-----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, IFOo0MDleJH8pzljFzn6d0TsrNS8DxOeHJxgrd000Ay18m9ZRG4LWyJ1R8RdvKeA PxWuGD6B2ZNZmYZF37kTyQ== 0000849101-02-000012.txt : 20020813 0000849101-02-000012.hdr.sgml : 20020813 20020813172942 ACCESSION NUMBER: 0000849101-02-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVADO BRANDS INC CENTRAL INDEX KEY: 0000849101 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 592778983 STATE OF INCORPORATION: GA FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19542 FILM NUMBER: 02730921 BUSINESS ADDRESS: STREET 1: HANCOCK AT WASHINGTON CITY: MADISON STATE: GA ZIP: 30650 BUSINESS PHONE: 7063424552 MAIL ADDRESS: STREET 1: HANCOCK AT WASHINGTON CITY: MADISON STATE: GA ZIP: 30650 FORMER COMPANY: FORMER CONFORMED NAME: APPLE SOUTH INC DATE OF NAME CHANGE: 19950111 10-Q 1 q202-10q.txt FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2002 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to ___________ Commission File Number: 0-19542 AVADO BRANDS, INC. (Exact name of registrant as specified in its charter) Georgia 59-2778983 - ---------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) Hancock at Washington, Madison, GA 30650 - ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) 706-342-4552 --------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- --- As of August 9, 2002, there were 33,101,929 shares of common stock of the Registrant outstanding. AVADO BRANDS, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002 INDEX Part I - Financial Information Item 1 - Consolidated Financial Statements: Consolidated Statements of Earnings(Loss).......................3 Consolidated Balance Sheets.....................................4 Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive Income........................................5 Consolidated Statements of Cash Flows...........................6 Notes to Consolidated Financial Statements......................7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations..................16 Item 3 - Quantitative and Qualitative Disclosures About Market Risk.....22 Part II - Other Information Item 4 - Submission of Matters to a Vote of Security Holders............23 Item 6 - Exhibits and Reports on Form 8-K...............................23 Signature....................................................................24 Page 2 Avado Brands, Inc. Consolidated Statements of Earnings (Loss) (Unaudited)
(In thousands, except per share data) Quarter Ended Six Months Ended - --------------------------------------------------------------------------------------------- ---------------------------- June 30, July 1, June 30, July 1, 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------- ---------------------------- Restaurant sales: Don Pablo's $ 69,539 73,484 138,755 147,155 Hops 46,271 48,081 96,569 100,215 - -------------------------------------------------------------------------------------------- ---------------------------- Total restaurant sales 115,810 121,565 235,324 247,370 - -------------------------------------------------------------------------------------------- ---------------------------- Restaurant operating expenses: Food and beverage 32,554 34,067 66,444 69,156 Payroll and benefits 39,007 39,628 78,488 79,976 Depreciation and amortization 3,974 4,752 8,034 9,380 Other operating expenses 30,827 33,293 63,625 65,978 - -------------------------------------------------------------------------------------------- ---------------------------- Total restaurant operating expenses 106,362 111,740 216,591 224,490 - -------------------------------------------------------------------------------------------- ---------------------------- General and administrative expenses 6,576 6,794 12,992 13,295 Loss on disposal of assets 15 435 101 137 Asset revaluation and other special charges 4,448 850 4,448 1,250 - -------------------------------------------------------------------------------------------- ---------------------------- Operating income (loss) (1,591) 1,746 1,192 8,198 - -------------------------------------------------------------------------------------------- ---------------------------- Other income (expense): Interest expense, net (8,084) (10,347) (16,317) (19,378) Distribution expense on preferred securities (807) (1,202) (1,922) (2,446) Gain on debt extinguishment 26,783 - 26,783 - Other, net 201 (3,331) (211) (4,879) - -------------------------------------------------------------------------------------------- ---------------------------- Total other income (expense) 18,093 (14,880) 8,333 (26,703) - -------------------------------------------------------------------------------------------- ---------------------------- Earnings (loss) from continuing operations before income taxes 16,502 (13,134) 9,525 (18,505) Income tax expense (benefit) 1,500 (4,375) 375 (6,125) - -------------------------------------------------------------------------------------------- ---------------------------- Net earnings (loss) from continuing operations 15,002 (8,759) 9,150 (12,380) - -------------------------------------------------------------------------------------------- ---------------------------- Discontinued operations: Earnings (loss) from discontinued operations, net of tax (406) 3,910 (272) 6,486 - -------------------------------------------------------------------------------------------- ---------------------------- Net earnings (loss) $ 14,596 (4,849) 8,878 (5,894) ============================================================================================ =========================== Basic earnings (loss) per common share: Basic earnings (loss) from continuing operations $ 0.49 (0.31) 0.31 (0.44) Basic earnings (loss) from discontinued operations (0.01) 0.14 (0.01) 0.23 - -------------------------------------------------------------------------------------------- --------------------------- Basic earnings (loss) per common share $ 0.48 (0.17) 0.30 (0.21) ============================================================================================ =========================== Diluted earnings (loss) per common share: Diluted earnings (loss) from continuing operations $ 0.46 (0.31) 0.30 (0.44) Diluted earnings (loss) from discontinued operations (0.01) 0.14 (0.01) 0.23 - -------------------------------------------------------------------------------------------- --------------------------- Diluted earnings (loss) per common share $ 0.45 (0.17) 0.29 (0.21) ============================================================================================ ===========================
See accompanying notes to consolidated financial statements Page 3 Avado Brands, Inc. Consolidated Balance Sheets (Unaudited)
(In thousands, except share data) - --------------------------------------------------------------------------------------------------------------------- June 30, Dec. 30, 2002 2001 - --------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 934 559 Restricted cash - 9,978 Accounts receivable 6,041 10,723 Inventories 5,752 5,870 Prepaid expenses and other 3,531 2,928 Assets held for sale 8,945 9,737 - --------------------------------------------------------------------------------------------------------------------- Total current assets 25,203 39,795 Premises and equipment, net 275,266 285,813 Goodwill, net 34,920 34,920 Deferred income tax benefit 11,620 11,620 Other assets 32,906 26,408 - --------------------------------------------------------------------------------------------------------------------- $ 379,915 398,556 ===================================================================================================================== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 9,840 15,766 Accrued liabilities 45,156 64,265 Current installments of long-term debt 26 13 Income taxes 34,021 33,773 - --------------------------------------------------------------------------------------------------------------------- Total current liabilities 89,043 113,817 Long-term debt 213,045 215,815 Other long-term liabilities 2,076 3,111 - --------------------------------------------------------------------------------------------------------------------- Total liabilities 304,164 332,743 - --------------------------------------------------------------------------------------------------------------------- Company-obligated mandatorily redeemable preferred securities of Avado Financing I, a subsidiary holding solely Avado Brands, Inc. 7% convertible subordinated debentures due March 1, 2027 3,179 68,559 Shareholders' equity: Preferred stock, $0.01 par value. Authorized 10,000,000 shares; none issued - - Common stock, $0.01 par value. Authorized - 75,000,000 shares; issued - 40,478,760 shares in 2002 and 2001; outstanding - 33,101,929 shares in 2002 and 28,682,140 shares in 2001 405 405 Additional paid-in capital 154,637 146,139 Retained earnings 14,189 5,311 Treasury stock at cost; 7,376,831 shares in 2002 and 11,796,620 in 2001 (96,659) (154,601) - --------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 72,572 (2,746) - --------------------------------------------------------------------------------------------------------------------- $ 379,915 398,556 =====================================================================================================================
See accompanying notes to consolidated financial statements Page 4 Avado Brands, Inc. Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive Income (Unaudited)
Additional Total Common Stock Paid-in Retained Treasury Shareholders' (In thousands) Shares Amount Capital Earnings Stock Equity (Deficit) - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 30, 2001 40,479 $405 $146,139 $5,311 ($154,601) ($2,746) - ------------------------------------------------------------------------------------------------------------------------------ Net earnings (loss) - - - (5,718) - (5,718) Conversion of convertible preferred securities - - 889 - 4,461 5,350 - ------------------------------------------------------------------------------------------------------------------------------ Balance at March 31, 2002 40,479 405 147,028 (407) (150,140) (3,114) - ------------------------------------------------------------------------------------------------------------------------------ Net earnings (loss) - - - 14,596 - 14,596 Conversion of convertible preferred securities - - 7,609 - 53,481 61,090 - ------------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 2002 40,479 $405 $154,637 $14,189 ($96,659) $72,572 ==============================================================================================================================
See accompanying notes to consolidated financial statements Page 5 Avado Brands, Inc. Consolidated Statements of Cash Flows (Unaudited)
(In thousands) Six Months Ended - ------------------------------------------------------------------------------------------------------------------------ June 30, July 1, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net earnings (loss) $ 8,878 (5,894) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 10,775 12,561 Gain on debt extinguishment (26,783) - Asset revaluation and other special charges 4,448 1,250 (Gain) loss on disposal of assets 101 136 (Earnings) loss from discontinued operations 272 (6,486) Mark-to-market adjustment on interest rate swap 861 (86) (Increase) decrease in assets: Accounts receivable (26) (1,587) Inventories 118 (263) Prepaid expenses and other 514 (3,565) Increase (decrease) in liabilities: Accounts payable (5,511) (8,968) Accrued liabilities (19,462) 11,125 Income taxes 248 (6,318) Other long-term liabilities (192) 207 - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities (25,759) (7,888) - ------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Capital expenditures (3,340) (5,705) Proceeds from disposal of assets and notes receivable, net - 5,389 Additions to noncurrent assets (886) (1,754) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities (4,226) (2,070) - ------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from (repayment of) revolving credit agreements 18,127 4,993 Proceeds from (repayment of) term credit agreement 12,898 - Payment of financing costs (8,502) - Payment of long-term debt (5,584) - Principal payments on long-term debt (13) (13) Settlement of interest rate swap agreement (1,704) - Reduction in letter of credit collateral 9,978 - - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 25,200 4,980 - ------------------------------------------------------------------------------------------------------------------------ Cash provided by (used in) discontinued operations 5,160 4,960 - ------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 375 (18) Cash and cash equivalents at the beginning of the period 559 402 - ------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at the end of the period $ 934 384 ========================================================================================================================
See accompanying notes to consolidated financial statements. Page 6 AVADO BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002 (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statement reporting purposes. However, there has been no material change in the information disclosed in the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 30, 2001, except as disclosed herein. The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" and Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" in the first quarter of 2002. The Company also adopted Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" in the second quarter of 2002. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the quarter ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 29, 2002. NOTE 2 - LONG-TERM DEBT AND LIQUIDITY On March 25, 2002, the Company completed a $75.0 million credit facility to replace its existing credit agreement. The facility, which matures on March 25, 2005, limits total borrowing capacity at any given time to an amount equal to two and one quarter times the Company's trailing 12 months earnings before interest, income taxes and depreciation and amortization as determined for the most recently completed four quarters ("Borrowing Base EBITDA"). The calculation of Borrowing Base EBITDA excludes the 2001 operations of McCormick & Schmick's, gains and losses on the disposal of assets, asset revaluation and other special charges, non-cash rent expense and preopening costs. The agreement provides a $35.0 million revolving credit facility, which may be used for working capital and general corporate purposes, and a $40.0 million term loan facility, which is limited to certain defined purposes, excluding working capital and capital expenditures. In certain circumstances, borrowings under the term loan facility are required to be repaid to the lender and any such repayments are not available to be re-borrowed by the Company. Events generating a required repayment include, among other things, proceeds from asset dispositions, casualty events, tax refunds and excess cash flow, each as defined in the credit agreement. In addition, the lender reserves the right to impose certain reserves against the Company's total borrowing availability under the facility which may limit the Company's availability on both the revolving and term loans. Lender imposed reserves against the Company's total borrowing availability, as of June 30, 2002, were $4.2 million. Subsequent to June 30, 2002, the lender reserve amount was reduced to $3.1 million. Irrespective of future borrowings, certain obligations will exist with respect to the agreement including annual anniversary fees of $1.1 million and an additional fee payable at maturity of $5.1 million. The loan is secured by substantially all of the Company's assets. During the second quarter of 2002, Borrowing Base EBITDA was $25.9 million, resulting in a maximum borrowing capacity of $58.3 million. At June 30, 2002, the Company's trailing 12 months EBITDA totaled $24.7 million. Accordingly, the Company's maximum borrowing capacity will be adjusted from $58.3 million to $55.7 million in conjunction with the Company's filing of its quarterly reports with the lender on or before August 14, 2002. At June 30, 2002, $18.1 million of cash borrowings were outstanding under the revolving portion of the Company's credit facility and $12.9 million was outstanding under the term portion of the facility. During the first half of 2002, $10.0 million in restricted cash, which was held as collateral to secure letters of credit which secure the Company's insurance programs, was released and used to reduce the outstanding cash borrowings under the revolving credit facility. Under the new credit agreement, revolving loan capacity is used to secure the Company's letters of credit. At June 30, 2002, in addition to the $18.1 million of cash borrowings outstanding under the revolving facility, an additional $14.9 million of the facility was utilized to secure letters of credit and $2.0 million of the revolving facility remained unused and available. At June 30, 2002, $6.2 million remained unused and available under the Company's term loan facility. As a result of the upcoming reduction in the Company's borrowing base, which will be somewhat offset by the $1.1 million lender reserve reduction, availability on the term facility will be reduced by $1.5 million on or before August 14, 2002, while availability on the revolving facility will remain unchanged. Page 7 Borrowings under the term loan facility during the second quarter included $7.5 million (including approximately $1.9 million in accrued interest) to repurchase $34.2 million in face value of the Company's outstanding 11.75% Senior Subordinated Notes, due June 2009. After a $1.8 million write-off primarily of deferred loan costs and unamortized initial issue discount, the Company recorded a gain on the extinguishment of $26.8 million. An additional $5.4 million of term loan proceeds were used during the second quarter to make a one-time payment of accrued interest, equal to $4.25 per share, to holders of the Company's $3.50 term convertible securities, due March 2027 (the "TECONS"). The payment was conditional upon the holders of at least 90% of the outstanding TECONS agreeing to convert their securities into shares of common stock of the Company pursuant to the terms of the TECONS. According to the terms of the securities, each TECON can be converted, at the holders' option, into 3.3801 shares of common stock. During the second quarter, holders representing approximately 95% of the outstanding securities agreed to the terms of the offer and, in connection with the $5.4 million payment, 1,200,391 TECONS were converted into 4,057,442 shares of the Company's common stock. As a result of this transaction, the outstanding balance of the TECONS was reduced by $60.0 million. Subsequent to the end of the second quarter, an additional $3.2 million was borrowed under the term loan facility to repurchase $17.9 million in face value of the Company's outstanding 11.75% Senior Subordinated Notes. Principal financing sources in the first half of 2002 consisted of (i) term loan proceeds of $12.9 million, (ii) proceeds from the revolving credit agreement of $9.6 million, net of financing costs of $8.5 million, (iii) a $10.0 million refund of payments to collateralize letters of credit for the Company's self-insurance programs and (iv) proceeds of $5.2 million from discontinued operations related primarily to the McCormick & Schmick's divestiture. The primary uses of funds consisted of (i) net cash used in operations of $25.8 million which included interest payments of $20.7 million primarily related to the Company's 9.75% senior notes, 11.75% senior subordinated notes and the one-time TECON payment, in addition to operating lease payments of $12.5 million, (ii) $5.6 million for the repurchase of $34.2 million in face value of the Company's outstanding 11.75% Senior Subordinated Notes, (iii) capital expenditures of $3.3 million, and (iv) settlement of the Company's interest rate swap agreement for $1.7 million. Interest payments on the Company's senior and subordinated notes are due semi-annually in each June and December. Prior to the Company's repurchase of $52.1 million in face value of its outstanding 11.75% Senior Subordinated Notes, the Company's semi-annual interest payments totaled approximately $11.6 million. Subsequent to the repurchase, the Company's semi-annual interest payments will total approximately $8.5 million. Under the terms of the related note indentures, the Company has an additional 30-day period from the scheduled interest payment dates before an event of default is incurred and the Company utilized these provisions with respect to its June 2002 interest payments as well as its June and December 2001 interest payments. These provisions will again be available to the Company, if needed, with respect to the December 2002 interest payments. The terms of the Company's new credit facility, senior and subordinated notes, $30.0 million master equipment lease and $28.4 million Hops sale-leaseback transaction include various provisions which, among other things, require the Company to (i) achieve certain EBITDA targets, (ii) maintain defined net worth and coverage ratios, (iii) maintain defined leverage ratios, (iv) limit the incurrence of certain liens or encumbrances in excess of defined amounts and (v) limit certain payments. In conjunction with the March 25, 2002 closing of the Company's refinanced credit facility, the Company terminated its interest rate swap agreement thereby eliminating any aforementioned restrictions on the Company contained in that agreement. In addition, in March 2002 the Company amended its master equipment lease agreement to substantially conform the covenants to the refinanced credit facility and also obtained an amendment of certain provisions contained in its sale-leaseback agreement. In June 2002, the Company also obtained an amendment to its new credit agreement which allowed the Company to use proceeds from the term loan facility to make the one-time payment of accrued interest related to the TECONS. The amendment also increased the interest rate on revolving loans by 1.5% and increased the fees related to letter of credit accommodations by 1.0%. The Company was in compliance with the various provisions of its agreements at June 30, 2002. The Company incurs various capital expenditures related to existing restaurants and restaurant equipment in addition to capital requirements for developing new restaurants. In 2002, the Company anticipates opening two to four new restaurants. Capital requirements for the construction of these restaurants are expected to approximate $2 to $3 million with capital for existing restaurants expected to be an additional $5 to $6 million. Capital expenditures of $3.3 million for the first half of 2002 relate primarily to capital spending for existing restaurants. Capital expenditures in 2001 were $17.9 million and provided for the opening of three new restaurants, as well as capital for existing restaurants. The Company's 1998 Federal income tax returns are currently in the early stages of an audit by the Internal Revenue Service. The Company believes its recorded liability for income taxes is adequate to cover its exposure that may result from the ultimate resolution of the audit. Although no assessment has been made, in the event the Company is required to pay its recorded liability, Page 8 or additional income taxes and related interest amounts become due, the Company's liquidity position would be negatively impacted. The Company anticipates that any significant amounts due would be payable over time. As described herein, the Company has a number of situations which could result in amounts due when the Company does not have sufficient availability from working capital or under its borrowing arrangements to satisfy such liabilities. Material adverse changes in the Company's assessment of these matters could have a negative impact on the Company's liquidity. NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION For the six months ended June 30, 2002 and July 1, 2001, the following supplements the consolidated statements of cash flows (amounts in thousands): 2002 2001 ---------- ---------- Interest paid (net of amounts capitalized) $ 15,285 11,501 Distributions paid on preferred securities $ 5,372 - Income taxes paid (refunded) $ 127 193 NOTE 4 - ASSET REVALUATION AND OTHER SPECIAL CHARGES Asset revaluation and other special charges of $4.4 million in 2002, which were predominately non-cash, were the result of the second quarter decision to close two Don Pablo's restaurants and two Hops restaurants as well as the decision to write-off various capitalized costs related to future restaurant development. The aforementioned restaurants were subsequently closed in July 2002. In the first six months of 2001, asset revaluation and other special charges totaled $1.3 million. These charges included $0.7 million in severance costs associated with the elimination of certain management positions at the Company's corporate headquarters and $0.6 million related to an abandoned site. NOTE 5 - DISPOSAL OF ASSETS Loss on disposal of assets of $0.1 million for the six months ended June 30, 2002 primarily reflects fees incurred in connection with the first quarter termination of the Company's interest rate swap agreement. Loss on disposal of assets of $0.1 million for the six months ended July 1, 2001 reflects the net result of the sale of an office facility in Bedford, Texas and the sale of various other closed restaurant properties and miscellaneous assets. NOTE 6 - GAIN ON DEBT EXTINGUISHMENT Gain on debt extinguishment for the quarter and six months ended June 30, 2002 reflects the retirement of $34.2 million in face value of the Company's 11.75% Senior Subordinated Notes for $5.6 million plus $1.9 million in accrued interest. After a $1.8 million write-off primarily of deferred loan costs and unamortized initial issue discount, the Company recorded a gain on the extinguishment of $26.8 million. NOTE 7 - INCOME TAXES Income tax expense represents the effective rate of expense on earnings before income taxes for the first six months of 2002. The tax rate is based on the Company's expected rate for the full fiscal 2002 year. NOTE 8 - DISCONTINUED OPERATIONS In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 extends the requirement of APB