EX-2.1 STOCK PURCHASE AGREEMENT

 

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                                                                     Exhibit 2.1

 

                            STOCK PURCHASE AGREEMENT

 

         THIS STOCK PURCHASE AGREEMENT is made and entered into as of the 3rd

day of September, 2004 by and between AFC ENTERPRISES, INC., a Minnesota

corporation ("AFC"), and FOCUS BRANDS INC., a Delaware corporation ("BUYER").

 

                                    RECITALS

 

         AFC owns all of the issued and outstanding capital stock of Cinnabon

International, Inc., a Delaware corporation (the "COMPANY"). Buyer desires to

purchase and AFC desires to sell all of the issued and outstanding shares of

capital stock of the Company, all on the terms and conditions set forth in this

Agreement.

 

                                    WITNESSETH:

 

         In consideration of the mutual promises, representations and

warranties, covenants, payments and actions herein provided, the parties hereto,

each intending to be legally bound hereby, do agree as follows:

 

1.        DEFINITIONS

 

         For convenience, certain terms used in this Agreement are listed in

alphabetical order and defined or referred to below (such terms as well as any

other terms defined elsewhere in this Agreement shall be equally applicable to

both singular and plural forms of the terms defined).

 

         "ACCEPTANCE NOTICE" is defined in Section 5.5(b).

 

         "ACCOUNTS RECEIVABLE" is defined in Section 3.9.

 

         "ACQUISITION DATE" means October 12, 1998, the date of AFC's

acquisition of the Shares.

 

         "AFC AFFILIATED GROUP" means the Affiliated Group of which AFC, the

Company and the Subsidiary are currently members.

 

         "AFC FINANCIAL STATEMENTS" is defined in Section 3.5.

 

         "AFC'S KNOWLEDGE" or words of like import means the actual knowledge of

the following persons or such knowledge that the following persons should

reasonably be expected to have within the scope of their employment with the

Company, the Subsidiary or AFC as the case may be: Chris Elliott, Lenore Krentz,

Jerry Bell, Dan Bauer, Scott Bedora, Stan Stout and Debbie Ferrell, and

additionally, solely for purposes of Sections 3.14 (Benefit Plans), 3.16

(Compliance with Court Orders and Regulations), 3.17 (Legal Proceedings), 3.18

(Contracts and Commitments), 3.21 (Intellectual Property), 3.24 (Franchise,

License

 

 

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and Development Agreements), 3.25 (Advertising Funds), 3.26 (Franchise

Registration/UFOC) and 3.27 (SBC License), Harold "Sonny" Cohen, Karen

Wickliffe, Lisa Morse, Christine Maciver, D'Wayne Tanner and David McDougall.

 

         "AFFILIATED GROUP" means any affiliated group within the meaning of

Section 1504 of the Code or any comparable or analogous group under state, local

or foreign law.

 

         "AGREEMENT" means this Agreement and the exhibits and schedules hereto.

 

         "ALTERNATIVE TRANSACTION" is defined in Section 5.3.

 

         "ASSETS" means all of the assets, properties, business, goodwill and

rights of every kind and description, real and personal, tangible and

intangible, wherever situated belonging to the Company or the Subsidiary.

 

         "BASE WORKING CAPITAL" means Eight Hundred Ten Thousand Dollars

($810,000).

 

         "BENEFIT PLANS" is defined in Section 3.14.

 

         "BUSINESS" means the existing business, operations, facilities and

other Assets, financial condition, results of operations, finances, markets,

products, competitive positions, raw materials and other supplies, and customers

and customer relations of the Company and the Subsidiary.

 

         "BUSINESS CONDITION" means the Business and Assets of the Company and

the Subsidiary, taken as a whole.

 

         "CASH" is defined in Section 2.8.

 

         "CASH NOTICE" is defined in Section 2.8.

 

         "CALL OPTION" is defined in Section 3.27(b).

 

         "CI AD FUND" is defined in Section 3.25(b)(i).

 

         "CI DIVISION" means that portion of the Business relating to the

operation of the Company-Owned Bakeries and the franchising and licensing of the

CI System and the Company Intellectual Property or any component thereof.

 

         "CI SYSTEM" means the unique and distinctive system for the development

and operation of retail bakeries or restaurants specializing in the sale of

specialty baked goods (including without limitation, proprietary cinnamon rolls)

under the Company Intellectual Property developed and owned by the Company or

the Subsidiary.

 

         "CLOSING" and "CLOSING DATE" are defined in Section 2.5.

 

 

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         "CLOSING DATE BALANCE SHEET" is defined in Section 2.7(a).

 

         "CLOSING WORKING CAPITAL" is defined in Section 2.7(a).

 

         "CODE" means the Internal Revenue Code of 1986, as amended.

 

         "COMMON STOCK" means the common stock, $0.01 par value per share, of

the Company.

 

          "COMPANY INTELLECTUAL PROPERTY" means any Intellectual Property that is

owned by the Company or the Subsidiary. Company Intellectual Property does not

include any Intellectual Property licensed to the Company and/or the Subsidiary.

 

         "COMPANY REGISTERED INTELLECTUAL PROPERTY" means all of the Registered

Intellectual Property owned by or filed in the name of the Company and/or the

Subsidiary.

 

         "COMPANY MATERIAL ADVERSE CHANGE" means any change in the Business

Condition that has or is reasonably expected to have a Company Material Adverse

Effect; provided, however, none of the following shall be deemed, in and of

itself, to be a Company Material Adverse Change: (x) a change that primarily

results from economic or political conditions or events affecting the United

States economy or world economy; (y) a change that results from the announcement

or pendency of this Agreement and the Transactions; or (z) a change that results

directly from action taken by a party to this Agreement.

 

         "COMPANY MATERIAL ADVERSE EFFECT" means any change, event, violation,

inaccuracy or circumstance the effect of which is both material and adverse to

(a) the Business Condition or (b) the ability of AFC or the Company and the

Subsidiary to perform any of its material obligations under this Agreement;

provided, however, none of the following shall be deemed, in and of itself, to

be a Company Material Adverse Effect: (x) a change that primarily results from

economic or political conditions or events affecting the United States economy

or world economy; (y) a change that results from the announcement or pendency of

this Agreement and the Transactions; or (z) a change that results directly from

action taken by a party to this Agreement.

 

         "COMPANY-OWNED BAKERIES" means bakeries or restaurants owned by the

Company or the Subsidiary using any components of the CI System or the Company

Intellectual Property.

 

         "CONFIDENTIALITY AGREEMENT" means that certain Confidentiality

Agreement, dated April 26, 2004, between Roark Capital, an affiliate of the

Buyer, and AFC.

 

         "CONTRACT" means any written or oral contract, agreement, lease,

instrument or other commitment (including Franchise Agreements) that is binding

on any Person or its property under applicable law, other than its charter or

bylaws.

 

 

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         "COURT ORDER" means any judgment, decree, injunction, order or ruling

of any Governmental Authority that is binding on any Person or its property

under applicable law.

 

         "CURRENT SUBSIDIARY FINANCIAL STATEMENTS" is defined in Section 3.5.

 

         "DAMAGES" is defined in Section 10.2.

 

         "DEFICIT" is defined in Section 2.6.

 

         "DISCLOSURE SCHEDULE" means the written information delivered to Buyer

simultaneously with AFC's execution of this Agreement.

 

         "EFFECTIVE TIME" is defined in Section 2.4.

 

         "ENCUMBRANCE" means any claim, charge, easement, encumbrance, lease,

covenant, security interest, lien, option, pledge, rights of others, or

restriction (whether on voting, sale, transfer, disposition or otherwise),

whether imposed by agreement, understanding, law, equity or otherwise, except

for any restrictions on transfer generally arising under any applicable Federal

or state securities law. The term Encumbrance shall not include any Permitted

Encumbrance.

 

         "ENVIRONMENTAL LAWS" is defined in Section 3.8(c)(i).

 

         "ERISA" is defined in Section 3.14.

 

         "EXCESS" is defined in Section 2.6.

 

          "EXCLUDED ITEMS" is defined in Section 3.5.

