<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 20, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
EINSTEIN/NOAH BAGEL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 5812 84-1294908
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
14123 DENVER WEST PARKWAY; P.O. BOX 4086
GOLDEN, COLORADO 80401
TELEPHONE (303) 215-9300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
PAUL A. STRASEN
VICE PRESIDENT AND GENERAL COUNSEL
EINSTEIN/NOAH BAGEL CORP.
14123 DENVER WEST PARKWAY; P.O. BOX 4086
GOLDEN, COLORADO 80401
TELEPHONE (303) 215-9300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
KEVIN J. MCCARTHY
BELL, BOYD & LLOYD
THREE FIRST NATIONAL PLAZA
CHICAGO, ILLINOIS 60602
TELEPHONE: (312) 372-1121
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per 9,908,327
share shares $31.00 $307,158,137 $105,917
- -----------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Calculated in accordance with Rule 457(c) and based upon the average of
the high and low sale prices of the registrant's Common Stock reported on
the Nasdaq National Market on September 13, 1996, as reported in The Wall
Street Journal (Western Edition).
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED
BY ITEMS OF PART I OF FORM S-1.
<TABLE>
<CAPTION>
REGISTRATION STATEMENT CAPTION OR LOCATION
ITEM NUMBER AND CAPTIONS IN PROSPECTUS
------------------------ -------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus..... Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus.... Inside Front and Outside Back Cover Pages;
Additional Information
3. Summary Information, Risk
Factors, and Ratio of
Earnings to Fixed Charges.... Prospectus Summary; Risk Factors
4. Use of Proceeds............... Outside Front Cover Page
5. Determination of Offering
Price........................ *
6. Dilution...................... *
7. Selling Security Holders...... Outside Front Cover Page; Registering
Stockholders
8. Plan of Distribution.......... Registering Stockholders; Plan of
Distribution
9. Description of Securities to
be Registered................ Description of Capital Stock
10. Interests of Named Experts and
Counsel...................... *
11. Information with Respect to Outside Front Cover Page; Prospectus
the Registrant............... Summary--The Company; Risk Factors; Price
Range of Common Stock; Dividend Policy;
Selected Historical and Pro Forma
Consolidated Financial and Store Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Relationship with Boston
Chicken; Principal Stockholders and
Securities Ownership of Management; Shares
Eligible for Future Sale; Financial
Statements
12. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities.................. *
</TABLE>
- --------
* Item inapplicable or answer is negative and omitted from Prospectus.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED SEPTEMBER 20, 1996
PROSPECTUS
9,908,327 SHARES
LOGO
COMMON STOCK
-----------
This Prospectus covers 9,908,327 shares (the "Shares") of common stock, par
value $.01 (the "Common Stock"), of Einstein/Noah Bagel Corp. (the "Company")
which may be offered and sold from time to time for the account of the persons
who are identified herein under the heading "Registering Stockholders" and any
other person who obtains the right to sell the Shares hereunder (the
"Registering Stockholders"). Only 1,380,175 of such Shares will be immediately
available for resale upon effectiveness of the Registration Statement of which
this Prospectus forms a part and the remainder of such Shares are subject to
contractual lock-up arrangements of various durations. Such remaining Shares
will become available for sale hereunder upon expiration, termination, waiver
or amendment of such lock-up arrangements. See "Shares Eligible for Future
Sale." The Shares are being registered hereunder to simplify resale thereof if
and when a Registering Stockholder determines to sell Shares from time to time
and not because of any expressed intent to immediately sell such Shares. See
"Registering Stockholders" and "Plan of Distribution." THE COMPANY WILL RECEIVE
NO PART OF THE PROCEEDS OF ANY SALES OF THE SHARES.
The distribution of the Shares by the Registering Stockholders may be
effected from time to time in one or more transactions on the Nasdaq National
Market (which may involve block transactions), in special offerings, in
negotiated transactions, or otherwise, and at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, or at
negotiated prices. See "Plan of Distribution." The Registering Stockholders may
engage one or more brokers to act as principal or agent in making sales, who
may receive discounts or commissions from the Registering Stockholders in
amounts to be negotiated. The Registering Stockholders and any such brokers may
be deemed "underwriters" under the Securities Act of 1933, as amended (the
"Securities Act"), of the Shares sold.
The Common Stock is traded on the Nasdaq National Market under the symbol
"ENBX". On September 18, 1996, the closing sale price of the Common Stock, as
reported in The Wall Street Journal (Western Edition), was $31.00 per share.
See "Price Range of Common Stock."
-----------
SEE "RISK FACTORS" AT PAGE 9 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-----------
The date of this Prospectus is , 1996.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN
OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL.
THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Prospectus Summary........................................................ 3
Special Note Regarding Forward-Looking Statements......................... 7
The Company............................................................... 7
Risk Factors.............................................................. 9
Price Range of Common Stock............................................... 14
Dividend Policy........................................................... 14
Selected Historical and Pro Forma Consolidated Financial and Store Data... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 22
Management................................................................ 35
Certain Transactions...................................................... 39
Principal Stockholders and Securities Ownership of Management............. 49
Relationship with Boston Chicken.......................................... 51
Description of Capital Stock.............................................. 57
Shares Eligible for Future Sale........................................... 58
Registering Stockholders.................................................. 60
Plan of Distribution...................................................... 66
Experts................................................................... 66
Index to Financial Statements............................................. F-1
</TABLE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, registration statements, proxy
statements, and other information filed by the Company with the Commission can
be inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the Commission's Regional Offices: 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New
York 10048. Copies of such materials can be obtained at prescribed rates from
the Public Reference Section of the Commission, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549.
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to
the Common Stock registered hereunder. As used herein, the term "Registration
Statement" means the initial Registration Statement and any and all amendments
thereto. This Prospectus omits certain information contained in said
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock registered hereunder, reference is made to the Registration Statement,
including the exhibits thereto. Statements herein concerning the contents of
any contract or other document are not necessarily complete and in each
instance reference is made to such contract or other document filed with the
Commission as an exhibit to the Registration Statement, or otherwise, each
such statement being qualified by and subject to such reference in all
respects.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise indicated, the information in this Prospectus
gives effect to a 225-for-1 stock split effected by the Company in July 1996.
Unless the context suggests otherwise, references in this Prospectus to the
"Company" mean Einstein/Noah Bagel Corp., its predecessors, and its and their
subsidiaries. Einstein Bros.(TM), Noah's Bagels(R) and Noah's New York
Bagels(R) are trademarks owned by the Company.
THE COMPANY
The Company operates and franchises specialty retail stores that feature
fresh-baked bagels, cream cheeses, coffee and other related products, primarily
under the Einstein Bros. Bagels and Noah's New York Bagels brand names. As of
September 4, 1996, there were 218 stores in operation systemwide, of which 18
were Company-operated and 200 were operated by area developers financed in part
by the Company. Such financing generally permits the Company in certain
circumstances to convert its loan into a majority equity interest in the area
developer. As of September 4, 1996, the Company had entered into area
development agreements that provide for the development of 1,001 additional
stores, the majority of which are scheduled to open over the next three years.
The Company estimates that there will be between 275 and 300 stores in
operation systemwide by the end of 1996. SEE "SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS" ON PAGE 7.
The Company's principal business objective is to become the leading specialty
retailer of fresh-baked bagels and related products in the United States and to
ultimately support and extend its consumer brands through alternate
distribution channels, such as wholesale and contract food service. The Company
believes that there is an opportunity to develop a significant multi-unit
specialty retail business based on fresh-baked bagels because of the growth in
per capita consumption of bagels and the fragmented state of the current retail
bagel market. To achieve its specialty retail objectives, the Company and its
area developers employ a concentrated market development strategy that is
designed to create strong local brand awareness. The Company believes this
strategy will allow it and its area developers to more efficiently leverage
marketing, development and operations resources, while establishing a strong
competitive position in each targeted market. The Company initially plans to
segregate development of its Einstein Bros. Bagels and Noah's New York Bagels
stores on a geographic basis; however, the Company intends to test the
development and operation of both brands within the same trade area.
Einstein Bros. Bagels stores feature both traditional and creative bagels
baked fresh throughout the day and offered to customers in an inviting store
environment that combines the authentic tastes of a bagel bakery with the
comfortable setting of a neighborhood meeting place. Each Einstein Bros. Bagels
store blends function, style and customer comfort with simple, contemporary
colors and furnishings in a relaxed social atmosphere. In addition to a
distinctive variety of fresh-baked bagels, Einstein Bros. Bagels stores offer a
broad selection of specialty cream cheeses, premium coffee products and an
array of creative soups, salads and sandwiches. The stores' atmosphere and
products are enhanced by a service philosophy designed to develop customer
loyalty, so that visiting an Einstein Bros. Bagels store becomes part of the
customer's daily or weekly routine. The first Einstein Bros. Bagels store
opened in June 1995 in Ogden, Utah and as of September 4, 1996, there were 119
stores operating under the brand in 18 states. The Company currently expects
that it and its area developers will develop Einstein Bros. Bagels stores
primarily outside of the West Coast area.
Noah's New York Bagels stores are authentic kosher bagel bakeries featuring
bagels baked fresh throughout the day, cream cheese "shmears", kosher dairy
deli items, including fish salads and four varieties of lox, and selected New
York deli-style beverages. Noah's New York Bagels stores recreate the mood and
feeling of a turn-of-the-century New York bakery. A key element of the Noah's
New York Bagels brand is involvement on a store-by-store basis as a committed
and conscientious member of the community. The first Noah's New York Bagels
store opened in Berkeley, California in 1989 and as of September 4, 1996, there
were 63 stores operating under the brand in three states. The Company currently
expects that it and its area developers will develop Noah's New York Bagels
stores primarily on the West Coast.
3
<PAGE>
The Company was established in early 1995 as Progressive Bagel Concepts, Inc.
and launched its business through the acquisition of three regional bagel
retailers. The Company's formation was facilitated by Boston Chicken, which, in
addition to providing convertible and non-convertible loan financing, has
supported, and continues to support, the Company's growth with multi-unit
retail infrastructure and systems pursuant to fee service agreements.
Subsequently, the Company changed its name to Einstein Bros. Bagels, Inc.,
developed the Einstein Bros. Bagels brand and acquired two West Coast bagel
retailers, including Noah's New York Bagels, Inc. ("Noah's"). In June 1996, the
Company changed its name to Einstein/Noah Bagel Corp. to reflect its dual brand
development strategy. The Company and its area developers intend to convert
stores currently operating under all other brand names to either Einstein Bros.
Bagels stores or Noah's New York Bagels stores by early 1998.
In August 1996, the Company completed (i) an initial public offering of
3,105,000 shares of its common stock, par value $.01 per share (the "Common
Stock"), at a price of $17.00 per share (the "Initial Public Offering"), (ii) a
concurrent public offering of 425,000 shares of Common Stock at a price of
$15.81 per share (the "Concurrent Public Offering") and (iii) a concurrent
private placement of 2,000,000 shares of Common Stock to Boston Chicken, Inc.
("Boston Chicken") at a price of $15.81 per share (the "Concurrent Private
Placement"). The net proceeds to the Company from the Initial Public Offering,
the Concurrent Public Offering and the Concurrent Private Placement were
approximately $86.0 million after deduction of underwriting discount and other
offering expenses. Of such net proceeds, approximately $69.3 million was used
to repay indebtedness.
The Company's executive offices are located at 14123 Denver West Parkway,
Golden, Colorado 80401 and its telephone number is (303) 215-9300.
SHARES BEING REGISTERED HEREUNDER
This Prospectus covers 9,908,327 shares of Common Stock which may be offered
and sold from time to time for the account of the Registering Stockholders or
their pledgees, donees, transferees or other successors in interest of the
Registering Stockholders. Only 1,380,175 of such Shares will be immediately
available for resale upon effectiveness of the Registration Statement of which
this Prospectus forms a part and the remainder of such Shares are subject to
contractual lock-up arrangements of various durations. Such remaining Shares
will become available for resale hereby upon expiration, termination, waiver or
amendment of such lock-up arrangements. See "Shares Eligible for Future Sale."
The Shares are being registered hereunder to simplify resale thereof if and
when a Registering Stockholder determines to sell Shares from time to time and
not because of any expressed intent to immediately sell such Shares.
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS. SEE
"RISK FACTORS."
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND STORE DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF STORES)
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM PERIOD FROM MARCH 24, 1995
MARCH 24, 1995 DECEMBER 26, (INCEPTION) TWO QUARTERS
(INCEPTION) THROUGH 1994 THROUGH THROUGH ENDED JULY 14,
DECEMBER 31, 1995 DECEMBER 31, 1995 JULY 9, 1995 1996(1)
------------------- ----------------- -------------- -----------------
PRO
ACTUAL PRO FORMA(2) ACTUAL FORMA(3)
------------------- ----------------- ------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Total revenue........... $ 26,423 $ 70,388 $ 7,715 $40,585 $43,889
Income (loss) from
operations(4)(5)....... (43,152) (46,369) (1,964) 1,033 (150)
Net income (loss)(4)(5). $(43,716) $(54,802) $(2,184) $(3,022) $ (459)
======== ======== ======= ======= =======
Net income (loss) per
common and equivalent
share(6)............. $ (4.54) $ (2.20) $ (0.23) $ (0.23) $ (0.02)
======== ======== ======= ======= =======
Weighted average
number of common and
equivalent shares
outstanding during
the period........... 9,659 24,986 9,626 14,261 29,568
======== ======== ======= ======= =======
STORE DATA (UNAUDITED):
Systemwide revenue(7)... $ 26,986 $ 71,263 $ 7,900 $60,470 $63,774
======== ======== ======= ======= =======
Number of stores in
operation at period
end:
Company-operated...... 47 84 29 49 49
Area developers....... 13 13 -- 139 139
-------- -------- ------- ------- -------
Total................. 60 97 29 188 188
======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JULY 14, 1996(1)
---------------------
AS
ACTUAL ADJUSTED(8)
-------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................... $ (4,210) $ 25,140
Notes receivable.......................................... 65,322 65,322
Total assets.............................................. 206,720 236,070
Long-term debt(9)......................................... 77,011 --
Stockholders' equity...................................... 110,714 217,075
</TABLE>
- --------
(1) The Company's fiscal year is the 52/53-week period ending on the last
Sunday in December and normally consists of 13 four-week periods. The first
quarter consists of four periods, and each of the remaining three quarters
consists of three periods, with the first, second and third quarters ending
16 weeks, 28 weeks and 40 weeks, respectively, into the fiscal year.
(2) Giving pro forma effect to the acquisition of Brackman Brothers, Inc.,
Bagel & Bagel, Inc., Offerdahl's Bagel Gourmet, Inc., Baltimore Bagel Co.
and Noah's and conversion of the Company's $120.0 million convertible loan
from Boston Chicken into 15,307,421 shares of Common Stock (which occurred
on June 17, 1996) (the "Loan Conversion") as though all transactions
occurred as of December 26, 1994 (deemed to be the beginning of the
Company's 1995 fiscal year). See the Company's Unaudited Pro Forma
Consolidated Financial Statements and Notes thereto contained elsewhere
herein.
5
<PAGE>
(3) Giving pro forma effect to the acquisition of Noah's and the Loan
Conversion as of the beginning of the Company's 1996 fiscal year. See the
Company's Unaudited Pro Forma Consolidated Financial Statements and Notes
thereto contained elsewhere herein.
(4) Includes for the pro forma two quarters ended July 14, 1996 approximately
$954,000 of stock option expense attributable to the acceleration of the
vesting of compensatory stock options issued by Noah's for such period. The
vesting acceleration occurred immediately prior to the acquisition of
Noah's by the Company. See Note 5 of Notes to the Company's Unaudited Pro
Forma Consolidated Financial Statements included elsewhere herein.
(5) Includes a $26,575,000 write-off of intangible assets for the period from
March 24, 1995 (inception) through December 31, 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
March 24, 1995 (inception) to December 31, 1995--Results of Operations" and
Note 13 of Notes to the Company's Audited Consolidated Financial Statements
included elsewhere herein.
(6) As of July 14, 1996, the Company had approximately $56.7 million of debt
outstanding under the Company's revolving credit facilities. In August
1996, the Company utilized a portion of the proceeds from the Initial
Public Offering, Concurrent Public Offering and the Concurrent Private
Placement to repay such indebtedness. For the two quarters ended July 14,
1996, assuming such debt had been repaid utilizing the proceeds from the
sale of 3,583,175 shares of Common Stock ($15.81 per share) and giving
effect to the Loan Conversion as of the beginning of the fiscal year, the
net income per common and equivalent share would have been $0.09. For the
period from March 24, 1995 (inception) through December 31, 1995, giving
effect to the Loan Conversion as of the beginning of the period, the net
loss per common and equivalent share would have been $1.70.
(7) Includes gross revenue for all stores operated by the Company and its area
developers. Gross revenue excludes sales taxes.
(8) Adjusted to give effect to the approximately $86.0 million raised in August
1996 from the Initial Public Offering, Concurrent Public Offering and the
Concurrent Private Placement and the application of the net proceeds
therefrom and the reclassification of the repurchase common stock shares
and Series A preferred shares from long-term debt to stockholders' equity.
See Note 12 of Notes to the Company's Audited Consolidated Financial
Statements included elsewhere herein.
(9) Includes at July 14, 1996, $12,548,000 attributable to the repurchase
common stock shares and $7,813,000 attributable to the Series A preferred
shares. See Note 12 of Notes to the Company's Audited Consolidated
Financial Statements included elsewhere herein.
6
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS PROSPECTUS UNDER "PROSPECTUS SUMMARY," "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS" CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS OF THE COMPANY, ITS AREA DEVELOPERS AND FRANCHISEES, AND EINSTEIN
BROS. BAGELS AND NOAH'S NEW YORK BAGELS STORES TO BE MATERIALLY DIFFERENT FROM
ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING:
COMPETITION; SUCCESS OF OPERATING INITIATIVES; AREA DEVELOPERS' ADHERENCE TO
DEVELOPMENT SCHEDULES; ADVERTISING AND PROMOTIONAL EFFORTS; ADVERSE PUBLICITY;
ACCEPTANCE OF NEW PRODUCT OFFERINGS; THE COMPANY'S RELATIONSHIPS WITH BOSTON
CHICKEN; AVAILABILITY, LOCATIONS AND TERMS OF SITES FOR STORE DEVELOPMENT;
CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT PLANS; AVAILABILITY AND TERMS OF
CAPITAL; FOOD, LABOR AND EMPLOYEE BENEFITS COSTS; CHANGES IN GOVERNMENT
REGULATIONS; REGIONAL WEATHER CONDITIONS; AND OTHER FACTORS REFERENCED IN THIS
PROSPECTUS. THE SUCCESS OF THE COMPANY IS DEPENDENT ON ITS AREA DEVELOPERS AND
FRANCHISEES AND THE MANNER IN WHICH THEY OPERATE AND DEVELOP EINSTEIN BROS.
BAGELS AND NOAH'S NEW YORK BAGELS STORES.
THE COMPANY
The Company operates and franchises specialty retail stores that feature
fresh-baked bagels, cream cheeses, coffee and other related products,
primarily under the Einstein Bros. Bagels and Noah's New York Bagels brand
names. As of September 4, 1996, there were 218 stores in operation systemwide,
of which 18 were Company-operated and 200 were operated by area developers
financed in part by the Company. Such financing generally permits the Company
in certain circumstances to convert its loan into a majority equity interest
in the area developer. As of September 4, 1996, the Company had entered into
area development agreements that provide for the development of 1,001
additional stores, the majority of which are scheduled to open over the next
three years. The Company estimates that there will be between 275 and 300
stores in operation systemwide by the end of 1996. SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS" ABOVE.
The Company was incorporated in Delaware in February 1995 under the name
Progressive Bagel Concepts, Inc. In March 1995, the Company launched its
business through the acquisition of three regional bagel retailers, Brackman
Brothers, Inc. of Salt Lake City ("Brackman"), Bagel & Bagel, Inc. of Kansas
City ("Bagel & Bagel"), and Offerdahl's Bagel Gourmet, Inc. of Fort Lauderdale
("Offerdahl's"), and in August 1995, acquired Baltimore Bagel Co. of San Diego
("Baltimore Bagel") (collectively the "Founding Companies"). The Company
issued 1,959,152 shares of Common Stock and 6,250 shares of Series A preferred
stock (the "Preferred Shares") to the owners of the Founding Companies in such
transactions. Also in March 1995, the Company raised approximately $20.8
million in a private placement of Common Stock to investors and entered into a
series of agreements with Boston Chicken, including a convertible secured loan
agreement pursuant to which Boston Chicken agreed to loan to the Company up to
$80.0 million (subsequently increased to $120.0 million). On June 17, 1996,
this loan was converted into 15,307,421 shares of Common Stock. Boston Chicken
also provided the Company with a non-convertible revolving credit facility of
$14.0 million, which was subsequently increased to $50.0 million. Boston
Chicken further facilitated the Company's formation and continues to
facilitate the Company's growth by providing multi-unit retail infrastructure
and systems pursuant to fee service agreements. The relationship between the
Company and Boston Chicken, including the terms of the loan agreements, is
described more fully under "Relationship with Boston Chicken." See also
"Certain Transactions."
After formation, the Company assembled a management team comprised of
individuals from the Founding Companies and Boston Chicken, as well as other
professionals experienced in rapid multi-unit retail growth. The Company also
launched a project that resulted in the development of the Einstein Bros.
Bagels brand and store.
7
<PAGE>
As part of the development project, management analyzed (i) the Founding
Companies' stores, including brand positionings, product offerings,
operational service systems and atmosphere, (ii) the competitive environment
and (iii) the preferences of consumers across the United States. The Einstein
Bros. Bagels brand and store were first tested in Ogden, Utah in June 1995
and, based on extensive consumer research, were revised throughout the summer
of 1995, resulting in the Einstein Bros. Bagels brand positioning, product
offering and store design.
In the fall of 1995, the Company developed and launched its area developer
program, which incorporates aspects of the area developer program utilized by
Boston Chicken. The Company believes that having a relatively small group of
area developers, each led by a management group with substantial multi-unit
retail food service experience and short- and long-term incentives tied to
performance, is a superior means to achieve market leadership than either
direct Company ownership of all stores or more traditional franchising
approaches which utilize a larger number of franchisees. As of September 4,
1996, the Company had entered into area development agreements with ten
entities that provide for the development of 1,201 stores, 200 of which were
open as of such date. See "Business--Expansion Strategy" and "Business--
Development Agreements." The Company expects to enter into similar agreements
with at least one additional entity during 1996 and, in connection with such
transactions, expects to sell to such entity Company-operated stores, if any,
in the territories covered by such agreements.
In the fall of 1995, after the development of the Einstein Bros. Bagels
brand, the Company decided to convert its existing stores operating under the
Brackman Bros., Bagel & Bagel, Offerdahl's Bagel Gourmet and Baltimore Bagel
brand names to the Einstein Bros. Bagels brand. The Company and its area
developer for the Salt Lake City market completed conversion of nine Brackman
Bros. stores located in the Salt Lake City area to Einstein Bros. Bagels
stores in March 1996. The Company and its area developers intend to convert
stores currently operating under all other brand names to either Einstein
Bros. Bagels stores or Noah's New York Bagels stores by early 1998.
The Company acquired Noah's, the leading West Coast bagel retailer, in
February 1996, enabling the Company to achieve a strong base of operations on
the West Coast and to add a second premier consumer brand, Noah's New York
Bagels. In connection with the transaction, certain stockholders of Noah's,
including Noah Alper, the founder of Noah's, and members of Noah's management,
acquired 855,225 shares of Common Stock, and Mr. Alper became Vice Chairman of
the Board.
In August 1996, the Company raised an aggregate of approximately $86.0
million from the Initial Public Offering, the Concurrent Public Offering and
the Concurrent Private Placement, after deduction of underwriting discount and
other offering expenses. Of such net proceeds, approximately $69.3 million was
used to repay indebtedness.
8
<PAGE>
RISK FACTORS
Prospective purchasers of the shares of Common Stock offered hereby should
consider carefully the specific factors set forth below as well as the other
information contained in this Prospectus in evaluating an investment in the
Common Stock.
LIMITED OPERATING HISTORY AND RECENT LOSSES
The Company commenced operations in March 1995 and has a limited operating
history upon which investors may evaluate the Company's performance. As of
September 4, 1996, the Company and its area developers operated 218 stores, 36
of which were operating under brands other than Einstein Bros. Bagels or
Noah's New York Bagels. Approximately 145 of the stores operated by the
Company and its area developers have been open for less than one year and an
additional 29 of such stores have been open for less than two years.
Consequently, operating results achieved to date may not be indicative of the
results that may be achieved in the future by any new or existing store. The
Company achieved its first quarter of profitable operations in the second
quarter of fiscal 1996 and previously incurred significant operating losses.
There can be no assurance that the Company's recent results of operations are
indicative of its future results of operations or that any profitability will
continue in the near future or on a sustained basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Company's Consolidated Financial Statements and the Notes thereto. SEE ALSO
"SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 7.
COMPETITION; EASE OF ENTRY INTO BUSINESS
The food service industry is intensely competitive with respect to food
quality, concept, convenience, location, customer service and value. In
addition, there are many well-established food service competitors with
substantially greater financial and other resources than the Company and with
substantially longer operating histories than the Company. Many of such
competitors are less dependent than the Company on a single, primary product.
The Company believes that it competes with other bagel retailers and bakeries,
specialty coffee retailers, doughnut shops, fast-food restaurants,
delicatessens, take-out food service companies, supermarkets and convenience
stores. The Company believes that competition in the retail bagel market will
increase as large retail bagel companies attract additional capital, new
competitors enter the market and bagel retailers compete for market share. In
addition, the Company believes that the start-up costs associated with retail
bagel and similar food service establishments are not a significant impediment
to entry into the retail bagel business. See "Business--Competition."
RAPID EXPANSION
The Company intends to expand primarily by developing additional bagel
stores through its area developer network, although the Company and its area
developers may also acquire existing bagel stores or other properties. As of
September 4, 1996, the Company had entered into area development agreements
with ten entities that provide for the opening of 1,201 stores, 200 of which
were open as of such date. By the end of 1996, the Company expects to have
between 275 and 300 stores in operation systemwide. SEE "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 7. Such expansion will require
the addition of management, facilities, systems and personnel. Failure to
acquire necessary resources on a cost-effective basis could have a material
adverse effect on the results of operations and financial condition of the
Company and its area developers. There can be no assurance that the Company
and its area developers will be able to achieve their development and
operating goals, manage expanding operations effectively, or maintain or
accelerate growth. In addition, there can be no assurance of the viability of
any of the Company's brands in a particular geographic region or locale. See
"Business--Expansion Strategy."
9
<PAGE>
AVAILABILITY OF CAPITAL
The Company anticipates that it and its area developers will have a
continuing need for additional financing for the development of stores and for
bagel and cream cheese production capacity, the amount of which is dependent
primarily on the number of stores opened, the cost of such stores, store
operating results and production capacity requirements. The Company's capital
requirements will also depend on the amount and timing of borrowings under the
loan agreements between the Company and its existing and future area
developers. The Company and its area developers may seek funds from public or
private offerings of debt or equity securities or other types of financing.
There can be no assurance that the Company and its area developers will be
able to raise such funds on satisfactory terms when needed. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources," "Business--Expansion Strategy" and
"Business--Area Developer Financing."
DEPENDENCE ON AREA DEVELOPERS
The Company's success is dependent to a significant extent upon its area
developers and the manner in which they operate and develop their stores. The
opening and success of stores are dependent on a number of factors, including
the availability of suitable sites, the negotiation of acceptable lease or
purchase terms for such sites, permitting and regulatory compliance, the
ability to meet construction schedules, the ability to hire and train
qualified personnel, the financial and other capabilities of the Company and
its area developers, and general economic and business conditions. Not all of
the foregoing factors are within the control of the Company or its area
developers. There can be no assurance that area developers will have access to
financial resources necessary to open the stores required by their development
schedules or that such area developers will successfully develop or operate
stores in their development areas in a manner consistent with the Company's
concepts and standards. See "Business--Area Developer Financing."
The Company has extended secured debt financing to its area developers
pursuant to which the Company has agreed to lend an aggregate of approximately
$184.8 million, of which approximately $95.8 million had been advanced as of
September 4, 1996. These loans subject the Company to the risks of being a
secured lender. As a result of executing the rapid expansion strategy required
by the Company, the Company's area developers incurred net losses of $1.3
million in 1995, and the Company anticipates that its area developers will
continue to incur substantial net losses during their expansion phase. The
Company believes that such losses will be recovered as expansion moderates and
development costs correspondingly diminish, store investment costs decrease,
operational efficiencies increase as a result of overall system maturity and
operational experience, advertising efficiencies commence and average weekly
store revenue increases. However, there can be no assurance that such events
will occur or that such losses will be recovered. The failure of an area
developer to achieve a sufficient level of profitability subsequent to the
completion of its expansion phase could have a material adverse impact on the
Company's financial position and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Expansion Strategy" and Note 11 of Notes to the Company's Audited
Consolidated Financial Statements. SEE ALSO "SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS" ON PAGE 7.
DEPENDENCE ON BOSTON CHICKEN
The Company's success is highly dependent on its continued relationship with
Boston Chicken. The Company and Boston Chicken are parties to various
agreements, pursuant to which Boston Chicken has agreed to provide to the
Company certain accounting and administration, and computer and communications
services. In addition, Boston Chicken has agreed to make available to the
Company a non-convertible loan facility of up to $50.0 million. The
termination of any of these agreements, the loss of any of these services or a
material adverse change in Boston Chicken's business or financial condition
could have a material adverse effect on the Company. See "Relationship with
Boston Chicken."
10
<PAGE>
CONTROL BY AND CONFLICTS OF INTEREST WITH BOSTON CHICKEN
Boston Chicken beneficially owns approximately 60% of the outstanding shares
of Common Stock of the Company. In addition, in connection with the Concurrent
Private Placement, the Company granted to Boston Chicken an option that
permits it to maintain ownership of shares of Common Stock having up to 52% of
the voting power of all of the outstanding shares of capital stock of the
Company having the power generally to vote in the election of directors. By
reason of its holdings and such option, Boston Chicken will be able to control
the affairs and policies of the Company, elect the Company's board of
directors and approve or disapprove any matter submitted to a vote of the
stockholders, including certain fundamental corporate transactions requiring
stockholder approval. In addition, concentrated ownership of the Company could
affect the potential applicability to the Company of personal holding company
tax in certain circumstances. See "Certain Transactions," "Principal
Stockholders and Securities Ownership of Management" and "Relationship with
Boston Chicken."
The Concurrent Private Placement Agreement entered into between the Company
and Boston Chicken prohibits the Company from taking certain actions without
the consent of Boston Chicken as long as such option to Boston Chicken
discussed above has not terminated, including altering any rights attaching to
the Common Stock, offering or issuing any equity securities or debt securities
convertible into equity securities, in either case other than Common Stock,
distributing assets or securities of the Company having a fair market value in
excess of 10% of the Company's consolidated gross assets or consolidated gross
revenues measured as of the immediately preceding fiscal year end, and filing
a petition in bankruptcy.
In addition to existing agreements between the Company and Boston Chicken,
the Company may enter into additional or modified agreements, arrangements and
transactions with Boston Chicken. While the Company expects that any such
future arrangements and transactions will be determined through negotiation
between the two companies, there can be no assurance that conflicts of
interest will not occur with respect to such future business dealings and
similar corporate matters. Conflicts may arise in connection with product
offerings, consumer and market positioning, recruiting, site selection and
issuances of additional securities by the Company. There can be no assurance
that any such conflicts will be resolved in a manner favorable to the Company
or its minority stockholders.
LIMITED SOURCES OF BAGEL DOUGH AND CREAM CHEESE SUPPLY
The Company's development plans require that the Company rapidly develop
significant bagel dough production capacity from internal or external sources.
To date, the Company has met its bagel dough production requirements through a
combination of local fresh dough commissaries owned and operated by the
Company or its area developers, two frozen dough production facilities leased
by the Company and subleased to and operated by area developers of the
Company, and a frozen dough production facility owned and operated by a third-
party baking company that has committed certain capacity to the Company
pursuant to a long-term supply agreement. Any interruption of existing or
planned production capacity at any plant or commissary could have a material
adverse effect on the ability of the Company or its area developers to supply
bagels to their stores. In addition, stores in certain markets are currently
dependent for frozen bagel dough on a single production facility owned and
controlled by the third-party baking company.
The Company also purchases from a single supplier certain proprietary cream
cheeses and spreads sold in Einstein Bros. Bagels stores. Any interruption of
such supply or the inability of the Company to obtain sufficient additional
capacity to meet its requirements could have a material adverse effect on the
Company's ability to supply its proprietary cream cheese to certain bagel
stores. See "Business--Vendors."
RISKS ASSOCIATED WITH THE FOOD SERVICE INDUSTRY
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the cost and availability of labor, purchasing power, availability
of products and the type, number and location of competing restaurants. Multi-
unit food service
11
<PAGE>
chains such as the Company can also be substantially adversely affected by
publicity resulting from food quality, illness, injury or other health
concerns (including food-borne illness claims) or operating issues stemming
from one store or a limited number of stores, whether or not the Company is
liable. Claims relating to foreign objects, food-borne illness or operating
issues are common in the food service industry and a number of such claims may
exist at any given time. In addition, factors such as increased costs of
goods, labor and employee benefits costs, regional weather conditions and the
potential scarcity of experienced management and hourly employees may also
adversely affect the food service industry in general and the results of
operations and financial condition of the Company and its area developers in
particular.
GOVERNMENT REGULATION
The restaurant industry is subject to numerous federal, state and local
government regulations, including those relating to the preparation and sale
of food and building and zoning requirements. The Company and its area
developers are also subject to laws governing their relationship with
employees, including minimum wage requirements, overtime, working and safety
conditions and citizenship requirements. In addition, the Company is subject
to regulation by the Federal Trade Commission and must comply with certain
state laws which govern the offer, sale and termination of franchises and the
refusal to renew franchises. The failure to obtain or retain food licenses or
approvals to sell franchises, or increases in employee benefits costs or other
costs associated with employees, could adversely affect the Company and its
area developers. See "Business--Government Regulation."
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Common Stock could be subject to significant
fluctuations in response to the Company's operating results and other factors.
ANTI-TAKEOVER EFFECT OF CHARTER AND STATUTORY PROVISIONS
Boston Chicken's ownership interest in the Company and the terms of certain
provisions in the Company's Restated Certificate of Incorporation and Amended
and Restated Bylaws may have the effect of discouraging a change in control of
the Company. Such provisions include the requirement that all stockholder
action must be effected at a duly-called annual or special meeting of
stockholders and the requirement that stockholders follow an advance
notification procedure for stockholder nominations of candidates for the board
of directors and to present other stockholder business to be considered at any
meeting of stockholders. In addition, the board of directors has the
authority, without further action by the stockholders, to issue up to 20
million shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, and to issue authorized but
unissued shares of Common Stock up to a maximum of 200 million shares. The
issuance of preferred stock or additional shares of Common Stock could have
the effect of delaying, deferring or preventing a change in control of the
Company, even if such change in control would be beneficial to the Company's
stockholders. See "Principal Stockholders and Securities Ownership of
Management," "Relationship with Boston Chicken" and "Description of Capital
Stock."
SHARES ELIGIBLE FOR FUTURE SALE
At September 4, 1996, the Company had 28,987,326 shares of Common Stock
outstanding. The 3,105,000 shares of Common Stock sold in the Initial Public
Offering are freely tradeable (other than by an "affiliate" of the Company as
such term is defined in the Securities Act) without restriction or
registration under the Securities Act. The 425,000 shares of Common Stock sold
in the Concurrent Public Offering, although also freely tradeable (other than
by an "affiliate" of the Company as such term is defined in the Securities
Act), are subject to contractual lock-up arrangements restricting their sale
prior to August 1, 1997, without the consent of Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch"). All of Shares covered by this
Prospectus, 8,569,050 of which are currently issued and outstanding and
1,339,277 of which are issuable pursuant to outstanding warrants granted by
the Company, may be offered hereby by the Registering Stockholders and sold in
the public market from time to time or in a private transaction subject to
compliance with an exemption from the registration requirements of the
Securities Act, such as Rule 144 or Rule 144A. The holders of 6,971,820 of
12
<PAGE>
the Shares covered hereby have agreed that they will not sell any of such
Shares prior to January 28, 1997, subject to certain exceptions, without the
consent of Merrill Lynch, the holders of 167,197 of the Shares covered hereby
have agreed that they will not sell any of such Shares prior to 180 days from
the date of this Prospectus, the holders of 17,000 of the Shares covered
hereby have agreed that they will not sell any of such Shares prior to August
1, 1997 and the holders of 1,372,135 of the Shares covered hereby (consisting
of all officers and directors of the Company, who hold an aggregate of 550,460
of such Shares, and area developers of the Company holding an aggregate of
821,675 of such Shares) have agreed that they will not sell any of such Shares
prior to August 1, 1998. The Company has registered under the Securities Act
5,295,195 shares of Common Stock issuable under its stock option plans, fewer
than 10% of which will be vested and exercisable within 180 days of the date
of this Prospectus. See "Management--Stock Option Plans." In connection with
the Concurrent Private Placement, the Company has entered into a registration
agreement with Boston Chicken, pursuant to which the Company granted to Boston
Chicken certain demand and piggyback registration rights under the Securities
Act with respect to an aggregate of 16,797,175 shares owned by Boston Chicken.
Boston Chicken has agreed with the Representatives not to sell the 2,000,000
shares of Common Stock purchased by it in the Concurrent Private Placement
prior to August 1, 1997 and not to sell other shares owned by it prior to
January 28, 1997, subject to certain exceptions, without the consent of
Merrill Lynch. In addition, the Company may file a registration statement
covering shares of Common Stock for issuance from time to time in connection
with potential future acquisitions and resales of such shares by the
recipients thereof, although no such acquisitions are currently pending.
Shares so registered could not be sold in the public market prior to January
28, 1997, subject to certain exceptions, without the consent of Merrill Lynch.
No predictions can be made as to the effect, if any, that market sales of such
shares or the availability of such shares for sale will have on the market
price for shares of Common Stock prevailing from time to time. Sales of
substantial amounts of shares of Common Stock in the public market could
adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through an offering of equity
securities or securities convertible into equity securities. See "Certain
Transactions--Registration Rights," "Relationship with Boston Chicken--
Concurrent Private Placement Agreement and Registration Agreement" and "Shares
Eligible for Future Sale."
TRADEMARKS
The Company owns a number of federal trademark and service mark
registrations and the Company has federal trademark applications pending for
additional trademarks and service marks. However, the Company has not yet
obtained federal registrations for certain of the trademarks or service marks
used in its business, certain of the Company's applications have been the
subject of oppositions to such marks, and there can be no assurance that any
such registrations for the Company's trademarks and service marks will be
obtained. In addition, the Company is aware of the use by other persons in
certain geographic areas of names and marks which may be deemed to be similar
to the Einstein Bros. or Noah's New York Bagels brands. There can be no
assurance that such marks will be available for use by the Company and its
area developers in all locations or that the Company will be able to assure
the exclusive use of such marks by the Company and its area developers. See
"Business--Trademarks and Other Proprietary Rights."
ABSENCE OF DIVIDENDS OR DISTRIBUTIONS
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. In addition,
the Company's secured revolving credit facility contains a prohibition on the
payment of cash dividends. See "Dividend Policy."
RECOVERABILITY OF INTANGIBLE ASSETS
The Company has recorded significant intangible assets in connection with
the Company's acquisitions of Brackman, Bagel & Bagel, Offerdahl's, Baltimore
Bagel and Noah's. Applicable accounting standards require the Company to
review long-lived assets (such as goodwill and other identifiable intangible
assets) to be held and used by the Company for impairment whenever events or
changes in circumstances indicate that the carrying values of those assets may
not be recoverable. In the event that the Company determines that the carrying
value of such intangible assets is impaired, it would write-down such carrying
value, which would result in a charge to
13
<PAGE>
earnings. Any such charge could have a material adverse effect on the
Company's financial results. See Notes 2, 4 and 13 of Notes to the Company's
Audited Consolidated Financial Statements and Note 2 of Notes to the Company's
Unaudited Consolidated Financial Statements contained elsewhere herein.
PRICE RANGE OF COMMON STOCK
The Common Stock began trading on the Nasdaq National Market on August 2,
1996. The range of the per share high and low sale prices of the Common Stock
as quoted on the Nasdaq National Market for the period from August 2, 1996 to
September 18, 1996 was $31 3/8 to $19.00, as reported by The Wall Street
Journal (Western Edition). On September 18, 1996, the last reported sale price
of the Common Stock on the Nasdaq National Market was $31.00 per share. At
September 4, 1996, there were approximately 540 record holders of the Common
Stock.
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock and the board of
directors intends to continue a policy of retaining earnings to finance its
growth and for general corporate purposes. In addition, the Company's secured
revolving credit facility contains a prohibition on payment of any cash
dividends, and the Company does not anticipate paying any such dividends in
the foreseeable future.
14
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND STORE DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF STORES)
EINSTEIN/NOAH BAGEL CORP.
The following table sets forth selected historical and pro forma
consolidated financial and store data for the Company. These data should be
read in conjunction with "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and the historical and pro forma
consolidated financial statements and related notes thereto of the Company.
The historical financial statements of the Company for the period from March
24, 1995 (inception) through December 31, 1995 have been audited by Arthur
Andersen LLP, independent accountants, whose report thereon appears elsewhere
herein. The financial data for the two quarters ended July 14, 1996 and for
the period from March 24, 1995 (inception) through July 9, 1995 is unaudited,
but in the opinion of management, include all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the Company's
consolidated financial position and results of operations. Interim results are
not necessarily indicative of results for subsequent periods or the full year.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM PERIOD FROM MARCH
MARCH 24, 1995 DECEMBER 26, 24, 1995
(INCEPTION) THROUGH 1994 THROUGH (INCEPTION) THROUGH TWO QUARTERS ENDED
DECEMBER 31, 1995 DECEMBER 31, 1995 JULY 9, 1995 JULY 14, 1996(1)
------------------- ----------------- ------------------- ---------------------
ACTUAL PRO FORMA(2) ACTUAL PRO FORMA(3)
------------------- ----------------- ------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenue:
Company-operated
stores............... $ 25,685 $ 69,650 $ 7,715 $31,489 $34,793
Royalties and
franchise related
fees................. 738 738 -- 9,096 9,096
-------- -------- ------- ------- -------
Total revenue....... 26,423 70,388 7,715 40,585 43,889
Cost of products sold... 8,239 25,085 2,356 10,078 11,196
Salaries and
benefits(4)............ 13,531 29,547 3,636 14,444 16,805
General and
administrative
expenses............... 21,230 35,550 3,687 15,030 16,038
Write-off of intangible
assets(5).............. 26,575 26,575 -- -- --
-------- -------- ------- ------- -------
Income (loss) from
operations............. (43,152) (46,369) (1,964) 1,033 (150)
Other income (expenses),
net.................... (564) (8,433) (220) (4,055) (309)
-------- -------- ------- ------- -------
Net income (loss)....... $(43,716) $(54,802) $(2,184) $(3,022) $ (459)
======== ======== ======= ======= =======
Net income (loss) per
common and equivalent
share(6)............. $(4.54) $ (2.20) $ (.023) $ (0.23) $(0.02)
======== ======== ======= ======= =======
Weighted average
number of common and
equivalent shares
outstanding during
the period........... 9,659 24,986 9,626 14,261 29,568
======== ======== ======= ======= =======
STORE DATA (UNAUDITED):
Systemwide revenue(7)... $ 26,986 $ 71,263 $ 7,900 $60,470 $63,774
======== ======== ======= ======= =======
Number of stores in
operation at period
end:
Company-operated...... 47 84 29 49 49
Area developers....... 13 13 -- 139 139
-------- -------- ------- ------- -------
Total............... 60 97 29 188 188
======== ======== ======= ======= =======
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
JULY 14, 1996(1)
---------------------
DECEMBER 31, AS
1995 ACTUAL ADJUSTED(8)
------------ -------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.............................. $ 41 $ (4,210) $ 25,140
Notes receivable............................. 7,267 65,322 65,322
Total assets................................. 50,299 206,720 236,070
Long-term debt(9)............................ 58,875 77,011 --
Stockholders' equity......................... (20,994) 110,714 217,075
</TABLE>
- --------
(1) The Company's fiscal year is the 52/53-week period ending on the last
Sunday in December and normally consists of 13 four-week periods. The
first quarter consists of four periods, and each of the remaining three
quarters consists of three periods, with the first, second and third
quarters ending 16 weeks, 28 weeks and 40 weeks, respectively, into the
fiscal year.
(2) Giving pro forma effect to the acquisition of Brackman, Bagel & Bagel,
Offerdahl's, Baltimore Bagel and Noah's and the Loan Conversion as though
all transactions occurred as of December 26, 1994 (deemed to be the
beginning of the Company's 1995 fiscal year). See the Company's Unaudited
Pro Forma Consolidated Financial Statements and Notes thereto contained
elsewhere herein.
(3) Giving pro forma effect to the acquisition of Noah's and the Loan
Conversion as of the beginning of the Company's 1996 fiscal year. See the
Company's Unaudited Pro Forma Consolidated Financial Statements and Notes
thereto contained elsewhere herein.
(4) Includes for the pro forma two quarters ended July 14, 1996 approximately
$954,000 of stock option expense attributable to the acceleration of the
vesting of compensatory stock options issued by Noah's for such period.
The vesting acceleration occurred immediately prior to the acquisition of
Noah's by the Company. See Note 5 of Notes to the Company's Unaudited Pro
Forma Consolidated Financial Statements included elsewhere herein.
(5) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--March 24, 1995 (inception) to December 31, 1995--
Results of Operations" and Note 13 of Notes to the Company's Audited
Consolidated Financial Statements included elsewhere herein.
(6) As of July 14, 1996, the Company had approximately $56.7 million of debt
outstanding under the Company's revolving credit facilities. In August
1996, the Company utilized a portion of the proceeds from the Initial
Public Offering, Concurrent Public Offering and the Concurrent Private
Placement to repay such indebtedness. For the two quarters ended July 14,
1996, assuming such debt had been repaid utilizing the proceeds from the
sale of 3,583,175 shares of Common Stock ($15.81 per share) and giving
effect to the Loan Conversion as of the beginning of the fiscal year, the
net income per common and equivalent share would have been $0.09. For the
period from March 24, 1995 (inception) through December 31, 1995, giving
effect to the Loan Conversion as of the beginning of the period, the net
loss per common and equivalent share would have been $1.70.
(7) Includes gross revenue for all stores operated by the Company and its area
developers. Gross revenue excludes sales taxes.
(8) Adjusted to give effect to the approximately $86.0 million raised in
August 1996 from the Initial Public Offering, Concurrent Public Offering
and the Concurrent Private Placement and the application of the net
proceeds therefrom and the reclassification of the repurchase common stock
shares and the Preferred Shares from long-term debt to stockholders'
equity. See Note 12 of Notes to the Company's Audited Consolidated
Financial Statements included elsewhere herein.
(9) Includes at July 14, 1996, $12,548,000 attributable to the repurchase
common stock shares and $7,813,000 attributable to the Preferred Shares.
See Note 12 of Notes to the Company's Audited Consolidated Financial
Statements included elsewhere herein.
16
<PAGE>
PREDECESSOR COMPANIES
The summary historical combined financial data shown below represent the
financial data of the Company's predecessors: Brackman, Bagel & Bagel and
Offerdahl's. The financial data for the year ended December 31, 1995 include
the results of operations of the predecessors through their respective dates
of acquisition which were March 24, 1995 for Brackman and Bagel & Bagel and
March 31, 1995 for Offerdahl's. The financial information is presented on the
historic cost basis of each of the predecessors. The net income (loss) per
common and equivalent share and the weighted average number of common and
equivalent shares outstanding during the period have not been presented for
these periods because the Company believes this information is not meaningful.
Subsequent to the acquisition of these predecessors, the Company sold
substantially all of their assets. See Note 13 of Notes to the Company's
Audited Consolidated Financial Statements included elsewhere herein.
Accordingly, the Company does not believe that such operating results are
meaningful or are indicative of future operating results of the Company.
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
--------------------------------------------------- JANUARY 1, 1995
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, THROUGH
1991 1992 1993 1994 MARCH 31, 1995
------------ ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
COMBINED STATEMENTS OF
OPERATIONS DATA:
Total revenue........... $4,134 $7,880 $12,048 $19,158 $5,882
Income from operations.. 400 565 449 1,452 39
Net income (loss)....... 351 501 389 696 (158)
COMBINED BALANCE SHEET
DATA:
Total assets............ $1,708 $2,580 $ 4,770 $ 9,511
Long-term debt.......... 532 591 1,011 2,822
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company commenced operations in March 1995 through the acquisition of
three regional bagel retailers, with subsequent acquisitions in August 1995
and February 1996. The Company sold certain acquired stores in 1995 and 1996
to area developers financed in part by the Company. To date, the predominant
source of the Company's revenue has been derived from sales at Company-
operated stores. However, because the Company has sold, and intends to
continue to sell, substantially all of the Company-operated stores to its area
developers and also intends to continue to expand its business primarily
through such area developers, the Company anticipates that its future revenue
will be increasingly derived from royalties, franchise-related fees and
interest income from its area developers. Consequently, comparisons of
operating results to date may not be meaningful.
The Company currently estimates that there will be between 275 and 300
stores in operation systemwide by the end of 1996. SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS" ON PAGE 7. This rapid expansion significantly
affects the comparability of results of operations from period to period in a
number of ways. Store revenue is not as high in the first periods following
opening as it is in later periods and revenue for any new store is also highly
dependent on the proximity of other Company-operated or franchised stores and
those of competitors, the size of the store and its visibility. Further, the
cost of products sold is generally higher as a percentage of revenue for newly
opened stores than for more mature stores because of inefficiencies caused by
less experienced employees and a lack of store-specific operating history from
which to predict daily food production needs. Moreover, in order to support
its expansion program, the Company is continuing to develop its corporate
support center, and accordingly, certain related expenditures will be higher
as a percentage of revenue in earlier periods than in later comparable
periods. In addition, the Company's rapid expansion significantly affects its
liquidity and capital requirements.
The Company's success is highly dependent on its continued relationship with
Boston Chicken, which, as of September 4, 1996, beneficially owned
approximately 60% of the outstanding shares of Common Stock of the Company. In
addition, in connection with the Concurrent Private Placement, the Company
granted to Boston Chicken an option that would permit it to maintain ownership
of shares of Common Stock having up to 52% of the voting power of all of the
outstanding shares of capital stock of the Company having the power generally
to vote in the election of directors. The Company and Boston Chicken are
parties to various agreements, pursuant to which Boston Chicken has agreed to
provide to the Company certain accounting and administration and computer and
communications services. In addition, Boston Chicken has agreed to make
available to the Company a non-convertible loan facility of up to $50.0
million. See "Relationship with Boston Chicken."
Store activity for both Company-operated and franchised stores for the
quarter ended July 14, 1996, was as follows:
<TABLE>
<CAPTION>
STORES AT STORES OPENED STORES CLOSED STORES AT
BEGINNING IN THE IN THE END OF
OF QUARTER QUARTER QUARTER QUARTER
---------- ------------- ------------- ---------
<S> <C> <C> <C>
138 51 (1) 188
</TABLE>
Gross systemwide revenue for all stores was $30.7 million for the quarter
ended July 14, 1996 compared to $6.4 million for the comparable quarter in
1995.
MARCH 24, 1995 (INCEPTION) TO DECEMBER 31, 1995
Results of Operations
Revenue. Total revenue for the period ended December 31, 1995 was $26.4
million, consisting of $25.7 million from sales at Company-operated stores and
$0.7 million from royalties and franchise-related fees. At December 31, 1995,
the Company had 47 Company-operated stores compared to 13 stores owned by area
developers.
18
<PAGE>
Costs and Expenses. Cost of products sold (which consists of food and paper
costs at stores and commissary expenses) were $8.2 million for the period
ended December 31, 1995. Salaries and benefits (which includes salaries and
benefits for both store employees and support center employees) were $13.5
million and general and administrative expenses (which includes both store
expenses and support center expenses) were $21.2 million for the period ended
December 31, 1995. Such expenses resulted from the operations of Company-
operated stores and the development and operation of the Company's support
center.
In addition, after the acquisition of the Founding Companies, the Company
launched a development project, pursuant to which management analyzed (i) the
Founding Companies' stores, including brand positionings, product offerings,
operational service systems and atmosphere, (ii) the competitive environment
and (iii) the preferences of consumers across the United States. The project
resulted in the development of the Einstein Bros. Bagels brand and store. In
connection with, and as a result of, the development of the Einstein Bros.
Bagels brand and store, management determined to discontinue the use of the
identifiable intangible assets acquired in the acquisitions of the Founding
Companies, including trademarks and recipes. Consequently, during the period
ended December 31, 1995, the Company wrote-off $26.6 million of such assets.
The write-off resulted from the discontinuation of the use of these assets and
management's evaluation of the lack of recoverability of the costs thereof.
Goodwill of $14.0 million resulting from these acquisitions continues to be
amortized over its estimated useful life of 35 years. The Company will
continue to evaluate whether events and circumstances occur which may warrant
revising the estimated useful life or writing down all or part of the balance.
See Note 2 of Notes to the Company's Audited Consolidated Financial Statements
included elsewhere herein.
Other Expense. The Company incurred other expense of $0.6 million for the
period ended December 31, 1995, consisting principally of interest expense of
$1.3 million on the Company's loan agreement with Boston Chicken, offset by
other income of $0.7 million resulting from gains recognized on the sale of
marketable equity securities.
QUARTER ENDED JULY 14, 1996 COMPARED TO THE QUARTER ENDED JULY 9, 1995
Results of Operations
Revenue. Total revenue increased $11.9 million to $18.2 million for the
quarter ended July 14, 1996 from $6.3 million for the quarter ended July 9,
1995. For the two quarters ended July 14, 1996, total revenue increased $32.9
million to $40.6 million from $7.7 million for the prior period. Revenue from
Company-operated stores increased $6.8 million to $13.1 million for the
quarter ended July 14, 1996 from $6.3 million for the quarter ended July 9,
1995. For the two quarters ended July 14, 1996, revenue from Company-operated
stores increased $23.8 million to $31.5 million from $7.7 million for the
prior period. The increase in revenue from Company-operated stores for the
current quarter was due to a higher average number of Company-operated stores
open. The increase in revenue from Company-operated stores for the two
quarters ended July 14, 1996 was due to the short operating period in the
first quarter of the Company's first fiscal year of operations resulting in a
combination of a higher average number of Company-operated stores open and a
higher number of operating weeks in the two quarters ended July 14, 1996.
Royalty and franchise-related fees were $5.1 million for the quarter ended
July 14, 1996 and $9.1 million for the two quarters ended July 14, 1996. There
were no such fees in the comparable periods last year. There were 139 stores
operated by area developers as of July 14, 1996.
Cost of Products Sold. Cost of products sold increased $2.7 million to $4.6
million for the quarter ended July 14, 1996, compared with $1.9 million for
the prior period. Cost of products sold increased $7.7 million to $10.1
million for the two quarters ended July 14, 1996, compared with $2.4 million
for the prior period. The increase in cost of products sold for the current
quarter was due to a higher average number of Company-operated stores open.
The increase in cost of products sold for the two quarters ended July 14, 1996
was due to the short operating period in the first quarter of the Company's
first fiscal year of operations resulting in a combination of a higher average
number of Company-operated stores open and a higher number of operating weeks
in the two quarters ended July 14, 1996.
19
<PAGE>
Salaries and Benefits. Salaries and benefits increased $2.3 million to $5.3
million for the quarter ended July 14, 1996, compared with $3.0 million for
the prior period. Salaries and benefits increased $10.8 million to $14.4
million for the two quarters ended July 14, 1996, compared with $3.6 million
for the prior period. The increase in salaries and benefits for the current
quarter was due to a higher average number of stores open and an increase in
the number of employees at the Company's support center necessary to support
systemwide expansion. The increase in salaries and benefits for the two
quarters ended July 14, 1996 was due to the short operating period in the
first quarter of the Company's first fiscal year of operations resulting in an
increase in the number of employees at Company-operated stores due to a higher
average number of stores open during the current period, an increase in the
number of employees at the Company's support center necessary to support
systemwide expansion, and a higher number of operating weeks in the two
quarters ended July 14, 1996.
General and Administrative. General and administrative expenses increased
$2.8 million to $6.0 million for the quarter ended July 14, 1996, compared
with $3.2 million for the prior period. General and administrative expenses
increased $11.3 million to $15.0 million for the two quarters ended July 14,
1996, compared with $3.7 million for the prior period. The increase in general
and administrative expenses for the current quarter was due to an increase in
the number of stores open and an increase in expenses at the Company's support
center necessary to support systemwide expansion. The increase in general and
administrative expenses for the two quarters ended July 14, 1996 was due to
the short operating period in the first quarter of the Company's first fiscal
year of operations resulting in an increase in the number of Company-operated
stores due to a higher average number of stores open during the current
period, an increase in expenses at the Company's support center necessary to
support systemwide expansion, and a higher number of operating weeks in the
two quarters ended July 14, 1996.
Included in general and administrative expenses are depreciation and
amortization charges of $1.2 million for the quarter ended July 14, 1996 and
$3.1 million for the two quarters ended July 14, 1996. These depreciation and
amortization charges include amortization on $98.3 million of goodwill and
intangible assets. These assets are being amortized over their estimated
useful lives ranging from 10 to 35 years. The Company will continue to
evaluate in the ordinary course whether events and circumstances occur which
may warrant revising the estimated useful lives or writing down all or part of
the balance.
Other Expense. The Company incurred other expense of $2.0 million for the
quarter ended July 14, 1996, compared to other expense of $0.1 million for the
prior period. The Company incurred other expense of $4.1 million for the two
quarters ended July 14, 1996, compared to other expense of $0.2 million for
the prior period. The increases reflect higher interest expense attributable
to the borrowings under the Company's loan agreements, offset by gains
recognized on the sale of marketable equity securities.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The Company's primary capital requirements relate to the
development of stores, principally in the form of partial financing for its
area developers. The remainder of the Company's capital requirements relate
primarily to investments in bagel and cream cheese production facilities and
investments in, and operation of, its corporate support center necessary to
support the increase in the number of stores in operation systemwide. In
addition, in February 1996, the Company acquired all of the outstanding
capital stock of Noah's New York Bagels, Inc. for $100.9 million in cash.
The Company has entered into convertible secured loan agreements with its
area developers whereby the area developer may draw on a revolving line of
credit, with certain limitations, in order to provide partial funding for
store development and working capital. As of December 31, 1995 and July 14,
1996, the Company had secured loan commitments aggregating approximately $16.0
million and $162.5 million respectively, of which approximately $3.5 million
and $59.3 million, respectively, had been advanced. As a result of executing
the rapid expansion strategy required by the Company, the Company's area
developers incurred net losses of $1.3 million in 1995, and the Company
anticipates its area developers will continue to incur substantial net losses
during their
20
<PAGE>
expansion stage. The Company believes that such losses will be recovered as
expansion moderates and development costs correspondingly diminish, store
investment costs decrease, operational efficiencies increase as a result of
overall system maturity and operational experience, advertising efficiencies
commence and average weekly store revenue increases. However, there can be no
assurance that such events will occur or that such losses will be recovered.
The failure of an area developer to achieve a sufficient level of
profitability subsequent to completion of its expansion phase could have a
material adverse impact on the Company's financial position and results of
operations. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 7.
In connection with entering into new area development agreements, the
Company has sold, and intends to continue to sell, Company-operated stores
located in areas covered by such area development agreements to the respective
area developer. In 1995, the Company sold 13 Company-operated stores to BCE
West Bagels, L.L.C., one of its area developers, and during the two quarters
ended July 14, 1996, the Company sold an aggregate of 68 Company-operated
stores and related assets to Finest Bagels, L.L.C., Gulfstream Bagels, L.P.
(formerly Einstein Bros. America, L.P.), Noah's Pacific, L.L.C., Liberty
Foods, L.L.C., Colonial Bagels, L.P. and Mayfair Bagels, L.L.C., each of which
is an area developer of the Company. The aggregate proceeds from the sale of
these stores and related assets were approximately $5.5 million in 1995 and
$42.2 million for the two quarters ended July 14, 1996. There were no material
gains or losses recognized as a result of these sales.
Capital Resources. For the period ended December 31, 1995, the Company's
primary sources of capital included $20.8 million from the sale of shares of
Common Stock and $40.0 million from borrowings under its loan agreement with
Boston Chicken. For the two quarters ended July 14, 1996, the Company's
primary sources of capital included $16.2 million from the sale of shares of
Common Stock and $136.7 million of net borrowings under its revolving credit
facilities. The Company had two credit facilities with Boston Chicken,
consisting of a $120.0 million convertible loan facility and a $50.0 million
non-convertible loan facility. In addition, the Company has a $45.0 million
credit facility with Bank of America Illinois, as agent for the lenders. On
June 17, 1996, the outstanding balance of $120.0 million under the Company's
convertible loan facility from Boston Chicken was converted into 15,307,421
shares of Common Stock. As of July 14, 1996, an aggregate of $56.7 million was
outstanding under the two remaining facilities.
In August 1996, the Company completed an underwritten initial offering of
3,105,000 shares of its Common Stock to the public, a concurrent non-
underwritten public offering of 425,000 shares of its Common Stock to certain
individuals and entities and a concurrent private placement of 2,000,000
shares of its Common Stock to Boston Chicken. The aggregate net proceeds of
these offerings were approximately $86.0 million, $69.3 million of which was
utilized to repay the outstanding balances under its revolving credit
facilities.
The Company anticipates it will have a continuing need for additional
financing to continue systemwide expansion. The timing of the Company's
capital requirements will be affected by the number of Company-operated and
area developer stores opened, operational results of the stores and the amount
and timing of borrowings under the loan agreements between the Company and its
existing and future area developers. As the Company's capital requirements
increase, the Company will seek additional funds from public or private
offerings of debt or equity securities. There can be no assurance that the
Company will be able to raise such capital on satisfactory terms when needed.
SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 7.
21
<PAGE>
BUSINESS
GENERAL
The Company operates and franchises specialty retail stores that feature
fresh-baked bagels, cream cheeses, coffee and other related products,
primarily under the Einstein Bros. Bagels and Noah's New York Bagels brand
names. As of September 4, 1996, there were 218 stores in operation systemwide,
of which 18 were Company-operated and 200 were operated by area developers
financed in part by the Company. Such financing generally permits the Company
in certain circumstances to convert its loan into a majority equity interest
in the area developer. As of September 4, 1996, the Company had entered into
area development agreements that provide for the development of 1,001
additional stores, the majority of which are scheduled to open over the next
three years. The Company estimates that there will be between 275 and 300
stores in operation systemwide by the end of 1996. SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS" ON PAGE 7.
BUSINESS STRATEGY
The Company's principal business objective is to become the leading
specialty retailer of fresh-baked bagels and related products in the United
States and to ultimately support and extend its consumer brands through
alternate distribution channels, such as wholesale and contract food service.
The Company believes that there is an opportunity to develop a significant
multi-unit specialty retail business based on fresh-baked bagels because of
the growth in per capita consumption of bagels and the fragmented state of the
current retail bagel market. Key elements of the Company's strategy include:
Distinctive Consumer Brands. The Company believes that its Einstein Bros.
Bagels and Noah's New York Bagels brands are distinct within the retail bagel
market and have their own respective competitive advantages in key areas,
including store design and atmosphere, products and customer and community
service. The Company intends to build initial brand awareness by developing
stores that foster customer loyalty and are an integral part of the local
community. Marketing methods, including the use of broadcast media, will be
used to further enhance brand awareness and facilitate extension of the brands
into new geographic areas and ultimately into alternate distribution channels.
Local Market Focus. The Company believes that a concentrated, rapid
development of stores into select markets is the best strategy for
establishing a competitive position as the preferred provider of fresh-baked
bagels. By focusing on select markets, the Company and its area developers
intend to leverage marketing, development and operations resources and
accelerate attainment of the critical mass necessary to achieve media spending
efficiency.
Area Developer Organization. The Company's strategy of concentrated
development in local markets is supported by area developers financed in part
by the Company. The Company believes that having a relatively small group of
area developers, each led by a management group with substantial multi-unit
retail food service experience and short- and long-term incentives tied to
performance, is a superior means to achieve market leadership than either
direct Company ownership of all stores or more traditional franchising
approaches which utilize a larger number of franchisees. As a result of
providing convertible financing to its area developers, the Company generally
will have, after a moratorium period (typically two years) and after the area
developer has completed not less than 80% of its area development commitment
(or in the event of certain defaults), the right to acquire a majority equity
interest in such area developers. See "--Expansion Strategy" and "--Area
Developer Financing."
Relationship with Boston Chicken. The Company's formation and growth have
been significantly advanced by its relationship with Boston Chicken. Boston
Chicken has provided (i) significant capital financing, (ii) multi-unit retail
infrastructure and systems, including accounting and administration, real
estate and computer and communications services and systems, pursuant to fee
service agreements, and (iii) assistance in recruiting experienced area
developer candidates. The Company believes that the multi-unit retail
infrastructure and services provided to date and to be provided in the future
by Boston Chicken allow the Company to focus its
22
<PAGE>
energy and resources on brand and store development. See "Relationship with
Boston Chicken." In addition, the Company is implementing certain key business
strategies that it believes have been important to Boston Chicken's
development of the Boston Market(R) brand.
Production Efficiencies. The Company believes that its use of proprietary
frozen bagel dough products for both the Einstein Bros. Bagels and Noah's New
York Bagels brands provides significant operational and developmental
advantages. Products for both brands have been developed so that they can be
produced in large, centrally located plants and efficiently packaged and
shipped to stores, where they are baked fresh. The Company believes that its
centralized production allows for a more consistent, superior bagel product
and permits more rapid development, production and deployment of a variety of
new products into stores systemwide. Similarly, the Company believes that its
long-term supply agreement with, and option to acquire, Doc's Cheese Company,
L.L.C. ("Doc's"), in Logan, Utah, provides additional product quality and cost
advantages. See "--Vendors." Doc's has developed a proprietary process that
blends fresh, natural ingredients directly into the cream cheese as it is
being produced, unlike flavored cream cheeses created by adding flavors to
already processed plain cream cheese. In addition, the Doc's product has an
extended refrigerated shelf life enabling the Company to gain centralized
production efficiencies. While the Company currently intends to retain
proprietary product recipes for each of the Einstein Bros. Bagels and Noah's
New York Bagels brands' bagel and cream cheese products, the Company believes
that the use of common production facilities for the two brands could offer
certain additional manufacturing and distribution efficiencies. SEE "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 7.
Community Involvement. The Company believes that a key component in
developing both the Einstein Bros. Bagels and Noah's New York Bagels brands is
a strong local and community-based effort that encourages a close relationship
between each store and its community. The Company and its area developers
utilize community involvement as a means of providing charitable service, as
well as building brand awareness and loyalty. Stores are typically designed to
complement their respective communities by adapting to the surrounding
neighborhood and architecture, incorporating local motifs and themes.
EXPANSION STRATEGY
Geographic and Brand Focus. The Company's current expansion strategy for
Einstein Bros. Bagels and Noah's New York Bagels is based on geographic
segregation of the brands. Noah's New York Bagels is the leading West Coast
bagel retailer, and the Company currently intends to continue expansion of
this brand primarily on the West Coast. The Company and its area developers
have moved aggressively to penetrate targeted designated market areas ("DMAs")
throughout the rest of the United States with the Einstein Bros. Bagels brand,
and the Company currently intends to continue the expansion of this brand
primarily outside of the West Coast. However, the Company intends to test the
development and operation of both brands within the same trade area, and the
Company has granted rights for the development of both brands to separate area
developers for the Las Vegas DMA. The Company estimates that there will be
between 275 and 300 stores in operation systemwide by the end of 1996. SEE
"SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 7.
As of September 4, 1996, in addition to 182 Einstein Bros. Bagels and Noah's
New York Bagels stores, the Company and its area developers were operating 36
bagel stores under the Bagel & Bagel, Offerdahl's Bagel Gourmet and Baltimore
Bagel brands. As part of the Company's expansion strategy, it and its area
developers intend to convert all such stores to either Einstein Bros. Bagels
stores or Noah's New York Bagels stores by early 1998. The Company and its
area developer for the Salt Lake City market completed conversion of nine
Brackman Bros. stores to Einstein Bros. Bagels stores in March 1996.
Area Developer Organizations. The Company's strategy of concentrated
development of local markets is supported by area developers financed in part
by the Company. The Company currently expects that by the end of 1996 all
stores within the system will be owned and operated by area developers. The
Company believes that having a relatively small group of area developers, each
led by a management group with substantial multi-unit
23
<PAGE>
retail food service experience and short- and long-term incentives tied to
performance, is a superior means to achieve market leadership than either
direct Company ownership of all stores or more traditional franchising
approaches which utilize a larger number of franchisees. As a result of
providing convertible financing to its area developers, the Company generally
will have, after a moratorium period (typically two years) and after the area
developer has completed not less than 80% of its area development commitment
(or in the event of certain defaults), the right to acquire a majority equity
interest in such area developers. See "--Area Developer Financing."
As of September 4, 1996, the Company had entered into area development
agreements with ten entities for the development and operation of an aggregate
of 897 Einstein Bros. Bagels stores and an aggregate of 304 Noah's New York
Bagels stores over the next six years (as summarized below). One hundred
sixteen of such Einstein Bros. Bagels stores and 63 of such Noah's New York
Bagels stores were open as of September 4, 1996 and a majority of the
additional stores committed are scheduled to open over the next three years.
The Company expects to enter into similar agreements with at least one
additional entity during 1996 for the development of Einstein Bros. Bagels or
Noah's New York Bagels stores. The Company and its area developers currently
operate stores in 31 territories, and expect to have stores in all of the
territories currently covered by area developer agreements by the end of 1996.
SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 7.
<TABLE>
<CAPTION>
CURRENT ADDITIONAL
STORES STORES
AREA DEVELOPER PRIMARY DEVELOPMENT TERRITORIES OPEN(1) COMMITTED
- -------------- ------------------------------- ------- ----------
<S> <C> <C> <C>
Einstein Bros. Bagels:
BCE West Bagels, Denver, Salt Lake City, Phoenix, Tucson,
L.L.C................ Albuquerque, Las Vegas, Colorado Springs 37 74
Colonial Bagels, L.P.. Boston, Cleveland, Pittsburgh, Providence/
New Bedford, Springfield, MA 4 118
Finest Bagels, L.L.C.. Kansas City, St. Louis, Minneapolis 21 47
Great Lakes Bagels,
L.L.C................ Milwaukee, Chicago, Detroit, Madison 30 167
Gulfstream Bagels, Miami, Fort Lauderdale, West Palm Beach,
L.P.................. Orlando, Tampa 30 65
Liberty Foods, L.L.C.. New York City metropolitan area 7 143
Mayfair Bagels,
L.L.C................ Washington, D.C., Baltimore 4 65
Philly Rose, L.P...... Philadelphia 4 81
Noah's New York Bagels:
Noah's Bay Area Sacramento, San Francisco/Oakland/
Bagels, L.L.C........ San Jose 34 61
Noah's Pacific,
L.L.C................ Los Angeles, Portland, Seattle/Tacoma 29 180
--- -----
Total.......................................................... 200(2) 1,001
=== =====
</TABLE>
- --------
(1) Includes 11 stores operated under the Bagel & Bagel brand, and 10 stores
operated under the Offerdahl's Bagel Gourmet brand.
(2) In addition, at September 4, 1996, the Company operated 18 stores, three
of which were operated under the Einstein Bros. Bagels brand and 15 of
which were operated under the Baltimore Bagel brand.
The Company believes that rapid penetration of selected DMAs is superior to
more limited penetration of many DMAs for several reasons. Concentrations of
stores allow both area developers and Company personnel to gain greater
expertise concerning the trade areas within the DMA, thus improving their
ability to locate and approve sites on a more informed and efficient basis as
part of a market-wide strategy. In addition, store concentrations can permit
more efficient operations, in terms of multi-unit management, convenient
employee training, and sharing of employees, expertise and other resources
within a DMA. Concentrated DMA penetration also permits cost-efficient media
advertising to commence sooner than would be the case with a more scattered
nationwide expansion. The Company believes that media advertising increases
aggregate store revenue (which,
24
<PAGE>
in turn, can promote certain in-store operating efficiencies) and is valuable
in assisting the Company's area developers to secure real estate for future
sites on acceptable terms and assists in the efficient recruiting of both
management and hourly employees.
Site Selection. The Company has an extensive site selection process,
commencing with an overall market plan for each DMA that is compiled by the
Company and the relevant area developer. This market plan divides the DMA into
trade areas based on an aerial review, an extensive vehicle tour and
demographic analysis, and takes into account traffic counts, patterns and
drive times, natural and other boundaries and day-time populations. Once the
market plan is established, local real estate managers of the Company or area
developer and local real estate brokers focus on the most desirable sites in
each trade area, taking into account such factors as visibility, ready
accessibility (particularly for morning drive-time traffic), parking, signage
and adaptability of any current structure, and determine the availability of
the site and the costs relating thereto. A thorough analysis of each site,
including the foregoing types of information, photographs of the site and
neighboring area, and a proposed layout and site elevations, as well as other
materials, must be submitted to the Company for approval. Company personnel
visit each site in connection with the site approval process. In addition,
leases must contain certain terms and provisions and be approved by the
Company. The Company emphasizes neighborhood locations, including end-cap and
in-line locations with easy morning-time access from high traffic roads.
The Company estimates that the initial investment for a Company-operated or
franchised Einstein Bros. Bagels or Noah's New York Bagels store currently
ranges from approximately $269,000 to $592,000. This estimate includes
development and franchise fees (where applicable), professional fees,
deposits, leasehold improvements, furniture, fixtures, equipment, opening
inventory and supplies, architectural and engineering fees, permit and impact
fees, grand opening expenses, computer and software expenses and initial
working capital. This estimate does not include any additional costs which may
be associated with the purchase of the site or underlying real estate. The
actual cost depends on, among other factors, the size and location of the
store, the level of pre-opening expenditures and the amount of improvements,
less any applicable construction allowance.
The Company believes that its ability to achieve rapid development growth is
dependent on (i) its ability to secure area development agreements with
qualified area developers for specific geographic regions, (ii) its and its
area developers' ability to secure suitable sites, which includes negotiating
acceptable lease terms, securing required permitting, complying with other
regulatory requirements and meeting construction schedules, (iii) the
operational and other capabilities of the Company's area developers, (iv) the
availability of capital to its area developers, (v) the ability of the Company
to manage anticipated expansion and recruit and train personnel, and (vi) the
general economic and business environment. There can be no assurance that the
Company or its area developers will be able to achieve their goals.
The standard forms of area development agreement and franchise agreement,
and the terms of the Company's secured convertible financing to area
developers, are discussed more fully below under
"--Development Agreements," "--Franchise Agreements" and "--Area Developer
Financing."
THE EINSTEIN BROS. BAGELS BRAND
The Company developed the Einstein Bros. Bagels brand primarily during the
three-month period following the Company's formation and opened a test store
in Ogden, Utah in June 1995. The Company continued to develop and refine the
Einstein Bros. Bagels brand and concept store during the summer and early fall
of 1995 based on extensive consumer and competitor research. The Company
intends to continue to refine the Einstein Bros. Bagels brand, store design
and products to reflect consumers' tastes and preferences. As of September 4,
1996, the Company and its area developers had opened a total of 119 Einstein
Bros. Bagels stores in 18 states.
Products. The key component of the Einstein Bros. Bagels product strategy is
the Einstein Bros. bagel, which is produced utilizing a proprietary process
that allows for maximum inclusion of high quality ingredients, such as whole
blueberries, raisins and nuts. Bagels are offered in a wide variety of both
traditional and creative flavors, including Plain, Cinnamon Raisin Swirl,
Chopped Onion, Chopped Garlic, Honey Wheat, Spinach Herb,
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Nutty Banana, Wild Blueberry, Dark Pumpernickel, Chocolate Chip and Vegetable.
Bagels are baked fresh throughout the day in each store using a steamed-baking
process that produces a moist and dense interior wrapped in a firm, shiny
crust.
The exclusive line of Einstein Bros. Bagels cream cheeses includes Wildberry
Lite, Cheddar & Peppers, Veggie Lite, Smoked Salmon, Mendocino Sun-Dried
Tomato and Spinach Dill Lite, in addition to traditional cream cheese flavors.
Unlike flavored cream cheeses created by adding flavors to already processed
plain cream cheese, Einstein Bros. Bagels cream cheeses are created by
blending quality flavors and ingredients (such as fresh fruits and vegetables)
directly into the cream cheese during initial production. This process is
specifically designed to yield a more consistently flavored and more
spreadable cream cheese than traditional grocery store products.
The Einstein Bros. Bagels stores also offer consumers an extensive line of
beverages featuring branded coffee products. In addition to several blends of
premium drip coffee, customers can choose from a traditional offering of
espresso-based drinks, including Lattes, Cappuccinos and Americanos, that can
be augmented with gourmet syrup flavorings. High quality herbal, green and
black teas complete the hot beverage offerings. Cold beverages featured by
Einstein Bros. Bagels stores include Cool Cat(TM) iced cappuccino drinks,
fruit teas, bottled sodas, juices and waters, and a full line of fountain
sodas.
The Einstein Bros. Bagels menu of creative soups, salads and bagel
sandwiches offers customers a variety of lunch alternatives. Sandwiches
include signature offerings such as the Tasty Turkey, Veg-Out and Salmon-And-
The-Works, in addition to made-to-order deli sandwiches. Salads include spicy
Tabouli, Caesar, Greek and a Pasta-of-the-Week, as well as distinctive chicken
and tuna salads. The stores also offer a wide variety of soups that are
rotated and offered on a daily basis. In addition, stores feature branded
retail products that support the major menu categories, including ground and
whole bean coffee, teas, bagel chips, coffee mugs and other items.
Store Design and Atmosphere. The Einstein Bros. Bagels store is designed to
combine the authentic tastes of a bagel bakery with the comfortable setting of
a neighborhood meeting place. Each Einstein Bros. Bagels store blends
function, style and customer comfort with simple, contemporary colors and
furnishings in a relaxed social atmosphere. The look of the Einstein Bros.
Bagels store incorporates stained concrete or wood floors and eggplant-,
spruce- and mustard-colored aniline-dyed woods. Menu boards are black with
white lettering and designed to resemble chalkboards. The seating area
features cafe-style tables and wooden chairs with mismatched colors. Walls are
covered with whimsical drawings and sayings that relate to the Einstein Bros.
Bagels products. Other characteristic decorative items include a community
events calendar board that is customized to the store's neighborhood, a
bulletin board for community notices, painted Einstein Bros. Bagels logos and
a chalkboard for children.
A key component of the brand's "neighborhood feel" is its ability to blend
with local architecture by utilizing existing buildings and adapting the
Einstein Bros. Bagels trade dress to such locations. Einstein Bros. Bagels
stores are typically in leased locations of approximately 2,200 square feet
with ample parking, indoor seating for 30 to 40 customers, and, when
practical, additional outdoor seating. The Company and its area developers
generally seek sites located in neighborhood areas with seven-day-a-week
trade.
THE NOAH'S NEW YORK BAGELS BRAND
The Noah's New York Bagels brand was created in 1989 in Berkeley, California
and has evolved into the leading specialty retailer of fresh-baked bagels on
the West Coast. As of September 4, 1996, two of the Company's area developers
operated 63 Noah's New York Bagels stores in the San Francisco Bay Area,
Sacramento, Southern California, Portland and Seattle markets.
Products. The Noah's New York Bagels store is an authentic kosher bagel
bakery featuring 16 varieties of fresh-baked bagels, including Super Onion,
New York Rye, Whole Wheat Sesame, Egg, Garlic and Everything bagels, as well
as hand-made bialys and knishes. Noah's bagels are made from proprietary
recipes and are baked fresh throughout the day using a steamed-baking process
to create a light, moist and flavorful product.
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Noah's New York Bagels stores offer 12 flavors of Noah's Shmears(R), which
are also made from proprietary recipes utilizing a process that results in a
cream cheese product that is light and smooth while still having a rich taste.
Regular and low fat Noah's Shmears flavors include Plain, Lox, Sun-Dried
Tomato, Basil, Chive, Garlic Herb, Veggie, Walnut Raisin and Strawberry.
The Noah's New York Bagels kosher dairy deli menu includes four varieties of
lox (New York Nova, Oregon, Norwegian and Nova lox trim), and salads and
specialty items, including Seven Herb Salmon, Smoked Whitefish, Albacore Tuna
and Hummus. Beverages include premium branded coffees and traditional New York
deli-style beverages.
Store Design and Atmosphere. Noah's New York Bagels stores recreate the mood
and feeling of a turn-of-the-century New York bakery. Mosaic tilework
incorporating the Noah's New York Bagels logo is reminiscent of the tile in
many New York landmarks and subway stations. Signage, menus and literature
incorporate Yiddish words and phrases, old photos and various New York
memorabilia. The lighting, marble counters and tables, and cherry woodwork
contribute to a feeling of old-fashioned comfort.
Particularly on weekends, the Noah's New York Bagels stores are a community
meeting place. The upbeat attitude of each Noah's New York Bagels store crew
helps set the store's atmosphere. Store crew members are encouraged to deliver
warm, personal service, as well as to participate in the Noah's New York
Bagels commitment to the community. Noah's New York Bagels stores are
typically in leased locations ranging in size from 900 to 2,500 square feet,
with newer stores being approximately 1,800 square feet. Stores include
approximately 16 seats, with additional outdoor seating in most locations.
MARKETING
The Company believes that a key component in developing both the Einstein
Bros. Bagels and Noah's New York Bagels brands is a strong local and
community-based effort that encourages a close relationship between each store
and its community. The Company and its area developers intend to utilize
community involvement as a means of providing charitable service, as well as
building brand awareness and loyalty. The Company also utilizes traditional
marketing and advertising methods including television, radio, newspapers and
other print media (including use of free-standing inserts and promotional
coupons), signage, direct mail and in-store point-of-purchase displays to
promote its brands. Both the Company-operated and area developer stores
contribute to a national advertising fund and a local advertising fund to pay
for the development of advertising material and for advertising in their
respective DMAs. See "--Franchise Agreements" and Note 9 of the Notes to the
Company's Audited Consolidated Financial Statements.
VENDORS
In May 1996, the Company entered into a project and approved supplier
agreement (the "Harlan Supply Agreement") with Harlan Bagel Supply Company,
LLC ("Harlan") and the equity owners of Harlan. Harlan recently completed the
construction of a new production facility in Avon, Indiana (the "New
Facility"), which is designed to produce frozen dough for approximately 1.4
million dozen bagels per month, expected to be sufficient to supply
approximately 200 Einstein Bros. Bagels stores. Under the Harlan Supply
Agreement, Harlan has agreed to sell to the Company, its area developers and
their food service distributors up to 1.4 million dozen bagels per month
through June 1, 2003, for which such purchasers will be charged a price equal
to the cost of ingredients and packaging, will absorb an agreed upon allowance
for product losses, and will pay a fixed toll charge (which is subject to
adjustment for inflation, changes in formulations, specifications or
procedures required by the Company or failure of the Company, its area
developers and their food service distributors to purchase certain minimum
numbers of bagels). Under certain circumstances, contract purchase amounts may
be increased, which would permit Harlan to double the New Facility's capacity.
Harlan has granted to the Company an option, exercisable at any time from
December 15, 1999 through June 1, 2002, to acquire all of the assets of Harlan
at a formula price equal to a multiple of Harlan's profits from sales of
products under the Harlan Supply Agreement. Approximately $7.5 million of
equipment used in the New Facility is owned by the Company and leased to
Harlan pursuant to an operating lease.
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The Company is also a party to a cream cheese supply agreement and certain
related agreements with Doc's (the "Doc's Agreements"). Under the Doc's
Agreements, Doc's has agreed to supply the Company, its area developers and
other authorized purchasers with up to 160,000 pounds of cream cheese per week
(which the Company believes is sufficient to supply at least 350 bagel stores)
through October 2, 2000, and the Company has agreed, subject to certain
exceptions and limitations, that it, its area developers and other authorized
purchasers will purchase the lesser of such amount or 60% of their
requirements for cream cheese. Prices for Doc's products are based on Doc's
cost, adjusted as necessary to provide Doc's with sufficient cash flow to fund
principal payments on certain outstanding indebtedness. The Company has
provided certain debt financing to Doc's, primarily to fund the purchase of
cream cheese production equipment and for Doc's working capital needs. The
Doc's Agreements also grant the Company an option, exercisable at any time on
or before October 2, 2000, to acquire all of the assets of Doc's at a formula
price based on cream cheese production volumes and production cost.
The Company has a national account relationship with Sysco Corporation
("Sysco"), which provides for deliveries of food, paper and smallware products
to participating stores several times a week at a negotiated standardized
mark-up above cost. The Company and its area developers currently purchase in
excess of 10% of their products and supplies from Sysco. The Company is
currently negotiating the terms of a distribution agreement with another
national food distribution company.
The Company and its area developers may be subject to shortages or
interruptions in supply caused by transportation strikes, adverse weather or
other conditions which could adversely affect the quality, availability and
cost of ingredients.
The Harlan Supply Agreement and the Doc's Agreements are exhibits to the
Registration Statement of which this Prospectus is a part.
COMPETITION
The food service industry is intensely competitive with respect to food
quality, concept, convenience, location, customer service and value. In
addition, there are many well-established food service competitors with
substantially greater financial and other resources than the Company and with
substantially longer operating histories. Many of such competitors are less
dependent than the Company on a single, primary product. The Company believes
that it competes with other bagel retailers and bakeries, including, among
others, Bruegger's Bagel Bakery, Manhattan Bagel, Big Apple Bagel and
Chesapeake Bagel Bakery, specialty coffee retailers, doughnut shops, fast-food
restaurants, delicatessens, take-out food service companies, supermarkets and
convenience stores. The Company believes that competition in the retail bagel
market will increase as large retail bagel companies attract additional
capital, new competitors enter the market and bagel retailers compete for
market share. In addition, the Company believes that the start-up costs
associated with retail bagel and similar food service establishments are not a
significant impediment to entry into the retail bagel business. The Company
believes that its Einstein Bros. Bagels and Noah's New York Bagels brands
compete favorably in the important factors of taste, food quality,
convenience, customer service and value.
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the cost and availability of labor, purchasing power, availability
of product and the type, number and location of competing restaurants. Multi-
unit food service chains such as the Company can also be substantially
adversely affected by publicity resulting from food quality, illness, injury
or other health concerns (including food-borne illness claims) or operating
issues stemming from one store or a limited number of stores, whether or not
the Company is liable. Claims relating to foreign objects, food-borne illness
or operating issues are common in the food service industry and a number of
such claims may exist at any given time. In addition, factors such as
increased costs of goods, labor and employee benefit costs, regional weather
conditions and potential scarcity of experienced management and hourly
employees may also adversely affect the food service industry in general and
the results of operations and financial condition of the Company and its area
developers in particular. The Company attempts to manage or adapt to these
factors, but some or all of these factors could cause the Company and some or
all of its area developers to be adversely affected.
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DEVELOPMENT AGREEMENTS
The Company's form of area development agreement currently provides for the
development of a specified number of bagel stores of a specified brand within
a defined geographic territory in accordance with a development schedule of
store opening dates. The development schedule generally covers two to five
years and contains store opening benchmarks for the number of stores to be
opened and in operation at quarterly or semi-annual intervals. An area
developer's development schedule typically requires concurrent store
development by the area developer in multiple DMA's. Area developers initially
pay a non-refundable development fee of $5,000 per store to be developed and a
non-refundable real estate services fee of $5,000 per store to be developed.
Such fees are not recognized as income by the Company until the store is
opened. The area development agreements generally provide that the area
developer has the right to open a specified number of stores within each DMA
during the term of the development schedule applicable to that DMA and
generally preclude the Company from operating or franchising bagel stores of
the brand for which rights have been granted within such territory, except
that the Company reserves the right to engage in certain special distribution
arrangements and, in the event the area developer chooses not to develop them,
to develop target sites and conversion sites within the specified territory.
Target sites are sites which the Company believes should be developed for
competitive or market reasons regardless of the applicable development
schedule or the location of pre-existing sites. Conversion sites are sites
obtained from other companies which are suitable for conversion to bagel
stores.
Breaches of the area development agreement, including failure to meet
development schedules, may lead to termination of the limited exclusivity
provided by the agreement, renegotiation of development and franchise
provisions or termination of the right to build future stores, although such
termination will not generally affect existing franchise agreements for
developed locations unless such breaches independently constitute defaults of
the franchise agreements. Any such termination could be contested by the area
developer.
The form of area development agreement between the Company and its area
developers is an exhibit to the Registration Statement of which this
Prospectus is a part.
FRANCHISE AGREEMENTS
Once an acceptable lease for an approved store site has been executed or
real estate for a new site has been acquired, the Company and the area
developer enter into a franchise agreement under which the area developer
becomes the franchisee for the specific store to be developed at the site.
Franchise agreements typically provide for a non-refundable franchise fee of
$35,000 per store, a 5% royalty on "Royalty Base Revenue," which is defined as
gross revenue less customer refunds and coupons, the portion of employee meals
not charged to the employee and monies received by the store from other stores
directly attributable to an approved commissary operated in the store, a
national advertising fund contribution of 2% on Royalty Base Revenue, a local
advertising fund contribution of 4% on Royalty Base Revenue and a $10,000
minimum grand opening expenditure. The national and local advertising fund
contributions may each be increased by .25% per calendar year over the prior
year at the discretion of the Company. The Company's franchise and area
development agreements with respect to markets where the Company has already
commenced store development generally provide for 6% royalties.
The Company's form of franchise agreement provides that the Company may
specify computer hardware and software for use in stores, including licensed
software designated or created by or for Boston Chicken and used by the
Company and its area developers. The cost of designated computer hardware is
approximately $15,000 to $30,000 per store. The Company currently specifies
off-the-shelf computer hardware for use in stores and charges fees aggregating
$16,000 for licensed software for store systems, which fee is paid to Boston
Chicken (including $1,000 for third-party proprietary software which the area
developer is required to use) under an existing computer and communications
systems services agreement (the "Computer Services Agreement"). See
"Relationship with Boston Chicken--Computer and Communications Systems
Services Agreement." The Company's form of franchise agreement also provides
for a periodic maintenance and support fee for modifications and enhancements
made to the licensed software and certain other maintenance and support
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services. The Company and its area developers pay $323 to Boston Chicken and
such area developers pay $77 to the Company per four-week accounting period
per store for these services. The Company believes that the integrated
hardware and licensed software systems used by its area developers will
facilitate the movement of knowledge, including financial, customer and
employee performance data, allowing the Company and its area developers to
react more quickly in a competitive environment.
The Company's form of franchise agreement provides for an area of limited
exclusivity surrounding the bagel store in which the Company may neither
develop nor grant to others the right to develop additional bagel stores
(generally limited to bagel stores of the brand that has been licensed to the
franchisee), except that the Company reserves the right to engage in certain
special distribution arrangements and, in the event that the franchisee
chooses not to develop them, to develop conversion sites within the
franchisee's designated territory. Designated territories in suburban
locations are generally a one-mile radius surrounding the store, while urban
locations occasionally have a smaller (e.g., one-half mile) radius or a trade-
area-specific designated territory.
The Company's form of franchise agreement requires that each store be
operated in accordance with the operating procedures and menu, and meet the
applicable quality, service and cleanliness standards, established by the
Company. The Company may work with a franchisee to improve substandard
performance or any items of non-compliance and may terminate any franchise
agreement if the franchisee does not comply with such standards. The Company
is specifically authorized to take accelerated action in the event that the
operations of any franchised store present a health risk. The Company believes
that maintaining superior food quality, a clean and pleasing environment and
excellent customer service are critical to the reputation and success of the
Company's brands and, therefore, intends to strictly enforce applicable
contractual requirements. Upon any termination of a franchise agreement, the
Company has the right to purchase the assets of the franchisee at the net
tangible book value of such assets.
The form of franchise agreement between the Company and its area developers
is an exhibit to the Registration Statement of which this Prospectus is a
part.
AREA DEVELOPER FINANCING
Secured Loan Agreements. The Company's area developers are generally funded
in part by a senior secured loan made by the Company that is typically
convertible into a majority equity interest in the area developer. The Company
believes that the development and operation of stores in a DMA is improved
when management is permitted to focus primarily on store development and
operations, rather than on raising capital. Accordingly, to facilitate the
development of its brands, the Company has made, and currently intends to
make, loans to area developers to provide partial financing for store
development and working capital. The maximum amount of such a loan is based on
the amount of equity investments (excluding promissory notes) made by the
members of the area developer's management, one or more equity investments
made by Bagel Store Development Funding, L.L.C., a Delaware limited liability
company, formerly Einstein Bros. Equity Funding, L.L.C. ("Bagel Funding"), and
equity investments made by any other investors.
The area developer financing program requires the area developer to expend
at least 75% of its equity capital contributed in cash toward developing
stores and funding working capital prior to drawing on its revolving loan,
with advances permitted during a two- or three-year draw period in a pre-
determined maximum amount generally equal to four times the amount of the area
developer's equity capital contributions (excluding promissory notes). Upon
expiration of the draw period under the loan agreement, the loan generally
converts to an amortizing term loan payable over five years in periodic
installments, with a final balloon payment. Interest is set at 1% over the
applicable reference rate of Bank of America Illinois as established from time
to time and is payable currently. The loan is secured by a pledge of
substantially all of the assets of the area developer.
Each loan agreement contains customary representations, warranties, terms
and covenants. The Company's loans to its area developers subject the Company
to the risks of being a secured lender. The Company considers each area
developer's use of loan proceeds, adherence to its store development schedule,
store performance
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trends, type and amount of collateral securing the loan, prevailing economic
conditions and other factors it deems relevant at the time in evaluating
whether to establish an allowance for potential loan losses. See Note 11 of
Notes to the Company's Audited Consolidated Financial Statements.
The Company may convert all or any portion of the loan amount at its
election into equity in the area developer at a conversion price that is
generally set at a 12% premium over the per unit price paid by the investors
in the area developer for their equity investment made concurrently with the
execution of the loan agreement. To the extent such loan is not fully drawn or
has been drawn and repaid, the Company has a corresponding option to acquire
at the loan conversion price the amount of additional equity it could have
acquired by conversion of the loan had the loan been fully drawn. The
Company's conversion and option rights are only exercisable after a moratorium
period (typically two years) and after the area developer has completed not
less than 80% of its store development commitment. In addition, the Company
may exercise its conversion and option rights upon the occurrence of certain
specified defaults under the area developer loan agreement. An area
developer's default of its development schedule is a default under the loan
agreement (so as to permit the Company to exercise its conversion and option
rights) only if during the 180-day period immediately preceding the event
giving rise to the default, the area developer had access to debt or equity
capital, either directly or through Company sources, on commercially
reasonable terms for similarly situated restaurant businesses, or income from
operations, sufficient in either case to complete its development obligations.
The Company also has certain rights regarding future financings of the area
developer that allow the Company, if it so desires, to maintain the potential
for a majority interest in the area developer upon conversion of the loan and
any corresponding option exercise. There can be no assurance, however, that
the Company will exercise its future rights to acquire an equity interest in
any area developer or that such exercise will result in a majority interest in
the area developer. Any determination to convert any area developer loan would
involve a variety of economic and operational considerations, including the
status of the area developer's market penetration, the performance of the area
developer's stores, the Company's desire to own such stores, the Company's
ability to manage such stores if necessary, and the financial impact of
converting the loan. In addition, any loan conversion or other acquisition of
an equity interest in an area developer by the Company would not be indicative
of whether the Company intended to, or would, convert or otherwise acquire an
equity interest in any other area developer.
The form of secured loan agreement between the Company and its area
developers is an exhibit to the Registration Statement of which this
Prospectus is a part.
Area Developer Equity. Members of management of each of the Company's area
developers generally make an equity investment in the area developer entity.
The amount and type of such investments vary among the area developers. At
September 4, 1996, the aggregate amount of investments by management of the
Company's ten area developers was approximately $0.8 million in cash and
approximately $4.5 million in full recourse, secured, interest-bearing
promissory notes. Future investments by management or others could include
contributions of assets.
In addition to equity investments provided by an area developer's
management, Bagel Funding may make one or more equity investments in the
Company's area developers. Bagel Funding was formed in December 1995 to invest
in area developers of the Company. Bagel Funding has received total capital
commitments from its members aggregating $90.0 million, $45.8 million of which
has been contributed to Bagel Funding and the balance of which is payable from
such members to Bagel Funding at such times on or after October 1, 1996 and on
or before December 31, 1998 as Bagel Funding's manager or managers make one or
more capital calls. The Company, in its capacity as manager of Bagel Funding,
has made a capital call for an aggregate of $30.0 million on or before October
5, 1996. As of September 4, 1996, Bagel Funding had invested a total of
approximately $45.8 million in area developers.
Bagel Funding has the right to require each area developer to redeem Bagel
Funding's equity interest in the area developer (the "Bagel Funding Put") at a
pre-determined formula purchase price based on the store level cash flow of
the area developer in the event (i) the Company acquires a majority interest
in the area developer pursuant to the exercise of its conversion or option
rights under the area developer's secured loan agreement, (ii) the Company's
conversion and option rights expire unexercised and the Company has not
consented to a public
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offering of the area developer, or (iii) the Company does not acquire a
majority interest in an area developer pursuant to the exercise of the
Company's conversion or option rights, such rights have expired under the
secured loan agreement and the Company has not consented to a request by the
area developer to terminate its area development and franchise agreements with
the Company. In the event the area developer does not redeem Bagel Funding's
equity interest when required to do so, the Company will be obligated to
purchase from Bagel Funding its equity interest in the area developer at the
same price applicable to the area developer.
The form of Fourth Amended and Restated Limited Liability Company Agreement
of Bagel Funding and the form of agreement between the Company and Bagel
Funding relating to the contingent repurchase obligation of the Company with
respect to the Bagel Funding Put (including the terms of the formula purchase
price for the Bagel Funding Put) are exhibits to the Registration Statement of
which this Prospectus is a part.
The Company is currently the manager of Bagel Funding. Certain directors and
executive officers of each of the Company and Boston Chicken have made, or
have committed to make, equity investments in Bagel Funding aggregating
approximately $21.7 million. See "Certain Transactions--Bagel Store
Development Funding."
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
The Company owns a number of trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including
Noah's New York Bagels(R), Noah's Bagels(R), A Taste of Old New York(R),
Noah's Shmears(R), Shmear 'Em(R) and Protect Your Bagels, Put Lox on Them(R).
In addition, the Company has federal trademark applications pending for a
number of trademarks and service marks, including Just Say Noah's(TM),
Einstein Bros.(TM), Einstein's(TM), Poppies(TM), The Coffee Table(TM),
Bubbler(TM), Cool Cat(TM), Little Monsters(TM), Fresh & Holesome(TM), Veggie
Confetti(TM), The Veg-Out(TM), Bagelmeister(TM) and Boomerang(TM), as well as
certain logos used by the Company. The Company has applied to register Noah's
New York Bagels(R) in more than 30 foreign countries and to register each of
Einstein Bros.(TM) and Einstein's(TM) in approximately 20 foreign countries.
Most of such pending applications in the United States and foreign countries
were filed in 1995 and 1996. The Company has not yet obtained federal
registrations for any of the trademarks or service marks used in connection
with the Einstein Bros. Bagels stores and products and there can be no
assurance that any such registrations will be obtained.
After the Company filed an application for the service mark Einstein's for
restaurant services in May 1995, Peach State Restaurants, Inc. ("Peach
State"), which owns a restaurant in Atlanta that uses the name Einstein's,
filed a federal trademark application for the name Einstein's for restaurant
services and filed an opposition to the Company's application for Einstein's.
In July 1996 the Company entered into an agreement with Peach State in which
Peach State agreed to withdraw such application, to abandon such opposition
and to not object to, or interfere with, any of the Company's trademark and
service mark applications that include the name Einstein's. Peach State has
also agreed not to use any mark incorporating the name Einstein's for
restaurant services outside of the Atlanta metropolitan area, and the Company
has agreed not to use any mark incorporating the name Einstein's for
restaurant services in the State of Georgia (except for permitted national
advertising and promotion and similar uses).
Hebrew University of Jerusalem ("Hebrew University"), which claims certain
rights to the name Albert Einstein, has obtained an extension of time to file
an opposition to certain of the Company's U.S. applications for Einstein's and
has filed oppositions to the Company's trademark applications in three foreign
countries, although the Company does not use (and does not intend to use,
absent a licensing agreement or other consent of Hebrew University) Albert
Einstein's first name, likeness or scientific formulae or theories in
connection with the Einstein Bros. Bagels brand. The Company is currently
seeking to enter into an agreement with Hebrew University pursuant to which
Hebrew University would grant to the Company rights to use certain indicia of
Albert Einstein and Hebrew University would abandon its trademark oppositions.
There can be no assurance, however, that the Company and Hebrew University
will enter into such an agreement, or that Hebrew University will not oppose
the registration or challenge the use of certain of the Company's trademarks
under laws governing trademarks or publicity rights.
32
<PAGE>
The Company is aware of the use by other persons or entities in certain
geographic areas of names and marks which may be deemed to be similar to
certain of the Company's marks. Some of these persons or entities may have
prior rights to such marks in their respective localities. While the Company
is not aware of any prior uses that would prevent the use of the Company's
marks in any DMA for which it has granted development rights, there can be no
assurance that the Company's marks will be available for use by the Company
and its area developers in all locations.
The Company considers its intellectual property rights to be important to
its business and its policy is to actively defend and enforce such rights.
GOVERNMENT REGULATION
Stores, commissaries and other production facilities operated by the Company
and its area developers are required to comply with federal, state and local
government laws and regulations applicable to food production and consumer
food service businesses generally, including those relating to the preparation
and sale of food, minimum wage requirements, overtime, working and safety
conditions and citizenship requirements, as well as regulations relating to
zoning, construction, health, business licensing and employment. An increase
in employee benefit costs or other costs associated with employees, such as
minimum wage requirements, could adversely affect the Company.
Certain states and the Federal Trade Commission require a franchisor to
transmit specified disclosure statements to potential franchisees before
granting a franchise. Additionally, some states require the franchisor to
register its franchise with the state or qualify for certain statutory or
discretionary exemptions from registration before it may offer a franchise.
The Company believes that its Uniform Franchise Offering Circular (together
with any applicable state versions or supplements) complies with both the
Federal Trade Commission guidelines and all applicable state laws regulating
franchising in those states in which it has offered franchises. The Company's
Uniform Franchise Offering Circular, which contains the base forms of the
Company's current area development, franchise and area developer financing
agreements, is an exhibit to the Registration Statement of which this
Prospectus is a part.
PROPERTIES/LEASING
The Company leases its support center facility, which consists of
approximately 38,000 square feet of office space (and certain common areas,
including parking areas), from Boston Chicken. See "Relationship With Boston
Chicken--Other Relationships Between Boston Chicken and the Company." The
Company also leases office space in San Diego and Los Angeles, California for
use as a support center for the operations of the Company in such location.
The Company and its wholly owned subsidiaries lease the land and buildings
for all Company-operated stores. In addition, the Company and its subsidiaries
may lease land or buildings that they sublease or assign to area developers.
While the Company expects its area developers primarily to continue to lease
sites in the future, the Company or its area developers may also purchase land
and/or buildings for stores to the extent acceptable terms are available. The
majority of the Company's stores are located in retail community shopping
centers, community business districts or freestanding locations.
Stores leased by the Company are typically leased under "triple net" leases
that require the Company to pay its proportionate share of real estate taxes,
maintenance costs and insurance premiums. In some cases, in addition to base
rent, the Company pays percentage rent based on sales in excess of specified
amounts. Generally, the Company's store leases have initial terms of five
years with options to renew for three additional five-year periods at market
rates.
33
<PAGE>
The Company owns commissaries in or near Salt Lake City, Utah and San Diego,
California. The facility in Salt Lake City also contains office space for the
use of operational personnel of the Company's area developer in the Salt Lake
City area and is presently the subject of an environmental remediation program
to correct soil and groundwater contamination resulting from the closure of an
underground storage tank by a prior owner. A groundwater remediation system
has been installed at the site, which is subject to the oversight of the State
of Utah, Division of Environmental Response and Remediation. All of the costs
of the remediation are being paid by certain of the former shareholders of
Brackman pursuant to an indemnification agreement with the Company entered
into by them at the time Brackman was acquired. The remaining costs of the
remediation are not expected to exceed the amount such former shareholders are
obligated to pay under the indemnification agreement.
The Company leases dough production facilities in San Leandro and Whittier,
California, which are subleased to one of its area developers. The Company
leases facilities used as commissaries in or near Fort Lauderdale, Florida and
Kansas City, Kansas. The Company also leases a facility in Parker, Colorado
which it currently uses as a test commissary. The Company may lease or
sublease its commissaries and related office space to area developers.
EMPLOYEES
At September 4, 1996, the Company had approximately 350 employees, including
approximately 110 employed at its support center offices in Golden, Colorado,
approximately 10 employed at zone offices or commissaries and approximately
230 employed at bagel stores operated by the Company. None of the Company's
employees are represented by a labor union or covered by a collective
bargaining contract. The Company believes that its relationships with its
employees are generally good.
LEGAL PROCEEDINGS
The Company, like others in the food service business, is from time to time
the subject of complaints, threat letters or litigation from customers
alleging illness, injury or other food quality, health (including food-borne
illness claims) or operational concerns. Claims relating to foreign objects,
food-borne illness or operating issues are common in the food service industry
and a number of such claims may exist at any given time. Adverse publicity
resulting from such allegations may materially adversely affect the Company
and one or more of its brands, regardless of whether such allegations are
valid or whether the Company is liable. In addition, the Company also
encounters complaints and allegations from former or prospective employees or
others from time to time, as well as other matters which are common for
businesses similar to the Company's. The Company does not believe that any
such matters of which it is aware are material to the Company individually or
in the aggregate, but matters may arise which could adversely affect the
Company or its business operations. See "--Trademarks and Other Proprietary
Rights."
In the course of enforcing its rights under existing area development and
franchise agreements, the Company may also be the subject from time to time of
complaints, threat letters or litigation concerning the proper interpretation
and application of these agreements, particularly in the event of a default or
termination of area development or franchise rights. No such matters are
currently pending.
INSURANCE
The Company currently has the types and amounts of insurance coverage that
it considers appropriate for a company in its business. While management
believes that its insurance coverage is adequate, if the Company was held
liable for amounts exceeding the limits of its insurance coverage or for
claims outside the scope of its insurance coverage, the Company's business,
results of operations and financial condition could be materially adversely
affected.
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Scott A. Beck(3) 38 Chairman of the Board
Noah C. Alper 49 Vice Chairman of the Board
Mark R. Goldston 41 President, Chief Executive Officer and Director
Michael J. Beau-
doin 34 Senior Vice President--Supply Chain
W. Eric Carlborg 32 Senior Vice President--Finance
David G. Stanchak 38 Vice President, Chief Development Officer and Director
Jeffrey L. Butler 34 President of Einstein Bros. Bagels Concept
Joel M. Alam 38 Vice President and Secretary
Paul A. Strasen 40 Vice President and General Counsel
Kyle T. Craig 48 Director
M. Laird
Koldyke(1)(2)(3) 35 Director
Gail A. Lozoff 46 Director and Vice President
John H.
Muehlstein,
Jr.(3) 41 Director
John A.
Offerdahl(1) 32 Director
Lloyd D.
Ruth(1)(2)(3) 49 Director
</TABLE>
- --------
(1) Member of the Audit Committee of the board of directors.
(2) Member of the Reporting Person Stock Option Committee of the board of
directors.
(3) Member of the Compensation and Stock Option Committees of the board of
directors.
Messrs. Craig, Stanchak and Beck were elected to the board of directors as
designees of Boston Chicken, Messrs. Koldyke, Muehlstein and Ruth were elected
to the board of directors as designees of investors in the Company's March
1995 private placement and Messrs. Offerdahl and Daniel V. Colangelo (the
Company's former President and Chief Executive Officer and formerly a
director) and Ms. Lozoff were elected to the board of directors as designees
of Offerdahl's, Brackman and Bagel & Bagel, respectively. Boston Chicken and
Brackman did not designate nominees for the 1996 election of directors and the
private placement investors designated Messrs. Koldyke, Muehlstein and Ruth
for such election. All such contractual designation rights have expired. See
"Risk Factors--Control by and Conflicts of Interest with Boston Chicken."
All directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Officers
serve at the pleasure of the board of directors.
Mr. Beck became Chairman of the Board of the Company in July 1996. Mr. Beck
has served as a director of the Company since March 1995. He has been Chief
Executive Officer and a director of Boston Chicken since June 1992 and served
as Chairman of Boston Chicken from such time until December 1995 when he
became Co-Chairman. He was Vice Chairman of the Board of Blockbuster
Entertainment Corporation ("Blockbuster") in Fort Lauderdale, Florida from
September 1989 until January 1992, and Chief Operating Officer of Blockbuster
from September 1989 to January 1991. Since 1980, Mr. Beck also has been
President of Pace Affiliates, Inc., an investment banking firm he founded.
Mr. Alper became the Company's Vice Chairman of the Board in March 1996. Mr.
Alper founded Noah's in 1989 and served as its Chairman of the Board until
March 1996.
35
<PAGE>
Mr. Goldston became President and Chief Executive Officer and a director of
the Company in April 1996. Since January 17, 1996, Mr. Goldston has also been
employed by Boston Chicken to undertake various special projects for Boston
Chicken. From July 1994 to April 1996, Mr. Goldston was the Chairman and Chief
Executive Officer of The Goldston Group, a strategic advisory firm which
advises high-growth companies on improving performance and creating operating
leverage and efficiencies. From October 1991 to June 1994, Mr. Goldston served
as President and Chief Operating Officer of L.A. Gear, Inc. From September
1989 to October 1991, Mr. Goldston was a principal of Odyssey Partners, L.P.,
an investment firm, and from September 1988 to September 1989 served as Chief
Marketing Officer of Reebok Inc.
Mr. Beaudoin became the Company's Senior Vice President--Supply Chain in
July 1996. Prior thereto, he served as Vice President and Chief Financial
Officer of the Company from July 1995 to July 1996, after serving as Assistant
to the Chairman of Boston Chicken from February 1995. From December 1992 to
February 1995, he held several positions with NewLeaf Entertainment (a joint
venture between Blockbuster and IBM), including Vice President of Finance,
Marketing and Operations. From June 1990 through November 1992, Mr. Beaudoin
was an Associate and Limited Partner of Pfingsten Partners, L.P., a private
equity investment firm in Deerfield, Illinois.
Mr. Carlborg became Senior Vice President--Finance of the Company in July
1996. From October 1995 through June 1996, he was Vice President of Alignment
and Planning of Boston Chicken. Prior thereto, Mr. Carlborg served as Vice
President--Corporate Finance of Merrill Lynch from January 1994 to October
1995 and served as an Associate of Merrill Lynch from August 1989 through
December 1993.
Mr. Stanchak became a director and Vice President and Chief Development
Officer of the Company in March 1995. From June 1992 until March 1995, he
served as a Senior Vice President of Boston Chicken, and from August 1989
until June 1992, Mr. Stanchak was the National Director of Real Estate and
Real Estate Legal Counsel for Blockbuster.
Mr. Butler became President of Einstein Bros. Bagels Concept in May 1996.
From January 1996 until May 1996, Mr. Butler served as Chief Operating Officer
of the Company. Prior thereto, he was employed by BC Great Lakes, L.L.C., an
area developer of Boston Chicken ("BC Great Lakes"), since June of 1995, and
also served as President of the managing member of BC Heartland, L.L.C., also
a Boston Chicken area developer, since August 1995. From June 1993 until June
1995, Mr. Butler served as President and Chief Executive Officer of the
general partner of BC Detroit L.P., a predecessor of BC Great Lakes. From
January 1992 to June 1993, Mr. Butler served as Vice President--Human
Resources of Boston Chicken. Prior thereto, Mr. Butler was an independent
consultant from July 1991 until January 1992 and was Regional Director of
Operations for Blockbuster in San Diego and Orange County, California from
April 1990 until June 1991.
Mr. Alam became Vice President and Secretary in April 1995. From January
1994 to April 1995, he was Vice President and Associate General Counsel of
Boston Chicken and from May 1993 to January 1994 he was Assistant General
Counsel of Boston Chicken. Prior thereto, Mr. Alam was an associate at the
Chicago law firm of Bell, Boyd & Lloyd from 1986 to May 1993.
Mr. Strasen became Vice President and General Counsel of the Company in
April 1995. Prior thereto, he was a partner at the Chicago law firm of Bell,
Boyd & Lloyd from 1988 to April 1995.
Mr. Craig has been a director of the Company from the date the Company was
incorporated in February 1995. Mr. Craig was Chairman of the Board of the
Company from June 1995 until he resigned in July 1996. From February 1995
until being appointed as Chairman in June 1995, Mr. Craig served as Vice
President of the Company. Mr. Craig also served as the Chief Concept Officer
of Boston Chicken from April 1994 through June 1995. From November 1993 until
April 1994, he was President of KFC-Brand Development, a unit of KFC Corp. in
Louisville, Kentucky, and from April 1990 until November 1993, he was
President of KFC-USA, also a unit of KFC Corp. in Louisville, Kentucky. KFC
Corp. is a wholly owned subsidiary of PepsiCo, Inc.
36
<PAGE>
Mr. Koldyke became a director of the Company in March 1995. Mr. Koldyke has
served as a general partner of the Frontenac Company ("Frontenac"), a venture
capital company, in Chicago, Illinois since 1989.
Ms. Lozoff became a director and a Vice President of the Company in April
1995, after working with Bagel & Bagel, which she founded in June 1988. From
April 1995 until September 1996, Ms. Lozoff served as Vice President--Design
and Merchandising of the Company. Ms. Lozoff also served as President and
Chief Executive Officer of Bagel & Bagel from May 1992 to April 1995.
Mr. Muehlstein became a director of the Company in March 1995. Since 1986,
he has been a partner at the Chicago law firm of Pedersen & Houpt.
Mr. Offerdahl became a director in March 1995 and served as Vice President--
Operations, Southeast Zone of the Company from March 1995 through August 1996.
Mr. Offerdahl served as the Chairman and Chief Executive Officer of
Offerdahl's, which he founded in 1989, from December 1989 until March 1995.
From May 1986 until September 1994, Mr. Offerdahl played professional football
for the Miami Dolphins in the National Football League.
Mr. Ruth became a director of the Company in March 1995. Since January 1987,
he has been a general partner at Marquette Management Partners, a venture
capital company, in Deerfield, Illinois.
MANAGEMENT COMPENSATION
The Company was incorporated in February 1995 and did not conduct any
operations prior to that time. The only executive officer of the Company who
earned more than $100,000 in salary and bonus during fiscal year 1995 was
Daniel V. Colangelo, the Company's former President and Chief Executive
Officer who served in that capacity during fiscal year 1995 (the "named
executive officer"). Mr. Colangelo's total cash compensation during fiscal
year 1995 consisted of $103,462 in salary and $47,375 in bonus.
On March 24, 1995, the Company entered into a three-year employment
agreement with Mr. Colangelo, pursuant to which he became the President of the
Company's Rocky Mountain Division and a director of the Company. Mr. Colangelo
was later promoted to President and Chief Executive Officer of the Company.
Under the employment agreement, Mr. Colangelo was entitled to receive an
annual salary of $125,000 and reimbursement for reasonable business expenses.
In addition, during 1995, Mr. Colangelo was granted options to purchase 50,979
shares of Common Stock under the Plan (defined herein) at an exercise price of
$5.88 per share. See "--Option Grants in Last Fiscal Year."
In March 1996, Mr. Colangelo's employment agreement was terminated and the
Company entered into a consulting agreement with him in connection with his
resignation as President and Chief Executive Officer and a director of the
Company. Pursuant to the consulting agreement, Mr. Colangelo will, upon the
Company's request, provide information, advice and assistance to the Company
concerning matters that were within the scope of his knowledge and expertise
during the course of his employment by the Company. The consulting agreement
has a term of one year and is automatically renewed for successive one-year
periods unless terminated by either party upon 30 days' prior written notice.
Under the consulting agreement, Mr. Colangelo receives $100,000 per year and
is entitled to reimbursement for his related reasonable business expenses. In
addition, the options granted during 1995 to Mr. Colangelo under the Plan were
deemed vested and were exercised by him in January 1996. Mr. Colangelo also
retained options granted in January 1996 under the Plan to purchase an
aggregate of 37,931 shares of Common Stock at an exercise price of $6.59 per
share, which options were granted in January 1996 and vest in accordance with
the Plan's vesting schedule during the term of his consulting agreement.
The Company has also entered into employment and consulting agreements with
certain of its other current executive officers and others. See "Certain
Transactions--Employment and Consulting Agreements."
37
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth individual grants of stock options made to
the named executive officer during the fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK
PRICE
APPRECIATION
PERCENT OF TOTAL FOR OPTION
OPTIONS GRANTED EXERCISE TERM(2)
DATE OF OPTIONS TO EMPLOYEES OR BASE EXPIRATION ----------------
NAME GRANT GRANTED(1) IN FISCAL YEAR PRICE FATE 5% 10%
---- ------- ---------- ---------------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel V. Colangelo..... 3/24/95 25,491 1.2% $5.88 3/24/05 $94,337 $239,068
5/16/95 16,992 0.8 5.88 5/16/05 62,886 159,428
7/25/95 8,496 0.4 5.88 7/25/05 31,443 79,746
</TABLE>
- --------
(1) Options granted to Mr. Colangelo in 1995 were deemed fully vested in
January 1996 in connection with his resignation as President and Chief
Executive Officer of the Company. See "--Management Compensation."
(2) These amounts represent certain assumed annual rates of appreciation
calculated from the exercise price, as required by the rules of the
Securities and Exchange Commission. Actual gains, if any, on stock option
exercises and Common Stock holdings are dependent on the future
performance of the Common Stock. There can be no assurance that the
amounts reflected in this table will be achieved.
DIRECTOR COMPENSATION
In addition to annual grants under the Directors Plan (as defined herein),
directors who are not officers or employees of, or consultants to, the Company
receive $500 cash compensation for each board of directors meeting at which
they are present and for each committee meeting at which they are present not
held in conjunction with a meeting of the board of directors. Outside
directors are also reimbursed for their expenses for each board and committee
meeting attended.
The Company has also entered into employment and consulting agreements with
certain of its directors who are also current executive or other officers of
the Company. See "Certain Transactions--Employment and Consulting Agreements."
STOCK OPTION PLANS
The Company has adopted an Amended and Restated 1995 Stock Option Plan,
effective August 15, 1996. The purpose of the Plan is to benefit the Company
by offering certain present and future employees, officers and consultants of
the Company and its subsidiaries, if any, a favorable opportunity to become
holders of Common Stock over a period of years, thereby giving them a long-
term stake in the growth and prosperity of the Company and encouraging the
continuance of their involvement with the Company. Under the Plan, eligible
persons may be granted options to purchase an aggregate of not more than
5,500,000 shares of Common Stock. An aggregate of approximately 1,540,000
shares of Common Stock are currently available for option grants under the
Plan. Such options are not intended to be treated as incentive stock options
as defined in Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code").
The Plan is administered, with respect to persons subject to Section 16 of
the Exchange Act and the rules promulgated thereunder ("Reporting Persons"),
by the Reporting Person Stock Option Committee (the "Reporting Person
Committee"), consisting of two members of the board of directors, each of whom
is a "non-employee director" (as such term is defined under Rule 16b-3 of the
Exchange Act) and, with respect to all other persons receiving options under
the Amended Plan, by the Stock Option Committee (the "Stock Option
Committee").
38
<PAGE>
Options granted under the Plan have a term of 10 years, subject to earlier
expiration if the optionee's service terminates, and no options under the Plan
may be granted after February 1, 2005. Options become exercisable with respect
to 10% of the total number of shares subject to the option on the first
anniversary of the date of grant, an additional 20% on the second anniversary
of the date of grant, an additional 30% on the third anniversary of the date
of grant and the balance on the fourth anniversary of the date of grant. The
Plan provides that, unless otherwise determined by the relevant Committee in
its sole discretion, options granted prior to May 7, 1996 shall be governed by
the Plan as it was in effect prior to such date and options granted from May
7, 1996 through August 14, 1996 shall be governed by the Plan as it was in
effect during such period.
On May 28, 1996, the board of directors of the Company adopted the 1996
Stock Option Plan for Non-Employee Directors (the "Directors Plan"), which was
subsequently approved by the stockholders of the Company. On May 28, 1996,
options to purchase an aggregate of 4,318 shares of Common Stock were granted
under the Directors Plan to each of Messrs. Koldyke, Muehlstein and Ruth at an
exercise price of $11.58 per share. The Directors Plan is administered by the
board of directors.
Options under the Directors Plan may only be granted to directors of the
Company who are not officers or employees of the Company. Options may be
granted with respect to a total of not more than 100,000 shares of Common
Stock under the Directors Plan, subject to antidilution and other adjustments.
Such options are not intended to be treated as incentive stock options as
defined in Section 422 of the Code. Each option granted under the Directors
Plan is for a term of ten years, subject to earlier termination if the
optionee's service as a director terminates. Options which have been granted
become exercisable after the end of one year from the date of grant.
Pursuant to the Directors Plan, options for shares having a fair market
value of $50,000 at the date of grant, as determined in good faith by the
board of directors on such date, are granted at the time of each election or
re-election of eligible directors to the Board, except that the initial grants
of options under the Directors Plan were made on the date of adoption of the
Directors Plan by the board of directors.
Copies of the Plan and the Directors Plan are exhibits to the Registration
Statement of which this Prospectus forms a part.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The board of directors has approved the terms of compensation paid and to be
paid to the Company's executive officers for fiscal years 1995 and 1996.
During the year ended December 31, 1995, the following persons served as
members of the Stock Option Committee of the board of directors: Scott Beck,
Kyle Craig and John Muehlstein.
Currently, no executive officer of the Company, except for Scott Beck, who
is Chairman of the Board of the Company and a member of the Compensation
Committee of the board of directors, and Mark R. Goldston, who is President
and Chief Executive Officer of the Company, serves as a member of the
compensation committee or as a director of any other entity, one of whose
executive officers serves on the compensation committee or is a director of
the Company. Mr. Beck is Co-Chairman of the Board and Chief Executive Officer
of Boston Chicken and Mr. Goldston is a director of Boston Chicken. Neither
Mr. Beck nor Mr. Goldston serves on the compensation committee of Boston
Chicken's board of directors.
CERTAIN TRANSACTIONS
FORMATION OF THE COMPANY AND SUBSEQUENT ACQUISITIONS
In March 1995, the Company acquired the operations of Brackman, Bagel &
Bagel and Offerdahl's, and in connection with such acquisitions, issued
1,959,152 shares of Common Stock valued at $5.88 per share to the owners of
such companies. Concurrently with the acquisitions, the Company also raised
approximately $20.8 million in a private placement of its Common Stock to
investors (including approximately $5.2 million of such
39
<PAGE>
amount that was purchased, directly or indirectly, by officers and directors
of each of the Company and Boston Chicken). The terms of each of these
transactions resulted from arms-length negotiations between the Company and
unrelated third parties. In addition, the Company believes that such arms-
length negotiations established the fair market value of the Common Stock as
of the date such transactions were entered into by the Company. These
transactions are separately described below.
On March 24, 1995, pursuant to an agreement to contribute shares, the
Company acquired all of the outstanding capital stock of Brackman, of which
Daniel V. Colangelo, the Company's former President and Chief Executive
Officer, was a shareholder (the "Brackman Acquisition"). The consideration
paid by the Company consisted of 573,750 shares of Common Stock and 488,236
shares of Boston Chicken common stock, which shares of Boston Chicken common
stock were purchased by the Company for a cash purchase price of $17.00 per
share, pursuant to a stock purchase agreement between the Company and Boston
Chicken dated as of March 24, 1995. See "Relationship with Boston Chicken--
Other Relationships Between Boston Chicken and the Company." Following the
Brackman Acquisition, Mr. Colangelo entered into an employment agreement with
the Company, pursuant to which he became President--Rocky Mountain Zone and a
director of the Company. See "Management--Management Compensation."
On March 24, 1995, pursuant to an agreement to contribute assets, the
Company acquired all of the assets, properties and business of Bagel & Bagel,
of which Richard Lozoff, Gail Lozoff's spouse, was the sole shareholder (the
"Bagel & Bagel Acquisition"). The consideration paid by the Company consisted
of 573,750 shares of Common Stock and 323,530 shares of Boston Chicken common
stock, which shares of Boston Chicken common stock were purchased by the
Company for a cash purchase price of $17.00 per share, pursuant to a stock
purchase agreement between the Company and Boston Chicken dated as of March
24, 1995. See "Relationship with Boston Chicken--Other Relationships between
Boston Chicken and the Company." Following the Bagel & Bagel Acquisition, Ms.
Lozoff entered into an employment agreement with the Company, pursuant to
which she became Vice President--Design and Merchandising and a director of
the Company. See "--Employment and Consulting Agreements."
On March 31, 1995, pursuant to an agreement to contribute assets, the
Company acquired substantially all of the assets, properties and business of
Offerdahl's, of which John Offerdahl was a majority shareholder (the
"Offerdahl's Acquisition"). The consideration paid by the Company consisted of
811,652 shares of Common Stock and 331,852 shares of Boston Chicken common
stock, which shares of Boston Chicken common stock were purchased by the
Company for a cash purchase price of $16.875 per share, pursuant to a stock
purchase agreement between the Company and Boston Chicken dated as of March
31, 1995. See "Relationship with Boston Chicken--Other Relationships between
Boston Chicken and the Company." Following the Offerdahl's Acquisition, Mr.
Offerdahl entered into an employment agreement with the Company, pursuant to
which he became Vice President--Operations, Southeast Zone and a director of
the Company. In addition, Mr. Offerdahl's spouse, Lynnora Offerdahl, entered
into a consulting agreement with the Company. See "--Employment and Consulting
Agreements."
On March 24, 1995, the Company entered into Subscription Agreements pursuant
to which certain investors, including Messrs. Craig, Stanchak, Beaudoin,
Butler and Beck, Mr. Alam and his spouse, PJS Bagel Investing, L.L.C., an
entity controlled by Mr. Strasen and his spouse ("PJS"), OBG Holdings, Inc.
(formerly Offerdahl's), of which Mr. Offerdahl and his spouse are majority
stockholders ("OBG"), Frontenac VI, Limited Partnership ("Frontenac"), of
which Mr. Koldyke is a general partner, Marquette Venture Partners II, L.P.
("Marquette") and MVP II Affiliates Fund, L.P. ("MVP II"), the general partner
of each of which is an entity of which Mr. Ruth is a general partner, and
Pedersen Bagel Investments Joint Venture ("Pedersen Bagel"), of which Mr.
Muehlstein is a general partner, purchased 1,618,972 shares of Common Stock at
$5.88 per share.
In February 1996, the Company acquired all of the outstanding stock of
Noah's for an aggregate purchase price of $100.9 million in cash. In
connection with the transaction, certain former shareholders of Noah's,
including Noah Alper, Vice Chairman of the Board, and other members of Noah's
management purchased 855,225 shares of Common Stock at a purchase price of
$10.52 per share.
40
<PAGE>
REGISTRATION RIGHTS
The Company is a party to an amended and restated registration rights
agreement dated as of February 1, 1996 (the "Stockholder Registration
Agreement") with certain stockholders of the Company, including Messrs. Craig,
Alper, Stanchak, Beaudoin, Butler, Beck and Colangelo, as well as Mr. Alam and
his spouse, PJS, OBG, Frontenac, Marquette, MVP II and B&B Holdings, Inc.
(formerly Bagel & Bagel), of which Ms. Lozoff's spouse is the sole stockholder
("B&B"), and with Boston Chicken (with respect to the shares of Common Stock
issued pursuant to the Loan Conversion). Pursuant to such agreement, the
Company granted to such stockholders and Boston Chicken certain piggyback
registration rights under the Securities Act with respect to shares of Common
Stock owned by them (the "Registrable Securities"). The Company has filed the
Registration Statement of which this Prospectus forms a part covering the
Registrable Securities held by such stockholders, which will permit them to
make public resales of the Registrable Securities. Such stockholders have
agreed not to sell their Registrable Securities prior to January 28, 1997. See
"Shares Eligible for Future Sale." The Company entered into the Boston Chicken
Registration Agreement (defined below) that superseded the rights of Boston
Chicken under the Stockholder Registration Agreement. In connection therewith,
the Company has obtained from the parties to the Stockholder Registration
Agreement a waiver of the provision of such agreement prohibiting the Company
from granting registration rights superior to those granted under the
agreement, and a consent to the grant by the Company to Boston Chicken of
registration rights pursuant to the Boston Chicken Registration Agreement. See
"--Concurrent Public Offering," "Relationship with Boston Chicken--Concurrent
Private Placement Agreement and Registration Agreement" and "Shares Eligible
for Future Sale."
CONCURRENT PUBLIC OFFERING
In the Concurrent Public Offering, the Company sold to certain persons or
entities, consisting primarily of officers, directors and employees of each of
the Company and Boston Chicken, an aggregate of 425,000 shares of Common Stock
at a price equal to the initial public offering price per share, net of
underwriting discount. In the Concurrent Public Offering, executive officers
and directors of the Company (none of whom were members of the committee of
the Company's board of directors who negotiated the initial public offering
price with the representatives of the underwriters of the Initial Public
Offering) purchased an aggregate of 45,360 of such shares of Common Stock as
follows: Mr. Scott Beck--8,612; Mr. Alper--3,498; Mr. Goldston--3,750; Mr.
Carlborg--3,750; Mr. Stanchak--3,750; Mr. Beaudoin--3,750; Mr. Butler--3,750;
Mr. Alam--4,500; Mr. Strasen--2,500; Mr. Muehlstein--3,750; and Mr. Ruth--
3,750. Certain executive officers and directors of Boston Chicken (other than
Scott Beck and Mark Goldston) purchased in the Initial Public Offering and the
Concurrent Public Offering an aggregate of 39,850 shares of Common Stock.
BAGEL STORE DEVELOPMENT FUNDING
In December 1995, Bagel Funding was formed under the name Einstein Bros.
Equity Funding, L.L.C. with the objective of raising $90.0 million to invest
in existing and proposed area developers of the Company. Bagel Funding has
received total capital commitments from its members aggregating such amount,
$45.8 million of which has been contributed to Bagel Funding and the balance
of which is payable by such members to Bagel Funding at such times on or after
October 1, 1996 and on or before December 31, 1998 as the manager or managers
of Bagel Funding make one or more capital calls. The Company, in its capacity
as manager of Bagel Funding, has made a capital call for an aggregate of $30.0
million payable on or before October 5, 1996. In the event a member fails to
make its capital contribution within three days of the date it is due, or such
longer period as the manager or managers determine (but in no event longer
than 45 days), Bagel Funding is required to treat such defaulting member's
interest in future profits as terminated, so that such defaulting member is
entitled to receive from Bagel Funding only the amount of such member's
capital account at the time of such default, reduced by any future allocation
of losses to such member, payable without interest thereon at the expiration
of the term of Bagel Funding.
Through September 4, 1996, Bagel Funding had invested a total of
approximately $45.8 million in area developers of the Company. See "Business--
Area Developer Financing." No fees were paid to the Company in
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its capacity as manager in 1995. The Company will be entitled to receive fees
of $500,000 and $50,000 for serving as manager of Bagel Funding during 1996
and the first quarter of 1997, respectively.
Bagel Funding has the right to require each area developer to redeem Bagel
Funding's equity interest in the area developer (the "Bagel Funding Put") at a
predetermined formula purchase price based on the store level cash flow of the
area developer in the event (i) the Company acquires a majority interest in
the area developer pursuant to the exercise of its conversion or option rights
under the area developer's secured loan agreement, (ii) the Company's
conversion and option rights expire unexercised and the Company has not
consented to a public offering of the area developer, or (iii) the Company
does not acquire a majority interest in an area developer pursuant to the
exercise of the Company's conversion or option rights, such rights have
expired under the secured loan agreement and the Company has not consented to
a request by the area developer to terminate its area development and
franchise agreements with the Company. In the event the area developer does
not redeem Bagel Funding's equity interest when required to do so, the Company
will be obligated to purchase from Bagel Funding its equity interest in the
area developer at the same price applicable to the area developer.
The Company's term as manager of Bagel Funding expires on April 20, 1997,
although the Company may be removed prior to such time for cause by action of
more than two-thirds in interest of Bagel Funding's members and may be removed
for any reason at fiscal year-end by action of more than four-fifths in
interest of Bagel Funding's members. Prior to the expiration of the Company's
term as manager, Bagel Funding also has a three-person advisory committee, the
members of which were nominated by the Company and approved by a majority in
interest of Bagel Funding's members. None of the members of the advisory
committee are officers, directors or employees of the Company. The advisory
committee is required to approve any sale by Bagel Funding of an interest in
an area developer and to determine the manner in which Bagel Funding's
interests in an area developer should be voted on any merger, consolidation,
sale of all or substantially all of the assets of the area developer or
amendment of its governing documents. The advisory committee is also available
to consult with the manager with respect to any matters requested by the
manager concerning Bagel Funding's investments and has the power to resolve
any questions with respect to potential conflicts of interest between Bagel
Funding and the manager that may be presented to it by the manager. Bagel
Funding's limited liability company agreement contains no specific provisions
with respect to the resolution of potential conflicts of interest between
Bagel Funding and its manager; however, resolution of such potential conflicts
of interest will be governed by applicable Delaware law. The advisory
committee has the authority to adopt rules and procedures not inconsistent
with Bagel Funding's limited liability company agreement, relating to the
conduct of the advisory committee's affairs. Actions taken by the advisory
committee must be authorized by a majority of the persons then serving as
advisory committee members. Each member of the advisory committee may
designate from time to time an alternate and such alternate may attend any and
all meetings of the advisory committee and otherwise may act in place of the
member selecting such alternate.
Effective April 21, 1997, or at such earlier time as the Company ceases to
be the manager of Bagel Funding, each of the members of the advisory committee
will become a manager of Bagel Funding and collectively will constitute the
three-person board of managers. At such time the advisory committee of Bagel
Funding will disband and all authority previously vested in the advisory
committee will be vested in the board of managers. In addition, when the
Company ceases to be the manager of Bagel Funding, the equity interests of
Bagel Funding in the Company's area developers will automatically be converted
from nonvoting equity interests to voting equity interests, which will have
the power to select the manager or general partner, as applicable, of each of
the Company's area developers.
Bagel Funding has also acquired from the Company, for an aggregate purchase
price of $45,000, warrants to acquire 1,012,500 shares of Common Stock of the
Company having an exercise price of $6.47 per share (the "Bagel Funding
Warrants"), or 11,250 shares of Common Stock for every $1.0 million of capital
committed to Bagel Funding. The Bagel Funding Warrants have a term of five
years. In the event the total capital ultimately contributed to Bagel Funding
is less than $90.0 million or Bagel Funding is dissolved prior to the time all
remaining capital commitments have been called, the number of shares
purchasable upon exercise of the Bagel Funding Warrants will be adjusted based
on the total amount of capital contributed or committed to be
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contributed to Bagel Funding less the amount of cash to be distributed to the
members of Bagel Funding upon such dissolution. In the event of such a
dissolution, the amount of capital committed to be contributed to Bagel
Funding shall be deemed to be zero. Such adjustments to the number of shares
covered by the Bagel Funding Warrants, if any, will be made by the Company (i)
at the time that Bagel Funding may no longer accept additional capital
subscriptions, (ii) at such time, if any, as any member of Bagel Funding fails
to honor its commitment to contribute capital and (iii) immediately prior to
any dissolution of Bagel Funding that occurs prior to the time all committed
capital has been contributed to Bagel Funding, but only if the Warrants have
not been distributed by Bagel Funding.
Bagel Funding is required to distribute the Bagel Funding Warrants to its
members on the later of (i) six months after the date of the closing of an
underwritten initial public offering of the Company or (ii) four months after
all committed capital has been contributed to Bagel Funding, but in no event
later than the date that is six months prior to the expiration date of the
Bagel Funding Warrants. Bagel Funding has informed its members that it intends
to distribute Bagel Funding Warrants covering an aggregate of 506,273 shares
of Common Stock upon the effectiveness of the Registration Statement of which
this Prospectus forms a part.
Messrs. Scott Beck, Butler, Carlborg, Muehlstein, Ruth and Stanchak each own
a direct equity interest in Bagel Funding. Such interests aggregate
approximately 8.1% of the outstanding equity interest in Bagel Funding.
Certain executive officers and directors of Boston Chicken own direct equity
interests in Bagel Funding. Such interests, excluding interests owned by Scott
Beck, aggregate approximately 16.3% of the outstanding equity interest in
Bagel Funding.
INTERESTS IN AREA DEVELOPERS BY CERTAIN PERSONS
BCE West Bagels, L.L.C. Effective November 26, 1995, the Company entered
into a convertible secured loan agreement and an area development agreement
with BCE West Bagels, L.L.C. ("Old BCE West") for the development of the
following DMAs: Phoenix (excluding portions of California included in the
Phoenix DMA); Tucson; Albuquerque/Santa Fe; Denver (excluding portions of
South Dakota included in the Denver DMA); Colorado Springs; Las Vegas; and El
Paso. Also effective November 26, 1995, the Company entered into a convertible
secured loan agreement and an area development agreement with BCE SLC Bagels,
L.L.C. ("BCE SLC") for the development of the Salt Lake City DMA. At the time
of the consummation of such transactions, Lawrence Beck, Scott Beck's father,
was the majority equity owner of Old BCE West and BCE SLC. In connection with
the execution of such agreements, the Company sold to Old BCE West and BCE SLC
the Company-operated stores and other assets located in certain of such DMAs
at net book value for an aggregate purchase price of $1,432,519 and
$3,719,625, respectively, pursuant to asset sale agreements, and entered into
a franchise agreement for each such store. The Company realized no significant
gain or loss on such sales. The Company believes that the terms of the
agreements entered into with Old BCE West and BCE SLC are as favorable to the
Company as the terms that could be negotiated with unrelated third parties.
On December 29, 1995, Lawrence Beck sold to Bagel Funding 1,750,000 units of
membership interest in each of Old BCE West and BCE SLC for an aggregate
purchase price of approximately $3.5 million. The Company understands that
Lawrence Beck did not realize any significant gain or loss on such sales.
Lawrence Beck retained a minority equity interest in each of Old BCE West and
BCE SLC, and an entity controlled by him remained the manager of each such
entity.
Effective January 29, 1996, BCE SLC acquired the assets of Old BCE West, BCE
SLC was renamed BCE West Bagels, L.L.C. ("BCE West") and Old BCE West was
dissolved.
For the Company's 1995 fiscal year and the two quarters ended July 14, 1996,
BCE West (together with its predecessor, Old BCE West) paid to the Company an
aggregate of $2,308,714 and $1,594,320, respectively, in development,
franchise, royalty, real estate, software license, software maintenance,
miscellaneous and accounting fees and deposits. For the two quarters ended
July 14, 1996, BCE West (together with Old BCE West) paid $172,339 in national
and $317,868 in local advertising fund contributions. In addition, for such
period, BCE West (together with Old BCE West) paid to the Company $415,817 in
interest on its loan from the Company.
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Finest Bagels, L.L.C. Effective January 1, 1996, the Company entered into a
convertible secured loan agreement and an area development agreement with
Finest Bagels, L.L.C. ("Finest") for the development of the following DMAs:
St. Louis; Kansas City; and Minneapolis/St. Paul. Bagel Funding is the
majority equity owner of Finest. In connection with the execution of such
agreements, the Company sold to Finest the Company-operated stores and other
assets located in certain of those DMAs at net book value for an aggregate
purchase price of $6,216,545, pursuant to an asset sale agreement, and entered
into a franchise agreement with Finest for each such store. The Company
realized no significant gain or loss on such sale. For the Company's two
quarters ended July 14, 1996, Finest paid to the Company an aggregate of
$2,514,421 in development, franchise, royalty, real estate, software license,
software maintenance, miscellaneous and accounting fees and deposits. For the
two quarters ended July 14, 1996, Finest paid $123,298 in national and
$246,597 in local advertising fund contributions. In addition, for such
periods, Finest paid to the Company $203,807 in interest on its loan from the
Company. The Company believes that the terms of the agreements entered into
with Finest are as favorable to the Company as terms of agreements that could
be negotiated by the Company with unrelated third parties.
Einstein Bros. America, L.P. Effective March 25, 1996, the Company entered
into a convertible secured loan agreement and an area development agreement
with Einstein Bros. America, L.P. ("EBA") for the development of the following
DMAs: Milwaukee; Chicago; Detroit; Madison; Tampa/St. Petersburg/Sarasota;
Orlando/Daytona Beach/Melbourne; Ft. Myers/Naples; Miami/Ft. Lauderdale; and
West Palm Beach/Ft. Pierce. Bagel Funding is the majority equity owner of EBA.
In connection with the execution of such agreements, the Company sold to EBA
the Company-operated stores and other assets located in certain of those DMAs
at net book value for an aggregate purchase price of $18,622,026, pursuant to
an asset sale agreement, and entered into a franchise agreement with EBA for
each such store. The Company realized no significant gain or loss on such
sale.
Effective June 17, 1996, EBA contributed to Great Lakes Bagels, L.L.C.
("Great Lakes") its assets located in the following DMAs: Milwaukee; Chicago;
Detroit; and Madison (the "Great Lakes DMAs"). Upon such contribution, the
equity interests in Great Lakes were distributed in redemption of a portion of
the equity interests in EBA and EBA's name was changed to Gulfstream Bagels,
L.P. ("Gulfstream"). At the same time, the Company entered into a convertible
secured loan agreement and an area development agreement with Great Lakes for
the development of the Great Lakes DMAs, and it modified the agreements it had
previously entered into with Gulfstream to exclude the Great Lakes DMAs from
such agreements. For the Company's two quarters ended July 14, 1996,
Gulfstream (together with its predecessor, EBA) paid to the Company an
aggregate of $7,249,552 in development, franchise, royalty, real estate,
software license, software maintenance, miscellaneous and accounting fees and
deposits. For the two quarters ended July 14, 1996, Gulfstream (together with
EBA) paid $125,381 in national and $300,174 in local advertising fund
contributions. In addition, for such periods, Gulfstream (together with EBA)
paid to the Company $380,467 in interest on its loan from the Company.
The Company believes that the terms of the agreements entered into with
Gulfstream and Great Lakes are as favorable to the Company as terms of
agreements that could be negotiated by the Company with unrelated third
parties.
Mayfair Bagels, L.L.C. On April 1, 1996, the Company entered into a
convertible secured loan agreement and an area development agreement with
Mayfair Bagels, L.L.C. ("Mayfair") for the development of a portion of the
Baltimore and Washington, D.C. DMAs. Bagel Funding is the majority equity
owner of Mayfair. In connection with the execution of such agreements, the
Company sold to Mayfair certain assets located in certain of those DMAs at net
book value for an aggregate purchase price of $249,084, pursuant to an asset
sale agreement. The Company realized no significant gain or loss on such sale.
For the Company's two quarters ended July 14, 1996, Mayfair paid to the
Company an aggregate of $1,439,256 in development, franchise, royalty, real
estate, software license, software maintenance, miscellaneous and accounting
fees and deposits. For the two quarters ended July 14, 1996, Mayfair paid
$3,534 in national and $7,067 in local advertising fund contributions. In
addition, for such periods, Mayfair paid to the Company $149 in interest on
its loan from the Company. The Company believes that the terms of the
agreements entered into with Mayfair are as favorable to the Company as terms
of agreements that could be negotiated by the Company with unrelated third
parties.
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Liberty Foods, L.L.C. Effective May 6, 1996, the Company entered into a
convertible secured loan agreement and an area development agreement with
Liberty Foods, L.L.C. ("Liberty") for the development of the New York DMA.
Bagel Funding is the majority equity owner of Liberty. In connection with the
execution of such agreements, the Company sold to Liberty the Company-operated
store and certain assets located in the DMA at net book value for an aggregate
purchase price of $869,743, pursuant to an asset sale agreement, and entered
into a franchise agreement with Liberty for such store. The Company realized
no significant gain or loss on such sale. For the Company's second quarter
ended July 14, 1996, Liberty paid to the Company an aggregate of $2,429,576 in
development, franchise, royalty, real estate, software license, software
maintenance, miscellaneous and accounting fees and deposits. For the second
quarter ended July 14, 1996, Liberty paid $2,655 in national and $5,310 in
local advertising fund contributions. In addition, for such period, Liberty
paid to the Company $589 in interest on its loan from the Company. The Company
believes that the terms of agreements entered into with Liberty are as
favorable to the Company as terms of agreements that could be negotiated by
the Company with unrelated third parties.
Colonial Bagels, L.P. Effective June 17, 1996, the Company entered into a
convertible secured loan agreement and an area development agreement with
Colonial Bagels, L.L.C. ("Colonial") for the development of the following
DMAs: Boston; Burlington/Plattsburgh; Cleveland; Pittsburgh; Providence/New
Bedford; and Springfield, MA. Bagel Funding is the majority equity owner of
Colonial. Lawrence Beck owns a 50 percent interest in the general partner of
Colonial. In connection with the execution of such agreements, the Company
sold to Colonial certain assets located in certain of those DMAs at net book
value for an aggregate purchase price of $72,377, pursuant to an asset sale
agreement. The Company realized no significant gain or loss on such sale. For
the Company's second quarter ended July 14, 1996, Colonial paid to the Company
an aggregate of $2,009,690 in development, franchise and miscellaneous fees.
The Company believes that the terms of agreements entered into with Colonial
are as favorable to the Company as terms of agreements that could be
negotiated by the Company with unrelated third parties.
Noah's Pacific, L.L.C. Effective June 17, 1996, the Company entered into a
convertible secured loan agreement and an area development agreement with
Noah's Pacific, L.L.C. ("Noah's Pacific") for the development of the following
DMAs: Los Angeles; Portland; Seattle/Tacoma; and Las Vegas. Bagel Funding is
the majority equity owner of Noah's Pacific. Noah Alper owns a minority equity
interest in Noah's Pacific. In connection with the execution of such
agreements, the Company sold to Noah's Pacific the Company-owned stores and
certain assets located in certain of those DMAs at net book value for an
aggregate purchase price of approximately $10.5 million, pursuant to an asset
sale agreement, and entered into a franchise agreement with Noah's Pacific for
each such store. The Company realized no significant gain or loss on such
sale. For the Company's second quarter ended July 14, 1996, Noah's Pacific
paid to the Company an aggregate of $3,187,353 in development, franchise and
miscellaneous fees. The Company believes that the terms of agreements entered
into with Noah's Pacific are as favorable to the Company as terms of
agreements that could be negotiated by the Company with unrelated third
parties.
Noah's Bay Area Bagels, L.L.C. Effective July 15, 1996, the Company entered
into a convertible secured loan agreement and an area development agreement
with Noah's Bay Area Bagels, L.L.C. ("Noah's Bay Area") for the development of
the following DMAs: San Francisco/Oakland/San Jose and Sacramento/
Stockton/Modesto. Bagel Funding is the majority equity owner of Noah's Bay
Area. Noah Alper owns a minority equity interest in Noah's Bay Area. In
connection with the execution of such agreements, the Company sold to Noah's
Bay Area the Company-owned stores and certain assets located in those DMAs at
net book value for an aggregate purchase price of approximately $10.9 million,
pursuant to an asset sale agreement, and entered into a franchise agreement
with Noah's Bay Area for each such store. The Company realized no significant
gain or loss on such sale. The Company believes that the terms of the
agreements entered into with Noah's Bay Area are as favorable to the Company
as terms of agreements that could be negotiated by the Company with unrelated
third parties.
Philly Rose, L.P. On July 29, 1996, the Company entered into a convertible
secured loan agreement and an area development agreement with Philly Rose,
L.P. ("Philly Rose") for the development of the Philadelphia
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DMA. Bagel Funding is the majority equity owner of Philly Rose. In connection
with the execution of such agreements, the Company sold to Philly Rose the
Company-owned stores and certain assets located in such DMA at net book value
for an aggregate purchase price of $375,455, pursuant to an asset sale
agreement, and entered into a franchise agreement with Philly Rose for each
such store. The Company realized no significant gain or loss on such sale. The
Company believes that the terms of the agreements entered into with Philly
Rose are as favorable to the Company as terms of agreements that could be
negotiated by the Company with unrelated third parties.
BCE West, Finest, Gulfstream, Great Lakes, Mayfair, Colonial, Noah's Pacific
and Noah's Bay Area are each represented by Pedersen & Houpt, a law firm in
which John Muehlstein, Jr., a director of the Company, is a partner.
AREA DEVELOPER WARRANTS
On January 15, 1996, in connection with the formation of the Company's
prospective area developers, the Company issued to eleven such entities
warrants to acquire an aggregate of 1,237,050 shares of Common Stock of the
Company, each at an exercise price per share of $6.47. As of September 4,
1996, warrants to purchase an aggregate of 902,475 shares of Common Stock had
been exercised by area developers as follows: BCE West-- 85,050 shares;
Finest--77,175 shares; Great Lakes--108,225 shares; Liberty--100,350 shares;
Mayfair--77,175 shares; Noah's Pacific--168,750 shares; Colonial--100,350
shares; Philly Rose--92,700 shares; and Gulfstream--92,700 shares. See "--
Interests in Area Developers by Certain Persons." Lawrence Beck owns a
minority equity interest in Colonial.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into a consulting agreement with Mr. Colangelo in
connection with his resignation as President and Chief Executive Officer of
the Company. See "Management--Management Compensation."