Opinion No. 30, of reporting separately discontinued operations, to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. The Company adopted SFAS 144 in the first quarter of 2002 and reclassified its Canyon Cafe brand, which has been held for sale since December 30, 2001, and its McCormick & Schmick's brand, which was divested in August 2001, as discontinued operations for all periods presented in the consolidated financial statements. Page 9 Net loss from discontinued operations of $0.4 million for the quarter ended June 30, 2002 primarily reflects a loss on disposal of assets related to the closure and sale of a Canyon Cafe location. Net loss from discontinued operations of $0.3 million for the six months ended June 30, 2002 reflects (i) operating income of $0.2 million before asset revaluation and other special charges and (gain) loss on disposal of assets, (ii) non-cash asset impairment charges of $0.7 million to reduce the carrying value of the assets of the Canyon Cafe brand to estimated fair value, and (iii) a gain on disposal of assets of $0.2 million which reflects adjustments to amounts receivable from the divestiture of McCormick & Schmick's which were partially offset by a loss on disposal of assets related to the sale of a Canyon Cafe location. Net earnings from discontinued operations of $3.9 million for the quarter ended July 1, 2001 reflects (i) operating income of $6.2 million, before asset revaluation and other special charges and (gain) loss on disposal of assets, (ii) goodwill amortization of $0.4 million related to McCormick & Schmick's and (iii) income tax expense of $1.9 million. Net earnings from discontinued operations of $6.5 million for the six months ended July 1, 2001 reflects (i) operating income of $10.0 million, before asset revaluation and other special charges and (gain) loss on disposal of assets, (ii) a gain on disposal of assets of $0.5 million related to the sale of a closed Canyon Cafe location, (iii) goodwill amortization of $0.8 million related to McCormick & Schmick's and (iv) income tax expense of $3.2 million. NOTE 9 - CONTINGENCIES In 1997, two lawsuits were filed by persons seeking to represent a class of shareholders of the Company who purchased shares of the Company's common stock between May 26, 1995 and September 24, 1996. Each plaintiff named the Company and certain of its officers and directors as defendants. The complaints alleged acts of fraudulent misrepresentation by the defendants which induced the plaintiffs to purchase the Company's common stock and alleged illegal insider trading by certain of the defendants, each of which allegedly resulted in losses to the plaintiffs and similarly situated shareholders of the Company. The complaints each sought damages and other relief. In 1998, one of these suits (Artel Foam Corporation Pension Trust, et al. v. Apple South, Inc., et al., Civil Action No. CV-97-6189) was dismissed. An amended complaint, styled John Bryant, et al. vs. Apple South, Inc., et al. consolidating previous actions was filed in January 1998. During 1999, the Company received a favorable ruling from the 11th Circuit Court of Appeals relating to the remaining suit. As a result of the ruling, the District Court again considered the motion to dismiss the case, and the defendants renewed their motion to dismiss in December 1999. In June 2000, the District Court dismissed with prejudice the remaining suit. The plaintiffs appealed the court's final decision. Upon hearing the appeal, a three-judge panel reversed the motion to dismiss and gave the plaintiffs the opportunity to amend their suit and state with more particularity their allegations. Although the ultimate outcome of the suit cannot be determined at this time, the Company believes that the allegations therein are without merit and intends to continue vigorously defending itself. The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. NOTE 10 - INTEREST RATE SWAP During the first quarter of 2002, the Company terminated its only interest rate swap agreement. The settlement or fair market value of the interest rate swap on the date of termination was $1.7 million. Prior to termination, mark-to-market adjustments of $0.9 million were recorded as an increase to interest expense, which increased the settlement or fair market value of the interest rate swap to $1.7 million from $0.8 million at December 30, 2001. At July 1, 2001, the settlement or fair market value of the interest rate swap was $8.8 million and is included in other long-term liabilities in the accompanying consolidated balance sheet. For the six months ended July 1, 2001, mark-to-market adjustments of $0.1 million were recorded as a reduction of interest expense. NOTE 11 - RELATED PARTY TRANSACTIONS At December 30, 2001, the Company held several notes receivable, one of which was secured by real estate, from Tom E. DuPree, Jr., Chairman of the Board and Chief Executive Officer of the Company (the "Chairman Notes" and the "Chairman"). At December 30, 2001, the due date of the Chairman Notes was June 30, 2002 with an interest rate of 11.5% payable at maturity. At December 30, 2001, total amounts owed to the Company under the Chairman Notes were $10.9 million in principal and $3.0 million in accrued interest. At that time, the Company recorded an allowance against the ultimate realization of amounts due totaling $11.1 million, yielding a net balance of $2.8 million, the fair value of the real estate collateral held by the Company. Page 10 In March 2002, The Board of Directors approved a series of transactions whereby the Chairman sold the real estate collateral securing one of the Chairman Notes and, with the $2.8 million in proceeds, purchased $14.0 million in face value of the Company's 11.75% Senior Subordinated Notes (the "Sub Notes"), maturing in June 2009. The Sub Notes were pledged as collateral by the Chairman to secure amounts owed by him to the Company under the Chairman Notes. On March 6, 2002 the principal and interest due on the several Chairman Notes were consolidated into one note with a principal balance of $14.1 million (the "New Chairman Note"), and the interest payment terms, interest rate and due date of the note were changed to match the terms and due date of the Sub Notes. All amounts of interest and principal paid by the Company on the Sub Notes owned by the Chairman and pledged as collateral to the Company, will be used to make simultaneous payments to the Company on amounts due to the Company under the New Chairman Note. In conjunction with the Company's July 10, 2002 payment of the semi-annual interest due to holders of its Sub Notes, the Chairman made a simultaneous payment of principal and interest under the New Chairman Note in the amount of $0.8 million. As a result, the principal balance of the New Chairman Note was reduced to $13.7 million. NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which requires nonamortization of goodwill and intangible assets that have indefinite useful lives and annual tests of impairments of those assets. The statement also provides specific guidance about how to determine and measure goodwill and intangible asset impairments, and requires additional disclosure of information about goodwill and other intangible assets. The provisions of the statement are required to be applied starting with fiscal years beginning after December 15, 2001 and applied to all goodwill and other intangible assets recognized in financial statements at that date. The Company adopted SFAS 142 effective at the beginning of its fiscal 2002 year. The following table discloses the Company's earnings (loss), assuming it excluded goodwill amortization for the periods ended:
Quarter Ended Six Months Ended - ----------------------------------------------------------------------------------------- -------------------------- June 30, July 1, June 30, July 1, 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------- -------------------------- Net earnings (loss) $ 14,596 (4,849) 8,878 (5,894) Add back: Goodwill amortization, net of income taxes - 458 - 915 Trademark amortization, net of income taxes - 3 - 5 - ----------------------------------------------------------------------------------------- -------------------------- Adjusted net earnings (loss) $ 14,596 (4,388) 8,878 (4,974) ========================================================================================= ========================== Basic earnings (loss) per share: $ 0.48 (0.17) 0.30 (0.21) Add back: Goodwill amortization, net of income taxes - 0.02 - 0.03 Trademark amortization, net of income taxes - 0.00 - 0.00 - ----------------------------------------------------------------------------------------- -------------------------- Adjusted basic earnings (loss) per share $ 0.48 (0.15) 0.30 (0.18) ========================================================================================= ========================== Diluted earnings (loss) per share: $ 0.45 (0.17) 0.29 (0.21) Add back: Goodwill amortization, net of income taxes - 0.02 - 0.03 Trademark amortization, net of income taxes - 0.00 - 0.00 - ------------------------------------------------------------------------------------------ -------------------------- Adjusted diluted earnings (loss) per share $ 0.45 (0.15) 0.29 (0.18) ========================================================================================== ==========================
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which requires entities to recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The statement is effective for fiscal years beginning after June 15, 2002. The Company is assessing the impact of adoption of the statement on its consolidated financial position and results of operations. Page 11 In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 extends the requirement of APB Opinion No. 30, of reporting separately discontinued operations, to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. The Company adopted SFAS 144 in the first quarter of 2002 and reclassified its Canyon Cafe brand, which has been held for sale since December 30, 2001, and its McCormick & Schmick's brand, which was divested in August 2001, as discontinued operations for all periods presented in the consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which eliminates the requirement to report gains and losses related to extinguishments of debt as extraordinary items. The statement also included other amendments and technical corrections which will not have a material impact on the Company. The provisions of the statement related to the treatment of debt extinguishments are required to be applied in fiscal years beginning after May 15, 2002. The Company elected to adopt SFAS 145 in the second quarter of 2002. As a result of the application of the statement, the Company's $26.8 million gain related to the repurchase of $34.2 million of its 11.75% Senior Subordinated Notes was not presented as an extraordinary item in the accompanying Consolidated Statements of Earnings (Loss). The Company has not reported any extraordinary losses in prior periods and, accordingly, no prior period reclassifications were required. NOTE 13 - GUARANTOR SUBSIDIARIES The Company's senior notes and revolving credit facility are fully and unconditionally guaranteed on a joint and several basis by substantially all of its wholly owned subsidiaries. Such indebtedness is not guaranteed by the Company's non-wholly owned subsidiaries. These non-guarantor subsidiaries primarily include certain partnerships of which the Company is typically a 90% owner. At June 30, 2002 and December 30, 2001, these partnerships in the non-guarantor subsidiaries operated 20 of the Company's restaurants. At July 1, 2001, these partnerships in the non-guarantor subsidiaries operated 60 of the Company's restaurants. Accordingly, condensed consolidated balance sheets as of June 30, 2002 and December 30, 2001, and condensed consolidated statements of earnings and cash flows for the six months ended June 30, 2002 and July 1, 2001 are provided for such guarantor and non-guarantor subsidiaries. Corporate costs associated with the maintenance of a centralized administrative function for the benefit of all Avado restaurants, as well as goodwill, have not been allocated to the non-guarantor subsidiaries. In addition, interest expense has not been allocated to the non-guarantor subsidiaries. Separate financial statements and other disclosures concerning the guarantor and non-guarantor subsidiaries are not presented because management has determined that they are not material to investors. There are no contractual restrictions on the ability of the guarantor subsidiaries to make distributions to the Company. Condensed Consolidated Statement of Earnings (Loss) Six Months Ended June 30, 2002
- ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Guarantor Non-Guarantor (In thousands) Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Restaurant sales $ 208,109 27,215 - 235,324 Restaurant operating expenses 192,049 24,542 - 216,591 General and administrative expenses 11,759 1,233 - 12,992 (Gain) loss on disposal of assets 101 - - 101 Other special charges 4,448 - - 4,448 - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Operating income (248) 1,440 - 1,192 - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Other income (expense) 8,333 - - 8,333 Earnings (loss) before income taxes for continuing operations 8,085 1,440 - 9,525 Income taxes 319 56 - 375 - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Net earnings (loss) from continuing operations 7,766 1,384 - 9,150 - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Net earnings (loss) from discontinued (272) - - (272) operations - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Net earnings (loss) $ 7,494 1,384 - 8,878 ================================================ ================ ================= =============== ================
Page 12 Condensed Consolidated Statement of Earnings (Loss) Six Months Ended July 1, 2001
- ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Guarantor Non-Guarantor (In thousands) Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Restaurant sales $ 168,369 79,001 - 247,370 Restaurant operating expenses 151,828 72,662 - 224,490 General and administrative expenses 9,741 3,554 - 13,295 (Gain) loss on disposal of assets 137 - - 137 Other special charges 1,250 - - 1,250 - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Operating income 5,413 2,785 - 8,198 - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Other income (expense) (26,267) (436) - (26,703) Earnings (loss) before income taxes for continuing operations (20,854) 2,349 - (18,505) Income taxes (6,900) 775 - (6,125) - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Net earnings (loss) from continuing operations (13,954) 1,574 - (12,380) - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Net earnings (loss) from discontinued 6,486 - - 6,486 operations - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Net earnings (loss) $ (7,468) 1,574 - (5,894) ================================================ ================ ================= =============== ================
Condensed Consolidated Balance Sheet June 30, 2002
- ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Guarantor Non-Guarantor (In thousands) Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- ASSETS Current assets $ 24,243 960 - 25,203 Premises and equipment, net 250,937 24,329 - 275,266 Goodwill, net 34,920 - - 34,920 Deferred income tax benefit 11,620 - - 11,620 Other assets 32,888 18 - 32,906 Intercompany investments 12,370 - (12,370) - Intercompany advances 12,838 - (12,838) - - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- $ 379,816 25,307 (25,208) 379,915 ================================================ ================ ================= =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities $ 88,944 99 - 89,043 Long-term liabilities 215,121 - - 215,121 Intercompany payables - 12,370 (12,370) - Convertible preferred securities 3,179 - - 3,179 Shareholders' equity 72,572 12,838 (12,838) 72,572 - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- $ 379,816 25,307 (25,208) 379,915 ================================================ ================ ================= =============== ================
Condensed Consolidated Balance Sheet December 30, 2001
- ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Guarantor Non-Guarantor (In thousands) Subsidiaries Subsidiaries Eliminations Consolidated - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- ASSETS Current assets $ 38,927 868 - 39,795 Premises and equipment, net 260,957 24,856 - 285,813 Goodwill, net 34,920 - - 34,920 Deferred income tax benefit 11,620 - - 11,620 Other assets 26,390 18 - 26,408 Intercompany investments 12,370 - (12,370) - Intercompany advances 12,647 - (12,647) - - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- $ 397,831 25,742 (25,017) 398,556 ================================================ ================ ================= =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities $ 113,092 725 - 113,817 Long-term liabilities 218,926 - - 218,926 Intercompany payables - 12,370 (12,370) - Convertible preferred securities 68,559 - - 68,559 Shareholders' equity (2,746) 12,647 (12,647) (2,746) - ------------------------------------------------ ---------------- ----------------- --------------- ---------------- $ 397,831 25,742 (25,017) 398,556 ================================================ ================ ================= =============== ================
Page 13 Condensed Consolidated Statement of Cash Flows Six Months Ended June 30, 2002
- ------------------------------------------------ ---------------- ----------------- --------------- ---------------- Guarantor Non-Guarantor (In thousands) Subsidiaries Subsidiaries Eliminations Consolidated - ----------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net cash provided by (used in) operating $ (27,890) 2,131 - (25,759) activities - ----------------------------------------------------- ---------------- ----------------- --------------- ---------------- Cash flows from investing activities: Capital expenditures (2,990) (350) - (3,340) Other investing activities (886) - - (886) - ----------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net cash provided by (used in) investing (3,876) (350) - (4,226) activities - ----------------------------------------------------- ---------------- ----------------- --------------- ---------------- Cash flows from financing activities: Proceeds from revolving credit agreements 18,127 - - 18,127 Proceeds from term credit agreement 12,898 - - 12,898 Payment of financing costs (8,502) - - (8,502) Payment of long-term debt (5,584) - - (5,584) Principal payments on long-term debt (13) - - (13) Reduction in letter of credit collateral 9,978 - - 9,978 Proceeds from (payment of) intercompany advances 277 (277) - - Settlement of interest rate swap agreement (1,704) - - (1,704) - ----------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net cash provided by (used in) financing activities 25,477 (277) - 25,200 - ----------------------------------------------------- ---------------- ----------------- --------------- ---------------- Cash provided by (used in) discontinued operations 5,160 - - 5,160 - ----------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net increase (decrease) in cash and cash equivalents (1,129) 1,504 - 375 Cash and equivalents at the beginning of the period 530 29 - 559 - ----------------------------------------------------- ---------------- ----------------- --------------- ---------------- Cash and equivalents at the end of the period $ (599) 1,533 - 934 ===================================================== ================ ================= =============== ================
Condensed Consolidated Statement of Cash Flows Six Months Ended July 1, 2001
- ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Guarantor Non-Guarantor (In thousands) Subsidiaries Subsidiaries Eliminations Consolidated - ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net cash provided by operating activities $ (12,820) 4,932 - (7,888) - ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Cash flows from investing activities: Capital expenditures (4,944) (761) - (5,705) Proceeds from disposal of assets, net 5,389 - - 5,389 Other investing activities (1,754) - - (1,754) - ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net cash provided by (used in) investing (1,309) (761) - (2,070) activities - ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Cash flows from financing activities: Proceeds from revolving credit agreements 4,993 - - 4,993 Proceeds from (payment of) intercompany advances 4,173 (4,173) - - Other financing activities (13) - - (13) - ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net cash provided by (used in) financing activities 9,153 (4,173) - 4,980 - ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Cash provided by (used in) discontinued operations 4,960 - - 4,960 - ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Net increase (decrease) in cash and cash equivalents (16) (2) - (18) Cash and equivalents at the beginning of the period 310 92 - 402 - ---------------------------------------------------- ---------------- ----------------- --------------- ---------------- Cash and equivalents at the end of the period $ 294 90 - 384 ==================================================== ================ ================= =============== ================
NOTE 14 - SUBSEQUENT EVENTS On August 6, 2002, the Company's Board of Directors adopted a Shareholder Rights Plan. Under the plan, Rights will be distributed as a dividend at the rate of one Right for each share of Avado common stock, par value $.01 per share, held by shareholders of record as of the close of business on September 4, 2002. The Rights Plan was not adopted in response to any effort to acquire control of Avado Brands. Page 14 The Rights Plan is designed to deter coercive takeover tactics, including the accumulation of shares in the open market or through private transactions and to prevent an acquirer from gaining control of Avado without offering a fair and adequate price and terms to all of Avado's shareholders. The Rights will expire on September 4, 2007. Each Right initially will entitle stockholders to buy one unit of a share of a series of preferred stock for $9.50. The Rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of Avado's common stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 15% or more of Avado's common stock. Page 15 Item 2. AVADO BRANDS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Second Quarter and Six Months Ended June 30, 2002 Consolidated Overview of Operations Consolidated restaurant sales for the second quarter and six months ended June 30, 2002 were $115.8 million and $235.3 million, respectively, compared to $121.6 million and $247.4 million for the same respective periods of 2001. Declining revenues were primarily a result of a decrease in same-store sales at Don Pablo's and Hops and a decrease in operating capacity from the closure of four Don Pablo's restaurants at the end of the first quarter of 2001. Same-store-sales for the second quarter decreased by 5.4% at Don Pablo's and 3.5% at Hops as compared to the corresponding period of the prior year (same-store-sales comparisons include all restaurants open for 18 months as of the beginning of the quarter). On a year-to-date basis, same-store sales decreased by 5.1% at Don Pablo's and 3.0% at Hops. Declining revenues for the six months ended June 30, 2002 were slightly offset by increased operating capacity from one new Hops restaurant opened in 2001. Consolidated operating income before asset revaluation and other special charges and gain/loss on the disposal of assets for the quarter and six months ended June 30, 2002 was $2.9 million and $5.7 million, respectively, compared to $3.0 million and $9.6 million for the corresponding periods of 2001. Decreased operating income for the six months ended June 30, 2002 was predominately related to (i) declining sales volumes which generated an increase in fixed operating expenses as a percentage of sales and (ii) higher operating expenses associated with increased marketing initiatives. While marketing related expenses increased during the first half of 2002, in June, the Company revised its overall marketing strategy to encompass a more regional focus and dramatically reduced its marketing expenditures. As a result, management believes that consolidated marketing expense as a percent of sales will be approximately 4.5% to 5.5% for the full year 2002. Decreases in operating income were somewhat offset by (i) decreases in utility costs as a result of the unseasonably warm weather during the first quarter of 2002 and (ii) decreases in costs associated with new manager training at Don Pablo's and Hops due to improved management retention. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 extends the requirement of APB Opinion No. 30, of reporting separately discontinued operations, to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. The Company adopted SFAS 144 in the first quarter of 2002 and reclassified its Canyon Cafe brand, which has been held for sale since December 2001, and its McCormick & Schmick's brand, which was divested in August 2001, as discontinued operations for all periods presented in the consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which eliminates the requirement to report gains and losses related to extinguishments of debt as extraordinary items. The provisions of the statement related to the treatment of debt extinguishments are required to be applied in fiscal years beginning after May 15, 2002. The Company elected to adopt SFAS 145 in the second quarter of 2002. As a result of the application of the statement, the Company's $26.8 million gain related to the repurchase of $34.2 million of its 11.75% Senior Subordinated Notes was not presented as an extraordinary item in the accompanying Consolidated Statements of Earnings (Loss). The Company has not reported any extraordinary losses in prior periods and, accordingly, no prior period reclassifications were required. Page 16 Restaurant Operating Expenses The following table sets forth the percentages, which certain items of income and expense bear to total restaurant sales for the Company's continuing operations for the quarter and six month periods ended June 30, 2002 and July 1, 2001.