 

         "EXCLUDED LIABILITIES" means (a) all liabilities, whether now existing

or hereafter arising, known or unknown, that the Company or any Subsidiary may

have based on or arising out of any franchise agreement, lease, sublease or

other agreement or understanding now or hereafter existing between the Company

or any Subsidiary and Latrelle's SA/Austin, Top Bon or LFG Group, LLC, (b) the

liabilities and obligations of the Company or the Subsidiary requiring the

payment of monies arising out of and specifically identified in the following

agreements: (1) Settlement Agreement dated June 27, 2003 by and between the

Subsidiary, the Company, AFC, JRM, JRM Group LLC, Michael Wager and Joseph Uhl;

(2) Settlement Agreement dated July 1, 2004 by and between the Subsidiary, the

Company, AFC, JRM, JRM Group LLC, Michael Wager and Joseph Uhl; (3) Settlement

Agreement dated June 10, 2004 by and between the Subsidiary, Sunnybons, LLC,

Moore Buns, LLC, HJM Enterprises, LLC and Herman J. Moore; (4) Settlement

Agreement dated July 21, 2003 by and between the Subsidiary, Top Bon, LLC,

Richard Neuman and Stan Mallin; (5) Settlement Agreement dated March 7, 2004 by

and between the Subsidiary, Mark R. Goldstein, Inc., Vancouver Gold's Inc.,

Samuel B. Goldstein, Mark R. Goldstein and Miranda D. Goldstein, (6) Settlement

Agreement dated December 29, 2003 by and between the Subsidiary, Sanabon, Inc.

and Emerald Foods, Inc., (7) Settlement Agreement dated

 

 

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December 30, 2003, but effective as of December 1, 2003, by and between

Cinnabon, Inc. and LFG Group, LLC, (8) Settlement Agreement dated June 29, 2004,

but effective as of June 21, 2004, by and between Cinnabon, Inc., Sunnybons,

LLC, Moore Buns, LLC and Herman J. Moore, (c) all amounts payable by the Company

or the Subsidiary to AFC or to any Affiliate of AFC, other than amounts payable

by the Company to the Subsidiary or by the Subsidiary to the Company; (d) all

amounts payable in connection with the deferred compensation arrangements

disclosed in Section 3.18(a)(viii) of the Disclosure Schedule; (e) any and all

obligations pursuant to any vehicle lease to which the Company or the Subsidiary

is a party (it being understood that AFC shall cause the Company or Subsidiary

to transfer any of such vehicle leases and the leased vehicles to AFC or its

designee prior to Closing); and (f) for the avoidance of doubt, all amounts

payable in connection with the lease defaults identified in Section 3.8(a) of

the Disclosure Schedule as CI#68, CI#127, CI#136, CI#175 and CI#258.

 

         "FINAL CLOSING DATE BALANCE SHEET" is defined in Section 2.7(a).

 

         "FINAL DETERMINATION" means (i) a decision, judgment, decree or other

order by any court of competent jurisdiction, which decision, judgment, decree

or other order has become final after all allowable appeals by either party have

been exhausted or the time for filing such appeal has expired, (ii) a closing

agreement entered into under Section 7121 of the Code, or any other settlement

entered into in connection with an administrative or judicial proceeding, or

(iii) the expiration of the time for instituting a claim for refund, or if such

a claim was filed, the expiration of the time for instituting suit with respect

thereto.

 

         "FINAL NET WORKING CAPITAL" is defined in Section 2.7(a).

 

         "FINANCIAL STATEMENTS" is defined in Section 3.5.

 

         "FIRM" is defined in Section 2.7(a).

 

         "FRANCHISE AGREEMENTS" shall mean the franchise agreements with respect

to the Company and the Subsidiary (including franchise agreements, license

agreements, satellite agreements, franchise development agreements, area

development agreements, development incentive agreements together with all

ancillary agreements) under which Company and/or the Subsidiary has or may grant

any person the right to establish and operate a franchise (including, without

limitation, a franchise for Franchised Bakeries and SBC International Cafes).

For purposes hereof, the International Contracts shall be deemed Franchise

Agreements.

 

         "FRANCHISE REGULATIONS" means any Regulation relating to the

relationship between franchisor and franchisees or to the offer, sale,

termination, non-renewal or transfer of franchises, master franchises, area and

developers, subfranchises, business, business opportunities, or seller-assisted

marketing plans.

 

 

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         "FRANCHISED BAKERIES" means bakeries or restaurants operated by

Franchisees of the Subsidiary using any components of the CI System or any

components of the Company Intellectual Property.

 

         "FRANCHISEES" or "LICENSEES" means any Person (i) who has been granted

the right to operate Franchised Bakeries or to use any components of the CI

System or any components of the Company Intellectual Property pursuant to a

Franchise Agreement; or (ii) has been granted rights to operate an SBC

International Cafe pursuant to International Contracts.

 

         "FRANCHISES" is defined in Section 3.24(d).

 

         "GAAP" means generally accepted accounting principles in the United

States as in effect on any applicable date.

 

         "GOVERNMENTAL AUTHORITY" means any (a) nation, state, county, city,

town, village, district, or other jurisdiction of any nature; (b) federal,

state, local, municipal, foreign, or other government; (c) governmental or

quasi-governmental authority of any nature (including any governmental agency,

branch, department, official, or entity and any court or other tribunal); (d)

multi-national organization or body; or (e) body exercising, or entitled to

exercise, any administrative, executive, judicial, legislative, police,

regulatory, or taxing authority or power of any nature.

 

         "IMMIGRATION LAWS" is defined in Section 3.28(d).

 

         "INDEMNIFIED PERSONS" is defined in Section 10.2(a).

 

         "INTELLECTUAL PROPERTY" means any or all of the following and all

rights arising out of or associated therewith: all United States, international

and foreign patents, trademarks, trade names, service marks, trade dress, logos,

corporate names, together with all translations, adaptations, derivations, and

combinations thereof and including all goodwill associated therewith, Internet

domain names, copyrights and any renewal rights therefor, mask works,

schematics, technology, manufacturing processes, unique sources of supply or

sources not generally known, supplier lists, training and operations manuals,

trade secrets, know-how, moral rights, computer software programs or

applications (in both source and object code form), technical documentation for

computer software programs or applications, registrations and applications for

any of the foregoing and all other tangible or intangible proprietary

information or materials that are or have been used in (including in the

development of) the Business and/or in any product or process (including ideas,

research and development, know-how, formulas, recipes, compositions, marketing

processes and techniques, technical data, designs, drawings, business and

marketing plans and cost information) (i) currently being manufactured or

marketed by the Company and/or the Subsidiary, or (ii) currently under

development for possible future manufacturing or marketing or other use by the

Company and/or the Subsidiary, all other proprietary rights, and all copies and

tangible embodiments thereof (in whatever medium), and any other similar

intellectual property rights actually used in connection with the Business.

 

 

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         "INTERNATIONAL CONTRACT" has the meaning ascribed to it in the SBC

License Agreement.

 

         "INTERNATIONAL TERRITORIES" has the meaning ascribed to it in the SBC

License Agreement.

 

         "JRM" means JRM Bakeries, LLC.

 

         "LIABILITY" means any direct or indirect liability, indebtedness,

obligation, expense, claim, loss, damage, deficiency, guaranty or endorsement of

or by any Person, absolute or contingent, accrued or unaccrued, due or to become

due, liquidated or unliquidated.

 

         "MASTER LICENSOR" means, collectively, Seattle Coffee Company and SBC.

 

         "MATERIAL" or "MATERIALLY" means material or materially to the Business

Condition.

 

         "MATERIALS OF ENVIRONMENTAL CONCERN" is defined in Section 3.8(c)(i).

 

         "MOORE BUNS" means Moore Buns, LLC.

 

         "OBJECTION NOTICE" is defined in Section 2.7(a).

 

         "ORDINARY COURSE OF BUSINESS" means as to any action taken by the

Company or the Subsidiary that (a) such action is consistent with its past

practices and is taken in the ordinary course of its normal day-to-day

operations; and (b) such action is not required to be authorized by its board of

directors.

 

         "PERMITTED ENCUMBRANCES" means: (a) liens imposed by law for taxes,

assessments or governmental charges or claims that are not yet due or are being

properly contested; (b) carriers', warehousemen's, mechanics', materialmen's,

repairmen's, landlords' and other like liens imposed by law, arising in the

Ordinary Course of Business and securing obligations that are not overdue by

more than 30 days or are being properly contested; (c) pledges and deposits made

in the Ordinary Course of Business in compliance with workers' compensation,

unemployment insurance and other social security laws or regulations; (d)

deposits to secure the performance of bids, trade contracts, leases, statutory

obligations, surety, indemnity and appeal bonds, performance and return-of-money

and fiduciary bonds and other obligations of a like nature, in each case in the

Ordinary Course of Business; (e) easements, zoning restrictions, rights-of-way,

licenses, covenants, conditions, minor defects, encroachments or irregularities

in title and similar encumbrances on or affecting any Premises that do not

secure any monetary obligations and do not materially interfere with the

ordinary conduct of business of the Company or the Subsidiary at any Premises

subject to such liens; (f) leases or subleases identified in the Disclosure

Schedule; (g) any (i) interest or title of a lessor or sublessor under any

lease, (ii) restriction or encumbrance that the interest or title of such lessor

or sublessor may be subject to, or (iii) subordination of the interest of the

lessee or sublessee under such lease to any restriction or encumbrance referred

to in the

 

 

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preceding clause (ii); (h) liens on goods held by suppliers arising in the

Ordinary Course of Business for sums not yet delinquent or being contested in

good faith, if such reserve or other appropriate provision, if any, as shall be

required by GAAP shall have been made therefor and as long as such lien remains

unperfected; (i) liens in favor of customs and revenue authorities arising as a

matter of law to secure payment of customs duties in connection with the

importation of goods; (j) rights of franchisees under franchise agreements in

keeping with the Subsidiary's historical business practices; (k) with respect to

any Premises in which the Company or the Subsidiary owns a leasehold estate, any

defect or encumbrance caused by or arising out of the failure to record the

lease or a memorandum thereof in the applicable real property records in the

county where such Premises is located; and (l) the effect of any moratorium,

eminent domain or condemnation proceedings; provided that the term "Permitted

Encumbrances" shall not include any lien securing indebtedness for money

borrowed by the Company or the Subsidiary.

