The waiting periods and premiums related to these benefits and specific information about plan content will be explained during the orientation process. Our benefit and insurance package is subject to ongoing review and modification from time to time. You will receive an Employee Handbook at your benefits orientation which will explain our vacation and holiday schedules. Au Bon Pain is a nonsmoking work facility. If you have specific questions about our benefits, please 3 -3- contact Joanne Dobson of our Human Resource group at extension 1331. This offer is contingent on your ability to provide employment eligibility documentation as required by law and outlined on the enclosed information. Nothing in this letter is intended, or should be construed to execute a contract for a definite term. In addition, Au Bon Pain has a ninety (90) day probationary period. Either you or the Company are free to terminate the employment relationship at any time. Please indicate your acceptance of this offer by signing and returning one original of this letter no later than April 21, 1995, after which time this offer will expire. We believe that your background and experience will provide a solid foundation for success with Au Bon Pain. We are extremely enthusiastic about our future growth and expansion and anticipate that you will be an important factor in that growth. If you have any questions about the enclosed information, please let me know. Once again, Max, we welcome you to Au Bon Pain and we look forward to your participation, energy, and contributions. Sincerely, /s/ Mariel Clark - ------------------------------------ Mariel Clark Sr. Vice President, Human Resources I have read and accept the provisions as outlined above. APRIL 12, 1995 /S/ MAXWELL T. ABBOTT - -------------- --------------------- Maxwell T. Abbott EX-10.6.4 11 EMPLOYMENT MEMORANDUM (S. YONG) 1 M E M O R A N D U M To: Sam Yong From: Mariel Clark Date: October 29, 1993 Re: Offer of Employment with Au Bon Pain Co., Inc. ================================================================================ In order to summarize our several conversations regarding your potential employment with Au Bon Pain Co., Inc. (the "Company"), what follows is the Company's understanding of its agreement with you on the principal terms on which you are to be offered employment with the Company: Position. You will be hired as an Executive Vice President, with responsibility for international business development, new business development and such other responsibilities as may be assigned to you from time to time by the Co-Chairmen. You will report to Mr. Ronald M. Shaich, the Co-Chairman. Your anticipated employment commencement date is February 1, 1994. As is the case with all of the Company's senior management personnel, you will be treated as an at-will employee, with contractual rights upon your employment being terminated at certain times and under certain circumstances, as more particularly described below. All other terms of your employment not specifically addressed herein will be the same as similarly-situated senior management personnel of the Company. Separation Agreement. You will enter into a separation agreement with the Company. This agreement will cover separation terms in the event that your employment is terminated within the two (2) years following your employment commencement date (for purposes hereof, such two (2)-year period is referred to as the "Covered Period"). 1. No separation payments will be owed or made to you if your employment is terminated during the Covered Period by the Company for gross misconduct, including gross dereliction of duties. 2 2. No separation payments (other than those, if any, then customarily paid by the Company to its senior managers under similar circumstances) will be owed or made to you if your employment is terminated following the Covered Period by the Company for any reason or for no reason. 3. If during the Covered Period, your employment with the Company is terminated by the Company for any reason other than gross misconduct, then the Company will pay to you your "Base Pay" (as defined below) for the remaining portion of the Covered Period, as and when the same would have been paid to you had your employment not been so terminated. For purposes hereof, "Base Pay" shall mean your base salary and car allowance, determined as of the effective date of your employment termination. 4. If during the Covered Period, you voluntarily terminate your employment with the Company for any reason or for no reason, and in so doing you provide to the Company no less than 120 days' prior written notice, then the Company will pay to you your Base Pay for the 120-day period following the effective date of an employment termination covered by this paragraph, as and when the same would have been paid to you had your employment not been so terminated. 5. If during the Covered Period, you voluntarily terminate your employment with the Company for any reason or for no reason, and in so doing you DO NOT provide to the Company the at least 120 days' prior written notice, then no separation payments will be owed or made to you. 6. In addition to the foregoing separation payment arrangements, if at any time during the Covered Period and for one (1) year thereafter (the "3-Year Period"), both Louis I. Kane and Ronald M. Shaich shall cease to serve as the Co-Chairmen of the Company and thereafter, but before the expiration of the 3-Year Period, your employment with the Company is terminated by the Company for any reason other than gross misconduct, then the Company will pay to you your Base Pay for the remaining portion of the 3-Year Period, as and when the same would have been paid to you had your employment not been so terminated. A separation agreement has been attached to this memorandum, for your review and consideration. When signed by you and the Company, the separation agreement shall constitute our agreement regarding separation payment arrangements for you and shall supersede this memorandum in all respects. Stock Options. 3 1. Upon hire, you will be granted a fully-vested option to purchase that number of shares which equals $300,000 divided by the closing price of a share of Class A common stock on the trading day immediately preceding the grant date. This option will terminate to the extent not then exercised (i) ninety (90) days following termination of your employment by the Company for any reason other than cause, (ii) twelve (12) months following your death or termination of your employment by reason of your disability, (iii) thirty (30) days following voluntary termination by you of your employment by the Company, and (iv) in all other cases, immediately following termination of your employment by the Company. 2. Subject to your continuing employment with the Company, you will participate in the Company's "Performance Based Option Program" along with similarly-situated senior management personnel, whereby you will receive additional incentive-based options to purchase shares of Class A common stock, in amounts to be determined in conjunction with the Company's annual budget, plan and incentive processes. These options will be subject to then-existing plan provisions, including vesting schedules; currently, similar options contain a 5-year vesting schedule, with options vesting 25% two years after grant and an additional 25% three, four and five years after grant. In addition, these options will be fully vested in the event that the Company is sold or if both of the Co-Chairmen cease to hold their respective positions as such with the Company. These options will contain termination provisions similar to those described above. 3. Subject to your continuing employment with the Company, you will receive additional options to purchase an aggregate of $300,000 worth of Class A common stock. These options will be granted in twelve (12) quarterly traunches, in arrears on the last day of each calendar quarter, commencing with the calendar quarter which includes your employment commencement date and continuing for twelve (12) consecutive calendar quarters, as follows: Option Date Value ---- ------ 03/31/94 $25,000 06/30/94 $25,000 09/30/94 $25,000 12/31/94 $25,000 03/31/95 $25,000 06/30/95 $25,000 09/30/95 $25,000 4 12/31/95 $25,000 03/31/96 $25,000 06/30/96 $25,000 09/30/96 $25,000 12/31/96 $25,000 Termination of your employment, for any reason or for no reason, will cause these options to cease being granted, but will not affect your rights with respect to previously granted options. Each option will represent the right to purchase that number of shares which equals $25,000 divided by the closing price of a share of Class A common stock on the trading day immediately preceding the grant date. These options will be subject to then-existing terms, including vesting schedules, applicable to options granted under the Company's "Performance Based Option Program." These options will contain termination provisions similar to those described above. 4. If the Company achieves $300,000,000 in annual sales (defined as sales from Company-operated bakery/cafes plus development fees and franchise fees paid to and received by the Company, excluding franchise royalty fees, and sales from franchised cafes determined by the year-end audited financial statements of the Company)and you are then employed by the Company, then you will be granted a fully-vested option to purchase that number of shares which equals $600,000 divided by the closing price of a share of Class A common stock on the immediately preceding trading day. In the event that prior to the Company achieving $300,000,000 in annual sales (as defined above), the Company is sold or if both of the Co-Chairmen cease to hold their respective positions as such with the Company, then you will receive a portion of these options, as follows: (a) If the event occurs within one (1) year following your employment commencement date, then you will receive a fully-vested option to purchase that number of shares which equals $200,000 divided by the closing price of a share of Class A common stock on the immediately preceding trading day; and (b) If the event occurs between one (1) year and two (2) years following your employment commencement date, then you will receive a fully-vested option to purchase that number of shares which equals $400,000 divided by the closing price of a share of Class A common stock on the immediately preceding trading day; and 5 (c) If the event occurs between two (2) years and three (3) years following your employment commencement date, then you will receive a fully-vested option to purchase that number of shares which equals $600,000 divided by the closing price of a share of Class A common stock on the immediately preceding trading day. These options will contain termination provisions similar to those described above. Forms of the option agreements to be used for the foregoing stock options have been attached to this memorandum, for your review and consideration. Miscellaneous. 1. Your initial annual base salary will be $160,000. This will be subject to review annually together with review of all management salaries, in accordance with Company policy, based on (among other things) your performance and the Company's profitability. 2. Your initial incentive compensation will be based upon thirty percent (30%) of your annual base salary; the actual incentive compensation will depend upon achieving an agreed set of plan objectives. Continuing incentive compensation will be subject to review annually together with review of all management incentive programs, in accordance with Company policy. 3. You will receive an annual car allowance, initially set at $5,000. 4. The Company will pay you $40,000 toward your expenses for relocation to Boston. 5. As a member of the Company's senior management, you will be subject to Company policy regarding the purchase and sale of Company stock. Currently, these policies include: (a) No more than 25% of your aggregate stock holdings and options may be sold in one year in any single transaction or related series of transactions. (b) No transaction in the Company's stock may be effected other than during the ten (10)-day "window" following the release of the Company's quarterly earnings statement. (c) You will be subject to the reporting obligations and short-swing profit restrictions of section 16 6 of the Securities Exchange Act of 1934. Essentially, you will be required to report all transactions in Company stock, either monthly or at the end of each year; and if you buy and sell, or sell and buy, Company stock for a profit within any six (6)-month period, then the profit must be paid over to the Company. 6. Nothing herein will be construed to obligate the Company to employ you or, if the Company so chooses to employ you and you agree to such employment, to continue your employment for any period of time. /s/ Sam Yong 11/2/93 /s/ Mariel Clark 11/2/93 EX-10.7.1 12 FORM OF STOCK PURCHASE WARRANT (ALLIED CAPITAL) 1 THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED IN A TRANSACTION NOT INVOLVING ANY PUBLIC OFFERING AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE ACT. AU BON PAIN CO., INC. ------------------------------ STOCK PURCHASE WARRANT ------------------------------ Right to Purchase up to Certificate No. _________ shares of Common Stock Dated as of July 24, 1996 (subject to adjustment as provided herein) 1. GRANT. For consideration of $______ and other value received, AU BON PAIN CO., INC., a Delaware corporation (the "Company"), hereby grants to ALLIED CAPITAL CORPORATION, a Maryland corporation, or its registered assigns (the "Holder"), at the exercise price set forth in Section 3 below, the right to purchase up to __________ shares of the Company's Class A Common Stock (the "Warrant Shares"). This Warrant is one of six issued pursuant to the terms of an investment agreement dated as of the date hereof (the "Investment Agreement") by and among the Company, the Holder and certain other parties named therein. (The other five Warrants issued pursuant to the Investment Agreement are hereinafter collectively referred to as the "Other Warrants".) 2. EXERCISE PERIOD. Subject to adjustment as provided in Section 5, the right to exercise this Warrant, in whole or in part, shall commence as of the date hereof, and shall expire on that date (the "Expiration Date") which is three years from the date of the payment in full of all obligations related to those certain senior subordinated debentures issued under the Investment Agreement (collectively, the "Debentures"). 3. EXERCISE PRICE. The exercise price of this Warrant shall be $____ per share (the "Exercise Price"). 