On March 24, 1995, the Company entered into an employment agreement with Ms.
Lozoff, pursuant to which Ms. Lozoff became Vice President--Design and
Merchandising and a director of the Company. The employment agreement
terminates August 1, 1998. Ms. Lozoff receives an annual salary of $125,000
and reimbursement of reasonable business expenses. In addition, at the time
she entered into the employment agreement, Ms. Lozoff was granted options to
purchase 42,483 shares of Common Stock under the Plan with an exercise price
of $5.88 per share.
On March 31, 1995, the Company entered into an employment agreement with Mr.
Offerdahl, pursuant to which Mr. Offerdahl became Vice President of
Operations--Southeast Zone and a director of the Company. Mr. Offerdahl
resigned as an officer of the Company effective July 26, 1996 and the
employment agreement terminated effective on that date. At the time he entered
into the employment agreement, Mr. Offerdahl was granted options to purchase
42,483 shares of Common Stock under the Plan with an exercise price of $5.88
per share, the vesting of all of which options were accelerated in connection
with Mr. Offerdahl's resignation.
On March 31, 1995, the Company entered into a consulting agreement with
Lynnora Offerdahl, Mr. Offerdahl's spouse, pursuant to which she provides
information, advice and assistance concerning product development, restaurant
design and general projects for the Company. Ms. Offerdahl resigned as a
consultant to the Company effective August 11, 1996 and the consulting
agreement terminated effective on that date. At the time she entered into the
consulting agreement, Ms. Offerdahl was granted options to purchase 42,483
shares of Common Stock under the Plan with an exercise price of $5.88 per
share, the vesting of all of which options were accelerated in connection with
Ms. Offerdahl's resignation.
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On April 5, 1996, Mr. Goldston was elected President and Chief Executive
Officer and a director of the Company. The Company has agreed to pay to Mr.
Goldston a base salary of $360,000 per year, with a guaranteed bonus of
$400,000 for fiscal year 1996. For fiscal year 1997, Mr. Goldston will be
eligible for a $400,000 bonus, his receipt of which will be based upon the
achievement of mutually agreed upon reasonable performance goals. In addition,
the Company granted to Mr. Goldston options under the Plan to purchase 114,030
shares of Common Stock at an exercise price of $10.52 per share. Beginning in
fiscal year 1997, and for each year thereafter as long as he remains an
employee of the Company, Mr. Goldston will be eligible for an annual stock
option grant under the Amended Plan to purchase, at a minimum, that number of
shares of Common Stock that have an aggregate exercise price of $800,000. In
connection with his employment, Mr. Goldston also purchased 28,508 shares of
Common Stock at a price of $10.52 per share.
Effective January 17, 1996, Boston Chicken employed Mr. Goldston to
undertake various special projects for Boston Chicken. As an employee of
Boston Chicken, Mr. Goldston receives an annual salary of $40,000 and is
eligible to participate in Boston Chicken's employee stock option plan. Mr.
Goldston has been granted options under that plan to purchase 100,000 shares
of Boston Chicken common stock at an exercise price of $27.9375 per share.
Boston Chicken has agreed to structure Mr. Goldston's future projects so that
his employment with Boston Chicken will not interfere with his duties with the
Company.
In addition, in consideration for certain consulting services rendered to
Boston Chicken by Mr. Goldston and the consulting firm of which Mr. Goldston
was a principal, Boston Chicken has paid $1,818,086 for consulting services
rendered during fiscal years 1995 and 1996 and granted an option (outside of
the Boston Chicken employee option plan) to purchase 100,000 shares of Boston
Chicken common stock at an exercise price of $16.00 per share. Boston Chicken
has also granted to Mr. Goldston an option to purchase from Boston Chicken
344,673 shares of Common Stock at an exercise price of $6.38 per share.
On July 1, 1996, the Company entered into a transition and consulting
agreement with Mr. Craig in connection with his resignation as Chairman of the
Board of the Company, pursuant to which Mr. Craig will continue as a full-time
employee of the Company until June 30, 1997 and will provide consulting
services to the Company for a period of one year thereafter. As an employee of
the Company Mr. Craig will be paid approximately $3,600 bi-weekly through the
end of fiscal 1996 and approximately $7,900 bi-weekly during the first six
months of fiscal 1997. During the term of his employment, Mr. Craig will
continue to participate in the Company's employee benefit plans, except that
he will not be eligible to receive options under any of the Company's stock
option plans.
BOWANA AVIATION, INC.
During the 1995 fiscal year, the Company from time to time used airplanes
owned by a company controlled by Scott Beck and Lawrence Beck, for which the
Company incurred aggregate rental expense of $85,874 in such fiscal year. The
Company believes that the terms of its use of the planes were at least as
favorable to the Company as those it could have obtained from an unaffiliated
party. The Company has entered into two subleases with Boston Chicken,
pursuant to which the Company will be entitled to the non-exclusive use of
aircraft leased by Boston Chicken from unaffiliated leasing companies. See
"Relationship with Boston Chicken--Other Relationships Between Boston Chicken
and the Company."
LOANS TO EXECUTIVE OFFICERS
On August 9, 1995, the Company made a loan to Mr. Craig in the principal
amount of $400,000, the proceeds of which were used by Mr. Craig to pay off a
loan from Boston Chicken. Interest on the principal amount of the Company's
loan to Mr. Craig accrues at the reference rate announced by Bank of America
Illinois from time to time plus 1%. The principal balance of the loan and all
accrued but unpaid interest thereon are due and payable upon demand. Mr. Craig
repaid the loan and all interest accrued thereon in full on September 10,
1996.
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On March 31, 1995, in connection with the Company's acquisition of the
assets of Offerdahl's (now known as OBG) the Company made a non-recourse loan
to OBG in the principal amount of $437,497, the proceeds of which were used to
purchase an aggregate of 74,345 shares of Common Stock, which shares secure
the payment of principal and interest under such loan. Also on March 31, 1995,
the Company made a non-recourse loan to OBG in the principal amount of
$1,312,500, the proceeds of which were used to purchase an equity interest in
BC Equity Funding, L.L.C., a Delaware limited liability company which invests
in Boston Chicken area developers ("BCEF"), which equity interest secures the
payment of principal and interest under such loan. Each loan described above
accrues interest on the principal amount at the reference rate announced by
Bank of America Illinois from time to time plus 1%. The principal balance of
each loan and all accrued but unpaid interest thereon are due and payable on
April 15, 2001, but may be required to be repaid earlier under certain
circumstances.
Also in connection with the Company's acquisition of the assets of
Offerdahl's, on each of April 15, 1995, June 15, 1995, September 15, 1995 and
January 15, 1996, the Company made an interest-free loan to OBG in the
principal amount of $46,100, and on April 15, 1996, the Company made an
additional interest-free loan to OBG in the principal amount of $1,502,276.
The proceeds of each such loan were used to satisfy income tax obligations
arising from the acquisition. Each such loan is secured by units of membership
interest in BCEF owned by OBG. The principal balance of each loan and all
accrued but unpaid interest thereon are due and payable on April 15, 2001, but
may be required to be repaid in whole or in part under certain circumstances.
OTHER RELATIONSHIPS
Blind Faith, Inc., of which Ms. Lozoff and her spouse are the sole
shareholders, leases to the Company the land and building on which a store is
located. The Company subleases such land and building to one of its area
developers. The annual rental payments under the lease and sublease, each of
which terminates in May 2009, aggregate $72,000.
Quantum Media International, Inc. ("Quantum"), of which Mr. Goldston was a
director, performs advertising and marketing services for the Noah's New York
Bagels brand. During 1995, Noah's paid Quantum an aggregate of approximately
$188,000. Through May 1996, Noah's and the Company paid Quantum an aggregate
of approximately $61,000. The Company intends to retain the services of
Quantum for the Noah's New York Bagels brand during 1996.
CERTAIN TRANSACTIONS WITH BOSTON CHICKEN
See "Risk Factors--Dependence on Boston Chicken," "Risk Factors--Control by
and Conflicts of Interest with Boston Chicken" and "Relationship with Boston
Chicken."
48
<PAGE>
PRINCIPAL STOCKHOLDERS AND SECURITIES OWNERSHIP OF MANAGEMENT
OWNERSHIP OF COMPANY COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of Common Stock by each person known by the Company to be the
beneficial owner of 5% or more of the outstanding Common Stock, by each of the
Company's directors and the named executive officer and by all directors and
executive officers of the Company as a group, as of September 4, 1996. The
beneficial ownership reflected in the following table is calculated in
accordance with Section 13(d) of the Exchange Act. Unless otherwise indicated,
ownership includes sole voting and investment power. As of such date, there
were approximately 540 record holders of Common Stock.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED(1)
------------------
NAMES(2) NUMBER PERCENT
-------- ---------- -------
<S> <C> <C>
Boston Chicken, Inc.(3)................................ 17,307,421 59.7%
Daniel V. Colangelo.................................... 351,354 1.2%
Scott A. Beck(4)....................................... 58,271 *
Noah C. Alper(5)....................................... 93,600 *
Mark R. Goldston(6).................................... 149,447 *
David G. Stanchak...................................... 29,242 *
Kyle T. Craig.......................................... 47,581 *
M. Laird Koldyke(7).................................... 424,827 1.5%
Gail A. Lozoff(8)...................................... 551,098 1.9%
John H. Muehlstein, Jr.(9)............................. 682,411 2.4%
John A. Offerdahl(10).................................. 970,963 3.3%
Lloyd D. Ruth(11)...................................... 216,164 *
All directors and executive officers as a group
(excluding Mr. Colangelo)(15 persons)................. 3,403,158 11.8%
</TABLE>
- --------
*Less than 1%.
(1) Includes shares subject to options granted by the Company which are
exercisable within 60 days of September 4, 1996 as follows: Mr. Craig--
5,098; Mr. Offerdahl--42,483; and all executive officers and directors as
a group--61,345.
(2) Unless otherwise indicated, the address of such person is c/o
Einstein/Noah Bagel Corp., 14123 Denver West Parkway, Golden, Colorado
80401-4086. The address for each of Boston Chicken and Scott Beck is
14123 Denver West Parkway, Golden, Colorado 80401-4086.
(3) Includes 701,177 shares of Common Stock on which Boston Chicken has
granted options to purchase such shares to certain individuals (including
Mr. Goldston), of which options to purchase 117,189 shares of Common
Stock are exercisable within 60 days of September 4, 1996. Includes
510,246 shares of Common Stock owned by BCEF, of which Boston Chicken is
the manager. See "Relationship with Boston Chicken--Loan Agreement."
(4) Excludes the aggregate number of shares of Common Stock shown above as
owned by Boston Chicken that may be deemed to be beneficially owned by
Scott Beck because he may be deemed to be an affiliate of Boston Chicken.
Mr. Beck disclaims any beneficial ownership of such shares.
(5) Represents 93,600 shares held by a trust, of which Mr. Alper is a trustee
and a beneficiary.
(6) Includes 117,189 shares of Common Stock subject to options from Boston
Chicken which were currently exercisable as of September 4, 1996.
(7) Represents 424,827 shares of Common Stock held by Frontenac, the general
partner of which is an entity of which Mr. Koldyke is a general partner.
Frontenac's address is 135 S. La Salle Street, Suite 3800, Chicago,
Illinois 60603.
(8) Includes 546,850 shares of Common Stock held by B&B (formerly Bagel &
Bagel), of which Ms. Lozoff's spouse is the sole stockholder.
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<PAGE>
(9) Includes 678,661 shares of Common Stock held by Pedersen Bagel, of which
Mr. Muehlstein is a general partner. Pedersen Bagel's address is 161 N.
Clark St., Suite 3100, Chicago, Illinois 60601.
(10) Includes 885,997 shares of Common Stock held by OBG and 42,483 shares
beneficially owned by Mr. Offerdahl's spouse, which are subject to
options from the Company that were exercisable as of September 4, 1996.
OBG's address is 1801 Clint Moore Road, Suite 215, Boca Raton, Florida
33487.
(11) Includes 206,514 shares of Common Stock held by Marquette and 5,900
shares of Common Stock held by MVP II, the general partner of each of
which is an entity of which Mr. Ruth is a general partner. The address
for each of Marquette and MVP II is 520 Lake Cook Road, Suite 450,
Deerfield, Illinois 60015.
PERSONAL HOLDING COMPANY TAX
Under Section 541 of the Internal Revenue Code, a personal holding company
is subject to a 39.6% tax on its undistributed personal holding company income
(the "PHC Tax"). In order to be considered a personal holding company in any
taxable year, a corporation must satisfy two tests. First, at any time during
the last half of the taxable year more than 50% in value of its outstanding
stock must be owned, directly or indirectly, by or for not more than five
individuals (the "Stock Ownership Test"). Second, at least 60% of its adjusted
gross income for the taxable year must be personal holding company income,
which generally consists of passive forms of income such as dividends,
interest, rents and royalties, as defined for tax purposes, but not including
income from the provision of services (the "Income Test"). Although the
ownership of Boston Chicken is attributed to its stockholders for purposes of
such calculation, certain attribution rules that are included as part of the
Stock Ownership Test could result in the Stock Ownership Test being satisfied
in the case of the Company. The Company believes that the nature of its
activities and its expected sources of income during 1996 will be such that
the Income Test will not be satisfied and consequently that the PHC Tax will
not apply for its 1996 taxable year. Because the Company intends to utilize
area developers financed in part by the Company from which it will receive
interest and certain royalty income, there can be no assurance that the
Company will not meet the Income Test in future years.
OWNERSHIP OF BOSTON CHICKEN COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of Boston Chicken's common stock as of September 4, 1996 by the
Company's directors and the named executive officer and all directors and
executive officers as a group. The beneficial ownership reflected in the
following table is calculated in accordance with Section 13(d) of the Exchange
Act. Unless otherwise indicated, ownership includes sole voting and investment
power.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
OWNED(1)(2)
-----------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
------------------------ --------- -------
<S> <C> <C>
Daniel V. Colangelo.................................... 0 *
Scott A. Beck.......................................... 6,564,410 10.2%
Mark R. Goldston....................................... 50,000 *
David G. Stanchak...................................... 427,730 *
Noah C. Alper.......................................... 0 *
Kyle T. Craig.......................................... 75,173 *
M. Laird Koldyke....................................... 0 *
Gail A. Lozoff(3)...................................... 291,177 *
John H. Muehlstein, Jr................................. 5,000 *
John A. Offerdahl(4)................................... 77,589 *
Lloyd D. Ruth.......................................... 0 *
All directors and executive officers as a group
(excluding
Mr. Colangelo) (15 persons)........................... 8,278,394 12.8%
</TABLE>
- --------
*Less than 1%.
50
<PAGE>
(1) Includes shares subject to options which are exercisable within 60 days of
September 4, 1996 as follows: Mr. Scott Beck--543,025; Mr. Craig--48,025;
Mr. Goldston--50,000; Mr. Stanchak--108,423; and all executive officers
and directors as a group (including such individuals)--903,758. Options
granted to Messrs. Craig and Stanchak by Boston Chicken continue to vest
pursuant to their respective consulting agreements with Boston Chicken.
(2) Excludes an aggregate of 4,360,687 of the 6,711,350 shares of common stock
of Boston Chicken beneficially owned by BC Midwest Trust and certain
partnerships, which shares may be deemed to be beneficially owned by Scott
Beck by virtue of his ownership of shares of BC Midwest, Inc., the trustee
of BC Midwest Trust and the general partner of such partnerships. Mr. Beck
disclaims beneficial ownership with respect to all of such shares because
such shares exceed his pecuniary interest of 2,350,663 shares as a
beneficiary of BC Midwest Trust, as a limited partner of such partnerships
and as a stockholder of BC Midwest, Inc.
(3) Represents shares owned by B&B.
(4) Represents shares owned by OBG.
RELATIONSHIP WITH BOSTON CHICKEN
During 1994 and 1995 Boston Chicken spent substantial amounts of time and
resources investigating the potential of the bagel business. In March 1995,
Boston Chicken made an investment in the Company in the form of a convertible
secured loan and sold to the Company at net book value certain assets and
certain know-how and agreements. On June 17, 1996, Boston Chicken converted
the loan into shares of Common Stock, as more fully described below. Also in
March 1995, Boston Chicken and the Company entered into fee service agreements
pursuant to which Boston Chicken has provided the Company with certain multi-
unit retail infrastructure support, including accounting and administration
services, financial services, real estate services and computer and
communications services. Any of the foregoing fee service agreements which
remain in effect may be changed at any time, as may be agreed by Boston
Chicken and the Company. See "Risk
Factors--Control by and Conflicts of Interest with Boston Chicken."
The loan agreement between Boston Chicken and the Company, each of the other
agreements referred to above and other agreements between the Company and
Boston Chicken, are summarized below and are attached as exhibits to the
Registration Statement of which this Prospectus is a part.
LOAN AGREEMENT
On March 24, 1995, Boston Chicken made a senior secured convertible loan to
the Company, secured by substantially all of the Company's and its
subsidiaries' assets, pursuant to which the Company could draw on a line of
credit through March 1998, in order to provide partial funding for store
development and working capital. In February 1996, in connection with the
Noah's acquisition, Boston Chicken increased the amount available under the
loan from $80.0 million to $120.0 million. Also in February 1996, Boston
Chicken provided a $25.0 million bridge loan to the Company (later increased
to $40.0 million), which was repaid by the Company upon the closing of the
Company's secured revolving credit facility. On May 9, 1996, Boston Chicken
and the Company amended the convertible loan agreement to include a $14.0
million non-convertible facility, which was subsequently increased to $50.0
million. On June 17, 1996, pursuant to the terms of the convertible loan
agreement, Boston Chicken converted $80.0 million outstanding under the loan
into Common Stock at a conversion price of $6.38 per share, and converted the
remaining $40.0 million outstanding under the loan into Common Stock at a
conversion price of $14.42 per share. The Company issued an aggregate of
15,307,421 shares of Common Stock in the Loan Conversion, including 510,246
shares issued to BCEF pursuant to its participation interest in the
convertible loan, which interest is described below. As of September 4, 1996,
there were no amounts outstanding under the non-convertible loan facility.
Interest on the non-convertible loan is based on the reference rate of Bank of
America Illinois plus 0.5%. Any borrowings outstanding under the Company's
non-convertible loan facility from Boston Chicken are payable on June 15,
2003. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 7 of Notes to the Company's Audited
Consolidated Financial Statements.
51
<PAGE>
Boston Chicken may satisfy a portion of its funding obligations under the
loan agreement in cash or in shares of Boston Chicken common stock. Boston
Chicken has agreed to guarantee the price of any shares of Boston Chicken
common stock delivered to the Company in satisfaction of Boston Chicken's
obligations under the loan agreement and thereafter sold by the Company.
Boston Chicken's obligation to guarantee the selling price of the shares is
contingent upon the Company selling all of the shares of Boston Chicken common
stock received by it with respect to a particular advance within the first
seven trading days after the advance date in one or more bona fide broker's or
market maker transactions through or to Merrill Lynch to one or more persons
not affiliated with, related to, or associated with the Company. As of
September 4, 1996, Boston Chicken had issued to the Company, and the Company
had sold on the Nasdaq National Market, through Merrill Lynch acting as
broker, 2,701,615 shares of registered Boston Chicken common stock for
aggregate proceeds of approximately $88.0 million.
In April 1996, Boston Chicken sold a $4 million undivided interest in the
convertible loan to BCEF pursuant to a participation agreement. BCEF's
interest in the convertible loan included the pro rata participation by BCEF
in the principal, interest and security of the loan and the conversion and
option rights of Boston Chicken under such loan. In connection with the
conversion and option rights, two-thirds of BCEF's participation interest was
convertible into Common Stock at a conversion price of $6.38 per share and the
remaining one-third had a conversion price of $14.42 per share. BCEF had no
independent right to exercise any conversion or option rights with respect to
its participation interest, or to cause Boston Chicken to exercise such
conversion or option rights. Upon conversion of the convertible loan by Boston
Chicken, BCEF received 510,246 shares of Common Stock. The shares of Common
Stock acquired by BCEF upon Boston Chicken's conversion of the loan may not be
transferred by BCEF without providing Boston Chicken prior notice and the
opportunity to purchase such shares for, at the option of Boston Chicken, cash
or registered shares of Boston Chicken common stock. Certain executive
officers and directors of the Company own in the aggregate less than 10% of
the outstanding equity interests of BCEF.
In connection with the closing of the Company's secured revolving credit
facility with Bank of America Illinois, Boston Chicken agreed to subordinate
all of its loans to the Company, both convertible and non-convertible, to all
indebtedness under the Company's secured revolving credit facility, and
further agreed to release its security interest in the assets of the Company.
CONCURRENT PRIVATE PLACEMENT AGREEMENT AND REGISTRATION AGREEMENT
Concurrent with the consummation of the Initial Public Offering and the
Concurrent Public Offering, the Company entered into a concurrent private
placement agreement with Boston Chicken (the "Concurrent Private Placement
Agreement"), pursuant to which Boston Chicken purchased 2,000,000 shares of
Common Stock at the initial public offering price per share, net of
underwriting discount. The Concurrent Private Placement Agreement includes
customary terms and provisions, representations and warranties and
indemnification obligations. In addition, the Concurrent Private Placement
Agreement permits Boston Chicken to maintain ownership of shares of Common
Stock having up to 52% of the voting power of all of the outstanding shares of
capital stock of the Company having the power generally to vote in the
election of directors pursuant to an option (the "BCI Option") to purchase
newly issued shares of Common Stock for cash or registered shares of Boston
Chicken common stock at a per share exercise price equal to the (i) the
weighted average price per share at which the Common Stock was issued or sold
in a transaction pursuant to which the BCI Option becomes exercisable, in the
case of a transaction in which such price per share is readily ascertainable,
or (ii) in all other cases, the average of the closing sale prices for the
Common Stock on the Nasdaq National Market (or such other principal exchange
or market on which the Common Stock may then be trading) for the five trading
days ending on the fifth trading day prior to the date of the transaction
pursuant to which the BCI Option becomes exercisable, but subject in each case
to adjustments for issuances of shares of Common Stock in connection with
recapitalizations, dividends, stock splits, consolidations of shares and other
diluting events. In the event payment is made in registered shares of Boston
Chicken common stock, Boston Chicken will guarantee the price at which those
shares can be sold at the market within a limited time period. The BCI Option
will terminate if (i) Boston
52
<PAGE>
Chicken sells or transfers shares of Common Stock and as a result owns less
than a majority of the then outstanding shares of the Company's voting stock
or (ii) the percentage of outstanding shares of voting stock of the Company
owned by Boston Chicken is reduced below 50% other than as a result of Boston
Chicken's voluntary sale or transfer of shares of Common Stock and Boston
Chicken fails to acquire a sufficient number of shares of Common Stock so that
it owns at least a majority of the then outstanding shares of voting stock of
the Company by July 31 of the calendar year next following the calendar year
in which such reduction occurs. In addition, the percentage ownership level of
52% is subject to reduction to the extent voluntary sales or transfers by
Boston Chicken reduce its ownership of the outstanding shares of voting stock
of the Company to less than 52% but do not otherwise result in termination of
the BCI Option. The Concurrent Private Placement Agreement prohibits the
Company from taking certain actions without the consent of Boston Chicken as
long as the BCI Option has not terminated, including altering any rights
attaching to the Common Stock, offering or issuing any equity securities or
debt securities convertible into equity securities, in either case other than
Common Stock, distributing assets or securities of the Company having a fair
market value in excess of 10% of the Company's consolidated gross assets or
consolidated gross revenues measured as of the immediately preceding fiscal
year end, and filing a petition in bankruptcy.
In connection with the Concurrent Private Placement Agreement, the Company
also entered into a registration agreement with Boston Chicken (the "Boston
Chicken Registration Agreement"), pursuant to which the Company granted to
Boston Chicken five demand and unlimited piggyback registration rights under
the Securities Act with respect to the shares of Common Stock purchased by
Boston Chicken in the Concurrent Private Placement or otherwise owned by it,
including shares of Common Stock subject to the BCI Option for which the
Company will bear substantially all of the expenses in connection with such
registrations (other than underwriting discounts or commissions). The Boston
Chicken Registration Agreement supersedes the rights of Boston Chicken under
the Stockholder Registration Agreement. Boston Chicken's demand registration
rights under the Boston Chicken Registration Agreement are not exercisable by
it until the earlier of (i) the date on which the Company requests the
effectiveness of the registration statement under the Stockholder Registration
Agreement or (ii) September 7, 1997. In addition, the Company has agreed in
connection with Boston Chicken's first demand registration, to waive the
requirement of the Stockholder Registration Agreement, if it is still
applicable, that the holders of the Registrable Securities agree not to sell
up to 30% of such Registrable Securities for certain periods and Boston
Chicken has agreed to consent to such waiver. The Company obtained from the
parties to the Stockholder Registration Agreement a waiver of the provision of
such agreement prohibiting the Company from granting registration rights
superior to those granted under such agreement, and a consent to the grant by
the Company to Boston Chicken of registration rights pursuant to the Boston
Chicken Registration Agreement. See "Certain Transactions--Registration
Rights" and "Shares Eligible for Future Sale."
The Concurrent Private Placement Agreement and the Boston Chicken
Registration Agreement are exhibits to the Registration Statement of which
this Prospectus is a part.
ASSIGNMENT AND REIMBURSEMENT AGREEMENT
On March 24, 1995, Boston Chicken and the Company entered into an assignment
and reimbursement agreement, pursuant to which Boston Chicken assigned to the
Company certain intellectual property rights relating to the development,
manufacture and sale of bagels and bagel-related products (the "Bagel Rights")
and certain rights under contracts to which Boston Chicken was a party,
including Boston Chicken's rights under a lease of office space in Golden,
Colorado that was formerly used as the Company's support center (the "Bagel
Contracts"). The Company paid to Boston Chicken an aggregate of $1,160,334 in
consideration for certain assets and Boston Chicken's assignment of the Bagel
Rights and the Bagel Contracts, and in reimbursement of certain costs and
expenses paid by Boston Chicken in connection with the development and
creation of the Company and certain of its relationships, the development or
acquisition of the Bagel Rights, the negotiation of the Bagel Contracts and
the costs associated with transferring certain employees from Boston Chicken
to the Company. The Company also agreed to assume Boston Chicken's liabilities
and obligations under the Bagel Contracts and in connection with the other
activities performed by Boston Chicken for which the Company reimbursed Boston
Chicken.
53
<PAGE>
ACCOUNTING AND ADMINISTRATION SERVICES AGREEMENT
On March 24, 1995, Boston Chicken and the Company entered into an accounting
and administration services agreement, subsequently amended and restated in
May 1996 and June 1996 to incorporate minor changes to such agreement (the
"Accounting and Administration Services Agreement"), pursuant to which Boston
Chicken has agreed to assist the Company, its subsidiaries and its area
developers in performing certain services, including maintaining accounting
records, performing accounting activities, preparing financial reports,
administering options, establishing and administering employee benefits, human
resources, insurance and recordkeeping services, assisting with lease
negotiations, maintaining lease files and complying with reporting obligations
thereunder, and providing certain other administrative support services.
In consideration for such assistance, the Company has agreed to pay to
Boston Chicken a base fee of $30,000 for each four-week accounting period, and
to cause each Entity (defined below) to pay a supplemental base fee of $4,500
for each accounting period for services to each area developer or business
unit of the Company (each such area developer or business unit being herein
sometimes referred to as an "Entity"), which fees may be increased
cumulatively not more than 10% per fiscal year by Boston Chicken. The
Accounting and Administration Services Agreement also provides for a per store
fee, ranging from $850 per four-week accounting period if the Company or
Entity operates fewer than twelve bagel stores, to $350 per four-week
accounting period if the Company or Entity operates more than 200 bagel stores
(which range of per store fees may be reduced to a range from $700 to $250
upon compliance with certain reporting requirements, administrative procedure
compliance requirements and timeliness deadlines established by Boston
Chicken). The Company has also agreed to reimburse Boston Chicken for all non-
ordinary, out-of-pocket expenses incurred by Boston Chicken or its affiliates
in connection with the Accounting and Administration Services Agreement. All
such expenses in excess of $50,000 must be approved by the Company prior to
being incurred. Pursuant to the Accounting and Administration Services
Agreement, the Company paid to Boston Chicken in fiscal year 1995 and for the
two quarters ended July 14, 1996, fees aggregating $489,750 and $407,450,
respectively.
The Accounting and Administration Services Agreement has a term of three
years and may be terminated by the Company or Boston Chicken upon 180 days'
prior written notice. In addition, Boston Chicken may terminate the agreement
without notice 15 days after giving notice of non-payment of the fees provided
for in the agreement, unless such non-payment is cured within such 15-day
period.
FINANCIAL SERVICES AGREEMENT
On March 24, 1995, Boston Chicken and the Company entered into a financial
services agreement, (as amended, the "Financial Services Agreement"), pursuant
to which Boston Chicken agreed to provide certain financial services to the
Company and its area developers, including identification and analysis of
possible transactions and related financial and strategic advice, assistance
in budget and forecast preparation, consultations and advice as to
presentations, discussions and disclosures to financial analysts and the
financial press, and advice concerning crisis management and control. In
consideration for such financial services, the Company agreed to pay to Boston
Chicken financial services fees aggregating $500,000 for fiscal year 1995 and
approximately $96,000 for fiscal year 1996. The Company also agreed to
reimburse Boston Chicken for all non-ordinary, out-of-pocket expenses incurred
by Boston Chicken or its affiliates in connection with the Financial Services
Agreement. All such expenses in excess of $50,000 were required to be approved
by the Company prior to being incurred. The Financial Services Agreement was
terminated effective as of May 20, 1996.
REAL ESTATE SERVICES AGREEMENT
On March 24, 1995, Boston Chicken and the Company entered into a real estate
services agreement, subsequently amended and restated in May 1996 to make
minor changes to such agreement (the "Real Estate Services Agreement"),
pursuant to which Boston Chicken agreed to assist the Company, its
subsidiaries and its area developers in conducting certain real estate-related
activities, including site analysis, advisory services regarding customer
trade area studies and other real estate matters. In consideration for such
real estate services,
54
<PAGE>
the Company agreed to pay a general real estate advisory fee of $5,000 for
each bagel store location proposed to be owned, operated, leased or franchised
by the Company or any of its area developers or subsidiaries. The Company also
agreed that the Company and its subsidiaries would pay Boston Chicken's
regular fees for customer area trade studies, market development plans, and
demographic and census reports, charts and maps (which fees were subject to
change from time to time by Boston Chicken). The Company also agreed to
reimburse Boston Chicken for all non-ordinary, out-of-pocket expenses incurred
by Boston Chicken or its affiliates in connection with the Real Estate
Services Agreement. All such expenses in excess of $50,000 were required to be
approved by the Company prior to being incurred. Pursuant to the Real Estate
Services Agreement, the Company paid to Boston Chicken in fiscal year 1995
fees aggregating $280,000. The Real Estate Services Agreement was terminated
effective as of June 17, 1996.
COMPUTER AND COMMUNICATIONS SYSTEMS SERVICES AGREEMENTS
On March 24, 1995, Boston Chicken and the Company entered into the Computer
Services Agreement, subsequently amended and restated in May 1996 and June
1996 to make certain changes to such agreement, pursuant to which (i) the
Company has agreed to acquire communications and computer systems or hardware
specified or required from time to time by Boston Chicken for use by the
Company and its subsidiaries and area developers (except for Noah's Pacific an
area developer of the Company operating Noah's New York Bagels stores, which
has entered into a separate agreement with Boston Chicken for computer systems
conversion and services as more fully described below), (ii) Boston Chicken
has licensed the Company to use retail store-level computer software programs
and certain other computer software programs in connection with various
support and control functions (which the Company has agreed to use
exclusively, along with other software specified by Boston Chicken), and (iii)
Boston Chicken has agreed to provide certain computer and communications
support services. In consideration for such license and provision of services,
the Company has agreed to pay, and to cause each of its subsidiaries and area
developers to pay, to Boston Chicken a one-time license fee of $15,000 per
bagel store. In addition, the Company agreed to pay fees aggregating $156,000
for certain real estate software, fees aggregating $156,000 for certain Lotus
Notes Database(R) templates and fees aggregating $156,000 for certain
structured report software. In addition, the Company has agreed to pay to
Boston Chicken, for data center and network service operations and support of
certain infrastructure programs, $750,000 for each of the 1996, 1997 and 1998
fiscal years and 0.25% of net systemwide revenue of the Company, its
subsidiaries and its area developers (excluding the revenue derived from
Noah's New York Bagels stores) for each of the 1999 and 2000 fiscal years. The
Company has also agreed to pay, and to cause each of its subsidiaries and area
developers to pay, to Boston Chicken a software maintenance and support
service fee of $323 for each of Boston Chicken's four-week accounting periods
for each installed copy of certain software licensed from Boston Chicken,
which fee may be increased by Boston Chicken at any time at its option. The
Company has also agreed to compensate Boston Chicken at hourly rates for
performance of support services not otherwise covered by the foregoing fees
and to incur certain additional amounts as may be needed to modify, enhance or
replace computer or communications systems or computer software, some of which
amounts may be payable to Boston Chicken. The Company has also agreed to
reimburse Boston Chicken for certain costs and expenses incurred by Boston
Chicken in connection with the Computer Services Agreement. Pursuant to the
Computer Services Agreement, the Company, its subsidiaries and area developers
paid to Boston Chicken in fiscal year 1995 and for the two quarters ended July
14, 1996, fees aggregating $234,823 and $375,460, respectively.
The Computer Services Agreement has a term of five years and may be
terminated by the Company or Boston Chicken upon one year prior written
notice. In addition, Boston Chicken may terminate the agreement without notice
15 days after giving notice of non-payment of the fees provided for in the
agreement, unless such non-payment is cured within such 15-day period.
In June 1996, Noah's Pacific and Boston Chicken entered into a computer and
communications systems conversion and services agreement (the "Noah's Pacific
Agreement") substantially similar to the Computer Services Agreement with
respect to the systems and hardware acquired by Noah's Pacific and the
computer and communications support services provided by Boston Chicken. The
Noah's Pacific Agreement provides that
55
<PAGE>
Boston Chicken will provide certain conversion assistance to Noah's Pacific
and Noah's Bay Area L.L.C. The conversion services provided by Boston Chicken
under the Noah's Pacific Agreement include assisting with the development of a
conversion plan and timetable for converting the Noah's Pacific system to the
Company's system, the development of employee training materials, programs and
processes and customizing and adapting the Company's systems and software
programs for use in connection with the development and operation of Noah's
New York Bagels stores. In consideration of the conversion assistance,
software support and other services to be provided by Boston Chicken pursuant
to the Noah's Pacific Agreement, Noah's Pacific has agreed to pay to Boston
Chicken $1.5 million for the period beginning June 17, 1996 and ending
December 29, 1996, $3.0 million for each of Boston Chicken's 1997 and 1998
fiscal years and, for each of Boston Chicken's accounting periods in fiscal
1999 and 2000, an amount equal to 0.5% of the combined Royalty Base Revenue of
all stores owned by Noah's Pacific, Noah's Bay Area or their subsidiaries or
affiliates which are operating during any such accounting period.
The Noah's Pacific Agreement terminates at the end of Boston Chicken's
fiscal year 2000. In addition, Boston Chicken may terminate the agreement
without notice (i) 15 days after giving notice of non-payment of the fees
provided for in the agreement, unless such non-payment is cured within such
15-day period and (ii) if Noah's Pacific breaches any provision of the
agreement or, as to a particular store owned and operated by Noah's Pacific or
Noah's Bay Area, if the franchise agreement covering the operation of the
store is terminated for any reason.
OTHER RELATIONSHIPS BETWEEN BOSTON CHICKEN AND THE COMPANY
Pursuant to subscription agreements and certain other agreements entered
into upon the formation of the Company, the stockholders of the Company agreed
to vote their shares in favor of three persons designated by Boston Chicken as
directors of the Company. The Company currently has ten directors, including
the following designees of Boston Chicken: Scott Beck, Kyle Craig and David
Stanchak. Boston Chicken did not designate nominees for the 1996 election of
directors. In addition, certain officers of the Company were previously
officers or employees of Boston Chicken. See "Management."
The Company has from time to time purchased from Boston Chicken shares of
Boston Chicken common stock for delivery by the Company in connection with
acquisitions of other businesses by the Company. In addition to shares of
Boston Chicken common stock funded by Boston Chicken under the loan agreement,
during the period from March 24, 1995 through August 10, 1995, the Company
also purchased an aggregate of 1,298,958 shares of Boston Chicken common stock
in connection with such acquisitions, having an aggregate market value,
measured as of the respective dates such shares were acquired, of
approximately $23.4 million. See "Certain Transactions--Formation of the
Company and Subsequent Acquisitions." The Company may from time to time
acquire shares of common stock, or other securities, of Boston Chicken for
such purposes in the future. See also "--Loan Agreement."
In connection with the formation of the Company, the Company granted options
to purchase an aggregate of 224,300 shares of Common Stock to certain officers
and employees of Boston Chicken at an exercise price of $5.88 per share. Of
such shares, 50,978 shares are subject to options granted to executive
officers of Boston Chicken as follows: Mark W. Stephens, Vice Chairman of the
Board and Chief Financial Officer, 15,294 shares; Thomas R. Sprague, Executive
Vice President, 15,294 shares; Donald J. Bingle, Vice President, General
Counsel and Secretary, 10,195 shares; and Mark A. Link, Vice President--
Financial Reporting, 10,195 shares.
In July 1996, the Company, as tenant, entered into a lease with Boston
Chicken, as landlord, for the Company's support center facility, consisting of
approximately 38,000 square feet of office space (and certain common areas,
including parking areas) located in Golden, Colorado. The lease commenced on
September 1, 1996 and has a 15-year term, renewable for two consecutive five-
year terms. The lease provides for initial rent of approximately $38,000 per
month to be increased by 15% every five years during the initial term and any
renewal term of the lease. Under the lease, the Company has agreed that, in
the event Boston Chicken enters into a sale/leaseback transaction with any
third party, the Company will, at Boston Chicken's option, amend the
56
<PAGE>
amount of rental payments under the lease to equal 40% of the rental amounts
agreed to be paid by Boston Chicken pursuant to such a transaction. The lease
is a "triple net" lease which requires the Company to pay its proportionate
share of costs associated with the property, building and common areas related
to the leased premises, including, without limitation, real estate taxes,
maintenance costs and insurance premiums. In addition, the Company is required
to pay to Boston Chicken an administrative and management fee not to exceed
15% of such costs. Under the terms of the lease, the Company is required to
procure and maintain comprehensive commercial liability and property damage
insurance for the leased premises. The lease contains other provisions typical
of commercial leases generally, including indemnification provisions, a
prohibition against subleasing without landlord consent and standard
provisions relating to defaults under the lease and remedies available upon
default. The Company believes the terms and provisions of the lease, including
the rent payable thereunder, are at least as favorable to the Company as those
it could have obtained from an unaffiliated third party.
The Company is a party to two subleases with Boston Chicken, pursuant to
which the Company is entitled to the non-exclusive use of aircraft leased by
Boston Chicken from unaffiliated leasing companies. Under the subleases, the
Company is obligated to pay to Boston Chicken between $1,900 and $2,800
(depending on the type of aircraft) for each hour of flight time such aircraft
is used by the Company. There is no minimum monthly use requirement or lease
payment under either of the subleases, and both subleases may be terminated by
either party upon 30 days' written notice. The Company believes that costs
incurred by it under the subleases are lower than the costs it would incur to
lease and maintain its own aircraft from an unaffiliated third party lessor
and slightly higher than the costs it would incur to charter individual
aircraft on a spot-basis from unaffiliated third party lessors. However, the
Company believes that such higher costs are reasonably related to the benefits
to the Company from the subleases, including aircraft availability and higher
maintenance standards, that it would not realize from charter arrangements
with unaffiliated third party lessors.
See also "Risk Factors--Dependence on Boston Chicken," "Risk Factors--
Control by and Conflicts of Interest with Boston Chicken" and "Certain
Transactions."
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 200 million shares
of Common Stock, $.01 par value per share, and 20 million shares of preferred
stock, $.01 par value per share (the "Preferred Stock"). At September 4, 1996,
the Company had 28,987,326 shares of Common Stock issued and outstanding. As
of such date, no shares of Preferred Stock were issued and outstanding. The
following description is a summary of the provisions of the Company's Restated
Certificate of Incorporation (the "Certificate of Incorporation"), and its
Amended and Restated Bylaws (the "Bylaws"), copies of which are exhibits to
the Registration Statement of which this Prospectus is a part. See "Risk
Factors--Anti-Takeover Effect of Charter and Statutory Provisions."
COMMON STOCK
Except as required by law or by the Certificate of Incorporation, holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the holders of Common Stock. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors and are not permitted to act by written consent. Subject
to preferences that may be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may
be declared by the board of directors out of funds legally available therefor.
See "Dividend Policy." In the event of a liquidation, dissolution, or winding
up of the Company, holders of the Common Stock are entitled to share ratably
in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding Preferred Stock. Holders of Common Stock
have no preemptive rights and have no right to convert their Common Stock into
any other securities. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are,
and the Common Stock to be outstanding upon consummation of the Offerings will
be, fully paid and nonassessable. The board of directors may issue additional
authorized shares of Common Stock without further action by the stockholders.
57
<PAGE>
PREFERRED STOCK
The board of directors has the authority, without further action by the
stockholders, to issue up to 20 million shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, and the number of shares constituting any
series or the designation of such series. However, pursuant to the Certificate
of Incorporation, the holders of Preferred Stock would not have cumulative
voting rights with respect to the election of directors. The issuance of
Preferred Stock could adversely affect the voting power of holders of Common
Stock and could have the effect of delaying, deferring, or preventing a change
in control of the Company.
On August 10, 1995, the Company issued the Preferred Shares in connection
with the acquisition of Baltimore Bagel. Each of the Preferred Shares had a
liquidation preference of $1,000 and paid annual dividends of $60.00. Upon
completion of the Initial Public Offering, each Preferred Share was
automatically converted into 73.52941 shares of Common Stock.
As of September 4, 1996, no shares of Preferred Stock were outstanding and
the Company has no present plan to issue any shares of Preferred Stock.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is LaSalle National
Trust, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
At September 4, 1996, the Company had 28,987,326 shares of Common Stock
outstanding. The 3,105,000 shares of Common Stock sold in the Initial Public
Offering are freely tradeable (other than by an "affiliate" of the Company as
such term is defined in the Securities Act) without restriction or
registration under the Securities Act. The 425,000 shares of Common Stock sold
in the Concurrent Public Offering, although also freely tradeable (other than
by an "affiliate" of the Company as such term is defined in the Securities
Act), are subject to contractual lock-up arrangements restricting their sale
prior to August 1, 1997, without the consent of Merrill Lynch. The 16,797,175
shares of Common Stock owned by Boston Chicken were issued and sold by the
Company in private transactions ("Restricted Shares") and may not be resold
unless registered under the Securities Act or sold in accordance with an
exemption therefrom, such as Rule 144, Rule 144A or Rule 701 thereunder. The
Company has granted to Boston Chicken five demand and unlimited piggyback
registration rights under the Boston Chicken Registration Agreement. Boston
Chicken has agreed, however, not to sell shares of Common Stock purchased in
the Concurrent Private Placement prior to August 1, 1997, without the consent
of Merrill Lynch, and has agreed not to sell the remaining shares of Common
Stock owned by it prior to January 28, 1997. Of the Shares covered by this
Prospectus, 8,569,050 are currently issued and outstanding and 1,339,277 are
issuable pursuant to outstanding warrants granted by the Company. All of such
Shares covered by this Prospectus are, or when issued will be, Restricted
Shares, but may be offered hereby by the Registering Stockholders in the
public market. The holders of 6,971,820 of such Shares have agreed, however,
that they will not sell any of such Shares prior to January 28, 1997, subject
to certain exceptions, without the consent of Merrill Lynch, the holders of an
167,197 of the Shares covered hereby have agreed that they will not sell any
of such Shares prior to 180 days from the date of this Prospectus, the holders
of 17,000 of the Shares covered hereby have agreed that they will not sell any
of such Shares prior to August 1, 1997 and the holders of 1,372,135 of the
Shares covered hereby (consisting of all officers and directors of the
Company, who hold an aggregate of 550,460 of such Shares, and area developers
of the Company holding an aggregate of 821,675 of such Shares) have agreed
that they will not sell any of such Shares prior to August 1, 1998.
In general, under Rule 144 as currently in effect, a holder of Restricted
Shares who beneficially owns shares that were not acquired from the Company or
an affiliate of the Company within the previous two years would be entitled to
sell in the public market within any three-month period a number of shares
that does not exceed the
58
<PAGE>
greater of (i) one percent of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume of the Common Stock on the Nasdaq
National Market during the four calendar weeks immediately preceding the date
on which notice of the sale is filed with the Securities and Exchange
Commission (the "Commission"). Sales pursuant to Rule 144 are also subject to
certain other requirements relating to manner of sale, notice and the
availability of current public information about the Company. A person who is
deemed not to have been an affiliate of the Company at any time during the
three months immediately preceding a sale and who beneficially owns shares
that were not acquired from the Company or an affiliate of the Company within
the past three years is entitled to sell such shares under Rule 144(k) without
regard to the foregoing limitations. Rule 144A under the Securities Act
permits the immediate sale by the holders of Restricted Shares issued prior to
completion of the Offerings of all or a portion of their shares to certain
"qualified institutional buyers" as defined in Rule 144A. Although under Rule
144, as currently in effect, none of the Restricted Shares are currently
available for resale under such rule, the shares of Common Stock covered by
this Prospectus may be offered hereby by the Registering Stockholders in the
public market.
Boston Chicken is a party to the Stockholder Registration Agreement.
However, in connection with the Concurrent Private Placement, the Company
entered into the Boston Chicken Registration Agreement (which superseded
Boston Chicken's rights under the Stockholder Registration Agreement).
Pursuant to the Boston Chicken Registration Agreement, the Company granted to
Boston Chicken five demand and unlimited piggyback registration rights under
the Securities Act with respect to the shares of Common Stock owned by Boston
Chicken, including shares of Common Stock subject to the BCI Option, for which
the Company will bear substantially all of the expenses (other than
underwriting discounts or commissions). The demand registration rights are not
exercisable by Boston Chicken until the earlier of (i) the date on which the
Company requests the effectiveness of the resale registration statement under
the Stockholder Registration Agreement or (ii) 13 months after completion of
the Offerings. In addition, the Company has agreed, in connection with Boston
Chicken's first demand registration, to waive the requirement of the
Stockholder Registration Agreement, if it is still applicable, that the
holders of the Registrable Securities agree not to sell up to 30% of such
Registrable Securities for certain periods and Boston Chicken has agreed to
consent to such waiver. The Company has obtained from the parties to the
Stockholder Registration Agreement a waiver of the provision of such agreement
prohibiting the Company from granting registration rights superior to those
granted under such agreement, and a consent to the grant by the Company to
Boston Chicken of registration rights pursuant to the Boston Chicken
Registration Agreement. See "Certain Transactions--Registration Rights" and
"Relationship with Boston Chicken--Concurrent Private Placement Agreement and
Registration Agreement."
The Company has registered under the Securities Act 3,569,436 shares of
Common Stock subject to outstanding options and 1,725,759 shares of Common
Stock reserved for issuance under the Amended Plan and the Directors Plan. All
shares purchased in the future under such plans will be available for resale
in the public market without restriction, except that affiliates must comply
with the provisions of Rule 144 other than the two-year holding period
requirement described above. In addition, the Company may file a registration
statement covering shares of Common Stock for issuance from time to time in
connection with potential future acquisitions and resales thereof by the
recipients, although no such acquisitions are currently pending. Shares so
registered could not be sold in the public market prior to January 28, 1997,
subject to certain exceptions, without the consent of Merrill Lynch.
59
<PAGE>
REGISTERING STOCKHOLDERS
The Shares are being registered hereunder to simplify resale thereof if and
when a Registering Stockholder determines to sell Shares from time to time and
not because of any expressed intent to immediately sell such Shares. The
following table sets forth certain information regarding the ownership of the
Company's Common Stock as of September 4, 1996 by each of the Registering
Stockholders. Of the Shares being registered hereunder, 8,569,050 are
currently issued and outstanding and 1,339,277 are issuable pursuant to
outstanding warrants granted by the Company. Only 1,380,175 of the Shares
registered hereunder will be immediately available for resale upon
effectiveness of the Registration Statement of which this Prospectus forms a
part. The remaining 8,528,152 of the Shares registered hereunder are subject
to contractual lock-up arrangements of various durations as follows: the
holders of 6,971,820 of the Shares registered hereunder have agreed that they
will not sell any of such Shares prior to January 28, 1997, subject to certain
exceptions, without the consent of Merrill Lynch, the holders of 167,197 of
the Shares registered hereunder have agreed that they will not sell any of
such Shares prior to 180 days from the date of this Prospectus, the holders of
17,000 of the Shares registered hereunder have agreed that they will not sell
such shares prior to August 1, 1997 and the holders of 1,372,135 of the Shares
registered hereunder (consisting of all officers and directors of the Company,
who hold an aggregate of 550,460 of such Shares, and area developers of the
Company holding an aggregate of 821,675 of such Shares) have agreed that they
will not sell any of such Shares prior to August 1, 1998.
<TABLE>
<CAPTION>
SHARES NOT
TOTAL REGISTERED
SHARES OWNED HEREUNDER
--------------- SHARES REGISTERED --------------
NAME NUMBER PERCENT HEREUNDER(1) NUMBER PERCENT
- ---- ------ ------- ----------------- ------ -------
<S> <C> <C> <C> <C> <C>
Paul Aiken.................... 18,000 * 18,000(10) -- *
Sangwoo Ahn................... 13,191 * 13,191 -- *
Joan M. Alam.................. 100 * 100 -- *
Joel M. Alam and Bernadette
Dennehy, joint tenants....... 6,524 * 2,024 4,500 *
Daniel V. and Lynne K. Alper,
as community property........ 16,630 * 16,630(2) -- *
Fred Alper.................... 7,127 * 7,127(2) -- *
Noah C. or Hope M. Alper,
Trustee or Successor Trustee
of the Alper Living Trust
U/A/D July 18, 1994.......... 93,600 * 93,600(2) -- *
Altgeld Management
Corporation.................. 43,743 * 43,743(3) -- *
ALTHEO, Inc................... 3,823 * 3,823 -- *
Amalgamated Acme Corp. Profit
Sharing Trust Earmarked
Rollover Account for Michael
L. Epsteen................... 1,426 * 1,426(2) -- *
Glenn Bacheller............... 9,028 * 9,028(2) -- *
Bagel South, L.L.C............ 11,953 * 11,953(3) -- *
Albert S. and Anne M.
Baldocchi, as community
property..................... 88,715 * 84,965 3,750 *
Baldwin & Lyons, Inc.......... 57,250 * 56,250(3) 1,000 *
Bank America Investment Corp.. 28,688 * 28,688(3) -- *
Bank of America Illinois...... 15,375 * 15,375(4) -- *
Bank of America Illinois,
Trustee of the Hayden GST
Trust u/a dated 12/28/95..... 29,739 * 29,739 -- *
B & B Holdings, Inc........... 546,850 1.9 546,850(5) -- *
B.B. Investments, Ltd......... 263,817 * 263,817 -- *
BC Equity Funding, L.L.C...... 510,246 1.8 510,246(6) -- *
BCE West Bagels, L.L.C........ 85,050 * 85,050(12) -- *
Michael Beaudoin.............. 24,990 * 21,240 3,750 *
Lawrence Beck................. 21,125 * 19,125(3) 2,000 *
Belushi Partners II........... 4,781 * 4,781(3) -- *
Daniel Bercu.................. 2,426 * 1,426(2) 1,000 *
Steven Berrard................ 14,273 * 13,273(3) 1,000 *
Robert Bielinski.............. 4,562 * 1,062 3,500 *
Donald J. Bingle.............. 3,520 * 1,020(8) 2,500 *
Theodore A. Bosler Trust...... 3,391 * 2,391(3) 1,000 *
</TABLE>
- --------
*Represents less than 1% of the outstanding Common Stock.
60
<PAGE>
<TABLE>
<CAPTION>
SHARES NOT
TOTAL REGISTERED
SHARES OWNED HEREUNDER
--------------- SHARES REGISTERED --------------
NAME NUMBER PERCENT HEREUNDER(1) NUMBER PERCENT
- ---- ------- ------- ----------------- ------ -------
<S> <C> <C> <C> <C> <C>
Brau Family Partnership,
L.P......................... 465,830 1.6 465,830(9) -- *
Charles A. Brickman, Trustee
under Trust dated 6/1/88.... 20,119 * 19,119 1,000 *
Dean L. Buntrock............. 2,000 * 2,000(7) -- *
Jeffrey L. Butler............ 99,135 * 95,385(3)(8) 3,750 *
Vincent Buonanno............. 3,869 * 2,869(3) 1,000 *
James S. Cary................ 8,225 * 7,725(8) 500 *
W. Eric Carlborg............. 15,115 * 11,365(3) 3,750 *
C & B Holdings, Ltd.......... 101,705 * 101,705 -- *
Dr. Richard Caleel........... 5,281 * 4,781(3) 500 *
Arthur Chaykin............... 100 * 100(5) -- *
Daniel V. Colangelo.......... 351,354 1.2 351,354(10) -- *
Vito J. Colangelo............ 13,500 * 13,500(10) -- *
Colonial Bagels, L.P......... 100,350 * 100,350(12) -- *
Kyle T. Craig................ 42,483 * 42,483 -- *
John W. Croghan, Trustee for
the John W. Croghan Trust
dated 12/28/82.............. 19,119 * 19,119 -- *
Joseph A. Cusimano IRA
Rollover.................... 3,825 * 3,825(3) -- *
D&R, L.L.C................... 56,250 * 56,250(3) -- *
DNB, L.P..................... 10,620 * 10,620 -- *
Peter Desnoes................ 5,781 * 4,781(3) 1,000 *
Chris B. Dodge............... 5,475 * 2,975 2,500 *
Craig J. Duchossois.......... 10,558 * 9,558 1,000 *
EBB Investors, Inc........... 23,906 * 23,906(3) -- *
EB&M Holdings, Ltd........... 14,344 * 14,344(3) -- *
F. Warren Ellish............. 6,372 * 6,372 -- *
Andrew J. Filipowski......... 34,058 * 32,058(3) 2,000 *
Finest Bagels, L.L.C......... 77,175 * 77,175(12) -- *
Robert Flynn................. 1,688 * 1,688(3) -- *
Brian J. Flynn Trust......... 12,250 * 11,250(3) 1,000 *
Donald F. Flynn, 1993 Trust.. 13,250 * 11,250(3) 2,000 *
Kevin F. Flynn Trust......... 11,250 * 11,250(3) -- *
Craig J. Foley............... 19,006 * 19,006(2) -- *
Richard A. Forsythe Revocable
Trust....................... 4,781 * 4,781(3) -- *
Julius Frankel............... 13,500 * 13,500(10) -- *
Frontenac VI Limited
Partnership................. 424,827 1.5 424,827 -- *
Stuart Fullinwider........... 14,650 * 12,150(8) 2,500 *
Furst Rudman Investors,
L.L.P....................... 4,781 * 4,781(3) -- *
Thomas F. Githens Family
Partnership................. 3,823 * 3,823 -- *
J. Douglas Gray.............. 3,391 * 2,391(3) 1,000 *
Robert Guerin................ 10,620 * 10,620 -- *
Great Lakes Bagels, L.L.C.... 103,500 * 103,500(12) -- *
Arnold C. Greenberg.......... 12,500 * 12,500(7) -- *
Grosvenor Fund, L.P.......... 5,625 * 5,625(3) -- *
Gulfstream Bagels, L.P....... 97,425 * 97,425(12) -- *
Frederic C. Hamilton......... 9,558 * 9,558 -- *
Hal P. Harlan................ 11,325 * 3,825(3) 7,500 *
</TABLE>
- --------
*Represents less than 1% of the outstanding Common Stock.
61
<PAGE>
<TABLE>
<CAPTION>
SHARES NOT
TOTAL REGISTERED
SHARES OWNED HEREUNDER
--------------- SHARES REGISTERED --------------
NAME NUMBER PERCENT HEREUNDER(1) NUMBER PERCENT
- ---- ------- ------- ----------------- ------ -------
<S> <C> <C> <C> <C> <C>
Harlan Bagel Supply Company.. 23,173 * 23,173(12) -- *
J. Bruce Harreld............. 2,500 * 2,500(7) -- *
Jeff Harpster................ 6,563 * 2,813(3) 3,750 *
Nancy Hauge.................. 4,752 * 4,752(2) -- *
Mark X. Hayden............... 18,967 * 16,467(3)(8) 2,500 *
Hay Property Company, Ltd.... 4,500 * 4,500(3) -- *
Theodore P. Heininger........ 4,812 * 1,062 3,750 *
J. Michael Hesler............ 6,738 * 5,738(3) 1,000 *
James Hilmer................. 90,278 * 90,278(8) -- *
A. Barry Hirschfeld.......... 3,391 * 2,391(3) 1,000 *
Matt Holmes.................. 2,901 * 1,901(2) 1,000 *
Joe Hoog..................... 5,663 * 1,913(3) 3,750 *
William B. Hughson, Trustee
under the William B. Hughson
and Margaret A. Hsia
Revocable Trust............. 8,553 * 8,553(2) -- *
William P. Hulligan.......... 10,563 * 9,563(3) 1,000 *
Barbara Huth................. 8,496 * 8,496 -- *
M Howard Jacobson............ 500 * 500(7) -- *
JKS Trust.................... 10,206 * 10,206 -- *
JMH Associates, Inc. Profit
Sharing Fund................ 3,825 * 3,825(3) -- *
JWC Trust.................... 3,825 * 3,825(3) -- *
Adrienne Kizer............... 500 * 500(5) -- *
Jeffrey A. Klein............. 38,715 * 38,715(3) -- *
Karen Klein.................. 1,426 * 1,426(2) -- *
KMK & Associates............. 10,563 * 9,563(3) 1,000 *
James W. Largay.............. 57,492 * 57,492(10) -- *
North American Trust Company,
as Trustee for Bell, Boyd &
Lloyd Retirement Plan
Account FBO Paul A. Strasen. 3,398 * 3,398 -- *
Lowell H. Leberman........... 16,294 * 15,294 1,000 *
Gerard Lewis................. 4,624 * 2,124 2,500 *
Kathryn C. Lewis............. 64,125 * 64,125 -- *
Kathryn C. Lewis Trust U/A
6/14/93..................... 33,300 * 33,300 -- *
Perry J. Lewis............... 13,191 * 13,191 -- *
Peter C. Lewis............... 90,678 * 90,678 -- *
Peter C. Lewis Trust U/A
6/14/93..................... 33,300 * 33,300 -- *
Frederick W. Ley............. 55,603 * 53,103 2,500 *
Liberty Foods, L.L.C......... 100,350 * 100,350(12) -- *
Mark Link.................... 2,926 * 426 2,500 *
Gail A. Lozoff............... 4,249 * 4,249(8) -- *
Shelby Lozoff................ 150 * 150(5) -- *
Aaron March.................. 250 * 250(5) -- *
Daniel C. Marino, Jr......... 38,235 * 38,235 -- *
Marquette Venture Partners
II, L.P..................... 206,514 * 206,514 -- *
Maverick Fund USA, Ltd....... 41,680 * 41,680(3) -- *
Mayfair Bagels, L.L.C........ 77,175 * 77,175(12) -- *
John & Janet Melk Jt. Ten.... 47,813 * 47,813(3) -- *
David B. Meltzer............. 2,869 * 2,869(3) -- *
</TABLE>
- --------
*Represents less than 1% of the outstanding Common Stock.
62
<PAGE>
<TABLE>
<CAPTION>
SHARES NOT
TOTAL REGISTERED
SHARES OWNED HEREUNDER
--------------- SHARES REGISTERED --------------
NAME NUMBER PERCENT HEREUNDER(1) NUMBER PERCENT
- ---- ------- ------- ----------------- ------ -------
<S> <C> <C> <C> <C> <C>
Merrill Lynch, Pierce,
Fenner & Smith, Custodian
for the W. Eric Carlborg
Individual Retirement
Account, for the benefit of
W. Eric Carlborg........... 12,744 * 12,744 -- *
Robert Meyer................ 100 * 100(5) -- *
James Fox Miller............ 10,563 * 9,563(3) 1,000 *
Lewis Miller................ 5,596 * 5,596(8) -- *
Jim Mizes................... 12,778 * 9,028(2) 3,750 *
John A. Morgan.............. 13,191 * 13,191 -- *
Morgan Lewis Githens & Ahn,
L.P........................ 28,688 * 28,688(3) -- *
John Morlock................ 28,575 * 26,075(3)(8) 2,500 *
Shirley Morlock............. 8,496 * 8,496 -- *
John H. Muehlstein, Jr...... 6,141 * 6,141(3)(7) -- *
Dennis B. Mullen............ 3,600 * 1,100(3) 2,500 *
Andrew P. Murphy............ 1,125 * 1,125(3) -- *
Barbara Musante............. 8,152 * 6,652(2) 1,500 *
MVP II Affiliates, L.P...... 5,900 * 5,900 -- *
Alfred G. Naddaff........... 6,014 * 6,014(8) -- *
Saad J. Nadhir.............. 6,748 * 6,748(7) -- *
Gary Thomas Naifeh.......... 5,874 * 2,124 3,750 *
Jeffrey C. Neal............. 83,786 * 83,786(3) -- *
The Nippon Credit Bank,
Ltd........................ 4,397 * 4,397 -- *
NNYB, L.L.C................. 234,227 * 234,227(12) -- *
Stephen A. Norman........... 230,358 * 230,358(10) -- *
Noah's Pacific, L.L.C....... 168,750 * 168,750(12) -- *
NS Associates, Inc.......... 5,625 * 5,625(3) -- *
OBG Holdings, Inc........... 885,997 3.1 885,997(11) -- *
Alain O'Hayon............... 956 * 956(3) -- *
Edward M. Palms............. 4,624 * 2,124 2,500 *
George G.C. Parker.......... 1,711 * 1,711(2) -- *
Gary Pasternak.............. 2,500 * 2,500(5) -- *
Irene Pasternak............. 7,500 * 7,500(5) -- *
Sam Pasternak............... 7,500 * 7,500(5) -- *
Thomas H. Patrick........... 133,821 * 133,821 -- *
Pedersen Bagel Investment
Joint Venture.............. 678,661 2.3 678,661 -- *
Peer Pedersen............... 49,813 * 49,813(3)(7) -- *
Joren C. Peterson........... 10,996 * 8,496 2,500 *
Philly Rose, L.P............ 92,700 * 92,700(12) -- *
The Pisces Fund............. 6,842 * 6,842(2) -- *
PJS Bagel Investing, L.L.C.. 5,099 * 5,099 -- *
Platinum Venture Partners I,
L.P........................ 17,206 * 17,206 -- *
Platinum Venture Partners
II, L.P.................... 21,029 * 21,029 -- *
PSR Investments, L.P........ 19,125 * 19,125(3) -- *
Steven J. Quamme............ 9,375 * 5,625(3) 3,750 *
A. G. Rappaport............. 4,781 * 4,781(3) -- *
A.G. Rappaport and Diane M.
Rappaport, tenants by the
entireties................. 141,819 * 138,069 3,750 *
Charles Reeder.............. 5,781 * 4,781(3) 1,000 *
</TABLE>
- --------
*Represents less than 1% of the outstanding Common Stock.
63
<PAGE>
<TABLE>
<CAPTION>
SHARES NOT
TOTAL REGISTERED
SHARES OWNED HEREUNDER
--------------- SHARES REGISTERED --------------
NAME NUMBER PERCENT HEREUNDER(1) NUMBER PERCENT
- ---- ------- ------- ----------------- ------ -------
<S> <C> <C> <C> <C> <C>
J. Christopher Reyes...... 5,781 * 4,781(3) 1,000 *
M. Jude Reyes............. 5,781 * 4,781(3) 1,000 *
Rodney Rice............... 24,993 * 21,243(8) 3,750 *
Harry T. Rose............. 6,141 * 2,391(3) 3,750 *
Rosewood Capital, L.P..... 475,126 1.6 475,126(2) -- *
Maurice Rowe.............. 8,846 * 8,496 350 *
Karen Rugen............... 5,050 * 2,550 2,500 *
Lloyd D. Ruth............. 5,663 * 5,663(3)(7) -- *
William Schrader.......... 12,778 * 9,028(2) 3,750 *
Martin Schwartz........... 24,906 * 23,906(3) 1,000 *
Lisa A. Sebring........... 64,125 * 64,125 -- *
Lisa A. Sebring Trust U/A
6/14/93.................. 33,300 * 33,300 -- *
Penny Bender Sebring...... 50,934 * 50,934(3) -- *
Jeffry J. Shearer......... 79,993 * 77,493(3) 2,500 *
John A. Shields........... 3,869 * 2,869(3) 1,000 *
Scott Slabotsky........... 500 * 500(5) -- *
Judith A. Smith........... 1,901 * 1,901(2) -- *
Thomas R. Sprague and
Victoria B. Sprague,
joint tenants............ 3,062 * 212 2,850 *
David G. Stanchak......... 43,305 * 43,305(3)(7)(8) -- *
Starbucks Corporation..... 171,045 * 171,045(2) -- *
Mark W. Stephens.......... 106,052 * 106,052(7) -- *
Debra Swaden.............. 7,500 * 7,500(5) -- *
Rick Tasman............... 1,372 * 772 600 *
Texas Bagels, L.L.C....... 77,175 * 77,175(12) -- *
Mark A. Thomas............ 772 * 772 -- *
Mark A. Thomas and Nena M.
Thomas, joint tenants.... 2,124 * 2,124 -- *
Triune Venture Partners,
L.P...................... 181,614 * 181,614 -- *
Triune Venture Partners
II, L.P.................. 56,250 * 56,250(3) -- *
Doug Troy................. 11,528 * 9,028(2) 2,500 *
Mark G. Villalpando....... 12,246 * 8,496 3,750 *
Anthony J. Vinci and Paula
Vinci, joint tenants..... 2,124 * 2,124 -- *
Howard C. Warren.......... 49,813 * 47,813(3) 2,000 *
Marshall Weber............ 150 * 150(5) -- *
M. David White............ 83,528 * 81,028(3) 2,500 *
Wijler (Guernsey), Ltd.... 14,344 * 14,344(3) -- *
Joel Winston.............. 150 * 150(5) -- *
David G. Wurfel........... 6,248 * 4,248 2,000 *
Youngstown Partners....... 39,375 * 39,375(3) -- *
Laurence M. Zwain......... 7,281 * 7,281(3)(7) -- *
</TABLE>
- --------
*Represents less than 1% of the outstanding Common Stock.
(1) Unless otherwise indicated, the Registering Stockholders received all of
their respective Shares being registered hereunder in connection with
their initial subscription in March 1995 or upon the transfer of such
Shares from a subscriber.
(2) Such Registering Stockholders received all of the Shares being registered
hereunder in connection with the acquisition by the Company of Noah's.
(3) Altgeld Management Corporation, Steven Berrard, Jeffrey L. Butler, W. Eric
Carlborg, Andrew J.
64
<PAGE>
Filipowski, Mark X. Hayden, Jeffrey A. Klein, Maverick Fund USA, Ltd., John
Morlock, John H. Muehlstein, Jr., Jeffrey C. Neal, Peer Pedersen, Lloyd D.
Ruth, Jeffry J. Shearer, David G. Stanchak, M. David White and Laurence M.
Zwain will receive, upon the exercise of warrants granted by the Company to
be distributed by Bagel Funding to its members, 22,500, 5,625, 5,625,
2,869, 22,500, 9,563, 6,216, 9,563, 11,250, 2,391, 16,875, 47,813, 1,913,
56,250, 14,063, 2,860 and 4,781 of such Shares being registered hereunder,
respectively. Each of the other Registering Stockholders will receive, upon
the exercise of warrants granted by the Company to be distributed by Bagel
Funding to its members, all of the Shares being registered hereunder.
(4) Bank of America Illinois received a warrant to purchase all of the Shares
being registered hereunder in connection with the commitment to provide the
Company with the secured revolving credit facility.
(5) B&B Holdings, Inc. received all of the Shares being registered hereunder in
connection with the acquisition by the Company of Bagel & Bagel and all of
the Shares being registered hereunder for the account of such other
Registering Stockholders were acquired upon the transfer of such Shares
from B&B Holdings, Inc.
(6) BC Equity Funding, L.L.C. received all of the Shares being registered
hereunder from Boston Chicken.
(7) Dean L. Buntrock, Arnold C. Greenberg, J. Bruce Harreld, M Howard Jacobson,
John H. Muehlstein, Jr., Saad J. Nadhir, Peer Pedersen, Lloyd D. Ruth,
David G. Stanchak, Mark W. Stephens and Laurence M. Zwain received 2,000,
7,500, 2,500, 500, 3,750, 2,500, 2,000, 3,750, 3,750, 2,500 and 2,500 of
such Shares in the Concurrent Public Offering. Mr. Greenberg also received
5,000 of the Shares being registered hereunder in the Initial Public
Offering.
(8) Jeffrey L. Butler, Donald J. Bingle, James S. Cary, Stuart N. Fullinwider,
Mark X. Hayden, James Hilmer, Gail A. Lozoff, Lewis Miller, John Morlock,
Alfred Naddaff, Rodney Rice and David G. Stanchak received 71,069, 1,020,
7,725, 1,530, 4,249, 72,221, 4,249, 983, 1,699, 490, 21,243 and 4,249 of
such Shares being registered hereunder, respectively, pursuant to the
exercise of stock options granted by the Company under the Plan.
(9) Brau Family Partnership, L.P. received all of the Shares being registered
hereunder in connection with the acquisition by the Company of Baltimore
Bagel.
(10) Daniel V. Colangelo, Vito J. Colangelo, James W. Largay, Stephen A.
Norman, Paul Aiken and Julius Frankel, received 300,375, 13,500, 40,500,
187,875, 18,000 and 13,500 of the Shares being registered hereunder,
respectively, in connection with the acquisition by the Company of
Brackman, and Daniel V. Colangelo, Mr. Largay and Mr. Norman received
50,979, 16,992 and 42,483 of the Shares being registered hereunder,
respectively, pursuant to the exercise of stock options granted by the
Company under the Plan.
(11) OBG Holdings, Inc. received 811,652 of the Shares being registered
hereunder in connection with the acquisition by the Company of
Offerdahl's.
(12) Each of Registering Stockholders received, or will receive, all of the
Shares registered hereunder pursuant to the exercise of warrants granted
by the Company.
Joel M. Alam is Vice President and Secretary of the Company. Noah C. Alper is
Vice Chairman of the Board of the Company and a trustee and a beneficiary of
the Alper Living Trust U/A/D July 18, 1994. Richard Lozoff, husband of Gail A.
Lozoff, a director of the Company, is the sole stockholder of B&B Holdings,
Inc. Michael J. Beaudoin is Senior Vice President--Supply Chain of the Company.
Scott A. Beck is Chairman of the Board of the Company. Jeffrey L. Butler is
President of Einstein Bros. Bagels Concept of the Company. W. Eric Carlborg is
Senior Vice President--Finance of the Company. Kyle T. Craig is a director of
the Company. M. Laird Koldyke, a director of the Company, is a general partner
of Frontenac VI Limited Partnership. Mark R. Goldston is President and Chief
Executive Officer and a director of the Company. John A. Muehlstein, Jr., a
director of the Company, is a general partner of Pedersen Bagel Investment
Joint Venture. John A. Offerdahl, a director of the Company, is a stockholder
of OBG Holdings, Inc. Lloyd D. Ruth, a director of the Company, is a general
partner of the general partner of each of Marquette Venture Partners II, L.P.
and MVP II Affiliates, L.P. Paul A. Strasen, Vice President and General Counsel
of the Company, is a beneficiary of the Bell, Boyd & Lloyd Retirement Plan
Account FBO Paul A. Strasen and is a member of PJS Bagel Investing, L.L.C.
David G. Stanchak is Vice President and Chief Development Officer and a
director of the Company. See "Management." Bank of American Illinois has
provided the Company with a $45.0 million secured, revolving credit facility.
BCE
65
<PAGE>
West Bagels, L.L.C., Great Lakes Bagels, L.L.C., Gulfstream Bagels, L.P.,
Liberty Foods, L.L.C., Mayfair Bagels, L.L.C., Noah's Pacific, L.L.C., and
Philly Rose, L.P. are area developers of the Company. See "Certain
Transactions--Interests in Area Developers By Certain Persons." Harlan Bagel
Supply Company, LLC ("Harlan") and the Company are parties to the Harlan Supply
Agreement, pursuant to which Harlan has agreed to supply the Company, its area
developers and their food-service distributors with specified quantities of
bagels per month through June 1, 2003. Hal P. Harlan owns an equity interest in
Harlan. See "Business Vendors."
PLAN OF DISTRIBUTION
An aggregate of up to 9,908,327 Registering Stockholders' Shares may be
offered pursuant to this Prospectus. The distribution of such Shares by the
Registering Stockholders may be effected from time to time in one or more
transactions on the Nasdaq National Market (which may involve block
transactions), in special offerings, in negotiated transactions, or otherwise,
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices, or at negotiated prices. The Registering Stockholders
may engage one or more brokers to act as principal or agent in making sales,
who may receive discounts or commissions from the Registering Stockholders in
amounts to be negotiated. The Registering Stockholders and any such brokers may
be deemed "underwriters" under the Securities Act of the Shares sold. In
addition, pledgees, donees, transferees or other successors in interest of the
Registering Stockholders may sell, pursuant to this Prospectus, Shares from
time to time in any manner and at prices determined by any methods provided
herein.
The Company will pay all expenses of filing the Registration Statement and
preparing and reproducing this Prospectus. The Registering Stockholders will
pay any selling expenses, including brokerage commissions, incurred in
connection with their sale of any Shares covered by this Prospectus.
EXPERTS
The consolidated balance sheet of Einstein/Noah Bagel Corp. and subsidiaries
as of December 31, 1995 and the related consolidated statements of operations,
stockholders' deficit and cash flows for the period from March 24, 1995
(inception) through December 31, 1995 included in this Prospectus and the
related financial statement schedule included elsewhere in the Registration
Statement of which this Prospectus is a part, have been included herein in
reliance on the reports of Arthur Andersen LLP, independent accountants, given
on the authority of that firm as experts in accounting and auditing.
The consolidated financial statements of Noah's New York Bagels, Inc. as of
December 31, 1994 and December 30, 1995 and for each of the three fiscal years
in the period ended December 30, 1995 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The financial statements of Bagel & Bagel, Inc. for the year ended December
27, 1994 and the period from December 28, 1994 to March 23, 1995 included in
this Prospectus have been audited by Mayer Hoffman McCann L.C., independent
auditors, as stated in their reports appearing herein and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The combined financial statements of Offerdahl's Bagel Gourmet, Inc. and
Affiliates for the years ended December 31, 1993 and 1994 and for the period
from January 1, 1995 to April 2, 1995 included in this Prospectus have been
included herein in reliance upon the reports of Arthur Andersen LLP,
independent accountants, given upon the authority of that firm as experts in
accounting and auditing.
The financial statements of Baltimore Bagel Co. for the years ended December
31, 1994 and for the period from January 1, 1995 to August 10, 1995 included in
this Prospectus have been included herein in reliance upon the reports of
Arthur Andersen LLP, independent accountants, given upon the authority of that
firm as experts in accounting and auditing.
66
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
Report of Independent Public Accountants.................................. F-3
Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1995......................... F-4
Consolidated Statement of Operations for the period from March 24, 1995
(inception) through December 31, 1995.................................. F-5
Consolidated Statement of Stockholders' Deficit for the period from
March 24, 1995 (inception) through December 31, 1995................... F-6
Consolidated Statement of Cash Flows for the period from March 24, 1995
(inception) through December 31, 1995.................................. F-7
Notes to Audited Consolidated Financial Statements...................... F-8
Consolidated Balance Sheets at December 31, 1995 and July 14, 1996
(unaudited)............................................................ F-19
Consolidated Statements of Operations for the quarter ended July 9,
1995, the period from March 24, 1995 (inception) through July 9, 1995,
and for the quarter and two quarters ended July 14, 1996 (unaudited)... F-20
Consolidated Statements of Cash Flows for the period from March 24, 1995
(inception) through July 9, 1995 and for the two quarters ended July
14, 1996 (unaudited)................................................... F-21
Notes to Unaudited Consolidated Financial Statements.................... F-22
NOAH'S NEW YORK BAGELS, INC.
Independent Auditors' Report.............................................. F-26
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1994 and December 30, 1995.. F-27
Consolidated Statements of Operations for the fiscal years ended
December 31, 1993, December 31, 1994 and December 30, 1995............. F-28
Consolidated Statements of Shareholders' Equity (Deficit) for the fiscal
years ended December 31, 1993, December 31, 1994 and December 30, 1995. F-29
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1993, December 31, 1994 and December 30, 1995............. F-30
Notes to Audited Consolidated Financial Statements...................... F-31
BAGEL & BAGEL, INC.
Report of Independent Public Accountants.................................. F-37
Financial Statements:
Statements of Operations for the fiscal year ended December 27, 1994 and
for the period from December 28, 1994 through March 23, 1995........... F-38
Statements of Cash Flows for the fiscal year ended December 27, 1994 and
for the period from December 28, 1994 through March 23, 1995........... F-39
Notes to Audited Financial Statements................................... F-40
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
OFFERDAHL'S BAGEL GOURMET, INC. AND AFFILIATES
Report of Independent Public Accountants.................................. F-42
Combined Financial Statements:
Combined Statements of Operations for the fiscal years ended December
31, 1993 and December 31, 1994 and for the period from January 1, 1995
through April 2, 1995.................................................. F-43
Combined Statements of Cash Flows for the fiscal years ended December
31, 1993 and December 31, 1994 and for the period from January 1, 1995
through April 2, 1995.................................................. F-44
Notes to Audited Combined Financial Statements.......................... F-45
BALTIMORE BAGEL CO.
Report of Independent Public Accountants.................................. F-46
Financial Statements:
Statements of Operations for the years ended December 31, 1993 and
December 31, 1994 and for the period from January 1, 1995 through
August 10, 1995........................................................ F-47
Statements of Cash Flows for the years ended December 31, 1993 and 1994
and for the period from January 1, 1995 through August 10, 1995........ F-48
Notes to Financial Statements........................................... F-49
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Financial Information of Einstein/Noah
Bagel Corp............................................................... F-50
Unaudited Pro Forma Consolidated Statement of Operations for the fiscal
year ended December 31, 1995............................................. F-51
Unaudited Pro Forma Consolidated Statement of Operations for the quarter
ended April 21, 1996..................................................... F-52
Notes to Unaudited Pro Forma Consolidated Financial Statements............ F-53
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Einstein/Noah Bagel Corp.:
We have audited the accompanying consolidated balance sheet of Einstein/Noah
Bagel Corp. (a Delaware corporation) and subsidiaries as of December 31, 1995,
and the related consolidated statements of operations, stockholders' deficit
and cash flows for the period from inception (March 24, 1995) through December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Einstein/Noah Bagel Corp.
and subsidiaries as of December 31, 1995, and the results of their operations
and their cash flows for the period from inception (March 24, 1995) through
December 31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
July 16, 1996
F-3
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
ASSETS
- ------
<S> <C>
Current Assets:
Cash and cash equivalents....................................... $ 5,368
Accounts receivable............................................. 1,327
Inventory....................................................... 883
Deposits........................................................ 1,492
Prepaid expenses and other current assets....................... 217
-------
Total current assets.......................................... 9,287
Property and Equipment, net....................................... 19,410
Notes Receivable.................................................. 7,267
Excess of Purchase Price Over Fair Value of Net Assets Acquired,
net.............................................................. 13,715
Other Assets, net................................................. 620
-------
Total assets.................................................. $50,299
=======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
<S> <C>
Current Liabilities:
Accounts payable................................................ $ 5,633
Accrued expenses................................................ 2,968
Deferred franchise revenue...................................... 645
-------
Total current liabilities..................................... 9,246
Convertible Debt.................................................. 40,000
Deferred Franchise Revenue........................................ 265
Other Noncurrent Liabilities...................................... 2,907
Repurchase Common Stock Shares--1,721,250 shares issued and
outstanding...................................................... 11,062
Series A Preferred Stock--6,250 shares issued and outstanding..... 7,813
Commitments
Stockholders' Deficit:
Preferred Stock--$.01 par value; 20,000,000 shares authorized;
no shares issued and outstanding............................... --
Common Stock--$.01 par value; 200,000,000 shares authorized;
3,848,607 shares issued and outstanding........................ 38
Additional paid-in capital...................................... 22,684
Accumulated deficit............................................. (43,716)
-------
Total stockholders' deficit................................... (20,994)
-------
Total liabilities and stockholders' deficit................... $50,299
=======
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
F-4
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 24, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
Revenue:
Company-operated stores............................................ $ 25,685
Royalties and franchise-related fees............................... 738
--------
26,423
Costs and Expenses:
Cost of products sold.............................................. 8,239
Salaries and benefits.............................................. 13,531
General and administrative......................................... 21,230
Write-off of intangible assets..................................... 26,575
--------
Total costs and expenses........................................... 69,575
--------
Loss from Operations................................................. (43,152)
Other Income (Expense):
Interest expense, net.............................................. (1,281)
Other income, net.................................................. 717
--------
Total other expense.............................................. (564)
========
Net loss........................................................... $(43,716)
========
Net loss per common and equivalent share........................... $ (4.54)
========
Weighted average number of common and equivalent shares
outstanding....................................................... 9,659
========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
F-5
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM MARCH 24, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
Common Stock
Balance at inception............................................... $ --
Issuance of common stock........................................... 38
--------
Balance at December 31, 1995....................................... $ 38
========
Additional paid-in capital
Balance at inception............................................... $ --
Issuance of common stock, net of offering cost of $500............. 22,051
Dividends on Series A preferred stock and accretion of dividends on
repurchase shares................................................. (1,077)
Expense recognized for warrants issued............................. 1,710
--------
Balance at December 31, 1995....................................... $ 22,684
========
Accumulated deficit
Balance at inception............................................... $ --
Net loss........................................................... (43,716)
--------
Balance at December 31, 1995....................................... $(43,716)
========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
F-6
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 24, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net loss........................................................... $(43,716)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 1,657
Warrant expense.................................................. 1,710
Write-off of intangible assets................................... 26,575
Gain on the sale of marketable equity securities..................... (719)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable................................................ (680)
Accounts payable and accrued expenses.............................. 1,778
Deferred franchise revenue......................................... 910
Other assets and liabilities....................................... 173
--------
Net cash used in operating activities............................ (12,312)
Cash Flows from Investing Activities:
Purchase of property and equipment................................. (18,109)
Proceeds from sale of property and equipment....................... 5,519
Purchase of marketable equity securities, net of proceeds from
sales............................................................. (22,682)
Purchase of other assets........................................... (621)
Issuance of notes receivable....................................... (10,569)
Repayment of notes receivable...................................... 3,831
--------
Net cash used in investing activities............................ (42,631)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock............................. 20,311
Proceeds from convertible debt..................................... 91,060
Repayment of convertible debt...................................... (51,060)
--------
Net cash provided by financing activities........................ 60,311
--------
Net Increase in Cash and Cash Equivalents............................ 5,368
Cash and Cash Equivalents, inception................................. --
--------
Cash and Cash Equivalents, end of year............................... $ 5,368
========
Supplemental Cash Flow Information:
Interest Paid...................................................... $ 1,107
========
Supplemental Schedule of Non-Cash Activities:
Exchange of Series A preferred stock, repurchase common stock,
common stock and marketable equity securities for net assets
acquired.......................................................... $ 42,742
========
Issuance of common stock for note receivable....................... $ 437
========
Accretion of dividends on repurchase common stock.................. $ 933
========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
F-7
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Einstein/Noah Bagel Corp. and subsidiaries, formerly Einstein Bros. Bagels,
Inc. (the "Company"), operate and franchise specialty retail stores in the
United States that feature fresh-baked bagels, proprietary cream cheeses,
specialty coffees and teas, and creative soups, salads and sandwiches. At
December 31, 1995, there were 60 stores in operation systemwide, consisting of
47 Company-operated stores and 13 franchise stores. In 1995, the Company sold
13 Company-operated stores to newly-formed area developers of the Company.
Subject to the provisions of the applicable franchise agreements, the Company
is obligated to allow franchisees to utilize the Company's trademarks,
copyrights, recipes, operating procedures and other elements of its systems in
the operation of franchised stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
Fiscal Year
The Company's fiscal year is the 52/53 week period ending on the last Sunday
in December.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and on deposit, and highly
liquid instruments purchased with maturities of three months or less.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of food, paper products and supplies.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and
amortization. The provision for depreciation and amortization has been
calculated using the straight-line method. The following represent the useful
lives over which the assets are depreciated and amortized:
<TABLE>
<S> <C>
Buildings and improvements.................................... 15-30 years
Furniture, fixtures and equipment............................. 6-8 years
Pre-opening expenses.......................................... 1 year
</TABLE>
Property and equipment additions include acquisitions of buildings and
equipment, costs incurred in the development and construction of new stores
and major improvements to existing stores. Expenditures for maintenance and
repairs are charged to expense as incurred. Pre-opening costs consist
primarily of salaries and other direct expenses incurred in connection with
the set-up, initial stocking of stores, initial training of employees and
general management activities incurred prior to the opening of new stores.
F-8
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" to evaluate the recoverability of long-lived assets and
assets to be disposed of. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable and long-lived assets and
certain identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. SFAS No. 121 also establishes
the procedures for review of recoverability, and measurement of impairment if
necessary, of long-lived assets and certain identifiable intangibles to be
held and used by an entity.
Excess Purchase Price Over Fair Value of Identifiable Net Assets Acquired
The excess purchase price over the fair value of identifiable net assets
acquired from acquisitions is being amortized on a straight-line basis over 35
years. The Company evaluates whether events and circumstances have occurred
that indicate revision to the remaining useful life or the remaining balances
may be appropriate. Such events and circumstances include, but are not limited
to, a change in business strategy or change in current and long-term projected
operating performance. When factors indicate that the carrying amount of an
asset may not be recoverable, the Company estimates the future cash flows
expected to result from the use of such asset and its eventual disposition. If
the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, the Company will
recognize an impairment loss equal to the excess of the carrying amount over
the fair value of the asset.
Revenue Recognition
Revenue from Company-operated stores is recognized in the period related
food and beverage products are sold. Royalties are recognized in the same
period that related franchised store revenue is generated. Revenue derived
from initial franchise fees and area development fees is recognized when the
franchised store opens. Interest is recognized as earned. The components of
royalties and franchise-related fees for fiscal 1995 are as follows (in
thousands of dollars):
<TABLE>
<S> <C>
Initial franchise and area development fees......................... $520
Royalties........................................................... 35
Other............................................................... 183
----
Total royalties and franchise-related fees.......................... $738
====
</TABLE>
Per Share Data
Net loss per common share is computed by dividing net loss, adjusted for
dividends on Series A preferred stock, by the weighted average number of
common shares outstanding during the period and common stock and common stock
equivalent shares issued within one year prior to the effective date of the
Company's initial public offering at a price or exercise price less than the
initial public offering price. The common stock equivalents have been reduced
by the number of shares of common stock which could be purchased with the
proceeds from the assumed exercise of the options and warrants, including tax
benefits assumed to be realized.
Stock Options
Employee stock options are accounted for pursuant to APB No. 25.
Employee Benefit Plan
The Company has a 401(k) plan to which the Company makes no contributions.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT DATA
Accounts receivable are net of an allowance for doubtful accounts of $81,000
at December 31, 1995.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
(IN THOUSANDS OF
DOLLARS)
<S> <C>
Property and equipment consists of:
Land.................................................. $ 123
Buildings and improvements............................ 12,083
Furniture, fixtures and equipment..................... 7,544
Pre-opening expenses.................................. 401
-------
20,151
Less: Accumulated depreciation and amortization....... (741)
-------
Total property and equipment, net................... $19,410
=======
Accrued expenses consist of:
Accrued payroll and fringe benefits................... $ 876
Accrued interest...................................... 325
Accrued other......................................... 1,767
-------
Total accrued expenses.............................. $ 2,968
=======
Interest expense, net consists of:
Interest expense...................................... $ 1,432
Interest income....................................... (151)
-------
Total interest expense, net......................... $ 1,281
=======
</TABLE>
4. ACQUISITIONS
In 1995, the Company acquired four regional bagel companies. In March 1995,
the acquisitions included Brackman Brothers, Inc. ("Brackman") for which the
Company issued 573,750 shares of common stock valued at $5.88 per share and
other marketable equity securities with a value of $8.3 million, Bagel &
Bagel, Inc. ("Bagel & Bagel") for which the Company issued 573,750 shares of
common stock valued at $5.88 per share and other marketable equity securities
with a value of $5.5 million, and Offerdahl's Bagel Gourmet, Inc.
("Offerdahl's") for which the Company issued 811,625 shares of common stock
valued at $5.88 per share and other marketable equity securities with a value
of $5.6 million. In August 1995, the Company acquired Baltimore Bagel Co.
("Baltimore Bagel") for which the Company issued 6,250 shares of Series A
preferred stock with a value of $7.8 million and other marketable equity
securities with a value of $4.0 million. Pursuant to the acquisitions, the
Company agreed to repurchase up to 1,721,250 shares of the common stock under
certain circumstances (see Note 12). The acquisitions have been accounted for
as purchases, and, accordingly, the purchase prices were allocated to assets
(both tangible and identifiable intangible) and liabilities based upon an
evaluation of their fair values at the dates of the acquisitions. The total
purchase price for these four companies, including assumption of liabilities,
was $51.1 million, of which $21.2 million was allocated to trademarks
(amortized over a 35-year life), $5.4 million was allocated to recipes
(amortized over a 10-year life) and $14.0 million was allocated to excess
purchase price over fair value of identifiable net assets acquired (amortized
over a 35-year life). Such intangibles were identified by management based
upon its evaluation of the businesses acquired. The allocation of the purchase
price to trademarks and recipes was based upon a royalty savings methodology
which determines the present value of the stream of royalties which the
Company believes an independent third party would be willing to pay to obtain
the use of such trademarks and recipes. The estimated useful life for these
assets was based upon various factors which existed at the time of the
acquisitions, including the anticipated periods of benefit to be derived from
the utilization of such assets in connection with executing a
F-10
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
regional brand business strategy, increasing consumer demand for bagel
products, the lack of a competitor with national brand awareness, the lack of
regulatory limitations on the potential useful lives of such assets, the
absence of any inherent or technological obsolescence for such assets, and in
the case of trademarks, the long-lived nature of a primary brand name in the
consumer marketplace. Subsequent to these acquisitions, management launched a
development project which resulted in the development of the Einstein Bros.
Bagel brand and store, at which time management determined it would
discontinue the use of the acquired trademarks and recipes. Consequently, this
change in business strategy resulted in an impairment of these identifiable
intangible assets, and accordingly, the assets were written down to their fair
market values, resulting in a write-off of $26.6 million (see Note 13). The
financial statements include the results of operations for the acquired
entities from their dates of acquisition.
The following represents the unaudited pro forma results of operations as if
all of the above-noted business combinations had occurred at the beginning of
the Company's fiscal year (in thousands of dollars, except per share data):
<TABLE>
<S> <C>
Revenue........................................................... $38,065
Net loss.......................................................... 43,540
Net loss per share................................................ $ 4.51
</TABLE>
The pro forma information given above does not purport to be indicative of
the results that actually would have been obtained if the operations were
combined as of the beginning of the Company's fiscal year, and is not intended
to be a projection of future results or trends.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and Cash Equivalents
The carrying value approximates fair value due to the length of maturity of
the investments.
Notes Receivable
The estimated fair value of the Company's notes receivable, including the
conversion option (Notes 6 and 11), is based on the discounted value of future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings.
Convertible Debt
The estimated fair value of the Company's convertible debt, including the
conversion option (see Note 7), is based on the discounted value of future
payments using the current rate at which a similar loan would be made to a
company with similar credit ratings.
Common Stock Subject to Repurchase
The estimated fair value of the Company's common stock subject to repurchase
by the Company is based on the price of other common stock equity transactions
near December 31, 1995.
Series A Preferred Stock
The estimated fair value of the Company's Series A preferred stock is based
on the discounted value of future cash flows using interest rates which would
be applicable to similar instruments held in companies with similar credit
ratings.
The estimated fair values of the Company's financial instruments are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
--------------- ----------
<S> <C> <C>
Cash and cash equivalents...................... $ 5,368 $ 5,368
Notes receivable............................... 7,267 7,267
Convertible debt............................... 40,000 40,000
Repurchase common stock........................ 11,062 11,142
Series A preferred stock....................... 7,813 7,813
</TABLE>
F-11
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. NOTES RECEIVABLE
The following table summarizes the primary components of notes receivable as
of December 31, 1995 (in thousands of dollars):
<TABLE>
<S> <C>
Due from area developers (Note 11)................................ $3,538
Notes receivable from stockholder................................. 1,888
Term loans........................................................ 1,108
Revolving loan.................................................... 226
Other............................................................. 507
------
$7,267
======
</TABLE>
Notes receivable from stockholder bear interest at 1% over the applicable
reference rate of Bank of America Illinois. Principal and interest are due
April 2001. The notes are collateralized by various assets.
Term loans bear interest based upon the reference rate plus 1%. Principal is
due in annual installments with balloon payments required through various
dates through 2001. The loans are collateralized by various assets.
The revolving loan provides a credit facility to a vendor of up to $400,000
through October 2000 with interest payable currently based upon the reference
rate plus 1%. The loan is collateralized by various assets.
7. DEBT
The Company has entered into a secured loan agreement (the "Agreement")
providing borrowings through March 1998, pursuant to which Boston Chicken,
Inc. ("Boston Chicken") provides debt financing and, in turn, obtains the
right to convert all or any portion of the loan into shares of common stock of
the Company. In January 1996, Boston Chicken increased the available
borrowings under the Agreement from $80.0 million to $120.0 million. The
ownership percentage represented by the shares of common stock to be acquired
upon conversion (or exercise of the option, as provided below) is dependent
upon total equity and rights outstanding, but would represent a majority
ownership in certain instances. The loan may be converted at any time after
the earlier of April 1997, the completion of an initial public offering, or
the Company being in default of the loan and until October 2003. Additionally,
during this same period, to the extent the loan is not fully drawn or has been
drawn and repaid, Boston Chicken has the option to acquire at the loan
conversion price, as defined, the amount of additional equity it could have
acquired by conversion of the loan had the loan been fully drawn. The loan is
collateralized by substantially all of the assets of the Company and a pledge
of the common stock of its subsidiaries. The Agreement contains various
restrictive covenants including restricting cash dividends and limiting
additional indebtedness. Interest is based upon the reference rate of Bank of
America Illinois plus 1% and is payable currently. In April 1998, the loan
converts to an amortizing term loan payable through May 2003, with a final
balloon payment.
Principal maturities on the outstanding balance as of December 31, 1995 were
as follows (in thousands of dollars):
<TABLE>
<S> <C>
1998.............................................................. $ 3,077
1999.............................................................. 4,000
2000.............................................................. 4,000
Thereafter........................................................ 28,923
-------
$40,000
=======
</TABLE>
In connection with the acquisition of Noah's New York Bagels, Inc.
("Noah's") in February 1996 (Note 15), Boston Chicken provided the Company
with a non-convertible bridge loan facility of up to $40.0 million.
F-12
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES
As of December 31, 1995, the Company had cumulative federal and state tax
operating loss carryforwards available to reduce future taxable income of
approximately $11.1 million which begin to expire in 2010.
The primary components that comprise the net deferred tax asset as of
December 31, 1995 are as follows (in thousands of dollars):
<TABLE>
<S> <C>
Deferred tax assets:
Accounts payable and accrued expenses.......................... $ 218
Deferred franchise revenue..................................... 355
Other noncurrent liabilities................................... 220
Write-off of intangible assets that are amortizable for tax.... 2,017
Net operating loss............................................. 4,104
Other.......................................................... 1,380
-------
Total deferred tax assets.................................... 8,294
Deferred tax liabilities:
Property and equipment......................................... (489)
Other assets................................................... (116)
-------
Total deferred tax liabilities............................... (605)
-------
Net deferred tax asset....................................... 7,689
Valuation allowance.............................................. (7,689)
-------
Net deferred tax asset........................................... $ --
=======
</TABLE>
The increase in the valuation allowance of $7,689,000 from inception through
December 31, 1995, is due to uncertainty regarding the realization of the
related tax benefits.
9. NATIONAL AND LOCAL ADVERTISING FUNDS
The Company administers a National Advertising Fund to which Company-
operated stores and franchised stores make contributions based on individual
franchise agreements (2% of net revenue). Collected amounts are spent
primarily on developing marketing and advertising materials for use
systemwide. Such amounts are not segregated from the cash resources of the
Company, but the National Advertising Fund is accounted for separately and not
included in the financial statements of the Company.
The Company maintains Local Advertising Funds that provide comprehensive
advertising and sales promotion support for stores in particular markets.
Contributions are made by both Company-operated and franchised stores
(currently 4% of net revenue). The Company disburses funds and accounts for
all transactions related to such Local Advertising Funds. Such amounts are not
segregated from the cash resources of the Company, but are accounted for
separately and are not included in the financial statements of the Company.
10. COMMITMENTS
The Company leases sites for its stores, commissaries and office space.
Lease terms are generally five years with two or three five-year renewal
options. The Company also subleases sites to its area developers. The sublease
terms to area developers are negotiated at arms length on commercially
reasonable terms. The Company is contingently liable for all lease costs
including common area maintenance charges. Most of the leases contain
escalation clauses and common area maintenance charges.
F-13
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a schedule of future minimum rental payments which are
required under operating leases that have initial or remaining noncancellable
lease terms in excess of one year and sublease proceeds as of December 31,
1995 (in thousands of dollars):
<TABLE>
<CAPTION>
MINIMUM SUBLEASE NET MINIMUM
RENTAL PAYMENTS PROCEEDS RENTAL PAYMENTS
--------------- -------- ---------------
<S> <C> <C> <C>
1996............................. $ 3,495 $ 822 $ 2,673
1997............................. 2,908 597 2,311
1998............................. 2,686 590 2,096
1999............................. 2,403 560 1,843
2000............................. 1,587 529 1,058
Thereafter....................... 3,046 1,352 1,694
------- ------ -------
$16,125 $4,450 $11,675
======= ====== =======
</TABLE>
The net rental expense under operating leases, primarily for Company-
operated stores, was approximately $1,909,000 for the period from March 24,
1995 (inception) through December 31, 1995.
In December 1995, Bagel Store Development Funding, L.L.C. ("Bagel Funding"),
formerly Einstein Bros. Equity Funding, L.L.C., was formed with the objective
of raising $90.0 million to invest in existing and proposed area developers.
Through December 31, 1995, Bagel Funding had raised approximately $40.0
million (including an aggregate of $20.0 million in subscription receivables)
and had invested a total of $3.5 million in area developers. In March 1996,
Bagel Funding raised the remainder of anticipated funds, so that the funds
raised equalled the $90.0 million (including an aggregate of $45.0 million in
subscription receivables). Bagel Funding can require an area developer to
redeem Bagel Funding's equity interest at a formula price in the event the
Company acquires a majority interest in the area developer, and if the area
developer fails to do so, the Company will be required to purchase Bagel
Funding's unredeemed equity interest at the formula price. In the event the
Company's conversion and/or option rights expire unexercised under the area
developer's secured loan agreement with the Company, as originally in effect,
Bagel Funding will have the right to require, subject to the Company's prior
consent, that the area developer undertake a firm commitment underwritten
public offering of equity of the area developer. In the event the Company does
not consent to a public offering, the area developer can be required to
purchase Bagel Funding's unredeemed equity interest in the area developer at a
formula price and if the area developer fails to do so, the Company will be
required to purchase Bagel Funding's unredeemed equity interest. Also, in the
event the Company does not acquire a majority interest in the area developer
pursuant to the Company's conversion and/or option rights prior to the time
such rights expire unexercised under the area developer's secured loan
agreement with the Company, as originally in effect, Bagel Funding will have
the right to request that the area developer seek to terminate its area
development and franchise agreements with the Company. If the Company does not
consent to such termination, the area developer can be required to redeem
Bagel Funding's equity interest in the area developer at a formula price, and
if the area developer fails to do so, the Company will be required to purchase
Bagel Funding's unredeemed equity interest.
The Company has entered into a supply agreement relating to the purchase of
certain minimum levels of cream cheese, which expires in October 2000, or
earlier in certain circumstances. The agreement requires the Company, its
subsidiaries, area developers and other authorized purchasers to purchase the
lesser of 160,000 pounds of cream cheese per week or 60% of their requirements
for cream cheese (excluding certain requirements that may be satisfied through
other commitments and certain requirements of acquired companies). The price
per pound is determined over the term of the contract based upon production
costs.
11. AREA DEVELOPER FINANCING
The Company currently offers partial financing to its area developers for
use in expansion of their operations. These financing arrangements permit the
Company to obtain an equity interest in the area developer
F-14
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
at a predetermined price after a moratorium (generally two years) and after
the area developer has completed not less than 80% of its area development
commitment (or in the event of certain defaults) on conversion of the loan
into equity. The maximum loan amount is established to give the Company
majority ownership of the area developer upon conversion (or option exercise,
as described further below) provided the Company exercises its right to
participate in any intervening financing of the area developer.
Area developer financing requires the developer to expend at least 75% of
its contributed capital toward developing stores prior to drawing on the
revolving loan account, with draws permitted during a three-year draw period
in a pre-determined maximum amount equal to four times the amount of the area
developer's equity capital. Upon expiration of the draw period, the loan
converts to an amortizing term loan payable over five years in periodic
installments, with a final balloon payment. Interest is set at 1% over the
applicable reference rate of Bank of America Illinois from time to time and is
payable each four-week period. The loan is secured by a pledge of substantially
all of the assets of the area developer.
(a) Loan Conversion Option
All or any portion of the loan amount may be converted at the Company's
election at any time after the expiration of a specified moratorium period
(generally two years) and after the area developer has completed not less than
80% of its area development commitment (or in the event of certain defaults)
into equity in the area developer at the conversion price set forth in such
loan agreement, generally at a 12% premium over the per equity unit price paid
by the investors in the area developer for the equity investment made
concurrently with the execution of the loan agreement. To the extent such loan
is not fully drawn or has been drawn and repaid, the Company has a
corresponding option to acquire at the loan conversion price the amount of
additional equity it could have acquired by conversion of the loan had it been
fully drawn.
There can be no assurance the Company will or will not convert any loan
amount or exercise its option at such time as it may be permitted to do so
and, if it does convert, that such conversion will constitute a majority
interest in the area developer.
(b) Commitments to Extend Area Developer Financing
The following table summarizes as of December 31, 1995 credit commitments
for area developer financing (in thousands of dollars):
<TABLE>
<S> <C>
Number of area developers receiving financing.................... 2
Loan commitments................................................. $16,000
Unused loans..................................................... 12,462
-------
Loans outstanding (included in Notes Receivable)................. $ 3,538
=======
Allowance for loan losses........................................ $ --
=======
</TABLE>
The principal maturities on the aforementioned notes receivable are as
follows (in thousands of dollars):
<TABLE>
<S> <C>
1998............................................................... $ 82
1999............................................................... 354
2000............................................................... 354
Thereafter......................................................... 2,748
------
$3,538
======
</TABLE>
F-15
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(c) Credit Risk and Allowance for Loan Losses
The allowance for credit losses is maintained at a level that in
management's judgment is adequate to provide for estimated possible loan
losses. The amount of the allowance is based on management's review of each
area developer's use of loan proceeds, stage of development, adherence to its
store development schedule, store performance trends, type and amount of
collateral securing the loan, prevailing economic conditions, and other
factors which management deems relevant at the time. Based upon this review
and analysis, no allowance was required as of December 31, 1995.
12. STOCKHOLDERS' EQUITY
Common Stock
On July 8, 1996, the Company approved a 225-for-one split of the Company's
common stock in the form of a stock dividend. Per share amounts, the number of
common shares and capital accounts have been restated to give retroactive
effect to the stock split.
The Company issued 3,536,361 shares of common stock at the time of its
formation, which provided net proceeds of approximately $20.8 million.
Preferred Stock
In connection with the acquisition of the net assets of Baltimore Bagel, the
Company issued 6,250 shares of Series A preferred stock. The Series A
preferred stock has a liquidation preference of $1,000 per share, pays annual
dividends of $60 per share, and is automatically convertible into common stock
of the Company in an initial public offering with the number of shares of
common stock received being equal to $1,000 plus accrued and unpaid dividends
divided by 80% of the gross offering price per share to the public.
The Series A preferred stock is redeemable by the Company at any time after
February 10, 1999, at a price per share equal to $1,250 plus accrued and
unpaid dividends. A majority of the holders may require the Company to redeem
one-third of the shares of Series A preferred stock on each of February 28,
1998, May 1, 1998 and August 1, 1998, at a price of $1,250 plus accrued and
unpaid dividends. The holders of the Series A preferred stock may also require
redemption in the event the Company has failed to pay three consecutive
quarterly dividends.
Common Stock Subject to Repurchase
Pursuant to the purchase agreements (see Note 4), the Company has agreed
that, in the event it has not completed an initial public offering of its
common stock resulting in gross proceeds of at least $15.0 million by
specified dates or Boston Chicken's ownership of, or right to acquire an
ownership interest in, the Company's common stock falls below 25%, the holders
of common stock subject to repurchase by the Company can require the Company
to redeem such shares of common stock at their fair market value, but not less
than a specified floor price per share. The difference between the
consideration paid per share and the greater of the fair market value of the
shares or the floor price per share is being accreted to the shares as a
dividend over the life of the put option.
Warrants
The Company sold warrants to purchase 1,012,500 shares of common stock of
the Company to Bagel Funding. The warrants have an exercise price of $6.47 per
common share and expire in 2000. The market value of the warrants was recorded
as an expense and credited to additional paid-in capital during fiscal 1995.
F-16
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Option Plan
The Company has a stock option plan (the "Plan") under which options to
purchase up to 3,600,000 shares of common stock, subsequently increased to
5,500,000 shares of common stock, may be granted to certain employees and
officers of, and consultants to, the Company. The option price is equal to the
fair market value of the stock on the date of the grant and each option has a
term of ten years. Options granted under the Plan generally vest at a rate of
10% at the end of the first year, an additional 20% at the end of the second
year, an additional 30% at the end of the third year, with the balance vesting
at the end of the fourth year from the date of the grant.
Activity under the option plan through December 31, 1995 was as follows:
<TABLE>
<CAPTION>
OPTION
PRICE PER
SHARES SHARE
--------- -----------
<S> <C> <C>
Granted........................................... 2,090,248 $5.88-$6.47
Cancelled......................................... (16,778) 5.88
--------- -----------
Outstanding as of December 31, 1995............... 2,073,470 $5.88-$6.47
========= ===========
Exercisable as of December 31, 1995............... 29,738 $ 5.88
========= ===========
</TABLE>
As of December 31, 1995, the Company had 17,146,125 shares of common stock
reserved for issuance upon exercise of options and warrants and conversion of
Boston Chicken's loan into common stock. In addition, the Company has
contractually agreed to reserve a sufficient number of shares of common stock
for issuance to the holder of the Series A preferred stock upon conversion.
13. WRITE-OFF OF INTANGIBLE ASSETS
After the acquisition of Brackman, Bagel & Bagel, Offerdahl's and Baltimore
Bagel (collectively the "Founding Companies"), the Company launched a
development project, pursuant to which management analyzed (i) the Founding
Companies' stores, including brand positionings, product offerings,
operational service systems and atmosphere, (ii) the competitive environment
and (iii) the preferences of consumers across the United States. The project
resulted in the development of the Einstein Bros. Bagels brand and store. In
connection with, and as a result of, the development of the Einstein Bros.
Bagels brand and store, management determined to discontinue the use of the
identifiable intangible assets acquired in the acquisitions of the Founding
Companies, including trademarks and recipes. Consequently, this change in
business strategy resulted in an impairment of these identifiable intangible
assets, and accordingly, the assets were written down to their fair market
values resulting in a write-off of $26.6 million.
14. RELATED-PARTY TRANSACTIONS
Certain officers and directors of Boston Chicken have an equity interest in
the Company. For the Company's 1995 fiscal year, the Company paid to Boston
Chicken approximately $1.2 million for the purchase of furniture, equipment
and other miscellaneous assets and approximately $3.0 million in software
license, software maintenance, real estate, financial advisory, accounting
fees and interest on its loan with Boston Chicken.
Certain officers and directors of the Company are officers and investors in
Bagel Funding and had invested $8.4 million in Bagel Funding at December 31,
1995. The Company is the manager of Bagel Funding. No fees were paid to the
Company in its capacity as manager during 1995.
The Company has entered into secured loan and area developer agreements with
certain area developers in which certain directors and officers and members of
their families have a direct or indirect equity interest. The
F-17
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Company received from these entities approximately $2.3 million in
development, franchise, royalty, management services and interest in fiscal
1995. The Company has also sold to these entities, stores, inventory,
equipment and other miscellaneous assets for which it received approximately
$5.5 million in 1995.
During 1995, the Company paid $85,874 to Bowana Aviation, Inc. ("Bowana")
for the Company's use of an aircraft owned by Bowana. A director and a member
of his family (both stockholders of the Company) own Bowana. The Company
believes that the amounts charged are at rates comparable to those charged by
third parties.
15. SUBSEQUENT EVENTS
In February 1996, the Company acquired Noah's, the largest regional bagel
retailer on the West Coast, for approximately $100.9 million, including
approximately $83.7 million of intangible assets, including excess purchase
price over the fair value of net assets acquired.
In May 1996, the Company entered into a secured revolving credit facility
providing for borrowings of up to $45.0 million through April 30, 1998.
Borrowing under the facility may be either floating rate loans with interest
at the lender's base rate plus 1.0% or, at the Company's option, the rate
offered in the interbank Eurodollar market for one-, two-, or three-month
dollar deposits offered by the lender plus 3.0%. In addition, a commitment fee
of .25% of the average daily unused portion of the loan is required. The
facility contains covenants, among others, restricting other borrowings,
prohibiting cash dividends, and requires the Company to maintain minimum
interest coverage and cash flow ratios, specified store level sales, and a
minimum capital level.
In June 1996, the $120.0 million convertible loan to the Company was
converted into 15,307,421 shares of common stock of the Company.
F-18
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JULY 14,
1995 1996
------------ -----------
(UNAUDITED)
ASSETS
- ------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................... $ 5,368 $ 569
Accounts receivable, net............................ 1,327 5,354
Inventory........................................... 883 1,054
Prepaid expenses and other current assets........... 1,709 481
------- --------
Total current assets.............................. 9,287 7,458
Property and Equipment, net........................... 19,410 28,828
Notes Receivable...................................... 7,267 65,322
Excess of Purchase Price Over Fair Value of Net Assets
Acquired, net........................................ 13,715 69,706
Trademarks, net....................................... -- 21,840
Recipes, net.......................................... -- 5,000
Other Assets, net..................................... 620 8,566
------- --------
Total assets...................................... $50,299 $206,720
======= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................... $ 5,633 $ 3,198
Accrued expenses.................................... 2,968 6,055
Deferred franchise revenue.......................... 645 2,415
------- --------
Total current liabilities......................... 9,246 11,668
Convertible Debt...................................... 40,000 --
Revolving Credit Facilities........................... -- 56,650
Deferred Franchise Revenue............................ 265 5,550
Other Noncurrent Liabilities.......................... 2,907 1,777
Repurchase Common Stock Shares--1,721,250 shares
issued and outstanding............................... 11,062 12,548
Series A Preferred Stock--6,250 shares issued and
outstanding.......................................... 7,813 7,813
Commitments and Contingencies Stockholders' Equity
(Deficit):
Preferred stock--$.01 par value; 20,000,000 shares
authorized; no shares issued and outstanding....... -- --
Common stock--$.01 par value; 200,000,000 shares
authorized; issued and outstanding: 3,848,607 in
1995 and 21,150,975 in 1996........................ 38 212
Additional paid-in capital.......................... 22,684 157,240
Accumulated deficit................................. (43,716) (46,738)
------- --------
Total stockholders' equity (deficit).............. (20,994) 110,714
------- --------
Total liabilities and stockholders' equity........ $50,299 $206,720
======= ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-19
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED PERIOD FROM TWO
---------------- MARCH 24, 1995 QUARTERS
JULY (INCEPTION) ENDED
JULY 9, 14, THROUGH JULY 14,
1995 1996 JULY 9, 1995 1996
------- ------- -------------- --------
<S> <C> <C> <C> <C>
Revenue:
Company-operated stores............ $ 6,292 $13,092 $ 7,715 $31,489
Royalties and franchise-related
fees.............................. -- 5,114 -- 9,096
------- ------- ------- -------
Total revenue.................... 6,292 18,206 7,715 40,585
Costs and Expenses:
Cost of products sold.............. 1,918 4,588 2,356 10,078
Salaries and benefits.............. 2,993 5,316 3,636 14,444
General and administrative......... 3,165 5,999 3,687 15,030
------- ------- ------- -------
Total costs and expenses......... 8,076 15,903 9,679 39,552
------- ------- ------- -------
Income (Loss) from Operations........ (1,784) 2,303 (1,964) 1,033
Other Expense:
Interest expense, net.............. (141) (2,651) (221) (5,984)
Other income, net.................. 1 643 1 1,929
------- ------- ------- -------
Total other expense.............. (140) (2,008) (220) (4,055)
------- ------- ------- -------
Income (Loss) Before Income Taxes.... (1,924) 295 (2,184) (3,022)
Income Taxes......................... -- -- -- --
------- ------- ------- -------
Net Income (Loss).................... $(1,924) $ 295 $(2,184) $(3,022)
======= ======= ======= =======
Net Income (Loss) Per Common and
Equivalent Share.................... $ (0.20) $ 0.01 $ (0.23) $ (0.23)
======= ======= ======= =======
Weighted Average Number of Common and
Equivalent Shares Outstanding....... 9,679 20,370 9,626 14,261
======= ======= ======= =======
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-20
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 24, 1995 TWO QUARTERS
(INCEPTION) THROUGH ENDED
JULY 9, 1995 JULY 14, 1996
------------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss................................... $ (2,184) $ (3,022)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 557 3,087
Gain on sale of marketable equity
securities.............................. -- (1,872)
Changes in assets and liabilities, net of
effect of acquisitions:
Accounts receivable and due from
affiliates............................ 474 (3,731)
Accounts payable and accrued expenses.. (4,304) (5,162)
Deferred franchise revenue............. -- 7,040
Other assets and liabilities........... (191) (4,834)
-------- ---------
Net cash used in operating
activities.......................... (5,648) (8,494)
-------- ---------
Cash Flows from Investing Activities:
Purchase of property and equipment......... (941) (27,066)
Proceeds from sale of assets............... -- 42,217
Purchase of other assets................... (120) (7,179)
Net assets purchased, net of cash acquired. (2,358) --
Acquisition of Noah's New York Bagels, Inc.
.......................................... -- (100,902)
Issuance of notes receivable............... (1,796) (118,747)
Repayment of notes receivable.............. -- 60,692
Purchase of marketable equity securities... (21,465) (66,778)
Proceeds from sales of marketable equity
securities................................ -- 68,650
-------- ---------
Net cash used in investing
activities.......................... (26,680) (149,113)
-------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock..... 23,819 16,158
Borrowings under revolving credit
facilities................................ 43,191 286,154
Repayments of revolving credit facilities.. (33,755) (149,504)
-------- ---------
Net cash provided by financing
activities.......................... 33,255 152,808
-------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents................................. 927 (4,799)
Cash and Cash Equivalents, beginning of
period...................................... -- 5,368
-------- ---------
Cash and Cash Equivalents, end of period..... $ 927 $ 569
======== =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-21
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements have been prepared by Einstein/Noah
Bagel Corp. (the "Company") and are unaudited except for the consolidated
balance sheet at December 31, 1995. The financial statements have been
prepared in accordance with the instructions for Form 10-Q and, therefore, do
not necessarily include all information and footnotes required by generally
accepted accounting principles. In the opinion of the Company, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the Company's consolidated financial position, results of operations and cash
flows as of July 14, 1996 and for all periods presented have been made. The
statements are subject to year-end audit adjustment. A description of the
Company's accounting policies and other financial information is included in
its 1995 audited consolidated financial statements included in the prospectus
that forms a part of the Company's Registration Statement on Form S-1 (Reg.
No. 333-04725). The consolidated results of operations for the quarter and two
quarters ended July 14, 1996 are not necessarily indicative of the results
expected for the full year.
2. ACQUISITION
In February 1996, the Company acquired Noah's New York Bagels, Inc. for
approximately $100.9 million. The acquisition has been accounted for as a
purchase, and, accordingly, the purchase price was allocated to assets (both
tangible and identifiable intangible) and liabilities based upon an evaluation
of their fair values at the date of the acquisition. Of such total purchase
price, $22.1 million was allocated to trademarks (amortized over a 35-year
life), $5.2 million was allocated to recipes (amortized over a 10-year life)
and $56.3 million was allocated to excess purchase price over fair value of
identifiable net assets acquired (amortized over a 35-year life). Such
intangibles were identified by management based upon its evaluation of the
business acquired. The allocation of the purchase price to trademarks and
recipes was based upon a royalty savings methodology which determines the
present value of the stream of royalties which the Company believes an
independent third party would be willing to pay to obtain the use of such
trademarks and recipes. The estimated useful life for these assets was based
upon various factors which existed at the time of the acquisition, including
the anticipated periods of benefit to be derived from the utilization of such
assets in connection with executing a dual brand business strategy, increasing
consumer demand for bagel products, the lack of a competitor with national
brand awareness, the lack of regulatory limitations on the potential useful
lives of such assets, the absence of any inherent or technological
obsolescence for such assets, and in the case of trademarks, the long-lived
nature of a primary brand name in the consumer marketplace.
The following represents the unaudited pro forma results of operations for
the two quarters ended July 14, 1996 as if the acquisition had occurred at the
beginning of the Company's fiscal year (in thousands of dollars, except per
share amount):
<TABLE>
<S> <C>
Revenue........................................................... $43,889
Net loss.......................................................... $ 4,904
Net loss per share................................................ $ 0.36
</TABLE>
This pro forma information is not indicative of the results of operations
that actually would have been obtained if the transactions had occurred at the
beginning of the Company's fiscal year. The pro forma information is not
intended to be a projection of future results.
F-22
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. AREA DEVELOPER FINANCING
The Company currently offers partial financing to its area developers for
use in expansion of their operations. Area developer financing requires the
area developer to expend at least 75% of its contributed capital toward
developing stores prior to drawing on the revolving loan account, with draws
permitted during a three-year draw period in a pre-determined maximum amount
equal to four times the amount of the developer's equity capital. Upon
expiration of the draw period, the loan converts to an amortizing term loan
payable over five years in periodic installments, with a final balloon
payment. Interest is set at 1% over the applicable reference rate of Bank of
America Illinois as established from time to time and is payable each four-
week period. The loan is secured by a pledge of substantially all of the
assets of the area developer.
(A) Loan Conversion Option
All or any portion of the loan amount may be converted at the Company's
election at any time after the expiration of a specified moratorium (generally
two years) and after the area developer has completed not less than 80% of its
area development commitment (or in the event of certain defaults) into equity
in the area developer at the conversion price set forth in such loan
agreement, generally at a 12% premium over the per unit equity price paid by
the investors in the area developer for the equity investment made
concurrently with the execution of the loan agreement. The maximum loan amount
is established to give the Company majority ownership of the area developer
upon conversion provided the Company exercises its right to participate in any
intervening financing of the developer. To the extent such loan is not fully
drawn or has been drawn and repaid, the Company has a corresponding option to
acquire, at the loan conversion price, the amount of additional equity it
could have acquired by conversion of the loan, had it been fully drawn.
There can be no assurance the Company will or will not convert any loan
amount or exercise its option at such time as it may be permitted to do so
and, if it does convert, that such conversion will constitute a majority
interest in the area developer.
(B) Commitments to Extend Area Developer Financing
The following table summarizes credit commitments for area developer
financing (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31, JULY 14,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Number of area developers receiving financing... 2 8
Loan commitments................................ $16,000 $162,540
Unused loans.................................... 12,462 103,219
------- --------
Loans outstanding (included in Notes
Receivable).................................... $ 3,538 $ 59,321
======= ========
Allowance for loan losses $ -- $ --
======= ========
</TABLE>
(C) Credit Risk and Allowance for Loan Losses
The allowance for credit losses is maintained at a level that in
management's judgment is adequate to provide for estimated possible loan
losses. The amount of the allowance is based on management's review of each
area developer's use of loan proceeds, stage of development, adherence to its
store development schedule, store performance trends, type and amount of
collateral securing the loan, prevailing economic conditions and other factors
which management deems relevant at the time. Based upon this review and
analysis, no allowance was required as of December 31, 1995 and July 14, 1996.
F-23
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth certain aggregate financial information
obtained from area developers to which the Company had outstanding loans (in
thousands, except total number of area developers and store data):
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Total number of area developers.............................. 2
Total number of area developer stores open................... 13
Total gross assets........................................... $9,262
Total debt to the Company.................................... $3,538
Total members' equity........................................ $2,676
</TABLE>
4. DEBT
In May 1996, the Company entered into a secured revolving credit facility
providing for borrowings of up to $45.0 million through April 30, 1998.
Borrowings under the facility may be either floating rate loans with interest
at the lender's base rate plus 1.0% (subsequently reduced to .5% in August
1996) or, at the Company's option, the rate offered in the interbank
Eurodollar market for one-, two-, or three-month dollar deposits offered by
the lender plus 3.0%. In addition, a commitment fee of .25% of the average
daily unused portion of the loan is required. The facility contains covenants,
among others, restricting other borrowings, prohibiting cash dividends and
requiring the Company to maintain minimum interest coverage and cash flow
ratios, specified store level sales, and a minimum capital level. As of July
14, 1996, $42.7 million was outstanding under the facility.
The Company also has an unsecured revolving credit facility from Boston
Chicken, Inc. providing for borrowings of up to $14.0 million (subsequently
increased to $50.0 million) through June 15, 2003. The facility bears interest
at the reference rate of Bank of America Illinois plus 1%. As of July 14,
1996, $14.0 million was outstanding under the facility.
The Company utilized a portion of the proceeds from its equity offerings
(see Note 8) to payoff the outstanding balances under both facilities.
5. ROYALTIES AND FRANCHISE-RELATED FEES
The components of royalties and franchise-related fees are comprised of the
following (in thousands of dollars):
<TABLE>
<CAPTION>
QUARTER ENDED PERIOD FROM
---------------- MARCH 24, 1995 TWO QUARTERS
JULY 9, JULY 14, (INCEPTION) THROUGH ENDED
1995 1996 JULY 9, 1995 JULY 14, 1996
------- -------- ------------------- -------------
<S> <C> <C> <C> <C>
Royalties................ $ -- $ 995 $ -- $1,674
Initial franchise and
area developer fees..... -- 3,060 -- 5,660
Interest income.......... -- 914 -- 1,337
Other.................... -- 145 -- 425
----- ------ ----- ------
$ -- $5,114 $ -- $9,096
===== ====== ===== ======
</TABLE>
F-24
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS
In December 1995, Bagel Store Development Funding, L.L.C., formerly named
Einstein Bros. Equity Funding, L.L.C. ("Bagel Funding"), was formed to invest
in existing and proposed area developers. Through July 14, 1996, Bagel Funding
had raised $90.0 million (including an aggregate of $45.0 million in
subscriptions receivable) and had invested a total of $40.4 million in area
developers. Bagel Funding can require an area
developer to redeem Bagel Funding's equity interest at a formula price in the
event the Company acquires a majority interest in the area developer, and if
the area developer fails to do so, the Company will be required to purchase
Bagel Funding's unredeemed equity interest. In the event the Company's
conversion and/or option rights expire unexercised under the area developer's
secured loan agreement with the Company, as originally in effect, Bagel
Funding will have the right to require, subject to the Company's prior
consent, that the area developer undertake a firm commitment underwritten
public offering of equity of the area developer. In the event the Company does
not consent to a public offering, the area developer can be required to
purchase Bagel Funding's unredeemed equity interest in the area developer at a
formula price and if the area developer fails to do so, the Company will be
required to purchase Bagel Funding's unredeemed equity interest. Also, in the
event the Company does not acquire a majority interest in the area developer
pursuant to the Company's conversion and/or option rights prior to the time
such rights expire unexercised under the area developer's secured loan
agreement with the Company, as originally in effect, Bagel Funding will have
the right to request that the area developer seek to terminate its area
developer and franchise agreements with the Company. If the Company does not
consent to such termination, the area developer can be required to redeem
Bagel Funding's equity interest in the area developer at a formula price, and
if the area developer fails to do so, the Company will be required to purchase
Bagel Funding's unredeemed equity interest.
7. CONTINGENCIES
The Company is subject to various lawsuits, claims, and other legal matters
in the course of conducting its business, including its business as a
franchisor. The Company believes that the outcome of such lawsuits, claims,
and other legal matters will not have a material impact on the Company's
financial position or results of operations.
8. SUBSEQUENT EVENT
In August 1996, the Company completed an underwritten initial offering of
3,105,000 shares of its common stock to the public, a concurrent non-
underwritten public offering of 425,000 shares of its common stock to certain
individuals and entities and a concurrent private placement of 2,000,000
shares of its common stock to Boston Chicken, Inc., raising aggregate net
proceeds of approximately $86.0 million. Such proceeds were partially used to
retire the outstanding balances under its revolving credit facilities. For the
two quarters ended July 14, 1996, assuming the offering proceeds had been
utilized to repay the then outstanding balances under the revolving credit
facilities of $56.7 million, the loss per share would have been $0.18.
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Noah's New York Bagels, Inc.:
We have audited the accompanying consolidated balance sheets of Noah's New
York Bagels, Inc. (the "Company") as of December 31, 1994 and December 30,
1995, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for each of the three fiscal years in the
period ended December 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994 and
December 30, 1995, and the results of their operations and cash flows for each
of the three fiscal years in the period ended December 30, 1995 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
May 7, 1996
F-26
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND DECEMBER 30, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1994 1995
------- -------
ASSETS
- ------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................. $ 1,726 $ 1,630
Accounts receivable........................................ 239 550
Inventory.................................................. 255 652
Prepaid expenses........................................... 657 963
------- -------
Total current assets..................................... 2,877 3,795
Property and Equipment....................................... 9,631 19,847
Other Assets................................................. 752 926
------- -------
Total Assets............................................. $13,260 $24,568
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT
- -------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable........................................... $ 1,296 $ 3,439
Accrued payroll............................................ 455 831
Other accrued expenses..................................... 178 328
Current portion of long-term debt.......................... 211 1,005
------- -------
Total current liabilities................................ 2,140 5,603
Long-Term Debt:
Related parties............................................ 4,480 --
Bank....................................................... 3,378 10
Deferred Credits............................................. 270 309
Redeemable Preferred Stock (liquidation preference of $6,573
in 1994 and $23,891 in 1995)................................ 3,331 20,325
Shareholders' Deficit:
Common stock, no par value: authorized, 38,000,000 shares;
issued and outstanding, 5,359,219 shares in 1994 and
5,365,197 shares in 1995.................................. 387 858
Accumulated deficit........................................ (726) (1,566)
Unearned compensation...................................... -- (971)
------- -------
Total shareholders' deficit.............................. (339) (1,679)
------- -------
Total Liabilities and Shareholders' Deficit.............. $13,260 $24,568
======= =======
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND DECEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
Net Sales............................................ $8,148 $17,530 $32,323
Costs and Expenses:
Cost of sales...................................... 3,122 6,704 12,118
Salaries and benefits.............................. 2,504 6,340 12,388
General and administrative expenses................ 1,877 4,728 8,561
------ ------- -------
Total Costs and Expenses........................... 7,503 17,772 33,067
------ ------- -------
Income (Loss) from Operations........................ 645 (242) (744)
Interest Expense--Net (including interest expense of
$--, $352 and $326)................................. (168) (331) (79)
Other Income (Expense)............................... (17) 20 (17)
------ ------- -------
Net Income (Loss).................................... $ 460 $ (553) $ (840)
====== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
---------------- EARNINGS UNEARNED
SHARES AMOUNT (DEFICIT) COMPENSATION TOTAL
--------- ------ ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993.. 922,222 $ 16 $ 203 $ -- $ 219
Dividends Declared.......... -- -- (836) -- (836)
Net Income.................. -- -- 460 -- 460
Issuance of Common Stock for
Acquisition................ 1,180,000 717 -- -- 717
--------- ----- ------- ----- -------
Balance at January 1, 1994.. 2,102,222 733 (173) -- 560
Recapitalization............ 3,219,028 -- -- -- --
Stock Options Exercised..... 37,969 1 -- -- 1
Accretion of Redeemable
Preferred Stock............ -- (347) -- -- (347)
Net Loss.................... -- -- (553) -- (553)
--------- ----- ------- ----- -------
Balance at December 31,
1994....................... 5,359,219 387 (726) -- (339)
Stock Options Exercised..... 5,978 1 -- -- 1
Accretion of Redeemable
Preferred Stock............ -- (520) -- -- (520)
Compensatory Stock Option
Grants..................... -- 990 -- (990) --
Amortization of Unearned 19
Compensation............... -- -- -- 19
Net Loss.................... -- -- (840) -- (840)
--------- ----- ------- ----- -------
Balance at December 30,
1995....................... 5,365,197 $ 858 $(1,566) $(971) $(1,679)
========= ===== ======= ===== =======
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND DECEMBER 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)................................. $ 460 $ (553) $ (840)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 289 863 1,966
Noncash compensation expense..................... -- -- 19
Deferred credits................................. 50 220 39
Other............................................ -- 276 184
Changes in assets and liabilities:
Accounts receivable............................. (74) (71) (311)
Inventory....................................... (70) (138) (397)
Prepaid expenses................................ (39) (582) (306)
Other assets.................................... (32) (94) (205)
Accounts payable and accrued expenses........... 498 1,190 2,669
------- ------- --------
Net cash provided by operating activities...... 1,082 1,111 2,818
Cash Flows from Investing Activities--
Purchases of property and equipment............... (1,996) (7,578) (12,160)
Cash Flows from Financing Activities:
Borrowings from related parties................... 1,250 5 5,191
Proceeds from issuance of short-term debt......... -- 2,000 --
Proceeds from issuance of redeemable preferred
stock, net....................................... -- 2,970 7,123
Net borrowings (repayments) under line-of-credit
agreements....................................... 95 3,550 (2,550)
Repayments of long-term debt...................... (113) (315) (24)
Repayments related party debt..................... -- (104) (495)
Stock options exercised........................... -- 15 1
Dividends paid.................................... (207) (167) --
------- ------- --------
Net cash provided by financing activities...... 1,025 7,954 9,246
------- ------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents....................................... 111 1,487 (96)
Cash and Cash Equivalents at Beginning of Year..... 128 239 1,726
------- ------- --------
Cash and Cash Equivalents at End of Year........... $ 239 $ 1,726 $ 1,630
======= ======= ========
Other Cash Flow Information--Interest paid......... $ 119 $ 313 $ 400
======= ======= ========
Supplemental Information of Noncash Transactions:
Acquisition of P&A Ventures, Inc.--common stock
issued........................................... $ 717 $ -- $ --
Dividends paid with notes payable................. 462 -- --
Conversion of promissory note to series B
redeemable preferred stock....................... -- -- 5,283
Conversion of related party debt to Series B
redeemable preferred stock....................... -- -- 4,068
</TABLE>
See notes to consolidated financial statements.
F-30
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND DECEMBER 30, 1995
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business--Noah's New York Bagels, Inc. (the "Company") produces high quality
bagels, cream cheeses and salads and sells them, along with a variety of
sandwiches, beverages and other delicatessen items, primarily through Company-
owned and operated restaurants on the West Coast. In addition, the Company
operates a wholesale business selling bagels and cream cheeses directly to
various grocers, delicatessens and restaurants.
Recapitalization--In April 1994, the Company effected a recapitalization
whereby each outstanding share of common stock (2,102,222 shares) converted
into 2.53125 shares of common stock (3,291,028 shares) and 0.84375 shares of
Series A convertible preferred stock (1,773,750 shares).
Change in Fiscal Year End--In 1995 the Company changed its year end from
December 31 to the Saturday closest to December 31. As a result fiscal 1995
ended December 30, 1995.
Cash and Cash Equivalents--The Company classifies as cash equivalents all
highly liquid investments, primarily composed of money market accounts and
certificate of deposits with a maturity of three months or less, which are
convertible to a known amount of cash and carry an insignificant risk of
change in value.
Inventory, primarily raw ingredients and food held for resale, is stated at
the lower of cost (first-in, first-out method) or market.
Property and Equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets ranging
from 3 to 10 years. Amortization of improvements to leased properties is based
upon the term of the applicable lease or the estimated useful lives of such
assets, whichever is shorter.
Income Taxes--Effective May 3, 1994, the Company converted from an S-
Corporation to a C-Corporation subject to federal and state income taxes.
Pre-opening costs consist of direct costs of hiring and training the initial
workforce and other direct costs associated with opening a new store. Such
costs are amortized over a twelve-month period commencing with the store
opening.
Deferred Rent--Certain of the Company's lease agreements provide for
scheduled rent increases during the lease term, or for rental payments
commencing at a date other than initial occupancy. Provision is made for the
excess of operating lease rentals computed on a straight-line basis over the
lease term, over cash rentals paid.
Accounting Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Impact of New Accounting Standards--The Company will adopt Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of in 1996. The
adoption of SFAS No. 121 is expected to have no material affect on the
Company's consolidated financial statements.
F-31
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fair Value of Financial Instruments--In accordance with SFAS No. 107,
"Disclosure About Fair Value of Financial Instruments," the carrying value of
the Company's current assets and liabilities approximate their estimated fair
value.
The Company is required to adopt "SFAS" No. 123, Accounting for Stock-Based
Compensation in fiscal 1996. SFAS No. 123 establishes accounting and
disclosure requirements using a fair value based method of accounting for
stock based employee compensation plans. Under SFAS No. 123 the Company may
either adopt the new fair value based accounting method or continue the
intrinsic value based method under APB 25. Accounting for Stock issued to
Employees and provide pro forma disclosures of net earnings as if the
accounting provisions of SFAS No. 123 had been adopted. The Company plans to
adopt only the disclosure requirements of SFAS No. 123; therefore such
adoption will have no effect on the Company's consolidated net earnings or
cash flows.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31 and December
30, respectively (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Leasehold improvements.................................. $ 5,002 $11,248
Equipment............................................... 3,875 7,422
Furniture and fixtures.................................. 808 2,076
Construction in progress................................ 1,116 2,187
------- -------
Total............................................... 10,801 22,933
Less accumulated depreciation and amortization.......... (1,170) (3,086)
------- -------
Property and equipment--net............................. $ 9,631 $19,847
======= =======
</TABLE>
3. BANK LINE OF CREDIT
At December 30, 1995 the Company had a line of credit agreement with a bank
that provides for unsecured borrowings up to $12,000,000 through January 1,
2002 of which $1,000,000 was outstanding and was repaid in February 1996.
Interest on borrowings under this agreement are at varying rates, based on the
bank's prime rate or at a fixed rate.
Long-term debt at December 31 and December 30, respectively, consists of the
following (in thousands):
<TABLE>
<CAPTION>
1994 1995
------ -------
<S> <C> <C>
Line of credit........................................... $3,550 $ 1,000
Other.................................................... 39 15
------ -------
Total................................................ 3,589 1,015
Less current portion..................................... (211) (1,005)
------ -------
Total................................................ $3,378 $ 10
====== =======
</TABLE>
Minimum principal payments are as follows (in thousands):
<TABLE>
<S> <C>
1996............................................................... $1,005
1997............................................................... 5
1998............................................................... 5
------
Total.......................................................... $1,015
======
</TABLE>
F-32
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. NOTES PAYABLE TO RELATED PARTIES
During 1995, $4,068,000 of related party debt (including $83,000 of accrued
interest) was converted into Series B preferred stock and $495,000 was repaid.
Notes payable to related parties at December 31, 1994 consisted of convertible
subordinated notes of $3,330,000 issued to shareholders bearing interest at
8%; subordinated notes issued to shareholders of $655,000 bearing interest at
10%; a promissory note issued to shareholders of $475,000 bearing interest at
10%; and S-Corporation distribution notes of $20,000 payable in installments
of principal and interest at 10%.
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) net operating loss carryforwards.
Significant components of the Company's net deferred taxes at December 31
and December 30, respectively, are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
---- -----
<S> <C> <C>
Deferred tax assets:
Federal operating tax loss carryforward.................... $227 $ 619
State operating tax loss carryforward...................... 24 75
Nondeductible accruals..................................... 95 92
---- -----
Total.................................................... $346 $ 786
==== =====
Deferred tax liabilities:
Preopening stores expense.................................. $149 $ 197
Depreciation............................................... 118 245
Other...................................................... 34 44
---- -----
Total.................................................... 301 486
---- -----
Net deferred tax assets...................................... 45 300
Less valuation allowance..................................... (45) (300)
---- -----
Total.................................................... $ -- $ --
==== =====
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. As it is more likely
than not that sufficient taxable income will not be generated in future
periods to utilize the deferred tax assets, a valuation allowance has been
recorded. During 1995 the valuation allowance increased by $255,000 and during
1994 the valuation allowance increased by $45,000.
As of December 30, 1995, the Company had a net operating loss carryforward
for federal income tax purposes of approximately $1,821,000 and a net
operating loss carryforward for state tax purposes of approximately
$1,214,000. Subsequent to year end, there was a change in ownership of the
Company (Note 9). Certain provisions of the 1986 Tax Reform Act have
significantly limited the use of the Company's net operating loss
carryforwards under the change in ownership provisions of Section 382 of the
Internal Revenue Code. Federal NOL's expire beginning 2009; state NOL's expire
beginning 1999.
F-33
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. REDEEMABLE PREFERRED STOCK
Changes in redeemable preferred stock are as follows (in thousands):
<TABLE>
<CAPTION>
SERIES A SERIES B
-------------- --------------
SHARES DOLLARS SHARES DOLLARS TOTAL
------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1993.............. -- $ -- -- $ -- $ --
Recapitalization (Note 1).............. 1,774 -- -- -- --
Issuance of Series A for cash.......... 1,500 2,970 -- -- 2,970
Stock options exercised................ 12 14 -- -- 14
Accretion to redemption value.......... -- 347 -- -- 347
----- ------ ----- ------- -------
Balance at December 31, 1994........... 3,286 3,331 -- -- 3,331
Issuance of Series B for cash.......... -- -- 2,121 7,550 7,550
Conversion of related party debt to
Series B (Note 4)..................... -- -- 1,143 4,068 4,068
Conversion of promissory note to Series
B..................................... -- -- 1,481 5,283 5,283
Costs of issuing Series B.............. -- -- -- (427) (427)
Accretion to redemption value.......... -- 520 -- -- 520
----- ------ ----- ------- -------
Balance at December 30, 1995........... 3,286 $3,851 4,745 $16,474 $20,325
===== ====== ===== ======= =======
</TABLE>
In March 1995, the Company amended and restated its Articles of
Incorporation to authorize the issuance of 76,000,000 shares including
38,000,000 shares of common stock and 38,000,000 shares of preferred stock. Of
the 38,000,000 shares of preferred stock, 3,375,000 shares are designated
Series A convertible redeemable preferred stock and 4,904,425 shares are
designated as Series B cumulative convertible redeemable preferred stock.
In March 1995, the Company issued $5,191,000 of 5.90% convertible promissory
notes to a shareholder. In September 1995, the entire unpaid principal balance
of $5,191,000 and accrued interest of $92,000 automatically converted into
1,481,219 shares of the Company's Series B cumulative convertible redeemable
preferred stock.
Liquidation Preferences--Upon liquidation, the holders of Series A
convertible redeemable preferred stock and Series B cumulative convertible
redeemable preferred stock are entitled to receive a preferential payment of
$2.00 per share and $3.56 per share, respectively, before payments are made to
the holders of common stock.
Dividends and Dividend Preferences--If declared by the Board of Directors of
the Company, the holders of Series A cumulative convertible redeemable
preferred stock are entitled to receive dividends at a rate per annum of $.16
per share. If declared by the Board of Directors of the Company, dividends
accrue and accumulate on Series B cumulative convertible redeemable preferred
stock at a rate of $.2848 per share, per annum. Through December 31, 1995, no
dividends have been declared.
Conversion Rights--All series of preferred stock are convertible into common
stock on a one-for-one basis, as adjusted, based on the issuance of common
stock, options, warrants or other securities convertible into common stock.
Preferred Stock Redemption--Series A convertible redeemable preferred stock
is redeemable at the option of the holder under certain conditions beginning
March 31, 2001 at a per share price of $2.00, plus an amount equal to all
accrued but unpaid dividends. Series B cumulative convertible redeemable
preferred stock is redeemable at the option of the holder under certain
conditions beginning March 31, 2001 at a per share price of $3.56, plus an
amount equal to the total of all accrued but unpaid dividends. The preferred
stock is being accreted to its minimum redemption value.
F-34
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. STOCK OPTION PLANS
Under Company's stock option plans, the Company may grant incentive and
nonqualified options to purchase up to 2,053,750 shares of common stock and
101,250 shares of Series A Preferred Stock. Options vest ratably over five
years, are exercisable up to ten years and are generally granted at an
exercise price that approximates fair market value at the date of grant, as
determined by the Board of Directors.
A summary of stock option transactions follows:
<TABLE>
<CAPTION>
NUMBER
OF STOCK OPTION PRICE
OPTIONS PER SHARE
--------- ------------
<S> <C> <C>
Outstanding at December 31, 1993
Granted......................................... 844,500 $ .20
Canceled........................................ (7,500) .20
Outstanding at December 31, 1994.................. 837,000 .20
Granted......................................... 977,075 .20-.50
Exercised....................................... (5,978) .20
Canceled........................................ (103,247) .20-.50
--------- ---------
Outstanding at December 30, 1995.................. 1,704,850 $.20-$.50
========= =========
</TABLE>
At December 30, 1995, stock options available for grant were 45,158 and
approximately 170,000 options were exercisable.
During 1995, the Company granted options with exercise prices below market
value. The difference between the market value and the exercise price will be
recognized as compensation expense over the five year vesting period.
Compensation expense in 1995 related to such options was $19,000. Immediately
prior to the acquisition of the Company in February 1996 (see Note 9), certain
options were accelerated and exercised. Accordingly, the unamortized
compensation expense of $971,000 at December 30, 1995, will be recognized as
compensation expense in 1996.
8. LEASES
The Company leases restaurant, office and production facilities under
operating lease agreements that expire at various dates, with options to
extend through 2016. In addition to minimum rental payments, certain of the
leases require contingent payments based on sales levels. The Company also
pays real estate taxes, insurance and maintenance expenses related to these
leases. Net rental expense for all operating leases was as follows (in
thousands):
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ------
<S> <C> <C> <C>
Minimum rentals......................................... $309 $638 $1,409
Contingent rentals and other charges.................... -- 40 40
---- ---- ------
$309 $678 $1,449
==== ==== ======
</TABLE>
F-35
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The aggregate future minimum lease payments under all non-cancelable lease
agreements are as follows (in thousands):
<TABLE>
<S> <C>
1996............................................................. $ 3,305
1997............................................................. 4,213
1998............................................................. 4,074
1999............................................................. 3,982
2000............................................................. 3,749
Thereafter....................................................... 15,167
-------
Total minimum lease commitments.............................. 34,490
Less sublease rentals............................................ (160)
-------
Total minimum lease commitments.............................. $34,330
=======
</TABLE>
9. SUBSEQUENT EVENT
In February 1996, all outstanding preferred and common stock of the Company
was acquired by Einstein/Noah Bagel Corp. for approximately $100.9 million in
cash.
F-36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Bagel & Bagel, Inc.:
We have audited the accompanying statements of operations and cash flows for
the year ended December 27, 1994 and the period from December 28, 1994 to
March 23, 1995 of Bagel & Bagel, Inc. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Bagel &
Bagel, Inc. for the year ended December 27, 1994 and the period from December
28, 1994 to March 23, 1995 in conformity with generally accepted accounting
principles.
MAYER HOFFMAN McCANN L.C.
Kansas City, Missouri
April 26, 1996
F-37
<PAGE>
BAGEL & BAGEL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 27, 1994 AND THE PERIOD FROM
DECEMBER 28, 1994 TO MARCH 23, 1995
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 27, DECEMBER 28, 1994
1994 TO MARCH 23, 1995
------------ -----------------
<S> <C> <C>
Net Sales........................................ $5,858,908 $1,887,424
Cost and Expenses:
Cost of products sold.......................... 2,369,512 735,691
Salaries and benefits.......................... 1,534,138 534,759
General and administrative..................... 1,704,667 653,430
---------- ----------
Total costs and expenses..................... 5,608,317 1,923,880
---------- ----------
Income (Loss) from Operations.................... 250,591 (36,456)
---------- ----------
Other Expense:
Interest expense............................... (133,331) (79,093)
Other expense, net............................. (249,000) (14,277)
---------- ----------
Total other expense.......................... (382,331) (93,370)
---------- ----------
Net Loss......................................... $ (131,740) $ (129,826)
========== ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-38
<PAGE>
BAGEL & BAGEL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 27, 1994 AND FOR THE PERIOD FROM
DECEMBER 28, 1994 TO MARCH 23, 1995
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER DECEMBER 28, 1994
27, 1994 TO MARCH 23, 1995
----------- -----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss...................................... $ (131,740) $ (129,826)
Adjustments to reconcile loss to net cash
provided by operating activities:
Depreciation and amortization............... 375,742 139,478
Changes in assets and liabilities:
Accounts receivable....................... 1,469 63,053
Inventories............................... (186,994) 20,349
Prepaid expenses and other current assets. (9,242) 34,587
Accounts payable and accrued expenses..... 683,417 (115,568)
----------- -----------
Net cash provided by operating
activities............................. 732,652 12,073
Cash Flows from Investing Activities:
Purchase of property and equipment............ (2,087,859) (525,019)
Purchase of other assets...................... (11,464) --
----------- -----------
Net cash used in investing activities... (2,099,323) (525,019)
Cash Flows from Financing Activities:
Increase in short-term obligations............ 632,679 2,038,652
Proceeds from long-term obligations........... 903,420 101,180
Repayment of long-term obligations............ (125,894) (1,672,197)
----------- -----------
Net cash provided by financing
activities............................. 1,410,205 467,635
----------- -----------
Net increase (decrease) in Cash................. 43,534 (45,311)
Cash, beginning of period....................... 210,340 253,874
----------- -----------
Cash, end of period............................. $ 253,874 $ 208,563
=========== ===========
Supplemental Cash Flow Information:
Interest Paid................................. $ 84,880 $ 12,701
=========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-39
<PAGE>
BAGEL & BAGEL, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
The Company operates a chain of bagel stores in the Kansas City metropolitan
area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
The provision for depreciation and amortization has been calculated using
the straight-line and accelerated methods. The following represents the useful
lives over which the assets are depreciated and amortized:
<TABLE>
<S> <C>
Leasehold improvements.......................................... 8 years
Furniture, fixtures, and equipment.............................. 5-7 years
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
Revenue Recognition
Revenue from sales is recognized in the period the related food and beverage
products are sold.
Income Taxes
The Company is organized as a Subchapter S corporation for federal and state
income tax purposes. Any taxable income or loss is the responsibility of the
individual stockholders.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
Certain items in the financial statements for the year ended December 27,
1994 have been reclassified to conform with the presentation of the period
ended March 23, 1995.
3. COMMITMENTS AND CONTINGENCIES
The Company leases its corporate offices, store premises and commissary
under various noncancelable operating lease agreements. Lease terms are
generally five years with renewal options ranging from one to ten years. Most
of these leases contain escalation clauses and common area maintenance
charges. Total rent expense was approximately $306,000 for the year ended
December 27, 1994 and $100,000 for the period ended March 23, 1995, including
contingent rental expense of approximately $101,000 for the year ended
December 27, 1994 and $23,000 for the period ended March 23, 1995.
On December 13, 1994, the Company suffered a fire at one of its retail
locations, resulting in the involuntary conversion of the equipment, inventory
and leasehold improvements therein. The Company retains insurance
F-40
<PAGE>
BAGEL & BAGEL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
coverage at the replacement value which is deemed to be in excess of the net
book value of the assets lost. As the claim for recovery from insurance is
probable of realization, no loss has been recorded in the financial statements
for the year ended December 27, 1994. In addition, as the amount of the
insurance proceeds to be collected is uncertain, no gain has been recorded in
the financial statements for the year ended December 27, 1994 and the period
ended March 23, 1995. If the final insurance proceeds exceed the net book
value of the assets lost, a gain may result which would be recorded at that
time.
4. RELATED-PARTY TRANSACTIONS
The Company leases certain facilities from an entity controlled by the sole
stockholder. Total rent paid under this lease was $8,307 for the year ended
December 27, 1994 and $18,000 for the period ended March 23, 1995.