 

         "PERSON" means any individual, corporation (including any non-profit

corporation), general or limited partnership, limited liability company, joint

venture, estate, trust, association, organization, labor union, or other entity

or Governmental Authority.

 

         "POLICIES" is defined in Section 5.10.

 

          "PREMISES" is defined in Section 3.8(a).

 

         "PRE-CLOSING TAX PERIOD" is defined in Section 10.2(b).

 

         "PRIME RATE" is defined in Section 2.7(b).

 

         "PROCEEDING" means any action, arbitration, audit, hearing,

investigation, litigation, or suit (whether civil, criminal, administrative,

investigative, or informal) commenced, brought, conducted, or heard by or

before, or otherwise involving, any Governmental Authority or arbitrator.

 

         "PROPRIETARY RIGHT CLAIM" is defined in Section 3.21(f).

 

         "PTO" is defined in Section 3.21(c).

 

         "PURCHASE PRICE" is defined in Section 2.2.

 

         "REGISTERED INTELLECTUAL PROPERTY" means all United States,

international and foreign: (i) patents and patent applications (including

provisional applications); (ii) registered trademarks and service marks,

applications to register trademarks and service marks, intent-to-use

applications, or other registrations or applications related to trademarks and

service marks; (iii) registered copyrights and applications for copyright

registration; (iv) domain name registrations; and (v) any other Intellectual

Property that is the subject of an application, certificate, filing,

registration or other document issued, filed with, or recorded with any federal,

state, local or foreign government or other public body.

 

 

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         "REGULATION" means any statute, law, ordinance, regulation, order or

rule of any Governmental Authority, including, without limitation, those

covering environmental, energy, safety, health, transportation, bribery,

recordkeeping, zoning, employment, labor, immigration, anti-discrimination,

antitrust, wage and hour, and price and wage control matters.

 

         "REPRESENTATIVE" means with respect to a particular Person, any

director, officer, employee, agent, consultant, advisor, or other representative

of such Person, including legal counsel, accountants, and financial advisors.

 

         "RETAINED EMPLOYMENT LIABILITIES" means those liabilities to be paid or

retained by AFC as provided in Appendix A hereto.

 

         "SBC" means Seattle's Best Coffee, LLC, a Washington corporation and

the original franchisor under the International Contracts.

 

         "SBC DIVISION" means that portion of the Business operating pursuant to

the SBC License.

 

         "SBC INTERNATIONAL AD FUND" is defined in Section 3.25(b)(ii).

 

         "SBC INTERNATIONAL CAFE" means a Cafe as defined in the Master License

Agreement.

 

         "SBC LICENSE" means that certain Master License Agreement dated as of

July 13, 2003, between the Subsidiary, as Licensee, and the Master Licensor, as

Licensor, as amended by First Amendment thereto, dated as of July 13, 2003.

 

         "SBC LICENSED INTELLECTUAL PROPERTY" means all Intellectual Property

licensed by the Subsidiary pursuant to the SBC License.

 

         "SECURED LENDER" means the lender parties to that certain Credit

Agreement, dated as of May 23, 2002, as amended, among AFC, as Borrower, such

Lender Parties, J.P. Morgan Securities, Inc., as Joint Bookrunner and Co-Lease

Arranger, Credit Lyonnais New York Branch, as Co-Documentation Agent, Fleet

National Bank, Inc. as Co-Documentation Agent, and SunTrust Bank, as Co-Document

Agent.

 

         "SHARES" means all of the issued and outstanding shares of stock of the

Company.

 

         "SMS" is defined in Section 5.6.

 

         "SMS AGREEMENT" is defined in Section 5.6.

 

         "STRADDLE PERIOD" is defined in Section 10.2(b).

 

         "SUBSIDIARY" means Cinnabon, Inc., a Washington corporation.

 

 

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         "SUBSIDIARY BALANCE SHEET" and "SUBSIDIARY BALANCE SHEET DATE" are

defined in Section 3.5.

 

         "SUNNYBONS" means Sunnybons, LLC.

 

         "SUPPLIERS" is defined in Section 3.24(g).

 

         "TAXES" means all Federal, state, county, local or foreign taxes,

charges, fees, levies, imposts, duties, or other assessments (whether imposed

directly or through withholding or otherwise), including income, gross receipts,

excise, employment, sales, use, transfer, recording, license, payroll,

franchise, severance, documentary, stamp, occupation, windfall profits,

environmental, federal highway use, commercial rent, customs duty, capital

stock, paid-up capital, profits, Social Security, single business and

unemployment, disability, real property, personal property, registration, ad

valorem, value added, alternative or add-on minimum, estimated, or other tax or

governmental fee of any kind whatsoever, imposed or required to be withheld by

any governmental authority, including any interest, additions imposed thereon or

with respect thereto, or penalties applicable thereto, and including liability

for the Taxes of any other person under Treas. Reg. 1.1502-6 (or any similar

provision of state, local, or foreign law) as a transferee or successor, by

contract, or otherwise.

 

         "TAX INDEMNITY" is defined in Section10.2(b).

 

         "TAX RETURNS" means all Federal, state, local, and foreign tax returns,

declarations, statements, reports, schedules, forms, notices, information

returns, or other document or information filed with or submitted to, or

required to be filed with or submitted to any taxing authority in connection

with the determination, assessment, collection or payment of any Tax or in

connection with the administration, implementation or enforcement of compliance

with any legal requirement relating to any Tax (including any amended Tax

Return).

 

         "TERRITORIAL RIGHTS" is defined in Section 3.24(f).

 

          "TOP BON" means Top Bon, LLC.

 

         "TRANSACTIONS" means the transactions contemplated by this Agreement.

 

         "TRANSITION SERVICES AGREEMENT" is defined in Section 5.8.

 

         "TREAS. REG." means the Federal income tax regulations from time to

time promulgated under the Code by the Internal Revenue Service and the Treasury

Department and "PROP. REG." means the Federal income tax regulations proposed

from time to time for promulgation under the Code by the Internal Revenue

Service and the Treasury Department.

 

         "UFOC" means the Company's and the Subsidiary's franchise offering

circular(s) or disclosure document(s) or similar document(s) used by the Company

and the Subsidiary to

 

 

                                     - 10 -

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offer and sell franchises in the United States and throughout the world for

Franchised Bakeries and/or SBC International Cafes.

 

         "WORKING CAPITAL" means, as of any date of determination, the amount

that is equal to the difference between (a) the sum of the following current

assets of the Company and the Subsidiary as of such date of determination: trade

accounts receivable, vendor accounts receivable, inventory and other current

assets (excluding cash and cash equivalents, accounts receivable from officers

and Current Deferred Tax Assets) and (b) the sum of the following current

liabilities of the Company and the Subsidiary as of such date of determination:

accounts payable (including outstanding checks not yet presented for payment)

and other current liabilities (excluding the current portion of long-term debt

and accrued interest, the marketing fund liability, accrued property taxes and

Current Deferred Tax Liabilities), but excluding any current liabilities that

are to be paid by AFC as herein provided or with respect to which AFC is

obligated to indemnify Buyer as herein provided. For purposes of this definition

of "Working Capital" the terms "Current Deferred Tax Assets" and "Current

Deferred Tax Liabilities" shall have the meanings ascribed to them in GAAP.

 

2.        TERMS OF PURCHASE AND SALE OF SHARES

 

         2.1       ACQUISITION OF SHARES. Subject to the terms and conditions

hereinafter set forth, on the Closing Date, Buyer shall purchase from AFC, and

AFC shall sell, assign, transfer, set over and deliver to Buyer all of AFC's

right, title and interest in and to all of the Shares.

 

         2.2       PURCHASE PRICE. The purchase price (the "PURCHASE PRICE") to

be paid by Buyer for all of the Shares shall equal Thirty Million Two Hundred

Fifty Thousand Dollars ($30,250,000) adjusted at Closing as provided in section

2.6 below (such amount, as adjusted, the "CLOSING PAYMENT"), plus the amount by

which Final Working Capital is more than Base Working Capital, or minus the

amount by which Final Working Capital is less than Base Working Capital. The

Closing Payment shall be paid at Closing by wire transfer to the account

designated by AFC.