- ---------------------------------------------- ---------------- ----------------- ---------------- ----------------- Quarter Quarter Six Months Six Months Ended Ended Ended Ended June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001 - ---------------------------------------------- ---------------- ----------------- ---------------- ----------------- Restaurant sales: Don Pablo's 60.0% 60.4% 59.0% 59.5% Hops 40.0% 39.6% 41.0% 40.5% - ---------------------------------------------- ---------------- ----------------- ---------------- ----------------- Total restaurant sales 100.0% 100.0% 100.0% 100.0% - ---------------------------------------------- ---------------- ----------------- ---------------- ----------------- Restaurant operating expenses: Food and beverage 28.1% 28.0% 28.2% 28.0% Payroll and benefits 33.7% 32.6% 33.4% 32.3% Depreciation and amortization 3.4% 3.9% 3.4% 3.8% Other operating expenses 26.6% 27.4% 27.0% 26.7% - ---------------------------------------------- ---------------- ----------------- ---------------- ----------------- Total restaurant operating expenses 91.8% 91.9% 92.0% 90.8% - ---------------------------------------------- ---------------- ----------------- ---------------- ----------------- Income from restaurant operations 8.2% 8.1% 8.0% 9.2% General and administrative expenses 5.7% 5.6% 5.5% 5.4% - ---------------------------------------------- ---------------- ----------------- ---------------- ----------------- Operating income before special charges and (gain) loss on disposal of assets 2.5% 2.5% 2.4% 3.9% ============================================== ================ ================= ================ =================
Restaurant operating expenses for the quarter and six months ended June 30, 2002 were 91.8% and 92.0% of sales, respectively, compared to 91.9% and 90.8% of sales for the corresponding periods of 2001. The resulting decrease in restaurant operating margins for the six months ended June 30, 2002 was predominately due to increases in operating expenses generated by (i) declining sales volumes which generated an increase in fixed operating expenses as a percentage of sales and (ii) ongoing advertising strategies designed to build sales volumes over time at Don Pablo's and Hops which increased advertising expenditures to 5.9% and 5.4% of sales at Don Pablo's and Hops, respectively, compared to 5.3% and 3.9%, respectively, for the same periods of 2001. While marketing related expenses increased during the first half of 2002, in June, the Company revised its overall marketing strategy to encompass a more regional focus and dramatically reduced its marketing expenditures. As a result, management believes that consolidated marketing expense, as a percent of sales, will be approximately 4.5% to 5.5% for the full year 2002. Decreases in operating margins were somewhat offset by (i) decreases in utility costs as a result of the unseasonably warm weather during the first quarter of 2002 and (ii) decreases in costs associated with new manager training at Don Pablo's and Hops due to improved management retention. General and Administrative Expenses General and administrative expenses of 5.7% and 5.5% of sales for the quarter and six months ended June 30, 2002, respectively, increased slightly over the comparable periods of the prior year due primarily to a decline in sales volumes. Discontinued Operations Net loss from discontinued operations of $0.4 million for the quarter ended June 30, 2002 primarily reflects a loss on disposal of assets related to the closure and sale of a Canyon Cafe location. Net loss from discontinued operations of $0.3 million for the six months ended June 30, 2002 reflects (i) operating income of $0.2 million before asset revaluation and other special charges and (gain) loss on disposal of assets, (ii) non-cash asset impairment charges of $0.7 million to reduce the carrying value of the assets of the Canyon Cafe brand to estimated fair value, and (iii) a gain on disposal of assets of $0.2 million which reflects adjustments to amounts receivable from the divestiture of McCormick & Schmick's which were partially offset by a loss on disposal of assets related to the sale of a Canyon Cafe location. Page 17 Net earnings from discontinued operations of $3.9 million for the quarter ended July 1, 2001 reflects (i) operating income of $6.2 million, before asset revaluation and other special charges and (gain) loss on disposal of assets, (ii) goodwill amortization of $0.4 million related to McCormick & Schmick's and (iii) income tax expense of $1.9 million. Net earnings from discontinued operations of $6.5 million for the six months ended July 1, 2001 reflects (i) operating income of $10.0 million, before asset revaluation and other special charges and (gain) loss on disposal of assets, (ii) a gain on disposal of assets of $0.5 million related to the sale of a closed Canyon Cafe location, (iii) goodwill amortization of $0.8 million related to McCormick & Schmick's and (iv) income tax expense of $3.2 million. Asset Revaluation and Other Special Charges Asset revaluation and other special charges of $4.4 million in 2002, which were predominately non-cash, were the result of the second quarter decision to close two Don Pablo's restaurants and two Hops restaurants as well as the decision to write-off various capitalized costs related to future restaurant development. The aforementioned restaurants were subsequently closed in July 2002. In the first six months of 2001, asset revaluation and other special charges totaled $1.3 million. These charges included $0.7 million in severance costs associated with the elimination of certain management positions at the Company's corporate headquarters and $0.6 million related to an abandoned site. Interest and Other Expenses Net interest expense for the second quarter and six months ended June 30, 2002 was $8.1 million and $16.3 million, respectively, compared to $10.3 million and $19.4 million for the corresponding periods of the prior year. Decreased interest expense was primarily due to the divestiture of McCormick & Schmick's, the proceeds of which were used to repay $95.8 million outstanding under the Company's revolving credit facility during the third quarter of 2001. Decreases in interest expense were somewhat offset by unfavorable mark-to-market adjustments recorded during the first quarter of 2002 under a fixed-to-floating interest rate swap agreement, which was terminated on March 25, 2002, and by increased interest charges incurred primarily during the first quarter of 2002 related to past due sales and use, property and other taxes. Due to the timing of the Company's $34.2 million repurchase of 11.75% Senior Subordinated Notes, which occurred near the end of the second quarter, no significant reduction in interest expense was realized during the first half of 2002. Distribution expense on preferred securities relates to the Company's $3.50 term convertible securities with a liquidation preference of $50 per security and convertible into 3.3801 shares of Avado Brands common stock for each security (the "TECONS"). Expenses related to these securities decreased as a result of the conversion of 86,128 of the securities into 291,115 shares of common stock during 2001, coupled with 1,307,591 additional conversions in the first half of 2002 into 4,419,789 shares of common stock all of which were issued from treasury stock. The Company has the right to defer quarterly distribution payments on the Convertible Preferred Securities for up to 20 consecutive quarters and has deferred all such payments beginning with the December 1, 2000 payment until December 1, 2005. The Company may pay all or any part of the interest accrued during the extension period at any time. In June 2002, the Company made a one-time distribution payment of accrued interest, totaling $5.4 million or $4.25 per share, to holders of its TECONS. Of the 1,307,591 shares converted during the first half of 2002, 1,200,391 were converted in conjunction with this distribution payment. As a result of these conversions, annual distribution expense on the remaining TECONS outstanding will be approximately $0.2 million. Loss on disposal of assets of $0.1 million for the six months ended June 30, 2002 primarily reflects fees incurred in connection with the first quarter termination of the Company's interest rate swap agreement. During the six months ended June 30, 2002, other expenses related primarily to the incurrence of various tax penalties. The decrease in other expenses for the six months ended June 30, 2002 was primarily related to a reduction in the incurrence of various tax penalties as compared to the first six months of 2001 and the non-amortization of goodwill as a result of the Company's first quarter 2002 adoption of SFAS 142 , "Goodwill and Other Intangible Assets". For the six months ended July 1, 2001, the Company recorded goodwill amortization of $1.0 million. Page 18 Income tax expense represents the effective rate of expense on earnings before income taxes for the first half of 2002. The tax rate is based on the Company's expected rate for the full fiscal 2002 year. Liquidity and Capital Resources Generally, the Company operates with negative working capital since substantially all restaurant sales are for cash while payment terms on accounts payable typically range from 0 to 45 days. Fluctuations in accounts receivable, inventories, prepaid expenses and other current assets, accounts payable and accrued liabilities typically occur as a result of new restaurant openings and the timing of settlement of liabilities. Decreases in accounts payable during the first half occurred as a result of a planned reduction in various outstanding obligations with borrowings from the Company's $75.0 million refinanced credit facility. Decreases in accrued liabilities during the first half of 2002 occurred (i) as a result of a reduction in accrued interest due to the retirement of $34.2 million in outstanding debt related to the Company's 11.75% Senior Subordinated Notes (ii) as a result of a reduction in accrued interest due to the payment of accrued interest and conversion of 1,307,591 shares, or $65.4 million, of the Company's Convertible Preferred Securities, and (iii) as a result of the payment of previously deferred payments related to sales, use, property and other taxes. On March 25, 2002, the Company completed a $75.0 million credit facility to replace its existing credit agreement. The facility, which matures on March 25, 2005, limits total borrowing capacity at any given time to an amount equal to two and one quarter times the Company's trailing 12 months earnings before interest, income taxes and depreciation and amortization as determined for the most recently completed four quarters ("Borrowing Base EBITDA"). The calculation of Borrowing Base EBITDA excludes the 2001 operations of McCormick & Schmick's, gains and losses on the disposal of assets, asset revaluation and other special charges, non-cash rent expense and preopening costs. The agreement provides a $35.0 million revolving credit facility, which may be used for working capital and general corporate purposes, and a $40.0 million term loan facility, which is limited to certain defined purposes, excluding working capital and capital expenditures. In certain circumstances, borrowings under the term loan facility are required to be repaid to the lender and any such repayments are not available to be re-borrowed by the Company. Events generating a required repayment include, among other things, proceeds from asset dispositions, casualty events, tax refunds and excess cash flow, each as defined in the credit agreement. In addition, the lender reserves the right to impose certain reserves against the Company's total borrowing availability under the facility which may limit the Company's availability on both the revolving and term loans. Lender imposed reserves against the Company's total borrowing availability, as of June 30, 2002, were $4.2 million. Subsequent to June 30, 2002, the lender reserve amount was reduced to $3.1 million. Irrespective of future borrowings, certain obligations will exist with respect to the agreement including annual anniversary fees of $1.1 million and an additional fee payable at maturity of $5.1 million. The loan is secured by substantially all of the Company's assets. During the second quarter of 2002, Borrowing Base EBITDA was $25.9 million, resulting in a maximum borrowing capacity of $58.3 million. At June 30, 2002, the Company's trailing 12 months EBITDA totaled $24.7 million. Accordingly, the Company's maximum borrowing capacity will be adjusted from $58.3 million to $55.7 million in conjunction with the Company's filing of its quarterly reports with the lender on or before August 14, 2002. At June 30, 2002, $18.1 million of cash borrowings were outstanding under the revolving portion of the Company's credit facility and $12.9 million was outstanding under the term portion of the facility. During the first half of 2002, $10.0 million in restricted cash, which was held as collateral to secure letters of credit which secure the Company's insurance programs, was released and used to reduce the outstanding cash borrowings under the revolving credit facility. Under the new credit agreement, revolving loan capacity is used to secure the Company's letters of credit. At June 30, 2002, in addition to the $18.1 million of cash borrowings outstanding under the revolving facility, an additional $14.9 million of the facility was utilized to secure letters of credit and $2.0 million of the revolving facility remained unused and available. At June 30, 2002, $6.2 million remained unused and available under the Company's term loan facility. As a result of the upcoming reduction in the Company's borrowing base, which will be somewhat offset by the $1.1 million lender reserve reduction, availability on the term facility will be reduced by $1.5 million on or before August 14, 2002, while availability on the revolving facility will remain unchanged. Borrowings under the term loan facility during the second quarter included $7.5 million (including approximately $1.9 million in accrued interest) to repurchase $34.2 million in face value of the Company's outstanding 11.75% Senior Subordinated Notes, due June 2009. After a $1.8 million write-off primarily of deferred loan costs and unamortized initial issue discount, the Company recorded a gain on the extinguishment of $26.8 million. An additional $5.4 million of term loan proceeds were used during the second quarter to make a one-time payment of accrued interest, equal to $4.25 per share, to holders of the Company's $3.50 term convertible securities, due March 2027 (the "TECONS"). The payment was conditional upon the holders of at least 90% of the outstanding TECONS agreeing to convert their securities into shares of common stock of the Company pursuant to the terms of the TECONS. According to the terms of the securities, each TECON can be converted, at the holders' option, into 3.3801 shares of common stock. During the second quarter, holders representing Page 19 approximately 95% of the outstanding securities agreed to the terms of the offer and, in connection with the $5.4 million payment, 1,200,391 TECONS were converted into 4,057,442 shares of the Company's common stock. As a result of this transaction, the outstanding balance of the TECONS was reduced by $60.0 million. Subsequent to the end of the second quarter, an additional $3.2 million was borrowed under the term loan facility to repurchase $17.9 million in face value of the Company's outstanding 11.75% Senior Subordinated Notes. Principal financing sources in the first half of 2002 consisted of (i) term loan proceeds of $12.9 million, (ii) proceeds from the revolving credit agreement of $9.6 million, net of financing costs of $8.5 million, (iii) a $10.0 million refund of payments to collateralize letters of credit for the Company's self-insurance programs and (iv) proceeds of $5.2 million from discontinued operations related primarily to the McCormick & Schmick's divestiture. The primary uses of funds consisted of (i) net cash used in operations of $25.8 million which included interest payments of $20.7 million primarily related to the Company's 9.75% senior notes, 11.75% senior subordinated notes and the one-time TECON payment, in addition to operating lease payments of $12.5 million, (ii) $5.6 million for the repurchase of $34.2 million in face value of the Company's outstanding 11.75% Senior Subordinated Notes, (iii) capital expenditures of $3.3 million, and (iv) settlement of the Company's interest rate swap agreement for $1.7 million. Interest payments on the Company's senior and subordinated notes are due semi-annually in each June and December. Prior to the Company's repurchase of $52.1 million in face value of its outstanding 11.75% Senior Subordinated Notes, the Company's semi-annual interest payments totaled approximately $11.6 million. Subsequent to the repurchase, the Company's semi-annual interest payments will total approximately $8.5 million. Under the terms of the related note indentures, the Company has an additional 30-day period from the scheduled interest payment dates before an event of default is incurred and the Company utilized these provisions with respect to its June 2002 interest payments as well as its June and December 2001 interest payments. These provisions will again be available to the Company, if needed, with respect to the December 2002 interest payments. The terms of the Company's new credit facility, senior and subordinated notes, $30.0 million master equipment lease and $28.4 million Hops sale-leaseback transaction include various provisions which, among other things, require the Company to (i) achieve certain EBITDA targets, (ii) maintain defined net worth and coverage ratios, (iii) maintain defined leverage ratios, (iv) limit the incurrence of certain liens or encumbrances in excess of defined amounts and (v) limit certain payments. In conjunction with the March 25, 2002 closing of the Company's refinanced credit facility, the Company terminated its interest rate swap agreement thereby eliminating any aforementioned restrictions on the Company contained in that agreement. In addition, in March 2002 the Company amended its master equipment lease agreement to substantially conform the covenants to the refinanced credit facility and also obtained an amendment of certain provisions contained in its sale-leaseback agreement. In June 2002, the Company also obtained an amendment to its new credit agreement, which allowed the Company to use proceeds from the term loan facility to make the one-time payment of accrued interest related to the TECONS. The amendment also increased the interest rate on revolving loans by 1.5% and increased the fees related to letter of credit accommodations by 1.0%. The Company was in compliance with the various provisions of its agreements at June 30, 2002. The Company incurs various capital expenditures related to existing restaurants and restaurant equipment in addition to capital requirements for developing new restaurants. In 2002, the Company anticipates opening two to four new restaurants. Capital requirements for the construction of these restaurants are expected to approximate $2 to $3 million with capital for existing restaurants expected to be an additional $5 to $6 million. Capital expenditures of $3.3 million for the first half of 2002 relate primarily to capital spending for existing restaurants. Capital expenditures in 2001 were $17.9 million and provided for the opening of three new restaurants, as well as capital for existing restaurants. The Company is also exposed to certain contingent payments. Under the Company's insurance programs, coverage is obtained for significant exposures as well as those risks required to be insured by law or contract. It is the Company's preference to retain a significant portion of certain expected losses related primarily to workers' compensation, physical loss to property, and comprehensive general liability. Provisions for losses estimated under these programs are recorded based on estimates of the aggregate liability for claims incurred. For the six months ended June 30, 2002, claims paid under the Company's self-insurance programs totaled $2.6 million. In addition, at June 30, 2002, the Company was contingently liable for letters of credit aggregating approximately $14.9 million, relating to its insurance programs. Page 20 The Company's 1998 Federal income tax returns are currently in the early stages of an audit by the Internal Revenue Service. The Company believes its recorded liability for income taxes is adequate to cover its exposure that may result from the ultimate resolution of the audit. Although no assessment has been made, in the event the Company is required to pay its recorded liability, or additional income taxes and related interest amounts become