5. SALE OF ASSETS
In March 1995, the Company sold substantially all of its net assets in
exchange for consideration with a market value of approximately $8.9 million.
F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Offerdahl's Bagel Gourmet, Inc.
and Affiliates:
We have audited the accompanying combined statements of operations and cash
flows of Offerdahl's Bagel Gourmet, Inc. and Affiliates (Florida corporations)
for the years ended December 31, 1993 and 1994 and the period from January 1,
1995 to April 2, 1995. These financial statements are the responsibility of
the Companies' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
Offerdahl's Bagel Gourmet, Inc. and Affiliates for the years ended December
31, 1993 and 1994 and the period from January 1, 1995 to April 2, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
April 24, 1996
F-42
<PAGE>
OFFERDAHL'S BAGEL GOURMET, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIOD
FROM JANUARY 1, 1995 TO APRIL 2, 1995
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER PERIOD FROM
31, JANUARY 1, 1995
---------------------- TO
1993 1994 APRIL 2, 1995
---------- ---------- ---------------
<S> <C> <C> <C>
Net Sales............................... $2,691,161 $4,785,116 $1,712,091
Cost and Expenses:
Cost of products sold................. 1,167,075 2,082,739 1,010,311
Salaries and benefits................. 761,466 1,525,307 776,739
General and administrative............ 487,359 1,014,670 227,585
---------- ---------- ----------
Total costs and expenses............ 2,415,900 4,622,716 2,014,635
---------- ---------- ----------
Income (loss) from Operations........... 275,261 162,400 (302,544)
Other Income (Expense):
Interest expense...................... -- (585) (6,058)
Interest income....................... -- 295 --
Other income (expense)................ (2,909) 23,749 365
---------- ---------- ----------
Total other income (expense)........ (2,909) 23,459 (5,693)
---------- ---------- ----------
Net Income (Loss)....................... $ 272,352 $ 185,859 $ (308,237)
========== ========== ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-43
<PAGE>
OFFERDAHL'S BAGEL GOURMET, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND FOR THE PERIOD
FROM JANUARY 1, 1995 TO APRIL 2, 1995
<TABLE>
<CAPTION>
YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1995
-------------------- TO APRIL 2,
1993 1994 1995
--------- --------- ---------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)...................... $ 272,352 $ 185,859 $(308,237)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization........ 120,091 232,158 68,321
Changes in assets and liabilities:
Accounts receivable................ (35,804) 35,842 (17,420)
Inventories........................ (46,770) (48,527) 7,592
Prepaid expenses and other current
assets............................ (13,965) (27,352) (9,969)
Accounts payable and accrued
expenses.......................... 111,424 84,834 879,557
Other.............................. (43,367) (57,974) (28,848)
--------- --------- ---------
Net cash provided by operating
activities...................... 363,961 404,840 590,996
Cash Flows from Investing Activities:
Purchases of property and equipment.... (600,775) (800,205) (458,380)
--------- --------- ---------
Net cash used in investing
activities...................... (600,775) (800,205) (458,380)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock. 547,005 760,000 28,080
Distributions to stockholders.......... (235,000) (570,000) (32,000)
Proceeds from long-term obligations.... -- 250,000 --
Repayment of long-term obligations..... -- -- (250,000)
--------- --------- ---------
Net cash provided by (used in)
financing activities............ 312,005 440,000 (253,920)
--------- --------- ---------
Net increase (decrease) in Cash.......... 75,191 44,635 (121,304)
Cash, beginning of period................ 128,316 203,507 248,142
--------- --------- ---------
Cash, end of period...................... $ 203,507 $ 248,142 $ 126,838
========= ========= =========
Supplemental Cash Flow Information:
Interest Paid.......................... $ -- $ -- $ 6,643
========= ========= =========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-44
<PAGE>
OFFERDAHL'S BAGEL GOURMET, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Offerdahl's Bagel Gourmet, Inc. and Affiliates (the "Company") operates a
chain of bagel stores in Southern Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The accompanying combined financial statements include the accounts of
Offerdahl's Bagel Gourmet Inc., Bagel Gourmet (Sheridan), Inc., Bagel Gourmet
(Weston), Inc., Bagel Gourmet (Pembroke), Inc., Bagel Gourmet (Boynton), Inc.,
Bagel Gourmet (Promenade), Inc., Bagel Gourmet, Inc., and Bagel Gourmet
Production, Inc. Bagel Gourmet, Inc. was formed in 1993 through the merger of
Bagel Gourmet (Sheridan), Inc., Bagel Gourmet (Pembroke), Inc., Bagel Gourmet
(Boynton), Inc., Bagel Gourmet (Promenade), Inc. and Bagel Gourmet (Weston),
Inc., with Bagel Gourmet (Weston), Inc. as the surviving corporation. Bagel
Gourmet (Weston), Inc. then changed its name to Bagel Gourmet, Inc.
Offerdahl's Bagel Gourmet, Inc. was formed December 31, 1994 through the
merger of Bagel Gourmet Production, Inc. and Bagel Gourmet, Inc. All the
companies are under common control. All material intercompany accounts and
transactions have been eliminated in combination.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
The provision for depreciation and amortization has been calculated using
the straight-line method. The following represents the useful lives over which
the assets are depreciated and amortized:
<TABLE>
<S> <C>
Leasehold improvements........................................ 10-15 years
Furniture, fixtures, and equipment............................ 5-7 years
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
Revenue Recognition
Revenue from sales is recognized in the period the related food and beverage
products are sold.
Income Taxes
The Company is organized as a Subchapter S corporation for federal and state
income tax purposes. Any taxable income or loss is the responsibility of the
individual stockholders.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
3. COMMITMENTS
The Company leases its corporate offices, store premises and commissary
under various noncancelable operating lease agreements. Lease terms are
generally five years with two or three five-year renewal options. Most of
these leases contain escalation clauses and common area maintenance charges.
Total rent expense was approximately $168,000 in 1993, $264,000 in 1994, and
$97,000 from January 1, 1995 through April 2, 1995.
4. SALE OF ASSETS
In March 1995, the Company sold certain of its net assets in exchange for
consideration with a market value of approximately $10.4 million.
F-45
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Baltimore Bagel Co.:
We have audited the accompanying statements of operations and cash flows of
Baltimore Bagel Co. (a California corporation) for the years ended December
31, 1993 and 1994 and the period from January 1, 1995 to August 10, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
Baltimore Bagel Co. for the years ended December 31, 1993 and 1994 and the
period from January 1, 1995 to August 10, 1995 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
April 24, 1996
F-46
<PAGE>
BALTIMORE BAGEL CO.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIOD FROM
JANUARY 1, 1995 TO AUGUST 10, 1995
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, PERIOD FROM
---------------------- JANUARY 1, 1995
1993 1994 TO AUGUST 10, 1995
---------- ---------- ------------------
<S> <C> <C> <C>
Net Sales............................ $6,365,586 $7,714,995 $5,760,017
Cost and Expenses:
Cost of products sold.............. 1,887,879 2,378,824 1,857,310
Salaries and benefits.............. 2,550,276 2,623,055 2,033,937
General and administrative......... 1,762,373 2,138,286 1,614,783
---------- ---------- ----------
Total costs and expenses......... 6,200,528 7,140,165 5,506,030
---------- ---------- ----------
Income from Operations............... 165,058 574,830 253,987
Other Income (Expense):
Interest expense................... (40,101) (36,106) (13,100)
Interest income.................... 11,667 12,766 16,261
Other income (expense), net........ (80) 29,743 (21,027)
---------- ---------- ----------
Total other income (expense)..... (28,514) 6,403 (17,866)
---------- ---------- ----------
Net Income........................... $ 136,544 $ 581,233 $ 236,121
========== ========== ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-47
<PAGE>
BALTIMORE BAGEL CO.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND FOR THE PERIOD FROM
JANUARY 1, 1995 TO AUGUST 10, 1995
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD FROM
-------------------- JANUARY 1, 1995
1993 1994 TO AUGUST 10, 1995
--------- --------- ------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.......................... $ 136,544 $ 581,233 $ 236,121
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization..... 206,353 205,828 148,926
Loss on disposal of property and
equipment........................ 26,417 -- 16,619
Changes in assets and liabilities:
Accounts receivable............. (3,140) (8,956) 3,254
Inventories..................... (18,263) (1,097) 823
Prepaid expenses and other
current assets................. 4,518 (25,815) 16,677
Accounts payable and accrued
expenses....................... 21,703 67,220 42,713
Other assets.................... -- (4,950) 10,343
--------- --------- ---------
Net cash provided by operating
activities................... 374,132 813,463 475,476
Cash Flows from Investing Activities:
Purchases of property and equipment. (46,464) (480,908) (217,774)
Proceeds from sale of property and
equipment.......................... -- -- 29,004
--------- --------- ---------
Net cash used in investing
activities................... (46,464) (480,908) (188,770)
Cash Flows from Financing Activities:
Distributions to stockholders....... -- -- (823,950)
Proceeds from long-term obligations. 364,123 436,566 149,880
Repayment of long-term obligations.. (375,621) (764,837) (105,381)
--------- --------- ---------
Net cash used in financing
activities................... (11,498) (328,271) (779,451)
--------- --------- ---------
Net increase (decrease) in cash and
equivalents.......................... 316,170 4,284 (492,745)
Cash and equivalents, beginning of
period............................... 172,291 488,461 492,745
--------- --------- ---------
Cash and equivalents, end of period... $ 488,461 $ 492,745 $ --
========= ========= =========
Supplemental Cash Flow Information:
Interest Paid....................... $ 40,101 $ 36,106 $ 13,100
========= ========= =========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-48
<PAGE>
BALTIMORE BAGEL CO.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
The Company operates a chain of bagel stores in southern California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
The provision for depreciation and amortization has been calculated using
the straight-line method. The following represents the useful lives over which
the assets are depreciated and amortized:
<TABLE>
<S> <C>
Leasehold improvements......................................... 5-18 years
Furniture, fixtures, and equipment............................. 3-7 years
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
Revenue Recognition
Revenue from sales is recognized in the period the related food and beverage
products are sold.
Income Taxes
The Company is organized as a Subchapter S corporation for federal and state
income tax purposes. Any taxable income or loss is the responsibility of the
individual stockholders.
Employee Benefit Plan
The Company has a 401(k) plan for which all full-time employees participate.
Company contributions were approximately $4,800 in 1993, $11,300 in 1994, and
$4,700 for the period ended August 10, 1995.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
3. COMMITMENTS
The Company leases its corporate offices, store premises and commissary
under various noncancelable operating lease agreements. Lease terms are
generally five years with one or two five-year renewal options. Most of these
leases contain escalation clauses and common area maintenance charges. Total
rent expense was approximately $479,500 in 1993, $535,900 in 1994, and
$473,500 for the period ended August 10, 1995.
4. RELATED-PARTY TRANSACTIONS
The Company leases its corporate offices from an entity controlled by the
stockholders. Total rent paid under this lease was approximately $79,900 in
1993, $81,100 in 1994, and $59,700 for the period ended August 10, 1995.
5. SALE OF ASSETS
In August 1995, the Company sold substantially all of its net assets in
exchange for consideration with a market value of approximately $11.8 million.
F-49
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION OF EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
The pro forma consolidated statements of operations for the fiscal year
ended December 31, 1995 and for the two quarters ended July 14, 1996 give
effect to the acquisitions of Noah's New York Bagel's, Inc., Bagel & Bagel,
Inc., Baltimore Bagel Co., Brackman Brothers, Inc., and Offerdahl's Bagel
Gourmet, Inc. as of December 26, 1994 (the beginning of the Company's 1995
fiscal year). The pro forma consolidated financial statements are based upon
the assumptions set forth in the accompanying notes to such statements. The
pro forma adjustments are based upon available information and assumptions
that management believes are reasonable under the circumstances.
The pro forma consolidated financial statements should be read in
conjunction with the related historical financial statements and are not
necessarily indicative of the results that would have actually occurred had
the acquisitions been consummated on the dates or for the periods indicated or
which may occur in the future.
F-50
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOAH'S NEW
YORK OFFERDAHL'S BRACKMAN
EINSTEIN/NOAH BAGELS, BAGEL & BALTIMORE BAGEL BROTHERS,
BAGEL CORP. INC. BAGEL, INC. BAGEL CO. GOURMET, INC. INC. PRO FORMA UNAUDITED
(HISTORICAL) (HISTORICAL) (HISTORICAL) (HISTORICAL) (HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA
------------- ----------- ----------- ----------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Company-operated
stores........... $ 25,685 $32,323 $1,887 $5,760 $1,712 $2,283 $ 69,650
Royalties and
franchise-related
fees............. 738 -- -- -- -- -- 738
-------- ------- ------ ------ ------ ------ --------
26,423 32,323 1,887 5,760 1,712 2,283 70,388
Costs and
Expenses:
Cost of products
sold............. 8,239 12,118 736 1,857 1,010 1,125 25,085
Salaries and
benefits......... 13,531 12,388 535 2,034 777 282 29,547
General and
administrative... 21,230 8,561 653 1,615 228 497 2,766 (1) 35,550
Write-off of
intangible
assets........... 26,575 -- -- -- -- -- 26,575
-------- ------- ------ ------ ------ ------ --------
Total costs and
expenses.......... 69,575 33,067 1,924 5,506 2,015 1,904 116,757
-------- ------- ------ ------ ------ ------ --------
Income (Loss) from
Operations........ (43,152) (744) (37) 254 (303) 379 (46,369)
Other Income
(Expense):
Interest income
(expense), net.... (1,281) (79) (79) 3 (6) -- (9,090)(2) (10,532)
Other income
(expense), net.... 717 (17) (14) (21) -- -- 665
-------- ------- ------ ------ ------ ------ --------
Total other
expense.......... (564) (96) (93) (18) (6) -- (9,867)
-------- ------- ------ ------ ------ ------ --------
Income (Loss)
Before Income
Taxes............. (43,716) (840) (130) 236 (309) 379 (56,236)
Provision for
Income Taxes...... -- -- -- -- -- 98 98 (3) --
-------- ------- ------ ------ ------ ------ --------
Net Income (Loss). $(43,716) $ (840) $ (130) $ 236 $ (309) $ 281 $(56,236)
======== ======= ====== ====== ====== ====== ========
Net loss per
common and
equivalent share.. $ (4.54) $ (5.82)
======== ========
Weighted average
number of common
and equivalent
shares
outstanding....... 9,659 9,679 (4)
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of this statement.
F-51
<PAGE>
EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWO QUARTERS ENDED JULY 14, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOAH'S NEW
EINSTEIN/NOAH YORK BAGELS,
BAGEL CORP. INC. PRO FORMA UNAUDITED
(HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA
------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Company-operated stores..... $31,489 $3,304 $34,793
Royalties and franchise-
related fees............... 9,096 -- 9,096
------- ------ -------
40,585 3,304 43,889
Costs and Expenses:
Cost of products sold....... 10,078 1,118 11,196
Salaries and benefits(5).... 14,444 2,361 16,805
General and administrative.. 15,030 795 213 (1) 16,038
------- ------ -------
Total costs and expenses.. 39,552 4,274 44,039
------- ------ -------
Income (Loss) from Operations. 1,033 (970) (150)
Other Income (Expense):
Interest expense, net....... (5,984) (4) (699)(2) (6,687)
Other income, net........... 1,929 4 1,933
------- ------ -------
Total other expense....... (4,055) -- (4,754)
------- ------ -------
Net Loss...................... $(3,022) $ (970) $(4,904)
======= ====== =======
Net loss per common and
equivalent share............. $ (0.23) $ (0.36)
======= =======
Weighted average number of
common and equivalent shares
outstanding.................. 14,261 14,261
======= =======
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of this statement.
F-52
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. To record amortization on the intangible assets acquired in connection with
the acquisition of Noah's New York Bagel's, Inc. (Noah's) over periods
ranging from 10 to 35 years.
2. To adjust interest expense to reflect the acquisition of Noah's as of the
beginning of the Company's fiscal year.
3. To adjust the provision for income taxes based upon the consolidated loss.
4. The pro forma weighted average number of shares for 1995 gives effect to
the issuance of 1,959,125 shares of common stock and 6,250 shares of Series
A preferred stock deemed to be issued as of December 26, 1994 (the
beginning of the Company's 1995 fiscal year) pursuant to the acquisition of
the common stock of Brackman Brothers, Inc. and certain net assets of Bagel
& Bagel, Inc., Baltimore Bagel Co. and Offerdahl's Bagel Gourmet, Inc. and
all other shares of common stock, options and warrants issued during the
year prior to the initial public offering. The options and warrants issued,
and shares of common stock sold, are deemed outstanding for the entire
reporting period pursuant to Staff Accounting Bulletin No. 83.
5. Noah's salaries and benefits include approximately $954,000 of stock option
expense attributable to the acceleration of the vesting of compensatory
stock options. The acceleration of the vesting occurred immediately before
the acquisition of Noah's by Einstein/Noah Bagel Corp.
Note: Subsequent to the acquisitions of Noah's, Bagel & Bagel, Inc., Baltimore
Bagel Co., Offerdahl's Bagel Gourmet, Inc. and Brackman Brothers, Inc., the
Company sold all of the stores acquired in these acquisitions, with the
exception of the Baltimore Bagel Co. stores, to area developers of the
Company. Consequently, the store revenue (and related operating expenses)
reflected in the pro forma consolidated statement of operations will be
replaced with revenue (and operating expenses) of the Company as a franchisor
and lender.
F-53
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be borne by the
Company in connection with the registration, issuance, and distribution of the
securities being registered hereunder, other than underwriting discounts and
commissions. All amounts are estimates except the SEC registration fee, the
NASD filing fee, and the Nasdaq listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $105,917
Blue Sky fees and expenses...................................... 10,000
Printing and engraving expenses................................. 25,000
Legal fees and expenses......................................... 50,000
Accounting fees and expenses.................................... 20,000
Miscellaneous................................................... 4,083
--------
Total....................................................... $215,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes
indemnification of directors, officers, employees, and agents of the Company;
allows the advancement of costs of defending against litigation; and permits
companies incorporated in Delaware to purchase insurance on behalf of
directors, officers, employees, and agents against liabilities whether or not
in the circumstances such companies would have the power to indemnify against
such liabilities under the provisions of the statute.
The Company's Restated Certificate of Incorporation provides for
indemnification of the Company's officers and directors to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law. The Company
intends to obtain directors and officers insurance covering its executive
officers and directors.
The Company's Restated Certificate of Incorporation eliminates, to the
fullest extent permitted by Delaware law, liability of a director to the
Company or its stockholders for monetary damages for a breach of such
director's fiduciary duty of care except for liability where a director (a)
breaches his or her duty of loyalty to the Company or its stockholders, (b)
fails to act in good faith or engages in intentional misconduct or knowing
violation of law, (c) authorizes payment of an illegal dividend or stock
repurchase, or (d) obtains an improper personal benefit. While liability for
monetary damages has been eliminated, equitable remedies such as injunctive
relief or rescission remain available. In addition, a director is not relieved
of his or her responsibilities under any other law, including the federal
securities laws.
Insofar as indemnification by the Company for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers, and controlling persons of the Company pursuant to the
foregoing provisions, the Company has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On March 24, 1995, in connection with the formation of the Company, the
Company issued to the shareholders of Brackman Bros., Inc. ("Brackman") and to
Bagel & Bagel, Inc. ("Bagel & Bagel") an aggregate of 573,750 and 573,750
shares of Common Stock, respectively, as partial consideration for all of the
outstanding shares of Brackman and substantially all of the assets of Bagel &
Bagel. On such date, the Company also sold to certain accredited investors an
aggregate of 3,536,361 shares of Common Stock for $20.8 million in cash. The
above-mentioned securities were sold without registration under the Securities
Act in reliance on Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated under the Securities Act.
On March 31, 1995, in connection with the formation of the Company, the
Company issued to Offerdahl's Bagel Gourmet, Inc. ("Offerdahl's") an aggregate
of 885,996 shares of Common Stock as partial consideration for substantially
all of the assets of Offerdahl's and a non-recourse promissory note in the
aggregate amount of $437,497. Such securities were sold without registration
under the Securities Act in reliance on Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated under the Securities Act.
On August 10, 1995, the Company issued to the shareholder of Baltimore Bagel
Co. ("Baltimore Bagel") an aggregate of 6,250 shares of Series A Preferred
Stock in connection with the merger of Baltimore Bagel into a wholly owned
subsidiary of the Company. Such shares were issued without registration under
the Securities Act in reliance on Section 4(2) of the Securities Act and Rule
506 of Regulation D promulgated under the Securities Act.
On December 29, 1995, the Company sold a warrant to purchase an aggregate of
1,012,500 shares of Common Stock to Bagel Store Development Funding, L.L.C.,
formerly known as Einstein Bros. Equity Funding, L.L.C., at an exercise price
of $6.47 per share. The cash purchase price for the warrant was $45,000. Such
warrant was sold without registration under the Securities Act in reliance on
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
under the Securities Act.
On January 15, 1996, the Company sold warrants to purchase an aggregate of
1,237,050 shares of Common Stock to certain accredited investors at an
exercise price of $6.47 per share. The aggregate purchase price for the
warrants was $1,100, which purchase price was paid by delivery of promissory
notes from the accredited investors. An aggregate of 925,648 shares of Common
Stock have been issued pursuant to the exercise of certain of such warrants
for an aggregate exercise price of $5,988,943. Such warrants, and the shares
of Common Stock issued upon exercise thereof, were sold without registration
under the Securities Act in reliance on Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated under the Securities Act.
On February 1, 1996, the Company sold to certain accredited investors (all
of whom were former shareholders of Noah's New York Bagels, Inc.) an aggregate
of 855,225 shares of Common Stock for a cash purchase price of $10.52 per
share. Such shares were issued without registration under the Securities Act
in reliance on Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated under the Securities Act.
On April 5, 1996, the Company sold to Mark A. Goldston, President and Chief
Executive Officer and a director of the Company, 28,508 shares of Common Stock
for a cash purchase price of $10.52 per share. Such shares were sold without
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated under the Securities
Act.
On May 28, 1996, in connection with entering into its secured revolving
credit facility, the Company issued a warrant to purchase an aggregate of
15,375 shares of Common Stock to one accredited investor at an exercise price
of $11.58. Such warrant was issued without registration under the Securities
Act and Rule 506 of Regulation D promulgated under the Securities Act.
Since its inception, the Company has granted options for 3,980,594 shares of
Common Stock pursuant to its stock option plans at exercise prices ranging
from $5.88 to $15.00 per share, of which options to purchase 304,805 shares of
Common Stock have been exercised. Such options were issued without
registration under the Securities Act in reliance on Section 4(2) and Rule 701
promulgated under the Securities Act.
II-2
<PAGE>
On August 7, 1996, the Company sold to Boston Chicken, Inc. 2,000,000 shares
of Common Stock for an aggregate purchase price of $31,620,000 without
registration under the Securities Act in reliance on Section 4(2) under the
Securities Act and Rule 506 of Regulation D promulgated under the Securities
Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The exhibits to the Registration Statement are listed in the Exhibit
Index which appears elsewhere in this Registration Statement and is hereby
incorporated herein by reference.
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts............. II-6
All other schedules are omitted because of the absence of the condition
under which they are required or because the information is included in the
consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
the Company pursuant to the provisions described under Item 14 above or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer, or
controlling person of the Company in the successful defense of any action,
suit, or proceeding) is asserted against the Company by such director,
officer, or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT, OR AMENDMENT THERETO, TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN GOLDEN,
COLORADO, ON SEPTEMBER 19, 1996.
Einstein/Noah Bagel Corp.
/s/ Mark R. Goldston
By:__________________________________
Mark R. Goldston
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT, OR AMENDMENT THERETO, HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON SEPTEMBER 19, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Mark R. Goldston President, Chief Executive Officer and
___________________________________________ Director
Mark R. Goldston (Principal Executive Officer)
/s/ W. Eric Carlborg Senior Vice President--Finance (Principal
___________________________________________ Financial and Accounting Officer)
W. Eric Carlborg
/s/ Noah C. Alper Director
___________________________________________
Noah C. Alper
/s/ Scott A. Beck Director
___________________________________________
Scott A. Beck
/s/ Kyle T. Craig Director
___________________________________________
Kyle T. Craig
Director
___________________________________________
M. Laird Koldyke
/s/ Gail A. Lozoff Director
___________________________________________
Gail A. Lozoff
/s/ John H. Muehlstein, Jr. Director
___________________________________________
John H. Muehlstein, Jr.
___________________________________________ Director
John H. Offerdahl
/s/ Lloyd D. Ruth Director
___________________________________________
Lloyd D. Ruth
/s/ David G. Stanchak Director
___________________________________________
David G. Stanchak
</TABLE>
II-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Einstein/Noah Bagel Corp.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Einstein/Noah Bagel Corp. and
subsidiaries as of December 31, 1995 for the period from March 24, 1995
(inception) to December 31, 1995 included in this Registration Statement and
have issued our report thereon dated July 16, 1996. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The supplemental schedule listed in Part II, Item 16 of this
Registration Statement is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
supplemental schedule has been subjected to the auditing procedures applied in
the audit of the basic financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth therein
in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Denver, Colorado
July 16, 1996
II-5
<PAGE>
SCHEDULE II
EINSTEIN/NOAH BAGEL CORP.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED BALANCE
AT TO AT
BEGINNING COSTS AND END OF
CLASSIFICATIONS OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------------- --------- --------- ---------- -------
<S> <C> <C> <C> <C>
Period from March 24, 1995 (inception)
through December 31, 1995:
Allowance for Doubtful Accounts....... $-- $81,000 $-- $81,000
</TABLE>
II-6
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT(+) PAGE
------- ------------------------- ----
<C> <S> <C>
2.1(a) Agreement to Contribute Shares dated February 17, 1995 among
the Company, Brackman Brothers, Inc. ("Brackman") and the
shareholders of Brackman (the "Brackman Agreement")
(incorporated by reference to Exhibit 2.1(a) to the Company's
Registration Statement on Form S-1 (Registration No. 333-
04725)).
2.1(b) Amendment to Agreement to Contribute Shares dated March 24,
1995 among the Company, Brackman and the shareholders of
Brackman (the "Amendment to Brackman Agreement") (incorporated
by reference to Exhibit 2.1(b) to the Company's Registration
Statement on Form S-1 (Registration No. 333-04725)).
2.2 Agreement to Contribute Assets dated March 2, 1995 among the
Company, Bagel & Bagel, Inc. and Richard Lozoff (the "Bagel &
Bagel Agreement") (incorporated by reference to Exhibit 2.2 to
the Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
2.3 Agreement to Contribute Assets dated March 23, 1995 among the
Company, Offerdahl's Bagel Gourmet, Inc. ("Offerdahl's") and
the stockholders of Offerdahl's (the "Offerdahl's Agreement")
(incorporated by reference to Exhibit 2.3 to the Company's
Registration Statement on Form S-1 (Registration No. 333-
04725)).
2.4 Agreement and Plan of Merger dated August 10, 1995 among the
Company, Baltimore Bagel Co., BBC Acquiring Corporation and
Michael E. Brau and Rachel C. Brau, individually and as
trustees of the Brau Living Trust dated January 23, 1990 (the
"Baltimore Bagel Agreement") (incorporated by reference to
Exhibit 2.4 to the Company's Registration Statement on Form S-
1 (Registration No. 333-04725)).
2.5 Merger Agreement dated as of January 22, 1996, as amended,
among the Company, NNYB Acquisition Corporation, Noah's New
York Bagels, Inc. ("Noah's"), and the shareholders and
optionholders of Noah's (the "Noah's Agreement") (incorporated
by reference to Exhibit 2.5 to the Company's Registration
Statement on Form S-1 (Registration No. 333-04725)).
3.1 Restated Certificate of Incorporation of the Company
("Certificate of Incorporation") (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-
1 (Registration No. 333-04725)).
3.2 Amended and Restated Bylaws of the Company ("Bylaws")
(incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Registration No. 333-
04725)).
4.1 Certificate of Incorporation (included in Exhibit 3.1).
4.2 Bylaws (included in Exhibit 3.2).
4.3 Certificate representing Common Stock (incorporated by
reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-1 (Registration No. 333-04725)).
</TABLE>
- --------
(+)In the case of incorporation by reference to documents filed by the Company
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
the Company's file number under that Act is 0-21097. In the case of
incorporation by reference to documents filed by Boston Chicken, Inc.
("Boston Chicken") under the Exchange Act, Boston Chicken's file number
under that Act is 0-22802.
Exhibit-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT(+) PAGE*
------- ------------------------- ----
<C> <S> <C>
4.4 Amended and Restated Registration Rights Agreement dated
February 1, 1996 by and among the Company and certain
stockholders of the Company (incorporated by reference to
Exhibit 4.4 to the Company's Registration Statement on Form
S-1 (Registration No. 333-04725)).
4.5 Concurrent Private Placement Agreement dated August 1, 1996
between Boston Chicken, Inc. ("Boston Chicken") and the
Company ("Concurrent Private Placement Agreement")
(incorporated by reference to Exhibit 10.3 to Boston
Chicken's quarterly report on Form 10-Q for the quarter ended
July 14, 1996).
4.6 Registration Agreement dated August 1, 1996 between Boston
Chicken and the Company (incorporated by reference to Exhibit
10.3 to Boston Chicken's quarterly report on Form
10-Q for the quarter ended July 14, 1996).
5.1 Opinion of Bell, Boyd & Lloyd.
10.1(a) Amended and Restated Loan Agreement dated May 17, 1996 between
Boston Chicken and the Company (the "Loan Agreement")
(incorporated by reference to Exhibit 10.1(a) to the
Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
10.1(b) First Amendment to the Loan Agreement dated July 19, 1996
(incorporated by reference to Exhibit 10.1(b) to the
Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
10.1(c) Second Amendment to the Loan Agreement dated September 16,
1996.
10.2 Concurrent Private Placement Agreement (included in Exhibit
4.5).
10.3(a) Secured Demand Note of the Company dated January 30, 1996
payable to Boston Chicken ("Secured Demand Note")
(incorporated by reference to Exhibit 10.23(d) to Boston
Chicken's 1995 annual report on Form 10-K).
10.3(b) First Amendment to Secured Demand Note dated as of March 7,
1996 (incorporated by reference to Exhibit 10.3(b) to the
Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
10.3(c) Second Amendment to Secured Demand Note dated as of September
16, 1996 (included in Exhibit 10.1(c)).
10.4 Brackman Agreement and Amendment to Brackman Agreement
(included in Exhibits 2.1(a) and 2.1(b)).
10.5 Bagel & Bagel Agreement (included in Exhibit 2.2).
10.6 Offerdahl's Agreement (included in Exhibit 2.3).
10.7 Baltimore Bagel Agreement (included in Exhibit 2.4).
10.8 Noah's Agreement (included in Exhibit 2.5).
10.9(a) Secured Credit Agreement dated as of May 17, 1996 among the
Company, the Lenders named therein, and Bank of America
Illinois, as Agent ("Secured Credit Agreement") (incorporated
by reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (Registration No. 333-04725)).
10.9(b) First Amendment and Waiver to Secured Credit Agreement dated
August 27, 1996.
10.10 The Company's Amended and Restated 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (Registration No.
333-04725)).
</TABLE>
- --------
(+)In the case of incorporation by reference to documents filed by the Company
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
the Company's file number under that Act is 0-21097. In the case of
incorporation by reference to documents filed by Boston Chicken under the
Exchange Act, Boston Chicken's file number under that Act is 0-22802.
Exhibit-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT(+) PAGE*
------- ------------------------- ----
<C> <S> <C>
10.11 The Company's 1996 Stock Option Plan for Non-Employee
Directors (incorporated by reference to Exhibit 10.11 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
10.12(a) Amended and Restated Accounting and Administration Services
Agreement dated as of May 28, 1996 between Boston Chicken
and the Company (incorporated by reference to Exhibit
10.12(a) to the Company's Registration Statement on Form S-1
(Registration No. 333-04725)).
10.12(b) First Amendment to Amended and Restated Accounting and
Administration Services Agreement dated as of June 17, 1996
between Boston Chicken and the Company (incorporated by
reference to Exhibit 10.12(b) to the Company's Registration
Statement on Form S-1 (Registration No. 333-04725)).
10.13(a) Financial Services Agreement dated as of March 24, 1995
between Boston Chicken and the Company ("Financial Services
Agreement") (incorporated by reference to Exhibit 10.15 to
Boston Chicken's 1994 annual report on Form 10-K).
10.13(b) First Amendment to Financial Services Agreement dated as of
March 7, 1996 (incorporated by reference to Exhibit 10.13(b)
to the Company's Registration Statement on Form S-1
(Registration No. 333-04725)).
10.13(c) Financial Services Agreement Termination Agreement effective
as of May 20, 1996 (incorporated by reference to Exhibit
10.13(c) to the Company's Registration Statement on Form S-1
(Registration No. 333-04725)).
10.14(a) Amended and Restated Real Estate Services Agreement dated as
of May 28, 1996 between Boston Chicken and the Company
(incorporated by reference to Exhibit 10.14(a) to the
Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
10.14(b) Amended and Restated Real Estate Services Agreement
Termination Agreement dated as of June 17, 1996 between the
Company and Boston Chicken (incorporated by reference to
Exhibit 10.14(b) to the Company's Registration Statement on
Form S-1 (Registration No. 333-04725)).
10.15(a) Amended and Restated Computer and Communications Systems
Services Agreement dated as of June 17, 1996 between Boston
Chicken and the Company (incorporated by reference to
Exhibit 10.15(a) to the Company's Registration Statement on
Form S-1 (Registration No. 333-04725)).
10.15(b) First Amendment to the Amended and Restated Computer and
Communications Systems Services Agreement dated as of June
17, 1996 between Boston Chicken and the Company
(incorporated by reference to Exhibit 10.15(b) to the
Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
10.16 Assignment and Reimbursement Agreement dated March 24, 1995
between Boston Chicken and the Company (incorporated by
reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1 (Registration No. 333-04725)).
10.17(a) Employment Agreement dated March 24, 1995 between Daniel V.
Colangelo and the Company (incorporated by reference to
Exhibit 10.17(a) to the Company's Registration Statement on
Form S-1 (Registration No. 333-04725)).
</TABLE>
- --------
(+)In the case of incorporation by reference to documents filed by the Company
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
the Company's file number under that Act is 0-21097. In the case of
incorporation by reference to documents filed by Boston Chicken under the
Exchange Act, Boston Chicken's file number under that Act is 0-22802.
Exhibit-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT(+) PAGE*
------- ------------------------- ----
<C> <S> <C>
10.17(b) Amendment to Employment Agreement and Transition and
Consulting agreement dated January 16, 1996 between Daniel
V. Colangelo and the Company, as amended March 6, 1996
(incorporated by reference to Exhibit 10.17(b) to the
Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
10.18 Letter Agreement dated April 5, 1996 between Mark R.
Goldston and the Company (incorporated by reference to
Exhibit 10.18 to the Company's Registration Statement on
Form S-1 (Registration No. 333-04725)).
10.19 Employment Agreement dated March 24, 1995 between Gail
Lozoff and the Company (incorporated by reference to
Exhibit 10.19 to the Company's Registration Statement on
Form S-1 (Registration No. 333-04725)).
10.20 Secured Loan Agreement dated October 2, 1995 between Doc's
Cheese Company, L.L.C. ("Doc's") and the Company
(incorporated by reference to Exhibit 10.20 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
10.21(++) Supply Agreement dated October 2, 1995 between Doc's and the
Company (incorporated by reference to Exhibit 10.21 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
10.22 License Agreement dated October 2, 1995 between Doc's and
the Company (incorporated by reference to Exhibit 10.22 to
the Company's Registration Statement on Form S-1
(Registration No. 333-04725)).
10.23 Option agreement dated October 2, 1995 between Doc's and the
Company (incorporated by reference to Exhibit 10.23 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
10.24(++) Project and Approved Supplier Agreement dated May 24, 1996
among the Company, Harlan Bagel Supply Company, L.L.C.
("Harlan Bagel Supply"), Harlan Bakeries, Inc. ("Harlan
Bakeries") and Hal P. Harlan, Hugh P. Harlan and Doug H.
Harlan (the "Harlans") (incorporated by reference to
Exhibit 10.24 to the Company's Registration Statement on
Form S-1 (Registration No. 333-04725)).
10.25 Option Agreement dated August 27, 1996 among Harlan Bagel
Supply, the Harlans and the Company.
10.26 Right of First Refusal Agreement dated August 27, 1996 among
Harlan Bakeries, the Harlans and the Company.
10.27 Aircraft dry leases dated January 16, 1996 between the
Company and Bowana Aviation, Inc. (incorporated by
reference to Exhibit 10.27 to the Company's Registration
Statement on Form S-1 (Registration No. 333-04725)).
10.28 Fourth Amended and Restated Limited Liability Company
Agreement of Bagel Store Development Funding, L.L.C.
("Bagel Funding") dated as of July 1, 1996.
10.29 Warrant Purchase Agreement dated as of December 29, 1995
between the Company and Bagel Funding (including form of
warrant to purchase 1,012,500 shares of Common Stock)
(incorporated by reference to Exhibit 10.29 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
</TABLE>
- --------
(+)In the case of incorporation by reference to documents filed by the Company
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
the Company's file number under that Act is 0-21097. In the case of
incorporation by reference to documents filed by Boston Chicken under the
Exchange Act, Boston Chicken's file number under that Act is 0-22802.
(++)Confidential treatment requested.
Exhibit-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT(+) PAGE*
------- ------------------------- ----
<C> <S> <C>
10.30 Form of agreement between the Company and Bagel Funding
relating to the Company's purchase of Bagel Funding's
interests in area developers (incorporated by reference to
Exhibit 10.30 to the Company's Registration Statement on
Form S-1 (Registration No. 333-04725)).
10.31 Form of Area Development Agreement between the Company and
its Area Developers (included in Exhibit 99).
10.32 Form of Franchise Agreement between the Company and its Area
Developers (included in Exhibit 99).
10.33 Form of Secured Loan Agreement between the Company and its
Area Developers (included in Exhibit 99).
10.34 Employment Agreement dated March 31, 1995 between John A.
Offerdahl and the Company (incorporated by reference to
Exhibit 10.34 to the Company's Registration Statement on
Form S-1 (Registration No. 333-04725)).
10.35 Office Lease Agreement dated as of July 1, 1996 between the
Company and Boston Chicken (incorporated by reference to
Exhibit 10.35 to the Company's Registration Statement on
Form S-1 (Registration No. 333-04725)).
10.36 Consulting Agreement dated as of July 1, 1996 between Kyle T.
Craig and the Company (incorporated by reference to Exhibit
10.36 to the Company's Registration Statement on Form S-1
(Registration No. 333-04725)).
10.37(a) Aircraft Dry Sublease and related Letter Agreement dated as
of July 9, 1996 between the Company and Boston Chicken
(incorporated by reference to Exhibit 10.37(a) to the
Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
10.37(b) Aircraft Dry Sublease and related Letter Agreement dated as
of July 9, 1996 between the Company and Boston Chicken
(incorporated by reference to Exhibit 10.37(b) to the
Company's Registration Statement on Form S-1 (Registration
No. 333-04725)).
11 Statement re: Computation of Earnings (Loss) Per Share
(incorporated by reference to Exhibit 11 to the Company's
quarterly report on Form 10-Q for the quarter ended July 14,
1996).
21.1 Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Company's Registration Statement on Form
S-1 (Registration No. 333-04725)).
23.1 Consent of Arthur Andersen LLP with respect to the Audited
Consolidated Financial Statements of the Company.
23.2 Consent of Deloitte & Touche LLP with respect to the Audited
Consolidated Financial Statements of Noah's New York Bagels,
Inc.
23.3 Consent of Mayer Hoffman McCann L.C. with respect to the
Audited Financial Statements of Bagel & Bagel, Inc.
23.4 Consent of Arthur Andersen LLP with respect to the Audited
Combined Financial Statements of Offerdahl's Bagel Gourmet,
Inc.
23.5 Consent of Arthur Andersen LLP with respect to the Audited
Financial Statements of Baltimore Bagel Co.
23.6 Consent of Bell, Boyd & Lloyd (included in Exhibit 5.1).
27 Financial Data Schedule (incorporated by reference to Exhibit
27 to the Company's quarterly report on Form 10-Q for the
quarter ended July 14, 1996).
99 Uniform Franchise Offering Circular, as amended as of
September 1, 1996.
</TABLE>
- --------
(+)In the case of incorporation by reference to documents filed by the Company
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
the Company's file number under that Act is 0-21097. In the case of
incorporation by reference to documents filed by Boston Chicken under the
Exchange Act, Boston Chicken's file number under that Act is 0-22802.
Exhibit-5
<PAGE>
Exhibit 5.1
September 19, 1996
Einstein/Noah Bagel Corp.
14123 Denver West Parkway
Golden, Colorado 80401
REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have represented Einstein/Noah Bagel Corp., a Delaware corporation (the
"Company"), in connection with the preparation of a registration statement on
Form S-1 (the "Registration Statement"), filed under the Securities Act of 1933,
as amended (the "Act"), for the purpose of registering under the Act an
aggregate of 9,908,327 shares of common stock, $.01 par value (the "Common
Stock"), of the Company, 8,569,050 shares of which (the "Outstanding Shares")
are owned by certain stockholders of the Company and 1,339,277 shares of which
(the "Warrant Shares") are issuable pursuant to outstanding warrants issued by
the Company (the "Warrants"). In this connection, we have examined originals,
or copies certified or otherwise identified to our satisfaction, of such
documents, corporate and other records, certificates and other papers, including
the Registration Statement and pertinent resolutions of the board of directors
of the Company, as we deemed it necessary to examine for the purpose of this
opinion.
Based upon such examination, it is our opinion that:
1. The Outstanding Shares are legally issued, fully paid and
non-assessable shares of Common Stock of the Company.
2. The Warrant Shares, when issued and paid for upon the exercise of the
Warrants in accordance with the terms thereof, will, upon such
issuance, constitute legally issued, fully paid, and nonassessable
shares of Common Stock of the Company.
We consent to the filing of this opinion as an exhibit to the Registration
Statement. In giving this consent, we do not admit that we are within the
category of persons whose consent is required by Section 7 of the Securities Act
of 1933.
Very truly yours,
/s/ Bell, Boyd & Lloyd
<PAGE>
Exhibit 10.1(c)
SECOND AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
This Second Amendment to Amended and Restated Loan Agreement ("Second
Amendment") is made and entered into as of the 16th day of September, 1996 by
and between Einstein/Noah Bagel Corp. (formerly known as Einstein Bros. Bagels,
Inc.), a Delaware corporation (the "Company"), and Boston Chicken, Inc., a
Delaware corporation ("Boston Chicken").
RECITALS
--------
A. The Company and Boston Chicken are parties to an Amended and
Restated Secured Loan Agreement dated as of May 17, 1996, as amended by First
Amendment to Amended and Restated Loan Agreement dated as of July 19, 1996 (the
"Loan Agreement"), pursuant to which Boston Chicken has agreed, among other
things, to make the Company a Convertible Loan, which on June 17, 1996 was
converted by Boston Chicken into common stock of the Company, and a $50,000,000
Nonconvertible Loan, upon the terms and subject to the conditions set forth
therein.
B. The Company now desires to reduce the interest rate applicable to
the Nonconvertible Loan, and Boston Chicken is willing to reduce the interest
rate, on the terms and conditions set forth herein.
COVENANTS
---------
Based upon the above recitals, the parties agree as follows:
1.1 Amendment of Loan Agreement. Upon satisfaction by the Company of
the conditions set forth in Section 3.1 hereof, the Loan Agreement shall be
amended as of the date hereof as follows:
(1) Section 1.4(a) of the Loan Agreement is hereby amended by deleting
the figure "1%" and substituting the figure "1/2 of 1%" in place thereof.
2.1 Effect of Amendment to Loan Agreement. From and after the
effective date hereof, reference in the Loan Agreement and all other documents
executed pursuant to the Loan Agreement (as each of the foregoing is amended
hereby or pursuant hereto) to (a) the Loan Agreement shall be deemed to be
references to the Loan Agreement as amended hereby and (b) the Note shall be
deemed to be references to the Note as amended by the Second Amendment to
Nonconvertible Note of even date herewith, in the form attached hereto as
Exhibit A, to be delivered hereunder (the "Note Amendment").
<PAGE>
3.1 Effective Date; Conditions. This Second Amendment shall not
become effective until:
(1) The Company shall have executed and delivered to Boston
Chicken this Amendment and the Note Amendment;
(2) The Company shall have delivered to Boston Chicken a
certificate of the Company dated as of the effective date hereof in
substantially the form attached hereto as Exhibit B, which shall be signed by a
duly authorized officer of the Company; and
(3) The Company shall have delivered to Boston Chicken such other
documents and instruments as Boston Chicken may request in connection herewith.
4.1 Representations. To induce Boston Chicken to enter into this
Second Amendment, the Company represents to Boston Chicken as of the date hereof
that:
(1) The representations and warranties contained in Article IV of the
Loan Agreement are true and correct;
(2) No Default or Event of Default has occurred and is continuing; and
(3) This Second Amendment and the Note Amendment have each been duly
authorized by all required action on the part of the Company, and each of
this Second Amendment and the Note Amendment has been duly executed and
delivered by the Company and constitutes the legal, valid, and binding
obligation of the Company enforceable in accordance with its terms.
5.1 Definitions; Ratification. Any term used but not defined herein
or in the exhibits hereto shall have the meaning ascribed thereto in the Loan
Agreement. Except as expressly contemplated herein, the Loan Agreement and all
related certificates, and other documents, are hereby ratified and confirmed and
shall remain in full force and effect.
6.1 GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF COLORADO APPLICABLE TO
CONTRACTS MADE AND TO BE PERFORMED THEREIN WITHOUT REGARD TO THE CONFLICTS OF
LAW PROVISIONS THEREOF.
7.1 Counterparts. This Second Amendment may be executed in
counterparts, each of which shall be deemed an original, but each of which
together shall constitute but one and the same instrument.
2
<PAGE>
8.1 Headings. The headings of the sections of this Second Amendment
are inserted for convenience only and shall not be deemed to constitute a part
of this Second Amendment.
IN WITNESS WHEREOF, the parties have executed this Second Amendment to
be effective on the date provided herein.
BOSTON CHICKEN, INC. EINSTEIN/NOAH BAGEL CORP.
By: /s/ Paul A. Strasen By: /s/ Bernadette Dennehy
------------------------- -----------------------------
Title: Vice President Title: Vice President
3
<PAGE>
EXHIBIT A
<PAGE>
RIGHTS OF THE HOLDER TO RECEIVE PAYMENT HEREUNDER ARE SUBJECT TO A SUBORDINATION
AGREEMENT DATED MAY 17, 1996 EXECUTED BY BOSTON CHICKEN, INC. IN FAVOR OF BANK
OF AMERICA ILLINOIS, AS AGENT FOR CERTAIN LENDERS
SECOND AMENDMENT TO AMENDED AND RESTATED
NONCONVERTIBLE NOTE
This Second Amendment to Amended and Restated Nonconvertible Note (the
"Second Amendment") is made and entered into as of the 16th day of September,
1996 by and between Einstein/Noah Bagel Corp. (formerly known as Einstein Bros.
Bagels, Inc.), a Delaware corporation (the "Company"), and Boston Chicken, Inc.,
a Delaware corporation ("Boston Chicken").
RECITALS
--------
A. Boston Chicken and the Company have previously entered into an
Amended and Restated Loan Agreement dated as of May 17, 1996, as amended (the
"Loan Agreement"), pursuant to which Boston Chicken agreed, among other things,
to make a nonconvertible loan to the Company in the maximum principal amount of
$50,000,000, evidenced by that certain Amended and Restated Nonconvertible Note
dated May 17, 1996, as amended by First Amendment to Amended and Restated
Nonconvertible Note dated as of July 19, 1996 (the "Note") payable to the order
of Boston Chicken in the original principal amount of $50,000,000.
B. The Company and Boston Chicken have agreed to reduce the interest
rate on the Note from Bank of America Illinois' reference rate plus 1%, to the
reference rate plus 1/2 of 1%, and desire to execute this Second Amendment to
evidence such decrease in the interest rate.
NOW, THEREFORE, in consideration of the mutual promises set forth below and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Boston Chicken and the Company agree as follows:
1. The Note is hereby amended by deleting the figure "1%" from the
third paragraph thereof, and substituting the figure "1/2 of 1%" in place
thereof.
2. This Second Amendment shall become effective when the Company and
Boston Chicken shall have each executed and delivered this Second Amendment.
3. The Company represents and warrants to Boston Chicken that: (a)
the execution, delivery and performance of this Second Amendment have been duly
authorized by all necessary corporate action and will not require any consent or
approval of its stockholders,
<PAGE>
violate any provisions of any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to it or constitute a default under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which the
Company is a party or by which it or its properties may be bound or affected;
(b) this Second Amendment is the legal, valid and binding obligation of the
Company, enforceable against it in accordance with the terms thereof; and (c) no
default has occurred and is continuing or exists under the Loan Agreement or the
Note, as amended hereby, as of the effective date hereof.
4. The Note, as amended hereby, is hereby ratified and confirmed and
remains in full force and effect in accordance with their respective terms.
5. This Second Amendment shall be governed by and construed in
accordance with the laws of the State of Colorado.
6. The Second Amendment may be executed in two or more counterparts,
each of which together shall constitute the same agreement.
IN WITNESS WHEREOF, each of the undersigned has, through its duly
authorized officers, executed this Second Amendment as of the day and year first
above written.
Borrower:
EINSTEIN/NOAH BAGEL CORP.,
a Delaware corporation
By: /s/ Paul A. Strasen
--------------------------------
Its: Vice President
Lender:
BOSTON CHICKEN, INC., a Delaware
corporation
By: /s/ Bernadette M. Dennehy
--------------------------------
Its: Vice President
2
<PAGE>
EXHIBIT B
<PAGE>
CERTIFICATE
The undersigned, being the Senior Vice President - Finance of
Einstein/Noah Bagel Corp., a Delaware corporation (the "Company"), hereby
represents, warrants, and certifies that (i) no Default or Event of Default has
occurred under the Amended and Restated Secured Loan Agreement dated as of May
17, 1996 between the Company and Boston Chicken, Inc., a Delaware corporation,
as amended (the "Loan Agreement"), and (ii) all of the covenants, agreements,
representations, and warranties made by the Company therein and in the Security
Instruments and in any writing delivered pursuant to the Loan Agreement are true
and correct and complete and have been fully complied with as of the date of
this Certificate.
X
----------------------------------
Name: W. Eric Carlborg
Title: Senior Vice President - Finance
Dated: September 16, 1996
<PAGE>
Exhibit 10.9(b)
FIRST AMENDMENT AND WAIVER
TO
SECURED CREDIT AGREEMENT
THIS FIRST AMENDMENT AND WAIVER dated as of August 27, 1996 is entered
into by and among Einstein/Noah Bagel Corp. (f/k/a Einstein Bros. Bagels, Inc.),
a Delaware corporation (the "Borrower"), the lenders who are party to the Credit
Agreement referred to below (the "Lenders") and Bank of America Illinois, an
Illinois banking corporation, as Agent for the Lenders (herein, in such
capacity, the "Agent").
W I T N E S E T H:
-----------------
WHEREAS, the Borrower, the Lenders and the Agent are parties to a
certain Secured Credit Agreement dated as of May 17, 1996 (herein called the
"Credit Agreement");
WHEREAS, the Borrower wishes to enter into a Lease Agreement with
Harlan Bagel Supply Company, LLC, an Indiana limited liability Company,
("Harlan"), pursuant to which Harlan would lease from the Borrower capital
equipment with a fair market value of up to $12,000,000 (the "Lease
Transaction")
WHEREAS, since Harlan is not authorized to operate Stores it would not
constitute a "Franchisee" and so the Borrower would not be permitted to enter
into the Lease Transaction; and
WHEREAS, subject to the terms and conditions set forth herein the
Agent and the Lenders are willing to amend the Credit Agreement so as to, among
other things, permit the Lease Transaction.
NOW, THEREFORE, in consideration of the premises, and intending to be
legally bound hereby, the Borrower, the Agent and the Lenders hereby agree as
follows:
SECTION 1. AMENDMENTS.
Upon receipt of the documents to be delivered by the Borrower pursuant
to Section 3 below, and in reliance on the Borrower's warranties set forth in
Section 4 below, as of the date hereof the Credit Agreement and the other Loan
Documents shall be hereby amended as follows:
(a) All references in any Loan Document to "Einstein Bros. Bagels,
Inc." are amended to read "Einstein/Noah Bagel Corp."
<PAGE>
(b) Section 6.7 of the Credit Agreement is amended by adding at the
end of each Section a new clause (8) which reads as follows:
"(8) The Borrower may lease capital equipment to Harlan Bagel
Supply Company, LLC, an Indiana limited liability company ("Harlan"),
pursuant to that certain Lease Agreement dated as of August 23, 1996
between the Borrower and Harlan; provided that the fair market value
of such capital equipment shall at no time exceed $12,000,000."
(c) Section 7.5 of the Credit Agreement is amended to read in its
entirety as follows:
"SECTION 7.5 Maximum Senior Indebtedness to EBITDAL. Maintain as
of the last day of each Computation Period occurring during the fiscal
quarters of the Borrower set forth below, a ratio of Senior
Indebtedness to EBITDAL for such Computation Period of not greater
than the ratio set forth below opposite the respective fiscal period
in which such Computation Period occurs:
Fiscal Quarter/Year Senior Indebtedness
------------------- to EBITDAL
----------
2nd and 3rd, 1996 4.00:1.00
thereafter 3.00:1.00"
(d) Clause (3) of Schedule 1.1(A) of the Credit Agreement is amended
to read in its entirety as follows:
"(3) As security for the Franchisee Debt, the Franchisee shall
have granted to the Borrower a first priority Lien (subject to the
types of Liens described in Clauses (4) through (11) of Section 6.1 of
the Agreement, without giving effect to Clause 11 (d) of such Section
6.1) on all of the assets of the Franchisee, including, without
limitation, all real and personal property of such Franchisee and all
leasehold interests of such Franchisee which are entered into after
May 17, 1996 (unless after Franchisee's best efforts (which shall not
require unreasonable efforts) Franchisee is unable to obtain the
-2-
<PAGE>
consent of the respective landlord for such leasehold to the extent
such consent is required) which Lien has been duly assigned to the
Agent for the benefit of the Banks."
SECTION 2. WAIVER.
The Agent and Lenders hereby waive non-compliance by the Borrower with
the terms of Section 6.14 of the Credit Agreement and Sections 3 and 6 of the
BCI Subordination Agreement, such waiver to be solely with respect to any
payments of the BCI Non-Convertible Debt which are made between October 5 and
October 12, 1996; provided, that (i) at all times between August 7, 1996 and
October 5, 1996 no Revolving Loans are outstanding under the Credit Agreement
and (ii) the amount of such payments of the BCI Non-Convertible Debt shall not
exceed the amount of borrowings by the Borrower under the BCI Non-Convertible
Debt made from and including August 7, 1996 to but excluding October 5, 1996.
SECTION 3. CERTAIN DOCUMENTS.
Concurrently herewith the Borrower has delivered the following to the
Agent, each duly executed and appropriately dated and in form and substance
satisfactory to the Agent:
(a) Certificate of the Borrower. A certificate of the Secretary of
the Borrower certifying a true and correct copy of the Lease Agreement
referred to in Section 6.7 of the Credit Agreement, as executed and
delivered by all parties thereto; and
(b) Miscellaneous. Such other approvals, opinions or documents as
the Agent may reasonably request.
SECTION 4. WARRANTIES.
To induce the Agent and the Lenders to enter into this Amendment, the
Borrower warrants to the Agent and the Lenders as of the date hereof that:
(a) The representations and warranties contained in Article IV of the
Credit Agreement are true and correct in all material respects on and as of
the date hereof (except to the extent such representations and warranties
expressly refer to an earlier date); and
(b) No Default or Event of Default has occurred and is continuing.
-3-
<PAGE>
SECTION 5. GENERAL.
(a) Terms used but not otherwise defined herein are used herein as
defined in the Credit Agreement.
(b) As hereby modified, the Credit Agreement shall remain in full
force and effect and is hereby ratified, approved and confirmed in all respects.
(c) This Amendment shall be binding upon and shall inure to the
benefit of the Borrower, the Lenders and the Agent and respective successors and
assigns of the Lenders and the Agent.
(d) This Amendment may be executed in any number of counterparts and
by the different parties on separate counterparts, and each such counterpart
shall be deemed to be an original, but all such counterparts shall together
constitute but one and the same Amendment.
(e) The Borrower hereby notifies all parties hereto that its
designated address for notice purposes under Section 10.2 of the Credit
Agreement is 14123 Denver West Parkway, P.O. Box 4086, Golden, Colorado 80401,
Telephone: (303) 215-9300; Facsimile: (303) 216-3490.
-4-
<PAGE>
Delivered at Chicago, Illinois, as of the date and year first above written.
EINSTEIN/NOAH BAGEL CORP.
By: /s/ Paul A. Strasen
-------------------------------
Title: Vice President
------------------------
BANK OF AMERICA ILLINOIS, as Agent
By:
-------------------------------
Title:
------------------------
BANK OF AMERICA ILLINOIS, as Lender
By:
-------------------------------
Title:
------------------------
LASALLE NATIONAL BANK
By:
-------------------------------
Title:
------------------------
HARRIS TRUST AND SAVINGS BANK
By:
-------------------------------
Title:
------------------------
The undersigned hereby acknowledge the foregoing amendments and reaffirm
their respective duties and obligations arising under the Loan Documents to
which each is a party.
BRACKMAN BROTHERS, INC.
By: /s/ Paul A. Strasen
-------------------------------
Its: Vice President
------------------------------
BALTIMORE BAGEL CO.
By: /s/ Paul A. Strasen
-------------------------------
Its: Vice President
------------------------------
-5-
<PAGE>
NOAH'S NEW YORK BAGELS, INC.
By: /s/ Paul A. Strasen
-------------------------------
Its: Vice President
------------------------------
BRACKMAN BROTHERS OF IDAHO, INC.
By: /s/ Paul A. Strasen
-------------------------------
Its: Vice President
------------------------------
-6-
<PAGE>
Delivered at Chicago, Illinois, as of the date and year first above written.
EINSTEIN/NOAH BAGEL CORP.
By:
-------------------------------
Title:
------------------------
BANK OF AMERICA ILLINOIS, as Agent
By: /s/ David A. Johanson
-------------------------------
Title: David A. Johanson
------------------------
Vice President
BANK OF AMERICA ILLINOIS, as Lender
By: /s/ Authorized Signatory
-------------------------------
Title: Vice President
------------------------
LASALLE NATIONAL BANK
By:
-------------------------------
Title:
------------------------
HARRIS TRUST AND SAVINGS BANK
By:
-------------------------------
Title:
------------------------
The undersigned hereby acknowledge the foregoing amendments and reaffirm
their respective duties and obligations arising under the Loan Documents to
which each is a party.
BRACKMAN BROTHERS, INC.
By:
-------------------------------
Its:
------------------------------
-4-
<PAGE>
Delivered at Chicago, Illinois, as of the date and year first above written.
EINSTEIN/NOAH BAGEL CORP.
By:
-------------------------------
Title:
------------------------
BANK OF AMERICA ILLINOIS, as Agent
By:
-------------------------------
Title:
------------------------
BANK OF AMERICA ILLINOIS, as Lender
By:
-------------------------------
Title:
------------------------
LASALLE NATIONAL BANK
By: /s/ John C. Thurston
-------------------------------
Title: Commercial Loan Officer
------------------------
HARRIS TRUST AND SAVINGS BANK
By:
-------------------------------
Title:
------------------------
The undersigned hereby acknowledge the foregoing amendments and reaffirm
their respective duties and obligations arising under the Loan Documents to
which each is a party.
BRACKMAN BROTHERS, INC.
By:
-------------------------------
Its:
------------------------------
BALTIMORE BAGEL CO.
By:
-------------------------------
Its:
------------------------------
-5-
<PAGE>
Delivered at Chicago, Illinois, as of the date and year first above written.
EINSTEIN/NOAH BAGEL CORP.
By:
-------------------------------
Title:
------------------------
BANK OF AMERICA ILLINOIS, as Agent
By:
-------------------------------
Title:
------------------------
BANK OF AMERICA ILLINOIS, as Lender
By:
-------------------------------
Title:
------------------------
LASALLE NATIONAL BANK
By:
-------------------------------
Title:
------------------------
HARRIS TRUST AND SAVINGS BANK
By: /s/ Authorized Signatory
-------------------------------
Title: Senior Vice President
------------------------
The undersigned hereby acknowledge the foregoing amendments and reaffirm
their respective duties and obligations arising under the Loan Documents to
which each is a party.
BRACKMAN BROTHERS, INC.
By:
-------------------------------
Its:
------------------------------
BALTIMORE BAGEL CO.
By:
-------------------------------
Its:
------------------------------
-5-
<PAGE>
Exhibit 10.25
OPTION AGREEMENT
DATED AUGUST 27, 1996
AMONG
EINSTEIN/NOAH BAGEL CORP.
HARLAN BAGEL SUPPLY COMPANY, LLC
HAL P. HARLAN,
HUGH P. HARLAN
AND
DOUG H. HARLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Article 1.0 The Option......................................... 1
1.1 The Option............................................ 1
1.2 Exercise of the Option................................ 2
1.3 Regulatory Compliance................................. 3
1.4 Purchase Price upon Exercise of the Option............ 3
1.5 Allocation of Purchase Price Among Option Assets...... 3
1.6 Valuation of ENBC Stock or BCI Stock.................. 3
1.7 Closing of Option Exercise............................ 3
1.8 Procedure at each Closing............................. 4
Article 2.0 Representations and Warranties of Supplier
and the Members.................................... 5
2.1 Organization, Power and Authority of Supplier......... 5
2.2 Due Authorization; Binding Agreement of Supplier...... 5
2.3 Ownership Interests in Supplier....................... 5
2.4 Ownership of Interests by the Members................. 6
2.5 Title to Supplier's Assets............................ 6
2.6 Accuracy of Information Furnished by Supplier
and the Members....................................... 6
2.7 Investment Banker's and Broker's Fees................. 6
Article 3.0 Representations and Warranties of ENBC............. 6
3.1 Organization, Power and Authority of ENBC............. 6
3.2 Due Authorization; Binding Agreement of ENBC.......... 6
3.3 Investment Bankers' and Brokers' Fees................. 7
Article 4.0 Additional Covenants of Supplier and the
Prior to the Termination........................... 7
4.1 Reasonable Best Efforts............................... 7
4.2 Conduct of Business................................... 7
4.3 Access to Supplier's Properties and Records........... 8
4.4 Notice of Material Developments....................... 8
4.5 No Disclosure......................................... 8
4.6 No Other Discussions; Retention of Shares............. 9
Article 5.0 Conditions to the Closing of the Option
Exercise by ENBC................................... 9
5.1 Accuracy of Representations and Warranties and
Compliance with Obligations........................... 9
5.2 HSR Act Waiting Period................................ 9
5.3 Receipt of Necessary Consents......................... 9
5.4 No Adverse Litigation................................. 9
5.5 No Material Adverse Change............................ 9
5.6 Delivery of Information............................... 10
Article 6.0 Certain Additional Covenants....................... 10
6.1 Accuracy of Representations and Warranties and
Compliance with Obligations........................... 10
6.2 HSR Act Waiting Period................................ 10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
6.3 Receipt of Necessary Consents......................... 10
6.4 No Adverse Litigation................................. 10
Article 7.0 Indemnification.................................... 10
7.1 Execution of Further Documents........................ 10
7.2 Cooperation of Supplier and the Members............... 10
7.3 Subsequent Audited Financial Statements............... 11
7.4 Confidential Information.............................. 11
7.5 Remedies; Waiver...................................... 12
7.6 Employment by ENBC of Supplier's Employees............ 12
7.7 No Obligation of ENBC to Employ....................... 13
Article 8.0 Indemnification.................................... 13
8.1 Agreement by Supplier and the Members to Indemnify.... 13
8.2 Agreement by ENBC to Indemnify........................ 14
8.3 Tax Effect of Damages and Indemnity Payments.......... 14
8.4 Legal Proceedings..................................... 14
Article 9.0 Miscellaneous
9.1 Amendment and Modification............................ 15
9.2 Payment of Expenses................................... 15
9.3 Binding Effect........................................ 15
9.4 Entire Agreement...................................... 15
9.5 Headings.............................................. 15
9.6 Execution in Counterpart.............................. 15
9.7 Notices............................................... 15
9.8 Governing Law......................................... 16
9.9 Publicity............................................. 16
</TABLE>
ii
<PAGE>
OPTION AGREEMENT
This option agreement (the "Agreement") is made and entered into this
27th day of August 1996 by and among Einstein/Noah Bagel Corp. a Delaware
corporation ("ENBC"), Harlan Bagel Supply Company, LLC, an Indiana limited
liability company ("Supplier"), and Hal P. Harlan, Hugh P. Harlan and Doug H.
Harlan (collectively, the "Members").
RECITALS
--------
ENBC, the Supplier, and Harlan Bakeries, Inc. and the Members have
entered into a project and approved supplier agreement (the "Approved Supplier
Agreement"). ENBC desires to obtain an option to acquire all of the assets of
Supplier, and Supplier desires to grant such an option, all on the terms and
subject to the conditions set forth herein.
COVENANTS
---------
In consideration of the mutual representations, warranties and covenants
and subject to the conditions herein contained herein and in the Approved
Supplier Agreement, the parties hereto agree as follows:
ARTICLE 1.0 THE OPTION
1.1 THE OPTION. Upon the terms and subject to the conditions hereof,
Supplier hereby grants to ENBC an irrevocable option (the "Option") to purchase,
at the purchase price provided for in Section 1.4 hereof, all of the assets of
Supplier (the assets subject to the option being herein sometimes referred to as
the "Option Assets"). Without limiting the generality of the foregoing, the
Option Assets shall include:
1.1.1 all of Supplier's machinery, equipment, tools, supplies,
leasehold improvements, construction in progress, furniture and fixtures, and
other fixed assets ("Fixed Assets");
1.1.2 all inventories and raw materials of Supplier;
1.1.3 all receivables of Supplier including without limitation any
receivables under Sections 7.5 and 7.8 of the Approved Supplier Agreement;
1.1.4 all real estate owned by Supplier, if any, and all of the
interest of, and the rights and benefits accruing to, Supplier as lessee under
all leases of real property and all improvements thereto and buildings thereon,
and all leases or rental agreements covering machinery, equipment, tools,
supplies, vehicles, furniture and fixtures and other fixed assets or personal
property;
1.1.5 all of the rights and benefits accruing to Supplier under the
Approved Supplier Agreement and under all sales orders, sales contracts, supply
contracts, purchase orders and
<PAGE>
purchase commitments made by Supplier in the ordinary course of business, all
other agreements to which Supplier is a party or by which it is bound and all
other choices in action, causes of action and other rights of every kind, but
excluding contracts relating solely to the production or the sale of products
other than the Products (as defined in the Approved Supplier Agreement)
("Excluded Contracts");
1.1.6 all operating data and records of Supplier, including,
without limitation, customer lists, financial, accounting and credit
records, correspondence, budgets and other similar documents and records
(although Supplier may retain copies thereof at its own expense for its
tax or other legitimate business purposes);
1.1.7 all of the proprietary rights of Supplier, including,
without limitation, all trademarks, trade names (but expressly excluding
the name "Harlan" or any name including the name "Harlan"), patents,
patent applications, licenses, trade secrets, technology, know-how,
formula, designs and drawings, computer software, slogans, copyrights,
processes, operating rights, other licenses and permits, and other similar
intangible property and rights, if any; and
1.1.8 all cash and investments, and all prepaid and deferred items
of the Supplier, including, without limitation, prepaid rentals,
insurance, taxes and unbilled charges and deposits.
The Option shall be exercisable at any time on or after December 15, 1999 and on
or before June 1, 2002 ("Termination Date").
1.2 EXERCISE OF THE OPTION. In the event that ENBC elects to exercise
the Option it shall give written notice of such exercise to Supplier in the
manner provided herein for the giving of notice, which notice shall specify the
consideration which ENBC elects to deliver upon the Closing (as hereinafter
defined), which may consist of shares of common stock of ENBC ("ENBC Stock"),
shares of common stock ("BCI Stock") of Boston Chicken, Inc. ("BCI"), cash, or
any combination of the foregoing, having an aggregate value equal to the
Supplier Value (as defined in Section 1.4), provided, however, that such
consideration may consist of ENBC Stock or BCI Stock (the issuer of such stock
being referred to herein as the "Issuer") only if (a) the average closing sales
price per share of such stock of the Issuer as quoted on the NASDAQ National
Market, as quoted on such other market or exchange on which such shares are
traded, for the ten consecutive trading days ending on the second business day
prior to the Closing Date (as hereinafter defined) (the "Share Price") is at
least $10, and (b) the value of the Issuer (defined as the product of the Share
Price and the total number of outstanding shares of such stock of the Issuer) is
at least $300 million. In the event ENBC elects to deliver upon the Closing
Shares of ENBC Stock or shares of BCI Stock, such shares shall be registered
under the Securities Act of 1933, as amended, and shall be accompanied by a
written undertaking of ENBC to pay to the Supplier in cash the excess, if any,
of the value of the shares so delivered, determined in the manner provided in
Section 1.6 hereof, over the proceeds (net of commissions) from the sale of the
shares, assuming all shares are sold in accordance with such reasonable
conditions on the timing, daily volume and manner of sale as may be set forth in
such undertaking. Such undertaking shall be assignable by the supplier to its
members to the extent any such shares are assigned to such members.
2
<PAGE>
1.3 REGULATORY COMPLIANCE. Upon the exercise of the Option each of the
parties shall promptly prepare and file with the Federal Trade Commission
("FTC") and the United States Department of Justice ("Justice Department") any
notification required to be filed with respect to the transactions contemplated
hereby under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 as
amended, or any rules or regulations thereunder (the "HSR Act"). Each party
represents and warrants to the other parties hereto that any such filing made by
it shall be true and accurate in all material respects and shall conform to the
requirements of the HSR Act. Each party shall promptly complete and file any
required responses to requests by the FTC or the Justice Department for
additional data and information. Each party shall also make available to the
other parties hereto such information relative to its business, assets and
property as may be required for the preparation of such notifications and
reports.
1.4 PURCHASE PRICE UPON EXERCISE OF THE OPTION. The purchase price
payable by ENBC upon the exercise of the Option shall consist of: (i) ENBC
Stock, BCI Stock, cash or any combination of the foregoing (determined in
accordance with Section 1.2) having an aggregate value equal to the Supplier
Value as of the Closing Date (as hereinafter defined) and (ii) the assumption by
ENBC of Supplier's accounts payable, accrued expenses, outstanding indebtedness
for money borrowed and contractual obligations, except that ENBC shall not be
obligated to assume any liability or obligation under the Excluded Contracts or
any liability or obligation the existence of which constitutes a breach of any
representation and warranty made by Supplier or the Members in this Agreement or
incurred in violation of any covenants or agreements of Supplier made in this
Agreement (such liabilities to be assumed by ENBC being herein referred to as
the "Assumed Liabilities"). For this purpose, the "Supplier Value" as of the
Closing Date shall be determined in the manner set forth in Exhibit A.
1.5 ALLOCATION OF PURCHASE PRICE AMONG OPTION ASSETS. The purchase price
for the Option Assets shall be allocated among each item or class of the Option
Assets as determined by the parties. Supplier and ENBC agree that they will
prepare and file their federal and any state or local income tax returns based
on such allocation of the purchase price. Supplier and ENBC agree that they will
prepare and file any notices or other filings required pursuant to Section 1060
of the Internal Revenue Code of 1986, as amended, and that any such notices of
filings will be prepared based on such agreed allocation of the purchase price.
1.6 VALUATION OF ENBC STOCK OR BCI STOCK. ENBC Stock or BCI Stock
delivered upon the Closing (as hereinafter defined) shall be deemed to have a
value equal to the average closing sales price per share of such stock as quoted
on the NASDAQ National Market, as reported in the Wall Street Journal (Western
Edition), or as quoted on such other market or exchange on which such shares are
traded, for the ten consecutive trading days ending on the second business day
prior to the Closing Date (as hereinafter defined).
1.7 CLOSING OF OPTION EXERCISE. The closing of the exercise of the
Option shall take place at the offices of ENBC at 9:00 A.M., local time, on the
fifth business day after the date of the notice of such exercise referred to in
Section 1.2, or, if later, the second business day after the satisfaction or
waiver of all other conditions to the exercise of the Option provided for in
Articles 5.0
3
<PAGE>
and 6.0 hereof. Throughout this Agreement, such event is referred
to as "Closing" and such date and time are referred to as "Closing Date".
1.8 PROCEDURE AT THE CLOSING. At the Closing: (i) Supplier shall execute
and deliver to ENBC instruments of assignment in form and substance satisfactory
to ENBC sufficient to convey to ENBC all right, title and interest of Supplier
in and to the Option Assets, all necessary consents or approvals of third
parties (including any governmental entities) to the transactions contemplated
hereby, subscription agreements of Supplier and the Members satisfactory in form
and substance to ENBC, in the event ENBC has elected to deliver ENBC Stock or
BCI Stock at the Closing, and an opinion of Henderson, Daily, Withrow & Devoe,
or other counsel reasonably acceptable to ENBC, dated as of the Closing Date and
in a form reasonably acceptable to ENBC, to the effect that: (A) Supplier is a
limited liability company duly organized and validly existing under the laws of
the State of Indiana with full power and authority to own or lease its
properties, to carry on its business as it is being conducted and to convey the
Option Assets to ENBC pursuant to this Agreement, (B) the sale of the Option
Assets has been duly authorized by all necessary action of Supplier under
Indiana law, its articles of incorporation and bylaws, (C) the sale of the
Option Assets will not conflict with or violate any provision of the articles of
organization or operating agreement of Supplier, conflict with or violate any
order, judgment or decree known to such counsel applicable to Supplier or the
Members or by which any of Supplier's properties are affected, or result in a
breach of, or constitute a default (or any event which with notice or lapse of
time would become a default) under, or give to others any rights of first
refusal, termination, amendment, acceleration or cancellation of, or result in
the creation of any lien or encumbrance on any of the Option Assets pursuant to,
any notice, bond, mortgage, indenture contract, agreement, lease or other
instrument or obligation known to such counsel by which Supplier or any of the
Members is bound or by which any of the Supplier's properties are affected, (D)
the sale of the Option Assets will not, require any consent, approval,
exemption, authorization or permit of, filing with or notification, or other
action by, any court, administrative agency or governmental or regulatory
authority, under any provision of Indiana or Federal law, except for such
consents and approvals as shall have been obtained and filings which shall have
been made, and (E) to such counsel's knowledge, there are no actions, suits,
proceedings or governmental inquiries pending or threatened against Supplier or
any of the Members seeking to prevent the consummation of the transactions
contemplated by this Agreement or which could reasonably be expected to have a
material adverse effect on the Option Assets or the ability of Supplier and the
Members to perform their obligations under this Agreement, and (ii) ENBC shall
deliver to Supplier the purchase price, an instrument of assumption in form and
substance satisfactory to Supplier, assuming the Assumed Liabilities, and
releases of any guarantees made by the Members in connection with the Assumed
Liabilities, to the extent such releases may be obtained through ENBC's
reasonable efforts (which the parties agree shall not require ENBC to expend
money or provide security to the holder of any of the Assumed Liabilities). ENBC
acknowledges that the legal opinion referred to above will be subject to review
by Henderson, Daily's opinion committee prior to the time of issuance of such
opinion so that such opinion is consistent with prevailing opinion letter
practice at such time.
4
<PAGE>
ARTICLE 2.0 REPRESENTATIONS AND WARRANTIES OF SUPPLIER AND THE MEMBERS
In order to induce ENBC to enter into this Agreement and to consummate
the transactions contemplated hereunder, Supplier and the Members jointly and
severally make the following representations and warranties:
2.1 ORGANIZATION, POWER AND AUTHORITY OF SUPPLIER. The Company is a
limited liability company duly organized and validly existing under the laws of
Indiana, and has full corporate power and authority to own or lease its
properties and to carry on its business as it is now being conducted and to
enter into this Agreement and to carry out the transactions and agreements
contemplated hereby. Supplier is legally qualified to transact business, and is
in good standing, in any jurisdictions in which its business or property is such
as to require that it be thus qualified, except where the failure to be so
qualified would not have a material adverse effect on its business, properties
or financial condition.
2.2 DUE AUTHORIZATION; BINDING AGREEMENT OF SUPPLIER AND MEMBERS. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
action of Supplier, including the approval of the Members of Supplier. This
Agreement has been duly executed and delivered by Supplier and the Members and
is a valid and binding obligation of Supplier and the Members, enforceable in
accordance with its terms. Neither the execution and delivery of this Agreement
by Supplier or the Members nor the consummation of the transactions contemplated
hereby will: (i) conflict with or violate any provision of the articles of
organization or operating agreement of Supplier or of any decree or order of any
court or administrative or other governmental body which is either applicable
to, binding upon or enforceable against Supplier or the Members or the assets
and properties of Supplier or the Members; or (ii) result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify or cancel, or require any notice
under, any mortgage, contract, agreement, indenture or other instrument which is
either binding upon or enforceable against Supplier or the Members or the assets
and properties of Supplier or the Members. No permit, consent, approval or
authorization of, or declaration to or filing with, any regulatory or other
government authority is required in connection with the execution and delivery
of this Agreement by Supplier or the Members and the consummation by it of the
transactions contemplated hereby, except pursuant to the HSR Act.
2.3 OWNERSHIP INTERESTS IN SUPPLIER. All voting rights in Supplier are
vested exclusively in its membership interests (the "Interests"), and there are
no voting trusts, proxies or other agreements or understandings with respect to
the voting of the Interests of Supplier, except for the operating agreement
among the Supplier and the Members (the "Operating Agreement"). Supplier has
previously furnished to ENBC copies of Supplier's articles of organization and
the Operating Agreement, and such copies are correct and complete in all
respects. There are no outstanding warrants, options or rights of any kind to
acquire from Supplier any interests or securities of any kind, and there are no
pre-emptive rights with respect to the issuance or sale of interests of
Supplier. Supplier has no obligation to acquire any of its issued and
outstanding interests or any other security issued by it from any holder
thereof, except pursuant to the Operating Agreement.
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2.4 OWNERSHIP OF INTERESTS BY THE MEMBERS. The Members are the lawful
owners of all of the outstanding Interests of Supplier and have valid marketable
title thereto, free and clear of all liens, pledges, encumbrances, security
interests, restrictions on transfer, claims and equities of every kind, other
than restrictions under federal and state securities laws. There are no
outstanding warrants, options or rights of any kind to acquire from the Members
any of the Interests.
2.5 TITLE TO SUPPLIER'S ASSETS. Supplier has good and marketable title
to all of its assets and properties, free and clear of all liens, mortgages,
pledges, encumbrances or charges of every kind, nature, and description
whatsoever, and upon the Closing ENBC will acquire good and marketable title to
the Option Assets, free and clear of all liens, mortgages, pledges, encumbrances
or charges of every kind, nature and description whatsoever, except for (i)
security interests securing any indebtedness for money borrowed or other
contractual obligations but only if such indebtedness or obligations are assumed
by ENBC or (ii) such liens, mortgages, pledges, encumbrances or charges as shall
have been approved by ENBC in writing.
2.6 ACCURACY OF INFORMATION FURNISHED BY SUPPLIER AND THE MEMBERS. No
representation, statement or information made or furnished by Supplier or the
Members to ENBC, including without limitation those contained in this Agreement
and the various schedules attached hereto, when taken as a whole, contains or
shall contain any untrue statement of a material fact or omits or shall omit any
material fact necessary to make the information contained therein not
misleading.
2.7 INVESTMENT BANKERS' AND BROKERS' FEES. Neither the Members nor
Supplier have any obligation to pay any fees or commissions to any investment
banker, broker, finder or agent with respect to the transactions contemplated by
this Agreement.
ARTICLE 3.0 REPRESENTATIONS AND WARRANTIES OF ENBC
In order to induce Supplier and the Members to enter into this Agreement
and to consummate the transactions contemplated hereunder, ENBC makes the
following representations and warranties:
3.1 ORGANIZATION, POWER AND AUTHORITY OF ENBC. ENBC is a corporation
duly organized and validly existing under the laws of the State of Delaware, and
has full corporate power and authority to own or lease its properties and to
carry on its business as it is now being conducted and to enter into this
Agreement and to carry out the transactions and agreements contemplated hereby.
3.2 DUE AUTHORIZATION; BINDING AGREEMENT OF ENBC. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action of ENBC. This Agreement has been duly executed and delivered by
ENBC and is a valid and binding obligation of ENBC, enforceable in accordance
with its terms. Neither the execution and delivery of this Agreement by ENBC nor
the consummation of the transactions contemplated hereby will: (i) conflict with
or violate any provision of the certificate of incorporation or bylaws of ENBC
or of any decree or order of any court or administrative or other governmental
body which is either applicable to, binding upon or
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enforceable against ENBC, or its assets and properties; or (ii) result in a
breach of, constitute a default under, result in the acceleration of, create in
any party the right to accelerate, terminate, modify or cancel, or require any
notice under, any mortgage, contract, agreement, indenture or other instrument
which is either binding upon or enforceable against ENBC, or its assets and
properties. No permit, consent, approval of authorization of, or declaration to
or filing with, any regulatory or other government authority is required in
connection with the execution and delivery of this Agreement by ENBC and the
consummation by it of the transactions contemplated hereby.
3.3 INVESTMENT BANKERS' AND BROKERS' FEES. ENBC has no obligation to pay
any fees or commissions to any investment banker, broker, finder or agent with
respect to the transactions contemplated by this Agreement.
ARTICLE 4.0 ADDITIONAL COVENANTS OF SUPPLIER AND THE MEMBERS PRIOR TO THE
TERMINATION DATE
4.1 REASONABLE BEST EFFORTS. Supplier and the Members will use
reasonable best efforts to cause to be satisfied as soon as practicable and
prior to the Closing Date all of the conditions set forth in Articles 5.0 and
6.0. Without limiting the generality of the foregoing Supplier and the Members
will not, without ENBC's written consent, take any action that would result in a
requirement that any third party consent or approval be obtained in connection
with exercise of the Option.
4.2 CONDUCT OF BUSINESS. From and after the execution and delivery of
this Agreement and until the earlier of the Closing Date or the Termination
Date, except as otherwise provided by the prior written consent of ENBC:
4.2.1 Supplier will use reasonable best efforts to (i) preserve its
business organization intact, (ii) keep available the services of its
officers, employees, and agents, and (iii) preserve its relationships with
suppliers and others having dealings with Supplier;
4.2.2 Supplier will maintain all of its properties in customary
repair, order and condition, reasonable wear and use and damage by
unavoidable casualty excepted; and
4.2.3 Supplier will not (a) sell, lease, transfer or otherwise
dispose of assets other than in the ordinary course of business, (b)
redeem, purchase or otherwise acquire from any of its Members all or any
part of their equity interest in the Supplier or pay any dividends or make
any other distributions or payments to such Members, or persons or entities
related to them, except for (i) distributions to the members to permit
payment by them of income taxes on income of Supplier allocated to them,
which shall be based on a tax rate equal to the highest effective combined
statutory rate of federal and state income tax (giving effect to the
deductibility of state income taxes for federal income tax purposes)
imposed on taxable income of an individual residing in the State of
Indiana, and (ii) other cash distributions and compensation payments that
are permitted to be made by the Financing Documents (as defined in the
Approved Supplier Agreement), (c) incur indebtedness other than the
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indebtedness provided for in the Financing Documents (as defined in the
Approved Supplier Agreement), (d) incur any material obligations or
liabilities (other than its obligations under this Agreement and the
Approved Supplier Agreement), or enter into any material transaction
(other than transactions contemplated by this Agreement or the Approved
Supplier Agreement) other than in the ordinary course of business, (e)
merge or consolidate with any other entity, effect any change in its
capital structure, make any investment in any other entity, liquidate or
dissolve, (f) amend its articles of organization or the Operating
Agreement, (g) enter into any transaction with any affiliate except on
terms at least as favorable as those that could be obtained from an
unrelated third party or (h) agree to do any of the foregoing.
4.3 ACCESS TO SUPPLIER'S PROPERTIES AND RECORDS. From and after the
execution and delivery of this Agreement and until the earlier of the Closing
Date or the Termination Date, Supplier will afford to the representatives of
ENBC access, during normal business hours and upon reasonable notice, to
Supplier's premises and books and records sufficient to enable ENBC to inspect
the assets and properties of Supplier and to determine the Supplier Value (as
defined in Exhibit A hereof), and Supplier will furnish to such representatives
during such period all such information relating to the foregoing investigation
as ENBC may reasonably request; provided, however, that any furnishing of such
information to ENBC and any investigation by ENBC shall not affect the right of
ENBC to rely on the representations and warranties made by Supplier and the
Members in or pursuant to this Agreement, and provided further, that ENBC shall
maintain the confidentiality of any information so furnished to it in accordance
with the provisions of Article 12.0 of the Approved Supplier Agreement. Without
limiting the generality of the foregoing, Supplier shall furnish to ENBC on or
before the date on which the Option is first exercisable, within fifteen
business days after the end of each calendar quarter thereafter and within
fifteen business days after any notice of exercise of the Option, a statement
setting forth the Supplier Value (as defined in Exhibit A hereof) determined as
of the end of such calendar quarter (or as of the applicable date under Exhibit
A, in the event of the exercise of the Option), which statement shall be
prepared in accordance with Exhibit A and shall set forth with specificity the
calculation of Supplier Value.
4.4 NOTICE OF MATERIAL DEVELOPMENTS. From and after the execution and
delivery of this Agreement and until the earlier of the Closing Date or the
Termination Date, Supplier will give prompt written notice to ENBC of any
material development affecting the assets, properties, business, business
prospects, financial condition or results of operations of Supplier, including
without limitation any development which results in the inaccuracy of any of the
representations and warranties of Supplier and the Members made herein.
4.5 NO DISCLOSURE. Without the prior written consent of ENBC, neither
Supplier nor any of the Members will, prior to the earlier of the Closing Date
or the Termination Date, disclose the existence of or any term or condition of
this Agreement to any person or entity except that such disclosure may be made
(i) to any lender or financing source of Supplier or any person in a business
relationship with Supplier to whom such disclosure is necessary in order to
satisfy any of the conditions or obligations which are set forth in this
Agreement, and (ii) to the extent Supplier believes in good faith that such
disclosure is required by law (in which case Supplier will consult with ENBC
prior to making such disclosure).
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4.6 NO OTHER DISCUSSIONS; RETENTION OF INTERESTS. Neither the Members
nor Supplier will, prior to the earlier of the Closing Date or the Termination
Date, enter into discussions or negotiate with or entertain or accept the
unsolicited offer of any other party concerning the potential sale or exchange
of all or any part of the assets of or interests in Supplier to, or the merger
or consolidation of Supplier with, any person other than ENBC. The Members will
not, prior to the earlier of the Closing Date or the Termination Date, sell,
assign, transfer, pledge, encumber or otherwise dispose of any of the Interests
owned by them, except for Exempt Transactions permitted by the Operating
Agreement.
ARTICLE 5.0 CONDITIONS TO ENBC'S OBLIGATION TO CLOSE THE OPTION EXERCISE.
The obligation of ENBC to purchase the assets of Supplier upon the
exercise of the Option shall be subject to the fulfillment or waiver by ENBC at
or prior to the Closing Date of each of the following conditions:
5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES AND COMPLIANCE WITH
OBLIGATIONS. The representations and warranties of Supplier and the Members
contained in this Agreement shall have been true and correct in all material
respects at and as of the date hereof, and they shall be true and correct in all
material respects at and as of the Closing Date with the same force and effect
as though made at and as of that time. Supplier and the Members shall have
performed and complied with all of their obligations required by this Agreement
to be performed or complied with at or prior to the Closing Date. The Members
shall have delivered to ENBC a certificate, dated as of the Closing Date and
signed by each of the Members, certifying that such representations and
warranties are thus true and correct in all material respects and that all such
obligations have been thus performed and complied with.
5.2 HSR ACT WAITING PERIOD. Any waiting period imposed by the HSR Act
with respect to the exercise of the Option shall have expired or been
terminated.
5.3 RECEIPT OF NECESSARY CONSENTS. All necessary consents or approvals
of third parties to any of the transactions contemplated hereby, shall have been
obtained and shown by written evidence satisfactory to ENBC.
5.4 NO ADVERSE LITIGATION. There shall not be any pending or threatened
action or proceeding by or before any court or other governmental body which
shall seek to restrain, prohibit or invalidate the purchase of the assets of
Supplier or any other transaction contemplated hereby, and no injunction or
other order prohibiting the purchase of the Option Assets or any other
transaction contemplated hereby shall have been entered by any court or other
governmental body.
5.5 NO MATERIAL ADVERSE CHANGE. Since the date of the exercise of the
Option, there shall have been no changes in the business or properties of
Supplier, or in its financial condition, other than changes which in the
aggregate shall not have had a material adverse effect.
5.6 DELIVERY OF INFORMATION. Supplier shall have delivered to ENBC any
information required to have been delivered to ENBC pursuant to Section 4.3
hereof.
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ARTICLE 6.0 CONDITIONS TO THE SUPPLIER'S OBLIGATION TO CLOSE THE OPTION
EXERCISE
The obligation of Supplier to sell the assets of Supplier upon the
exercise of the Option shall be subject to the fulfillment or waiver by Supplier
at or prior to the Closing Date of each of the following conditions:
6.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES AND COMPLIANCE WITH
OBLIGATIONS. The representations and warranties of ENBC contained in this
Agreement shall have been true and correct in all material respects at and as of
the date hereof, and they shall be true and correct in all material respects at
and as of the Closing Date with the same force and effect as though made at and
as of that time. ENBC shall have performed and complied with all of its
obligations required by this Agreement to be performed or complied with at or
prior to the Closing Date. ENBC shall have delivered to Supplier a certificate,
dated as of the Closing Date and signed by ENBC, certifying that such
representations and warranties are thus true and correct in all material
respects and that all such obligations have been thus performed and complied
with.
6.2 HSR ACT WAITING PERIOD. Any waiting period imposed by the HSR Act
with respect to the exercise of the Option shall have expired or been
terminated.
6.3 RECEIPT OF NECESSARY CONSENTS. All necessary consents or approvals
of third parties to any of the transactions contemplated hereby, shall have been
obtained and shown by written evidence satisfactory to Supplier.
6.4 NO ADVERSE LITIGATION. There shall not be any pending or threatened
action or proceeding by or before any court or other governmental body which
shall seek to restrain, prohibit or invalidate the sale of the assets of
Supplier or any other transaction contemplated hereby, and no injunction or
other order prohibiting the purchase of the Option Assets or any other
transaction contemplated hereby shall have been entered by any court or other
governmental body.
ARTICLE 7.0 CERTAIN ADDITIONAL COVENANTS
7.1 EXECUTION OF FURTHER DOCUMENTS. From and after the Closing, upon the
reasonable request of ENBC, Supplier and the Members shall execute, acknowledge
and deliver all such further acts, deeds, assignments, transfers, conveyances,
powers of attorney and assurances as may be required to convey and transfer to
and vest in ENBC the Option Assets and as may be appropriate otherwise to carry
out the transactions contemplated by this Agreement.
7.2 COOPERATION OF SUPPLIER AND THE MEMBERS. Each of the Members
acknowledges and agrees that ENBC may have need of information concerning
Supplier and the Members in order to comply with applicable securities laws and
regulations in connection with future public and private debt and equity
offerings by ENBC ("Offerings"). The Members jointly and severally agree that
they will cooperate with ENBC in connection with any Offerings and that they
will, at ENBC's expense: (i) furnish ENBC with such information concerning
Supplier and the Members as ENBC may reasonably require to comply with
applicable securities laws and regulations (the "Company Information"); (ii) use
diligent efforts to review, comment on, and otherwise assist ENBC as reasonably
necessary for the preparation of, descriptions concerning Supplier and the
Members to be
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used in connection with Offerings; and (iii) represent and warrant to ENBC in
connection with any Offerings that Company Information will not contain any
untrue statement of a material fact or omit any material fact necessary to make
the information contained therein not misleading.
7.3 SUBSEQUENT AUDITED FINANCIAL STATEMENTS. Each of the Members
covenants and agrees with ENBC that if ENBC shall determine that audited
financial statements of ENBC or Supplier for the periods prior to the Closing
are necessary or advisable in connection with an initial public offering,
another transaction or offering, or otherwise, each shall cooperate fully with
ENBC's accountants in the preparation of such audited financial statements, at
ENBC's expense, and each shall make such reasonable representations and
warranties to the applicable certified public accountants as are customary in
connection with the preparation of audited financial statements.
7.4 CONFIDENTIAL INFORMATION.
7.4.1 The Members may possess certain confidential and proprietary
information and trade secrets including, but not limited to, information,
methods, techniques, procedures and knowledge developed by or for Supplier
respecting the business of Supplier (the "Confidential Information"). Each
of the Members acknowledges and agrees that neither such Shareholder nor
any other person or entity has acquired by or through such Members any
interest in or right to use the Confidential Information other than the
right to utilize it in the operation of the businesses of Supplier and
ENBC, and that the use or duplication of the Confidential Information in
any other business would constitute an unfair method of competition with
Supplier and ENBC. Notwithstanding the foregoing, however, ENBC
acknowledges that the Members are actively involved as Members, officers
and directors of Harlan Bakeries, Inc. and that certain Confidential
Information may be shared with Harlan Bakeries, Inc. The foregoing is not
intended to prevent Harlan Bakeries from using such Confidential
Information in its business generally, but Confidential Information
relating specifically to ENBC or its Formulations, Specifications and
Procedures (as defined in the Approved Supplier Agreement) may not be used
by Harlan Bakeries except to the extent such use is solely for the benefit
of ENBC or its Formulations, Specifications and Procedures (as defined in
the Approved Supplier Agreement) may not be used by Harlan Bakeries except
to the extent such use is solely for the benefit of ENBC.
7.4.2 Subject to Section 7.4.1 hereof, each of the Members
acknowledges and agrees that the Confidential Information is confidential
to and a valuable asset of Supplier, is proprietary, and includes trade
secrets of Supplier and that such Member: (i) will not use the
Confidential Information in any other business or capacity; (ii) will
maintain the absolute secrecy and confidentiality of the Confidential
Information; and (iii) will not make unauthorized copies of any portion of
the Confidential Information disclosed in written or other tangible form.
7.4.3 Notwithstanding the foregoing, the obligations of the Members
specified above shall not apply to any Confidential Information which (i)
is disclosed in a printed publication available to the public, or is
otherwise in the public domain through no act of any of the Members, their
agents or any person or entity which has received such Confidential
Information from or through any of the Members, (ii) is
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approved for release by written authorization of an officer of ENBC,
(iii) is required to be disclosed by proper order of a court of
applicable jurisdiction after adequate notice to ENBC to seek a
protective order therefor, the imposition of which protective order the
Members agree to approve and support, or (iv) in the written opinion of
the disclosing Member's counsel, is necessary to be made by such Member
in order that the Member not violate any law, rule or regulation
applicable to him.
7.5 REMEDIES; WAIVER.
7.5.1 Each of the Members agrees that the provisions and
restrictions set forth above in Section 7.4 are necessary to protect ENBC
and its successors and assigns in the protection of the Option Assets
ENBC is entitled to acquire pursuant to this Agreement. Each of the
Members agrees that damages cannot compensate ENBC in the event of a
violation of the covenants contained in Section 7.4 hereof, and that
injunctive relief shall be essential for the protection of ENBC and its
successors and assigns. Accordingly, each of the Members agrees and
consents that, in the event he shall violate or breach any of said
covenants ENBC shall be entitled to obtain (and he hereby consents to)
such injunctive relief against such Shareholder, without bond, in
addition to such further or other relief as may appertain at equity or
law. The exercise or enforcement by ENBC of any right or remedy hereunder
shall not preclude the exercise or enforcement by ENBC of any other right
or remedy hereunder or which ENBC has the right to enforce under
applicable law.
7.5.2 Failure by any party to insist upon strict compliance with any
of the terms, covenants or conditions hereof shall not be deemed a waiver
of such term, covenant or condition, nor shall any waiver or
relinquishment of any right or remedy hereunder at any one or more times
be deemed a waiver or relinquishment of such right or remedy at any other
time or times.
7.6 EMPLOYMENT BY ENBC OF SUPPLIER'S EMPLOYEES. Supplier shall use its
reasonable best efforts to aid ENBC in engaging such of its employees as are
employed on the Closing Date, if any, whom ENBC desires to engage after the
Closing Date, and except with the written consent of ENBC, neither Supplier nor
any Affiliate (as hereinafter defined) of Supplier shall employ, for a period of
one year after the Closing Date, any person employed by Supplier at or at any
time within six months prior to the Closing Date unless such person was either
not offered employment by ENBC or was terminated by ENBC. As used in this
Agreement, the term "Affiliate" means, with respect to a specified person, any
other person which directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with, the person
specified, and the term "control" (including the terms "controlling,"
"controlled by" and "under common control with") shall mean the possession,
direct or indirect, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of voting
shares, by contract, or otherwise.
7.7 NO OBLIGATION OF ENBC TO EMPLOY. ENBC shall have no obligation to
employ any of the persons employed by Supplier at the time of the Closing, if
any, or to continue, or institute
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any replacement or substitution for, any vacation, severance, incentive, bonus,
profit sharing, pension or other employee benefit plan or program of Supplier.
ARTICLE 8.0 INDEMNIFICATION
8.1 AGREEMENT BY SUPPLIER AND THE MEMBERS TO INDEMNIFY. Subject to the
qualifications and limitations set forth in this Section 8.1, Supplier and the
Members jointly and severally agree that from and after the Closing, if any,
they will indemnify and hold ENBC harmless in respect of the aggregate of all
ENBC Indemnifiable Damages (as hereinafter defined). For this purpose, ENBC
Indemnifiable Damages shall mean the aggregate of all expenses, losses, costs,
deficiencies, liabilities and damages (including related counsel fees and
expenses) incurred or suffered by ENBC (or any successor to all or any part of
the assets or business of Supplier) (i) resulting from any inaccurate
representation or warranty made by Supplier and the Members in or pursuant to
this Agreement, (ii) resulting from any default in the performance of any of the
covenants or agreements made by Supplier or the Members in this Agreement, or
(iii) resulting from the failure of Supplier to pay, discharge or perform any
liability or obligation that is not required to be assumed by ENBC hereunder
("Excluded Liabilities"). Without limiting the generality of the foregoing,
with respect to the measurement of ENBC Indemnifiable Damages, ENBC shall have
the right to be put in the same financial position as it would have been in had
each of the representations and warranties of Supplier and the Members been true
and correct, had each of the covenants and agreements of Supplier and the
Members been performed in full and had each of the Excluded Liabilities been
paid or performed in full. The foregoing obligation to indemnify ENBC shall be
subject to each of the following principles or qualifications:
8.1.1 Each of the representations and warranties made by the Supplier
and the Members in this Agreement or pursuant hereto, shall survive for a
period of eighteen (18) months after the exercise of the Option and
thereafter all such representations and warranties shall be extinguished,
provided, however, that the representations and warranties made in Sections
2.1, 2.2, 2.3, 2.4 and 2.7 hereof shall in each case survive forever. No
claim for the recovery of ENBC Indemnifiable Damages based upon the
inaccuracy of such representations and warranties may be asserted by ENBC
after such representations and warranties shall be thus extinguished;
provided, however, that claims first asserted in writing within the
applicable period (whether or not the amount of any such claim has become
ascertainable within such period) shall not thereafter be barred.
8.1.2 The Supplier and the Members shall be liable for any claim for
ENBC Indemnifiable Damages arising out of any inaccuracy of any
representation or warranty only to the extent the aggregate amount of all
such ENBC Indemnifiable Damages do exceed $25,000.
8.1.3 The liability of the Supplier and the Members for claims for
all ENBC Indemnifiable Damages arising out of inaccuracies of
representations and warranties of the Supplier and the Members shall in no
event exceed the amount of the purchase price payable under Section 1.4.
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8.2 AGREEMENT BY ENBC TO INDEMNIFY. ENBC agrees that from and after the
Closing, if any, it will indemnify and hold Supplier and the Members harmless in
respect of the aggregate of all Supplier Indemnifiable Damages (as hereinafter
defined). For this purpose, Supplier Indemnifiable Damages shall mean the
aggregate of all expenses, losses, costs, deficiencies, liabilities and damages
(including related counsel fees and expenses) incurred or suffered by Supplier
or the Members (i) resulting from any inaccurate representation or warranty made
by ENBC in or pursuant to this Agreement, (ii) resulting from any default in the
performance of any of the covenants or agreements made by ENBC in this
Agreement, (iii) resulting from the failure of ENBC to discharge any Assumed
Liabilities (including any Assumed Liabilities that may have been guaranteed by
one or more of the Members) after Closing or (iv) resulting from the operation
of the business utilizing the Option Assets by ENBC after Closing (except to the
extent arising from any inaccurate representation or warranty made by the
Supplier and the Members herein). Without limiting the generality of the
foregoing, with respect to the measurement of Supplier Indemnifiable Damages,
Supplier and the Members shall each have the right to be put in the same
financial position as they would have been in had each of the representations
and warranties of ENBC been true and correct, had each of the covenants and
agreements of ENBC been performed in full and had each of the Assumed
Liabilities been paid or performed in full.
8.3 TAX EFFECT OF DAMAGES AND INDEMNITY PAYMENTS. In determining the amount
of ENBC Indemnifiable Damages payable under Section 8.1 and Supplier
Indemnifiable Damages payable under Section 8.2, there shall be taken into
account both tax benefits, if any, arising from the incurrence of damages and
tax detriments, if any, arising from the receipt of payments hereunder.
8.4 LEGAL PROCEEDINGS. In the event Supplier, the Members or ENBC become
involved in any legal, governmental or administrative proceeding which may
result in indemnification claims hereunder, such party shall promptly notify the
other parties in writing of such proceeding. The other parties may, at their
option and expense, defend any such proceeding if the proceeding could give rise
to an indemnification obligation hereunder. If any party elects to defend any
proceeding, such party shall have full control over the conduct of such
proceeding, although the party being indemnified shall have the right to retain
legal counsel at its own expense and shall have the right to approve any
settlement of any dispute giving rise to such proceeding, such approval not to
be withheld unreasonably by the party being indemnified; provided, that, in the
event the indemnifying party shall fail to initiate a defense of a claim within
twenty days of the notice to the indemnified party of a claim, the indemnified
party shall have the option to conduct the defense of such claim as it may in
its discretion deem proper. The party being indemnified shall reasonably
cooperate with the indemnifying party in such proceeding.
ARTICLE 9.0 MISCELLANEOUS
9.1 AMENDMENT AND MODIFICATION. The parties hereto may amend, modify and
supplement this Agreement in such manner as may be agreed upon by them in
writing.
9.2 PAYMENT OF EXPENSES. Each party to this Agreement shall pay all of the
expenses incurred by it in connection with this Agreement, including without
limitation its legal and accounting fees and expenses.
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9.3 BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, assigns, heirs
and legal representatives.
9.4 ENTIRE AGREEMENT. This instrument and the exhibits attached hereto
contain the entire agreement of the parties hereto with respect to the option to
purchase the Option Assets and the other transactions contemplated herein, and
supersede all prior understandings and agreements of the parties with respect to
the subject matter hereof. Any reference herein to this Agreement shall be
deemed to include the exhibits attached hereto.
9.5 HEADINGS. The descriptive headings in this Agreement are inserted
for convenience only and do not constitute a part of this Agreement.
9.6 EXECUTION IN COUNTERPART. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original.
9.7 NOTICES. Any notice, request, information or other document to be
given hereunder shall be in writing. any notice, request, information or other
document shall be deemed duly given three business days after it is sent by
registered or certified mail, postage prepaid, to the intended recipient,
addressed as follows:
If to Supplier addressed as follows:
Harlan Bakeries, Inc.
7597 East U.S. Highway 36
Avon, Indiana 46168-7971
Attention: Hugh P. Harlan
with a copy to such party at the following address:
Harlan Sprague Dawley, Inc.
P.O. Box 29176
Indianapolis, Indiana 46229
Attention: Hal P. Harlan
with a copy to:
Henderson, Daily, Withrow & Devoe
2600 One Indiana Square
Indianapolis, Indiana 46204
Attention: Roberts E. Inveiss, Esq.
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If to ENBC, addressed as follows:
Einstein/Noah Bagel Corp.
14123 Denver West Parkway
P.O. Box 4086
Golden, Colorado 80401
Attention: Senior Vice President-Supply Chain
with a copy to:
Einstein/Noah Bagel Corp.
14123 Denver West Parkway
P.O. Box 4086
Golden, Colorado 80401
Attention: General Counsel
Any party may send any notice, request, information or other document to be
given hereunder using any other means (including personal delivery, courier,
messenger service, facsimile transmission, telex or ordinary mail), but no such
notice, request, information or other document shall be deemed duly given unless
and until it is actually received by the party for whom it is intended. Any
party may change the address to which notices hereunder are to be sent to it by
giving written notice of such change of address in the manner herein provided
for giving notice.
9.8 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado applicable to contracts made
and to be performed wholly therein.
9.9 PUBLICITY. No press release or other public announcement related to
this Agreement or the transactions contemplated hereby (or the existence of any
discussions or negotiations among the parties regarding any other possible
transactions) will be issued, and no disclosure of this Agreement or the terms
hereof will be made, by Supplier or any of the Members without the prior
approval of ENBC. ENBC agrees to use reasonable best efforts to consult with
Supplier prior to issuing any press release or public or trade announcement or
statement relating to this Agreement or the transactions contemplated hereby.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
EINSTEIN/NOAH BAGEL CORP.
/s/ Paul A. Strasen
By ____________________________________
Vice President
HARLAN BAGEL SUPPLY COMPANY, LLC
/s/ Doug H. Harlan
By ____________________________________
Doug H. Harlan
Vice President
/s/ Hal P. Harlan
______________________________________
Hal P. Harlan
/s/ Hugh P. Harlan
______________________________________
Hugh P. Harlan
/s/ Doug H. Harlan
______________________________________
Doug H. Harlan
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EXHIBITS
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Exhibit A Determination of Supplier Value
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"Supplier Value" as the Closing Date shall be equal to (A) the Applicable
Multiple (as hereinafter defined) multiplied by the Supplier Profit (as
hereafter defined), but, in the event the parties to the Approved Supplier
Agreement have not entered into an amendment pursuant to Section 8.1 thereof
providing for the installation of a second bagel line, not less than $2,350,000
minus (B) the outstanding long-term indebtedness of Supplier as of the Closing
Date, minus (C) $750,000, plus (D) any excess of Supplier's current assets over
its current liabilities as of the Closing Date or minus (E) any excess of
Supplier's current liabilities over its current assets as of the Closing Date
(with current assets including any receivables under Sections 7.5 and 7.8 of the
Approved Supplier Agreement and current liabilities including appropriate
accruals for real and personal property taxes, utilities and similar items for
purposes of such clauses (D) and (E)). The "Applicable Multiple" shall be 6, if
the Option is exercised on or after December 15, 1999 and before July 1, 2000
and 5.25 if the Option is exercised on or after July 1, 2000 until the
Termination Date. The "Supplier Profit" shall be equal to Supplier's Formula
Profit (as hereinafter defined) for the six-month period ending on the last day
of the last calendar month ending prior to the month in which the Option is
exercised multiplied by two. "Supplier's Formula Profit" for any period shall be
equal to Supplier's revenues from the sale of the Products during such period
(determined based on the price of the Products F.O.B. Supplier's Production
Facility, net of returns or allowances) less Supplier's Materials Cost (as
hereinafter defined) for such period, less Supplier's Production Cost (as
hereinafter defined) for such period, less Supplier's Equipment Financing Cost
(as hereinafter defined) for such period. For this purpose, (a) "Materials Cost"
shall have the meaning ascribed to it in the Approved Supplier Agreement, (b)
"Production Cost" shall mean the sum of direct labor, overhead, fixed general
and administrative expense and interest expense from indebtedness other than its
equipment financing, (c) "Occupancy Cost" shall mean building rental expense,
real estate taxes, utilities, maintenance and repair and property/casualty
insurance, and (d) "Equipment Financing Cost" shall mean operating lease rentals
and interest and principal amortization from all equipment financing and
depreciation expense on any equipment which has been purchased, provided,
however, that (i) the Equipment Financing Cost for the equipment covered by the
lease agreement of even date herewith between ENBC and the Supplier shall be
determined by amortizing the principal amount at a rate of 5.59970% per quarter
(resulting in annual principal of approximately $1,616,000) rather than
amortizing principal as provided for in such lease, and (ii) depreciation
expense on any equipment which has been purchased shall be equal to the
operating lease rentals that would have been payable on such equipment if such
equipment had been covered by the lease agreement of even date herewith between
ENBC and the Supplier (adjusted as provided in the preceding clause (i) hereof).
<PAGE>
Exhibit 10.26
RIGHT OF FIRST REFUSAL AGREEMENT
This right of first refusal agreement (the "Agreement") is entered into as
of August 27, 1996 by and among Einstein/Noah Bagel Corp., a Delaware
corporation ("ENBC"), Harlan Bakeries, Inc., an Indiana corporation ("Harlan"),
Hal P. Harlan, Hugh P. Harlan and Doug H. Harlan (collectively, the "Harlans").
RECITALS
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The Harlans own all of the outstanding capital stock of Harlan. Harlan has
constructed a new production facility (the "Production Facility") adjacent to
its existing production facility in Avon, Indiana, and Harlan Bagel Supply
Company, LLC, an Indiana limited liability company (the "Supplier"), ENBC,
Harlan and the Harlans have entered into a project and approved supplier
agreement dated as of May 24, 1996 (the "Approved Supplier Agreement"), pursuant
to which the Supplier has agreed to supply raw frozen bagel dough products to
ENBC and other approved purchasers.
ENBC desires to obtain a right of first refusal to obtain the shares of
capital stock or assets of Harlan, and Harlan and the Harlans have agreed to
grant such a right of first refusal, on the terms and subject to the conditions
set forth herein.
COVENANTS
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In consideration of the premises and the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. RESTRICTIONS ON TRANSFER. Subject to the provisions of Section 7
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hereof, each of the Harlans agrees that he shall not, at any time prior to the
Termination Date (as hereinafter defined), sell, assign, transfer, pledge or
otherwise dispose of any shares of capital stock of Harlan ("Shares") owned by
him, except in accordance with the provisions of Section 2 hereof or in a
Permitted Transfer (as hereinafter defined). All certificates representing
Shares owned or hereafter acquired by the Harlans, or any transferee of the
Harlans bound by this Agreement shall have affixed thereto a legend
substantially in the following form:
"The sale or other disposition of any of the shares
represented by this certificate is restricted by a Right
of First Refusal Agreement among the registered owner
of this certificate, ENBC and the other shareholders of
the Company, a copy of which is available for inspection
at the offices of the Company."
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2. RIGHT OF FIRST REFUSAL TO PURCHASE SHARES OF CAPITAL STOCK. Subject to
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the provisions of Section 7 hereof, in the event Harlan or any of the Harlans
(the "Seller") desires to sell any Shares, at any time prior to the Termination
Date, except in a Permitted Transfer, the Seller shall first give written notice
(a "Share Sale Notice") to ENBC of any such proposed sale, which Notice shall
state the name and address of the proposed purchaser, the number of Shares to be
sold and the price, terms of payment and conditions of such proposed sale. ENBC
shall thereupon have the right, for a period of 45 days from the date of the
Share Sale Notice, to purchase such Shares at the price and, except as provided
herein as to the medium of payment, on the terms and conditions stated in the
Share Sale Notice. ENBC may exercise such right by giving a notice of exercise
to the Seller, which notice shall specify a place of closing, a closing date,
which shall not be later than 30 days following the date of such notice of
exercise, (or, if later, two business days after the expiration or termination
of any waiting period under the HSR Act (as hereinafter defined)) and the
consideration which ENBC elects to deliver upon the closing, which may consist
of the medium of payment provided for in the Share Sale Notice, shares of common
stock of ENBC ("ENBC Stock"), shares of common stock ("BCI Stock") of Boston
Chicken, Inc. ("BCI"), cash, or any combination of the foregoing, provided,
however, that such consideration may consist of ENBC Stock or BCI Stock (the
issuer of such stock being referred to herein as the "Issuer") only if (a) the
average closing sales price per share of such stock of the Issuer as quoted on
the NASDAQ National Market, as reported in the Wall Street Journal (Western
Edition), or as quoted on such other market or exchange on which such shares are
traded, for the ten consecutive trading days ending on the second business day
prior to the Closing Date (as hereinafter defined) (the "Share Price") is at
least $10, and (b) the value of the Issuer (defined as the product of the Share
Price and the total number of outstanding shares of such stock of the Issuer) is
at least $300 million. In the event ENBC elects to deliver upon closing shares
of ENBC Stock or shares of BCI Stock, such shares shall be registered under the
Securities Act of 1933, as amended (the "1933 Act"), and shall be accompanied by
a written undertaking of ENBC to pay to the Seller in cash the excess, if any,
of the value of the shares so delivered, determined in the manner provided in
Section 6 hereof, over the proceeds (net of commissions) from the sale of the
shares, assuming all shares are sold in accordance with such reasonable
conditions on the timing, daily volume and manner of sale as may be set forth in
such undertaking. At the closing, ENBC shall pay the purchase price for the
Shares and the Seller shall deliver to ENBC certificates evidencing the Shares
accompanied, in the case of a sale of Shares by any of the Harlans, by duly
executed stock powers together with a certificate signed by the Seller stating
that the Shares are being sold free and clear of all liens, claims,
encumbrances, charges and restrictions or transfer, except for restrictions on
transfer imposed by federal and state securities laws ("Encumbrances"). In the
event ENBC does not elect to purchase the Shares as provided in this Section 2
the Seller may sell such Shares to the proposed third party purchaser on the
terms and conditions stated in the Share Sale Notice, but only if such sale is
consummated within 60 days after the expiration of the 45-day period referred to
above.
3. PERMITTED TRANSFERS. The provisions of Section 2 hereof shall not
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apply to (i) sales of shares by Harlan or the Harlans in an initial public
offering, (ii) sales of
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shares by Harlan in a private placement (other than to Permitted Transferees),
provided that the Harlans own at least 51% by vote and by value of the
outstanding capital stock of Harlan after any such offering and provided further
that Harlan has first offered to ENBC the opportunity to purchase the shares so
offered on terms no less favorable to ENBC than the terms offered in such
private placement, and (iii) transfers of Shares by any of the Harlans among
themselves or to any of their spouses or descendants, any trust solely for the
benefit of one or more of the Harlans, their spouses or descendants, or any
corporation, partnership or limited liability company all of the stockholders,
partners or members of which consist solely of one or more such persons or
trusts ("Permitted Transferees"), provided that the transferee in any such
transfer agrees in writing to be bound by the provisions of this Agreement
("Permitted Transfers").
4. RIGHT OF FIRST REFUSAL TO PURCHASE ASSETS. Subject to the provisions
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of Section 7 hereof, n the event Harlan desires to sell all or substantially all
of its assets, then Harlan shall first given written notice (the "Asset Sale
Notice") to ENBC of any such proposed sale, which Asset Sale Notice shall state
the name and address of the proposed purchaser, the assets to be sold and the
price, terms of payment and conditions of such proposed sale. ENBC shall
thereupon have the right, for a period of 45 days from the date of the Asset
Sale Notice, to purchase such assets at the price and, except as provided herein
as to the medium of payment, on the terms and conditions stated in the Asset
Sale Notice. ENBC may exercise such right by giving a notice of exercise to
Harlan, which notice shall specify a place of closing and a closing date which
shall not be later than 30 days following the date of such notice of exercise
(or, if later, two business days after the expiration or termination of any
waiting period under the HSR Act (as hereinafter defined)), and the
consideration which ENBC elects to deliver upon the closing, which may consist
of the medium of payment provided for in the Asset Sale Notice, shares of ENBC
Stock, shares of BCI Stock, cash, or any combination of the foregoing, provided,
however, that such consideration may consist of ENBC Stock or BCI Stock (the
issuer of such stock being referred to herein as the "Issuer") only if (a) the
average closing sales price per share of such stock of the Issuer as quoted on
the NASDAQ National Market, as reported in the Wall Street Journal (Western
Edition), or as quoted on such other market or exchange on which such shares are
traded, for the ten consecutive trading days ending on the second business day
prior to the Closing Date (as hereinafter defined) (the "Share Price") is at
least $10, and (b) the value of the Issuer (defined as the product of the Share
Price and the total number of outstanding shares of such stock of the Issuer) is
at least $300 million. In the event ENBC elects to deliver upon closing shares
of ENBC Stock or shares of BCI Stock, such shares shall be registered under the
1933 Act, and shall be accompanied by a written undertaking of ENBC to pay to
Harlan in cash the excess, if any, of the value of the shares so delivered,
determined in the manner provided in Section 6 hereof, over the proceeds (net of
commissions) from the sale of the shares, assuming all shares are sold in
accordance with such reasonable conditions on the timing, daily volume and
manner of sale as may be set forth in such undertaking. Such undertaking shall
be assignable by Harlan to its shareholders to the extent any such shares are
assigned to such shareholders. At the closing, ENBC shall pay the purchase
price for the assets and Harlan shall execute and deliver to ENBC instruments of
transfer sufficient to convey to ENBC all right, title and
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interest in and to the assets, free and clear of all Encumbrances, except as may
be specified in the Asset Sale Notice. In the event ENBC does not elect to
purchase the assets as provided in this Section 4 Harlan may sell such assets to
the proposed third party purchaser on the terms and conditions stated in the
Notice, but only if such sale is consummated within 60 days after the expiration
of the 45-day period referred to above.
5. REGULATORY COMPLIANCE. Upon the exercise by ENBC of its right to
---------------------
purchase Shares or its right to purchase assets of Harlan the parties shall
promptly prepare and file with the Federal Trade Commission ("FTC") and the
United States Department of Justice ("Justice Department") any notification
required to be filed with respect to the transactions contemplated hereby under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or any
rules or regulations thereunder (the "HSR Act"). Each party represents and
warrants to the other parties hereto that any such filing made by it shall be
true and accurate in all material respects and shall conform to the requirements
of the HSR Act. Each party shall promptly complete and file any required
responses to requests by the FTC or the Justice Department for additional data
and information. Each party shall also make available to the other parties
hereto such information relative to its business, assets and property as may be
required for the preparation of such notifications and reports.
6. VALUATION OF ENBC STOCK OR BCI STOCK. ENBC Stock or BCI Stock
------------------------------------
delivered upon the closing of any transaction contemplated hereby shall be
deemed to have a value equal to the average closing sales price per share of
such stock as quoted on the NASDAQ National Market, as reported in the Wall
Street Journal (Western Edition), or as quoted on such other market or exchange
on which such shares are traded, for the ten consecutive trading days ending on
the second business day prior to the date of closing.
7. TERMINATION. This Agreement shall terminate upon the later of the
------------
expiration of the Approved Supplier Agreement or the expiration of the Lease (as
defined in the Approved Supplier Agreement) (the "Termination Date"), provided,
however, that if the Approved Supplier Agreement expires prior to the expiration
of the Lease, then after the expiration of the Approved Supplier Agreement,
ENBC shall thereafter, until expiration of the Lease, have only a right of first
refusal to purchase the land and buildings owned by Harlan that consist of the
Production Facility, the adjacent building and the land on which they are
situated.
8. AMENDMENTS. The parties hereto may amend, modify and supplement this
-----------
Agreement in such manner as may be agreed upon by them in writing.
9. EXPENSES. Each party to this Agreement shall pay all of the expenses
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incurred by such party in connection with this Agreement and the transactions
contemplated hereby, including without limitation legal and accounting fees and
expenses, and the commissions, fees and expenses of any person employed or
retained by such party to bring about, or to represent it in, the transactions
contemplated hereby.
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10. BINDING AGREEMENT. This Agreement shall be binding upon and inure to
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the benefit of the parties hereto and their respective successors and assigns.
11. ENTIRE AGREEMENT. This instrument contains the entire agreement of
----------------
the parties hereto with respect to the subject matter hereof and supersedes all
prior understandings and agreements of the parties with respect to the subject
matter hereof.
12. HEADINGS. The descriptive headings in this Agreement are inserted for
--------
convenience only and do not constitute a part of this Agreement.
13. COUNTERPARTS. This Agreement may be executed in any number of
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counterparts, each of which shall be deemed an original.
14. NOTICES. Any notice, request, information or other document to be
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given hereunder shall be in writing. Any notice, request, information or the
document shall be deemed duly given three business days after it is sent by
registered or certified mail, postage prepaid, to the intended recipient,
addressed as follows:
If to Harlan, or any of the Harlans, addressed to such party at the
following address:
7597 East U.S. Highway 36
Avon, Indiana 46168-7971
with a copy to such party at the following address:
Harlan Sprague Dawley, Inc.
P.O. Box 29176
Indianapolis, Indiana 46229
Attention: Hal P. Harlan
and a copy to:
Henderson, Daily, Withrow & DeVoe
2600 One Indiana Square
Indianapolis, Indiana 46204
Attention: Roberts E. Inveiss, Esq.
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If to Einstein Bros., addressed as follows:
Einstein/Noah Bagel Corp.
14123 Denver West Parkway
Golden, Colorado 80401
Attention: Senior Vice President - Supply Chain
with a copy to:
Einstein/Noah Bagel Corp.
14123 Denver West Parkway
Golden, Colorado 80401
Attention: General Counsel
Any party may send any notice, request, information or other document to be
given hereunder using any other means (including personal delivery, courier,
messenger service, fax or ordinary mail), but no such notice, request,
information or other document shall be deemed duly given unless and until it is
actually received by the party for whom it is intended. Any party may change
the address to which notices hereunder are to be sent to it by giving written
notice of such change of address in the manner herein provided for giving
notice.
15. GOVERNING LAW. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Colorado applicable to contracts made
and to be performed wholly therein.
16. INJUNCTIVE RELIEF. In the event of a breach or threatened breach of
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any of the provisions of this Agreement, the parties acknowledge and agree that
the non-breaching party will not have an adequate remedy at law and therefore
will be entitled to enforce any such provision by temporary or permanent
injunctive or mandatory relief as a remedy for any such breach, and that such
remedy shall not be deemed to be the exclusive remedy for any such breach but
shall be in addition to all other remedies.
17. PUBLICITY. No press release or other public or trade announcement or
---------
statement related to this Agreement or the transactions contemplated hereby (or
the existence of any discussions or negotiations between the parties regarding
any other possible transactions) will be issued, and no disclosure of this
Agreement or the terms hereof will be made, by Harlan or any of the Harlans
without the prior approval of ENBC. ENBC agrees to use reasonable best efforts
to consult with Harlan and the Harlans prior to issuing any press release or
public or trade announcement or statement relating to this Agreement or the
transactions contemplated hereby.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
EINSTEIN/NOAH BAGEL CORP.
/s/ Paul A. Strasen
By ____________________________
Paul A. Strasen
Vice President
HARLAN BAKERIES, INC.
/s/ Hugh P. Harlan
By ____________________________
Hugh P. Harlan
President
/s/ Hal P. Harlan
_______________________________
Hal P. Harlan
/s/ Hugh P. Harlan
_______________________________
Hugh P. Harlan
/s/ Doug H. Harlan
_______________________________
Doug H. Harlan
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Exhibit 10.28
FOURTH AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
BAGEL STORE DEVELOPMENT FUNDING, L.L.C.
(FORMERLY KNOWN AS
EINSTEIN BROS. EQUITY FUNDING, L.L.C.)
This Fourth Amended and Restated Limited Liability Company Agreement of
Bagel Store Development Funding, L.L.C. (formerly known as Einstein Bros. Equity
Funding, L.L.C.) (the "Company") is made as of July 1, 1996, among the Persons
whose names and signatures are set forth on the signature pages hereto.
RECITALS
The Company was formed pursuant to the Delaware Limited Liability Company
Act, 6 Del.C. (S)18-101, et seq., as amended from time to time (the "Delaware
Act"), on December 7, 1995. Additional Members were admitted to the Company on
December 29, 1995 and March 8, 1996 pursuant to an Amended and Restated Limited
Liability Company Agreement dated as of December 29, 1995 and a Second Amended
and Restated Limited Liability Company Agreement dated as of March 8, 1996. The
Members entered into a Third Amended and Restated Limited Liability Company
Agreement dated as of March 29, 1996 to provide for certain changes in the
manner and time of making additional Capital Contributions by the Members.
The parties hereto desire to continue the Company as a limited liability
company under the Delaware Act and to provide for certain changes in the
governance and operations of the Company.
COVENANTS
In consideration of the agreements and obligations set forth herein and for
other good and valuable considerations, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE I
DEFINED TERMS
SECTION 1.1 DEFINITIONS. Unless the context otherwise requires, the terms
defined in this Article I shall, for the purposes of this Agreement, have the
meanings herein specified.
"Additional Funding" has the meaning given it in Section 4.1.1.
"Additional Funding Obligation" has the meaning given it in Section 4.1.1.
"Affiliate" means with respect to a specified Person, any Person that
directly or indirectly controls, is controlled by, or is under common control
with, the specified Person. As used in this definition, the term "control" means
the possession, directly or indirectly, of the
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Power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise.
"Agreement" means this Limited Liability Company Agreement, as
amended, modified, supplemented or restated from time to time.
"Area Developer" means a Person who has entered into an area
development agreement with Bagel Corp. and in whom Bagel Corp. has made an
investment in the form of convertible debt.
"Assignee" means any Person who is an assignee of a Member's interest
in the Company, or part thereof, and who does not become a Member pursuant to
Section 13.1 hereof.
"Bagel Corp." means Einstein/Noah Bagel Corp., a Delaware
corporation.
"Bankruptcy" has the meaning given it in Section 18-101 of the
Delaware Act.
"BCI" means Boston Chicken, Inc., a Delaware corporation.
"Capital Account" means, with respect to any Member or Assignee, the
account maintained for such Member or Assignee in accordance with the provisions
of Section 4.4 hereof.
"Capital Contribution" means, with respect to any Member, the
aggregate amount of money actually contributed to the Company pursuant to
Section 4.1 hereof with respect to the Units held by such Member. In the case of
a Member or Assignee who acquires an interest in the Company by virtue of an
assignment in accordance with the terms of this Agreement, "Capital
Contribution" has the meaning set forth in Section 4.4.1 hereof.
"Cause" for the removal of Bagel Corp. as Manager means (i) a failure
by Bagel Corp. as Manager to make any distribution when required by the terms of
this Agreement, (ii) a failure by Bagel Corp. as Manager to deliver to the
Members the financial statements and other information required to be delivered
by Section 10.1.2 or (iii) any other violation of this Agreement by Bagel Corp.
as Manager.
"Certificate" means the Certificate of Formation and any and all
amendments thereto and restatements thereof filed on behalf of the Company with
the office of the Secretary of State of the State of Delaware pursuant to the
Delaware Act.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any corresponding federal tax statute enacted after the date of this
Agreement. A reference to a specific section of the Code refers not only to such
specific section but also to any corresponding provision of any federal tax
statute enacted after the date of this Agreement, as such specific section or
corresponding provision is in effect on the date of application of the
provisions of this Agreement containing such reference.
"Company" means Bagel Store Development Funding, L.L.C., the limited
liability company heretofore formed under the name Einstein Bros. Equity
Funding, L.L.C. and continued under and pursuant to the Delaware Act and this
Agreement.
"Covered Person" means a Member, any Manager, any Affiliate of a
Member or of any Manager, any officers, directors, shareholders, partners,
employees, representatives or agents of a Member, any Manager or their
respective Affiliates, any member of the Advisory Committee or designated
alternate to the Advisory Committee, or any officer, employee or agent
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of the Company or its Affiliates, including without limitation Bagel Corp. and
its officers, directors, shareholders and employees at any time that Bagel Corp.
is providing services to the Company.
"Delaware Act" means the Delaware Limited Liability Company Act, 6
Del.C. (S) 18-101, et seq., as amended from time to time.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"ERISA Member" means a Member which is (i) an "Employee Benefit Plan"
within the meaning of and subject to the provisions of ERISA, (ii) a "Plan"
within the meaning of and subject to Section 4975 of the Code or (iii) an entity
the assets of which constitute assets of an Employee Benefit Plan or a Plan
under Department of Labor Regulations 29 C.F.R. Section 2510.3-101.
"Fiscal Year" means the accounting period selected by the Manager or
Managers or any portion of such period for which the Company is required to
allocate Profits, Losses and other items of Company income, gain, loss or
deduction pursuant to Article VIII hereof.
"Gross Asset Value" means, with respect to any asset, such asset's
adjusted basis for federal income tax purposes, except as follows:
(i) the initial Gross Asset Value of any asset contributed by a Member
to the Company shall be the gross fair market value of such asset, as
agreed to by the contributing Member and the Manager or Managers;
(ii) the Gross Asset Value of all Company assets shall be adjusted to
equal their respective gross fair market values, as determined by the
Manager or Managers, as of the following times: (a) the acquisition of an
additional interest in the Company by any new or existing Member in
exchange for more than a de minimis Capital Contribution; (b) the
distribution by the Company to a Member or Assignee of more than a de
minimis amount of Company assets as consideration for an interest in the
Company; and (c) the liquidation of the Company within the meaning of
Treasury Regulation Section 1.704-1(b)(2)(ii)(g); provided, however, that
adjustments pursuant to clause (a) and clause (b) of this sentence shall be
made only if the Manager or Managers reasonably determine that such
adjustments are necessary or appropriate to reflect the relative economic
interests of the Members and Assignees in the Company; and
(iii) the Gross Asset Value of any Company asset distributed to any
Member or Assignee shall be the gross fair market value of such asset on
the date of distribution, as determined by the distributee Member or
Assignee and the Manager or Managers.
"Liquidating Trustee" has the meaning set forth in Section 14.3
hereof.
"Majority Vote" means, with respect to any group of Members as of any
particular time, the vote of Members in such group whose Units at such time
exceed one-half of the outstanding Units of all Members in such group at such
time and whose Capital Account balances at such time exceed one-half of the
outstanding Capital Account balances of all Members in such group at such time,
in each case ignoring any Units or Capital Account balances held by Assignees.
"Manager" or "Managers" means the Person or Persons designated by the
Members in Article VI hereof as the manager of the Company within the meaning of
the
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Delaware Act and shall include all successors appointed pursuant to the
provisions of this Agreement. References to the "Manager", the "Managers" or the
"Manager or Managers" shall all be construed to refer to the Person or Persons
then serving as Managers of the Company.
"Member" means any Person named as a member of the Company on Schedule
A hereto and includes any Person admitted as a Substitute Member pursuant to the
provisions of this Agreement, and "Members" means two or more of such Persons
when acting in their capacities as members of the Company. For purposes of the
Delaware Act, the Members shall constitute one class or group of members.
"Other Business Entity" has the meaning given it in Section 18-209 of
the Delaware Act.
"Permitted Temporary Investments" means Treasury securities, bank
certificates of deposit and time deposits, in each case having a maturity of one
year or less, commercial paper or money-market instruments.
"Person" includes any individual, corporation, association,
partnership (general or limited), joint venture, trust, estate, limited
liability company, or other legal entity or organization.
"Profits" and "Losses" means, for each Fiscal Year, an amount equal to
the Company's taxable income or loss for such Fiscal Year, determined in
accordance with Section 703(a) of the Code (but including in taxable income or
loss, for this purpose, all items of income, gain, loss or deduction required to
be stated separately pursuant to Section 703(a)(1) of the Code), with the
following adjustments:
(i) any income of the Company exempt from federal income tax and not
otherwise taken into account in computing Profits or Losses pursuant to
this definition shall be added to such taxable income or loss;
(ii) any expenditures of the Company described in Section 705(a)(2)(B)
of the Code (or treated as expenditures described in Section 705(a)(2)(B)
of the Code pursuant to Treasury Regulation Section 1.704-1 (b)(2)(iv)(i))
and not otherwise taken into account in computing Profits or Losses
pursuant to this definition shall be subtracted from such taxable income or
loss;
(iii) in the event the Gross Asset Value of any Company asset is
adjusted in accordance with paragraph (ii) or paragraph (iii) of the
definition of "Gross Asset Value" above, the amount of such adjustment
shall be taken into account as gain or loss from the disposition of such
asset for purposes of computing Profits or Losses; and
(iv) gain or loss resulting from any disposition of any asset of the
Company with respect to which gain or loss is recognized for federal income
tax purposes shall be computed by reference to the Gross Asset Value of the
asset disposed of, notwithstanding that the adjusted tax basis of such
asset differs from its Gross Asset Value.
"Substitute Member" means a Person who is admitted to the Company as a
Member pursuant to Section 13.1 hereof, and who is named as a Member on Schedule
A to this Agreement.
"Tax Matters Partner" has the meaning set forth in Section 11.1
hereof.
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"Treasury Regulations" means the income tax regulations, including
temporary regulations, promulgated under the Code, as such regulations may be
amended from time to time (including corresponding provisions of succeeding
regulations).
"Unit" means an interest in the Company representing such fractional
part of the interest of all Members and Assignees pursuant to this Agreement as
is equal to one divided by the total number of Units.
ARTICLE II
CONTINUATION AND TERM
SECTION 2.1 CONTINUATION.
2.1.1 The Members hereby agree to continue the Company as a
limited liability company under and pursuant to the provisions of the
Delaware Act and agree that the rights, duties and liabilities of the
Members and the Managers shall be as provided in the Delaware Act,
except as otherwise provided herein.
2.1.2 The name and mailing address of each Member and Assignee
shall be listed on Schedule A attached hereto. The Manager or
Managers shall update Schedule A from time to time as necessary to
accurately reflect the information therein. Any amendment or revision
to Schedule A made in accordance with this Agreement shall not be
deemed an amendment to this Agreement. Any reference in this
Agreement to Schedule A shall be deemed to be a reference to Schedule
A as amended and in effect from time to time.
SECTION 2.2 NAME. The name of the Company continued hereby is Bagel
Store Development Funding, L.L.C. The business of the Company may be conducted
upon compliance with all applicable laws under any other name designated by the
Managers. The Managers may amend the Certificate to change the name of the
Company to any name designated by the Managers.
SECTION 2.3 TERM. The term of the Company commenced on the date the
Certificate was filed in the office of the Secretary of State of the State of
Delaware and shall continue until December 31, 2005, unless dissolved before
such date in accordance with the provisions of this Agreement.
SECTION 2.4 REGISTERED AGENT AND OFFICE. The Company's registered
agent and office in Delaware shall be The Corporation Trust Company, Corporation
Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. At any time, the
Managers may designate another registered agent and/or registered office.
SECTION 2.5 PRINCIPAL PLACE OF BUSINESS. The principal place of
business of the Company shall be at 1526 Cole Boulevard, Suite 200, Golden, CO
80401-4086. Upon ten days notice to the Members, the Managers may change the
location of the Company's principal place of business.
SECTION 2.6 QUALIFICATION IN OTHER JURISDICTIONS. The Managers may
cause the Company to be qualified, formed or registered under assumed or
fictitious name statutes or
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similar laws in any jurisdiction in which the Company transacts business. Any
Manager, as an authorized person, within the meaning of the Delaware Act, may
execute, deliver and file any certificates (and any amendments and/or
restatements thereof) necessary for the Company to qualify to do business in a
jurisdiction in which the Company may wish to conduct business.
ARTICLE III
PURPOSE AND POWERS OF THE COMPANY
SECTION 3.1 PURPOSE. The Company is formed for the object and
purpose of, and the nature of the business to be conducted and promoted by the
Company is, (i) investing in equity securities of Area Developers, (ii)
investing in warrants to purchase shares of Bagel Corp. and (iii) engaging in
any and all activities necessary or incidental to the foregoing and any other
legal business.
SECTION 3.2 POWERS OF THE COMPANY. The Company shall have the power
and authority to take any and all actions necessary, appropriate, proper,
advisable, incidental or convenient to or for the furtherance of the purpose set
forth in Section 3.1, including, but not limited to, the power:
(a) to conduct its business, carry on its operations and have and
exercise the powers granted to a limited liability company by the
Delaware Act in any state, territory, district or possession of the
United States, or in any foreign country that may be necessary,
convenient or incidental to the accomplishment of the purposes of the
Company;
(b) subject to the provisions of Section 3.1, to purchase, take,
receive, subscribe for or otherwise acquire, own, hold, vote, use,
employ, sell, mortgage, lend, pledge or otherwise dispose of, and
otherwise use and deal in and with, shares or other interests in or
obligations of Area Developers and Bagel Corp., or rights to acquire
any of the foregoing;
(c) to purchase, take, receive, subscribe for or otherwise
acquire, own, hold, vote, use, employ, sell, mortgage, lend, pledge or
otherwise dispose of, and otherwise use and deal in and with Permitted
Temporary Investments;
d) to enter into, perform and carry out contracts of any kind,
including, without limitation, contracts with any Manager or any
Member or any Affiliate of any of them, or any agent of the Company
necessary to, in connection with, convenient to, or incidental to the
accomplishment of the purpose of the Company;
(e) to lend money;
(f) to sue and be sued, complain and defend, and participate in
administrative or other proceedings, in its name;
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(g) to elect and designate one or more managers of the Company in
accordance with Article VI hereof and to appoint officers, employees
and agents of the Company, and define their duties and fix their
compensation;
(h) to indemnify any Person in accordance with the Delaware Act;
(i) to cease its activities and cancel its Certificate;
(j) to negotiate, enter into, renegotiate, extend, renew,
terminate, modify, amend, waive, execute, acknowledge or take any
other action with respect to any contract or security agreement in
respect of any assets of the Company;
(k) to borrow money and issue evidences of indebtedness, and to
secure the same by a mortgage, pledge or other lien on the assets of
the Company;
(l) to take actions to protect and preserve the Company's assets,
including insuring the business and assets of the Company against
risks;
(m) to hold Company assets in the name of the Company or in the
name of one or more nominees;
(n) to open one or more bank accounts in the name of the Company
or in any other name in which the Company's funds are to be held, make
deposits therein, draw funds therefrom and deal in or with the
Company's funds;
(o) to make distributions of the Company's funds or assets to the
Members as provided for by this Agreement;
(p) to make such income tax elections as may be appropriate or
desirable, as contemplated by the Code and the Treasury Regulations;
prepare and file tax returns for the Company with federal, state and
local authorities; file amendments to such returns; participate in
audits of such returns; consent to extensions relating to such
returns; execute documents relating to the settlement of tax
proceedings involving the Company or its tax returns; participate in
administrative and judicial proceedings, including appeals, relating
to the Company's tax returns or its tax liabilities; and settle issues
relating to the Company's federal and, to the extent required, state
and local income tax returns even though the Members rather than the
Company shall be subject to tax as so determined;
(q) to pay, collect, compromise, litigate, arbitrate or otherwise
adjust or settle any and all other claims or demands of or against the
Company or to hold such proceeds against the payment of contingent
liabilities; and
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(r) to make, execute, acknowledge and file any and all documents
or instruments necessary, convenient or incidental to the
accomplishment of the purposes of the Company.
ARTICLE IV
CAPITAL CONTRIBUTIONS,
UNITS, CAPITAL ACCOUNTS AND ADVANCES
SECTION 4.1 CAPITAL CONTRIBUTIONS.
4.1.1 Each Member has contributed to the capital of the Company
the amount set forth opposite the Member's name on Schedule A attached
hereto. In addition, each Member agrees to contribute to the Company
in the future the aggregate amount set forth opposite such Member's
name on Schedule A under the heading Additional Capital Subscription
at the time or times called for by the Manager or Managers on not less
than 30 days written notice (a "Capital Call"). The Manager or
Managers may not require that any portion of the Additional Capital
Subscription be paid on a date earlier than October 1, 1996 or later
than December 31, 1998 and may not require that the total amount of
the Additional Capital Subscription be paid in more than two
installments, each of which shall be for at least 20% of the Members'
aggregate Additional Capital Subscriptions. The making of each such
additional Capital Contribution is referred to herein as an
"Additional Funding" and the amount each Member is obligated to
contribute at an Additional Funding is referred to as such Member's
"Additional Funding Obligation."
4.1.2 Until March 31, 1996, the Manager may admit additional
Members or accept increased Capital Contributions from Members;
provided that all Capital Contributions shall be on the same terms.
No revaluation of the Company's assets shall be made in connection
with such admission or increase, it being the intention to treat all
such Members as if admitted on the date of this Agreement.
4.1.3 The Members agree that the prompt payment of each
Additional Funding Obligation is of the essence of this Agreement,
that failure of any Member to make such payments will cause injury to
the Company and the other Members and that the amount of damages
caused by such injury will be extremely difficult to calculate.
Accordingly, the Members agree that if a Member fails to pay any of
such Member's Additional Funding Obligations within three days of the
date it is due, or such longer period as the Manager or Managers may
in its or their sole discretion determine (but in no event longer than
45 days), the Company shall treat such defaulting Member's interest in
future Profits of the Company as terminated; and such defaulting
Member shall be entitled to receive from the Company only the amount
of such Member's Capital Account at the time of such default (reduced
by any future allocation of Losses to such Member), such amount to be
payable without interest at the expiration of the term of the Company.
Upon
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such default, the defaulting Member shall cease to have any rights as
a Member except as described in the preceding sentence.
4.1.4 Notwithstanding Section 4.1.3, if at any time before a
date on which any Additional Funding Obligation is payable any ERISA
Member shall obtain and deliver to the Managers an opinion of
independent legal counsel, which counsel and opinion are acceptable to
the Managers (which acceptance the Managers shall not unreasonably
withhold) to the effect that such Member is an ERISA Member and there
is a material likelihood that the payment of such Additional Funding
Obligation would either (i) cause or constitute a prohibited
transaction under Section 406 of ERISA or Section 4975 of the Code or
(ii) cause the assets of the Company to constitute plan assets for
purposes of ERISA, then such Member shall be released from any further
obligation to pay such Additional Funding Obligation.
4.1.5 Upon any default described in Section 4.1.3 or any release
described in Section 4.1.4, the Managers may designate any person to
assume the entire unpaid balance of the Additional Funding Obligation
(and the future Additional Funding Obligation, if any) of the
defaulting or released Member and become a Member entitled to share in
the profits and losses of the Company as determined pursuant to this
Agreement. The Managers agree to offer the opportunity to pay such
Additional Funding Obligation to the Members who are not in default or
released, pro rata to their Capital Contributions, prior to offering
such opportunity to third parties. Any Member who fails to accept
such offer in writing within fifteen (15) days after it is made shall
be deemed to have rejected the offer.
4.1.6 The remedies provided in this Section 4.1 are in addition
to and not in limitation of any other right or remedy of the Company
provided by law or under this Agreement. In the event of any legal
proceedings relating to default by a Member, if the Company shall
prevail, such Member shall pay (i) all costs and expenses incurred by
the Company, including attorneys' fees, and (ii) interest on the
unpaid Additional Funding Obligation at a per annum rate equal to the
lesser of the maximum interest rate permitted by law or the rate of
interest publicly announced from time to time by Bank of America
Illinois, Chicago, Illinois (or its successor in interest), as its
Prime Rate (or its equivalent) for United States Dollar loans, plus
4%.
SECTION 4.2 UNITS. A Member or Assignee's interest in the Company
shall be represented by the "Unit" or "Units" held by such Member or Assignee.
Each Member or Assignee's respective Units shall be set forth on Schedule A
attached hereto. Each Member hereby agrees that its interest in the Company and
in its Units shall for all purposes be personal property. A Member or Assignee
has no interest in specific Company property.
SECTION 4.3 STATUS OF CAPITAL CONTRIBUTIONS.
4.3.1 No Member or Assignee shall have the right to withdraw its
Capital Contribution or Capital Account or to receive any interest,
salary or drawing with respect to its Capital Contributions or its
Capital Account or for
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services rendered on behalf of the Company or otherwise in its
capacity as a Member or Assignee, except as otherwise specifically
provided in this Agreement.
4.3.2 Except as otherwise provided herein and by applicable
state law, the Members shall be liable only to make their Capital
Contributions (including the Additional Funding Obligations) pursuant
to Section 4.1 hereof, and no Member or Assignee shall be required to
lend any funds to the Company or, after a Member's Capital
Contributions (including the Additional Funding Obligations) have been
fully paid pursuant to Section 4.1 hereof, to make any additional
Capital Contributions to the Company. No Member or Assignee shall
have any personal liability for the repayment of any Capital
Contribution of any other Member or Assignee.
SECTION 4.4 CAPITAL ACCOUNTS.
4.4.1 An individual Capital Account shall be established and
maintained for each Member. The original Capital Account established
for any Member or Assignee who acquires an interest in the Company by
virtue of an assignment in accordance with the terms of this Agreement
shall be in the same amount as, and shall replace, the Capital Account
of the assignor of such interest, and, for purposes of this Agreement,
such Member or Assignee shall be deemed to have made the Capital
Contributions made by the assignor of such interest (or made by such
assignor's predecessor in interest) and to have assumed the
obligation, if any, to pay the Additional Funding Obligations of the
assignor of such interest (or the obligation of such assignor's
predecessor in interest); provided, however, that the assignor of such
interest shall not be relieved of the obligation to pay the Additional
Funding Obligations until such Additional Funding Obligations are in
fact paid by such Member or Assignee. To the extent such Member or
Assignee acquires less than the entire interest in the Company of the
assignor of the interest so acquired by such Member or Assignee, the
original Capital Account of such Member or Assignee and its Capital
Contributions and obligation to pay the Additional Funding Obligations
shall be in proportion to the interest it acquires, and the Capital
Account of the assignor who retains a partial interest in the Company,
and the amount of its Capital Contributions shall be reduced in
proportion to the interest it retains.
4.4.2 The Capital Account of each Member or Assignee shall be
maintained in accordance with the following provisions:
(a) to such Member or Assignee's Capital Account there shall
be credited such Member or Assignee's Capital Contributions, such
Member or Assignee's distributive share of Profits and the amount
of any Company liabilities that are assumed by such Member or
Assignee or that are secured by any Company assets distributed to
such Member or Assignee;
(b) to such Member or Assignee's Capital Account there shall
be debited the amount of cash and the Gross Asset Value of any
Company assets distributed to such Member or Assignee pursuant to
any provision
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of this Agreement, such Member or Assignee's distributive share
of Losses and the amount of any liabilities of such Member or
Assignee that are assumed by the Company or that are secured by
any property contributed by such Member or Assignee to the
Company; and
(c) in determining the amount of any liability for purposes
of this Section 4.4.2, there shall be taken into account Section
752(c) of the Code and any other applicable provisions of the
Code and the Treasury Regulations.
SECTION 4.5 ADVANCES. If any Member or Assignee shall advance any
funds to the Company in excess of its Capital Contributions, the amount of such
advance shall neither increase its Capital Account nor entitle it to any
increase in its share of the distributions of the Company. The amount of any
such advance shall be a debt obligation of the Company to such Member or
Assignee and shall be repaid to it by the Company with interest at a per annum
rate equal to the lesser of (i) the rate of interest publicly announced from
time to time by Bank of America Illinois, Chicago, Illinois (or its successor in
interest), as its Prime Rate (or its equivalent) for United States Dollar Loans,
plus 1%, and (ii) the maximum rate permitted by applicable law, and upon such
other terms and conditions as shall be mutually determined by such Member or
Assignee and the Manager or Managers. Any such advance shall be payable and
collectible only out of Company assets, and the other Members and Assignees
shall not be personally obligated to repay any part thereof.
ARTICLE V
MEMBERS
SECTION 5.1 POWERS OF MEMBERS. The Members shall have the power to
exercise any and all rights or powers granted to the Members pursuant to the
express terms of this Agreement. The Members shall also have the power to
authorize the Manager or Managers, by Majority Vote of the Members, to possess
and exercise any right or power not already vested in the Managers pursuant to
Section 6.4 or any other provision of this Agreement. The Members shall not
have the power to bind the Company.
SECTION 5.2 PARTITION. Each Member waives, until termination of the
Company, any and all rights that it may have to maintain an action for partition
of the Company's property.
SECTION 5.3 RESIGNATION OF MEMBERS. A Member may not resign from the
Company without the written consent of the Manager or Managers.
SECTION 5.4 ADVISORY COMMITTEE.
5.4.1 The Company shall have an Advisory Committee consisting of
three persons, as determined by the Manager, none of whom shall be an
officer, director or employee of Bagel Corp. or BCI. The members of
the Advisory Committee shall be nominated by the Manager and approved
by a Majority Vote of Members. Replacement members of the Advisory
Committee shall be selected in the same manner. The Members hereby
agree that the members of the Advisory Committee on the date of this
Agreement shall be Perry J. Lewis, J. Christopher Reyes and Alberto
Finol. The Advisory Committee shall (i)
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determine, at the time such right becomes exercisable, whether the
Company should exercise any right held by it to cause an Area
Developer to purchase from the Company the Company's equity interest
in such Area Developer, (ii) determine, at the time such right becomes
exercisable, whether the Company should exercise any right held by it
to require an Area Developer to undertake an underwritten public
offering, (iii) determine, at the time such right becomes exercisable,
whether the Company should exercise any right held by it to require an
Area Developer to seek to terminate its area development agreement and
franchise agreements with Bagel Corp., (iv) determine whether the
Company should sell its equity interest in an Area Developer to such
Area Developer or Bagel Corp. at a price different from the "Put
Price" as defined in the governing documents of the Area Developer at
the time the Company acquired its equity interest, (v) consult with
the Manager with respect to any matters requested by the Manager
concerning the Company's investments, (vi) resolve any questions with
respect to potential conflicts of interest between the Company, on the
one hand, and the Manager, on the other hand, as may be presented by
the Manager to the Advisory Committee, (vii) whenever the Company
holds equity interests in an Area Developer which entitle the Company
to vote with respect to (a) the election of the Manager of the Area
Developer, (b) the approval or disapproval of any merger,
consolidation or sale of substantially all of the assets of such Area
Developer or (c) an amendment to the governing documents of the Area
Developer, determine the manner in which the Company should vote such
equity interests and (viii) perform such other functions and have such
other powers as are expressly provided for in this Agreement.