 

         2.3       DELIVERY OF SHARES. At the Closing, AFC shall deliver to Buyer

all certificates representing the Shares, duly endorsed to Buyer, free and clear

of any and all Encumbrances.

 

         2.4       EFFECTIVE TIME. The Closing shall be effective as of 12:01

a.m. on the Closing Date (the "EFFECTIVE TIME").

 

         2.5       CLOSING. On the third business day following the satisfaction

or waiver of the conditions specified in Sections 7 and 8 hereof, but in any

event not later than November 1, 2004, a closing (the "CLOSING") will be held at

the offices of Alston & Bird LLP, Atlanta, Georgia (or such other date and place

as the parties may agree). The date on which the Closing occurs is hereinafter

referred to as the "CLOSING DATE." At the Closing, there shall be delivered the

documents referred to in Sections 7 and 8.

 

 

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         2.6       WORKING CAPITAL ADJUSTMENT. Not later than three (3) business

days prior to the Closing Date, AFC and the Buyer shall agree on an estimate of

the Company's Working Capital as of the Effective Time (the "ESTIMATED WORKING

CAPITAL"), which shall be calculated and presented in the same manner as set

forth on Exhibit 2.6. If the Estimated Working Capital is less than the Base

Working Capital (the "Deficit"), the Purchase Price shall be reduced by the

amount of the Deficit; and if the Estimated Working Capital exceeds the Base

Working Capital (the "Excess"), the Purchase Price shall be increased by the

amount of the Excess.

 

         2.7       POST CLOSING ADJUSTMENT.

 

                  (a)       Within sixty (60) calendar days after the Closing

Date, the Buyer will conduct a review of the Working Capital as of the Effective

Time (the "CLOSING WORKING CAPITAL") and will prepare and deliver to AFC a

balance sheet of the Company as of the Effective Time (the "CLOSING DATE BALANCE

SHEET") and a computation of the Closing Working Capital shown thereon. Buyer

will make available to AFC all records and work papers used in preparing the

Closing Date Balance Sheet. If AFC disagrees with the computation of the Closing

Working Capital or the items reflected on the Closing Date Balance Sheet, AFC

may, within thirty (30) calendar days after receipt of the Closing Date Balance

Sheet, deliver a notice (an "OBJECTION NOTICE") to Buyer setting forth AFC's

calculation of the Working Capital as of the Closing Date. If AFC does not

deliver an Objection Notice within such thirty (30) calendar day period, then

the Closing Working Capital as shown on the Closing Date Balance Sheet shall be

deemed to be finally determined. If AFC timely delivers an Objection Notice to

Buyer, AFC and Buyer will use reasonable efforts to resolve any disagreement as

to the computation of the Closing Working Capital as soon as practicable, but if

they can not reach a final resolution within thirty (30) calendar days after

Buyer has received the Objection Notice, Buyer and AFC will jointly retain an

independent accounting firm of recognized national standing (the "FIRM") to

resolve their disagreement. If Buyer and AFC are unable to agree on the choice

of the Firm, then the Firm will be an independent accounting firm of recognized

national standing selected by lot (after excluding one firm designated by Buyer

and one firm designated by AFC). Buyer and AFC will direct the Firm to render a

determination within thirty (30) calendar days of its retention and Buyer and

AFC and their Representatives will cooperate with the Firm during its

engagement. The Firm will consider only those items and amounts in the Closing

Date Balance Sheet set forth in the Objection Notice which Buyer and AFC are

unable to resolve. In resolving any disputed item, the Firm may not assign a

value to any item greater than the greatest value for such item claimed by

either party or less than the smallest value for such item claimed by either

party. The Firm's determination will be based on such review as the Firm deems

necessary to make its determination, and on the definition of the Working

Capital included herein. The determination of the Closing Working Capital by the

Firm will be conclusive and binding upon the Buyer and AFC. Buyer and AFC shall

bear the costs and expenses of the Firm based on the percentage which the

portion of the contested amount not awarded to each party bears to the amount

actually contested by or on behalf of such party. The Closing Working Capital,

as finally determined pursuant to this Section 2.7(a), is referred to herein as

the "FINAL NET WORKING CAPITAL." The balance sheet

 

 

                                     - 12 -

<PAGE>

 

that reflects the computation of the Final Net Working Capital is referred to

herein as the "FINAL CLOSING DATE BALANCE SHEET."

 

                  (b)       If the Final Net Working Capital exceeds the

Estimated Working Capital, Buyer shall, within five (5) business days after the

determination thereof, pay to AFC an amount equal to the amount by which (i) the

Final Net Working Capital exceeds (ii) the Estimated Working Capital, together

with interest on such excess from the Closing Date to and including the date of

payment at an interest rate equal to the "Prime Rate" as listed in The Wall

Street Journal on the Closing Date (the "PRIME RATE"). Such payment shall be

made by wire transfer or delivery of other immediately available funds in United

States Dollars to AFC in cash, by cashier's or certified check, or by wire

transfer of immediately available funds to an account designated by AFC.

 

                  (c)       If the Final Net Working Capital is less than the

Estimated Working Capital, AFC shall, within five (5) business days after the

determination thereof, pay to Buyer an amount equal to the amount by which (i)

the Estimated Working Capital exceeds (ii) the Final Net Working Capital,

together with interest on such excess from the Closing Date to and including the

date of payment at an interest rate equal to the Prime Rate. Such payment will

be made in cash, by cashier's or certified check, or by wire transfer of

immediately available funds to an account designated by the Buyer.

 

                  (d)       If, pursuant to Section 2.7(a) above, a dispute

exists as to the final determination of the Closing Working Capital, the Buyer

and AFC shall promptly pay to the other, as appropriate in accordance with

Sections 2.7(b) and 2.7(c), such amounts as are not in dispute, pending final

determination of such dispute pursuant to Section 2.7(a).

 

         2.8       CASH BALANCE. Not later than ten (10) days following the

Closing Date, Buyer shall notify AFC in writing of the aggregate amount of cash

and cash equivalents of the Company and the Subsidiary (the "CASH") on hand or

on deposit as of the Effective Time (the "CASH NOTICE"). Not later than five (5)

days following its receipt of the Cash Notice, AFC shall pay to the Company the

amount, if any, by which the Cash is less than the amount set forth on Exhibit

2.8, as the same may be amended as provided in Section 5.10.

 

         2.9       EMPLOYEE AND EMPLOYEE BENEFIT MATTERS. From and after the

Closing, the parties hereto shall comply with the provisions set forth in

APPENDIX A hereto, which APPENDIX A is incorporated herein by reference and made

a part of this Agreement.

 

         2.10      TAX MATTERS.

 

                  (a)       TAX SHARING AGREEMENTS. Any tax sharing, allocation,

indemnity or similar agreement or arrangement (whether or not written) with

respect to or involving the Company or the Subsidiary shall be terminated as of

the Closing Date and will have no further effect for any taxable year (whether

the current year, a future year, or a past year).

 

                  (b)       TAX RETURNS FOR PERIODS THROUGH THE CLOSING DATE. AFC

will include the income of the Company and the Subsidiary (including any

deferred income

 

 

                                     - 13 -

<PAGE>

 

triggered into income by Treas. Reg. Section 1.1502-13 and Treas. Reg. Section

1.1502-14 and any excess loss accounts taken into income under Treas. Reg.

Section 1.1502-19) on the AFC consolidated, unitary or combined income Tax

Returns for all periods through the Closing Date and will pay any income Taxes

attributable to such income and will prepare and timely file (or cause to be

prepared and timely filed) all such income Tax Returns. The Company and the

Subsidiary will furnish Tax information to AFC for inclusion in AFC's

consolidated, unitary or combined income Tax Return for the period which

includes the Closing Date in accordance with the Company's and Subsidiary's past

custom and practice. AFC will allow Buyer an opportunity to review and comment

upon such Tax Returns (including any amended Tax Returns) prior to filing to the

extent that they relate to the Company and the Subsidiary. AFC will take no

position on such Tax Returns that relates to the Company and the Subsidiary that

would adversely affect the Company or the Subsidiary after the Closing Date

unless such position would be reasonable in the case of a person or entity that

owned the Company and the Subsidiary both before and after the Closing Date. The

income of the Company and the Subsidiary will be apportioned to the period up to

and including the Closing Date and the period after the Closing Date by closing

the books of the Company and the Subsidiary as of the end of the day upon which

the Closing Date falls.