4. ANTI-DILUTION ADJUSTMENT OF EXERCISE PRICE. The Exercise Price shall be subject to adjustment from time to time as follows: (a) If the Company shall issue, or be deemed to have issued (pursuant to subsection (3) of Section 4(b)), any Common Stock, (other than "Excluded Stock" (as defined 2 below), or stock dividends, subdivisions, split-ups or combinations, which are covered by Sections 4(d) and 4(e) hereof), for a consideration (determined in the manner provided in subsections (1), (2) and (3) of Section 4(b)) per share less than the Exercise Price, the Exercise Price shall forthwith be adjusted to a price equal to the consideration paid or payable to the Company with respect to such issuance or deemed issuance. (b) For the purposes of Section 4(a), the following provisions shall be applicable: (1) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor without deducting any discounts, commissions or expenses paid or incurred by the Company in connection with the issuance and sale thereof. (2) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors, in accordance with GAAP; provided, however, that if, at the time of such determination, the Company's Common Stock is traded in the over-the-counter market or on a national or regional securities exchange, such fair market value as determined by the Board of Directors shall not exceed the aggregate "fair market value" (as defined in Section 11(b) below) of the shares of Common Stock being issued. (3) In the case of the issuance of (i) options to purchase or rights to subscribe for Common Stock (other than Excluded Stock), (ii) securities by their terms convertible into or exchangeable for Common Stock (other than Excluded Stock), or (iii) options to purchase or rights to subscribe for securities by their terms convertible into or exchangeable for Common Stock (other than Excluded Stock): (A) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections (1) and (2) of this Section 4(b)), if any, received by the Company upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (B) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities, or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof, shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related -2- 3 options or rights (the consideration in each case to be determined in the manner provided in subsections (1) and (2) of this Section 4(b)); and (C) on any change in the number of shares of Common Stock deliverable upon exercise of any such options or rights or conversion of or exchange for such convertible or exchangeable securities, or on any change in the minimum purchase price of such options, rights or securities (other than a change resulting from the anti-dilution provisions, if any, of such options, rights or securities, unless there is not simultaneously an adjustment in the Exercise Price pursuant to the terms of this Section 4), then the Exercise Price shall forthwith be readjusted to such Exercise Price as would have been obtained had the adjustment made upon (x) the issuance of such options, rights or securities not exercised, converted or exchanged prior to such change, as the case may be, been made upon the basis of such change or (y) the options or rights related to such securities not converted or exchanged prior to such change, as the case may be, been made upon the basis of such change. (c) "Excluded Stock" shall mean: (1) all shares of capital stock issued and outstanding on the effective date hereof; (2) all shares of Common Stock into which securities issued and outstanding on the date hereof are convertible; and (3) subject to adjustment pursuant to stock splits, stock dividends and the like, up to an aggregate of 3,450,000 shares of Common Stock or other securities issued or issuable to employees, officers, consultants or directors of the Company; provided, however, that (A) no such shares of Common Stock or other securities shall be issued, or shall be deemed to have been issued, for consideration (determined in the manner provided in subsections (1), (2) and (3) of Section 4(b)) less than the fair market value thereof on the date of issuance, or the deemed date of issuance, thereof; and (B) such aggregate number shall consist of (i) up to 2,500,000 shares currently authorized under the Parent's 1992 Equity Incentive Plan; (ii) up to 500,000 additional shares to be authorized under the Parent's 1992 Equity Incentive Plan (except that, in the event any such shares are issued to either Louis Kane or Ron Shaich, such shares shall not be included in this definition of Excluded Stock); (iii) up to 150,000 shares authorized under the Parent's Employee Stock Option Plan; (iv) up to 150,000 shares authorized under the Parent's Director Stock Option Plan; and (v) up to 150,000 shares authorized under the Department Manager Stock Option Plan. (d) If the number of shares of Common Stock outstanding at any time after the date hereof is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, on the date such payment is made or such change is effective, the Exercise Price in effect immediately prior to such event shall be proportionately decreased, and the number of Warrant Shares shall be proportionately increased. -3- 4 (e) If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding shares of Common Stock, then, on the effective date of such combination, the Exercise Price in effect immediately prior to such event shall be proportionately increased, and the number of Warrant Shares shall be proportionately decreased. (f) In case, at any time after the date hereof, of any capital reorganization, or any reclassification of the stock of the Company (other than a change in par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or of the consolidation or merger of the Company with or into another person, or of the sale or other disposition of all or substantially all the properties and assets of the Company as an entirety to any other person, the Warrant Shares shall, after such reorganization, reclassification, consolidation, merger, sale or other disposition, receive upon conversion of the Warrant Shares, the number of shares of stock or other securities or property or cash of the Company or of the entity resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold or otherwise disposed to which a holder of Common Stock deliverable upon conversion would have been entitled on such reorganization, reclassification, consolidation, merger, sale or other disposition. The provisions of this Section 4(f) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales or other dispositions. (g) All calculations under this Section 4 shall be made to the nearest cent. (h) Upon any adjustment of the Exercise Price, then and in each such case the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the holder of this Warrant at the last registered address of such holder as shown on the books of the Company, which notice shall state the facts leading to, and the Exercise Price resulting from, such adjustment. 5. ADJUSTMENT IN NUMBER OF SHARES ISSUABLE HEREUNDER. (a) In the event the obligations under the Debentures are fully paid prior to a date 30 full months from the date hereof, the number of Warrant Shares issuable hereunder shall be reduced in accordance with the following chart: Date of Full Payment Number of Warrant Shares of Debentures Issuable Hereunder* ------------- ------------------- Prior to August __, 1997 From August __, 1997 and before January __, 1998 From January __, 1998 and before July __, 1998 -4- 5 From July __, 1998 and before January __, 1999 From January __, 1999 and thereafter *The numbers of Warrant Shares issuable hereunder shall be subject to increase or decrease to account for all anti-dilution adjustments occurring from the date hereof until the Expiration Date. (b) In the event the obligations under the Debentures are not fully paid prior to a date 30 full months from the date hereof, and if Holder elects to partially exercise this Warrant prior to such date, the number of Warrant Shares issuable under this Warrant in connection with such partial exercise shall be limited to the number of Warrant Shares that would have been issuable had the obligations under the Debentures been fully paid at the time of such exercise. The remaining Warrant Shares shall become issuable under this Warrant as the time periods run and in the increments set forth in the chart in Section 5(a). 6. EFFECT OF REORGANIZATION OR RECLASSIFICATION. If, at any time while this Warrant is outstanding, there is any reorganization or reclassification of the capital stock of the Company other than a subdivision or combination of shares, the Holder shall thereafter, upon exercise of this Warrant, be entitled to receive the number of shares of stock or other securities or property of the Company to which a holder of the Common Stock (and any other securities and property) of the Company, deliverable upon the exercise of this Warrant, would have been entitled upon such reorganization or reclassification of capital stock if this Warrant had been exercised immediately prior to such reorganization or reclassification of capital stock. In any such case, appropriate adjustment (as determined by the Board of Directors of the Company and approved by the Holder) shall be made in the application of the provisions set forth in this Warrant with respect to the rights and interests thereafter of the Holder to the end that the provisions set forth in this Warrant shall thereafter be applicable, as near as reasonably may be, in relation to any shares or other property thereafter deliverable upon the exercise hereof as if this Warrant had been exercised immediately prior to such reorganization or reclassification of capital stock and the Holder had carried out the terms of the exchange as provided for by such reorganization or reclassification of capital stock. 7. PRIOR NOTICE AS TO CERTAIN EVENTS. Subject to the limitations set forth in the Investment Agreement, if, at any time: (a) the Company shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than cash dividends) to the holders of its Common Stock; (b) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or any other rights; -5- 6 (c) there shall be any reorganization or reclassification of the capital stock of the Company, or a consolidation or merger of the Company with, or a sale of all or substantially all its assets to, another entity; or (d) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in each such case, the Company shall give prior written notice, by first class mail, postage prepaid, addressed to the Holder at its address shown on the books of the Company, of the date on which (i) the books of the Company shall close or a record shall be taken for such stock dividend, distribution or subscription rights or (ii) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in said dividend, distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least 30 days prior to the action in question and not less than 30 days prior to the record date or the date on which the Company's transfer books are closed in respect thereto. 8. RESERVATION OF COMMON STOCK. The Company shall, at all times, reserve and keep available for issuance upon the exercise of this Warrant and the Other Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all of the outstanding Warrants and, upon such issuance, all such shares of Common Stock will be validly issued, fully paid and nonassessable. 9. NO VOTING RIGHTS; LIMITATIONS OF LIABILITY. Prior to exercise, this Warrant will not entitle the Holder to any voting rights or other rights as a stockholder of the Company. No provision of this Warrant, in the absence of affirmative action by the Holder to exercise this Warrant, and no enumeration in this Warrant of the rights or privileges of the Holder, will give rise to any liability of such Holder for the Exercise Price. 10. EXERCISE PROCEDURE. This Warrant may be exercised by presenting it and tendering the Exercise Price, at the option of the Holder (i) in legal tender, (ii) by bank cashier's or certified check, or (iii) by cancellation of indebtedness owing under the Debenture held by Holder, at the principal office of the Company along with written subscription substantially in the form of Exhibit "A" attached hereto. The date on which this Warrant is thus surrendered, accompanied by tender or payment as hereinbefore or hereinafter provided, is referred to herein as the "Exercise Date." The Company shall forthwith at its sole expense (including the payment of issue taxes), issue and deliver to Holder certificates for the proper number of Warrant Shares upon exercise of this Warrant within 10 days after the Exercise Date, and such Warrant Shares shall be deemed issued for all purposes as of the opening of business on the Exercise Date, notwithstanding any delay in the actual issuance. 11. Net Issue Election. ------------------ -6- 7 (a) RIGHT TO CONVERT. The Holder shall have the right at any time prior to its expiration to convert this Warrant into shares of Common Stock (the "Conversion Right"). Upon exercise of the Conversion Right, the Company shall deliver to the Holder (without payment by the Holder of any Exercise Price or of any other cash or other consideration) that number of fully paid and nonassessable shares of Common Stock as is computed using the following formula: X = Y(A-B) ----- A where: X = the number of shares to be issued to the Holder pursuant to this Section 11; Y = the number of shares covered by this Warrant in respect of which the net issue election is made pursuant to this Section 11; A = the fair market value of one share of Common Stock, as determined in accordance with Section 11(b) below; B = the Exercise Price in effect under this Warrant at the time the net issue election is made pursuant to this Section 11. (b) Fair Market Value. For purposes hereof, the fair market value of a share of Common Stock is determined as follows: (i) If the Common Stock of the Company is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq Stock Market (National Market), the fair market value shall be the last reported sale price of the Common Stock on such exchange or system on the last business day prior to the date of exercise of this Warrant or if no such sale is made on such day, the average closing bid and asked prices for such day on such exchange or system. (ii) If the Common Stock of the Company is not so listed or admitted to unlisted trading privileges, the fair market value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc., on the last business day prior to the date of the exercise of this Warrant. (iii) If the Common Stock of the Company is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the fair market value shall be an amount reasonably determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. (c) METHOD OF EXERCISE. The Conversion Right may be exercised by the Holder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the Holder thereby intends to exercise the Conversion Right. Certificates for the shares of Common Stock issuable upon exercise of the Conversion Right shall be delivered to the Holder within 10 days following the Company's receipt of this Warrant together with the aforesaid written statement. -7- 8 12. TRANSFER OF BORROWERS' BUSINESS. If, prior to the issuance of the Warrant Shares hereunder, a "Transfer of Borrowers' Business" (as defined in Article I of the Investment Agreement) shall occur, the Holder, at its option, may receive, in lieu of the Warrant Shares otherwise issuable hereunder, such money or property as it would have been entitled to receive if this Warrant had been exercised immediately prior to the Transfer of Borrowers' Business. 13. SALE OF WARRANT OR SHARES. Neither this Warrant nor any of the Warrant Shares have been registered under the Act or under the securities laws of any state. Neither this Warrant nor any of the Warrant Shares (when issued) may be sold, assigned, transferred, pledged or hypothecated or otherwise disposed of in the absence of: (a) an effective registration statement for this Warrant or the Warrant Shares, as the case may be, under the Act and such registration or qualification as may be necessary under the securities laws of any state, or (b) an opinion of counsel reasonably satisfactory to the Company that such registration or qualification is not required. The Company shall cause a certificate or certificates evidencing all or any of the Warrant Shares issued upon exercise of the purchase rights herein prior to said registration and qualification of such shares to bear the following legend: THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE. THE SHARES MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SUCH REGISTRATION OR QUALIFICATION AS MAY BE NECESSARY UNDER THE SECURITIES LAWS OF ANY STATE, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION OR QUALIFICATION IS NOT REQUIRED. 