5.4.2 The Advisory Committee shall have the authority to adopt
rules and procedures, not inconsistent with this Agreement, relating
to the conduct of its affairs. All actions taken by the Advisory
Committee shall be authorized by a majority of the Advisory Committee
members then serving as members. Each member of the Advisory
Committee shall be entitled to designate from time to time an
alternate and such alternate may attend any and all meetings of the
Advisory Committee and otherwise may act in the place and stead of
such member with the same authority and effect as such member.
Members of the Advisory Committee and their alternates shall receive
no fees from the Company for their services, but shall be entitled to
reimbursement from the Company for reasonable travel, lodging and
similar expenses incurred in connection therewith.
5.4.3 The members of the Advisory Committee shall exercise their
best judgment in carrying out their functions for the Company. The
members of the Advisory Committee shall not be liable to the Company
or any Member for any mistakes of judgment or for losses due to such
mistakes or by reason of any act or omission performed or omitted in
good faith and in a manner reasonably believed to be within the scope
of authority conferred on such Advisory Committee by this Agreement.
5.4.4 From and after the time that Bagel Corp. ceases to be the
Manager pursuant to Article VI hereof, the Advisory Committee shall be
disbanded and shall have no further authority with respect to the
Company.
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ARTICLE VI
MANAGERS
SECTION 6.1 DESIGNATION OF MANAGERS. The management of the Company's
business shall be vested in one or more Managers designated by the Members as
hereinafter provided. A Manager may be but need not be a Member. The Members
hereby agree to continue Bagel Corp. as the initial Manager, and Bagel Corp.
agrees to be bound by the terms and conditions of this Agreement. Bagel Corp.
shall be the Manager for a term ending on April 20, 1997.
SECTION 6.2 DESIGNATION OF SUCCESSOR MANAGERS. The Members hereby
agree that, effective April 21, 1997 or at such earlier time as Bagel Corp.
ceases to be the Manager of the Company as a result of its removal or
resignation as provided in this Agreement, the members of the Advisory Committee
immediately prior to the time it is disbanded pursuant to Section 5.4.4 hereof
shall each become, without further action by the Members, a Manager of the
Company and a member of the Board of Managers. The Board of Managers shall act
as provided in Section 6.3 hereof. Each of the members of the Advisory Committee
named in Article V has executed a copy of this Agreement accepting and agreeing
to the terms and conditions of this Agreement and to serve as a Manager and a
member of the Board of Managers as provided herein. In the event that any
replacement members of the Advisory Committee are selected as provided in
Article V, each such member shall be required as a condition of becoming a
member of the Advisory Committee to execute a copy of this Agreement accepting
and agreeing to the terms and conditions of this Agreement and to serve as a
Manager and a member of the Board of Managers as provided herein. On or about
April 1 of each year commencing in 1998, the Board of Managers will submit the
names of its nominees for Managers to the Members. Each nominee who is elected
by a Majority Vote of the Members shall serve as a Manager and a member of the
Board of Managers until he dies, resigns, is removed as provided herein or
becomes unable to fulfill the duties of a Manager and member of the Board of
Managers or (if such Manager is not renominated by the Board of Managers or
fails to be elected by a Majority Vote of the Members) until a successor is
elected by a Majority Vote of the Members. In the event of a vacancy as the
result of the death, resignation, removal or incapacity of a member of the Board
of Managers, the remaining members of the Board of Managers shall promptly
submit the name of its nominee as a successor Manager to the Members. Such
nominee shall become a Manager and a member of the Board of Managers if he
receives a Majority Vote of the Members. If any nominee at any time fails to
receive a Majority Vote of the Members, the Board of Managers shall submit the
name of a different nominee to the Members. No Manager may be an officer,
director or employee of Bagel Corp. or of BCI.
SECTION 6.3 ACTION BY THE BOARD OF MANAGERS. After Bagel Corp.
ceases to be the Manager of the Company, the successor Managers shall act
collectively as the Board of Managers, which shall consist of three Managers.
The Board of Managers may act by a majority vote of its members at a meeting
(which may be conducted by conference telephone) or by a written consent signed
by a majority of its members. Notice of any action taken by a consent signed by
less than all of the members of the Board of Managers shall be given to any
member who did not sign such consent. Each member of the Board of Managers and
any officer of the Company shall be authorized to execute any document or take
any action on behalf of the Company if such document or action has been approved
by the Board of Managers. The Board of Managers may make additional rules to
facilitate its management of the Company.
SECTION 6.4 POWER AND AUTHORITY OF THE MANAGERS. Subject to the
limitations expressly set forth in this Agreement, the business and affairs of
the Company shall be managed by the Managers, and, except as provided in Section
5.4 hereof, the Managers shall have full authority to act for and to bind the
Company in all matters in connection with or
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relating to the Company's business, including, without limitation, directing the
investment of the Company's assets in Area Developers in the sole discretion of
the Managers. No Person dealing with the Company shall be required to inquire as
to the authority of any Manager or any officer of the Company to take any action
on behalf of the Company.
SECTION 6.5 LIMITATIONS ON THE MANAGERS' POWERS. Notwithstanding the
provisions of Section 6.4, the Managers shall not have the power to take any of
the following actions unless such actions have been approved by a Majority Vote
of the Members (and, in the case of an amendment to this Agreement, such
additional approvals as are required by Section 7.2 hereof):
(a) to make investments other than (i) Permitted Temporary
Investments, (ii) shares or other interests in or obligations of Area
Developers and Bagel Corp. or (iii) rights to acquire any of the
foregoing;
(b) to cause the Company to merge with, or consolidate into,
another Delaware limited liability company or Other Business Entity;
(c) to amend this Agreement; or
(d) to dissolve the Company except as provided in Section 14.2
hereof.
SECTION 6.6 MANAGEMENT FEES AND REIMBURSEMENT.
6.6.1 While Bagel Corp. is the Manager it shall receive from the
Company a one-time fee in the amount of $500,000 payable in four equal
quarterly installments not later than the end of each 1996 fiscal
quarter of the Manager and a management fee of $50,000 for the first
calendar quarter of 1997, payable not later than the end of such
quarter.
6.6.2 Beginning at the time that the members of the Board of
Managers become the successor Managers, each member of the Board of
Managers shall receive an annual management fee equal to $33,333 or
such lesser amount for any Manager as the Board of Managers may
approve, payable in equal quarterly installments not later than the
end of each calendar quarter.
6.6.3 The Company shall reimburse each Manager for all ordinary
and necessary out-of-pocket expenses incurred by the Manager on behalf
of the Company, including without limitation any fees and expenses (i)
incurred in connection with the organization of the Company, (ii)
incurred in connection with any investment made by the Company or
(iii) paid to Bagel Corp. for services rendered to the Company after
Bagel Corp. has ceased to be the Manager.
6.6.4 Management fees paid pursuant to Section 6.6.1 or Section
6.6.2 and amounts reimbursed pursuant to Section 6.6.3 shall be
treated as expenses of the Company and shall not be deemed to
constitute a distributive share of Profits or a distribution to any
Manager.
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SECTION 6.7 REMOVAL OF MANAGER. While Bagel Corp. is the Manager it
may be removed with Cause at any time by a vote of Members holding more than
two-thirds of the outstanding Units, ignoring for this purpose any Units held by
Assignees. Bagel Corp. may be removed as the Manager without Cause at the end
of any Fiscal Year upon not less than 90 day prior written notice by a vote of
Members holding more than four-fifths of the outstanding Units. If the removal
of Bagel Corp. is for Cause, the removal shall not be effective unless and until
the Members voting to remove Bagel Corp. as the Manager shall have given Bagel
Corp. a written notice specifying the basis for the removal and Bagel Corp.
shall not have acted to remedy such basis within 60 days after such notice is
given. Once Bagel Corp. has ceased to be the Manager, any member of the Board
of Managers may be removed at any time, with or without Cause, by a vote of
Members holding more than two-thirds of the outstanding Units.
SECTION 6.8 RESIGNATION OF MANAGER. Any Manager may resign at any
time upon notice to the Members.
SECTION 6.9 OFFICERS. The Company shall have a president, one or
more vice presidents, a secretary and such assistant secretaries and other
officers as shall be determined by the Managers, and the authority and duties of
each officer shall be determined by the Managers. All officers shall be
appointed by the Managers and may be removed at any time by the Managers with or
without cause. Officers shall not be entitled to receive compensation from the
Company for serving as officers. The initial officers of the Company shall be:
Michael Beaudoin, President; David White, Vice President; Mark Hayden, Vice
President; Paul Strasen, Vice President and Assistant Secretary; and Joel Alam,
Vice President and Secretary.
ARTICLE VII
MEETINGS; AMENDMENTS; MERGER
OR CONSOLIDATION
SECTION 7.1 MEETINGS OF THE MEMBERS.
7.1.1 Meetings of the Members may be called by the Managers and
shall state the location of the meeting and the nature of the business
to be transacted. Notice of any such meeting shall be given to all
Members not less than seven business days nor more than thirty days
prior to the date of such meeting. Members may vote in person or by
proxy at such meeting. Whenever a vote, consent or approval of
Members is permitted or required under this Agreement, such vote,
consent or approval may be given at a meeting of Members or may be
given in accordance with the procedure prescribed in Section 7.1.5.
Except as otherwise expressly provided in this Agreement, the Majority
Vote of the Members shall be required to constitute the act of the
Members.
7.1.2 For the purpose of determining the Members entitled to
vote on, or to vote at, any meeting of the Members or any adjournment
thereof, the Managers may fix, in advance, a date as the record date
for any such determination. Such date shall not be more than thirty
days nor less than ten business days before any such meeting.
7.1.3 Each Member may authorize any Person to act for it by
proxy on all matters in which a Member is entitled to participate,
including waiving notice of any meeting, or voting or participating at
a meeting. Every proxy must be
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signed by the Member or its attorney-in-fact. No proxy shall be valid
after the expiration of eleven months from the date thereof unless
otherwise provided in the proxy. Every proxy shall be revocable at the
pleasure of the Member executing it.
7.1.4 Each meeting of Members shall be conducted by the Managers
or by such other Person that the Managers designate.
7.1.5 Any action which may be taken at a meeting of Members may
be taken without a meeting, without prior notice and without a vote,
if a consent or consents in writing, setting forth the action so
taken, shall be signed by Members having not less than the minimum
number of votes that would be necessary to authorize or take such
action at a meeting and shall be delivered to the Company by delivery
to its registered office, its principal place of business or to an
officer or agent of the Company having custody of the books in which
proceedings of Members are recorded. Delivery made to the Company's
registered office shall be by hand or by certified or registered mail,
return receipt requested.
SECTION 7.2 AMENDMENTS. Except as provided in Section 14.2, any
amendment to this Agreement shall be adopted and be effective as an amendment
hereto only if it receives the approval of the Manager or Managers and a
Majority Vote of the Members; provided, however, that no such amendment shall
(i) extend the term of the Company beyond that permitted by Section 2.3, (ii)
change the purpose of the Company from that set forth in Section 3.1, (iii)
alter the Capital Account of any Member, (iv) change the allocation provisions
of Article VIII hereof, (v) alter the respective interests of the Members in
distributions made by the Company, (vi) increase the liabilities of any Member
beyond those provided for in Section 12.1, (vii) cause the Company to cease to
qualify as a limited liability company under the Delaware Act or (viii) amend
this Section 7.2 to delete or alter any of clauses (i) through (viii), in each
case without the consent of any Member adversely affected thereby, and, in the
case of an amendment described in clause (i), (ii) or (vii), without the consent
of all of the Members and, in the case of an amendment affecting the provisions
of Sections 4.1, 6.7 or 9.1, without the consent of Members owning two-thirds of
the Units.
SECTION 7.3 MERGER OR CONSOLIDATION. The Company may merge with, or
consolidate into, one or more other Delaware limited liability companies or
Other Business Entities only with the approval of the Managers and a Majority
Vote of the Members.
ARTICLE VIII
ALLOCATIONS
SECTION 8.1 PROFITS AND LOSSES. Subject to the allocation rules of
Section 8.2 hereof, Profits and Losses for any Fiscal Year shall be allocated
among the Members and Assignees in proportion to the number of Units held by
each of them; provided, however, that if any Member's interest in Profits has
been terminated pursuant to Section 4.1.3, Profits shall be allocated among the
Members other than the defaulting Member in accordance with their respective
Units and Losses shall be allocated among all of the Members, including the
defaulting Member, in accordance with their respective Units.
SECTION 8.2. ALLOCATION RULES.
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8.2.1 In the event Members are admitted to the Company pursuant
to this Agreement after March 31, 1996, the Profits or Losses
allocated to the Members and Assignees for each Fiscal Year during
which Members are so admitted shall be allocated among the Members and
Assignees in proportion to the number of Units each holds from time to
time during such Fiscal Year in accordance with Section 706 of the
Code, using any convention permitted by law and selected by the
Managers.
8.2.2 For purposes of determining the Profits, Losses or any
other items allocable to any period, Profits, Losses and any such
other items shall be determined on a daily, monthly or other basis, as
determined by the Managers using any method that is permissible under
Section 706 of the Code and the Treasury Regulations thereunder.
8.2.3 Except as otherwise provided in this Agreement, all items
of Company income, gain, loss, deduction and any other allocations not
otherwise provided for shall be divided among the Members and
Assignees in the same proportions as they share Profits and Losses for
the Fiscal Year in question.
SECTION 8.3 TAX ALLOCATIONS.
8.3.1 In accordance with Section 704(c) of the Code and the
Treasury Regulations thereunder, income, gain, loss and deduction with
respect to any property contributed to the capital of the Company
shall, solely for income tax purposes, be allocated among the Members
and Assignees so as to take account of any variation between the
adjusted basis of such property to the Company for federal income tax
purposes and its initial Gross Asset Value (computed in accordance
with Section 1.1 hereof).
8.3.2 In the event the Gross Asset Value of any Company asset is
adjusted pursuant to paragraph (ii) of the definition of "Gross Asset
Value" contained in Section 1.1 hereof, subsequent allocations of
income, gain, loss and deduction with respect to such asset shall take
account of any variation between the adjusted basis of such asset for
federal income tax purposes and its Gross Asset Value in the same
manner as under Section 704(c) of the Code and the Treasury
Regulations thereunder.
8.3.3 Any elections or other decisions relating to allocations
under this Section 8.3, including the selection of any allocation
method permitted under proposed Treasury Regulation Section 1.704-
1(c), shall be made by the Managers in any manner that reasonably
reflects the purpose and intention of this Agreement. Allocations
pursuant to this Section 8.3 are solely for purposes of federal, state
and local taxes and shall not affect, or in any way be taken into
account in computing, any Member or Assignee's Capital Account or
share of Profits, Losses, other items or distributions pursuant to any
provision of this Agreement.
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ARTICLE IX
DISTRIBUTIONS
SECTION 9.1 DISTRIBUTIONS. Except as otherwise provided in Article
XIV (relating to the dissolution of the Company) or in this Section 9.1, all
distributions shall be made at such times and in such amounts as shall be
determined by the Managers. All distributions shall be made to the Members and
Assignees in proportion to the number of Units held by each of them. Any
distribution of Capital Contributions that have never been invested in any Area
Developer may be made only if the Managers have received written notice from
Bagel Corp. that no further opportunities to invest in any Area Developer will
be available for a period of at least six months. Except as provided in the
next sentence, any distributions of cash received by the Company with respect to
its equity interest in any Area Developer, whether or not denominated as tax
distributions, shall be promptly distributed by the Company to the Members. The
proceeds (whether in the form of cash or capital stock of Bagel Corp. or BCI) of
any redemption or sale (net of any expenses of such redemption or sale and after
payment of any expenses described in Section 6.6) of any equity interest in an
Area Developer owned by the Company shall be distributed promptly to the
Members; provided, however, that, to the extent that they do not exceed the
amount of capital invested by the Company in the redeeming Area Developer, the
net proceeds of any such redemption or sale occurring on or before June 30, 1997
may be re-invested in accordance with the provisions of Section 3.1 if the
Managers determine to do so. Any warrant or other right held by the Company to
acquire stock of Bagel Corp. shall be distributed to the Members and Assignees
on the later of the date that is (i) six months after the closing of the initial
underwritten public offering of shares of common stock of Bagel Corp. or any
successor to Bagel Corp. or (ii) four months after the payment of the last
Additional Funding Obligation, but in no event later than the date that is six
months prior to the expiration date of such warrant or other right.
SECTION 9.2 WITHHELD TAXES. All amounts withheld pursuant to the
Code or any provision of any state or local tax law with respect to any Member
or Assignee shall be treated as a Distribution to the respective Member or
Assignee pursuant to this Article IX for all purposes of this Agreement, except
to the extent such amount exceeds the amount distributed (or treated as
distributed) pro rata to the Members and Assignees in accordance with their
Units, which excess shall be treated as a loan to the respective Member or
Assignee and shall be repaid by the respective Member or Assignee receiving such
loan at the time that the Company is required to pay over such amount to any
federal, state or local government. The Managers are authorized to withhold
from distributions, or with respect to allocations, to the Members or Assignees
and to pay over to any federal, state or local government any amounts required
to be so withheld pursuant to the Code or any provision of any other federal,
state or local law and shall allocate such amounts to those Members or Assignees
with respect to which such amounts were withheld. If the Managers conclude that
the Company is required to withhold any amount as described in the preceding
sentence, it shall provide prompt written notice to the Members and Assignees of
the reasons it believes that the Company is required to so withhold and an
explanation of the calculation of the amounts withheld or to be withheld. For
purposes of this Section 9.2, the Company may assume that any Member or Assignee
who fails to provide to the Company satisfactory evidence of his tax status for
United States federal income tax purposes is a foreign person. Each Member
agrees to provide written notice to the Company within sixty days of any change
in such Member's tax status for United States federal income tax purposes.
SECTION 9.3 LIMITATIONS ON DISTRIBUTIONS. Notwithstanding any
provision to the contrary contained in this Agreement, the Company shall not
make a distribution to any Member or Assignee on account of its interest in the
Company if such distribution would violate Section 18- 607 of the Delaware Act
or other applicable law.
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ARTICLE X
BOOKS AND RECORDS
SECTION 10.1 BOOKS, RECORDS AND FINANCIAL STATEMENTS.
10.1.1 At all times during the continuance of the Company, the
Company shall maintain, at its principal place of business, separate
books of account for the Company that shall show a true and accurate
record of all costs and expenses incurred, all charges made, all
credits made and received and all income derived in connection with
the operation of the Company's business. Such books of account,
together with a copy of this Agreement and of the Certificate, shall
at all times be maintained at the principal place of business of the
Company and shall be open to inspection and examination at reasonable
times by each Member and its duly authorized representative for any
purpose reasonably related to such Member's interest in the Company.
The books of account and the records of the Company shall be examined
by and reported upon as of the end of each Fiscal Year by a firm of
independent certified public accountants selected by the Managers.
10.1.2 The Managers shall prepare and maintain, or cause to be
prepared and maintained, the books of account of the Company and shall
use their best efforts to cause the following documents to be
transmitted to each Member at the times hereinafter set forth:
(a) Within four months after the close of each Fiscal Year,
the following financial information:
(i) an audited balance sheet of the Company as of the
beginning and close of such Fiscal Year;
(ii) an audited statement of operations of the Company
for such Fiscal Year; and
(iii) a statement of such Member's Capital Account as
of the close of such Fiscal Year, and changes therein during
such Fiscal Year.
(iv) a statement showing the Store Level Cash Flow (as
defined in the confidential private placement memorandum of
the Company and Bagel Corp. dated December 13, 1995 and the
supplement thereto dated January 31, 1996) of each of the
Area Developers in which the Company has an equity
investment, based upon information received by the Company
from the Area Developers.
(b) Within three months after the close of each Fiscal Year,
a statement indicating such Member's share of each item of
Company
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income, gain, loss, deduction or credit for such Fiscal Year for
income tax purposes.
10.1.3 All information contained in any statement or other
document distributed to any Member pursuant to Section 10.1.2 shall be
deemed accurate, binding and conclusive with respect to such Member
unless written objection is made thereto by such Member to the Company
within 20 business days after the receipt of such statement or other
document by such Member.
SECTIONS 10.2 ACCOUNTING METHOD. For both financial and tax
reporting purposes and for purposes of determining Profits and Losses, the books
and records of the Company shall be kept on the accrual method of accounting
applied in a consistent manner and shall reflect all Company transactions and be
appropriate and adequate for the Company's business.
SECTION 10.3 CONFIDENTIALITY. Each Member and each Manager hereby
covenant and agree that so long as such Member holds Units, or so long as such
Manager serves as a Manager, and for a period of three years thereafter, such
Member or Manager will hold in confidence all financial and other information
concerning the Company, Bagel Corp. and the Area Developers in which the Company
is an investor and will not, without the prior consent of Bagel Corp., disclose
any of such information to any person. The preceding sentence shall not apply
to information which (i) is disclosed in a printed publication available to the
public, or is otherwise in the public domain through no act of such Member or
Manager or the employees or agents of such Member or Manager or other person or
entity which has received such information from or through such Member or
Manager or (ii) is required to be disclosed by proper order of a court of
applicable jurisdiction after adequate notice to Bagel Corp. sufficient to
permit Bagel Corp. to seek a protective order therefor, the imposition of which
protective order such Member or Manager agrees to approve and support. Each
Member or Manager acknowedges that Bagel Corp. and the Area Developers are
intended third party beneficiaries of the covenants in this Section 10.3 and can
enforce such covenants directly against such Member and Manager.
ARTICLE XI
TAX MATTERS
SECTION 11.1 TAX MATTERS PARTNER.
11.1.1 The Managers are hereby authorized to designate a Member
of the Company to serve as the tax matters partner of the Company for
purposes of Section 6231(a)(7) of the Code (the "Tax Matters
Partner"). The Tax Matters Partner shall have the power to manage and
control, on behalf of the Company, any administrative proceeding at
the Company level with the Internal Revenue Service relating to the
determination of any item of Company income, gain, loss, deduction or
credit for federal income tax purposes. The Tax Matters Partner may
be a Manager if the Manager is a Member.
11.1.2 The Tax Matters Partner shall, within ten days of the
receipt of any notice from the Internal Revenue Service in any
administrative proceeding at the
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Company level relating to the determination of any Company item of
income, gain, loss, deduction or credit, mail a copy of such notice to
each Member and Assignee.
11.1.3 The Managers may at any time hereafter designate a new
Tax Matters Partner; provided, however, that only a Member may be
designated as the Tax Matters Partner of the Company.
SECTION 11.2 RIGHT TO MAKE TAX ELECTIONS. The Managers may, in their
discretion, make or revoke, on behalf of the Company, any tax election under the
Code or the Treasury Regulations, or under state, local or foreign law.
ARTICLE XII
LIABILITY, EXCULPATION AND INDEMNIFICATION
SECTION 12.1 LIABILITY.
12.1.1 Except as otherwise provided by the Delaware Act, the
debts, obligations and liabilities of the Company, whether arising in
contract, tort or otherwise, shall be solely the debts, obligations
and liabilities of the Company, and no Covered Person shall be
obligated personally for any such debt, obligation or liability of the
Company solely by reason of being a Covered Person.
12.1.2 Except as otherwise expressly required by law, a Member,
in its capacity as such, shall have no liability in excess of (i) the
amount of its Capital Contributions, (ii) its share of any assets and
undistributed profits of the Company, (iii) its obligation to make
other payments expressly provided for in this Agreement, and (iv) the
amount of any distributions wrongfully distributed to it.
SECTION 12.2 EXCULPATION.
12.2.1 No Covered Person shall be liable to the Company or any
other Covered Person for any loss, damage or claim incurred by reason
of any act or omission performed or omitted by such Covered Person in
good faith on behalf of the Company and in a manner reasonably
believed to be within the scope of authority conferred on such Covered
Person by this Agreement, except that a Covered Person shall be liable
for any such loss, damage or claim incurred by reason of such Covered
Person's gross negligence or willful misconduct.
12.2.2 A Covered Person shall be fully protected in relying in
good faith upon the records of the Company and upon such information,
opinions, reports or statements presented to the Company by any Person
(including any tax advisor) as to matters the Covered Person
reasonably believes are within such other Person's professional or
expert competence and who has been selected with reasonable care by or
on behalf of the Company, including information, opinions, reports or
statements as to the value and amount of the assets, liabilities,
Profits or Losses or any other facts pertinent
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to the existence and amount of assets from which distributions to
Members might properly be paid.
SECTION 12.3 DUTIES OF COVERED PERSONS.
12.3.1 In accordance with Section 18-1101(c)(2) of the Delaware
Act the duties and liabilities of the Managers and the Members, in
their capacities as such, shall be limited to those set forth in this
Agreement.
12.3.2 To the extent that a Covered Person has duties and
liabilities relating to the Company or its Members or to any other
Covered Person, a Covered Person acting under this Agreement shall not
be liable to the Company or its Members or to any other Covered Person
for its good faith reliance on the provisions of this Agreement. The
provisions of this Agreement, to the extent that they restrict the
duties and liabilities of a Covered Person otherwise existing at law
or in equity, are agreed by the parties hereto to replace such other
duties and liabilities of such Covered Person.
12.3.3 The Members expressly acknowledge that Bagel Corp. and
its Affiliates have or will have area development, franchise, lending,
real estate and other relationships with the Area Developers in which
the Company will invest and that Bagel Corp. will have a conflict of
interest in making determinations as Manager as to the Area Developers
in which the Company will invest, the amount of any such investment
and any negotiated terms of such investment. The Members hereby (i)
agree that Bagel Corp. may act in its own interest in making
determinations as Manager in any situation in which such a conflict is
present, (ii) ratify and approve all such determinations made by Bagel
Corp. as Manager, (iii) waive any rights they have or may receive by
reason of such conflicts of interest or such determinations made by
Bagel Corp. as Manager and any right to receive notice of or
disclosure concerning any such conflicts of interest or
determinations, and (iv) covenant not to sue Bagel Corp. in connection
with any such determinations or any matter or thing based upon or
arising out of any such determinations.
12.3.4 Whenever in this Agreement a Covered Person is permitted
or required to make a decision (i) in its "discretion" or under a
grant of similar authority or latitude, the Covered Person shall be
entitled to consider any such interests and factors as it desires,
including its own interests, and shall have no duty or obligation to
give any consideration to any interest of or factors affecting the
Company or any other Person, or (ii) in its "good faith" or under
another express standard, the Covered Person shall act under such
express standard and shall not be subject to any other or different
standard imposed by this Agreement or other applicable law.
SECTION 12.4 INDEMNIFICATION. To the fullest extent permitted by
applicable law, a Covered Person shall be entitled to indemnification from the
Company for any loss, damage or claim incurred by such Covered Person by reason
of any act or omission performed or omitted by such Covered Person in good faith
on behalf of the Company and in a manner reasonably believed to be within the
scope of authority conferred on such Covered Person by this Agreement, except
that no Covered Person shall be entitled to be indemnified in respect of any
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loss, damage or claim incurred by such Covered Person by reason of gross
negligence or willful misconduct with respect to such acts or omissions;
provided, however, that any indemnity under this Section 12.4 shall be provided
out of and to the extent of Company assets only, and no Covered Person shall
have any personal liability on account thereof.
SECTION 12.5 EXPENSES. To the fullest extent permitted by applicable
law, expenses (including legal fees) incurred by a Covered Person in defending
any claim, demand, action, suit or proceeding shall, from time to time, be
advanced by the Company prior to the final disposition of such claim, demand,
action, suit or proceeding upon receipt by the Company of an undertaking by or
on behalf of the Covered Person to repay such amount if it shall be determined
that the Covered Person is not entitled to be indemnified as authorized in
Section 12.4 hereof.
SECTION 12.6 OUTSIDE BUSINESSES. Any Member, Manager or Affiliate
thereof may engage in or possess an interest in other business ventures of any
nature or description, independently or with others, similar or dissimilar to
the business of the Company, and the Company, the Members and the Managers shall
have no rights by virtue of this Agreement in and to such independent ventures
or the income or profits derived therefrom, and the pursuit of any such venture,
even if competitive with the business of the Company, shall not be deemed
wrongful or improper. No Member, Manager or Affiliate thereof shall be
obligated to present any particular investment opportunity to the Company even
if such opportunity is of a character that, if presented to the Company, could
be taken by the Company, and any Member, Manager or Affiliate thereof shall have
the right to take for its own account (individually or as a partner or
fiduciary) or to recommend to others any such particular investment opportunity.
ARTICLE XIII
ASSIGNABILITY AND SUBSTITUTE MEMBERS
SECTION 13.1 ASSIGNABILITY OF UNITS.
13.1.1 No Member may assign the whole or any part of its Units
or other interests in the Company without the approval of the Managers
and a Majority Vote of all Members other than the assigning Member,
which approval and favorable vote may be given or withheld in the sole
and absolute discretion of the Managers and each such other Member.
If the required approval and favorable vote is obtained for any such
assignment, such assignment shall, nevertheless, not entitle the
Assignee to become a Substitute Member or to be entitled to exercise
or receive any of the rights, powers or benefits of a Member other
than the right to receive distributions to which the assigning Member
would be entitled, unless the assigning Member designates, in a
written instrument delivered to the other Members, its Assignee to
become a Substitute Member and such designation is approved by the
Managers and a Majority Vote of all Members other than the Assignee,
which approval and favorable vote may be given or withheld in the sole
and absolute discretion of the Managers and each such other Member;
and provided further, that such Assignee shall not become a Substitute
Member without having first executed an instrument reasonably
satisfactory to the other Members accepting and agreeing to the terms
and conditions of this Agreement, including a counterpart signature
page to this Agreement, and without having paid to the Company a fee
sufficient to cover all reasonable expenses of the Company in
connection with such Assignee's admission as a Substitute Member. If
a Member assigns all of its interest in the Company and the Assignee
of such interest is entitled to become a Substitute Member pursuant to
this Section, such Assignee shall be admitted to the Company effective
immediately prior to the
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effective date of the assignment, and, immediately following such
admission, the assigning Member shall cease to be a member of the
Company. In such event, the Company shall not dissolve if the business
of the Company is continued without dissolution in accordance with
Section 14.2(iii) hereof.
13.1.2 Notwithstanding anything to the contrary herein, (i) the
Managers shall not cause or permit Units to become traded on an
established securities market and (ii) the Managers shall withhold
their consent to any Transfer that, to the Managers' knowledge after
reasonable inquiry, would otherwise be accomplished by a trade on a
secondary market (or the substantial equivalent thereof). For purposes
of this subsection the terms "traded on an established securities
market" and "secondary market (or the substantial equivalent thereof)"
shall have the meanings set forth in Sections 469(k)(2) and 7704 of
the Code and any regulations promulgated thereunder that are in effect
at the time of the proposed Transfer.
SECTION 13.2 RECOGNITION OF ASSIGNMENT BY COMPANY. No assignment, or
any part thereof, that is in violation of this Article XIII shall be valid or
effective, and neither the Company nor the Members shall recognize the same for
the purpose of making distributions pursuant to Section 9.1 hereof with respect
to such Company interest or part thereof. Neither the Company nor the
nonassigning Members shall incur any liability as a result of refusing to make
any such distributions to the assignee of any such invalid assignment.
SECTION 13.3 INDEMNIFICATION. In the case of an assignment or
attempted assignment of an interest in the Company that has not received the
consents required by Section 13.1 hereof, the parties engaging or attempting to
engage in such assignment shall be liable to indemnify and hold harmless the
Company, the Managers, the other Members and the respective Covered Persons of
the Company, the Managers and the other Members from all costs, liabilities and
damages that any of such indemnified Persons may incur (including, without
limitation, incremental tax liability and lawyers' fees and expenses) as a
result of such assignment or attempted assignment and efforts to enforce the
indemnity granted hereby.
SECTION 13.4 EFFECTIVE DATE OF ASSIGNMENT. Any valid assignment of a
Member's interest in the Company, or part thereof, pursuant to the provisions of
Section 13.1 hereof shall be effective as of the close of business on the last
day of the calendar month in which the other Members give their written consent
to such assignment (or the last day of the calendar month in which such
assignment occurs, if later). The Company shall, from the effective date of such
assignment, thereafter pay all further distributions on account of the Company
interest (or part thereof) so assigned, to the Assignee of such interest, or
part thereof. As between any Member and its Assignee, Profits and Losses for the
Fiscal Year of the Company in which such assignment occurs shall be apportioned
for federal income tax purposes in accordance with any convention permitted
under Section 706(d) of the Code and selected by the Managers in their
discretion.
ARTICLE XIV
DISSOLUTION, LIQUIDATION AND TERMINATION
SECTION 14.1 NO DISSOLUTION. The Company shall not be dissolved by
the admission of Substitute Members in accordance with the terms of this
Agreement.
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SECTION 14.2 EVENTS CAUSING DISSOLUTION. The Company shall be
dissolved and its affairs shall be wound up only upon the occurrence of any of
the following events:
(i) the expiration of the term of the Company, as provided in
Section 2.3 hereof;
(ii) the approval of the Managers and a Majority Vote of the
Members to dissolve the Company;
(iii) the Bankruptcy of a Member, unless, within 90 days after
the occurrence of such an event, there is given the approval of the
Managers and there is obtained a Majority Vote of the Members other
than such Member to continue the business of the Company;
(iv) the entry of a decree of judicial dissolution under Section
18-802 of the Delaware Act; or
(v) by the Managers at any time that the assets of the Company
consist only of cash, Permitted Temporary Investments, a warrant to
purchase stock of Bagel Corp., stock of Bagel Corp., stock of BCI or
any combination of the foregoing.
Each Member shall give to the Company prompt written notice of the Bankruptcy of
such Member. From and after the time that the Company receives an opinion of
counsel to the Managers to the effect that the provisions of clause (iii) above
are no longer necessary to cause the Company to be classified as a partnership
for federal income tax purposes, this Section 14.2 shall be amended without
further action of the Members to eliminate such clause (iii) and to renumber
clauses (iv) and (v) as clauses (iii) and (iv).
SECTION 14.3 NOTICE OF DISSOLUTION. Upon the dissolution of the
Company, the Person or Persons approved by a Majority Vote of the Members to
carry out the winding up of the Company (the "Liquidating Trustee") shall
promptly notify the Members of such dissolution.
SECTION 14.4 LIQUIDATION. Upon dissolution of the Company, the
Liquidating Trustee shall immediately commence to wind up the Company's affairs;
provided, however, that a reasonable time shall be allowed for the orderly
liquidation of the assets of the Company and the satisfaction of liabilities to
creditors so as to enable the Members to minimize the normal losses attendant
upon a liquidation. The Members and Assignees shall continue to share Profits
and Losses during liquidation in the same proportions, as specified in Article
VIII hereof, as before liquidation. Each Member shall be furnished with a
statement prepared by the Company's certified public accountants that shall set
forth the assets and liabilities of the Company as of the date of dissolution.
The proceeds of liquidation shall be distributed, as realized, in the following
order and priority:
(i) to creditors of the Company, including the Managers or
Members or Assignees who are creditors, to the extent otherwise
permitted by law, in satisfaction of the liabilities of the Company
(whether by payment or the making
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of reasonable provision for payment thereof), other than liabilities
for distributions to Members or Assignees; and
(ii) to distribute to the Members and Assignees the remaining
proceeds of liquidation in accordance with their Capital Account
balances, after giving effect to all Capital Contributions,
distributions and allocations for all periods. If any Member is owed a
Capital Account balance pursuant to Section 4.1.3, such Member shall
share in the remaining proceeds of liquidation in the proportion that
such Member's Capital Account balance determined in accordance with
Section 4.1.3 compares to the aggregate Capital Account balances of
all of the other Members, but such Member shall not be entitled to
receive more than the amount determined in accordance with Section
4.1.3.
SECTION 14.5 TERMINATION. The Company shall terminate when all of
the assets of the Company, after payment of or due provision for all debts,
liabilities and obligations of the Company, shall have been distributed to the
Members and Assignees in the manner provided for in this Article XIV, and the
Certificate shall have been canceled in the manner required by the
Delaware Act.
SECTION 14.6 CLAIMS OF THE MEMBERS. The Members and Assignees shall
look solely to the Company's assets for the return of their Capital
Contributions, and if the assets of the Company remaining after payment of or
due provision for all debts, liabilities and obligations of the Company are
insufficient to return such Capital Contributions, the Members and Assignees
shall have no recourse against the Company or any other Member or the Manager.
ARTICLE XV
MISCELLANEOUS
SECTION 15.1 NOTICES. All notices provided for in this Agreement
shall be in writing, duly signed by the party giving such notice, and shall be
sent by Federal Express or other reliable overnight courier, sent by fax or
mailed by registered or certified mail, return receipt requested, as follows:
(i) if given to the Company, in care of the Managers at the
address of the Company's principal place of business, with a copy to
Bagel Corp. at its mailing address set forth on Schedule A attached
hereto;
(ii) if given to the Managers, at their mailing addresses set
forth on Schedule A attached hereto, with a copy to Bagel Corp.; or
(iii) if given to any Member at the address set forth opposite
its name on Schedule A attached hereto, or at such other address as
such Member may hereafter designate by written notice to the Company.
Each such notice shall be deemed to have been given upon the earlier of the
receipt of such notice by the intended recipient thereof, two days after it is
sent by Federal Express or other reliable overnight courier or sent by fax, or
five days after it is mailed by registered or certified mail, return receipt
requested.
26
<PAGE>
SECTION 15.2 FAILURE TO PURSUE REMEDIES. The failure of any party to
seek redress for violation of, or to insist upon the strict performance of, any
provision of this Agreement shall not prevent a subsequent act, which would have
originally constituted a violation, from having the effect of an original
violation.
SECTION 15.3 CUMULATIVE REMEDIES; LIMITATION ON DAMAGES. The rights
and remedies provided by this Agreement are cumulative and the use of any one
right or remedy by any party shall not preclude or waive its right to use any or
all other remedies. Said rights and remedies are given in addition to any other
rights the parties may have by law, statute, ordinance or otherwise.
Notwithstanding anything to the contrary herein, no party hereto shall be liable
for consequential, indirect, incidental, special, speculative, exemplary or
punitive damages (including, but not limited to, loss of revenue or profit)
whether such claim alleges breach of contract, tortious conduct including, but
not limited to, negligence, or any other theory.
SECTION 15.4 BINDING EFFECT. This Agreement shall be binding upon
and inure to the benefit of all of the parties and, to the extent permitted by
this Agreement, their successors, legal representatives and assigns.
SECTION 15.5 CAPTIONS. The captions herein are inserted for
convenience of reference only and shall not affect the construction of this
Agreement.
SECTION 15.6 PRONOUNS AND PLURALS. Whenever the context may require,
any pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa.
SECTION 15.7 SEVERABILITY. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such invalid
or unenforceable provision were omitted.
SECTION 15.8 COUNTERPARTS. This Agreement may be executed in any
number of counterparts with the same effect as if all parties hereto had signed
the same document. All counterparts shall be construed together and shall
constitute one instrument.
SECTION 15.9 INTEGRATION. This Agreement constitutes the entire
agreement among the parties hereto pertaining to the subject matter hereof and
supersedes all prior agreements and understandings pertaining thereto.
SECTION 15.10 GOVERNING LAW. This Agreement and the rights of the
parties hereunder shall be interpreted in accordance with the laws of the State
of Delaware, and all rights and remedies shall be governed by such laws without
regard to principles of conflict of laws.
27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
MEMBERS:
/s/ Lawrence Beck
-----------------
Lawrence Beck
D&R, L.L.C.
By /s/ Dean L. Buntrock
--------------------
Dean L. Buntrock
DONALD F. FLYNN
1993 TRUST
By /s/ Donald F. Flynn
-------------------
Donald F. Flynn
/s/ Robert Flynn
----------------
Robert Flynn
BRIAN J. FLYNN
June, 1992 NONEXEMPT TRUST
By /s/ Brian J. Flynn
------------------
Brian J. Flynn
KEVIN F. FLYNN
June, 1992 NONEXEMPT TRUST
By /s/ Kevin F. Flynn
------------------
Kevin F. Flynn
/s/ John J. Melk
----------------
John J. Melk
/s/ Janet L. Melk
-----------------
Janet L. Melk
<PAGE>
/s/ Peer Pedersen
-----------------
Peer Pedersen
BELUSHI PARTNERS II
By /s/ James A. Belushi
--------------------
James A. Belushi
/s/ Vincent Buonnanno
---------------------
Vincent Buonnanno
JOSEPH A. CUSIMANO
IRA ROLLOVER
By /s/ Joseph A. Cusimano
----------------------
Joseph A. Cusimano
/s/ Peter B. Desnoes
--------------------
Peter B. Desnoes
RICHARD A. FORSYTHE
REVOCABLE TRUST DATED
1/22/85 AS RESTATED 10/11/94
By /s/ Richard A. Forsythe
------------------------
Richard A. Forsythe
/s/ J. Douglas Gray
-------------------
J. Douglas Gray
/s/ J. Michael Hester
---------------------
J. Michael Hester
<PAGE>
JMH ASSOCIATES, INC.
PROFIT SHARING FUND
By /s/ J. Michael Hester
---------------------
J. Michael Hester
/s/ William P. Hulligan
-----------------------
William P. Hulligan
/s/ David B. Meltzer
--------------------
David B. Meltzer
/s/ James Fox Miller
--------------------
James Fox Miller
/s/ John Muehlstein
-------------------
John Muehlstein
/s/ Charles Reeder
------------------
Charles Reeder
/s/ J. Christopher Reyes
------------------------
J. Christopher Reyes
/s/ M. Jude Reyes
-----------------
M. Jude Reyes
PSR INVESTMENTS, L.P.
By /s/ Philip Rooney
-----------------
Philip Rooney
FURST RUDMAN INVESTORS, L.P.
By /s/ Robert D. Furst, Jr.
-----------------------
Robert D. Furst, Jr.
<PAGE>
/s/ L.D. Ruth
-------------
L.D. Ruth
/s/ John A. Shields
-------------------
John A. Shields
/s/ H.C. Warren by Peer Pedersen
--------------------------------
H.C. Warren by Peer Pedersen
WIJLER GUERNSEY, LTD.
By /s/ Rene' Burgauer
---------------------
Rene' Burgauer
/s/ Penny Bender Sebring
------------------------
Penny Bender Sebring
/s/ Jeffrey C. Neal
-------------------
Jeffrey C. Neal
/s/ Martin Schwartz
-------------------
Martin Schwartz
YOUNGSTOWN PARTNERS
By /s/ Thomas H. Patrick
----------------------
Thomas H. Patrick
BALDWIN & LYONS, INC.
By /s/ G. Patrick Corydon
-----------------------
G. Patrick Corydon
N.S. ASSOCIATES, INC.
By /s/ Nathan Shapiro
-------------------
Nathan Shapiro
/s/ Scott A. Beck
-----------------
Scott A. Beck
<PAGE>
/s/ Jeff Butler
---------------
Jeff Butler
/s/ W. Eric Carlborg
--------------------
W. Eric Carlborg
/s/ Andrew J. Filipowski
------------------------
Andrew J. Filipowski
/s/ Mark X. Hayden
------------------
Mark X. Hayden
ALTGELD MANAGEMENT CORPORATION
By /s/ Hank Huth
----------------
Hank Huth
/s/ John Morlock
----------------
John Morlock
/s/ Joe Hoog
------------
Joe Hoog
/s/ Dennis B. Mullen
--------------------
Dennis B. Mullen
HAY PROPERTY COMPANY, LTD.
By /s/ Raymond A. Hay
-------------------
Raymond A. Hay
/s/ Andrew P. Murphy
--------------------
Andrew P. Murphy
<PAGE>
/s/ A.G. Rappaport
------------------
A.G. Rappaport
/s/ Harry T. Rose
-----------------
Harry T. Rose
/s/ Jeff Shearer
----------------
Jeff Shearer
/s/ David Stanchak
------------------
David Stanchak
/s/ Jeff Harpster
-----------------
Jeff Harpster
/s/ M. David White
------------------
M. David White
/s/ Larry Zwain
---------------
Larry Zwain
THEODORE A. BOSLER TRUST,
THEODORE A. BOSLER,
TRUSTEE, U/A 4/21/93
By /s/ Theodore A. Bosler
----------------------
Theodore A. Bosler
JWC TRUST DATED 12/28/82
By /s/ John W. Croghan
-------------------
John W. Croghan
EBB INVESTORS, INC.
By /s/ John Hume
--------------
John Hume
/s/ Alain O'Hayon
-----------------
Alain O'Hayon
BAGEL SOUTH, L.L.C.
By /s/ S. Kent Stewart
--------------------
S. Kent Stewart
<PAGE>
/s/ Jeffrey A. Klein
--------------------
Jeffrey A. Klein
MORGAN LEWIS GITHENS & AHN, L.P.
By /s/ Sangwoo Ahn
---------------
Sangwoo Ahn
TRIUNE VENTURE PARTNERS, II, L.P.
By TRIUNE VENTURE HOLDINGS, L.P.
--------------------------------
as general partner
By TRIUNE, INC.
as general partner
By /s/ Kevin Shepherd
------------------
Kevin Shepherd
EB&M HOLDINGS, LTD.
By /s/ Michelle Bencher
---------------------
Michelle Bencher
MAVERICK INCOME FUND USA, LTD.
By /s/ Evan Wyly
-------------
Evan Wyly
<PAGE>
MAVERICK FUND USA, LTD.
By /s/ Evan Wyly
-------------
Evan Wyly
BANKAMERICA INVESTMENT CORP.
By /s/ Edward J. McCaffrey
-----------------------
Edward J. McCaffrey
/s/ Richard T. Caleel
---------------------
Richard T. Caleel
KMK & ASSOCIATES
By /s/ Laura K. McGrath
---------------------
Laura K. McGrath
/s/ A. Barry Hirschfield
------------------------
A. Barry Hirschfield
/s/ Hal P. Harlan
-----------------
Hal P. Harlan
GROSVENOR FUND, L.P.
By /s/ Bruce B. Dunnan
-------------------
Bruce B. Dunnan
This Agreement is accepted and agreed to by:
MANAGER:
EINSTEIN/NOAH BAGEL CORP.
By /s/ Paul A. Strasen
-------------------
Paul A. Strasen
MEMBERS OF THE ADVISORY COMMITTEE
/s/ Perry J. Lewis
------------------
Perry J. Lewis
/s/ J. Christopher Reyes
------------------------
J. Christopher Reyes
/s/ Alberto Finol
-----------------
Alberto Finol
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated July 16, 1996, on our audit of the consolidated financial
statements of Einstein/Noah Bagel Corp., and to all references to our firm
included in or made a part of this registration statement on Form S-1.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Denver, Colorado
September 18, 1996
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement on Form S-1 of
Einstein/Noah Bagels Corp. of our report dated May 7, 1996 on the consolidated
financial statements of Noah's New York Bagels, Inc. as of December 31, 1994 and
December 30, 1995 and for each of the three fiscal years in the period ended
December 30, 1995 appearing in the Prospectus, which is a part of this
Registration Statement and to the reference to us under the heading "Experts" in
such Prospectus.
DELOITTE & TOUCHE LLP
San Francisco, California
September 18, 1996
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement on Form S-1 of
Einstein/Noah Bagel Corp. of our report dated April 26, 1996 on the financial
statements of Bagel & Bagel, Inc. appearing in the Prospectus, which is a part
of this Registration Statement and to the reference to us under the heading
"Experts" in such Prospectus.
MAYER HOFFMAN McCANN L.C.
Kansas City, Missouri /s/ Mayer Hoffman McCann L.C.
September 19, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated April 24, 1996, on our audit of the combined financial statements
of Offerdahl's Bagel Gourmet, Inc. and Affiliates, and to all references to our
firm included in or made a part of in this registration statement on Form S-1.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Denver, Colorado
September 18, 1996
<PAGE>
Exhibit 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated April 24, 1996, on our audit of the consolidated financial
statements of Baltimore Bagel Co. and to all references to our firm included
in or made a part of this registration statement on Form S-1.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Denver, Colorado
September 18, 1996
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
MARCH 29, 1996, AS AMENDED SEPTEMBER 1, 1996
INFORMATION FOR PROSPECTIVE FRANCHISE OWNERS
REQUIRED BY FEDERAL TRADE COMMISSION
* * * * * *
TO PROTECT YOU, WE'VE REQUIRED YOUR FRANCHISOR TO GIVE YOU THIS
INFORMATION. WE HAVEN'T CHECKED IT, AND DON'T KNOW IF IT'S CORRECT. IT SHOULD
-----------------------------------------------------
HELP YOU MAKE UP YOUR MIND. STUDY IT CAREFULLY. WHILE IT INCLUDES SOME
INFORMATION ABOUT YOUR CONTRACT, DON'T RELY ON IT ALONE TO UNDERSTAND YOUR
CONTRACT. READ ALL OF YOUR CONTRACT CAREFULLY. BUYING A FRANCHISE IS A
COMPLICATED INVESTMENT. TAKE YOUR TIME TO DECIDE. IF POSSIBLE, SHOW YOUR
CONTRACT AND THIS INFORMATION TO AN ADVISOR, LIKE A LAWYER OR AN ACCOUNTANT. IF
YOU FIND ANYTHING YOU THINK MAY BE WRONG OR ANYTHING IMPORTANT THAT'S BEEN LEFT
OUT, YOU SHOULD LET US KNOW ABOUT IT. IT MAY BE AGAINST THE LAW.
THERE MAY ALSO BE LAWS ON FRANCHISING IN YOUR STATE. ASK YOUR STATE
AGENCIES ABOUT THEM.
FEDERAL TRADE COMMISSION
------------------------
WASHINGTON, D.C. 20580
----------------------
<PAGE>
[LOGO OF EINSTEIN BROS BAGELS]
[LOGO OF NOAH'S BAGELS]
FRANCHISE OFFERING CIRCULAR
EINSTEIN/NOAH BAGEL CORP.
A DELAWARE CORPORATION
14103 DENVER WEST PARKWAY
P.O. BOX 4086 GOLDEN, CO 80401
(303) 278-9500
The franchise offered is to operate food service businesses which sell
bagels, bagel-related products, beverages, and other items and food products
ENBC approves or requires for sale ("Units") and to develop and operate a
specified number of Units at approved locations within defined geographic areas
according to a specified development schedule.
Initial payments you must make under the Franchise Agreement and
Development Agreement are described in this paragraph. The initial franchise fee
is $35,000 under the Franchise Agreement for a Unit, and the development fee
under the Development Agreement is $5,000 for each Unit to be developed under
the Development Agreement. Under the Development Agreement, a real estate
services fee equal to $5,000 for each Unit to be developed will be due to ENBC.
Under both the Development and the Franchise Agreement, you will purchase the
computer system ENBC designates that will cost $15,000 to $30,000, and you will
pay to ENBC a software license fee of $15,000. A demographic detail report fee
of $50 per site for each proposed or potential site for a Unit is payable under
the Development Agreement only and is due before each Unit opens. In addition,
before each Unit opens, you will make the first payment of the monthly $400
software support fee. The estimated initial investment for a Unit ranges from
$268,700 to $591,700. The estimated initial investment to operate as a developer
ranges from $69,950 to $124,200.
RISK FACTORS:
1. THE FRANCHISE AGREEMENT AND DEVELOPMENT AGREEMENT PERMIT THE FRANCHISEE
AND DEVELOPER,RESPECTIVELY, TO SUE ONLY IN COLORADO. OUT OF STATE
LITIGATION MAY FORCE YOU TO ACCEPT A LESS FAVORABLE SETTLEMENT FOR
DISPUTES. IT MAY ALSO COST MORE TO SUE THE FRANCHISOR IN COLORADO THAN
IN YOUR HOME STATE.
2. EACH OF THE FRANCHISE AGREEMENT AND DEVELOPMENT AGREEMENT STATES THAT
COLORADO LAW GOVERNS THE AGREEMENT, AND THIS LAW MAY NOT PROVIDE THE
SAME PROTECTIONS AND BENEFITS AS LOCAL LAW. YOU MAY WANT TO COMPARE
THESE LAWS. SOME STATE FRANCHISE LAWS PROVIDE THAT CHOICE OF LAW
PROVISIONS ARE VOID OR SUPERSEDED. YOU
<PAGE>
MAY WANT TO INVESTIGATE WHETHER YOU ARE PROTECTED BY A STATE FRANCHISE
LAW. YOU SHOULD REVIEW ANY ADDENDA OR RIDERS ATTACHED TO THIS OFFERING
CIRCULAR FOR DISCLOSURES REGARDING STATE FRANCHISE LAWS.
3. THERE MAY BE OTHER RISKS CONCERNING THIS FRANCHISE.
Information comparing franchisors is available. Call the state administrators
listed in Exhibit A or your public library for sources of information.
---------
REGISTRATION OF THIS FRANCHISE BY A STATE DOES NOT MEAN THAT THE STATE
RECOMMENDS IT OR HAS VERIFIED THE INFORMATION IN THIS OFFERING CIRCULAR. If you
learn that anything in the offering circular is untrue, contact the Federal
Trade Commission and the state authority listed in Exhibit A.
---------
Effective Date: March 29, 1996, as amended September 1, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
<S> <C> <C>
1 THE FRANCHISOR, ITS PREDECESSORS AND AFFILIATES ...................... 1
2 BUSINESS EXPERIENCE .................................................. 9
3 LITIGATION ........................................................... 14
4 BANKRUPTCY ........................................................... 18
5 INITIAL FRANCHISE FEE ................................................ 18
6 OTHER FEES ........................................................... 20
7 INITIAL INVESTMENT ................................................... 28
8 RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES ..................... 36
9 FRANCHISEE'S OBLIGATIONS ............................................. 47
10 FINANCING ............................................................ 50
11 FRANCHISOR'S OBLIGATIONS ............................................. 54
12 TERRITORY ............................................................ 72
13 TRADEMARKS ........................................................... 81
14 PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION ...................... 84
15 OBLIGATION TO PARTICIPATE IN THE
ACTUAL OPERATION OF THE FRANCHISE BUSINESS ........................... 87
16 RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL ......................... 91
17 RENEWAL, TERMINATION, TRANSFER AND DISPUTE RESOLUTION ................ 92
18 PUBLIC FIGURES ....................................................... 97
19 EARNINGS CLAIMS........................................................ 97
</TABLE>
i
<PAGE>
TABLE OF CONTENTS CONTINUED
-----------------
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C> <C>
20 LIST OF OUTLETS ..................................................... 97
21 FINANCIAL STATEMENTS ................................................ 102
22 CONTRACTS ........................................................... 102
23 RECEIPTS ................................................ (Last 2 pages)
</TABLE>
EXHIBITS
--------
EXHIBIT A STATE AGENCIES/AGENTS FOR SERVICE OF PROCESS
EXHIBIT B EINSTEIN/NOAH BAGEL CORP. DEVELOPMENT AGREEMENT
EXHIBIT C EINSTEIN/NOAH BAGEL CORP. FRANCHISE AGREEMENT
EXHIBIT D ADDENDUM TO LEASE
EXHIBIT E EINSTEIN/NOAH BAGEL CORP. FINANCIAL STATEMENTS
EXHIBIT F FINANCED AREA DEVELOPER PROGRAM LOAN AGREEMENT
APPLICABLE STATE LAW MAY REQUIRE ADDITIONAL DISCLOSURES RELATED TO THE
INFORMATION CONTAINED IN THIS OFFERING CIRCULAR. THESE ADDITIONAL DISCLOSURES,
IF ANY, APPEAR IN AN ADDENDUM.
ii
<PAGE>
ITEM 1
------
THE FRANCHISOR, ITS PREDECESSORS AND AFFILIATES
ENBC PREDECESSORS, AFFILIATES AND THE ENBC SYSTEM
- -------------------------------------------------
The franchisor is Einstein/Noah Bagel Corp. The franchisor will be referred
to in this offering circular as "ENBC." A person who buys a franchise from ENBC
will be referred in this offering circular as "you." If you are a privately held
corporation, limited liability company, partnership or other legal entity,
certain provisions of ENBC's franchise agreement, development agreement, and
related agreements also will apply to your owners.
ENBC is a Delaware corporation incorporated on February 2, 1995 and
currently maintains its principal office at 1526 Cole Boulevard, Suite 200,
Golden, Colorado 80401-4086. ENBC's agents for service of process are disclosed
in Exhibit A to this offering circular. ENBC has no predecessors. ENBC was
---------
formerly known as Progressive Bagel Concepts, Inc. until it changed its
corporate name in December 1995 to Einstein Bros. Bagels, Inc. and again in May
1996 to Einstein/Noah Bagel Corp.
ENBC's business began when it acquired and consolidated three regional
bagel chains in March 1995. On March 24, 1995, ENBC acquired the stock of
Brackman Brothers, Inc., a corporation which owns and operates stores under the
name "Brackman Brothers." Brackman Brothers, Inc. maintained its office at 3541
S. 300 West, Salt Lake City, Utah 84115. Brackman Brothers, Inc. began operating
bagel shops in April 1989 and has operated them continuously since then.
Brackman Brothers has not offered franchises for bagel shops or for any other
lines of business. Brackman Brothers, Inc. remains a wholly owned subsidiary of
ENBC, and its principal office address is the same as ENBC's.
Also on March 24, 1995, ENBC acquired the assets of Bagel & Bagel, Inc., a
corporation which owned and operated stores under the name "Bagel & Bagel" in
and around Kansas City, Kansas and maintained its offices at 8595 College
Boulevard #150, Overland Park, Kansas 66210. Bagel & Bagel, Inc. began operating
bagel shops in 1988 and operated them continuously until ENBC acquired the
company's assets. Bagel & Bagel did not offer franchises for bagel shops or for
any other lines of business. It did grant certain development rights in Dallas,
Texas to a joint venture, Bagel & Bagel Development Corp. that built two stores
in Dallas. The joint venture has since dissolved, and its rights have been
cancelled.
On March 31, 1995, ENBC acquired the assets of Offerdahl's Bagel Gourmet,
Inc., a corporation which owned and operated stores under the "Offerdahl's" name
in and around Miami and Fort Lauderdale, Florida and maintained its offices at
929 Shotgun Road, Sunrise, Florida 33326. Offerdahl's Bagel Gourmet, Inc. began
operating bagel shops in October 1990 and operated them continuously until March
31, 1995, when ENBC acquired the company's assets. Offerdahl's did not offer
franchises for bagel shops or for any other lines of business.
<PAGE>
On August 4, 1995, ENBC acquired the assets of nine franchised "Bagel Stop"
bagel stores in the Denver, Colorado area from the franchisees who owned and
operated them. The franchisor consented to those sales. The franchisor and
franchisee by mutual consent terminated the franchise agreement applicable to
each of those stores concurrently with the sale of the store assets to ENBC.
On August 10, 1995, San Diego-based Baltimore Bagel Co., formerly located
at 7007 Carroll Road, San Diego, California 92121 was merged into Baltimore
Bagel Co., a Delaware corporation and a wholly-owned subsidiary of ENBC. At the
time of the merger, Baltimore Bagel Co. owned and operated its 15 bagel stores
in San Diego and Orange County, California, under the name "Baltimore Bagels."
Baltimore Bagels began operating bagel shops in April 1980 and operated them
continuously until the date of the merger. Baltimore Bagel Co. did not offer
franchises for bagel shops or any other lines of business.
On January 31, 1996, Noah's New York Bagels, Inc., formerly located at
14054 Catalina St., San Leandro, California 94577 was merged with NNYB
Acquisition Corp., ENBC's wholly owned subsidiary. At the time of the merger,
Noah's New York Bagels, Inc. owned and operated 38 bagel stores in California
and Washington under the name "Noah's New York Bagels." In this offering
circular, ENBC refers to Noah's New York Bagels Units as "Noah's Units." Noah's
New York Bagels, Inc. began operating bagel shops in June 1989 and operated them
continuously until the date of the merger. It did not grant franchises before
the merger for bagel shops or any other lines of business.
ENBC operates, and offers and sells development rights for multiple
franchises to operate, food service businesses, referred to in this offering
circular as "Units," which sell, among other things, bagels, bagel-related
products, cream cheese and/or other spreads, sandwiches, soups, salads, baked
goods, breakfast items, and an assortment of hot and cold beverages, teas
(leaves, bags or dry mixes), coffee (whole beans, ground and prepared) and other
food and beverage products and mixes that ENBC approves or requires to be sold
at Units ("Products"). Units offer Products for on-premises and carry-out
dining.
Units operate at locations which feature distinctive food service formats
and "trade dress" and use one or more of ENBC's trademarks, service marks and
associated logos, including "Einstein Bros.," "Brackman Brothers," "Bagel &
Bagel," "Offerdahl's," "Baltimore Bagels," "Noah's New York Bagels," and/or
other trademarks, service marks and associated logos which ENBC is continuing to
develop and refine and may adopt (collectively, the "Marks"). "Trade dress"
means the total image or overall impression which ENBC's stores, products and
packaging create, including the individual elements which make up that image or
impression. Units use ENBC's distinctive formats, specifications, employee
selection and training programs, signs, equipment, layouts, systems, menu,
recipes, methods, procedures, designs and marketing and advertising standards
and formats, all of which ENBC may modify periodically in its sole discretion,
and all of which may have one or more variations which ENBC may approve or
specify (the "System").
2
<PAGE>
As described in Item 12, the Unit you operate or develop will be under a
distinct concept identified by certain Marks that will operate under the System
that ENBC develops for Units using those Marks; the Unit you operate or develop
will be referred to in this offering circular as the "Store" or "Stores." For
example, if ENBC grants you rights to operate a Store under the "Einstein Bros.
Bagels" Mark, you will use the concept and System that ENBC has established, and
must operate under the standards and specifications ENBC designates, for
Einstein Bros. Bagels Units as described in manuals developed for those Units.
ENBC may, in its discretion, offer you the opportunity to offer Delivery Service
(described below and defined in Item 12), Catering Service (described below and
defined in Item 12) and/or operate special distribution arrangements (defined
below). ENBC is currently exploring a number of different distribution methods
other than through branded retail food service outlets, including wholesaling to
other retail stores and sales to other distribution channels (e.g., hotels,
airlines and institutional facilities). While ENBC has not yet determined what
other means of distribution it will utilize, it reserves the right to use any
other means not expressly included in the exclusive rights of its franchisees.
ENBC, directly and through its subsidiaries as of December 31, 1995, owned
and operated 59 bagel stores under the names "Einstein Bros.," "Brackman
Brothers," "Bagel & Bagel," "Offerdahl's," "The Bagel Shop," "Bagel Stop," and
"Baltimore Bagels." As of April 1, 1996, ENBC owned and operated through a
subsidiary 45 Noah's New York Bagel shops. (See Item 20) ENBC engages in no
other business activities. ENBC began operating Stores in March, 1995 and began
offering franchises for Stores as of the date of this offering circular. ENBC
has not offered franchises in other lines of business.
Throughout the United States, the food service industry is highly
competitive, with constantly changing market conditions, and is characterized by
a profusion of operators, including well-financed and highly sophisticated
national and regional chains. Stores will compete with restaurants, fast food
outlets and other bagel shops operated by national and regional chains and
independent operators and, to some extent, with grocery and convenient stores
that sell various prepared food products. Units will compete with these
competitors for market share and access to desirable locations and to recruit
food service personnel. Units will offer Products primarily to individual
consumers for on-site or off-site consumption. The market for the Products is
developed in some areas and developing in other areas, depending on the number
of restaurants and stores operating in the particular area.
Boston Chicken, Inc. ("BCI") made a secured loan to ENBC for $40,000,000
which was subsequently increased to $120,000,000. The loan was convertible into
shares of common stock of ENBC, and BCI had, as part of the loan transaction,
the option to acquire ENBC stock. In June 1996, BCI converted the loan and
exercised its option; BCI currently holds shares of common stock of ENBC
representing 59.6% of ENBC's issued and outstanding common stock. Since March
1989, BCI has operated, and offered and sold development rights for multiple
franchises and single-unit franchises for the operation of food service
businesses that sell rotisserie chicken, ham, turkey and other food products
under the mark "Boston Market"for on-
3
<PAGE>
premises and carry-out dining. BCI does not offer or sell franchises in any
other lines of business than as described in this Item.
In August 1996, ENBC completed (a) an underwritten initial offering of
3,105,000 shares of its common stock to the public, (b) a concurrent non-
underwritten public offering of 425,000 shares of its common stock to certain
individuals and entities and (c) a concurrent private placement of 2,000,000
shares of its common stock to BCI, raising aggregate net proceeds of
approximately $86,000,000.
DEVELOPMENT AND FRANCHISE RIGHTS OFFERED.
- ----------------------------------------
(a) DEVELOPMENT RIGHTS. For each Store you develop under the Development
------------------
Agreement, you must execute ENBC's then-current standard franchise agreement and
any riders, exhibits, guarantees and other agreements ENBC uses. The following
paragraphs describe the rights and obligations you will have under the
Development Agreement and/or the Franchise Agreement.
ENBC will offer and sell to certain qualified persons or entities
("Developers") the right to acquire franchises to develop, own and operate a
specified number of Stores at approved location(s) ("Approved Sites") within a
defined geographic area (the "Development Area") under the terms of ENBC's
development agreement (the "Development Agreement"), a copy of which is attached
to this offering circular as Exhibit B. The Development Area may be composed of
---------
a number of smaller areas referred to as "Sub-Areas." If you are a Developer,
the total number of Stores which you must develop under the Development
Agreement (the "Development Obligations") and the development schedule (the
"Development Schedule") specifying the number of Stores you open and operate in
each Sub-Area and the required opening dates for each of them will be inserted
in the Development Agreement before it is executed. The material terms and
conditions of the then-current standard franchise agreement may vary
substantially from the terms and conditions of the Franchise Agreement (defined
below) described in this offering circular. However, under the Development
Agreement, the initial franchise fee under each standard franchise agreement you
sign will not exceed $35,000, and the royalty fee under each standard franchise
agreement you sign will not exceed 5% of the Store's Royalty Base Revenue (as
defined in Item 6). (See Items 5 and 6) ENBC may in some instances require or
permit developers of Stores that previously entered into development agreements
with ENBC to enter into the form of franchise agreement attached to their
development agreement rather than the Franchise Agreement described in this
offering circular.
Under the Development Agreement, ENBC may require you to establish and
operate one or more food preparation facilities to prepare and distribute the
Products to Stores in your Development Area ("Commissaries"). Commissaries will
not serve Products or any service to the general public, and they will operate
according to ENBC's standards and specifications.
4
<PAGE>
In order to meet ENBC's standards and specifications for products sold
through the Stores and to maintain quality controls, it will at some point be
necessary to establish one or more Commissaries in the Development Area. You
agree in the Development Agreement to establish in the Development Area the
number of Commissaries ENBC reasonably determines to be necessary for the stores
in the Development Area and to operate the commissaries according to ENBC's
standards and specifications.
(b) FRANCHISE RIGHTS. ENBC will offer and sell to certain qualified persons
----------------
("Franchisees") a franchise to establish and operate a Store using the System
under the Marks ENBC designates and offering Products (the "Franchise") under
the terms of ENBC's franchise agreement (the "Franchise Agreement") attached to
this offering circular as Exhibit C. ENBC anticipates that Developers will own
---------
and operate most or all Stores. Each Store will operate at a site ENBC has
approved (a "Site") within a certain designated geographic area (a "Territory").
Under the Franchise Agreement, ENBC may offer you the opportunity to sign an
agreement to sell Products at a facility or location such as a convenience store
or airport (a "Special Distribution Agreement"). ENBC may also offer you the
opportunity to or require you to sign a rider to the Franchise Agreement that
allows you to deliver Products to consumers inside or outside of your Territory
(a "Delivery Rider") and/or may offer you the opportunity to or require you to
sign a rider to the Franchise Agreement that allows you to cater Products to
consumers within a designated area (a "Catering Rider"). Copies of the Delivery
Rider and the Catering Rider are attached to the Franchise Agreement (see
Exhibit C to this offering circular).
- ---------
VARIATIONS IN THE OPERATING SYSTEM
- ----------------------------------
Some aspects of ENBC's franchise program and its retail store concept are
still in the development stage. ENBC believes that it is desirable, and part of
its mission is, to take full advantage of the customer base, customer loyalty,
market strength and operating efficiencies of each of the concepts it has
acquired. As a result, it expects that there will be some significant variations
in the System. These variations may be for an initial or transitional period, or
they may be permanent, depending on whether ENBC in its sole discretion
ultimately determines that it can best capture those advantages by developing
and operating only Einstein Bros. Units or stores using all or some of the
components of the original acquired concepts in those markets where those brands
already have a strong presence, or some combination of both. ENBC may, for
instance, allow certain Developers to use one recipe for bagels, cream cheeses
or other items while allowing other Developers to use different recipes. ENBC
may also allow variations between Developers in the areas of trademarks, trade
dress, operational items or other aspects of Units. However, you must
acknowledge and agree that only ENBC may determine what variations are allowable
and that you will in any event conform strictly to the standards and
specifications which ENBC establishes for your Stores.
ENBC intends to allow these variations for at least two reasons: (a) as
part of ongoing research and development for Units generally; and (b) to test
whether regional variations in Units may be advantageous. It is ENBC's
expectation that over time during the term of your
5
<PAGE>
Development Agreement and Franchise Agreements ENBC will continue to develop and
refine various aspects of the ENBC program based, in part, on the experiences of
Developers and Franchisees with any different recipes and other variations in
Units it may allow. ENBC expects, and you should expect, that as new products,
new operating procedures, new trade dress and other refinements occur, ENBC may,
in its sole discretion, cease to allow some or all of the variations and may
require local or regional variations or national uniformity among Stores in
aspects for which it had previously allowed variations. This may mean that you
may be required, for example, to change one or more of: (a) the recipes you use
for bagels, cream cheese or other items; (b) the trademarks and/or service marks
you use; (c) the trade dress or operational procedures you use; or (d) other
aspects of your Stores. Some or all of these changes may require you to make
substantial additional capital expenditures or other expenses to conform your
operations to ENBC's revised local, regional and/or national requirements for
particular aspects of your business. By signing a Development Agreement and
Franchise Agreements, you acknowledge and agree that if ENBC decides to do so,
it may discontinue any of the variations which ENBC had allowed previously and
that you will conform to all required local, regional and/or national standards
and specifications and other requirements which ENBC may establish periodically
as part of the development and refinement of ENBC's retail store concept, even
if it means substantial additional expense for you. Furthermore, you acknowledge
and agree that you will provide to ENBC the data it requires concerning your
operations to allow ENBC to assess the success of various variations in its
retail store concept.
In addition to those considerations, you should also be aware that ENBC may
continue to operate and/or to allow you and other Developers and Franchisees in
certain regions to operate Stores under trademarks and service marks including
both "Einstein Bros." and "Noah's New York Bagels." Thus, you may have franchise
rights to the Einstein Bros. Bagels concept in a market, while another party may
have franchise rights for the Noah's New York Bagels concept in the same market.
ENBC currently anticipates that it eventually will convert all Units to operate
under either the "Einstein Bros. Bagels" Mark or the "Noah's New York Bagel"
Mark. However, ENBC may allow the use of other marks (such as "Bagel & Bagel,"
"Offerdahl's" and "Baltimore Bagels") temporarily in the regions where stores
are currently operating under those names, pending conversion of those stores to
Einstein Bros. or Noah's New York Bagels units. By signing a Development
Agreement and Franchise Agreements, you acknowledge and agree that such
trademark variations may exist and that, if they do, ENBC's franchise program
may not be for a nationwide chain of stores all operating under a single mark,
but rather a dual-branded program using the Einstein Bros. and Noah's New York
Bagels Marks. Thus, you should be aware that ENBC uses the term "Units"
throughout this offering circular for convenience to refer to the various bagel
stores for which ENBC may offer franchises, and that other Developers and
Franchisees may do business under more than one brand.
As described in Item 12 of the offering circular, the Store(s) you develop
and/or operate will be under a particular branded concept and will operate using
the Marks and the System that ENBC designates for that variety of Units. ENBC
reserves rights to develop and distribute
6
<PAGE>
Products under other Marks and through channels of distribution other than
retail stores. (See Item 12)
STORE MANAGER INCENTIVE PROGRAM
- -------------------------------
ENBC is considering a program under which Developers would be required to
offer an incentive program designed to attract individuals experienced in
restaurant management ("operators") to operate one or more of their Stores. The
Developer would enter into an employment agreement with the operator making the
operator the manager of a Store and giving the operator the right to receive, in
addition to a fixed draw, a percentage of the Store's income or cash flow as
specifically defined for that program. This is the only compensation the
operator would receive under the employment agreement. As of the date of this
offering circular, ENBC is still working out the details of this incentive
program. The final program may differ somewhat from this description, but ENBC
expects that it will be substantially similar.
GENERAL COMMENTS
- ----------------
This offering circular describes information about (a) the development
rights ENBC offers for Stores; (b) the Franchise; (c) Delivery Service, Catering
Service, Commissaries and Special Distribution Arrangements (as described in
Item 12); (d) the terms and conditions of the current Development Agreement,
Franchise Agreement, Delivery Rider, Catering Rider and Special Distribution
Arrangements Rider; and (e) certain financing arrangements which may be
available to you.
There may be instances when ENBC will vary the terms and conditions of the
agreements and riders, depending on the circumstances of a particular
transaction. ENBC intends only to enter into multi-unit development transactions
with sophisticated investors who are experienced food service operators, or who
employ management personnel with food service expertise, and who have access to
substantial capital necessary to finance multi-unit development of Stores over
development terms which will typically be of 2 to 5 years, depending on the
number of Stores to be developed.
You must comply with all local, state and federal laws and regulations that
apply to food service operations, including health and sanitation laws and
regulations, when you develop and operate Stores and, if applicable, when you
offer Delivery Service or Catering Service or operate Commissaries or Special
Distribution Arrangements.
DEFINITIONS
- -----------
As used in the Franchise Agreement, Development Agreement and this offering
circular, the following terms will have the following meanings:
7
<PAGE>
(a) "Owner" means all persons or entities that hold direct or indirect,
record or beneficial Ownership Interests (defined below) in you as specified in
the applicable agreement. The term Owner also refers to any person who has any
other direct or indirect property rights in you, the Franchise Agreement, the
Development Agreement, the Franchise or a Store;
(b) "Ownership Interest" means in relation to a: (i) corporation, the
record or beneficial ownership of shares in the corporation; (ii) limited
liability company, the record or beneficial ownership of membership interests in
the company; (iii) partnership, the record or beneficial ownership of a general
or limited partnership interest; or (iv) trust, the ownership of beneficial
interest of that trust;
(c) "Principal Owner" means each Owner which (1) is a general partner in
the Developer; or (2) has a direct or indirect equity interest of 10% or more
(regardless of whether such Owner is entitled to vote thereon) in (a) you or (b)
any Store or (c) any developer and/or franchise owner of Stores other than you;
provided, however, that a reduction in a Principal Owner's equity interest below
10% will not affect his/her/its status as a Principal Owner unless such
reduction is the result of the transfer of all his/her/its equity interests in
DEVELOPER, an a Store or a developer and/or franchise owner of a Store; and
(d) "Immediate Family" means: (1) a person's spouse; and (2) a person's
natural and adoptive parents and natural and adopted children and siblings and
their spouses; and (3) the natural and adoptive parents and natural and adopted
children and siblings of a person's spouse; and (4) any other member of the
person's household; so long as, in the case of children, siblings and their
spouses and the parents, children and siblings of the spouses, that these people
received or had access to Confidential Information including as your employee,
supplier, officer, director, stockholder or agent.
ITEM 2
------
BUSINESS EXPERIENCE
[PLEASE SEND REVISIONS AS NECESSARY]
CHAIRMAN OF THE BOARD: SCOTT A. BECK
- -------------------------------------
Scott A. Beck has been Chairman of the Board since June 1996. He previously
served as Chairman and Chief Executive Officer of ENBC from April 1995 to June
1995. He was also a Director from April 1995 until June 1996. He has been
Chairman, Chief Executive Officer and a Director of BCI since June 1992. He was
Vice Chairman of the Board of Blockbuster Entertainment Corporation in Fort
Lauderdale, Florida from September 1989 until January 1992, and Chief Operating
Officer from September 1989 to January 1991. From 1980 to the present, Mr. Beck
also has been President of Pace Affiliated, Inc., an investment banking firm he
founded.
8
<PAGE>
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR: MARK GOLDSTON
- ---------------------------------------------------------------
Mr. Goldston became ENBC's President and CEO in April 1996. From July 1994
to April 1996, was Chairman and CEO of The Goldston Group, an advisory firm in
Los Angeles, California, through which he provided consulting services to BCI.
From October 1991 through June 1994, Mr. Goldston was employed by L.A. Gear,
Inc. in Santa Monica, California, most recently as President and Chief Operating
Officer. From September 1989 to October 1991, he was a principal in Odyssey
Partners, L.P. in New York, New York. Since December 1995 Mr. Goldston has been
a Director of Bohbot Entertainment and Media, Inc. in New York, New York. In
August 1996, Mr. Goldston was elected to the Board of Directors of BCI.
DIRECTOR: KYLE T. CRAIG
- ------------------------
Mr. Craig has been one of ENBC's Directors since February 1995. He served
as ENBC's Vice President from the date the company was formed in February 1995
until his appointment as Chairman of the Board in June 1995, a position he held
until June 1996. Mr. Craig also served as the Chief Concept Officer of BCI from
April 1994 through June 1995. From November 1993 until April 1994, he was
President of KFC-Brand Development, a unit of KFC Corp. in Louisville, Kentucky,
and from April 1990 until November 1993, he was President of KFC-USA, also a
unit of KFC Corp. in Louisville, Kentucky. KFC Corp. is a wholly owned
subsidiary of PepsiCo, Inc.
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER: W. ERIC CARLBORG
- -----------------------------------------------------------------
Mr. Carlborg was appointed to his current position in July 1996. From
September 1995 to July 1996, he served as Vice President of Planning for Boston
Chicken, Inc. From August 1989 to September 1995, he was a Vice President with
Merrill Lynch & Co. in Chicago.
VICE CHAIRMAN: NOAH C. ALPER
- -----------------------------
Mr. Alper joined ENBC's Board of Directors as Vice Chairman when ENBC's
subsidiary, NNYB Acquisition Corp., merged with Noah's New York Bagels, Inc. on
January 31, 1996. Mr. Alper founded the Noah's New York Bagels chain and served
as its chairman from August 1988 to January 31, 1996.
DIRECTOR: LLOYD D. RUTH
- ------------------------
Mr. Ruth became a member of ENBC's Board of Directors when it formed in
February 1995. Since January 1987 he has been a General Partner at Marquette
Management Partners in Deerfield, Illinois.
9
<PAGE>
DIRECTOR: JOHN H. MUEHLSTEIN, JR.
- ----------------------------------
Mr. Muehlstein has been a member of ENBC's Board of Directors since it
formed in February 1995. He has also been an attorney at the Chicago law firm of
Pedersen & Houpt since June 1980.
DIRECTOR: M. LAIRD KOLDYKE
- ---------------------------
Mr. Koldyke has been a member of ENBC's Board of Directors since February
1995. Mr. Koldyke has served as the General Partner of the Frontenac Company in
Chicago, Illinois since 1989.
DIRECTOR, VICE PRESIDENT AND CHIEF DEVELOPMENT OFFICER: DAVID G. STANCHAK
- --------------------------------------------------------------------------
Mr. Stanchak has been a member of ENBC's Board of Directors, ENBC's Chief
Development Officer and a Vice President since ENBC formed in February 1995.
From June 1992 until February 1995, he served as the Senior Vice President of
BCI, and from August 1989 until June 1992, Mr. Stanchak was the National
Director of Real Estate and Real Estate Legal Counsel for Blockbuster
Entertainment Corporation.
DIRECTOR: JOHN A. OFFERDAHL
- -----------------------------
Mr. Offerdahl was a founder of Offerdahl's Bagel Gourmet, Inc., which ENBC
acquired in March 1995. When ENBC acquired that company, Mr. Offerdahl was
appointed as a Director and the Vice President-Operations, Southeast Zone. He
ceased acting as a Vice President in January 1996, but remains a Director of
ENBC. Mr. Offerdahl served as the Chairman and President of Offerdahl's Bagel
Gourmet in Fort Lauderdale, Florida from December 1989 until March 1995. From
May 1986 until September 1994, Mr. Offerdahl played professional football for
the Miami Dolphins in the National Football League.
VICE PRESIDENT OF PRODUCT: MICHAEL BRAU
- ----------------------------------------
In April 1980, Mr. Brau founded Baltimore Bagel Co. in San Diego,
California, where he served as President until that company's acquisition by
ENBC in August 1995. He served as ENBC's acting Zone President for the Western
Zone from August 1995 until May 1996, when he became ENBC's Vice President of
Product. He is based in San Diego, California.
DIRECTOR, VICE PRESIDENT -- DESIGN AND MERCHANDISING: GAIL LOZOFF
- ------------------------------------------------------------------
Ms. Lozoff began serving as a Director of ENBC and the Vice President-
Design and Merchandising in April 1995, after working with Bagel & Bagel, Inc.
in Prairie Village, Kansas from June 1988. She also served as President and
Chief Executive Officer of Bagel & Bagel
10
<PAGE>
from May 1992 to April 1995. Ms. Lozoff has also served as a Director of Three
Dog Bakery in Kansas City, Missouri since September 1994.
PRESIDENT, EINSTEIN BROS. CONCEPT: JEFFREY L. BUTLER
- -----------------------------------------------------
Mr. Butler was appointed ENBC's Chief Operating Officer in February 1996,
after having been a partner in BC Great Lakes, the franchisee of Boston Chicken,
Inc. headquartered in Chicago, Illinois, from June 1995 until February 1996.
Prior to that, Mr. Butler served in Madison Heights, Michigan, as President and
CEO of BC Detroit, the Detroit area franchise of Boston Chicken, Inc., from June
1993 to June 1995 (BC Detroit was later merged into BC Great Lakes). From
January 1992 to June 1993, he served as Vice President-Human Resources for
Boston Chicken, Inc. in Naperville, Illinois. July 1991 to January 1992, he was
an independent consultant and from April 1990 to June 1991, he was Regional
Director of Operations for Blockbuster Entertainment in San Diego, California.
SENIOR VICE PRESIDENT - SUPPLY CHAIN: MICHAEL BEAUDOIN
- -------------------------------------------------------
Mr. Beaudoin became ENBC's Senior Vice President - Supply Chain in July
1996. He served as ENBC's Vice President and Chief Financial Officer from July
1995 to July 1996, after serving as Assistant to the Chairman of Boston Chicken,
Inc. from February 1995. From December 1992 to February 1995, he was employed by
Soundsational, Inc. and NewLeaf Entertainment (both subsidiaries of Blockbuster
Entertainment Corporation in Ft. Lauderdale, Florida), first as Director of
Strategic Planning for Soundsational, Inc. (December 1992 to May 1993), then as
Sr. Director of Operations for Soundsational, Inc. (May 1993 to July 1993) and
Vice President of NewLeaf (July 1993 to February 1995). From June 1990 through
November 1992, Mr. Beaudoin was an associate with Pfingsten Partners, L.P. in
Deerfield, Illinois.
VICE PRESIDENT AND SECRETARY: JOEL M. ALAM
- -------------------------------------------
Mr. Alam became a Vice President and the Secretary of ENBC in May 1995.
From January 1994 until May 1995, he was Vice President, Associate General
Counsel and Assistant Secretary of BCI. From May 1993 until January 1994, Mr.
Alam was Assistant General Counsel of BCI. Before that, he was an associate in
the corporate department of the Chicago law firm Bell, Boyd & Lloyd for more
than five years.
VICE PRESIDENT -- BUSINESS DEVELOPMENT: ALBERT S. BALDOCCHI
- ------------------------------------------------------------
Mr. Baldocchi became ENBC's Vice President-Business Development in February
1995. From April 1994 until February 1995, he was President of Albert S.
Baldocchi, Inc. an investment firm in San Francisco, California. Before that,
Mr. Baldocchi was a Principal of Montgomery Securities in San Francisco from
January 1991 to March 1994, and he served as a Director of Morgan Stanley & Co.
from January 1986 until December 1991 in San Francisco and New York.
11
<PAGE>
VICE PRESIDENT -- DEVELOPMENT: PAUL D. BOOHER
- ----------------------------------------------
Mr. Booher became the Vice President-Development of ENBC in May 1995. From
March 1985 until April 1995, he served as Vice President of Development for Wal-
Mart Stores, Inc. in Bentonville, Arkansas.
VICE PRESIDENT -- PARTNER DEVELOPMENT: MICHAEL R. DAIGLE
- ---------------------------------------------------------
Mr. Daigle has served as ENBC's Vice President-Partner Development since
May 1995 after having held various legal and franchise positions with
Blockbuster Entertainment Corporation and its successor, Viacom, Inc., in Fort
Lauderdale, Florida, including as Vice President-Domestic Franchising from
September 1994 to April 1995, Vice President-Franchise Development from February
1994 to September 1995, Director-Franchise Development from January 1992 to
February 1994, Senior Franchise Counsel from September 1990 to January 1992. He
has been the Vice President - Partner Development for BCI since October 1995.
From April 1989 until September 1990, Mr. Daigle was the Senior Franchise
Counsel for Al Copeland Enterprises, Inc. (owner of Popeye's Fried Chicken and
Church's Chicken) in New Orleans, Louisiana.
VICE PRESIDENT - PARTNER DEVELOPMENT: THOMAS BECK
- --------------------------------------------------
Thomas Beck became ENBC's Vice President - Partner Development in October
1995. He has been Vice President - Franchise Development for BCI since June
1993. Mr. Beck was BCI's Director of Franchise Development from April 1992 to
May 1993. From August 1989 to March 1992, he was a director of and consultant to
the KCEB Foundation in Chicago, Illinois.
VICE PRESIDENT AND GENERAL COUNSEL: PAUL A. STRASEN
- ----------------------------------------------------
Mr. Strasen became a Vice President and General Counsel of ENBC in April
1995. Before that, he was a partner at the Chicago law firm of Bell, Boyd and
Lloyd from 1988 to April 1995.
VICE PRESIDENT -- MARKETING AND ADVERTISING: GARY T. NAIFEH
- ------------------------------------------------------------
Mr. Naifeh became ENBC's Vice President -- Marketing and Advertising in
August 1995. He was employed from September 1994 to August 1995 as BCI's Vice
President, National Marketing. From June 1994 to September 1994 he was the
Senior Vice President of Operations for Baskin Robbins, Inc. in Glendale, CA.
From June 1994 to March 1993, Mr. Naifeh was the Vice President of Marketing for
Pizza Hut, Inc. in Wichita, Kansas, and he was Zone Vice President of Operations
for Taco Bell Corp in Irving, California from June 1990 to March 1993. He was
Vice President, Branch Management for Coors Brewing Co. in Golden, Colorado from
February 1982 until June 1990.
12
<PAGE>
VICE PRESIDENT -- PRODUCT DEVELOPMENT AND QUALITY ASSURANCE: RONALD SAVELLI
- ----------------------------------------------------------------------------
Mr. Savelli joined ENBC in September 1995 as Vice President - Product and
Production. In July 1996, he became ENBC's Vice President - Product Development
and Quality Assurance. From September 1989 to September 1995, he was Product
Manager of Caravan Products, Inc. in Totowa, NJ.
VICE PRESIDENT -- OPERATIONS SERVICES: W. BENJAMIN NOVAK
- ---------------------------------------------------------
Mr. Novak joined ENBC in July 1995 as Director of Financial Systems and
Process Planning, after serving in the same capacity with BCI from March 1994 to
July 1995. He became ENBC's Vice President of Operations Services in January
1996. From September 1989 to March 1994, Mr. Novak served as Director of Finance
for Blockbuster Entertainment Corporation in Ft. Lauderdale, Florida.
VICE PRESIDENT -- PERFORMANCE EVALUATION: TED P. HEININGER
- -----------------------------------------------------------
Mr. Heininger joined ENBC in April 1995 and served as its Controller until
January 1996, when he was appointed ENBC's Vice President of Performance
Evaluation. From June 1993 to March 1995, Mr. Heininger was employed as Vice
President and Chief Financial Officer with Meyercord Co., a subsidiary of the
Berwind Group in Carol Stream, Illinois. He served as Vice President and Chief
Financial Officer of GPS Healthcare, also a subsidiary of the Berwind Group, in
Pottsville, Pennsylvania, from October 1990 to May 1993.
VICE PRESIDENT-PEOPLE AND CULTURE DEVELOPMENT: JANICE ELLIS
- ------------------------------------------------------------
Ms. Ellis joined ENBC in September 1995. Before that, she had been an
Executive Vice President of Nathan's Famous, Inc. in Westbury, New York since
March 1994. From February 1993 to March 1994, Ms. Ellis was Senior Vice
President - Restaurant Services with Long John Silver's, Inc. in Lexington,
Kentucky. She worked with KFC Corp. in Louisville, Kentucky, from August 1990 to
February 1991 as the Director of Operations Services and Training, from February
1991 to March 1992 as Vice President New Work Processes and from March 1992 to
February 1993 as Vice President Restaurant Support Services.
ITEM 3
------
LITIGATION
Dr. Frederick Sklar, Ray Schondak, Irving Smith, Ron Woodall, Atteberry
-----------------------------------------------------------------------
Children's Trust, Stan Fernald, Michael Boyd, and David Hickman v. Scott A.
- ---------------------------------------------------------------------------
Beck, Video Superstore Management, Inc., Pace Financial Management, Inc., Pace
- ------------------------------------------------------------------------------
Affiliated, Inc., Blockbuster Entertainment Corporation, Chuck Rice, Kevin
- --------------------------------------------------------------------------
Shepherd, and Jerry Reeves, (District Court,
- --------------------------
13
<PAGE>
Dallas County, Texas, Cause No. 91-10192). On October 10, 1991, Plaintiffs (who
are not related to ENBC) began an action against Defendants by filing a
complaint in the District Court for Dallas County, Texas. In the Complaint,
plaintiffs have asserted various causes of action including breach of fiduciary
duty, fraud, civil conspiracy, violation of the Texas Securities Act, breach of
contract and negligence from Blockbuster's purchase of the general partnership
interest of Video Superstore Management, Inc. ("VSMI") in VSMI/Blockbuster Ltd.
II. On December 20, 1991, Blockbuster filed an Answer denying liability. On
October 18, 1993, Plaintiffs agreed to drop all of their claims and settle this
lawsuit, and Defendants agreed to pay $50,000 to Plaintiffs.
7547 Partners v. Scott A. Beck, Saad J. Nadhir, Jeffry J. Shearer, J. Bruce
---------------------------------------------------------------------------
Harreld, Arnold C. Greenberg, M. Howard Jacobson, Peer Pedersen and Boston
- --------------------------------------------------------------------------
Chicken, Inc., (Court of Chancery of the State of Delaware, Docket No. 13252).
- --------------
Plaintiff, 7547 Partners, is a Florida general partnership owning shares of
common stock of BCI which brought this action derivatively for BCI on November
16, 1993. This suit arises out of BCI's initial public offering in which BCI
sold 1,900,000 shares of its common stock at $20 per share ($18.60 net to BCI
after underwriting commissions) and concurrently sold 900,000 shares of its
common stock to its executive officers in a private placement at a price of
$18.60 per share. A majority of the private placement shares were sold to
Messrs. Beck, Nadhir, Shearer and Harreld, all of whom are directors of BCI; Mr.
Beck is ENBC's Chairman of the Board. The public trading of BCI stock opened at
a per share price of $45.50 on November 9, 1993 and closed that day at $48.50.
Plaintiff alleges that the defendants were grossly negligent in pricing BCI's
shares for the initial public offering at $20 per share when market conditions
were such that BCI stock could be fairly sold for, and would initially trade at,
substantially in excess of $20 per share. The share amounts and per share prices
mentioned above refer to share prices and numbers of shares before any share
splits or other adjustments which occurred later. The complaint goes on to
allege that, as a result of the pricing BCI set for the initial public offering
and the private placement, executive officers of BCI, including the majority of
its Board of Directors, reaped profits in excess of $25 million which rightfully
belong to BCI. Plaintiff contends that the director defendants wasted BCI's
assets and did not act independently, did not remove or properly resolve
conflicts of interest, and did not exercise rational business judgment in
allowing certain of BCI's executives to purchase shares at the aforementioned
prices. Plaintiff alleges that Defendants committed a gross abuse of trust and
breached their fiduciary duties to BCI and its public stockholders. For BCI,
plaintiff asks the court to impose a constructive trust in favor of BCI on all
shares of its stock any of Defendants wrongfully acquired and to direct the
individual defendants to account to BCI for its damages and for all profits they
obtained as a result of the wrongs alleged in the complaint. BCI, the Board of
Directors and the individuals named in this action note that no executive
officer purchasing in the concurrent private placement was a member of the
special Pricing Committee which established the price of the stock issued and
dispute each and every claim asserted in this action and will vigorously defend
it. In February 1995, the court granted BCI's motion to dismiss the litigation.
In March 1995, Plaintiff filed a motion for re-argument and a motion seeking
permission to file an amended complaint. The court denied Plaintiff's motion in
August 1995. Plaintiff has filed a second motion for re-
14
<PAGE>
argument in August 1995, which the court also denied in October 1995. In October
1995, the plaintiff filed a Notice of Appeal with the Supreme Court of the State
of Delaware seeking reversal of the Chancery Court's rulings (Case No. 432,
1995). The appeal is in the pre-hearing briefing stage.
Kathleen Pessin v. H. Wayne Huizenga, A. Clinton Allen, John J. Melk, Scott
---------------------------------------------------------------------------
A. Beck, Donald J. Flynn, Steven R. Berrard, John W. Croghan, Blockbuster
- -------------------------------------------------------------------------
Entertainment Corporation and Viacom Inc., (Court of Chancery, New Castle
- -----------------------------------------
County, Delaware (Civil Action No. 13456)). This is a suit, filed on April 8,
1994, was brought by a shareholder of Blockbuster Entertainment Corporation
("Blockbuster") (who is not related to ENBC), against, among others, certain
directors of Blockbuster, including Mr. Scott Beck, ENBC's Chairman of the
Board. The first count, a shareholder's derivative action, alleged a breach of
fiduciary duty, waste of corporate assets and usurpation of corporate
opportunity on the part of the directors. Plaintiff's claims arise out of
various franchise transactions with certain directors of Blockbuster or members
of their immediate families or entities they control, including allegations that
franchised stores these persons owned were sold to Blockbuster at inflated
prices and also that the grants of these franchises were made on favorable
terms. None of the specific transactions recited was with Mr. Beck or any member
of his immediate family or any entity he controls. The second count of the
complaint was filed individually and as a class action for all stockholders of
Blockbuster against Viacom, Inc. and the directors of Blockbuster and alleged
that as a result of the alleged self-dealing described above, the proposed
merger of Blockbuster and Viacom, Inc. resulted in an artificially low purchase
price and was unfair and a breach of fiduciary duty. Plaintiff sought an order
for an accounting with respect to the transactions described in the first count
and, with respect to the second count, sought to be certified as a class, a
declaration that Defendants breached their fiduciary and other duties, an order
enjoining them from proceeding with the Blockbuster/Viacom merger or rescinding
the merger if it was completed and an unspecified amount of damages, costs and
attorneys' and accountants' fees. Mr. Beck is no longer on the Blockbuster Board
of Directors and was not on the Board at the time of the approval of the
proposed merger. In January 1995, Plaintiff and Defendants signed a proposed
settlement agreement which provided that all claims would be dismissed with
prejudice and that Defendants would pay Plaintiff's attorneys' fees and costs.
On April 5, 1995, the court determined that the proposed settlement was fair,
reasonable, adequate and in the best interest of Plaintiff and the lawsuit was
dismissed.
Charles D. Howell, in his Capacity as the Trustee of the Doug Howell Family
---------------------------------------------------------------------------
Trust, and Charles D. Howell, Individually, Plaintiffs, v. Blockbuster
- ----------------------------------------------------------------------
Entertainment Corporation, Scott A. Beck, Video Superstores Master Limited
- --------------------------------------------------------------------------
Partnership, Video Superstores Management, Inc., VSMI Limited Partnership,
- --------------------------------------------------------------------------
Blockbuster Midwest Limited Partnership, and SAB Acquisition Company, Inc.,
- ---------------------------------------------------------------------------
Defendants, (District Court, Dallas County, Texas, Cause No. 91-10193-M, removed
- ----------
to U.S. District Court, Northern District of Texas, Case No. 91 CV 1901-G and
then remanded to the Texas State District Court). Charles D. Howell individually
and in his capacity as trustee of the Doug Howell Family Trust (the "Trust")
began this action on August 23, 1991 by filing a Complaint in the District Court
for Dallas County, Texas against Defendants.
15
<PAGE>
Plaintiffs (who are not related to BCI) asserted causes of action for breach of
fiduciary duty, fraud, conspiracy, breach of contract and intentional
interference with contract arising out of Blockbuster's acquisition in August
1989 of the business operations of Video Superstores Master Limited Partnership
("VSMLP") and VSMI Limited Partnership ("VSMILP") and the failure at that time
to have included in that acquisition the limited partners' interest in
VSMI/Blockbuster Ltd. I, in which plaintiffs were an 18.75% limited partner.
Plaintiffs sought actual damages, exemplary damages, attorneys' fees and
interest. Following the trial of the case, on August 18, 1994, the court entered
a judgment in favor of plaintiffs on all causes of action. Defendants filed an
appeal with the Dallas Court of Appeal. While the appeal was pending, the
parties entered into a settlement agreement. Under the settlement agreement, the
parties exchanged mutual releases and Scott Beck and Viacom, Inc., as successor
to the other defendants, agreed to pay to the plaintiffs $30,750,000. The trial
court vacated its findings and judgment and dismissed all of the plaintiffs'
claims with prejudice.
Karen Murphy, as Temporary Administrator of the Estate of Doris Berglund
------------------------------------------------------------------------
Brock, and B. Coleman Renick, Jr. v. Blockbuster Entertainment Corporation,
- ---------------------------------------------------------------------------
Scott A. Beck, Video Superstores Master Limited Partnership f/k/a Blockbuster
- -----------------------------------------------------------------------------
Midwest Limited Partnership, VSMI Limited Partnership, SAB Acquisition Company,
- -------------------------------------------------------------------------------
Inc. and Zenith Capital, Inc. f/k/a Pace Financial Management, Inc., (District
- -------------------------------------------------------------------
Court of Dallas County, Texas, Case No. 94-10051M). Karen Murphy, in her
capacity as trustee of the Estate of Doris Berglund Brock and B. Coleman Renick,
Jr. began this action on September 27, 1994 by filing a Complaint in the
District Court for Dallas County, Texas against Defendants. Plaintiffs (who are
not related to ENBC) asserted causes of action identical to those Plaintiff
Howell asserted in the case described above, which causes of action allegedly
arise out of the facts described above in the Howell case. Plaintiffs claim to
------
be similarly situated to Plaintiff Howell. Plaintiffs seek actual damages in the
amount of at least $6.0 million, all profits which defendants Mr. Beck, Video
Superstores Master Limited Partnership, VSMI Limited Partnership and SAB
Acquisition Company, Inc. derived in an amount of at least $118 million and all
profits defendant Blockbuster made in an additional amount of at least $117
million, $350,000 in returned or forfeited compensation paid to one of
Defendants, exemplary damages in the amount of at least $1 billion, attorneys'
fees, costs, expenses, interest and other and further relief as the court may
determine. Certain of Defendants filed a Plea in Abatement and a Motion to Stay
discovery in this case. In December 1994, the court granted the Motion to Stay
discovery pending its ruling on the Plea in Abatement. In January 1995, the
court determined that no discovery would occur in this case until disposition of
the Howell case in the Dallas Court of Appeal. As of the date of this offering
------
circular, the parties have not commenced discovery and trial has been scheduled
for late 1996. Defendants deny the material allegations asserted in the
Complaint and intend to vigorously defend against the Complaint.
Robert L. Lambert, Robert F. Lambert and American Maritime Officers, f/k/a
--------------------------------------------------------------------------
District 2 Marine Engineers Beneficial Association -- Associated Maritime
- -------------------------------------------------------------------------
Officers, AFL-CIO v. Viacom, Inc., H. Wayne Huizenga, Scott A. Beck, Steven R.
- ------------------------------------------------------------------------------
Berrard, Joseph J. Burke, B&L Holding Corp., Blockbuster Holding Corp., and FLC
- -------------------------------------------------------------------------------
Holding Corp., Inc., (Circuit Court, Broward
- -------------------
16
<PAGE>
County, Florida Case No. 95-08900). On June 27, 1995, Robert F. and Robert L.
Lambert (the "Lamberts"), founders of Florida Princess Cruise Lines, Inc.,
Standard Cruise Lines, Inc. and Fort Lauderdale Charter Corp. (the "Lambert
Companies"), and the American Maritime Officers, f/k/a District 2 Marine
Engineers Beneficial Association -- Associated Maritime Officers AFL-CIO (the
"Union"), a New York corporation and an American maritime union, brought this
action against the defendants. Scott A. Beck is included as a defendant,
although the complaint in the lawsuit does not make any specific allegations
concerning Mr. Beck. The plaintiffs' claims arise from a business enterprise in
which Blockbuster Entertainment Corporation ("Blockbuster Entertainment") (which
was subsequently merged into Viacom, Inc.) and certain of its affiliates entered
into transactions with the Lamberts and companies they controlled to purchase
60% of the stock in B&L Holding Corp. ("B&L Holding"), which controlled the
Lamberts' luxury cruise line operations, and to develop a cruise business. On
July 16, 1990, Blockbuster Holding Corp. ("Blockbuster Holding"), a wholly-owned
subsidiary of Blockbuster Entertainment, paid the Lamberts $31,000 in cash and
issued a promissory note for $569,000 (the "Blockbuster Note") as consideration
for the 60% interest in B&L Holding. The Lamberts retained a 40% interest in B&L
Holding. The Lamberts allege that, through a stock redemption agreement dated
December 14, 1990, Blockbuster Entertainment caused B&L Holding to redeem the
Blockbuster Note and coerced Florida Princess Cruise Lines to issue a promissory
note (the "Princess Note") to Blockbuster Entertainment in the amount of
$600,000. The Lamberts allege that the inability of Florida Princess Cruise
Lines to pay the Princess Note and the defendants' failure to provide financing
to B&L Holding caused the Lambert Companies to fail. They further allege that
this allowed defendant FLC Holding Corp. to acquire a cruise ship from the
Lambert Companies on favorable terms.
Specifically, the Lamberts allege that the defendants: (1) fraudulently
misrepresented that they would adequately promote the cruise line business of
B&L Holding and adequately finance B&L Holding so that it could pay the Princess
Note and its other debts; (2) interfered with the Lamberts' business
opportunities and relationships by causing the Lambert Companies to fail; (3)
individually and as directors and officers of Blockbuster Entertainment and
Blockbuster Holding breached their fiduciary duty to the Lamberts as minority
shareholders of B&L Holding by causing B&L Holding to incur debt which B&L
Holding could not repay; and (4) conspired to defraud the Lamberts out of their
businesses. The Lamberts claim compensatory damages of more than $25,000,000 and
exemplary damages of more than $250,000,000 in each count of the complaint.
The American Maritime Officers union (the "Union") claims that the
defendants: (1) interfered with the Union's business relationships and
opportunity to generate union dues and economic benefits for its members who
would have served as crew members on the vessels the cruise lines operated if
the cruise lines had not failed; and (2) caused Blockbuster Holding and B&L
Holding to breach the Memorandum of Understanding with the Union under which the
Union was to provide crew members for the cruise ships. The Union claims more
than $500,000 in compensatory damages and more than $250,000,000 in exemplary
damages.
17
<PAGE>
The defendants have filed a motion for summary judgment and a motion to
dismiss stating that the claims the Lamberts asserted were all previously
decided against the plaintiffs and in favor of the defendants in earlier
litigation among the parties which occurred in 1991. The court denied the motion
for summary judgment and granted the motion to dismiss the Union's breach of
contract claim. The case remains in the pre-trial stage and the defendants
intend to vigorously defend against the plaintiffs' claims.
Other than these six actions, no litigation is required to be disclosed in
this offering circular.
ITEM 4
------
BANKRUPTCY
On August 14, 1989, Gail Lozoff filed for bankruptcy under Chapter 7 of the
U.S. Bankruptcy Code under her maiden name (Pasternak) (U.S. Bankruptcy Court
for the Western District of Missouri Case 89-41819-FWK). The case was discharged
on February 9, 1990.
Other than this one action, no person previously identified in Item 1, and
no officer identified in Item 2 of this offering circular has been involved as a
debtor in proceedings under the U.S. Bankruptcy Code required to be disclosed in
this Item.
ITEM 5
------
INITIAL FRANCHISE FEE
DEVELOPMENT AGREEMENT
- ---------------------
DEVELOPMENT FEE.
---------------
You must pay ENBC a non-refundable development fee (the "Development Fee")
in a lump sum when you sign the Development Agreement. The Development Fee will
be an amount equal to $5,000 multiplied by the number of Stores you will develop
under the Development Agreement. The Development Fee is uniform for all
Developers and is deemed fully earned upon payment.
REAL ESTATE SERVICES FEE.
------------------------
When you sign the Development Agreement you will pay ENBC a non-refundable,
lump sum real estate services fee (the "Real Estate Services Fee") in an amount
equal to $5,000 multiplied by the number of Stores you will develop under the
Development Agreement. The Real Estate Services Fee compensates ENBC for the
real estate services it will provide you,
18
<PAGE>
including advisory services, analyses and studies of trade areas, and
maintenance of lease files. The Real Estate Services Fee is uniform for all
Developers.
DEMOGRAPHIC DETAIL REPORT FEE.
-----------------------------
When you sign the Development Agreement and annually during the Development
Term, you must purchase from ENBC demographic detail reports on the demographics
of each Sub-Area (the "Demographic Detail Report") in which you retain the right
to develop Stores. ENBC's current charge for the Demographic Detail Report is
$50 per Site which is payable in a lump sum and is non-refundable.
COMMUNICATION AND INFORMATION SYSTEMS.
-------------------------------------
You must install and use the computer system ENBC designates (the "Computer
System") in your office before you begin operating as a Developer as described
in Item 11. The Computer System currently costs $15,000 to $30,000 which is
payable in a non-refundable lump sum and is uniform for all Developers. You must
also use the computer programs ENBC designates as described in Item 8. You must
pay ENBC a $15,000 software license fee (the "Software License Fee") at the time
of installation of the Computer System at your office. You must pay a periodic
payment of $400 as a software support service fee (the "Software Support Fee");
$77 of which is paid to ENBC and $323 of which is paid to BCI. The first payment
of the Software Support Fee will be due before each Store opens. The Software
License Fee and the Software Support Fee are uniform for all Franchisees, and
are not refundable.
If you do not purchase the Computer System from ENBC, you must pay ENBC a
reasonable fee for installation and testing when ENBC installs and tests the
operation of the programs with your computer system. ENBC's current fee for this
service is $3,500. The installation and testing fee is uniform for all
Developers who do not purchase the Computer System from ENBC, and it is not
refundable.
FRANCHISE AGREEMENT
- -------------------
INITIAL FRANCHISE FEE.
---------------------
You must pay ENBC's current initial franchise fee (the "Initial Franchise
Fee") of $35,000 in a lump sum when you sign the Franchise Agreement. The
Initial Franchise Fee is non-refundable and deemed earned upon payment. The
Initial Franchise Fee is uniform for all Franchisees that execute a Franchise
Agreement with ENBC.
19
<PAGE>
COMMUNICATION AND INFORMATION SYSTEMS.
-------------------------------------
You must install and use the Computer System at each Store as described in
Item 11. The Computer System currently costs $15,000 to $30,000 which is payable
in a non-refundable lump sum and is uniform for all Franchisees. In addition,
you must use the computer programs ENBC designates as described in Item 8. You
will pay ENBC a $15,000 software license fee (the "Software License Fee") at the
time of installation of the Computer System at your office. You must also pay to
ENBC a periodic payment of $400 as a software support service fee (the "Software
Support Fee"); $77 of which is paid to ENBC and $323 of which is paid to BCI.
The first payment of the Software Support Fee will be due before your Store
opens. The Software License Fee and the Software Support Fee are uniform for all
Franchisees, and are not refundable.
If you do not purchase the Computer System from ENBC, you must pay ENBC a
lump sum fee for installation and testing when ENBC installs and tests the
operation of the programs with your computer system. ENBC's current fee for this
service is $3,500. The installation and testing fee is uniform for all
Franchisees who do not purchase the Computer System from ENBC, and it is not
refundable.
ITEM 6
------
OTHER FEES
<TABLE>
<CAPTION>
=====================================================================================================================
DEVELOPMENT AGREEMENT/(1)/
- ---------------------------------------------------------------------------------------------------------------------
NAME OF FEE/(2)/ AMOUNT DUE DATE REMARKS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Software Support Fee $400 per 8th day ENBC may increase
Accounting before each fee with written
Period/(3)/ Accounting notice to you.
Period You must submit a
portion of this
fee (currently
$323) to BCI.
- ---------------------------------------------------------------------------------------------------------------------
Demographic Detail Report ENBC's then Each year, As further
current charge upon your described in
(current request Items 8 and 11.
charge -- $50
per site)
=====================================================================================================================
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================================
DEVELOPMENT AGREEMENT/(1)/
- ---------------------------------------------------------------------------------------------------------------------
NAME OF FEE(2) AMOUNT DUE DATE REMARKS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Initial Management Training Will vary As incurred We will train your training director with
under no charge to you. At your request,
circumstances additional personnel and replacement
personnel will be trained at the then
current charges which you will pay to ENBC
or the Developer who provides the training.
(See Item 11)
- ---------------------------------------------------------------------------------------------------------------------
Training Materials Will vary As incurred If ENBC or its designee provides you with
under training materials and refresher/updated
circumstances materials, you will pay ENBC the then-
current standard charges. (See Item 11)
- ---------------------------------------------------------------------------------------------------------------------
Accounting Services See footnote By the 20th If you participate in the Financed Area
Fee/(4)/ (4) day Developer Program (see Item 10), you must
following use accounting services under the
each Accounting and Administration Services
Accounting Agreement you will sign with BCI, which is
Period attached to the Secured Loan Agreement and
pay a fee to BCI (see footnote (4)).
- ---------------------------------------------------------------------------------------------------------------------
Indemnification Will vary As incurred You must reimburse ENBC for, and defend
under ENBC against, claims against ENBC and taxes
circumstances imposed on ENBC due to your activities
related to the Development Agreement.
- ---------------------------------------------------------------------------------------------------------------------
Legal Fees and Costs Will vary As incurred Payable if you fail to comply with
under Development Agreement.
circumstances
- ---------------------------------------------------------------------------------------------------------------------
Transfer Fee $10,000 plus Before You may only transfer subject to certain
out-of-pocket beginning conditions and with ENBC's consent. (See
expenses transfer Item 17)
transaction
=====================================================================================================================
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================================
DEVELOPMENT AGREEMENT/(1)/
- ---------------------------------------------------------------------------------------------------------------------
NAME OF FEE(2) AMOUNT DUE DATE REMARKS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Offering Expenses Will vary As incurred You must reimburse ENBC for its reasonable
under expenses (including attorneys' fees) it
circumstances incurs if you, a Franchise Owner, or an
entity having an interest in you, a
Franchise Owner or the Development
Agreement offers securities.
- ---------------------------------------------------------------------------------------------------------------------
Local Ad Fund Will vary As specified See footnote (5).
Contribution/(5)/ under in Franchise
circumstances Agreement
- ---------------------------------------------------------------------------------------------------------------------
Sublease of Approved Sites Will vary As specified If ENBC Sites you own to ENBC and then ENBC
under in sublease will sublease the Sites back to you. (See
circumstances Items 8 and 10)
- ---------------------------------------------------------------------------------------------------------------------
Target Site Fee $10,000 as a Within 10 See Item 12 for information about your
Site Location days after acquisition of Target Sites.
Fee or $20,000 ENBC
as a Site delivers a
Location and lease or
Negotiation Fee purchase
agreement
for a Target
Site to you.
- ---------------------------------------------------------------------------------------------------------------------
Conversion Site Costs ENBC's purchase Upon your See Item 12 for
price, plus purchase of of information about
costs and the your acquisition
liabilities Conversion of Conversion
associated with Site. Sites.
ENBC's
acquisition and
other expen-ses,
plus interest
=====================================================================================================================
</TABLE>
_____________________________
(1) You will also be responsible for other fees and payments as required
under the Franchise Agreements you sign under the Development
Agreement, which are described below.
(2) Except as noted, ENBC imposes all fees, which are non-refundable and
payable to ENBC.
22
<PAGE>
(3) An "Accounting Period" is one of 13 periods of four consecutive weeks
in each fiscal year, as ENBC designates.
(4) You will pay a fee for the accounting and administration services BCI
provides you under the Accounting and Administration Services
Agreement. Each Accounting Period, you will pay BCI a base fee of
$4,500. You will also pay BCI a per-Store fee for each Store you have
open and operating during all or any portion of an Accounting Period.
This fee will depend on the number of Stores you own and operate under
the Development Agreement. Under the Accounting and Administrative
Services Agreement, BCI has the right to increase the base fee and the
unit fees described below if it provides written notice to you, but
BCI will not increase the base fee and the unit fee by more than 10%
cumulatively per fiscal year. Store fees you will owe will be equal
to:
(a) $850 per Accounting Period for each Store open and operating
during any portion of an Accounting Period, until you open and
operate up to 11 Stores;
(b) $750 per Accounting Period after you open your 12th Store
and before you open your 30th Store;
(c) $650 per Accounting Period after you open your 30th Store
and before you open your 50th Store;
(d) $550 per Accounting Period after you open your 50th Store
and before you open your 100th Store;
(e) $450 per Accounting Period after you open your 100th Store
and before you open your 200th Store; and
(f) $350 per Accounting Period after you open your 200th Store
and for all Stores you open after that time.
If you and your Stores meet certain reporting requirements,
administrative procedure compliance requirements, and timeliness
deadlines that BCI establishes and announces periodically, the unit
fees described above may be reduced at BCI's discretion.
You must also pay BCI for all non-ordinary, out-of-pocket
expenses BCI (or its affiliates) or its designee incurs to provide the
services they render under the Accounting and Administrative Services
Agreement including travel expenses, legal fees, fees of experts,
audit fees, tax fees, and payroll service fees. However, you must
approve all non-ordinary, out-of-pocket expenses before those expenses
are incurred.
(5) You must contribute to the Local Ad Fund the standard amount required
periodically under the Franchise Agreement or, if it is greater, an
amount which, when aggregated
23
<PAGE>
with the Local Ad Fund contributions of your Stores, will be
sufficient to enable you, through the Local Ad Fund, to begin, within
one year of opening your first Store, television advertising in the
Designated Market Area ("DMA") where the applicable Sub-Areas or
Development Areas are located.
<TABLE>
<CAPTION>
=====================================================================================================================
FRANCHISE AGREEMENT
- ---------------------------------------------------------------------------------------------------------------------
NAME OF FEE/(1)/ AMOUNT DUE DATE REMARKS
<S> <C> <C> <C>
Royalty 8% of Royalty Base 20th day ENBC has the right to change the timing
Revenue/(2)(3)/ following of your payment, but will not require
each payment more than twice in each
Accounting Accounting Period. Your Royalty
Period/(4)/ payments must be accompanied by report
forms that ENBC designates.
- ---------------------------------------------------------------------------------------------------------------------
Marketing Fund Contribution 2% of Royalty Base 20th day ENBC has the right to increase your
Revenue following contribution up to 0.25% per year. ENBC
each has the right to change the timing of
Accounting your payment, but will not require
Period payment more than twice in each
Accounting Period. (See Item 11)
- ---------------------------------------------------------------------------------------------------------------------
Local Advertising Fund 4% of Royalty Base 20th day ENBC may periodically require you to
Contribution Revenue following increase your Local Ad Fund
each contributions up to 0.25% per year. If
Accounting you are not a member of a Local
Period Advertising Fund, you must spend these
amounts on local advertising on your
own, rather than contribute them to a
Local Advertising Fund. (See Item 11)
- ---------------------------------------------------------------------------------------------------------------------
Software Support Fee $400 per Accounting 8th day Subject to increase upon written
Period before notice. You must submit a portion of
Accounting this fee (currently $323) to BCI. (See
Period Items 7 and 11)
=====================================================================================================================
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
FRANCHISE AGREEMENT
- --------------------------------------------------------------------------------------------------------
NAME OF FEE(1) AMOUNT DATE DUE REMARDS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Training Materials Will vary under As incurred You and/or your management
circumstances personnel may have to attend
additional or refresher training
programs and may charge you the
costs of training materials that
ENBC provides at those sessions.
- --------------------------------------------------------------------------------------------------------
Special Assistance Will vary under As incurred If you request special training and
circumstances ENBC agrees that the training is
necessary, you will pay ENBC's
then current charge (currently
$1,500 per employee trained) plus
expenses of training personnel for
training that takes place at your
Store. (See Item 11)
- --------------------------------------------------------------------------------------------------------
Interest on Late Lesser of 18% per Upon payment After the date they are due, all
Payments year or highest of past due payments that you owe to ENBC or
legal rate amounts owed its affiliates will bear interest.
to ENBC or
its
affiliates
- --------------------------------------------------------------------------------------------------------
Cleaning, Repair, Will vary under 5th day Payable if you do not maintain the
Remodeling, Upgrading circumstances after condition and appearance of
receipt of the Store and ENBC arranges
bill to do so.
- --------------------------------------------------------------------------------------------------------
Required Purchases Will vary under As incurred You must buy goods and obtain services
circumstances according to ENBC's standards and
specifications and from suppliers
ENBC designates or approves, which
may include ENBC and its affiliates.
(See Item 8)
- --------------------------------------------------------------------------------------------------------
Product Evaluation Costs Cost of evaluation, As incurred You must pay ENBC's costs to test new
inspection, and products, goods and supplies or
supervision of inspect new suppliers you propose.
distributor/supplier (See Item 8)
- --------------------------------------------------------------------------------------------------------
Reimbursement of Insurance Will vary under As incurred Payable if you fail to obtain
Costs circumstances required insurance and ENBC obtains
coverage on your behalf.
========================================================================================================
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
FRANCHISE AGREEMENT
- --------------------------------------------------------------------------------------------------------
NAME OF FEE(1) AMOUNT DUE DATE REMARKS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reimbursement of Will vary under As incurred ENBC may conduct quality, service,
Inspection Costs circumstances cleanliness and other inspections
of the Store including designating
an independent evaluation service to
conduct a customer satisfaction
quality control and evaluation
program. You must participate
in these programs and pay for the
costs of these evaluation
services.
- --------------------------------------------------------------------------------------------------------
Reimbursement of Audit Will vary under As incurred If ENBC inspects or audits your
Costs circumstances financial records and other
information because you have
failed to submit reports,
records or other information
on a timely basis, or if
an audit reveals that you have
understated revenue by more
than 2%, you must reimburse
ENBC for the cost of the
audit or inspection.
- --------------------------------------------------------------------------------------------------------
Transfer Fee $5,000 plus Before You may only transfer subject to
out-of-pocket beginning certain conditions and with ENBC's
expenses transfer consent. (See Item 17)
transaction
- --------------------------------------------------------------------------------------------------------
Offering Expenses Will vary under As incurred You must reimburse ENBC for
circumstances reasonable expenses (including
attorneys' fees) incurred if
you or an entity having
an interest in you or the
Franchise Agreement offers
securities.
- --------------------------------------------------------------------------------------------------------
Successor Franchise Fee 33 1/3% of When you If ENBC is not then offering
then-current Initial sign franchises, the Successor
Franchise Fee successor Franchise Fee will be 33
Franchise 1/3% of the higher of (a)
Agreement the most recent standard
Initial Franchise Fee ENBC
charged under its franchise
program or (b) the Initial
Franchise Fee under the
franchise agreement which is
expiring.
========================================================================================================
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
FRANCHISE AGREEMENT
- --------------------------------------------------------------------------------------------------------
NAME OF FEE(1) AMOUNT DATE DUE REMARKS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Indemnification Will vary under As incurred You must reimburse ENBC for, and
circumstances defend ENBC against, claims
against ENBC and taxes imposed on
ENBC arising out of your activities
related to the Franchise Agreement
- --------------------------------------------------------------------------------------------------------
Legal Fees and Costs Will vary under As incurred Payable upon your failure
circumstances to comply with the Franchise
Agreement
========================================================================================================
</TABLE>
(1) Except for the product evaluation charges (which are payable to an
independent evaluation service), ENBC imposes all fees, which you must pay
to ENBC or its designee if ENBC delegates the service for which the fee is
payable. All fees are non-refundable unless otherwise stated or arranged.
(2) The term "Royalty Base Revenue" means and includes the gross revenue from
all sales of Products and all other products and services you or your Store
sells, performs or arranges to be sold or performed in, upon, from, or away
from the Store, or through or by means of the business conducted under the
Franchise Agreement, whether for cash or credit, including any assumed
gross revenue calculated for the purpose of an insurance claim for lost
profits to the extent an insurer pays a claim, but excluding: (1) all sales
or service taxes collected from customers and paid or payable to the
appropriate taxing authority; (2) all customer refunds, valid discounts and
coupons, and credits the Store makes (exclusions will not include any
reductions for credit card user fees, returned checks or reserves for bad
credit or doubtful accounts); (3) any portion of employee meals for which
you do not charge the employee; and (4) revenue, if any, you derive from
the sale of Products or other materials and supplies from a Commissary you
operate to Stores for resale to the public.
(3) Depending on certain factors, ENBC may negotiate with you for the amount of
Royalty payable under your Franchise Agreement. Those factors will include
whether you purchase ENBC-owned Stores that are operating in your Territory
when you sign a Development Agreement, the size of your Territory and the
size of your Total Development Quota (as defined in Item 12). However, the
Royalty will not be greater than 8% or less than 5% of Royalty Base
Revenue. If your Territory is within markets where ENBC purchased existing
bagel chains (including metropolitan Kansas City, Salt Lake City, the
Miami/Fort Lauderdale/Boca Raton metropolitan area, the Los Angeles and San
Francisco metropolitan areas and the states of Oregon and Washington) (the
"Founder Company Markets"), your Royalty will not be less than 6% of
Royalty Base Revenue for all Stores you develop, regardless of whether they
are in a Founder
27
<PAGE>
Company Market, in recognition of the established customer base and
goodwill in the Founder Company Markets.
(4) An "Accounting Period" is one of 13 periods of four consecutive weeks in
each fiscal year, as ENBC designates.
ITEM 7
------
INITIAL INVESTMENT
The charts and explanatory notes below describe the initial investment you
must make under a Development Agreement and a Franchise Agreement.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
28
<PAGE>
YOUR ESTIMATED INITIAL INVESTMENT
UNDER THE DEVELOPMENT AGREEMENT
<TABLE>
<CAPTION>
====================================================================================================================================
ITEM ESTIMATED AMOUNT/ METHOD OF TO WHOM
LOW-HIGH RANGE PAYMENT WHEN DUE WHETHER REFUNDABLE PAID
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Development Fee(1) $5,000 per Store Lump sum When you sign the No ENBC
to be developed Development Agreement
- ------------------------------------------------------------------------------------------------------------------------------------
Real Estate Service Fee(2) $5,000 per Store Lump sum When you sign the No ENBC
to be developed Development Agreement
- ------------------------------------------------------------------------------------------------------------------------------------
Software License Fee(3) $15,000 Lump sum When your Licensed No ENBC
Program is installed
- ------------------------------------------------------------------------------------------------------------------------------------
Computer System (including $16,200 to $36,200 Lump sum As incurred No ENBC,
the Specified Software approved
and related fees )(4) suppliers
- ------------------------------------------------------------------------------------------------------------------------------------
Accounting Services Fee(5) $12,750 to $16,500 As agreed By the 20th day following No ENBC
each Accounting Period
- ------------------------------------------------------------------------------------------------------------------------------------
Demographic Detail $1,000 to $1,500 Lump sum As incurred No ENBC
Reports(6)
- ------------------------------------------------------------------------------------------------------------------------------------
Miscellaneous Costs(7) $5,000 to $15,000 As agreed As incurred See note 7 Third parties
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Funds - 3 $10,000 to $30,000 As agreed As incurred See note 8 Third parties,
Months(8) suppliers,
utilities
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ESTIMATED INITIAL $69,950 to $124,200
INVESTMENT(9)
(FOOTNOTES FOLLOW CHART)
====================================================================================================================================
</TABLE>
29
<PAGE>
EXPLANATORY NOTES TO ESTIMATED INITIAL INVESTMENT -- DEVELOPMENT AGREEMENT
- --------------------------------------------------------------------------
The amounts shown are ENBC's reasonable estimates of the amounts that you
will typically spend for the purposes stated
(1) DEVELOPMENT FEE. As described in Item 5.
---------------
(2) REAL ESTATE SERVICE FEE. This amount compensates ENBC for the real
-----------------------
estate advice and analysis it will provide you as you develop each Store. (See
Item 5)
(3) SOFTWARE LICENSE FEE. You will pay this amount to use the proprietary
--------------------
software programs that ENBC specifies, including ENBC's licensed program (the
"Licensed Program") as described in Items 8 and 11.
(4) COMPUTER SYSTEM (INCLUDING SPECIFIED SOFTWARE AND RELATED FEES). You
---------------------------------------------------------------
must purchase and install the Computer System and Specified Software that ENBC
designates, as described in Item 11. This amount reflects the estimated
combined cost of the Computer System Specified Software (which is approximately
$15,000 to $35,000) and the Software Support Fee of $400 per month for 3 months.
If you do not purchase the Computer System from ENBC, you will pay ENBC a
$3,500 fee for installing and testing the Licensed Program on your Computer
System. (See Item 5) This amount includes the estimated cost of purchasing,
leasing or obtaining all aspects of the Computer System as currently configured.
However, if ENBC chooses, you will have to incur certain costs and expenses to
purchase, lease or obtain revised or upgraded components of the Computer System
when ENBC specifies.
(5) ACCOUNTING SERVICES FEE. This item reflects the amount you will pay
-----------------------
for BCI's accounting services under the Accounting and Administration Services
Agreement for the first 3 months after you sign the Development Agreement,
assuming that you open between one and six Stores during this time. The payment
schedule is described fully in Item 6.
(6) DEMOGRAPHIC DETAIL REPORTS. Demographic Detail Reports will provide
--------------------------
you information about the demographics of each Sub-Area where you develop
Stores. Each report currently costs $50. Your costs for the Demographic Detail
Reports may vary depending on the number of reports you purchase and if you
request additional demographic services.
(7) MISCELLANEOUS COSTS. This is an estimate of the funds you may need to
-------------------
cover expenses in your start-up phase, including lodging, meals and travel
expenses for your training director to attend the initial training program,
wages, and insurance premiums. These amounts may be refundable, depending on
arrangements you make with third parties.
30
<PAGE>
(8) ADDITIONAL FUNDS. This amount represents ENBC's estimate all of your
----------------
payments, costs and expenses necessary to operate as a Developer for the first 3
months after you execute the Development Agreement. It includes amounts for
utilities, bank charges, telephone and mail charges, office supplies, and
financing payments. The amount will vary, depending on your development
activities in the first 3 months. You should set aside an additional amount for
living expenses during the start-up period as this amount has not been included
in these figures since they vary widely with each individual. These amounts may
be refundable, depending on arrangements you make with third parties.
(9) TOTAL ESTIMATED INITIAL INVESTMENT. The amounts shown are ENBC's
----------------------------------
reasonable estimates of the amounts that you will typically spend for the
purposes indicated. However, the actual costs you incur may be higher or lower
based upon your particular circumstances, including factors like the number of
Stores you will develop, the size and location of your Development Area and the
extent to which you can use existing resources which might be available in your
existing organization. ENBC relied on the experience in the food service
business of certain of its officers to compile these estimates. (See Item 2) You
should review these figures carefully with a business advisor before you make
any decision to sign a Development Agreement. You will have additional initial
investment expenses for each Store you develop, and those costs are described in
the chart below.
ENBC does not offer, either directly or indirectly, financing to you for
any of the above items other than under its Financed Area Developer Program.
(See Item 10) The availability and terms of financing from independent third
parties will depend on factors including the availability of financing
generally, your creditworthiness and the collateral you make available to secure
any financing. Pledges of assets are subject to the transfer provisions of the
Development Agreement and Franchise Agreement. (See Item 17) The terms of the
financing arrangement that may be available to you, including amounts available,
applicable interest rate and down payment requirements, if any, are described in
Item 10.
[THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.]
31
<PAGE>
YOUR ESTIMATED INITIAL INVESTMENT
UNDER THE FRANCHISE AGREEMENT
<TABLE>
<CAPTION>
====================================================================================================================================
ITEM ESTIMATED AMOUNT/ METHOD OF WHETHER TO WHOM
LOW-HIGH RANGE PAYMENT WHEN DUE REFUNDABLE PAID
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Initial Franchise Fee(1) $35,000 Lump sum Upon execution of No ENBC
Franchise Agreement
Real Estate Brokerage $0 to $18,000 As incurred Upon satisfaction of No Real estate brokers
Fees(2) lease contingencies
Professional Fees and Due $5,000 to $10,000 As incurred Before execution No Attorneys and
Diligence(3) consultants
Lease Deposits(4) $0 to $10,000 Lump sum Upon execution of See note 4 Lessor
lease
Leasehold Improvements(5) $0 to $50,000 As incurred Before construction No Architects,
or renovation engineers and
contractors
Furniture, Fixtures, $125,000 to Lump sum Before opening No Suppliers
Smallwares and Equipment $150,000
(including Signage)(6)
Opening Inventory and $2,500 to $7,500 Lump sum Before opening No ENBC and suppliers
Supplies(7)
Architectural or $15,000 to $20,000 As incurred Before construction No Architects or
Engineering Fees and or renovation engineers;
Permit and Impact Fees(8) governmental
agencies
Grand Opening Advertising $10,000 As incurred As incurred No Suppliers
and Promotion(9)
Miscellaneous Opening $10,000 to $20,000 As incurred Before opening and See note 10 Suppliers,
Costs(10) shortly after opening Employees, and
other Creditors
====================================================================================================================================
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
ESTIMATED AMOUNT/ METHOD OF WHETHER TO WHOM
ITEM LOW-HIGH RANGE PAYMENT WHEN DUE REFUNDABLE PAID
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Software License Fee(11) $15,000 Lump sum When Licensed Program No ENBC
is installed
Computer System (including $16,200 to $36,200 As incurred Before opening No ENBC and/or
Specified Software and Suppliers
related fees)(12)
Additional Funds - 3 $35,000 to $110,000 As incurred As incurred See note 13 ENBC, Suppliers,
Months(13) Employees and other
Creditors
TOTAL ESTIMATED INITIAL $268,700 to
INVESTMENT(14) $591,700
(FOOTNOTES FOLLOW CHART)
====================================================================================================================================
</TABLE>
33
<PAGE>
EXPLANATORY NOTES TO ESTIMATED INITIAL INVESTMENT - FRANCHISE AGREEMENT
- -----------------------------------------------------------------------
(1) INITIAL FRANCHISE FEE. The Initial Franchise Fee is $35,000. As
---------------------
described in Item 6, if you elect to accept ENBC's offer to operate a Store at a
Target Site, you must pay a Site Location Fee or a Site Location and Negotiation
Fee to ENBC.
(2) REAL ESTATE BROKERAGE FEES. These fees represent commissions you may
--------------------------
pay to real estate brokers to secure a Site for your Store by lease.
(3) PROFESSIONAL FEES. This amount represents fees you may pay to
-----------------
professional advisors (attorneys and accountants) to evaluate the franchise and
real estate contracts, as well as the cost of any negotiations.
(4) LEASE DEPOSITS. This amount represents an estimate of up 6 months'
--------------
security deposit under the lease for the premises of a Store where rent is
$20,000 to $80,000 annually. Lease deposits vary widely from location to
location, and generally are refundable.
ENBC estimates that the typical Store location will have approximately
2,000 square feet with rentals that vary greatly depending on geographic
location, but broadly range from $10-$40 per square foot or more per year. ENBC
estimates an average rental rate of $15 to $20 per square foot. As described in
Item 8, if you own an Approved Site, you may have to lease the Approved Site to
ENBC and ENBC will sublease the Approved Site back to you.
ENBC expects that nearly all Store locations will be leased rather than
purchased. However, if you purchase the Site for the Store, the initial
investment will be significantly higher, approximately $200,000 to $750,000 or
more in incremental cost depending on the location and costs of development of
the Site and construction of improvements. Purchase contracts generally require
earnest money deposits of 5% to 25% or more of the purchase price; earnest money
deposits may or may not be refundable.
(5) LEASEHOLD IMPROVEMENTS. ENBC assumes a Store will require
----------------------
approximately 2,000 square feet with frontage of typically 20 feet. Leasehold
improvement costs are expected to range from $0 - $7.50 or more per square foot.
The costs of leasehold improvements may increase if a particular Site has
unusual dimensions or seating requirements. Variations in leasehold improvements
also are attributable to size and condition of the premises, construction, labor
and installation costs, geographic location and compliance with state and
municipal building and zoning laws and regulations. The interior and exterior of
the Store must be renovated to conform to ENBC's store design specifications.
The total cost of leasehold improvements may vary significantly depending on
factors including the amount of heating, ventilation and air conditioning, an
adequate electrical system and adequate access to water, among other items.
34
<PAGE>
(6) FURNITURE, FIXTURES, SMALLWARES AND EQUIPMENT. Furniture, fixtures,
---------------------------------------------
smallwares and equipment includes interior and exterior signs, serving-line
equipment, refrigeration, cooking and heating equipment, cash registers
(including capacity for computerized financial information collection) decor,
furniture, and smallwares.
(7) OPENING INVENTORY AND SUPPLIES. This item includes all initial food
------------------------------
products, inventory and paper supplies inventory. (See Item 8)
(8) ARCHITECTURAL OR ENGINEERING FEES AND PERMIT AND IMPACT FEES. Charges
------------------------------------------------------------
for architects or engineers vary widely depending on the quality, reputation and
experience of the professionals engaged, the geographic area and the nature and
extent of the work to be performed. At a minimum, you will have to incur costs
to prepare initial schematic drawings (approximately $750) as well as the final
site construction plan (estimated to range from $7,000 to $9,000 or more).
Permit and impact fees vary widely depending on the geographic area but range
from $1,000 to $10,000 or more.
(9) GRAND OPENING ADVERTISING. You must spend no less than $10,000 for
-------------------------
the Store's grand opening advertising and promotion program during the period 30
days before, and 90 days after, the opening of the Store. You can anticipate
engaging in a variety of promotions including the use of print media, direct
mail, and/or radio or television. The costs can vary widely depending on the
quality, reputation and experience of the advertising agencies engaged, the
geographic area and the nature and extent of advertising and promotions which
will take place.
(10) MISCELLANEOUS OPENING COSTS. This is an estimate of the funds you
---------------------------
will need to cover pre-opening expenses including: initial employee wages;
utility deposits; insurance premiums; architectural fee for preparation of the
Store's initial schematic drawing; the fee for ENBC's Demographic Detail Report
used for site selection; license and permit costs; uniforms; recruitment and in-
store training expenses as well as additional operating capital for other
variable costs (e.g., electricity, telephone or heating costs). These amounts
may be refundable, depending on the arrangements you make with third parties.
(11) SOFTWARE LICENSE FEE. You will pay this amount to use the proprietary
--------------------
software programs that ENBC specifies, including the Licensed Program. (See
Items 8 and 11)
(12) COMPUTER SYSTEM (INCLUDING SPECIFIED SOFTWARE AND RELATED FEES).
---------------------------------------------------------------
Please see the footnote under "Computer System" in the chart for the Development
Agreement above in this Item 7.
(13) ADDITIONAL FUNDS. This amount represents an estimate of all payments,
----------------
costs, and expenses necessary to operate the Store during the first 3 months of
operation. It includes amounts required for inventory, employee compensation
and benefits, recruitment and training
35
<PAGE>
expenses, utilities, supplies, telephone and mail charges, security system,
music, repair and maintenance, uniforms and laundry, bank charges, financing
payments, royalties, advertising contributions, and rental and all other related
charges. This amount includes the fee for initial training (which is payable to
the existing Franchisee who conducts the training, as described in Item 11) for
5 to 10 of your employees. The amount will vary, depending in part upon the
Store's revenues during the first 3 months of operation. You should set aside an
additional amount for living expenses during the Store's start-up period as this
amount has not been included in these figures since they vary widely with each
individual. The amounts you spend as additional funds may be refundable,
depending on the arrangements you make with third parties.
(14) TOTAL ESTIMATED INITIAL INVESTMENT. The amounts shown are ENBC's
----------------------------------
reasonable estimates of the amounts that you will typically spend for the
purpose indicated. However, the actual costs incurred may be higher or lower
for any given Store based upon the particular circumstances applicable to that
Store, including factors like its location, size, number and experience of
personnel, and whether you own and operate Commissary Store during the initial
period. ENBC relied on the experience in the food service business of certain
of its officers to compile these estimates. (See Item 2) You should review
these figures carefully with a business advisor before making any decision to
purchase the Franchise.
ENBC does not offer, either directly or indirectly, financing to you for
any of the above items other than under its Financed Area Developer Program.
(See Item 10) The availability and terms of financing from independent third
parties will depend on factors including the availability of financing
generally, your creditworthiness and the collateral you make available to secure
any financing. Pledges of assets are subject to the transfer provisions of the
Development Agreement and Franchise Agreement. (See Item 17) The terms of the
financing arrangement that may be available to you, including amounts available,
applicable interest rate and down payment requirements, if any, are described in
Item 10.
ITEM 8
------
RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES
If you sign a Development Agreement and/or a Franchise Agreement, you must
purchase, lease and conduct your operations according to ENBC's specifications.
You must obtain goods and services from designated or approved suppliers (which
may include ENBC or its affiliates). As described in Items 1 and 12, you must
comply with the standards, specifications and System that ENBC designates for
the Mark under which you are authorized to operate your Store. Collectively, the
purchases, leases and services you obtain according to ENBC's specifications or
from approved or designated suppliers represent virtually 100% of your total
purchases and leases to establish, and virtually 100% of your total purchases
and leases to operate as a Developer. The purchases and leases that you must
make according to ENBC's specifications or from ENBC or its affiliates are
described below. ENBC may negotiate purchase
36
<PAGE>
arrangements (including price terms) for the benefit of Developers and
Franchisees, and those arrangements are described below in this Item.
DEVELOPMENT AGREEMENT
- ---------------------
FINANCED AREA DEVELOPER PROGRAM.
-------------------------------
ENBC generally requires all Developers to participate in the Financed Area
Developer program described in Item 10.
COMPUTER SYSTEM.
---------------
Under the Development Agreement, you must purchase, install and use the
Computer System, including all programs and software that ENBC requires during
the term of the Development Agreement, as further described in Item 11. The
"Computer System" includes those brands, types, makes, and/or models of
communications and computer systems and hardware which ENBC specifies or
requires you to use in the operation of your Store and to communicate with other
Stores and with ENBC. The "Specified Software" means the software, programming,
and services other than the Licensed Program, which ENBC specifies during the
term of the Franchise Agreement for use with the Computer System.You must use
the Licensed Program under the Development Agreement. The Licensed Program
consists of the retail store-level computer software programs BCI develops (or
has developed) and licenses to ENBC. The Licensed Program may include ENBC's
point-of-sale, bookkeeping, inventory, training, marketing, employee selection,
operations and financial information, collection and retrieval systems
(including ENBC's general ledger system using the standard chart of accounts
ENBC requires) for use in the operation of Stores, including any updates,
supplements, modifications or enhancements ENBC may make or prescribe, all
related documentation, the tangible media upon which programs are recorded, and
the database file structure. The Licensed Program does not include any data or
databases ENBC or its affiliates own or compile for use with the Licensed
Program or otherwise or any data ENBC or its affiliates generate by using the
Licensed Program. You must purchase the hardware from MCR/AT&T GIS and the
software for the point of sale devices that ENBC licenses to you is the property
of Compris Technologies, Inc. (See Item 11) The cost of your computer equipment
will range from $15,000 to $35,000. (See Item 7)
ENBC attempts to negotiate its contracts with computer hardware and
software vendors to make discounted pricing available to you. In some instances
this may involve remarketing arrangements, and if it does, ENBC would derive
revenue from sales to you. ENBC estimates that the costs of the Computer System,
Licensed Program and Support/Control Programs will represent approximately 30%-
35% of the purchases and leases of goods and services you will make or enter
into in the establishment your business and will represent approximately 30%-35%
of the purchases and leases that you will make or enter into in the ongoing
operation of your business if you do not operate a Commissary and 1%-10% if you
do operate a Commissary.
37
<PAGE>
DEMOGRAPHIC DETAIL REPORTS.
--------------------------
At the beginning of the Development Term, and on an annual basis during the
Development Term, you must purchase Demographic Detail Reports from ENBC for
those Sub-Areas where you retain development rights, as noted in Items 5, 6 and
7. ENBC will derive revenue from providing Demographic Detail Reports to you.
ENBC cannot estimate what percentage the cost of Demographic Detail Reports will
represent of your initial and ongoing purchases and leases of goods and services
because the cost will vary with the number of Sites included in each report. The
Demographic Detail Reports currently cost $50 per Site. (See Item 6)
SITE REVIEW AND APPROVAL.
------------------------
You must comply with ENBC's standards and specifications when you select
the site for a Store or a Commissary. ENBC will evaluate your site according to
a required site approval procedure that is described in Item 11. You must use
forms that ENBC directs to request a site, and ENBC will evaluate the site you
propose according to its criteria. When you refurbish your Site or construct the
Store, you may have to engage contractors and real estate developers and brokers
which ENBC has approved. (See Item 11)
LEASE AGREEMENT TERMS.
---------------------
You must present the lessor of your Site with a lease in the form that ENBC
prescribes. If the lessor does not use the approved form, you may only sign a
lease that ENBC has approved and which has certain terms that ENBC may specify.
These terms and the procedure to seek ENBC's approval of the lease are described
in Item 11.
INSURANCE.
---------
In addition to the insurance required for the development and operation of
a Store under a Franchise Agreement, during the Agreement Term you must maintain
insurance policies with insurers rated "A-" or better by Alfred M. Best &
Company, Inc. that ENBC approves. The policies must include: (1) insurance
necessary to comply with all legal requirements concerning insurance coverage
(including workers' compensation requirements) for persons attending ENBC
training programs; and (2) general and motor vehicle (whether or not you own the
vehicles) liability insurance against claims for bodily and personal injury,
death and property damage caused by or occurring in the conduct of your business
under the Development Agreement, under one or more insurance policies containing
minimum liability coverage ENBC periodically requires. You will have additional
requirements that are similar to those under the Franchise Agreement, as
discussed below in this Item. You must purchase insurance for each Store you
open as described below under the heading "Franchise Agreement" in this Item 8.
38
<PAGE>
If you operate one or more a Commissaries, you must maintain insurance
policies for each Commissary that meet ENBC's requirements for insurance
coverage for Stores under the Franchise Agreement, as discussed below in this
Item.
COMMISSARY DEVELOPMENT.
----------------------
If ENBC chooses, you will have to develop and operate one or more
Commissaries under the Development Agreement on terms substantially similar to
the terms for developing and operating Stores described below in this Item 8.
SPECIFICATIONS, STANDARDS AND PROCEDURES.
----------------------------------------
The operation of your development business in strict compliance with ENBC's
high standards is important to ENBC and Stores, and you must maintain those high
standards under the Development Agreement. You must comply strictly with all of
ENBC's mandatory specifications, standards and operating and inspection
procedures regarding your business, and operation of Stores under Franchise
Agreements designated in your Development Agreement. ENBC formulates its
specifications and standards for Developers based on factors including its
business judgment and local, regional and national experience and market trends.
ENBC may modify its specifications, standards and procedures at any time with
notice to you.
ENBC will periodically provide you with its mandatory specifications,
standards and operating and inspection procedures in the Development Manual or
otherwise communicate them to you in writing. These specifications, standards
and procedures will constitute binding obligations on your part as if fully set
forth in the Development Agreement, and if you fail to adhere to the mandatory
specifications, standards and operating and inspection procedures, ENBC may
terminate the Development Agreement. (See Item 17)
OTHER OBLIGATIONS.
-----------------
You must maintain the number and level of management personnel for adequate
management and supervision of all Stores developed under the Development
Agreement. (See Item 15)
FRANCHISOR REVENUE.
------------------
ENBC did not receive revenue in the past fiscal year from Developers'
required purchases, but ENBC expects that in the future it will derive revenue
from Developers' purchases of items and services for which ENBC is an approved
or designated supplier.
39
<PAGE>
FRANCHISE AGREEMENT
- -------------------
COMPUTER SYSTEM.
---------------
You must purchase and install the Computer System, including all programs
and software that ENBC requires during the term of the Franchise Agreement. This
obligation is the same as under the Development Agreement, as described above in
this Item 8.
ENBC attempts to negotiate its contracts with computer hardware and
software vendors to make discounted pricing available to you. In some instances
this may involve remarketing arrangements, in which event ENBC would derive
revenue from sales to you. ENBC estimates that the costs of the Computer System
and Specified Software will represent approximately 8% of the purchases and
leases of goods and services you will make or enter into in the establishment of
the Store and will represent approximately 1% to 2% of the purchases and leases
that you will make or enter into in the ongoing operation of the Store.
PRODUCT PURCHASES.
-----------------
ENBC may develop certain proprietary food products which ENBC prepares, or
which third party contractors prepare for ENBC, according to ENBC's proprietary
recipes and formulae and certain private label food products, materials and
supplies ("Proprietary Items"). As described below, ENBC has designated cream
cheese and other spreads and bagel dough as Proprietary Items as of the date of
this offering circular. ENBC intends to develop Proprietary Items in the future,
which you must purchase. ENBC will require you to purchase the Proprietary Items
only from ENBC or its designees whom ENBC licenses to manufacture, prepare,
distribute and/or sell particular products. ENBC will designate in the Manuals
(defined in Item 11 below) which Products constitute Proprietary Items, and
which of the Proprietary Items must be purchased from ENBC or its designated
suppliers and/or which are to be prepared at the Store. ENBC may derive revenue
in the future from designated suppliers' sales of Proprietary Items and other
products or supplies to you.
You must purchase proprietary cream cheese and other spreads only from the
supplier or suppliers ENBC designates. Currently, Doc's Cheese Company, L.L.C.
(the "Cheese Company") is the only supplier ENBC has approved to provide its
proprietary cream cheese and other spreads for sale to Einstein Bros. stores.
ENBC will derive no revenue from the Cheese Company's sales to Franchisees. ENBC
has the option until the year 2000 to purchase the assets of the Cheese Company,
and if it exercises its option and ENBC becomes the only approved supplier of
cream cheese and spreads as a result, ENBC will derive revenue from sales of
cream cheese and spreads to Franchisees. You must also purchase ENBC's
proprietary bagel products only from the supplier or suppliers ENBC designates.
ENBC has entered into a supply agreement with Harlan Bagel Supply Company,
L.L.C., which is not an affiliate of ENBC and which is the only supplier ENBC
has approved to provide its proprietary bagel dough for sale
40
<PAGE>
to Einstein Bros. stores. ENBC would not derive revenue from that supplier's
sales of proprietary bagel dough to Franchisees.
APPROVED EQUIPMENT, FIXTURES, FURNISHINGS AND SIGNS.
---------------------------------------------------
You must use to develop and operate your Store only the brands, types
and/or models of equipment, vehicles, signs displaying the Marks, fixtures and
furnishings which meet ENBC's specifications. You may purchase approved brands,
types and/or models of equipment, fixtures, furnishings and signs which meet
ENBC's specifications only from suppliers ENBC designates or approves, which may
include ENBC. ENBC will periodically supply you with a list of suppliers who
sell items which meet ENBC's specifications, at your request.
SITE SELECTION AND LEASE.
------------------------
Before signing the Franchise Agreement, you must have obtained ENBC's
approval of, and the legal right of possession of, the Site according to the
terms of the Development Agreement. If the Franchise Agreement is not signed
under a Development Agreement, then you must comply with the site and lease
review and approval provisions specified in the form of Development Agreement
included in ENBC's most recent offering circular delivered to you for the state
in which the Site will be located. Other than as described in this Item, ENBC
will not derive revenue as a result of your selection of the Site and execution
of a lease for the Site according to ENBC's standards and specifications.
STORE DESIGN SPECIFICATIONS AND CONSTRUCTION PLANS.