 

                  (c)       AUDITS AND OTHER PROCEEDINGS. Following the Closing,

AFC will control and allow the Company and the Subsidiary and their counsel to

participate, at Buyer's expense, in any audit or other administrative or

judicial proceeding of AFC's consolidated, unitary or combined income Tax

Returns to the extent that such Tax Returns relate to the Company or the

Subsidiary. AFC will not settle any such audit in a manner which would adversely

affect the Company or the Subsidiary after the Closing Date without the prior

consent of Buyer, which shall not be unreasonably withheld or delayed. Buyer

shall control the conduct of all stages of all other audits or other

administrative or judicial proceedings with respect to Taxes of the Company or

the Subsidiary for all periods following the Closing.

 

                  (d)       CARRYBACKS. AFC will immediately pay to Buyer any Tax

refund (or reduction in Tax liability) resulting from a carryback of a

post-Closing Tax attribute of the Company or the Subsidiary into AFC's

consolidated, unitary or combined Tax Returns, when such refund or reduction is

realized by the AFC Affiliated Group. AFC will cooperate with the Company and

the Subsidiary in obtaining such refunds (or reduction in Tax liability),

including through the filing of amended Tax Returns or refund claims. Buyer

agrees to indemnify AFC for any Taxes paid by AFC that result from a Final

Determination of the disallowance of such post-Closing Tax attribute after

submission to Buyer of evidence reasonably satisfactory to Buyer of such Final

Determination and calculation and payment of such increased Taxes resulting

therefrom.

 

                  (e)       COOPERATION ON TAX MATTERS. Buyer, the Company, the

Subsidiary and AFC shall cooperate fully, as and to the extent reasonably

requested by the other Party, in connection with the filing of Tax Returns

pursuant to this Section 2.10 and any audit, litigation or other proceeding with

respect to Taxes. Such cooperation shall include the retention and (upon the

other Party's request) the provision of records and information which

 

 

                                     - 14 -

<PAGE>

 

are reasonably relevant to any such audit, litigation or other proceeding and

making employees available on a mutually convenient basis to provide additional

information and explanation of any material provided hereunder. Buyer, the

Company, the Subsidiary and AFC agree (i) to retain all books and records with

respect to Tax matters pertinent to the Company and the Subsidiary relating to

any taxable period beginning before the Closing Date until the expiration of the

statute of limitations (and, to the extent notified by Buyer or AFC, any

extensions thereof) of the respective taxable periods, and to abide by all

record retention agreements entered into with any taxing authority, and (ii) to

give the other Party reasonable written notice prior to transferring, destroying

or discarding any such books and records and, if the other Party so requests,

the Company and the Subsidiary or AFC, as the case may be, shall allow the other

Party to take possession of such books and records.

 

3.        REPRESENTATIONS AND WARRANTIES OF AFC.

 

         AFC represents and warrants to the Buyer as follows, and all such

representations and warranties shall be true and correct at and as of the

Closing Date as though then made:

 

         3.1       CORPORATE. Each of AFC, the Company and the Subsidiary is a

corporation duly organized, validly existing and in good standing under the laws

of the jurisdiction of its incorporation, and it has all necessary power and

authority to own, lease and operate its properties and other assets and to carry

on its business as it is now being conducted or presently proposed to be

conducted. Each of the Company and the Subsidiary is duly licensed and qualified

to do business as a foreign corporation and is in good standing in each

jurisdiction in which it owns or leases any real property except as disclosed on

the Disclosure Schedule and in every jurisdiction where the failure to so

qualify could reasonably be expected to have a Company Material Adverse Effect.

The Disclosure Schedule contains a complete and current copy of the Certificate

of Incorporation and of the Bylaws of each of the Company and the Subsidiary.

The Disclosure Schedule lists with respect to the Company and the Subsidiary its

name, jurisdiction of incorporation, officers and directors, and states and

other jurisdictions in which it is qualified to do business as a foreign

corporation.

 

         3.2       AUTHORIZATION. AFC has all necessary corporate power and

authority to execute, deliver and perform this Agreement and to perform the

Transactions to be performed by it. Such execution, delivery and performance

have been duly authorized by all necessary corporate action, including any

required approval by AFC's stockholders and Board of Directors. This Agreement

constitutes the legal, valid and binding obligation of AFC, enforceable against

it in accordance with its terms.

 

         3.3       VALIDITY OF CONTEMPLATED TRANSACTIONS. Except for the consents

specified in the Disclosure Schedule, neither the execution and delivery by AFC

of this Agreement, nor the performance of the Transactions to be performed by it

will violate, constitute a breach or default (with or without the giving of

notice, or lapse of time, or both), require any filing, consent, authorization

or approval under or be in conflict with (with or without the giving of notice,

or lapse of time, or both) or result in the imposition of any Encumbrance

against the Shares or any property or other asset of the Company or the

Subsidiary pursuant

 

 

                                     - 15 -

<PAGE>

 

to (a) any Regulation or Court Order to which the Company or the Subsidiary or

any of their respective properties or assets are subject, (b) (i) the

Certificate of Incorporation or Bylaws of the Company or the Subsidiary or (ii)

any resolution adopted by the board of directors or the stockholders of either

the Company or the Subsidiary; or (c) any material Contract or other material

document to which the Company or the Subsidiary is a party or to which any of

their respective properties or other assets may be subject.

 

         3.4       CAPITALIZATION AND STOCK OWNERSHIP.

 

                  (a)       The total authorized capital stock of the Company

consists of 10,000 shares of Common Stock, par value $0.01 per share. As of the

date of this Agreement 9,950 shares of Common Stock are issued and outstanding,

all of which are owned by AFC. Except for the security interest of the Secured

Lender which shall be terminated at Closing, AFC owns, and as of the Effective

Time shall own, the Shares, free and clear of all Encumbrances and shall at

Closing have full and unfettered right to transfer and deliver the Shares to

Buyer. There are no, and as of the Effective Time there will not be any,

options, warrants, calls, commitments or other rights of any character

(including conversion rights) obligating the Company or the Subsidiary to issue,

transfer or sell capital stock of the Company or the Subsidiary. The Shares are

duly and validly authorized and issued, fully paid, non-assessable and free of

pre-emptive rights.

 

                  (b)       The total authorized capital stock of the Subsidiary

consists of 100 shares of common stock, par value $0.01 per share, and as of the

date of this Agreement 100 shares of common stock are issued and outstanding,

all of which are owned by the Company. The outstanding shares of the

Subsidiary's common stock are duly and validly authorized and issued, fully

paid, non-assessable and free of pre-emptive rights.

 

         3.5       FINANCIAL STATEMENTS. AFC has delivered to Buyer copies of (i)

AFC's audited financial statements (including balance sheet, statement of

operations and statement of cash flows) for its fiscal years ending December 30,

2001, December 29, 2002 and December 28, 2003 (the "AFC FINANCIAL STATEMENTS")

and (ii) the Subsidiary's unaudited financial statements for the year ending

December 28, 2003 and the Subsidiary's sixth accounting period ended June 13,

2004 (the "SUBSIDIARY FINANCIAL STATEMENTS"). The AFC Financial Statements and

the Subsidiary Financial Statements (collectively, the "FINANCIAL STATEMENTS")

(a) are true, correct, complete and in accordance with the books and records of

AFC and the Subsidiary, (b) have been prepared in conformity with GAAP

consistently applied for the respective periods covered thereby, except with

respect to the Subsidiary Financial Statements which do not reflect adjustments

for income tax obligations and expenses filed on a consolidated basis (the

"EXCLUDED ITEMS"), the effect of which will not, individually or in the

aggregate, be materially adverse and do not include footnote disclosures; and

(c) when read together with the related notes to the audited AFC Financial

Statements, fairly present the financial condition of the Subsidiary as of such

dates and the results of its operations for the periods ended on such dates.

Except to the extent disclosed on Section 3.5 of the Disclosure Schedule or

reflected or reserved against or noted in the Subsidiary Balance Sheet and

except with respect to the Excluded Items on the Subsidiary Financial

Statements, neither the Company nor the Subsidiary has any material liabilities

or

 

 

                                     - 16 -

<PAGE>

 

obligations of any nature, whether accrued, absolute, contingent or otherwise

which are required to be set forth on the Subsidiary Balance Sheet (or a balance

sheet for the Company as of the Subsidiary Balance Sheet Date) in accordance

with GAAP, other than current liabilities incurred in the Ordinary Course of

Business since the date thereof. For purposes of this agreement, the Subsidiary

Financial Statements as of June 13, 2004 are referred to as the "CURRENT

FINANCIAL STATEMENTS," the balance sheet of the Subsidiary as of June 13, 2004

is referred to as the "SUBSIDIARY BALANCE SHEET" and the date thereof is

referred to as the "SUBSIDIARY BALANCE SHEET DATE".

 

         3.6       TITLE TO ASSETS AND RELATED MATTERS.

 

                  (a)       Each of the Company and the Subsidiary has good and

marketable title to all of its Assets, including the Assets listed on the

Subsidiary Balance Sheet, free and clear of any Encumbrances except (i) those

specified in the Disclosure Schedule, (ii) the security interest held by the

Secured Lender, which shall be released at Closing, and (iii) other matters

that, in the aggregate, are immaterial.