14. TRANSFER. This Warrant shall be registered on the books of the Company which shall be kept at the offices of the Company for that purpose, and shall be transferable in whole or in part, but only on such books by the Holder in person or by duly authorized attorney with written notice substantially in the form of Exhibit "B" attached hereto, and only in compliance with the preceding paragraph. The Company may issue appropriate stop orders to its transfer agent to prevent a transfer in violation of the preceding paragraph. 15. REPLACEMENT OF WARRANT. At the request of the Holder and on production of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) if required by the Company, upon delivery of an indemnity agreement, the Company, at Holder's expense, will issue in lieu thereof a new Warrant of like tenor. -8- 9 16. INVESTMENT COVENANT. By its acceptance hereof, the Holder represents and warrants that this Warrant is, and any Warrant Shares issued hereunder will be, acquired for its own account for investment purposes, and the Holder covenants that it will not distribute the same in violation of any state or federal law or regulation. 17. REGISTRATION RIGHTS. The Holder has certain "piggyback" and "demand" registration rights in regard to this Warrant and Warrant Shares issued or issuable hereunder as set forth in the Registration Rights Agreement, dated of even date herewith between the Company, the Holder, and certain other parties thereto. 18. GOVERNING LAW. This Warrant shall be construed according to the laws of Delaware (other than its conflict of law rules). IN WITNESS WHEREOF, the Company has caused this Warrant to be signed on its behalf, in its corporate name, by its President, and its corporate seal to be hereunto affixed and the said seal to be attested by its Secretary, as of the 24th day of July, 1996. AU BON PAIN CO., INC. a Delaware corporation Attest: By: [Seal] ---------------------- -------------------------- President -9- 10 EXHIBIT A --------- IRREVOCABLE SUBSCRIPTION ------------------------ To: AU BON PAIN CO., INC. The undersigned hereby elects to exercise its right under the attached Warrant by purchasing ________________ shares of the Common Stock of AU BON PAIN CO., INC., and hereby irrevocably subscribes to such issue. The certificates for such shares shall be issued in the name of: ------------------------------ (Name) ------------------------------ (Address) ------------------------------ (Taxpayer Number) and delivered to: ------------------------------ (Name) ------------------------------ (Address) The Exercise Price of $______ is enclosed. or In lieu of payment of the Exercise Price, the undersigned hereby invokes the provisions of Section 11 of the Warrant. Date:_______________ Signed: ________________________________________ (Name of Holder, Please Print) ---------------------------------------- (Address) ---------------------------------------- (Signature) -10- 11 EXHIBIT B --------- ASSIGNMENT ---------- FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto: ------------------------------- (Name) ------------------------------- (Address) the attached Warrant, together with all right, title and interest therein to purchase _____________ shares of the Common Stock of AU BON PAIN CO., INC., and does hereby irrevocably appoint _______________________ as attorney-in-fact to transfer said Warrant on the books of AU BON PAIN CO., INC., with full power of substitution in the premises. Done this ______ day of ____________ 19____. ------------------------------ (Signature) ------------------------------ (Name and title) ------------------------------ ------------------------------ (Address) -11- EX-10.7.2 13 FORM OF CONTINGENT STOCK PURCHASE WARRANT 1 THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED IN A TRANSACTION NOT INVOLVING ANY PUBLIC OFFERING AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE ACT. AU BON PAIN CO., INC. ------------------------------ STOCK PURCHASE WARRANT ------------------------------ Right to Purchase up to Certificate No. _______ shares of Common Stock Dated as of July __, 1996 (subject to adjustment as provided herein) 1. GRANT. For consideration of $_______ and other value received, AU BON PAIN CO., INC., a Delaware corporation (the "Company"), hereby grants to Allied Capital Corporation, a Maryland corporation, or its registered assigns (the "Holder"), at the exercise price set forth in Section 3 below, the right to purchase up to _____________ shares of the Company's Class A Common Stock (the "Warrant Shares"). This Warrant is one of six issued pursuant to the terms of an investment agreement dated as of the date hereof (the "Investment Agreement") by and among the Company, the Holder and certain other parties named therein. (The other five Warrants issued pursuant to the Investment Agreement are hereinafter collectively referred to as the "Other Warrants".) 2. EXERCISE PERIOD. Subject to Section 5, the right to exercise this Warrant, in whole or in part, shall commence as follows: (i) with respect to ____________ of the Warrant Shares, as of March 31, 1998; and (ii) with respect to the remaining ________________ of the Warrant Shares, as of March 31, 1999. The right to exercise this Warrant shall expire on that date (the "Expiration Date") which is three years from the date of the payment in full of all obligations related to those certain senior subordinated debentures issued under the Investment Agreement (collectively, the "Debentures"). 3. EXERCISE PRICE. The exercise price of this Warrant shall be $____ per share (the "Exercise Price"). 4. ANTI-DILUTION ADJUSTMENT OF EXERCISE PRICE. The Exercise Price shall be subject to adjustment from time to time as follows: 2 (a) If the Company shall issue, or be deemed to have issued (pursuant to subsection (3) of Section 4(b)), any Common Stock, (other than "Excluded Stock" (as defined below), or stock dividends, subdivisions, split-ups or combinations, which are covered by Sections 4(d) and 4(e) hereof), for a consideration (determined in the manner provided in subsections (1), (2) and (3) of Section 4(b)) per share less than the Exercise Price, the Exercise Price shall forthwith be adjusted to a price equal to the consideration paid or payable to the Company with respect to such issuance or deemed issuance. (b) For the purposes of Section 4(a), the following provisions shall be applicable: (1) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor without deducting any discounts, commissions or expenses paid or incurred by the Company in connection with the issuance and sale thereof. (2) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors, in accordance with GAAP; provided, however, that if, at the time of such determination, the Company's Common Stock is traded in the over-the-counter market or on a national or regional securities exchange, such fair market value as determined by the Board of Directors shall not exceed the aggregate "fair market value" (as defined in Section 11(b) below) of the shares of Common Stock being issued. (3) In the case of the issuance of (i) options to purchase or rights to subscribe for Common Stock (other than Excluded Stock), (ii) securities by their terms convertible into or exchangeable for Common Stock (other than Excluded Stock), or (iii) options to purchase or rights to subscribe for securities by their terms convertible into or exchangeable for Common Stock (other than Excluded Stock): (A) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections (1) and (2) of this Section 4(b)), if any, received by the Company upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (B) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities, or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof, shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or -2- 3 accrued dividends), plus the minimum additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections (1) and (2) of this Section 4(b)); and (C) on any change in the number of shares of Common Stock deliverable upon exercise of any such options or rights or conversion of or exchange for such convertible or exchangeable securities, or on any change in the minimum purchase price of such options, rights or securities (other than a change resulting from the anti-dilution provisions, if any, of such options, rights or securities, unless there is not simultaneously an adjustment in the Exercise Price pursuant to the terms of this Section 4), then the Exercise Price shall forthwith be readjusted to such Exercise Price as would have been obtained had the adjustment made upon (x) the issuance of such options, rights or securities not exercised, converted or exchanged prior to such change, as the case may be, been made upon the basis of such change or (y) the options or rights related to such securities not converted or exchanged prior to such change, as the case may be, been made upon the basis of such change. (c) "Excluded Stock" shall mean: (1) all shares of capital stock issued and outstanding on the effective date hereof; (2) all shares of Common Stock into which securities issued and outstanding on the date hereof are convertible; and (3) subject to adjustment pursuant to stock splits, stock dividends and the like, up to an aggregate of 3,450,000 shares of Common Stock or other securities issued or issuable to employees, officers, consultants or directors of the Company; provided, however, that (A) no such shares of Common Stock or other securities shall be issued, or shall be deemed to have been issued, for consideration (determined in the manner provided in subsections (1), (2) and (3) of Section 4(b)) less than the fair market value thereof on the date of issuance, or the deemed date of issuance, thereof; and (B) such aggregate number shall consist of (i) up to 2,500,000 shares currently authorized under the Parent's 1992 Equity Incentive Plan; (ii) up to 500,000 additional shares to be authorized under the Parent's 1992 Equity Incentive Plan (except that, in the event any such shares are issued to either Louis Kane or Ron Shaich, such shares shall not be included in this definition of Excluded Stock); (iii) up to 150,000 shares authorized under the Parent's Employee Stock Option Plan; (iv) up to 150,000 shares authorized under the Parent's Director Stock Option Plan; and (v) up to 150,000 shares authorized under the Department Manager Stock Option Plan. (d) If the number of shares of Common Stock outstanding at any time after the date hereof is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, on the date such payment is made or such change is effective, the Exercise Price in effect immediately prior to such event shall be proportionately decreased, and the number of Warrant Shares shall be proportionately increased. -3- 4 (e) If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding shares of Common Stock, then, on the effective date of such combination, the Exercise Price in effect immediately prior to such event shall be proportionately increased, and the number of Warrant Shares shall be proportionately decreased. (f) In case, at any time after the date hereof, of any capital reorganization, or any reclassification of the stock of the Company (other than a change in par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or of the consolidation or merger of the Company with or into another person, or of the sale or other disposition of all or substantially all the properties and assets of the Company as an entirety to any other person, the Warrant Shares shall, after such reorganization, reclassification, consolidation, merger, sale or other disposition, receive upon conversion of the Warrant Shares, the number of shares of stock or other securities or property or cash of the Company or of the entity resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold or otherwise disposed to which a holder of Common Stock deliverable upon conversion would have been entitled on such reorganization, reclassification, consolidation, merger, sale or other disposition. The provisions of this Section 4(f) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales or other dispositions. (g) All calculations under this Section 4 shall be made to the nearest cent. (h) Upon any adjustment of the Exercise Price, then and in each such case the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the holder of this Warrant at the last registered address of such holder as shown on the books of the Company, which notice shall state the facts leading to, and the Exercise Price resulting from, such adjustment. 5. Adjustment in Number of Shares Issuable Hereunder. ------------------------------------------------- (a) PAYMENT OF DEBENTURES. In the event the obligations under the Debentures are fully paid on or before that date which is 90 days following December 26, 1998, the number of Warrant Shares issuable hereunder shall be reduced in accordance with the following chart: Date of Full Payment Number of Warrant Shares of Debentures Issuable Hereunder ------------- ------------------ On or before that date which is 90 days following December 27, 1997 (the "1997 Audit Due Date") -4- 5 After the 1997 Audit Due Date and on or before that date which is 90 days following December 26, 1998 (the "1998 Audit Due Date") After the 1998 Audit Due Date and thereafter (b) Financial Model Targets. ----------------------- (i) For the fiscal year ending December 27, 1997, in the event the sum of net income plus interest expense, taxes, depreciation, amortization, and other non-cash charges, all determined in accordance with GAAP ("EBITDA"), as derived from the audited financial statements for the Company ("Actual EBITDA"), meets or exceeds targeted EBITDA as set forth in the Financial Model ("Targeted EBITDA"), the number of Warrants issuable hereunder shall be reduced by ________. (ii) For the fiscal year ending December 26, 1998, in the event Actual EBITDA meets or exceeds Targeted EBITDA, the number of Warrants issuable hereunder shall be reduced by ____________. (iii) In addition to any other reductions in the number of shares issuable hereunder for which the Company may qualify, for the combined fiscal years ending December 27, 1997, and December 26, 1998, in the event Actual EBITDA meets or exceeds Targeted EBITDA for such combined fiscal years, the number of shares issuable hereunder shall be reduced by ___________. (c) ANTI-DILUTION ADJUSTMENTS. The numbers of Warrant Shares issuable hereunder shall be subject to increase or decrease to account for all anti-dilution adjustments occurring from the date hereof until the Expiration Date. 6. EFFECT OF REORGANIZATION OR RECLASSIFICATION. If, at any time while this Warrant is outstanding, there is any reorganization or reclassification of the capital stock of the Company other than a subdivision or combination of shares, the Holder shall thereafter, upon exercise of this Warrant, be entitled to receive the number of shares of stock or other securities or property of the Company to which a holder of the Common Stock (and any other securities and property) of the Company, deliverable upon the exercise of this Warrant, would have been entitled upon such reorganization or reclassification of capital stock if this Warrant had been exercised immediately prior to such reorganization or reclassification of capital stock. In any such case, appropriate adjustment (as determined by the Board of Directors of the Company and approved by the Holder) shall be made in the application of the provisions set forth in this Warrant with respect to the rights and interests thereafter of the Holder to the end that the provisions set forth in this Warrant shall thereafter be applicable, as near as reasonably may be, in relation to any shares or other property thereafter deliverable upon the exercise hereof as if this -5- 6 Warrant had been exercised immediately prior to such reorganization or reclassification of capital stock and the Holder had carried out the terms of the exchange as provided for by such reorganization or reclassification of capital stock. 