due, the Company's liquidity position would be negatively impacted. The Company anticipates that any significant amounts due would be payable over time. As described herein, the Company has a number of situations which could result in amounts due when the Company does not have sufficient availability from working capital or under its borrowing arrangements to satisfy such liabilities. Material adverse changes in the Company's assessment of these matters could have a negative impact on the Company's liquidity. Effect of Inflation Management believes that inflation has not had a material effect on earnings during the past several years. Future inflationary increases in the cost of labor, food and other operating costs could adversely affect the Company's restaurant operating margins. In the past, however, the Company generally has been able to modify its operations to offset increases in its operating costs. Various federal and state laws increasing minimum wage rates have been enacted over the past several years. Such legislation, however, has typically frozen the wages of tipped employees at $2.13 per hour if the difference is earned in tip income. Although the Company has experienced slight increases in hourly labor costs in recent years, the effect of increases in minimum wage have been significantly diluted due to the fact that the majority of the Company's hourly employees are tipped and the Company's non-tipped employees have historically earned wages greater than federal and state minimums. As such, the Company's increases in hourly labor costs have not been proportionate to increases in minimum wage rates. Forward-Looking Information Certain information contained in this quarterly report, particularly information regarding the future economic performance and finances, restaurant development plans, capital requirements and objectives of management, is forward looking. In some cases, information regarding certain important factors that could cause actual results to differ materially from any such forward-looking statement appear together with such statement. In addition, the following factors, in addition to other possible factors not listed, could affect the Company's actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include competition within the casual dining restaurant industry, which remains intense; changes in economic conditions such as inflation or a recession; consumer perceptions of food safety; weather conditions; changes in consumer tastes; labor and benefit costs; legal claims; the continued ability of the Company to obtain suitable locations and financing for new restaurant development; government monetary and fiscal policies; laws and regulations; and governmental initiatives such as minimum wage rates and taxes. Other factors that may cause actual results to differ from the forward-looking statements contained in this release and that may affect the Company's prospects in general are described in Exhibit 99.1 to the Company's Form 10-Q for the fiscal quarter ended April 2, 2000, and the Company's other filings with the Securities and Exchange Commission. Page 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk from changes in interest rates and changes in commodity prices. Historically the Company's exposure to interest rate risk has related primarily to variable U.S.-based rates and foreign-based rate obligations on the Company's revolving credit agreement and a fixed to floating interest rate swap agreement. Interest swap agreements have historically been utilized to manage overall borrowing costs and balance fixed and floating interest rate obligations. As of March 25, 2002 the Company terminated the one such swap agreement it had in place and no further obligation remains after that date. The Company purchases certain commodities such as beef, chicken, flour and cooking oil. Purchases of these commodities are generally based on vendor agreements, which often contain contractual features that limit the price paid by establishing price floors or caps. As commodity price aberrations are generally short-term in nature and have not historically had a significant impact on operating performance, financial instruments are not used to hedge commodity price risk. Page 22 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders was held on May 23, 2002, at which the following proposals were voted upon by shareholders: (1) the election of six members to the Board of Directors, and (2) ratification of the selection of KPMG LLP as the Company's independent auditors. Each of the six members of the Company's Board of Directors was elected to serve a term of one year and until his or her successor is elected, and has qualified by the following votes: Affirmative Negative ----------- -------- Tom E. DuPree, Jr. 25,744,601 665,732 Margaret E. Waldrep 25,765,429 644,904 Emilio Alvarez-Recio 26,024,194 383,139 Jerome A. Atkinson 26,026,505 383,828 William V. Lapham 26,025,467 384,866 Robert Sroka 26,023,967 386,366 The remaining proposal, voted on at the May 23, 2002 annual meeting of shareholders, was approved as follows: Affirmative Negative Abstaining ----------- -------- ---------- Appointment of KPMG LLP 26,239,148 145,548 25,637 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 10.1 Amendment Number One, dated as of June 4, 2002, to Second Amended and Restated Credit Agreement dated as of March 20, 2002 by and among Avado Brands, Inc., as Borrower, the lenders signatory thereto, Foothill Capital Corporation, as Administrative Agent, and Ableco Finance LLC, as Collateral Agent. 10.2 Eighth amendment, dated as of March 25, 2002, to Participation Agreement (Apple South Trust No. 97-1), dated September 24, 1997, among Avado Brands, Inc., as lessee, First Security Bank, National Association, as lessor, SunTrust Bank, Atlanta, as administrative agent, and the holders and lenders signatory thereto. 11.1 Computation of earnings per common share 99.1 Safe Harbor Under the Private Securities Litigation Reform Act of 1995* 99.2 Certification of Corporate Officers * Incorporated by reference to the corresponding exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended April 2, 2000. (b) Reports on Form 8-K. None Page 23 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Avado Brands, Inc. (Registrant) Date: August 13, 2002 By:/s/Louis J. Profumo ------------------------- Louis J. Profumo Chief Financial Officer Page 24 EX-10 3 q202-10qca.txt FIRST AMENDMENT TO CREDIT AGREEMENT AMENDMENT NUMBER ONE TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDMENT NUMBER ONE TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment") dated as of June 4, 2002, is entered among AVADO BRANDS, INC., a Georgia corporation ("Borrower"), each of the lenders that from time to time is a party hereto (such lenders, each individually a "Lender" and collectively, the "Lenders"), FOOTHILL CAPITAL CORPORATION, a California corporation, as administrative agent for the Lender Group (in such capacity, together with its successors in accordance with the Transferee Side Letter, if any, in such capacity, "Administrative Agent"), and ABLECO FINANCE LLC, a Delaware limited liability company, as collateral agent for the Lender Group (in such capacity, together with its successors in accordance with the Transferee Side Letter, if any, in such capacity, the "Collateral Agent"; Administrative Agent, Collateral Agent and the Lenders, individually and collectively, the "Lender Group"), in light of the following: W I T N E S S E T H WHEREAS, Borrower, the Lenders, Administrative Agent, and Collateral Agent are parties to that certain Second Amended and Restated Credit Agreement, dated as of March 20, 2002 (as amended, restated, supplemented, or modified from time to time, the "Credit Agreement"); WHEREAS, Borrower has requested that the Term Loan Lenders make a Term Loan to Borrower in the amount of $5,400,000 (the "Designated Term Loan"), for the purpose of enabling the Borrower to make a payment of interest in the amount of $5,400,000 in respect of the Convertible Debentures (the "Designated Payment"); WHEREAS, pursuant to Section 5.01(v) of the Credit Agreement, the proceeds of Term Loans may not be used to fund payments of interest which are due and payable in respect of the Convertible Debentures; and WHEREAS, notwithstanding the provisions of the Credit Agreement and the other Loan Documents, subject to the terms and conditions of this Amendment, the Term Loan Lenders are willing to make the Designated Term Loan, and to consent to the Designated Payment. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree to amend the Credit Agreement, effective immediately, as follows: 1. DEFINITIONS. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement, as amended hereby. 2. AMENDMENTS TO CREDIT AGREEMENT. (a) Section 1.01 of the Credit Agreement hereby is amended by adding the following defined terms in proper alphabetical order: "First Amendment" means that certain Amendment Number One to Second Amended and Restated Credit Agreement, dated as of June 4, 2002, among Borrower, Lenders, Administrative Agent, and Collateral Agent. "First Amendment Effective Date" means the date, if ever, that all of the conditions set forth in Section 5 of the First Amendment shall be satisfied (or waived by the Required Lenders in their sole discretion). (b) Section 1.01 of the Credit Agreement hereby is amended by amending and restating the following defined term in its entirety as follows: "Revolving Loan Margin" means 6.00%; provided, however, that, with respect to any month, if Borrower has timely delivered to each Agent the financial statements required by Section 6.01(a)(iii) and the certified calculations required by Section 6.01(a)(iv)(B), and if such financial statements and certified calculations demonstrate that the Senior Debt to EBITDA Ratio for the twelve fiscal month period ending on the last day of the second month immediately preceding such month is less than or equal to 2.00, the Revolving Loan Margin shall mean 4.00% during such month; provided, further that (a) for the time period from the Effective Date until the date when Agents have received the monthly financial statements and certified calculations for the fiscal month ending December 30, 2001 required by Section 6.01(a)(iii) and Section 6.01(a)(iv)(B), the determination described in the second clause of this definition shall be made based upon the ratio of (i) the aggregate amount of all Obligations as of the Effective Date (after giving effect to the initial Loans and the initial Letter of Credit Accommodations made on or after the date hereof), to (ii) Borrower's EBITDA for the twelve fiscal month period ending on Page 1 November 25, 2001, and (b) for the time period from the date when Agents have received such monthly financial statements and certified calculations for the month ending December 30, 2001 until the date when Agents have received such monthly financial statements and certified calculations for the fiscal month ending in January of 2002, the determination described in the second clause of this definition shall be made based upon the ratio of (i) the aggregate amount of all Obligations as of the Effective Date (after giving effect to the initial Loans and the initial Letter of Credit Accommodations made on or after the date hereof), to (ii) Borrower's EBITDA for the twelve fiscal month period ending on December 30, 2001. The Revolving Loan Margin shall be determined on the Effective Date and shall be redetermined each month on the fifth Business Day of each such month. If financial statements and certified calculations described in the second clause of this definition are not timely delivered, the Revolving Loan Margin shall mean 6.00% until the date on which such financial statements and certified calculations are delivered (on which date (but not retroactively), without constituting a waiver of any Default or Event of Default occasioned by the failure to timely deliver such certification, the Revolving Loan Margin shall be redetermined based upon such financial statements and certified calculations). (c) Section 2.01(c)(ii) of the Credit Agreement is hereby amended by deleting the word "2.50%" appearing in the first sentence thereof, and replacing such word with the word "3.50%". (d) Section 2.01(c)(ii) of the Credit Agreement is hereby amended by deleting the word "5.50%" appearing in the first sentence thereof, and replacing such word with the word "6.50%". 3. consent and additional agreement. Upon the First Amendment Effective Date, (a) the Term Loan Lenders hereby agree, ratably in accordance with their respective Term Loan Commitments, to make the Designated Term Loan to Borrower, and (b) the Lender Group consents to Borrower making the Designated Payment from the proceeds of the Designated Term Loan. The agreements contained in this Section 3 are limited to the specifics hereof, shall not apply with respect to any facts or occurrences other than those on which the same are based, except as set forth in the Loan Documents, shall not constitute an agreement to make a similar Term Loan in the future, except as set forth in the Loan Documents, shall not constitute a consent to the Borrower making a similar payment in the future, and, shall not operate as a waiver or an amendment of any right, power or remedy of the Lender Group, nor as a consent to any further or other matter, under the Loan Documents. 4. Amendment Fee. Borrower agrees to pay to Administrative Agent on the First Amendment Effective Date, for the ratable benefit of the Lenders, an amendment fee, in the amount of $200,000 (the "First Amendment Fee"), and expressly authorizes Administrative Agent to designate the First Amendment Fee as a Revolving Loan under the Credit Agreement and to charge such First Amendment Fee to Borrower's Loan Account on the First Amendment Effective Date. Borrower hereby acknowledges and agrees that the First Amendment Fee is fully earned and non-refundable on First Amendment Effective Date, that such First Amendment Fee constitutes an Obligation, and is in addition to any other fees payable by Borrower under the Credit Agreement or any other Loan Document. 5. CONDITIONS PRECEDENT TO AMENDMENT. The satisfaction of each of the following unless waived or deferred by the Required Lenders in their sole discretion, shall constitute conditions precedent to the effectiveness of this Amendment and each and every provision hereof: (a) Collateral Agent shall have received the reaffirmation and consent of each of the Guarantors in the form attached hereto as Exhibit A, on or before the First Amendment Effective Date, duly executed and dated as of the First Amendment Effective Date, and in full force and effect. (b) Borrower shall have paid to Administrative Agent, for the ratable benefit of the Lenders, an amendment fee, in full in immediately available funds, in the amount of $200,000. (c) The representations and warranties in the Credit Agreement as amended by this Amendment, and the other Loan Documents shall be true and correct in all material respects on and as of the date hereof, as though made on such date (except to the extent that such representations and warranties relate solely to an earlier date). (d) No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein shall have been issued and remain in force by any Governmental Authority against the Lender Group. (e) No Event of Default shall result from the consummation of the transactions contemplated herein. Page 2 6. CONSTRUCTION. This Amendment shall be governed by and construed in accordance with the laws of the State of New York without giving effect to its conflicts of laws principles (other than any provisions thereof validating the choice of the laws of the State of New York as the governing law). 7. ENTIRE AMENDMENT. This Amendment, and terms and provisions hereof, constitute the entire agreement among the parties pertaining to the subject matter hereof and supersedes any and all prior or contemporaneous amendments relating to the subject matter hereof. Except as expressly amended hereby, the Credit Agreement and other Loan Documents shall remain unchanged and in full force and effect. To the extent any terms or provisions of this Amendment conflict with those of the Credit Agreement or other Loan Documents, the terms and provisions of this Amendment shall control. This Amendment is a Loan Document. 8. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Amendment by signing any such counterpart. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver an original executed counterpart of this Amendment, but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. 9. AMENDMENTS. This Amendment cannot be altered, amended, changed or modified in any respect or particular unless each such alteration, amendment, change or modification shall have been agreed to by each of the parties and reduced to writing in its entirety and signed and delivered by each party. 10. MISCELLANEOUS (a) Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like import referring to the Credit Agreement shall mean and refer to the Credit Agreement as amended by this Amendment. (b) Upon the effectiveness of this Amendment, each reference in the Loan Documents to the "Credit Agreement", "thereunder", "therein", "thereof" or words of like import referring to the Credit Agreement shall mean and refer to the Credit Agreement as amended by this Amendment. (c) The Lender Group hereby reserves all remedies, powers, rights, and privileges that the Lender Group may have under the Credit Agreement or the other Loan Documents, at law (including under the Code), in equity, or otherwise; and (b) all terms, conditions, and provisions of the Credit Agreement and the other Loan Documents are and shall remain in full force and effect and nothing herein shall operate as a consent to or a waiver, amendment, or forbearance in respect of any matter (including any Event of Default whether presently existing or subsequently occurring) or any other right, power, or remedy of the Lender Group under the Credit Agreement and the other Loan Documents. No delay on the part of the Lender Group in the exercise of any remedy, power, right or privilege shall impair such remedy, power, right, or privilege or be construed to be a waiver of any default, nor shall any partial exercise of any such remedy, power, right or privilege preclude further exercise thereof or of any other remedy, power, right or privilege. [Signature page follows.] 