 

                  (b)       The Company's sole asset consists of the outstanding

shares of the Subsidiary's capital stock.

 

         3.7       PERMITS. Except as set forth on the Disclosure Schedule, (i)

each of the Company and the Subsidiary holds all material permits that are

required by any Governmental Authority to permit it to conduct its respective

business as now being conducted or presently proposed to be conducted, the

failure of which to hold could reasonably be expected to have a Company Material

Adverse Effect and (ii) all such permits have been validly issued and are in

full force and effect and will remain so upon consummation of the Transactions.

No suspension, cancellation or termination of any such permit that could

reasonably be expected to have a Company Material Adverse Effect is, to AFC's

knowledge, threatened or imminent.

 

         3.8       REAL PROPERTY.

 

                  (a)       Leased Property. The Disclosure Schedule describes

all real estate used in the operation of the Business as well as any other real

estate that is in the possession of or leased by the Company or the Subsidiary

(as tenant or sub-lessor) (collectively, the "PREMISES"). Neither the Company

nor the Subsidiary owns any real estate. All leasehold properties held by the

Company or the Subsidiary as lessee are held under valid, binding and

enforceable leases, true and correct copies of which have been delivered to the

Buyer. Except as set forth on the Disclosure Schedule, no consents, approvals or

other actions are required to maintain each of the leases existing at the

Effective Time in full force and effect after the Effective Time. The Disclosure

Schedule contains a true and correct description of each lease (including any

amendment thereto) to which the Company or the Subsidiary is a party, together

with a list of all current rent obligations payable thereunder, and each of the

leases disclosed on the Disclosure Schedule is in full force and effect and

there are no existing defaults or events of default on the part of the Company

or the Subsidiary or, to AFC's knowledge, any other party thereto, or events

which with notice or lapse of time or

 

 

                                     - 17 -

<PAGE>

 

both would constitute defaults, the consequences of which, severally or in the

aggregate, would have a Company Material Adverse Effect. There are no monetary

obligations in excess of $1,000 to any lessor under any such lease (including,

without limitation, any obligation to repair or make improvements to any of the

Premises subject to such leases) that are required to be performed prior to the

Closing Date that have not been, or will not be, fully performed by that time.

Except as indicated on the Disclosure Schedule, all improvements on any

Company-Owned Bakery Premises are in compliance with the terms of the lease

relating to such Premises, except where the failure so to comply would not have

a material adverse effect on the Business conducted on such Premises. The

Company-Owned Bakery Premises and, to AFC's knowledge, all other Premises, are

zoned for the purposes for which they are presently being used.

 

                  (b)       Violations. Neither AFC, the Company nor the

Subsidiary has received written notice from any Governmental Authority that the

Premises or any improvements situated thereon, or the uses conducted thereon or

therein, materially violate any Regulations of any Governmental Authority having

jurisdiction over the Premises, and, to AFC's knowledge, no conditions exist

that are likely to give rise to any such notice. The use, occupancy, operation

and condition of the Company-Owned Bakery Premises, and to AFC's knowledge, all

other Premises, and all improvements on the Company-Owned Bakery Premises, and

to AFC's knowledge, all other Premises, comply with all applicable covenants,

conditions, restrictions and agreements contained in any lease relating to the

Premises and any applicable health, safety, environmental and other Regulations

to which they are subject, except where the failure so to comply would not have

a material adverse effect on the business conducted at such location. All

consents and all applicable permits, licenses and other evidences of compliance

which are or were required to be obtained in connection with the construction of

the improvements on the Company-Owned Bakery Premises, and, to AFC's knowledge,

all other Premises, and the occupancy, condition, operation and use of the

Company-Owned Bakery Premises, and, to AFC's knowledge, all other Premises, have

been obtained and complied with, except where the failure so to comply would not

have a material adverse effect on the business conducted at such location.

 

                  (c)       Environmental. (i) Neither the Company nor the

Subsidiary is in violation of any Regulation relating to pollution or protection

of human health or the environment including, without limitation, Regulations

relating to emissions, discharges, releases or threatened releases of chemicals,

pollutants, contaminants, wastes, toxic substances, hazardous substances,

petroleum or petroleum products, asbestos or asbestos-containing materials, or

polychlorinated biphenyls ("MATERIALS OF ENVIRONMENTAL CONCERN"), or otherwise

relating to the manufacture, processing, distribution, use, treatment, storage,

disposal, transport or handling of Materials of Environmental Concern

(collectively, "ENVIRONMENTAL LAWS") which could reasonably be expected to have

a Company Material Adverse Effect.

 

                  (ii)      Neither AFC, the Company nor the Subsidiary has

received any communication alleging that the Company or the Subsidiary is or may

be liable or is not in full compliance with any Environmental Laws or permit or

authorization required under applicable Environmental Laws where such failure to

comply fully could reasonably be

 

 

                                     - 18 -

<PAGE>

 

expected to have a Company Material Adverse Effect and, to AFC's knowledge,

there are no circumstances that may prevent or interfere with such full

compliance in the future.

 

                   (iii)     To AFC's knowledge, there is no claim, action, cause

of action, investigation or notice by any person or entity alleging potential

liability arising out of, based on or resulting from (a) the presence in or

release into the environment of any Materials of Environmental Concern at any

location owned, leased or operated, now or in the past, by the Company or the

Subsidiary or (b) circumstances forming the basis of any violation or alleged

violation of any Environmental Law pending or, to AFC's knowledge, threatened

against the Company or the Subsidiary.

 

                  (d)       Utilities. Except as set forth on the Disclosure

Schedule, all utilities and major service systems (including, without

limitation, electrical, sanitary and sewage, HVAC, air filtering, refrigeration

and water supply) necessary for the operation of the Company-Owned Bakery

Premises and, to AFC's knowledge, all other Premises are in working order and

are adequate for the present needs of the Premises. To the knowledge of AFC,

there are no facts or circumstances which will result in the termination of the

present access from any Premises to utility services or existing streets,

highways and roads adjoining such Premises.

 

                  (e)       Condemnation. AFC has no knowledge and neither the

Company nor the Subsidiary has received written notice, that any of the Premises

are or will be subjected to or affected by (i) any special assessments, whether

or not presently a lien thereon, or (ii) any condemnation, eminent domain or

similar proceedings.

 

         3.9       ACCOUNTS RECEIVABLE. All accounts receivable of the Subsidiary

(the "ACCOUNTS RECEIVABLE") are bona fide accounts receivable created in the

Ordinary Course of Business and are not subject to any right of set-off. All

Accounts Receivable of the Subsidiary (other than those which have arisen since

the Subsidiary Balance Sheet Date) are accurately reflected on the Subsidiary

Balance Sheet in accordance with GAAP. Unless paid prior to the Closing Date,

the Accounts Receivable are or will be as of the Closing Date current and

collectible net of the respective reserves shown on the Subsidiary Balance Sheet

or on the Closing Date Balance Sheet (which reserves are adequate and calculated

consistent with past practice and, in the case of the reserves reflected on the

Closing Date Balance Sheet, will not represent a lesser percentage of the

Accounts Receivable as of the Closing Date than the reserves reflected in the

Subsidiary Balance Sheet with respect to the Accounts Receivable reflected

therein and will not represent a material adverse change in the composition of

such Accounts Receivable in terms of aging). Accounts Receivable in the

aggregate amount reflected on the Closing Date Balance Sheet, net of related

reserves, will be collected in full, without any set-off, on or before February

15, 2005. Section 3.9 of the Disclosure Schedule contains a complete and

accurate list of all Accounts Receivable as of the Base Working Capital Date,

which list sets forth the aging of such Accounts Receivable.

 

         3.10      INVENTORY. All inventory of the Subsidiary, whether or not

reflected in the Subsidiary Balance Sheet, consists, in all material respects,

of items of quality and quantity usable and saleable in the Ordinary Course of

Business, except for items that are obsolete,

 

 

                                     - 19 -

<PAGE>

 

discontinued, returned, damaged or of below-standard quality or merchantability

that for purposes of the Subsidiary Balance Sheet have been written down to the

bona fide selling price less cost of disposition, or for which adequate reserves

have been provided.

 

         3.11      ABSENCE OF UNDISCLOSED LIABILITIES. There are no liabilities

or other obligations of the Company or the Subsidiary (whether absolute,

accrued, contingent or otherwise and whether or not due) required to be shown in

the Financial Statements in accordance with GAAP and not shown except (i) to the

extent reflected in the Subsidiary Balance Sheet and the notes and schedules

thereto, (ii) those liabilities described in this Agreement, (iii) those

liabilities incurred in the Ordinary Course of Business since the Subsidiary

Balance Sheet Date, and (iv) those liabilities not required under GAAP to be

reflected in the Financial Statements.