--------------------------------------------------
ENBC will furnish to you specifications of ENBC's requirements for design,
decoration, layout, equipment, furnishings, seating for on-premises dining,
fixtures and signs for your Stores (the "Design Specifications"). The Design
Specifications are an integral part of the System and include ENBC's trade dress
which ENBC has specified for your Stores and, therefore, the Store must be
designed and constructed according to the Design Specifications. You must cause
to be prepared the preliminary layout for the Store (if not already submitted to
ENBC) and detailed construction plans and specifications and space plans for the
Store (the "Construction Plans") that comply with the Design Specifications and
all applicable ordinances, building codes, permit requirements, and lease
requirements and restrictions. Other than as described elsewhere in this
offering circular, ENBC will not derive revenue as a result of your development
of the Store according to ENBC's standards and specifications.
DEVELOPMENT OF THE STORE.
------------------------
Within 120 days after signing the Franchise Agreement, you must, at your
expense, do or cause to be done the following: (1) secure all financing required
to fully develop the Store; (2) if you have not done so previously, submit the
Construction Plans to ENBC for approval;
41
<PAGE>
(3) obtain all required zoning changes, planning consents, building, utility,
sign, health, sanitation and business permits, licenses and approvals and any
other required permits and licenses; (4) construct all required improvements in
compliance with Construction Plans ENBC approves; (5) decorate and lay out the
Store in compliance with Design Specifications and plans and specifications ENBC
approves; (6) purchase, lease or license the Computer System, the Licensed
Program Support/Control Program and the Specified Software; (7) purchase or
lease and install all required equipment, vehicles, furnishings, fixtures and
signs and the Computer System; (8) purchase an adequate opening inventory of
Products, materials and supplies; (9) obtain all customary contractors' sworn
statements and partial and final waivers of lien for construction, remodeling,
decorating and installation services and (10) open the Store for business and
operate the Store on a regular and continuing basis.
STORE MENU AND SERVICES.
-----------------------
The Store will (1) offer for sale all Products (and no other products) and
(2) provide only the following services (and no other services): (a) the carry-
out service that ENBC authorizes and requires, (b) the Delivery Service that
ENBC, in its discretion, may authorize for the Store under a Delivery Rider and
(c) the Catering Service that ENBC in its discretion may authorize you to
provide from the Store (or a Catering Facility) under a Catering Rider. The
Store may not offer for sale or sell any products or services at or from the
Store which ENBC has not approved in writing. You may not use the Site or Store
for any purpose other than the operation of a Store. You must meet ENBC's
specifications, standards and procedures for carry-out service, on-premises
dining services, if applicable, Delivery Service and Catering Service, which
ENBC periodically requires in the Manuals or otherwise in writing. The Store may
not provide any services at, from or away from the Site until ENBC, in its
discretion, has approved the Store (or a Catering Facility) in writing for the
conduct of these services and ENBC and you have executed the applicable Rider to
the Franchise Agreement.
You may not sell any Products that have not been packaged according to
ENBC's specifications, standards and procedures required in the Manuals or
otherwise in writing. If ENBC requires your Store and other Units in the
Marketing Area (or, in ENBC's discretion, the trade area of your Store) to offer
new or substitute products or services not currently offered at Units in the
Marketing Area (or trade area), you must offer required services and/or products
in compliance with ENBC's specifications, standards and procedures required in
the Manuals or otherwise in writing and diligently pursue obtaining any permits
and take actions (including constructing improvements and acquiring fixtures,
furnishings, equipment, supplies and materials) required to offer the products
and/or services. Modifications to the services and/or products the Store offers
may require you to incur additional costs and expenses to operate the Store,
including the purchase and/or lease of additional or substitute furnishings,
furniture, fixtures, vehicles or equipment for Catering Service and/or Delivery
Service. You must incur those costs and expenses. The "Marketing Area" is the
geographic area in which the Store is located, the size and shape of which ENBC
determines periodically in its discretion, and which is typically a metropolitan
area. The "trade area" is typically the geographic area from which
42
<PAGE>
a Store draws its customers. In determining the Marketing Area, ENBC may take
into consideration a number of factors, as described in the Franchise Agreement.
QUALITY CONTROL PROGRAM.
-----------------------
ENBC may conduct quality, service, cleanliness, and other inspections of
Stores periodically to determine compliance with applicable contract provisions
and the standards and specifications ENBC applies periodically. ENBC requires
that your performance in the inspections is satisfactory. ENBC may designate an
independent evaluation service to conduct a "customer satisfaction" quality
control and evaluation program, as may be more fully described in the Manuals or
in writing, with respect to ENBC-owned and franchised Units. You must
participate in the mystery shopper program. ENBC-owned and other franchised
Units also will participate in the program to the extent ENBC has the right to
require participation. (See Item 6)
ACCOUNTING, REPORTS AND FINANCIAL STATEMENTS.
--------------------------------------------
You must install and use at the Store the Computer System in the form ENBC
specifies during the term of the Franchise Agreement, and transmit to, or permit
the electronic collection of information by, ENBC through use of the Computer
System. You, at your own expense, must establish and maintain at the Store, (i)
a telephone modem and dedicated line (or other mechanisms for data transmission
ENBC may periodically require) that ENBC may use to access the Computer System,
(ii) full, complete and accurate records and reports and, (iii) if ENBC
requires, computer diskettes and databases in the form ENBC specifies pertaining
to the operation of the Store, including site reports on the Store which you
must prepare and submit to ENBC, the Site Agreement (defined in the Development
Agreement), supervisory reports on operations, bookkeeping, accounting,
recordkeeping and records retention system conforming to ENBC's requirements
(including requirements for a general ledger system which uses a standard chart
of accounts ENBC requires periodically, and for timely entry of information into
data bases of the Computer System and periodic printouts of reports generated
from the Computer System), information on employee turnover and any other
records, reports and information ENBC periodically requires.
APPROVED PRODUCTS, DISTRIBUTORS AND SUPPLIERS.
---------------------------------------------
ENBC has developed and may continue to develop standards and specifications
for bagels, Products, other food products, ingredients, seasonings, spices,
mixes, beverages, materials and supplies you will incorporate in or use to
prepare, cook, serve, package, cater and deliver the prepared food products ENBC
authorizes for sale at or from Stores and for advertising those items. ENBC has
approved and will review and continue to approve suppliers and distributors of
the products, supplies and materials that meet its standards and requirements.
ENBC's criteria for evaluating, approving or disapproving suppliers and
distributors are based
43
<PAGE>
on its standards and requirements for quality, quantity and portions, prices,
volume capability, frequency of delivery, distribution methods and locations,
standards of service, including prompt attention to complaints, consistency,
reliability, financial capability, labor and customer relations and other
criteria. The evaluation criteria will be available to you at your request. You
must purchase only from distributors and suppliers ENBC approves or requires all
goods, food products, ingredients, spices, seasonings, mixes and beverages. ENBC
will also approve certain suppliers for materials and supplies used to prepare,
freeze, bake, cook, serve, package and deliver the Products, for providing
Catering Service and for your equipment, menus, forms, paper and plastic
products, packaging or other materials (collectively, "Supplies and Materials"),
and all advertising media placement services you purchase for local store
marketing. ENBC does not provide material benefits to you based on your use of
designated or approved sources.
ENBC may modify the list of approved or required suppliers and distributors
during the term of the Franchise Agreement, and may designate itself or an
affiliate as a required manufacturer, supplier and/or distributor of certain
equipment, products, materials, supplies or other items. You may not, after you
receive written notice from ENBC of a modification, reorder any product from any
supplier or distributor that is no longer approved. ENBC may approve or require
a single distributor or supplier for any products, materials or supplies and may
approve or require a distributor or supplier only as to certain products,
materials and supplies, and approval may be temporary pending ENBC's more
comprehensive evaluation of a distributor or supplier. ENBC may concentrate
purchases with one or more distributors or suppliers to obtain lower prices
and/or advertising support and/or services for the benefit of the System and/or
Stores. ENBC may establish company or affiliate-owned and operated food
commissaries and distribution facilities which ENBC may designate as an approved
or required distributor or supplier. You must at all times maintain an adequate
inventory of approved food and paper products, beverages, ingredients and other
products of sufficient quality and variety to realize the full potential of the
Store.
ENBC will derive revenue as a result of your purchase of approved products
and supplies from ENBC and may, in its discretion, collect and retain all
allowances, benefits, credits, monies, payments or rebates (collectively
"Promotional Allowances"), whether for promotional, advertising or other
purposes, which manufacturers, suppliers and distributors offer to you or ENBC
or its affiliates based upon your purchases of Non-Proprietary Products,
Proprietary Items and Supplies and Materials. You must assign to ENBC or its
designee all of your right, title and interest in and to any and all Promotional
Allowances and authorize ENBC or its designee to collect any Promotional
Allowances to remit to the Marketing Fund to the extent based on your purchase
of Products which are not Proprietary Items (the "Non-Proprietary Products") and
Supplies and Materials. However, ENBC may also retain in its general operating
funds the Promotional Allowances it receives from your purchases of Proprietary
Items from any source and the Promotional Allowances it receives from your
purchases from ENBC or its affiliates of Non-Proprietary Products and Supplies
and Materials. ENBC is not obligated to contribute to the Marketing Fund any
revenue it or its affiliates make or collect from sales to you or from
44
<PAGE>
your purchases of any goods or services. Designated suppliers will not make
payments to ENBC because of transactions with Franchisees.
You must notify ENBC and submit to ENBC any information, specifications and
samples as ENBC requests if you propose to purchase any goods, food products,
ingredients, seasonings, spices, mixes, beverages, menus, equipment, forms,
paper or plastic products, packaging or other materials or utensils from a
distributor or supplier whom ENBC has disapproved or not previously approved.
ENBC will use its reasonable best efforts to notify you within 120 days after
receipt of all requested information and materials whether you are authorized to
purchase products from a certain distributor or supplier. If you fail to receive
a notice of disapproval within the 120 day period, you may purchase the products
from the distributor or supplier until ENBC otherwise notifies you. ENBC's
failure to give its approval or disapproval will not be deemed to constitute
ENBC's approval of that distributor or supplier. If ENBC chooses, you will have
to reimburse ENBC for its reasonable costs incurred in evaluating, inspecting
and supervising a distributor or supplier. (See Item 6)
All approved suppliers will be evaluated continuously for things like
ability to deliver products or services, quality of products and services,
timeliness of delivery and cost. ENBC may revoke its approval of any supplier
who ENBC, in its reasonable judgment, believes is falling short in any category.
ENBC may remove a supplier from the list of approved suppliers at any time but
with notice.
SPECIFICATIONS, STANDARDS AND PROCEDURES.
----------------------------------------
Your obligations under the Franchise Agreement to operate according to
ENBC's specifications, standards and procedures are the same as those under the
Development Agreement, as described above in this Item 8.
INSURANCE.
---------
During the term of the Franchise Agreement, you must maintain in force,
insurance policies with insurers rated "A-" or better by Alfred M. Best &
Company, Inc. that ENBC approves: (1) commercial general liability insurance
(including coverage for motor vehicles used in the operation of the Store,
whether or not you own the vehicles), against claims for bodily and personal
injury, death and property damage caused by or occurring in the operation of the
Store or otherwise in your conduct of business under the Franchise Agreement,
under one or more insurance policies containing minimum liability coverage ENBC
requires periodically; and (2) all risk property and casualty insurance for the
replacement value of the Store and its contents (including leasehold
improvements, furnishings, fixtures, equipment, signs, inventory, supplies, and
materials). You must also maintain the insurance necessary to comply with all
legal requirements concerning insurance coverage (including worker's
compensation requirements), including coverage for persons attending ENBC
training programs on your behalf. ENBC may periodically increase the amounts of
coverage required under insurance
45
<PAGE>
policies and require different or additional kinds of insurance at any time,
including excess liability insurance, to reflect inflation, identification of
new risks, changes in law or standards of liability, higher damage awards, or
other relevant changes in circumstances. You will be responsible for maintaining
sufficient insurance coverage.
Each insurance policy you obtain under the Franchise Agreement or the
Development Agreement must name ENBC as an additional insured, must contain a
waiver of all subrogation rights against ENBC, its affiliates, and their
successors and assigns, and must provide for 30 days' prior written notice to
ENBC if the insurer materially modifies or cancels the policy or if the policy
expires. When you sign the Development Agreement or the Franchise Agreement, you
must provide ENBC with evidence of the required insurance, and you must furnish
to ENBC a copy of the certificate of insurance, or other evidence ENBC requests
that the required insurance coverage is in force, each year and/or when you
replace any policy.
As of the date of this offering circular, ENBC's requirements for insurance
coverage are the following: (1) employers' liability insurance of at least
$1,000,000 per accident and $1,000,000 per disease with a $1,000,000 policy
limit on disease; (2) business automobile liability insurance of at least
$20,000,000 with combined single limit per occurrence for bodily injury and
property damage; (3) commercial general liability insurance on an occurrence
basis of $20,000,000 combined single limit for claims against bodily injury,
property damage liability and personal injury; (4) "all risk" property and
boiler and machinery insurance in an amount at least equal to the full
replacement cost of your Store and its contents.
CREDIT CARDS AND OTHER METHODS OF PAYMENT.
-----------------------------------------
You must at all times have arrangements with a full range of credit and
debit card issuers or sponsors, check verification services and electronic fund
transfer systems as ENBC periodically designates in its discretion during the
term of the Franchise Agreement in order that the Store may accept customers'
credit and debit cards, checks and other methods of payment. You may use only
the payment methods that ENBC authorizes or approves.
ADVERTISING.
-----------
You must advertise and conduct promotions only according to ENBC's
standards and specifications, as described in Item 11.
DELIVERY SERVICE.
----------------
If you sign a Delivery Rider, you must take actions (including constructing
improvements and acquiring fixtures, equipment, delivery vehicles, and other
materials and supplies) at your own expense and obtain the required permits to
begin Delivery Service within the time period specified in the Delivery Rider.
You must maintain the condition and appearance of, and
46
<PAGE>
perform maintenance with respect to, the delivery vehicles, facilities, fixtures
and equipment used to provide Delivery Service according to ENBC's standards,
specifications and procedures, and consistent with the image of Stores as first
class, clean, sanitary, attractive and efficiently operated food service
businesses.
CATERING SERVICE.
----------------
If you sign a Catering Rider, you must take actions (including constructing
improvements and acquiring fixtures, equipment, vehicles, and other materials
and supplies) at your own expenses and obtain the required permits to begin
Catering Service from the Catering Facility (defined below) within the time
period specified in the Catering Rider. You must maintain the condition and
appearance of, and perform maintenance with respect to, the Catering Facility,
catering vehicles, furniture, fixtures and equipment used in the provision of
Catering Service according to ENBC's standards, specifications and procedures,
and consistent with the image of Stores and related facilities as first class,
clean, sanitary, attractive and efficiently operated food service businesses.
FRANCHISOR REVENUE.
------------------
ENBC did not receive revenue in the past fiscal year from Franchisees'
required purchases, but ENBC expects that in the future it will derive revenue
from Franchisees' purchases of items and services for which ENBC is an approved
or designated supplier.
ITEM 9
------
FRANCHISEE'S OBLIGATIONS
THIS TABLE LISTS YOUR PRINCIPAL OBLIGATIONS UNDER THE FRANCHISE AND OTHER
AGREEMENTS. IT WILL HELP YOU FIND MORE DETAILED INFORMATION ABOUT YOUR
OBLIGATIONS IN THESE AGREEMENTS AND IN OTHER ITEMS OF THIS OFFERING CIRCULAR.
<TABLE>
<CAPTION>
================================================================================
ITEM IN
OFFERING
OBLIGATION SECTION IN AGREEMENT CIRCULAR
- --------------------------------------------------------------------------------
<S> <C> <C>
(a) Site selection and Section 4.A of Franchise 6, 8, 10 and 11
acquisition/lease Agreement/Sections 6.A
and 6.B of Development
Agreement
===============================================================================
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
================================================================================
ITEM IN
OFFERING
OBLIGATION SECTION IN AGREEMENT CIRCULAR
- --------------------------------------------------------------------------------
<S> <C> <C>
(b) Pre-opening Sections 4.B, 4.C, 4.D., 8
purchases/leases 4.E and 4.G of Franchise
Agreement/Sections 6.B.,
10 and 12.J of
Development Agreement
- --------------------------------------------------------------------------------
(c) Site development and other Sections 4.C, 4.G and 4.I 5, 6, 7 and 11
pre-opening requirements of Franchise Agreement/
Sections 5.B, 6.C and 6.D
of Development Agreement
- --------------------------------------------------------------------------------
(d) Initial and ongoing Sections 5.A and 5.B of 6 and 11
training Franchise Agreement/
Sections 5.C, 13.D and
13.F of Development
Agreement
- --------------------------------------------------------------------------------
(e) Opening Section 4.F of Franchise 11
Agreement/Section 5.B. of
Development Agreement
- --------------------------------------------------------------------------------
(f) Fees Sections 4.E, 8.B and 5 and 6
8.D, 11.A-11.F, 13.A-13.C
of Franchise Agreement/
Sections 3.E, 6.D., 6.E,
7.A to 7.C, 10.B to 10.D
and 12.J of Development
Agreement
- --------------------------------------------------------------------------------
(g) Compliance with standards Sections 4.B, 4.C, 4.D, 11, 13 and 14
and policies/Operations 5.B, 5.C, 6.A, 6.B, 7.B,
Manual 12.A-12.H, 13 and 15 of
Franchise Agreement/
Sections 5.D., 6.A, 6.B,
8, 10.A, 10.B, 11.B,
13.J and 13.K of
Development Agreement
- --------------------------------------------------------------------------------
(h) Trademarks and proprietary Sections 4.E., 6.A-6.D, 13 and 14
information 7.A-7.D, 9.A, 9.B, 19.B,
and 19.C of Franchise
Agreement/Sections 8,
10.A-10.E, 11.A-11.D and
13.J of Development
Agreement
- --------------------------------------------------------------------------------
(i) Restrictions on Sections 12.B-12.D, 12.H 16
products/services offered of Franchise Agreement/
5.A. of Development
Agreement
================================================================================
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
================================================================================
ITEM IN
OFFERING
OBLIGATION SECTION IN AGREEMENT CIRCULAR
- --------------------------------------------------------------------------------
<S> <C> <C>
(j) Warranty and customer None
service requirements
- --------------------------------------------------------------------------------
(k) Territorial development Sections 2.B-2.D and 12
and sales quotas 3.A-3.C of Franchise
Agreement/Sections
3.B-3.F and 4.A-4.C of
Development Agreement;
Exhibit E to Development
Agreement
- --------------------------------------------------------------------------------
(l) Ongoing product/service Sections 12.B-12.D of 8
purchases Franchise Agreement/
Section 5.E.(7)
of Development Agreement
- --------------------------------------------------------------------------------
(m) Maintenance, appearance Section 12.A of Franchise 9
and remodeling requirements Agreement/ Section 5.E
(3) and (8) of Development
Agreement
- --------------------------------------------------------------------------------
(n) Insurance Section 12.G of Franchise 6 and 8
Agreement/Sections 5.F
and 12.H of Development
Agreement
- --------------------------------------------------------------------------------
(o) Advertising Sections 13.A-13.C of 6 and 11
Franchise Agreement/
Section 6.E of
Development Agreement
- --------------------------------------------------------------------------------
(p) Indemnification Section 8.D of Franchise 6
Agreement/Sections 8.E
and 16 of Development
Agreement
- --------------------------------------------------------------------------------
(q) Owner's Section 12.F of Franchise 11 and 15
participation/management/ Agreement/Sections 5.C.,
staffing 13.A-13.F of Development
Agreement
- --------------------------------------------------------------------------------
(r) Records/reports Section 14 of Franchise 8
Agreement/Section 13.I of
Development Agreement
- --------------------------------------------------------------------------------
(s) Inspections/audits Sections 15.A and 15.B of 6 and 11
Franchise Agreement
================================================================================
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
================================================================================
ITEM IN
OFFERING
OBLIGATION SECTION IN AGREEMENT CIRCULAR
- --------------------------------------------------------------------------------
<S> <C> <C>
(t) Transfer Sections 16.A-16.J of 6 and 17
Franchise Agreement
/Sections 5.G., 14.
A-14.I of Development
Agreement
- --------------------------------------------------------------------------------
(u) Renewal Sections 17.A-17.C of 6 and 17
Franchise Agreement
-------------------------------------------------------------------------------
(v) Post-termination Sections 19.A-19.F of 17
obligations FranchiseAgreement
/Sections 5.I., 16.A-
16.E of Development
Agreement
- --------------------------------------------------------------------------------
(w) Non-competition covenants Sections 9.B, 15.C (6) 17
and 19.D of Franchise
Agreement/Sections 9,
14.D (6) and 15.D of
Development Agreement
- --------------------------------------------------------------------------------
(x) Dispute resolution Sections 20.C, 20.E, and 17
20.F-20.J of Franchise
Agreement/18.C,
18.E-18.J. of Development
Agreement
================================================================================
</TABLE>
ITEM 10
-------
FINANCING
Neither ENBC nor any agent or affiliate of ENBC offers, directly or
indirectly, any financing arrangements to you, except as described below.
Copies of the financing documents are attached to this offering circular as
Exhibit F.
- ---------
FINANCED AREA DEVELOPER PROGRAM.
-------------------------------
ENBC offers financing under its "Financed Area Developer Program," as
described below, and expects to require all developers to participate in this
program. The Financed Area Developer Program, a copy of which is attached to
this offering circular as Exhibit F, provides developers with a substantial
---------
portion of the funds necessary to develop Stores. Because of restrictions on
when drawdowns of financing may occur, it is generally not available to be used
for the payment of the Development Fee or the Real Estate Services Fee. The
amount of financing available to you, if you are a qualified Developer, will
depend upon various factors such as the location of your Development Area, the
number of Stores you intend to develop, and the amount of equity capital you
raised for initial and ongoing operations. The maximum amount of financing
offered is typically four times the amount of your equity capital.
50
<PAGE>
Under the Financed Area Developer Program, you and ENBC will execute a
secured loan agreement (the "Loan Agreement"), which provides, among other
things, that you must spend at least 75% of your equity capital toward
developing Stores before drawing on the agreed loan amount. Draws will be
permitted during a pre-determined draw period, which will typically be two to
three years. Upon expiration of the draw period, the loan converts to an
amortizing term loan payable in 65 substantially equal periodic installments of
principal (the amount of which periodic installments of principal is determined
at the end of the draw period based on a schedule amortizing the outstanding
principal balance as of that date in 130 substantially equal periodic
installments of principal) plus accrued interest, with a final payment of the
remaining principal balance of the loan and all accrued but unpaid interest on
the principal balance due approximately five years after the expiration of the
draw period. The maximum loan amount available must be an amount at least equal
to the amount which, if converted into equity in you, would give ENBC control of
you under applicable state law, and will typically be in an amount that if
converted, would give ENBC approximately 75% ownership of you. For example, if
you are a corporation and the total capital paid in for your shares is $6
million, the maximum amount of your loan would be $24 million. With equity
capital of $6 million, you could begin drawing on the loan amount once you had
spent $4.5 million of your equity capital to develop Stores, and you could
continue drawing on the loan for at least 2 years. If you have borrowed the
entire $24 million at the end of the two-year draw period, you will begin
repayment in installments of 65 payments of approximately $184,615 each ($24
million divided by 130) plus accrued interest. Five years after your draw period
expires, you must make a final payment of the remaining principal and all
accrued interest on the outstanding principal.
Any amounts loaned to you will accrue interest daily on the aggregate
outstanding principal balance of the loan at a yearly rate equal to the rate the
Bank of America, Illinois (the "Bank") periodically designates and announces as
its "reference rate" in effect at its principal office in Chicago, Illinois,
plus 1%. The interest rate will be adjusted, periodically, on the same day on
which the Bank adjusts its reference rate. The annual percentage rate under the
Financed Area Developer Program as of July 1, 1996 was 9.25%. [UPDATE] Interest
on the outstanding principal balance of the loan will be payable on the first
day of each of ENBC's four-week accounting periods during the draw period. The
interest that you will pay will be the amount that accrued during the four-week
accounting period immediately before the date the interest payment is due. Upon
expiration of the draw period and conversion of the loan to a term loan, the
principal amount of the loan and interest on the principal balance will be
payable to ENBC in substantially equal periodic installments of principal over
the balance of the term, plus accrued interest as described above. (Sections
3.1 - 3.6 of Loan Agreement). At the time you sign the Loan Agreement, you must
also sign a promissory note (the "Note") for the maximum loan amount.
Although there is no prepayment penalty, the Note may not be prepaid at any
time without ENBC's consent. You expressly waive demand, delivery of the note
for payment, protest, diligence, notice of dishonor, and any other formality
under the Loan Agreement. (Page 2 of the Note).
51
<PAGE>
ENBC may, at any time after the earlier of (1) any acceleration of the loan
or (2) both the second anniversary of the execution of the Loan Agreement and
your completion of at least 80% of the Development Schedule, and up to the later
of the date on which you have properly repaid the outstanding principal balance
of the loan in full or a specified date which ENBC and you will negotiate,
convert the outstanding principal balance of the Note or any portion of the
outstanding principal balance (but not interest) into shares of your common
stock (or corresponding equity interests if you are not a corporation) under the
terms of the Loan Agreement at a premium to the original issue price of equity
interests in you ENBC will negotiate the amount of this premium with you at the
time you enter into the Development Agreement and the Loan Agreement. Conversion
of any portion of the principal balance of the loan will not relieve you of your
obligation to pay any accrued but unpaid interest on the portion of the
principal balance of the loan so converted. (Section 3.8(a) of Loan Agreement,
Article 1 of the Note).
ENBC also may, at any time after the earlier of (1) the acceleration of the
loan or (2) both the second anniversary of the execution of the Loan Agreement
and your completion of at least 80% of the Development Schedule, and up to the
later of the date on which you have properly repaid the outstanding principal
balance of the loan and all accrued interest thereon in full or a specified date
which you and ENBC will negotiate, purchase up to that number of shares of
common stock at the price determined by applying the formula set out in the Loan
Agreement so that the shares obtained by option and by conversion equal the
maximum number of shares which could have been obtained by conversion if the
loan were fully drawn and no portion repaid. (Section 3.9 of Loan Agreement).
To secure payment and performance of your obligations under the Loan
Agreement and all of your other obligations to ENBC, you must grant ENBC a
continuing security interest in and to substantially all of your property and
interest in property, whenever you acquire the property and wherever it is
located, consisting of the following: (a) all of your real estate, accounts,
equipment (including furniture, fixtures, tools, vehicles, and other tangible
property), inventory, leasehold improvements, contract rights (including your
rights as lessee under all leases of real property), general intangibles,
deposit accounts, tax refunds, chattel paper, instruments, notes, letters of
credit, documents, and documents of title (collectively, the "Collateral"); (b)
all insurance proceeds of or relating to any of the Collateral; (c) all of your
books, records, and computer programs and data relating to any of the
Collateral; and (d) all accessories and additions to, substitutions for, and
replacements, products and proceeds of, any of the Collateral. Section 4.1 of
Loan Agreement).
In addition to the security interest in the Collateral, your obligations
under the Loan Agreement and all of your other obligations to ENBC must be
secured by a pledge of all outstanding shares or other equity interests in you.
The stockholders generally do not need to personally guarantee payment of the
loan. (Section 4.2 of Loan Agreement).
52
<PAGE>
Under the Loan Agreement, ENBC also has a right of first negotiation, a
right of first refusal and preemptive equity rights regarding any future
financing you may prepare to arrange. ENBC will subordinate its loan to your
other debts incurred later if you meet certain conditions contained in the Loan
Agreement. In addition, the Loan Agreement provides that you may have an
employee stock option plan which provides for grants of options aggregating up
to an agreed upon portion of your fully-diluted equity, with a four-year (10%,
20%, 30%, 40%) vesting schedule for option grants. (Sections 7.9 and 8.3 of Loan
Agreement). Applicable federal and state law may require you to register or
qualify your stock option plan as a security.
Upon a default under the Loan Agreement, ENBC may: (1) terminate its
obligations under the Loan Agreement, cease to make advances and declare the
Note due and payable in full, without demand, presentment or notice of any kind;
(2) exercise its rights as a secured party under applicable law; (3) exercise
its rights under the various security documents; (4) convert any portion of the
outstanding principal balance of the loan into shares of common stock or other
equity interests in you; and (5) exercise all or a portion of its option right
(described above). Among other things, your default under the Development
Agreement or termination of the lesser of (1) 50% or (2) three of the Franchise
Agreements to which you or your affiliates and ENBC are parties constitutes a
default under the Loan Agreement. (Sections 10.1 and 10.2 of Loan Agreement).
You must also pay all reasonable attorneys' fees and any costs and charges
relating to or arising out of ENBC's enforcement of its rights to collect any
portion of the Loan (Section 11.3 of the Loan Agreement).
The Loan Agreement requires you to acknowledge that ENBC may not have cash,
cash equivalents or credit resources sufficient to permit ENBC to make all
requested advances and to agree that if ENBC fails to fund the loan as required
under the Loan Agreement (and if the failure constitutes a breach of the Loan
Agreement), the failure will not (a) constitute fraud, or (b) give rise to any
liability of any person or entity (other than ENBC, its successors and assigns)
for any other tort and, that you will be limited to your remedies in contract
and in a non-fraud tort action against ENBC. (Section 3.11 of Loan Agreement).
Under the Loan Agreement, the parties agree that they will not be liable
for consequential, indirect, incidental, special, speculative or punitive
damages. The parties also agree to waive their right, if any, to a jury trial,
subject to any limitations under applicable state law. (Section 11.14 of Loan
Agreement).
Under the Financed Area Developer Program, you must use ENBC's accounting
services under an Accounting Services Agreement, a copy of which is attached to
the Financed Area Developer Loan Program Agreement, which is attached to this
offering circular as Exhibit F. The fees you will pay ENBC under the Accounting
---------
Services Agreement are described in Item 6.
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GENERAL.
-------
The terms of the financing described above in this Item 10 may vary
depending on the particular circumstances. ENBC does not place financing with
anyone, and, therefore, it does not receive any payment for the placement of
financing.
Except for a qualified Developer's participation in the Financed Area
Developer Program, ENBC is unable to estimate whether you can to obtain
financing for any part or all of your investment or the terms of any of the
financing, which will depend on general credit conditions and your
creditworthiness. The terms on which financing is offered under the Financed
Area Developer Program are limited by ENBC's credit arrangement with its
lenders.
Under the terms of the Franchise Agreement, a pledge of the Franchise
Agreement or the lease for a Store made to secure financing constitutes a
transfer requiring ENBC's approval, and ENBC's policy is not to approve pledges
of leasehold improvements or franchise rights or other liens, royalty deferrals
or subordination provisions which the SBA or bank lenders request. Pledges of
equipment for equipment financing in the ordinary course of business are
generally outside the scope of this restriction.
ENBC does not have any past or present practice or intention to sell,
assign or discount to any third party any note, contract or other instrument you
execute, except that ENBC's rights to security interests in you and in shares of
common stock or other equity interests in you may be pledged to any secured
lender of ENBC.
ITEM 11
-------
FRANCHISOR'S OBLIGATIONS
DEVELOPMENT AGREEMENT
- ---------------------
Except as listed below, ENBC need not provide any assistance to you under
the Development Agreement.
Before you begin operations under the Development Agreement, ENBC will:
(1) LOAN YOU A DEVELOPMENT MANUAL. ENBC will loan to you for your sole
-----------------------------
use during the Agreement Term one copy of a confidential manual relating to the
development and operation of Stores, which may be one or more volumes,
handbooks, manuals, written materials, video or audio cassette tapes, or
computer diskettes, and other materials and intangibles, as ENBC may
periodically modify, add to, replace or supplement in its discretion, whether by
supplements, replacement pages, bulletins or other official pronouncements or
means (collectively the "Development Manual").
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ENBC also will loan to you for your use during the term of each Franchise
Agreement 1 copy of the Manuals (defined below) for each Store you develop and
open under the Development Agreement (the Manuals for the first Store to be
developed under the Development Agreement will be made available to you promptly
after you execute the Development Agreement) and one copy of the commissary
manual (the "Commissary Manual") for each Commissary you operate under the
Development Agreement. The Commissary Manual will be comparable to the Manuals
(as defined below in this Item), as applicable, and will relate to the
comparable aspects of the development and operation of a Commissary. The
Development Manual will contain specifications, standards, policies and
procedures ENBC periodically requires for developers of Stores and information
relative to other of your obligations and the operation of Stores. The
Development Manual and Commissary Manual, in whole or in part, will be specific
to the brand of Stores for which ENBC grants you rights to develop. See Items 1
and 12. The Development Manual and Commissary Manual may be periodically
modified in ENBC's discretion to reflect changes in the System or
specifications, standards, policies and procedures for Stores or other changes
or additions as ENBC deems necessary. You must keep your copy of the Development
Manual current by immediately inserting all modified pages or materials ENBC
furnishes. If a dispute about the contents of the Development Manual arises, the
master copies ENBC maintains at its principal office will be controlling. The
Development Manual is proprietary and confidential. Accordingly, you may not, at
any time, disclose, copy or distribute any part of the Development Manual.
Copies of the ENBC manuals that are in effect as of the date of this offering
circular, including the Development Manual, the Commissary Manual and the
Manuals, will be available for you to review before you sign the Development
Agreement. (Sections 5.D and 12.J of Development Agreement)
(2) REVIEW YOUR DEVELOPMENT PLAN. ENBC will review and may amend and
----------------------------
approve a real estate development plan for developing Stores in the Development
Area that you prepare and submit to ENBC for consideration. In addition, if you
are in full compliance with all of the terms and conditions of the Development
Agreement and you are in full compliance with all obligations under all
Franchise Agreements executed under the Development Agreement, ENBC will grant
to you during the Development Term and according to the Development Agreement,
the right to develop and operate Stores in the Development Area. (Sections 3.A
and 6.A of Development Agreement).
(3) REVIEW YOUR PERSONNEL. ENBC will review and determine whether your
---------------------
proposed Chief Operating Officer, Development Director, Training Director and
Marketing Director, as defined in this Item and Item 15, are acceptable to ENBC.
(See Item 15) (Sections 13.B-13.E of Development Agreement).
(4) PROVIDE TRAINING. ENBC will train your training director (the
----------------
"Training Director") in the relevant aspects of the operations of Stores and, if
applicable, Commissaries. See below in this Item. (Sections 5.C and 13.D of
Development Agreement).
55
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During your operation under the Development Agreement, ENBC will:
(1) IDENTIFY TARGET SITES. If during the Sub-Area Term of a particular
---------------------
Sub-Area ENBC locates a site suitable for a Store within the Sub-Area (a "Target
Site"), ENBC will notify you in writing of a Target Site if ENBC intends that a
certain Target Site be developed and operated as a Store. If ENBC has fully
negotiated a lease or purchase agreement for the Target Site, ENBC will fully
cooperate with you in obtaining the landlord's consent to execute the lease or
the seller's consent to execute the purchase agreement or assignment of purchase
agreement. If ENBC has not fully negotiated a lease or purchase agreement for
the Target Site, then you will have 30 days in which to negotiate and deliver to
ENBC for review a lease or purchase agreement for the Target Site in form for
execution. Your right to develop a Store at the Target Site, conditions to your
exercise of the right and the consequences of not exercising this right are
further described in Item 12 of this offering circular and the Development
Agreement. (Section 3.E of Development Agreement).
(2) OFFER YOU CONVERSION SITES. If, during the applicable Sub-Area
--------------------------
Term for a particular Sub-Area, ENBC acquires the shares or assets (which may
include furniture, fixtures, equipment, leasehold improvements and/or leasehold
interests) of any business operating at one or more sites located within the
Sub-Area which meet ENBC's specifications and standards as in effect
periodically for conversion to Stores (the "Conversion Sites"), and ENBC
determines in its discretion to convert a Conversion Site to a Store, ENBC
agrees to offer to sell the Conversion Sites to you for the price ENBC paid plus
any other direct or indirect costs and liabilities that ENBC incurs due to the
acquisition. Additional information concerning your right to purchase Conversion
Sites and the consequences of not exercising this right are described elsewhere
in this offering circular and in the Development Agreement (Section 3.F of
Development Agreement).
(3) PROVIDE YOU DEMOGRAPHIC SERVICES. Annually throughout the
--------------------------------
Development Term, ENBC will sell to you demographic detail reports on the
demographics of each Sub-Area ("Demographic Detail Report") in which you retain
the right to develop Stores. At your request, ENBC may provide other demographic
services at ENBC's then-current charges, which charges will vary with the type
of service requested. At your request, ENBC will provide to you, at ENBC's then-
current charges, a report and grid map containing certain demographic
information concerning a proposed site and surrounding area. ENBC or an
independent demographic statistics service may prepare the report and grid map
at ENBC's discretion.
(Section 6.A of Development Agreement)
(4) PROVIDE SITE EVALUATION. ENBC will provide you with the site
-----------------------
selection criteria it periodically establishes in its discretion. ENBC will
approve or disapprove a site by delivering written notice to you. ENBC will
exert its reasonable best efforts to deliver the notification to you within 30
days after ENBC receives a complete site approval request package and location
feasibility analysis on ENBC's specified forms (containing the demographic,
56
<PAGE>
commercial, and other information and photographs as ENBC may periodically
require) for each site at which you propose and intend in good faith to
establish and operate a Store and which you believe to conform to ENBC's minimum
site selection criteria. (Section 6.A of the Development Agreement).
(5) FURNISH FORM LEASE. ENBC will furnish you with a copy of its current
------------------
standard requirements for your lease, including form or addenda that you must
use. ENBC's current form of Addenda to Lease is attached as Exhibit D. ENBC may
periodically modify its standards for leases in its discretion. After receiving
a copy of a proposed Site Agreement for an Approved Site, ENBC will have the
right, in its discretion, to approve, approve with modification or disapprove
the Site Agreement. ENBC will exert its best efforts to deliver notification to
you within 20 days after ENBC receives the proposed Site Agreement. See below in
this Item. (Section 6.B of Development Agreement).
(6) OFFER YOU FRANCHISES. If (1) you are in full compliance with all of
--------------------
the terms and conditions of the Development Agreement, (2) you are in full
compliance with all Franchise Agreements you have entered into, and (3) you have
obtained legal possession of an Approved Site, ENBC will offer to you a
Franchise to operate a Store at the Approved Site by delivering a Franchise
Agreement to you in a form for you and your Principal Owners to sign. (Section
6.C of Development Agreement).
(7) PROVIDE COMMISSARY ASSISTANCE. If you operate a Commissary, ENBC will
-----------------------------
furnish you with its standards, specifications and procedures for Commissaries.
(Development Agreement - Section 5).
(8) DISCLOSE CONFIDENTIAL INFORMATION. ENBC will disclose parts of the
---------------------------------
Confidential Information (defined in Item 14 below) as ENBC periodically deems
necessary or advisable in its discretion for the development of Stores to you in
providing training, and in guidance and assistance furnished to you under the
Development Agreement and you may learn or otherwise obtain additional
Confidential Information from ENBC during the Agreement Term. (See Item 14)
(Section 11 of Development Agreement).
(9) REVIEW YOUR FUNDING PLAN. ENBC will review the written plans for your
------------------------
funding which you must periodically submit to ENBC, which plans must be
reasonably acceptable to ENBC and which must include details of the sources and
terms of funding and any other information or documents ENBC requires. (Section
13.G of Development Agreement).
(10) CONDUCT INSPECTIONS AND AUDITS. To determine whether you are
------------------------------
complying with the Development Agreement, ENBC or its agents will have the
right, at any reasonable time, to inspect, audit and copy any books, records,
reports, computer data bases and documents pertaining to your obligations under
the Development Agreement. (Section 13.I. of Development Agreement).
57
<PAGE>
(11) IDENTIFY COMPUTER SYSTEM AND REQUIRED SOFTWARE. ENBC will
----------------------------------------------
periodically identify those brands, types, makes, and/or models of
communications and computer systems or hardware which ENBC specifies or requires
for the Computer System, Specified Software and the Licensed Program. (Section
10 of Development Agreement).
(12) REVIEW PROPOSED TRANSFERS. ENBC will review and consider for approval
-------------------------
proposed transfers as described in Item 17. You must deliver to ENBC written
notice of your intent to transfer ownership interests in you 30 days before the
transfer is to occur, and ENBC will have 30 days to evaluate the proposed
transfer.(Development Agreement - Sections 15.B. and 15.D).
ENBC has the right to periodically delegate the performance of any portion
or all of its obligations and duties under the Development Agreement to
designees, whether they are agents or affiliates of ENBC or independent
contractors with which ENBC has contracted to provide services. (Section 14.I of
Development Agreement).
FRANCHISE AGREEMENT
- -------------------
Before you open your Store, ENBC will:
(1) REVIEW YOUR FUNDING PLAN. Before beginning development of the Store,
------------------------
you must obtain ENBC's consent to your plan for funding the development and
initial operation of the Store. You must submit a written plan for financing the
Store's development, which must include the sources and terms of financing and
other information ENBC may require. ENBC will review the funding plan and may
approve or disapprove it in its discretion. (Section 4.I of the Franchise
Agreement).
(2) EVALUATE YOUR SITE SELECTION AND LEASE. ENBC will evaluate your
--------------------------------------
proposed site and lease terms, if necessary, according to the procedures under
the Development Agreement and as described below in this Item. (Section 4.A of
the Franchise Agreement).
(3) PROVIDE YOU WITH STORE SPECIFICATIONS. ENBC will furnish you with
-------------------------------------
mandatory and suggested plans and specifications for a Store as described in
Item 8 (Section 4.B of the Franchise Agreement).
(4) PROVIDE YOU WITH THE MANUALS. ENBC will loan to you, for your sole
----------------------------
use, one copy of a set of ENBC's confidential manuals on the development and
operation of Stores, which may be one or more volumes, handbooks, manuals,
written materials, video or audio cassette tapes, computer diskettes or any
other materials or intangibles, as ENBC may periodically modify, add, replace or
supplement in its discretion, whether by supplements, replacement pages,
bulletins, or other official pronouncements or means (collectively the
"Manuals"). The Manuals will contain specifications, standards, policies and
procedures ENBC
58
<PAGE>
periodically requires for Stores and information relative to your other
obligations and the operation of a Store. The Manuals, in whole or in part, will
be specific to the brand of Store for which ENBC grants you rights to operate.
See Items 1 and 12. The Manuals may be periodically modified at ENBC's
discretion to reflect changes in the System or specifications, standards,
policies and procedures for Stores, to specify brands, types and/or models of
equipment which you must you to operate the Store, and to specify changes in the
decor, format, image, products, services and operations of a Store ENBC requires
or other changes or additions as ENBC deems necessary or advisable. Copies of
the Manuals in effect as of the date of this offering circular will be available
for you to review before you sign the Franchise Agreement. (Section 5.C of the
Franchise Agreement).
(5) IDENTIFY THE COMPUTER SYSTEM AND REQUIRED SOFTWARE. Both before you
--------------------------------------------------
open and during operation of your Store, ENBC will identify the Computer System
and required software that you must use as described below in this Item and in
Item 8. (Section 4.E of the Franchise Agreement).
During the operation of the Store, ENBC will:
(1) PROVIDE SYSTEM STANDARDS. As described in Item 8, ENBC will prescribe
------------------------
mandatory specifications, standards and procedures for the operation of Stores.
(Section 12.D of the Franchise Agreement)
(2) FURNISH GUIDANCE AND ASSISTANCE. ENBC may, in its discretion, furnish
-------------------------------
guidance to you with respect to: (1) recipes, methods, specifications, standards
and operating procedures used in Stores along with any modifications; and (2)
purchasing approved equipment, fixtures, furnishings, signs, products, and
materials and supplies; and (3) development and implementation of local
advertising and promotional programs; and (4) general operating and management
procedures of Stores; and (5) establishing and conducting employee training
programs at the Store; and (6) opening the Store. Any guidance will, in the
discretion of ENBC, be furnished in the form of ENBC's Manuals, bulletins, video
or audio cassette tapes, computer diskettes, written materials, reports and
recommendations, other materials and intangibles, refresher training programs
and/or telephonic consultations or consultations at the offices of ENBC or at
the Store. (Section 5.B of the Franchise Agreement)
OPENING OF THE STORE.
--------------------
ENBC estimates there will be an interval of approximately 120 days between
the execution of the Franchise Agreement and the opening of a Store, but the
interval may vary based upon factors including weather, the location and
condition of the Site and the construction schedule for the Store. You may not
open the Store for business until: (1) ENBC notifies you in writing that all of
your development obligations have been fulfilled; (2) pre-opening training of
personnel has been completed to ENBC's satisfaction; (3) all amounts then due to
ENBC have
59
<PAGE>
been paid; (4) ENBC has been furnished with copies of all insurance policies
required under the Franchise Agreement, or other evidence of insurance coverage
and payment of premiums that ENBC requests. You must comply with these
conditions and be prepared to open the Store for business within 120 days after
the date of the Franchise Agreement. You must open the Store for business and
begin conduct of business at the Store under the Franchise Agreement within 5
days after ENBC gives notice to you stating that the Store is ready for opening.
(Section 4.F of the Franchise Agreement)
ADVERTISING PROGRAMS.
--------------------
ENBC's advertising program consists of print, radio and television
advertising and merchandising activities. The advertising is local, regional and
national in scope. ENBC's national advertising agency produces or will produce
most of ENBC's advertising, although ENBC's in-house marketing personnel may
produce a portion of the advertising. ENBC may designate an outside advertising
agency for media placement.
Before you use advertising and promotions which ENBC has not prepared or
previously approved, you must submit samples of the advertising and promotional
materials you propose to use to ENBC for approval, in the form and manner ENBC
periodically requires. If ENBC does not grant you written approval within 15
days from the date after it receives the submitted materials, ENBC will be
deemed to have disapproved the submitted materials. You may not use any
advertising or promotional materials that ENBC has not approved, has disapproved
or that do not include the copyright registration notices and trademark
registration notices ENBC designates. In its discretion, ENBC may disapprove on
a prospective basis materials which ENBC had previously approved. ENBC does not
use an advertising council composed of Franchisees.
LOCAL AD FUNDS. All Franchisees in a particular Marketing Area must
--------------
participate in a local advertising fund (a "Local Ad Fund") for that Marketing
Area. Local Ad Funds will operate in substantially the same manner as the
Marketing Fund (described below). You must contribute to the appropriate Local
Ad Fund up to 4% (as ENBC determines periodically) of your Store's Royalty Base
Revenue for each Accounting Period in which you participate in the Local Ad
Fund. ENBC has the right to periodically require you to increase your
contributions to the Local Ad Fund above 4% by up to 0.25% each year. All
Franchisees in a Marketing Area must contribute to the Local Ad Fund at the same
rate. Stores that ENBC or its affiliates own (to the extent ENBC has the right
to require its affiliates to do so) will contribute to the Local Ad Fund on the
same basis as Franchisees. If you are a Developer, under the Development
Agreement you must cause each Store you own to contribute to the Local Ad Fund
an amount equal to the greater of: (1) the standard Local Ad Fund contribution
required under the applicable Franchise Agreement or (2) an amount which, when
aggregated with the Local Ad Fund contributions of the other Stores in the
Marketing Area will be sufficient for you, through the Local Ad Fund, to begin
Required Television Advertising within one year of the opening of the first
Store and to continue Required Television Advertising throughout the full
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term of the Development Agreement. "Required Television Advertising" means
television advertising in the DMA, as the A.C. Nielsen Co. periodically
determines, in which the Development Area is located at a minimum level of 200
gross ratings points for a minimum of 36 weeks per calendar year. A gross
ratings point is a unit of measure used in the advertising industry to measure
the number of households watching a particular television program at a
particular time. ENBC may, in its discretion, periodically use a market
designation comparable to, but different from, the DMA for purposes of this
definition.
ENBC administers the Local Ad Funds, which are not governed by written
documents, other than the terms of the Development Agreement and Franchise
Agreements. Under the Franchise Agreement, ENBC is obliged to prepare annual,
unaudited summary financial statements for each Local Ad Fund and to make them
available to participants in that fund upon their written request. ENBC may
require Local Ad Funds to be formed, changed, dissolved or merged. Noah's Stores
will not contribute to Local Ad Funds in which Stores participate, but Noah's
Stores may form and contribute to their own local advertising funds. Local Ad
Funds to which Stores contribute will not be used to promote Noah's Stores.
MARKETING FUND. Under the Franchise Agreement, you must contribute to
--------------
ENBC's national marketing fund (the "Marketing Fund"). There is no provision
under the Development Agreement that requires you in the capacity of a Developer
to contribute to the Marketing Fund. The Stores that ENBC or its affiliates own
(to the extent ENBC has the right to require its affiliates to do so) will
contribute to the Marketing Fund on the same basis as Franchisees do.
You must contribute to the Marketing Fund 2% of the Royalty Base Revenue of
your Store at the same time and in the same manner as the Royalty Fees payable
under the Franchise Agreement. (See Item 6) All Franchisees must contribute to
the Marketing Fund at the same rate. ENBC may periodically increase your
Marketing Fund contributions up to 0.25% per year.
ENBC will direct all advertising, media placement, marketing and public
relations programs and activities the Marketing Fund finances, with discretion
over the strategic direction, creative concepts, materials and endorsements
used, and the geographic, market, and media placement and allocation. The
Marketing Fund may be used to pay various costs and expenses, including
preparing and producing video, audio and written advertising materials; interest
on borrowed funds; sponsorship of sporting, charitable or similar events;
reasonable salaries and expenses of employees of ENBC or its affiliates working
for or on behalf of the Marketing Fund or on advertising, marketing, public
relations materials, programs or activities or promotions for the benefit of the
Marketing Fund and administrative costs and overhead of ENBC or its affiliates
incurred in activities reasonably related to the administration and activities
of the Marketing Fund; administering advertising programs, including, purchasing
direct mail and other media advertising and employing advertising agencies to
assist with administration; and supporting public relations, market research and
other advertising, promotional and marketing activities, including testing and
test marketing programs, fulfillment charges, and development,
61
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implementation, and testing of trade dress and design prototypes. You must
participate in all advertising, marketing, promotions, research and public
relations programs the Marketing Fund institutes. The Marketing Fund will
furnish you with reasonable quantities of marketing, advertising and promotional
formats and sample materials at cost.
The Marketing Fund will be accounted for separately, but will not be
required to be segregated, from the other funds of ENBC and will not be used to
defray any of ENBC's general operating expenses, except for the reasonable
salaries, administrative costs and overhead as ENBC may incur in activities
reasonably related to the administration and activities of the Marketing Fund
and creation or conduct of its marketing programs including conducting market
research, preparing advertising and marketing materials and collecting and
accounting for contributions to the Marketing Fund. ENBC may spend in a fiscal
year an amount greater or less than the aggregate contribution of all Stores to
the Marketing Fund in that year. The Marketing Fund may borrow from ENBC or
other lenders at standard commercial interest rates to cover deficits of the
Marketing Fund or invest any surplus for its future use. All interest earned on
monies contributed to the Marketing Fund will be used to pay costs of the
Marketing Fund before other assets of the Marketing Fund are expended. Although
the Marketing Fund contributions ENBC collects are covered by ENBC's annual
audit, separate audited financial statements are not prepared for the Marketing
Fund. ENBC will prepare a summary statement of monies collected and costs the
Marketing Fund incurs each year for ENBC's immediately preceding fiscal year and
will make it available to you upon your written request. The Marketing Fund may
be incorporated or operated through an entity separate from ENBC at any time as
ENBC deems appropriate, and that successor entity will have all rights and
duties of ENBC as described in this offering circular.
Any Promotional Allowances ENBC collects to remit to the Marketing Fund
based on your purchases of Products and Supplies and Materials from vendors
other than ENBC or its affiliates will not be credited toward your required
contribution to the Marketing Fund. (See Item 8) Under no circumstances will
ENBC or its affiliates be required to contribute to the Marketing Fund any
profits ENBC or its affiliates make or collect from your sales to or purchases
of any goods or services.
ENBC may, in its discretion, suspend contributions to and operations of the
Marketing Fund for periods that it determines to be appropriate and terminate
the Marketing Fund upon written notice to you. All unspent monies on the date of
termination will be distributed to ENBC and Franchisees in proportion to their
respective contributions to the Marketing Fund during the preceding 12 month
period. ENBC may reinstate the Marketing Fund upon the same terms and conditions
described above upon 30 days' prior written notice to Franchise.
MARKETING FUND AND LOCAL AD FUND PURPOSES. The Marketing Fund and the
-----------------------------------------
Local Ad Fund are intended to maximize recognition of the Marks and patronage of
Stores generally, with respect to the Marketing Fund, and in the Marketing Area,
with respect to the Local Ad Fund. Although ENBC will endeavor to use the
Marketing Fund and the Local Ad Fund to
62
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develop advertising and marketing materials and programs and to place
advertising in order to benefit all Stores whose franchise owners contribute to
those funds, ENBC undertakes no obligation to ensure that any Store will benefit
directly or indirectly or in proportion to its contribution to the Marketing
Fund or the Local Ad Fund from the development of advertising and marketing
materials or the placement of advertising by the funds. Your failure to derive
any benefit in this manner will not serve as a basis for a reduction or
elimination of your obligation to contribute to the funds.
Furthermore, the moneys you contribute to the Marketing Fund will be
combined with contributions which other franchisees of ENBC make to the
Marketing Fund, even though those other franchisees may operate their Stores
under different brand names and/or with other variations of the type described
in Item 1 of this offering circular. Thus, it is likely that some of the moneys
you contribute to the Marketing Fund will sometimes be used to promote brands
other than the brands used at your Stores. Similarly, some of the moneys
contributed by franchisees of ENBC operating under different brands will
sometimes be used to promote the brand which you use in the operation of your
Stores. Except as expressly described above, ENBC assumes no direct or indirect
liability or obligation to you with respect to the maintenance, direction, or
administration of the Marketing Fund or the Local Ad Fund.
As noted above, ENBC receives payment for providing services to the
Marketing Fund in that the salaries of certain ENBC employees who work in the
marketing area are paid out of the Marketing Fund. No monies from the Marketing
Fund are used for advertising that is principally a solicitation for the sale of
franchises. If all monies in the Marketing Fund are not spent in the fiscal year
in which they accrue, ENBC will retain those monies in the Marketing Fund and
carry them over to be used for expenditures in the following fiscal year.
COMPUTER SYSTEM AND REQUIRED SOFTWARE.
-------------------------------------
As described in Item 8, you must purchase, install and use the Computer
System including specified software that ENBC requires. Developers and
Franchisees currently must obtain and use the same hardware and software
described in this Item, except that Developers are required to use
"Support/Control Programs" as described below. Current specifications for the
Computer System and Specified Software are available from ENBC on request.
You must purchase computer equipment that falls into two general categories
-- "front of the house" and "back office".
For the front of the house, you must purchase point of sale devices, the
number of which may vary depending on factors including sales volume of the
Store, the presence of a drive-through window. Each of these point of sale
devices is itself a computer, which incorporates a touch-screen entry panel, a
central processing unit and software designed to provide cash register-like
functionality. Peripheral equipment is also associated with the point of sale
devices,
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including cash drawers and receipt printers. ENBC requires you to purchase
Specified Software for "front of the house" functions. (See Item 7)
In the back office, a computer is required to facilitate the performance of
Store management functions, including activities like production scheduling,
inventory management and cash reconciliation. Included with the back office
computer system is a printer for the generation of paper reports, a tape drive
that is used to make backup copies of computer data and a modem that is used to
transfer data and programs between the Store and other locations (for example,
ENBC's office). ENBC requires you to purchase the Licensed Program for "back of
the house" functions. (See Items 6 and 7)
In addition, if you are a Developer, you will use Support/Control Programs
that perform real estate tracking functions and operate to assist you to track,
support, supervise and communicate with Stores.
Miscellaneous computer-related equipment that you must purchase includes
cables and equipment to connect all of the point of sale devices to the back
office computer system, various power cables, an uninterruptible power supply,
etc.
The following identifies each hardware component and software program by
brand, type and principal functions.
<TABLE>
<CAPTION>
================================================================================
COMPONENT BRAND TYPE PRINCIPAL FUNCTIONS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Point of sale device NCR 7450 Point of sale/cash
register
-------------------------------------------------------------------------------
Back office computer NCR 33333 Computer-assisted
store management
-------------------------------------------------------------------------------
Printer Hewlett-Packard LaserJet Printing of reports
-------------------------------------------------------------------------------
Modem USRobotics 14400 Data communications
Sportster
-------------------------------------------------------------------------------
Point of sale software Compris V2.0 Cash register-like
functionality for
point of sale
devices
- --------------------------------------------------------------------------------
Back office software IntelliStore/TM/ V1.0 Software to
facilitate store
management
activities
================================================================================
</TABLE>
64
<PAGE>
No organization has the contractual right or obligation to provide
maintenance for any of the hardware components. The approximate annual cost for
an optional maintenance contract on all of the hardware components with the
vendor is $2,315.00
ENBC is responsible for providing ongoing maintenance, upgrades and updates
for the Licensed Program. In addition to an initial one-time software license
fee of $15,000 per Store, the ongoing annual cost for this support service is
$4,800. ENBC will test and install the Licensed Program for a $3,500 if your
purchase your Computer System from a supplier other than ENBC and you must pay
to ENBC a fee of $3,500 for this service. (See Item 6) ENBC is not responsible
for providing maintenance, upgrades or updates for software that is not part of
the Licensed Program.
NCR is the only supplier of the approved hardware components. NCR sells the
entire collection of hardware as a complete package. ENBC has been using the
hardware components since approximately February, 1995. NCR's address is:
NCR / AT&T GIS
2000 S. Colorado Blvd.,
Denver, CO 80222
(303) 758-3334
The Compris software is the only approved software for the point of sale
devices. This software is licensed through ENBC, from:
Compris Technologies Inc.,
1800 Parkway Place, Suite 400,
Marietta, GA 30067
(404) 423-8330
The other software components are the proprietary property of ENBC or its
licensors.
Compatible equivalent hardware components exist only for the back office
computer system (virtually any IBM-compatible 80486-based computer system may be
compatible). Except for these hardware components, no components, other than
those components described in the chart above in this Item 11 have been approved
for use as part of the back office computer system.
You may be required to upgrade or update any of the hardware components or
software programs described above. There are no contractual limitations on the
frequency or costs associated with this obligation. ENBC may modify its
specifications and the components of the Computer System, Support/Control
Programs or Specified Software at any time. ENBC's development and/or
modification of specifications for the components of the Computer System,
Support/Control Programs or Specified Software may require you to incur costs to
purchase,
65
<PAGE>
lease and/or license new or modified computer and communications hardware and/or
software and to obtain service and support for the Computer System during the
term of the Franchise Agreement. ENBC cannot estimate the costs of future
additions, enhancements and modifications to the Computer System and Specified
Software beyond those estimated for its current configuration and may add
additional elements, components, and software to the Licensed Program and the
cost to you of obtaining the additions, enhancements and modifications to the
Computer System, Specified Software, and Licensed Program may not be fully
amortizable over the remaining term of the Franchise Agreement. Nonetheless, you
must incur those costs in obtaining the Computer System, Specified Software, and
Licensed Program (or additions or modifications), if the Computer System which
ENBC directs you to use is the same Computer System which ENBC is then currently
specifying for use in ENBC-owned Stores. As described in Item 6 above, you must
to pay to ENBC or its designee a periodic Software Support Fee of $500 for
modifications and enhancements made to the Licensed Program and other
maintenance and support services related to operating the Licensed Program and
the Specified Software on the Computer System.
The point of sale hardware and software will be used to track individual
sales transactions that take place at the Store. This equipment is also used for
the tracking of employees' hours of work (i.e., employees punch in and punch out
using the point of sale equipment). Detailed records regarding every in-Store
sales transaction and every employee punch-in and punch-out are maintained.
The back office computer system is used to generate and/or maintain
production schedules, vendor orders, inventory lists, food cost analyses,
employee records and other collections of data related to the day-to-day
operation of the store. All of this data is stored on the back office computer
system. ENBC has independent access to all of this information and data. There
are no contractual limitations on ENBC's right to access this information and
data.
SITE SELECTION.
--------------
You must comply with ENBC's specifications and requirements regarding site
selection, development and construction, including those concerning relations
with and use of approved general contractors, subcontractors, real estate
developers and lessors and, if ENBC requests, real estate broker(s). ENBC will
provide you with a complete site approval request package (the "Site Package"),
which includes, among other items, a location feasibility analysis form. ENBC
will also furnish to you ENBC's current standard form lease for Stores (the
"Form Store Lease"). ENBC may periodically modify this form in its discretion.
You must submit to ENBC on ENBC's specified forms or other media ENBC
periodically designates a complete Site Package (containing demographic,
commercial, and other information and photographs as ENBC may periodically
require) for each site at which you propose and intend in good faith to
establish and operate a Store and which you reasonably believe to conform to
certain minimum site selection criteria ENBC establishes periodically in its
discretion.
66
<PAGE>
When ENBC evaluates proposed sites, it will consider factors it considers
relevant, including factors like demographic characteristics, traffic patterns,
parking, visibility, allowed signage, the predominant character of the
neighborhood, competition from other businesses providing similar services
within the area (including other Stores), the proximity to other businesses, the
exclusivity granted to other franchise owners or developers of Stores, the
nature of other businesses in proximity to the site, and other commercial
characteristics (including the purchase price or rental obligations and other
lease terms for the proposed site) and the size, appearance, and other physical
characteristics of the proposed site. ENBC may periodically alter the criteria
or impose additional criteria for acceptable sites for Stores at any time in its
discretion. You must abide by ENBC's site criteria and comply with your
development obligations imposed under the Development Agreement. You will not
receive extensions or changes in the required opening date of any Store based on
changes in ENBC's site criteria.
ENBC will approve or disapprove sites by delivering written notice to you.
ENBC will use its reasonable best efforts to deliver the notification to you
within 30 days after ENBC receives a complete Site Package and other materials
it periodically requests that contain all information ENBC requires. ENBC may
approve or disapprove a site and will have no liability as a result of its
approval or disapproval. Regardless of any other provision of the Development
Agreement, ENBC's failure to provide you with notice of its approval or
disapproval of one or more proposed sites will not constitute a waiver of ENBC's
right to approve or disapprove the sites or alter the required opening date of
Stores scheduled for development under the applicable Development Agreement. A
proposed site which ENBC approves as meeting its minimum criteria for the
development and operation of a Store is referred to in the Development Agreement
and this offering circular as an "Approved Site."
ENBC's approval of a Site for a Store does not constitute ENBC's assurance,
representation or warranty of any kind, express or implied, as to the
suitability of any Site for a Store or the successful operation of a Store at
the Site. ENBC's approval of a Site only indicates that the Site falls within
acceptable minimum criteria ENBC establishes solely for ENBC's purposes at the
time of the approval of a particular Site. ENBC will not be responsible for the
failure of any Site ENBC approves to meet your expectations as to revenue or
operational criteria.
Under the Development Agreement, ENBC will evaluate the site that you
propose for your Commissary using the same criteria and procedures as it uses to
evaluate sites for Stores. (Development Agreement - Section 5.B).
LEASE OF APPROVED SITES. You must present the Form Store Lease to the
-----------------------
lessor or seller of an Approved Site, as applicable, and use your best efforts
to cause the lessor to sign the Form Store Lease as the lease, sublease, or
assignment of lease (referred to in the Development Agreement as the "Site
Agreement"), as applicable, for the Approved Site. If you fail to obtain the
lessor's or seller's agreement to use the Form Store Lease as the Site
Agreement, you must cause the lessor to include in the Site Agreement the
standard terms which ENBC requires at
67
<PAGE>
that time in its discretion, and any other terms as ENBC may require or as it
may specifically approve in writing. Certain of ENBC's current standard lease
terms are included in the form of Addendum to Lease attached to this offering
circular as Exhibit D. ENBC may modify this addendum in its discretion.
---------
After receiving a copy of a proposed Site Agreement in form for signature,
ENBC may approve, approve with modification or disapprove the proposed Site
Agreement. ENBC will use its best efforts to notify you of its response within
20 days after ENBC's receipt of the proposed Site Agreement. You may not sign a
Site Agreement without ENBC's prior written approval, and any Site Agreement
must contain the express requirement of ENBC's prior written approval of the
Site Agreement. You must deliver to ENBC a copy of the fully signed Site
Agreement as previously approved within 15 days after all the parties sign it.
You may not agree to any modification of the Site Agreement which would affect
ENBC's rights without the prior written approval of ENBC.
If you fail to obtain lawful possession of an Approved Site (through
acquisition, lease, sublease or assignment) within 60 days after delivery of
ENBC's approval of the Approved Site, ENBC may, in its discretion, withdraw
approval of the Site. ENBC may withdraw its offer to grant a Franchise for a
Store at an Approved Site and withdraw its approval of a Site at any time before
ENBC's receipt of all applicable payments and ENBC's execution of the Franchise
Agreement for the Store.
At ENBC's request, if you own an Approved Site, you must enter into a lease
with ENBC or an affiliate of ENBC under ENBC's then-current form of lease for a
term equal to the term of the Franchise and for a rental equal to the Approved
Site's fair market rental value, and will sublease the Approved Site from ENBC
on the same terms as the prime lease. If you and ENBC cannot agree on the fair
market rental value, then an independent appraiser you and ENBC select will
determine the rental value you and ENBC select. If you and ENBC are unable to
agree on an independent appraiser, you and ENBC will each select an independent
appraiser, who will select a third independent appraiser, and the fair market
rental value will be deemed to be the average of the 3 independent appraisals
those appraisers make. Except as described above and in Item 6, ENBC will not
derive revenue as a result of your lease of Sites according to with ENBC's
standards and specifications.
TRAINING PROGRAMS.
-----------------
DEVELOPMENT AGREEMENT. Under the Development Agreement, ENBC will train
---------------------
your Training Director under the store-level management training program that it
conducts for Franchisees and is described below. ENBC does not charge for this
training, but you will be responsible for all expenses, including travel, room
and board that the trainee incurs. The Training Director must complete the
training program to ENBC's satisfaction and become certified to train and
supervise personnel at Stores and Commissaries. The Training Director must be
re-certified if and when ENBC requires re-certification. So long as your
Training
68
<PAGE>
Director is currently certified, he or she will be responsible for training the
employees of each Store and each Commissary you have developed at your training
facility that we have approved. If you replace the Training Director, or if he
or she does not complete training to ENBC's satisfaction, you will designate a
replacement Training Director who ENBC approves, and you will pay ENBC its then-
current daily rate to train the replacement Training Director. Training for
Training Directors will be held on an as-needed basis.
ENBC may periodically require your Training Director to attend refresher or
additional training programs during the term of the Development Agreement. You
will be responsible for expenses, including travel, room and board that the
Training Director incurs during additional or refresher training. There is no
schedule for additional or refresher training; ENBC may provide programs as it
thinks is appropriate.
If you operate a Commissary, your Commissary must employ and maintain one
full time manager (a "Commissary Manager") and a full-time additional employee
who will perform functions at the Commissary that ENBC requires (an "Additional
Commissary Manager"), and both must successfully complete ENBC's store level
training program which your Training Director will provide as described below.
FRANCHISE AGREEMENT. Under the Franchise Agreement, before you begin
-------------------
operating your Store, you must appoint the manager of your Store (the "Store
Manager") and one other management level employee (the "Additional Manager").
The Store Manager and the Store Manager must attend and complete to ENBC's
satisfaction a ENBC accredited and certified initial management training program
in the operation of a Store. Additional employees may attend training at your
option. This training program may include classroom training, instruction at
designated facilities and hands-on training in an operating Store. If you are a
Developer, your Training Director will provide the training program at your
training facilities according to ENBC's requirements. If ENBC or its designee
provides the training program, it will be provided at the time (subject to space
availability in ENBC's or its designee's regularly scheduled classes) as ENBC
may designate at a training facility and/or at a ENBC-owned or franchised Store
in the Denver, Colorado, area or other location which ENBC designates and will
last for approximately one to ten weeks. You will pay a $1,000 training fee for
each person who attends the initial management training program; we currently
designate an existing Franchisee as the trainer for new Franchisees' employees,
and the training fee is payable directly to the Franchisee who trains you. (See
Item 7) At your request, ENBC or its designee may provide the training program
to additional personnel at ENBC's then-current standard charges, including
applicable travel and lodging expenses, subject to space availability in ENBC's
or its designee's regularly scheduled training classes and/or availability of
ENBC's or its designee's training personnel. In addition, whether you, or ENBC's
designee is providing this training, ENBC may, in its discretion as it deems
necessary, require the Store Manager and/or the Additional Manager to work full-
time without pay from ENBC or its designee but at your expense for up to ten
weeks at a Store ENBC selects.
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<PAGE>
If a certified Store Manager and/or Additional Manager ceases to hold his
or her position at the Store, you will have 30 days in which to appoint a
substitute or replacement Store Manager and/or Additional Manager, who must
attend and complete to ENBC's satisfaction the initial management training
program as specified above promptly after appointment. If ENBC in its discretion
determines that the Store Manager or Additional Manager or any Store Manager or
Additional Manager appointed at a later date has failed to satisfactorily
complete the initial management training program or any additional or refresher
training program, you must immediately hire a substitute Store Manager or
Additional Manager and promptly arrange for that person to complete the initial
management training program to ENBC's satisfaction.
As of the date of this offering circular, the structure and content of the
training programs are still being developed and formalized. ENBC is reviewing
and evaluating several formats in an effort to provide a program which will
provide efficient training of your personnel while recognizing and taking
advantage of the resources already available in your current organization.
ENBC's National Training Director, Melanie McGraw, who joined ENBC from Brackman
Brothers, Inc. in July 1995, will direct the training personnel who will conduct
the training program and other on-going training. Ms. McGraw held various store-
level operational and corporate training positions with Brackman Brothers from
May 1993 to July 1995. Her last position with Brackman Brothers was as that
company's regional training director. In that position, she was responsible for
writing the manager training program, manuals and materials and carrying out the
training program.
While ENBC's training program is still being formulated, ENBC anticipates
that the training program will, at a minimum, provide a combination of classroom
and on-the-job training for each position within a Store, with training
materials created specifically for that position. The store-level training
program will include at least the following:
STORE LEVEL TRAINING
<TABLE>
<CAPTION>
================================================================================
HOURS OF HOURS OF
INSTRUCTION CLASSROOM ON-THE-JOB
SUBJECT MATERIALS TRAINING TRAINING INSTRUCTOR
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pre-employment Pre-employment 2 0 Store Manager,
Training Module certified trainer
and other and/or National
training materials Training Director
- --------------------------------------------------------------------------------
Orientation Orientation 2.5 0 Store Manager,
Training certified trainer
Module and and/or National
other training Training Director
materials
================================================================================
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
================================================================================
HOURS OF HOURS OF
INSTRUCTION CLASSROOM ON-THE-JOB
SUBJECT MATERIALS TRAINING TRAINING INSTRUCTOR
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Safety and Sanitation Safety and 2.5 0 Store Manager,
Sanitation certified trainer
Training Module and/or National
and other Training Director
training Materials
- --------------------------------------------------------------------------------
Counter Counter Training 0 4 Store Manager,
Module and other certified trainer
training materials and/or National
Training Director
- --------------------------------------------------------------------------------
Fronter Fronter Training 0 3 Store Manager,
Module and other certified trainer
training materials and/or National
Training Director
- --------------------------------------------------------------------------------
Register Register Training 0 3 Store Manager,
Module and other certified trainer
training materials and/or National
Training Director
- --------------------------------------------------------------------------------
Souper Souper Training 0 3.5 Store Manager,
Module and other certified trainer
training materials and/or National
Training Director
- --------------------------------------------------------------------------------
Baker Baker Training 0 40 Store Manager,
Module other certified trainer
training and/or National
Training Director
- --------------------------------------------------------------------------------
Shift Leader Shift Leader 0 4 Store Manager,
Training Module certified trainer
and other and/or National
training materials Training Director
- --------------------------------------------------------------------------------
Assistant Manager Assistant 0 15 Store Manager,
ManagerTraining certified trainer
Module and other and/or National
training materials Training Director
================================================================================
</TABLE>
ENBC or its designee may periodically offer additional or refresher
training programs to any Store Manager or Additional Manager appointed at a
later date and the Store's assistant managers at daily charges ENBC periodically
establishes and at the times as ENBC may designate to you. ENBC may, in its
discretion as it deems necessary, require the Store Manager, Additional Manager
or assistant managers of the Store or you to attend or to participate in, at
ENBC's daily charges and at your expense, including travel and lodging
71
<PAGE>
expenses of training personnel for training other than at the trainers'
principal offices, additional or refresher training programs at locations ENBC
designates during the term of the Franchise Agreement. There is no schedule for
additional or refresher training; ENBC may provide programs as it thinks is
appropriate.
ENBC is developing a manager-in-training program which will encompass all
of the above items in addition to training in managing store personnel and
overall operation at the store level. While the manager-in-training program is
still being developed as of the date of this offering circular, ENBC expects
that it will require Developers' Training Directors to conduct the training
course for Store Managers and Additional Managers every 2-to-3 weeks, and that
the program will encompass 4-6 weeks of classroom and on-the-job training.
ITEM 12
-------
TERRITORY
DEVELOPMENT AGREEMENT
- ---------------------
TERRITORIAL RIGHTS.
------------------
The Development Agreement grants you during the Development Term, the right
to develop and operate Stores in the Development Area, which consists of one or
more Sub-Areas. Except as otherwise expressly provided in the Development
Agreement, and if you are in full compliance with the Development Agreement and
you are in full compliance with all Franchise Agreements, ENBC and its
affiliates will not during the Sub-Area Term for each of the Sub-Areas operate
or grant franchises for the operation of Stores within the Sub-Area. Your rights
under the Development Agreement and within the Sub-Areas are limited to the
development of Stores under the Marks and System covered by your Development
Agreement and does not include rights to develop Stores under other Marks and
Systems. See Item 1. In addition, your rights are limited to the development of
retail stores and do not include the right to develop businesses that distribute
Products or other products or services in other channels of distribution. Your
rights under the Development Agreement are also limited to the applicable number
of Stores and the schedule and timing of the opening of Stores in the respective
Sub-Areas during the respective Sub-Area Terms and you are not granted any
rights to develop or operate, and you may not develop or operate, Stores outside
the respective Sub-Areas, except under rights granted to you under other
agreements entered into with ENBC, and you will also not offer Catering Service
or Delivery Service or operate Special Distribution Arrangements within the
Development Area, except as provided in the Development Agreement.
The continuation of your right to develop Stores within each of the Sub-
Areas is dependent upon your satisfaction of the development obligations set
forth in the Development Agreement for the Sub-Area and of all of your other
obligations and the obligations of your Owners under the Development Agreement.
Upon termination or expiration of the Agreement
72
<PAGE>
Term, the Development Term or the Sub-Area Term for a particular Sub-Area, and
as expressly provided in the Development Agreement during the Agreement Term,
ENBC and its affiliates will have the right to develop and operate, and to grant
to others development rights and franchises to develop and operate, Stores
within the Sub-Area, subject only to the territorial rights, if any, under the
Franchise Agreements you enter into for Stores in the Sub-Area. The Development
Area and the Sub-Areas may not be altered except by the mutual written agreement
of you and ENBC or by termination of some or all of your rights as a result of
your breach of the Development Agreement. The number of Stores that you are
required to have open and operating in each Sub-Area (the "Sub-Area Quota") and
in the Development Area overall (the "Total Development Quota) is determined
when you sign the Development Agreement and is found in the Development
Schedule, which is attached to the Development Agreement (Exhibit B to this
offering circular).
You must prepare a Market Real Estate Development Plan for development of
Stores in the Development Area and must open and have in operation in each Sub-
Area the number of Stores set forth in the Development Schedule attached as an
exhibit to the Development Agreement by the opening dates specified in the
Development Schedule. You may develop in the Sub-Area only the number of Stores
set forth on the Development Schedule. A Store that is closed for more than 5
days (not counting ENBC-approved holidays) during any period of 12 months will
not be counted as open and in operation for purposes of the Development Quota
(as defined in Item 12) as of the next Store opening date after the closing for
purposes of determining your compliance with the Development Schedule for the
Sub-Area in which the Store is located.
ENBC'S RESERVATION OF RIGHTS.
----------------------------
Except as expressly limited in the Development Agreement, ENBC (for itself,
its affiliates and its designees) retains all rights with respect to Stores
(including Stores), the Marks, the Copyrighted Works (defined in Item 14 below),
and the sale of Products and any other products and services, anywhere in the
world, including: (1) the right to operate or grant others the right to operate
food service businesses, including Stores and/or Stores, at locations within
and/or outside the Development Area and each Sub-Area and on the terms and
conditions as ENBC, in its discretion, deems appropriate both during and upon
expiration or termination of the Development Term; and (2) the right, and the
right to grant others the right, to develop, manufacture, market, distribute
and/or sell Products and/or any other product or service within and/or outside
the Development Area and each Sub-Area through any channel of distribution,
whether wholesale, retail or otherwise, including through Special Distribution
Arrangements, Delivery Service, Catering Service and/or through Boston Market
outlets, under or in association with the Marks or any other trademarks and/or
to own or operate any other business under the Marks or any other trademarks;
(3) the right to operate or grant others the right to operate Stores in the
Development Area and each Sub-Area under Marks and Systems that are different
from the Marks and System ENBC authorizes you to use in operating your Stores;
and (4) subject to your options to develop Target Sites and purchase Conversion
Sites under the
73
<PAGE>
Development Agreement, the right to acquire and operate any business, including
a business operating one or more food service businesses located or operating
within and/or outside of the Development Area and any Sub-Area.
YOUR OPTION TO DEVELOP TARGET SITES.
-----------------------------------
If during the Sub-Area Term of a particular Sub-Area ENBC locates a site
suitable for a Store within the Sub-Area (a "Target Site"), ENBC will notify you
in writing of a Target Site if ENBC intends that the Target Site be developed
and operated as a Store. Within 10 days after your receipt of ENBC's notice
regarding the Target Site (including any relevant site-related materials in
ENBC's possession), you must notify ENBC if you desire to develop and operate a
Store at the Target Site.
If you timely notify ENBC in writing that you wish to develop and operate a
Store at the Target Site and ENBC has fully negotiated a lease or purchase
agreement for the Target Site, then you must (1) obtain the consent of the
landlord to execute a lease, if applicable, or (2) execute a purchase agreement
or an assignment of purchase agreement, if applicable, and (3) execute ENBC's
then current form of standard franchise agreement (containing ENBC's then
current fee and expenditure requirements) and any ancillary documents (including
guarantees) ENBC then customarily uses in the grant of franchises for Stores
(collectively, "Franchise Documents") as modified for use along with a Target
Site, as necessary, and (4) pay ENBC the Site Location and Negotiation Fee, plus
ENBC's reasonable out-of-pocket expenses incurred in securing the Target Site,
within 10 business days after ENBC delivers to you the lease or purchase
agreement, as the case may be, and the Franchise Documents. ENBC will fully
cooperate with you to obtain the landlord's consent to execute the lease or the
seller's consent to execute a purchase agreement or assignment of purchase
agreement.
If you timely notify ENBC in writing that you desire to develop and operate
a Store at the Target Site and ENBC has not fully negotiated a lease or purchase
agreement for the Target Site, then you will have 30 days in which to negotiate
and deliver to ENBC a lease or purchase agreement for the Target Site in form
for execution. If ENBC disapproves the lease or purchase agreement for failure
to meet ENBC's requirements, you will have 10 days within which to negotiate and
deliver to ENBC a revised lease or purchase agreement for the Target Site in
form for execution. If the revised lease or purchase agreement fails to meet
ENBC's requirements, or if you fail to negotiate and deliver to ENBC a lease or
purchase agreement within the aforementioned 30 day period, then ENBC or its
designee may develop and operate a Store at the Target Site. If ENBC approves
the lease or the purchase agreement for the Target Site, then you will (1)
execute a lease or purchase agreement, as applicable, (2) execute the Franchise
Documents, and (3) pay the Site Location Fee, plus ENBC's reasonable out-of-
pocket expenses incurred in securing the Target Site, all within 10 business
days after ENBC's delivery of the Franchise Documents to you.
74
<PAGE>
If you decline the option to develop a Target Site, fail to timely notify
ENBC of your election to develop a Target Site or fail to timely execute the
lease or purchase agreement and Franchise Documents for a Target Site and pay
the Target Site Fee, then ENBC or its designee may develop and operate a Store
at the Target Site.
Any Target Site for which you execute Franchise Documents and develop and
open a Store will count toward the Sub-Area Quota (as defined in Item 12) for
the Sub-Area in which the Target Site is located. ENBC is not required to give
notice to you or offer to you a franchise to develop a Store with regard to any
suitable Target Site or Conversion Site (defined below) in a Sub-Area that ENBC
desires to develop and operate as a Store after the total number of Sites for
which you have executed a Franchise Agreement and accepted as Target Sites or
Conversion Sites equals the cumulative number of Stores required to be open and
operating on or before the last opening date for the last Store required to be
opened in the Sub-Area. As an alternative to terminating the Development
Agreement, ENBC has the right to terminate your option to develop Target Sites.
YOUR OPTION TO PURCHASE CONVERSION SITES.
----------------------------------------
If during the applicable Sub-Area Term for a particular Sub-Area ENBC
acquires the shares or assets (including furniture, fixtures, equipment,
leasehold improvements and/or leasehold interests) of any business operating at
one or more sites located within the Sub-Area which meet ENBC's specifications
and standards as in effect periodically for conversion to Stores (the
"Conversion Sites"), and ENBC determines in its discretion to convert the
Conversion Sites to Stores, ENBC will offer to sell the Conversion Sites to you
for the price ENBC paid, if: (1) the sale will not conflict with any existing
legal obligation of ENBC or the business being acquired; and (2) the sale will
not preclude the completion of the acquisition on the terms ENBC agreed to; and
(3) the sale will not interfere with any other legal agreement, arrangement or
combination or result in adverse federal or state income tax consequences for
any party; and (4) you agree to execute concurrently with your purchase, the
Franchise Documents, as modified for use along with a Conversion Site, as
necessary, for each and every Conversion Site and convert each Conversion Site
to a Store as soon as practicable according to ENBC's standards and
specifications. The sale may also be contingent upon your agreement to acquire
and close certain stores ENBC acquired with the Conversion Sites but which are
not suitable for conversion. You will have 30 days after receipt of ENBC's
offer in which to accept or reject the offer by written notice to ENBC.
Any Conversion Site for which Developer executes the Franchise Documents
and develops and opens a Store will count toward the Sub-Area Quota (as defined
in Item 12) for the Sub-Area in which the Conversion Site is located. If you
reject or fail to timely accept ENBC's offer to sell the Conversion Sites or
ENBC is unable to extend the offer for any of the reasons noted above, and if
you are in full compliance with the Development Agreement and all Franchise
Agreements to which you are a party, ENBC will not use the Marks at the
Conversion Sites (whether ENBC owns or franchises the Conversion Sites) for one
year following ENBC's
75
<PAGE>
acquisition of the Conversion Sites. ENBC may, however, operate, alter, modify,
refurbish, remodel, promote and market any of the Conversion Sites during the
one year period. As an alternative to terminating the Development Agreement,
ENBC has the right to terminate your option to develop Conversion Sites.
DEFINITIONS. As described below, ENBC may, in its discretion, (a) require
-----------
you or offer you the opportunity to offer Delivery Service and/or Catering
Service and/or (b) approve you to offer Special Distribution Arrangements.
(1) DELIVERY SERVICE. "Delivery Service" is the delivery of Products
----------------
prepared at a Store or a separate delivery facility ENBC approves (referred
to in this document as a "Delivery Facility") to customers in a Delivery
Area (defined below) according to ENBC's standards and specifications for
the provision of delivery service and ENBC's prototype plans and layout for
a delivery staging area within a Store or in a separate facility, if any,
ENBC approves, where (1) the Products are intended to serve fewer than 15
persons, and (2) the service involves the provision of no services other
than the delivery to a customer at a particular location within the
Delivery Area. A "Delivery Area" is the geographic area in which ENBC, in
its discretion may authorize you to provide Delivery Service under a
Delivery Rider. Your Delivery Area, if any, may be the same as, smaller
than, larger than or different from the prescribed territory of your Store
(the "Territory"). The Territory is more fully described in Item 12. ENBC
uses the Delivery Rider to authorize or require you, in its discretion, to
offer Delivery Service within a Delivery Area. A copy of ENBC's current
form of Delivery Rider is attached to the Franchise Agreement, which is
attached to this offering circular as Exhibit C. ENBC may, at any time and
---------
in its discretion, require that you provide Delivery Service from one or
more Stores. If you fail to provide Delivery Service, you will forfeit to
ENBC or its designees the right to provide Delivery Service. The terms and
conditions for Delivery Service are more fully described below.
(2) CATERING SERVICE. "Catering Service" is the delivery of Products
----------------
prepared at a Store or a separate facility ENBC approves (an approved
facility is referred to as a "Catering Facility") to customers in the
Catering Area (defined below) under the ENBC's standards and specifications
for the provision of that service and ENBC's prototype plans and layout for
a catering staging facility, where (1) the Products are intended to serve
15 or more persons, or (2) in addition to the delivery of Products,
ancillary services are provided to a customer at a location within the
Catering Area, including, for example, the setting up for serving or
distribution of Products. The "Catering Area" is the geographic area in
which ENBC, in its discretion, may authorize you to provide Catering
Service under a Catering Rider . Your Catering Area, if any, may be the
same as, smaller than, larger than or different from the Territory of a
Store. ENBC uses the Catering Rider to authorize or require you, in its
discretion, to offer Catering Service within a Catering Area. A copy of
ENBC's current form of Catering Rider is attached
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<PAGE>
to the Franchise Agreement attached to this offering circular as Exhibit C.
---------
If you fail to provide Catering Service, you will forfeit to ENBC or its
designees the right to provide Catering Service. The terms and conditions
for Catering Service are more fully described below.
(3) SPECIAL DISTRIBUTION ARRANGEMENTS. A "Special Distribution
---------------------------------
Arrangement" is the sale of Products at or from a Special Distribution
Location (defined below), whether or not by or through on-premises food
service facilities or concessions, according to ENBC's standards and
specifications for these sales. A "Special Distribution Location" is a
facility or location, including a school, hospital, office, work site,
military facility, grocery store, convenience store, supermarket,
entertainment or sporting facility or event, bus or train station, park,
toll road or limited access highway facility, shopping mall or other
similar facility, at or from which ENBC, in its discretion, authorizes a
Special Distribution Arrangement under a Special Distribution Agreement
(defined below). A Special Distribution Location may be located within or
outside the Territory. A "Special Distribution Agreement" is a separate
agreement in which ENBC authorizes you to operate a Special Distribution
Arrangement at a Special Distribution Location ENBC designates. ENBC will
propose the terms of a Special Distribution Agreement at the time, if any,
as it proposes a Special Distribution Arrangement to you. Special
Distribution Arrangements are more fully described below. ENBC is not
generally obligated to offer Special Distribution Arrangements to you and
may operate or grant others the right to operate Special Distribution
Arrangements in the Territory of a Store or the Development Area or a Sub-
Area.
SPECIAL DISTRIBUTION ARRANGEMENTS.
---------------------------------
You are not granted any rights to operate Special Distribution Arrangements
within or outside the Development Area under the Development Agreement. The
right to operate or grant to others the right to operate Special Distribution
Arrangements is expressly reserved to ENBC. ENBC has no obligation to offer to
you the right to operate Special Distribution Arrangements, and ENBC or its
designees may instead operate or grant to others the right to operate Special
Distribution Arrangements within and/or outside the Development Area. However,
if ENBC, at any time and in its discretion, determines to offer Developer the
right to operate a Special Distribution Arrangement at a Special Distribution
Location ENBC designates, ENBC will notify you by delivering to you a Special
Distribution Agreement authorizing you to conduct a Special Distribution
Arrangement at a Special Distribution Location. You will have 15 days to
execute and return to ENBC the Special Distribution Agreement after your receipt
of the Special Distribution Agreement. The Special Distribution Agreement will
provide that you commence the Special Distribution Arrangement from the
designated Special Distribution Location(s) within the time period ENBC
specifies in the Special Distribution Agreement. If you fail to execute and
return to ENBC the Special Distribution Agreement within a 15 day period or
commence the Special Distribution Arrangement within the specified period, then
you will have no right to operate the Special Distribution Arrangement after
that period ends. If you have executed a
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Special Distribution Agreement, ENBC may, at any time and in its discretion with
or without cause and regardless of the investment you make to establish or
operate the Special Distribution Arrangement or the length of time the Special
Distribution Arrangement has been in effect, suspend or terminate your right to
operate the Special Distribution Arrangement.
DELIVERY SERVICE.
----------------
You are not granted any rights within or outside the Development Area or
the Sub-Areas to offer Delivery Service from any of the Stores under the
Development Agreement and ENBC has no obligation to offer to you the right to
provide Delivery Service. However, if ENBC, at any time and in its discretion,
determines to offer Delivery Service in a designated Delivery Area in which a
Store developed under the Development Agreement is located, ENBC will offer you
the right to offer Delivery Service by delivering to you a Delivery Rider to the
applicable Franchise Agreement for the Store authorizing the offer of Delivery
Service within the designated Delivery Area. You will have 15 days to execute
and return to ENBC the Delivery Rider after your receipt of the Delivery Rider.
The Delivery Rider will provide that you will commence Delivery Service from the
Store or, in ENBC's discretion, from a Delivery Facility within the time period
ENBC specifies in the Delivery Rider. If you fail to execute and return to ENBC
the Delivery Rider within a 15 day period or commence Delivery Service within
the specified period, then you will have no right to provide Delivery Service at
any Store after that period, and ENBC or its designee will have the right to
offer Delivery Service within the designated Delivery Area. However, if ENBC
determines in its discretion that all franchise owners of Stores in the trade
area where the Store is located will offer Delivery Service, you must offer
Delivery Service, and ENBC will notify you and will deliver to you a Delivery
Rider to the applicable Franchise Agreement which you must execute and return to
ENBC within 15 days of its receipt. ENBC will determine, in its discretion, the
trade area, which will not exceed the Marketing Area.
CATERING SERVICE.
----------------
You are not granted any rights within or outside the Development Area or
the Sub-Areas to offer Catering Service from the Stores or from other locations
under the Development Agreement and ENBC has no obligation to offer to you the
right to provide Catering Service. However, if ENBC, at any time and in its
discretion, determines to offer Catering Service in a designated Catering Area
in which a Store developed under the Development Agreement is located, ENBC will
offer you the right to offer Catering Service by delivering to you a Catering
Rider to the applicable Franchise Agreement for the Store authorizing the offer
of Catering Service within the designated Catering Area. You will have 15 days
to execute and return to ENBC the Catering Rider after your receipt of the
Catering Rider. The Catering Rider will provide that you will commence Catering
Service from one or more Stores or one or more Catering Facilities, as ENBC may
determine in its discretion, within the time period ENBC specifies in the
Catering Rider. If you fail to execute and return to ENBC the Catering Rider
within a 15 day period or commence Catering Service within the specified period,
then you will
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<PAGE>
have no right to provide Catering Service within the designated Catering Area
after that time period, and ENBC or its designee will have the right to offer
Catering Service within the designated Catering Area. However, if ENBC
determines in its discretion that all franchise owners of Stores in the trade
area where the Store is located will offer Catering Service, you must offer
Catering Service, and ENBC will notify you and will deliver to you a Catering
Rider to the applicable Franchise Agreement which you must execute and return to
ENBC within 15 days of its receipt. ENBC will determine, in its discretion, the
trade area, which will not exceed the Marketing Area.
FRANCHISE AGREEMENT.
- -------------------
TERRITORIAL RIGHTS.
------------------
The Franchise is granted for a specified location, the Site within the
Territory, identified in an exhibit to the Franchise Agreement. Typically, your
Territory will be the area within a circle having a radius of at least one-
quarter mile and the Site at the center. Except as otherwise provided in the
Franchise Agreement and conditioned upon you being in full compliance with the
Franchise Agreement, ENBC and its affiliates will not during the term of the
Franchise Agreement operate or grant franchises for the operation of Stores
under the Marks and System ENBC covered by your Development Agreement, within
the Territory. Your rights under the Franchise Agreement and within the
Territory are limited to operation of a Store under the Marks and System ENBC
licenses to you, and does not include rights to develop a unit under another
Mark or System. Your rights are also limited to the operation of retail stores
and do not include the right to offer the Products in any other channel of
distribution. You may not conduct the business of the Store from any location
other than the Site, except as otherwise provided under the Franchise Agreement,
and may not conduct Catering Service, Delivery Service or Special Distribution
Arrangements within or outside the Territory, except as expressly provided in
the Franchise Agreement.
Your rights in the Territory do not depend on certain sales volume or
market penetration. The Territory may not be altered except by the mutual
written agreement of you and ENBC or termination of the Franchise Agreement.
ENBC'S RESERVATION OF RIGHTS.
----------------------------
Except as expressly limited in the Franchise Agreement, ENBC (for itself,
its affiliates and its designees) retains all rights with respect to Stores, the
Marks, the Copyrighted Works and the sale of Products and any other products and
services, anywhere in the world, including: (1) the right to operate or grant
others the right to operate food service businesses, including Stores and/or
Bagel Stores, at locations within and/or outside the Territory and on the terms
and conditions as ENBC, in its discretion, deems appropriate both during and
upon expiration and termination of the Agreement Term; (2) the right, and the
right to grant others the right, to
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develop, manufacture, market, distribute and/or sell Products and/or any other
product or service within and/or outside the Territory through any channel of
distribution, whether wholesale, retail or otherwise, including, through Special
Distribution Arrangements, Delivery Service, Catering Service and/or through
Boston Market outlets, under or in association with the Marks or any other
trademark and/or to own or operate any other business under the Marks or any
other trademarks; (3) the right to operate or grant others the right to operate
Stores in the Territory under Marks and Systems that are different from the
Marks and System ENBC authorizes you to use in operating your Store; and (4)
subject to your option to purchase conversion sites as described below, the
right to acquire and operate any business, including a business operating one or
more food service businesses located or operating within and/or outside the
Territory.
YOUR OPTION TO PURCHASE CONVERSION SITES.
----------------------------------------
See the preceding part of this Item 12 under "Developer's Option to
Purchase Conversion Sites." The applicable terms of the Franchise Agreement are
comparable to those in the Development Agreement, except that the terms of the
Franchise Agreement apply solely to the Territory, and if you fail to timely
accept or reject ENBC's offer to sell the Conversion Sites or ENBC is unable to
extend the offer for any reason, ENBC will not use the Marks at that Conversion
Site for one year following ENBC's acquisition of the Conversion Site, if you
are in full compliance with the Franchise Agreement. ENBC may, however,
operate, alter, modify, refurbish, remodel, promote or market that Conversion
Site during the one year period.
SPECIAL DISTRIBUTION ARRANGEMENTS.
---------------------------------
See the preceding part of this Item 12 concerning Special Distribution
Arrangements under the Development Agreement. The applicable terms for Special
Distribution Arrangements under the Franchise Agreement are comparable to those
in the Development Agreement.
DELIVERY SERVICE.
----------------
See the preceding part of this Item 12 concerning the Development
Agreement. The applicable terms of the Franchise Agreement concerning Delivery
Service are comparable to those in the Development Agreement.
CATERING SERVICE.
----------------
See the preceding part of this Item 12 concerning the Development
Agreement. The applicable terms of the Franchise Agreement concerning Catering
Service are comparable to those in the Development Agreement.
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RELOCATION OF THE STORE.
-----------------------
If your lease or sublease for the Site of the Store expires or terminates
without your fault, if the Site is damaged, condemned or otherwise rendered
unusable as a Store according to the Franchise Agreement, or if, in ENBC's and
your judgment, there is a change in the character of the location of the Site
sufficiently detrimental to its business potential to warrant its relocation,
ENBC will not unreasonably withhold permission for relocation of the Store to a
site within the Territory which meets ENBC's then-current site criteria, subject
to the rights of existing Franchisees under their franchise agreements with
ENBC. Any relocation will be at your sole expense. The Store is required to
re-open at the replacement Site as soon as reasonably practicable but under any
circumstance no more than 90 days after the closing of the original location
closed.
ITEM 13
-------
TRADEMARKS
ENBC owns registrations of certain Marks with the U.S. Patent and Trademark
Office on the principal register, including the following: [UPDATE TO COME]
<TABLE>
<CAPTION>
================================================================================
REGISTRATION REGISTRATION
NAME OR MARK NUMBER CLASS DATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Bagel & Bagel and Design 1918543 USA 9/12/95
42
- --------------------------------------------------------------------------------
Bagel & Bagel and Design 1918541 USA 7/5/94
42
- --------------------------------------------------------------------------------
Baltimore Bagel 1799531 USA 10/19/93
30
- --------------------------------------------------------------------------------
Offerdahl's Bagel Gourmet 1675585 USA 2/11/92
42
- --------------------------------------------------------------------------------
Offerdahl's Bagel Gourmet 1684164 USA 1/18/90
30
- --------------------------------------------------------------------------------
Offerdahl's Bagel Gourmet and Design 1896387 USA 5/30/95
30 & 42
================================================================================
</TABLE>
Noah's New York Bagels, Inc., a subsidiary of ENBC, owns registrations of
the following Marks on the Principal Register of the U.S. Patent and Trademark
Office:
81
<PAGE>
<TABLE>
<CAPTION>
================================================================================
REGISTRATION REGISTRATION
NAME OR MARK NUMBER CLASS DATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Noah's Bagels 1838799 USA 6/7/94
46
- --------------------------------------------------------------------------------
Noah's Bagels 1841045 USA 6/21/94
100
================================================================================
</TABLE>
ENBC has also applied for the registration of certain Marks with the U.S.
Patent and Trademark Office on the principal register, including the following:
<TABLE>
<CAPTION>
================================================================================
APPLICATION APPLICATION
NAME OR MARK NUMBER CLASS DATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Einstein Bros. 74/732659 USA 9/21/95
30
- --------------------------------------------------------------------------------
Einstein Bros. 74/732658 USA 9/21/95
29
- --------------------------------------------------------------------------------
Einstein Bros. 74/732660 USA 9/21/95
42
- --------------------------------------------------------------------------------
Einstein 74/675983 USA 5/15/95
42
- --------------------------------------------------------------------------------
Einstein 74/675985 USA 5/15/95
30
- --------------------------------------------------------------------------------
Bagel & Bagel 74/547132 USA 7/8/94
29 & 30
- --------------------------------------------------------------------------------
Bagel & Bagel 74/545735 USA 7/5/94
42
================================================================================
</TABLE>
By not having a Principal Register federal registration for the above
marks, ENBC does not have certain presumptive legal rights granted by a
registration.
[STATE REGISTRATIONS TO COME]
By signing the Franchise Agreement, you agree that ENBC owns the Marks and
that if you use the marks in an unauthorized manner, that use will constitute an
infringement of ENBC's rights in and to the Marks, and that all your use of the
Marks and any goodwill you
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establish by your use will only benefit ENBC. You also agree to operate your
Store in strict compliance with ENBC's high standard and in an safe and sanitary
condition and to comply strictly with all of ENBC's mandatory specifications,
standards and operating procedures that relate to Stores, as ENBC may change
periodically. Finally, you agree that you agree that before you use them, you
will submit to ENBC for its approval samples of all advertising an promotional
materials that ENBC has not prepared or previously approved. (See Item 11)
After ENBC filed an application for the service mark Einstein's for
restaurant services in May 1995, Peach State Restaurants, Inc. ("Peach State"),
which owns a restaurant in Atlanta that uses the name Einstein's, filed a
federal trademark application for the name Einstein's for restaurant services
and filed an opposition to ENBC's application for Einstein's. In July 1996, ENBC
entered into an agreement with Peach State in which Peach State agreed to
withdraw such application, to abandon such opposition and to not object to, or
interfere with, any of ENBC's trademark and service mark applications that
include the name Einstein's. Peach State has also agreed not to use any mark
incorporating the name Einstein's for restaurant services outside of the Atlanta
metropolitan area, and ENBC has agreed not to use any mark incorporating the
name Einstein's for restaurant services in the State of Georgia (except for
permitted national advertising and promotion and other agreed uses).
Hebrew University of Jerusalem ("Hebrew University"), which claims certain
rights to the name Albert Einstein, has obtained an extension of time to file an
opposition to certain of ENBC's U.S. applications for Einstein's and has filed
oppositions to ENBC's trademark applications in three foreign countries,
although ENBC does not use (and does not intend to use, absent a licensing
agreement or other consent of Hebrew University) Albert Einstein's first name,
likeness or scientific formulae or theories in connection with the Einstein
Bros. Bagels brand. ENBC is currently seeking to enter into an agreement with
Hebrew University under which Hebrew University would grant to ENBC rights to
use certain indicia of Albert Einstein and Hebrew University would abandon its
trademark oppositions. There can be no assurance, however, that ENBC and Hebrew
University will enter into such an agreement, or that Hebrew University will not
oppose the registration or challenge the use of ENBC's Einstein's trademark
under laws governing trademarks or publicity rights.
Other than as described above, there are no currently effective material
determinations of the U.S. Patent and Trademark Office, the trademark trial and
appeal board, the trademark administrator of any state, or any court, nor any
pending infringement, opposition, or cancellation proceeding, or any pending
material litigation, involving the Marks.
There are no agreements currently in effect which significantly limit
ENBC's rights to use or license the use of the Marks in any manner material to
you.
You must immediately notify ENBC of any apparent infringement of or
challenge to your use of any Mark, or any person's claim of any rights in any
Mark. You may not communicate with anyone except ENBC and its counsel with
respect to any infringement, challenge or claim.
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<PAGE>
ENBC will have discretion to take action as it deems appropriate along with any
infringement, challenge or claim, and the sole right to control exclusively any
litigation or other proceeding arising out of any infringement, challenge or
claim under any Mark. You must execute any and all instruments and documents,
render the assistance, and do acts and things that may, in the opinion of ENBC's
counsel, be necessary or advisable in order to protect and maintain ENBC's
interests in any litigation or proceeding or otherwise to protect and maintain
ENBC's interests in the Marks. ENBC will reimburse you for the reasonable
out-of-pocket expenses you incur and pay in complying with these requirements
except to the extent ENBC recovers money on your behalf in the action. Neither
the Franchise Agreement nor the Development Agreement require ENBC to take
affirmative action in response to any apparent infringement of or challenge to
your use of any Mark, or any person's claim of any rights in any Mark.
If it becomes advisable at any time in ENBC's sole judgment for you to
modify or discontinue the use of any Mark and/or for the Store to use one or
more additional or substitute trade or service marks, you must immediately
comply with ENBC's directions to modify or otherwise discontinue the use of the
Mark, and/or to use one or more additional or substitute trademarks, service
marks, logos or commercial symbols or substitute trade dress after ENBC's notice
to you. Neither ENBC nor its affiliates will have any obligation to reimburse
you for any expenditures you make because of any discontinuance or modification.
There are no infringing uses actually known to ENBC that could materially
affect Developer's or Franchise Owner's use of the Marks.
ITEM 14
-------
PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION
PATENTS.
-------
ENBC has no patents that are material to the Franchise.
COPYRIGHTS.
----------
ENBC claims copyright protection covering various materials used in its
business and the operation of Stores ("Copyrighted Works"). Under the
applicable agreement, ENBC may authorize you to use certain Copyrighted Works,
which are the valuable property of ENBC or its affiliates and of which ENBC or
its affiliate is the owner if you comply with the terms of the applicable
agreement. ENBC owns or is the licensee of the owner of the Copyrighted Works
and may create, acquire or obtain licenses for certain copyrights in various
works of authorship used for the operation of Stores, including the Development
Manual, the Manuals, advertisements, promotional materials, labels, menus,
coupons, gift certificates, posters and
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<PAGE>
signs, and may include all or part of the Marks, Licensed Program, Trade Dress
and other portions of the System.
You must immediately notify ENBC of any actual or apparent infringement of
or challenge to any of the Copyrighted Works, or any person's claim of any
rights in the Copyrighted Works, and you may not communicate with any person
other than ENBC and its counsel about any infringement, challenge or claim. ENBC
will have the discretion to take actions it thinks are appropriate in response
to infringement, and the right to control exclusively any settlement,
litigation, arbitration or administrative proceeding arising out of any alleged
infringement, challenge or claim or otherwise under the Copyrighted Works. ENBC
is under no obligation to participate in your defense and/or indemnify you for
damages or expenses you incur if you are a party to any administrative or
judicial proceeding involving the Copyrighted Work.
If it becomes advisable at any time in ENBC's sole judgment for you to
modify or discontinue use of any of the Copyrighted Works and/or for you to use
one or more additional or substitute copyrighted or copyrightable items, you
must immediately comply with ENBC's directions to modify or otherwise
discontinue the use of the copyrighted materials and/or to use one or more
substitute materials.
There are currently no effective determinations of the United States
Copyright Office or any court regarding any Copyrighted Works of ENBC, nor are
any proceedings pending, nor are there any currently effective agreements
between ENBC and third parties pertaining to ENBC's Copyrighted Works that will
or may significantly limit your use of ENBC's Copyrighted Works. ENBC is not
obligated under the Development Agreement or the Franchise Agreement or
otherwise to protect or defend its copyrights. ENBC knows of no infringements of
the Copyrighted Works that could materially affect your use of the Copyrighted
Works. ENBC has not registered any of the Copyrighted Works.
THE LICENSED PROGRAM AND SUPPORT/CONTROL PROGRAMS.
- -------------------------------------------------
The proprietary nature and ENBC's and your rights and obligations relating
to the Licensed Program and required software are described in Item 8.
CONFIDENTIAL INFORMATION.
- ------------------------
ENBC possesses and will further develop and acquire certain confidential
and proprietary information and trade secrets including the following categories
of information, methods, techniques, procedures and knowledge developed or that
ENBC or its affiliates or their consultants, contractors, or designees and/or
franchise owners and developers will develop (the "Confidential Information")
including: (1) methods, techniques, equipment, specifications, standards,
policies, procedures, information, concepts and systems on and knowledge of and
experience in the development, operation and franchising of Stores; and (2)
marketing and
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<PAGE>
promotional programs for Stores; and (3) knowledge concerning computer software
programs which ENBC authorizes for use along with the operation of Stores
(including the Licensed Program), and all additions, modifications and
enhancements made to those programs, and all data generated from use of the
programs, including the logic, structure and operation of database file
structures containing data and all additions, modifications and enhancements
made to those items; and (4) sales data and information concerning consumer
preferences and inventory requirements for Products, materials and supplies, and
specifications for and suppliers of certain materials, equipment and fixtures
for Stores; and (5) ingredients, formulas, mixes, spices, seasonings, recipes
for and methods of preparation, cooking, baking, serving, packaging, catering
and delivery of, Products sold at Stores; and (6) information concerning Product
sales, operating results, financial performance and other financial data of
Stores; and (7) the Development Manual and the Manuals; and (8) customer lists
and Product sales of the Stores; and (9) employee selection procedures, training
and staffing levels.
Under the Development Agreement, ENBC will disclose parts of the
Confidential Information to you as ENBC periodically deems necessary or
advisable for the development of Stores during training and in guidance and
assistance furnished to you under the Development Agreement and you may learn or
otherwise obtain from ENBC additional Confidential Information during the
Agreement Term. Under the Franchise Agreement, ENBC will also disclose parts of
the Confidential Information as ENBC periodically deems necessary or advisable
for the operation of a Store to you during training and in guidance and
assistance furnished to you during the term of the Franchise Agreement, and you
may learn or otherwise obtain from ENBC additional Confidential Information of
ENBC during the term of the Franchise Agreement. You must agree to disclose the
Confidential Information to your Owners and employees only to the extent
reasonably necessary and if those individuals have agreed to maintain the
information in confidence in an agreement ENBC can enforce.
The Confidential Information is confidential to and a valuable asset of
ENBC, is proprietary, includes trade secrets of ENBC and is disclosed to you on
the condition that you, and your Owners and employees who have access to the
Confidential Information agree that during and after the term of the applicable
agreement they: (1) will not use the Confidential Information in any other
business or capacity; (2) will maintain the absolute confidentiality of the
Confidential Information; (3) will not make unauthorized copies of any portion
of the Confidential Information disclosed in written or other tangible form; and
(4) will adopt and implement all reasonable procedures ENBC periodically
requires to prevent unauthorized use or disclosure of the Confidential
Information including requiring employees and Owners who have access to the
Confidential Information to execute non-competition and confidentiality
agreements in the forms attached to the Development Agreement and Franchise
Agreement or as ENBC otherwise requires periodically, and provide ENBC, at its
request, with signed copies of each of those agreements. Nothing contained in
the Development Agreement or Franchise Agreement will be construed to prohibit
you from using the Confidential Information in the operation of other Stores,
under the a Franchise Agreement or Development Agreement with ENBC.
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The restrictions on the disclosure and use of the Confidential Information
will not apply to the following: (a) information, methods, procedures,
techniques and knowledge which are or become generally known in the food service
business within the Development Area or Territory, other than through disclosure
you make (whether deliberate or inadvertent); and (b) the disclosure of the
Confidential Information in judicial or administrative proceedings to the extent
that you are legally compelled to disclose the information, if you have notified
ENBC before disclosure and used your best efforts, and afforded ENBC the
opportunity to obtain an appropriate protective order or other assurance
satisfactory to ENBC of confidential treatment for the information required to
be so disclosed.
You must disclose to ENBC all ideas, concepts, methods, techniques and
products concerning the development and operation of Stores you or your
employees conceive or develop or during the term of the applicable agreement.
You must grant to ENBC and agree to procure from your affiliates, owners or
employees a perpetual, non-exclusive and worldwide right to use same in all food
service businesses ENBC operates, its affiliates and its franchise owners. ENBC
will have no obligation to you to make any lump sum or on-going payments to you
with respect to any idea, concept, method, technique or product. You must agree
that you will not use nor will you allow any other person or entity to use any
concept, method, technique or product without obtaining ENBC's prior written
approval.
ITEM 15
-------
OBLIGATION TO PARTICIPATE IN THE
ACTUAL OPERATION OF THE FRANCHISE BUSINESS
DEVELOPMENT AGREEMENT
- ---------------------
FULL TIME SUPERVISION.
---------------------
You (or your designated Principal Owner(s) ENBC approves) and the Chief
Operating Officer (defined below) must exert full-time efforts to fulfill your
obligations under the Development Agreement and may not engage in any other
business or other activity, directly or indirectly, that requires any
significant management responsibility or time commitments, or that may otherwise
conflict with your obligations under the Development Agreement.
CHIEF OPERATING OFFICER.
-----------------------
Concurrently with the execution of the Development Agreement, you must
designate a person (other than the persons serving as the Development Director
(defined below), the Training Director and the Marketing Director (defined
below)) acceptable to ENBC to act as the chief operating officer of the business
you conduct under the Development Agreement (the "Chief Operating Officer").
The Chief Operating Officer must have appropriate multi-store food
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<PAGE>
service experience and be an Owner holding a significant, direct equity interest
in you at all times during the Agreement Term. If your relationship with the
Chief Operating Officer terminates or if the proposed Chief Operating Officer is
unable to satisfactorily complete ENBC's management training program, you must
promptly designate a replacement Chief Operating Officer acceptable to ENBC, who
will satisfactorily complete the management training program at your expense and
subject to ENBC's then-current training charges.
DEVELOPMENT DIRECTOR AND REAL ESTATE MANAGERS.
---------------------------------------------
Upon ENBC's written request, you must designate a person (other than the
persons serving as the Chief Operating Officer, the Training Director and the
Marketing Director) acceptable to ENBC to act as your Development Director (the
"Development Director") during the Development Term. If your relationship with
the Development Director terminates, you must promptly designate a replacement
Development Director acceptable to ENBC. The Development Director's duties will
include: (1) preparing and implementing a development plan for the Development
Area in form satisfactory to ENBC; and (2) consulting with ENBC concerning the
adaptation of ENBC's existing site criteria and lease requirements for the
Development Area; and (3) directing and coordinating your site evaluation
efforts; and (4) negotiating leases for proposed Store sites; and (5) developing
Stores in the Development Area. You are also obliged to hire and maintain the
number of real estate managers meeting ENBC's qualifications as ENBC specifies.
TRAINING DIRECTOR.
-----------------
You must designate a person (other than the persons serving as the Chief
Operating Officer, the Development Director or the Marketing Director)
acceptable to ENBC to act as your Training Director (the "Training Director")
who must satisfactorily complete ENBC's store-level management training program.
If the proposed Training Director completes the management training program to
ENBC's satisfaction, ENBC will certify him to fulfill the duties of the Training
Director. After the Training Director is certified, he or she will provide
training to the Store that you develop. If ENBC chooses, your Training
Director will have to become re-certified periodically. If the Training
Director ceases to be an employee of yours or if the proposed Training Director
is unable to satisfactorily complete the management training program or any
later training program, you must promptly designate a replacement Training
Director acceptable to ENBC, who must, at your expense and subject to ENBC's
then-current standard charges, satisfactorily complete ENBC's management
training program receive ENBC's certification as described above. ENBC may, in
its discretion as it thinks is necessary, require the Training Director to
attend or to participate in, at your expense, additional or refresher training
programs at locations ENBC designates during the term of the Development
Agreement. The Training Director's duties will include: (1) training and
supervision of Store personnel; and (2) furnishing on-site assistance to the
personnel of Stores according to the opening of Stores; and (3) ongoing
consultation with ENBC and management personnel of Stores concerning
88
<PAGE>
training matters; and (4) periodic reporting to ENBC concerning your training
programs you establish and operate.
If ENBC authorizes and requires, in its discretion, you must develop,
operate and maintain a training program for employees other than management
personnel and, to the extent ENBC authorizes and approves in writing
periodically, train management personnel of the Stores in the use of the System
throughout the Agreement Term according to specifications ENBC periodically
requires.
MARKETING DIRECTOR.
------------------
Upon ENBC's written request, you must designate a person (other than the
persons serving as the Chief Operating Officer, the Development Director and the
Training Director) acceptable to ENBC to act as your Marketing Director (the
"Marketing Director"). If your relationship with the Marketing Director
terminates, you agree to promptly designate a replacement Marketing Director
acceptable to ENBC. The Marketing Director's duties will include: (1)
consulting with ENBC concerning the adaptation of ENBC's existing marketing
programs and materials for the Development Area; and (2) preparing and
implementing marketing plans for the grand opening of the Stores; and (3)
preparing and implementing local marketing plans and marketing budgets for the
Stores and the Development Area; and (4) coordinating the direction and
administration of any local marketing efforts of the Stores; and (5) reporting
periodically to ENBC concerning your local marketing programs in the Development
Area.
MANAGEMENT PERSONNEL AND TRAINING.
---------------------------------
In addition to hiring, training and maintaining the personnel specified
above, you must hire, train and maintain the number and level of management
personnel required for the conduct of business under the Development Agreement
which will depend on the number of Stores to be developed and the qualifications
of the personnel you select. You also must ensure that a full-time Store Manager
and Additional Manager is hired and maintained at each Store, as well as
maintain adequate management and supervision of all Stores according to
guidelines ENBC periodically establishes. You must keep ENBC advised of the
identities of those personnel. You are responsible for ensuring that those
personnel are properly trained to perform their duties. ENBC, at its option and
in its discretion, may require your Training Director to provide initial
management training program to the Store Manager and Additional Manager of each
Store at a training facility ENBC certifies and accredits according to its
requirements; this will apply only if the Training Director currently is
certified to provide the training. As described in Item 14 above, ENBC requires
you to obtain confidentiality agreements from certain of your employees.
89
<PAGE>
COMMISSARY MANAGEMENT.
---------------------
You must employ a Commissary Manager and an Additional Commissary Manager
to supervise the day-to-day operations of each Commissary you operate, both of
whom must complete a ENBC accredited and certified initial management program on
the operations of a Commissary. Item 11. You will hire all Commissary employees
and require them to sign ENBC's standard form of confidentiality agreement for
store personnel.
GUARANTY.
--------
The Development Agreement requires that the Principal Owners of the
Developer and their spouses must sign the Guaranty and Assumption of Developer's
Obligations attached to the Development Agreement, although ENBC may accept
other assurances of performance ENBC in some cases. For purposes of the
Development Agreement, a "Principal Owner" is an owner which: (1) is a general
partner in the Developer; or (2) has a direct or indirect equity interest: (a)
in the Developer of 5% or more (regardless of whether the owner is entitled to
vote that interest); or (b) in any Store other than the Stores developed under
the Development Agreement, or any developer or franchise owner of Stores other
than the Developer; or (3) is otherwise designated as a Principal Owner in the
Development Agreement. However, a reduction in a Principal Owner's equity
interest in the Developer below 5% will not affect his/her/its status as a
Principal Owner unless ENBC expressly agrees.
FRANCHISE AGREEMENT
- -------------------
MANAGEMENT AND PERSONNEL OF THE STORE.
-------------------------------------
You (or your supervising Principal Owner(s)) must supervise and oversee the
operation of the Store. You also must employ and maintain at all times during
the term of the Franchise Agreement at least one Store Manager and one
Additional Manager at the Store. The Store Manager will be the full-time
manager of the Store and the Additional Manager will perform on a full-time
basis other operations for you as ENBC may reasonably and periodically specify,
and both must successfully complete to ENBC's satisfaction a ENBC certified
initial management training program for the operation of the Store. You also
must employ the number of assistant managers required for adequate staffing of
the Store, and must at all times keep ENBC advised of the identities of the
Store Manager, Additional Manager and assistant managers. ENBC may deal with
the Store Manager, Additional Manager and assistant managers on matters
pertaining to day-to-day operations of, and reporting requirements for, the
Store. The Store at all times must be under the direct, on-site supervision of
the Store Manager, Additional Manager or an assistant manager who has completed
a training program ENBC or you conduct (if applicable and if your Training
Director is certified under the terms of the Development Agreement). If ENBC
chooses, your then-current Store Manager will have to have an equity interest in
the Store during the term of the Franchise Agreement. You must hire all
employees of the Store and are
90
<PAGE>
exclusively responsible for the terms of their employment and compensation and
for the proper training of those employees in the operation of the Store. As
described in Item 14 above, ENBC requires you to obtain confidentiality
agreements from some of your employees.
GUARANTY.
--------
The Franchise Agreement requires that the Principal Owners of the Franchise
Owner and their spouses sign the Guaranty and Assumption of Franchise Owner's
Obligations attached to the Franchise Agreement, although ENBC may in some cases
accept other assurances of performance. A Principal Owner for purposes of the
Franchise Agreement is an owner which: (1) is a general partner in the
Franchisee; or (2) has a direct or indirect equity interest: (a) in the
Franchisee of 5% or more (regardless of whether the owner is entitled to vote
that interest); or (b) in any Store other than the Stores developed under the
Franchise Agreement, or any developer or franchise owner of Stores other than
the Developer; or (3) is otherwise designated as a Principal Owner in the
Franchise Agreement. However, a reduction in a Principal Owner's equity
interest in the Franchisee below 5% will not affect his/her/its status as a
Principal Owner unless ENBC expressly agrees. Certain provisions of the
Franchise Agreement and Development Agreement and the guaranties restrict the
Franchise Owner, Developer and/or their Principal Owners from participating in a
competing business. (See Item 17)
ITEM 16
-------
RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL
DEVELOPMENT AGREEMENT.
---------------------
Under the Development Agreement, you may not offer or provide Products,
supplies or services from your Commissary to the general public. Your
Commissary is restricted to furnishing your Stores in your Development Area with
Products and other goods and services that ENBC may require. Other than the
terms by which you must operate the Commissary, there is no provision in the
Development Agreement authorizing or restricting the goods or services you offer
or provide. However, you will be bound by the noncompete provisions of the
Development Agreement as well as the provisions of the Franchise Agreements
executed under the Development Agreement with respect to restrictions on goods
and services that Stores developed under the Development Agreement offer.
FRANCHISE AGREEMENT.
-------------------
Under the Franchise Agreement, you must offer all the Products that ENBC
periodically authorizes for your Stores and must provide all services that ENBC
periodically requires for Stores. ENBC has the right, in its discretion, to
change those of Products and services, including to implement local or regional
variations, national uniformity and/or innovations or
91
<PAGE>
other changes in ENBC's franchise program and business strategy, and there is no
limit on this right. You are prohibited from offering at your Store or any other
location or otherwise according to the Marks any other products or services
which have not been approved for Stores. The Franchise Agreement contains no
restrictions on the customers to whom you may sell the goods and services your
Store offers, except that you only may deliver or cater under an effective
Dining Rider or Catering Rider and then only within the Territory required in
the applicable Rider, all as described in Item 12 above.
ITEM 17
-------
RENEWAL, TERMINATION, TRANSFER AND DISPUTE RESOLUTION
The table below lists certain important provisions of the franchise and
related agreements. You should read these provisions in the agreements attached
to this offering circular.
<TABLE>
<CAPTION>
==================================================================================================================
SECTIONS IN FRANCHISE
AGREEMENT AND DEVELOPMENT
PROVISION AGREEMENT SUMMARY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(a) Term of franchise and Section 2.A of Franchise 15 years under Franchise Agreement. Under
development rights Agreement/Sections 3.A and Development Agreement, 2-5 years for
3.C and 16.E of Development development rights only, until expiration of
Agreement last Franchise Agreement for all other rights
and obligations, including the operation of the
Commissary.
- ------------------------------------------------------------------------------------------------------------------
(b) Renewal or extension of Sections 17.A-17.C of If you are and have been in good standing,
the term Franchise Agreement you can acquire successor franchise on
ENBC's then-current terms for 5 years. No
renewal of Development Agreement.
- ------------------------------------------------------------------------------------------------------------------
(c) Requirements for you to Sections 17.A-17.C of Give proper notice, maintain possession of
renew or extend Franchise Agreement premises or secure substitute premises,
remodel and/or expand, sign new agreement
and pay fee, sign release.
- ------------------------------------------------------------------------------------------------------------------
(d) Termination by you Section 18.A of Franchise If ENBC breaches Agreement and does not
Agreement/Section 15.A of cure or begin to cure within stated periods.
Development Agreement
- ------------------------------------------------------------------------------------------------------------------
(e) Termination by ENBC Section 5.G. of Development ENBC may at anytime require you to cease
without cause Agreement operating your Commissary.
==================================================================================================================
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
SECTIONS IN FRANCHISE
AGREEMENT AND DEVELOPMENT
PROVISION AGREEMENT SUMMARY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(f) Termination by ENBC Sections 18.B and 18.C of ENBC can terminate if you commit a violation
with cause Franchise Agreement/ specified in the agreement
Sections 15.B and 15.C of (See (g) below)
Development Agreement
- ------------------------------------------------------------------------------------------------------------------
(g) "Cause" defined -- Section 18.B of Franchise 10 days to begin required Catering Service,
defaults which can be Agreement/Section 15.B of Delivery Service or Special Distribution
cured Development Agreement Arrangements; 10 days to correct failure to
make payments due to ENBC or its affiliates
for Royalty, Software and Advertising/
Marketing fees and purchases from ENBC or
its affiliates; 10 days to correct failure to
operate Commissary at the time and location
ENBC requires; 30 days to cure or begin to
cure standard/specification violations or other
violations; 24 hours to 5 days to cure health,
safety or sanitation problems; 10 days to cure
failure to adhere to the required financing plan
(Development Agreement only).
- ------------------------------------------------------------------------------------------------------------------
(h) "Cause" defined -- Section 18.B of Franchise Agreement: failure to commence
defaults which cannot Franchise -------------------
be cured Agreement/Section operation on time; abandonment or a transfer
15.B of Development without ENBC's approval; misrepresentation
Agreement or omission in application for the Franchise or
for approval of a transfer; conviction or guilty
plea relating to a felony or other serious
crimes; misuse of or challenge to ENBC's
intellectual property rights; loss of right to
possess the Site; insolvency; violation by you
or your Owners of confidentiality or
noncompete agreements; uncured default
under lease for Site; 3 or more defaults in a
24-month period; 2 or more defaults in a 12-
month period; 3 or more (or 50% or more) of
the franchise agreements under the applicable
Development Agreement are terminated; you
or your affiliates terminate a franchise
agreement with ENBC without cause.
Development Agreement: failure to develop
---------------------
the required number of Stores; ENBC delivers
to you notice of termination of a franchise
agreement; you terminate a franchise
agreement without cause; other defaults
similar to the non-curable defaults under the
franchise agreement.
==================================================================================================================
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
SECTIONS IN FRANCHISE
AGREEMENT AND DEVELOPMENT
PROVISION AGREEMENT SUMMARY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(i) Your obligations Sections 19.A-19.F of Pay money owed, complete deidentification,
on terminatation/non Franchise return confidential information (also, see (o)
-renewal Agreement/Sections and (r) below); the expiration of the
5.I and 16.A-16.E of Agreement Term or the Development Term
Development Agreement does not affect your operation of the
Commissary, which continues until terminated
or until the last Store you developed has
expired or been terminated, whichever occurs
first.
- ------------------------------------------------------------------------------------------------------------------
(j) Assignment of Sections 16.A and 16.J of No restrictions on ENBC's right to assign.
contract by ENBC Franchise Agreement/ ENBC has the right to delegate the
Section 14.A of Development performance of any or all of its obligations or
Agreement duties.
- ------------------------------------------------------------------------------------------------------------------
(k) "Transfer" by you -- Section 16.B of Franchise Includes transfer or pledge of Agreement,
definition Agreement/Sections 5.G ease or assets, mortgage, lien or security
and 14.B of Development interest ownership change, sale of voting
Agreement interests or securities, delegation of
management functions, or transfer by means
of divorce, insolvency, dissolution, will,
intestate succession or declaration of or
transfer in trust.
- ------------------------------------------------------------------------------------------------------------------
(l) ENBC's approval of Sections 16.B and 16.C of ENBC has the right to approve transfers.
transfer by franchisee Franchise Agreement/
Sections 5.G., 14.B and 14.C
of Development Agreement
- ------------------------------------------------------------------------------------------------------------------
(m) Conditions for ENBC's Section 16.D of Franchise Agreement: ENBC will evaluate
approval of transfer Franchise -------------------
Agreement/Section proposed transfers based on factors such as
14.D of Development whether your Owner reimburses ENBC for
Agreement costs of evaluating the transfer, transfer fee
is paid, financing you may provide is
subordinate to the transferee's obligations to
ENBC, transferee signs then-current
undertakings ENBC requires, you, the
transferring Owner and the transferee (if
applicable) sign then-current releases ENBC
requires, the transferring Owner signs a
noncompetition agreement, you, your Owners
and the transferee pay fees due and unpaid,
transferee's staff completes training ENBC
requires, transferee agrees to be bound by the
Franchise Agreement or ENBC's then-current
franchise agreement, the transferee and your
Owner agree (and sign a consent agreeing)
that ENBC's approval of the transfer
==================================================================================================================
</TABLE>
94
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
SECTIONS IN FRANCHISE
AGREEMENT AND DEVELOPMENT
PROVISION AGREEMENT SUMMARY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(m) Conditions for ENBC's is not a guaranty, the transfer is in compliance
approval of transfer with applicable laws, the sale of the Store,
(continued) lease or assets only occurs at transfer, and the
transferee signs a guaranty and assumption of
obligations.
Development Agreement: ENBC will evaluate
---------------------
proposed transfers based on factors such as
whether transferee meets ENBC's standards,
the price and terms of the transfer, your
reimbursement for ENBC's evaluation,
payment of transfer fee, financing you provide
is subordinate to the transferee's obligations to
ENBC, transferee signs then-current
undertakings ENBC requires, you, the
transferring Owner and the transferee (if
applicable) sign then-current releases ENBC
requires and the transferring Owner signs a
noncompetition agreement.
- ------------------------------------------------------------------------------------------------------------------
(n) ENBC's right of first Section 16.H of Franchise ENBC can match any offer for your business,
refusal to acquire your Agreement/Section 14.G of assets or an ownership interest.
business Development Agreement
- ------------------------------------------------------------------------------------------------------------------
(o) ENBC's option to Section 19.F of ENBC has the option to buy the Store after
purchase your business Franchise Agreement termination or expiration of the Franchise
Agreement.
- ------------------------------------------------------------------------------------------------------------------
(p) Your death or disability Section 16.E of Franchise Franchise or ownership interest must be
Agreement/Section 14.C of assigned to an approved buyer within 9
Development Agreement months.
- ------------------------------------------------------------------------------------------------------------------
(q) Non-competition Section 10 of Franchise No direct or indirect involvement in a
Covenants during the Agreement/Section 12 of competing business anywhere; no solicitation
term of the franchise Development Agreement of employees of ENBC or its Franchisees; no
diversion or attempts to divert business or
customers to a competing business.
==================================================================================================================
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
SECTIONS IN FRANCHISE
AGREEMENT AND DEVELOPMENT
PROVISION AGREEMENT SUMMARY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(r) Non-competition Section 19.D of Franchise Agreement: No direct or indirect
covenants after the Franchise -------------------
franchise is terminated Agreement/Section involvement with (including owning interests
or expires 16.D of Development in or providing services for) a competing
Agreement business at the Site, within five miles from
your Store or any other Store or in the
Marketing Area; no diversion of business of a Store
or of employees of a Store or of ENBC or its
affiliates.
Development Agreement: For two years, no
---------------------
direct or indirect involvement with (including
owning interests in or providing services for)
a competing business within five miles from
any Store, within the Development Area or
within the states where the Development Area
is located; no diversion of business of a Store
or of employees of a Store or of ENBC or its
affiliates.
- ------------------------------------------------------------------------------------------------------------------
(s) Modification of the Sections 5.C and 21.K Modifications in writing only. Operations
agreement of Franchise Manuals may change.
Agreement/Sections
13.J and 18.K of
Development Agreement
- ------------------------------------------------------------------------------------------------------------------
(t) Integration/merger Section 21.L of Franchise Only the terms of the Agreement are binding.
clause Agreement/Section 18.L of Other promises may not be enforceable.
Development Agreement
- ------------------------------------------------------------------------------------------------------------------
(u) Dispute resolution by None
arbitration or mediation
- ------------------------------------------------------------------------------------------------------------------
(v) Choice of forum Section 21.G of Franchise Litigation must be in Jefferson County,
Agreement/Section 18.G of Colorado state court or federal district of
Development Agreement Colorado
- ------------------------------------------------------------------------------------------------------------------
(w) Choice of law Section 21.F of Franchise Colorado law applies
Agreement/Section 18.F of
Development Agreement
==================================================================================================================
</TABLE>
96
<PAGE>
These states have statutes which may supersede the franchise agreement in
your relationship with the franchisor including the areas of termination and
renewal of your franchise: ARKANSAS [Stat. Section 72-204], CALIFORNIA [Sections
20021, 20025, 20026, 20030], CONNECTICUT [Gen. Stat. Section 42-133f], DELAWARE
[Code Sections 2551-2556], HAWAII [Rev. Stat. Section 482E-6], ILLINOIS [815
ILCS 705/19, 705/20], INDIANA [Stat. Sections 1 (7) and (8); and 23-2-2.7], IOWA
[Code Sections 523H.7; 523H.8], MICHIGAN [Stat. Section 445.1527(c)-(d)],
MINNESOTA [Stat. Section 80C.14], MISSISSIPPI [Code Section 75-24-53], MISSOURI
[Stat. Section 407.405], NEBRASKA [Rev. Stat. Section 87-404], NEW JERSEY [Stat.
Section 56:10-5], SOUTH DAKOTA [Codified Laws Section 37-5A-51], VIRGINIA [Code
13.1-557-574-13.1-564], WASHINGTON [Code Section 19.100.180(i)-(j)], WISCONSIN
[Stat. Sections 135.03; 135.04]. These and other states may have court decisions
which may supersede the franchise agreement in your relationship with the
franchisor including the areas of termination and renewal of your franchise.
Bankruptcy laws may supersede the franchise agreement in your relationship with
the franchisor including the areas of termination of your franchise.
ITEM 18
-------
PUBLIC FIGURES
ENBC does not use any public figure to promote its franchise.
ITEM 19
-------
EARNINGS CLAIMS
ENBC does not furnish or authorize its salespersons to furnish any oral or
written information concerning the actual or potential sales, costs, income or
profits of a Store. Actual results vary from Store to Store and ENBC cannot
estimate the results of any particular franchise.
ITEM 20
-------
LIST OF OUTLETS
As of December 31, 1995, ENBC, directly or through its subsidiaries, owned
and operated 59 bagel stores including 15 Baltimore Bagel stores, 10 Offerdahl's
stores, 10 Bagel & Bagel stores, 8 Bagel Stop stores and 2 Bagel Shop stores.
In addition, ENBC, through a subsidiary and as of April 1, 1996, owned and
operated 45 Noah's New York Bagels shops in Washington and California. (See Item
1) There have been no terminations, non-renewals, cancellations of any
franchises or failure of any franchisee to communicate with ENBC.
97
<PAGE>
<TABLE>
<CAPTION>
================================================================================
STATUS OF COMPANY-OWNED BUSINESSES
FOR YEARS 1995/1994/1993/1/
- --------------------------------------------------------------------------------
BUSINESSES BUSINESSES TOTAL BUSINESSES
CLOSED DURING OPENED DURING OPERATING AT
STATE YEAR YEAR DECEMBER 31
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
California 0/0/0 15/0/0 15/0/0
- --------------------------------------------------------------------------------
Florida 0/0/0 10/0/0 10/0/0
- --------------------------------------------------------------------------------
Illinois 0/0/0 5/0/0 5/0/0
- --------------------------------------------------------------------------------
Kansas 0/0/0 6/0/0 6/0/0
- --------------------------------------------------------------------------------
Michigan 0/0/0 1/0/0 1/0/0
- --------------------------------------------------------------------------------
Missouri 0/0/0 4/0/0 4/0/0
- --------------------------------------------------------------------------------
TOTAL 0/0/0 41/0/0 41/0/0
================================================================================
</TABLE>
1/ These numbers do not include bagel stores that ENBC acquired, operated for
- -
a transitional period and then transferred to franchisees in 1995.
<TABLE>
<CAPTION>
================================================================================
STATUS OF FRANCHISED BUSINESSES
FOR YEARS 1995/1994/1993
- --------------------------------------------------------------------------------
BUSINESSES BUSINESSES TOTAL BUSINESSES
CLOSED DURING OPENED DURING OPERATING AT
STATE YEAR YEAR DECEMBER 31
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Colorado 1/0/0 9/0/0 8/0/0
- --------------------------------------------------------------------------------
Utah 0/0/0 10/0/0 10/0/0
- --------------------------------------------------------------------------------
TOTALS 1/0/0 19/0/0 18/0/0
================================================================================
</TABLE>
98
<PAGE>
<TABLE>
<CAPTION>
================================================================================
PROJECTED STORE OPENINGS AS OF DECEMBER 31, 1995
- --------------------------------------------------------------------------------
FRANCHISE PROJECTED PROJECTED
AGREEMENTS FRANCHISED COMPANY
SIGNED BUT NEW OWNED
BUSINESS BUSINESSES OPENINGS IN 1996
STATE NOT OPEN IN 1996 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Arizona 0 15 0
- --------------------------------------------------------------------------------
California 0 80 0
- --------------------------------------------------------------------------------
Colorado 0 10 0
- --------------------------------------------------------------------------------
District of 0 4 0
Columbia
- --------------------------------------------------------------------------------
Florida 0 30 0
- --------------------------------------------------------------------------------
Illinois 0 25 0
- --------------------------------------------------------------------------------
Indiana 0 3 0
- --------------------------------------------------------------------------------
Kansas 0 15 0
- --------------------------------------------------------------------------------
Massachusetts 0 12 0
- --------------------------------------------------------------------------------
Maryland 0 5 0
- --------------------------------------------------------------------------------
Michigan 0 9 0
- --------------------------------------------------------------------------------
Minnesota 0 10 0
- --------------------------------------------------------------------------------
Missouri 0 10 0
- --------------------------------------------------------------------------------
Nevada 0 5 0
- --------------------------------------------------------------------------------
Ohio 0 15 0
- --------------------------------------------------------------------------------
Pennsylvania 0 25 0
- --------------------------------------------------------------------------------
Rhode Island 0 3 0
- --------------------------------------------------------------------------------
Texas 0 14 0
- --------------------------------------------------------------------------------
Utah 0 10 0
- --------------------------------------------------------------------------------
Virginia 0 3 0
- --------------------------------------------------------------------------------
Wisconsin 0 10 0
================================================================================
</TABLE>
99
<PAGE>
<TABLE>
<CAPTION>
================================================================================
PROJECTED STORE OPENINGS AS OF DECEMBER 31, 1995
- --------------------------------------------------------------------------------
FRANCHISE PROJECTED PROJECTED
AGREEMENTS FRANCHISED COMPANY
SIGNED BUT NEW OWNED
BUSINESS BUSINESSES OPENINGS IN 1996
STATE NOT OPEN IN 1996 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL 0 313 0
================================================================================
</TABLE>
100
<PAGE>
<TABLE>
<CAPTION>
================================================================================
PROJECTED STORE OPENINGS AS OF DECEMBER 31, 1995
- --------------------------------------------------------------------------------
DEVELOPMENT PROJECTED PROJECTED
AGREEMENTS NEW COMPANY
SIGNED BUT DEVELOPMENT OWNED
BUSINESS AGREEMENTS DEVELOPMENT
STATE NOT OPERATING IN 1996 ARREAS IN 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Arizona 0 0 0
- --------------------------------------------------------------------------------
California 0 2 0
- --------------------------------------------------------------------------------
Colorado 0 0 0
- --------------------------------------------------------------------------------
District of Columbia 0 1 0
- --------------------------------------------------------------------------------
Florida 0 1 0
- --------------------------------------------------------------------------------
Illinois 0 1 0
- --------------------------------------------------------------------------------
Indiana 0 1 0
- --------------------------------------------------------------------------------
Kansas 0 1 0
- --------------------------------------------------------------------------------
Massachusetts 0 1 0
- --------------------------------------------------------------------------------
Maryland 0 1 0
- --------------------------------------------------------------------------------
Michigan 0 1 0
- --------------------------------------------------------------------------------
Minnesota 0 0 0
- --------------------------------------------------------------------------------
Missouri 0 1 0
- --------------------------------------------------------------------------------
Nevada 0 1 0
- --------------------------------------------------------------------------------
Ohio 0 1 0
- --------------------------------------------------------------------------------
Pennsylvania 0 2 0
- --------------------------------------------------------------------------------
Rhode Island 0 1 0
- --------------------------------------------------------------------------------
Texas 0 1 0
- --------------------------------------------------------------------------------
Utah 0 0 0
- --------------------------------------------------------------------------------
Virginia 0 2 0
- --------------------------------------------------------------------------------
Wisconsin 0 1 0
- --------------------------------------------------------------------------------
TOTAL 0 20 0
================================================================================
</TABLE>
101
<PAGE>
ITEM 21
-------
FINANCIAL STATEMENTS
Attached as Exhibit E are ENBC's audited balance sheet as of December 31,
---------
1995, and its audited statement of operations, statement of cash flows and
statement of stockholders' deficit for the period March 24, 1995 through
December 31, 1995. These financial statements were prepared under ENBC's former
name, Einstein Bros. Bagels, Inc. Also attached as Exhibit E is ENBC's
consolidated unaudited statements of operations and statements of cash flows for
the period from March 24, 1995 through July 9, 1995 and the two quarters ended
July 14 , 1996 and ENBC's unaudited balance sheet as of August 11, 1996.
ITEM 22
-------
CONTRACTS
---------
Attached to this offering circular are the following standard forms of
agreements that ENBC currently uses:
EXHIBITS
--------
Exhibit B Einstein/Noah Bagel Corp. Development Agreement
Exhibit C Einstein/Noah Bagel Corp. Franchise Agreement
Exhibit D Addendum to Lease
Exhibit F Financed Area Developer Loan Agreement
102
<PAGE>
EXHIBIT A
---------
STATE AGENCIES/AGENTS FOR SERVICE OF PROCESS
--------------------------------------------
<PAGE>
EXHIBIT A
---------
LIST OF STATE AGENCIES/AGENTS
FOR SERVICE OF PROCESS
----------------------
Listed here are the names, addresses and telephone numbers of the state
agencies having responsibility for franchising disclosure/registration laws. We
may not yet be registered to sell franchises in any or all of these states.
CALIFORNIA HAWAII
Department of Corporations: Director, Department of Commerce
and Consumer Affairs
Los Angeles Business Registration Division
1010 Richards Street
Suite 600 Honolulu, Hawaii 96813
3700 Wilshire Boulevard (808) 548-2021
Los Angeles, California 90010
(213) 736-2741
ILLINOIS
Sacramento
Illinois Attorney General
1115 Eleventh Street 500 South Second Street
Sacramento, California 95814 Springfield, Illinois 62706
(916) 445-7205 (217) 782-4465
San Diego
1350 Front Street INDIANA
San Diego, California 92101
(619) 525-4044 (for service of process)
Indiana Secretary of State
San Francisco 201 State House
200 West Washington Street
1390 Market Street Indianapolis, Indiana 46204
San Francisco, California 94102 (317) 232-6531
(415) 557-3787
(state agency)
Indiana Secretary of State
Securities Division
Room E-111
302 West Washington Street
Indianapolis, IN 46204
(317)232-6681
A-2
<PAGE>
MARYLAND NEW YORK
(state agency)
(for service of process)
Office of the Attorney General- Secretary of the State of New York
Securities Division 162 Washington Street
20th Floor Albany, New York 11231
200 St. Paul Place (518) 474-4750
Baltimore, Maryland 21202-2021
(410) 576-6360
(for other matters)
(for service of process) New York State Department of Law
Investor Protection and Securities
Bureau
Maryland Securities Commissioner 120 Broadway
at the Office of Attorney General- New York, New York 10271-0332
Securities Division (212) 416-8000
20th Floor
200 St. Paul Place
Baltimore, Maryland 21202-2021 NORTH DAKOTA
(410) 576-6360 Office of Securities Commissioner
Fifth Floor
MICHIGAN 600 East Boulevard
Bismarck, North Dakota 58505
Consumer Protection Division (701) 224-4712
Antitrust and Franchise Unit
Michigan Department of Attorney General
670 Law Building OREGON
Lansing, Michigan 48913
(517) 373-7177 Department of Insurance and Finance
Corporate Securities Section
MINNESOTA Labor and Industries Building
Salem, Oregon 97310
Minnesota Department of Commerce (503) 378-4387
133 East Seventh Street
St. Paul, Minnesota 55101
(612) 296-6328
A-3
<PAGE>
RHODE ISLAND WASHINGTON
Division of Securities (for service of process)
Suite 232
233 Richmond Street Director Department of Financial
Providence, Rhode Island 02903 Institutions
(401) 277-3048 Securities Division
General Admin. Bldg. 3rd Floor
210-11th Avenue S.W.
SOUTH DAKOTA Olympia, Washington 98504
Division of Securities (for other matters)
c/o 118 West Capitol
Pierre, South Dakota 57501 Department of Financial
(605) 773-4013 Institutions
Securities Division
VIRGINIA P.O.Box 9033
Olympia, Washington 98507-9033
(for service of process) (360) 902-8760
Clerk, State Corporation Commission WISCONSIN
1300 East Main Street
Richmond, Virginia 23219 Commissioner of Securities
(804) 371-9672 101 East Wilson Street, 4th Floor
Madison, Wisconsin 53702
(for other matters) (608) 266-3431
State Corporation Commission
Division of Securities and Retail Franchising
1300 East Main Street
Ninth Floor
Richmond, Virginia 23219
(804) 371-9051
A-4
<PAGE>
EXHIBIT B
EINSTEIN/NOAH BAGEL CORP.
DEVELOPMENT AGREEMENT
---------------------
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
DEVELOPMENT AGREEMENT
---------------------
_________________
DEVELOPER
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
1. PREAMBLES..................................................... 1
2. CERTAIN DEFINITIONS........................................... 2
3. DEVELOPMENT RIGHTS AND OBLIGATIONS............................ 9
A. GRANT OF DEVELOPMENT RIGHTS;
PRINCIPAL OWNERS' GUARANTY................................. 9
B. TERRITORIAL RIGHTS......................................... 10
C. DEVELOPMENT OBLIGATIONS.................................... 11
D. RIGHTS RETAINED BY COMPANY................................. 11
E. DEVELOPER'S OPTION TO DEVELOP TARGET SITES................. 12
F. DEVELOPER'S OPTION TO PURCHASE CONVERSION SITES............ 13
G. POST-TERM DEVELOPMENT...................................... 15
4. OTHER DISTRIBUTION METHODS.................................... 16
A. SPECIAL DISTRIBUTION ARRANGEMENTS.......................... 16
B. DELIVERY SERVICE........................................... 17
C. CATERING SERVICE........................................... 18
5. DEVELOPMENT AND OPERATION OF COMMISSARIES..................... 19
A. OBLIGATION TO OPERATE COMMISSARIES......................... 19
B. DEVELOPMENT AND OPENING OF COMMISSARIES.................... 19
C. TRAINING AND GUIDANCE...................................... 19
D. COMMISSARY MANUALS......................................... 20
E. OPERATION OF THE COMMISSARY................................ 20
F. INSURANCE.................................................. 22
G. TRANSFERS.................................................. 22
H. EXPIRATION AND TERMINATION OF COMMISSARY OPERATIONS........ 22
I. RIGHTS AND OBLIGATIONS OF COMPANY
AND DEVELOPER UPON TERMINATION OR
EXPIRATION OF RIGHT TO OPERATE A COMMISSARY................. 23
6. GRANT OF FRANCHISES AND ADVERTISING REQUIREMENT................ 23
A. SITE REVIEW AND APPROVAL.................................... 23
B. LEASE OF APPROVED SITES..................................... 24
C. EXECUTION OF FRANCHISE AGREEMENTS........................... 25
D. INITIAL FRANCHISE AND ROYALTY FEES.......................... 26
E. ADVERTISING EXPENDITURES.................................... 26
7. INITIAL PAYMENTS............................................... 26
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C> <C>
A. DEVELOPMENT FEE............................................. 26
B. REAL ESTATE SERVICES FEE.................................... 26
8. MARKS.......................................................... 27
A. GOODWILL AND OWNERSHIP OF MARKS............................. 27
B. LIMITATIONS ON DEVELOPER'S USE OF MARKS..................... 27
C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS.................... 27
D. DISCONTINUANCE OF USE OF MARKS.............................. 28
E. INDEMNIFICATION OF DEVELOPER................................ 28
9. COPYRIGHTS..................................................... 29
A. OWNERSHIP OF COPYRIGHTED WORKS.............................. 29
B. LIMITATION ON DEVELOPER'S USE OF COPYRIGHTED WORKS.......... 29
C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS.................... 30
D. DISCONTINUANCE OF USE OF.................................... 30
10. COMPUTER SYSTEM AND SOFTWARE................................... 30
A. GRANT OF LICENSE............................................ 30
B. SOFTWARE LICENSE FEE........................................ 33
C. SOFTWARE SUPPORT SERVICE.................................... 33
D. SOFTWARE SUPPORT SERVICE FEE................................ 33
E. MODIFICATION, ENHANCEMENT AND REPLACEMENT
OF COMPUTER SYSTEM AND SOFTWARE............................. 34
F. WARRANTIES AND LIMITATION OF LIABILITY...................... 34
G. SUBCOMPONENT LICENSES AND THIRD-PARTY LICENSES.............. 35
H. COVENANT TO USE ONLY SPECIFIED SOFTWARE AND
LICENSED PROGRAM SUPPORT/CONTROL PROGRAMS................... 36
11. CONFIDENTIAL INFORMATION....................................... 36
12. EXCLUSIVE RELATIONSHIP......................................... 39
13. OBLIGATIONS OF DEVELOPER....................................... 40
A. FULL TIME SUPERVISION....................................... 40
B. CHIEF OPERATING OFFICER..................................... 40
C. DEVELOPMENT DIRECTOR AND REAL ESTATE MANAGERS............... 40
D. TRAINING DIRECTOR........................................... 41
E. MARKETING DIRECTOR.......................................... 42
F. MANAGEMENT PERSONNEL AND TRAINING........................... 43
G. BUDGETS AND FINANCING PLANS................................. 43
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C> <C>
H. INSURANCE.................................................. 44
I. RECORDS AND REPORTS........................................ 45
J. DEVELOPMENT MANUAL, COMMISSARY MANUALS AND STORE MANUALS... 46
K. COMPLIANCE WITH LAWS AND GOOD BUSINESS PRACTICES........... 47
L. HUMAN RESOURCES............................................ 47
M. SPECIFICATIONS, STANDARDS AND PROCEDURES................... 48
14. TRANSFER...................................................... 49
A. BY COMPANY................................................. 49
B. THIS AGREEMENT IS NOT TRANSFERABLE BY DEVELOPER............ 49
C. CERTAIN RIGHTS TO TRANSFER
OWNERSHIP INTERESTS IN DEVELOPER........................... 50
D. COMPANY'S RIGHT TO APPROVE TRANSFERS....................... 51
E. PUBLIC OR PRIVATE OFFERINGS................................ 53
F. EFFECT OF CONSENT TO TRANSFER.............................. 55
G. COMPANY'S RIGHT OF FIRST REFUSAL........................... 55
H. OWNERSHIP STRUCTURE........................................ 56
I. DELEGATION BY COMPANY...................................... 56
J. PERMITTED TRANSFERS........................................ 56
15. TERMINATION OF AGREEMENT...................................... 57
A. BY DEVELOPER............................................... 57
B. BY COMPANY................................................. 57
C. TERMINATION OF THE DEVELOPMENT
TERM AND CERTAIN RIGHTS
OF DEVELOPER............................................... 60
16. RIGHTS AND OBLIGATIONS OF COMPANY AND
DEVELOPER UPON TERMINATION OF THIS
AGREEMENT OR EXPIRATION OF THE AGREEMENT TERM.................. 61
A. PAYMENT OF AMOUNTS OWED TO COMPANY.......................... 61
B. MARKS AND COPYRIGHTED WORKS................................. 61
C. CONFIDENTIAL INFORMATION.................................... 62
D. COVENANT NOT TO COMPETE..................................... 62
E. EFFECT ON COMMISSARIES...................................... 63
F. CONTINUING OBLIGATIONS...................................... 64
17. INDEPENDENT CONTRACTORS/INDEMNIFICATION........................ 64
18. ENFORCEMENT.................................................... 65
A. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS........... 65
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
B. WAIVER OF OBLIGATIONS....................................... 65
C. INJUNCTIVE RELIEF........................................... 67
D. RIGHTS OF PARTIES ARE CUMULATIVE............................ 67
E. COSTS AND LEGAL FEES........................................ 67
F. GOVERNING LAW............................................... 67
G. CONSENT TO JURISDICTION/CHOICE OF FORUM..................... 68
H. LIMITATIONS OF CLAIMS....................................... 68
I. WAIVER OF PUNITIVE DAMAGES.................................. 68
J. WAIVER OF JURY TRIAL........................................ 69
K. BINDING EFFECT.............................................. 69
L. CONSTRUCTION................................................ 69
M. REASONABLENESS; APPROVALS................................... 69
19. NOTICES AND PAYMENTS........................................... 69
EXHIBITS AND ATTACHMENTS
------------------------
EXHIBIT A - CATERING RIDER
EXHIBIT B - DELIVERY RIDER
EXHIBIT C - DEVELOPMENT FEE
EXHIBIT D - DEVELOPMENT AREA(S)
EXHIBIT E - DEVELOPMENT SCHEDULE
EXHIBIT F - FORM FRANCHISE AGREEMENT
EXHIBIT G - PRINCIPAL OWNERS, OTHER OWNERS, KEY MANAGERS,
PERMITTED COMPETITIVE BUSINESSES, AND INITIAL
CAPITALIZATION
EXHIBIT H - DEVELOPER ACKNOWLEDGMENTS AND REPRESENTATIONS
STATEMENT
EXHIBIT I - GUARANTY AND ASSUMPTION OF DEVELOPER'S
OBLIGATIONS
EXHIBIT J - CONFIDENTIALITY AND NONCOMPETE AGREEMENT
EXHIBIT K - PRINCIPAL MARKS TO BE USED BY DEVELOPER
</TABLE>
iv
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
DEVELOPMENT AGREEMENT
---------------------
THIS AGREEMENT is made and entered into this _____ day of ________________,
19____ (the "EFFECTIVE DATE"), by and between EINSTEIN/NOAH BAGEL CORP., a
Delaware corporation ("COMPANY"), and DEVELOPER (defined below).