3 IN WITNESS WHEREOF, the parties have caused this Amendment to be executed and delivered as of the date first written above. BORROWER: AVADO BRANDS, INC., a Georgia corporation By: _____________________ Name: Title: COLLATERAL AGENT: ABLECO FINANCE LLC, a Delaware limited liability company, as Collateral Agent By: ______________________ Name: Title: ADMINISTRATIVE AGENT: FOOTHILL CAPITAL CORPORATION, a California corporation, as Administrative Agent By: _______________________ Name: Title: LENDERS: ABLECO FINANCE LLC, a Delaware limited liability company, for itself and certain of its Affiliates, as Assignor By: ________________________ Name: Title: FOOTHILL CAPITAL CORPORATION, a California corporation By: ________________________ Name: Title: REGIMENT CAPITAL II, L.P., a Delaware limited partnership By: ________________________ Name: Title: Its General Partner HZ SPECIAL OPPORTUNITIES LLC, a Cayman Islands limited liability company, as Assignee By: Highbridge Capital Management,LLC By: __________________________ Name: Title: Exhibits and schedules to this agreement are not filed pursuant to Item 601(b)(2) of SEC Regulation S-K. By the filing of this form 10Q, the Registrant hereby agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Commission upon request. S-1 EX-10 4 q202-10qpa.txt EIGHTH AMENDMENT TO PARTICIPATION AGREEMENT EIGHTH AMENDMENT TO PARTICIPATION AGREEMENT THIS EIGHTH AMENDMENT TO PARTICIPATION AGREEMENT (hereinafter, as it may be modified, amended or supplemented from time to time, called this "Amendment"), made and entered into as of March 25, 2002, among (i) AVADO BRANDS, INC. formerly known as Apple South, Inc., a corporation organized and existing under the laws of Georgia (herein, together with its successors and assigns permitted hereunder, called the "Lessee"), (ii) WELLS FARGO BANK NORTHWEST NATIONAL ASSOCIATION, formerly known as First Security Bank, National Association, a national banking association ("First Security"), not in its individual capacity except as expressly provided herein, but solely as Owner Trustee under Apple South Trust No. 97-1 (herein in such capacity, together with its successors and assigns permitted hereunder, called the "Owner Trustee"), (iii) SunTrust Leasing Corporation, as successor by merger to STI Credit Corporation, a Nevada corporation, as assignee of SunTrust Bank, formerly known as SunTrust Bank, Atlanta, in its capacity as the holder of the beneficial interest in the trust estate established under Apple South Trust No. 97-1 (in such capacity as of the date hereof, the "Holder", and together with its successors and assigns permitted hereunder, called the "Holders"), (iv) the financial institutions now parties to the Participation Agreement (as defined below) as Lenders (each herein in such capacity, together with its successors and assigns permitted hereunder, called a "Lender" and collectively, the "Lenders"), and (v) SUNTRUST BANK, formerly known as SunTrust Bank, Atlanta, a banking corporation organized and existing under the laws of Georgia, ("SunTrust"), as collateral agent and administrative agent for the Lenders and the Holders (in such capacity, the "Administrative Agent"). W I T N E S S E T H WHEREAS, the Lessee, the Owner Trustee, the Holder, the Lenders and the Administrative Agent are parties to that certain Participation Agreement, dated as of September 24, 1997, as amended by the First Amendment to the Participation Agreement, dated as of March 27, 1998, as amended by the Second Amendment to the Participation Agreement, dated as of August 14, 1998, as amended by the Third Amendment to the Participation Agreement, dated as of November 13, 1998, as amended by the Fourth Amendment to the Participation Agreement, dated as of February 22, 1999, as amended by the Fifth Amendment to Participation Agreement, dated as of August 24, 1999, as amended by the Sixth Amendment to Participation Agreement dated as of December 22, 2000, and as amended by the Seventh Amendment to Participation Agreement dated as of April 2, 2001 (as so amended, the "Participation Agreement"); WHEREAS, the Owner Trustee and the Lessee are parties to that certain Master Equipment Lease Agreement, dated as of September 24, 1997, as amended by the First Amendment to Lease Agreement, dated as of March 27, 1998, as amended by the Second Amendment to Lease Agreement, dated as of May 18, 1999, as amended by the Third Amendment to Lease Agreement, dated as of December 22, 2000, as amended by the Fourth Amendment to Lease Agreement, dated as of April 22, 2001, and as amended by the Fifth Amendment to Lease Agreement, dated as of the date hereof (as so amended, the "Lease"); WHEREAS, the Lessee, the Owner Trustee, the Holder, the Lenders and the Administrative Agent have agreed to amend the Participation Agreement in certain respects and to waive certain covenant defaults, as described more particularly below. NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency whereof are hereby acknowledged, the Lessee, the Owner Trustee, the Holder, the Lenders and the Administrative Agent agree as follows: A. DEFINITIONS Unless the context otherwise requires, all capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in Appendix A to the Participation Agreement for all purposes of this Amendment. The General Provisions of Appendix A to the Participation Agreement are hereby incorporated by reference herein. Terms used herein and not otherwise defined herein or in Appendix A to the Participation Agreement, but are defined in the Credit Agreement shall have the meaning set forth for such term in the Credit Agreement. B. AMENDMENTS 1. Amendment to Existing Section 3.2: Section 3.2 of the Participation Agreement is hereby amended by adding the following new Section 3.2(x) (x) The Lessee has heretofore furnished to the Administrative Agent (i) projected monthly balance sheets, income statements and statements of cash flows of the Lessee and its Subsidiaries for the period from January 1, 2001 through December 31, 2001, and (ii) projected annual balance sheets, income statements and statements of cash flows of the Lessee and its Subsidiaries for the Fiscal Years ending in 2002 through 2005, in each case as updated from time to time pursuant to Section 5.1(e). Such projections, as so updated, have been prepared on a reasonable basis and in good faith by the Lessee, and have been based on assumptions believed by the Lessee to be reasonable at the time made and upon the best information then reasonably available to the Lessee, and the Lessee is not aware of any facts or information that would lead it to believe that such projections, as so updated, are incorrect or misleading in any material respect. 2. Amendment to Existing Section 5.1: Section 5.1 of the Participation Agreement (Information) is hereby amended by deleting Section 5.1 in its entirety and substituting in its place the following revised Section 5.1: 1 5.1 Information (a) With respect to the 2001 Fiscal Year, on or before April 2, 2001, and with respect to each subsequent Fiscal Year, within 60 days after the end of such Fiscal Year, a consolidated balance sheet of the Lessee and its Subsidiaries as of the end of such Fiscal Year and the related consolidated statements of income, shareholders' equity and cash flows for such Fiscal Year, setting forth in each case in comparative form the figures for the previous fiscal year, all certified by independent public accountants of nationally recognized standing, with such certification to be free of any material exceptions and qualifications; provided that, the information required by this paragraph may be satisfied by delivery of information pursuant to Section 5.1(f) or Section 5.1(g); (b) With respect to the fourth Fiscal Quarter of the 2001 Fiscal Year, on or before April 2, 2002, with respect to the fourth Fiscal Quarter of each subsequent Fiscal Year, within 60 days after the end of the fourth Fiscal Quarter of such Fiscal Year, and with respect to each other Fiscal Quarter of Lessee and its Subsidiaries, within 45 days after the end of such Fiscal Quarter, a consolidated balance sheet of the Lessee and its Subsidiaries as of the end of such Fiscal Quarter and the related statement of income and statement of cash flows for such quarter and for the portion of the Fiscal Year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the previous Fiscal Year, all certified (subject to normal year-end adjustments) as to fairness of presentation, GAAP and consistency by the chief financial officer of the Lessee; (c) With respect to each of the fiscal months of December 2001, January 2002 and February 2002, on or before April 2, 2002 and (except for months ending in a Fiscal Quarter of the Lessee) within 30 days of the end of each other fiscal month of Lessee and its Subsidiaries, unaudited consolidated balance sheets, consolidated statements of operations, consolidated statements of cash flows, and statements of cash flow for such fiscal month of Lessee and for the period from the beginning of such Fiscal Year to the end of such fiscal month, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the previous Fiscal Year, all certified (subject to normal year-end adjustments) as to fairness of presentation, GAAP and consistency by the chief financial officer of the Lessee; (d) Simultaneously with the delivery of each set of financial statements referred to in Sections 5.1(a), 5.1(b) and 5.1(c), a certificate, substantially in the form of Attachment B (a "Compliance Certificate"), of the chief financial officer of the Lessee (i) setting forth in reasonable detail the calculations required to establish whether the Lessee was in compliance with the requirements of Sections - 5.4, 5.5, 5.6, 5.7 and 5.19 on the date of such financial statements and (ii)stating whether any Lease Default exists on the date of such certificate and, if any Lease Default then exists, setting forth the details thereof and the action which the Lessee is taking or proposes to take with respect thereto; (e) On or before December 21 of each year, financial projections (A) supplementing and superseding the financial projections for such period referred to in Section 3.2(x), prepared on a monthly basis, for the immediately succeeding Fiscal Year for the Lessee and its Subsidiaries and (B) on or before the date that is 45 days after the last day of each fiscal quarter of the Lessee, financial projections supplementing and superseding the financial projections for such period referred to in Section 3.2(x), prepared on a monthly basis, for each remaining quarterly period in such Fiscal Year, all such financial projections to be prepared on a reasonable basis and in good faith, and to be based on assumptions believed by the Lessee to be reasonable at the time made and from the best information then reasonably available to the Lessee; (f) Promptly (and, in any event, within five (5) Domestic Business Days) after the Lessee becomes aware of the occurrence of any Lease Default, a certificate of the chief financial officer of the Lessee setting forth the details thereof and the action which the Lessee is taking or proposes to take with respect thereto; (g) Promptly upon the mailing thereof to the shareholders of the Lessee generally, copies of all financial statements, reports and proxy statements so mailed; (h) Promptly upon the filing thereof, copies of all registration statements and annual, quarterly or monthly reports which the Lessee shall have filed with the Securities and Exchange Commission; (i) If and when any member of the Controlled Group (i)gives or is required to give notice to the PBGC of any reportable event (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii)receives notice of complete or partial withdrawal liability under Title IV of ERISA, a copy of such notice; or (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, a copy of such notice; and (j) From time to time such additional information regarding the financial position or business of the Lessee and its Subsidiaries as the Administrative Agent, at the request of any Holder or Lender, may reasonably request. 2 3. Amendment to Existing Section 5.4: Section 5.4 of the Participation Agreement (Adjusted Total Debt/Adjusted Total Capital Ratio) is hereby amended by deleting Section 5.4 in its entirety and substituting in its place the following revised Section 5.4: 5.4 Tangible Net Worth Lessee shall not permit Tangible Net Worth of Lessee and its Subsidiaries at any time to be less than $20,000,000. 4. Amendment to Existing Section 5.5: Section 5.5 of the Participation Agreement (Fixed Charge Coverage Ratio) is hereby amended by deleting Section 5.5 in its entirety and substituting in its place the following revised Section 5.5: 5.5 Fixed Charge Coverage Ratio. Lessee shall not permit the Fixed Charge Coverage Ratio for the twelve fiscal month period ending on each date set forth below to be less than the amount set forth opposite such date: Trailing Twelve Fiscal Month Period Ending Fixed Charge Coverage Ratio March 31, 2002 0.56 April 30, 2002 0.58 May 31, 2002 0.59 June 30, 2002 0.57 July 31, 2002 0.55 August 31, 2002 0.54 September 30, 2002 0.51 October 31, 2002 0.50 November, 30, 2002 0.53 December 31, 2002 and thereafter until March 31, 2003 0.55 March 31, 2003 and thereafter until June 30, 2003 0.58 June 30, 2003 and thereafter until September 30, 2003 0.58 September 30, 2003 and thereafter until December 31, 2003 0.57 December 31, 2003 and thereafter 0.70 provided that the financial covenant set forth in this Section 5.5 for each trailing twelve fiscal month period ending on the last day of each fiscal month after December 31, 2003 shall be reset at a level based on 80% of the monthly projections most recently prepared and timely delivered by the Lessee pursuant to Section 5.1(e) hereof with respect to such period. 5.5 Amendment to Existing Section 5.6: Section 5.6 of the Participation Agreement (Total Debt/EBITDA Ratio) is hereby amended by deleting Section 5.6 in its entirety and substituting in its place the following revised Section 5.6: 5.6 Minimum Restaurants Generating Positive Operating Income. As of the last day of each fiscal month of Lessee, Lessee shall not permit the number of Restaurant locations which generate positive Cash Flow From Restaurant Operations for the twelve fiscal month period ending on each such date, to be less than the lesser of: (i) 150 Restaurant locations, or (ii) the smallest whole number equal to seventy percent (70%) of all Restaurant locations. 6. Amendment to Existing Section 5.7: Section 5.7 of the Participation Agreement (Total Senior Debt/EBITDA Ratio) is hereby amended by deleting Section 5.7 in its entirety and substituting in its place the following revised Section 5.7: 5.7 Maximum Senior Debt to EBITDA Ratio. Lessee shall not permit the Senior Debt to EBITDA Ratio, for the twelve month period ending on that last day of any month, to be greater than 2.25. 7. Amendment to Existing Section 5.7A: Section 5.7A of the Participation Agreement (Minimum EBITDA) is hereby amended by deleting Section 5.7A in its entirety and substituting in its place the following revised Section 5.7A: 3 5.7A Lessee EBITDA. Lessee shall not permit its EBITDA for the twelve fiscal month period ending on each date set forth below to be less than the amount set forth opposite such date: Trailing Twelve Fiscal Month Period Ending Lessee's EBITDA March 31, 2002 $24,218,000 April 30, 2002 $24,563,000 May 31, 2002 $25,000,000 June 30, 2002 $23,975,000 July 31, 2002 $24,150,000 August 31, 2002 $24,200,000 September 30, 2002 $24,250,000 October 31, 2002 $24,325,000 November, 30, 2002 $25,275,000 December 31, 2002 and thereafter until March 31, 2003 $26,400,000 March 31, 2003 and thereafter until June 30, 2003 $26,800,000 June 30, 2003 and thereafter until September 30, 2003 $27,825,000 September 30, 2003 and thereafter until December 31, 2003 $29,225,000 December 31, 2003 and thereafter $30,740,000 provided that the financial covenant set forth in this Section 5.7A for each trailing twelve fiscal month period ending on the last day of each fiscal month after December 31, 2003 shall be reset at a level based on 80% of the monthly projections most recently prepared and timely delivered by the Lessee pursuant to Section 5.1(e) hereof with respect to such period. 8. Amendment to Existing 5.7: Section 5.7 of the Participation Agreement is hereby amended by adding to the Participation Agreement, immediately following amended Section 5.7A thereof, new Sections 5.7B and 5.7C as follows: 5.7B Maximum Repurchase Payments. Lessee shall not pay or permit its Subsidiaries to pay, in the aggregate, more than $1,050,000 during any Fiscal Year to any limited partner of any Non-Wholly Owned Subsidiary in connection with the purchase of the Capital Stock in the Lessee or any of its Subsidiaries owned by such limited partner. 5.7C Maximum Pre-Opening Costs. Lessee shall not incur, or permit any of its Subsidiaries to incur, Pre-Opening Costs in any four consecutive fiscal quarters of Lessee, tested quarterly beginning with the fiscal quarter ending December 30, 2001, in excess of the amount set forth below for the applicable period set forth below: Four Fiscal Quarter Period Ending Maximum Pre-Opening Costs March 31, 2002 $200,000 June 30, 2002 $400,000 September 30, 2002 $900,000 December 31, 2002 $2,145,000 March 31, 2003 $3,300,000 June 30, 2003 $4,600,000 September 30, 2003 $5,450,000 December 31, 2003 $4,600,000 March 31, 2004 and thereafter $5,130,000 provided that the financial covenant set forth in this Section 5.7C for each trailing twelve fiscal month period ending on the last day of each fiscal month after December 31, 2003 shall be reset at a level based on 80% of the monthly projections most recently prepared and timely delivered by the Lessee pursuant to Section 5.1(e) hereof with respect to such period. 9. Amendment to Existing Section 5.8: Section 5.8 of the Participation Agreement (Negative Pledge) is hereby amended by deleting Section 5.8 in its entirety and substituting in its place the following revised Section 5.8: 4 5.8 Negative Pledge. The Lessee will not, nor will the Lessee permit any Subsidiary to, create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (i) the Morgan Liens, (ii) Liens on the Hops Marks to the extent necessary to reflect and permit the licensing thereof to the SPV under the Hops Marks License, (iii) those Liens, if any, described on Schedule 5.8, concerning existing Debt of the Lessee, to be set forth and described more particularly therein, together with any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any such Lien, provided that such Debt is not secured by any additional assets, and the amount of such Debt secured by any such Lien is not increased; (iv) Liens incidental to the conduct of its business or the ownership of its Properties which (A) do not secure Debt and (B) do not in the aggregate materially detract from the value of its Properties or materially impair the use thereof or the operation of its business, including, without limitation, easements, rights of way, restrictive covenants, zoning and other similar restrictions on real property; (v) materialmen's, mechanics', warehousemen's, carriers', landlords' and other similar statutory Liens which secure Debt or other obligations that are not past due, or, if past due are being contested in good faith by the Lessee or the appropriate Subsidiary by appropriate proceedings; (vi) Liens for taxes not delinquent or taxes being contested in good faith and by appropriate proceedings; (vii) pledges or deposits in connection with worker's compensation, unemployment insurance and other social security legislation; (viii) deposits to secure performance of bids, trade contracts, leases, statutory obligations (to the extent not excepted elsewhere herein); (ix) grants of security and rights of setoff in deposit accounts, securities and other properties held at banks or financial institutions to secure the payment or reimbursement under overdraft, letter of credit, acceptance and other credit facilities; (x) rights of setoff, banker's liens and other similar rights arising solely by operation of law; (xi) Purchase Money Liens, provided that the Purchase Money Debt secured thereby is permitted under Section 5.20(viii); (xii) rights of lessors under Capital Leases, provided that the Debt secured thereby is permitted under Section 5.20(viii); (xiii) rights of lessors in respect of Properties leased to the Lessee or its Subsidiaries under operating leases, to the extent permitted under Section 5.34; and (xiv) Liens granted pursuant to or permitted by the Credit Agreement (as amended and restated to date). 10. Amendment to Existing Section 5.11:Section 5.11 of the Participation Agreement (Consolidations, Mergers and Sales of Assets) is hereby amended by deleting Section 5.11 in its entirety and substituting in its place the following revised Section 5.11: 5.11 Consolidations, Mergers and Sales of Assets. The Lessee will not wind-up, liquidate or dissolve itself (or permit or suffer any thereof) or merge, consolidate or amalgamate with any Person, convey, sell, lease or sublease, transfer or otherwise dispose of, whether in one transaction or a series of related transactions, all or any part of its business, property or assets, whether now owned or hereafter acquired, or (agree to do any of the foregoing) or purchase or otherwise acquire, whether in one transaction or a series of related transactions, all or substantially all of the assets of any Person (or any division thereof) (or agree to do any of the foregoing), or permit any of its Subsidiaries to do any of the foregoing; provided, however, that: (i) any Dormant Subsidiary or any Non-Wholly Owned Subsidiary may be wound-up, liquidated or dissolved, so long as the proceeds of any such liquidation or dissolution and any remaining assets of such Dormant Subsidiary or Non-Wholly Owned Subsidiary are promptly transferred to the Lessee or any of its Wholly Owned Subsidiaries in connection therewith; (ii) any Subsidiary of the Lessee may be merged into the Lessee or another such Wholly Owned Subsidiary of the Lessee, other than a Liquor License Subsidiary or a Dormant Subsidiary, consolidate with another such Wholly Owned Subsidiary of the Lessee, other than a Liquor License Subsidiary or a Dormant Subsidiary, or sell assets to the Lessee or another Wholly Owned Subsidiary of the Lessee, other than a Liquor License Subsidiary or a Dormant Subsidiary, so long as (A) the Lessee gives the Administrative Agent (I) at least 15 days' prior written notice of any such merger or consolidation, or (II) at least 10 days' prior written notice of any such sale of assets, (B) no Lease Default or Lease Event of Default shall have occurred and be continuing either before or after giving effect to such transaction, (C) the Owner Trustee's rights in any Collateral, including, without limitation, the existence, perfection and priority of any Lien thereon, are not adversely affected by such merger, consolidation or sale of assets (D) and the Lessee complies with Section 14(r) of the Lease; and (iii) the Lessee and its Subsidiaries (other than the Liquor License Subsidiaries and the Dormant Subsidiaries) may (A) sell Inventory in the ordinary course of business, (B) dispose of obsolete or worn-out equipment in the ordinary course of business, (C) conduct Voluntary Store Closings provided that the Lessee complies with Section 14(q) of the Lease, (D) consummate the Permitted Affiliate Transaction, (E) sell or otherwise dispose of other property or assets as provided for in Section 6.02(c)(iii)E of the Credit Agreement or Section 6.02(c)(iii)F of the Credit Agreement provided that the Lessee complies with Section 14(r) of the Lease. 