 

         3.12      TAXES.

 

                  (a)       All Tax Returns required to be filed by or on behalf

of the Company or the Subsidiary or any Affiliated Group of which the Company or

the Subsidiary is or was a member have been duly and timely filed with the

appropriate taxing authority in all jurisdictions in which such Tax Returns are

required to be filed (after giving effect to any valid extensions of time in

which to make such filings), and all such Tax Returns are true, complete and

accurate in all material respects, except as explained in the Disclosure

Schedule in connection with AFC's restatement of its financial statements for

its 2000, 2001 and 2002 fiscal years (the "RESTATEMENT YEARS"). It is

acknowledged and agreed that any income tax refunds payable with respect to the

Restatement Years, the 2003 fiscal year, and the stub period ending on the

Closing Date shall be the property of AFC and neither the Company nor the

Subsidiary shall have any right to any portion thereof.

 

                   (b)       All Taxes with respect to the Company, the Subsidiary

or any Affiliated Group of which the Company or any Subsidiary is or was a

member shown to be payable on the Tax Returns and any subsequent assessments

with respect thereto have been timely paid in full or in the case of Taxes that

are not yet due or owing, the Company and the Subsidiary have made due and

sufficient accruals for the payment of all such Taxes on the face of the Final

Closing Date Balance Sheet and on its books and records and no other Taxes are

payable by the AFC Affiliated Group with respect to the Company or the

Subsidiary, other than Taxes that AFC, the Company or the Subsidiary is

contesting in good faith through appropriate proceedings and for which adequate

reserves have been established in accordance with GAAP. There are no liens on

any of the Shares or Assets with respect to Taxes, other than liens for Taxes

not yet due and payable or for Taxes that AFC or the Company or the Subsidiary

is contesting in good faith through appropriate proceedings and for which

adequate reserves have been established in accordance with GAAP. All required

estimated Tax payments sufficient to avoid any underpayment penalties have been

made by or on behalf of the Company and the Subsidiary.

 

                  (c)       Except as set forth in the Disclosure Schedule, none

of the Company, the Subsidiary or any other Person on their behalf has (i)

waived any statute of limitations in respect of any Taxes or agreed to any

extension of time with respect to a Tax assessment or

 

 

                                     - 20 -

<PAGE>

 

deficiency for any taxable period during which the Company or the Subsidiary was

a member of the AFC Affiliated Group, (ii) filed a consent pursuant to Section

341(f) of the Code (as in effect prior to the repeal under the Jobs and Growth

Tax reconciliation Act of 2003) or agreed to have Section 341(f)(2) of the code

(as in effect prior to the repeal under the Jobs and Growth Tax Reconciliation

Act of 2003) apply to any disposition of a subsection (f) asset (as such term is

defined in Section 341(f)(4) of the Code) owned by the Company or the

Subsidiary, (iii) agreed to or is required to make any adjustments pursuant to

Section 481(a) of the Code or any similar provision of law or has any knowledge

that any taxing authority has proposed any such adjustment, or has any

application pending with any taxing authority requesting permission for any

changes in accounting methods that relate to the Company or the Subsidiary (iv)

executed or entered into a closing agreement pursuant to Section 7121 of the

Code or any similar provision of law with respect to the Company or the

Subsidiary, (v) requested any extension of time within which to file any Tax

Return, which Tax Return has since not been filed, or (vi) granted to any Person

any power of attorney that is currently in force with respect to any Tax matter.

 

                  (d)       The Company and the Subsidiary have complied in all

material respects with all applicable laws relating to the payment and

withholding of Taxes and have duly and timely withheld and paid over to the

appropriate taxing authority all amounts required to be so withheld and paid

under all applicable laws.

 

                  (e)       No taxing authority in a jurisdiction where the

Company or the Subsidiary does not file Tax Returns has sent written notice to

the Company or the Subsidiary claiming that it is or may be subject to taxation

by that jurisdiction.

 

                  (f)       All deficiencies asserted or assessments made as a

result of any examinations by any taxing authority of the Tax Returns of, or

including, the Company or the Subsidiary have been fully paid other than

asserted deficiencies or assessments that AFC, the Company or the Subsidiary is

contesting in good faith through appropriate proceedings and for which adequate

reserves have been established in accordance with GAAP, and there are no other

audits or investigations by any taxing authority in progress, nor has AFC, the

Company or the Subsidiary received any written notice from any taxing authority

that it intends to conduct such an audit or investigation.

 

                  (g)       Neither the Company nor the Subsidiary has any

"corporate acquisition indebtedness" within the meaning of Section 279 of the

Code.

 

                  (h)       Neither the Company nor the Subsidiary has been a

U.S. real property holding corporation within the meaning of Section 897(c)(2)

of the Code during the applicable period specified in Section 897(c)(1)(A)(ii)

of the Code.

 

                  (i)       Neither the Company nor the Subsidiary is a party to

any tax sharing, allocation, indemnity or similar agreement or arrangement

(whether or not written) pursuant to which it will have any obligation to make

any payments after the Closing.

 

 

                                     - 21 -

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                  (j)       There is no contract, agreement, plan or arrangement

covering any person that, individually or collectively, could give rise to the

payment of any amount that would not be deductible by the Buyer, the Company or

their respective Affiliates by reason of Section 280G of the Code or would be

subject to withholding under Section 4999 of the Code.

 

                  (k)       Neither the Company nor the Subsidiary is subject to

any private letter ruling of the IRS or comparable rulings of any taxing

authority.

 

                  (l)       Since the Acquisition Date, neither the Company nor

the Subsidiary has ever been a member of any consolidated, combined, affiliated

or unitary group of corporations for any Tax purposes other than the AFC

Affiliated Group.

 

                  (m)       Neither the Company nor the Subsidiary has

constituted either a "distributing corporation" or a "controlled corporation"

(within the meaning of Section 355(a)(1)(A) of the Code) in a distribution of

stock qualifying for tax-free treatment under Section 355 of the Code in the

five (5) years prior to the date of this Agreement.

 

                  (n)       Section 3.12(n) of the Disclosure Schedule sets

forth, with respect to each of the Company and the Subsidiary (i) any

"intercompany transactions" in respect of which gain was and continues to be

deferred pursuant to Treasury Regulations Section 1.1502-13 or any analogous or

similar provision of Law, (ii) any "excess loss accounts" in respect of the

stock of the Subsidiary pursuant to Treasury Regulations Section 1.1502-19, or

any analogous or similar provision of Law, and (iii) any taxable income of the

Company or the Subsidiary that will be required under applicable Tax law to be

reported by the Buyer or any of its affiliates, including the Company or the

Subsidiary, for a taxable period beginning after the Closing Date which taxable

income was realized prior to the Closing Date.

 

                  (o)       The Company and the Subsidiary have disclosed on

their federal income Tax Returns all positions taken therein that could give

rise to substantial understatement of federal income tax within the meaning of

Section 6662 of the Code.

 

                  (q)       Neither the Company nor the Subsidiary has

participated in any reportable transaction, as defined in Treasury Regulation

Section 1.6011-4(b)(1), or a transaction substantially similar to a reportable

transaction.

 

                   (r)       Neither the Company nor the Subsidiary has, or has

ever had, a permanent establishment in any country other than the United States,

or has engaged in a trade or business in any country other than the United

States that subjected it to tax in such country.

 

         For purposes of this Section 3.12, any reference to the Company or the

Subsidiary shall be deemed to include any Person which merged with or was

liquidated into such Company or Subsidiary.

 

 

                                     - 22 -

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         3.13      EQUIPMENT. The Disclosure Schedule sets forth a brief

description of each item of machinery or equipment typically owned or leased by

the Company or the Subsidiary and used or held for use in the Company-Owned

Bakeries with an original book basis, in the case of owned equipment, in excess

of $5,000, indicating the typical budgeted cost of each such item when purchased

new, and in the case of leased equipment with an annual lease obligation in

excess of $1,500. Except as set forth on the Disclosure Schedule, each

Company-Owned Bakery has substantially all of the machinery and equipment

referenced in this Section 3.13. The machinery and equipment used in the

Business is in good operating condition and repair, and is adequate for the uses

to which it is being put, and none of such equipment is in need of maintenance

or repairs except for ordinary, routine maintenance and repairs that are not

material in nature or cost. Except as set forth in the Disclosure Schedule, the

Assets are sufficient for the continued conduct of the Business after the

Closing in substantially the same manner as conducted prior to the Closing.