"DEVELOPER": _________________________________________________________
________________________________________________________,
a _______________________________________________________
Principal Address: _________________________________________________________
_________________________________________________________
_________________________________________________________
1. PREAMBLES.
---------
COMPANY and its Affiliates (as defined below) have developed and are
continuing to develop and refine methods of operating a number of branded retail
food service businesses, each with its own concept and operated under its own
system and marks which are referred to in this Agreement as "UNITS" (defined
below), which feature Products (defined below) for on-premises dining and carry-
out. In addition to on-premises dining and carry-out, COMPANY may, in its sole
discretion, offer to a franchise owner of a UNIT the right (a) to offer Delivery
Service (defined below) and/or (b) to offer Catering Service (defined below)
and/or (c) to operate Special Distribution Arrangements (defined below). UNITS
utilize the Marks (defined below) and operate at locations that feature
distinctive food service formats and trade dress and utilize distinctive
business formats, specifications, employee selection and training programs,
signs, equipment, layouts, systems, recipes, methods, procedures, software,
designs and marketing and advertising standards and formats, all of which
COMPANY is continuing to develop and refine and may modify from time to time in
its sole discretion, and all of which may have one or more variations approved
or specified by COMPANY from time to time (the "SYSTEM"). COMPANY operates, and
grants franchises to certain qualified parties to own and operate UNITS using
the System and the Marks (defined below).
COMPANY grants to certain qualified persons or entities who meet COMPANY's
qualifications and who are willing to undertake the investment and effort, the
right to develop a specified number of UNITS (defined below) within a defined
geographic area. This Agreement governs the right and obligation of DEVELOPER
to enter into Franchise Agreements (defined below) which grant the right to
develop UNITS which use the branded concept, Principal Marks (defined below) and
System described in Exhibit K ("Stores", as further defined
<PAGE>
below) within the Development Area (defined below) in accordance with the
Development Schedule (defined below). The operation of each Store will be
governed by a Franchise Agreement (defined below).
2. CERTAIN DEFINITIONS.
-------------------
For purposes of this Agreement, the terms listed below have the meanings
that follow them. Other terms used in this Agreement are defined in the context
in which they occur.
"ACCOUNTING PERIOD" - One of thirteen periods of four consecutive weeks in
-----------------
each fiscal year of COMPANY that is designated by COMPANY as an accounting
period of COMPANY.
"AFFILIATE" - Any person or legal entity that directly or indirectly owns
---------
or controls COMPANY, that is directly or indirectly owned or controlled by
COMPANY, or that is under common control with COMPANY. For purposes of this
definition, "CONTROL" means the power to direct or cause the direction of the
management and policies of an entity. Neither Boston Chicken, Inc. ("BCI") nor
any of its affiliates shall be considered Affiliates of COMPANY until such time
as BCI owns a direct Ownership Interest in COMPANY and otherwise meets the
foregoing criteria.
"AGREEMENT TERM" - The period commencing upon the Effective Date and ending
--------------
upon the expiration or termination of the last to expire or terminate of the
Franchises (defined below) and successor Franchises granted to DEVELOPER
pursuant to this Agreement, unless terminated sooner in accordance with the
provisions of this Agreement.
"APPROVED SITE" - A site which COMPANY has approved as meeting its minimum
-------------
criteria for the development and operation of any UNITS.
"BAGEL STORE" - A food service business, including a UNIT, which derives a
-----------
significant portion of its revenue from the sale of bagels and/or bagel-related
products or from any other product or service which is or hereafter becomes a
source of a significant portion of the revenue of a UNIT.
"CATERING AREA" - The geographic area in which COMPANY, in its sole
-------------
discretion, authorizes the owner of a Franchise (a "FRANCHISE OWNER") to provide
Catering Service pursuant to a Catering Rider, which area may be the same as,
smaller than, larger than or different from the Territory (defined in the
Franchise Agreement) of a UNIT.
"CATERING RIDER" - The form of rider to this Agreement or to a Franchise
--------------
Agreement used by COMPANY from time to time to authorize in its sole discretion
a Franchise Owner to offer Catering Service (defined below) within the
applicable Catering Area. The current form of COMPANY's Catering Rider is
attached hereto as Exhibit A.
---------
"CATERING SERVICE" - The delivery of Products prepared at a UNIT or a
----------------
separate facility approved by COMPANY in writing (such approved facility is
referred to herein as a "CATERING
2
<PAGE>
FACILITY") to customers in the Catering Area pursuant to COMPANY's standards and
specifications for the provision of such service, which COMPANY may change from
time to time in its sole discretion, where
(1) such Products are intended to serve fifteen (15) or more persons,
or
(2) in addition to the delivery of Products, DEVELOPER provides
ancillary services to a customer at such location within the Catering Area,
including, by way of example and without limitation, the setting up for
serving or distribution of Products.
"COMMISSARY" - A food preparation facility operated by DEVELOPER pursuant
----------
to this Agreement that:
(1) procures and receives those Products, ingredients and materials
used in the preparation and packaging of Products, and other materials and
supplies used in the operation of UNITS as COMPANY may specify from time to
time;
(2) prepares and packages Products in accordance with recipes,
methods, procedures, standards and specifications established by COMPANY,
in its sole discretion, from time to time; and
(3) distributes to Stores (defined below) Products and other
materials and supplies used in the operation of UNITS.
"COMPETITIVE BUSINESS" - A business or enterprise, other than a UNIT or
--------------------
Commissary, that:
(1) offers food and/or beverage products at wholesale or retail,
which are the same as or similar to the Products, through:
(a) on-premises dining;
(b) carry-out;
(c) delivery service;
(d) catering service; or
(e) other distribution channels similar to those used by COMPANY; or
(2) grants or has granted franchises or licenses or establishes or
has established joint ventures, for the development and/or operation of one
or more businesses or enterprises described in the foregoing clause (1);
provided, however, that the term "Competitive Business" shall not include:
(a) any Boston Market restaurant operated pursuant to a valid
franchise or license agreement with Boston Chicken, Inc. or its
successors; or
3
<PAGE>
(b) any business or enterprise that derives less than 10% of its
revenue from the sale of (i) bagels and/or bagel related products
(including but not limited to cream cheese and other spreads,
bagel sandwiches and bagel chips) or (ii) any other product which
accounts for 15% or more of the revenue of any UNIT owned or
operated by COMPANY or a franchisee of COMPANY.
"COMPUTER SYSTEM" - Those brands, types, makes, and/or models of
---------------
communications and computer systems and hardware specified or required by
COMPANY for use by, between, or among the Stores and/or DEVELOPER including, but
not limited to:
(1) back office and point of sale systems, data, audio, video, and
voice storage, retrieval, and transmission systems for use at the Stores
and/or at DEVELOPER's office, between or among the Stores and DEVELOPER and
between or among Stores and/or DEVELOPER and COMPANY;
(2) security systems;
(3) printers; and
(4) archival and back-up systems.
"CONTROLLING INTEREST" - If DEVELOPER is a:
--------------------
(1) corporation, such number of the voting shares of DEVELOPER or
such other rights as (a) shall permit voting control of DEVELOPER on any
issue and (b) shall prevent any other person, group, combination, or entity
from blocking voting control on any issue or exercising any veto power; and
(2) general partnership, a managing partnership interest, such
percentage of the general partnership interests in DEVELOPER or such other
rights as (a) shall permit determination of the outcome on any issue and
(b) shall prevent any other person, group, combination, or entity from
blocking voting control on any issue or exercising any veto power;
(3) limited partnership, general partnership interest, such
percentage of limited partnership interests or such other rights as shall
permit the replacement or removal of any general partner; and
(4) limited liability company, such percentage of the membership
interests of DEVELOPER or such other rights as (a) shall permit voting
control of DEVELOPER on any issue, and (b) shall prevent any other person,
group, combination, or entity from blocking voting control on any issue or
exercising any veto power.
4
<PAGE>
"DELIVERY AREA" - The geographic area in which COMPANY, in its sole
-------------
discretion, authorizes a franchise owner to provide Delivery Service (defined
below) pursuant to a Delivery Rider (defined below), which area may be the same
as, smaller than, larger than or different from the Territory of a UNIT.
"DELIVERY RIDER" - The form of rider to this Agreement or to a Franchise
--------------
Agreement used by COMPANY from time to time to authorize or require in its sole
discretion a franchise owner of a UNIT to offer Delivery Service within the
applicable Delivery Area. The current form of COMPANY's Delivery Rider is
attached hereto as Exhibit B.
---------
"DELIVERY SERVICE" - The delivery of Products prepared at a UNIT or a
----------------
separate delivery facility approved by COMPANY (such approved facility is
referred to herein as a "DELIVERY FACILITY") to customers in the Delivery Area
pursuant to COMPANY's standards and specifications for the provision of such
service, which COMPANY may change from time to time in its sole discretion,
where
(1) such Products are intended to serve fewer than fifteen (15)
persons, and
(2) such service involves the provision of no services other than the
delivery of Products to a customer at a location within the Delivery Area.
"DEVELOPMENT AREA" - The aggregate of the geographic areas described in
----------------
Exhibit D to this Agreement.
- ---------
"DEVELOPMENT SCHEDULE" - The schedule of the number of UNITS required to be
--------------------
open and operational at specified dates in each Sub-Area (defined below) and the
required opening dates for each of them set forth in Exhibit E to this
---------
Agreement.
"DEVELOPMENT TERM" - The period during which DEVELOPER is authorized and
----------------
required to develop Stores pursuant to this Agreement, which will commence on
the Effective Date and will expire, unless terminated earlier in accordance with
the terms of this Agreement, on the earlier to occur of (i) the last opening
date set forth in the Development Schedule; or (ii) the first date on which the
number of Stores for which a Franchise Agreement has been executed and delivered
for a location in the Development Area is equal to the Total Development Quota
(as defined in the Development Schedule set forth in Exhibit E to this
---------
Agreement).
"FRANCHISE" - The right to operate a UNIT at a particular location and to
---------
use one or more of the Marks and the System in the operation thereof.
"FRANCHISE AGREEMENT" - at COMPANY's option, either:
-------------------
(1) the form of franchise agreement (including exhibits, riders,
addenda and attachments thereto) attached hereto as Exhibit F; or
5
<PAGE>
(2) the form of franchise agreement (including all exhibits, riders,
guarantees and other agreements used in connection therewith) used by
COMPANY from time to time in the offering and granting of Franchises in the
United States of America,
in either instance revised by COMPANY in good faith to the extent necessary to
have the Franchise Agreement reflect the substantive changes contained in
Addendum No. 1 to the Franchise Agreement attached hereto as part of Exhibit F.
"IMMEDIATE FAMILY" - (1) The spouse of a person; and (2) the natural and
----------------
adoptive parents and natural and adopted children and siblings of such person
and their spouses; and (3) the natural and adoptive parents and natural and
adopted children and siblings of the spouse of such person; and (4) any other
member of the household of such person; provided, in the case of natural and
adopted children and siblings and their spouses and the parents, children and
siblings of spouses, that such person received or had access to Confidential
Information, including as an employee, supplier, officer, director, stockholder
or agent of DEVELOPER or any other operator of a UNIT.
"LICENSED PROGRAM" - The retail store-level computer software programs
----------------
(other than the Support/Control Program, as defined below) developed by or for
COMPANY and designated by COMPANY from time to time as specified or required in
connection with utilization of the Computer System, which may include, without
limitation, COMPANY's required point-of-sale, bookkeeping, inventory, training,
marketing, employee selection, operations and financial information, collection
and retrieval systems (including COMPANY's general ledger system utilizing the
standard chart of accounts prescribed by COMPANY from time to time) for use in
connection with the operation of UNITS or franchise owners' and developers'
businesses, including any updates, supplements, modifications or enhancements
thereto made from time to time, all related documentation, the tangible media
upon which such programs are recorded, and the database file structure thereof,
but excluding any data or databases owned or compiled by COMPANY or its
Affiliates or their licensors for use with the Licensed Program or otherwise or
any data generated by the use of the Licensed Program. The Licensed Program
includes, but is not limited to, programs utilized by UNITS for point-of-sale
and cash management, customer feedback kiosks, inventory management, order
processing, employee feedback, production scheduling, labor scheduling, ideal
food costs, store operations and smart form reporting.
"MARKS" - The trademarks, service marks, logos and other commercial symbols
-----
which COMPANY uses and authorizes developers and franchise owners to use to
identify, the services and/or products offered by UNITS, and the "TRADE DRESS"
(defined in the Franchise Agreement); provided that such trademarks, service
marks, logos, other commercial symbols, and the Trade Dress are subject to
modification and discontinuance at COMPANY's sole discretion and may include
additional or substitute trademarks, service marks, logos, commercial symbols
and trade dress as provided in this Agreement. The Marks include the Principal
Marks DEVELOPER is authorized to use in the operation of the Stores.
6
<PAGE>
"OWNER" - Each person or entity holding direct or indirect, record or
-----
beneficial Ownership Interests in DEVELOPER, and each person who has other
direct or indirect property rights in DEVELOPER or this Agreement.
"OWNERSHIP INTERESTS" - In relation to a: (i) corporation, the record or
-------------------
beneficial ownership of one or more shares in the corporation; (ii) partnership,
the record or beneficial ownership of a general or limited partnership interest;
(iii) limited liability company, the record or beneficial ownership of a
membership interest in the limited liability company; or (iv) trust, the
ownership of a beneficial interest of such trust.
"PERMITTED COMPETITIVE BUSINESS" - A business which constitutes a
------------------------------
Competitive Business on the date of this Agreement and is disclosed in Exhibit G
---------
to this Agreement, provided that such business (1) is not on the date of this
Agreement and does not at any time thereafter become a Bagel Store, and (2) does
not offer bagels or bagel-related products on its menu, provided that if such
business is a franchised or licensed business of a franchisor which, pursuant to
an agreement executed prior to the date of this Agreement and under which, after
the date of this Agreement, the franchisor or licensor specifies that such
business offer bagels or bagel-related products as a required menu item, it
shall continue to be deemed a Permitted Competitive Business so long as it does
not become a Bagel Store.
"PRINCIPAL MARKS" - The Marks COMPANY authorizes DEVELOPER to use to
---------------
identify the Stores; the Principal Marks as of the date of this Agreement are
described in Exhibit K to this Agreement.
---------
"PRINCIPAL OWNER" - Each Owner which:
---------------
(1) is a general partner in DEVELOPER; or
(2) has a direct or indirect equity interest of 10% or more
(regardless of whether such Owner is entitled to vote thereon) in (a)
DEVELOPER or (b) any UNIT or (c) any developer and/or franchise owner of
UNITS other than DEVELOPER; provided, however, that a reduction in a
Principal Owner's equity interest below 10% shall not affect his/her/its
status as a Principal Owner unless such reduction is the result of the
transfer of all his/her/its equity interests in DEVELOPER, a UNIT or such
developer and/or franchise owner of UNITS; or
(3) is designated as a Principal Owner in Section 2 of Exhibit G to
this Agreement.
"PRODUCTS" - Products approved or required by COMPANY from time to time, in
--------
its sole discretion, for sale at or from UNITS, including, without limitation,
bagels, bagel-related products, cream cheese and other spreads, sandwiches,
soups, salads, baked goods, breakfast items, an assortment of hot and cold
beverages, teas (leaves, bags, dry mixes and related forms), coffees (beans,
ground and related forms) and other food products and merchandise, provided
7
<PAGE>
that the foregoing products are subject to modification or discontinuance in
COMPANY's sole discretion, from time to time, and may include additional or
substitute products.
"REQUIRED TELEVISION ADVERTISING" - Television advertising in the
-------------------------------
Designated Market Area ("DMA") (as defined by A.C. Nielsen Co. from time to
time) in which the Development Area is located at a minimum of 200 gross ratings
points for a minimum of 36 weeks per calendar year, provided that COMPANY may,
in its sole discretion, from time to time use a market designation comparable
to, but different from, the DMA for purposes of this definition.
"SPECIAL DISTRIBUTION AGREEMENT" - A separate agreement whereby COMPANY
------------------------------
authorizes a Franchise Owner to operate a Special Distribution Arrangement
(defined below) at a Special Distribution Location (as defined below) designated
by COMPANY.
"SPECIAL DISTRIBUTION ARRANGEMENT" - The sale of all or some of the
--------------------------------
Products, as designated by COMPANY, at or from a Special Distribution Location
(defined below), whether or not by or through on-premises food service
facilities or concessions, pursuant to COMPANY's standards and specifications
for such sales, which COMPANY may change from time to time in its sole
discretion.
"SPECIAL DISTRIBUTION LOCATION" - A facility or location, including by way
-----------------------------
of example and without limitation, a grocery store, convenience store,
supermarket, school, hospital, office, work site, military facility,
entertainment or sporting facility or event, airport, bus or train station,
park, toll road or limited access highway facility, or other similar facility,
at or from which COMPANY, in its sole discretion, authorizes the operation of a
Special Distribution Arrangement pursuant to a Special Distribution Agreement,
which facility may be located within or outside the Development Area or any Sub-
Area.
"SPECIFIED SOFTWARE" - Such software (other than the Licensed Program and
------------------
Support/Control Programs), programming, and services which COMPANY from time to
time specifies or requires in connection with utilization of the Computer
System, the Licensed Program and the Support/Control Programs.
"STORE" - A UNIT developed, owned and operated by DEVELOPER pursuant to
-----
this Agreement and a Franchise Agreement that operates using the System and
Principal Marks identified in Exhibit K hereto and pursuant to COMPANY's
operational requirements associated with such Principal Marks as in effect from
time to time.
"SUB-AREAS" - The geographic areas designated as Sub-Areas in Exhibit D to
--------- ---------
this Agreement which, taken together, make up the Development Area.
"SUB-AREA TERM" - The period during which DEVELOPER is authorized and
-------------
required to develop UNITS in a given Sub-Area pursuant to this Agreement, which
will commence on the Effective Date and will expire, unless terminated earlier
in accordance with the terms of this Agreement, on the earlier to occur of: (i)
the last opening date set forth in Exhibit D to this Agreement for that Sub-
---------
Area; or (ii) the first date on which the number of Stores in the Sub-
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Area for which a Franchise Agreement has been executed and delivered is equal to
the Sub-Area Quota (as set forth in Exhibit E ) for that Sub-Area.
----------
"SUPPORT/CONTROL PROGRAMS" - The computer software programs developed by or
------------------------
for COMPANY and designated from time to time as specified or required in
connection with real estate services and other functions performed by COMPANY
pursuant to this Agreement or in connection with support, supervision, reporting
or control of UNITS and in connection with analysis, tracking, maintenance,
feedback and communication functions related thereto or to the employees
thereof, including but not limited to, Notes Databases, structured reporting and
related software.
"UNIT" - A food service business that:
----
(1) offers Products for consumer consumption through on-premises
dining and carry-out, provided that COMPANY may, in its sole discretion,
authorize and/or require such business to offer Delivery Service pursuant
to a Delivery Rider and/or approve the Franchise Owner of such business to
offer Catering Service pursuant to a Catering Rider or to operate Special
Distribution Arrangements pursuant to a Special Distribution Agreement
(defined below); and
(2) operates using the System and one or more of the Marks; and
(3) is either operated by COMPANY or its Affiliates or pursuant to a
valid franchise from COMPANY.
3. DEVELOPMENT RIGHTS AND OBLIGATIONS.
----------------------------------
3.A. GRANT OF DEVELOPMENT RIGHTS;
PRINCIPAL OWNERS' GUARANTY.
--------------------------
DEVELOPER has requested that COMPANY grant to DEVELOPER the right to
develop, own and operate, strictly in accordance with the Sub-Area Development
Quotas and the Total Development Quota, Stores in the Development Area.
DEVELOPER's request, with respect to the Principal Marks and concepts associated
therewith (as listed on Exhibit K attached hereto), has been approved by COMPANY
in reliance upon all of the representations made by DEVELOPER and its Owners in
any submitted application and/or during the application process and in the
Developer Acknowledgements and Representations Statement, a copy of which is
attached to this Agreement as Exhibit H and which shall be executed by DEVELOPER
---------
concurrently with this Agreement. Within sixty (60) days of execution of this
Agreement, DEVELOPER agrees to prepare and submit to COMPANY for COMPANY's
review, amendment, and approval a real estate development plan for developing
Stores in the Development Area, including, without limitation, designed by which
of COMPANY's approved retail bagel store programs DEVELOPER intends to develop
in the Development Area or Sub-Area (the "MARKET REAL ESTATE DEVELOPMENT PLAN")
(which shall utilize, among other sources, information from the Demographic
Detail Report (defined below in Section 6.A.) which
9
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DEVELOPER purchases from COMPANY). Provided that DEVELOPER is in full compliance
with all of the terms and conditions of this Agreement, including, without
limitation, the development obligations contained in Section 3.C. hereof, and
DEVELOPER is in full compliance with all of their obligations under all
Franchise Agreements executed pursuant hereto, COMPANY will grant to DEVELOPER
during the Development Term and in accordance with Section 6 hereof, the right
to develop and operate the number and types of Stores in each Sub-Area of the
Development Area as specified on Exhibit D to this Agreement. DEVELOPER
---------
acknowledges and agrees that DEVELOPER's rights under this Agreement are limited
to the designated number of Stores for each Sub-Area and the schedule and timing
of the opening of Stores in each Sub-Area during the respective Sub-Area Terms
as set forth on Exhibit D to this Agreement. DEVELOPER is not granted any rights
---------
to develop or operate, and DEVELOPER will not develop or operate, UNITS outside
the Sub-Areas, except pursuant to rights granted to DEVELOPER under other
agreements entered into with COMPANY.
DEVELOPER expressly acknowledges and agrees that it has no right to renew
its rights under this Agreement upon the expiration or termination of the
Agreement Term or the Development Term. DEVELOPER acknowledges and agrees that
the execution and delivery of this Agreement shall constitute notice to
DEVELOPER of non-renewal for purposes of fulfilling the requirements of any
applicable state or federal law governing the non-renewal of franchise or
development rights.
DEVELOPER shall cause all Principal Owners and their spouses as of the
Effective Date to execute and deliver to COMPANY concurrently with the execution
of this Agreement and all persons or entities that become Principal Owners after
the Effective Date and their spouses to promptly thereafter execute and deliver
to COMPANY, the form of Guaranty and Assumption of Developer's Obligations
("GUARANTY") attached hereto as Exhibit I.
---------
Notwithstanding the foregoing:
(a) DEVELOPER shall not be required to cause the execution and
delivery of the Guaranties referred to in this Section if, and for such
period of time as, DEVELOPER does not pay dividends, distributions or
unreasonable compensation to any Owner at any time that the Owners' equity
in DEVELOPER is either less than $5,000,000 or would be reduced to below
that amount by reason of such payment; and
(b) spouses of guarantors shall not be required to execute any
Guaranties referred to in this Section unless, under applicable law
(including, without limitation, the law of the state in which such
guarantors and/or their spouses reside), their failure to execute would
render the Guaranties null and void.
3.B. TERRITORIAL RIGHTS.
------------------
Except as otherwise provided in this Agreement (including, without
limitation, Section 4 and Sections 3.E. and 3.F.), and provided that DEVELOPER
is in full compliance with this Agreement and with all Franchise Agreements,
COMPANY and its Affiliates will not during the
10
<PAGE>
Sub-Area Term for each Sub-Area operate or grant franchises for the operation of
Stores within such Sub-Area.
3.C. DEVELOPMENT OBLIGATIONS.
-----------------------
DEVELOPER agrees that during the Development Term, it will continuously
exert its best efforts to promote and enhance the development of UNITS within
the Development Area. Without limiting the foregoing obligation, DEVELOPER
agrees to have open and in operation in each Sub-Area the number and types of
Stores set forth as the respective Sub-Area Quota in Exhibit E attached hereto
---------
by the opening dates specified therein. DEVELOPER and COMPANY acknowledge and
agree that a Store that closes for more than five (5) days (not counting
COMPANY-approved holidays) during any period of 12 months shall not be counted
as open and in operation as of the next store opening date after such closing
for purposes of determining DEVELOPER's compliance with the Development Schedule
for the Sub-Area in which the Store is located unless such closing is due to
circumstances listed in the last paragraph of Section 18.B of this Agreement, in
which case, the provisions of Section 18.B shall apply. DEVELOPER also agrees
that it will at all times faithfully, honestly and diligently perform its
obligations under this Agreement and that it will update the Market Real Estate
Development Plan as COMPANY requires from time to time. DEVELOPER acknowledges
that COMPANY makes no representations or warranties that the Development Area or
the Sub-Areas can support, or that there are sufficient sites for, the number of
Stores specified in the Development Schedule. DEVELOPER acknowledges and agrees
that its failure to open and operate Stores pursuant to this Agreement shall be
a material breach of this Agreement entitling COMPANY to all remedies available
to it pursuant to this Agreement and applicable law.
3.D. RIGHTS RETAINED BY COMPANY.
--------------------------
COMPANY (on behalf of itself, its Affiliates and its designees) retains all
rights with respect to UNITS, the Marks, the Copyrighted Works, and the sale of
Products and any other products and services, anywhere in the world, including,
without limitation:
(1) the right to operate or grant others (including any person or
entity related to any manner whatsoever to COMPANY) the right to operate
food service businesses, including, without limitation, UNITS and/or Bagel
Stores, using the Marks or any other marks and using the System or any
other system at such locations within and/or outside the Development Area
and each Sub-Area, both during and upon expiration or termination of the
Development Term or Agreement Term, and on such terms and conditions as
COMPANY, in its sole discretion, deems appropriate (subject to the rights
expressly granted to DEVELOPER in Section 3.B. of this Agreement); and
(2) subject to any rights of DEVELOPER under Section 4 of this
Agreement, the right, and the right to grant others (including any person
or entity related in any manner whatsoever to COMPANY) the right, to
develop, manufacture, market, distribute and/or sell Products and/or any
other product or service within and/or outside the Development Area and
each Sub-Area through any channel of distribution whatsoever,
11
<PAGE>
whether wholesale, retail or otherwise, including, without limitation,
through Special Distribution Arrangements, Delivery Service, Catering
Service and BOSTON MARKET outlets under or in association with the Marks or
any other trademarks and/or to own or operate any other business under the
Marks or any other trademarks; and
(3) subject to Sections 3.E. and 3.F. below, the right to develop
Target Sites (defined below) and to acquire, operate and convert to a UNIT
any business, including, without limitation, a business operating one or
more Bagel Stores (other than UNITS) or other food service businesses
located or operating within and/or outside the Development Area and any
Sub-Area.
3.E. DEVELOPER'S OPTION TO DEVELOP TARGET SITES.
------------------------------------------
Notwithstanding anything to the contrary in this Agreement, if during the
Sub-Area Term of a particular Sub-Area COMPANY locates a site within such Sub-
Area at which a Bagel Store is not then operated but which, in COMPANY's
judgment, is suitable for a UNIT (a "TARGET SITE"), COMPANY shall, as soon as is
practicable after the site is identified (taking into consideration any
applicable contractual or legal prohibitions or limitations), notify DEVELOPER
in writing of such Target Site if COMPANY intends that such Target Site be
developed and operated as a Store. Within ten (10) days after DEVELOPER's
receipt of COMPANY's notice regarding such Target Site (including any relevant
site-related materials in COMPANY'S possession), DEVELOPER shall notify COMPANY
if DEVELOPER desires to develop and operate a UNIT at such Target Site as
described in the notice.
If DEVELOPER timely notifies COMPANY in writing that DEVELOPER desires to
develop and operate a Store at such Target Site and COMPANY has fully negotiated
a lease or purchase agreement for such Target Site, then DEVELOPER shall (1)
obtain the consent of the landlord to execute and shall execute such lease or an
assignment and assumption of lease, if applicable, or (2) obtain the consent of
the seller to execute and shall execute a purchase agreement or an assignment
and assumption of purchase agreement, if applicable, and (3) execute a Franchise
Agreement and such ancillary documents as are then customarily used by COMPANY
in the grant of franchises for UNITS (collectively, the "Franchise Documents")
as modified for use in connection with the Target Site, as necessary, and (4)
pay COMPANY a site location and negotiation fee (the "SITE LOCATION AND
NEGOTIATION FEE") equal to Twenty Thousand Dollars ($20,000.00) plus COMPANY's
reasonable out-of-pocket expenses incurred in locating such Target Site and
negotiating the lease or purchase agreement, all within ten (10) business days
after COMPANY's delivery to DEVELOPER of the lease or purchase agreement, as the
case may be, and the Franchise Documents. The Site Location and Negotiation Fee
is paid to compensate COMPANY for the internal costs of the site location
services it provides. COMPANY shall fully cooperate with DEVELOPER in obtaining
the landlord's consent to DEVELOPER's execution of such lease or the seller's
consent to DEVELOPER's execution of such purchase agreement or assignment of
purchase agreement as the case may be.
If DEVELOPER timely notifies COMPANY in writing that DEVELOPER desires to
develop and operate a Store at such Target Site and COMPANY has not fully
negotiated a lease
12
<PAGE>
or purchase agreement for such Target Site, then DEVELOPER will have thirty (30)
days in which to negotiate and deliver to COMPANY a lease or purchase agreement
for such Target Site in form for execution. If COMPANY disapproves the lease or
purchase agreement for failure to meet COMPANY's requirements, DEVELOPER will
have ten (10) business days within which to negotiate and deliver to COMPANY a
revised lease or purchase agreement for such Target Site in form for execution.
If COMPANY approves the lease or the purchase agreement for such Target Site,
then DEVELOPER will (1) execute such lease or purchase agreement, as applicable,
and (2) execute the Franchise Documents, and (3) pay to COMPANY a site location
fee (the "SITE LOCATION FEE") equal to Ten Thousand Dollars ($10,000.00), plus
COMPANY's reasonable out-of-pocket expenses in locating such Target Site and, to
the extent applicable, partially negotiating the lease or purchase agreement,
all within ten business (10) days after COMPANY's delivery of the Franchise
Documents to DEVELOPER.
If DEVELOPER (a) declines the option to develop a Target Site, (b) fails to
timely notify COMPANY of its election to develop a Target Site or (c) fails to
timely execute the approved lease or purchase agreement and Franchise Documents
for a Target Site and pay the applicable fee as provided herein, then COMPANY or
its designee may develop and operate a Store at such Target Site.
Any Target Site for which DEVELOPER executes the Franchise Documents and
develops and opens a UNIT will count toward the Sub-Area Quota for the Sub-Area
in which such Target Site is located. COMPANY will not be required to give
notice to DEVELOPER or offer to DEVELOPER a franchise to develop a Store with
regard to any suitable Target Site or Conversion Site (defined below) in a Sub-
Area that COMPANY desires to develop and operate as a Store after the total
number of sites for which DEVELOPER has executed a Franchise Agreement and
accepted as Target Sites or Conversion Sites for that Sub-Area equals the Sub-
Area Quota.
3.F. DEVELOPER'S OPTION TO PURCHASE CONVERSION SITES.
-----------------------------------------------
If, during the applicable Sub-Area Term for a particular Sub-Area, COMPANY
acquires the shares or assets (which may include, by way of illustration and not
by way of limitation, furniture, fixtures, equipment, leasehold improvements
and/or leasehold interests) of any business operating a Bagel Store at one or
more sites located within such Sub-Area which meet COMPANY's specifications and
standards as in effect from time to time for conversion to UNITS (the
"CONVERSION SITES"), and COMPANY determines in its sole discretion to convert
such Conversion Sites to Stores, COMPANY agrees to offer to sell such Conversion
Sites to DEVELOPER for the price paid therefor by COMPANY. Such price will
include that portion of the direct and indirect costs and liabilities incurred
or assumed by COMPANY in making such acquisition and allocated to such
Conversion Site whether paid or owed to the seller of such Conversion Sites, an
Affiliate or third parties and other expenses allocated or otherwise related to
such Conversion Sites (including losses, whether from continuing operations or
closing acquired units) plus interest at the COMPANY's cost of money on the
balance of such amounts from time to time, provided that:
13
<PAGE>
(1) such sale will not, in the COMPANY's judgment, conflict with any
existing legal obligation of COMPANY or the business being acquired; and
(2) such sale will not, in the COMPANY's judgment, preclude the
completion of the acquisition on the terms agreed to by COMPANY; and
(3) such sale will not, in COMPANY's judgment, interfere with any
other legal agreement, arrangement or combination or affect federal or
state income tax consequences arising from the acquisition in a manner
adverse to any of the parties thereto; and
(4) such sale may, at COMPANY's option, include (at a price
determined on the same basis as for Conversion Sites) certain acquired
stores which fall within the Development Area or any Sub-Area but which do
not meet COMPANY's criteria for conversion to UNITS and which may have to
be closed or sold to a third party subsequent to DEVELOPER's acquisition;
and
(5) DEVELOPER agrees to (a) execute, concurrently with DEVELOPER's
purchase, the Franchise Documents, as modified for use in connection with a
Conversion Site as necessary, for each and every such Conversion Site, (b)
convert each such Conversion Site to a Store as soon as practicable
thereafter (but in no event later than the date specified by COMPANY) in
accordance with COMPANY's standards and specifications and (c) close or
sell, within the reasonable time period specified by COMPANY, any acquired
sites which are not suitable for conversion.
DEVELOPER shall have thirty (30) days after receipt of COMPANY's offer in which
to accept or reject such offer by written notice to COMPANY. If accepted,
DEVELOPER shall have thirty (30) days from the date of acceptance within which
to complete the acquisition.
In the event DEVELOPER rejects or fails to timely accept COMPANY's offer to
sell such Conversion Sites or COMPANY is unable to extend such offer for any of
the aforementioned reasons, COMPANY agrees that, provided DEVELOPER is in full
compliance with this Agreement and all Franchise Agreements to which they are
parties, it will not utilize or license the use of the Marks at such Conversion
Sites for one (1) year following COMPANY's acquisition thereof; provided,
however, that COMPANY may operate, alter, modify, refurbish, remodel, promote
and market any such Conversion Sites and use the Licensed Program and Computer
System in the operation thereof during such one (1) year period. For purposes
of this Section 3.F., all references to COMPANY shall be deemed to include its
Affiliates.
Any Conversion Site for which DEVELOPER executes the Franchise Documents
and develops and opens a Store shall count toward the Sub-Area Quota for the
Sub-Area in which such Conversion Site is located as of the date of conversion.
14
<PAGE>
COMPANY agrees to use reasonable efforts to obtain input (including market
and competitive information) from DEVELOPER in connection with the due diligence
process undertaken by COMPANY in any potential acquisition of Conversion Sites
in a particular Sub-Area during the applicable Sub-Area Term.
3.G. POST-TERM DEVELOPMENT.
---------------------
(1) Notwithstanding anything contained in this Section 3 to the
contrary, if, at any time during the period commencing 18 months prior to
expiration of the Development Term for each Sub-Area (including any Sub-
Areas added pursuant to Section 3.G) and ending 24 months following the
expiration of the Development Term for such Sub-Area (the "Post-Development
Period"), either (a) COMPANY or its Affiliates or (b) DEVELOPER determines
that such Sub-Area may accommodate additional UNITS beyond that which are
required under the Agreement (the "Post-Development Stores") and desires to
conduct such additional development following the expiration of the
Development Term for such Sub-Area, the party desiring to conduct such
development shall provide the other with notice thereof ("Development Plan
Notice"). Such notice shall contain any demographic, competitive or market
analysis on which the notifying party based its determination and the
development plan and schedule proposed for such additional development.
(2) The parties shall, as soon as practicable following issuance and
receipt of a Development Plan Notice and for a period of 45 days
thereafter, engage in good faith negotiations for the execution of a new
development agreement (the "Post-Development Agreement") in the form of
development agreement then being used by COMPANY, which may contain
different terms and/or higher fees than the Agreement, for the right to
develop and acquire the franchise to operate the agreed-upon number of
UNITS.
(3) If COMPANY and DEVELOPER timely agree on the terms of the Post-
Development Agreement within the period specified in paragraph (2) above,
COMPANY shall provide DEVELOPER with execution forms of the Post-
Development Agreement, and DEVELOPER shall execute and return the Post-
Development Agreement to COMPANY within 15 days of its receipt thereof and
pay all fees due upon the execution thereof.
(4) As to any particular Sub-Area, COMPANY shall have no obligation
to negotiate with DEVELOPER pursuant hereto and may develop in such Sub-
Area the Post-Development Stores itself, through its Affiliates or other
franchisees or licensees if:
(a) DEVELOPER fails to commence good faith negotiations within
seven (7) days of its receipt of a Development Plan Notice from
COMPANY; or
(b) DEVELOPER and COMPANY have engaged in good faith
negotiations as required hereunder but are unable to agree upon a
final
15
<PAGE>
development schedule or form of Post-Development Agreement during the
45-day negotiation period; or
(c) DEVELOPER fails to execute the Post-Development Agreement
and pay all fees required thereunder within the periods specified in
subparagraph (3) below; or
(b) the Agreement is terminated, either in whole or with respect
to the applicable Sub-Area, prior to its expiration date; or
(e) DEVELOPER or any of its Principal Owners receives a notice
to cure, termination or default from COMPANY with respect to a breach
or default of any provision of the Agreement, and Franchise Agreement
or any other agreement with COMPANY and which, if curable, has not
been cured within any applicable cure period; or
(f) the Post-Development Period expires without either party
issuing a Development Plan Notice.
4. OTHER DISTRIBUTION METHODS.
--------------------------
4.A. SPECIAL DISTRIBUTION ARRANGEMENTS.
---------------------------------
DEVELOPER acknowledges and agrees that: (1) DEVELOPER is not granted, and
COMPANY has no obligation to offer to DEVELOPER, any rights to operate Special
Distribution Arrangements within or outside the Development Area or the Sub-
Areas pursuant to this Agreement; and (2) the right to operate or grant to
others the right to operate Special Distribution Arrangements is specifically
reserved to COMPANY or its designees. If COMPANY, at any time and in its sole
discretion, determines to offer DEVELOPER the right to operate a Special
Distribution Arrangement at a Special Distribution Location designated by
COMPANY, COMPANY will so notify DEVELOPER by delivering to DEVELOPER a form of
Special Distribution Agreement. DEVELOPER will have fifteen (15) days after its
receipt thereof to execute and deliver to COMPANY such executed Special
Distribution Agreement. If DEVELOPER fails to execute and deliver to COMPANY
the executed Special Distribution Agreement within such fifteen (15) day period
or commence such Special Distribution Arrangement within the period specified
therein, then DEVELOPER shall have no right to operate such Special Distribution
Arrangement thereafter. COMPANY reserves the right under the Special
Distribution Agreement, at any time and in its sole discretion with or without
cause and regardless of the investment made by DEVELOPER in establishing or
operating the Special Distribution Arrangement or the length of time the Special
Distribution Arrangement has been in effect, to suspend or terminate DEVELOPER's
right to operate the Special Distribution Arrangement, effective ninety (90)
days after COMPANY's written notice to DEVELOPER. Notwithstanding the
foregoing, COMPANY agrees that, if during the Development Term it intends to
engage in a Special Distribution Arrangement at or from (a) a military facility,
(b) an entertainment or sporting facility or event, (c) an airport, bus or train
station, (d) a toll road or
16
<PAGE>
limited access highway facility, or (e) any specialty kiosk located in or
adjacent to any similar facilities, located within the Development Area, COMPANY
will offer DEVELOPER a Special Distribution Agreement, the execution of which
shall be governed by this Section 4.A.
4.B. DELIVERY SERVICE.
----------------
DEVELOPER acknowledges and agrees that: (1) DEVELOPER is not granted, and
COMPANY has no obligation to offer to DEVELOPER, any rights within or outside
the Development Area or the Sub-Areas to offer Delivery Service from any of the
Stores or otherwise pursuant to this Agreement; and (2) the right to provide
Delivery Service is specifically reserved to COMPANY or its designees. If
COMPANY, at any time and in its sole discretion, determines to offer Delivery
Service in a designated Delivery Area in which a Store is located, COMPANY will
offer DEVELOPER the right to offer Delivery Service by delivering to DEVELOPER a
form of Delivery Rider to this Agreement (or to the applicable Franchise
Agreement). DEVELOPER will have fifteen (15) days after its receipt thereof to
execute and deliver to COMPANY such executed Delivery Rider. A Delivery
Facility will not be counted as a separate Store for purposes of the Sub-Area
Quotas or the Total Development Quota set forth in the Development Schedule. If
DEVELOPER fails to execute and deliver to COMPANY such executed Delivery Rider
within such fifteen (15) day period or commence Delivery Service within the
specified period, then DEVELOPER shall have no right to provide Delivery Service
at such Store thereafter.
If COMPANY determines in its sole discretion that all franchise owners of
UNITS in the trade area where a Store is located, as such trade area is
determined by COMPANY in its sole discretion and which in no event shall exceed
the Marketing Area (as defined in the Franchise Agreement), shall offer Delivery
Service, COMPANY will notify DEVELOPER and will deliver to DEVELOPER a Delivery
Rider to this Agreement (or to the applicable Franchise Agreement) which
DEVELOPER shall execute and return to COMPANY within fifteen (15) days after its
receipt.
COMPANY reserves the right under the Delivery Rider, at any time and in its
sole discretion, with or without cause and regardless of the investment made by
DEVELOPER in establishing and conducting Delivery Service or the length of time
DEVELOPER has offered Delivery Service: (1) to reduce, modify or expand the
Delivery Area, effective upon COMPANY's written notice to DEVELOPER, provided,
however, that if a reduction or modification of the Delivery Area amounts to a
termination of substantially all of DEVELOPER's rights to provide such services
(except in the case of the exercise by COMPANY of its remedies under Section
15.C of this Agreement), such reduction or modification shall not be effective
until 90 days after COMPANY's written notice to DEVELOPER; or (2) to suspend or
terminate DEVELOPER's right to offer Delivery Service, effective ninety (90)
days after COMPANY's written notice to DEVELOPER; and COMPANY may otherwise
terminate DEVELOPER's right to offer Delivery Service on the terms of the
Delivery Rider. In the event that COMPANY suspends or terminates DEVELOPER's
right to offer Delivery Service, COMPANY reserves the right to require
DEVELOPER to reinstate Delivery Service upon fifteen (15) days' prior written
notice to DEVELOPER.
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4.C. CATERING SERVICE.
----------------
DEVELOPER acknowledges and agrees that: (1) DEVELOPER is not granted, and
COMPANY has no obligation to offer to DEVELOPER, any rights within or outside
the Development Area or the Sub-Areas to offer Catering Service from any of the
Stores or otherwise pursuant to this Agreement; and (2) the right to provide
Catering Service is specifically reserved to COMPANY or its designees. If
COMPANY, at any time and in its sole discretion, determines to offer Catering
Service in a designated Catering Area in which a Store is located, COMPANY will
offer DEVELOPER the right to offer Catering Service by delivering to DEVELOPER a
form of Catering Rider to this Agreement (or to the applicable Franchise
Agreement). DEVELOPER will have fifteen (15) days after its receipt thereof to
execute and deliver to COMPANY such executed Catering Rider. A Catering
Facility will not be counted as a separate Store for purposes of the Sub-Area
Quotas or the Total Development Quota set forth in the Development Schedule. If
DEVELOPER fails to execute and deliver to COMPANY such executed Catering Rider
within such fifteen (15) day period or commence Catering Service within the
specified period, then DEVELOPER shall have no right to provide Catering Service
within the designated Catering Area thereafter.
If COMPANY determines in its sole discretion that all franchise owners of
UNITS in the trade area where a Store is located, as such trade area is
determined by COMPANY in its sole discretion and which in no event shall exceed
the Marketing Area (as defined in the Franchise Agreement), shall offer Catering
Service, COMPANY will notify DEVELOPER and will deliver to DEVELOPER a Catering
Rider to this Agreement (or to the applicable Franchise Agreement) which
DEVELOPER shall execute and return to COMPANY within fifteen (15) days after its
receipt.
COMPANY reserves the right under the Catering Rider, at any time and in its
sole discretion, with or without cause and regardless of the investment made by
DEVELOPER in establishing and conducting Catering Service or the length of time
DEVELOPER has offered Catering Service: (1) to reduce, modify or expand the
Catering Area, effective upon COMPANY's written notice to DEVELOPER, provided,
however, that if a reduction or modification of the Catering Area amounts to a
termination of substantially all of DEVELOPER's rights to provide such services
(except in the case of the exercise by COMPANY of its remedies under Section
15.C of this Agreement), such reduction or modification shall not be effective
until 90 days after COMPANY's written notice to DEVELOPER; or (2) to suspend or
terminate DEVELOPER's right to offer Catering Service, effective ninety (90)
days after COMPANY's written notice to DEVELOPER (in which case, DEVELOPER will
not fill any orders for Catering Service after the expiration of such ninety
(90) day period); and COMPANY may otherwise terminate DEVELOPER's right to offer
Catering Service pursuant to the terms of the Catering Rider. In the event that
COMPANY terminates or suspends DEVELOPER's right to offer Catering Service,
COMPANY reserves the right to require DEVELOPER to reinstate Catering Service
upon fifteen (15) days' prior written notice to DEVELOPER.
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5. DEVELOPMENT AND OPERATION OF COMMISSARIES.
-----------------------------------------
5.A. OBLIGATION TO OPERATE COMMISSARIES.
----------------------------------
DEVELOPER acknowledges and agrees that in order to meet COMPANY's standards
and specifications for Products (including, without limitation, the preparation
and packaging of Products) and to maintain appropriate quality controls as
required by this Agreement and the Franchise Agreements entered into by
DEVELOPER, it will be necessary for DEVELOPER to establish one or more
Commissaries in the Development Area. DEVELOPER agrees that, subject to this
Agreement and such Franchise Agreements, it will establish and operate the
number of Commissaries reasonably determined by COMPANY from time to time to be
sufficient to supply the Stores.
DEVELOPER agrees that each Commissary (and, where the Commissary is
operated under the same roof as a Store or other approved retail establishment,
that part of such facility which functions as the Commissary): (1) will not
under any circumstances offer for sale or sell to the general public any
products or services; (2) will procure, prepare and distribute to UNITS only
those Products and other materials and supplies specified by COMPANY; and (3)
will not use a Commissary or its premises for any purpose other than the
operation of the Commissary on the terms of this Agreement.
5.B. DEVELOPMENT AND OPENING OF COMMISSARIES.
---------------------------------------
The location of any Commissary established by DEVELOPER pursuant to this
Agreement shall be subject to COMPANY's approval in the manner described in
Section 6.A. of this Agreement, and Section 6.B. of this Agreement shall apply
to the lease for the Commissary. Each Commissary shall be developed,
constructed and equipped in the manner described in Sections 4.B., 4.C. and 4.D
of the Franchise Agreement. Section 4.F. of the Franchise Agreement shall apply
to the opening and commencement of operation of the Commissary and Sections 4.H.
and 4.I. of the Franchise Agreement shall apply to the relocation and financing
of the Commissary, respectively. Notwithstanding the foregoing, DEVELOPER shall
not be required to utilize the Trade Dress at a Commissary and DEVELOPER shall
not be obligated to commence operation of a Commissary until 180 days after
receipt of written notice that COMPANY requires DEVELOPER to develop a
Commissary to supply the Stores specified in such notice.
5.C. TRAINING AND GUIDANCE.
---------------------
DEVELOPER shall employ and maintain at all times at each Commissary
throughout its operation at least one (1) Commissary Manager and one (1)
Additional Commissary Manager. The Commissary Manager shall be the full time
manager of the Commissary and the Additional Commissary Manager shall perform on
a full-time basis such other operations for DEVELOPER as COMPANY may reasonably
specify from time to time and both must successfully complete to COMPANY's
satisfaction a COMPANY-certified management training program for the operation
of the Commissary. DEVELOPER shall also employ the number of assistant
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managers and other personnel required for adequate staffing of each Commissary,
and shall at all times keep COMPANY advised of the identities of the Commissary
Manager, the Additional Commissary Manager and the assistant managers of each
Commissary. Each Commissary at all times shall be under the direct, on-site
supervision of a Commissary Manager, an Additional Commissary Manager or an
assistant manager who has completed a training program conducted by COMPANY or
DEVELOPER (if applicable) and who has been certified under the terms of the
Development Agreement. DEVELOPER shall hire all employees of each Commissary and
shall be exclusively responsible for the terms of their employment and
compensation and for the proper training of such employees in the operation of a
Commissary.
In the event the certified Commissary Manager and/or the certified
Additional Commissary Manager ceases to hold such position at the Commissary,
FRANCHISE OWNER shall have thirty (30) days in which to appoint a substitute or
replacement Commissary Manager and/or Additional Commissary Manager, who must
attend and complete to COMPANY's satisfaction the initial management training
program as specified above promptly after appointment. If COMPANY in its sole
discretion determines that the Commissary Manager or Additional Commissary
Manager or any subsequently appointed Manager or Additional Commissary Manager
has failed to satisfactorily complete the initial management training program or
any additional or refresher training program, FRANCHISE OWNER shall immediately
hire a substitute Commissary Manager or Additional Commissary Manager and
promptly arrange for such person to complete the initial management training
program to the satisfaction of COMPANY.
5.D. COMMISSARY MANUALS.
------------------
COMPANY shall loan to DEVELOPER, for its sole use, one (1) copy of a set of
COMPANY's confidential manuals relating to the development and operation of
Commissaries (collectively the "Commissary Manuals"). The Commissary Manuals
shall be furnished in the same manner and on the same terms as set out in
Section 5.C. of the Franchise Agreement with respect to the Store Manuals.
5.E. OPERATION OF THE COMMISSARY.
---------------------------
DEVELOPER shall operate each Commissary in accordance with the standards,
specifications and procedures which the COMPANY prescribes, and which COMPANY
may change, in its sole discretion, from time to time, as set forth in the
Commissary Manuals or otherwise in writing. Such standards, specifications and
procedures may include, without limitation, requirements for: (1) Product
preparation; (2) delivery drivers and delivery vehicles (whether or not owned by
DEVELOPER); (3) management of the Commissary; (4) training of Commissary
personnel involved in Product preparation and delivery; (5) Commissary design,
layout, equipment, fixtures and signage; (6) Product packaging; and (7)
materials and supplies used in the operation of the Commissary.
Without limiting the foregoing, DEVELOPER agrees to:
20
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(1) require all Commissary delivery drivers to strictly comply with
all regulations, laws and ordinances applicable to the operation of motor
vehicles and to use due care, taking into consideration road conditions,
when operating motor vehicles in connection with Commissary operations;
(2) require all Commissary delivery drivers to maintain adequate
motor vehicle liability insurance that complies with all applicable laws
and regulations and that extends to the operation of a motor vehicle used
for commercial delivery;
(3) maintain all Commissary motor vehicles in good and safe operating
condition in full compliance with all applicable laws and regulations;
(4) conduct initial and periodic (at least once every six months)
driving records checks on all Commissary delivery drivers;
(5) require all Commissary delivery drivers to possess and maintain a
valid driver's license;
(6) suspend or, where appropriate under COMPANY's specifications and
standards as in effect from time to time, terminate any Commissary delivery
driver who does not conform to COMPANY's applicable standards and
specifications for Commissary operations;
(7) ensure that each Commissary is adequately stocked at all times
with food and beverage products, ingredients and other items necessary to
prepare and supply to the Stores serviced by the Commissary sufficient
Products and other materials and supplies to ensure the optimum performance
of those Stores;
(8) ensure that each Commissary and its facilities are kept clean and
are operated in a first class, sanitary, attractive and efficient manner
and in accordance with COMPANY's standards and specifications;
(9) ensure that the food preparation personnel at each Commissary are
properly trained in the preparation of Products and that they prepare
Products at all times in accordance with COMPANY's standards and
specifications; and
(10) use the Commissary, the premises of the Commissary and the motor
vehicles used in the operation of the Commissary solely for the purposes
contemplated by this Agreement.
DEVELOPER agrees that COMPANY may conduct quality, service, cleanliness and
other inspections of any Commissary from time to time and without notice in
order to determine compliance with this Agreement and with the standards and
specifications applied by COMPANY from time to time.
21
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COMPANY and DEVELOPER acknowledge and agree that the term "Royalty Base
Revenue" (as defined in the Franchise Agreement) shall not include revenue, if
any, derived from DEVELOPER's or a Commissary's sale of products or other
materials and supplies to Stores for resale to the public at such Stores.
5.F. INSURANCE.
---------
During the operation of each Commissary, DEVELOPER shall maintain in force
policies of insurance for the Commissary in the same manner as is required for
the Stores pursuant to Section 12.G. of the Franchise Agreement.
5.G. TRANSFERS.
---------
DEVELOPER agrees that no obligations, rights or interests of DEVELOPER in
(a) A Commissary, (b) the lease for the premises of a Commissary or (c) the
assets of a Commissary may be transferred without the prior written consent of
COMPANY. Any purported transfer in violation of this Section shall constitute a
breach of this Agreement and shall convey to the transferee no rights or
interests in the foregoing.
As used in this Section, the term "transfer" shall have the meaning
ascribed to it in the Franchise Agreement. In addition to the foregoing, a
transfer will require the prior written consent of COMPANY where such transfer
occurs by reason of: (a) divorce; (b) insolvency; (c) dissolution of a
corporation, partnership or limited liability company; (d) will; (e) intestate
succession; or (f) declaration of or transfer in trust.
No transfer restricted by this Section may be effected unless a transfer of
the Stores which are serviced by the Commissary is made simultaneously to the
same transferee.
In granting its approval of a proposed transfer, COMPANY may also impose
reasonable conditions upon its consent, including, without limitation, those
conditions provided for in the Franchise Agreement. Furthermore, any proposed
transfer under this Section shall be subject to a right of first refusal of
COMPANY on the terms set forth in Section 16.H. of the Franchise Agreement.
5.H. EXPIRATION AND TERMINATION OF COMMISSARY OPERATIONS.
---------------------------------------------------
COMPANY may require DEVELOPER to cease operation of a Commissary in the
event that DEVELOPER does not comply with this Agreement with respect to such
Commissary. Unless earlier terminated as provided herein, DEVELOPER's right and
obligation to operate a Commissary shall expire when the Franchise Agreement for
the last Store serviced by the Commissary has been terminated or has expired
without renewal. Furthermore, DEVELOPER agrees that, notwithstanding any other
provision of this Agreement to the contrary, COMPANY may, at any time and in its
sole discretion with or without cause and regardless of the investment made by
DEVELOPER in establishing a Commissary or the length of time DEVELOPER has
operated the Commissary, require DEVELOPER to cease operation of the Commissary,
effective
22
<PAGE>
upon 90 days written notice from COMPANY (except in the case of the exercise by
COMPANY of its remedies under Section 15.C of this Agreement, in which case, the
obligation to cease such operations shall be effective immediately upon written
notice from COMPANY.
5.1. RIGHTS AND OBLIGATIONS OF COMPANY
---------------------------------
AND DEVELOPER UPON TERMINATION OR
---------------------------------
EXPIRATION OF RIGHT TO OPERATE A COMMISSARY.
-------------------------------------------
Upon the expiration or termination of DEVELOPER's right to operate a
Commissary, DEVELOPER shall immediately remove the Marks from all vehicles used
in the operation of the Commissary and shall return to COMPANY all copies of the
Commissary Manuals.
Furthermore, COMPANY shall have the right to purchase the assets of the
Commissary on the same terms as set forth in Section 19.F. of the Franchise
Agreement, including the ancillary rights set forth in Section 19.F.
6. GRANT OF FRANCHISES AND ADVERTISING REQUIREMENT.
-----------------------------------------------
SITE REVIEW AND APPROVAL.
------------------------
Annually throughout the Development Term, DEVELOPER shall purchase from
COMPANY demographic detail reports on the demographics of each Sub-Area
("DEMOGRAPHIC DETAIL REPORT") in which DEVELOPER retains the right to develop
Stores. Such Demographic Detail Report shall be available to DEVELOPER at
COMPANY's then-current charges. At DEVELOPER's request, Company may provide
other demographic services at COMPANY's then current charges. Those charges
will vary with the type of service requested.
At DEVELOPER's request, COMPANY will provide to DEVELOPER, at COMPANY's
then-current charges, a report and grid map containing certain demographic
information concerning a proposed site and surrounding area, which report and
grid map may be prepared by COMPANY or by an independent demographic statistics
service at COMPANY's direction.
DEVELOPER shall comply with COMPANY's specifications and requirements
regarding site selection, development and construction, including, without
limitation, those concerning relations with and use of approved general
contractors, subcontractors, real estate developers and lessors and, if
requested by COMPANY, real estate broker(s). DEVELOPER shall submit to COMPANY
a complete site approval request package and location feasibility analysis (a
"SITE PACKAGE") on COMPANY's specified forms (containing such demographic,
commercial, and other information and photographs as COMPANY may require from
time to time) for each site at which DEVELOPER proposes and intends in good
faith to establish and operate a Store and which DEVELOPER reasonably believes
to conform to certain minimum site selection criteria established by COMPANY
from time to time in its sole discretion. Each such Site Package shall include
a designation of the type of UNIT DEVELOPER intends to develop at the site. In
approving or disapproving any proposed site, COMPANY may consider such matters
as it deems material from time to time, which factors may (but are not required
to) include, without
23
<PAGE>
limitation, the type of UNIT proposed, demographic characteristics, traffic
patterns, parking, visibility, allowed signage, the predominant character of the
neighborhood, competition from other businesses providing similar services
within the area (including other UNITS), the proximity to other businesses, the
exclusivity granted to other franchise owners or developers of UNITS, the nature
of other businesses in proximity to the site, and other commercial
characteristics (including the purchase price or rental obligations and other
lease terms for the proposed site) and the size, appearance, and other physical
characteristics of the proposed site. DEVELOPER acknowledges and agrees that
COMPANY may alter the criteria or impose additional criteria for acceptable
sites for UNITS at any time or from time to time in its sole discretion, that
DEVELOPER shall abide by such site criteria as they exist from time to time and
comply with its development obligations hereunder (including, but not limited
to, Exhibit F hereof) and that no extension or alteration of the Opening Date
---------
(as set forth in Exhibit E) of any UNIT shall arise by reason of such altered or
---------
additional site criteria).
DEVELOPER further acknowledges that each such proposed site will be
evaluated based on the information provided in the Site Package and on the
circumstances existing at the time of such evaluation. Consequently, a proposed
site might be rejected when submitted, but if later re-submitted, approved for
development by DEVELOPER, another developer or franchise owner or by COMPANY or
its Affiliates, subject to DEVELOPER's rights to exclusivity under this
Agreement.
COMPANY will approve or disapprove sites by delivery of written notice to
DEVELOPER. (A site which COMPANY has approved pursuant hereto is referred to as
an "APPROVED SITE.") COMPANY agrees to exert its reasonable best efforts to
deliver such notification to DEVELOPER within thirty (30) days after receipt by
COMPANY of a complete Site Package and such other materials requested by COMPANY
from time to time, containing all information required by COMPANY. COMPANY
shall have the right in its sole discretion to approve or disapprove a site, and
DEVELOPER acknowledges and agrees that COMPANY shall have no liability therefor.
Notwithstanding any other provision of this Agreement, COMPANY's failure to
provide DEVELOPER with notice of its approval or disapproval of one or more
proposed sites shall in no event constitute a waiver of COMPANY's right to
approve or disapprove such sites or cause any extension of the applicable
Development Schedule.
6.B. LEASE OF APPROVED SITES.
-----------------------
DEVELOPER acknowledges that COMPANY has developed a standard form lease
(the "FORM STORE LEASE") for UNITS. COMPANY will furnish DEVELOPER with a copy
of the current forms of Form Store Lease and DEVELOPER acknowledges that COMPANY
may modify such forms from time to time in its sole discretion. DEVELOPER shall
present the Form Store Lease to the lessor of an Approved Site, as applicable,
and use its best efforts to cause the lessor or seller of such Approved Site to
execute the Form Store Lease as the lease, sublease or assignment of lease
(referred to herein as the "SITE AGREEMENT"), as applicable, for such Approved
Site. If DEVELOPER fails to obtain the lessor's agreement to use the Form Store
Lease as the Site Agreement, DEVELOPER shall cause lessor to include in the Site
24
<PAGE>
Agreement such standard lease terms as COMPANY may require or otherwise
specifically approve in writing from time to time in its sole discretion.
After receiving a copy of a proposed Site Agreement in form for execution,
COMPANY shall have the right, in its sole discretion, to approve, approve with
modification or disapprove such proposed Site Agreement, and DEVELOPER
acknowledges and agrees that COMPANY shall have no liability therefor. COMPANY
agrees to exert its best efforts to deliver such notification to DEVELOPER
within twenty (20) days after receipt by COMPANY of the proposed Site Agreement.
DEVELOPER agrees that it will not execute a Site Agreement without the prior
written approval of COMPANY, and any such Site Agreement shall contain the
express condition precedent of COMPANY's prior written approval thereof.
DEVELOPER shall deliver to COMPANY a copy of the fully signed Site Agreement as
previously approved within fifteen (15) days after its full execution.
DEVELOPER further agrees that it will not execute or agree to any modification
of the Site Agreement which would affect COMPANY's rights without the prior
written approval of COMPANY.
If DEVELOPER fails to obtain lawful possession of an Approved Site (through
lease, sublease or assignment) within sixty (60) days after delivery of
COMPANY's approval of the Approved Site, COMPANY may, in its sole discretion,
withdraw approval of such site at any time.
If DEVELOPER owns an Approved Site, DEVELOPER will, at the request of
COMPANY, enter into a lease with COMPANY under COMPANY's then-current form of
lease for a term equal to the term of the Franchise and for a rental equal to
the Approved Site's fair market rental value, and will sublease the Approved
Site from COMPANY on the same terms as the prime lease. If DEVELOPER and
COMPANY cannot agree on the fair market rental value of such an Approved Site,
then such rental value shall be determined by an independent appraiser selected
by COMPANY and DEVELOPER, and if they are unable to agree on an independent
appraiser, COMPANY and DEVELOPER shall each select an independent appraiser, who
shall select a third independent appraiser, and the fair market rental value
shall be deemed to be the average of the three (3) independent appraisals made
by such appraisers.
6.C. EXECUTION OF FRANCHISE AGREEMENTS.
---------------------------------
Provided that (1) DEVELOPER is then in full compliance with all of the
terms and conditions of this Agreement, (2) DEVELOPER is in full compliance with
all Franchise Agreements it has entered into, and (3) DEVELOPER has obtained
legal possession of an Approved Site, COMPANY agrees to offer to DEVELOPER a
Franchise to operate a Store at such Approved Site by delivering to DEVELOPER a
Franchise Agreement in form for execution by DEVELOPER and its Principal Owners.
Such Franchise Agreement shall be executed and returned to COMPANY at the
earlier of fifteen (15) days after COMPANY's delivery thereof, or prior to the
opening of the Store, together with the fees required to be paid upon execution
thereof. COMPANY may withdraw its offer to grant a Franchise for a Store at
such Approved Site and withdraw its approval of such site at any time prior to
COMPANY's receipt of all applicable payments and COMPANY's execution of the
Franchise Agreement. In no event may
25
<PAGE>
a Store developed hereunder be opened for business prior to DEVELOPER's receipt
of written notice from COMPANY authorizing the opening of such Store.
6.D. INITIAL FRANCHISE AND ROYALTY FEES.
----------------------------------
For each Franchise granted pursuant to this Agreement during the
Development Term or the applicable Sub-Area Term, the fees shall be as provided
in the then-current form of Franchise Agreement, except that the Initial
Franchise Fee (defined in the Franchise Agreement) shall be Thirty-Five Thousand
Dollars ($35,000.00), and the Royalty Fee (as defined in the Franchise
Agreement) shall be an amount equal to eight percent (8%) of the Store's Royalty
Base Revenue (as defined in the Franchise Agreement).
6.E. ADVERTISING EXPENDITURES.
------------------------
DEVELOPER shall cause each Store it owns to contribute to the Local Ad Fund
(as defined in the Franchise Agreement) for such Store an amount equal to the
standard Local Ad Fund contribution required pursuant to the applicable
Franchise Agreement; provided, however, that, on notice from COMPANY, DEVELOPER
shall also cause each such Store to contribute to the standard Local Ad Fund
such additional amounts which, when aggregated with the Local Ad Fund
contributions of the other Stores, will be sufficient to enable DEVELOPER,
through the Local Ad Fund, to commence Required Television Advertising within
one year of the opening of the first Store and to continue Required Television
Advertising thereafter throughout the Agreement Term.
7. INITIAL PAYMENTS.
----------------
7.A. DEVELOPMENT FEE.
---------------
Concurrently with the execution of this Agreement, DEVELOPER shall pay to
COMPANY the sum set forth on Exhibit C hereof as a nonrefundable development fee
---------
(the "DEVELOPMENT FEE") which shall be deemed fully earned by COMPANY upon
execution of this Agreement. The Development Fee shall equal the sum derived by
multiplying the number of Stores to be developed under this Agreement, as set
forth on Exhibit E, by Five Thousand Dollars ($5,000.00). The Development Fee
---------
is paid to compensate COMPANY for its services in connection with this
Agreement, including but not limited to providing assistance in the development
of DEVELOPER's Market Real Estate Development Plan and providing initial
orientation training programs.
7.B. REAL ESTATE SERVICES FEE.
------------------------
Concurrently with the execution of this Agreement, DEVELOPER shall pay to
COMPANY a nonrefundable real estate services fee (the "Real Estate Services
Fee"), which fee shall be deemed fully earned by COMPANY upon execution of this
Agreement. The Real Estate Services Fee shall equal the total derived by
multiplying the number of Stores to be developed under this Agreement, as set
forth on Exhibit E, by Five Thousand Dollars
---------
26
<PAGE>
($5,000.00). The Real Estate Services Fee is paid to compensate COMPANY for its
services in connection with this Agreement, including but not limited to
providing certain advisory services regarding demographic analysis and
cannibalization studies for trade areas related to proposed and established
UNITS, maintenance of lease files and compliance with reporting requirements
thereunder, and general advisory services regarding other real estate matters.
8. MARKS.
-----
8.A. GOODWILL AND OWNERSHIP OF MARKS.
-------------------------------
DEVELOPER acknowledges that DEVELOPER's right to use the Marks, as
described in this Agreement and which include the Principal Marks set forth in
Exhibit K hereto, is derived solely from this Agreement and is limited to the
- ---------
development of Stores by DEVELOPER pursuant to and in compliance with this
Agreement and all applicable standards, specifications, and procedures
prescribed by COMPANY from time to time during the Agreement Term. Any
unauthorized use of the Marks by DEVELOPER shall constitute a breach of this
Agreement and an infringement of the rights of COMPANY in and to the Marks.
DEVELOPER acknowledges and agrees that all usage of the Marks by DEVELOPER and
any goodwill established thereby shall inure to the exclusive benefit of COMPANY
and that this Agreement does not confer any goodwill or other interests in the
Marks upon DEVELOPER, other than the right to use the Marks in the development
of the Stores in compliance with this Agreement. All provisions of this
Agreement applicable to the Marks shall apply to any other trademarks, service
marks, commercial symbols and trade dress hereafter authorized, in writing
(including by inclusion in any trademark usage or similar guide or manual issued
to franchise owners by COMPANY), for use by and licensed to DEVELOPER by
COMPANY.
8.B. LIMITATIONS ON DEVELOPER'S USE OF MARKS.
---------------------------------------
DEVELOPER shall not use any Mark as part of any corporate name or other
name of DEVELOPER or with any prefix, suffix, or other modifying words, terms,
designs, or symbols, or in any modified form, nor may DEVELOPER use any Mark in
connection with the performance or sale of any unauthorized services or products
or in any other manner not expressly authorized in writing by COMPANY.
DEVELOPER agrees to clearly identify itself as an independent operator/developer
and licensee of COMPANY and to display the Marks prominently in the manner
prescribed by COMPANY. DEVELOPER agrees to give such notices of trademark and
service mark registrations as COMPANY specifies and to obtain such business name
registrations as may be required under applicable law.
8.C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS.
----------------------------------------
DEVELOPER shall immediately notify COMPANY of any apparent infringement of
or challenge to DEVELOPER's use of any Mark, or claim by any person of any
rights in any Mark. DEVELOPER shall not communicate with any person other than
COMPANY and its counsel with respect to any such infringement, challenge or
claim. COMPANY shall have sole discretion to take such action as it deems
appropriate in connection with the foregoing, and the
27
<PAGE>
right to control exclusively any settlement, litigation, arbitration or Patent
and Trademark Office or other proceeding arising out of any such alleged
infringement, challenge or claim or otherwise relating to any Mark. DEVELOPER
agrees to execute any and all instruments and documents, render such assistance,
and do such acts and things as may, in the opinion of COMPANY's counsel, be
necessary or advisable to protect and maintain the interests of COMPANY in any
litigation or other proceeding or to otherwise protect and maintain the
interests of COMPANY in the Marks. COMPANY will reimburse DEVELOPER for the
reasonable out-of-pocket expenses incurred and paid by DEVELOPER in complying
with the requirements imposed by this Section; provided, however, that if any
action taken by COMPANY results in any monetary recovery for DEVELOPER (by way
of counterclaim or otherwise) which exceeds DEVELOPER's costs, then DEVELOPER
must pay its own costs and share pro rata in COMPANY's costs therefor up to the
amount of DEVELOPER's share of such recovery.
8.D. DISCONTINUANCE OF USE OF MARKS.
------------------------------
If it becomes advisable at any time in COMPANY's sole judgment for the
DEVELOPER to modify or discontinue use of any Mark and/or for the DEVELOPER to
use one or more additional or substitute trademarks or service marks or an
additional or substitute type of trade dress, DEVELOPER agrees to immediately
comply with COMPANY's directions to modify or otherwise discontinue the use of
such Mark, and/or to use one or more additional or substitute trademarks,
service marks, logos or commercial symbols or additional or substitute trade
dress after notice thereof by COMPANY. Neither COMPANY nor its Affiliates shall
have any obligation to reimburse DEVELOPER for any expenditures made by
DEVELOPER to modify or discontinue the use of a Mark or to adopt additional or
substitute marks for discontinued Marks, including, without limitation, any
expenditures relating to advertising or promotional materials or to compensate
DEVELOPER for any goodwill related to the discontinued Mark.
8.E. INDEMNIFICATION OF DEVELOPER.
----------------------------
COMPANY agrees to indemnity DEVELOPER against and to reimburse DEVELOPER
for all damages for which DEVELOPER is held liable in any claim, action or
proceeding brought by any person or entity claiming to have trademark or other
rights to any of the Marks or any name or trademark similar thereto arising out
of DEVELOPER's authorized use of the Marks, pursuant to and in compliance with
this Agreement, and for all costs reasonably incurred by DEVELOPER in the
defense of any such claim brought against DEVELOPER or in any proceeding in
which DEVELOPER is named as a party, provided that DEVELOPER has timely notified
COMPANY of such claim or proceeding, has given COMPANY sole control of the
defense and settlement of any such claim, has otherwise complied with the
requirements of this Agreement regarding use of the Marks, and this Agreement is
in full force and effect, and provided further, that the indemnification
provided by this Section 8.E shall not extend to any claim, action or proceeding
brought by any person or entity alleging any prior common law trademark rights.
28
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9. COPYRIGHTS.
----------
9.A. OWNERSHIP OF COPYRIGHTED WORKS.
------------------------------
DEVELOPER and COMPANY acknowledge and agree (1) that COMPANY may authorize
DEVELOPER to use certain copyrighted or copyrightable works (the "Copyrighted
Works"), (2) that the Copyrighted Works are the valuable property of COMPANY or
its Affiliates or, as applicable, their licensors and (3) that the DEVELOPER's
rights to use the Copyrighted Works are granted to DEVELOPER solely on the
condition that DEVELOPER complies with the terms of this Section. DEVELOPER
acknowledges and agrees that COMPANY owns or is the licensee of the owner of the
Copyrighted Works and may further create, acquire or obtain licenses for certain
copyrights in various works of authorship used in connection with the operation
of UNITS, including, but not limited to, all categories of works eligible for
protection under the United States copyright laws, all of which shall be deemed
to be Copyrighted Works under this Agreement. Such Copyrighted Works include,
but are not limited to, the Development Manual, advertisements, promotional
materials, labels, menus, posters, coupons, gift certificates, signs and store
designs, plans and specifications and may include all or part of the Marks,
Trade Dress (defined in the Franchise Agreement), Licensed Program and other
portions of the System. DEVELOPER acknowledges that this Agreement does not
confer any interest in the Copyrighted Works upon DEVELOPER, other than the
right to use them in connection with the development of the Stores in compliance
with this Agreement. If COMPANY authorizes DEVELOPER to prepare any adaptation,
translation or work derived from the Copyrighted Works, or if DEVELOPER prepares
any Copyrighted Works such as menus, advertisements, posters or promotional
materials, DEVELOPER hereby agrees that such adaptation, translation, derivative
work or Copyrighted Work shall be the property of COMPANY and DEVELOPER hereby
assigns all its right, title and interest therein to COMPANY (or such other
person identified by COMPANY). DEVELOPER agrees to execute any documents, in
recordable form, which COMPANY determines are necessary to reflect such
ownership. DEVELOPER shall submit all such adaptations, translations,
derivative works and Copyrighted Works to COMPANY for approval prior to use.
9.B. LIMITATION ON DEVELOPER'S USE OF COPYRIGHTED WORKS.
--------------------------------------------------
DEVELOPER acknowledges that DEVELOPER's right to use the Copyrighted Works,
as described in this Agreement, is derived solely from this Agreement and is
limited solely to uses directly connected with the development of Stores by
DEVELOPER during the Development Term pursuant to and in compliance with this
Agreement and all applicable standards, specifications, and operating procedures
prescribed by COMPANY from time to time. DEVELOPER shall ensure that all
Copyrighted Works used hereunder shall bear an appropriate copyright notice
under the Universal Copyright Convention or other copyright laws prescribed by
COMPANY specifying that COMPANY or an Affiliate of COMPANY is the owner of the
copyright therein. Any unauthorized use, adaptation, publication, reproduction,
preparation of derivative works, distribution of copies (whether by sale or
other transfer of ownership, or by rental, lease or lending), or attempts to
recreate all or a portion of such Copyrighted Works shall
29
<PAGE>
constitute a breach of this Agreement and an infringement of the rights of
COMPANY in and to the Copyrighted Works.
9.C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS.
----------------------------------------
DEVELOPER shall immediately notify COMPANY of any actual or apparent
infringement of or challenge to any of the Copyrighted Works, or claim by any
person of any rights in the Copyrighted Works. DEVELOPER shall not communicate
with any person other than COMPANY and its counsel in connection with any such
infringement, challenge or claims. COMPANY shall have the sole discretion to
take such action as it deems appropriate in connection with the foregoing, and
the right to control exclusively any settlement, litigation, arbitration or
administrative proceeding arising out of any such alleged infringement,
challenge or claim or otherwise relating to the Copyrighted Works. DEVELOPER
agrees to execute any and all instruments and documents, render such assistance,
and do such acts and things as may, in the opinion of COMPANY's counsel, be
necessary or advisable to protect and maintain the interests of COMPANY in any
litigation or other proceeding or to otherwise protect and maintain the
interests of COMPANY in the Copyrighted Works. COMPANY will reimburse DEVELOPER
for the reasonable out-of-pocket expenses incurred and paid by DEVELOPER in
complying with the requirements imposed by this Section; provided, however, that
if any action taken by COMPANY results in any monetary recovery for DEVELOPER
(by way of counterclaim or otherwise) which exceeds DEVELOPER's costs, then
DEVELOPER must pay its own costs and share pro rata in COMPANY's costs therefor
up to the amount of DEVELOPER's share of such recovery.
9.D. DISCONTINUANCE OF USE OF COPYRIGHTED WORKS.
------------------------------------------
If it becomes advisable at any time in COMPANY's sole judgment for
DEVELOPER to modify or discontinue use of any of the Copyrighted Works and/or
for DEVELOPER to use one or more additional or substitute copyrighted or
copyrightable items, DEVELOPER agrees to immediately comply with COMPANY's
directions to modify or otherwise discontinue the use of the Copyrighted Works
and/or to use one or more substitute materials. Neither COMPANY nor its
Affiliates shall have any obligation to reimburse DEVELOPER for any expenditures
made by DEVELOPER to modify or discontinue the use of any Copyrighted Work or to
adopt additional or substitute copyrighted or copyrightable items.
10. COMPUTER SYSTEM AND SOFTWARE.
----------------------------
10.A. GRANT OF LICENSE.
----------------
COMPANY hereby grants to DEVELOPER a nonexclusive, nontransferable,
nonassignable license to use the Licensed Program and Support/Control Programs,
subject to the following terms and conditions:
(1) The Licensed Program and Support/Control Programs shall be installed
and tested on the Computer System at DEVELOPER's principal office by
COMPANY or
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its designee. If DEVELOPER does not purchase the Computer System from
COMPANY, DEVELOPER must pay COMPANY or its designee a reasonable
installation and testing fee upon completion of COMPANY's or its
designee's installation and testing of the operation of the Licensed
Program and Support/Control Programs with the Computer System.
DEVELOPER acknowledges and agrees that COMPANY's current installation
and testing fee of $3,500.00 is reasonable. COMPANY agrees that the
installation and testing fee applicable to any Franchise Agreements
executed pursuant to this Agreement will not exceed $3,500.
(2) Except with the prior written consent of COMPANY, the Licensed Program
and Support/Control Programs shall not be operated by persons other
than DEVELOPER and employees of DEVELOPER, shall not be operated on
equipment other than the Computer System, shall not be used in
conjunction with any other computer appli cations program, and shall
not be operated at locations other than DEVELOPER's principal office;
provided, however, that with prior notice to COMPANY, DEVELOPER may
operate the Licensed Program and Support/Control Programs on equipment
other than the Computer System and at a location other than
DEVELOPER's principal office to the extent required due to malfunction
of the Computer System or other cause beyond the reasonable control of
DEVELOPER, but not for any period longer than seven (7) consecutive
days unless otherwise agreed in writing by COMPANY.
(3) The Licensed Program and Support/Control Programs shall be used in
DEVELOPER's development and supervision of the Stores and shall not be
used for any other purpose.
(4) Without limiting the foregoing, DEVELOPER shall not, and shall not
allow its employees or agents to: (a) sell, assign, lease, sublicense,
pledge, grant a security interest with respect to, market or
commercially exploit, in any way, the Licensed Program or
Support/Control Programs or any component thereof, or any data
generated by the use of the Licensed Program or Support/Control
Programs or any component thereof; (b) disclose or grant access to the
Licensed Program or Support/Control Programs, or any data generated by
the use thereof or any component thereof, to any third party other
than one to whom COMPANY has consented in writing and who has agreed
in writing with COMPANY to keep them confidential; (c) copy or
reproduce the Licensed Program or Support/Control Programs, or any
data generated by the use thereof or any component thereof, in any
manner, except to the extent necessary for normal back-up and
operating thereof; or (d) alter, modify or adapt the Licensed Program
or Support/Control Programs, any documentation relating thereto or any
component thereof, including, but not limited to, by translating,
decompiling, reverse engineering or disassembling them.
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(5) DEVELOPER acknowledges and agrees that the Licensed Program and
Support/Control Programs and any data generated by their use are the
valuable, proprietary property and trade secret of COMPANY or, as
applicable, of COMPANY's licensor, and DEVELOPER agrees to use the
utmost care to safeguard the Licensed Program and Support/Control
Programs and any data generated by their use and to maintain the
copyright protection and the secrecy and confidentiality thereof.
DEVELOPER shall not undertake to patent, copyright or otherwise assert
proprietary rights to the Licensed Program or Support/Control Programs
or any data generated by their use or any portion thereof. DEVELOPER
recognizes that all or part of the Licensed Program and
Support/Control Programs and any data generated by their use may be
copyrighted and agrees that this shall not be construed as causing the
copyrighted material to be public information. DEVELOPER will ensure
that all copies of the Licensed Program and Support/Control Programs
and any data generated by their use or any components thereof in its
possession contain an appropriate copyright notice under the Universal
Copyright Convention or other notice of proprietary rights specified
by COMPANY.
(6) DEVELOPER shall promptly disclose to COMPANY all ideas and suggestions
for modifications or enhancements of the Licensed Program and/or
Support/Control Programs conceived or developed by or for DEVELOPER,
and COMPANY and its Affiliates shall have the right to use and license
such ideas and suggestions. All modifications and enhancements made to
the Licensed Program or Support/Control Programs together with the
copyright therein shall be the property of COMPANY or its licensor, as
applicable, without regard to the source of the modification or
enhance ment, and DEVELOPER hereby assigns all of its right, title,
and interest in any ideas, modifications, and enhancements to COMPANY
(or such other persons designated by COMPANY). DEVELOPER agrees to
execute any document, in recordable form, which COMPANY determines is
necessary to reflect such ownership.
(7) COMPANY or its designee shall have the right at all times to access
the Licensed Pro gram and Support/Control Programs and to retrieve,
analyze and use all data in the files of DEVELOPER related thereto.
(8) COMPANY or its designee shall provide to DEVELOPER all upgrades,
modifica tions, improvements, enhancements, extensions and other
changes to the Licensed Program and Support/Control Programs approved
by COMPANY for use in connection with the operation of UNITS, and
DEVELOPER shall promptly implement their use.
(9) Upon expiration or termination of this Agreement, DEVELOPER shall
allow COMPANY's or its designee's employees or agents to remove the
Licensed Program and Support/Control Programs from the Computer
System, shall immediately return the Licensed Program and
Support/Control Programs, each
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component thereof, and any data generated by their use to COMPANY or
its designee, and shall immediately destroy any and all back-up or
other copies of the Licensed Program, the Support/Control Programs,
any parts thereof, documentation for the Licensed Program and
Support/Control Programs and any data generated by their use, and
other materials or information which relate to or reveal the Licensed
Program and Support/Control Programs, their operation or any data
generated by their use.
10.B.SOFTWARE LICENSE FEE.
--------------------
DEVELOPER agrees to pay to COMPANY or its designee upon installation of the
Licensed Program on DEVELOPER's Computer System, a software license fee (the
"Software License Fee") in the amount of Fifteen Thousand Dollars ($15,000.00).
The Software License Fee shall be fully earned by COMPANY or its designee upon
installation of the Licensed Program on the Computer System and is non-
refundable in whole or in part.
10.C SOFTWARE SUPPORT SERVICE.
------------------------
During the Agreement Term and, provided that DEVELOPER is in compliance
with the terms of this Agreement, COMPANY or its designee shall provide to
DEVELOPER such support services as COMPANY deems reasonably necessary to cause
the Licensed Program and Support/Control Programs to perform on the Computer
System in accordance with the standards therefor as specified from time to time
by COMPANY. Such support services shall not extend to (a) error corrections,
operational support and assistance resulting from DEVELOPER's use or operation
of software which is not authorized by COMPANY for use on the Computer System,
(b) software training or (c) hardware maintenance. Such support service shall
include non-procedural Help Desk calls. All procedural Help Desk calls will be
handled by COMPANY for an additional fee of $25 per call.
10.D SOFTWARE SUPPORT SERVICE FEE.
----------------------------
For the software support service with respect to the Licensed Program
provided to DEVELOPER, as described above, DEVELOPER agrees to pay to COMPANY or
its designee a periodic software support service fee ("Software Support Fee") in
the amount of Four Hundred Dollars ($400.00). Such fee shall be payable in
advance for each Accounting Period on or before the eighth (8th) day prior to
commencement of such period commencing on the installation of the Licensed
Program on the Computer System. The Software Support Fee may be increased by
COMPANY from time to time, at its sole option, upon written notice to DEVELOPER,
subject to any limitation set forth in the Franchise Agreement.
For the software support service relating to the Support/Control Programs
provided to DEVELOPER by COMPANY, no additional fee will be charged. In the
event DEVELOPER requests, and COMPANY, in its sole discretion, determines to
perform, other support services (e.g., software training, hardware maintenance)
----
not provided for in this Agreement, COMPANY will charge DEVELOPER an additional
fee at COMPANY's then-current hourly rate, plus
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<PAGE>
expenses for such support services. DEVELOPER acknowledges that COMPANY's
current rate for such services is $75 per hour and agrees that such rate is
reasonable.
10.E. MODIFICATION, ENHANCEMENT AND REPLACEMENT
OF COMPUTER SYSTEM AND SOFTWARE.
-------------------------------
DEVELOPER acknowledges that COMPANY may, during the term of this Agreement,
require DEVELOPER to modify, enhance and/or replace all or any part of the
Computer System, the Licensed Program, the Support/Control Programs and/or the
Specified Software at DEVELOPER's expense, and agrees, within sixty (60) days of
receipt of notice from COMPANY, to acquire, or acquire the right to use for the
remainder of the term of this Agreement and implement, the modified, enhanced or
replacement version of the Computer System, the Licensed Program, the
Support/Control Programs and/or Specified Software as specified by COMPANY and
to take any and all other actions as may be necessary to enable them to operate
as specified by COMPANY. Any such modifications, enhancements, and replacements
may require DEVELOPER to incur additional costs to purchase, lease and/or
license new or modified computer hardware and/or software or other equipment and
to obtain different and/or additional service and support services during the
term of this Agreement. DEVELOPER acknowledges that COMPANY cannot estimate the
costs of future enhancements, modifications, and replacements to the Computer
System, the Licensed Program, the Support/Control Programs and/or Specified
Software, and that the cost to DEVELOPER of obtaining such enhancements,
modifications, and replacements, may not be fully amortizable over the remainder
of the Development Term or the Agreement Term. Nonetheless, DEVELOPER agrees to
incur such costs in connection therewith, provided that the COMPANY is then
currently specifying the same enhancements, modifications, and replacements for
use in COMPANY-operated UNITS.
10.F WARRANTIES AND LIMITATION OF LIABILITY.
--------------------------------------
COMPANY represents and warrants to DEVELOPER that: (1) COMPANY has the
right to license the Licensed Program and Support/Control Programs to DEVELOPER,
as set forth in this Agreement; and (2) to the best of COMPANY's knowledge, the
Licensed Program and Support/Control Programs do not, and as a result of any
enhancements, improvements or modifications provided by COMPANY, will not
infringe upon any United States patent, copyright or other proprietary right of
any third party. In the event DEVELOPER's use of the Licensed Program or
Support/Control Programs or any portion thereof, as provided by COMPANY, is
enjoined as a result of a claim by a third party of patent or copyright
infringement or violation of proprietary rights, COMPANY shall, in its sole
discretion, either (i) procure for DEVELOPER the right to continue use of the
Licensed Program or Support/Control Programs as contemplated hereunder, or (ii)
replace the Licensed Program or Support/Control Programs or modify it such that
there is no infringement of the third party's rights. Such action by COMPANY
shall be DEVELOPER's sole and exclusive remedy against COMPANY in such event.
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Neither COMPANY nor its designee represents or warrants to DEVELOPER, and
expressly disclaims any warranty, that the Licensed Program or Support/Control
Programs are error-free or that their operation and use by DEVELOPER will be
uninterrupted or error-free. Neither COMPANY nor its designee shall have any
obligation or liability for any expense or loss incurred by DEVELOPER arising
from use of the Licensed Program or Support/Control Programs in conjunction with
any other computer program.
EXCEPT FOR THE ABOVE EXPRESS LIMITED WARRANTIES, COMPANY AND/OR ITS
DESIGNEE MAKE NO WARRANTIES, EXPRESS OR IMPLIED, ORAL OR WRITTEN, WITH RESPECT
TO THE LICENSED PROGRAM, SUPPORT/CONTROL PROGRAMS, PROGRAM DOCUMENTATION, OR ANY
OTHER MATERIAL FURNISHED HEREUNDER, OR ANY COMPONENT THEREOF AND THERE ARE
EXPRESSLY EXCLUDED ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT THERETO.
10.G. SUBCOMPONENT LICENSES AND THIRD-PARTY LICENSES.
----------------------------------------------
DEVELOPER acknowledges that the Licensed Program and Support/Control
Programs contain third-party components and subcomponents which COMPANY has the
authority to license to DEVELOPER as part of the Licensed Program and
Support/Control Programs pursuant to and in accordance with software license
agreements with third-party vendors (collectively, the "Component Licenses").
In addition, DEVELOPER acknowledges that acquisitions by DEVELOPER of all or
portions of the Computer System and the Specified Software from or through the
COMPANY are governed by license or other agreements by and between third-party
vendors and COMPANY, which agreements specifically permit COMPANY to sell and/or
sublicense all or portions of the Computer System and the Specified Software to
DEVELOPER or specifically require DEVELOPER to agree to be bound by the terms
thereof (either type of license hereinafter referred to as the "Third Party
Licenses"). DEVELOPER therefore hereby agrees to be bound by the terms of each
Component License and, to the extent DEVELOPER purchases all or portions of the
Specified Software or the Computer System from or through COMPANY, each relevant
Third Party License, in each case as if DEVELOPER was a party thereto, and
agrees that the vendors and licensors of all or portions of the Specified
Software and the Computer System and the licensors of all or portions of the
Licensed Program (collectively, the "Vendors") are third-party beneficiaries of
this Agreement with full rights to enforce this Agreement as it pertains to the
purchased items and the Licensed Program and Support/Control Programs.
DEVELOPER further agrees to indemnify and hold harmless COMPANY and each of the
Vendors from and against all costs, expenses, and damages arising out of or
based upon any breach or claim of a breach of this Agreement, the Third Party
Licenses or Component Licenses by DEVELOPER, its directors, officers, employees,
agents and owners.
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10.H COVENANT TO USE ONLY SPECIFIED SOFTWARE AND
LICENSED PROGRAM SUPPORT/CONTROL PROGRAMS.
-----------------------------------------
DEVELOPER acknowledges that operating non-Specified Software on the
Computer System with the Specified Software and/or the License Program and
Support/Control Programs may cause errors or other interruptions to or problems
with the Specified Software, Licensed Program and/or Support/Control Programs.
Therefore, DEVELOPER hereby agrees to operate only Specified Software, the
Licensed Program and the Support/Control Programs on the Computer System.
11. CONFIDENTIAL INFORMATION.
------------------------
COMPANY or its licensors, as applicable, possess and may further develop
and acquire certain confidential and proprietary information and trade secrets,
including, but not limited to, the following categories of information, methods,
techniques, procedures and knowledge developed or to be developed by COMPANY or
its Affiliates or their consultants, contractors or designees, and/or franchise
owners and developers (the "CONFIDENTIAL INFORMATION"):
(1) methods, techniques, equipment, specifications (including Design
Specifications, as defined in the Franchise Agreement), standards,
policies, procedures, information, concepts and systems relating to and
knowledge of and experience in the development, operation and franchising
of UNITS and the development and operation of Commissaries; and
(2) marketing and promotional programs for UNITS; and
(3) knowledge concerning the logic, structure and operation of
computer software programs which COMPANY authorizes for use in connection
with the operation of UNITS (including, without limitation, the Licensed
Program), and all additions, modifications and enhancements thereof, and
all data generated from use of such programs and the logic, structure and
operation of database file structures containing such data and all
additions, modifications and enhancements thereof; and
(4) sales data and information concerning consumer preferences and
inventory requirements for Products, materials and supplies, and
specifications for and suppliers of certain materials, equipment and
fixtures for UNITS (including, without limitation, the Stores) and for
Commissaries; and
(5) ingredients, formulas, mixes, spices, seasonings, recipes for and
methods of preparation, baking, cooking, freezing, serving, packaging,
catering and delivery of, Products and other items sold at UNITS; and
(6) information concerning Product sales, operating results,
financial performance and other financial data of UNITS (including, without
limitation, the Stores); and
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(7) the Development Manual (defined in Section 13.J. of this
Agreement), the Commissary Manuals (defined in Section 5.D of this
Agreement) and the Store Manuals (defined in the Franchise Agreement); and
(8) customer lists and Product sales of the Stores; and
(9) employee selection procedures, training and staffing levels.
COMPANY will disclose to DEVELOPER such parts of the Confidential
Information as COMPANY deems necessary or advisable from time to time in its
sole discretion for the development of Stores and Commissaries in providing
training and in guidance and assistance furnished to DEVELOPER under this
Agreement. DEVELOPER may also learn or otherwise obtain from COMPANY and its
Affiliates and other licensors of components or elements of the System
additional Confidential Information during the Agreement Term. DEVELOPER
acknowledges and agrees that neither DEVELOPER nor any other person or entity
will acquire by or through DEVELOPER any interest in or right to use the
Confidential Information, other than the right to use it in the development of
Stores and Commissaries pursuant to this Agreement, and that the use or
duplication of the Confidential Information in any other business would
constitute an unfair method of competition with COMPANY and with other UNIT
developers and franchise owners. DEVELOPER agrees to disclose the Confidential
Information to Owners and to its employees only to the extent reasonably
necessary for the development of Stores pursuant to this Agreement and only if
such individuals have agreed to maintain such information in confidence in an
agreement enforceable by COMPANY.
DEVELOPER acknowledges and agrees that the Confidential Information is
confidential to and a valuable asset of COMPANY or its licensors, as applicable,
is proprietary, includes trade secrets of COMPANY and is disclosed to DEVELOPER
solely on the condition that DEVELOPER, its Owners and employees who have access
to the Confidential Information agree, and DEVELOPER does hereby agree that,
during and after the Agreement Term, DEVELOPER, its Owners and such employees:
(a) will not use the Confidential Information in any other business
or capacity (unless, in the case of the Licensed Program, separately
licensed by the owner thereof); and
(b) will maintain the absolute confidentiality of the Confidential
Information; and
(c) will not make unauthorized copies of any portion of the
Confidential Information disclosed in written or other tangible form; and
(d) will adopt and implement all reasonable procedures prescribed
from time to time by COMPANY to prevent unauthorized use or disclosure of
the Confidential Information, including, without limitation, requiring
employees and Owners who will have access to such information to execute
non-competition and confidentiality
37
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agreements in the form attached hereto as Exhibit J (the "CONFIDENTIALITY
---------
AND NON-COMPETITION AGREEMENT"). DEVELOPER shall provide COMPANY, at its
request, executed originals of each such Confidentiality and Non-
Competition Agreement.
Nothing contained in this Agreement shall be construed to prohibit
DEVELOPER from using the Confidential Information in connection with the
operation of any Store pursuant to a Franchise Agreement or pursuant to another
development agreement between COMPANY and DEVELOPER.
Notwithstanding anything to the contrary contained in this Agreement and
provided DEVELOPER shall have obtained COMPANY's prior written consent, the
restrictions on DEVELOPER's disclosure and use of the Confidential Information
shall not apply to the following:
(i) information, methods, procedures, techniques and knowledge which
are or become generally known in the food service business within the
Development Area, other than through disclosure (whether deliberate or
inadvertent) by DEVELOPER or any other party having an obligation of
confidentiality to COMPANY; and
(ii) the disclosure of the Confidential Information in judicial or
administrative proceedings to the extent that DEVELOPER is legally
compelled to disclose such information, provided DEVELOPER has notified
COMPANY prior to disclosure and shall have used its best efforts to obtain,
and shall have afforded COMPANY the opportunity to obtain an appropriate
protective order or other assurance satisfactory to COMPANY of confidential
treatment for the information required to be so disclosed.
DEVELOPER agrees to disclose to COMPANY all ideas, concepts, methods,
techniques and products conceived or developed by DEVELOPER, Owners, affiliates
or employees thereof during the Agreement Term relating to the development and
operation of UNITS and Commissaries, provided that the aforementioned parties
will not be obligated to make such disclosures if doing so would violate any
contractual obligations of DEVELOPER which:
(A) arose prior to DEVELOPER's execution of this Agreement; and
(B) DEVELOPER disclosed to COMPANY in writing prior to the Effective
Date.
DEVELOPER hereby assigns to COMPANY and agrees to procure from its Owners,
affiliates and employees assignment of any such ideas, concepts, methods,
techniques and products which DEVELOPER is required to disclose to COMPANY
hereunder. COMPANY shall have no obligation to make any lump sum or on-going
payments to DEVELOPER or its Owners, affiliates or employees with respect to any
such idea, concept, method, technique or product. DEVELOPER agrees that
DEVELOPER will not use nor will it allow any other person or entity to use any
such concept, method, technique or product without obtaining COMPANY's prior
written approval.
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12 EXCLUSIVE RELATIONSHIP.
----------------------
DEVELOPER acknowledges and agrees that COMPANY would be unable to protect
the Confidential Information against unauthorized use or disclosure and would be
unable to encourage a free exchange of ideas and information among franchise
owners and developers of UNITS, if developers, franchise owners and their
Principal Owners (and members of their Immediate Families) were permitted to
engage in, hold interests in or perform services for Competitive Businesses.
DEVELOPER further acknowledges and agrees that the restrictions contained in
this Section will not hinder its activities or the activities of its Principal
Owners (or members of their Immediate Families) under this Agreement or in
general. COMPANY has entered into this Agreement with DEVELOPER on the express
condition that, with respect to the development and operation of food service
businesses that sell Products, DEVELOPER and its Princi pal Owners and members
of their respective Immediate Families will deal exclusively with COMPANY.
DEVELOPER therefore agrees that, during the Agreement Term, neither DEVELOPER
nor any Principal Owner of DEVELOPER, nor any member of the Immediate Family of
DEVELOPER or of a Principal Owner of DEVELOPER, shall directly or indirectly:
(a) have any interest as a record or beneficial owner in any
Competitive Business (this restriction shall not be applicable to the
ownership of shares of a class of securities listed on a stock exchange or
traded on the over-the-counter market and quoted by a national inter-dealer
quotation system that represent less than three percent (3%) of the number
of shares of that class of securities issued and outstanding); or
(b) perform services as a director, officer, manager, employee,
consultant, representative, agent, or otherwise for any Competitive
Business; or
(c) divert or attempt to divert any business or any customers of any
UNIT to any Competitive Business.
DEVELOPER further agrees that, during the Agreement Term, neither DEVELOPER nor
any Principal Owner of DEVELOPER, nor any member of the Immediate Family of
DEVELOPER or a Principal Owner of DEVELOPER shall directly or indirectly employ
or seek to employ any person who is employed by COMPANY, its Affiliates or by
any other developer or franchise owner of UNITS, nor induce nor attempt to
induce any such person to leave said employment without the prior written
consent of such person's employer.
Furthermore, if DEVELOPER is a corporation, limited liability company or
partnership, it will not engage in any business or other activity, directly or
indirectly, other than the development and operation of Stores.
DEVELOPER acknowledges and agrees that the failure of any person or entity
restricted pursuant to this Section to comply with the restrictions of this
Section (regardless of whether that person or entity actually has executed this
Agreement or a Confidentiality and Non-Competition Agreement) shall constitute a
breach of this Agreement.
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The restrictions of this Section shall not be construed to prohibit
DEVELOPER, any Principal Owner of DEVELOPER, or any member of the Immediate
Family of DEVELOPER or its Principal Owners from having a direct or indirect
Ownership Interest in any UNITS, development agreements or franchise agreements
for the development or operation of UNITS, or any entity owning, controlling or
operating UNITS, or from providing services to any such UNITS pursuant to other
agreements with COMPANY. Furthermore, the restrictions of this Section shall
not prohibit DEVELOPER, any Principal Owner or any member of the Immediate
Family of DEVELOPER or a Principal Owner (to the extent such person is an
individual) from performing services for or having an Ownership Interest in a
Permitted Competitive Business, or from conducting customary promotion and
advertising of a Permitted Competitive Business. Such person(s) and
business(es), if any, are identified on Exhibit G attached hereto.
---------
13. OBLIGATIONS OF DEVELOPER.
------------------------
13.A. FULL TIME SUPERVISION.
---------------------
DEVELOPER (or the Principal Owner(s) designated in Exhibit G of this
---------
Agreement and approved by COMPANY) and the Chief Operating Officer (as defined
below) shall exert full-time efforts to fulfill the obligations of DEVELOPER
under this Agreement and shall not engage in any other business or other
activity, directly or indirectly, that requires any significant management
responsibility or time commitments, or that may otherwise conflict with
DEVELOPER's obligations under this Agreement.
13.B. CHIEF OPERATING OFFICER.
-----------------------
Prior to or concurrently with the execution of this Agreement, DEVELOPER
has designated the person identified on Exhibit G to this Agreement to act as
---------
the Chief Operating Officer of the business conducted by DEVELOPER pursuant to
this Agreement (the "CHIEF OPERATING OFFICER"). DEVELOPER represents that the
Chief Operating Officer holds and will continue to hold a significant, direct
equity interest in DEVELOPER at all times during the Agreement Term. If the
relationship of the Chief Operating Officer with DEVELOPER terminates or if he
is unable to satisfactorily complete COMPANY's management training program,
DEVELOPER agrees to promptly designate a replacement Chief Operating Officer
acceptable to COMPANY, in its sole discretion, who shall at DEVELOPER's expense
and subject to COMPANY's then-current training charges, satisfactorily complete
the management training program.
13.C. DEVELOPMENT DIRECTOR AND REAL ESTATE MANAGERS.
---------------------------------------------
Upon COMPANY's written request, DEVELOPER shall designate a person (other
than the persons serving as the Chief Operating Officer, the Training Director
and the Marketing Director ) acceptable to COMPANY to act as the Development
Director of DEVELOPER (the "DEVELOPMENT DIRECTOR") during the Development Term.
If the relationship of the Development Director with DEVELOPER terminates,
DEVELOPER agrees to promptly designate a replacement Development Director
acceptable to COMPANY.
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The Development Director's duties will include, without limitation:
(1) preparing and implementing a development plan for the Development
Area in form satisfactory to COMPANY; and
(2) consulting with COMPANY concerning the adaptation of COMPANY's
existing site criteria and lease (or purchase) requirements for the
Development Area; and
(3) directing and coordinating the site evaluation efforts of
DEVELOPER; and
(4) negotiating leases or purchase agreements for proposed Store
sites; and
(5) developing Stores in the Development Area.
DEVELOPER shall also hire and maintain the number of real estate managers
meeting COMPANY's qualifications as COMPANY shall specify.
13.D. TRAINING DIRECTOR.
-----------------
Upon COMPANY's written request, DEVELOPER shall designate a person (other
than the persons serving as the Chief Operating Officer, the Development
Director or the Marketing Director) acceptable to COMPANY to act as the
Training Director of DEVELOPER (the "TRAINING DIRECTOR") who must satisfactorily
complete COMPANY's management training program. If the proposed Training
Director completes the management training program to COMPANY's satisfaction,
COMPANY will certify him to fulfill the duties of the Training Director.
Thereafter, DEVELOPER agrees to send the Training Director, from time to time as
determined by COMPANY, to one or more locations which COMPANY designates for a
period to be determined by COMPANY in order for COMPANY to re-certify the
Training Director. So long as the Training Director's certification is current,
the Training Director shall be responsible for training the employees of each
Store and each Commissary at DEVELOPER's training facility, provided that (i)
DEVELOPER has been authorized in writing by COMPANY to operate such a facility
and (ii) such facility meets, and has been approved by COMPANY, in writing, as
meeting, the specifications COMPANY prescribes for training facilities from time
to time. If the Training Director ceases to be an employee of DEVELOPER or if
the proposed Training Director is unable to satisfactorily complete the
management training program or any subsequent training program, DEVELOPER agrees
to promptly designate a replacement Training Director acceptable to COMPANY, who
must, at DEVELOPER's expense and subject to COMPANY's then-current standard
charges, satisfactorily complete COMPANY's management training program and be
certified by COMPANY as provided above. COMPANY may, in its sole discretion as
it deems necessary, require the Training Director to attend or to participate
in, at DEVELOPER's expense, additional or refresher training programs at
locations designated by COMPANY during the term of this Agreement.
41
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The Training Director's duties will include, without limitation:
(1) training and supervising Store and Commissary personnel; and
(2) furnishing on-site assistance to the personnel of Stores and
Commissaries in connection with Store and Commissary openings; and
(3) ongoing consultation with COMPANY and Store and Commissary
management personnel concerning training matters; and
(4) periodic reporting to COMPANY concerning DEVELOPER's training
programs established and operated by DEVELOPER.
DEVELOPER agrees, if authorized and required by COMPANY, in its sole
discretion, to develop, operate and maintain throughout the Agreement Term a
training program (including appropriate training facilities) for its employees
in the use of the System in accordance with specifications prescribed by COMPANY
from time to time.
13.E. MARKETING DIRECTOR.
------------------
Upon COMPANY's written request, DEVELOPER shall designate a person (other
than the persons serving as the Chief Operating Officer, the Development
Director and the Training Director) acceptable to COMPANY to act as the
Marketing Director of DEVELOPER (the "MARKETING DIRECTOR"). If the relationship
of the Marketing Director with DEVELOPER terminates, DEVELOPER agrees to
promptly designate a replacement Marketing Director acceptable to COMPANY.
The Marketing Director's duties will include, without limitation:
(1) consulting with COMPANY concerning the adaptation of COMPANY's
existing marketing programs and materials for the Development Area; and
(2) preparing and, subject to COMPANY's approval, implementing
marketing plans for the grand opening of the Stores; and
(3) preparing and, subject to COMPANY's approval, implementing local
marketing plans and marketing budgets for the Stores; and
(4) coordinating the direction and administration of any local
marketing efforts of the Stores; and
(5) reporting periodically to COMPANY concerning local marketing
programs of DEVELOPER in the Development Area.
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13.F. MANAGEMENT PERSONNEL AND TRAINING.
---------------------------------
In addition to hiring, training and maintaining the personnel described in
Paragraphs B. through E. of this Section, DEVELOPER shall hire, train and
maintain the number and level of management personnel required for the conduct
of its business pursuant to this Agreement, including, without limitation, a
full-time Store Manager and a full-time Additional Manager for each Store and a
full-time Commissary Manager and a full-time Additional Commissary Manager for
each Commissary, in accordance with guidelines established from time to time by
COMPANY. DEVELOPER shall keep COMPANY advised of the identities of such
personnel. DEVELOPER shall be responsible for ensuring that such personnel are
properly trained to perform their duties. COMPANY will from time to time make
available a management training program for such personnel at times and
locations designated by COMPANY. Such management training program will be made
available at no charge to DEVELOPER's initial Chief Operating Officer,
Development Director, Training Director and Marketing Director and, at
DEVELOPER's request and at COMPANY's then-current standard charges, including,
without limitation, travel and lodging expenses of COMPANY personnel for
training not conducted at COMPANY's principal offices, additional DEVELOPER
personnel and any replacement or substitute Chief Operating Officer, Development
Director, Training Director and/or Marketing Director, subject to space
availability in COMPANY's regularly scheduled management training programs. All
management personnel shall be required to complete to COMPANY's satisfaction
either COMPANY's management training program, a management training program
provided by DEVELOPER and approved by COMPANY or another management training
program certified and accredited by COMPANY.
After COMPANY has certified him pursuant to this Agreement, DEVELOPER's
Training Director shall provide an initial management training program to the
Store Manager and Additional Manager of each Store and the Commissary Manager
and Additional Commissary Manager of each Commissary at a training facility
(including a facility maintained by DEVELOPER if COMPANY so requires) certified
and accredited by COMPANY in accordance with COMPANY's requirements therefor.
COMPANY will provide DEVELOPER with appropriate training materials or refresher
or updated training materials at COMPANY's then-current standard charges
therefor.
13.G. BUDGETS AND FINANCING PLANS.
---------------------------
DEVELOPER shall maintain sufficient financial resources to fulfill its
obligations under this Agreement and under Franchise Agreements executed
pursuant to this Agreement. Within 30 days after the execution of this
Agreement, DEVELOPER shall submit to COMPANY for its approval, in a format
specified by COMPANY, a written plan for the funding of the development of
Stores pursuant to this Agreement (a "Funding Plan"), which plan shall be
reasonably acceptable to COMPANY and which shall include details of the sources
and terms of such funding and such other information or documents required by
COMPANY. Among other factors, COMPANY may consider DEVELOPER's proposed
debt/equity ratio and amount of indebtedness in reviewing such plan. Once a
Funding Plan is approved by COMPANY, DEVELOPER must execute and adhere to the
plan. The plan shall be subject to periodic review
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by COMPANY which may require, in its sole discretion, modifications to meet its
then current minimum standards for developer financing plans.
13.H. INSURANCE.
---------
During the Agreement Term, in addition to insurance required to be
maintained in connection with the development and operation of each Store,
DEVELOPER agrees to maintain under policies of insurance issued by insurers
rated "A-" or better by Alfred M. Best Company, Inc. and approved by Company:
(1) such insurance as is necessary to comply with all legal
requirements concerning insurance coverage (including, without limitation,
workers' compensation requirements and insurance coverage) for persons
attending COMPANY training programs on behalf of DEVELOPER; and
(2) commercial general liability insurance (including, but not
limited to, coverage for motor vehicles used in the development of Stores
and in the operation of Commissaries hereunder, whether or not such
vehicles are owned by DEVELOPER) against claims for bodily and personal
injury, death and property damage caused by or occurring in conjunction
with the conduct of business by DEVELOPER pursuant to this Agreement, under
one or more policies of insurance containing minimum liability coverage
prescribed by COMPANY from time to time.
COMPANY may periodically increase the amounts of coverage required under such
insurance policies and require different or additional kinds of insurance at any
time, including excess liability insurance, to reflect inflation, identification
of new risks, changes in law or standards of liability, higher damage awards or
other relevant changes in circumstances. Each insurance policy shall name
COMPANY as an additional named insured, shall contain a waiver of all
subrogation rights against COMPANY, its Affiliates, and their successors and
assigns, and shall provide for thirty (30) days' prior written notice to COMPANY
of any material modification, cancellation, or expiration of such policy. The
maintenance of insurance coverage which meets the minimum requirements described
in this Section and such additional coverages which DEVELOPER determines are
appropriate for its particular circumstance shall be the responsibility of
DEVELOPER.
Upon execution of this Agreement, DEVELOPER shall provide COMPANY with
evidence of such insurance. Thereafter, prior to the expiration of each
insurance policy, DEVELOPER shall furnish to COMPANY a copy of each renewal or
replacement insurance policy to be maintained by DEVELOPER for the immediately
following term and evidence of the payment of the premium therefor.
DEVELOPER's obligation to maintain insurance coverage as herein described
shall not be affected in any manner by reason of any separate insurance
maintained by COMPANY, nor shall the maintenance of such insurance relieve
DEVELOPER of any indemnification obligations under this Agreement.
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13.I. RECORDS AND REPORTS.
-------------------
DEVELOPER shall maintain and use at its principal office the Computer
System, in such form as is specified by COMPANY from time to time, and shall
transmit information to, or allow the electronic collection of information by,
COMPANY therefrom. DEVELOPER agrees, at its expense, to maintain and preserve
at its principal office, full, complete and accurate records and reports and, if
required by COMPANY, computer diskettes and databases in the form specified by
COMPANY from time to time pertaining to the development and operation of Stores
and the performance by DEVELOPER of its obligations under this Agreement,
including but not limited to, records and information relating to the following:
site reports, Site Agreements for Stores, supervisory reports relating to
operation of Stores, records reflecting the financial condition and performance
of DEVELOPER (utilizing COMPANY's bookkeeping, accounting, recordkeeping and
records retention system including, without limitation, a general ledger system
which utilizes a standard chart of accounts prescribed by COMPANY from time to
time and timely entry of information into data bases of the Computer System and
periodic printouts of reports generated from the Computer System), and
information relating to employee turnover. To determine whether DEVELOPER is
complying with this Agreement, COMPANY or its agents shall have the right at any
reasonable time to inspect, audit and copy any books, records, reports, computer
data bases and documents pertaining to DEVELOPER's obligations hereunder.
DEVELOPER agrees to cooperate fully with COMPANY in connection with any such
inspection or audit.
In addition to the reports and information required in connection with the
development and operation of Stores, DEVELOPER shall adopt a fiscal year
consistent with the fiscal year adopted by COMPANY from time to time and furnish
to COMPANY in the form and format from time to time prescribed by COMPANY
(including, without limitation, via computer diskette and restated in accordance
with COMPANY's financial reporting periods and consistent with COMPANY's then-
current financial reporting periods and accounting practices and procedures):
(1) weekly reports of sales and Royalty Base Revenue for the Stores
each Monday (for the preceding Monday through Sunday period) and, if
requested by COMPANY, daily reports of sales and Royalty Base Revenue for
the Stores, by facsimile or telephone no later than 10:00 a.m. Rocky
Mountain time on the following day; and
(2) by the twentieth (20th) day of each Accounting Period, a report
(in such form as COMPANY may request from time to time) on DEVELOPER's
financing plan and DEVELOPER's activities during the immediately preceding
Accounting Period including, but not limited to, DEVELOPER's activities in
locating and developing sites and monitoring the operation of Stores,
training activities, employee statistics and violations of health codes and
other laws; and
(3) upon request by COMPANY, such other data, reports, information
and supporting records for such periods as COMPANY may from time to time
prescribe
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(including, without limitation, daily and weekly sales reports by means of
telephonic, facsimile or other reporting system).
(4) within sixty (60) days after the end of DEVELOPER's fiscal year,
a fiscal year end balance sheet, an income statement for such fiscal year
reflecting all year-end adjustments and a statement of changes in cash
flow, prepared in accordance with generally accepted accounting principles
consistently applied and in the format prescribed by COMPANY from time to
time; and
(5) at least sixty (60) days prior to each required opening date on
the Development Schedule, an anticipated development program/plan, in form
prescribed by COMPANY from time to time, for the next succeeding required
opening date; and
Each such report and financial statement submitted by DEVELOPER shall be
signed to DEVELOPER and verified as correct in the manner prescribed in COMPANY.
DEVELOPER agrees to maintain and to furnish to COMPANY upon request
complete copies of all income, sales, value added, use and service tax returns,
and employee withholding, worker's compensation and similar reports filed by
DEVELOPER reflecting DEVELOPER's activities and the activities of the Stores.
DEVELOPER shall immediately report to COMPANY any events or developments
which may have a materially adverse impact on the operation of any Store, the
performance of DEVELOPER under this Agreement, or the goodwill associated with
the Marks and UNITS.
13.J. DEVELOPMENT MANUAL, COMMISSARY MANUALS
--------------------------------------
AND STORE MANUALS.
-----------------
COMPANY will loan to DEVELOPER for DEVELOPER's sole use during the
Agreement Term one (1) copy of a confidential manual relating to the development
and operation of UNITS and human resources policies and procedures, which may
consist of one or more volumes, handbooks, manuals, written materials, video or
audio cassette tapes, computer diskettes, and other materials and intangibles,
as may be modified, added to, replaced or supplemented by COMPANY from time to
time in its sole discretion (which modifications, additions or supplements may
contain information developed for COMPANY by DEVELOPER with respect to the type
of UNIT developed pursuant to this Agreement), whether by way of supplements,
replacement pages, franchise bulletins, or other official pronouncements or
means (collectively the "DEVELOPMENT MANUAL"). The Development Manual may be
modified from time to time in COMPANY's sole discretion to reflect changes in
the System or specifications, standards, policies and procedures for UNITS or
such other changes or additions as COMPANY deems necessary or advisable.
DEVELOPER shall keep its copy of the Development Manual current by immediately
inserting all modified pages or materials furnished by COMPANY. In the event of
a dispute about the contents of the Development Manual, the master copies
maintained by COMPANY at its principal office shall be controlling. DEVELOPER
acknowledges that the Development Manual is part of the Confidential Information
and will be
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protected accordingly. DEVELOPER acknowledges and agrees that the content of
the Development Manual and the Commissary Manuals, as modified from time to
time, is incorporated herein by reference and that DEVELOPER will comply with
all procedures, standards, specifications and requirements specified therein as
though each such item were set forth in detail in this Agreement.
COMPANY also will loan to DEVELOPER for its use during the term of each
Franchise Agreement one (1) copy of the Store Manuals for each Store developed
and opened by DEVELOPER under this Agreement. The Store Manuals for the first
Store to be developed under this Agreement will be made available to DEVELOPER
promptly after execution of this Agreement.
13.K. COMPLIANCE WITH LAWS AND GOOD BUSINESS PRACTICES.
------------------------------------------------
DEVELOPER shall secure and maintain in force in its name all required
licenses, permits, and certificates relat ing to the conduct of its business
pursuant to this Agreement. DEVELOPER shall comply with all applicable laws,
ordinances and regulations, including, without limitation, laws and governmental
regulations relating to the preparation, purchase and handling of food products,
Delivery Service, Catering Service, Special Distribution Arrangements and the
operation of Commissaries (if applicable), occupational hazards, health, safety
and sanitation, worker's compensation insurance, unemployment insurance, and
withholding and payment of all taxes. All advertising by DEVELOPER shall be
approved by COMPANY and be completely factual, in good taste in the judgment of
COMPANY, and conform to high standards of ethical advertising. DEVELOPER shall
in all dealings with its customers, suppliers, COMPANY and public officials
adhere to high standards of honesty, integrity, fair dealing and ethical
conduct. DEVELOPER agrees to refrain from any business or advertising practice
which may be injurious to the business of COMPANY and the goodwill associated
with the Marks and UNITS. DEVELOPER shall notify COMPANY in writing:
(1) within three (3) days after the commencement of any action, suit,
or proceeding, and of the issuance of any order, writ, injunction, award,
or decree of any court, agency, or other governmental instrumentality,
which may adversely affect the operation or financial condition of
DEVELOPER, the Stores or the Commissaries
(2) immediately after receipt of any notice of violation of any law,
ordinance or regulation relating to health, sanitation or the operation of
the Stores or the Commissaries.
13.L. HUMAN RESOURCES.
---------------
DEVELOPER shall adopt, observe and enforce those human resources policies,
programs and standards which COMPANY includes in the Development Manual, Store
Manuals and Commissary Manuals or otherwise designates in writing as mandatory.
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13.M. SPECIFICATIONS, STANDARDS AND PROCEDURES.
----------------------------------------
DEVELOPER agrees to comply strictly with all of COMPANY's mandatory
specifications, standards and procedures relating to the Stores and
Commissaries, which specifications, standards and procedures COMPANY may modify,
supplement or replace from time to time. Any failure by DEVELOPER to adhere to
such mandatory specifications, standards and procedures or to pass COMPANY's
periodic quality control inspections shall constitute a breach of this
Agreement. DEVELOPER agrees and acknowledges that COMPANY's mandatory
specifications, standards and operating procedures relating to the appearance,
function, cleanliness, days and hours of operation (days and hours of operation
may vary somewhat among UNITS based on COMPANY's reasonable judgment of the
requirements of the Store's trade area and whether COMPANY has approved any
special services to be offered at or from a site), and operation of a UNIT,
including, but not limited to:
(1) type, brand, quality, taste, weight, dimensions, ingredients,
uniformity, manner of preparation, preservation and sale of all Products
and Supplies and Materials; and
(2) sales and marketing procedures and customer service; and
(3) advertising and promotional programs; and
(4) layout, decor and color scheme of the Store; and
(5) recruitment, selection, training, appearance and dress of
employees, including, without limitation, use of COMPANY's employee
selection and training materials; and
(6) safety, maintenance, appearance, cleanliness, sanitation,
standards of service and operation of Stores; and
(7) submission of requests for approval of brands of food and
packaging products, supplies and suppliers; and
(8) use and illumination of signs, posters, displays, standard
formats and similar items; and
(9) identification of DEVELOPER (and/or the entity executing
Franchise Agreements for Stores pursuant to the Development Agreement) as
the owner of Stores in the Development Area; and
(10) types of and use of fixtures, furnishings, equipment, computer
hardware and software, vehicles, and signs; and
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(11) carry-out, on-premises dining and (if authorized by COMPANY and
agreed to by DEVELOPER) Delivery Service, Catering Service and Special
Distribution Arrangements; and
(12) required and approved menu items; and
(13) general staffing levels for the Stores and number, type and
qualifications of Store personnel; and
(14) participation in market research and test programs required or
approved by COMPANY concerning various aspects of the System, including,
without limitation, procedures, systems, techniques, furnishings, fixtures,
equipment, ingredients, signs, labels, trade dress, logos, packaging,
supplies, marketing materials and strategies, merchandising and new menu
items and services. DEVELOPER agrees, if requested by COMPANY, to
participate in COMPANY's customer surveys and market research programs.
DEVELOPER acknowledges and agrees that all mandatory specifications, standards
and operating and inspection procedures prescribed from time to time by COMPANY
in the Store Manuals or otherwise communicated to DEVELOPER in writing, shall
constitute binding obligations on the part of DEVELOPER as if fully set forth
herein, and any failure by DEVELOPER to adhere to such mandatory specifications,
standards and operating and inspection procedures or to pass COMPANY'S periodic
quality control inspections shall constitute grounds for termination of this
Agreement by COMPANY, as provided for herein. All references herein to this
Agreement shall include all such manda tory specifications, standards, and
operating procedures.
14. TRANSFER.
--------
14.A BY COMPANY.
----------
This Agreement is fully transferable by COMPANY and shall inure to the
benefit of any assignee or other legal successor to the interests of COMPANY
herein.
14.B THIS AGREEMENT IS NOT TRANSFERABLE BY DEVELOPER.
-----------------------------------------------
DEVELOPER understands, acknowledges and agrees (and hereby represents and
warrants that its Owners understand and agree) that the rights and duties
created by this Agreement are personal to DEVELOPER and its Owners and that a
material cause for COMPANY's agreeing to enter into this Agreement is its
reliance on the individual and collective character, skill, aptitude, business
ability, and financial capacity of DEVELOPER and its Owners. Therefore, except
as provided in Section 14.C. below, no Ownership Interest in DEVELOPER, no
obligations of DEVELOPER under this Agreement, and no interest in this Agreement
may be transferred. Any purported transfer in violation of this Section shall
constitute a breach of this
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Agreement and shall convey to the transferee no obligations under, rights to or
interest in the foregoing.
As used in this Agreement, a "transfer" shall include, without limitation,
the following, whether voluntary, involuntary, direct or indirect, or
conditional:
(1) an assignment, sale, gift or pledge;
(2) the grant of a mortgage, lien or security interest, including,
without limitation, the grant of a collateral assignment;
(3) a merger, consolidation, share exchange or issuance of
additional Ownership Interests or securities representing or potentially
representing Ownership Interests or redemption of Ownership Interests;
(4) a sale or exchange of voting interests or securities convertible
to voting interests, or an agreement granting the right to exercise or
control the exercise of voting rights of any holder of Ownership Interests
or to control the operations or affairs of DEVELOPER; and
(5) except where specifically approved by COMPANY, a management
agreement whereby DEVELOPER delegates (i) any of its obligations under this
Agreement; or (ii) any or all of the management functions with respect to a
Store or the business to be conducted by DEVELOPER pursuant to this
Agreement.
In addition to the foregoing, a transfer (as defined above) will require the
prior written consent of COMPANY where such transfer occurs by virtue of (a)
divorce; (b) insolvency; (c) dissolution of a corporation, partnership or
limited liability company; (d) will; (e) intestate succession; or (f)
declaration of or transfer in trust.
14.C. CERTAIN RIGHTS TO TRANSFER
OWNERSHIP INTERESTS IN DEVELOPER.
--------------------------------
Subject to (1) COMPANY's rights of first refusal under Section 14.G and (2)
COMPANY's right to approve the proposed purchaser under Section 14.D., Ownership
Interests (including stock options or other options to acquire Ownership
Interests) may be transferred if:
(1) the proposed transfer is by an Owner who is not a Principal
Owner; and
(2) the proposed transfer does not by itself or in conjunction with
other transfers, result in the transfer of a Controlling Interest in
DEVELOPER or of a change in the composition of the group holding a
Controlling Interest in DEVELOPER; and
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(3) the proposed transfer is not to a Competitive Business or to a
direct or indirect owner of interests in a Competitive Business; and
(4) DEVELOPER and its Owners are in full compliance with this
Agreement.
In addition, an Owner's Ownership Interests in DEVELOPER shall be
transferred to a transferee approved by COMPANY pursuant to Section 14.D within
a reasonable time, not to exceed nine (9) months, after the death, permanent
incapacity or liquidation of the Owner.
14.D. COMPANY'S RIGHT TO APPROVE TRANSFERS.
------------------------------------
COMPANY reserves the right to approve the proposed purchaser and transfer
of any Ownership Interests in DEVELOPER which are permitted or mandated under
Section 14.C. to be transferred. If any Owner intends to transfer Ownership
Interests, DEVELOPER shall deliver to COMPANY written notice of such proposed
transfer at least thirty (30) days prior to its intended effective date. Such
notice shall describe in detail the proposed transfer (including, without
limitation, the nature of the transfer, the nature and amount of the interests
being transferred, the reason for the transfer, the price and terms of the
transfer and effective date) and identify and provide information regarding the
proposed purchaser. COMPANY shall have thirty (30) days from delivery of such
notice within which to evaluate the proposed transaction and to notify DEVELOPER
of its approval or disapproval (with reasons) of the proposed transfer. If
approved, the transfer must take place as described in the notice (as modified
by any conditions imposed by COMPANY in granting its approval) and within thirty
(30) days of the delivery of notice of COMPANY's approval. In evaluating
whether to grant its approval, COMPANY may evaluate any and all reasonable
factors including, without limitation:
(1) whether the proposed transferee and, if applicable, its owners
are (a) of good moral character, (b) otherwise meet COMPANY's then
applicable standards for developers of UNITS and (c) are in full compliance
with any other franchise agreements or development agreements between
COMPANY and them; and
(2) whether the price and terms of the proposed transfer are not so
burdensome as to adversely affect or have a potentially adverse affect on
COMPANY's rights and interest under this Agreement.
In granting its approval, COMPANY may also impose certain reasonable
conditions, including, without limitation, the following:
(1) that DEVELOPER reimburse COMPANY for any costs and expenses
incurred by COMPANY in evaluating the proposed transfer;
(2) that DEVELOPER, the transferring Owner or the proposed purchaser
pay a transfer fee in the amount of $10,000;
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(3) that, if the transferring Owner finances any part of the sale
price, it agrees, in a manner satisfactory to COMPANY, that all obligations
of the purchaser under or pursuant to any promissory notes, agreements or
security interests reserved by the transferring Owner be subordinate to any
obligations of the purchaser to pay amounts due COMPANY and its Affiliates;
(4) that the purchaser execute any individual undertakings then
being required by COMPANY of other Owners of developers or franchise owners
of UNITS;
(5) that DEVELOPER, the transferring Owner and the purchaser (if the
purchaser is then the owner of interests in another developer or franchise
owner of UNITS) execute a general release and consent agreement, in form
satisfactory to COMPANY, of any and all claims against COMPANY, its
Affiliates, and their respective shareholders, officers, directors,
employees and agents for matters arising on or before the effective date of
the transfer; and
(6) that the transferring Owner execute a noncompetition agreement
in favor of COMPANY and the transferee, providing that the transferring
Owner shall not directly or indirectly (through a member of the Immediate
Family of the transferring Owner of DEVELOPER, or otherwise), for a period
of two (2) years commencing on the effective date of such transfer:
(a) have any interest as a disclosed or beneficial owner in any
Competitive Business located or operating:
(i) within a five (5) mile radius of any UNIT in
operation or under development in the Development Area on the
effective date of the transfer; or
(ii) within a five (5) mile radius of any other UNIT in
operation or under development on the effective date of the
transfer; or
(iii) within the Development Area; or
(iv) within the state(s) where the Development Area is
located;
or
(b) perform services as a director, officer, manager, employee,
consultant, representative, agent or otherwise for any Competitive
Business located or operating:
(i) within a five (5) mile radius of any UNIT in
operation or under development in the Development Area on the
effective date of the transfer; or
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(ii) within a five (5) mile radius of any other UNIT in
operation or under development on the effective date of the
transfer; or
(iii) within the Development Area; or
(iv) within the state(s) where the Development Area is
located; or
(c) divert or attempt to divert any business or any customers of
any UNIT to any Competitive Business;
or
(d) employ or seek to employ any person who is employed by
COMPANY, its Affiliates or by any other developer or franchise owner
of COMPANY, nor induce nor attempt to induce any such person to leave
said employment without the prior written consent of such person's
employer.
The rights of Owners to transfer interests in DEVELOPER may be exercised
only by the Owners and shall not be exercisable by a receiver, trustee,
liquidator or other person acting in a comparable capacity with respect thereto.
The restrictions of subparagraph (6)(a) of this Section 14.D. will not be
applicable to the ownership of shares of a class of securities listed on a stock
exchange or traded on the over-the-counter market and quoted by a national
inter-dealer quotation system that represent less than three percent (3%) of the
number of shares of that class of securities issued and outstanding nor shall
they be construed to prohibit DEVELOPER, any Principal Owner of Developer or any
member of the Immediate Family of DEVELOPER or any Principal Owner from having a
direct or indirect Ownership Interest in any UNIT, development agreements or
franchise agreements for the development or operation of UNITS, or any entity
owning, controlling or operating UNITS, or from providing services to UNITS
pursuant to other agreements with COMPANY. Furthermore, the restrictions of
this Section 14.D shall not prohibit DEVELOPER, any Owner of DEVELOPER, or (to
the extent of such person is an individual) any member of the Immediate Family
of an Owner of DEVELOPER from performing services for or having an Ownership
Interest in a Permitted Competitive Business, or from conducting customary
promotion and advertising of a Permitted Competitive Business.
14.E. PUBLIC OR PRIVATE OFFERINGS.
---------------------------
DEVELOPER acknowledges and agrees that it is the intent of COMPANY and
DEVELOPER that DEVELOPER not be or become a public company or "reporting
company" (as defined in Sections 12(b), 12(g) or 15(d) of the Securities
Exchange Act of 1934, as amended, or otherwise) including by way of an initial
public offering or a transfer to or merger with an existing public company.
Accordingly, DEVELOPER agrees that securities of DEVELOPER or an entity owning a
direct or indirect equity interest in DEVELOPER or this
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Agreement, or any Store or Franchise Agreement may not be offered pursuant to a
public offering. DEVELOPER further agrees that such securities will not be
offered pursuant to a private placement without COMPANY's prior written consent.
COMPANY hereby grants its consent to a private placement of securities by
DEVELOPER provided that DEVELOPER ensures that:
(1) such private placement complies with all applicable federal,
state and local laws governing offerings of securities and all applicable
agreements between DEVELOPER and COMPANY or its Affiliates;
(2) such private placement complies with each of the relevant
transfer procedures, requirements and limitations contained herein;
(3) such private placement does not result in any change in
operating control of DEVELOPER or any Store or in the parties owning a
Controlling Interest or in the individual or individuals controlling the
management, policies or decision-making power of DEVELOPER;
(4) each person or entity receiving securities under such private
placement shall be an accredited investor, as defined by applicable law,
and shall have been identified and be reasonably acceptable to COMPANY;
provided, however, that DEVELOPER may allow unaccredited investors to
receive securities if DEVELOPER has complied with applicable law with
respect thereto;
(5) a draft of any offering memorandum or information proposed to be
used in connection with any such private placement is submitted to COMPANY
for review and comment within a reasonable time prior to its use, that the
reasonable comments and suggestions of COMPANY thereto are given due
consideration and that a final version of such memorandum or information be
provided to COMPANY at least five (5) days prior to its distribution to
prospective investors;
(6) any offering memorandum or information used in connection with
any such private placement shall clearly state that it is not an offering
by COMPANY and that COMPANY has not participated in its preparation and has
not supplied any financial information projections, budgets, cost estimates
or similar information contained therein (all of which shall be the
responsibility of DEVELOPER);
(7) each recipient of information relating to such private placement
agrees to maintain it in confidence;
(8) the structure, timing, allocation and nature of such private
placement is reasonably acceptable to COMPANY;
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(9) DEVELOPER does not as a result of the private placement, become
a "Reporting Company" under Sections 12(b), 12(g) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
(10) each person who or entity which becomes an Owner or Principal
Owner as a result of such private placement agrees and undertakes to become
bound by any provisions of this Agreement pertaining to Owners or Principal
Owners, as applicable.
DEVELOPER agrees to indemnify COMPANY for and hold COMPANY harmless against
any and all costs, expenses, claims, actions, judgments and liabilities
(including, but not limited to, costs and expenses related to legal defense)
arising from or relating to any private placement approved by COMPANY pursuant
to this Section. DEVELOPER also agrees to reimburse COMPANY for its reasonable
expenses incurred in connection with any such private placement (including
attorney's fees) and to comply with all requirements of COMPANY in connection
with such offering, including, without limitation, adding appropriate
disclaimers to the offering documents and execution of appropriate
indemnification agreements.
14.F. EFFECT OF CONSENT TO TRANSFER.
-----------------------------
COMPANY's consent to a transfer of this Agreement or any interest subject
to the restrictions of this Section shall not constitute a waiver of any claims
it may have against DEVELOPER (or its Owners), nor shall it be deemed a waiver
of COMPANY's right to demand full compliance with any of the terms or conditions
of this Agreement by the transferee. COMPANY's consent to any such transfer
shall not, unless expressly provided in such consent, effect a release of
DEVELOPER (or its Owners, as the case may be) post-transfer.
14.G. COMPANY'S RIGHT OF FIRST REFUSAL.
--------------------------------
If DEVELOPER or any of its Owner(s) desire to make a transfer of an
interest that is permitted under this Agreement, DEVELOPER or its Owner(s) shall
obtain a bona fide, arms length executed purchase agreement (and any proposed
ancillary agreements) in complete and definitive form and not subject to any
financing or other material, substantive contingency and an earnest money
deposit (in the amount of ten percent (10%) or more of the purchase price) from
a qualified, responsible, bona fide and fully disclosed purchaser. A true and
complete copy of such purchase agreement (conditioned on COMPANY's first refusal
rights) and any proposed ancillary agreements shall immediately be submitted to
COMPANY by DEVELOPER, such Owner(s), or both. The purchase agreement must apply
only to an interest which is permitted to be transferred under this Agreement,
may not include the purchase of any other property or rights of DEVELOPER (or
such Owner(s)) and the price and terms of purchase offered to DEVELOPER (or such
Owner(s)) in the purchase agreement for the aforementioned interests will
reflect the bona fide price offered therefor and shall not reflect any value for
any other property or rights. If the proposed purchaser proposes to buy any
other property or rights from DEVELOPER (or such Owner(s)) under a separate,
contemporaneous purchase agreement, DEVELOPER shall submit to COMPANY a true and
complete copy of a bona fide, arms length executed purchase agreement (and any
proposed ancillary agreements) in complete and definitive
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form and not subject to any financing or other material, substantive
contingency. COMPANY shall have the right, exercisable by written notice
delivered to DEVELOPER (or such Owner(s)) within thirty (30) days from the date
of receipt by COMPANY of an exact copy of such purchase agreement, together with
payment of any applicable transfer fee, and a completed executed application for
COMPANY's consent to the transfer, to purchase such interest for the price and
on the terms and conditions contained in such purchase agreement, provided that
COMPANY may substitute cash, a cash equivalent, or marketable securities of
equivalent value for any form of payment proposed in such purchase agreement,
COMPANY's credit shall be deemed equal to the credit of any proposed purchaser,
and COMPANY shall have not less than sixty (60) days to prepare for closing.
Regardless of whether included in the purchase agreement, COMPANY shall be
entitled to all customary representations and warranties given by the seller of
a business, including, without limitation, representations and warranties as to:
(i) ownership, condi tion and title to the Ownership Interests and/or assets
being purchased; (ii) absence of liens and encumbrances relating to such
Ownership Interests or assets; (iii) validity of contracts of any legal entity
whose Ownership Interests are purchased and (iv) liabilities, contingent or
otherwise, of any legal entity whose Ownership Interests are purchased. If
COMPANY does not exercise its right of first refusal, DEVELOPER (or such
Owner(s)) may complete the sale to such purchaser pursuant to and on the exact
terms of the purchase agreement, subject to COMPANY's approval of the transfer,
as provided for in this Agreement, provided that if the sale to such purchaser
is not completed within one hundred twenty (120) days after receipt of such
purchase agreement by COMPANY, or there is a change in the terms of the sale,
COMPANY shall again have an additional right of first refusal for thirty (30)
days as set forth in this Agreement on the modified or initial terms and
conditions of sale.
14.H. OWNERSHIP STRUCTURE.
-------------------
DEVELOPER represents and warrants that its Owners are as set forth on
Exhibit G and covenants that DEVELOPER will not permit the identity of such
- ---------
Owners, or their respective interests in DEVELOPER, to change without complying
with this Agreement.
14.I. DELEGATION BY COMPANY.
---------------------
DEVELOPER agrees that COMPANY shall have the right, from time to time, to
delegate the performance of any portion or all of its obligations and duties
under this Agreement to designees, whether the same are agents of COMPANY or
independent contractors with which COMPANY has contracted to provide such
services.
14.J. PERMITTED TRANSFERS.
-------------------
Notwithstanding anything to the contrary contained in this Agreement and
provided (a) DEVELOPER reimburses any costs incurred by COMPANY in connection
therewith, (b) DEVELOPER, its Owners and the transferees comply with the
provisions of the HSR Act, if applicable, prior to such a transfer, (c)
DEVELOPER, its Owners and the transferees comply with all other restrictions of
this Agreement applicable to Owners and ownership interests (including, without
limitation, those restricting an Owner's ownership of interests in a
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Competitive Business), and (d) the transfer does not, by itself or in
conjunction with other transfers, result in the transfer of a Controlling
Interest in DEVELOPER or of a change in the composition of the group holding a
Controlling Interest in DEVELOPER, the provisions of this Section 14 (including,
without limitation, the requirement of the payment of transfer fees under
Section 14.D(2) and the right of first refusal granted to COMPANY in Section
14.G) shall not restrict or apply to any assignment, sale, transfer of an
Ownership Interest which:
(1) is pursuant and according to the terms of a written stock or
other equity interest option or stock or other equity interest bonus plan
which benefits employees of DEVELOPER and/or of the Boston Chicken, Inc.
franchise owner which provides management services to DEVELOPER pursuant to
a support services agreement, and has been approved by COMPANY; or
(2) is made for bona fide estate planning purposes (a) to a
corporation, trust, partnership, or other entity controlled by the
transferring Owner or (b) pursuant to an inter vivos or testamentary
document or the laws of descent and distribution.
15. TERMINATION OF AGREEMENT.
------------------------
15.A. BY DEVELOPER.
------------
If DEVELOPER is in full compliance with this Agreement and with all
Franchise Agreements and COMPANY materially breaches this Agreement, DEVELOPER
may terminate this Agreement effective thirty (30) days after COMPANY's receipt
of written notice of termination if DEVELOPER gives written notice of such
breach to COMPANY and COMPANY does not:
(1) correct such breach within thirty (30) days after COMPANY's
receipt of such notice of material breach; or
(2) if such breach cannot reasonably be cured within thirty (30)
days after COMPANY's receipt of such notice, undertake within thirty (30)
days after COMPANY's receipt of such notice, and continue until completion,
reasonable efforts to cure such breach.
Any attempt to terminate this Agreement by DEVELOPER other than as provided in
this Section 15.A. shall be a breach by DEVELOPER of this Agreement.
15.B. BY COMPANY.
----------
COMPANY may terminate this Agreement, effective upon delivery of notice of
termination to DEVELOPER or, where expressly applicable, upon failure to cure to
COMPANY's satisfaction any breach of this Agreement before the expiration of any
period of time within which such breach may be cured in accordance with the
provisions set forth below, if:
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(1) DEVELOPER fails to satisfy the development obligations for the
Development Area or any Sub-Area pursuant to this Agreement; or
(2) any person or entity makes an assignment or transfer in
violation of this Agreement; or
(3) DEVELOPER or any Principal Owner of DEVELOPER has made any mater
ial misrepresentation or omission in its application or acquisition of this
Agreement or in connection with any transfer hereunder; or
(4) DEVELOPER or any Owner of DEVELOPER is convicted by a trial
court of, or pleads guilty or no contest to, a felony, or to any other
crime or offense that may adversely affect the reputation of UNITS or the
goodwill associated with the Marks, or engages in any misconduct which may
adversely affect the reputation of UNITS or the goodwill associated with
the Marks; or
(5) DEVELOPER or any of its Owners or employees makes any
unauthorized use of the Marks or the Copyrighted Works, makes any
unauthorized use, disclosure or duplication of the Confidential
Information, the Development Manual, the Commissary Manual, any of the
Store Manuals or the Copyrighted Works, or challenges or seeks to challenge
the validity of COMPANY's or its Affiliates' rights in and to the Marks,
the Copyrighted Works or the Confidential Information (unless the foregoing
prohibited act is inadvertent and does not have, or threaten to have, an
adverse effect upon COMPANY, its business concept, its business operations,
the business of any UNIT, any Mark, the Confidential Information, the
Development Manual, or the Copyrighted Works, and DEVELOPER ceases and
desists any such prohibited act promptly upon notice and reimburses COMPANY
for all damages, losses, costs, and expenses incurred by COMPANY in
connection with such prohibited acts); or
(6) DEVELOPER, its Principal Owners, or members of their Immediate
Families (whether or not bound by individual noncompetition undertakings)
or other persons who have executed such individual undertakings violate the
restrictions on the operation of Competitive Businesses during the
Agreement Term set forth in Section 11 of this Agreement or Owners who
have access to the Confidential Information violate the covenants
concerning competition and confidentiality contained in the form of
Confidentiality and Non-Competition Agreement attached hereto as Exhibit J
---------
(regardless of whether any such party has executed this Agreement or a
Confidentiality and Non-Competition Agreement); or
(7) DEVELOPER fails to deliver or adhere to Funding Plan approved by
COMPANY as required pursuant to Section 13.G. of this Agreement and does
not correct such failure within ten (10) days after written notice of such
failure is delivered to DEVELOPER; or
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(8) DEVELOPER fails to make payments of any amounts due to COMPANY
and does not correct such failure within ten (10) days after written notice
of such failure is delivered to DEVELOPER; or
(9) DEVELOPER fails to timely commence or provide:
(a) Delivery Service pursuant to a Delivery Rider executed by
COMPANY and DEVELOPER; or
(b) Catering Service pursuant to a Catering Rider executed by
COMPANY and DEVELOPER; or
(c) Special Distribution Arrangements pursuant to a Special
Distribution Agreement executed by COMPANY and DEVELOPER,
in accordance with COMPANY's standards, specifications, and procedures, and
does not correct such failure within 10 days after DEVELOPER's receipt of
COMPANY's written notice of such failure to comply; or, if such failure
cannot reasonably be corrected within the aforesaid 10-day period but can
be corrected within a reasonably short time (not to exceed an additional 30
days), undertake within 10 days after DEVELOPER's receipt of COMPANY's
written notice, and continue until completion, best efforts to correct such
failure within such reasonably short time (not to exceed an additional 30
days) and furnish proof acceptable to COMPANY, upon its request, of such
efforts and the date full compliance will be achieved; or
(10) DEVELOPER fails to operate a Commissary at the time specified by
COMPANY and at the location approved by COMPANY in accordance with
COMPANY's standards, specifications and procedures and does not correct
such failure within 10 days after DEVELOPER's receipt of COMPANY's written
notice of such failure to comply; or, if such failure cannot reasonably be
corrected within the aforesaid 10-day period but can be corrected within a
reasonably short time (not to exceed an additional 30 days), undertake
within 10 days after DEVELOPER's receipt of COMPANY's written notice, and
continue until completion, best efforts to correct such failure within such
reasonably short time (not to exceed an additional 30 days) and furnish
proof acceptable to COMPANY, upon its request, of such efforts and the date
full compliance will be achieved; or
(11) DEVELOPER or any of its Owners fail: (a) to comply with any
other provision of this Agreement, and does not correct such failure within
thirty (30) days after DEVELOPER's receipt of COMPANY's written notice of
such failure to comply; or (b) if such failure cannot reasonably be
corrected within the aforesaid thirty (30) day period but can be corrected
within a reasonably short time (not to exceed an additional thirty (30)
days), undertake within ten (10) days after DEVELOPER's receipt of
COMPANY's written notice, and continue until completion, best efforts to
correct such failure within such reasonably short time (not to exceed an
additional thirty (30) days)
59
<PAGE>
and furnish proof acceptable to COMPANY, upon its request, of such efforts
and the date full compliance will be achieved; or
(12) DEVELOPER or any of its Principal Owners fails on three or more
separate occasions within any period of 18 consecutive months to comply
with this Agreement in any material respect; or
(13) COMPANY has delivered a notice of termination of a Franchise
Agreement executed pursuant to this Agreement in accordance with its terms
and conditions or DEVELOPER has attempted to terminate a Franchise
Agreement with COMPANY in breach thereof; or
(14) DEVELOPER becomes insolvent in the sense that it is unable to
pay its bills as they become due; or
(15) DEVELOPER has attempted to terminate this Agreement without
complying with Section 15.A. of this Agreement.
15.C. TERMINATION OF THE DEVELOPMENT
TERM AND CERTAIN RIGHTS OF DEVELOPER.
------------------------------------
In the event COMPANY is entitled to terminate this Agreement in accordance
with Paragraph B. of this Section, COMPANY, in its sole discretion, shall have
the option to terminate any one or more of the following instead of terminating
this Agreement:
(1) DEVELOPER's right to develop UNITS for which no Franchise
Agreement has been executed under Section 3.A.; and
(2) DEVELOPER's territorial rights granted pursuant to Section 3.A.
in some or all of the Sub-Areas; and
(3) DEVELOPER's option to develop UNITS at Target Sites under
Section 3.E.; and
(4) DEVELOPER's option to purchase, and develop and operate UNITS at
Conversion Sites under Section 3.F.; and
(5) any Delivery Rider(s) in effect between COMPANY and DEVELOPER;
and
(6) any Catering Rider(s) in effect between COMPANY and DEVELOPER;
and
(7) any Special Distribution Arrangement(s) in effect between
COMPANY and DEVELOPER, and
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(8) require DEVELOPER to cease operation of one or more
Commissaries,
effective ten (10) days after delivery of written notice thereof to DEVELOPER.
If any of such rights, options or arrangements are terminated in accordance with
this Paragraph, such termination shall be without prejudice to COMPANY's right
to terminate this Agreement or other such rights, options or arrangements at any
time thereafter for the same default or as a result of any additional defaults
of this Agreement in accordance with Paragraph B. of this Section.
16. RIGHTS AND OBLIGATIONS OF COMPANY AND
DEVELOPER UPON TERMINATION OF THIS
AGREEMENT OR EXPIRATION OF THE AGREEMENT TERM.
---------------------------------------------
16.A. PAYMENT OF AMOUNTS OWED TO COMPANY.
----------------------------------
DEVELOPER shall immediately pay to COMPANY upon termination of this
Agreement or upon expiration of the Agreement Term any amounts owed by DEVELOPER
to COMPANY or its Affiliates which are then unpaid plus interest due on any of
the foregoing.
16.B. MARKS AND COPYRIGHTED WORKS.