11. Amendment to Existing Section 5.12: Section 5.12 of the Participation Agreement (Compliance with Laws; Payment of Taxes) is hereby amended by deleting Section 5.12 in its entirety and substituting in its place the following revised Section 5.12: 5 5.12 Compliance with Laws; Payment of Taxes. The Lessee will, and will cause each of its Subsidiaries and each member of the Controlled Group to, comply in all material respects with applicable laws (including but not limited to ERISA), regulations and similar requirements of governmental authorities (including but not limited to PBGC), except where the necessity of such compliance is being contested in good faith through appropriate proceedings and except for the tax returns and material reports identified on Schedule 5.01(k)(i) to the Credit Agreement, for which the Lessee shall have 60 days after the Eighth Amendment Effective Date to file such tax returns and material reports. The Lessee will, and will cause each of its Subsidiaries to, pay promptly when due all taxes, assessments, governmental charges, claims for labor, supplies, rent and other obligations which, if unpaid, might become a Lien against the Property of the Lessee or any Subsidiary, except liabilities being contested in good faith and against which, if requested by the Administrative Agent, the Lessee will set up reserves in accordance with GAAP and except for Permitted Deferred Taxes. In respect of the foregoing, the Lessee acknowledges that the Administrative Agent may or, at the request of the Lenders, the Administrative Agent shall conduct (or cause to be conducted by one or more representatives, including certified public accountants) a periodic audit of the Lessee's and its Subsidiaries' payment of all property taxes, sales and use taxes, payroll taxes, and income taxes as and when due and payable (subject to the items listed on Schedule 5.01(k)(i) of the Credit Agreement and Permitted Deferred Taxes) to federal, state or local governmental authorities, all at the Lessee's expense. 12. Amendment to Existing Section 5.19(b): Section 5.19(b) of the Participation Agreement (Capital Expenditures) is hereby amended by deleting Section 5.19(b) in its entirety and substituting in its place the following revised Section 5.19(b): (b) Capital Expenditures. Make or commit or agree to make any Capital Expenditures that would cause the aggregate amount of all such Capital Expenditures made by Lessee and its Subsidiaries to exceed the amount set forth below opposite the applicable Fiscal Year: Fiscal Year Maximum Capital Expenditures 2002 $19,334,000 2003 $22,494,000 2004 and each $28,697,000 Fiscal Year thereafter 13. Amendment to Existing Section 5.19(k): Section 5.19(k) of the Participation Agreement (Advances to Affiliates) is hereby amended by deleting Section 5.19(k) in its entirety and substituting in its place the following revised Section 5.19(k): (k) Advances to Affiliates. Continue to hold Debt evidencing loans and advances to Affiliates made prior to the Eighth Amendment Effective Date, to the extent disclosed on Schedule 5.19K, provided (i) all such loans and advances shall have been repaid in full on or prior to the Basic Term Expiration Date and (ii) no new loans and advances to Affiliates may be made on or subsequent to the Eighth Amendment Date.; provided, further, that so long as no Event of Default has occurred and is continuing and so long as approved by the Board of Directors of the Lessee, Lessee may enter into the Permitted Affiliate Transaction and may cancel any Subordinated Notes in connection with the payment of the New Dupree Note. 14. Amendment to Existing Section 5.19: Section 5.19 of the Participation Agreement is hereby amended by adding the following new Section 5.19(m): (m) Permitted Investments. Make investments in any of the following: (i) marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within six months from the date of acquisition thereof, (ii) commercial paper, maturing not more than 270 days after the date of issue rated P-1 by Moody's or A-1 by Standard & Poor's; (iii) certificates of deposit maturing not more than one year after the date of issue, issued by commercial banking institutions and money market or demand deposit accounts maintained at commercial banking institutions, each of which is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $500,000,000; (iv) repurchase agreements having maturities of not more than 90 days from the date of acquisition which are entered into with major money center banks included in the commercial banking institutions described in clause (iii) above, (v) money market accounts maintained with mutual funds having assets in excess of $2,500,000,000, (vi) tax exempt securities rated A or better by Moody's or A+ or better by Standard & Poor's, (vii) investments permitted pursuant to Section 2.05(c)(v) of the Credit Agreement, (viii) investments arising from Permitted Intercompany Advances and from Debt of Lessee to Excluded Subsidiaries, (ix) investments made in connection with the operation of a Restaurant or purchases of goods or services, in each case in the ordinary course of business, (x) Capital Expenditures, to the extent otherwise permitted under Section 5.19(b), (xi) Existing Affiliate Advances, (xii) investments arising from the Tender Offer, (xiii) investments arising from escrow deposits for the payment of taxes, rents, utilities, insurance or like matters in the ordinary course of business of Lessee and its Subsidiaries, (xiv) deposits of cash in demand deposit accounts of banks in the ordinary course of its business in furtherance of any Concentration Account Agreement, and endorsement of checks, drafts or other 6 instruments in connection therewith, (xv) loans and advances to employees and officers of Lessee and its Subsidiaries from time to time in the ordinary course of business for travel expenses, moving expenses, and signing bonuses, (xvi) other loans to employees and officers of Lessee and its Subsidiaries from time to time in the ordinary course of business, other than Existing Affiliate Advances and Investments described in paragraph (xvii) of this definition, in an aggregate outstanding amount not in excess of $100,000, (xvii) investments in connection with the plans identified on Schedule 5.01(e) to the Credit Agreement, (xviii) Investments permitted pursuant to Section 6.02(c)(ii) of the Credit Agreement, and (xix) investments not otherwise described in the foregoing clauses of this definition in an aggregate outstanding amount not in excess of $100,000. 15. Amendment to Existing Section 5.20.Section 5.20 of the Participation Agreement (Debt) is hereby amended by deleting Section 5.20 in its entirety and substituting in its place the following revised Section 5.20: 5.20 Debt. The Lessee will not create, incur, assume, guarantee or suffer to exist, or otherwise become or remain liable with respect to any Indebtedness other than Permitted Indebtedness. 16. Amendment to Existing Section 5.21. Section 5.21 of the Participation Agreement (Dividends and Distributions) is hereby amended by deleting Section 5.21 in its entirety and substituting in its place the following revised Section 5.21: 5.21 Dividends and Distributions. The Lessee will not, nor will the Lessee permit any Subsidiary to, (i) pay any cash dividend; (ii) make any capital distribution; (iii) redeem, repurchase or retire for cash any Capital Stock provided, however, that, notwithstanding the foregoing, so long as no Default or Event of Default is occurring and is continuing, each Subsidiary may pay dividends and may make other distributions on any Capital Stock of such Subsidiary which is owned by the Lessee or another Consolidated Subsidiary which is a Subsidiary Guarantor. 17. Amendment to Existing Section 5.22: Section 5.22 of the Participation Agreement (Transactions With Affiliates) is hereby amended by deleting Section 5.22 in its entirety and substituting in its place the following revised Section 5.22: 5.22 Transactions With Affiliates. The Lessee shall not enter into, renew, extend or be a party to any transaction or series of related transactions (including, without limitation, the purchase, sale, lease, transfer or exchange of property or assets of any kind or the rendering of services of any kind) with any of its Affiliates, except (i) in the ordinary course of business in a manner and to an extent consistent with past practice and necessary or desirable for the prudent operation of its business, for fair consideration and on terms no less favorable to Lessee or such Subsidiary than would be obtainable in a comparable arm's length transaction with a Person that is not an Affiliate thereof, (ii) in connection with the Permitted Affiliate Transaction, the Permitted Convertible Debenture Payments, Permitted Intercompany Advances and payments in respect of Indebtedness permitted pursuant to clauses (j) and (o) of the definition of "Permitted Indebtedness" in the Credit Agreement, (iii) with the consent of the Administrative Agent (which consent shall not be unreasonably withheld), the cancellation of the Morgan Documents (as defined in the Credit Agreement) and the payments made to effect such cancellation and release, and (iv) royalty and management fees, solely to the extent permitted by Section 6.02(h)(vi) of the Credit Agreement and to the extent consistent with past practices. 18. Amendment to Existing Section 5.23: Section 5.23 of the Participation Agreement (Subsidiary Guaranties) is hereby amended by deleting Section 5.23, which was labeled "5.25 Subsidiaries" in the Seventh Amendment to Participation Agreement dated as of April 2, 2001, in its entirety and substituting in its place the following revised Section 5.23: 5.23 Subsidiaries. Without the prior written consent of the Lenders, such consent not to be unreasonably withheld, the Lessee will not, and will not permit any Subsidiary to, create or acquire any Subsidiary subsequent to the Eighth Amendment Effective Date. 19. Amendment to Existing Section 5.24: Section 5.24 of the Participation Agreement (Stock Purchases, Etc.) is hereby amended by deleting Section 5.24 in its entirety and substituting in its place the following revised Section 5.24: 5.24 Stock Purchases, Etc. The Lessee will not, and will not permit any Consolidated Subsidiary of the Lessee, to purchase any Capital Stock of the Lessee, whether in a "spot" transaction, pursuant to an Equity Forward Contract or otherwise; nor will the Lessee issue any Redeemable Preferred Stock subsequent to the Eighth Amendment Effective Date without the prior written consent of the Lenders, such consent not to be unreasonably withheld; nor will the Lessee create any new class of, or issue any new voting Capital Stock, or warrants to acquire new voting Capital Stock or redeem any capital stock, subsequent to the Eighth Amendment Effective Date without the prior written consent of the Lenders, such consent not to be unreasonably withheld; provided, however, that the Lessee shall not in any case redeem more than $1,000,0000 of capital stock in the aggregate. 7 20. Amendment to Existing Section 5.25: Section 5.25 of the Participation Agreement (No Prepayment of Senior Notes.) is hereby amended by deleting Section 5.25 in its entirety and substituting in its place the following revised Section 5.25: 5.25. No Prepayment of Senior Notes. The Lessee will not prepay, and will not permit any Subsidiary to prepay, the principal amount of any of the Senior Notes, heretofore issued by the Lessee, nor will Lessee repurchase or permit any Subsidiary or Affiliate to repurchase, such Notes; provided, that the Lessee shall not prepay nor permit any Subsidiary to prepay, the principal amount of any of the Senior Notes, heretofore issued by the Lessee, nor will Lessee repurchase or permit any Subsidiary or Affiliate to repurchase at any time an Event of Default has occurred and is continuing under the Credit Agreement; provided, further, that this Section 5.25 shall have no force and effect so long as Section 5.01(v) of the Credit Agreement and the Side Letter (as defined in the Credit Agreement) are in effect. 21. Amendment to Existing Section 5.26: Section 5.26 of the Participation Agreement (Stock Purchases, Etc.) is hereby amended by deleting Section 5.26 in its entirety and substituting in its place the following revised Section 5.26: 5.26. Subordinated Debt. The Lessee will not, and will not permit any Subsidiary to: (i) make any payment (whether of principal, interest, premium or otherwise) on any Subordinated Debt unless and except to the extent, if any, expressly permitted by the express, written terms of subordination governing such Subordination Debt as then approved in writing by the Required Lenders; or (ii), in any event, make any prepayment of any part or all of any Subordinated Debt, or otherwise repurchase, redeem or retire any instrument evidencing any Subordinated Debt prior to maturity; or enter into any agreement which could in any way be construed to amend, modify, alter or terminate any one or more instruments or agreements evidencing or relating to any Subordinated Debt; provided, that the Lessee shall not make any payments or prepayments on any Subordinated Debt at any time an Event of Default has occurred and is continuing under the Credit Agreement; provided, further, that this Section 5.26 shall have no force and effect so long as Section 5.01(v) of the Credit Agreement and the Side Letter (as defined in the Credit Agreement) are in effect. 22. Amendment to Existing Section 5.34: Section 5.34 of the Participation Agreement (Operating Leases) is hereby amended by deleting Section 5.34 in its entirety and substituting in its place the following revised Section 5.34: 5.34 Operating Leases. The Lessee shall not create, incur or suffer to exist any obligations as lessee for the payment of rent for any real or personal property under leases or agreements to lease other than (A) Capitalized Lease Obligations which would not cause the aggregate amount of all obligations under Capital Leases entered into after the Eighth Amendment Effective Date owing by Lessee and its Subsidiaries in any Fiscal Year to exceed the amounts set forth in subsection (b) of Section 5.19, and (B) Operating Lease Obligations which would not cause the aggregate amount of all Operating Lease Obligations (other than the portion of the Operating Lease Obligations which is based on the level of sales of Lessee or the applicable Subsidiary) owing by Lessee and its Subsidiaries to exceed $25,500,000 during any Fiscal Year. 23. Amendment to Existing Section 5.35: Section 5.35 of the Participation Agreement (Real Property) is hereby amended by deleting Section 5.35 in its entirety and substituting in its place the following revised Section 5.35: 5.35 [INTENTIONALLY OMMITTED] 24. Amendment to Existing Section 5.37: Section 5.37 of the Participation Agreement (Sales Tax) is hereby amended by deleting Section 5.37 in its entirety and substituting in its place the following revised Section 5.37: 5.37 Sales Tax. Effective beginning with the Fiscal Quarter ending closest to March 31, 2002, the Lessee will not, and will not permit its Subsidiaries, to have its and their total sales taxes (including late charges, penalties and interest) exceed at any time Ten Million Dollars ($10,000,000). 25. Amendment to Appendix A: Appendix A of the Participation Agreement is amended by adding the following definitions to Appendix A in the proper alphabetical order: "Capital Expenditures" means, with respect to any Person for any period, the sum of (i) the aggregate of all expenditures paid or payable by such Person and its Subsidiaries during such period that in accordance with GAAP are or should be included in "property, plant equipment" or similar fixed asset account on its balance sheet, whether such expenditures are paid in cash or financed and including all Capitalized Lease Obligations paid or payable during such period, and (ii) to the extent not covered by clause (i) above, the aggregate of all expenditures by such Person and its Subsidiaries to acquire by purchase or otherwise the business or fixed assets of, or the Capital Stock of, any other Person, excluding in each case, all expenditures made in connection with the repair, replacement or restoration of a Restaurant which is the subject of the loss, destruction, or taking by condemnation, to the extent permitted by Section 2.05(c)(v) of the Credit Agreement. "Cash Flow From Restaurant Operations" means, for any period and with respect to any Restaurant location, the earnings before interest, taxes, depreciation, amortization, the non-cash component of "operating lease expenses" (as such term is defined under GAAP), Pre-Opening Costs, and allocable general and administrative expenses of such Restaurant location for such period, which shall be calculated as consistently accounted for by Lessee and its Subsidiaries in their internal financial accounts and reports. 8 "Concentration Account Agreement" has the meaning set forth in Section 7.01(a) of the Credit Agreement. "Contingent Obligation" means, with respect to any Person, any obligation of such Person guaranteeing or intended to guarantee any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, (i) the direct or indirect guaranty, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of a primary obligor, (ii) the obligation to make take-or-pay or similar payments, if required, regardless of nonperformance by any other party or parties to an agreement, (iii) any obligation of such Person, whether or not contingent, (A) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (B) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (C) to purchase property, assets, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (D) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof, provided, however, that the term "Contingent Obligation" shall not include any products warranties extended in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation with respect to which such Contingent Obligation is made (or, if less, the maximum amount of such primary obligation for which such Person may be liable pursuant to the terms of the instrument evidencing such Contingent Obligation) or, if not stated or determinable, the maximum reasonably anticipated liability with respect thereto (assuming such Person is required to perform thereunder), as determined by such Person in good faith. "Disposition" means any transaction, or series of related transactions, pursuant to which Lessee or any of its Subsidiaries sells, assigns, transfers or otherwise disposes of any property or assets (whether now owned or hereafter acquired) to any other Person, in each case whether or not the consideration therefor consists of cash, securities or other assets owned by the acquiring Person, excluding any sales of inventory in the ordinary course of business on ordinary business terms, sales or other dispositions of Permitted Investments (as such term is defined in the Credit Agreement), or sales or other dispositions permitted by Section 6.02(c)(ii)(B) of the Credit Agreement and closings of Restaurants owned or operated by Lessee or any of its Subsidiaries, to the extent that such closings do not involve the transfer or other disposition of the Restaurant or the assets owned and/or operated by Lessee or the applicable Subsidiary in connection with such Restaurant. "Dormant Subsidiaries" means Avado Holding Corp., a Delaware corporation, Avado Operating Corp., a Georgia corporation, and Avado SCP VIII, Inc., an Oregon corporation. "Eighth Amendment Effective Date" shall mean, March 25, 2002. "ERISA Affiliate" means, with respect to any Person, any trade or business (whether or not incorporated) which is a member of a group of which such Person is a member and which would be deemed to be a "controlled group" within the meaning of Sections 414(b), (c), (m) and (o) of the Internal Revenue Code. "Excluded Subsidiaries" means, individually and collectively, the Liquor License Subsidiaries, the Dormant Subsidiaries and the Non-Wholly Owned Subsidiaries. "Existing Affiliate Advances" means all Indebtedness evidencing loans to Affiliates, employees and officers of the Lessee, made prior to the date hereof, to the extent disclosed on, and in an amount not in excess of the amount set forth on, Schedule E to the Credit Agreement, and extensions and renewals thereof. "Existing Notes" means those certain promissory notes (other than the New DuPree Note) executed prior to the Eighth Amendment Effective Date by Tom E. DuPree, Jr., in favor of the Lessee. "Hedging Agreement" means any and all transactions, agreements, or documents now existing or hereafter entered into by Lessee or any of its Subsidiaries, which provide for an interest rate, credit, commodity or equity swap, cap, floor, collar, forward foreign exchange transaction, currency swap, cross currency rate swap, currency option, or any combination of, or option with respect to, these or similar transactions, for the purpose of hedging Lessee's or its Subsidiaries' exposure to fluctuations in interest or exchange rates, loan, credit exchange, security or currency valuations or commodity prices. "Intercompany Advance" means loans made in the ordinary course of business from the Lessee to one of the Lessee's Subsidiaries or from one of the Lessee's Subsidiaries to the Lessee or another of the Lessee's Subsidiaries. "Inventory" means all of each of the Loan Parties' now owned and/or hereafter acquired right, title, and interest with respect to inventory, including goods held for sale and/or lease or to be furnished under a contract of service, goods that are leased by a Loan Party as lessor, goods that are furnished by a Loan Party under a contract of service, and raw materials, work in process, and/or materials used and/or consumed in such Loan Party's business. 