7. PRIOR NOTICE AS TO CERTAIN EVENTS. Subject to the limitations set forth in the Investment Agreement, if, at any time: (a) the Company shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than cash dividends) to the holders of its Common Stock; (b) the Company shall offer for subscription PRO RATA to the holders of its Common Stock any additional shares of stock of any class or any other rights; (c) there shall be any reorganization or reclassification of the capital stock of the Company, or a consolidation or merger of the Company with, or a sale of all or substantially all its assets to, another entity; or (d) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in each such case, the Company shall give prior written notice, by first class mail, postage prepaid, addressed to the Holder at its address shown on the books of the Company, of the date on which (i) the books of the Company shall close or a record shall be taken for such stock dividend, distribution or subscription rights or (ii) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in said dividend, distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least 30 days prior to the action in question and not less than 30 days prior to the record date or the date on which the Company's transfer books are closed in respect thereto. 8. RESERVATION OF COMMON STOCK. The Company shall, at all times, reserve and keep available for issuance upon the exercise of this Warrant and the Other Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all of the outstanding Warrants and, upon such issuance, all such shares of Common Stock will be validly issued, fully paid and nonassessable. 9. NO VOTING RIGHTS; LIMITATIONS OF LIABILITY. Prior to exercise, this Warrant will not entitle the Holder to any voting rights or other rights as a stockholder of the Company. No provision of this Warrant, in the absence of affirmative action by the Holder to exercise this Warrant, and no enumeration in this Warrant of the rights or privileges of the Holder, will give rise to any liability of such Holder for the Exercise Price. -6- 7 10. EXERCISE PROCEDURE. This Warrant may be exercised by presenting it and tendering the Exercise Price, at the option of the Holder (i) in legal tender, (ii) by bank cashier's or certified check, or (iii) by cancellation of indebtedness owing under the Debenture held by Holder, at the principal office of the Company along with written subscription substantially in the form of Exhibit "A" attached hereto. The date on which this Warrant is thus surrendered, accompanied by tender or payment as hereinbefore or hereinafter provided, is referred to herein as the "Exercise Date." The Company shall forthwith at its sole expense (including the payment of issue taxes), issue and deliver to Holder certificates for the proper number of Warrant Shares upon exercise of this Warrant within 10 days after the Exercise Date, and such Warrant Shares shall be deemed issued for all purposes as of the opening of business on the Exercise Date, notwithstanding any delay in the actual issuance. 11. NET ISSUE ELECTION. (a) RIGHT TO CONVERT. The Holder shall have the right at any time prior to its expiration to convert this Warrant into shares of Common Stock (the "Conversion Right"). Upon exercise of the Conversion Right, the Company shall deliver to the Holder (without payment by the Holder of any Exercise Price or of any other cash or other consideration) that number of fully paid and nonassessable shares of Common Stock as is computed using the following formula: X = Y(A-B) ----- A where: X = the number of shares to be issued to the Holder pursuant to this Section 11; Y = the number of shares covered by this Warrant in respect of which the net issue election is made pursuant to this Section 11; A = the fair market value of one share of Common Stock, as determined in accordance with Section 11(b) below; B = the Exercise Price in effect under this Warrant at the time the net issue election is made pursuant to this Section 11. (b) FAIR MARKET VALUE. For purposes hereof, the fair market value of a share of Common Stock is determined as follows: (i) If the Common Stock of the Company is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq Stock Market (National Market), the fair market value shall be the last reported sale price of the Common Stock on such exchange or system on the last business day prior to the date of exercise of this Warrant or if no such sale is made on such day, the average closing bid and asked prices for such day on such exchange or system. (ii) If the Common Stock of the Company is not so listed or admitted to unlisted trading privileges, the fair market value shall be the mean of the last reported bid and -7- 8 asked prices reported by the National Quotation Bureau, Inc., on the last business day prior to the date of the exercise of this Warrant. (iii) If the Common Stock of the Company is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the fair market value shall be an amount reasonably determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. (c) METHOD OF EXERCISE. The Conversion Right may be exercised by the Holder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the Holder thereby intends to exercise the Conversion Right. Certificates for the shares of Common Stock issuable upon exercise of the Conversion Right shall be delivered to the Holder within 10 days following the Company's receipt of this Warrant together with the aforesaid written statement. 12. TRANSFER OF BORROWERS' BUSINESS. If, prior to the issuance of the Warrant Shares hereunder, a "Transfer of Borrowers' Business" (as defined in Article I of the Investment Agreement) shall occur, the Holder, at its option, may receive, in lieu of the Warrant Shares otherwise issuable hereunder, such money or property as it would have been entitled to receive if this Warrant had been exercised immediately prior to the Transfer of Borrowers' Business. 13. SALE OF WARRANT OR SHARES. Neither this Warrant nor any of the Warrant Shares have been registered under the Act or under the securities laws of any state. Neither this Warrant nor any of the Warrant Shares (when issued) may be sold, assigned, transferred, pledged or hypothecated or otherwise disposed of in the absence of: (a) an effective registration statement for this Warrant or the Warrant Shares, as the case may be, under the Act and such registration or qualification as may be necessary under the securities laws of any state, or (b) an opinion of counsel reasonably satisfactory to the Company that such registration or qualification is not required. The Company shall cause a certificate or certificates evidencing all or any of the Warrant Shares issued upon exercise of the purchase rights herein prior to said registration and qualification of such shares to bear the following legend: THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE. THE SHARES MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SUCH REGISTRATION OR QUALIFICATION AS MAY BE NECESSARY UNDER THE SECURITIES LAWS OF ANY STATE, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION OR QUALIFICATION IS NOT REQUIRED -8- 9 14. TRANSFER. This Warrant shall be registered on the books of the Company which shall be kept at the offices of the Company for that purpose, and shall be transferable in whole or in part, but only on such books by the Holder in person or by duly authorized attorney with written notice substantially in the form of Exhibit "B" attached hereto, and only in compliance with the preceding paragraph. The Company may issue appropriate stop orders to its transfer agent to prevent a transfer in violation of the preceding paragraph. 15. REPLACEMENT OF WARRANT. At the request of the Holder and on production of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) if required by the Company, upon delivery of an indemnity agreement, the Company, at Holder's expense, will issue in lieu thereof a new Warrant of like tenor. 16. INVESTMENT COVENANT. By its acceptance hereof, the Holder represents and warrants that this Warrant is, and any Warrant Shares issued hereunder will be, acquired for its own account for investment purposes, and the Holder covenants that it will not distribute the same in violation of any state or federal law or regulation. 17. REGISTRATION RIGHTS. The Holder has certain "piggyback" and "demand" registration rights in regard to this Warrant and Warrant Shares issued or issuable hereunder as set forth in the Registration Rights Agreement, dated of even date herewith between the Company, the Holder, and certain other parties thereto. 18. GOVERNING LAW. This Warrant shall be construed according to the laws of Delaware (other than its conflict of law rules). IN WITNESS WHEREOF, the Company has caused this Warrant to be signed on its behalf, in its corporate name, by its President, and its corporate seal to be hereunto affixed and the said seal to be attested by its Secretary, as of the ____ day of July, 1996. AU BON PAIN CO., INC. a Delaware corporation Attest: By: [Seal] ----------------------- ------------------------------ President -9- 10 EXHIBIT A --------- IRREVOCABLE SUBSCRIPTION ------------------------ To: AU BON PAIN CO., INC. The undersigned hereby elects to exercise its right under the attached Warrant by purchasing ________________ shares of the Common Stock of AU BON PAIN CO., INC., and hereby irrevocably subscribes to such issue. The certificates for such shares shall be issued in the name of: ------------------------------ (Name) ------------------------------ (Address) ------------------------------ (Taxpayer Number) and delivered to: ------------------------------ (Name) ------------------------------ (Address) The Exercise Price of $______ is enclosed. or In lieu of payment of the Exercise Price, the undersigned hereby invokes the provisions of Section 11 of the Warrant. Date:_______________ Signed: ________________________________________ (Name of Holder, Please Print) ---------------------------------------- (Address) ---------------------------------------- (Signature) -10- 11 EXHIBIT B --------- ASSIGNMENT ---------- FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto: ------------------------------- (Name) ------------------------------- (Address) the attached Warrant, together with all right, title and interest therein to purchase _____________ shares of the Common Stock of AU BON PAIN CO., INC., and does hereby irrevocably appoint _______________________ as attorney-in-fact to transfer said Warrant on the books of AU BON PAIN CO., INC., with full power of substitution in the premises. Done this ______ day of ____________ 19____. ------------------------------ (Signature) ------------------------------ (Name and title) ------------------------------ ------------------------------ (Address) -11- EX-10.7.3 14 FORM OF STOCK PURCHASE WARRANT (PRINCES GATE) 1 THIS SECURITY HAS BEEN ACQUIRED IN A TRANSACTION NOT INVOLVING ANY PUBLIC OFFERING AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED EXCEPT IN COMPLIANCE WITH THE ACT. AU BON PAIN CO., INC. ------------------------------ STOCK PURCHASE WARRANT ------------------------------ Right to Purchase up to Certificate No. PG ______ shares of Common Stock Dated as of July 24, 1996 (subject to adjustment as provided herein) 1. GRANT. For consideration of $______ and other value received, AU BON PAIN CO., INC., a Delaware corporation (the "Company"), hereby grants to Princes Gate Investors, L.P., or its registered assigns (the "Holder"), at the exercise price set forth in Section 3 below, the right to purchase up to __________ shares ("Warrant Shares") of the Company's Class A Common Stock, par value $.0001 per share (the "Common Stock"). The number of Warrant Shares to be received upon the exercise of this Warrant and the price to be paid per Warrant Share are subject to adjustment from time to time as hereinafter set forth. Capitalized terms used but not separately defined herein shall have the meanings assigned to them in the Investment Agreement dated as of July 24, 1996 among the Company, certain of its subsidiaries, Allied Capital Corporation, Allied Capital Corporation II, and Capital Trust Investments, Ltd. 2. EXERCISE PERIOD. The right to exercise this Warrant, in whole or in part, shall commence as of the date hereof, and shall expire on that date (the "Expiration Date") which is the fifth anniversary of the date hereof. 3. EXERCISE PRICE. The exercise price of this Warrant shall be $______ per Warrant Share (the "Exercise Price"), subject to adjustment from time to time as provided herein. 4. CERTAIN ADJUSTMENTS. The Exercise Price and the number of Warrant Shares to be received by the Holder upon exercise of the Warrant shall be subject to adjustment from time to time as follows: (a) If the Company shall issue, or be deemed to have issued (pursuant to subsection (3) of Section 4(b)), any shares of Common Stock, (other than Excluded Stock (as defined below), for a consideration (determined in the manner provided in subsections (1), (2) and (3) of Section 4(b)) per share less than the Exercise Price, the Exercise Price to be in effect 2 following such issuance shall be adjusted to a price equal to the consideration paid or payable to the Company with respect to such issuance or deemed issuance. (b) For the purposes of Section 4(a), the following provisions shall be applicable: (1) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor without deducting any discounts, commissions or expenses paid or incurred by the Company in connection with the issuance and sale thereof. (2) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors, in accordance with GAAP; provided, however, that if, at the time of such determination, the Company's Common Stock is traded in the over-the-counter market or on a national or regional securities exchange, such fair market value as determined by the Board of Directors shall be the "fair market value" (as defined in Section 9(b) below) of the shares of Common Stock being issued. (3) In the case of the issuance of (i) options to purchase or rights to subscribe for Common Stock (other than Excluded Stock), (ii) securities by their terms convertible into or exchangeable for Common Stock (other than Excluded Stock), or (iii) options to purchase or rights to subscribe for securities by their terms convertible into or exchangeable for Common Stock (other than Excluded Stock): (A) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the aggregate consideration (determined in the manner provided in subsections (1) and (2) of this Section 4(b)), if any, received, (or to be received) by the Company upon the issuance of such options or rights and upon exercise thereof for the Common Stock covered thereby; (B) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities, or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof, shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the aggregate consideration received (or to be