 

         3.14      BENEFIT PLANS. The employee benefit plans and agreements

described in the Disclosure Schedule are the only employee benefit plans and

agreements maintained by the Company, the Subsidiary and AFC for the benefit of

their employees, retirees, dependents, spouses, directors, independent

contractors, or other beneficiaries and agents, including without limitation (i)

current and deferred compensation, pension, profit sharing, severance, vacation,

stock purchase, stock option, bonus and incentive compensation benefits and

other employee benefit plans (as defined in Title I, Subtitle A, Section 3(3) of

the Employee Retirement Income Security Act of 1974 ("ERISA")) for such

employees and agents; and (ii) the medical, hospital, life, health, accident,

disability, death and other fringe and welfare benefits for such employees and

agents; all of which plans, programs, practices, policies and other individual

and group arrangements and agreements, including any unwritten compensation,

fringe benefit, payroll or employment practices, procedures or policies of any

kind or description, are hereinafter referred to as "BENEFIT PLANS." For each

Benefit Plan, AFC has delivered or made available to Buyer true, correct and

complete copies of (i) the most recent two determination letters issued with

respect to any Benefit Plan intended to be qualified under Code Section 401(a);

(ii) copies of the most recent summary plan descriptions and any material

modifications thereto for the Benefit Plans covered by ERISA and subject to the

summary plan description requirements; (iii) all employment manuals and

policies; (iv) all collective bargaining agreements; and (v) the most recently

filed three IRS Forms 5500, including all schedules thereto and opinions of

independent accountants, filed for each Benefit Plan subject to the requirement

to file such an annual report. Except as disclosed in the Disclosure Schedule,

there are no contributions or payments due with respect to any of the Benefit

Plans other than contributions and payments due in the normal course. Other than

routine claims for benefits, no claim against or legal proceeding involving any

Benefit Plan is pending or, to AFC's knowledge, threatened. Except as disclosed

in the Disclosure Schedule, the Company, the Subsidiary and each Benefit Plan

are in compliance with the provisions of ERISA, the Code and any other laws

applicable to it, except where failure to comply could not reasonably be

expected to have a Company Material Adverse Effect. Each Benefit Plan that is

intended to be qualified under Code Section 401(a) has received a favorable

determination letter from the Internal Revenue Service, and AFC is not aware of

any circumstances likely to result in revocation of any such favorable

determination letter. AFC, the Company and the Subsidiary have never maintained

a plan subject to Title IV of ERISA. No "party in interest" (as defined in

Section 3(14) of ERISA) or "disqualified person" (as defined in

 

 

                                     - 23 -

<PAGE>

 

Code Section 4975(e)(2)) with respect to any Benefit Plan has engaged in any

nonexempt "prohibited transaction" (described in Code Section 4975(c) or Section

406 of ERISA) the penalty of which could have a Company Material Adverse Effect.

No tax under Code Sections 4980B or 5000 has been incurred with respect to any

Benefit Plan, and to AFC's knowledge, no circumstances exist which could give

rise to such tax.

 

         3.15      SUBSIDIARIES. Other than the Subsidiary, the Company does not

own directly or indirectly, any interest or investment (whether equity or debt)

in any Person.

 

         3.16      COMPLIANCE WITH COURT ORDERS AND REGULATIONS. Neither the

Company nor the Subsidiary is in material violation of any Court Order or any

Regulation, and neither the Business nor the Assets have been used or operated

by the Company or the Subsidiary in material violation of any Court Order or any

Regulation. Except as set forth on the Disclosure Schedule, neither the Company

nor the Subsidiary has received notice that any investigation or review by any

Governmental Authority with respect to the Company or the Subsidiary is pending

or that any such investigation or review is contemplated. Neither Company nor

the Subsidiary is subject to any judgment or Court Order in any lawsuit or

proceeding which has or may have a Company Material Adverse Effect on its rights

and interests in any Franchise Agreement. To AFC's knowledge, there are not

currently, nor have there ever been any administrative actions, cease and desist

orders, or other administrative actions against the Company or the Subsidiary by

any Governmental Authority which regulates the sale of Franchises (as defined

below).

 

         3.17      LEGAL PROCEEDINGS. Except as disclosed on the Disclosure

Schedule, there is no Proceeding that is pending or, to AFC's knowledge,

threatened against the Company or the Subsidiary, and to AFC's knowledge, there

is no basis for any Proceeding.

 

         3.18      CONTRACTS AND COMMITMENTS.

 

                  (a)       The Disclosure Schedule lists (and the Company has

provided true and correct copies to the Buyer of) each of the following items to

which either the Company or the Subsidiary is a party or to which any of their

properties or other assets are subject, except for any Contracts that may be

terminated without liability or penalty on not more than 30 days' notice and any

Contracts under which the executory obligation of the Company or the Subsidiary

involves an individual amount of less than $10,000 (unless a different amount is

specified below):

 

                           (i)       Contracts with any present or former

                  stockholder, director, officer, employee, partner or

                  consultant of the Company or the Subsidiary;

 

                           (ii)      Contracts for the future purchase of, or

                  payment for, supplies or products, or for the performance of

                  services by a third party, in excess of $20,000 in any

                  individual case;

 

                           (iii)     Contracts to sell or supply products or to

                  perform services to or for third parties, in excess of $10,000

                  in any individual case;

 

 

                                     - 24 -

<PAGE>

 

                           (iv)      notes, debentures, bonds, conditional sale

                  agreements, equipment trust agreements, letter of credit

                  agreements, reimbursement agreements, loan agreements or other

                  Contracts for the borrowing or lending of money, agreements or

                  arrangements for a line of credit or guarantee, pledge or

                   undertaking in any manner (including guarantees of lease

                  obligations) whatsoever of the indebtedness of any other

                  Person;

 

                           (v)       Contracts limiting or restraining the

                   Company or the Subsidiary from engaging or competing in any

                  line of business or any geographical area;

 

                           (vi)      Contracts relating to any license, franchise

                  or distributorship, or copyright, or to any ideas, technical

                  assistance or other know-how of or used by the Company or the

                  Subsidiary;

 

                           (vii)     Collective bargaining agreements or other

                  contracts with labor unions;

 

                           (viii)    Agreements relating to severance

                  arrangements, retirement benefits, deferred compensation or

                  termination of employment;

 

                           (ix)      Contracts not made in the Ordinary Course of

                  Business that individually involve the payment or receipt of

                  more than $10,000;

 

                           (x)       each joint venture, partnership, and other

                  Contract (however named) involving a sharing of profits,

                  losses, costs, or liabilities by either the Company or the

                  Subsidiary with any other Person;

 

                           (xi)      each power of attorney that is currently

                  effective and outstanding; and

 

                           (xii)     each domestic and foreign Cinnabon

                  Franchisee or Licensee competition and reward program.

 

                  (b)       Neither the Company, the Subsidiary nor, to AFC's

knowledge, any other party is in default under, nor to AFC's knowledge, has any

event occurred that (with or without the giving of notice or lapse of time, or

both) would constitute a material default under any of the Contracts. Neither

the Company nor the Subsidiary has received any communication from, or given any

communication to, any other party indicating that the Company, the Subsidiary or

such other party, as the case may be, is currently or by the lapse of time will

be in material default under any Contract.

 

         3.19      INSURANCE.

 

                  (a)       The Company and the Subsidiary are covered by

policies of insurance maintained by AFC, the Company or the Subsidiary covering

such risks, in such amounts

 

 

                                      - 25 -

<PAGE>

 

and with such deductibles and exclusions as are reasonable for the Business and

the Assets, as determined by AFC in its reasonable business judgment. None of

the Company or the Subsidiary is in material default with respect to its

obligations under any of such insurance policies, and to AFC's knowledge, no

event has occurred which, with notice or the lapse of time or both, would

constitute a material breach or default, or permit termination, modification, or

acceleration, under the policy. To the extent that the Company and the

Subsidiary self-insure certain of their properties or risks, such self-insurance

protects against such casualties and contingencies and is at such levels as is

in accordance with reasonable business practices, as determined by AFC in its

reasonable business judgment.

 

                  (b)       To AFC's knowledge, no party to any such insurance

policy has repudiated any material provision thereof. All known claims asserted

against the Company or the Subsidiary as of the date hereof, if any, of which

the Company or the Subsidiary has received written notice that may by covered by

insurance have been disclosed to and accepted by the appropriate insurance

companies and are being defended by such appropriate insurance companies and are

described in Section 3.19 of the Disclosure Schedule. Except as disclosed in the

Disclosure Schedule, no claims have been denied coverage during the last two

years. Other than for health insurance premium increases and as set forth in the

Disclosure Schedule, neither the Company nor the Subsidiary has received any

written notice (i) of any material pending premium increase under any policy,

(ii) that it is subject to any retroactive premium adjustment or other material

loss-sharing arrangement or (iii) of the intent of any insurance company not to

renew any such policy.

 

         3.20      LABOR MATTERS. Neither the Company nor the Subsidiary is

obligated under any agreement to recognize or bargain with any labor

organization or union on behalf of its employees. To AFC's knowledge, there is

not now any formal organization activity among any of the emp