9 "Investment" means, with respect to any Person, any investment by such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances, or capital contributions (excluding (a) commission, travel, and similar advances to officers and employees of such Person made in the ordinary course of business, and (b) bona fide accounts arising from the sale of goods or rendition of services in the ordinary course of business consistent with past practice), purchases or other acquisitions for consideration of Indebtedness or Capital Stock of such other Person (including without limitation an acquisition of Indebtedness pursuant to the Tender Offer), and any other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "Lender Group" has the meaning set forth in the introductory paragraph to the Credit Agreement. "Lessee's Business Operation Plan" shall mean that certain business plan dated as of December 12, 2001, delivered by the Lessee to the Administrative Agent and attached hereto as Schedule A. "Lessee's EBITDA" means, with respect to Lessee and its Subsidiaries for any period, the EBITDA of Lessee and its Subsidiaries for such period, minus the EBITDA of McCormick & Schmick Holding Corp. and its Subsidiaries during such period (if any). "Initial Letter of Credit" the irrevocable standby letter of credit, in the face amount of $600,000, issued for the account of the Lessee by a commercial bank acceptable to the Administrative Agent in its sole discretion and naming the Administrative Agent on behalf of the Lessor beneficiary thereof, and under which the Administrative Agent may draw, upon the occurrence and during the continuation of an Event of Default, substantially in the form and substance satisfactory to the Administrative Agent in its sole discretion. Any draws on the Initial Letter of Credit due to an Event of Default caused by a failure of the Lessee to make a Scheduled Rent payment shall be applied to outstanding Rent in inverse order of maturity and shall not cure the Event of Default caused by a failure of the Lessee to make a Scheduled Rent payment. "Letter of Credit" means one or more irrevocable standby letters of credit, each in the face amount of $200,000, issued for the account of the Lessee by a commercial bank acceptable to the Administrative Agent in its sole discretion and naming the Administrative Agent on behalf of the Lessor beneficiary thereof, and under which the Administrative Agent may draw, upon the occurrence and during the continuation of an Event of Default, all substantially in the form and substance satisfactory to the Administrative Agent in its sole discretion. Any draws on any Letter of Credit due to an Event of Default caused by a failure of the Lessee to make a Scheduled Rent payment shall be applied to outstanding Rent in inverse order of maturity and shall not cure the Event of Default caused by a failure of the Lessee to make a Scheduled Rent payment. "Letter of Credit Obligation" means (i) the Lessee's obligation to pay $600,000 with respect to the Initial Letter of Credit and (ii) the Lessee's obligation to pay an additional $200,000 per month plus applicable taxes, commencing on April 1, 2002, in connection with the Lease. "Liquor License Subsidiaries" means, individually and collectively, Don Pablo's TX Liquor, Inc., Don Pablos of Baltimore County, Inc., a Maryland corporation, Don Pablos of Howard County, Inc., a Maryland corporation, Don Pablos of Prince George's County, Inc., a Maryland corporation, SMAS, Inc., a Texas corporation, and any other Subsidiary of the Lessee which does not own any assets or property other than a liquor license. "Loan Documents" means the Credit Agreement, the Acknowledgment Agreement, the Guaranties, the Security Agreements, the Side Letter, the Transferee Side Letter, the Pledge Agreements, the Former Mortgages, the New Mortgages, the Mortgage Assignments, the UCC Assignments, the Mortgage Amendments, the Trademark Assignment, the Trademark Security Agreements, the Estoppel Letter, the Concentration Account Agreement, the Credit Card Agreements, and all other agreements, instruments, and other documents executed and delivered pursuant hereto or thereto or otherwise evidencing or securing any Loan, as each of the forgoing terms is defined in the Credit Agreement. "Loan Party" shall have the meaning assigned to such term in the Credit Agreement. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA for which a Loan Party or any ERISA Affiliate of such Loan Party has contributed to, or has been obligated to contribute to, at any time during the preceding six (6) years. "Net Income" means, with respect to any Person for any period, the net income (loss) of such Person for such period, determined in accordance with GAAP. "Net Interest Expense" means, with respect to any Person for any period, gross interest expense of such Person for such period determined in conformity with GAAP (including, without limitation, interest expense paid to Affiliates of such Person, and accrued interest expense in connection with the TECONS), less (i) the sum of (A) interest income for such period and (B) gains for such period on Hedging Agreements (to the extent not included in interest income above and to the extent not deducted in the calculation of such gross interest expense), plus (ii) the sum of (A) losses for such period on Hedging Agreements (to the extent not included in such gross interest expense) and (B) the upfront costs or fees for such period associated with Hedging Agreements (to the extent not included in gross interest expense), each determined in accordance with GAAP for such Person. 10 "New DuPree Note" means that certain promissory note, dated as of the Eighth Amendment Effective Date, executed by Tom E. DuPree, Jr. in favor of the Lessee, in an aggregate amount equal to $14,130,472.99 as contemplated by the Permitted Affiliate Transaction. "Non-Wholly Owned Subsidiaries" means, individually and collectively, Hops of Louisiana, Ltd., a Florida limited partnership, Hops of the Rockies, Ltd., a Florida limited partnership, Hops of the Rockies II, Ltd., a Florida limited partnership, Hops of Cherry Creek, Ltd., a Florida limited partnership, Hops of Colorado Springs, Ltd., a Florida limited partnership, Hops of Connecticut, Ltd., a Florida limited partnership, Hops of Minnesota, Ltd., a Florida limited partnership, Hops of Virginia, Ltd., a Florida limited partnership, Hops of Virginia II, Ltd., a Florida limited partnership, Hops of Baltimore County, LLC, a Florida limited liability company, Hops of Greater Boston, Ltd., a Florida limited partnership, and Hops of Rhode Island, LLC, a Rhode Island limited liability company and any other Subsidiary of Lessee which is not a Wholly Owned Subsidiary of Lessee, a Liquor License Subsidiary or a Dormant Subsidiary. "Operating Lease Obligations" means all obligations for the payment of rent for any real or personal property under leases or agreements to lease, other than Capitalized Lease Obligations. "Permitted Affiliate Transaction" means the proposed transaction pursuant to which (a) the real property securing the Existing Notes will be sold, (b) the proceeds of such sale (in an amount equal to the lesser of the amount of such proceeds and the amount which is necessary to purchase Senior Subordinated Notes with a face value equal to the face amount of the New DuPree Note) will be used to purchase a portion of the Senior Subordinated Notes, which will be pledged to secure the New DuPree Note, (c) the New DuPree Note will be executed and delivered by Tom E. DuPree, Jr. to Lessee, and (d) the Existing Notes will be either terminated or exchanged for the New DuPree Note. "Permitted Convertible Debenture Payments" means those payments that are permitted pursuant to the terms of paragraph 1 of the Side Letter (as defined in the Credit Agreement). "Permitted Deferred Taxes" means with respect to any date (each such date, a "Determination Date") (A) before the date that is 90 days after the Eighth Amendment Effective Date, taxes which are set forth on Schedule 5.01(k)(ii) of the Credit Agreement in an aggregate outstanding amount as of such Determination Date which is not more than $9,741,000, (B) on or after the date that is 90 days after the Eighth Amendment effective date and before the date that is 180 days after the Eighth Amendment Effective Date, penalties with respect to sales taxes set forth on Schedule 5.01(k)(iii) of the Credit Agreement in an aggregate outstanding amount as of such Determination Date which is not more than $2,100,000, and (C) as of any Determination Date, any other taxes, interest thereon and/or penalties in an aggregate outstanding amount as of such Determination Date which is not more than $250,000. "Permitted Indebtedness" means: (a) any Indebtedness owing to the Lender Group under the Loan Documents or pursuant to the Obligations (as defined in the Credit Agreement); (b) any other Indebtedness of Lessee or its Subsidiaries', other than the Liquor License Subsidiaries, listed on Schedule 6.02(b) of the Credit Agreement, including the extension of maturity, refinancing or modification of the terms thereof; provided, however, that (i) such extension, refinancing or modification is pursuant to terms that are not, in the aggregate, materially less favorable to Lessee or any of its Subsidiaries than the terms of the Indebtedness being extended, refinanced or modified and (ii) after giving effect to the extension, refinancing or modification, such Indebtedness is not greater than the amount of Indebtedness outstanding immediately prior to such extension, refinancing or modification; (c) Indebtedness of Lessee or its Subsidiaries', other than the Excluded Subsidiaries, evidenced by Capitalized Lease Obligations entered into in order to finance Capital Expenditures made by Lessee or such Subsidiaries in accordance with the provisions of Section 5.19(b), which indebtedness, when aggregated in the principal amount of all indebtedness incurred under this clause (c) and clause (d) of this definition, does not exceed the amounts set forth on Lessee's Business Operation Plan dated December 12, 2001; (d) Indebtedness of Lessee or its Subsidiaries', other than the Excluded Subsidiaries, permitted by clauses (e) and (l) of the definition of "Permitted Liens"; (e) Indebtedness of Lessee or its Subsidiaries resulting from endorsement of negotiable instruments received in the ordinary course of Lessee's or such Subsidiary's business; (f) Indebtedness of Lessee and its Subsidiaries resulting from (A) unpaid taxes, licenses and fees, to the extent that such Indebtedness is either (i) not yet due and payable, or (ii) the subject of a Permitted Protest, or (B) Permitted Deferred Taxes. (g) accrued and unfunded pension fund, workers compensation and other employee benefit plan obligations and liabilities, provided that such Indebtedness does not otherwise result in the existence of a Default or Event of Default; (h) Indebtedness in respect of guarantees by the Lessee or its Subsidiaries of Indebtedness permitted hereunder; 11 (i) Indebtedness arising under a Concentration Account Agreement (as defined in the Credit Agreement); (j) Indebtedness in connection with the plans identified on Schedule 5.01(e) of the Credit Agreement; (k) Indebtedness of Lessee or its Subsidiaries' resulting from Permitted Investments (as defined in the Credit Agreement); (l) Indebtedness secured by liens permitted under clause (j) of the definition of Permitted Liens (as defined in the Credit Agreement); (m) Indebtedness of Lessee or any of its Subsidiaries in connection with: beer, wine and liquor related bonds, utility bonds, construction bonds and other similar bonds or guaranties in respect of Restaurant operations or management in the ordinary course of business; (n) Indebtedness arising from Permitted Intercompany Advances; (o) Indebtedness of Lessee to Excluded Subsidiaries; (p) Indebtedness of Lessee and its Subsidiaries in connection with unpaid insurance premiums in the ordinary course of business; and (q) additional Indebtedness of Lessee or any of its Subsidiaries, other than the Excluded Subsidiaries, not expressly permitted by clauses (a) through (p) above, provided that the aggregate principal amount of the Indebtedness outstanding under this clause (q) shall not at any time exceed $750,000. "Permitted Intercompany Advance" means an Intercompany Advance, so long as (a) the Intercompany Subordination Agreement (as defined in the Credit Agreement) is in full force and effect with respect to the proposed Intercompany Advance, (b) if the Person acting as the borrower with respect to such Intercompany Advance is a Non-Wholly Owned Subsidiary and has not executed a Guaranty (as defined in the Credit Agreement) or a Security Agreement (as defined in the Credit Agreement), (i) the aggregate outstanding amount of all such Intercompany Advances to non-guarantors other than Liquor License Subsidiaries, as of the last day of each fiscal quarter of the Lessee, shall not be greater than the sum of (A) the aggregate outstanding amount of such Intercompany Advances as of December 30, 2001, and (B) $1,000,000, and (ii) the proceeds of each such Intercompany Advance are used solely for Capital Expenditures and other general business or operating expenses of a Restaurant operated by such Person, and (c) if the Person acting as the borrower with respect to such Intercompany Advance is a Liquor License Subsidiary and has not executed a Guaranty (as defined in the Credit Agreement) or a Security Agreement(as defined in the Credit Agreement), the proceeds of each such Intercompany Advance are used solely for the obligation of such Liquor License Subsidiary to pay for or maintain licenses and related expenses in respect thereof. "Permitted Protest" means the right of Lessee or any of its Subsidiaries to protest any Lien (other than any such Lien that secures the Obligations (as defined in the Credit Agreement) and Liens with respect to the interests of the Owner Trustee under the Lease and the Lease Supplement), taxes (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established by Lessee in such amount as is required under GAAP, (b) any such protest is instituted promptly and prosecuted diligently by Lessee or the applicable Subsidiary, in good faith, (c) the Agents (as defined in the Credit Agreement) are satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, and/or priority of any of the Lender Group's Liens on any material portion of the Collateral (as defined in the Credit Agreement), and (d) the Administrative Agent is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, and/or priority of any of the Liens with respect to the interests of the Owner Trustee under the Lease and the Lease Supplement. "Pre-Opening Costs" means costs incurred by Lessee or any of its Subsidiaries prior to opening a Restaurant location including wages and salaries, hourly employee recruiting and training, initial license fees, advertising, pre-opening parties, lease expense, food cost, utilities, meals, lodging, and travel plus the cost of hiring and training the management teams. "Provident Cash Management Agreement" means any Cash Management Services Contract between Provident Bank and the Lessee or one or more if its Subsidiaries existing prior to, on or subsequent to the Eighth Amendment Effective Date. "Senior Debt to EBITDA Ratio" means, for any period, the ratio of (a) the aggregate amount of all Obligations (as defined in the Credit Agreement) as of the last date of such period, to (b) Lessee's EBITDA for such period. "Senior Notes" means those certain 9.75% Senior Notes due June 2006 originally issued by Apple South, Inc., a Georgia corporation, as predecessor-in-interest to Lessee. "Senior Subordinated Notes" means those certain 11.75% Senior Subordinated Notes due June 2009 originally issued by Apple South, Inc., a Georgia corporation, as predecessor-in-interest to Lessee. 12 "Tangible Net Worth" means, with respect to any Person at any time, (i) the sum of the following accounts (or their equivalents) set forth on a consolidated balance sheet of such Person and its Subsidiaries prepared in accordance with GAAP: the par or stated value of all outstanding Capital Stock, capital surplus, retained earnings (or less accumulated deficits), and, with respect to the Lessee, the TECONS, less (ii) all intangibles included on the asset side of such balance sheet, including, without limitation, goodwill (including any amounts, however designated on such balance sheet, representing the excess of the purchase price paid for assets or stock acquired over the value assigned thereto on the books of such Person and its Subsidiaries), patents, trademarks, trade names, copyrights and similar intangibles. "Tender Offer" means the cash offer by the Lessee for the repurchase Indebtedness in accordance with the Side Letter. "Triggering Event" has the meaning specified therefor in Section 2.05(c)(v) of the Credit Agreement. "Wholly Owned Subsidiary" means, with respect to any Person at any date, any corporation, limited or general partnership, limited liability company, trust, association or other entity of which 100% of (A) the outstanding Capital Stock having (in the absence of contingencies) ordinary voting power to elect a majority of the board of directors of such corporation, (B) the interest in the capital or profits of such partnership or limited liability company or (C) the beneficial interest in such trust or estate is, at the time of determination, owned or controlled directly or indirectly through one or more intermediaries, by such Person. 