received) by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections (1) and (2) of this Section 4(b)); and (C) on any change in the number of shares of Common Stock deliverable upon exercise of any such options or rights or conversion of or exchange for such -2- 3 convertible or exchangeable securities, or on any change in the minimum purchase price of such options, rights or securities (other than a change resulting from the anti-dilution provisions, if any, of such options, rights or securities, unless the event giving rise to such adjustment does not also give rise to an adjustment in the Exercise Price pursuant to the terms of this Section 4), then the Exercise Price shall forthwith be readjusted to such Exercise Price as would have been obtained had the adjustment made upon (x) the issuance of such options, rights or securities not exercised, converted or exchanged prior to such change, as the case may be, been made upon the basis of such change or (y) the options or rights related to such securities not converted or exchanged prior to such change, as the case may be, been made upon the basis of such change. (c) "Excluded Stock" shall mean: (1) all shares of Common Stock issued and outstanding on the effective date hereof; (2) all shares of Common Stock into which securities issued and outstanding on the date hereof are convertible; (3) subject to adjustment pursuant to stock splits, stock dividends and the like, up to 3,450,000 shares of Common Stock or other securities issued or issuable to employees, officers, consultants or directors of the Company under any agreement, arrangement or plan, including any incentive stock plan, approved by the Board of Directors and the stockholders of the Company; and (4) all warrants for purchase of Common Stock issued concurrently with this Warrant. (d) If the number of shares of Common Stock outstanding at any time after the date hereof is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, on the date such payment is made or such change is effective, the Exercise Price in effect immediately prior to such event shall be proportionately decreased, and the number of Warrant Shares shall be proportionately increased. (e) If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding shares of Common Stock, then, on the effective date of such combination, the Exercise Price in effect immediately prior to such event shall be proportionately increased, and the number of Warrant Shares shall be proportionately decreased. (f) In case, at any time after the date hereof, of any capital reorganization, or any reclassification of the Common Stock of the Company (other than a change in par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or of the consolidation or merger of the Company with or into another person (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding Common Stock) or of the sale of other disposition of all or substantially all the properties and -3- 4 assets of the Company as an entirety to any other person, the Warrant Shares shall, after such reorganization, reclassification, consolidation, merger, sale or other disposition, receive upon exercise of this Warrant, the kind and number of shares of stock or other securities or property or cash of the Company or of the entity resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold or otherwise disposed to which a holder of the number of Shares of Common Stock deliverable upon exercise would have been entitled on such reorganization, reclassification, consolidation, merger, sale or other disposition had this Warrant been exercised immediately prior to such event assuming (i) such holder of Common Stock is not a Person with which the Company consolidated or into which the Company merged or which merged into the Company or to which such sale or transfer was made, as the case may be ("constituent person"), or an Affiliate of a constituent Person and (ii) in the case of a consolidation merger, sale or transfer which includes an election as to the consideration to be received by the holders, such holder of Common Stock failed to exercise its rights of election, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer (provided that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer is not the same for each share of Common Stock held immediately prior to such consolidation, merger, sale or transfer by other than a constituent Person or an Affiliate thereof and in respect of which such rights of election shall not have been exercised ("non-electing share"), then for the purpose of this paragraph (i) the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). Adjustments for events subsequent to the effective date of such a consolidation, merger and sale of assets shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. In any such event, effective provisions shall be made in the certificate or articles of incorporation of the resulting or surviving corporation, in any contract of sale, conveyance, lease or transfer, or otherwise so that the provisions set forth herein for the protection of the rights of the Holder shall thereafter continue to be applicable; and any such resulting or surviving corporation shall expressly assume the obligation to deliver, upon exercise, such shares of stock, other securities, cash and property. The provisions of this Section 4(f) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales or other dispositions. (g) All calculations under this Section 4 shall be made to the nearest cent. (h) In the event that, at any time as a result of the provisions of this Section 4, the holder of this Warrant upon subsequent exercise shall become entitled to receive any shares of capital stock of the Company other than Common Stock, the number of such other shares so receivable upon exercise of this Warrant shall thereafter be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions contained herein. (i) Upon any adjustment of the Exercise Price, then and in each such case the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the holder of this Warrant at the last registered address of such holder as shown on the books of the -4- 5 Company, which notice shall state the facts leading to, and the Exercise Price resulting from, such adjustment. 5. PRIOR NOTICE AS TO CERTAIN EVENTS. If, at any time: (a) the Company shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than cash dividends) to the holders of its Common Stock; (b) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or any other rights; (c) there shall be any reorganization or reclassification of the capital stock of the Company, or a consolidation or merger of the Company with, or a sale of all or substantially all its assets to, another entity; or (d) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in each such case, the Company shall give prior written notice, by first class mail, postage prepaid, addressed to the Holder at its address shown on the books of the Company, of the date on which (i) the books of the Company shall close or a record shall be taken for such stock dividend, distribution or subscription rights or (ii) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in said dividend, distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least 30 days prior to the action in question and not less than 30 days prior to the record date or the date on which the Company's transfer books are closed in respect thereto. 6. RESERVATION OF COMMON STOCK. The Company shall, at all times, reserve and keep available for issuance and delivery upon the exercise of this Warrant such number of its authorized but unissued shares of Common Stock or other securities of the Company as will be sufficient to permit the exercise in full of this Warrant. Upon such issuance, all such shares will be validly issued, fully paid and nonassessable free and clear of all liens, security interests, charges and other encumbrances or restrictions on sale and free and clear of all preemptive rights. 7. NO VOTING RIGHTS; LIMITATIONS OF LIABILITY. Prior to exercise, this Warrant will not entitle the Holder to any voting rights or other rights as a stockholder of the Company. No provision of this Warrant, in the absence of affirmative action by the Holder to exercise this Warrant, and no enumeration in this Warrant of the rights or privileges of the Holder, will give rise to any liability of such Holder for the Exercise Price. -5- 6 8. EXERCISE PROCEDURE. (a) This Warrant may be exercised, in whole or in part, or from time to time, prior to the Expiration Date, by presenting it and tendering the Exercise Price, at the option of the Holder (i) in legal tender, (ii) by bank cashier's or certified check, or (iii) by cancellation of indebtedness owing under the Debenture held by Holder, at the principal office of the Company along with written subscription substantially in the form of Exhibit "A" attached hereto. The date on which this Warrant is thus surrendered, accompanied by tender or payment as hereinbefore or hereinafter provided, is referred to herein as the "Exercise Date." The Company shall forthwith at its sole expense (including the payment of issue taxes), issue and deliver to Holder certificates for the proper number of Warrant Shares upon exercise of this Warrant within 10 days after the Exercise Date, and such Warrant Shares shall be deemed issued and the Holder deemed the holder of record of such Warrant Shares, for all purposes as of the opening of business on the Exercise Date, notwithstanding any delay in the actual issuance. (b) The Company shall pay any and all documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of the Warrant Shares. (c) If the Holder exercises this Warrant in part, this Warrant shall be surrendered by the Holder to the Company and a new Warrant of the same tenor and for the unexercised number of Warrant Shares shall be executed by the Company. The Company shall register the new Warrant in the name of the Holder or in such name or names of its transferee pursuant to paragraph (12) hereof as may be directed in writing by the Holder and deliver the new Warrant to the Person or Persons entitled to receive the same. 9. Cashless Exercise. ----------------- (a) RIGHT TO CONVERT. Notwithstanding anything herein to the contrary, in lieu of payment of the applicable Exercise Price, the Holder may elect to receive upon exercise of this Warrant, the number of Warrants Shares reduced by a number of shares of Common Stock having the aggregate Fair Market Value equal to the aggregate Exercise Price for the Warrant Shares. (b) FAIR MARKET VALUE. For purposes hereof, the Fair Market Value of a share of Common Stock is determined as follows: (i) If the Common Stock of the Company is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq Stock Market (National Market), the Fair Market Value shall be the last reported sale price of the Common Stock on such exchange or system on the last trading day prior to the date of exercise of this Warrant or if no such sale is made on such day, the average closing bid and asked prices for such day on such exchange or system. (ii) If the Common Stock of the Company is not so listed or admitted to unlisted trading privileges, the Fair Market Value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc., on the last trading day prior to the date of the exercise of this Warrant. -6- 7 (iii) If the Common Stock of the Company is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the Fair Market Value shall be an amount reasonably determined in such reasonable manner as may be prescribed by the Board of Directors of the Company (c) METHOD OF EXERCISE. This Warrant may be exercised in accordance with the provisions of this Section 9 by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the Holder thereby intends to so exercise the Warrant. With the exception of the payment of the Exercise Price, the provisions of Section 8 hereof shall apply to any such exercise. 10. TRANSFER OF BORROWERS' BUSINESS. If, prior to the issuance of the Warrant Shares hereunder, a "Transfer of Borrowers' Business" (as defined in Article I of the Investment Agreement) shall occur, the Holder, at its option, may receive, in lieu of the Warrant Shares otherwise issuable hereunder, such money or property as it would have been entitled to receive if this Warrant had been exercised immediately prior to the Transfer of Borrowers' Business. 11. SALE OF WARRANT OR SHARES. Neither this Warrant nor any of the Warrant Shares have been registered under the Act or under the securities laws of any state. Neither this Warrant nor any of the Warrant Shares (when issued) may be sold, assigned, transferred, pledged or hypothecated or otherwise disposed of in the absence of: (a) an effective registration statement for this Warrant or the Warrant Shares, as the case may be, under the Act and such registration or qualification as may be necessary under the securities laws of any state, or (b) an opinion of counsel reasonably satisfactory to the Company that such registration or qualification is not required. The Company shall cause a certificate or certificates evidencing all or any of the Warrant Shares issued upon exercise of the purchase rights herein prior to said registration and qualification of such shares to bear the following legend: THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE. THE SHARES MAY NOT BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SUCH REGISTRATION OR QUALIFICATION AS MAY BE NECESSARY UNDER THE SECURITIES LAWS OF ANY STATE, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION OR QUALIFICATION IS NOT REQUIRED. 12. TRANSFER. This Warrant shall be registered on the books of the Company which shall be kept at the offices of the Company for that purpose, and shall be transferable in whole or in part, but only on such books by the Holder in person or by duly authorized attorney with written notice substantially in the form of Exhibit "B" attached hereto, and only in -7- 8 compliance with the preceding paragraph. The Company may issue appropriate stop orders to its transfer agent to prevent a transfer in violation of the preceding paragraph. 13. REPLACEMENT OF WARRANT. At the request of the Holder and on production of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) if required by the Company, upon reasonably satisfactory indemnification, the Company, at Holder's expense, will issue in lieu thereof a new Warrant of like tenor. 14. INVESTMENT COVENANT. By its acceptance hereof, the Holder represents and warrants that this Warrant is, and any Warrant Shares issued hereunder will be, acquired for its own account for investment purposes, and the Holder covenants that it will not distribute the same in violation of any state or federal law or regulation. 15. REGISTRATION RIGHTS. The Holder has certain "piggyback" and "demand" registration rights in regard to the Warrant Shares issued or issuable hereunder as set forth in the Registration Rights Agreement, dated of even date herewith between the Company, the Holder, and certain other parties thereto. 16. GOVERNING LAW. This Warrant shall be construed according to the laws of Delaware (other than its conflict of law rules). 