---------------------------
Upon the termination of this Agreement or expiration of the Agreement Term,
DEVELOPER shall:
(1) immediately cease use of all of the Marks and not thereafter
directly or indirect ly at any time or in any manner identify itself or any
business as a current or former developer of or as otherwise associated
with COMPANY, or use any Mark, any colorable imitation thereof or use any
mark substantially identical to or deceptively similar to any Mark in any
manner or for any purpose, or utilize for any purpose any trade name,
trademark or service mark or other commercial symbol or trade dress that
suggests or indicates a connection or association with COMPANY; and
(2) immediately remove all signs containing any Mark, and return to
COMPANY or destroy all forms, advertising and promotional materials and
other materials containing any Mark or otherwise identifying or relating to
the Marks; and
(3) immediately take such action as may be required to cancel or, at
COMPANY's option, to transfer to COMPANY or its designee, all fictitious or
assumed name or equivalent registrations relating to its use of any Mark;
and
(4) immediately cease use of all Copyrighted Works which were
furnished and/or licensed to DEVELOPER by COMPANY pursuant to this
Agreement and return to COMPANY or destroy, at COMPANY's option, all forms,
advertising and promotional materials or other materials containing such
Copyrighted Works.
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DEVELOPER shall furnish to COMPANY within thirty (30) days after the effective
date of termination or expiration, evidence satisfactory to COMPANY of
DEVELOPER's compliance with all of the foregoing obligations. Notwithstanding
the foregoing, DEVELOPER shall continue to have the right to use the Marks and
Copyrighted Works pursuant to any Franchise Agreements it has entered into
pursuant to this Agreement which are then in effect.
16.C. CONFIDENTIAL INFORMATION.
------------------------
DEVELOPER agrees that upon termination of this Agreement or expiration of
the Agreement Term:
(1) it, and all of its affiliates, Owners, employees, agents or
other representatives, will immediately cease to use and will maintain the
absolute confidentiality of any Confidential Information of COMPANY
disclosed to or otherwise learned or acquired by DEVELOPER and will refrain
from using such Confidential Information in any business or otherwise; and
(2) it will return to COMPANY all copies of the Development Manual
and any other confidential materials which have been loaned or made
available to it by COMPANY pursuant to this Agreement.
16.D. COVENANT NOT TO COMPETE.
-----------------------
Upon expiration of the Agreement Term or termination of this Agreement by
COMPANY or by DEVELOPER, other than pursuant to Section 15.A., neither DEVELOPER
nor any of its Principal Owners shall directly or indirectly (through a member
of the Immediate Family of DEVELOPER or a Principal Owner of DEVELOPER, or
otherwise) for a period of two (2) years commencing on the effective date of
such termination or expiration or the date on which DEVELOPER ceases to conduct
its activities hereunder, whichever is later:
(1) have any interest as a disclosed or beneficial owner in any
Competitive Business located or operating:
(a) within a five (5) mile radius of any UNIT in operation or
under development in the Development Area on the effective date of
termination or expiration of this Agreement; or
(b) within a five (5) mile radius of any other UNIT in operation
or under development on the effective date of termination or
expiration of this Agreement; or
(c) within the Development Area; or
(d) within the state(s) where the Development Area is located;
or
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<PAGE>
(2) perform services as a director, officer, manager, employee,
consultant, representative, agent or otherwise for any Competitive Business
located or operating:
(a) within a five (5) mile radius of any UNIT in operation or
under development in the Development Area on the effective date of
termination or expiration of this Agreement; or
(b) within a five (5) mile radius of any other UNIT in operation
or under development on the effective date of termination or
expiration of this Agreement; or
(c) within the Development Area; or
(d) within the state(s) where the Development Area is located;
or
(3) divert or attempt to divert any business or any customers of any
UNIT to any Competitive Business; or
(4) employ or seek to employ any person who is employed by COMPANY,
its Affiliates or by any other developer or franchise owner of COMPANY, nor
induce nor attempt to induce any such person to leave said employment
without the prior written consent of such person's employer.
The restrictions of Subparagraph (1) of this Paragraph D. will not be
applicable to the ownership of shares of a class of securities listed on a stock
exchange or traded on the over-the-counter market and quoted by a national
inter-dealer quotation system that represent less than three percent (3%) of the
number of shares of that class of securities issued and outstanding nor shall
they be construed to prohibit DEVELOPER, any Principal Owner of Developer or any
member of the Immediate Family of DEVELOPER or any Principal Owner from having a
direct or indirect Ownership Interest in any UNIT, development agreements or
franchise agreements for the development or operation of UNITS, or any entity
owning, controlling or operating UNITS, or from providing services to UNITS
pursuant to other agreements with COMPANY. Furthermore, the restrictions of
this Paragraph D. shall not prohibit DEVELOPER, any Principal Owner of
DEVELOPER, or (to the extent of such person is an individual) any member of the
Immediate Family of DEVELOPER or a Principal Owner of DEVELOPER from performing
services for or having an Ownership Interest in a Permitted Competitive
Business, or from conducting customary promotion and advertising of a Permitted
Competitive Business.
16.E. EFFECT ON COMMISSARIES.
----------------------
It is understood and agreed that the termination or expiration of the
Development Term or the Agreement Term shall not affect the operation of the
Commissaries which shall continue on the terms of this Agreement. DEVELOPER's
right and obligation to operate a Commissary pursuant to this Agreement shall
expire or terminate solely as set out in Section 5 of this Agreement.
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<PAGE>
16.F. CONTINUING OBLIGATIONS.
----------------------
All obligations of COMPANY and DEVELOPER under this Agreement which
expressly or by their nature survive or are intended to survive the termination
of this Agreement or expiration of the Agreement Term shall continue in full
force and effect subsequent to and notwithstanding its expiration or termination
and until they are satisfied in full or by their nature expire.
17. INDEPENDENT CONTRACTORS/INDEMNIFICATION.
---------------------------------------
It is understood and agreed by the parties hereto that this Agreement does
not create a fiduciary relationship between them, that COMPANY and DEVELOPER are
and shall be independent contractors, and that nothing in this Agreement is
intended to make either party a general or special agent, joint venturer,
partner, or employee of the other for any purpose. DEVELOPER shall
conspicuously identify itself in all dealings with customers, suppliers,
vendors, public officials, DEVELOPER personnel, and others as a developer of
UNITS licensed by COMPANY and shall conspicuously and prominently place such
other notices of independent ownership on such forms, business cards,
stationery, advertising, and such other materials as COMPANY may require from
time to time.
DEVELOPER agrees to defend and hold COMPANY, its Affiliates and their
respective shareholders, directors, officers, employees, agents, successors and
assignees harmless against and to reimburse them for:
(a) all claims, losses, obligations, damages and taxes described in
this Section;
(b) any and all claims, losses, damages and liabilities of customers
and others directly or indirectly arising out of this Agreement, the
development or operation of any UNITS pursuant to this Agreement or the
development and operation of Commissaries pursuant to this Agreement
(including, without limitation, breach or violation of any agreement,
contract or commitment by DEVELOPER resulting from DEVELOPER's execution
and delivery of this Agreement or performance of any of its obligations
hereunder or liabilities asserted by Owners or employees, agents or other
representatives of DEVELOPER arising in connection with training provided
by COMPANY or its Affiliates or designees or otherwise);
(c) the conduct of Catering Service or Delivery Service
(d) the operation of Special Distribution Arrangements;
(e) unauthorized activities conducted in association with the Marks;
or
(f) the transfer of any interest in this Agreement, any UNITS, to
the extent that such claims, obligations, damages, losses or liabilities do
not arise solely from the gross negligence or wrongful conduct of COMPANY.
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<PAGE>
For purposes of this indemnification, "claims" shall mean and include all
obligations, actual, consequential, special, and punitive damages and costs
reasonably incurred in the defense of any such claim against COMPANY or amounts
paid and costs reasonably incurred in the settlement of any such claims,
including, without limitation, reasonable accountants', attorneys', attorney
assistants', arbitrators' and expert witness fees, cost of investigation and
proof of facts, court costs, other litigation expenses, and travel and living
expenses. COMPANY shall have the right to defend any such claim against it in
such manner as COMPANY deems appropriate or desirable in its sole discretion.
This indemnity shall continue in full force and effect subsequent to and
notwithstanding the expiration or termination of this Agreement.
18. ENFORCEMENT.
-----------
18.A. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS.
-------------------------------------------------
If any provision of this Agreement relating to the in-term exclusive
dealing covenants is declared or made invalid or unenforceable by judicial
action, legislation or other government action, COMPANY may, if it believes in
its sole discretion that the continuation of this Agreement would not be in its
best interests, terminate this Agreement effective upon sixty (60) days' prior
written notice to DEVELOPER.
All other provisions of this Agreement are severable and this Agreement
shall be interpreted and enforced as if all completely invalid or unenforceable
provisions were not contained herein and partially valid and enforceable
provisions shall be enforced to the extent valid and enforceable. To the extent
the post-transfer restrictive covenants or post-termination/post-expiration
restrictive covenants contained herein are deemed unenforceable by virtue of
their scope in terms of geographic area, business activity prohibited, or length
of time, but may be made enforceable by reductions or alterations of either or
any thereof, DEVELOPER and COMPANY agree that same shall be enforced to the
fullest extent permissible under the laws and public policies applied in the
jurisdiction in which enforcement is sought. If any applicable and binding law
or rule of any jurisdiction requires a greater prior notice of the termination
of this Agreement than is required hereunder, or the taking of some other action
not required hereunder, or if under any applicable and binding law or rule of
any jurisdiction, any provision of this Agreement or any specification, standard
or operating procedure prescribed by COMPANY is invalid or unenforceable, the
prior notice and/or other action required by such law or rule shall be
substituted for the comparable provisions hereof, and COMPANY shall have the
right, in its sole discretion, to modify such invalid or unenforceable
provision, specification, standard or operating procedure to the extent required
to be valid and enforceable. Such modifications to this Agreement shall be
effective only in such jurisdiction and shall be enforced as originally made and
entered into in all other jurisdictions.
18.B. WAIVER OF OBLIGATIONS.
---------------------
COMPANY and DEVELOPER may by written instrument unilaterally waive or
reduce any obligation of or restriction upon the other under this Agreement,
effective upon delivery of written notice thereof to the other or such other
effective date stated in the notice of waiver.
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<PAGE>
Whenever this Agreement requires COMPANY's prior approval or consent, DEVELOPER
shall make a timely written request therefor and such approval shall be obtained
in writing.
With respect to this Agreement, the Franchise Agreements, the relationship
of the parties, the Stores, Catering Service, Delivery Service, Special
Distribution Arrangements or any other matter, COMPANY makes no representations,
warranties or guarantees upon which DEVELOPER may rely, and assumes no liability
or obligation to DEVELOPER, by granting any waiver, approval, or consent to
DEVELOPER, or by reason of any neglect, delay, or denial of any request
therefor. Any waiver granted by COMPANY: (1) shall be without prejudice to any
other rights COMPANY may have, (2) will be subject to continuing review by
COMPANY, and (3) as to continuing waivers, may be revoked prospectively, in
COMPANY's sole discretion, at any time and for any reason, effective upon
delivery to DEVELOPER of ten (10) days' prior written notice.
COMPANY and DEVELOPER shall not be deemed to have waived or impaired any
right, power or option reserved by this Agreement (including, without
limitation, the right to demand full compliance with every term, condition and
covenant in this Agreement, or to declare any breach thereof to be a default and
to terminate this Agreement prior to the expiration of its term), by virtue of
any:
(i) custom or practice of the parties at variance with the terms
hereof; or
(ii) any failure, refusal, or neglect of COMPANY or DEVELOP ER to
exercise any right under this Agreement or to insist upon full compliance
by the other with its obligations hereunder, including, without limitation,
any mandatory specification, standard or operating procedure; or
(iii) any waiver, forbearance, delay, failure, or omission by
COMPANY to exercise any right, power, or option, whether of the same,
similar or different nature, with respect to any UNIT or any development or
franchise agreement therefor; or
(iv) any grant of a Franchise Agreement to DEVELOPER; or
(v) the acceptance by COMPANY of any payments from DEVELOPER after
any breach of this Agreement.
Neither COMPANY nor DEVELOPER shall be liable for loss or damage or deemed
to be in breach of this Agreement if its failure to perform its obligations
results from any of the following and is not caused by the non-performing party:
(vi) acts of God; or
(vii) acts of war or insurrection; or
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(viii) strikes, lockouts, boycotts, fire and other casualties.
Any delay resulting from any of said causes shall extend the time allowed for
performance accordingly or excuse performance, in whole or in part, as may be
reasonable for the Store(s) directly affected thereby, except that such causes
shall not excuse payment of amounts owed at the time of such occurrence or
payment of any fees thereafter nor otherwise affect the Development Schedule or
the development of other UNITS to be developed under this Agreement, and as soon
as performance is possible the non-performing party shall immediately resume
performance and, in no event, shall non-performance be excused for more than six
(6) months.
18.C. INJUNCTIVE RELIEF.
-----------------
Nothing in this Agreement shall bar COMPANY's right to seek specific
performance of the provisions of this Agreement and injunctive relief against
threatened conduct that will cause it loss or damages under customary equity
rules, including applicable rules for obtaining restraining orders and
preliminary injunctions. DEVELOPER agrees that COMPANY may obtain such
injunctive relief in addition to such further or other relief as may be
available at law or in equity. DEVELOPER agrees that COMPANY will not be
required to post a bond to obtain any injunctive relief and that DEVELOPER's
only remedy if an injunction is entered against DEVELOPER will be the
dissolution of that injunction, if warranted, upon due hearing (all claims for
damages by reason of the wrongful issuance of such injunction being expressly
waived hereby). Any such action shall be brought as provided in Paragraph G of
this Section.
18.D. RIGHTS OF PARTIES ARE CUMULATIVE.
--------------------------------
The rights of COMPANY and DEVELOPER hereunder are cumulative and no
exercise or enforcement by COMPANY or DEVELOPER of any right or remedy hereunder
shall preclude the exercise or enforcement by COMPANY or DEVELOPER of any other
right or remedy hereunder or to which COMPANY or DEVELOPER is entitled by law.
18.E. COSTS AND LEGAL FEES.
--------------------
If COMPANY engages legal counsel in connection with any failure by
DEVELOPER to comply with this Agreement, DEVELOPER shall reimburse COMPANY for
costs and expenses incurred by COMPANY, including, without limitation,
reasonable accountants', attorneys', attorneys assistants', arbitrators' and
expert witness fees, cost of investigation and proof of facts, court costs,
other litigation expenses and travel and living expenses, whether incurred prior
to, in preparation for, in contemplation of or in connection with the filing of
any judicial or arbitration proceeding to enforce this Agreement.
18.F. GOVERNING LAW.
-------------
EXCEPT TO THE EXTENT GOVERNED BY THE UNITED STATES TRADEMARK ACT OF 1946
(LANHAM ACT, 15 U.S.C. {{ 1051 ET SEQ.), THIS
------
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AGREEMENT AND THE RELATIONSHIP BETWEEN THE PARTIES HERETO SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF COLORADO
EXCEPT THAT SUCH STATE'S CHOICE OF LAW AND CONFLICT OF LAW RULES SHALL NOT APPLY
AND ANY FRANCHISE REGISTRATION, DISCLOSURE, RELATIONSHIP OR SIMILAR STATUTE
WHICH MAY BE ADOPTED BY THE STATE OF COLORADO SHALL NOT APPLY UNLESS ITS
JURISDICTIONAL REQUIREMENTS ARE MET INDEPENDENTLY WITHOUT REFERENCE TO THIS
PARAGRAPH.
18.G. CONSENT TO JURISDICTION/CHOICE OF FORUM.
---------------------------------------
DEVELOPER AGREES THAT DEVELOPER SHALL, AND COMPANY MAY, AT ITS OPTION,
INSTITUTE ANY ACTION ARISING OUT OF OR RELATING TO THIS AGREEMENT IN ANY STATE
COURT OF GENERAL JURISDICTION IN JEFFERSON COUNTY, COLORADO OR THE UNITED STATES
FEDERAL DISTRICT COURT FOR THE DISTRICT OF COLORADO, OR THE STATE COURT OF
GENERAL JURISDICTION OR UNITED STATES FEDERAL DISTRICT COURT NEAREST TO
COMPANY'S EXECUTIVE OFFICE AT THE TIME SUCH ACTION IS FILED. DEVELOPER
IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT AND WAIVES ANY
OBJECTION IT MAY HAVE TO EITHER THE JURISDICTION OR VENUE OF ANY SUCH COURT.
18.H. LIMITATIONS OF CLAIMS.
---------------------
EXCEPT FOR CLAIMS BROUGHT BY COMPANY WITH REGARD TO DEVELOPER'S OBLIGATIONS
TO MAKE PAYMENTS TO COMPANY PURSUANT TO THIS AGREEMENT OR TO INDEMNIFY COMPANY
PURSUANT TO SECTION 17, ANY AND ALL CLAIMS ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE RELATIONSHIP OF DEVELOPER AND COMPANY PURSUANT HERETO SHALL BE
BARRED UNLESS AN ACTION IS COMMENCED WITHIN: (1) TWO (2) YEARS FROM THE DATE ON
WHICH THE ACT OR EVENT GIVING RISE TO THE CLAIM OCCURRED, OR (2) ONE (1) YEAR
FROM THE DATE ON WHICH DEVELOPER OR COMPANY KNEW OR SHOULD HAVE KNOWN, IN THE
EXERCISE OF REASONABLE DILIGENCE, OF THE FACTS GIVING RISE TO SUCH CLAIMS,
WHICHEVER OCCURS FIRST.
18.I. WAIVER OF PUNITIVE DAMAGES.
--------------------------
COMPANY AND DEVELOPER HEREBY WAIVE TO THE FULLEST EXTENT PERMITTED BY LAW,
ANY RIGHT OR CLAIM FOR ANY PUNITIVE, EXEMPLARY, CONSEQUENTIAL OR SPECULATIVE
DAMAGES AGAINST THE OTHER AND AGREE THAT IN THE EVENT OF A DISPUTE BETWEEN THEM,
EXCEPT AS OTHERWISE PROVIDED HEREIN, EACH SHALL BE LIMITED TO THE RECOVERY OF
ACTUAL DAMAGES SUSTAINED BY IT.
68
<PAGE>
18.J. WAIVER OF JURY TRIAL.
--------------------
COMPANY AND DEVELOPER IRREVOCABLY WAIVE TRIAL BY JURY ON ANY ACTION,
PROCEEDING OR COUNTERCLAIM, WHETHER AT LAW OR IN EQUITY, BROUGHT BY EITHER OF
THEM.
18.K. BINDING EFFECT.
--------------
This Agreement is binding upon the parties hereto and their respective
executors, administrators, heirs, assigns, and successors in interest, and shall
not be modified except by written agreement signed by both DEVELOPER and
COMPANY.
18.L. CONSTRUCTION.
------------
The preambles and exhibits are a part of this Agreement, this Agreement
constitutes the entire agreement of the parties, and there are no other oral or
written understandings or agreements between COMPANY and DEVELOPER relating to
the subject matter of this Agreement. Except as otherwise set forth herein,
nothing in this Agreement is intended, nor shall be deemed, to confer any rights
or remedies upon any person or legal entity not a party hereto. The headings of
the several sections and paragraphs hereof are for convenience only and do not
define, limit, or construe the contents of such sections or paragraphs. The
term "DEVELOPER" as used in this Agreement is applicable to one or more persons
or entities as the case may be, and the singular usage includes the plural and
the masculine and neuter usages include each other and the feminine.
If two or more persons are at any time DEVELOPER hereunder, whether or not
as partners or joint venturers, their obligations and liabilities to COMPANY
shall be joint and several. This Agreement shall be executed in multiple
copies, each of which shall be deemed an original.
18.M. REASONABLENESS; APPROVALS.
-------------------------
COMPANY and DEVELOPER agree to act reasonably in all dealings with each
other pursuant to this Agreement. Whenever the consent or approval of either
party is required or contemplated hereunder, the party whose consent or approval
is required agrees not to unreasonably withhold the same, unless expressly
subject to such party's sole discretion pursuant to the terms of this Agreement.
19. NOTICES AND PAYMENTS.
--------------------
All written notices and reports permitted or required to be delivered by
the provisions of this Agreement or of the Development Manual shall be deemed so
delivered at the time delivered by hand, one (1) business day after transmission
by facsimile with proof of receipt, one (1) business day after being placed in
the hands of a commercial courier service for overnight delivery, or three (3)
business days after placement in the United States Mail by
69
<PAGE>
Registered or Certified Mail, Return Receipt Requested, postage prepaid and
properly addressed. Unless otherwise notified in writing, all notices, reports
and/or payments to COMPANY shall be sent to COMPANY at 1526 Cole Boulevard,
Suite 200, Golden, Colorado 80401-4086, to the attention of the Vice President,
Franchise Development, with a copy to Vice President, General Counsel, or its
most current principal business address of which DEVELOPER has been notified.
Notices to DEVELOPER shall be sent to DEVELOPER at the address shown on the
first page of this Agreement or to DEVELOPER's most current principal business
address of which COMPANY has been notified, as applicable. All payments and
reports required by this Agreement shall be directed to COMPANY at the above
address, or to such other persons and places as COMPANY may direct from time to
time. Any required payment or report not actually received by COMPANY during
regular business hours on the date due (or postmarked by postal authorities at
least two (2) days prior thereto) shall be deemed delinquent.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement in multiple originals on the day and year first above written and
COMPANY has accepted this Agreement in Jefferson County, Colorado.
EINSTEIN/NOAH BAGEL CORP. ___________________________________
DEVELOPER
By:___________________________________ By:________________________________
Title:______________________________ Title:___________________________
70
<PAGE>
EXHIBIT A
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND
__________________________________________________________
DATED ______________________
CATERING RIDER
--------------
[PLEASE REFER TO THE FRANCHISE AGREEMENT, ATTACHED AS EXHIBIT C TO THIS OFFERING
CIRCULAR, WHICH INCLUDES THE CATERING RIDER AS EXHIBIT A.]
<PAGE>
EXHIBIT B
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND
__________________________________________________________
DATED ______________________
DELIVERY RIDER
--------------
[PLEASE REFER TO THE FRANCHISE AGREEMENT, ATTACHED AS EXHIBIT C TO THIS OFFERING
CIRCULAR, WHICH INCLUDES THE DELIVERY RIDER AS EXHIBIT B.]
<PAGE>
EXHIBIT C
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND ___________________________________________
DATED _____________________________
DEVELOPMENT FEE
---------------
<PAGE>
DEVELOPMENT FEE
---------------
1. DEVELOPMENT FEE. The Development Fee referred to in Section 7.A.
---------------
of this Agreement shall be _________________________ Thousand Dollars
($_________).
EINSTEIN/NOAH BAGEL CORP. ___________________________________
DEVELOPER
By:_________________________________ By:________________________________
Title:____________________________ Title:___________________________
C-1
<PAGE>
EXHIBIT D
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND
___________________________________________________________
DATED ______________________
DEVELOPMENT AREA(S)
-------------------
<PAGE>
DEVELOPMENT AREA(S)
-------------------
The Development Area referred to in Section 2 of this Agreement shall
consist of the aggregate of the Sub-Areas described as follows:
SUB-AREA NO. 1
--------------
SUB-AREA NO. 2
--------------
D-1
<PAGE>
SUB-AREA NO. 3
--------------
EINSTEIN/NOAH BAGEL CORP. ________________________________________
DEVELOPER
By:____________________________ By:_____________________________________
Title:_______________________ Title:__________________________________
D-2
<PAGE>
EXHIBIT E
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND
_______________________________________________________
DATED _________________________
DEVELOPMENT SCHEDULE
--------------------
<PAGE>
DEVELOPMENT SCHEDULE
--------------------
1. STORE DEVELOPMENT. DEVELOPER agrees to develop a total of ______________
-----------------
___________ (_____) Stores in accordance with the terms of this Agreement.
2. DEVELOPMENT OBLIGATIONS. DEVELOPER agrees to have each Store specified
-----------------------
below open on or before the specified "OPENING DATE" shown below and to have
open and in operation in each Sub-Area indicated, on or before the Opening Dates
specified below, the cumulative numbers of Stores shown below:
SUB-AREA NO. 1
--------------
CUMULATIVE NUMBER
OF STORES TO BE
STORE OPENING OPEN AND IN OPERATION
NUMBER DATE (THE "SUB-AREA QUOTA")
-------- ------- ----------------------
E-1
<PAGE>
SUB-AREA NO. 2
--------------
CUMULATIVE NUMBER
OF STORES TO BE
STORE OPENING OPEN AND IN OPERATION
NUMBER DATE (THE "SUB-AREA QUOTA")
-------- ------- ----------------------
SUB-AREA NO. 3
--------------
CUMULATIVE NUMBER
OF STORES TO BE
STORE OPENING OPEN AND IN OPERATION
NUMBER Date (THE "SUB-AREA QUOTA")
-------- ------- ----------------------
E-2
<PAGE>
TOTAL DEVELOPMENT QUOTA FOR THE
DEVELOPMENT AREA (THE "TOTAL
DEVELOPMENT QUOTA"):
-------------------
_____________
EINSTEIN/NOAH BAGEL CORP. ___________________________________
DEVELOPER
By:____________________________ By:________________________________
Title:_______________________ Title:___________________________
E-3
<PAGE>
EXHIBIT F
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND
______________________________________________________
DATED ________________
FORM FRANCHISE AGREEMENT
------------------------
[PLEASE REFER TO THE FRANCHISE AGREEMENT ATTACHED AS EXHIBIT C TO THIS OFFERING
CIRCULAR.]
<PAGE>
EXHIBIT G
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND
________________________________________________________
DATED __________________
PRINCIPAL OWNERS, OTHER OWNERS, KEY MANAGERS,
PERMITTED COMPETITIVE BUSINESSES,
AND INITIAL CAPITALIZATION
--------------------------
<PAGE>
PRINCIPAL OWNERS, OTHER OWNERS, KEY MANAGERS,
PERMITTED COMPETITIVE BUSINESSES,
AND INITIAL CAPITALIZATION
--------------------------
1. PRINCIPAL OWNERS: Listed below is the full name and mailing address
----------------
of each person or entity who is a Principal Owner of DEVELOPER, and a
description of the nature and amount of such Principal Owner's direct or
indirect equity or voting interest in DEVELOPER:
Name:_________________________________ Number of Interests Owned:_________
Address:______________________________ % of Total Interests:______________
______________________________________ Number of Interests Owner is
______________________________________ Entitled to
______________________________________ Vote:______________________________
______________________________________ Other Interest (Describe):_________
______________________________________ ___________________________________
Name:_________________________________ Number of Interests Owned:_________
Address:______________________________ % of Total Interests:______________
______________________________________ Number of Interests Owner is
______________________________________ Entitled to
______________________________________ Vote:______________________________
______________________________________ Other Interest (Describe):_________
______________________________________ ___________________________________
Name:_________________________________ Number of Interests Owned:_________
Address:______________________________ % of Total Interests:______________
______________________________________ Number of Interests Owner is
______________________________________ Entitled to
______________________________________ Vote:______________________________
______________________________________ Other Interest (Describe):_________
______________________________________ ___________________________________
Name:_________________________________ Number of Interests Owned:_________
Address:______________________________ % of Total Interests:______________
______________________________________ Number of Interests Owner is
______________________________________ Entitled to
______________________________________ Vote:______________________________
______________________________________ Other Interest (Describe):_________
______________________________________ ___________________________________
G-1
<PAGE>
2. DESIGNATED PRINCIPAL OWNERS: The following individuals above are
---------------------------
designated as Principal Owners based upon their business experience, financial
capacity or other personal attributes:
Name:_________________________________ Name:______________________________
Name:_________________________________ Name:______________________________
3. OTHER OWNERS. Listed below is the full name and mailing address of
------------
each person or entity, other than the Principal Owners, who directly or
indirectly owns an equity or voting interest in DEVELOPER and a description of
the nature of the interest (attach additional sheet if required):
Name:_________________________________ Number of Interests Owned:_________
Address:______________________________ % of Total Interests:______________
______________________________________ Number of Interests Owner is
______________________________________ Entitled to
______________________________________ Vote:______________________________
______________________________________ Other Interest (Describe):_________
___________________________________
Name:_________________________________ Number of Interests Owned:_________
Address:______________________________ % of Total Interests:______________
______________________________________ Number of Interests Owner is
______________________________________ Entitled to
______________________________________ Vote:______________________________
______________________________________ Other Interest (Describe):_________
______________________________________ ___________________________________
4. MANAGEMENT: As required pursuant to Sections 13.A. and 13.B. of this
----------
Agreement, the following Principal Owners and the Chief Operating Officer shall
exert full-time efforts to fulfill the obligations of DEVELOPER under this
Agreement:
Name:_________________________________ Name:______________________________
(Principal Owner) (Chief Operating Officer)
Name:_________________________________
(Principal Owner)
G-2
<PAGE>
5. OWNERS OF PERMITTED COMPETITIVE BUSINESSES: Listed below are the
------------------------------------------
Permitted Competitive Businesses and the Owners who are permitted hereunder to
engage in those businesses.
NAME OF OWNER: NAME OF OWNER:
______________________________________ ___________________________________
Name of Competitive Business: Name of Competitive Business:
______________________________________ ___________________________________
Address of Competitive Business: Address of Competitive Business:
______________________________________ ___________________________________
______________________________________ ___________________________________
NAME OF OWNER: NAME OF OWNER:
______________________________________ ___________________________________
Name of Competitive Business: Name of Competitive Business:
______________________________________ ___________________________________
Address of Competitive Business: Address of Competitive Business:
______________________________________ ___________________________________
______________________________________ ___________________________________
DEVELOPER and its Owners represent and warrant that they have previously
provided to COMPANY a true, correct, complete and detailed description of all
Competitive Businesses in which they own, directly or indirectly, interests and
that all such Competitive Businesses are
G-3
<PAGE>
disclosed in this Exhibit G. DEVELOPER and its Owners acknowledge that COMPANY
---------
has relied on the aforementioned description of such Competitive Businesses in
entering into this Agreement with DEVELOPER.
6. INITIAL CAPITALIZATION. DEVELOPER: (a) represents and warrants that it
----------------------
has developed and previously provided to COMPANY a description of its initial
capital structure (the "Initial Capital Structure") which is a true, correct,
complete and detailed description of DEVELOPER's capital structure; (b)
covenants that it will not deviate from the Initial Capital Structure without
COMPANY's prior written consent; and (c) acknowledges that COMPANY has relied on
the Initial Capital Structure in entering into this Agreement.
EINSTEIN/NOAH BAGEL CORP. ___________________________________
DEVELOPER
By:___________________________________ By:________________________________
Title:______________________________ Title:___________________________
G-4
<PAGE>
EXHIBIT H
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND
_____________________________________________________________
DATED ______________________
DEVELOPER ACKNOWLEDGMENTS AND REPRESENTATIONS STATEMENT
-------------------------------------------------------
<PAGE>
ACKNOWLEDGMENTS AND REPRESENTATIONS STATEMENT
---------------------------------------------
1. DEVELOPER acknowledges that it has read the Development Agreement (the
"AGREEMENT") between Einstein/Noah Bagel Corp. ("COMPANY") and DEVELOPER dated
as of the date hereof and COMPANY's Franchise Offering Circular in their
entirety and that it understands and accepts the terms, conditions and covenants
contained in the Agreement as being reasonably necessary to maintain COMPANY's
high standards of quality and service and the uniformity of those standards at
all UNITS in order to protect and preserve the goodwill of the Marks.
(Capitalized terms not defined herein shall have the respective meanings set
forth in the Agreement.) DEVELOPER acknowledges that: (a) COMPANY delivered and
DEVELOPER received a copy of COMPANY's Franchise Offering Circular at the
earlier of (i) DEVELOPER's first personal meeting with COMPANY or (ii) ten
business days prior to the execution of the Agreement or the payment of any
consideration by DEVELOPER in connection with the transaction contemplated in
the Agreement; and (b) COMPANY delivered and DEVELOPER received the Agreement in
form for execution at least five (5) business days prior to the execution of the
Agreement.
2. Attached to COMPANY's Franchise Offering Circular is a copy of the
current form of Franchise Agreement. DEVELOPER acknowledges that the Franchise
Agreement attached to COMPANY's Franchise Offering Circular is the current form
of Franchise Agreement and that COMPANY, at its sole discretion, may from time
to time modify or amend in any respect the standard form of Franchise Agreement
used by COMPANY in offering or granting a UNIT franchise.
3. DEVELOPER acknowledges that the food service business is a highly
competitive industry, with constantly changing market conditions. DEVELOPER
acknowledges that it has conducted an independent investigation of the business
contemplated by the Agreement and recognizes that, like any other business, the
nature of the business conducted by UNITS may change over time, that an
investment in a UNIT involves business risks, and that the success of the
venture is largely dependent upon the business abilities and efforts of
DEVELOPER.
4. DEVELOPER acknowledges and agrees that COMPANY has developed and will
continue to develop or modify in the future branded retail food service
businesses that offer and sell Products and other food and beverage items under
different marks, systems and concepts. DEVELOPER understands that the rights
granted to it under this Agreement are with regard only to the type of branded
retail store that operates under the Principal Marks and System designated in
Exhibit K. Further, DEVELOPER acknowledges and agrees that COMPANY retains the
right, among other rights, to (1) operate and/or grant others the right to
operate retail stores featuring bagels in DEVELOPER's Territory under marks and
systems other than the Principal Marks and System designated in Exhibit K; or
(2) operate and/or grant others the right to offer Products in DEVELOPER's
Territory using any method of distribution other than Stores including but not
limited to wholesaling to other retail stores and to other distribution channels
such as hotels and airlines.
H-1
<PAGE>
5. DEVELOPER acknowledges and agrees that some aspects of COMPANY's
franchise program and the System are still under development and that COMPANY
expects that there will be some significant variations in the System in
different regional markets which may exist for an initial or transitional
period, or on a permanent basis. COMPANY may, for example, allow DEVELOPER to
use one recipe for bagels, cream cheeses or other items while allowing other
developers and franchise owners to use different recipes. COMPANY may also allow
variations between developers and franchise owners in the areas of trademarks,
trade dress, operational items or other aspects of UNITS. DEVELOPER acknowledges
and agrees that only COMPANY may determine what variations DEVELOPER may use and
that DEVELOPER will in any event conform strictly to the standards and
specifications which COMPANY establishes for DEVELOPER's Stores.
COMPANY intends to allow these variations in the System: (a) as part of
ongoing research and development for UNITS generally; and (b) to test whether
regional variations in UNITS may be advantageous. DEVELOPER understands and
accepts that, over time during the term of the Agreement COMPANY will continue
to develop and refine various aspects of the System and that as new products,
new operating procedures, new trade dress and other refinements are introduced,
COMPANY may, in its sole discretion, cease to allow some or all of the
variations and may require local or regional variations or national uniformity
among UNITS as to aspects for which COMPANY had previously allowed variations.
DEVELOPER acknowledges and agrees that this may mean that DEVELOPER may be
required, for example, to change one or more of (a) the recipes DEVELOPER uses
for bagels, cream cheese or other items; (b) the trademarks and/or service marks
DEVELOPER uses; (c) the trade dress or operational procedures DEVELOPER uses; or
(d) other aspects of DEVELOPER's Stores. Some or all of these changes may
require DEVELOPER to make substantial additional capital expenditures. DEVELOPER
acknowledges and agrees that COMPANY may discontinue any of the variations which
it had previously allowed DEVELOPER to utilize and that DEVELOPER will conform
to all required local, regional and/or national standards and specifications and
other requirements which COMPANY may establish from time to time even if it
means substantial additional expense for DEVELOPER Further, COMPANY acknowledges
and agrees that it shall provide to COMPANY the data COMPANY requires concerning
DEVELOPER'S operations in order to allow COMPANY to assess the success of
different variations in its retail store concept.
Furthermore, DEVELOPER acknowledges and agrees that COMPANY may continue to
operate and/or franchise others to operate UNITS in certain areas under a
variety of trademarks and service marks, including without limitation "BAGEL &
BAGEL," "BALTIMORE BAGELS," "EINSTEIN BROS.," "NOAH'S NEW YORK BAGELS" or
"OFFERDAHL'S." COMPANY may allow the use of such various marks temporarily,
indefinitely or permanently and on a local, regional, national or international
basis. DEVELOPER further understands and agrees that COMPANY may, rather than
operating and franchising a national chain of bagel stores operating under a
single trademark or service mark, determine in its sole discretion to operate
and franchise a network of bagel shops operating under different names and in
different geographic areas.
H-2
<PAGE>
6. DEVELOPER acknowledges that neither COMPANY nor any officer, director,
employee, agent, representative or Affiliate thereof or agents, has made any
representations or statements of actual, average, projected or forecasted sales,
profits, earnings, cash flow or costs with respect to any UNITS or the business
contemplated by the Agreement. Neither COMPANY's sales personnel nor any
employee, officer, director, agent, representative or affiliate of COMPANY is
authorized to make any claims or statements as to the sales, profits, earnings,
cash flow, costs or pros pects or chances of success that any developer or
franchisee can expect or that present or past developers or franchisees have
had. COMPANY specifically instructs its sales personnel, employees, officers,
directors, agents, representatives and affiliates that they are not permitted to
make such claims or statements as to the sales, profits, earnings, cash flow,
costs or the prospects or chances of success, nor are they authorized to
represent or estimate amounts of sales, profits, earnings, cash flow, costs or
other measures as to any aspect of the operation of UNITS. COMPANY recommends
that applicants for development rights make their own investigations and
determine whether or not the business con templated by this Agreement is
profitable. COMPANY will not be bound by any unauthorized representations as to
DEVELOPER's sales, profits, earnings, cash flow, costs or prospects or chances
of success. COMPANY recommends that each applicant for development rights
consult with an attorney of its choosing and further be represented by legal
counsel at the time of its closing. DEVELOPER acknowledges that it has had ample
opportunity to consult with legal counsel and other professional advisors.
DEVELOPER acknowledges that it has not received or relied on any representations
about the development rights granted in the Agreement by COMPANY, or its
officers, directors, employees or agents, that are contrary to the statements
made in COMPANY's Franchise Offering Circular.
7. DEVELOPER hereby acknowledges and agrees that COMPANY's approval of a
proposed site or Site Agreement for a Store or a Commissary does not constitute
an assurance, representation or warranty of any kind, express or implied, as to
the suitability of the proposed site or Site Agreement for a Store or a
Commissary or the successful operation or profitability of a Store or a
Commissary operated at such site. COMPANY's approval of any such site or Site
Agreement indicates only that COMPANY believes that such site or Site Agreement
falls within acceptable minimum criteria established by COMPANY solely for
COMPANY's purposes at the time of COMPANY's approval thereof. Both DEVELOPER and
COMPANY acknowledge that application of criteria that have been effective with
respect to other sites and premises may not be predictive of potential for all
sites and that, subsequent to COMPANY's approval of a proposed site, demographic
and/or economic factors, such as competition from other similar businesses,
included in or excluded from COMPANY's criteria could change, thereby altering
the potential of a proposed site. Such fac tors are unpredictable and are beyond
COMPANY's control. COMPANY shall not be responsible for the failure of a site
approved by COMPANY to meet DEVELOPER's expectations as to revenue or
operational criteria. DEVELOPER further acknowledges and agrees that its
acceptance of a franchise for the operation of a Store at any such site and its
acceptance of the right and obligation to operate a Commissary are based on its
own independent investigation of the suitability of the site.
8. DEVELOPER acknowledges that COMPANY's approval of a financing plan for
DEVELOPER's development and operation of the Stores under the Agreement does not
constitute any assurance that such financing plan is adequate, favorable or not
unduly
H-3
<PAGE>
burdensome, or that such Stores will be successful if the financing plan is
implemented by DEVELOPER. COMPANY's approval of the financing plan indicates
only that such financing plan meets or that COMPANY has waived COMPANY's then-
current minimum standards established by COMPANY solely for its own purposes at
the time of approval thereof.
9. DEVELOPER acknowledges that in all of COMPANY's dealings with
DEVELOPER, the officers, directors, employees and agents of COMPANY act only in
a representative capacity and not in an individual capacity. DEVELOPER further
acknowledges that the Agreement, and all business dealings between DEVELOPER and
such individuals as a result of the Agreement, are solely between DEVELOPER and
COMPANY. DEVELOPER further represents to COMPANY, as an inducement to its entry
into this Agreement, that neither DEVELOPER nor its Owners have made any
misrepresentations in obtaining the rights granted under the Agreement.
10. If DEVELOPER is a legal entity, DEVELOPER:
A. represents that it is duly organized and validly existing in good
standing under the laws of the jurisdiction of its organization, is
qualified to do business in all jurisdictions in which its business
activities or the nature of properties owned by DEVELOPER requires such
qualification, and has the authority to execute and deliver the Agreement
and perform all of DEVELOPER's obligations under the Agreement; and
B. agrees that all certificates representing Ownership Interests of
DEVELOPER now outstanding or hereafter issued will be endorsed with a
legend in form approved by COMPANY reciting that the transfer of Ownership
Interests in DEVELOPER is subject to restrictions contained in the
Agreement.
11. DEVELOPER, whether or not a legal entity, represents and warrants that
DEVELOPER is not subject to any restriction, agreement, contract, commitment,
law, judgment or decree which would prohibit or be breached or violated by
DEVELOPER's execution and delivery of the Agreement or performance of its
obligations thereunder. At COMPANY's request, DEVELOPER shall furnish an opinion
of counsel to COMPANY, in form and substance satisfactory to COMPANY, to the
effect that the Agreement is a valid and binding agreement of DEVELOPER,
enforceable against DEVELOPER in accordance with its terms, and that DEVELOPER
is not subject to any restriction, agreement, law, judgment or decree which
would prohibit or be violated by DEVELOPER's execution and delivery of the
Agreement and performance of its obligations thereunder.
12. DEVELOPER further represents and warrants that all Owners of DEVELOPER
and their interests therein are completely and accurately listed in Exhibit G to
---------
the Agreement and covenants that DEVELOPER will make, execute and deliver to
COMPANY such revisions thereto as may be necessary during the term of the
Agreement to reflect any changes in the information contained therein.
H-4
<PAGE>
13. DEVELOPER represents and warrants that its domicile is as set forth
below:
______________________________________________________________________
Address
______________________________________________________________________
City and State
Dated:_____________________________
___________________________________
DEVELOPER
By:________________________________
Title:___________________________
H-5
<PAGE>
EXHIBIT I
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND ______________________________________
DATED ____________________
GUARANTY AND ASSUMPTION OF DEVELOPER'S OBLIGATIONS
--------------------------------------------------
<PAGE>
GUARANTY AND ASSUMPTION OF DEVELOPER'S OBLIGATIONS
--------------------------------------------------
THIS GUARANTY AND ASSUMPTION OF DEVELOPER'S OBLIGATIONS is given this ____
day of ________________________, 19__ , by the undersigned.
DEVELOPER:____________________________
(NAME)
DATE OF DEVELOPMENT AGREEMENT:_________________
In consideration of, and as an inducement to, the execution of the above-
mentioned Einstein/Noah Bagel Corp. Development Agreement (the "AGREEMENT") by
EINSTEIN/NOAH BAGEL CORP. ("COMPANY"), each of the undersigned and any other
parties who sign counterparts of this guaranty (referred to herein individually
as a "GUARANTOR" and collectively as "GUARANTORS") hereby personally and
unconditionally: (a) guarantees to COMPANY, and its successors and assigns, for
the term of the Agreement and thereafter as provided in the Agreement, that
DEVEL OPER shall punctually pay and perform each and every undertaking,
agreement and covenant set forth in the Agreement; and (b) agrees to be
personally bound by, and personally liable for the breach of, each and every
provision in the Agreement, both monetary obligations and other obligations,
including without limitation, the obligation to pay costs and legal fees as
provided in the Agreement and the obligation to take or refrain from taking
specific actions or to engage or refrain from engaging in specific activities,
including without limitation the provisions of the Agreement relating to
competitive activities.
Each Guarantor waives:
1. acceptance and notice of acceptance by COMPANY of the foregoing
undertakings; and
2. notice of demand for payment of any indebtedness or
nonperformance of any obligations hereby guaranteed; and
3. protest and notice of default to any party with respect to the
indebtedness or nonperformance of any obligations hereby guaranteed; and
4. any right he may have to require that an action be brought
against DEVELOPER or any other person as a condition of liability; and
I-1
<PAGE>
5. all rights to payments and claims for reimbursement or
subrogation which he may have against DEVELOPER arising as a result of his
execution of and performance under this guaranty by the undersigned
(including by way of counterparts); and
6. any and all other notices and legal or equitable defenses to
which he may be entitled.
Each Guarantor consents and agrees that:
(A) his direct and immediate liability under this guaranty shall be
joint and several not only with DEVELOPER, but also among the Guarantors;
and
(B) he shall render any payment or performance required under the
Agreement upon demand if DEVELOPER fails or refuses punctually to do so;
and
(C) such liability shall not be contingent or conditioned upon
pursuit by COMPANY of any remedies against DEVELOPER or any other person;
and
(D) such liability shall not be diminished, relieved or otherwise
affected by any subsequent rider or amendment to the Agreement or by any
extension of time, credit or other indulgence which COMPANY may from time
to time grant to DEVELOPER or to any other person, including, without
limitation, the acceptance of any partial payment or performance, or the
compromise or release of any claims, none of which shall in any way modify
or amend this guaranty, which shall be continuing and irrevocable
throughout the Agreement Term of the Agreement and for so long thereafter
as there are any monies or obligations owing by DEVELOPER to COMPANY under
the Agreement; and
(E) the written acknowledgment of DEVELOPER, accepted in writing by
COMPANY, or the judgment of any court or arbitration panel of competent
jurisdiction establishing the amount due from DEVELOPER shall be conclusive
and binding on the undersigned as guarantors.
If COMPANY is required to enforce this guaranty in a judicial or
arbitration proceeding, and prevails in such proceeding, it shall be entitled to
reimbursement of its costs and expenses, including, but not limited to,
reasonable accountants', attorneys', attorneys' assistants', arbitrators' and
expert witness fees, costs of investigation and proof of facts, court costs,
other litigation expenses and travel and living expenses, whether incurred prior
to, in preparation for or in contemplation of the filing of any such proceeding.
If COMPANY is required to engage legal counsel in connection with any failure by
the undersigned to comply with this Guaranty, the Guarantors shall reimburse
COMPANY for any of the above-listed costs and expenses incurred by it.
I-2
<PAGE>
Each of the undersigned Guarantors represents and warrants that, if no
signature appears below for such Guarantor's spouse, such guarantor is either
not married or, if married, is a resident of a state which does not require the
consent of both spouses to encumber the assets of the Guarantor's marital
estate.
IN WITNESS WHEREOF, each Guarantor has hereunto affixed his signature on
the same day and year as the Agreement was executed.
GUARANTOR(S)
- ------------
______________________________________ SPOUSE:____________________________
NAME: NAME:
______________________________________ SPOUSE:____________________________
NAME: NAME:
______________________________________ SPOUSE:____________________________
NAME: NAME:
______________________________________ SPOUSE:____________________________
______________________________________ SPOUSE:____________________________
______________________________________ SPOUSE:____________________________
I-3
<PAGE>
EXHIBIT J
TO THE EINSTEIN/NOAH BAGEL CORP.
DEVELOPMENT AGREEMENT
BY AND BETWEEN
EINSTEIN/NOAH BAGEL CORP.
AND _______________________________
DATED _________________________________
CONFIDENTIALITY AND NON-COMPETE AGREEMENT
-----------------------------------------
[PLEASE REFER TO THE FRANCHISE AGREEMENT, ATTACHED AS EXHIBIT C TO THIS OFFERING
CIRCULAR, WHICH INCLUDES THE CONFIDENTIALITY AND NON-COMPETE AGREEMENT AS
EXHIBIT H.]
<PAGE>
EXHIBIT K
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND
_______________________________________________________
DATED _________________________
PRINCIPAL MARKS TO BE USED BY DEVELOPER
The Stores to be developed pursuant to this Agreement shall be identified
by the following Principal Marks (subject to the rights of COMPANY to
discontinue or modify such Marks pursuant to Section 8 of this Agreement) and
shall be operated in accordance with the COMPANY's requirements, including but
not limited to the System designated for the Store associated with such
Principal Marks as in effect from time to time:
COMPANY will provide DEVELOPER with the Development Manual(s) and
Commissary Manual(s) (if applicable), as modified from time to time, that
describes and provides standards and specifications for development of Stores
under the Principal Marks and the System associated therewith and development
and operation of commissaries.
K-1
<PAGE>
EXHIBIT C
---------
EINSTEIN/NOAH BAGEL CORP.
FRANCHISE AGREEMENT
-------------------
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
FRANCHISE AGREEMENT
-------------------
________________________________________
FRANCHISE OWNER
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C> <C>
1. INTRODUCTION AND CERTAIN DEFINITIONS......................... 1
A. INTRODUCTION............................................ 1
B. DEFINITIONS............................................. 2
2. GRANT OF FRANCHISE........................................... 8
A. GRANT OF FRANCHISE; TERM; PRINCIPAL OWNERS'
GUARANTY................................................ 8
B. TERRITORIAL RIGHTS...................................... 9
C. RIGHTS RETAINED BY COMPANY.............................. 9
D. FRANCHISE OWNER'S OPTION TO PURCHASE CONVERSION
SITES................................................... 10
3. OTHER DISTRIBUTION METHODS................................... 11
A. SPECIAL DISTRIBUTION ARRANGEMENTS....................... 11
B. DELIVERY SERVICE........................................ 12
C. CATERING SERVICE........................................ 13
4. DEVELOPMENT AND OPENING OF THE STORE......................... 14
A. SITE SELECTION AND LEASE................................ 14
B. STORE DESIGN SPECIFICATIONS AND CONSTRUCTION PLANS...... 14
C. DEVELOPMENT OF THE STORE................................ 14
D. EQUIPMENT, FIXTURES, FURNISHINGS AND SIGNS.............. 15
E. COMPUTER SYSTEM......................................... 16
F. STORE OPENING........................................... 16
G. GRAND OPENING PROGRAM................................... 16
H. RELOCATION OF THE STORE................................. 17
I. FINANCING PLAN.......................................... 17
5. TRAINING AND GUIDANCE........................................ 18
A. TRAINING................................................ 18
B. GUIDANCE AND ASSISTANCE................................. 18
C. STORE MANUALS........................................... 19
6. MARKS........................................................ 20
A. GOODWILL AND OWNERSHIP OF MARKS......................... 20
B. LIMITATIONS ON FRANCHISE OWNER'S USE OF MARKS........... 20
C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS................ 21
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C> <C>
D. DISCONTINUANCE OF USE OF MARKS.............................. 21
E. INDEMNIFICATION OF FRANCHISE OWNER.......................... 21
7. COPYRIGHTS....................................................... 22
A. OWNERSHIP OF COPYRIGHTED WORKS.............................. 22
B. LIMITATION ON FRANCHISE OWNER'S USE OF
COPYRIGHTED WORKS........................................... 22
C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS.................... 23
D. DISCONTINUANCE OF USE OF COPYRIGHTED WORKS.................. 23
8. LICENSED PROGRAM AND COMPUTER SYSTEM........................ 24
A. GRANT OF LICENSE............................................ 24
B. SOFTWARE LICENSE FEE........................................ 26
C. SOFTWARE SUPPORT SERVICE.................................... 26
D. SOFTWARE SUPPORT SERVICE FEE................................ 26
E. MODIFICATION, ENHANCEMENT,
AND REPLACEMENT OF COMPUTER SYSTEM,
LICENSED PROGRAM AND SPECIFIED SOFTWARE..................... 27
F. WARRANTIES AND LIMITATION OF LIABILITY...................... 27
G. SUBCOMPONENT LICENSES AND THIRD-PARTY LICENSES.............. 28
9. CONFIDENTIAL INFORMATION......................................... 28
10. EXCLUSIVE RELATIONSHIP........................................... 31
11. FEES............................................................. 32
A. INITIAL FRANCHISE FEE....................................... 32
B. ROYALTY FEE................................................. 33
C. DEFINITION OF "ROYALTY BASE REVENUE"........................ 33
D. INTEREST ON LATE PAYMENTS................................... 33
E. APPLICATION OF PAYMENTS..................................... 34
F. ELECTRONIC FUNDS TRANSFER................................... 44
12. STORE IMAGE AND OPERATION........................................ 34
A. CONDITION AND APPEARANCE OF THE STORE....................... 34
B. STORE MENU AND SERVICES..................................... 36
C. APPROVED PRODUCTS, DISTRIBUTORS AND SUPPLIERS............... 37
D. SPECIFICATIONS, STANDARDS AND PROCEDURES.................... 39
E. COMPLIANCE WITH LAWS AND GOOD BUSINESS PRACTICES............ 40
F. MANAGEMENT AND PERSONNEL OF THE STORE....................... 41
G. INSURANCE................................................... 41
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C> <C>
H. CREDIT CARDS AND OTHER METHODS OF PAYMENT................... 43
13. ADVERTISING...................................................... 43
A. MARKETING FUND.............................................. 43
B. LOCAL ADVERTISING FUND...................................... 45
C. ADVERTISING BY FRANCHISE OWNER.............................. 47
14. ACCOUNTING, REPORTS AND FINANCIAL STATEMENTS..................... 48
15. INSPECTIONS AND AUDITS........................................... 50
A. COMPANY'S RIGHT TO INSPECT THE STORE........................ 50
B. COMPANY'S RIGHT TO AUDIT.................................... 50
16. TRANSFER......................................................... 51
A. BY COMPANY.................................................. 51
B. NONTRANSFERABILITY OF CERTAIN RIGHTS........................ 51
C. COMPANY'S RIGHT TO APPROVE TRANSFERS........................ 52
D. CONDITIONS FOR APPROVAL OF TRANSFERS........................ 53
E. DEATH OR INCAPACITY OF FRANCHISE OWNER...................... 56
F. PUBLIC OR PRIVATE OFFERING.................................. 56
G. EFFECT OF CONSENT TO TRANSFER............................... 58
H. COMPANY'S RIGHT OF FIRST REFUSAL............................ 58
I. OWNERSHIP STRUCTURE......................................... 59
J. DELEGATION BY COMPANY....................................... 59
K. PERMITTED TRANSFERS......................................... 59
17. GRANT OF SUCCESSOR FRANCHISES.................................... 60
A. FRANCHISE OWNER'S RIGHT TO A SUCCESSOR FRANCHISE............ 60
B. NOTICES..................................................... 61
C. SUCCESSOR FRANCHISE AGREEMENT/RELEASES...................... 62
18. TERMINATION OF THE FRANCHISE..................................... 62
A. BY FRANCHISE OWNER.......................................... 62
B. BY COMPANY.................................................. 62
C. TERMINATION OF CERTAIN RIGHTS OF FRANCHISE OWNER............ 65
19. RIGHTS AND OBLIGATIONS OF COMPANY AND FRANCHISE
OWNER UPON TERMINATION OR EXPIRATION OF THE AGREEMENT............ 66
A. PAYMENT OF AMOUNTS OWED TO COMPANY.......................... 66
B. MARKS, TRADE DRESS, AND COPYRIGHTED WORKS................... 66
C. CONFIDENTIAL INFORMATION.................................... 68
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C> <C>
D. COVENANT NOT TO COMPETE................................. 68
E. CONTINUING OBLIGATIONS.................................. 69
F. COMPANY'S RIGHT TO PURCHASE ASSETS OF THE STORE......... 69
20. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION.................. 71
A. INDEPENDENT CONTRACTORS................................. 71
B. NO LIABILITY FOR ACTS OF OTHER PARTY.................... 71
C. TAXES................................................... 72
D. INDEMNIFICATION......................................... 72
21. ENFORCEMENT.................................................. 72
A. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS....... 72
B. WAIVER OF OBLIGATIONS................................... 73
C. INJUNCTIVE RELIEF....................................... 74
D. RIGHTS OF PARTIES ARE CUMULATIVE........................ 75
E. COSTS AND LEGAL FEES.................................... 75
F. GOVERNING LAW........................................... 75
G. CONSENT TO JURISDICTION/CHOICE OF FORUM................. 75
H. LIMITATIONS OF CLAIMS................................... 76
I. WAIVER OF PUNITIVE DAMAGES.............................. 76
J. WAIVER OF JURY TRIAL.................................... 76
K. BINDING EFFECT.......................................... 76
L. CONSTRUCTION............................................ 76
M. REASONABLENESS; APPROVALS............................... 77
22. NOTICES AND PAYMENTS......................................... 77
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS AND ATTACHMENTS
- ------------------------
<S> <C>
EXHIBIT A - CATERING RIDER
EXHIBIT B - DELIVERY RIDER
EXHIBIT C - FRANCHISE OWNER ACKNOWLEDGMENTS AND
REPRESENTATIONS STATEMENT
EXHIBIT D - PERMITTED COMPETITIVE BUSINESSES, FORM
DEVELOPMENT AGREEMENT (FOR SINGLE-STORE
FRANCHISES) AND IDENTITY OF DEVELOPER AND DATE
OF DEVELOPMENT AGREEMENT
EXHIBIT E - PRINCIPAL OWNERS, OTHER OWNERS, DESIGNATED
PRINCIPAL OWNERS, STORE MANAGER, SUPERVISING
OWNERS AND INITIAL CAPITALIZATION
EXHIBIT F - SITE AND TERRITORY
EXHIBIT G - GUARANTY AND ASSUMPTION OF FRANCHISE OWNER'S
OBLIGATIONS
EXHIBIT H - CONFIDENTIALITY AND NON-COMPETE AGREEMENT
EXHIBIT I - AUTHORIZATION AGREEMENT FOR PREARRANGED
PAYMENTS (DIRECT DEBITS)
EXHIBIT J - COLLATERAL ASSIGNMENT OF TELEPHONE NUMBERS
AND LISTINGS
EXHIBIT K - PRINCIPAL MARKS TO BE USED BY FRANCHISE OWNER
</TABLE>
v
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
FRANCHISE AGREEMENT
-------------------
THIS AGREEMENT is made and entered into this day ___ of__________ , 199__
(the "EFFECTIVE DATE"), by and between EINSTEIN/NOAH BAGEL CORP., a Delaware
corporation ("COMPANY"), and FRANCHISE OWNER (as defined below).
"FRANCHISE OWNER": _______________________________________,
a ______________________________________
________________________________________
________________________________________
________________________________________
1. INTRODUCTION AND CERTAIN DEFINITIONS.
------------------------------------
INTRODUCTION.
------------
COMPANY and its Affiliates (as defined below) have developed and may
continue to develop methods of operating a number of branded retail food service
businesses, each with its own concept and operated under its own system and
marks referred to in this Agreement as a "UNIT" (defined below), which feature
Products (defined below) for carry-out and on-premises dining. In addition to
carry-out and on-premises dining, COMPANY may, in its sole discretion, offer to
FRANCHISE OWNER the right to offer Delivery Service (defined below); or Catering
Service (defined below) or to operate Special Distribution Arrangements (defined
below) in connection with the UNIT. UNITS utilize the Marks (defined below) and
operate at locations that feature distinctive food service formats and Trade
Dress (defined below) and utilize distinctive business formats, specifications,
employee selection and training programs, signs, equipment, layouts, systems,
recipes, methods, procedures, software, designs and marketing and advertising
standards and formats, all of which COMPANY may modify from time to time in its
sole discretion (the "SYSTEM"). COMPANY operates, and grants franchises to
certain qualified parties to own and operate UNITS using the System and the
Marks .
FRANCHISE OWNER has requested that COMPANY grant it a franchise to own and
operate a UNIT at the Site (defined below) using the branded concept, Principal
Marks (defined below) and System described in Exhibit K (a "STORE"). FRANCHISE
OWNER's request and the Site have been approved by COMPANY in reliance upon all
of the representations made in FRANCHISE OWNER'S application, in FRANCHISE
OWNER's Site Approval Package (as defined in the Development Agreement), during
the application process and in the Franchise Owner Acknowledgments and
Representations Statement, a copy of which is attached hereto as Exhibit A,
---------
which shall be executed by FRANCHISE OWNER concurrently with this Agreement.
Pursuant to the terms of the Development Agreement (defined below) COMPANY
has granted to FRANCHISE OWNER (referred to in the Development Agreement as
"DEVELOPER") the right to acquire the franchise to own and operate one (1) or
more Stores.
<PAGE>
1.B DEFINITIONS.
-----------
For purposes of this Agreement, the terms listed below have the meanings
that follow them. Other terms used in this Agreement are defined in the context
in which they occur.
"ACCOUNTING PERIOD" - One of thirteen periods of four consecutive weeks in
-----------------
each fiscal year of COMPANY that is designated by COMPANY as an accounting
period of COMPANY.
"AFFILIATE" - Any person or legal entity that directly or indirectly owns
---------
or controls COMPANY, that is directly or indirectly owned or controlled by
COMPANY, or that is under common control with COMPANY. For purposes of this
definition, "CONTROL" means the power to direct or cause the direction of the
management, policies and operation of an entity. Neither Boston Chicken, Inc.
("BCI") nor any of its affiliates shall be considered Affiliates of COMPANY
until such time as BCI owns a direct Ownership Interest in COMPANY and otherwise
meets the foregoing definition of "Affiliates".
"BAGEL STORE" - A food service business, including a UNIT, which derives a
-----------
significant portion of its revenue from the sale of bagels and/or bagel-related
products or from any other product or service which is or hereafter becomes a
source of a significant portion of the revenue of any UNIT.
"CATERING AREA" - The geographic area in which COMPANY, in its sole
-------------
discretion, authorizes FRANCHISE OWNER to provide Catering Service pursuant to a
Catering Rider, which area may be the same as, smaller than, larger than or
different from the Territory (defined below).
"CATERING RIDER" - The form of rider to a Franchise Agreement (as defined
--------------
in the Development Agreement) used by COMPANY from time to time to authorize in
its sole discretion a franchise owner of a UNIT to offer Catering Service
(defined below) within the applicable Catering Area. The current form of
COMPANY's Catering Rider is attached hereto as Exhibit A.
"CATERING SERVICE" - The delivery of Products prepared at a UNIT or a
----------------
separate facility approved by COMPANY in writing (such approved facility is
referred to herein as a "CATERING FACILITY") to customers in the Catering Area
pursuant to COMPANY's standards and specifications for the provision of such
service, which COMPANY may change from time to time in its sole discretion,
where
(1) such Products are intended to serve fifteen (15) or more persons,
or
(2) in addition to the delivery of Products, FRANCHISE OWNER provides
ancillary services to a customer at a location within the Catering Area,
including, by way of example and without limitation, the setting up for
serving or distribution of Products.
"COMMISSARY" - A food preparation facility operated by DEVELOPER pursuant
----------
to this Agreement that:
2
<PAGE>
(1) procures and receives Products, ingredients and materials used in
the preparation and packaging of Products, and other materials and supplies
used in the operation of UNITS;
(2) prepares and packages Products in accordance with recipes,
methods, procedures, standards and specifications established by COMPANY,
in its sole discretion, from time to time; and
(3) distributes to UNITS Products and other materials and supplies
used in the operation of UNITS.
"COMPETITIVE BUSINESS" - A business or enterprise, other than a UNIT or
--------------------
Commissary, that:
(1) offers food and/or beverage products at wholesale or retail,
which are the same as or similar to the Products through:
(a) on-premises dining;
(b) carry-out;
(c) delivery service;
(d) catering service; or
(e) other distribution channels; similar to those used by
COMPANY; or
(2) grants or has granted franchises or licenses or establishes or
has established joint ventures, for the development and/or operation of one
or more businesses or enterprises described in the foregoing clause (1);
provided, however, that the term "Competitive Business" shall not include:
(a) any Boston Market restaurant operated pursuant to a valid
franchise or license agreement with Boston Chicken, Inc. or
its successors; or
(b) any business or enterprise that derives less than 10% of its
revenue from the sale of (i) bagels and/or bagel related
products (including but not limited to cream cheese and
other spreads, bagel sandwiches and bagel chips) or (ii) any
other product which accounts for 15% or more of the revenue
of any UNIT owned or operated by COMPANY or a franchisee of
COMPANY.
3
<PAGE>
"COMPUTER SYSTEM" - Those brands, types, makes, and/or models of
---------------
communications and computer systems and hardware specified or required by
COMPANY for use by, between, or among UNITS, including, but not limited to:
(1) back office and point of sale systems, data, audio, video, and
voice storage, retrieval, and transmission systems for use at the Store,
between or among UNITS, and between and among the Store and COMPANY and/or
FRANCHISE OWNER;
(2) security systems;
(3) printers; and
(4) archival and back-up systems.
"CONTROLLING INTEREST" - If FRANCHISE OWNER is a:
--------------------
(1) corporation, such number of the voting shares of FRANCHISE OWNER
or such other rights as (a) shall permit voting control of FRANCHISE OWNER
on any issue and (b) shall prevent any other person, group, combination, or
entity from blocking voting control on any issue or exercising any veto
power; and
(2) general partnership, a managing partnership interest, such
percentage of the general partnership interests in FRANCHISE OWNER or such
other rights as (a) shall permit determination of the outcome on any issue
and (b) shall prevent any other person, group, combination, or entity from
blocking voting control on any issue or exercising any veto power;
(3) limited partnership, general partnership interest, such
percentage of limited partnership interests or such other rights as shall
permit the replacement or removal of any general partner; and
(4) limited liability company, such percentage of the membership
interests of FRANCHISE OWNER or such other rights as (a) shall permit
voting control of FRANCHISE OWNER on any issue and (b) shall prevent any
other person, group, combination or entity from blocking voting control on
any issue or exercising any veto power.
"DELIVERY AREA" - The geographic area in which COMPANY, in its sole
-------------
discretion, authorizes FRANCHISE OWNER to provide Delivery Service (defined
below) pursuant to a Delivery Rider (defined below), which area may be the same
as, smaller than, larger than or different from the Territory (defined below).
"DELIVERY RIDER" - The form of rider to a Franchise Agreement used by
--------------
COMPANY from time to time to authorize or require in its sole discretion a
franchise owner of a UNIT to
4
<PAGE>
offer Delivery Service within the applicable Delivery Area. The current form of
COMPANY's Delivery Rider is attached hereto as Exhibit B.
"DELIVERY SERVICE" - The delivery of Products prepared at a UNIT or a
----------------
separate delivery facility approved by COMPANY (such approved facility is
referred to herein as a "DELIVERY FACILITY") to customers in the Delivery Area
pursuant to COMPANY's standards and specifications for the provision of such
service, which COMPANY may change from time to time in its sole discretion,
where
(1) such Products are intended to serve fewer than fifteen (15)
persons, and
(2) such service involves the provision of no services other than the
delivery of Products to a customer at a particular location within the
Delivery Area.
"DEVELOPMENT AGREEMENT" - The Einstein/Noah Bagel Corp. Development
---------------------
Agreement executed by COMPANY and DEVELOPER, if any, dated as of the date stated
in Exhibit D attached hereto, pursuant to which DEVELOPER was granted the right
---------
to develop one (1) or more UNITS in a geographic area in which the Store is
located.
"IMMEDIATE FAMILY" - (1) The spouse of a person; and (2) the natural and
----------------
adoptive parents and natural and adopted children and siblings of such person
and their spouses; and (3) the natural and adoptive parents and natural and
adopted children and siblings of the spouse of such person; and (4) any other
member of the household of such person; provided, in the case of natural and
adopted children and siblings and their spouses and the parents, children and
siblings of spouses, that such person received or had access to Confidential
Information, including as an employee, supplier, officer, director, stockholder
or agent of FRANCHISE OWNER or any other operator of a UNIT.
"LICENSED PROGRAM" - The computer software programs developed by or for
----------------
COMPANY and/or designated by COMPANY from time to time as specified or required
in connection with utilization of the Computer System, which may include,
without limitation, COMPANY's point-of-sale, bookkeeping, inventory, training,
marketing, employee selection, operations and financial information, collection
and retrieval systems (including COMPANY's general ledger system utilizing the
standard chart of accounts prescribed by COMPANY from time to time) for use in
connection with the operation of UNITS or franchise owners' and developers'
businesses, including any updates, supplements, modifications or enhancements
thereto made from time to time, all related documentation, the tangible media
upon which such programs are recorded, and the database file structure thereof,
but excluding any data or databases owned or compiled by COMPANY or its
Affiliates or their licensors for use with the Licensed Program or otherwise or
any data generated by the use of the Licensed Program.
"MARKETING AREA" - The geographic area in which the Store and other UNITS
--------------
(regardless of the principal Mark under which the UNITS operate) are located
which COMPANY designates from time to time in its sole discretion as a distinct
area for marketing purposes. In making such determination, COMPANY may take into
consideration:
5
<PAGE>
(1) information obtained from Arbitron, A. C. Nielsen Co. or a
comparable source or
(2) penetration of various forms of media such as radio, cable
television, broadcast television, local and regional newspapers and similar
media; or
(3) demographic characteristics (for example, urban versus suburban);
or
(4) political, man-made, or natural boundaries (for example, city,
county or other political boundaries, expressways, railroads or rivers); or
(5) other reasonable factors, including, without limitation, any
combination of the foregoing.
"MARKS" - The trademarks, service marks, logos and other commercial symbols
-----
which COMPANY uses and authorizes developers and franchise owners to use to
identify the services and/or products offered by UNITS, and the TRADE DRESS
(defined below); provided that such trademarks, service marks, logos, other
commercial symbols, and the Trade Dress are subject to modification and
discontinuance at COMPANY's sole discretion and may include additional or
substitute trademarks, service marks, logos, commercial symbols and trade dress
as provided in this Agreement. The Marks include the Principal Marks which
FRANCHISE OWNER is authorized to use in the operation of the Store.
"OWNERSHIP INTERESTS" - In relation to a: (i) corporation, the record or
-------------------
beneficial ownership of one or more shares in the corporation; (ii) partnership,
the record or beneficial ownership of a general or limited partnership interest;
(iii) limited liability company, the record or beneficial ownership of a
membership interest in the limited liability company; or (iv) trust, the
ownership of a beneficial interest of such trust.
"OWNER" - Each person or entity holding direct or indirect, record or
-----
beneficial Ownership Interests in FRANCHISE OWNER and each person who has other
direct or indirect property rights in FRANCHISE OWNER, this Agreement, the
Franchise or the Store.
"PERMITTED COMPETITIVE BUSINESS" - A business which constitutes a
------------------------------
Competitive Business and is disclosed in Exhibit D to this Agreement, provided
---------
that such business (1) was not on the date of the Development Agreement and does
not at any time thereafter become a Bagel Store, and (2) does not offer bagels
or bagel-related products on its menu, provided that if such business is a
franchised or licensed business of a franchisor which, pursuant to an agreement
which is executed prior to the date of the Development Agreement and under
which, after the date of the Development Agreement, the franchisor or licensor
specifies that such business offer bagels or bagel-related products as a
required menu item, it shall be deemed a Permitted Competitive Business so long
as it does not become a Bagel Store.
"PRINCIPAL MARKS" - The Marks COMPANY authorizes FRANCHISE OWNER to use to
---------------
identify the Store; the Principal Marks as of the date of this Agreement are
described in Exhibit K to this Agreement.
---------
6
<PAGE>
"PRINCIPAL OWNER" - Each Owner which:
---------------
(1) is a general partner in FRANCHISE OWNER; or
(2) has a direct or indirect equity interest of 10% or more
(regardless of whether such Owner is entitled to vote thereon) in (a)
FRANCHISE OWNER or (b) any Store or (c) any developer and/or franchise
owner of UNITS other than FRANCHISE OWNER; provided, however, that a
reduction in a Principal Owner's equity interest below 10% shall not affect
his/her/its status as a Principal Owner unless such reduction is the result
of the transfer of all his/her/its equity interests in FRANCHISE OWNER, a
UNIT or such developer and/or franchise owner of a UNIT; or
(3) is designated as a Principal Owner in Section 2 of Exhibit G to
---------
this Agreement;
"PRODUCTS" - Products approved or required by COMPANY from time to time in
--------
its sole discretion for sale at or from UNITS, including, without limitation,
bagels, bagel-related products, cream cheese and other spreads, sandwiches,
soups, salads, baked goods, breakfast items, an assortment of hot and cold
beverages, teas (leaves, bags, dry mixes and related forms), coffees (beans,
ground and related forms) and other food products and merchandise, provided that
the foregoing products are subject to modification or discontinuance in
COMPANY's sole discretion from time to time and may include additional or
substitute products.
"SITE" - The location identified in Exhibit F of this Agreement. As used
---- ---------
herein, the term "SITE" also refers to the interior and exterior of the
structure housing the Store.
"SPECIAL DISTRIBUTION AGREEMENT" - A separate agreement whereby COMPANY
------------------------------
authorizes a franchise owner of a UNIT to operate a Special Distribution
Arrangement (defined below) at a Special Distribution Location (defined below)
designated by COMPANY.
"SPECIAL DISTRIBUTION ARRANGEMENT" - The sale of all or some of the
--------------------------------
Products, as designated by COMPANY, at or from a Special Distribution Location
(defined below), whether or not by or through on-premises food service
facilities or concessions, pursuant to COMPANY's standards and specifications
for such sales, which COMPANY may change from time to time in its sole
discretion.
"SPECIAL DISTRIBUTION LOCATION" - A facility or location, including by
-----------------------------
way of example and without limitation, a grocery store, convenience store,
supermarket, a school, hospital, office, work site, military facility,
entertainment or sporting facility or event, airport, bus or train station,
park, toll road or limited access highway facility or other similar facility, at
or from which COMPANY, in its sole discretion, authorizes the operation of a
Special Distribution Arrangement pursuant to a Special Distribution Agreement,
which facility may be located within or outside the Territory.
7
<PAGE>
"SPECIFIED SOFTWARE" - Such software, programming, and services, other than
------------------
the Licensed Program, which COMPANY from time to time specifies or requires in
connection with utilization of the Computer System.
"STORE" - The UNIT which FRANCHISE OWNER is franchised to operate at the
-----
Site pursuant to this Agreement that operates using the System and Principal
Marks identified in Exhibit K hereto and pursuant to COMPANY's operational
requirements associated with such Principal Marks as in effect from time to
time.
"TERRITORY" - The geographic area described in Exhibit F of this Agreement.
--------- ---------
"TRADE DRESS" - The unit design, decor and image which COMPANY authorizes
-----------
and requires for use in connection with the operation of the Store, as it may be
revised and further developed by COMPANY or its Affiliates from time to time and
as further described in the Manuals (defined below).
"UNIT" - A branded retail store that:
----
(1) offers Products (defined below) for consumer consumption through
on-premises dining and carry-out, provided that COMPANY may, in its sole
discretion, authorize such business to offer Delivery Service pursuant to a
Delivery Rider and/or approve the franchise owner of such business to offer
Catering Service pursuant to a Catering Rider or to operate Special
Distribution Arrangements pursuant to a Special Distribution Agreement
(defined below); and
(2) operates using the System and the Marks; and
(3) is either operated by COMPANY or its Affiliates or pursuant to a
valid franchise from COMPANY.
2. GRANT OF FRANCHISE.
------------------
2.A. GRANT OF FRANCHISE; TERM; PRINCIPAL OWNERS' GUARANTY.
----------------------------------------------------
Subject to the provisions of this Agreement, COMPANY hereby grants to
FRANCHISE OWNER a franchise (the "FRANCHISE") to operate the Store at the Site,
and to use the Marks and System in the operation thereof, for a term of fifteen
(15) years commencing on the date of this Agreement. Termination or expiration
of this Agreement shall constitute a termination or expiration of the Franchise
and any and all licenses granted herein. FRANCHISE OWNER agrees that it will at
all times faithfully, honestly and diligently perform its obligations hereunder,
and that it will continuously exert its best efforts to promote and enhance the
business of the Store and the goodwill of the Marks. FRANCHISE OWNER shall not
conduct the business of the Store from any location other than the Site, except
as otherwise provided under this Agreement, and will not offer Catering Service,
Delivery Service or Special Distribution Arrangements within or outside the
Territory, except as provided in Section 3 of this Agreement. FRANCHISE OWNER
shall cause all persons or entities who are Principal Owners as of the
8
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Effective Date, and their spouses, to execute and deliver to COMPANY
concurrently with this Agreement, and all persons or entities which become
Principal Owners thereafter, and their spouses, to execute and deliver to
COMPANY promptly thereafter, the form of Guaranty and Assumption of Franchise
Owner's Obligations ("GUARANTY") attached hereto as Exhibit G.
---------
Notwithstanding the foregoing:
(a) FRANCHISE OWNER shall not be required to cause the execution
and delivery of the Guaranties referred to in this Section
if, and for such period of time as, FRANCHISE OWNER does not
pay dividends or unreasonable compensation to any Owner at
any time that members' equity is either less than $5,000,000
or would be reduced to below that amount by reason of such
payment; and
(b) spouses of guarantors shall not be required to execute any
Guaranties referred to in this Section unless, under
applicable law (including, without limitation, the law of
the state in which such guarantors and/or their spouses
reside), their failure to execute would render the
Guaranties null and void.
2.B. TERRITORIAL RIGHTS.
------------------
Except as otherwise provided in this Agreement (including, without
limitation, Section 2.D. and Section 3) and provided that FRANCHISE OWNER is in
full compliance with this Agreement, COMPANY and its Affiliates will not during
the term of this Agreement, operate or grant franchises for the operation of
Stores within the Territory other than the Franchise granted to FRANCHISE OWNER
pursuant to this Agreement.
2.C. RIGHTS RETAINED BY COMPANY.
--------------------------
COMPANY (on behalf of itself, its Affiliates and its designees) retains all
rights with respect to UNITS, the Marks, Copyrighted Works (defined below), and
the sale of Products and any other products and services, anywhere in the world,
including, without limitation:
(1) the right to operate or grant others (including any person or
entity related in any manner whatsoever to COMPANY) the right to operate
food service businesses, including, without limitation, UNITS and/or Bagel
Stores, using the Marks or any other marks and using the System or any
other system at such locations within and/or outside the Territory, both
during and upon expiration or termination of the term of this Agreement,
and on such terms and conditions as COMPANY, in its sole discretion, deems
appropriate (subject to the rights expressly granted to FRANCHISE OWNER in
Section 2.B. of this Agreement); and
(2) subject to any rights of FRANCHISE OWNER under Section 3 of this
Agreement, the right, and the right to grant others (including any person
or entity related in any manner whatsoever to COMPANY) the right, to
develop, manufacture, market,
9
<PAGE>
distribute and/or sell Products and/or any other product or service within
and/or outside the Territory through any channel of distribution
whatsoever, whether wholesale, retail or otherwise, including, without
limitation, through Special Distribution Arrangements (including, without
limitation, through BOSTON MARKET outlets), Delivery Service and Catering
Service under or in association with the Marks or any other trademark
and/or to own or operate any other business under the Marks or any other
trademarks; and
(3) subject to Section 2.D. below, the right to acquire, operate and
convert to a UNIT any business, including, without limitation, a business
operating one or more Bagel Stores (other than UNITS) or other food service
businesses located or operating within and/or outside the Territory.
2.D. FRANCHISE OWNER'S OPTION TO PURCHASE CONVERSION SITES.
-----------------------------------------------------
If, during the term of this Agreement, COMPANY acquires the shares or
assets (which may include, by way of illustration and not by way of limitation,
furniture, fixtures, equipment, leasehold improvements and/or leasehold
interests) of any business operating a Bagel Store at one or more sites located
within the Territory which meet COMPANY's specifications and standards as in
effect from time to time for conversion to UNITS (the "CONVERSION SITES"), and
COMPANY determines to convert such Conversion Sites to Stores, COMPANY agrees to
offer to sell such Conversion Sites to FRANCHISE OWNER for the price paid
therefor by COMPANY. Such price will include that portion of the direct and
indirect costs and liabilities incurred or assumed by COMPANY in making such
acquisition and allocated to such Conversion Sites whether paid or owed to the
seller of such Conversion Sites, an Affiliate or any other party, and other
expenses allocated or otherwise related to such Conversion Sites (including
losses, whether from continuing operations or closing acquired locations) plus
interest at COMPANY's cost of money on the balance of such amounts from time to
time, provided that:
(1) such sale will not in COMPANY's judgment conflict with any
existing legal obligation of COMPANY or the business being acquired; and
(2) such sale will not in COMPANY's judgment preclude the completion
of the acquisition on the terms agreed to by COMPANY; and
(3) such sale will not, in COMPANY's judgment, interfere with any
other legal agreement, arrangement or combination or affect federal or
state income tax consequences arising from the acquisition in a manner
adverse to any of the parties thereto; and
(4) such sale may, at COMPANY's discretion, include (at a price
determined on the same basis as for Conversion Sites) certain acquired
stores which fall within the Territory but which do not meet COMPANY's
criteria for conversion to UNITS and which may have to be closed or sold to
a third party subsequent to FRANCHISE OWNER's acquisition; and
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<PAGE>
(5) FRANCHISE OWNER agrees to (a) execute, concurrently with
FRANCHISE OWNER's purchase, COMPANY's then current form of standard
franchise agreement containing COMPANY's then current fees and expense
requirements and such ancillary documents (including guarantees) as are
then customarily used by COMPANY in the grant of franchises for UNITS, as
modified for use in connection with a Conversion Site as necessary, for
each and every such Conversion Site, (b) convert each such Conversion Site
to a Store as soon as practicable thereafter (but in no event later than
the date specified by COMPANY) in accordance with COMPANY's standards and
specifications, and (c) close or sell, within the reasonable time period
specified by COMPANY, any acquired sites which are not suitable for
conversion .
FRANCHISE OWNER shall have thirty (30) days after receipt of COMPANY's offer in
which to accept or reject such offer by written notice to COMPANY. If accepted,
FRANCHISE OWNER shall have 30 days from the date of acceptance within which to
complete the acquisition.
In the event FRANCHISE OWNER rejects or fails to timely accept COMPANY's
offer to sell such Conversion Sites or COMPANY is unable to extend such offer
for any of the aforementioned reasons, COMPANY agrees that, provided that
FRANCHISE OWNER is in full compliance with this Agreement, it will not utilize
or license the use of the Marks at such Conversion Sites for a period of one (1)
year following COMPANY's acquisition thereof; provided, however, that COMPANY
may operate, alter, modify, refurbish, remodel, promote or market any such
Conversion Sites and use the Licensed Program and Computer System in the
operation thereof during such one (1) year period. For purposes of this Section,
all references to COMPANY shall be deemed to include its Affiliates.
COMPANY agrees to use reasonable efforts to obtain input (including market
and competitive information) from FRANCHISE OWNER in connection with the due
diligence process undertaken by COMPANY in any potential acquisition of
Conversion Sites in a particular Sub-Area during the applicable Sub-Area Term.
3. OTHER DISTRIBUTION METHODS.
--------------------------
3.A. SPECIAL DISTRIBUTION ARRANGEMENTS.
---------------------------------
FRANCHISE OWNER acknowledges and agrees that: (1) FRANCHISE OWNER is not
granted, and COMPANY has no obligation to offer to FRANCHISE OWNER, any rights
to operate Special Distribution Arrangements within or outside the Territory
pursuant to this Agreement; and (2) the right to operate or grant to others the
right to operate Special Distribution Arrangements is specifically reserved to
COMPANY or its designees. If COMPANY, at any time and in its sole discretion,
determines to offer FRANCHISE OWNER the right to operate a Special Distribution
Arrangement at a Special Distribution Location designated by COMPANY, COMPANY
will so notify FRANCHISE OWNER by delivering to FRANCHISE OWNER a form of
Special Distribution Agreement. FRANCHISE OWNER will have fifteen (15) days
after its receipt thereof to execute and deliver to COMPANY such executed
Special Distribution Agreement. If FRANCHISE OWNER fails to execute and deliver
11
<PAGE>
to COMPANY the executed Special Distribution Agreement within such fifteen (15)
day period or commence such Special Distribution Arrangement within the period
specified therein, then FRANCHISE OWNER shall have no right to operate such
Special Distribution Arrangement thereafter. COMPANY reserves the right under
the Special Distribution Agreement, at any time and in its sole discretion with
or without cause and regardless of the investment made by FRANCHISE OWNER in
establishing or operating the Special Distribution Arrangement or the length of
time the Special Distribution Arrangement has been in effect, to suspend or
terminate FRANCHISE OWNER's right to operate the Special Distribution
Arrangement, effective ninety (90) days after COMPANY's written notice to
FRANCHISE OWNER.
Notwithstanding the foregoing, COMPANY agrees that, if during the Development
Term it intends to engage in a Special Distribution Arrangement at or from (a) a
military facility, (b) an entertainment or sporting facility or event, (c) an
airport, bus or train station, (d) a toll road or limited access highway
facility or (e) any specialty kiosk located in or adjacent to any similar
facilities, located within the Territory, COMPANY will offer FRANCHISE OWNER a
Special Distribution Agreement, the execution of which shall be governed by this
Section 3.A.
3.B DELIVERY SERVICE.
----------------
FRANCHISE OWNER acknowledges and agrees that: (1) FRANCHISE OWNER is not
granted, and COMPANY has no obligation to offer to FRANCHISE OWNER, any rights
within or outside the Territory to offer Delivery Service from the Store or
otherwise pursuant to this Agreement; and (2) the right to provide Delivery
Service is specifically reserved to COMPANY or its designees. If COMPANY, at any
time and in its sole discretion, determines to offer Delivery Service in a
designated Delivery Area in which the Store is located, COMPANY will offer to
FRANCHISE OWNER, or to DEVELOPER pursuant to the Development Agreement, the
right to offer Delivery Service by delivering to FRANCHISE OWNER (or DEVELOPER)
a form of Delivery Rider to this Agreement (or a Delivery Rider to the
Development Agreement). FRANCHISE OWNER (or DEVELOPER) will have fifteen (15)
days after its (or DEVELOPER's) receipt thereof to execute and deliver to
COMPANY such executed Delivery Rider. If FRANCHISE OWNER (or DEVELOPER) fails to
execute and deliver such executed Delivery Rider to COMPANY within such fifteen
(15) day period or to commence Delivery Service within the specified period,
then FRANCHISE OWNER (or DEVELOPER) shall have no right to provide Delivery
Service at the Store thereafter.
If COMPANY determines in its sole discretion that all franchise owners of
UNITS in the trade area where the Store is located (as such trade area is
determined by COMPANY in its sole discretion and which in no event shall exceed
the Marketing Area) shall offer Delivery Service, COMPANY will notify FRANCHISE
OWNER (or DEVELOPER) and will deliver to FRANCHISE OWNER (or DEVELOPER) a
Delivery Rider to this Agreement (or the Development Agreement) which FRANCHISE
OWNER (or DEVELOPER) shall execute and deliver to COMPANY within fifteen (15)
days after its receipt.
COMPANY reserves the right under the Delivery Service Rider, at any time
and in its sole discretion, with or without cause and regardless of the
investment made by FRANCHISE OWNER (or DEVELOPER) in establishing and conducting
Delivery Service or the length of
12
<PAGE>
time FRANCHISE OWNER (or DEVELOPER) has offered Delivery Service: (1) to reduce,
modify or expand the Delivery Area, effective upon COMPANY's written notice to
FRANCHISE OWNER, provided, however, that if a reduction or modification of the
Delivery Area amounts to a termination of substantially all of FRANCHISE OWNER's
rights to provide such services (except in the case of the exercise by COMPANY
of its remedies under Section 18.C of this Agreement), such reduction or
modification shall not be effective until 90 days after COMPANY's written notice
to FRANCHISE OWNER; or (2) to suspend or terminate FRANCHISE OWNER's (or
DEVELOPER's) right to offer Delivery Service, effective ninety (90) days after
COMPANY's written notice to FRANCHISE OWNER (or DEVELOPER); and COMPANY may
otherwise terminate FRANCHISE OWNER's (or DEVELOPER's) right to offer Delivery
Service pursuant to the terms of the Delivery Rider. In the event that COMPANY
suspends or terminates FRANCHISE OWNER's (or DEVELOPER's) right to offer
Delivery Service, COMPANY reserves the right to require FRANCHISE OWNER (or
DEVELOPER) to reinstate Delivery Service upon fifteen (15) days' prior written
notice to FRANCHISE OWNER (or DEVELOPER).
3.C CATERING SERVICE.
----------------
FRANCHISE OWNER acknowledges and agrees that: (1) FRANCHISE OWNER is not
granted, and COMPANY has no obligation to offer to FRANCHISE OWNER, any rights
within or outside the Territory to offer Catering Service from the Store or
otherwise pursuant to this Agreement; and (2) the right to provide Catering
Service is specifically reserved to COMPANY or its designees. If COMPANY, at any
time and in its sole discretion, determines to offer Catering Service in a
designated Catering Area in which the Store is located, COMPANY will offer
FRANCHISE OWNER, or to DEVELOPER pursuant to the Development Agreement the right
to offer Catering Service by delivering to FRANCHISE OWNER (or DEVELOPER) a form
of Catering Rider to this Agreement (or to the Development Agreement). FRANCHISE
OWNER (or DEVELOPER) will have fifteen (15) days after its (or DEVELOPER's)
receipt thereof to execute and deliver to COMPANY the executed Catering Rider.
If FRANCHISE OWNER (or DEVELOPER) fails to execute and deliver such executed
Catering Rider to COMPANY within such fifteen (15) day period or commence
Catering Service within the specified period, then FRANCHISE OWNER (or
DEVELOPER) shall have no right to provide Catering Service within the designated
Catering Area thereafter.
If COMPANY determines in its sole discretion that all franchise owners of
UNITS in the trade area where a Store is located (as such trade area is
determined by COMPANY in its sole discretion and which in no event shall exceed
the Marketing Area), shall offer Catering Service, COMPANY will notify FRANCHISE
OWNER (or DEVELOPER) and will deliver to FRANCHISE OWNER (or DEVELOPER) a
Catering Rider to this Agreement (or to the Development Agreement) which
FRANCHISE OWNER (or DEVELOPER) shall execute and return to COMPANY within
fifteen (15) days after its receipt. COMPANY reserves the right under the
Catering Rider, at any time and in its sole discretion, with or without cause
and regardless of the investment made by FRANCHISE OWNER (or DEVELOPER) in
establishing and conducting Catering Service or the length of time FRANCHISE
OWNER (or DEVELOPER) has offered Catering Service: (1) to reduce, modify or
expand the Catering Area, effective upon COMPANY's written notice to FRANCHISE
OWNER, provided, however, that if a reduction
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<PAGE>
or modification of the Catering Area amounts to a termination of substantially
all of FRANCHISE OWNER's rights to provide such services (except in the case of
the exercise by COMPANY of its remedies under Section 18.C of this Agreement),
such reduction or modification shall not be effective until 90 days after
COMPANY's written notice to FRANCHISE OWNER; or (2) to suspend or terminate
FRANCHISE OWNER's (or DEVELOPER's) right to offer Catering Service, effective
ninety (90) days after COMPANY's written notice to FRANCHISE OWNER (or
DEVELOPER) (in which case FRANCHISE OWNER (or DEVELOPER) will not fill any
orders for Catering Service after the expiration of such ninety (90) day
period); and COMPANY may otherwise terminate FRANCHISE OWNER's (or DEVELOPER's)
right to offer Catering Service pursuant to the terms of the Catering Rider. In
the event that COMPANY terminates or suspends FRANCHISE OWNER's (or DEVELOPER's)
right to offer Catering Service, COMPANY reserves the right to require FRANCHISE
OWNER (or DEVELOPER) to reinstate Catering Service upon fifteen (15) days' prior
written notice to FRANCHISE OWNER (or DEVELOPER).
4. DEVELOPMENT AND OPENING OF THE STORE.
------------------------------------
4.A SITE SELECTION AND LEASE.
------------------------
Prior to execution of this Agreement, FRANCHISE OWNER shall have obtained
COMPANY's approval of and the legal right of possession of the Site in
accordance with the terms of the Development Agreement.
4.B STORE DESIGN SPECIFICATIONS AND CONSTRUCTION PLANS.
--------------------------------------------------
COMPANY will furnish to FRANCHISE OWNER specifications of COMPANY's
requirements for design, decoration, layout, equipment, furnishings, fixtures
and signs for Stores using the Principal Marks designed on Exhibit K and the
Trade Dress and operating procedures associated therewith (the "DESIGN
SPECIFICATIONS"). FRANCHISE OWNER acknowledges and agrees that the Design
Specifications, which include Trade Dress, are an integral part of the System
and that the Store will be designed and constructed in accordance with the
Design Specifications. FRANCHISE OWNER will cause to be prepared and submitted
to COMPANY for approval the preliminary layout for the Store (if not already
submitted to and approved by COMPANY) and detailed construction plans and
specifications and space plans for the Store (the "CONSTRUCTION PLANS") that
comply with the Design Specifications and all applicable ordinances, building
codes, permit requirements, and lease requirements and restrictions.
4.C DEVELOPMENT OF THE STORE.
------------------------
Within one hundred twenty (120) days after the date of execution of this
Agreement, FRANCHISE OWNER agrees at its expense to do or cause to be done the
following:
(1) secure all financing required to fully develop the Store in
accordance with this Section; and
14
<PAGE>
(2) submit the Construction Plans and preliminary layout to COMPANY
for approval; and
(3) obtain all required zoning changes, planning consents, building,
utility, sign, health, sanitation and business permits, licenses and
approvals and any other required permits and licenses; and
(4) construct all required improvements in compliance with
Construction Plans approved by COMPANY; and
(5) decorate and lay out the Store in compliance with Design
Specifications and plans and specifications approved by COMPANY; and
(6) (a) acquire the Computer System for the Store and acquire the
right to use, for the remainder of the term of the Franchise Agreement
applicable to the Store, the Specified Software in the manner specified by
COMPANY; (b) obtain any and all peripheral equipment and accessories and
arrange for any and all support services that may be necessary to enable
the Computer System, the Licensed Program, and the Specified Software to
operate as specified by COMPANY, and (c) take all other actions (including
but not limited to installation of electrical wiring and cabling, and
temperature and humidity controls) that may be necessary to prepare the
Store to enable the Computer System, the Licensed Program, and the
Specified Software to operate as specified by COMPANY; and
(7) purchase or lease and install all required equipment, vehicles,
furnishings, fixtures and signs; and
(8) purchase an adequate opening inventory of Products, and Supplies
and Materials (defined below); and
(9) obtain all customary contractors' sworn statements and partial
and final waivers of lien for construction, remodelling, decorating and
installation services; and
(10) open the Store for business and thereafter operate the Store on a
regular and continuing basis for the term hereof.
4.D. EQUIPMENT, FIXTURES, FURNISHINGS AND SIGNS.
------------------------------------------
FRANCHISE OWNER agrees to use in the development and operation of the Store
only those brands, types and/or models of equipment, vehicles, signs displaying
the Marks, fixtures and furnishings which meet COMPANY's specifications.
FRANCHISE OWNER may purchase approved brands, types and/or models of equipment,
fixtures and signs which meet the COMPANY's specifications only from suppliers
designated or approved by COMPANY, which may include COMPANY. At FRANCHISE
OWNER's request, COMPANY will from time to time supply FRANCHISE OWNER with a
list of suppliers who sell items which meet COMPANY's specifications.
15
<PAGE>
4.E. COMPUTER SYSTEM.
---------------
FRANCHISE OWNER agrees to use in the development and operation of the Store
only those brands, types, makes, and/or models of communications and computer
systems or hardware which COMPANY has from time to time specified or required
for the Computer System. FRANCHISE OWNER also agrees to use in the development
and operation of the Store only the Specified Software and the Licensed Program,
as comprised from time to time in accordance with the specifications and
requirements of COMPANY.
4.F. STORE OPENING.
-------------
FRANCHISE OWNER agrees not to open the Store for business until:
(1) COMPANY notifies FRANCHISE OWNER in writing that all of FRANCHISE
OWNER's obligations pursuant to Paragraphs A, B, C and D of this Section 4
have been fulfilled; and
(2) preopening training of Store personnel has been completed to
COMPANY's satisfaction; and
(3) all amounts then due to COMPANY and its Affiliates have been paid
and all required Guaranties are executed and delivered to COMPANY; and
(4) COMPANY has been furnished with copies of all insurance policies
required pursuant to this Agreement, or such other evidence of insurance
coverage and payment of pre miums as COMPANY requests.
FRANCHISE OWNER agrees to comply with these conditions and to be prepared to
open the Store for business within one hundred twenty (120) days after the date
of this Agreement. COMPANY's determination that FRANCHISE OWNER has met all of
COMPANY's pre-opening requirements shall not constitute a waiver of non-
compliance by FRANCHISE OWNER or of COMPANY's right to demand full compliance
with such requirements. FRANCHISE OWNER further agrees to open the Store for
business and commence conduct of business at the Store pursuant to this
Agreement within five (5) days after COMPANY gives notice to FRANCHISE OWNER
stating that the Store is ready for opening.
4.G. GRAND OPENING PROGRAM.
---------------------
FRANCHISE OWNER agrees to conduct a grand opening advertising and
promotional program for the Store during the period commencing thirty (30) days
prior to, and ending ninety (90) days after, the opening of the Store and to
expend no less than Ten Thousand Dollars ($10,000.00) on such advertising and
promotion during such period. Such advertising and promotional program shall:
(1) be in addition to advertising and promotion conducted pursuant to
Section 13 of this Agreement; and
16
<PAGE>
(2) utilize marketing and public relations programs and media and
advertising materials approved by COMPANY; and
(3) be conducted in accordance with COMPANY's specifications and
standards and pursuant to a grand opening plan which FRANCHISE OWNER shall
prepare and submit to COMPANY for approval at least forty-five (45) days
prior to the opening date of the Store. If FRANCHISE OWNER does not
prepare a grand opening program and obtain COMPANY's approval of such plan,
COMPANY may prepare the grand opening plan for the Store.
COMPANY may, in its discretion, reduce the amount of required spending for the
grand opening program, reduce the time period during which the grand opening
program shall be conducted, and/or direct that a portion of such funds be re-
directed to a Local Ad Fund established pursuant to Section 13.B of this
Agreement; provided that (a) COMPANY reasonably determines that the Marketing
Area in which the Store is opened has been sufficiently covered by the opening
of other UNITS, and (b) COMPANY is acting comparably with respect to its own
UNITS in similar situations.
4.H. RELOCATION OF THE STORE.
-----------------------
If FRANCHISE OWNER's lease or sublease for the Site of the Store expires or
terminates without fault of FRANCHISE OWNER, if the Site is destroyed, condemned
or otherwise rendered unusable as a UNIT in accordance with this Agreement, or
if, in the judgment of COMPANY and FRANCHISE OWNER, there is a change in the
character of the location of the Site sufficiently detrimental to its business
potential to warrant its relocation, COMPANY will not unreasonably withhold
permission for relocation of the Store to a site within the Territory which
meets COMPANY's then-current site criteria, subject to the rights of existing
Franchisees under their franchise agreements with COMPANY. Any such relocation
shall be at FRANCHISE OWNER's sole expense. FRANCHISE OWNER shall seek and
obtain COMPANY's approval of the replacement site pursuant to COMPANY's then
current site approval process, and the Store shall re-open at the replacement
Site as soon as reasonably practicable but in no event more than ninety (90)
days after the closing of the original location.
4.I. FINANCING PLAN.
--------------
Within ten (10) days after the execution of this Agreement, FRANCHISE OWNER
must submit a written plan for FRANCHISE OWNER's funding of the development and
operation of the Store, which plan shall be reasonably acceptable to COMPANY and
which shall include details of the sources and terms of such funding and such
other information or documents required by COMPANY from time to time. FRANCHISE
OWNER may not begin development of the Store until COMPANY has given its
approval of such plan, which approval COMPANY may give or withhold in its sole
discretion. Among other factors, COMPANY may consider FRANCHISE OWNER's
debt/equity ratio and amount of indebtedness in reviewing such plan. Once a
plan is approved by COMPANY, FRANCHISE OWNER must execute and adhere to the
plan. Any proposed material deviation from or modifications to the originally
approved plan must be submitted to COMPANY for prior approval.
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5. TRAINING AND GUIDANCE.
---------------------
5.A. TRAINING.
--------
Prior to the commencement of the operation of the Store, the manager of the
Store (the "STORE MANAGER") and one (1) other management level employee (the
"ADDITIONAL MANAGER"), appointed by FRANCHISE OWNER in accordance with this
Agreement and identified in Section 4 of Exhibit E, must attend and complete to
---------
COMPANY's satisfaction a COMPANY accredited and certified initial management
training program in the operation of a UNIT. Such training program may include
classroom training, instruction at designated facilities and hands-on training
in an operating UNIT. DEVELOPER's Training Director shall provide such training
program at DEVELOPER's training facilities in accordance with COMPANY's
requirements therefor, provided that DEVELOPER's Training Director is currently
certified to provide such training program under the terms of the Development
Agreement. In addition, whether DEVELOPER or COMPANY is providing such
training, COMPANY may, in its sole discretion as it deems necessary, require the
Store Manager and/or the Additional Manager to work full-time without
compensation by COMPANY and at FRANCHISE OWNER's expense for up to ten (10)
weeks at a UNIT selected by COMPANY.
COMPANY may, in its sole discretion as it deems necessary, require the
Store Manager, Additional Manager or assistant managers of the Store or
FRANCHISE OWNER to attend or to participate in updated, additional or refresher
training programs during the term of this Agreement. COMPANY also may charge
for updated, additional or refresher training materials supplied to FRANCHISE
OWNER or its personnel.
In the event the certified Store Manager and/or the certified Additional
Manager ceases to hold such position at the Store, FRANCHISE OWNER shall have
thirty (30) days in which to appoint a substitute or replacement Store Manager
and/or Additional Manager, who must attend and complete to COMPANY's
satisfaction the initial management training program as specified above promptly
after appointment. If COMPANY in its sole discretion determines that the Store
Manager or Additional Manager or any subsequently appointed Store Manager or
Additional Manager has failed to satisfactorily complete the initial management
training program or any additional or refresher training program, FRAN CHISE
OWNER shall immediately hire a substitute Store Manager or Additional Manager
and promptly arrange for such person to complete the initial management training
program to the satisfaction of COMPANY.
FRANCHISE OWNER shall be responsible for the travel, living and other
expenses (including, without limitation, local transportation expenses) and
compensation of FRANCHISE OWNER, the Store Manager, the Additional Manager,
assistant managers, and any other agents or employees of FRANCHISE OWNER
incurred in connection with attendance at training programs or work at UNITS
that is part of their training.
5.B. GUIDANCE AND ASSISTANCE.
-----------------------
COMPANY shall, in its sole discretion, furnish guidance to FRANCHISE OWNER
with respect to:
18
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(1) recipes, methods, specifications, standards and operating
procedures utilized by UNITS and any modifications thereof; and
(2) purchasing approved equipment, fixtures, furnishings, signs,
Products, and Supplies and Materials (defined below); and
(3) development and implementation of local advertising and
promotional programs; and
(4) general operating and management procedures of UNITS; and
(5) establishing and conducting employee training programs at the
Store; and
(6) opening the Store.
Such guidance shall, in the discretion of COMPANY, be furnished in the form of
COMPANY's Manuals (defined below in this Section), bulletins, video or audio
cassette tapes, computer diskettes, written materials, reports and
recommendations, other materials and intangibles, refresher training programs
and/or telephonic consultations or consultations at the offices of COMPANY or at
the Store. If special training of Store personnel or other assistance in
operating the Store is requested by FRANCHISE OWNER and COMPANY determines in
its sole discretion that such training or assistance or assistance should take
place at the Store, all expenses for such training or assistance shall be paid
by FRANCHISE OWNER, including, without limitation, COMPANY's per diem charges
and travel and living expenses for COMPANY personnel.
5.C. STORE MANUALS.
-------------
COMPANY shall loan to FRANCHISE OWNER, for its sole use, one (1) copy of a
set of COMPANY's confidential manuals relating to the development and operation
of Stores, which may consist of one or more volumes, handbooks, manuals, written
materials, video or audio cassette tapes, computer diskettes or any other
materials or intangibles, all of which may be modified, added to, replaced or
supplemented by COMPANY from time to time in its sole discretion (which
modifications, additions or supplements may contain information developed by
COMPANY by DEVELOPER or FRANCHISE OWNER with respect to the type of UNIT
developed pursuant to this Agreement), whether by way of supplements,
replacement pages, franchise bulletins, or other official pronouncements or
means (collectively the "STORE MANUALS"). The Store Manuals may be modified
from time to time at COMPANY's sole discretion to reflect changes in the System
or specifications, standards, policies and procedures for UNITS, to specify
brands, types and/or models of equipment which must be used by FRANCHISE OWNER
in the operation of the Store, and to specify changes in the decor, format,
image, Products, services and operations of Stores prescribed by COMPANY or such
other changes or additions as COMPANY deems necessary or advisable. FRANCHISE
OWNER shall keep its copy of the Store Manuals current by immediately inserting
all modified pages or materials furnished by COMPANY. In the event of a dispute
about the contents of the Store Manuals, the master copies maintained by COMPANY
at its principal office shall be controlling.
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FRANCHISE OWNER acknowledges that the Store Manuals are part of the Confidential
Information and will be used and protected accordingly. FRANCHISE OWNER
acknowledges and agrees that the content of the Store Manuals, as modified from
time to time, is incorporated herein by reference and that FRANCHISE OWNER will
comply with all procedures, standards, specifications and requirements specified
therein as though each such item were set forth in detail in this Agreement.
6. MARKS.
-----
6.A. GOODWILL AND OWNERSHIP OF MARKS.
-------------------------------
FRANCHISE OWNER acknowledges that FRANCHISE OWNER's right to use the Marks,
as described in this Agreement, is derived solely from this Agreement and is
limited to the development and operation of the Store by FRANCHISE OWNER
pursuant to and in compliance with this Agreement and all applicable standards,
specifications, and operating procedures prescribed by COMPANY from time to time
during the term of the Franchise. Any unauthorized use of the Marks by
FRANCHISE OWNER shall constitute a breach of this Agreement and an infringement
of the rights of COMPANY in and to the Marks. FRANCHISE OWNER acknowledges and
agrees that all usage of the Marks by FRANCHISE OWNER and any goodwill
established thereby shall inure to the exclusive benefit of COMPANY and that
this Agreement does not confer any goodwill or other interests in the Marks upon
FRANCHISE OWNER, other than the right to use the Marks in the operation of the
Store in compliance with this Agreement. All provisions of this Agreement
applicable to the Marks shall apply to any other trademarks, service marks,
commercial symbols and trade dress hereafter authorized, in writing (including
by inclusion in any trademark usage or similar guide or manual issued to
franchise owners by COMPANY), for use by and licensed to FRANCHISE OWNER by
COMPANY.
6.B. LIMITATIONS ON FRANCHISE OWNER'S USE OF MARKS.
---------------------------------------------
FRANCHISE OWNER agrees to use the Marks as the sole trade identification of
the Store and the Products, provided that FRANCHISE OWNER shall identify itself
as the independent owner and licensee of the Store in the manner prescribed by
COMPANY. FRANCHISE OWNER shall not use any Mark as part of any corporate name
or other name of FRANCHISE OWNER or with any prefix, suffix, or other modifying
words, terms, designs, or symbols, or in any modified form, nor may FRANCHISE
OWNER use any Mark in connection with the performance or sale of any
unauthorized services or products or in any other manner not expressly
authorized in writing by COMPANY. FRANCHISE OWNER agrees to display the Marks
prominently in the manner prescribed by COMPANY at the Store and in connection
with advertising and marketing materials. FRANCHISE OWNER agrees to give such
notices of trademark and service mark registrations as COMPANY specifies and to
obtain such business name registrations as may be required under applicable law.
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6.C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS.
----------------------------------------
FRANCHISE OWNER shall immediately notify COMPANY of any apparent
infringement of or challenge to FRANCHISE OWNER's authorized use of any Mark, or
claim by any person of any rights in any Mark, and FRANCHISE OWNER shall not
communicate with any person other than COMPANY and its counsel in connection
with any such infringement, challenge or claim. COMPANY shall have sole
discretion to take such action as it deems appropriate in connection with the
foregoing, and the right to control exclusively any settlement, litigation,
arbitration or U.S. Patent and Trademark Office or other proceeding arising out
of any such alleged infringement, challenge or claim or otherwise relating to
any Mark. FRANCHISE OWNER agrees to execute any and all instruments and
documents, render such assistance, and do such acts and things as may, in the
opinion of COMPANY's counsel, be necessary or advisable to protect and maintain
the interests of COMPANY in any litigation or other proceeding or to otherwise
protect and maintain the interests of COMPANY in the Marks. COMPANY will
reimburse FRANCHISE OWNER for the reasonable out-of-pocket expenses incurred and
paid by FRANCHISE OWNER in complying with the requirements imposed by this
Paragraph, provided, however, that if any action taken by COMPANY results in any
monetary recovery for FRANCHISE OWNER (by way of counterclaim or otherwise)
which exceeds FRANCHISE OWNER's costs, then FRANCHISE OWNER must pay its own
costs and share pro rata in COMPANY's costs therefor up to the amount of
FRANCHISE OWNER's share of such recovery.
6.D. DISCONTINUANCE OF USE OF MARKS.
------------------------------
If it becomes advisable at any time in COMPANY's sole judgment for the
Store to modify or discontinue use of any Mark and/or for the Store to use one
or more additional or substitute trademarks or service marks or an additional or
substitute type of trade dress, FRANCHISE OWNER agrees to immediately comply
with COMPANY's directions to modify or otherwise discontinue the use of such
Mark, and/or to use one or more additional or substitute trademarks, service
marks, logos or commercial symbols or additional or substitute trade dress after
notice thereof by COMPANY. Neither COMPANY nor its Affiliates shall have any
obligation to reimburse FRANCHISE OWNER for any expenditures made by FRANCHISE
OWNER to modify or discontinue the use of a Mark or to adopt additional marks or
substitutes for a discontinued Mark, including, without limitation, any
expenditures relating to advertising or promotional materials or to compensate
FRANCHISE OWNER for any goodwill related to the discontinued Mark.
6.E. INDEMNIFICATION OF FRANCHISE OWNER
----------------------------------
COMPANY agrees to indemnify FRANCHISE OWNER against and to reimburse
FRANCHISE OWNER for all damages for which FRANCHISE OWNER is held liable in any
claim, action or proceeding brought by any person or entity claiming to have
trademark or other rights to any of the Marks or any name or trademark similar
thereto arising out of FRANCHISE OWNER's authorized use of the Marks, pursuant
to and in compliance with this Agreement, and for all costs reasonably incurred
by FRANCHISE OWNER in the defense of any such claim brought against FRANCHISE
OWNER or in any proceeding in which FRANCHISE OWNER
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is named as a party, provided that FRANCHISE OWNER has timely notified COMPANY
of such claim or proceeding, has given COMPANY sole control of the defense and
settlement of any such claim, has otherwise complied with the requirements of
this Agreement regarding use of the Marks, and this Agreement is in full force
and effect, and provided further, that the indemnification provided by this
Section 6.E shall not extend to any claim, action or proceeding brought by any
person or entity alleging any prior common law trademark rights.
7. COPYRIGHTS.
----------
7.A. OWNERSHIP OF COPYRIGHTED WORKS.
------------------------------
FRANCHISE OWNER and COMPANY acknowledge and agree (1) that COMPANY may
authorize FRANCHISE OWNER to use certain copyrighted or copyrightable works (the
"COPYRIGHTED WORKS"), (2) that the Copyrighted Works are the valuable property
of COMPANY or its Affiliates or, as applicable, their licensors and (3) that the
FRANCHISE OWNER's rights to use the Copyrighted Works are granted to FRANCHISE
OWNER solely on the condition that FRANCHISE OWNER complies with the terms of
this Section. FRANCHISE OWNER acknowledges and agrees that COMPANY owns or is
the licensee of the owner of the Copyrighted Works and may further create,
acquire or obtain licenses for certain copyrights in various works of authorship
used in connection with the operation of UNITS, including, but not limited to,
all categories of works eligible for protection under the United States
copyright law, all of which shall be deemed to be Copyrighted Works under this
Agreement. Such Copyrighted Works include, but are not limited to, the Store
Manuals, advertisements, promotional materials, labels, menus, posters, coupons,
gift certificates, signs and store designs, plans and specifications and may
include all or part of the Marks, Licensed Program, Trade Dress and other
portions of the System. FRANCHISE OWNER acknowledges that this Agreement does
not confer any interest in the Copyrighted Works upon FRANCHISE OWNER, other
than the right to use them in the operation of the Store in compliance with this
Agreement. If COMPANY authorizes FRANCHISE OWNER to prepare any adaptation,
translation or work derived from the Copyrighted Works, or if FRANCHISE OWNER
prepares any Copyrighted Works such as menus, advertisements, posters or
promotional material, FRANCHISE OWNER hereby agrees that such adaptation,
translation, derivative work or Copyrighted Work shall be the property of
COMPANY, and FRANCHISE OWNER hereby assigns all its right, title and interest
therein to COMPANY (or such other person identified by COMPANY). FRANCHISE
OWNER agrees to execute any documents, in recordable form, which COMPANY
determines are necessary to reflect such ownership. FRANCHISE OWNER shall
submit all such adaptations, translations, derivative works and Copyrighted
Works to COMPANY for approval prior to use.
7.B. LIMITATION ON FRANCHISE OWNER'S USE OF COPYRIGHTED WORKS.
--------------------------------------------------------
FRANCHISE OWNER acknowledges that FRANCHISE OWNER's right to use the
Copyrighted Works, as described in this Agreement, is derived solely from this
Agreement and is limited to the use of such Copyrighted Works pursuant to and in
compliance with this
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Agreement and all applicable standards, specifications, and operating procedures
prescribed by COMPANY from time to time during the term of this Agreement.
FRANCHISE OWNER shall ensure that all Copyrighted Works used hereunder shall
bear an appropriate copyright notice under the Universal Copyright Convention or
other copyright laws prescribed by COMPANY specifying that COMPANY or an
Affiliate of COMPANY is the owner of the copyrights therein. Any unauthorized
use, adaptation, publication, reproduction, preparation of derivative works,
distribution of copies (whether by sale or other transfer of ownership, or by
rental, lease or lending), or attempts to recreate all or a portion of such
Copyrighted Works shall constitute a breach of this Agreement and an
infringement of the rights of COMPANY in and to the Copyrighted Works.
7.C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS.
----------------------------------------
FRANCHISE OWNER shall immediately notify COMPANY of any actual or apparent
infringement of or challenge to any of the Copyrighted Works, or claim by any
person of any rights in the Copyrighted Works. FRANCHISE OWNER shall not
communicate with any person other than COMPANY and its counsel in connection
with any such infringement, challenge or claims. COMPANY shall have the sole
discretion to take such action as it deems appropriate in connection with the
foregoing, and the right to control exclusively any settlement, litigation,
arbitration or administrative proceeding arising out of any such alleged
infringement, challenge or claim or otherwise relating to the Copyrighted Works.
FRANCHISE OWNER agrees to execute any and all instruments and documents, render
such assistance, and do such acts and things as may, in the opinion of COMPANY's
counsel, be necessary or advisable to protect and maintain the interests of
COMPANY in any litigation or other proceeding or to otherwise protect and
maintain the interests of COMPANY in the Copyrighted Works. COMPANY will
reimburse FRANCHISE OWNER for the reasonable out-of-pocket expenses incurred and
paid by FRANCHISE OWNER in complying with the requirements imposed by this
Paragraph provided, however, that if any action taken by COMPANY results in any
monetary recovery for FRANCHISE OWNER (by way of counterclaim or otherwise)
which exceeds FRANCHISE OWNER's costs, then FRANCHISE OWNER must pay its own
costs and share pro rata in COMPANY's costs therefor up to the amount of
FRANCHISE OWNER's share of such recovery.
7.D. DISCONTINUANCE OF USE OF COPYRIGHTED WORKS.
------------------------------------------
If it becomes advisable at any time in COMPANY's sole judgment for
FRANCHISE OWNER to modify or discontinue use of any of the Copyrighted Works
and/or for FRANCHISE OWNER to use one or more additional or substitute
copyrighted or copyrightable items, FRANCHISE OWNER agrees to immediately comply
with COMPANY's directions to modify or otherwise discontinue the use of the
Copyrighted Works and/or to use any substitute materials specified by COMPANY.
Neither COMPANY nor its Affiliates shall have any obligation to reimburse
FRANCHISE OWNER for any expenditures made by FRANCHISE OWNER to modify or
discontinue the use of any Copyrighted Work or to adopt additional or substitute
copyrighted or copyrightable items.
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8. LICENSED PROGRAM AND COMPUTER SYSTEM.
------------------------------------
8.A. GRANT OF LICENSE.
----------------
COMPANY hereby grants to FRANCHISE OWNER a nonexclusive, nontransferable,
nonassignable license to use the Licensed Program, subject to the following
terms and conditions:
(1) The Licensed Program shall be installed and tested on the Computer
System by COMPANY or its designee. If FRANCHISE OWNER does not
purchase the Computer System from COMPANY, FRANCHISE OWNER must pay
COMPANY or its designee a reasonable installation and testing fee upon
completion of COMPANY's or its designee's installation and testing of
the operation of the Licensed Program with the Computer System.
FRANCHISE OWNER acknowledges and agrees that COMPANY's current
installation and testing fee of $3,500.00 is reasonable. COMPANY
agrees that the installation and testing fee applicable pursuant to
this Agreement will not exceed $3,500.
(2) Except with the prior written consent of COMPANY, the Licensed Program
(a) shall not be operated by persons other than FRANCHISE OWNER and
employees of FRANCHISE OWNER, (b) shall not be operated on equipment
other than the Computer System, (c) shall be used only in conjunction
with the Specified Software and not with any other computer
applications program, and (d) shall not be operated at locations other
than the Store and the FRANCHISE OWNER's principal office; provided,
however, that with prior notice to COMPANY, FRANCHISE OWNER may
operate the Licensed Program on equipment other than the Computer
System and at a location other than the Store and the FRANCHISE
OWNER's principal office to the extent required due to malfunction of
the Computer System or other cause beyond the reasonable control of
FRANCHISE OWNER, but not for any period longer than seven (7)
consecutive days unless otherwise agreed in writing by COMPANY.
(3) The Licensed Program shall be used in FRANCHISE OWNER's operation of
the Store and shall not be used for any other purpose.
(4) Without limiting the foregoing, FRANCHISE OWNER shall not, and shall
not allow its employees or agents to: (a) sell, assign, lease,
sublicense, pledge, grant a security interest with respect to, market
or commercially exploit, in any way, the Licensed Program or any
component thereof, or any data generated by the use of the Licensed
Program or any component of the Licensed Program; (b) disclose or
grant access to the Licensed Program, or any data generated by the use
of the Licensed Program or any component of the Licensed Program, to
any third party other than one to whom COMPANY has consented in
writing and who has agreed in writing with COMPANY to keep the
Licensed Program confidential; (c) copy or reproduce the Licensed
Program, or any data generated by the use of the Licensed Program or
any component of the Licensed Program, in any manner,
24
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except to the extent necessary for normal back-up and operating
thereof; or (d) alter, modify or adapt the Licensed Program, any
documentation relating thereto or any component of the Licensed
Program, including, but not limited to, by translating, decompiling,
reverse engineering or disassembling the Licensed Program.
(5) FRANCHISE OWNER acknowledges and agrees that the Licensed Program and
any data generated by the use of the Licensed Program is the valuable,
proprietary property and trade secret of COMPANY or, as applicable,
COMPANY's licensor and FRANCHISE OWNER agrees to use the utmost care
to safeguard the Licensed Program and any data generated by the use of
the Licensed Program and to maintain the copyright protection and the
secrecy and confidentiality thereof. FRANCHISE OWNER shall not
undertake to patent, copyright or otherwise assert proprietary rights
to the Licensed Program and any data generated by the use of the
Licensed Program or any portion thereof. FRANCHISE OWNER recognizes
that all or part of the Licensed Program and any data generated by the
use of the Licensed Program may be copyrighted and agrees that this
shall not be construed as causing the copyrighted material to be
public information. FRANCHISE OWNER will ensure that all copies of
the Licensed Program and any data generated by the use of the Licensed
Program or any components of the Licensed Program in its possession
contain an appropriate copyright notice under the Universal Copyright
Convention or other notice of proprietary rights specified by COMPANY.
(6) FRANCHISE OWNER shall promptly disclose to COMPANY all ideas and
suggestions for modifications or enhancements of the Licensed Program
conceived or developed by or for FRANCHISE OWNER, and COMPANY and its
Affiliates shall have the right to use and license such ideas and
suggestions. All modifications and enhancements made to the Licensed
Program together with the copyright therein shall be the property of
COMPANY, without regard to the source of the modification or
enhancement, and FRANCHISE OWNER hereby assigns all of its right,
title, and interest in any ideas, modifications, and enhancements to
COMPANY. FRANCHISE OWNER agrees to execute any document, in
recordable form, which COMPANY determines is necessary to reflect such
ownership.
(7) COMPANY or its designee shall have the right at all times to access
the Licensed Pro gram and to retrieve, analyze and use all data in the
files of FRANCHISE OWNER for the Licensed Program.
(8) COMPANY or its designee shall provide to FRANCHISE OWNER all upgrades,
modifications, improvements, enhancements, extensions and other
changes to the Licensed Program approved by COMPANY for use in
connection with the operation of UNITS and FRANCHISE OWNER shall
promptly implement their use.
25
<PAGE>
(9) Upon expiration or termination of this Agreement, FRANCHISE OWNER
shall allow COMPANY's or its designee's employees or agents to remove
the Licensed Program from the Computer System, shall immediately
return the Licensed Program, each component thereof, and any data
generated by the use of the Licensed Program to COMPANY or its
designee, and shall immediately destroy any and all back-up or other
copies of the Licensed Program or parts thereof, documentation for the
Licensed Program and any data generated by the use of the Licensed
Program, and other materials or information which relate to or reveal
the Licensed Program and its operation and any data generated by the
use of the Licensed Program.
8.B. SOFTWARE LICENSE FEE.
--------------------
FRANCHISE OWNER agrees to pay to COMPANY or its designee upon installation
of the Licensed Program on FRANCHISE OWNER's Computer System, a software license
fee (the "Software License Fee") in the amount of Fifteen Thousand Dollars
($15,000.00). The Software License Fee shall be fully earned by COMPANY or its
designee upon installation of the Licensed Program on the Computer System and is
non-refundable in whole or in part.
8.C. SOFTWARE SUPPORT SERVICE.
------------------------
During the term of this Agreement and, provided that FRANCHISE OWNER is in
compliance with the terms of this Agreement, COMPANY or its designee shall
provide to FRANCHISE OWNER such support services as COMPANY deems reasonably
necessary to cause the Licensed Program to perform on the Computer System in
accordance with the standards for the Licensed Program as specified from time to
time by COMPANY, provided, however, that in no event will such support services
be less than COMPANY or its designee provides to COMPANY-operated UNITS. Such
support services shall not extend to error corrections, operational support and
assistance resulting from FRANCHISE OWNER's use or operation of software which
is not authorized by this Agreement for use on the Computer System, (b) software
training or (c) hardware maintenance such support service shall include non-
procedure Help Desk calls. All procedural Help Desk calls will be handled by
COMPANY for an additional fee of $25 per call.
8.D. SOFTWARE SUPPORT SERVICE FEE.
----------------------------
For the software support service provided to FRANCHISE OWNER, as described
above, FRANCHISE OWNER agrees to pay to COMPANY or its designee a periodic
software support service fee ("Software Support Fee") in the amount of Four
Hundred Dollars ($400.00). Such fee shall be payable in advance for each
Accounting Period on or before the eighth (8th) day prior to commencement of
such period commencing on the installation of the Licensed Program on the
Computer System. The Software Support Fee may be increased by COMPANY from time
to time, at its sole option, upon written notice to FRANCHISE OWNER.
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<PAGE>
8.E. MODIFICATION, ENHANCEMENT,
AND REPLACEMENT OF COMPUTER SYSTEM,
LICENSED PROGRAM AND SPECIFIED SOFTWARE.
---------------------------------------
FRANCHISE OWNER acknowledges that COMPANY may, during the term of this
Agreement, require FRANCHISE OWNER to modify, enhance and/or replace all or any
part of the Computer System, the Licensed Program and/or the Specified Software
at FRANCHISE OWNER's expense, and agrees, within sixty (60) days of receipt of
notice from COMPANY, to acquire, or acquire the right to use for the remainder
of the term of this Agreement and implement, the modified, enhanced or
replacement version of the Computer System, the Licensed Program and/or the
Specified Software specified by COMPANY and to take any and all other actions as
may be necessary to enable them, as modified, enhanced or replaced, to operate
as specified by COMPANY. Any such modifications, enhancements, and replacements
may require FRANCHISE OWNER to incur costs to purchase, lease and/or license new
or modified computer hardware and/or software or other equipment and to obtain
different and/or additional service and support services during the term of this
Agreement. FRANCHISE OWNER acknowledges that COMPANY cannot estimate the costs
of such future enhancements, modifications, and replacements and that such costs
may not be fully amortizable over the remaining term of the Franchise Agreement.
Nonetheless, FRANCHISE OWNER agrees to incur such costs, where directed by
COMPANY to do so, provided that the COMPANY is then currently specifying the
same enhancements, modifications, and replacements for use in COMPANY-operated
UNITS.
8.F. WARRANTIES AND LIMITATION OF LIABILITY.
--------------------------------------
COMPANY represents and warrants to FRANCHISE OWNER that: (1) COMPANY has
the right to license the Licensed Program to FRANCHISE OWNER, as set forth in
this Agreement; and (2) to the best of COMPANY's knowledge the Licensed Program
does not, and as a result of any enhancements, improvements or modifications
provided by COMPANY, will not, to the best of COMPANY's knowledge, infringe upon
any United States patent, copyright or other proprietary right of any third
party. In the event FRANCHISE OWNER's use of the Licensed Program as required
by COMPANY is enjoined as a result of a claim by a third party of patent or
copyright infringement or violation of proprietary rights, COMPANY shall, in its
sole discretion, either (i) procure for FRANCHISE OWNER the right to continue
use of the Licensed Program as contemplated hereunder, or (ii) replace the
Licensed Program or modify it such that there is no infringement of the third
party's rights. Such action by COMPANY shall be FRANCHISE OWNER's sole and
exclusive remedy against COMPANY in such event.
Neither COMPANY nor its designee represents or warrants to FRANCHISE OWNER,
and expressly disclaims any warranty, that the Licensed Program is error-free or
that the operation and use of the Licensed Program by FRANCHISE OWNER will be
uninterrupted or error-free. Neither COMPANY nor its designee shall have any
obligation or liability for any expense or loss incurred by FRANCHISE OWNER
arising from use of the Licensed Program in conjunction with any other computer
program not authorized by COMPANY.
27
<PAGE>
EXCEPT FOR THE ABOVE EXPRESS LIMITED WARRANTIES, COMPANY AND/OR ITS
DESIGNEE MAKE NO WARRANTIES, EXPRESS OR IMPLIED, ORAL OR WRITTEN, WITH RESPECT
TO THE LICENSED PROGRAM, PROGRAM DOCUMENTATION, OR ANY OTHER MATERIAL FURNISHED
HEREUNDER, OR ANY COMPONENT THEREOF AND THERE ARE EXPRESSLY EXCLUDED ALL
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT
THERETO.
8.G. SUBCOMPONENT LICENSES AND THIRD-PARTY LICENSES.
----------------------------------------------
FRANCHISE OWNER acknowledges that the Licensed Program contains third-party
components and subcomponents which COMPANY has the authority to license to
FRANCHISE OWNER as part of the Licensed Program pursuant to and in accordance
with software license agreements with third-party vendors (collectively, the
"Component Licenses"). In addition, FRANCHISE OWNER acknowledges that
acquisitions by FRANCHISE OWNER of all or portions of the Computer System and
the Specified Software from or through the COMPANY are governed by license or
other agreements by and between third-party vendors and COMPANY, which
agreements specifically permit COMPANY to sell and/or sublicense all or portions
of the Computer System and the Specified Software to FRANCHISE OWNER or
specifically require FRANCHISE OWNER to agree to be bound by the terms thereof
(either type of license hereinafter referred to as the "Third Party Licenses").
FRANCHISE OWNER therefore hereby agrees to be bound by the terms of each
Component License and each relevant Third Party License, in each case as if
FRANCHISE OWNER was a party thereto, and agrees that the vendors and licensors
of all or portions of the Specified Software and the Computer System and the
licensors of all or portions of the Licensed Program (collectively, the
"Vendors") are third-party beneficiaries of this Agreement with full rights to
enforce their respective rights under this Section 8 of this Agreement.
FRANCHISE OWNER further agrees to indemnify and hold harmless COMPANY and each
of the Vendors from and against all costs, expenses, and damages arising out of
or based upon any breach or claim of a breach of this Agreement, the Third Party
Licenses or Component Licenses by FRANCHISE OWNER, its directors, officers,
employees, agents and owners.
9. CONFIDENTIAL INFORMATION
------------------------
COMPANY or its licensors, as applicable, possess and may further develop
and acquire certain confidential and proprietary information and trade secrets
including, but not limited to, the following categories of information, methods,
techniques, procedures and knowledge developed or to be developed by COMPANY,
its consultants or contractors, its Affiliates or its designees, and/or
franchise owners and developers (the "CONFIDENTIAL INFORMATION"):
(1) methods, techniques, equipment, specifications (including Design
Specifications), standards, policies, procedures, information, concepts and
systems relating to and knowledge of and experience in the development,
operation and franchising of UNITS; and
(2) marketing and promotional programs for UNITS; and
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(3) knowledge concerning the logic, structure and operation of
computer software programs which COMPANY authorizes for use in connection
with the operation of UNITS (including, without limitation, the Licensed
Program) and all additions, modifications and enhancements thereof, and all
data generated from use of such programs and the logic, structure and
operation of the data base file structures containing such data and all
additions, modifications and enhancements thereof; and
(4) sales data and information concerning consumer preferences and
inventory requirements for Products, materials and supplies, and
specifications for and knowledge of suppliers of certain materials,
equipment and fixtures for UNITS; and
(5) ingredients, formulas, mixes, spices, seasonings, recipes for,
and methods of preparation, baking, cooking, freezing, serving, packaging,
catering and delivery of, Products and other items sold at UNITS; and
(6) information concerning customers, customer lists, Product sales,
operating results, financial performance and other financial data of UNITS;
and
(7) the Store Manuals and the Development Manual (defined in the
Development Agreement); and
(8) employee selection procedures, training and staffing levels.
COMPANY will disclose to FRANCHISE OWNER such parts of the Confidential
Information as COMPANY deems necessary or advisable from time to time in its
sole discretion for the operation of a Store during training, and in guidance
and assistance furnished to FRANCHISE OWNER during the term of the Franchise,
and FRANCHISE OWNER may learn or otherwise obtain from COMPANY and its
Affiliates and other licensors of components or elements of the System, other
developers and other franchise owners additional Confidential Information of
COMPANY during the term of the Franchise. FRANCHISE OWNER acknowledges and
agrees that neither FRANCHISE OWNER nor any other person or entity will acquire
by or through FRANCHISE OWNER any interest in or right to use the Confidential
Information other than the FRANCHISE OWNER's right to utilize it in the
operation of the Store pursuant to this Agreement, and that the use or
duplication of the Confidential Information in any other business would
constitute an unfair method of competition with COMPANY and other UNIT
developers and franchise owners. FRANCHISE OWNER agrees to disclose the
Confidential Information to its Owners and to employees of the Store only to the
extent reasonably necessary for the operation of the Store and only if such
individuals have agreed to maintain such information in confidence in an
agreement enforceable by COMPANY.
FRANCHISE OWNER acknowledges and agrees that the Confidential Information
is confidential to and a valuable asset of COMPANY or its licensors, if
applicable, is proprietary, includes trade secrets of COMPANY, and is disclosed
to FRANCHISE OWNER solely on the condition that FRANCHISE OWNER, its Owners and
its employees who have access to the Confidential Information agree, and
FRANCHISE OWNER does hereby agree, that, during and after the term of this
Agreement, FRANCHISE OWNER, its Owners and such employees:
29
<PAGE>
(a) will not use the Confidential Information in any other business
or capacity (unless in the case of the Licensed Program, separately
licensed by the owner thereof); and
(b) will maintain the absolute secrecy and confidentiality of the
Confidential Information; and
(c) will not make unauthorized copies of any portion of the
Confidential Information disclosed in written or other tangible form; and
(d) will adopt and implement all reasonable procedures prescribed
from time to time by COMPANY to prevent unauthorized use or disclosure of
or access to the Confidential Information, including, without limitation,
requiring employees and Owners who will have access to such information to
execute non-competition and confidentiality agreements in the form attached
hereto as Exhibit H (the "CONFIDENTIALITY AND NON-COMPETITION AGREEMENT").
---------
FRANCHISE OWNER shall provide COMPANY, at its request, executed originals
of each such Confidentiality and Non-Competition Agreement.
Notwithstanding the foregoing and any other provision of this Agreement,
FRANCHISE OWNER may use the Confidential Information in connection with the
operation of other UNITS (in addition to the Store) pursuant to other franchise
agreements with COMPANY.
Notwithstanding anything to the contrary contained in this Agreement and
provided FRANCHISE OWNER shall have obtained COMPANY's prior written consent,
the restrictions on FRANCHISE OWNER's disclosure and use of the Confidential
Information shall not apply to the following:
(i) information, methods, procedures, techniques and knowledge which
are or become generally known in the food service business in the
Territory, other than through disclosure (whether deliberate or
inadvertent) by FRANCHISE OWNER or any other party having an obligation of
confidentiality to COMPANY; and
(ii) the disclosure of the Confidential Information in judicial or
administrative proceedings to the extent that FRANCHISE OWNER is legally
compelled to disclose such information, provided FRANCHISE OWNER has
notified COMPANY prior to disclosure and shall have used its best efforts
to obtain, and shall have afforded COMPANY the opportunity to obtain, an
appropriate protective order or other assurance satisfactory to COMPANY of
confidential treatment for the information required to be so disclosed.
FRANCHISE OWNER agrees to disclose to COMPANY all ideas, concepts, methods,
techniques and products conceived or developed by FRANCHISE OWNER, its
affiliates, Owners or employees during the term of this Agreement relating to
the development and operation of UNITS, provided that FRANCHISE OWNER will not
be obligated to make such disclosures if doing so would violate any contractual
obligations of FRANCHISE OWNER (or DEVELOPER, if applicable) which:
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(A) arose prior to DEVELOPER's execution of the Development Agreement
(or, if there is no Development Agreement, then which arose prior to
FRANCHISE OWNER's execution of this Agreement); and
(B) DEVELOPER disclosed to COMPANY in writing prior to or upon
execution of the Development Agreement.
FRANCHISE OWNER hereby grants to COMPANY and agrees to procure from its
Affiliates, Owners or employees a perpetual, non-exclusive, and worldwide right
to use any such ideas, concepts, methods, techniques and products in all food
service businesses operated by COMPANY or its Affiliates, franchisees and
designees. COMPANY shall have no obligation to make any lump sum or on-going
payments to FRANCHISE OWNER with respect to any such ideas, concepts, methods,
techniques or products. FRANCHISE OWNER agrees that FRANCHISE OWNER will not use
nor will it allow any other person or entity to use any such concept, method,
technique or product without obtaining COMPANY's prior written approval.
10. EXCLUSIVE RELATIONSHIP.
----------------------
FRANCHISE OWNER acknowledges and agrees that COMPANY would be unable to
protect the Confidential Information against unauthorized use or disclosure and
would be unable to encourage a free exchange of ideas and information among
franchise owners and developers of UNITS if franchise owners, developers and
their Principal Owners (and members of their Immediate Families) were permitted
to engage in, hold interests in or perform services for Competitive Businesses.
FRANCHISE OWNER further acknowledges and agrees that the restrictions contained
in this Section 10 will not hinder its activities or the activities of its
Principal Owners (or member of their Immediate Families) under this Agreement or
in general. COMPANY has entered into this Agreement with FRANCHISE OWNER on the
express condition that, with respect to the operation of food service businesses
that sell Products, FRANCHISE OWNER and its Principal Owners and members of
their respective Immediate Families will deal exclusively with COMPANY.
FRANCHISE OWNER therefore agrees that during the term of this Agreement, neither
FRANCHISE OWNER nor any Principal Owner of FRANCHISE OWNER, nor any member of
the Immediate Family of FRANCHISE OWNER or of any Principal Owner, shall
directly or indirectly:
(a) have any interest as a record or beneficial owner in any
Competitive Business (this restriction shall not be applicable to the
ownership of shares of a class of securities listed on a stock exchange or
traded on the over-the-counter market and quoted on a national inter-dealer
quotation system that represent less than three percent (3%) of the number
of shares of that class of securities issued and outstanding);
(b) perform services as a director, officer, manager, employee,
consultant, representative, agent, or otherwise for any Competitive
Business; or
(c) divert or attempt to divert any business or any customers of
any UNIT to any Competitive Business.
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FRANCHISE OWNER also agrees that, during the term of this Agreement, neither
FRANCHISE OWNER nor any Principal Owner of FRANCHISE OWNER, nor any member of
the Immediate Family of FRANCHISE OWNER or a Principal Owner shall directly or
indirectly employ or seek to employ any person who is employed by COMPANY, its
Affiliates or by any other developer or franchise owner of UNITS, nor induce any
such person to leave said employment without the prior written consent of such
person's employer.
Furthermore, if FRANCHISE OWNER is a corporation, limited liability company
or partnership, it will not engage in any business or other activity, directly
or indirectly, other than the development and operation of the Store and other
UNITS developed and operated pursuant to other agreements with COMPANY.
FRANCHISE OWNER acknowledges and agrees that the failure of any person or
entity restricted pursuant to this Section 10 to comply with the restrictions of
this Section 10 (regardless of whether that person or entity actually has
executed this Agreement or a Confidentiality and Non-Competition Agreement)
shall constitute a breach of this Agreement.
The restrictions of this Section 10 shall not be construed to prohibit
FRANCHISE OWNER, any Principal Owner of FRANCHISE OWNER, or any member of the
Immediate Family of FRANCHISE OWNER or its Principal Owners from having a direct
or indirect ownership interest in any UNIT, development agreements or franchise
agreements for the development or operation of UNITS, or any entity owning,
controlling or operating UNITS, or from providing services to any such UNITS
pursuant to other agreements with COMPANY. Furthermore, the restrictions of
this Section 10 shall not prohibit FRANCHISE OWNER, any Principal Owner, or any
member of the Immediate Family of FRANCHISE OWNER or a Principal Owner (to the
extent any such person is an individual) from performing services for or having
an ownership interest in a Permitted Competitive Business, or from conducting
customary promotion and advertising of a Permitted Competitive Business. Such
person(s) and business(es), if any, are identified in Exhibit D attached to this
---------
Agreement.
11. FEES.
----
11.A. INITIAL FRANCHISE FEE.
---------------------
FRANCHISE OWNER agrees to pay to COMPANY upon execution of this Agreement
an initial franchise fee (the "INITIAL FRANCHISE FEE") in the amount of Thirty-
Five Thousand Dollars ($35,000.00). The Initial Franchise Fee (and any deposits
applicable thereto under the Development Agreement) shall be fully earned by
COMPANY upon the earlier of payment thereof or execution of this Agreement. The
Initial Franchise Fee is non-refundable in whole or in part and is paid to
compensate COMPANY for various services provided to FRANCHISE OWNER, including
but not limited to providing initial training, furnishing plans and
specifications for the Store and inspecting the Store prior to opening. The
Initial Franchise Fee is not compensation for the use of the Marks or the
Copyrighted Works.
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11.B. ROYALTY FEE.
-----------
FRANCHISE OWNER agrees to pay to COMPANY a continuing royalty fee (the
"ROYALTY FEE") in an amount equal to eight percent (8%) of the Store's Royalty
Base Revenue (as defined in Paragraph C of this Section). The Royalty Fee shall
be payable to COMPANY on or before the twentieth (20th) day of each Accounting
Period based on the Store's Royalty Base Revenue for the immediately preceding
Accounting Period. The Royalty Fee is paid, in part, to compensate COMPANY for
various services provided to FRANCHISE OWNER after the Store opens, including,
but not limited to, quality, service, and cleanliness inspections. COMPANY, upon
written notice to FRANCHISE OWNER shall have the right to change the timing of
FRANCHISE OWNER's payments of Royalty Fees and Marketing Contributions (as
defined below) due under this Agreement, provided that COMPANY shall make such
payments due no more frequently than twice each Accounting Period. FRANCHISE
OWNER shall not subordinate to any other obligation its obligation to pay the
Royalty Fee or any other fee or charge hereunder. Each payment of Royalty Fees
shall be accompanied by a report, in a form approved by COMPANY, reflecting the
calculation of the amount of the Royalty Fee remitted, the amount of Local
Expenditures (defined below) for the period covered as well as such other
information as COMPANY requires from time to time (a "Royalty Reporting Form").
11.C. DEFINITION OF "ROYALTY BASE REVENUE".
-----------------------------------
As used in this Agreement, the term "ROYALTY BASE REVENUE" shall mean and
include the gross revenue from all sales of Products and all other products and
services sold or performed by or for FRANCHISE OWNER or the Store in, at, from,
or away from the Store, or through or by means of the business conducted
pursuant to this Agreement, whether for cash or credit, including any assumed
gross revenue calculated for the purpose of an insurance claim for lost profits
to the extent such claim is paid by the insurer, but excluding: (1) all sales
or service taxes collected from customers and paid or payable to the appropriate
taxing authority; (2) all customer refunds, valid discounts and coupons, and
credits made by the Store (such exclusions shall not include any reductions for
credit card user fees, returned checks or reserves for bad credit or doubtful
accounts); (3) any portion of employee meals for which FRANCHISE OWNER does not
charge the employee; and (4) any monies received by the Store from other UNITS
as a result of and directly attributable to any approved Commissary operated out
of the Store.
11.D. INTEREST ON LATE PAYMENTS.
-------------------------
All fees and other amounts which FRANCHISE OWNER owes to COMPANY or its
Affiliates, shall bear interest after due date for the number of days which such
payment is overdue at a rate equal to the lesser of: (1) eighteen percent (18%)
per annum; or (2) the highest legal rate permitted by applicable law. FRANCHISE
OWNER acknowledges that this Paragraph shall not constitute COMPANY's agreement
to accept such payments after same are due or a commitment by COMPANY to extend
credit to, or otherwise finance FRANCHISE OWNER's operation of the Store.
Further, FRANCHISE OWNER acknowledges that failure to pay all such amounts when
due shall, notwithstanding the provisions of this Paragraph, constitute grounds
for termination of this Agreement, as provided in this Agreement.
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11.E. APPLICATION OF PAYMENTS.
-----------------------
Notwithstanding any designation by FRANCHISE OWNER, COMPANY shall have sole
discretion to apply any payments received from FRANCHISE OWNER or any
indebtedness of COMPANY to FRANCHISE OWNER, to any past due indebtedness, of
whatever nature, of FRANCHISE OWNER to COMPANY or its Affiliates.
11.F. ELECTRONIC FUNDS TRANSFER.
-------------------------
COMPANY reserves the right to require FRANCHISE OWNER to remit fees and
other amounts due to COMPANY hereunder via electronic funds transfer or other
similar means utilizing the Computer System or otherwise. If COMPANY notifies
FRANCHISE OWNER to use such payment method, FRANCHISE OWNER agrees to comply
with procedures specified by COMPANY and/or perform such acts and deliver and
execute such documents, including authorization (in the form attached hereto as
Exhibit I or such other form as COMPANY shall accept) for direct debits from
- ---------
FRANCHISE OWNER's business bank operating account, as may be necessary to assist
in or accomplish payment by such method. Under this procedure FRANCHISE OWNER
shall authorize COMPANY to initiate debit entries and/or credit correction
entries to a designated checking or savings account for payments of fees and
other amounts payable to COMPANY and its Affiliates and any interest charges due
thereon. FRANCHISE OWNER shall make the funds available to COMPANY for
withdrawal by electronic transfer no later than the due date for payment
therefor. If FRANCHISE OWNER has not timely reported the Store's Royalty Base
Revenue to COMPANY for any reporting period, then COMPANY shall be authorized,
at COMPANY's option, to debit FRANCHISE OWNER's account in an amount equal to
(a) the fees transferred from FRANCHISE OWNER's account for the last reporting
period for which a report of the Store's Royalty Base Revenue was provided to
COMPANY as required hereunder or (b) the amount due based on information
retrieved from the Computer System.
12. STORE IMAGE AND OPERATION.
-------------------------
12.A. CONDITION AND APPEARANCE OF THE STORE.
-------------------------------------
FRANCHISE OWNER agrees that:
(1) neither the Store nor the Site will be used for any purpose
other than the operation of a UNIT in full compliance with this Agreement;
and
(2) FRANCHISE OWNER will maintain the condition and appearance of
the Store, its equipment, furnishings, fixtures, signs and vehicles in
accordance with the specifications and standards of COMPANY and consistent
with the image of a UNIT as a first-class, clean, sanitary, attractive and
efficiently operated food service business; and
(3) FRANCHISE OWNER will perform such maintenance (including,
without limitation, maintenance procedures and routines which COMPANY
prescribes from time to time) with respect to the decor, equipment,
fixtures, furnishings, vehicles, and signs
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of the Store and the Site, as may be required or directed by COMPANY from
time to time to maintain such condition, appearance, and efficient
operation, including, without limitation:
(a) continuous and thorough cleaning and sanitation of the
interior and exterior of the Store; and
(b) thorough repainting and redecorating of the interior and
exterior of the Store and/or the Site at reasonable intervals; and
(c) interior and exterior repair of the Store and/or the
Site; and
(d) repair or replacement of damaged, worn out or obsolete
furnishings, equipment, vehicles, fixtures and signs; and
(4) FRANCHISE OWNER will not make any material alterations to the
Site, or to the appearance of the Store as originally developed, without
the prior approval of COMPANY; and
(5) subject to approval by COMPANY of plans, layouts and designs,
FRANCHISE OWNER will remodel, expand, redecorate, re-equip and refurnish
the Site and the Store at reasonable intervals determined by COMPANY to
reflect changes in the appearance and operation of UNITS prescribed by
COMPANY and required of new UNIT franchise owners, provided that:
(a) COMPANY has initiated a program to begin such changes
with respect to other UNITS operated within the Marketing Area, to the
extent COMPANY has the contractual right to require any such UNITS to
do so; and
(b) FRANCHISE OWNER shall have a reasonable time period
remaining in the term of this Agreement (not less than five (5) years)
to amortize the costs of such improvements, or equipment (excluding
the Computer System, Licensed Program and/or Specified Software),
vehicles, fixtures and furnishings;
it being understood and agreed by FRANCHISE OWNER that the provision of
Delivery Service from the Store and/or Catering Service from a Catering
Facility, if authorized or required by COMPANY, may require FRANCHISE OWNER
to incur additional costs to obtain equipment, vehicles, fixtures,
furnishings and furniture and improve the Store to provide such services in
accordance with COMPANY's standards and specifications therefor; and
(6) FRANCHISE OWNER will place or display at the Store (interior and
exterior) only such signs, emblems, lettering, logos, and display and
advertising materials that are from time to time approved by COMPANY.
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In addition to any other remedies available to COMPANY, if FRANCHISE OWNER
does not maintain the condition and appearance of the Store as herein required,
COMPANY may, upon not less than ten (10) days' written notice (or, in cases of
health or sanitation hazards or other public endangerment, as determined by
COMPANY, in its sole discretion, immediately on oral or written notice) to
FRANCHISE OWNER:
(i) arrange for the necessary cleaning or sanitation, repair,
remodeling, upgrading, painting or decorating; or
(ii) replace, as necessary, fixtures, furnishings, equipment,
vehicles, or signs.
FRANCHISE OWNER shall pay the entire cost thereof on or before the fifth (5th)
day following the receipt of a bill for such work from COMPANY.
12.B. STORE MENU AND SERVICES.
-----------------------
FRANCHISE OWNER agrees that the Store shall (1) offer for sale all Products
and all promotional and related items (for example, T-shirts, cups, mugs, caps,
hats and similar items) as may be directed by COMPANY from time to time (and no
other products) and (2) provide only the following services (and no other
services): (a) the carry-out service and on-premises dining that COMPANY
authorizes and requires, (b) the Delivery Service that COMPANY, in its sole
discretion, may authorize and/or require from time to time for the Store
pursuant to a Delivery Rider and (c) the Catering Service that COMPANY in its
sole discretion may authorize and/or require from time to time to provide from
the Store (or a Catering Facility) pursuant to a Catering Rider, all in
accordance with COMPANY's specifications, standards and procedures. FRANCHISE
OWNER agrees that the Store shall not under any circumstances offer for sale or
sell any products or services at or from the Store which have not been approved
by COMPANY prior to such offer or sale. FRANCHISE OWNER also acknowledges and
agrees that the preparation and packaging of Products for purposes of carry-out
service, on-premises dining, Delivery Service and Catering Service is important
to the image of the System, and that, therefore, FRANCHISE OWNER shall not sell
any Products that have not been prepared and packaged in accordance with
COMPANY's specifications, standards and procedures prescribed in the Store
Manuals or otherwise in writing. FRANCHISE OWNER also acknowledges and agrees
that if COMPANY requires the Store to offer new or substitute products or
services not currently offered at UNITS, FRANCHISE OWNER agrees to offer such
services and/or products in compliance with COMPANY's specifications, standards
and procedures and to diligently pursue obtaining any permits and take such
actions (including, without limitation, constructing improvements and acquiring
fixtures, furnishings, equipment, supplies and materials) required to offer such
products and/or services. FRANCHISE OWNER acknowledges and understands that
such modifications to the services and/or products to be offered by the Store
may require FRANCHISE OWNER to incur additional costs and expenses to operate
the Store, including, without limitation, the purchase and/or lease of
additional or substitute furnishings, furniture, fixtures, vehicles or equipment
for Catering Service and/or Delivery Service, and FRANCHISE OWNER agrees to
incur such expenses in connection therewith.