26. Amendment to Appendix A: Appendix A of the Participation Agreement is amended (i) by deleting the definitions of "Capital Stock", "EBITDAR", "Renewal Rent Adjustment" and "Renewal Rent Adjustment Multiple" in their entirety and (ii) by deleting the definitions of "Credit Agreement", "EBITDA", "Fee Letter", "Fixed Charge Coverage Ratio", "GAAP", "Indebtedness", "Net Cash Proceeds", "Operative Agreements" "Renewal Rent" and "Subordinated Debt" in their entirety and replacing such definitions in Appendix A in the proper alphabetical order with the following definitions: "Capital Stock" means (i) with respect to any Person that is a corporation, any and all shares, interests, participations or other equivalents (however designated and whether or not voting) of corporate stock, and (ii) with respect to any Person that is not a corporation, any and all partnership or other equity interests of such Person. "Credit Agreement" shall mean that certain Second Amended and Restated Credit Agreement dated as of March 20, 2002, by and among Lessee, the lenders signatory thereto, Foothill Capital Corporation, as administrative agent, and Ableco Finance LLC, as collateral Agent, without giving effect to any amendments thereto. "EBITDA" means, with respect to any Person for any period, the Net Income of such Person for such period, plus without duplication, the sum of the following amounts of such Person for such period and to the extent deducted in determining Net Income of such Person for such period: (A) Net Interest Expense, (B) income tax expense, (C) depreciation expense, (D) amortization expense, (E) Pre-Opening Costs, (F) restructuring charges, asset revaluation and other special charges, (G) extraordinary (on an after tax basis) or non-recurring losses, (H) net losses attributable to Dispositions, (I) all other non cash items (including without limitation, the cumulative effect from changes in accounting principles (on an after tax basis)), and (J) items properly included the category entitled "Other Income (Expense), Net" in Lessee's financial statements (other than payments made to any limited partner of any non-wholly owned Subsidiary) and which are properly excluded from the operating income of Lessee and its Subsidiaries, in each case consistent with the past accounting practices of Lessee and its Subsidiaries, in all instances in (A) through (J) above, reducing Net Income, minus without duplication, the sum of the following amounts of such Person for such period and to the extent included in determining Net Income of such Person for such period: (W) extraordinary (on an after tax basis) or non-recurring gains, (X) net gains attributable to Dispositions, (Y) items properly included the category entitled "Other Income (Expense), Net" in Lessee's financial statements (other than payments made to any limited partner of any non-wholly owned Subsidiary) and which are properly excluded from the operating income of Lessee and its Subsidiaries, in each case consistent with the past accounting practices of Lessee and its Subsidiaries, and (Z) all other non cash items (including without limitation, the cumulative effect from changes in accounting principles (on an after tax basis)), in all instances (W) through (Z) above, increasing Net Income, if any. "Fee Letter" shall mean the letter agreement dated as of June 4, 1997, as amended by that certain Amended and Restated Fee Letter, dated as of the Eighth Amendment Effective Date, executed by Lessee, SunTrust, and SunTrust Capital Markets, Inc. with respect to the Administrative Agent's Fees. "Fixed Charge Coverage Ratio" means, for any period, the ratio of (i) Lessee's EBITDA for such period, to (ii) the sum of (A) all principal of Indebtedness for borrowed money of Lessee and its Subsidiaries scheduled to be paid or prepaid during such period (not including prepayments of the Revolving Loans (as defined in the Credit Agreement) unless such prepayments are accompanied by a reduction of the Revolving Credit Commitment (as defined in the Credit Agreement)), plus (B) Net Interest Expense of Lessee and its Subsidiaries for such period, plus (C) income taxes paid or payable by Lessee and its Subsidiaries during such period (other than income taxes paid or payable by Lessee during such period as a result of the transactions contemplated by paragraphs 2 or 3 of the Side Letter (as defined in the Credit Agreement)) plus (D) cash dividends or distributions paid by Lessee or any of its Subsidiaries (other than dividends or distributions paid (1) to Lessee, or (2) on account of Lessee's interest obligations with respect to the Convertible Debentures (as defined in the Credit Agreement)) during such period, plus (E) Capital Expenditures made by Lessee and its Subsidiaries during such period, plus (F) all amounts paid or payable by Lessee or any of its Subsidiaries in connection with the Letter of Credit Obligation during such period. 13 "GAAP" means generally accepted accounting principles in effect from time to time in the United States, provided that for the purpose of Sections 5.4, 5.5, 5.6, 5.7, 5.7A, 5.7B and 5.7C hereof and the definitions used therein, "GAAP" shall mean generally accepted accounting principles in effect on the date hereof and consistent with those used in the preparation of the Financial Statements (as defined in the Credit Agreement), provided, further, that if there occurs after the Eighth Amendment Effective Date any change in GAAP that affects in any material respect the calculation of any covenant contained in Sections 5.4, 5.5, 5.6, 5.7, 5.7A, 5.7B or 5.7C hereof, the Administrative Agent and the Lessee shall negotiate in good faith amendments to the provisions of this Agreement that relate to the calculation of such covenant with the intent of having the respective positions of the Administrative Agent and the Lessee after such change in GAAP conform as nearly as possible to their respective positions as of the Eighth Amendment Effective Date and, until any such amendments have been agreed upon, the covenants in Sections 5.4, 5.5, 5.6, 5.7, 5.7A, 5.7B and 5.7C hereof shall be calculated as if no such change in GAAP has occurred. "Indebtedness" means, without duplication, with respect to any Person, (i) all indebtedness of such Person for borrowed money; (ii) all obligations of such Person for the deferred purchase price of property or services (other than trade payables or other accounts payable incurred in the ordinary course of such Person's business irrespective of when paid); (iii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments or upon which interest payments are customarily made (excluding the TECONS); (iv) all obligations and liabilities of such Person created or arising under any conditional sales or other title retention agreement with respect to property used and/or acquired by such Person, even though the rights and remedies of the lessor, seller and/or lender thereunder are limited to repossession or sale of such property; (v) all Capitalized Lease Obligations of such Person; (vi) all obligations and liabilities, contingent or otherwise, of such Person, in respect of letters of credit, acceptances and similar facilities; (vii) all obligations and liabilities, calculated on a basis satisfactory to the Administrative Agent and in accordance with accepted practice, of such Person under Hedging Agreements; (viii) all Contingent Obligations; (ix) liabilities incurred under Title IV of ERISA with respect to any plan (other than a Multiemployer Plan) covered by Title IV of ERISA and maintained for employees of such Person or any of its ERISA Affiliates; (x) withdrawal liability incurred under ERISA by such Person or any of its ERISA Affiliates to any Multiemployer Plan; (xi) all other items which, in accordance with GAAP, would be included as liabilities on the liability side of the balance sheet of such Person; and (xii) all obligations referred to in clauses (i) through (xi) of this definition of another Person secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) a Lien upon property owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness. The Indebtedness of any Person shall include the Indebtedness of any partnership of or joint venture in which such Person is a general partner or a joint venturer. "Lease Rental" shall mean, for each Class of Equipment, during the Basic Term and the Renewal Term, if any, the respective "Lease Rental" for such Class of Equipment shown on Exhibit C attached to the Lease; provided, that the Lease Rental shown on Exhibit C shall be subject to adjustment on the first day of the Renewal Term for each Class of Equipment such that the Lease Rental shall reflect an amount which is equal to four hundred (400) basis points plus the rate of interest for U.S. Treasury Bills published on the first day of the Renewal Term by the Bloomberg Reporting Service with a maturity equal to two (2) years. Holder shall prepare a schedule reflecting the adjustment in the Lease Rental as provided for above and deliver such schedule to Lessee promptly upon the commencement of the Renewal Term with respect to each such Class of Equipment. "Net Cash Proceeds" means, (i) with respect to any Triggering Event or any other Disposition by any Person, the amount of cash received (directly or indirectly) from time to time (whether as initial consideration or through the payment of deferred consideration) by or on behalf of such Person or any of its Subsidiaries or Affiliates, in connection therewith after deducting therefrom, solely in connection with a Triggering Event which involves a Disposition, only (A) the principal amount of any Indebtedness secured by any Permitted Lien on any asset that is the subject of the Disposition (other than Indebtedness assumed by the purchaser of such asset) which is required to be, and is, repaid in connection with such Disposition (other than Indebtedness under this Agreement), (B) reasonable expenses related thereto reasonably incurred such Person or such Affiliate in connection therewith, (C) transfer taxes paid by such Person or such Affiliate in connection therewith and (D) a provision for net income taxes, whether paid or payable, in connection with such Disposition (after taking into account any tax credits or deductions and any tax sharing arrangements) and (ii) with respect to the issuance or incurrence of any Indebtedness by any Person, or the sale or issuance by any Person of any shares of its Capital Stock, the aggregate amount of cash received (directly or indirectly) from time to time (whether as initial consideration or through the payment of deferred consideration) by or on behalf of such Person or any of its Subsidiaries or Affiliates in connection therewith after deducting therefrom only reasonable brokerage commissions, underwriting fees and discounts, legal fees and similar fees and commissions. "Operative Agreements" shall mean each Certificate of Delivery and Acceptance, the Participation Agreement, the Trust Agreement, the Certificates, the Loan Agreement, the Notes, the Agency Agreement, each Assignment Agreement, the Lease, each Lease Schedule, each Lease Replacement Schedule, each Purchase Agreement Assignment, each Purchase Agreement, , the Initial Letter of Credit, each Letter of Credit and the Fee Letter. 14 "Renewal Rent" shall mean, on any Scheduled Payment Date during the Renewal Term for any Class of Equipment, an amount equal to (i) the Lease Rental for such Class of Equipment, multiplied by (ii) the Equipment Cost for such Class of Equipment. "Subordinated Debt" shall mean Debt of the Lessee evidenced by, and limited to, the Senior Subordinated Notes. 27. Amendment to Schedules: Schedule 5.8. 5.20 of the Participation Agreement are amended by deleting Schedules 5.8 and 5.20 in their entirety and replacing such schedules with the attached Schedules 5.8 and 5.20. In addition, the Participation Agreement is hereby amended by adding the attached Schedule A. C. WAIVERS Upon the effectiveness of this Amendment and subject to Section D hereof, the Holder, the Owner Trustee and the Lenders hereby waive the following Events of Default that arose as a result of: (i) the failure of the Lessee maintain a Minimum EBITDA of at least $16,900,000 for the Fiscal Quarter ending September 30, 2001 and $16,800,000 for the Fiscal Quarter ending December 31, 2001; (ii) the failure of the Lessee to maintain a sales tax liability less than $8,000,000 for the Fiscal Quarters ending September 30, 2001 and December 31, 2001; (iii) the failure to pay the additional $200,000 per month for the months of January, February and March 2002, (iv) the failure of the Lessee maintain a Fixed Charge Coverage Ratio greater than 1.20:1.00 for the Fiscal Quarter ending December 31, 2001, (v) the failure of the Lessee maintain a Total Debt/EBITDA Ratio less than 5.35:1.00 for the Fiscal Quarter ending December 31, 2001, (vi) the failure of the Lessee maintain an Adjusted Total Debt to Adjusted Total Capital Ratio less than .80:1.00 for the Fiscal Quarters ending September 30, 2001 and December 31, 2001, and (vii) the failure of the Lessee maintain a Total Senior Debt/EBITDA Ratio less than 4.00:1.00 Fiscal Quarters ending September 30, 2001 and December 31, 2001. D. POST CLOSING COVENANT The Lessee agrees to deliver to the Holder no later than 5:00 p.m. on March 26, 2002, the Initial Letter of Credit, with a copy to the Administrative Agent. The Lessee acknowledges and agrees (a) that the failure of the Lessee to deliver the Initial Letter of Credit by 5:00 p.m. on March 26, 2002, shall constitute an Event of Default under the Participation Agreement or the Lease Agreement, as the case may be and (b) that the waiver of the Events of Default by the Holder, the Owner Trustee and the Lenders in Section C of this Amendment shall be void and of no effect. E. MISCELLANEOUS 1. This Amendment shall become effective (i) receipt by the Administrative Agent of a duly executed counterpart of this Amendment executed by each party hereto, (ii) receipt by the Administrative Agent of a duly executed copy of the Credit Agreement, (iii) receipt by the Administrative Agent of a duly executed counterpart of the Fee Letter, (iv) receipt by the Administrative Agent for the ratable benefit of the Lenders, an amendment fee of $75,000, and (v) receipt by the Administrative Agent of all other fees and expenses of the Administrative Agent (including attorneys fees and expenses). Pursuant to Section 10.1 (a) of the Trust Agreement, the Holder authorizes and requests that the Owner Trustee execute this Amendment. 2. Except as expressly set forth herein, this Amendment shall be deemed not to waive or modify any provision of the Participation Agreement or the other Operative Agreements, and all terms of the Participation Agreement, as amended hereby, and all other Operative Agreements shall be and remain in full force and effect and shall constitute a legal, valid, binding and enforceable obligations of the Lessee. All references to the Participation Agreement shall hereinafter be references to the Participation Agreement as amended by this Amendment. To the extent any terms and conditions in any of the Operative Agreements shall contradict or be in conflict with any terms or conditions of the Participation Agreement, after giving effect to this Amendment, such terms and conditions are hereby deemed modified and amended accordingly to reflect the terms and conditions of the Participation Agreement as modified and amended hereby. It is not intended by the parties that this Amendment constitute, and this Amendment shall not constitute, a novation or accord and satisfaction. 3. To induce the Owner Trustee, the Holder, the Lenders and the Administrative Agent to enter into this Amendment (A) Lessee hereby represents and warrants that the representations and warranties set forth in Section 3.2 of the Participation Agreement, other than the representation and warranty set forth in Section 3.2(g), as amended hereby are true and correct, (B) Lessee hereby restates, ratifies and reaffirms each and every term and condition set forth in the Participation Agreement, as amended hereby, and in the Operative Agreements as amended hereby, and in the Operative Agreements, effective as of the date hereof; and (C) Lessee hereby certifies that no Lease Event of Default has occurred and is continuing. 4. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA AND ALL APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. 5. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. 6. This Amendment shall be binding on, and shall inure to the benefit of, the successors and assigns of the parties hereto. 15 7. In the event that any part of this Agreement shall be found to be illegal or in violation of public policy, or for any reason unenforceable at law, such finding shall not invalidate any other part thereof. 8. TIME IS OF THE ESSENCE UNDER THIS AGREEMENT. 9. The parties agree that their signatures by telecopy or facsimile shall be effective and binding upon them as though executed in ink on paper but that the parties shall exchange original ink signatures promptly following any such delivery by telecopy or facsimile. 10. Lessee agrees to pay all costs and expenses of Administrative Agent incurred in connection with the preparation, execution, delivery and enforcement of this Amendment and all other Operative Agreements executed in connection herewith, including the reasonable fees and out-of-pocket expenses of Administrative Agent's counsel. 11. This Amendment shall constitute an Operative Agreement for all purposes of the Participation Agreement and shall be governed accordingly. [Signatures appear on next page] 16 IN WITNESS WHEREOF, the Lessee, the Owner Trustee, the Holder, each Lender and the Administrative Agent have set their hands as of the day and year first above written. LESSEE AVADO BRANDS, INC. formerly known as Apple South, Inc. By:_________________________________ Name: Title: OWNER TRUSTEE WELLS FARGO BANK NORTHWEST NATIONAL ASSOCIATION, formerly known as First Security Bank, National Association By:_________________________________ Name:___________________________ Title:__________________________ HOLDER SunTrust Leasing Corporation, as successor by merger to STI Credit Corporation By:_________________________________ Name:___________________________ Title:__________________________ LENDERS SUNTRUST BANK, formerly known as SunTrust Bank, Atlanta, as the Administrative Agent and as a Lender By:_________________________________ Name:___________________________ Title:__________________________ FLEET CAPITAL CORP., as successor in interest to BancBoston Leasing, Inc. By:_________________________________ Name:___________________________ Title:__________________________ SOUTHTRUST BANK, N.A. By:_________________________________ Name:___________________________ Title:__________________________ Exhibits and schedules to this agreement are not filed pursuant to Item 601(b)(2) of SEC Regulation S-K. By the filing of this Form 10-Q, the Registrant hereby agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Commission upon request. EX-11 5 exhb112.txt EARNINGS PER SHARE Exhibit 11.1 Computation of Earnings (Loss) Per Common Share
(In thousands, except per share data) Quarter Ended Six Months Ended - ---------------------------------------------------------------------------------------------------- ------------------------ June 30, July 1, June 30, July 1, 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------- ------------------------ Average number of common shares used in basic calculation 30,110 28,625 29,560 28,455 Net additional shares issuable pursuant to employee stock option plans at period-end market price 988 - * 895 - * Shares issuable on assumed conversion of convertible preferred securities 3,207 - * - * - * - ---------------------------------------------------------------------------------------------------- ------------------------ Average number of common shares used in diluted calculation 34,305 28,625 30,455 28,455 ==================================================================================================== ======================== Net earnings (loss) from continuing operations $ 15,002 (8,759) 9,150 (12,380) Net earnings (loss) from discontinued operations (406) 3,910 (272) 6,486 - ---------------------------------------------------------------------------------------------------- ------------------------ Net earnings (loss) 14,596 (4,849) 8,878 (5,894) Distribution savings on assumed conversion of convertible preferred securities, net of income taxes 728 - * - * - * - ---------------------------------------------------------------------------------------------------- ------------------------ Net earnings (loss) for computation of diluted earnings per common share $ 15,324 (4,849) 8,878 (5,894) ==================================================================================================== ======================== Basic earnings (loss) per common share from continuing operations 0.49 (0.31) 0.31 (0.44) Basic earnings (loss) per common share from discontinued operations (0.01) 0.14 (0.01) 0.23 - ---------------------------------------------------------------------------------------------------- ------------------------ Basic earnings (loss) per common share $ 0.48 (0.17) 0.30 (0.21) ==================================================================================================== ======================== Diluted earnings (loss) per common share from continuing operations 0.46 (0.31)* 0.30 (0.44)* Diluted earnings (loss per common share from discontinued operations (0.01) 0.14 (0.01) 0.23 - ---------------------------------------------------------------------------------------------------- ------------------------ Diluted earnings (loss) per common share $ 0.45 (0.17) 0.29 (0.21) ==================================================================================================== ========================
* Inclusion of shares issuable pursuant to employee stock option plans and the shares related to the convertible preferred securities results in an increase to earnings (loss) per share ("EPS") in both the quarter and six months ended July 1, 2001. For the six months ended June 30, 2002, inclusion of shares issuable related to the convertible preferred securities results in an increase to EPS. As such shares are antidilutive, they have been excluded from the computation of diluted EPS. EX-99 6 exhb992.txt CERTIFICATION OF CORPORATE OFFICERS CERTIFICATION OF CORPORATE OFFICERS Each of the undersigned hereby certifies in his capacity as an officer of Avado Brands, Inc. (the "Company") that the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of the periods covered by such report and the results of operations of the Company for such periods. Date: August 13, 2002 By: /s/ Tom E. DuPree, Jr. ------------------------------ Tom E. DuPree, Jr. Chairman of the Board and Chief Executive Officer Date: August 13, 2002 By: /s/ Louis J. Profumo ------------------------------- Louis J. Profumo Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----