17. AMENDMENTS; WAIVERS. Any provision of this Warrant may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Holder and the Company, or in the case of a waiver, by the party against whom the waiver is to be effective. No failure or delay by either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed on its behalf, in its corporate name, by its President, and its corporate seal to be hereunto affixed and the said seal to be attested by its Secretary, as of the 24th day of July, 1996. AU BON PAIN CO., INC. a Delaware corporation Attest: By: [Seal] ---------------------- -------------------------- President -8- 9 EXHIBIT A --------- IRREVOCABLE SUBSCRIPTION ------------------------ To: AU BON PAIN CO., INC. The undersigned hereby elects to exercise its right under the attached Warrant by purchasing ________________ shares of the Common Stock of AU BON PAIN CO., INC., and hereby irrevocably subscribes to such issue. The certificates for such shares shall be issued in the name of: ------------------------------ (Name) ------------------------------ (Address) ------------------------------ (Taxpayer Number) and delivered to: ------------------------------ (Name) ------------------------------ (Address) The Exercise Price of $______ is enclosed. or In lieu of payment of the Exercise Price, the undersigned hereby invokes the provisions of Section 9 of the Warrant. Date: --------------- Signed: --------------------------------------------------- (Name of Holder, Please Print) ---------------------------------------- (Address) ---------------------------------------- (Signature) -9- 10 EXHIBIT B --------- ASSIGNMENT ---------- FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto: ------------------------------- (Name) ------------------------------- (Address) the attached Warrant, together with all right, title and interest therein to purchase _____________ shares of the Common Stock of AU BON PAIN CO., INC., and does hereby irrevocably appoint _______________________ as attorney-in-fact to transfer said Warrant on the books of AU BON PAIN CO., INC., with full power of substitution in the premises. Done this ______ day of ____________ 19____. ------------------------------ (Signature) ------------------------------ (Name and title) ------------------------------ ------------------------------ (Address) -10- EX-10.7.4 15 REGISTRATION RIGHTS AGREEMENT 1 REGISTRATION RIGHTS AGREEMENT ----------------------------- REGISTRATION RIGHTS AGREEMENT dated as of July 24, 1996 among (a) ALLIED CAPITAL CORPORATION, a Maryland corporation, ("ACC") ALLIED CAPITAL CORPORATION II ("ACC II"), a Maryland corporation, CAPITAL TRUST INVESTMENTS, LTD., a Guernsey corporation ("CTI" and collectively with ACC and ACC II, the "Allied Holders"), (b) PRINCES GATE INVESTORS, L.P., ("Princes Gate"), ACORN PARTNERSHIP I, L.P., ("Acorn"), PGI INVESTMENTS LIMITED, ("PGI"), PGI SWEDEN AB, ("PGI Sweden"), and GREGOR VON OPEL, ("GVO" and collectively with Princes Gate, Acorn, PGI, and PGI Sweden, the "PG Holders"), and (c) AU BON PAIN CO., INC., a Delaware corporation ("ABP" or the "Issuer"). WHEREAS, ACC, ACC II AND CTI have agreed to extend credit to ABP, Saint Louis Bread Company, Inc. and ABP Midwest Manufacturing, Inc. pursuant to an Investment Agreement dated as of July 24, 1996 (the "Investment Agreement"), by and among ACC, ACC II and CTI and ABP, Saint Louis Bread Company, Inc. and ABP Midwest Manufacturing, Inc.; and WHEREAS, pursuant to the terms of a certain Securities Purchase Agreement (the "Securities Purchase Agreement") dated as of December 1993, Princes Gate, Acorn, PGI, PGI Sweden, GVO and PG Holdings have purchased from ABP, and are currently the holders of, ABP's 4.75% Convertible Subordinated Notes due January 2, 2001 in the aggregate principal amount of $30,000,000 (as amended, modified or restated and in effect from time to time, the "4.75% Subordinated Convertible Notes") and in connection therewith were granted certain registration rights by ABP, which rights were granted to the PG Holders in said Securities Purchase Agreement and Exhibit D thereto (collectively the "Original Registration Rights Agreements"). The PG Holders and ABP desire to terminate their respective rights and obligations under the Original Registration Rights Agreements in consideration of the execution by ABP and each of the PG Holders of this Agreement; and WHEREAS, in order to induce Allied Holders to enter into the Investment Agreement and the other agreements and transactions contemplated thereby, ABP has agreed to enter into this Agreement with the Allied Holders and the PG Holders. ARTICLE I DEFINITIONS SECTION 1.1. DEFINITIONS. The following terms, as used herein, have the following meanings: "Affiliate" has the meaning provided in Rule 405 promulgated under the Securities Act. "Allied Holders" has the meaning provided in the first recital above. "Allied Majority Holders" means the Holder or Holders of 75% of Registrable Securities then held by Allied Holders. "Commission" means the Securities and Exchange Commission. "Common Stock" means the Class A Common Stock, par value of $.0001 per share, of the Issuer. 2 "Demand Registration" means, unless the context requires another meaning, a registration request pursuant to Section 2.1 (a)(1) or Section 2.1(b)(1) of this Agreement. "Holder" means the initial purchaser of any Registrable Security or any permitted assignee or transferee of such Registrable Security. "Issuer" has the meaning set forth in the introductory paragraph above. "Majority Holders" means the Holder or Holders of a majority of Registrable Securities then outstanding. "PG Holders" has the meaning set forth in the second recital above. "PG Majority Holders" means the Holder or Holders of a majority of Registrable Securities then held by PG Holders. "Piggy-Back Registration" means a Piggy-Back Registration as defined in Section 2.2. "Registrable Securities" means the shares of Common Stock issued or issuable upon conversion of the 4.75% Subordinated Convertible Notes and the shares of Common Stock issued or issuable upon exercise of the Warrants, and any securities into which such Common Stock shall have been changed or any securities resulting from any reclassification of such Common Stock, until (i) a registration statement covering such shares of Common Stock has been declared effective by the Commission and such shares have been disposed of pursuant to such effective registration statement, (ii) such shares are sold under circumstances in which all of the applicable conditions of Rule 144 (or any similar provisions then in force) under the Securities Act are met or (iii) such shares have been otherwise transferred and the Issuer has delivered a new certificate or other evidence of ownership for such shares not bearing a legend referring to restrictions on transfer under the Securities Act and such shares may be resold without subsequent registration under the Securities Act. "Securities Act" means the Securities Act of 1933, as amended. "Selling Holder" means a Holder who is selling Registrable Securities pursuant to a registration statement under the Securities Act. "Underwriter" means a securities dealer who purchases any Registrable Securities as principal and not as part of such dealer's market-making activities. "Warrants" means the stock purchase warrants issued and sold by the Issuer to (i) the Allied Holders pursuant to the Subordinated Investment Agreement and (ii) to the PG Holders pursuant to the Agreement and Waiver among the Issuer, certain of its subsidiaries and the PG Holders dated as of the date hereof. ARTICLE II REGISTRATION RIGHTS SECTION 2.1. Demand Registration. ------------------- (a) By Allied Holders. ----------------- -2- 3 (1) REQUEST FOR REGISTRATION. Allied Majority Holders may make a written request for registration under the Securities Act of all or part of their Registrable Securities (an "Allied Demand Registration"); provided, that (x) the Issuer shall not be obligated to effect more than one Allied Demand Registration in any 12-month period, and no more than two Allied Demand Registrations in total and (y) the number of shares requested to be sold in each such registration shall have an aggregate fair market value (determined at the time such request is made) of at least Three Million Dollars ($3,000,000) or, if less, shall constitute all Registrable Securities then held by Allied Holders. Such request will specify the number of shares of Registrable Securities proposed to be sold and will also specify the intended method of disposition thereof. Within 5 Business Days after receipt of such request, the Issuer will give written notice of such registration request to all other Holders of the Registrable Securities and include in such registration all such Registrable Securities with respect to which the Issuer has received written requests for inclusion therein within 10 Business Days after the receipt by the applicable Holder of the Issuer's notice. Each such request will also specify the number of shares of Registrable Securities to be registered and the intended method of disposition thereof. (2) ADDITIONAL DEMAND REGISTRATIONS. If the Allied Majority Holders in an Allied Demand Registration so elect, the offering of such Registrable Securities pursuant to such Allied Demand Registration shall be in the form of an underwritten offering. The Allied Majority Holders shall select the book-running managing Underwriter in connection with such offering and any additional investment bankers and managers to be used in connection with the offering; provided that such managing Underwriter and additional investment bankers and managers must be reasonably satisfactory to the Issuer. To the extent 10% or more of the Registrable Securities so requested to be registered by the Allied Majority Holders are excluded from the offering in accordance with Section 2.3, then such demand shall not count for purposes of the limitations set forth in Section 2.1(a)(1) above. (b) By PG Holders. ------------- (1) REQUEST FOR REGISTRATION. PG Holders may make a written request for registration under the Securities Act of all or part of their Registrable Securities (a "PG Demand Registration"); provided, that (x) the Issuer shall not be obligated to effect more than one PG Demand Registration in any 12-month period, and no more than two PG Demand Registrations in total and (y) the number of shares requested to be sold in each such registration shall have an aggregate fair market value (determined at the time such request is made) of at least $3 million or, if less, shall constitute all Registrable Securities then held by PG Holders. Such request will specify the number of shares of Registrable Securities proposed to be sold and will also specify the intended method of disposition thereof. Within 5 Business Days after receipt of such request, the Issuer will give written notice of such registration request to all other Holders of the Registrable Securities and include in such registration all such Registrable Securities with respect to which the Issuer has received written requests for inclusion therein within 10 Business Days after the receipt by the applicable Holder of the Issuer's notice. Each such request will also specify the number of shares of Registrable Securities to be registered and the intended method of disposition thereof. (2) ADDITIONAL DEMAND REGISTRATIONS. If the PG Majority Holders in a PG Demand Registration so elect, the offering of such Registrable Securities pursuant to such PG Demand Registration shall be in the form of an underwritten offering. The PG Holders shall select the book-running managing Underwriter in connection with such offering and any additional investment bankers and managers to be used in connection with the offering; provided that such managing Underwriter and additional investment bankers and managers shall be reasonably satisfactory to the Issuer. To the extent 10% or more of the -3- 4 Registrable Securities so requested to be registered by the PG Holders are excluded from the offering in accordance with Section 2.3, then such demand shall not count for purposes of the limitations set forth in Section 2.1 (b)(i) above. SECTION 2.2. PIGGY-BACK REGISTRATION. If the Issuer proposes to file a registration statement under the Securities Act with respect to an offering by the Issuer for its own account or for the account of any of its respective security holders of any class of security (other than a registration statement on Form S-4 or S-8 (or any substitute form that may be adopted by the Commission), or filed in connection with an exchange offer or offering of securities solely to the Issuer's existing security holders), including a registration statement filed in connection with a Demand Registration, then the Issuer shall give written notice of such proposed filing to the Holders of Registrable Securities as soon as practicable (but in no event less than 10 business days before the anticipated filing date), and such notice shall offer such Holders the opportunity to register such number of shares of Registrable Securities as each such Holder may request (a "Piggy-Back Registration"). The Issuer shall use its best efforts to cause the managing Underwriter or Underwriters of a proposed underwritten offering to permit the Registrable Securities requested to be included in a Piggy-Back Registration to be included on the same terms and conditions as any similar securities of the Issuer included therein. SECTION 2.3. REDUCTION OF OFFERING. Notwithstanding anything contained herein, if the managing Underwriter or Underwriters of an offering described in Section 2.1(a)(1), Section 2.1 (b)(1 ) or Section 2.2 deliver a written opinion to the Holders of the Registrable Securities included in such offering that (i) the size of the offering that the Holders, the Issuer and such other persons intend to make or (ii) the kind of securities that the Holders, the Issuer and any other persons or entities intend to include in such offering are such that the success of the offering would be materially and adversely affected by inclusion of the Registrable Securities requested to be included, then if the size of the offering is the basis of such Underwriter's opinion, the amount of securities to be offered shall be cut back only to the extent necessary and the accounts of Holders shall be reduced pro rata (according to the Registrable Securities proposed for registration) to such extent to reduce the total amount of securities to be included in such offering to the amount recommended by such managing Underwriter or Underwriters, which securities shall be included in the following order of priority: (1) with respect to an Allied Demand Registration, the Issuer will include in such registration in the following priority: (x) first, up to the full amount of Registrable Securities proposed to be offered and sold by the Allied Holders, reduced pro rata to the extent necessary, (y) second, up to the full amount of Registrable Securities proposed to be offered and sold by the PG Holders, reduced pro rata to the extent necessary, and then (z) any shares of Common Stock held by other persons that the Issuer may be obligated to include in such registration; (2) with respect to a PG Demand Registration, the Issuer will include in such registration in the following priority: (x) first, up to the full amount of Registrable Securities proposed to be offered and sold by the PG Holders, reduced pro rata to the extent necessary, (y) second, up to the full amount of Registrable Securities proposed to be offered and sold by the Allied Holders, reduced pro rata to the extent necessary, and then (z) any shares of Common Stock held by other persons that the Issuer may be obligated to include in such registration; and -4- 5 (3) with respect to a registration initiated by the Issuer for its own account, (x) first, all shares of Common Stock the Issuer proposes to offer and sell, (y) second, up to the full amount of Registrable Securities proposed to be offered and sold by Holders of Registrable Securities, reduced pro rata to the extent necessary, and then (z) any shares of Common Stock held by other persons that the Issuer may be obligated to include in such registration; and ARTICLE III REGISTRATION PROCEDURES SECTION 3.1. FILINGS; INFORMATION. Whenever Holders request that any Registrable Securities be registered pursuant to Section 2.1 hereof, the Issuer will use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof as quickly as practicable, and in connection with any such request: (a) The Issuer will as expeditiously as possible and in any event within 30 days from the receipt of such request prepare and file with the Commission a registration statement on any form for which the Issuer then qualifies or which counsel for the Issuer shall deem appropriate and which form shall be available for the sale of the Registrable Securities to be registered thereunder in accordance with the intended method of distribution thereof, and use its best efforts to cause such filed registration statement to become and remain effective for a period of not less than 180 days; provided that if the Issuer shall furnish to the Holders making a request pursuant to Section 2.1 a certificate signed by its Chairman of the Board (or either Co-Chairman of the Board) stating that in his good faith judgment it would be significantly disadvantageous to the Issuer or its shareholders for such a registration statement to be filed as expeditiously as possible and stating the reasons for such judgment, the Issuer shall have a period of not more than 90 days within which to file such registration statement measured from the date of receipt of the request in accordance with Section 2.1. (b) The Issuer will, if requested, prior to filing a registration statement or prospectus or any amendment or supplement thereto, furnish to each Selling Holder and each Underwriter, if any, of the Registrable Securities covered by such registration statement copies of such registration statement as proposed to be filed, and thereafter furnish to such Selling Holder and Underwriter, if any, such number of copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such Selling Holder or Underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Selling Holder. Each Selling Holder shall provide the Issuer with its or his comments to such registration statement, prospectus and amendments thereto or supplements thereof, as the case may be, within five (5) business days of its or his receipt of such document(s). (c) After the filing of the registration statement, the Issuer will promptly notify each Selling Holder of Registrable Securities covered by such registration statement of any stop order issued or threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered. (d) The Issuer will use its best efforts to (i) register or qualify the Registrable Securities under such other securities or blue sky laws of such jurisdictions in the United States as any Selling Holder reasonably (in light of such Selling Holder's intended plan of distribution) requests and (ii) cause such Registrable Securities to be registered with or -5- 6 approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Issuer and do any and all other acts and things that may be reasonably necessary or advisable to enable such Selling Holder to consummate the disposition of the Registrable Securities owned by such Selling Holder: provided that the Issuer will not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (d), (B) subject itself to taxation in any such jurisdiction or (C) consent to general service of process in any such jurisdiction. (e) The Issuer will immediately notify each Selling Holder of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the occurrence of an event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and promptly make available to each Selling Holder any such supplement or amendment. (f) The Issuer and the Selling Holders will enter into customary agreements (including an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities. (g) The Issuer will make available for inspection by any Selling Holder of such Registrable Securities, any Underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other professional retained by any such Selling Holder or Underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Issuer (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Issuer's officers, directors and employees to supply all information reasonably requested by any Inspectors in connection with such registration statement. Records which the Issuer reasonably determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such registration statement or (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction. Each Selling Holder of such Registrable Securities agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Issuer or its Affiliates unless and until such is made generally available to the public. Each Selling Holder of such Registrable Securities further agrees that it will, upon learning that disclosure of such Records is sought by subpoena or in a court of competent jurisdiction, give notice to the Issuer and allow the Issuer, at its expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential. (h) The Issuer will furnish, at the effectiveness of the registration statement and again at closing, to each Selling Holder and to each Underwriter, if any, a signed counterpart, addressed to such Selling Holder and such Underwriter, of (i) an opinion or opinions of counsel to the Issuer and (ii) a comfort letter or comfort letters from the Issuer's independent public accountants, each in customary form and covering such matters of the type customarily covered by opinions or comfort letters, as the case may be. (i) The Issuer will otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering a period of 12 months, beginning -6- 7 within three months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11 (a) of the Securities Act. (j) The Issuer will use its best efforts to cause all such Registrable Securities to be listed on each securities exchange or quotation system on which similar securities issued by the Issuer are then listed. The Issuer's registrar and transfer agent is Boston Equiserve, L.P., 150 Royal Street, Canton, MA 02021. As a condition to its rights to sell Registrable Securities in such registration, each Selling Holder of Registrable Securities shall, upon the Issuer's request, promptly furnish in writing to the Issuer such information regarding the distribution of the Registrable Securities as the Issuer may from time to time reasonably request and such other information as may be legally required in connection with such registration. Each Selling Holder agrees that, upon receipt of any notice from the Issuer of the happening of any event of the kind described in Section 3 .1 (e) hereof, such Selling Holder will forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Selling Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3.1 (e) hereof, and, if so directed by the Issuer, such Selling Holder will deliver to the Issuer all copies, other than permanent file copies then in such Selling Holder's possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. In the event the Issuer shall give such notice, the Issuer shall extend the period during which such registration statement shall be maintained effective (including the period referred to in Section 3.1 (a) hereof) by the number of days during the period from and including the date of the giving of notice pursuant to Section 3.1 (e) hereof to the date when the Issuer shall make available to the Selling Holders of Registrable Securities covered by such registration statement a prospectus supplemented or amended to conform with the requirements of Section 3.1(e) hereof. SECTION 3.2. REGISTRATION EXPENSES. In connection with any registration statement required to be filed hereunder, the Issuer shall pay all expenses incurred in connection with the registration hereunder (the "Registration Expenses") including, without limitation, the following: (i) all registration and filing fees, (ii) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (iii) printing expenses, (iv) internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), (v) the fees and expenses incurred in connection with the listing of the Registrable Securities, (vi) reasonable fees and disbursements of counsel for the Issuer and customary fees and expenses for independent certified public accountants retained by the Issuer (including the expenses of any comfort letters or costs associated with the delivery by independent certified public accountants of a comfort letter or comfort letters requested pursuant to Section 3 .1 (h) hereof), (vii) the reasonable fees and expenses of any special experts retained by the Issuer in connection with such registration, and (viii) reasonable fees and expenses of not more than one counsel (who shall be reasonably acceptable to the Issuer) for all Holders whose Registrable Securities are included in such registration provided however, that if representation for all such Holders by the same counsel would be inappropriate due to actual or potential differing interests between them, then in any such case the Issuer shall pay the reasonable fees and expenses of one additional counsel. The Issuer shall have no obligation to pay any underwriting fees, discounts or commissions attributable to the sale of Registrable Securities. ARTICLE IV -7- 8 INDEMNIFICATION AND CONTRIBUTION SECTION 4.1. INDEMNIFICATION BY THE ISSUER. The Issuer agrees to indemnify and hold harmless each Selling Holder of Registrable Securities, its officers, directors and agents, and each Person, if any, who controls the Issuer (an "Issuer Control Person") or such Selling Holder within the meaning, in each case, of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Securities (as amended or supplemented if the Issuer shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information furnished in writing to the Issuer by such Selling Holder or on such Selling Holder's behalf expressly for use therein provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Selling Holder from whom the person asserting any such loss, claim, damage or liability purchased the Registrable Securities if it is determined that (i)it was the responsibility of such Selling Holder to provide such person with a current copy of the prospectus, (ii) such Selling Holder had been furnished with copies of such current prospectus within a reasonable time prior to such purchase, and (iii) such current copy of the prospectus would have cured the defect giving rise to such loss, claim, damage or liability. The Issuer also agrees to indemnify any Underwriters of the Registrable Securities, their officers and directors and each person who controls such underwriters on substantially the same basis as that of the indemnification of the Selling Holders provided in this Section 4.1. SECTION 4.2. INDEMNIFICATION BY HOLDERS OF REGISTRABLE SECURITIES. Each Selling Holder agrees, severally but not jointly, to indemnify and hold harmless the Issuer, its officers, directors and agents and each Person, if any, who controls the Issuer within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Issuer to such Selling Holder, but only with reference to information related to such Selling Holder furnished in writing by such Selling Holder or on such Selling Holder's behalf expressly for use in any registration statement or prospectus relating to the Registrable Securities, or any amendment or supplement thereto, or any preliminary prospectus subject to the proviso that the liability of each Selling Holder to the Issuer and its officers, directors, agents and control persons set forth in this Section 4.2 shall be limited to the net proceeds received by such Selling Holder as a result of his or its sale of Registrable Securities pursuant to such registration statement or prospectus (including amendments and supplements thereto) Notwithstanding the foregoing, each Selling Holder also agrees to indemnify and hold harmless Underwriters of the Registrable Securities, their officers and directors and each person who controls such Underwriters on substantially the same basis as that of the indemnification of the Issuer provided in this Section 4.2. SECTION 4.3. CONDUCT OF INDEMNIFICATION PROCEEDINGS. In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 4.1 or 4.2, such person (an "Indemnified Party") shall promptly notify the person against whom such indemnity may be sought (an "Indemnifying Party") in writing and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party, and shall assume the payment of all fees and expenses. In any such proceeding, any Indemnified Party shall have the right to retain its own counsel, but the fees -8- 9 and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the Indemnified Party and the Indemnifying Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them as reasonably determined by the Indemnified Party or (iii) Indemnifying Party fails to retain counsel or diligently pursue the defense. It is understood that the Indemnifying Party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for all such Indemnified Parties, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Indemnified Parties, such firm shall be designated in writing by the Indemnified Parties. The Indemnifying Party shall not be liable for any settlement of any proceeding effected without its consent, but if settled with such consent, or if there be a final judgment for the plaintiff, the Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an Indemnified Party shall have requested an Indemnifying Party to reimburse the Indemnified Party for fees and expenses of counsel as contemplated by the third sentence of this paragraph, the Indemnifying Party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 business days after receipt by such Indemnifying Party of the aforesaid request and (ii) such Indemnifying Party shall not have reimbursed the Indemnified Party in accordance with such request prior to the date of such settlement. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending or threatened proceeding in respect of with any Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all liability arising out of such proceeding. SECTION 4.4. CONTRIBUTION. If the indemnification provided for in this Article 4 is unavailable to the Indemnified Parties in respect of any losses, claims, damages or liabilities referred to herein, then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (i) as between the Issuer and the Selling Holders (subject to the limitations on liabilities of each Selling Holder to the Issuer set forth in the proviso contained in Section 4.2 hereof) on the one hand and the Underwriters on the other, in such proportion as is appropriate to reflect the relative benefits received by the Issuer and the Selling Holders on the one hand and the Underwriters on the other from the offering of the Registrable Securities, or if such allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits but also the relative fault of the Issuer and the Selling Holders on the one hand and of the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations and (ii) as between the Issuer on the one hand and each Selling Holder on the other, in such proportion as is appropriate to reflect the relative fault of the Issuer and of each Selling Holder in connection with such statements or omissions, as well as any other relevant equitable considerations. The relative benefits received by the Issuer and the Selling Holders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Issuer and the Selling Holders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the prospectus. The relative fault of the Issuer and the Selling Holders on the one hand and of the Underwriters on the other shall be determined by -9- 10 reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Issuer and the Selling Holders or by the Underwriters. The relative fault of the Issuer on the one hand and of each Selling Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Issuer and the Selling Holders agree that it would not be just and equitable if contribution pursuant to this Section 4.4 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 4.4, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no Selling Holder shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities of such Selling Holder were offered to the public exceeds the amount of any damages which such Selling Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section ll(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Selling Holder's obligations to contribute pursuant to this Section 4.4 are several in proportion to the proceeds of the offering received by such Selling Holder bears to the total proceeds of the offering received by all the Selling Holders and not Joint. ARTICLE V MISCELLANEOUS SECTION 5.1. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may participate in any underwritten registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and these Registration Rights. SECTION 5.2. RULE 144. The Issuer covenants that it will use its best efforts to file any reports required to be filed by it under the Securities Act and the Exchange Act and that it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable Holders to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any Holder, the Issuer will deliver to such Holder a written statement as to whether it has complied with such requirements. -10- 11 SECTION 5.3. HOLDBACK AGREEMENTS. (a) RESTRICTIONS ON PUBLIC SALE BY HOLDER OF REGISTRABLE SECURITIES. To the extent not inconsistent with applicable law, each Holder whose securities are included in a registration statement agrees not to effect any public sale or distribution of the issue being registered or a similar security of the Issuer, or any securities convertible into or exchangeable or exercisable for such securities, including a sale pursuant to Rule 144 under the Securities Act, during the 14 days prior to, and during the 90-day period beginning on, the effective date of such registration statement (except as part of such registration), if and to the extent requested by the managing Underwriter or Underwriters in the case of an underwritten public offering. (b) RESTRICTIONS ON PUBLIC SALE BY THE ISSUER AND OTHERS. The Issuer and its Affiliates agree (i) not to effect any public sale or distribution of any securities similar to those being registered in accordance with Section 2.1 or Section 2.2 hereof, or any securities convertible into or exchangeable or exercisable for such securities, during the 14 days prior to, and during the 90-day period beginning on, the effective date of any registration statement (except as part of such registration statement where the Majority Holders of the Registrable Securities to be included in such registration statement consent) or the commencement of a public distribution of Registrable Securities; and (ii) that any agreement entered into after the date of the Agreement pursuant to which the Issuer issues or agrees to issue any privately placed securities shall contain a provision under which holders of such securities agree not to effect any public sale or distribution of any such securities during the periods described in (i) above, in each case including a public sale or distribution pursuant to Rule 144 under the Securities Act (except as part of any such registration, if permitted); provided, however, that the provisions of this paragraph (b) shall not prevent the conversion or exchange of any securities pursuant to their terms into or for other securities. SECTION 5.4. EXISTING REGISTRATION AGREEMENTS. Issuer represents that it is not obligated under any agreement other than this Agreement to register any of its securities on behalf of third parties. Issuer covenants and agrees it will not, in the absence of a written agreement with each of the PG Majority Holders and the Allied Majority Holders, on and after the date hereof grant any registration rights to any third party except on terms which subordinates those registration rights to the rights granted under this Agreement. SECTION 5.5. NOTICES. All notices or communications under this agreement or the Debentures shall be mailed, postage prepaid, delivered by facsimile, or delivered by courier to the following addresses (or to such other address as shall at any time be designated by any party in writing to the other parties): To ACC and ACC II: Allied Capital Corporation and Allied Capital Corporation II c/o Allied Capital Corporation 1666 K Street, N.W., Ninth Floor Washington, DC 20006 Attention: Gay S. Truscott, Vice President Facsimile: (202) 659-2053 With a copy to: Piper & Marbury L.L.P. 1200 Nineteenth Street, N.W. Washington, DC 20036 Attention: Anthony H. Rickert, Esquire Facsimile: (202) 223-2085 -11- 12 To CTI: Capital Trust Investments, Ltd. c/o Capital Trust Limited 49 Mount Street London, England W1Y5RE Attention: Bassam Aburdene Fax: 01144171499 0524 With a copy to: Morgan, Lewis & Bockius LLP 101 Park Avenue New York, New York 10178 Attention: Charles E. Engros, Esquire Facsimile: (212) 309-6273 To Princes Gate: Princes Gate Investors, L.P. Acorn Partnership I, L.P. PGI Investments Limited PGI Sweden AB Gregor Von Opel c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Attention: Hartley R. Rogers Telecopier: (212) 761-0517 With a copy to: Davis, Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Attention: Paul R. Kingsley Facsimile: (212) 450-4800 To the Issuer: Au Bon Pain Co., Inc. 19 Fid Kennedy Avenue Marine Industrial Park Boston, MA 02210-2497 Attention: Louis I. Kane Facsimile: (617) 423-7879 With a copy to: Gadsby & Hannah LLP 225 Franklin Street Boston, MA 02110 Attention: Walter D. Wekstein, Esquire Marianne Gilleran, Esquire Facsimile: (617) 345-7050 Rejection or other refusal to accept, or the inability to deliver because of a changed address of which not notice was given, shall not affect the effectiveness or the date of delivery for any notice sent in accordance with the foregoing provisions. Each such notice request or other communication shall be deemed sufficiently given, served, sent and received for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt, the affidavit of the messenger or the answer back being deemed conclusive (but not exclusive) evidence of such delivery) or at such time as delivery is refused by addressee upon presentation. -12- 13 SECTION 5.6. BINDING AGREEMENT. This Agreement shall bind and inure to the benefit of each of the Holders, the Borrowers, and except as otherwise expressly provided to the contrary herein, each of their respective heirs and permitted successors and assigns. Without limiting the generality of the foregoing sentence, the rights of the Holders to cause the Issuer to register Registrable Securities granted pursuant to this Agreement may be transferred or assigned by any holder to a transferee or assignee; provided, however, that the transferee or assignee of such rights assumes the obligations of such transferor or assignor, as the case may be, under this Agreement and that such transferee or assignee executes and delivers a copy of this Agreement to the Issuer. SECTION 5.7. ENTIRE AGREEMENT; INTEGRATION CLAUSE. This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the subject matter hereof, and any prior agreements, including, without limitation, the Original Registration Rights Agreement, are hereby terminated. SECTION 5.8. NO ORAL MODIFICATION OR WAIVERS. The terms hereof may not be modified or waived orally, but only by an instrument in writing signed by the party against which enforcement of the modification or waiver (as the case may be) is sought. SECTION 5.9. VENUE; PERSONAL JURISDICTION; FULL FAITH AND CREDIT; PERSONAL SERVICE. (a) Venue for the adjudication of any claim or dispute arising out of this Agreement or any of the other Investment Documents shall be proper only in the state or federal courts of the City and State of New York, and all parties to this Agreement and the other Investment Documents hereby consent to such venue and agree that it shall not be not inconvenient and not subject to review by any court other than such courts in New York; (b) The Issuer intends and agrees that the courts of the jurisdictions in which the Issuer is formed and in which the Issuer conducts its business should afford full faith and credit to any judgment rendered by a court of the State of New York against the Issuer under this Agreement, and the Issuer intends and agrees that such courts should hold that the New York courts have jurisdiction to enter a valid, in personam judgment against the Issuer; (c) The Issuer agrees that service of any summons and complaint, and other process which may be served in any suit, action or other proceeding, may be made by mailing via U.S. certified or registered mail or by hand-delivering a copy of such process to the Issuer at its address specified above, with a copy to its counsel at its address specified above; and (d) The Issuer expressly acknowledges and agrees that the provisions of this Section 5.9 are reasonable and made for the express benefit of each of the Holders. SECTION 5.10. WAIVER OF TRIAL BY JURY. Each party to this Agreement agrees that any suit, action or proceeding, whether claim, defense or counterclaim, brought or instituted by any party hereto or any successor or assign of any party on or with respect to this Agreement or which in any way relates, directly or indirectly, to any event, transaction or occurrence arising out of or in any way connected with this Agreement or dealings of the parties hereto with respect to the subject matter hereof, shall be tried only by a court and not by a jury. EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING, AND ACKNOWLEDGES THAT THIS IS A WAIVER OF A LEGAL RIGHT AND THAT IT MAKES THIS -13- 14 WAIVER VOLUNTARILY AND KNOWINGLY AFTER CONSULTATION WITH, OR THE OPPORTUNITY TO CONSULT WITH, COUNSEL OF ITS CHOICE. SECTION 5.11. HEADINGS. The headings of the paragraphs and sub-paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute a part of this Agreement. SECTION 5.12. SEVERABILITY. To the extent any provision herein violates any applicable law, that provision shall be considered void and the balance of this Agreement shall remain unchanged and in full force and effect. SECTION 5.13. COUNTERPARTS. This Agreement may be executed in as many counterpart copies as may be required. It shall not be necessary that the signature of, or on behalf of, each party appear on each counterpart, but it shall be sufficient that the signature of, or on behalf of, each party appear on one or more of the counterparts. All counterparts shall collectively constitute a single agreement. It shall not be necessary in any proof of this Agreement to produce or account for more than a number of counterparts containing the respective signatures of, or on behalf of, all of the parties. SECTION 5.14. CONSENT OR APPROVAL OF HOLDERS. To the extent the terms of this Agreement or any of the other Investment Documents require the Issuer to obtain the consent, waiver or approval of Holders, or if the Issuer wishes to amend this Agreement, such consent, waiver, approval, or amendment shall be effective upon receipt by the Issuer of written consent or approval from the individuals or entities holding not less than two-thirds (2/3rds) of the Registrable Securities then held by, in each case, the Allied Holders and the PG Holders. SECTION 5.15. GOVERNING LAW. This Agreement shall be governed by, and interpreted and construed in accordance with, the internal laws of the State of New York (without regard to its conflicts of law principles). (Signatures next page) -14- 15 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written by their authorized representatives thereunto duly authorized. Very truly yours, AU BON PAIN CO., INC. By: /s/ LOUIS I. KANE -------------------------- Name: Louis I. Kane Title: Co-Chairman ALLIED CAPITAL CORPORATION By: /s/ GAY S. TRUSCOTT -------------------------- Name: Gay S. Truscott Title: Vice President ALLIED CAPITAL CORPORATION II By: /s/ GAY S. TRUSCOTT -------------------------- Name: Gay S. Truscott Title: Vice President CAPITAL TRUST INVESTMENTS, LTD. By: /s/ -------------------------- Name: Title: Attorney-in-fact -15- 16 PRINCESS GATE INVESTORS, L.P. By PG Investors, Inc. its General Partner By: /s/ DAVID POWERS -------------------------- Name: David Powers Title: Vice President ACORN PARTNERSHIP I, L.P. By PG Investors, Inc., its General Partner By: /s/ DAVID POWERS -------------------------- Name: David Powers Title: Vice President PGI INVESTMENTS LIMITED By PG Investors, Inc., as Attorney-In-Fact By: /s/ DAVID POWERS -------------------------- Name: David Powers Title: Vice President PGI SWEDEN AB By PG Investors, Inc. as Attorney-In-Fact By: /s/ DAVID POWERS -------------------------- Name: David Powers Title: Vice President -16- 17 GREGOR VON OPEL By PG Investors, inc. as Attorney-In-Fact By: /s/ DAVID POWERS -------------------------- Name: David Powers Title: Vice President -17- EX-11.1 16 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11.1 AU BON PAIN CO., INC. EARNINGS PER SHARE COMPUTATION (in thousands, except per share amounts)
FOR THE FISCAL YEARS ENDED ---------------------------------- Dec. 31, Dec. 30, Dec. 28, 1994 1995 1996 -------- ------- ------- Net income (loss)................. $ 7,841 $(1,614) $(4,365) Weighted number of average shares outstanding: Common stock outstanding, beginning of period Class B Common............. 1,916 1,732 1,707 Class A Common............. 9,155 9,828 9,929 Class B Preferred stock outstanding.................. - 20 20 Weighted average common stock issued during the period: Class A Common................. 341 41 49 Weighted average preferred stock issued during the period: Class B Preferred.............. 15 - - Weighted shares issued from assumed exercise of options...... 197 - - ------- ------- ------- Weighted average shares and equivalent shares outstanding.... 11,624 11,621 11,705 ======= ======= ======= Income (loss) per common and common equivalent share.......... $ .67 $ (.14) $ (.37) ======= ======= =======
The above schedule represents the calculation of both primary and fully diluted earnings per share. The effect of shares to be issued upon the conversion of the 1993 Notes would be antidilutive fiscal years ended December 30, 1995 and December 28, 1996. Accordingly, the Company excluded the effect of these shares in computing income per common share for these years. EX-21 17 REGISTRANTS SUBSIDIARIES 1 SUBSIDIARIES ------------
NAME Percentage (voting power) - ---- OWNED ------------------------- ABP Midwest Manufacturing Co., Inc. 100% Au Bon Pain Corporation* 100% Au Bon Pain Fairlane Corporation* 100% Au Bon Pain Foundation, Inc. 100% Au Bon Pain Properties, Inc.* 100% Pain Francais, Inc. 75% Saint Louis Bread Company, Inc. 100% The joint ventures organized and operated pursuant to the ABP/LI Associates Joint Venture Agreement 51-90% varied ownership
*inactive EX-27 18 FDS
5 1,000 YEAR DEC-28-1996 DEC-31-1995 DEC-28-1996 2,579 0 7,834 104 8,997 27,874 192,857 71,124 195,594 25,178 79,736 0 0 1 90,055 195,594 236,934 236,934 85,631 200,995 38,122 93 5,140 (2,848) (2,253) (595) 0 (3,770) 0 (4,365) (.37) (.37)
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