36
<PAGE>
FRANCHISE OWNER acknowledges that COMPANY may conduct quality, service,
cleanliness, and other inspections of the Store from time to time without notice
to FRANCHISE OWNER to determine compliance with this Agreement and the standards
and specifications applied by COMPANY from time to time and that performance
meeting COMPANY's standards in such inspections is required hereunder. COMPANY
also may designate an independent evaluation service to conduct a "mystery
shopper" quality control and evaluation program with respect to COMPANY-owned
and/or franchised UNITS. FRANCHISE OWNER agrees that the Store will participate
in such mystery shopper program, as prescribed and required by COMPANY, provided
that COMPANY-owned and franchised UNITS also will participate in such program to
the extent COMPANY has the right to require such participation. FRANCHISE OWNER
agrees to timely pay the then-current charges imposed by such evaluation service
for the Store's participation in such program.
12.C. APPROVED PRODUCTS, DISTRIBUTORS AND SUPPLIERS.
---------------------------------------------
The reputation and goodwill of all UNITS are based upon, and can only be
maintained by, the sale of distinctive, high-quality Products, and the
presentation, packaging and service of Products in an efficient and appealing
manner. COMPANY has developed and shall continue to develop certain proprietary
food products which will be prepared by or for COMPANY according to COMPANY's
proprietary recipes and formulas. COMPANY also has developed and may continue to
develop standards and specifications for bagels and other food products,
ingredients, spreads, seasonings, spices, mixes, teas, coffees and other
beverages, materials and supplies incorporated in or used in the preparation,
freezing, baking, cooking, serving, packaging, catering and delivery of prepared
food products authorized for sale at or from UNITS.
COMPANY has approved and shall review and continue to approve suppliers and
distributors of the foregoing products, supplies and materials that meet its
standards and requirements including, without limitation, standards and
requirements relating to quality, quantity and portions, prices, volume
capability, frequency of delivery, distribution methods and locations, standards
of service, including prompt attention to complaints, consistency, reliability,
financial capability, labor and customer relations and other criteria.
FRANCHISE OWNER agrees that the Store shall:
(1) purchase those Products which are COMPANY's private label food
products, materials, supplies and proprietary food products developed by or
for COMPANY or its Affiliates whether or not pursuant to a special recipe
or formula or bearing the Marks (collectively "PROPRIETARY ITEMS") only
from COMPANY or designees required and licensed by COMPANY to manufacture,
prepare, distribute and/or sell such products;
(2) purchase only from distributors and suppliers approved or
required by COMPANY all other goods and items authorized to be sold in the
Store, and other materials and supplies used in the preparation, freezing,
baking, cooking, serving, packaging, delivery and catering of Products and
equipment, menus, forms, paper and
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plastic products, packaging or other materials (collectively "SUPPLIES AND
MATERIALS"); and
(3) purchase only from distributors and suppliers approved or
required by COMPANY all Products other than Proprietary Items ("NON-
PROPRIETARY PRODUCTS").
COMPANY may, in its sole discretion, designate which Products constitute
Proprietary Items, and which of such Proprietary Items: (a) are required to be
purchased from COMPANY or its designated suppliers; or (b) may be produced
and/or prepared at the Store. COMPANY may from time to time modify the list of
approved or required suppliers and distributors, and may designate itself or an
Affiliate as a required manufacturer, supplier and/or distributor of certain
equipment, products, materials, supplies or other items. FRANCHISE OWNER shall
not, after receipt in writing of such modification, reorder any product from any
supplier or distributor that is no longer approved. COMPANY may approve or
require a single distributor or supplier for any products, materials or supplies
and may approve or require a distributor or supplier only as to certain
products, materials and supplies, and such approval may be temporary pending a
further evaluation of such distributor or supplier by COMPANY. COMPANY may
concentrate purchases with one or more distributors or suppliers to obtain lower
prices and/or advertising support and/or services for the benefit of the System
and/or UNITS. COMPANY may establish COMPANY or Affiliate-owned and operated food
commissaries and distribution facilities which COMPANY may designate as an
approved or required distributor or supplier.
FRANCHISE OWNER shall notify COMPANY and submit to COMPANY such
information, specifications and samples as COMPANY requests if the FRANCHISE
OWNER proposes to purchase any Products or Supplies and Materials from a
distributor or supplier whom COMPANY has disapproved or not previously approved.
COMPANY shall use its reasonable best efforts to notify FRANCHISE OWNER within
one hundred twenty (120) days after receipt of all requested information and
materials whether FRANCHISE OWNER is authorized to purchase such products from
such distributor or supplier. If FRANCHISE OWNER fails to receive a notice of
approval or disapproval within such one hundred twenty (120) day period,
FRANCHISE OWNER may not purchase such products from such distributor or
supplier. COMPANY may require FRANCHISE OWNER to reimburse COMPANY for its
reasonable costs incurred in connection with the evaluation, inspection and
supervision of such distributor or supplier.
FRANCHISE OWNER shall at all times maintain an adequate inventory of
approved food and paper products, beverages, ingredients and other products
sufficient in quality and variety to realize the full potential of the Store.
FRANCHISE OWNER acknowledges and agrees that COMPANY may, in its sole
discretion, collect and retain all allowances, benefits, credits, monies,
payments or rebates (collectively "PROMOTIONAL ALLOWANCES") offered to FRANCHISE
OWNER or COMPANY or its Affiliates by manufacturers, suppliers and distributors
for promotional or advertising purposes based upon FRANCHISE OWNER's purchases
of Proprietary Items, Supplies and Materials and Non-Proprietary Products.
FRANCHISE OWNER assigns to COMPANY or its designee all of FRANCHISE OWNER's
right, title and interest in and to any and all such Promotional
38
<PAGE>
Allowances and authorizes COMPANY or its designee to collect any such
Promotional Allowances for remission to: (a) the Marketing Fund (defined below)
to the extent based on FRANCHISE OWNER's purchase of Non-Proprietary Products
and Supplies and Materials, except as provided in clause (b) following; and (b)
the general operating funds of COMPANY to the extent based on FRANCHISE OWNER's
purchases of Proprietary Items, regardless of where purchased, as well as Non-
Proprietary Products and Supplies and Materials purchased from COMPANY or its
Affiliates. FRANCHISE OWNER acknowledges and agrees that under no circumstances
will COMPANY or its Affiliates be required to contribute to the Marketing Fund
any revenue made or collected by COMPANY or its Affiliates from sales to or
purchases by FRANCHISE OWNER of any goods or services.
12.D. SPECIFICATIONS, STANDARDS AND PROCEDURES.
----------------------------------------
FRANCHISE OWNER acknowledges that the operation of the Store in strict
compliance with COMPANY's high standards is important to COMPANY and other UNITS
and FRANCHISE OWNER agrees to maintain such high standards in the operation of
the Store. The Store and all Products used and offered for sale at the Store
shall at all times be maintained in a safe and sanitary condition. FRANCHISE
OWNER agrees to comply strictly with all of COMPANY's mandatory specifications,
standards and operating procedures relating to the appearance, function,
cleanliness, days and hours of operation (days and hours of operation may vary
somewhat among UNITS based on COMPANY's reasonable judgment of the requirements
of the Store's trade area and whether COMPANY has approved any special services
to be offered at or from a site), and operation of a UNIT, including, but not
limited to:
(1) type, brand, quality, taste, weight, dimensions, ingredients,
uniformity, manner of preparation, preservation and sale of all Products
and Supplies and Materials; and
(2) sales and marketing procedures and customer service; and
(3) advertising and promotional programs; and
(4) layout, decor and color scheme of the Store; and
(5) recruitment, selection, training, appearance and dress of
employees, including, without limitation, use of COMPANY's employee
selection and training materials; and
(6) safety, maintenance, appearance, cleanliness, sanitation,
standards of service and operation of the Store; and
(7) submission of requests for approval of brands of food and
packaging products, supplies and suppliers; and
(8) use and illumination of signs, posters, displays, standard
formats and similar items; and
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<PAGE>
(9) identification of FRANCHISE OWNER as the owner of the Store;
and
(10) types of and use of fixtures, furnishings, equipment, computer
hardware and software, vehicles, and signs; and
(11) carry-out, on-premises dining and (if authorized by COMPANY and
agreed to by FRANCHISE OWNER) Delivery Service, Catering Service and
Special Distribution Arrangements; and
(12) required and approved menu items; and
(13) general staffing levels for the Store and number, type and
qualifications of Store personnel; and
(14) participation in market research and test programs required or
approved by COMPANY concerning various aspects of the System, including,
without limitation, procedures, systems, techniques, furnishings, fixtures,
equipment, ingredients, signs, labels, trade dress, logos, packaging,
supplies, marketing materials and strategies, merchandising and new menu
items and services. FRANCHISE OWNER agrees, if requested by COMPANY, to
participate in COMPANY's customer surveys and market research programs.
FRANCHISE OWNER acknowledges and agrees that all mandatory specifications,
standards and operating and inspection procedures prescribed from time to time
by COMPANY in the Store Manuals or otherwise communicated to FRANCHISE OWNER in
writing, shall constitute binding obligations on the part of FRANCHISE OWNER as
if fully set forth herein, and any failure by FRANCHISE OWNER to adhere to such
mandatory specifications, standards and operating and inspection procedures or
to pass COMPANY's periodic quality control inspections shall constitute grounds
for termination of this Agreement by COMPANY, as provided for herein. All
references herein to this Agreement shall include all such mandatory
specifications, standards, and operating procedures.
12.E. COMPLIANCE WITH LAWS AND GOOD BUSINESS PRACTICES.
------------------------------------------------
FRANCHISE OWNER shall secure and maintain in force in its name all required
licenses, permits, and certificates relating to the conduct of its business
pursuant to this Agreement. FRANCHISE OWNER shall comply with all applicable
laws, ordinances and regulations, including, without limitation, laws and
governmental regulations relating to the preparation, purchase and handling of
food products, Delivery Service, Catering Service and Special Distribution
Arrangements (if applicable), occupational hazards, health, safety and
sanitation, worker's compensation insurance, unemployment insurance, and
withholding and payment of all taxes. All advertising by FRANCHISE OWNER shall
be approved by COMPANY and be completely factual, in good taste in the judgment
of COMPANY, and shall conform to high standards of ethical advertising.
FRANCHISE OWNER shall in all dealings with its customers, suppliers, COMPANY,
and public officials adhere to high standards of honesty, integrity, fair
dealing and ethical conduct. FRANCHISE OWNER agrees to refrain
40
<PAGE>
from any business or advertising practice which may be injurious to the business
of COMPANY and the goodwill associated with the Marks and other UNITS. FRANCHISE
OWNER shall notify COMPANY in writing:
(1) within three (3) days after the commencement of any action,
suit, proceeding or issuance of any order, writ, injunction, award, or
decree of any court, agency, or other governmental instrumentality, which
may adversely affect the operation or financial condition of FRANCHISE
OWNER or the Store; or
(2) immediately upon the receipt of any notice of violation of any
law, ordinance or regulation relating to health, sanitation or the
operation of the Store.
12.F. MANAGEMENT AND PERSONNEL OF THE STORE.
-------------------------------------
FRANCHISE OWNER (or the persons identified as supervising Owners in Exhibit
-------
E hereto) shall supervise and oversee the operation of the Store. FRANCHISE
- -
OWNER shall employ and maintain at all times during the term of this Agreement
at least one (1) Store Manager and one (1) Additional Manager at the Store. The
Store Manager shall be the full-time manager of the Store and the Additional
Manager shall perform on a full-time basis such other operations for FRANCHISE
OWNER as COMPANY may reasonably specify from time to time and both must
successfully complete to COMPANY's satisfaction a COMPANY certified initial
management training program for the operation of the Store. FRANCHISE OWNER
also shall employ the number of assistant managers and other personnel required
for adequate staffing of the Store, and shall at all times keep COMPANY advised
of the identities of the Store Manager, Additional Manager and assistant
managers. COMPANY shall have the right to deal with the Store Manager,
Additional Manager and assistant managers on matters pertaining to day-to-day
operations of, and reporting requirements for, the Store. The Store at all
times shall be under the direct, on-site supervision of the Store Manager,
Additional Manager or an assistant manager who has completed a training program
conducted by COMPANY or DEVELOPER (if applicable) and who has been certified
under the terms of the Development Agreement. FRANCHISE OWNER shall provide the
Store Manager with a compensation program reasonably acceptable to COMPANY
designed to provide an incentive to the Store Manager to use diligent efforts to
cause the Store to be operated in a profitable manner.
FRANCHISE OWNER shall hire all employees of the Store and shall be
exclusively responsible for the terms of their employment and compensation and
for the proper training of such employees in the operation of the Store.
12.G. INSURANCE.
---------
During the term of this Agreement, FRANCHISE OWNER shall maintain in force,
under policies of insurance issued by insurers rated "A-" or better by Alfred M.
Best & Company, Inc. and approved by COMPANY:
(1) such insurance as is necessary to comply with all legal
requirements concerning insurance coverage (including, without limitation,
workers' compensation
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requirements), and insurance coverage for persons attending COMPANY
training programs on behalf of FRANCHISE OWNER;
(2) commercial general liability insurance (including, but not
limited to, coverage for motor vehicles used in the development and
operation of the Store, whether or not owned by FRANCHISE OWNER), against
claims for bodily and personal injury, death and property damage caused by
or occurring in conjunction with the operation of the Store or otherwise in
conjunction with the conduct of business by FRANCHISE OWNER pursuant to
this Agreement, under one or more policies of insurance containing minimum
liability coverage prescribed by COMPANY from time to time; and
(3) all risk property and casualty insurance for the replacement
value of the Store and its contents (including leasehold improvements,
furnishings, fixtures, equipment, the Computer System, signs, inventory,
supplies, and materials).
COMPANY may periodically increase the amounts of coverage required under
such insurance policies and require different or additional kinds of insurance
at any time, including excess liability insurance, to reflect inflation,
identification of new risks, changes in law or standards of liability, higher
damage awards, or other relevant changes in circumstances. Each insurance
policy shall name COMPANY as an additional named insured, shall contain a waiver
of all subrogation rights against COMPANY, its Affiliates, and their successors
and assigns, and shall provide for thirty (30) days' prior written notice to
COMPANY of any material modification, cancellation, or expiration of such
policy. The maintenance of insurance coverage that meets the minimum
requirements described in this Section and such additional coverages which
FRANCHISE OWNER determines are appropriate for its particular circumstances
shall be the responsibility of FRANCHISE OWNER.
Upon execution of this Agreement, FRANCHISE OWNER shall provide COMPANY
with evidence of the insurance required under this Agreement. Thereafter, prior
to the expiration of the term of each insurance policy, FRANCHISE OWNER shall
furnish COMPANY with a copy of each renewal or replacement insurance policy to
be maintained by FRANCHISE OWNER for the immediately following term and evidence
of the payment of the premium therefor. If FRANCHISE OWNER fails or refuses to
maintain required insurance coverage, or to furnish satisfactory evidence
thereof and the payment of the premiums therefor, COMPANY, at its option and in
addition to its other rights and remedies under this Agreement, may obtain such
insurance coverage on behalf of FRANCHISE OWNER and FRANCHISE OWNER shall fully
cooperate with COMPANY in its effort to obtain such insurance policies, promptly
execute all forms or instruments required to obtain or maintain any such
insurance, allow any inspections of the Store or vehicles which are required to
obtain or maintain such insurance, and pay to COMPANY, on demand, any costs and
premiums incurred by COMPANY.
FRANCHISE OWNER's obligations to maintain insurance coverage as herein
described shall not be affected in any manner by reason of any separate
insurance maintained by COMPANY, nor shall the maintenance of such insurance
relieve FRANCHISE OWNER of any indemnification obligations under this Agreement.
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12.H. CREDIT CARDS AND OTHER METHODS OF PAYMENT.
-----------------------------------------
FRANCHISE OWNER shall at all times have arrangements in existence with a
full range of credit and debit card issuers or sponsors, check verification
services and electronic fund transfer systems as COMPANY designates in its sole
discretion from time to time in order that the Store may accept customers'
credit and debit cards, checks and other methods of payment. FRANCHISE OWNER
shall use only such methods of payment which COMPANY authorizes or approves.
13. ADVERTISING.
-----------
13.A. MARKETING FUND.
--------------
Recognizing the value of advertising and marketing to the goodwill and
public image of UNITS, COMPANY has instituted and FRANCHISE OWNER agrees that
COMPANY or its designee shall maintain and administer a mar keting fund (the
"MARKETING FUND") for such advertising, media placement, marketing and public
relations programs, research and related activities as COMPANY, in its sole
discretion, may deem necessary or appropriate to generally promote UNITS and/or
the System. FRANCHISE OWNER shall contribute to the Marketing Fund two percent
(2%) of the Store's Royalty Base Revenue (without credit for any Promotional
Allowances collected by COMPANY and contributed pursuant to Section 12.C.),
payable to COMPANY by separate check or transfer at the same time and in the
same manner as the Royalty Fees due hereunder. UNITS which are owned by COMPANY
or its Affiliates, to the extent COMPANY has the right to require such
Affiliates to do so, shall contribute to the Marketing Fund on the same basis as
FRANCHISE OWNER. COMPANY shall have the right to require FRANCHISE OWNER from
time to time to increase FRANCHISE OWNER'S Marketing Fund contributions up to
one fourth of one percent (0.25%) per year.
COMPANY shall direct all advertising, media placement, marketing and public
relations programs and activities financed by the Marketing Fund, with sole
discretion over the strategic direction, creative concepts, materials and
endorsements used therein, and the geographic, market, and media placement and
allocation thereof. FRANCHISE OWNER agrees that the Marketing Fund may be used
to pay various costs and expenses, including, by way of example and without
limitation: preparing and producing video, audio and written advertising
materials; interest on borrowed funds; sponsorship of sporting, charitable or
similar events; reasonable salaries and expenses of employees of COMPANY or its
Affiliates working for or on behalf of the Marketing Fund or on advertising,
marketing, public relations materials, programs, or activities or promotions for
the benefit of the Marketing Fund and administrative costs and overhead of
COMPANY or its Affiliates incurred in activities reasonably related to the
administration of the Marketing Fund; administering advertising programs,
including, without limitation, purchasing direct mail and other media
advertising and employing advertising agencies to assist therewith; and
supporting public relations, market and consumer research and other advertising,
promotional and marketing activities, including testing and test marketing
programs, fulfillment charges, and development, implementation and testing of
Trade Dress and design prototypes. FRANCHISE OWNER agrees to participate in all
advertising, marketing, promotions, research and public relations programs
instituted by the Marketing Fund. The
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Marketing Fund shall furnish FRANCHISE OWNER with reasonable quantities of
marketing, advertising and promotional formats and sample materials at cost.
The Marketing Fund shall be accounted for separately, but shall not be
required to be segregated, from the other funds of COMPANY and shall not be used
to defray any of COMPANY's general operating expenses, except for such
reasonable salaries, administrative costs and overhead as COMPANY may incur in
activities reasonably related to the administration and activities of the
Marketing Fund and creation or conduct of its marketing programs including,
without limitation, conducting market research, preparing advertising and
marketing materials and collecting and accounting for contributions to the
Marketing Fund. COMPANY may spend in a fiscal year an amount greater or less
than the aggregate contributions of all UNITS to the Marketing Fund in that
year. The Marketing Fund may borrow from COMPANY or other lenders at standard
commercial interest rates to cover deficits of the Marketing Fund or cause the
Marketing Fund to invest any surplus for future use by the Marketing Fund. All
interest earned on monies contributed to the Marketing Fund will be used to pay
costs of the Marketing Fund before other assets of the Marketing Fund are
expended. A summary statement of monies collected and costs incurred by the
Marketing Fund for COMPANY's immediately preceding fiscal year shall be made
available to FRANCHISE OWNER upon FRANCHISE OWNER's written request. COMPANY
will have the right to cause the Marketing Fund to be incorporated or operated
through an entity separate from COMPANY at such time as COMPANY deems
appropriate, and such successor entity shall have all rights and duties of
COMPANY pursuant to this Paragraph A.
Notwithstanding anything in this Agreement to the contrary, under no
circumstances will COMPANY or its Affiliates be required to contribute to the
Marketing Fund any revenue or profits (or an portion thereof) made or collected
by COMPANY or its Affiliates from sales to or purchases by FRANCHISE OWNER of
any goods or services.
FRANCHISE OWNER understands and acknowledges that the Marketing Fund is
intended to maximize recognition of the Marks and the System generally.
Although COMPANY will endeavor to utilize the Marketing Fund to develop
advertising and marketing materials and programs, and to place advertising in
order to benefit all UNITS, COMPANY undertakes no obligation to ensure that
expenditures by the Marketing Fund in or affecting any geographic area are
proportionate or equivalent to the contributions to the Marketing Fund by UNITS
operating in that geographic area or that any UNIT will benefit directly or in
proportion to its contribution to the Marketing Fund from the develop ment of
advertising and marketing materials or the placement of advertising. COMPANY
may use the Marketing Fund to promote any type of UNIT in the System. FRANCHISE
OWNER acknowledges that its failure to derive any such ben efit will not serve
as a basis for a reduction or elimination of its obligation to contribute to the
Marketing Fund. FRANCHISE OWNER further acknowledges and agrees that the
failure (whether with or without COMPANY's permission) of any other franchise
owner to make the appropriate amount of contributions to the Marketing Fund
shall not in any way release FRANCHISE OWNER from or reduce FRANCHISE OWNER's
obligations under this Paragraph A., such obligations being separate and
independent obligations of FRANCHISE OWNER under this Agreement. Except as
expressly provided in this Paragraph A.,
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COMPANY assumes no direct or indirect liability or obligation to FRANCHISE OWNER
with respect to the maintenance, direction, or administration of the Marketing
Fund.
FRANCHISE OWNER understands and acknowledges that the monies it contributes
to the Marketing Fund shall be combined with contributions of other franchise
owners in the System, including those franchise owners in the System that may
operate their UNITs under different brand names or Marks, or with trade dress
and operations that differ from FRANCHISE OWNER'S. Contributions to the
Marketing Fund made by FRANCHISE OWNER may be used to promote UNITS and brands
that differ from type of UNIT FRANCHISE OWNER operates and the brands FRANCHISE
OWNER uses, and contributions to the Marketing Fund made by franchise owners in
the System that use brands and operate UNITS that differ from FRANCHISE OWNER'S
brands and UNIT may be used to promote the type of UNIT FRANCHISE OWNER
operates. COMPANY undertakes no obligation to insure that Marketing Fund monies
will be spent to promote various types of UNITS using various brands in
proportion to the Marketing Fund contributions made by franchise owners in the
System of such types of UNITS or using those brands.
COMPANY reserves the right, in its sole discretion, to suspend
contributions to and operations of the Marketing Fund for such periods that it
determines to be appropriate and to terminate the Marketing Fund upon written
notice to FRANCHISE OWNER. All unspent monies on the date of termination shall
be distributed to COMPANY and franchise owners in proportion to their respective
contributions to the Marketing Fund during the preceding twelve (12) month
period. COMPANY has the right to reinstate the Marketing Fund upon the same
terms and conditions set forth herein upon thirty (30) days' prior written
notice to FRANCHISE OWNER.
13.B. LOCAL ADVERTISING FUND.
----------------------
FRANCHISE OWNER agrees that, unless otherwise notified by COMPANY, in its
sole discretion, FRANCHISE OWNER shall participate in a local advertising fund
(a "LOCAL AD FUND") comprised of the UNIT(s) (including those owned by COMPANY
or its Affiliates, or other franchise owners, to the extent COMPANY has the
right to require any such Affiliate or franchise owner to do so) located in the
same Marketing Area (subject to the rights of other franchise owners under their
franchise agreements with COMPANY). COMPANY shall establish, maintain and
administer the Local Ad Fund for such advertising, media placement, marketing
and public relations programs and related activities as COMPANY, in its sole
discretion, may deem necessary or appropriate to promote UNITS in the Marketing
Area. FRANCHISE OWNER shall contribute to such Local Ad Fund up to four percent
(4%) of the Store's Royalty Base Revenue as determined by COMPANY from time to
time for each Accounting Period in which it participates in the Local Ad Fund.
COMPANY shall have the right to require FRANCHISE OWNER from time to time
to increase FRANCHISE OWNER's Local Ad Fund contributions above four percent
(4%) up to one fourth of one percent (0.25%) each year. Amounts paid to such
Local Ad Fund by FRANCHISE OWNER shall be payable to COMPANY by separate check
or transfer at the same time and in the same manner as the Royalty Fees and
Marketing Fund Contributions due under
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this Agreement. UNITS located in the same Marketing Area which are owned by
COMPANY or its Affiliates, to the extent COMPANY has the right to require such
Affiliates to do so, shall contribute to such Local Ad Fund on the same basis as
franchise owners who are members of such Local Ad Fund. Notwithstanding the
foregoing, FRANCHISE OWNER acknowledges and agrees that it may be required from
time to time to contribute to the Local Ad Fund an amount greater than that
provided for herein to enable the commencement and combination of "REQUIRED
TELEVISION ADVERTISING" (as defined in the Development Agreement) as required
pursuant to the Development Agreement.
COMPANY or its designee shall direct all advertising, media placement,
marketing and public relations programs and activities of the Local Ad Fund,
with sole discretion over the strategic direction, creative concepts, materials
and endorsements used therein, and the geographic, market, and media placement
and allocation thereof within the Marketing Area. FRANCHISE OWNER may consult
with and advise COMPANY concerning activities of the Local Ad Fund. FRANCHISE
OWNER agrees that the Local Ad Fund may be used to pay the costs of: preparing,
adapting and producing video, audio and written advertising materials; interest
on borrowed funds; sponsorship of sporting, charitable or similar events;
reasonable salaries and expenses of employees of COMPANY or its Affiliates
working for or on behalf of the Local Ad Fund or on advertising, marketing,
public relations materials, programs, or activities or promotions for the
benefit of the Local Ad Fund and administrative costs and overhead of COMPANY or
its Affiliates incurred in activities reasonably related to the administration
or activities of the Local Ad Fund; administering advertising programs,
including, without limitation, purchasing direct mail and other media
advertising and employing advertising agencies to assist therewith; and
supporting public relations, market research and other advertising, promotional
and marketing activities, including testing and test marketing, fulfillment
charges and development, implementation, and testing of Trade Dress and design
prototypes. FRANCHISE OWNER agrees to participate in all advertising,
promotional events and public relations programs instituted by the Local Ad
Fund.
The Local Ad Fund shall be accounted for separately, but shall not be
required to be segregated, from the other funds of COMPANY and shall not be used
to defray any of COMPANY's general operating expenses, except for such
reasonable salaries, administrative costs and overhead as COMPANY may incur in
activities reasonably related to the administration or activities of the Local
Ad Fund and creation or conduct of its marketing programs (including, without
limitation, conducting marketing research, preparing advertising and marketing
materials and collecting and accounting for contributions to the Local Ad Fund).
COMPANY may spend in any fiscal year an amount greater or less than the
aggregate contributions of all UNITS to the Local Ad Fund in that year. The
Local Ad Fund may borrow from COMPANY or other lenders at standard commercial
interest rates to cover deficits of the Local Ad Fund or cause the Local Ad Fund
to invest any surplus for its future use. All interest earned on monies
contributed to the Local Ad Fund will be used to pay costs of the Local Ad Fund
before other assets are expended. A summary statement of monies collected and
costs incurred by the Local Ad Fund for COMPANY's immediately preceding fiscal
year shall be made available to FRANCHISE OWNER upon FRANCHISE OWNER's written
request. COMPANY will have the right to cause the Local Ad Fund to be
incorporated or operated through an entity separate from
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COMPANY at such time as COMPANY deems appropriate, and such successor entity
shall have all rights and duties of COMPANY pursuant to this Paragraph B.
FRANCHISE OWNER understands and acknowledges that the Local Ad Fund is
intended to maximize recognition of the Marks and patronage of UNITS in the
Marketing Area. Although COMPANY will endeavor to utilize the Local Ad Fund to
develop advertising and marketing materials and programs, and to place
advertising in order to benefit all UNITS in the Marketing Area, COMPANY
undertakes no obligation to ensure that any UNIT in the Marketing Area will
benefit directly or in proportion to its contribution to the Local Ad Fund from
the development of advertising and marketing materials or the placement of
advertising by the Local Ad Fund. The COMPANY may use the Local Ad Fund to
promote any type of UNIT in the System. FRANCHISE OWNER acknowledges that its
failure to derive any such benefit will not serve as a basis for a reduction or
elimination of its obligation to contribute to the Local Ad Fund. FRANCHISE
OWNER further acknowledges and agrees that the failure (whether with or without
COMPANY's permission) of any other franchise owner to make the appropriate
amount of contributions to the Local Ad Fund shall not in any way release
FRANCHISE OWNER from or reduce FRANCHISE OWNER's obligations under this
Paragraph B., such obligations being separate and independent obligations of
FRANCHISE OWNER under this Agreement. Except as expressly provided in this
Paragraph B., COMPANY assumes no direct or indirect liability or obligation to
FRANCHISE OWNER with respect to the maintenance, direction, or administration of
the Local Ad Fund.
COMPANY reserves the right, in its sole discretion, to suspend
contributions to and operations of the Local Ad Fund for such periods that it
determines to be appropriate and to terminate the Local Ad Fund upon written
notice to FRANCHISE OWNER. All unspent monies on the date of termination shall
be distributed to COMPANY and franchise owners in proportion to their respective
contributions to the Local Ad Fund during the preceding twelve (12) month
period. COMPANY has the right to reinstate the Local Ad Fund upon the same terms
and conditions set forth herein upon thirty (30) days' prior written notice to
FRANCHISE OWNER. In the event that COMPANY terminates or suspends operation of
the Local Ad Fund, FRANCHISE OWNER shall spend as Local Expenditures (defined
below) at least such percentage of the Royalty Base Revenue of the Store as
shall be equal to the percentage which could have been required to be paid to
the Local Ad Fund under this Paragraph B.
13.C. ADVERTISING BY FRANCHISE OWNER.
------------------------------
During each Accounting Period during the term of this Agreement in which
the Store does not participate in a Local Ad Fund during such Accounting Period,
FRANCHISE OWNER shall conduct local advertising and promotion for the Store.
Expenditures for such required advertising and promotion are referred to herein
as "LOCAL EXPENDITURES". FRANCHISE OWNER shall make Local Expenditures during
each Accounting Period during which the Store does not participate in the Local
Ad Fund of at least such percentage of the Store's Royalty Base Revenue as shall
be equal to the percentage which could have been required to be paid to the
Local Ad Fund under Paragraph B of this Section for such Accounting Period. The
following shall not count as Local Expenditures: (1) moneys spent on classified
telephone directory listings and advertisements, advertising and promotional
expenses required under the lease for
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the Store and discounts and the redemption of coupons; and (2) the cost of goods
or services supplied without charge. Amounts spent for local advertising and
promotion of the Store shall not be credited toward FRANCHISE OWNER's Local
Expenditures under this Agreement to the extent that FRANCHISE OWNER is
reimbursed for such expenditures by, or such expenditures are made by, a
supplier of the Store.
Prior to their use by FRANCHISE OWNER, samples of all advertising and
promotional materials not prepared or previously approved by COMPANY shall be
submitted to COMPANY for approval, in the form and manner prescribed by COMPANY
from time to time. If approval is not granted by COMPANY within fifteen (15)
days from the date of receipt by COMPANY of such materials, COMPANY shall be
deemed to have disapproved the submitted materials. FRANCHISE OWNER shall not
use any advertising or promotional materials that COMPANY has not approved, has
disapproved or that do not include the copyright registration notices and
trademark registration notices designated by COMPANY. COMPANY, in its sole
discretion, may disapprove on a prospective basis materials that it had
previously approved.
In order to promote efficiency and coordination of advertising of UNITS,
FRANCHISE OWNER shall only utilize advertising agencies designated by COMPANY
for the placement of local advertising with the various media.
14. ACCOUNTING, REPORTS AND FINANCIAL STATEMENTS.
--------------------------------------------
FRANCHISE OWNER shall install and use at the Store the Computer System in
such form as is specified by COMPANY from time to time and transmit to or permit
the electronic collection of information by COMPANY through use of the Computer
System. FRANCHISE OWNER, at its own expense, shall establish and maintain at
the Store, (i) a telephone modem and dedicated line or other data transmission
medium specified by COMPANY from time to time that COMPANY may use to access the
Computer System, (ii) full, complete and accurate records and reports and, (iii)
if required by COMPANY, computer diskettes and databases in the form specified
by COMPANY pertaining to the operation of the Store, including, but not limited
to, site reports on the Store prepared by FRANCHISE OWNER and submitted to
COMPANY, the Site Agreement, supervisory reports relating to Store operations, a
bookkeeping, accounting, recordkeeping and records retention system conforming
to the requirements prescribed by COMPANY from time to time (including, without
limitation, requirements for a general ledger system which utilizes the standard
chart of accounts prescribed by COMPANY from time to time and for timely entry
of information into data bases of the Computer System and periodic printouts of
reports generated from the Computer System) and information relating to employee
turnover. Each transaction of the Store shall be processed on the Computer
System in the manner prescribed by COMPANY from time to time. COMPANY shall
have, at all times, the right to access and retrieve information from and data
processed on the Computer System with respect to the Store, and FRANCHISE OWNER
shall take such action as may be necessary to provide such access to COMPANY.
With respect to the operation and financial condition of the Store,
FRANCHISE OWNER shall adopt, until otherwise specified by COMPANY, a fiscal year
consisting of thirteen (13) four-week accounting periods which coincides with
COMPANY's then current fiscal year, as
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specified by COMPANY and furnish to COMPANY or its designee in the form and
format prescribed by COMPANY from time to time, including, without limitation,
via computer diskette and/or restated in accordance with COMPANY's financial
reporting periods consistent with COMPANY's then-current financial reporting
periods and accounting practices and procedures:
(1) royalty reporting forms;
(2) weekly reports of the Store's sales and Royalty Base Revenue
each Monday (for the preceding Monday through Sunday period) and, if
requested by COMPANY, daily reports of Store's sales and Royalty Base
Revenue and, by facsimile or telephone no later than 10:00 a.m. Rocky
Mountain time on the following day; and
(3) upon request by COMPANY, such other data, reports, information,
and supporting records for such periods as COMPANY from time to time
requires (including, without limitation, daily and weekly reports of
Product and/or service sales by category by means of telephonic, facsimile
or other transmission system);
(4) within thirty (30) days after the end of each quarter of
FRANCHISE OWNER's fiscal year, FRANCHISE OWNER shall submit reports of
those income and expense items of the Store which COMPANY specifies from
time to time for use in any revenue, earnings, and/or cost summary it
chooses to furnish to prospective franchise owners, provided that COMPANY
will not identify to prospective franchise owners any specific financial
results of the Store; and
(5) within sixty (60) days after the end of FRANCHISE OWNER's
fiscal year, a fiscal year-end balance sheet, an income statement of the
Store for such fiscal year reflecting all year-end adjustments, and a
statement of changes in cash flow of FRANCHISE OWNER, prepared in
accordance with generally accepted accounting principles consistently
applied and in the format prescribed by COMPANY from time to time.
Each report and financial statement submitted by FRANCHISE OWNER to COMPANY or
its designee shall be signed by FRANCHISE OWNER and verified as correct in the
manner prescribed by COMPANY.
FRANCHISE OWNER agrees to maintain and to furnish to COMPANY and/or its
designee upon request complete copies of all income, sales, value added, use and
service tax returns, and employee withholding, worker's compensation, and
similar reports filed by FRANCHISE OWNER reflecting activities of the Store.
FRANCHISE OWNER shall immediately report to COMPANY and/or its designee any
events or developments which may have a materially adverse impact on the
operation of the Store, the performance of Franchise Owner under this Agreement,
or the goodwill associated with the Marks and UNITS.
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15. INSPECTIONS AND AUDITS.
----------------------
15.A. COMPANY'S RIGHT TO INSPECT THE STORE.
------------------------------------
To determine whether FRANCHISE OWNER and the Store are complying with this
Agreement and with specifications, standards and operating procedures prescribed
by COMPANY for the operation of UNITS, COMPANY or its agents shall have the
right, at any reasonable time to: (1) inspect the Site, the Store, the Computer
System and other equipment, furnishings, fixtures, signs, vehicles, operating
materials and supplies of the Store; (2) observe, photograph and video tape the
operations of the Store for such consecutive or intermittent periods as COMPANY
deems necessary; (3) remove samples of any Products and Supplies and Materials
for testing and analysis; (4) interview personnel of the Store; (5) interview
customers of the Store; and (6) inspect and copy any books, records, reports,
computer data bases and documents relating to the operation of the Store.
FRANCHISE OWNER agrees to cooperate fully with COMPANY in connection with any
such inspections, observations, photographing and video taping, product removal
and interviews. FRANCHISE OWNER shall present to its customers such evaluation
forms as are periodically prescribed by COMPANY and shall participate and/or
request its customers to participate in any surveys performed by or on behalf of
COMPANY. FRANCHISE OWNER agrees that COMPANY may inspect and monitor
electronically information concerning FRAN CHISE OWNER's sales and the Store's
Royalty Base Revenue, and such other information as may be contained or stored
in the Computer System. COMPANY shall have telephone access to FRANCHISE
OWNER's Computer System as provided herein at such times and in such manner as
COMPANY shall from time to time specify.
15.B. COMPANY'S RIGHT TO AUDIT.
------------------------
COMPANY shall have the right at any time during business hours, and with
reasonable notice to FRANCHISE OWNER, to inspect and audit, or cause to be
inspected and audited, the business records, bookkeeping and accounting records,
computer data bases, value added, sales, use, service, payroll, employee
withholding, worker's compensation, and income tax records and returns, and
other records of the Store and FRANCHISE OWNER and the books and records of
FRANCHISE OWNER if a corporation or partnership. FRANCHISE OWNER shall fully
cooperate with representatives of COMPANY and independent accountants hired by
COMPANY to conduct any such inspection or audit. COMPANY's right to audit shall
also include COMPANY's right to access the Computer System by telephone as
provided in this Agreement. In the event any such inspection or audit shall
disclose an understatement of the Store's Royalty Base Revenue or an
underpayment of any fees due under this Agreement, COMPANY shall be authorized
to initiate immediately a debit to FRANCHISE OWNER's account for in the amount
due plus interest via electronic funds transfer, as described in Section 11.F.
Alternatively, at COMPANY's option, FRANCHISE OWNER shall pay to COMPANY, within
fifteen (15) days after receipt of the inspection or audit report, the fees due
on the amount of such understatement, plus interest (at the rate and on the
terms provided for herein) from the date originally due until the date of
payment. Further, in the event such inspection or audit is made necessary by
the failure of FRANCHISE OWNER to furnish reports, supporting records, other
information or financial statements, as herein required, or to furnish
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such reports, records, information or financial statements on a timely basis, or
if an understatement of Royalty Base Revenue for the period of any audit is
determined by any such audit or inspection to be greater than two percent (2%),
FRANCHISE OWNER shall reimburse COMPANY for the cost of such inspection or
audit, including, without limitation, legal fees and accountants' fees, and the
travel expenses, room and board and applicable per diem charges for employees of
COMPANY. The foregoing remedies shall be in addition to all other remedies and
rights of COMPANY hereunder or under applicable law.
16. TRANSFER.
--------
16.A. BY COMPANY.
----------
This Agreement is fully transferable by COMPANY and shall inure to the
benefit of any transferee or other legal successor to the interests of COMPANY
herein.
16.B. NONTRANSFERABILITY OF CERTAIN RIGHTS.
------------------------------------
FRANCHISE OWNER understands, acknowledges and agrees (and hereby represents
and warrants that its Owners understand and agree) that the rights and duties
created by this Agreement are personal to FRANCHISE OWNER and its Owners and
that a material cause for COMPANY's willingness to enter into this Agreement is
its reliance upon the individual or collective character, skill, aptitude,
business ability and financial capacity of FRANCHISE OWNER and its Owners.
Therefore, FRANCHISE OWNER agrees that:
(1) no Ownership Interest in FRANCHISE OWNER; and
(2) no obligations, rights or interest of FRANCHISE OWNER in (a)
this Agreement, (b) the lease for the premises of the Store, (c) the
Franchise, (d) the Store or (e) the assets of the Store
may be transferred without the prior written consent of COMPANY. This
restriction shall not apply to the sale of inventory in the ordinary course of
business. Any purported transfer in violation of this Section shall constitute
a breach of this Agreement and shall convey to the transferee no rights or
interests in the foregoing.
As used in this Agreement, the term "transfer" shall include, without
limitation, the following, whether voluntary or involuntary, conditional, direct
or indirect:
(1) an assignment, sale, gift or pledge; and
(2) the grant of a mortgage, charge, lien or security interest,
including, without limitation, the grant of a collateral assignment; and
(3) a merger, consolidation, share exchange, issuance of additional
Ownership Interests or securities representing or potentially representing
Ownership Interests, or redemption of Ownership Interests; and
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(4) a sale or exchange of voting interests or securities
convertible to voting interests, or an agreement granting the right to
exercise or control the exercise of the voting rights of any holder of
Ownership Interests or to control the operations or affairs of FRANCHISE
OWNER; and
(5) except where specifically approved by COMPANY, a management
agreement whereby FRANCHISE OWNER delegates (i) any of its obligations
under this Agreement; or (ii) any or all of the management functions with
respect to a Store or the business to be conducted by FRANCHISE OWNER
pursuant to this Agreement.
In addition to the foregoing, a transfer (as defined above) will require
the prior written consent of COMPANY where such transfer occurs by virtue of (a)
divorce; (b) insolvency; (c) dissolution of a corporation, partnership or
limited liability company; (d) will; (e) intestate succession; or (f)
declaration of or transfer in trust.
16.C. COMPANY'S RIGHT TO APPROVE TRANSFERS.
------------------------------------
If FRANCHISE OWNER or any Owner intends to make a transfer of any interests
which, under Paragraph B of this Section, requires COMPANY's prior written
consent, FRANCHISE OWNER shall deliver to COMPANY written notice of such
proposed transfer at least thirty (30) days prior to its intended effective
date. Such notice shall describe in detail the proposed transfer (including,
without limitation, the nature of the transfer, the nature and amount of the
interests being transferred, the reason for the transfer, the consideration to
be paid and the terms of payment of such consideration and the effective date)
and shall identify and provide all pertinent background information regarding
the proposed purchaser. COMPANY shall have 30 days from delivery of such notice
within which to evaluate the proposed transactions and to notify FRANCHISE OWNER
of its approval or disapproval (with reasons) of the proposed transfer. If
approved, the transfer must take place as described in the notice (as modified
by any conditions imposed by COMPANY in granting its approval) and within 30
days of the delivery of notice of COMPANY's approval.
FRANCHISE OWNER agrees that it would be reasonable for COMPANY to
disapprove any proposed transfer based on any and all reasonable factors
including, without limitation, in the event that:
(1) the proposed transfer is a transfer by a Principal Owner;
(2) the proposed transfer, by itself or in conjunction with other
transfers, would result in the transfer of a Controlling Interest in
FRANCHISE OWNER or of a change in the composition of the group holding a
Controlling Interest in FRANCHISE OWNER;
(3) the proposed transfer is to a Competitive Business or to a
direct or indirect owner of interests in a Competitive Business;
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(4) FRANCHISE OWNER and its Owners are not in full compliance with
this Agreement;
(5) the proposed transferee and, if applicable, any of its owners
(a) are not of good moral character, (b) otherwise fail to meet COMPANY's
then applicable standards for franchise owners or owners of franchise
owners or (c) are not in full compliance with any other franchise
agreements or development agreements between COMPANY and them; or
(6) the price and terms of the proposed transfer are so burdensome
as to adversely affect or have a potentially adverse affect on COMPANY's
rights and interests under this Agreement.
16.D. CONDITIONS FOR APPROVAL OF TRANSFERS.
------------------------------------
In granting its approval of a proposed transfer, COMPANY may also impose
certain reasonable conditions, including, without limitation, one or more of the
following:
(1) that FRANCHISE OWNER reimburse COMPANY for any costs and
expenses incurred by COMPANY in evaluating the proposed transfer;
(2) that FRANCHISE OWNER, the transferring Owner or the proposed
purchaser pay a transfer fee in the amount of $5,000;
(3) that, if any part of the sale price is financed by the
transferor, it agrees, in a manner satisfactory to COMPANY, that all
obligations of the purchaser under or pursuant to any promissory notes,
agreements or security interests reserved by the transferor be subordinate
to any obligations of the purchaser to pay amounts then or thereafter due
COMPANY and its Affiliates;
(4) that the purchaser and its owners execute any undertakings then
being required by COMPANY of other franchise owners or owners of franchise
owners of UNITS;
(5) that FRANCHISE OWNER, the transferring Owner and the purchaser
(if the purchaser is then the owner of interests in another developer or
franchise owner of UNITS) execute a general release and consent agreement,
in form satisfactory to COMPANY, of any and all claims against COMPANY and
its Affiliates and their respective shareholders, officers, directors,
employees and agents, for matters arising on or before the effective date
of the transfer;
(6) that the FRANCHISE OWNER or, if applicable, the transferring
Owner execute a noncompetition undertaking in favor of COMPANY and the
transferee, providing that the transferor shall not directly or indirectly
(through a member of the Immediate Family of the transferor or otherwise),
for a period of two years commencing on the effective date of such
transfer:
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(a) have any direct or indirect interest as a disclosed or
beneficial owner in any Competitive Business located or operating:
(i) at the Site; or
(ii) within a five (5) mile radius of the Site; or
(iii) within a five (5) mile radius of any other UNIT
in operation or under development on the effective date of the
transfer; or
(iv) within the Marketing Area; or
(b) perform services as a director, officer, manager,
employee, consultant, representative, agent, or otherwise for any
Competitive Business located or operating:
(i) at the Site; or
(ii) within a five (5) mile radius of the Site; or
(iii) within a five (5) mile radius of any other UNIT
in operation or under development on the effective date of the
transfer; or
(iv) within the Marketing Area; or
(c) divert or attempt to divert any business or any
customers of any UNIT to any Competitive Business; or
(d) employ or seek to employ, any person who is employed by
COMPANY, its Affiliates or any developer or franchise owner of
COMPANY, nor induce nor attempt to induce any such person to leave
said employment without the prior written consent of such person's
employer;
(7) FRANCHISE OWNER, the transferor and the transferee (if it is
then a developer or franchise owner of COMPANY) must pay such Royalty Fees,
Software License Fees, Software Support Fees, Marketing Contributions,
amounts owed for purchases by FRANCHISE OWNER or such transferee from
COMPANY and its Affiliates, and all other amounts owed to COMPANY or its
Affiliates, which are then due and unpaid; and
(8) the transferee must agree to cause its designated Store Manager
and Additional Manager to complete to COMPANY's satisfaction COMPANY's
initial management training program in the operation of a UNIT prior to the
transfer at the time
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specified by COMPANY and the transferee must have paid COMPANY's then
current standard training charges; and
(9) in the event of a transfer of the Agreement, the transferee and
its owners, at COMPANY's option, must agree, in a manner satisfactory to
COMPANY, to be bound by all terms and conditions of this Agreement for the
remainder of its term or execute COMPANY's then-current form of standard
franchise agreement and such ancillary documents (including guarantees) as
are then customarily used by COMPANY in the grant of franchises for UNITS,
modified as necessary to provide for the same Royalty Fees, Software
License Fees, Software Support Fees, and Marketing Contributions required
hereunder and a term equal to the remaining term of this Agreement;
(10) the transferee and its owners must execute COMPANY's then-
current form of secured loan agreement and accounting services agreement
and such ancillary documents as are then customarily used by COMPANY in the
grant of area development rights or franchises for UNITS containing such
terms as are then customarily used by COMPANY in the grant of area
development rights or franchises for UNITS; and
(11) that the transferee and FRANCHISE OWNER acknowledge and agree
that COMPANY's approval of the proposed transfer indicates only that the
transferee meets or that COMPANY has waived the criteria established by
COMPANY for franchise owners as of the time of such transfer and that
COMPANY's approval thereof does not constitute a warranty or guaranty by
COMPANY, express or implied, of the suitability of the terms of sale or of
the successful operation or profitability of the Store by the transferee;
(12) that the transfer be made in compliance with all applicable
laws;
(13) that the transfer of the Store, the lease or the assets of the
Store (other than in connection with the financing of authorized equipment
for the Store, the sale of inventory or otherwise in the ordinary course of
business), be made only in conjunction with a transfer of this Agreement;
(14) that the FRANCHISE OWNER, the transferor and the transferee
execute a consent agreement, in form satisfactory to COMPANY, providing
for, among other things, an acknowledgment from the parties that COMPANY's
approval of the transfer does not constitute a warranty or guaranty by
COMPANY, express or implied, of the suitability of the terms of sale or of
the successful operation or profitability of the Store by the transferee.
A transfer of an Owner's interest shall not be required to meet the
conditions set forth in Subparagraphs (2), (6) or (9) if the Owner is not a
Principal Owner and the transfer does not itself, or together with prior or
concurrent transfers involve the transfer of a Controlling Interest in FRANCHISE
OWNER and COMPANY determines in its sole discretion that such transfer does not
result in the transfer or elimination of a Controlling Interest or a change in
the composition of any group of Owners who previously together possessed a
Controlling Interest.
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Subparagraph (2) above, shall not apply to transfers by gift, bequest, or
inheritance. FRANCHISE OWNER acknowledges and agrees that the failure of any
person or entity restricted pursuant to Subparagraph (6) to comply with this
Section 16, including, without limitation, the restrictions of Subparagraph (6),
shall constitute a breach of this Agreement. The restrictions of Subparagraph
(6)(a) shall not be applicable to the ownership of shares of a class of
securities listed on a stock exchange or traded on the over-the-counter market
and quoted by a national inter-dealer quotation system that represent less than
three percent (3%) of the number of shares of that class of securities issued
and outstanding nor shall they be construed to prohibit FRANCHISE OWNER, any
Principal Owner of FRANCHISE OWNER, or any member of the Immediate Family of
FRANCHISE OWNER or any Principal Owner from having a direct or indirect
ownership interest in any UNIT, development agreement or franchise agreement for
the development or operation of any UNIT, or any entity owning, controlling or
operating a UNIT, or from providing services to a UNIT. Furthermore, the
restrictions of Subparagraph (6) shall not prohibit FRANCHISE OWNER, any
Principal Owner of FRANCHISE OWNER, or any member of the Immediate Family of
FRANCHISE OWNER or a Principal Owner of FRANCHISE OWNER (to the extent any such
person is an individual) from performing services for or having an ownership
interest in a Permitted Competitive Business, or from conducting customary
promotion and advertising of a Permitted Competitive Business.
The rights of FRANCHISE OWNER and its Owners to seek COMPANY's approval of
a transfer of interests, as provided in this Agreement, may be exercised only by
the FRANCHISE OWNER or its Owners and not by a receiver, trustee, liquidator or
other person acting in a comparable capacity with respect to the assets or
ownership of FRANCHISE OWNER.
16.E. DEATH OR INCAPACITY OF FRANCHISE OWNER.
--------------------------------------
Upon the death of FRANCHISE OWNER or the permanent incapacity of FRANCHISE
OWNER to conduct business affairs or, if FRANCHISE OWNER is a corporation,
limited liability company or partnership, upon the death or permanent incapacity
of a Principal Owner of FRANCHISE OWNER, all of such person's interest in this
Agreement, or such interest in FRANCHISE OWNER shall be transferred to a
transferee approved by COMPANY. Such disposition of this Agreement or such
interest in FRANCHISE OWNER (including, without limitation, transfer by bequest
or inheritance), shall be completed within a reasonable time, not to exceed nine
(9) months from the date of death or permanent disability and shall be subject
to all the terms and conditions applicable to transfers contained in this
Section. Failure to so transfer the interest in this Agreement or such interest
in FRANCHISE OWNER, within said period of time shall constitute a breach of this
Agreement.
16.F. PUBLIC OR PRIVATE OFFERING.
--------------------------
FRANCHISE OWNER acknowledges and agrees that it is the intent of both
COMPANY and FRANCHISE OWNER that FRANCHISE OWNER not be or become a public
company or "reporting company" (as defined in Sections 12(b), 12(g) or 15(d) of
the Securities Exchange Act of 1934, as amended, or otherwise) including,
without limitation, by way of an initial public offering or transfer to or
merger with an existing public company. Accordingly, FRANCHISE
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OWNER agrees that securities of FRANCHISE OWNER or an entity owning a direct or
indirect equity interest in FRANCHISE OWNER, this Agreement, the Franchise or
the Store may not be offered pursuant to a public offering. FRANCHISE OWNER
further agrees that such securities will not be offered pursuant to a private
placement without the prior written consent of COMPANY. COMPANY hereby grants
its consent to a private placement of securities by FRANCHISE OWNER provided
that FRANCHISE OWNER ensures that:
(1) such private placement complies with all applicable federal,
state and local laws governing offerings of securities and all applicable
agreements between FRANCHISE OWNER and COMPANY or its Affiliates;
(2) such private placement complies with each of the relevant
transfer procedures, requirements, and limitations contained herein;
(3) such private placement does not result in any change in
operating control of FRANCHISE OWNER or the Store or in the parties owning
a Controlling Interest in FRANCHISE OWNER or any Store or in the individual
or individuals controlling the management, policies or decision-making
power of FRANCHISE OWNER; and
(4) each such entity or individual receiving securities in such
private placement shall be an accredited investor, as defined by applicable
law, and shall have been identified and be reasonably acceptable to
COMPANY; provided, however, that FRANCHISE OWNER may allow unaccredited
investors to receive securities if FRANCHISE OWNER has complied with
applicable law with respect thereto;
(5) a draft of any offering memorandum or other information used
in connection with any such private placement is submitted to COMPANY for
review and comment a reasonable time prior to its use, that the reasonable
comments and suggestions of COMPANY thereon are given due consideration and
that a final version of such memorandum or information be provided to
COMPANY at least five (5) days prior to its distribution to prospective
investors;
(6) any offering memorandum or information used in connection with
any such private placement shall clearly identify that it is not an
offering by COMPANY and that COMPANY has not participated in its
preparation and has not supplied any financial information, projections,
budgets, cost estimates, or similar information contained therein, all of
which shall be the sole responsibility of FRANCHISE OWNER;
(7) each recipient of information relating to such private
placement shall agree to maintain it in confidence;
(8) the structure, timing, allocation and nature of such private
placement shall be reasonably acceptable to COMPANY;
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(9) FRANCHISE OWNER shall not become a "Reporting Company" by
virtue of Sections 12(b), 12(g) or 15(d) of the Securities Exchange Act of
1934, as amended; and
(10) each person who or entity which becomes an Owner or Principal
Owner as a result of such private placement agrees to become bound by any
provision of this Agreement pertaining to Owners or Principal Owners, as
applicable.
FRANCHISE OWNER agrees to indemnify COMPANY and its Affiliates and their
respective officers, directors, agents and employees, for and hold them harmless
against any and all costs, expenses, claims, actions, judgments and liabilities
(including, but not limited to, costs and expenses related to legal defense)
arising from or relating to any private placement approved by COMPANY pursuant
to this Section. FRANCHISE OWNER also agrees to reimburse COMPANY for its
reasonable expenses incurred in connection with any such private placement
(including attorney's fees) and to comply with all requirements of COMPANY in
connection with such offering, including, without limitation, adding appropriate
disclaimers to the offering documents and execution of appropriate
indemnification agreements.
16.G. EFFECT OF CONSENT TO TRANSFER.
-----------------------------
COMPANY's consent to a transfer under this Section 16 shall not constitute
a waiver of any claims it may have against FRANCHISE OWNER (or its Owners), nor
shall it be deemed a waiver of COMPANY's right to demand full compliance with
any of the terms or conditions of this Agreement by FRANCHISE OWNER or the
transferee. COMPANY's consent to any such transfer shall not, unless expressly
provided in such consent, effect a release of FRANCHISE OWNER (or its Owners, as
the case may be) post-transfer.
16.H. COMPANY'S RIGHT OF FIRST REFUSAL.
--------------------------------
If FRANCHISE OWNER or any of its Owners shall at any time determine to sell
an interest in this Agreement, the Franchise, the Store, some or all of the
assets of the Store (other than in the ordinary course of business) or an
ownership interest in FRANCHISE OWNER, FRANCHISE OWNER or its Owner(s) shall
obtain a bona fide, arms length, executed purchase agreement (and any ancillary
agreements) in complete and definitive form and not subject to any financing
contingency or other material, substantive contingency and an earnest money
deposit (in the amount of ten percent (10%) or more of the purchase price) from
a qualified, responsible, bona fide and fully disclosed purchaser. A true and
complete copy of such purchase agreement (conditioned on COMPANY's right of
first refusal) and any proposed ancillary agreements shall immediately be
submitted to COMPANY by FRANCHISE OWNER, such Owner(s) or both. The purchase
agreement must apply only to an interest which is permitted to be transferred
under this Agreement and may not include the purchase of any other property or
rights of FRANCHISE OWNER (or such Owner(s)) and the price and terms of purchase
offered to FRANCHISE OWNER (or such Owner(s)) in the purchase agreement for the
aforementioned interests shall reflect the bona fide price offered therefor and
shall not reflect any value for any other property or rights. If the purchaser
proposes to buy any other property or rights from FRANCHISE OWNER (or such
Owner(s)) under a separate, contemporaneous
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purchase agreement, FRANCHISE OWNER shall submit a true and complete copy of a
bona fide, arms length executed purchase agreement (and any proposed ancillary
agreements) in complete and definitive form and not subject to any financing or
other material, substantive contingency. COMPANY shall have the right,
exercisable by written notice delivered to FRANCHISE OWNER or such Owner(s)
within thirty (30) days from the date of receipt by COMPANY of an exact copy of
such purchase agreement, together with payment of any applicable transfer fee
and a completed and executed application for COMPANY's consent to transfer such
interest for the price and on the terms and conditions contained in such
purchase agreement, provided that COMPANY may substitute cash, a cash
equivalent, or marketable securities of equivalent value for any form of payment
proposed in such purchase agreement, COMPANY's credit shall be deemed equal to
the credit of any proposed purchaser, and COMPANY shall have not less than sixty
(60) days to prepare for closing. Regardless of whether included in the purchase
agreement, COMPANY shall be entitled to all customary representations and
warranties given by the seller of a business, including, without limitation,
representations and warranties as to: (1) ownership, condition and title to the
Ownership Interests and/or assets being purchased; (2) liens and encumbrances
relating to such Ownership Interests and/or assets; and (3) validity of
contracts and liabilities, contingent or otherwise, of any legal entity whose
Ownership Interests are purchased. If COMPANY does not exercise its right of
first refusal, FRANCHISE OWNER or such Owner(s) may complete the sale to such
purchaser pursuant to and on the exact terms of such purchase agreement, subject
to COMPANY's approval of the transfer, as provided for in this Agreement,
provided that if the sale to such purchaser is not completed within one hundred
twenty (120) days after receipt of such purchase agreement by COMPANY, or if
there is a change in the terms of the sale, COMPANY shall have an additional
right of first refusal for thirty (30) days as set forth herein on the modified
or initial terms and conditions of sale.
16.I. OWNERSHIP STRUCTURE.
-------------------
FRANCHISE OWNER represents and warrants that its Owners are as set forth on
Exhibit E attached to this Agreement and covenants that it will not permit the
- ---------
identity of such Owners, or their respective interests in FRANCHISE OWNER, to
change without complying with this Agreement.
16.J. DELEGATION BY COMPANY.
---------------------
FRANCHISE OWNER agrees that COMPANY shall have the right, from time to
time, to delegate the performance of any portion or all of its obligations and
duties under this Agreement to designees, whether the same are agents of COMPANY
or independent contractors with which COMPANY has contracted to provide such
services.
16.K. PERMITTED TRANSFERS.
-------------------
Notwithstanding anything to the contrary contained in this Agreement and
provided (a) FRANCHISE OWNER reimburses any costs incurred by COMPANY in
connection therewith, (b) FRANCHISE OWNER, its Owners and the transferees comply
with the provisions of the HSR Act, if applicable, prior to such a transfer, (c)
FRANCHISE OWNER, its Owners
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and the transferees comply with all other restrictions of this Agreement
applicable to Owners and Ownership interests (including, without limitation
those restricting an Owner's ownership of interests in a Competitive Business),
and (d) the transfer does not, by itself or in conjunction with other transfers,
result in the transfer of a Controlling Interest in FRANCHISE OWNER or of a
change in the composition of the group holding a Controlling Interest in
FRANCHISE OWNER, the provisions of this Section 16 (including, without
limitation, the requirement of the payment of transfer fees under Section
16.D(2) and the right of first refusal granted to COMPANY in Section 16.H) shall
not restrict or apply to any assignment, sale, transfer of an Ownership Interest
which:
(1) is pursuant and according to the terms of a written stock or
other equity interest option or stock or other equity interest
bonus plan which benefits employees of FRANCHISE OWNER and/or
of the Boston Chicken, Inc. franchise owner which provides
management services to FRANCHISE OWNER pursuant to a support
services agreement and has been approved by COMPANY; or
(2) is made for bona fide estate planning purposes (a) to a
corporation, trust, partnership, or other entity controlled by
the transferring Owner or (b) pursuant to an inter vivos or
testamentary document or the laws of descent and distribution.
17 GRANT OF SUCCESSOR FRANCHISES.
-----------------------------
17.A. FRANCHISE OWNER'S RIGHT TO A SUCCESSOR FRANCHISE.
------------------------------------------------
Subject to the provisions of Paragraphs B and C of this Section, upon
expiration of the initial term of this Agreement, if:
(1) FRANCHISE OWNER and its Owners have complied with this
Agreement during the initial term of this Agreement in all material
respects; and
(2) FRANCHISE OWNER and its Owners are then in full compliance
with this Agreement; and
(3) (a) FRANCHISE OWNER maintains possession of the Site and
agrees to remodel and/or expand the Store, add or replace equipment,
furnishings, fixtures, and signs and otherwise modify the Store to
bring it into compliance with specifications and standards then
applicable under new or successor franchises for UNITS; or
(b) if FRANCHISE OWNER is unable to maintain possession
of the Site, or if, in the judgment of COMPANY, the Store should be
relocated within the Territory, FRANCHISE OWNER secures a substitute
site within the Territory approved by COMPANY and agrees to develop
expeditiously such substitute site
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in compliance with specifications and standards then applicable under
new or successor franchises for UNITS;
then FRANCHISE OWNER shall have the right to obtain a successor franchise to
operate a UNIT at the Site (a "SUCCESSOR FRANCHISE") for a term of five (5)
years. In consideration of the grant of the Successor Franchise, FRANCHISE
OWNER shall pay to COMPANY a fee in an amount equal to thirty-three and one-
third percent (33-1/3%) of the then-current initial franchise fee charged by
COMPANY in connection with the grant of a single UNIT franchise. If COMPANY is
not, at that time, actively engaged in the sale of UNIT franchises, the fee
shall be equal to 33-1/3% of the higher of (a) the Initial Franchise Fee due
under this Agreement or (b) the Initial Franchise Fee charged under the standard
single UNIT franchise offered as set forth in the latest offering version of
COMPANY's Uniform Franchise Offering Circular. As additional consideration for
the grant of a Successor Franchise, FRANCHISE OWNER agrees to execute a general
release in form prescribed by COMPANY in accordance with this Section.
FRANCHISE OWNER shall have the right to obtain a second Successor Franchise on
the same terms and subject to the same conditions as the initial Successor
Franchise.
17.B. NOTICES.
-------
FRANCHISE OWNER shall give COMPANY written notice of its election to obtain
a Successor Franchise not more than twenty-four (24) months, and not less than
twelve (12) months, prior to the expiration of this Agreement. COMPANY agrees
to give FRANCHISE OWNER written notice, not more than ninety (90) days after
receipt of FRANCHISE OWNER's notice, of (a) COMPANY's determination whether or
not it will grant FRANCHISE OWNER a Successor Franchise pursuant to this Section
and/or (b) any deficiencies in FRANCHISE OWNER's operation of the Store (or any
other failure to comply with the terms of this Agreement) which could cause
COMPANY to refuse to grant a Successor Franchise. Such notice shall state what
actions FRANCHISE OWNER must take to correct the deficiencies and shall specify
the time period in which such deficiencies must be corrected. COMPANY shall
give FRANCHISE OWNER written notice of a decision not to grant a Successor
Franchise based upon FRANCHISE OWNER's failure to cure deficiencies not less
than ninety (90) days prior to the expiration of the initial term of this
Agreement. Such notice shall state the reasons for COMPANY's refusal to grant a
Successor Franchise. In the event COMPANY fails to give FRAN CHISE OWNER (a)
notice of deficiencies in the Store, or in FRANCHISE OWNER's operation of the
Store, within ninety (90) days after receipt of FRANCHISE OWNER's timely
election to obtain a Successor Franchise, or (b) notice of COMPANY's decision
not to grant a Successor Franchise at least ninety (90) days prior to the
expiration of the term of this Agreement, COMPANY may extend the term of this
Agreement for such period of time as is necessary in order to provide FRANCHISE
OWNER reasonable time to cure deficiencies or to provide ninety (90) days'
notice of COMPANY's determination not to grant a Successor Franchise. The grant
of a Successor Franchise shall be conditioned upon FRANCHISE OWNER's continued
compliance with all the terms and conditions of this Agreement up to the date of
expiration.
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17.C. SUCCESSOR FRANCHISE AGREEMENT/RELEASES.
--------------------------------------
To obtain a Successor Franchise, COMPANY, FRANCHISE OWNER and its Owners
shall execute the form of franchise agreement and any ancillary agreements then
customarily used by COMPANY in the grant of franchises for the operation of
UNITS (with appropriate modifications to the term, the successor franchise
provisions, and other appropriate provisions to reflect the fact that the
agreement relates to a Successor Franchise) which may provide for higher or
additional Royalty Fees and other fees, and FRANCHISE OWNER and its Owners shall
execute general releases, in form satisfactory to COMPANY, of any and all claims
against COMPANY and its Affiliates and their respective shareholders, officers,
directors, employees, agents, successors and assigns. The franchise agreement
for a Successor Franchise will not include any right to any further renewal,
extension, or successor franchise rights. Failure by FRANCHISE OWNER and its
Owners to sign and deliver to COMPANY, such agreements and releases within
fifteen (15) days after delivery thereof to FRANCHISE OWNER shall be deemed an
election by FRANCHISE OWNER not to obtain a Successor Franchise.
18 TERMINATION OF THE FRANCHISE.
----------------------------
18.A. BY FRANCHISE OWNER.
------------------
If FRANCHISE OWNER is in full compliance with this Agreement and COMPANY
materially breaches this Agreement, FRANCHISE OWNER may terminate this Agreement
effective thirty (30) days after COMPANY's receipt of written notice of
termination if FRANCHISE OWNER gives written notice of such breach to COMPANY
and COMPANY does not:
(1) correct such failure within thirty (30) days after COMPANY's
receipt of such notice of material breach; or
(2) if such breach cannot reasonably be cured within thirty (30)
days after COMPANY's receipt of such notice, undertake within thirty (30)
days after COMPANY'S receipt of such notice, and continue until completion,
reasonable efforts to cure such breach.
Any attempt to terminate this Agreement by FRANCHISE OWNER other than as
provided in this Paragraph A shall be a breach of this Agreement.
18.B. BY COMPANY.
----------
COMPANY may terminate this Agreement, effective upon delivery of notice of
termination to FRANCHISE OWNER, or, where expressly applicable, upon failure to
cure to COMPANY's satisfaction any breach by the expiration of any period of
time within which such breach may be cured in accordance with the provisions set
forth below, if:
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(1) FRANCHISE OWNER fails to develop the Store in accordance with
this Agreement and commence operation of business within the time provided
in this Agreement; or
(2) FRANCHISE OWNER fails to operate, abandons, surrenders or
transfers control of the operation of the Store without prior written
approval of COMPANY; or
(3) FRANCHISE OWNER or any of its Principal Owners has made any
material misrepresentation or omission in the application for or
acquisition of the Franchise or in materials submitted relating to a
transfer; or
(4) FRANCHISE OWNER or any of its Owners is convicted by a trial
court of, or pleads guilty or no contest to, a felony, or to another crime
or offense that may adversely affect the reputation of FRANCHISE OWNER or
the Store or the goodwill associated with the Marks or engages in any
misconduct which may adversely affect the reputation of any UNIT or the
goodwill associated with the Marks; or
(5) FRANCHISE OWNER or any of its Owners makes an assignment or
transfer in violation of this Agreement; or
(6) FRANCHISE OWNER (or any of its Owners or employees) makes any
unauthorized use or disclosure of or duplicates any copy of any
Confidential Information or of any of the Store Manuals, makes any
unauthorized use of the Marks or Copyrighted Works, or challenges or seeks
to challenge the validity of COMPANY's or its Affiliates' rights in and to
the Marks, the Copyrighted Works or the Confidential Information (unless
the foregoing prohibited act is inadvertent and does not have, or threaten
to have, an adverse effect upon COMPANY, its business concept, its business
operations, the business of any UNIT, any Mark, the Confidential
Information, any Store Manuals, or the Copyrighted Works, and FRANCHISE
OWNER ceases and desists any such prohibited act promptly upon notice and
reimburses COMPANY for all damages, losses, costs, and expenses incurred by
COMPANY in connection with such prohibited acts); or
(7) FRANCHISE OWNER loses the right to possession of the Site and
does not relocate the Store to another site in accordance with this
Agreement; or
(8) FRANCHISE OWNER fails to timely commence or provide:
(a) Delivery Service pursuant to a Delivery Rider executed by
COMPANY and FRANCHISE OWNER; or
(b) Catering Service pursuant to a Catering Rider executed by
COMPANY and FRANCHISE OWNER; or
(c) Special Distribution Arrangements if required pursuant to
a Special Distribution Agreement executed by COMPANY and FRANCHISE
OWNER,
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in accordance with COMPANY's standards, specifications and procedures, and
does not correct such failure within 10 days after FRANCHISE OWNER's
receipt of COMPANY's written notice of such failure to comply; or, if such
failure cannot reasonably be corrected within the aforesaid 10-day period
but can be corrected within a reasonably short time (not to exceed an
additional 30 days), undertake within 10 days after FRANCHISE OWNER's
receipt of COMPANY's written notice, and continue until completion, best
efforts to correct such failure within such reasonably short time (not to
exceed an additional 30 days), and furnish proof acceptable to COMPANY,
upon its request, of such efforts and the date full compliance will be
achieved; or
(9) FRANCHISE OWNER fails to operate a Commissary to service the
Store, at the time specified by COMPANY and at the location approved by
COMPANY, in accordance with COMPANY's standards, specifications and
procedures and does not correct such failure within ten (10) days after
written notice of such failure is delivered to FRANCHISE OWNER.
(10) FRANCHISE OWNER becomes insolvent in the sense that it is
unable to pay its bills as they become due; or
(11) FRANCHISE OWNER, its Principal Owners or members of their
Immediate Families (whether or not bound by individual noncompetition
undertakings) or other persons who have executed such individual
undertakings violate the restrictions in this Agreement with respect to
Competitive Businesses or Owners who have had access to the Confidential
Information violate the covenants concerning competition and
confidentiality contained in the form of Confidentiality and Non-
Competition Agreement attached hereto as Exhibit H (regardless of whether
---------
any such party has executed this Agreement or a Confidentiality and Non-
Competition Agreement); or
(12) FRANCHISE OWNER fails to report accurately the Store's Royalty
Base Revenue or fails to make payments of any amounts due COMPANY for
Royalty Fees, Software Fees, Marketing Contributions, purchases from
COMPANY or its Affiliates, or any other amounts due to COMPANY or its
Affiliates, and does not correct such failure within ten (10) days after
written notice of such failure is delivered to FRANCHISE OWNER; or
(13) FRANCHISE OWNER causes or permits to exist a default under the
lease or sublease for the Site and fails to cure such default within the
applicable cure period set forth in the lease or sublease; or
(14) FRANCHISE OWNER or any of its Principal Owners fails on three
or more separate occasions within any period of 12 consecutive months to
comply with this Agreement in any material respect, whether or not such
failures to comply are corrected after notice of default is given, or fail
on two (2) or more separate occasions within any period of nine (9)
consecutive months to comply with the same requirement under this
Agreement, whether or not such failures to comply are corrected after
notice of default is given; or
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(15) FRANCHISE OWNER or any of its Owners fail to comply with any
other provision of this Agreement or any mandatory specification, standard,
or operating or inspection procedure prescribed by COMPANY or to pass
COMPANY's quality control inspection and does not: (a) correct such
failure within thirty (30) days after FRANCHISE OWNER's receipt of
COMPANY's written notice of such failure to comply; or (b) if such failure
cannot reasonably be corrected within the aforesaid thirty (30) day period,
but can be corrected within a reasonably short time (not to exceed an
additional thirty (30) days), under take within ten (10) days after
FRANCHISE OWNER's receipt of COMPANY's written notice, and continue until
completion within such reasonably short time (not to exceed an additional
thirty (30) days), best efforts to bring the Store into full compliance,
and furnish proof acceptable to COMPANY upon its request of such efforts
and the date full compliance will be achieved; or
(16) FRANCHISE OWNER or any of its Owners fail or refuse to follow
or comply with any mandatory specification, standard or operating procedure
prescribed by COMPANY relating to the cleanliness or sanitation of the
Store or receives a notice of violation from a governmental authority or
violates any health, safety or sanitation law, ordinance or regulation and
does not: (a) correct such failure or refusal within twenty-four (24) hours
after written notice thereof is delivered to FRANCHISE OWNER; or (b) if
such failure can be corrected within five (5) days but cannot reasonably be
corrected within twenty-four (24) hours after such written notice is
received by FRANCHISE OWNER, undertake corrective action within twenty-four
(24) hours and achieve full compliance within five (5) days after written
notice thereof; or
(17) The lesser of (a) three (3) or more, or (b) fifty percent (50%)
or more, of the Franchise Agreements granted to FRANCHISE OWNER and
DEVELOPER in accordance with the terms of the Development Agreement are
terminated by COMPANY in accordance with their terms, excluding the
permanent closing of any UNITS with the prior written approval of COMPANY;
or
(18) FRANCHISE OWNER has attempted to terminate a Franchise
Agreement with COMPANY without complying with Section 18.A. of this
Agreement.
18.C. TERMINATION OF CERTAIN RIGHTS OF FRANCHISE OWNER.
------------------------------------------------
If COMPANY is entitled to terminate this Agreement in accordance with
Paragraph B. of this Section, COMPANY shall have the option to terminate any one
or more of the following instead of terminating this Agreement:
(1) FRANCHISE OWNER's option to purchase and develop UNITS at
Conversion Sites under Section 2.E. of this Agreement; and
(2) any Delivery Rider in effect between COMPANY and FRANCHISE
OWNER; and
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(3) any Catering Rider in effect between COMPANY and FRANCHISE
OWNER; and
(4) any Special Distribution Agreement in effect between COMPANY
and FRANCHISE OWNER; and
(5) any exclusivity for the Territory granted under Section 2.B. of
this Agreement,
effective ten (10) days after delivery of written notice thereof to FRANCHISE
OWNER. If any of such rights, options or arrangements are terminated in
accordance with this Paragraph C., such termination shall be without prejudice
to COMPANY's right to terminate this Agreement in accordance with Section 18.B
or to terminate any other rights, options or arrangements under this Agreement
at any time thereafter for the same default or as a result of any additional
defaults of the terms of this Agreement.
19. RIGHTS AND OBLIGATIONS OF COMPANY AND FRANCHISE
OWNER UPON TERMINATION OR EXPIRATION OF THE AGREEMENT.
-----------------------------------------------------
19.A. PAYMENT OF AMOUNTS OWED TO COMPANY.
----------------------------------
FRANCHISE OWNER shall immediately pay to COMPANY upon termination or
expiration of this Agreement such Royalty Fees, Software License Fees, Marketing
Contributions and amounts owed for purchases by FRANCHISE OWNER from COMPANY or
its Affiliates, interest due on any of the foregoing, and all other amounts owed
to COMPANY or its Affiliates which are then unpaid, whether or not attributable
to the Store.
19.B. MARKS, TRADE DRESS, AND COPYRIGHTED WORKS.
-----------------------------------------
Upon the termination or expiration of this Agreement, FRANCHISE OWNER
shall:
(1) immediately cease use of all the Marks and not thereafter
directly or indirectly at any time or in any manner identify itself or any
business as a current or former UNIT, or as a current or former franchise
owner of or as otherwise associated with COMPANY, or use any Mark, any
colorable imitation thereof or any mark substantially identical to or
deceptively similar to any Mark in any manner or for any purpose, or
utilize for any purpose any trade name, trademark or service mark, or other
commercial symbol or trade dress that suggests or indicates a connection or
association with COMPANY; and
(2) immediately remove from the Site all signs containing any Mark,
remove the Marks from all vehicles, fixtures, furnishings, decor items and
other objects displaying any Mark at the Site and return to COMPANY or
destroy all packaging materials and forms, advertising and promotional
materials, catalogs, invoices and other materials containing any Mark or
otherwise identifying or relating to a UNIT; and
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(3) immediately take such action as may be required to cancel or,
at COMPANY's option, to transfer to COMPANY or its designee, all fictitious
or assumed name or equivalent registrations relating to its use of any
Mark; and
(4) immediately cease use of all Copyrighted Works which were
furnished and/or licensed to FRANCHISE OWNER by COMPANY pursuant to this
Agreement and return to COMPANY or destroy, at COMPANY's option, all forms,
advertising and promotional materials or other materials containing such
Copyrighted Works; and
(5) immediately take all such actions as may be necessary to
transfer any telephone number and any telephone directory listings
associated with the Marks to COMPANY. FRANCHISE OWNER acknowledges that, as
between COMPANY and FRANCHISE OWNER, COMPANY has the sole right to and
interest in all telephone numbers and directory listings associated with
the Marks. FRANCHISE OWNER concurrently with the execution of this
Agreement shall execute COMPANY's form of collateral assignment of
telephone numbers and listings (the "TELEPHONE NUMBER ASSIGNMENT"),
attached to this Agreement as
Exhibit J. FRANCHISE OWNER acknowledges and agrees that the telephone
---------
company and all listing agencies may accept the Telephone Number Assignment
as conclusive evidence of the exclusive right of the COMPANY in such
telephone numbers and directory listings and its authority to direct their
transfer; and
(6) if COMPANY does not purchase the Store as provided in Section
19.F., at FRANCHISE OWNER's expense, immediately make such modifications
and alterations, including removal of all distinctive physical and
structural features associated with the Trade Dress of UNITS, as may be
necessary to distinguish the Site and the Store so clearly from its former
appearance and from other UNITS as to prevent any possibility that the
public will associate the Site with UNITS and to prevent confusion created
by such association. Such modifications and alterations shall include, but
not be limited to, removing all awnings and removing or covering the
distinctive decor and color scheme on all walls, signage, counters,
displays, equipment, vehicles, fixtures and furnishings, as well as the
exterior of the Store. If FRANCHISE OWNER fails to initiate immediately or
complete such modifications, alterations and/or removals within such time
as COMPANY deems appropriate, FRANCHISE OWNER agrees that COMPANY or its
designated agents may enter the Store and adjacent areas without prior
notice to make such modifications, alterations and/or removals, at
FRANCHISE OWNER's expense, without liability for trespass or damages.
FRANCHISE OWNER expressly acknowledges that its failure to make such
alterations will cause irreparable injury to COMPANY and consents to entry,
at FRANCHISE OWNER's expense, of an ex-parte order by any court of
competent jurisdiction authorizing COMPANY or its agents to take such
action, if COMPANY seeks such an order.
FRANCHISE OWNER shall furnish to COMPANY (i) within thirty (30) days after the
effective date of termination or expiration, evidence satisfactory to COMPANY of
FRANCHISE OWNER's compliance with Subparagraphs (1), (3) and (4) of the
foregoing obligations, and (ii) within thirty (30) days after the later of
expiration of COMPANY's option to purchase the
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Store, as provided in this Section, or receipt of notice that COMPANY elects not
to purchase the Store pursuant to this Section, evidence satisfactory to COMPANY
of FRANCHISE OWNER's compliance with all of the foregoing obligations. If
COMPANY exercises its option to purchase the Store under this Section, COMPANY,
in its sole discretion, shall direct FRANCHISE OWNER regarding which, if any, of
the above requirements FRANCHISE OWNER shall observe.
19.C. CONFIDENTIAL INFORMATION.
------------------------
FRANCHISE OWNER agrees that upon termination or expiration of the Franchise
(without grant of a Successor Franchise):
(1) it, and all of its affiliates, Owners, employees, agents or
other representatives, will immediately cease to use and will maintain the
absolute confidentiality of any Confidential Information of COMPANY
disclosed to or otherwise learned or acquired by FRANCHISE OWNER and will
refrain from using such Confidential Information in any business or
otherwise; and
(2) it will return to COMPANY all copies of the Store Manuals and
any other confidential materials which have been loaned or made available
to it by COMPANY.
19.D. COVENANT NOT TO COMPETE.
-----------------------
Upon expiration or termination of this Agreement by COMPANY or by FRANCHISE
OWNER, other than pursuant to Section 18.A., neither FRANCHISE OWNER nor any of
its Principal Owners shall directly or indirectly (through a member of the
Immediate Family of FRANCHISE OWNER or a Principal Owner or otherwise) for a
period of two (2) years commencing on the effective date of such termination or
expiration, or the date on which FRANCHISE OWNER ceases to operate the Store,
whichever is later:
(1) have any interest as a disclosed or beneficial owner in any
Competitive Business located or operating:
(a) at the Site; or
(b) within a five (5) mile radius of the Site; or
(c) within a five (5) mile radius of any other UNIT in
operation or under development on the effective date of termination or
expiration of this Agreement; or
(d) within the Marketing Area; or
(2) perform services as a director, officer, manager, employee,
consultant, representative, agent or otherwise for any Competitive Business
located or operating:
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(a) at the Site; or
(b) within a five (5) mile radius of the Site; or
(c) within a five (5) mile radius of any other UNIT in
operation or under development on the effective date of termination or
expiration of this Agreement; or
(d) within the Marketing Area; or
(3) divert or attempt to divert any business or any customers of
any UNIT to any Competitive Business; or
(4) employ or seek to employ, any person who is employed by
COMPANY, its Affiliates or any developer or franchise owner of COMPANY, nor
induce nor attempt to induce any such person to leave said employment
without the prior written consent of such person's employer.
The restrictions of Subparagraph (1) of this Paragraph D. will not be
applicable to the ownership of shares of a class of securities listed on a stock
exchange or traded on the over-the-counter market and quoted on a national
inter-dealer quotation system that represent less than three percent (3%) of the
number of shares of that class of securities issued and outstanding nor shall
they be construed to prohibit FRANCHISE OWNER, any Principal Owner of FRANCHISE
OWNER, or any member of the Immediate Family of FRANCHISE OWNER or any Principal
Owner from having a direct or indirect ownership interest in any UNIT,
development agreement or franchise agreement for the development or operation of
any UNIT, or any entity owning, controlling or operating a UNIT, or from
providing services to a UNIT. Furthermore, the restrictions of this Paragraph
D. shall not prohibit FRANCHISE OWNER, any Principal Owner of FRANCHISE OWNER,
or (to the extent any such person is an individual) any member of the Immediate
Family of FRANCHISE OWNER or a Principal Owner of FRANCHISE OWNER from
performing services for or having an ownership interest in a Permitted
Competitive Business, or from conducting customary promotion and advertising of
a Permitted Competitive Business.
19.E. CONTINUING OBLIGATIONS.
----------------------
All obligations of COMPANY and FRANCHISE OWNER which expressly or by their
nature survive or are intended to survive the expiration or termination of this
Agreement shall continue in full force and effect subsequent to and
notwithstanding its expiration or termination and until they are satisfied in
full or by their nature expire.
19.F. COMPANY'S RIGHT TO PURCHASE ASSETS OF THE STORE.
-----------------------------------------------
Upon termination of this Agreement by COMPANY in accordance with its terms
and conditions, upon termination of this Agreement by FRANCHISE OWNER without
complying with this Agreement, or upon expiration of this Agreement (without the
grant of a Successor
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Franchise), COMPANY or its assignee shall have the option, exercisable by giving
written notice thereof within sixty (60) days from the date of such expiration
or termination, to purchase from FRANCHISE OWNER all the assets used in the
Store. As used in this Paragraph, "ASSETS" shall mean and include, without
limitation, leasehold improvements, equipment, computer hardware, vehicles,
furnishings, fixtures, signs, inventory (non-perishable products, materials and
supplies) and the lease or sublease for the Site. COMPANY shall have the
unrestricted right to assign this option to purchase. COMPANY or its assignee
shall be entitled to all customary warranties and representations given by the
seller of a business including, without limitation, representations and
warranties as to: (1) ownership, condition and title to assets; (2) liens and
encumbrances relating to the assets; and (3) validity of contracts and
liabilities, inuring to COMPANY or affecting the assets, contingent or
otherwise.
The purchase price for the assets of the Store shall be the tangible book
value, determined as of the date of termination or expiration of this Agreement
in a manner consistent with reasonable depreciation of leasehold improvements
owned by FRANCHISE OWNER and the equipment, computer hardware, vehicles,
furnishings, fixtures, signs and inventory of the Store, provided that the
purchase price shall take into account the termination or expiration of the
Franchise granted hereunder and this Agreement and shall not contain any factor
or increment for any trademark, service mark or other commercial symbol used in
connection with the operation of the Store or any goodwill or "going concern"
value for the Store and further provided that COMPANY may exclude from the
assets purchased hereunder any equipment, computer hardware, vehicles,
furnishings, fixtures, signs and inventory that are not approved as meeting
then-current quality standards for UNITS. The length of the remaining term of
the lease or sublease for the Site of the Store shall also be considered in
determining the fair market value hereunder.
The purchase price shall be paid in cash, a cash equivalent, or marketable
securities of equivalent value at the closing of the purchase, which shall take
place no later than ninety (90) days after receipt by FRANCHISE OWNER of notice
of exercise of this option to purchase, at which time FRANCHISE OWNER shall
deliver instruments transferring to COMPANY or its assignee: (i) good and
merchantable title to the assets purchased, free and clear of all liens and
encumbrances (other than liens and security interests acceptable to COMPANY or
its assignee), with all sales and other transfer taxes paid by FRANCHISE OWNER;
(ii) all licenses and permits of the Store which may be assigned or transferred;
and (iii) the lease or sublease for the Site. In the event that FRANCHISE OWNER
cannot deliver clear title to all of the purchased assets as aforesaid, or in
the event there shall be other unresolved issues, the closing of the sale shall
be accomplished through an escrow. Further, FRANCHISE OWNER and COMPANY shall,
prior to closing, comply with all applicable legal requirements, including the
bulk sales provisions of the Uniform Commercial Code of the state in which the
Store is located and the bulk sales provisions of any applicable tax laws and
regulations. FRANCHISE OWNER shall, prior to or simultaneously with the closing
of the purchase, pay all tax liabilities incurred in connection with the
operation of the Store. COMPANY shall have the right to set off against and
reduce the purchase price by any and all amounts owed by FRANCHISE OWNER to
COMPANY, and the amount of any encumbrances or liens against the assets or any
obligations assumed by COMPANY.
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If COMPANY or its assignee exercises this option to purchase, pending the
closing of such purchase as hereinabove provided, COMPANY shall have the right
to appoint a manager to maintain the operation of the Store, in which case
FRANCHISE OWNER shall continue to operate the Store on the terms of this
Agreement until the closing of the purchase. Alternatively, COMPANY may require
FRANCHISE OWNER to close the Store during such time period without removing any
assets from the Store. FRANCHISE OWNER shall maintain in force all insurance
policies required pursuant to this Agreement, through the date of closing. If
the Site is leased, COMPANY agrees to use reasonable efforts to effect a
termination of the existing lease for the Site and enter into a new lease on
reasonable terms with the landlord. In the event COMPANY is unable to enter
into a new lease and FRANCHISE OWNER's rights under the lease for the Site are
assigned to COMPANY or COMPANY subleases the Site from FRANCHISE OWNER, COMPANY
will indemnify and hold harmless FRANCHISE OWNER from any ongoing liability
under the lease from the date COMPANY assumes possession of the Site.
20 RELATIONSHIP OF THE PARTIES/INDEMNIFICATION.
-------------------------------------------
20.A. INDEPENDENT CONTRACTORS.
-----------------------
It is understood and agreed by the parties hereto that this Agreement does
not create a fiduciary relationship between them, that COMPANY and FRANCHISE
OWNER are and shall be independent contractors, and that nothing in this
Agreement is intended to make either party a general or special agent, joint
venturer, partner, or employee of the other for any purpose. FRANCHISE OWNER
shall conspicuously identify itself in all dealings with customers, suppliers,
vendors, public officials, FRANCHISE OWNER personnel, and others as the owner of
the Store under a franchise granted by COMPANY and shall conspicuously and
prominently place such other notices of independent ownership on the Site and on
such forms, business cards, stationery, advertising, and such other materials as
COMPANY may require from time to time.
20.B. NO LIABILITY FOR ACTS OF OTHER PARTY.
------------------------------------
FRANCHISE OWNER shall not employ any of the Marks in signing any contract,
application for any license or permit, or in a manner that may result in
liability of COMPANY or its Affiliates for any indebtedness or obligation of
FRANCHISE OWNER, nor will FRANCHISE OWNER use the Marks in any way not expressly
authorized herein. Except as expressly authorized in writing, neither COMPANY
nor FRANCHISE OWNER shall make any express or implied agreements, warranties,
guarantees or representations, or incur any debt in the name of or on behalf of
the other, or represent that their relationship is other than franchisor and
franchise owner, and neither COMPANY nor FRANCHISE OWNER shall be obligated by
or have any liability under any agreements or representations made by the other
that are not expressly authorized in writing, nor shall COMPANY be obligated for
any damages to any person or property directly or indirectly arising out of the
operation of the Store or FRANCHISE OWNER's business authorized by or conducted
pursuant to this Agreement.
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20.C. TAXES.
-----
COMPANY shall have no liability for any sales, value added, use, service,
occupation, excise, gross receipts, income, property, payroll, employee
withholding or other taxes, whether levied upon this Agreement, FRANCHISE OWNER,
the Store or FRANCHISE OWNER's property, or upon COMPANY, in connection with the
sales made or business conducted by FRANCHISE OWNER, except any taxes COMPANY is
required by law to collect from FRANCHISE OWNER with respect to purchases from
COMPANY. Payment of all such taxes shall be the responsibility of FRANCHISE
OWNER.
20.D. INDEMNIFICATION.
---------------
FRANCHISE OWNER agrees to indemnify, defend and hold COMPANY, its
Affiliates, and their respective shareholders, directors, officers, employees,
agents, successors and assignees harmless against and to reimburse them for:
(1) any and all taxes described in Paragraph C of this Section; (2) any and all
claims against, and losses, obligations, damages and expenses incurred, by
COMPANY in connection with any and all claims, losses, damages and expenses of
customers and others directly or indirectly arising out of this Agreement, the
development or operation of the Store (including, without limitation, breach or
violation of any agreement, contract or commitment by FRANCHISE OWNER resulting
from FRANCHISE OWNER's execution and delivery of this Agreement or performance
of any of its obligations hereunder or liabilities asserted by owners or
employees, agents or other representatives of FRANCHISE OWNER arising in
connection with training provided by COMPANY or its Affiliates or designees or
otherwise), (3) the conduct of Catering Service or Delivery Service, (4) the
operation of Special Distribution Arrangements, (5) unauthorized activities
conducted in association with the Marks, or (6) the transfer of any interest in
this Agreement, the Franchise, the Store, some or all of the assets of the Store
(other than sales in the ordinary course of business) or FRANCHISE OWNER, in any
manner not in accordance with this Agreement to the extent that such claims,
obligations, damages, taxes, losses or liabilities do not arise solely from the
gross negligence or wrongful conduct of COMPANY. For purposes of this indemni
fication, "CLAIMS" shall mean and include all obligations, actual,
consequential, special, and punitive damages, and costs incurred in the defense
or settlement of any claim, including, without limitation, reasonable
accountants', attorneys', attorney assistants', arbitrators' and expert witness
fees, costs of investigation and proof of facts, court costs, other litigation
expenses, and travel and living expenses. COMPANY shall have the right to
defend any such indemnified claim against it in such manner as COMPANY deems
appropriate or desirable in its sole discretion. This indemnity shall continue
in full force and effect subsequent to and notwithstanding the expiration or
termination of this Agreement.
21. ENFORCEMENT.
-----------
21.A. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS.
-------------------------------------------------
If any provision of this Agreement relating to the in-term exclusive
dealing covenants is declared or made invalid or unenforceable by judicial
action, legislation or other government action, COMPANY may, if it believes in
its sole discretion that the continuation of this
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Agreement would not be in its best interests, terminate this Agreement effective
upon sixty (60) days' written notice to FRANCHISE OWNER.
All other provisions of this Agreement are severable and this Agreement
shall be interpreted and enforced as if all completely invalid or unenforceable
provisions were not contained herein and partially valid and enforceable
provisions shall be enforced to the extent valid and enforceable. To the extent
the post-transfer restrictive covenants or post-termination/post-expiration
restrictive covenants contained herein are deemed unenforceable by virtue of
their scope in terms of geographic area, business activity prohibited and/or
length of time, but may be made enforceable by reductions or alterations of
either or any thereof, FRANCHISE OWNER and COMPANY agree that the same shall be
enforced to the fullest extent permissible under the laws and public policies
applied in the jurisdiction in which enforcement is sought. If any applicable
and binding law or rule of any jurisdiction requires a greater prior notice of
the termination of this Agreement or refusal to grant a Successor Franchise than
is required hereunder, or the taking of some other action not required
hereunder, or if under any applicable and binding law or rule of any
jurisdiction, any provision of this Agreement or any specification, standard or
operating procedure prescribed by COMPANY is invalid or unenforceable, the prior
notice and/or other action required by such law or rule shall be substituted for
the comparable provisions hereof, and COMPANY shall have the right, in its sole
discretion, to modify such invalid or unenforceable provision, specification,
standard, or operating procedure to the extent required to be valid and
enforceable. Such modifications to this Agreement shall be effective only in
such jurisdiction and this Agreement shall be enforced as originally made and
entered into in all other jurisdictions.
21.B. WAIVER OF OBLIGATIONS.
---------------------
COMPANY and FRANCHISE OWNER may by written instrument unilaterally waive or
reduce any obligation of or restriction upon the other under this Agreement,
effective upon delivery of written notice thereof to the other or such other
effective date stated in the notice of waiver. Whenever this Agreement requires
COMPANY's prior approval or consent, FRANCHISE OWNER shall make a timely written
request therefor and such approval shall be obtained in writing.
With respect to this Agreement, the relationship of the parties, the Store,
Catering Service, Delivery Service, Special Distribution Arrangements,
Commissaries or any other matter, COMPANY makes no representations, warranties
or guaranties upon which FRANCHISE OWNER may rely, and assumes no liability or
obligation to FRANCHISE OWNER, by granting any waiver, approval, or consent to
FRANCHISE OWNER or by reason of any neglect, delay, or denial of any request
therefor. Any waiver granted by COMPANY (1) shall be without prejudice to any
other rights COMPANY may have, (2) will be subject to continuing review by
COMPANY, and (3) as to continuing waivers, may be revoked prospectively, in
COMPANY's sole discretion, at any time and for any reason, effective upon
delivery to FRANCHISE OWNER of ten (10) days' prior written notice.
COMPANY and FRANCHISE OWNER shall not be deemed to have waived or impaired
any right, power, or option reserved by this Agreement (including, without
limitation, the right
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to demand full compliance with every term, condition, and covenant in this
Agreement, or to declare any breach thereof to be a default and to terminate
this Agreement prior to the expiration of its term), by virtue of any:
(i) custom or practice of the parties at variance with
the terms hereof; or
(ii) any failure, refusal, or neglect of COMPANY or
FRANCHISE OWNER to exercise any right under this Agreement or to insist
upon full compliance by the other with its obligations hereunder,
including, without limitation, any mandatory specification, standard or
operating procedure; or
(iii) any waiver, forebearance, delay, failure, or
omission by COMPANY to exercise any right, power, or option, whether of the
same, similar or different nature, with respect to any other UNIT or any
development or franchise agreement therefor; or
(iv) the acceptance by COMPANY of any payments from
FRANCHISE OWNER after any breach by FRANCHISE OWNER of this Agreement.
Neither COMPANY nor FRANCHISE OWNER shall be liable for loss or damage or
deemed to be in breach of this Agreement if its failure to perform its
obligations results from any of the following and is not caused by the non-
performing party:
(v) acts of God; or
(vi) acts of war or insurrection; or
(viii) strikes, lockouts, boycotts, fires and other
casualties.
Any delay resulting from any of said causes shall extend the time allowed for
performance or excuse performance, in whole or in part, as may be reasonable,
except that said causes shall not excuse payments of amounts owed at the time of
such occurrence or payment of Royalty Fees, Software License Fees, Marketing
Contributions or other fees thereafter and as soon as performance is possible
the non-performing party shall immediately resume performance and, in no event,
shall non-performance be excused for more than six (6) months.
21.C. INJUNCTIVE RELIEF.
-----------------
COMPANY shall have the right to seek specific performance of the provisions
of this Agreement and injunctive relief against threatened conduct that will
cause it loss or damages under customary equity rules, including applicable
rules for obtaining restraining orders and preliminary injunctions. FRANCHISE
OWNER agrees that COMPANY may obtain such injunctive relief in addition to such
further or other relief as may be available at law or in equity. FRANCHISE
OWNER agrees that COMPANY will not be required to post a bond to obtain any
injunctive relief and that FRANCHISE OWNER's only remedy if an injunction is
entered against FRANCHISE OWNER will be the dissolution of that injunction, if
warranted, upon due hearing (all claims for damages by reason of the wrongful
issuance of such injunction
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being expressly waived hereby). Any such action shall be brought as provided in
Paragraph G. of this Section.
21.D. RIGHTS OF PARTIES ARE CUMULATIVE.
--------------------------------
The rights of COMPANY and FRANCHISE OWNER hereunder are cumulative and no
exercise or enforcement by COMPANY or FRANCHISE OWNER of any right or remedy
hereunder shall preclude the exercise or enforcement by COMPANY or FRANCHISE
OWNER of any other right or remedy hereunder or to which COMPANY or FRANCHISE
OWNER is entitled by law.
21.E. COSTS AND LEGAL FEES.
--------------------
If COMPANY engages legal counsel in connection with any failure by
FRANCHISE OWNER to comply with this Agreement, FRANCHISE OWNER shall reimburse
COMPANY for costs and expenses incurred by COMPANY, including, without
limitation, reasonable accountants, attorneys', attorneys assistants',
arbitrators' and expert witness fees, cost of investigation and proof of facts,
court costs, other litigation expenses and travel and living expenses, whether
incurred prior to, in preparation for, in contemplation of or in connection with
the filing of any judicial or arbitration proceeding to enforce this Agreement.
21.F. GOVERNING LAW.
-------------
EXCEPT TO THE EXTENT GOVERNED BY THE UNITED STATES TRADEMARK ACT OF 1946
(LANHAM ACT, 15 U.S.C. {{ 1051 ET SEQ.), THIS AGREEMENT AND THE RELATIONSHIP
------
BETWEEN THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF COLORADO, EXCEPT THAT SUCH STATE'S CHOICE OF
LAW AND CONFLICTS OF LAW RULES SHALL NOT APPLY AND ANY FRANCHISE REGISTRATION,
DISCLOSURE, RELATIONSHIP OR SIMILAR STATUTE WHICH MAY BE ADOPTED BY THE STATE OF
COLORADO SHALL NOT APPLY UNLESS ITS JURISDICTIONAL REQUIREMENTS ARE MET
INDEPENDENTLY WITHOUT REFERENCE TO THIS PARAGRAPH.
21.G. CONSENT TO JURISDICTION/CHOICE OF FORUM.
---------------------------------------
FRANCHISE OWNER AGREES THAT FRANCHISE OWNER SHALL, AND COMPANY MAY, AT ITS
OPTION, INSTITUTE ANY ACTION ARISING OUT OF OR RELATING TO THIS AGREEMENT IN ANY
STATE COURT OF GENERAL JURISDICTION IN JEFFERSON COUNTY, COLORADO OR THE UNITED
STATES FEDERAL DISTRICT COURT FOR THE DISTRICT OF COLORADO, OR THE STATE COURT
OF GENERAL JURISDICTION OR UNITED STATES FEDERAL DISTRICT COURT NEAREST TO
COMPANY'S EXECUTIVE OFFICE AT THE TIME SUCH ACTION IS FILED. FRANCHISE OWNER
IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT AND WAIVES ANY
OBJECTION IT MAY HAVE TO EITHER THE JURISDICTION OR VENUE OF ANY SUCH COURT.
75
<PAGE>
21.H. LIMITATIONS OF CLAIMS.
---------------------
EXCEPT FOR CLAIMS BROUGHT BY COMPANY WITH REGARD TO FRANCHISE OWNER'S
OBLIGATIONS TO MAKE PAYMENTS TO COMPANY PURSUANT TO THIS AGREEMENT AND TO
INDEMNIFY COMPANY PURSUANT TO SECTION 20.D., ANY AND ALL CLAIMS ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR THE RELATIONSHIP OF FRANCHISE OWNER AND COMPANY
PURSUANT TO THIS AGREEMENT SHALL BE BARRED UNLESS AN ACTION IS COMMENCED WITHIN:
(1) TWO (2) YEARS FROM THE DATE ON WHICH THE ACT OR EVENT GIVING RISE TO THE
CLAIM OCCURRED OR (2) ONE (1) YEAR FROM THE DATE ON WHICH FRANCHISE OWNER OR
COMPANY KNEW OR SHOULD HAVE KNOWN, IN THE EXERCISE OF REASONABLE DILIGENCE, OF
THE FACTS GIVING RISE TO SUCH CLAIMS, WHICHEVER OCCURS FIRST.
21.I. WAIVER OF PUNITIVE DAMAGES.
--------------------------
COMPANY AND FRANCHISE OWNER HEREBY WAIVE TO THE FULLEST EXTENT PERMIT TED
BY LAW, ANY RIGHT TO OR CLAIM FOR ANY PUNITIVE, EXEMPLARY, CONSEQUENTIAL OR
SPECULATIVE DAMAGES AGAINST THE OTHER AND AGREE THAT IN THE EVENT OF A DISPUTE
BETWEEN THEM, EXCEPT AS OTHERWISE PROVIDED HEREIN, EACH SHALL BE LIMITED TO THE
RECOVERY OF ACTUAL DAMAGES SUSTAINED BY IT.
21.J. WAIVER OF JURY TRIAL.
--------------------
COMPANY AND FRANCHISE OWNER HEREBY IRREVOCABLY WAIVE TRIAL BY JURY ON ANY
ACTION, PROCEEDING OR COUNTERCLAIM, WHETHER AT LAW OR IN EQUITY, BROUGHT BY
EITHER OF THEM.
21.K. BINDING EFFECT.
--------------
This Agreement is binding upon the parties hereto and their respective
executors, administrators, heirs, assigns, and successors in interest, and shall
not be modified, except by written agreement signed by both FRANCHISE OWNER and
COMPANY.
21.L. CONSTRUCTION.
------------
The preambles and exhibits are a part of this Agreement, this Agreement
constitutes the entire agreement of the parties, and there are no other oral or
written understandings or agreements between COMPANY and FRANCHISE OWNER
relating to the subject matter of this Agreement. Except as otherwise provided
herein, nothing in this Agreement is intended, nor shall be deemed, to confer
any rights or remedies upon any person or legal entity not a party hereto. The
headings of the several sections and paragraphs hereof are for convenience only
and do not define, limit, or construe the contents of such sections or
paragraphs. The term "FRANCHISE OWNER" as used in this Agreement is applicable
to one or more persons or enti-
76
<PAGE>
ties as the case may be, and the singular usage includes the plural and the
masculine and neuter usages include each other and the feminine.
If two or more persons are at any time FRANCHISE OWNER hereunder, whether
or not as partners or joint venturers, their obligations and liabilities to
COMPANY shall be joint and several. This Agreement shall be executed in
multiple copies, each of which shall be deemed an original.
21.M. REASONABLENESS; APPROVALS.
-------------------------
COMPANY and FRANCHISE OWNER agree to act reasonably in all dealings with
each other pursuant to this Agreement. Whenever the consent or approval of
either party is required or contemplated hereunder, such approval shall be in
writing, and the party whose consent or approval is required agrees not to
unreasonably withhold the same, unless expressly subject to such party's sole
discretion pursuant to the terms of this Agreement.
22. NOTICES AND PAYMENTS.
--------------------
All written notices and reports permitted or required to be delivered by
the provisions of this Agreement or of the Store Manuals shall be deemed so
delivered at the time delivered by hand, one (1) business day after transmission
by facsimile with proof of receipt, one (1) business day after being placed in
the hands of a commercial courier service for overnight delivery, or three (3)
business days after placement in the United States Mail by Registered or
Certified Mail, Return Receipt Requested, postage prepaid and properly
addressed. Unless otherwise notified in writing, all notices, reports or
payments to COMPANY shall be sent to COMPANY at 1526 Cole Boulevard, Suite 200,
Golden, Colorado 80401-4086, to the attention of the Vice President, Franchise
Development, with a copy to the Vice President and General Counsel or at its
most current principal business address of which FRANCHISE OWNER has been
notified. Notices to FRANCHISE OWNER shall be sent to FRANCHISE OWNER at the
address shown on the first page of this Agreement or to FRANCHISE OWNER's most
current principal business address of which COMPANY has been notified, as
applicable. All payments and reports required by this Agreement shall be
directed to COMPANY at the above address, or to such other persons and places as
COMPANY may direct from time to time. Any required payment or report not
actually received by COMPANY during regular business hours on the date due (or
postmarked by postal authorities at least two (2) days prior thereto) shall be
deemed delinquent.
77
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement in multiple originals on the day and year first above written and
COMPANY has accepted this Agreement in Jefferson County, Colorado.
EINSTEIN/NOAH BAGEL CORP. ____________________________________
FRANCHISE OWNER
By:________________________________ By:_________________________________
Title:___________________________ Title:____________________________
78
<PAGE>
EXHIBIT A
TO THE EINSTEIN/NOAH BAGEL CORP. FRANCHISE AGREEMENT
BY AND BETWEEN
EINSTEIN/NOAH BAGEL CORP.
AND ____________________________________
DATED _____________________
CATERING RIDER
--------------
<PAGE>
CATERING RIDER
--------------
THIS RIDER is made as of this _________________ day of _____________,
19____ by and between EINSTEIN/NOAH BAGEL CORP., a Delaware corporation
("COMPANY"), and
________________________________________________________________________________
________________________, a ____________________________________________
("FRANCHISE OWNER"), and is attached to and incorporated into the Einstein/Noah
Bagel Corp. Franchise Agreement by and between COMPANY and FRANCHISE OWNER (the
"Agreement") dated as of ______________________________________________. All
capitalized terms not defined in this Rider shall have the respective meanings
set forth in the Agreement. To the extent that the terms of this Rider are
inconsistent with any of the terms of the Agreement, the terms of this Rider
shall supersede and govern.
1. CATERING SERVICE. FRANCHISE OWNER agrees that, within
----------------
_____________________ (____________) days after the execution date of this Rider
and thereafter during the remainder of the term of the Agreement, subject to
earlier termination by COMPANY as provided below in this Rider, FRANCHISE OWNER
will offer and provide Catering Service (defined below) from the Stores or, if
required by COMPANY in its sole discretion, from a catering facility ("CATERING
FACILITY") to customers located within the geographic area described in Schedule
--------
A attached hereto ("CATERING AREA"). As used herein, "Catering Service" shall
- -
mean the delivery of Products prepared at the Stores or a Catering Facility to
customers in the Catering Area, where (a) such Products are intended to serve
fifteen (15) or more persons, or (b) in addition to the delivery of Products,
FRANCHISE OWNER provides ancillary services to a customer at a location within
the Catering Area, including, by way of example and without limitation, setting
up for serving or other distribution of Products. The Stores or the Catering
Facility, whichever is used for the conduct of Catering Service by FRANCHISE
OWNER, shall be referred to herein as the "CATERING LOCATION" and shall be
identified in Schedule A attached hereto immediately after COMPANY approves such
----------
Catering Facility in writing pursuant to the requirements of Paragraph 2 below.
FRANCHISE OWNER acknowledges and agrees that Catering Service shall not include
Delivery Service, as defined in the Agreement. FRANCHISE OWNER, at its sole
expense, shall take such actions (including, without limitation, constructing
such improvements and acquiring fixtures, equipment, vehicles, and other
materials and supplies) and obtain such permits as are required to commence
Catering Service from the Catering Location within the (___) day period
specified above.
2. CATERING SERVICE STANDARDS. FRANCHISE OWNER agrees to provide
--------------------------
Catering Service in accordance with the standards, specifications and procedures
for Catering Service which COMPANY prescribes, and may change from time to time
in its sole discretion, in the Manuals or otherwise in writing, including,
without limitation, requirements for catering vehicles (owned and non-owned),
training and conduct of personnel involved in Catering Service, design, layout,
equipment, fixtures, furniture, signage, product packaging, materials and
supplies, and COMPANY's prototype plans and layout for a Catering Location.
In particular, and without limiting the foregoing, FRANCHISE OWNER shall:
A-1
<PAGE>
a. require all catering drivers to strictly comply with all
regulations, laws and ordinances applicable to the operation of motor
vehicles and use due care, taking into consideration road conditions,
when performing catering services;
b. require all catering drivers to maintain adequate motor
vehicle liability insurance that complies with all applicable laws
and regulations and that extends to the operation of a motor vehicle
for use for commercial delivery;
c. maintain or cause drivers to maintain all catering
vehicles in good and safe operating condition in full compliance with
all applicable laws and regulations;
d. conduct initial and periodic (at least once every six
months) driving record checks on all catering drivers;
e. require all catering drivers to possess and maintain
valid drivers licenses and driving records free of disqualifying
violations;
f. suspend, or where appropriate under COMPANY's
specifications and standards as in effect from time to time, terminate
any catering driver who does not conform to COMPANY's standards and
specifications for Catering Service; and
g. obtain and maintain all licenses, permits and other
governmental approvals necessary or advisable for the provision of
Catering Services, and the conduct of such Catering Service in a
manner which complies with all sanitary, safety and food preparation
and holding period standards.
FRANCHISE OWNER shall maintain the condition and appearance of, and
perform maintenance with respect to, the Catering Location, catering vehicles,
furniture, fixtures and equipment used in connection with the provision of
Catering Service in accordance with COMPANY's standards, specifications and
procedures, and consistent with the image of UNITS and related facilities as
first class, clean, sanitary, attractive and efficiently operated food service
businesses.
3. COMPANY'S REVIEW AND APPROVAL OF THE CATERING FACILITY.
------------------------------------------------------
FRANCHISE COMPANY's specifications and requirements regarding site selection (if
applicable), development and construction of the Catering Facility. FRANCHISE
OWNER shall promptly submit to COMPANY after the execution date of this Rider a
complete site evaluation report and feasibility analysis (the "CATERING FACILITY
SITE PACKAGE") on COMPANY's specified form (containing such commercial and other
information and photographs as COMPANY may require from time to time) for the
site at which FRANCHISE OWNER proposes and intends in good faith to establish
and operate the Catering Facility and which FRANCHISE OWNER reasonably believes
to conform to certain minimum site criteria for catering facilities established
by COMPANY from time to time in its sole discretion. In approving or
disapproving any proposed site for the Catering Facility, COMPANY will consider
such matters as it deems material, including, without limitation, the effect
Catering Service will have on the carry-out and on-premises dining services and
Delivery Service (if any) conducted
A-2
<PAGE>
at or from the STORE, traffic patterns, parking, the predominant character of
the neighborhood, the nature of other businesses in proximity to the site, and
other commercial characteristics (including the purchase price or rental
obligations and other lease terms for the proposed site, if applicable) and the
size, appearance, and other physical characteristics of the proposed site.
COMPANY will approve or disapprove a proposed site for the Catering
Facility by delivery of written notice to FRANCHISE OWNER. COMPANY agrees to
exert its best efforts to deliver such notification to FRANCHISE OWNER within
twenty (20) days after receipt by COMPANY of a complete Catering Facility Site
Package and such other materials requested by COMPANY from time to time,
containing all information required by COMPANY. COMPANY shall have the right in
its sole discretion to approve or disapprove a proposed site for the Catering
Facility, and FRANCHISE OWNER acknowledges and agrees that COMPANY shall have no
liability therefor. Notwithstanding any other provision of this Rider,
COMPANY's failure to provide FRANCHISE OWNER with notice of its approval or
disapproval of one or more proposed sites shall in no event constitute a waiver
of COMPANY's right to approve or disapprove the site for the Catering Facility.
4. COMPANY'S RIGHT TO TERMINATE THE AGREEMENT OR CATERING SERVICE. If
--------------------------------------------------------------
FRANCHISE OWNER fails to provide Catering Service as required pursuant to this
Rider, FRANCHISE OWNER acknowledges and agrees COMPANY shall have the right to
(a) terminate the Agreement pursuant to and in accordance with the terms
specified in Section 3.C. of the Agreement, or (b) FRANCHISE OWNER's right to
provide Catering Service, among other rights, pursuant to and in accordance with
the terms specified in Section 18.B(8)(b) of the Agreement. If COMPANY
terminates FRANCHISE OWNER's right to perform Catering Service pursuant to this
Paragraph 4, COMPANY or its designee will have the right to offer Catering
Service within the Territory of the STORE from and after COMPANY's delivery of
written notice of such termination to FRANCHISE OWNER.
Notwithstanding the foregoing, COMPANY reserves the right, at any time and
in its sole discretion, with or without cause and regardless of the investment
made by FRANCHISE OWNER in establishing and conducting Catering Service or the
length of time FRANCHISE OWNER has offered Catering Service: (1) to reduce,
modify or expand the Catering Area, effective upon COMPANY's written notice to
FRANCHISE OWNER, provided, however, that if a reduction or modification of the
Catering Area amounts to a termination of substantially all of FRANCHISE OWNER's
rights to provide such services (except in the case of the exercise by COMPANY
of its remedies under Section 18.C of this Agreement), such reduction or
modification shall not be effective until 90 days after COMPANY's written notice
to FRANCHISE OWNER; or (2) to suspend or terminate FRANCHISE OWNER's right to
offer Catering Service, effective one hundred eighty (180) days after COMPANY's
written notice to FRANCHISE OWNER (in which case, FRANCHISE OWNER will not file
any orders for Catering Service after the expiration of such one hundred eighty
(180) day period). In the event of such suspension or termination, COMPANY
reserves the right to require FRANCHISE OWNER to reinstate Catering Service upon
fifteen (15) days' prior written notice to FRANCHISE OWNER.
A-3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Rider in multiple originals as of the date of the Agreement.
EINSTEIN/NOAH BAGEL CORP. ________________________________
FRANCHISE OWNER
By:_____________________ ________________________
Its:____________________ ________________________
A-4
<PAGE>
SCHEDULE A
TO THE EINSTEIN/NOAH BAGEL CORP.
FRANCHISE AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND ________________________________
DATED __________________TO THE CATERING RIDER
CATERING AREA AND CATERING FACILITY
-----------------------------------
1. CATERING AREA. The Catering Area will be as follows:
-------------
, provided that COMPANY may, at any time and in its sole discretion, with or
without cause and regardless of the investment made by FRANCHISE OWNER in
establishing and conducting Catering Service or the length of time FRANCHISE
OWNER has offered Catering Service, reduce, modify or expand the Catering Area.
2. CATERING FACILITY. The Catering Facility will be located at the
-----------------
following address:
_________________________________________________________________
_________________________________________________________________
EINSTENIN BROS. BABELS, INC. _______________________________________
FRANCHISE
By:_________________________________ By:____________________________________
Its:______________________________ Its:_________________________________
A-1
<PAGE>
EXHIBIT B
TO THE EINSTEIN/NOAH BAGEL CORP.
FRANCHISE AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND __________________________________________
DATED ________________________
DELIVERY RIDER
--------------
<PAGE>
DELIVERY RIDER
--------------
THIS RIDER is made as of this _________________ day of _____________,
19___ by and between EINSTEIN/NOAH BAGEL CORP., a Delaware corporation
("COMPANY"), and ______________________________________________________________
a ___________________________________ ("FRANCHISE OWNER"), and is attached to
and incorporated into the Einstein/Noah Bagel Corp. Franchise Agreement by and
between COMPANY and FRANCHISE OWNER (the "AGREEMENT") dated as of ______________
All capitalized terms not defined in this Rider shall have the respective
meanings set forth in the Agreement. To the extent that the terms of this Rider
are inconsistent with any of the terms of the Agreement, the terms of this Rider
shall supersede and govern.
1. DELIVERY SERVICE. FRANCHISE OWNER agrees that, within
----------------
_____________________ (________________) days after the execution date of this
Rider and thereafter during the remainder of the term of the Agreement, subject
to earlier termination by COMPANY as provided below in this Rider, FRANCHISE
OWNER will offer and provide Delivery Service (defined below) from the Stores
or, if required by COMPANY its sole discretion, from a separate delivery
facility approved by COMPANY in writing ("DELIVERY FACILITY"), to customers
located within the geographic area described in Schedule A attached hereto
----------
("DELIVERY AREA"). As used herein, "DELIVERY SERVICE" shall mean the delivery
of Products prepared at the Stores or a Delivery Facility to customers in the
Delivery Area, where (a) such Products are intended to serve fewer than fifteen
(15) persons, and (b) such service involves the provision of no services other
than the delivery of Products to a customer at a location within the Delivery
Area. FRANCHISE OWNER acknowledges and agrees that Delivery Service shall not
include Catering Service, as defined in the Agreement. FRANCHISE OWNER, at its
sole expense, shall take such actions (including, without limitation,
constructing such improvements and acquiring fixtures, equipment, delivery
vehicles, and other materials and supplies) and obtain such permits as required
to commence Delivery Service within the ______________________________
(_______________) day period specified above.
2. DELIVERY SERVICE STANDARDS. FRANCHISE OWNER agrees to provide
--------------------------
Delivery Service in accordance with the standards, specifications and procedures
for Delivery Service which COMPANY prescribes, and which COMPANY may change from
time to time in its sole discretion, in the Manuals or otherwise in writing,
including, without limitation, requirements for delivery drivers, delivery
vehicles (owned and non-owned), delivery response time, training of personnel
involved in Delivery Service, design, layout, equipment, fixtures, signage,
product packaging, materials and supplies, and COMPANY's prototype plans and
layout for a delivery staging area within a UNIT or for a Delivery Facility, if
any, approved by COMPANY.
In particular, and without limiting the foregoing, FRANCHISE OWNER shall:
a. require all delivery drivers to strictly comply with all
regulations, laws and ordinances applicable to the operation of motor
vehicles and use due care, taking into consideration road conditions, when
performing delivery services;
B-1
<PAGE>
b. require all delivery drivers to maintain adequate motor vehicle
liability insurance that complies with all applicable laws and regulations
and that extends to the operation of a motor vehicle for use for commercial
delivery;
c. maintain or cause drivers to maintain all delivery vehicles in
good and safe operating condition in full compliance with all applicable
laws and regulations;
d. conduct initial and periodic (at least once every six months)
driving record checks on all delivery drivers;
e. not guarantee to customers delivery within any specified time or
advertise or promote refunds or discounts for FRANCHISE OWNER's failure to
deliver within any specified time;
f. require all delivery drivers to possess and maintain valid
drivers licenses and driving records free of disqualifying violations; and
g. suspend, or where appropriate under COMPANY's specifications and
standards as in effect from time to time, terminate any delivery driver who
does not conform to COMPANY's standards and specifications for Delivery
Service.
FRANCHISE OWNER shall maintain the condition and appearance of, and perform
maintenance with respect to the delivery vehicles, facilities, fixtures and
equipment used in connection with the provision of Delivery Service in
accordance with COMPANY's standards, specifications and procedures, and
consistent with the image of UNITS as first class, clean, sanitary, attractive
and efficiently operated food service businesses.
3. COMPANY'S RIGHT TO TERMINATE THE AGREEMENT OR DELIVERY SERVICE. If
--------------------------------------------------------------
FRANCHISE OWNER fails to provide Delivery Service as required pursuant to this
Rider, FRANCHISE OWNER acknowledges and agrees COMPANY shall have the right to
terminate (a) the Agreement pursuant to and in accordance with Section
18.B(8)(a) of the Agreement, or (b) FRANCHISE OWNER's right to provide Delivery
Service, among other rights, pursuant to and in accordance with Section 3.B of
the Agreement. If COMPANY terminates FRANCHISE OWNER's right to perform Delivery
Service pursuant to this Paragraph 3, COMPANY or its designee will have the
right to offer Delivery Service within the Development Area from and after
COMPANY's delivery of written notice of such termination to FRANCHISE OWNER.
Notwithstanding the foregoing, COMPANY reserves the right, at any time
and in its sole discretion, with or without cause and regardless of the
investment made by FRANCHISE OWNER in establishing and conducting Delivery
Service or the length of time FRANCHISE OWNER has offered Delivery Service: (a)
to reduce, modify or expend the Delivery Area, effective upon COMPANY's written
notice to FRANCHISE OWNER, provided, however, that if a reduction or
modification of the Delivery Area amounts to a termination of substantially all
of FRANCHISE OWNER's rights to provide such services (except in the case of the
exercise by COMPANY of its remedies under Section 18.C of this Agreement), such
reduction or modification shall not be effective until 90 days after COMPANY's
written notice to
B-2
<PAGE>
FRANCHISE OWNER; or (b) to suspend or terminate FRANCHISE OWNER's right to offer
Delivery Service, effective one hundred eighty (180) days after COMPANY's
written notice to FRANCHISE OWNER. In the event of such suspension termination,
COMPANY reserves the right to require FRANCHISE OWNER to reinstate Delivery
Service upon fifteen (15) days' prior written notice to FRANCHISE OWNER.
4. DISPLAY OF MARKS. FRANCHISE OWNER is hereby granted a special,
----------------
limited license to display on delivery vehicles used in the performance of
delivery service pursuant to this Rider the Marks and logos in the form and
manner specified by COMPANY in the Manuals or otherwise. This license shall
expire automatically and without notice upon the expiration or termination of
FRANCHISE OWNER's right to provide delivery services pursuant to this Rider.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Rider in multiple originals as of the date of the Agreement.
EINSTEIN/NOAH BAGEL CORP. ___________________________________
(FRANCHISE OWNER)
By:_____________________________________ ___________________________________
Its:__________________________________ ___________________________________
B-3
<PAGE>
SCHEDULE A
TO THE DELIVERY RIDER
TO THE EINSTEIN/NOAH BAGEL CORP. FRANCHISE AGREEMENT
BY AND BETWEEN
EINSTEIN/NOAH BAGEL CORP.
AND __________________________________________
DATED ________________________
DELIVERY AREA
-------------
1. DELIVERY AREA. The Delivery Area of the STORE will be as follows:
-------------
, provided that COMPANY may, and FRANCHISE OWNER acknowledges and agrees that
COMPANY may, at any time and in its sole discretion with or without cause and
regardless of the investment made by FRANCHISE OWNER in establishing and
conducting Delivery Service or the length of time FRANCHISE OWNER has offered
Delivery Service, reduce, modify or expand the Delivery Area.
EINSTEIN/NOAH BAGEL CORP. ___________________________________
(FRANCHISE OWNER)
By:_____________________________________ By:________________________________
Its:__________________________________ Its:_____________________________
B-1
<PAGE>
EXHIBIT C
TO THE EINSTEIN/NOAH BAGEL CORP.
FRANCHISE AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND __________________________________________
DATED ________________________
FRANCHISE OWNER ACKNOWLEDGEMENTS
AND REPRESENTATIONS STATEMENT
-----------------------------
<PAGE>
FRANCHISE OWNER ACKNOWLEDGEMENTS
AND REPRESENTATIONS STATEMENT
-----------------------------
1. FRANCHISE OWNER acknowledges that it has read the Franchise Agreement
(the "AGREEMENT") between Einstein/Noah Bagel Corp. ("COMPANY") and FRANCHISE
OWNER dated as of the same date hereof and COMPANY's Franchise Offering Circular
in their entirety and that it understands and accepts the terms, conditions, and
covenants contained in the Agreement as being reasonably necessary to maintain
COMPANY's high standards of quality and service and the uniformity of those
standards at all UNITS and to protect and preserve the goodwill of the Marks and
the System. (Capitalized terms not defined herein shall have the respective
meanings set forth in the Agreement.) FRANCHISE OWNER acknowledges that:
(1) COMPANY delivered and FRANCHISE OWNER received a copy of COMPANY's Franchise
Offering Circular at the earlier of (a) FRANCHISE OWNER's first personal meeting
with COMPANY or (b) ten business days prior to the execution of the Agreement or
the payment of any consideration by FRANCHISE OWNER in connection with the
transaction contemplated in the Agreement; and (2) COMPANY delivered and
FRANCHISE OWNER received the Agreement in form for execution at least five (5)
business days prior to the execution of the Agreement.
2. FRANCHISE OWNER acknowledges that the food service business is a
highly competitive industry, with constantly changing market conditions.
FRANCHISE OWNER acknowledges that it has conducted an independent investigation
of the business venture contemplated by the Agreement and recognizes that, like
any other business, the nature of the business conducted by UNITS may change
over time, that an investment in a UNIT involves business risks and that the
success of the venture is largely dependent upon the business abilities and
efforts of FRANCHISE OWNER.
3. FRANCHISE OWNER acknowledges and agrees that COMPANY has developed and
will continue to develop or modify in the future a number of branded retail food
service businesses that offer and sell Products and other food and beverage
items under different marks, systems and concepts. FRANCHISE OWNER understands
that the rights granted to it under this Agreement are with regard only to the
type of branded retail store that operates under the Marks and System designated
in Exhibit K. Further, FRANCHISE OWNER acknowledges and agrees that COMPANY
retains the right, among other rights, to (1) operate and/or grant others the
right to operate retail stores featuring bagels in FRANCHISE OWNER's Territory
under marks and systems other than the Marks and System designated in Exhibit K;
or (2) operate and/or grant others the right to offer Products in FRANCHISE
OWNER's Territory using any method of distribution other than UNITS including
but not limited to wholesaling to other retail stores and to other distribution
channels such as hotels and airlines.
4. FRANCHISE OWNER acknowledges and agrees that some aspects of COMPANY's
franchise program and the System are still under development and that COMPANY
expects that there will be some significant variations in the System in
different regional markets which may exist for an initial or transitional
period, or on a permanent basis. COMPANY may, for example, allow FRANCHISE
OWNER to use one recipe for bagels,
C-1
<PAGE>
cream cheeses or other items while allowing other developers and franchise
owners to use different recipes. COMPANY may also allow variations between
developers and franchise owners in the areas of trademarks, trade dress,
operational items or other aspects of UNITS. FRANCHISE OWNER acknowledges and
agrees that only COMPANY may determine what variations FRANCHISE OWNER may use
and that FRANCHISE OWNER will in any event conform strictly to the standards and
specifications which COMPANY establishes for FRANCHISE OWNER's Store.
COMPANY intends to allow these variations in the System: (a) as part of
ongoing research and development for UNITS generally; and (b) to test whether
regional variations in UNITS may be advantageous. FRANCHISE OWNER understands
and accepts that, over time during the term of the Agreement COMPANY will
continue to develop and refine various aspects of the System and that as new
products, new operating procedures, new trade dress and other refinements are
introduced, COMPANY may, in its sole discretion, cease to allow some or all of
the variations and may require local or regional variations or national
uniformity among UNITS as to aspects for which COMPANY had previously allowed
variations. FRANCHISE OWNER acknowledges and agrees that this may mean that
FRANCHISE OWNER may be required, for example, to change one or more of (a) the
recipes FRANCHISE OWNER uses for bagels, cream cheese or other items; (b) the
trademarks and/or service marks FRANCHISE OWNER uses; (c) the trade dress or
operational procedures FRANCHISE OWNER uses; or (d) other aspects of your UNITS.
Some or all of these changes may require FRANCHISE OWNER to make substantial
additional capital expenditures. FRANCHISE OWNER acknowledges and agrees that
COMPANY may discontinue any of the variations which it had previously allowed
FRANCHISE OWNER to utilize and that FRANCHISE OWNER will conform to all required
local, regional and/or national standards and specifications and other
requirements which COMPANY may establish from time to time even if it means
substantial additional expense for FRANCHISE OWNER Further, COMPANY acknowledges
and agrees that it shall provide to COMPANY the data COMPANY requires concerning
FRANCHISE OWNER'S operations in order to allow COMPANY to assess the success of
different variations in its retail store concept.
Furthermore, FRANCHISE OWNER acknowledges and agrees that COMPANY may
continue to operate and/or franchise others to operate UNITS in certain areas
under a variety of trademarks and service marks including without limitation
"BAGEL & BAGEL," "BALTIMORE BAGELS," "EINSTEIN BROS.," "NOAH'S NEW YORK BAGELS"
or "OFFERDAHL'S." COMPANY may allow the use of such various marks temporarily,
indefinitely or permanently and on a local, regional, national or international
basis. FRANCHISE OWNER further understands and agrees that COMPANY may, rather
than operating and franchising a national chain of bagel stores operating under
a single trademark or service mark, determine in its sole discretion to operate
and franchise a network of bagel shops operating under different names and in
different geographic areas.
5. FRANCHISE OWNER acknowledges that neither COMPANY nor any officer,
director, employee, agent, representative or Affiliate thereof has made any
representations or statements of actual, average, projected or forecasted sales,
profits, earnings, cash flow or costs with respect to any UNITS. Neither
COMPANY's sales personnel nor any employee, officer,
C-2
<PAGE>
director, agent, representative or affiliate of the COMPANY is authorized to
make any claims or statements as to the sales, profits, earnings, cash flow,
costs or prospects or chances of success that any developer or franchise owner
can expect or that present or past franchise owners have had. COMPANY
specifically instructs its sales personnel, employees, officers, directors,
agents, representatives and affiliates that they are not permitted to make such
claims or statements as to the sales, profits, earnings, cash flow, costs or the
prospects or chances of success, nor are they authorized to represent or
estimate amounts of sales, profits, earnings, cash flow, costs or other measures
as to any aspect of the operation of UNITS. COMPANY recommends that applicants
for UNIT franchises make their own investigations and determine whether or not a
UNIT is profitable. COMPANY will not be bound by any unauthorized
representations as to FRANCHISE OWNER's sales, profits, earnings, cash flow,
costs or prospects or chances of success. COMPANY recommends that each
applicant for a UNIT franchise consult with an attorney of its choosing and
further be represented by legal counsel at the time of its closing. FRANCHISE
OWNER acknowledges that it has had ample opportunity to consult with legal
counsel and other professional advisors. FRANCHISE OWNER acknowledges that it
has not received or relied on any representations about the Franchise by
COMPANY, or its sales personnel, employees, officers, directors, agents,
representatives or affiliates that are contrary to the statements made in
COMPANY's Franchise Offering Circular or to the terms of the Agreement.
6. FRANCHISE OWNER hereby acknowledges and agrees that COMPANY's approval
of the Site and Site Agreement for the Store does not constitute an assurance,
representation or warranty of any kind, express or implied, as to the
suitability of the Site or Site Agreement for a Store, or the successful
operation or profitability of a Store operated at the Site. COMPANY's approval
of the Site indicates only that COMPANY believes that the Site or Site Agreement
falls within acceptable minimum criteria established by COMPANY solely for
COMPANY's purposes at the time of the approval thereof. Both FRANCHISE OWNER
and COMPANY acknowledge that application of criteria that have been effective
with respect to other sites may not be predictive of potential for all sites and
that, subsequent to COMPANY's approval of the Site, demographic and/or economic
factors, such as competition from other similar businesses, included in or
excluded from COMPANY's criteria could change, thereby altering the potential of
the Site. Such factors are unpredictable and are beyond COMPANY's control.
COMPANY shall not be responsible for the failure of the Site approved by COMPANY
to meet FRANCHISE OWNER's expectations as to revenue or operational criteria.
FRANCHISE OWNER further acknowledges and agrees that its acceptance of a
Franchise for the operation of a Store at the Site is based on its own
independent investigation of the suitability of the Site.
7. FRANCHISE OWNER acknowledges that COMPANY's approval of a financing
plan for operation of the Store under the Agreement does not constitute any
assurance that such financing plan is adequate, favorable or not unduly
burdensome, or that the Store will be successful if the financing plan is
implemented by FRANCHISE OWNER. COMPANY's approval of the financing plan
indicates only that such financing plan meets or that COMPANY has waived
COMPANY's then-current minimum standards established by COMPANY solely for its
own purposes at the time of approval thereof.
C-3
<PAGE>
8. FRANCHISE OWNER acknowledges that in all of COMPANY's dealings with
FRANCHISE OWNER, the officers, directors, employees, and agents of COMPANY act
only in a representative capacity and not in an individual capacity. FRANCHISE
OWNER further acknowl edges that the Agreement, and all business dealings
between FRANCHISE OWNER and such individuals as a result of the Agreement, are
solely between FRANCHISE OWNER and COMPANY. Furthermore, FRANCHISE OWNER
represents to COMPANY, as an inducement to its entry into the Agreement, that
neither FRANCHISE OWNER nor its Owners have made any misrepresentations in
obtaining the Franchise.
9. If FRANCHISE OWNER is a legal entity, FRANCHISE OWNER:
(A) represents that it is duly organized and validly existing in good
standing under the laws of the jurisdiction of its organization, is
qualified to do business in all jurisdictions in which its business
activities or the nature of properties owned by FRANCHISE OWNER requires
such qualification, and has the authority to execute and deliver the
Agreement and perform all FRANCHISE OWNER's obligations under the
Agreement; and
(B) agrees that all certificates representing Ownership Interests in
FRANCHISE OWNER now outstanding or hereafter issued will be endorsed with a
legend in form approved by COMPANY reciting that the transfer of Ownership
Interests in FRANCHISE OWNER is subject to restrictions contained in this
Agreement.
10. FRANCHISE OWNER, whether or not a legal entity, represents and
warrants that FRANCHISE OWNER is not subject to any restriction, agreement,
contract, commitment, law, judgment or decree which would prohibit or be
breached or violated by FRANCHISE OWNER's execution and delivery of the
Agreement or performance of its obligations thereunder. At COMPANY's request,
FRANCHISE OWNER shall furnish an opinion of counsel to COMPANY in form and
substance satisfactory to COMPANY, to the effect that the Agreement is a valid
and binding agreement of FRANCHISE OWNER, enforceable against FRANCHISE OWNER in
accordance with its terms, and that FRANCHISE OWNER is not subject to any
restriction, agreement, law, judgment or decree which would prohibit or be
violated by FRANCHISE OWNER's execution and delivery of the Agreement and
performance of its obligations thereunder.
11. FRANCHISE OWNER further represents and warrants that all Owners of
FRANCHISE OWNER and their interests therein are completely and accurately listed
in Exhibit E to the Agreement and covenants that FRANCHISE OWNER will make,
---------
execute and deliver to COMPANY such revisions thereto as may be necessary during
the term of the Franchise to reflect any changes in the information contained
therein.
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<PAGE>
12. FRANCHISE OWNER represents and warrants that its domicile is as set
forth below:
________________________________________
Address
________________________________________
City and State
__________________________________
FRANCHISE OWNER
By:_______________________________
Title:_________________________
Date:_____________________________
C-5
<PAGE>
EXHIBIT D
TO THE FRANCHISE AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND
________________________________________________________ ("FRANCHISE OWNER")
DATED ___________________
PERMITTED COMPETITIVE BUSINESSES,
IDENTITY OF DEVELOPER AND DATE OF DEVELOPMENT AGREEMENT
-------------------------------------------------------
<PAGE>
PERMITTED COMPETITIVE BUSINESSES,
IDENTITY OF DEVELOPER AND DATE OF DEVELOPMENT AGREEMENT
-------------------------------------------------------
1. APPLICABILITY. If this Agreement is not executed pursuant to a
-------------
Development Agreement, Section 2 of this Exhibit shall be completed by the
parties and Sections 2 and 3 of this Exhibit shall be incorporated into this
Agreement. If this Agreement is executed pursuant to a Development Agreement,
Section 4 of this Exhibit shall be completed by the parties and incorporated
into this Agreement.
2. OWNERS IN PERMITTED COMPETITIVE BUSINESSES. If applicable pursuant to
------------------------------------------
Section 1 of this Exhibit and as specified in Section 10 of this Agreement, the
following Owners currently perform services for or have an ownership interest in
a Permitted Competitive Business as of the date of this Agreement.
NAME OF OWNER: NAME OF OWNER:
____________________________________ ________________________________________
Name of Competitive Business: Name of Competitive Business:
____________________________________ ________________________________________
Address of Competitive Business: Address of Competitive Business:
____________________________________ ________________________________________
____________________________________ ________________________________________
NAME OF OWNER: NAME OF OWNER:
____________________________________ ________________________________________
Name of Competitive Business: Name of Competitive Business:
____________________________________ ________________________________________
Address of Competitive Business: Address of Competitive Business:
____________________________________ ________________________________________
____________________________________ ________________________________________
D-1
<PAGE>
FRANCHISE OWNER and its Owners represent and warrant that they have
previously provided to COMPANY a true, correct, complete and detailed
description of all Competitive Businesses in which they own, directly or
indirectly, interests and that all such Competitive Businesses are disclosed in
this Exhibit D. FRANCHISE OWNER and its Owners acknowledge that COMPANY has
relied on the aforementioned description of such Competitive Businesses in
entering into this Agreement with DEVELOPER.
3. DEVELOPMENT AGREEMENT. If applicable pursuant to Section 1 of this
---------------------
Exhibit, FRANCHISE OWNER acknowledges that it has received, and it has reviewed
and understands, the form of Development Agreement contained in COMPANY's
Uniform Franchise Offering Circular in effect as of the date of this Agreement.
4. DATE OF DEVELOPMENT AGREEMENT AND IDENTITY OF DEVELOPER. If
-------------------------------------------------------
applicable pursuant to Section 1 of this Exhibit, the date of the Development
Agreement and the identity of DEVELOPER under the Development Agreement is as
follows:
________________________
DEVELOPER
________________________
DATE
EINSTEIN/NOAH BAGEL CORP. ___________________________________
FRANCHISE OWNER
By:_____________________________________ By:________________________________
Title:________________________________ Title:___________________________
D-2
<PAGE>
EXHIBIT E
TO THE FRANCHISE AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND
____________________________ ("FRANCHISE OWNER")
DATED ___________________________
PRINCIPAL OWNERS, OTHER OWNERS,
DESIGNATED PRINCIPAL OWNERS,
STORE MANAGER AND ADDITIONAL MANAGER,
SUPERVISING OWNERS AND INITIAL CAPITALIZATION
---------------------------------------------
<PAGE>
PRINCIPAL OWNERS, OTHER OWNERS,
DESIGNATED PRINCIPAL OWNERS,
STORE MANAGER AND ADDITIONAL MANAGER,
SUPERVISING OWNERS AND INITIAL CAPITALIZATION
---------------------------------------------
1. PRINCIPAL OWNERS: Listed below is the full name and mailing address
----------------
of each person or entity who is a Principal Owner of FRANCHISE OWNER and a
description of the nature and amount of such Principal Owner's direct or
indirect equity or voting interest in FRANCHISE OWNER:
_________ (INITIAL HERE IF THE FOLLOWING STATEMENT IS APPLICABLE AND DO NOT
COMPLETE THE REST OF THIS SECTION 1.) The Principal Owners of FRANCHISE OWNER
and their respective equity and voting interests in FRANCHISE OWNER are the same
as indicated in the Development Agreement with respect to the Principal Owners
and their interests in DEVELOPER.
Name:__________________________ Number of Interests Owned:___________________
Address:_______________________ % of Total Interests:________________________
_______________________________ Number of Interests Owner is Entitled
_______________________________ to Vote:_____________________________________
_______________________________ Other Interest (Describe):___________________
_____________________________________________
Name:__________________________ Number of Interests Owned:___________________
Address:_______________________ % of Total Interests:________________________
_______________________________ Number of Interests Owner is Entitled
_______________________________ to Vote:_____________________________________
_______________________________ Other Interest (Describe):___________________
_____________________________________________
Name:__________________________ Number of Interests Owned:___________________
Address:_______________________ % of Total Interests:________________________
_______________________________ Number of Interests Owner is Entitled
_______________________________ to Vote:_____________________________________
_______________________________ Other Interest (Describe):___________________
_____________________________________________
Name:__________________________ Number of Interests Owned:___________________
Address:_______________________ % of Total Interests:________________________
_______________________________ Number of Interests Owner is Entitled
_______________________________ to Vote:_____________________________________
E-1
<PAGE>
_______________________________ Other Interest (Describe):___________________
_____________________________________________
2. DESIGNATED PRINCIPAL OWNERS. The following individuals are designated
---------------------------
as Principal Owners based upon their business experience, financial capacity or
other personal attributes:
___________________________________ ________________________________________
Name Name
___________________________________ ________________________________________
Name Name
3. OTHER OWNERS. Listed below is the full name and mailing address of
------------
each person or entity, other than the Principal Owners, who directly or
indirectly owns an equity voting interest in FRANCHISE OWNER and a description
of the nature and amount of the interest (attach additional sheets if
necessary):
__________ (INITIAL HERE IF THE FOLLOWING STATEMENT IS APPLICABLE AND DO NOT
COMPLETE THE REST OF THIS SECTION 3.) The Owners of FRANCHISE OWNER
and their respective equity and voting interests in FRANCHISE OWNER
are the same as indicated in the Development Agreement with respect
to the Owners and their interests in DEVELOPER.
Name:__________________________ Number of Interests Owned:___________________
Address:_______________________ % of Total Interests:________________________
_______________________________ Number of Interests Owner is Entitled
_______________________________ to Vote:_____________________________________
_______________________________ Other Interest (Describe):___________________
_____________________________________________
Name:__________________________ Number of Interests Owned:___________________
Address:_______________________ % of Total Interests:________________________
_______________________________ Number of Interests Owner is Entitled
_______________________________ to Vote:_____________________________________
_______________________________ Other Interest (Describe):___________________
_____________________________________________
E-2
<PAGE>
4. STORE MANAGER AND ADDITIONAL MANAGER: As required pursuant to this
------------------------------------
Agreement, the following person shall attend the training program as the initial
Store Manager and the initial Additional Manager of the Store:
Name:_________________________________ Name:______________________________
(Store Manager) (Additional Manager)
5. SUPERVISING OWNERS: As required pursuant to this Agreement, the
------------------
following Principal Owners shall supervise the operation of the Store:
Name:_________________________________ Name:______________________________
Name:_________________________________ Name:______________________________
6. INITIAL CAPITALIZATION. FRANCHISE OWNER: (a) represents and warrants
----------------------
that it has developed and previously provided to COMPANY a description of its
initial capital structure (the "INITIAL CAPITAL STRUCTURE") which is a true,
correct, complete and detailed description of FRANCHISE OWNER's capital
structure; (b) covenants that it will not deviate from the Initial Capital
Structure without COMPANY's prior written consent; and (c) acknowledges that
COMPANY has relied on the Initial Capital Structure in entering into this
Agreement.
EINSTEIN/NOAH BAGEL CORP. ___________________________________
FRANCHISE OWNER
By:___________________________________ By:________________________________
Title:______________________________ Title:___________________________
E-3
<PAGE>
EXHIBIT F
TO THE FRANCHISE AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND
_____________________________ ("FRANCHISE OWNER")
DATED ________________________
SITE AND TERRITORY
------------------
<PAGE>
SITE AND TERRITORY
------------------
1. SITE. The Site of the Store will be as follows:
2. TERRITORY. Territory shall be as follows:
EINSTEIN/NOAH BAGEL CORP. ___________________________________
FRANCHISE OWNER
By:____________________________________ By:________________________________
Title:_______________________________ Title:___________________________
F-1
<PAGE>
EXHIBIT G
TO THE FRANCHISE AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND
___________________________________ ("FRANCHISE OWNER")
DATED ___________________
GUARANTY AND ASSUMPTION OF FRANCHISE OWNER'S OBLIGATIONS
--------------------------------------------------------
<PAGE>
GUARANTY AND ASSUMPTION OF FRANCHISE OWNER'S OBLIGATIONS
--------------------------------------------------------
THIS GUARANTY AND ASSUMPTION OF FRANCHISE OWNER'S OBLIGATIONS is given this
_______ day of _______________, 19__, by the undersigned.
FRANCHISE OWNER:_______________________________________
DATE OF FRANCHISE AGREEMENT:___________________________
In consideration of, and as an inducement to, the execution of the above
mentioned Einstein/Noah Bagel Corp. Franchise Agreement (the "FRANCHISE
AGREEMENT") by EINSTEIN/NOAH BAGEL CORP. ("COMPANY"), each of the undersigned
and any other parties who sign counterparts of this guaranty (referred to herein
individually as a "GUARANTOR" and collectively as "GUARANTORS") hereby
personally and unconditionally: (a) guarantees to COMPANY, and its successors
and assigns, for the term of the Franchise Agreement and thereafter as provided
in the Franchise Agreement, that FRANCHISE OWNER shall punctually pay and
perform each and every undertaking, agreement and covenant set forth in the
Franchise Agreement; and (b) agrees to be personally bound by, and personally
liable for the breach of, each and every provision in the Franchise Agreement,
both monetary obligations and other obligations, including, without limitation,
the obligation to pay costs and legal fees as provided in the Franchise
Agreement and the obligation to take or refrain from taking specific actions or
to engage or refrain from engaging in specific activities, including, without
limitation, the provisions of the Franchise Agreement relating to competitive
activities.
Each Guarantor waives:
(1) acceptance and notice of acceptance by COMPANY of the foregoing
undertakings; and
(2) notice of demand for payment of any indebtedness or
nonperformance of any obligations hereby guaranteed; and
(3) protest and notice of default to any party with respect to the
indebtedness or nonperformance of any obligations hereby guaranteed; and
(4) any right he may have to require that an action be brought
against FRANCHISE OWNER or any other person as a condition of liability;
and
G-1
<PAGE>
(5) all rights to payments and claims for reimbursement or
subrogation which he may have against FRANCHISE OWNER arising as a result
of his execution and performance under this guaranty (including by way of
counterpart); and
(6) any and all other notices and legal or equitable defenses to which
he may be entitled.
Each Guarantor consents and agrees that:
(A) his direct and immediate liability under this guaranty shall be
joint and several not only with FRANCHISE OWNER, but also among the
Guarantors; and
(B) he shall render any payment or performance required under the
Franchise Agreement upon demand if FRANCHISE OWNER fails or refuses
punctually to do so; and
(C) such liability shall not be contingent or conditioned upon
pursuit by COMPANY of any remedies against FRANCHISE OWNER or any other
person; and
(D) such liability shall not be diminished, relieved or otherwise
affected by any subsequent rider or amendment to the Franchise Agreement or
by any extension of time, credit or other indulgence which COMPANY may from
time to time grant to FRANCHISE OWNER or to any other person, including,
without limitation, the acceptance of any partial payment or performance,
or the compromise or release of any claims, none of which shall in any way
modify or amend this guaranty, which shall be continuing and irrevocable
throughout the term of the Franchise Agreement and for so long thereafter
as there are any monies or obligations owing by FRANCHISE OWNER to COMPANY
under the Franchise Agreement; and
(E) the written acknowledgment of FRANCHISE OWNER, accepted in
writing by COMPANY, or the judgement of any court or arbitration panel of
competent jurisdiction establishing the amount due from FRANCHISE OWNER
shall be conclusive and binding on the undersigned as guarantors.
If COMPANY is required to enforce this guaranty in a judicial or
arbitration proceeding, and prevails in such proceeding, it shall be entitled to
reimbursement of its costs and expenses, including, but not limited to,
reasonable accountants', attorneys', attorneys' assistants', arbitrators' and
expert witness fees, costs of investigation and proof of facts, court costs,
other litigation expenses and travel and living expenses, whether incurred prior
to, in preparation for or in contemplation of the filing of any such proceeding.
If COMPANY is required to engage legal counsel in connection with any failure by
the undersigned to comply with this guaranty, the Guarantors shall reimburse
COMPANY for any of the above-listed costs and expenses incurred by it .
G-2
<PAGE>
Each of the undersigned Guarantors represents and warrants that, if no
signature appears below for such Guarantor's spouse, such Guarantor is either
not married or, if married, is a resident of a state which does not require the
consent of both spouses to encumber the assets of the Guarantor's marital
estate.
IN WITNESS WHEREOF, each Guarantor has hereunto affixed his signature on
the same day and year as the Franchise Agreement was executed.
GUARANTOR(S):
- ------------
DEVELOPER (if any):
___________________________________
Name of DEVELOPER
___________________________________ ATTEST:
State of Organization
By:________________________________ _____________________________________
Signature Name:________________________________
Title:____________________________
___________________________________
Name and Title
PRINCIPAL OWNERS OF DEVELOPER:
- -----------------------------
___________________________________ Spouse:______________________________
Name: Name:
___________________________________ Spouse:______________________________
Name: Name:
___________________________________ Spouse:______________________________
Name: Name:
PRINCIPAL OWNERS OF FRANCHISE OWNER:
- -----------------------------------
___________________________________ Spouse:_____________________________
Name: Name:
G-3
<PAGE>
____________________________________ Spouse:_____________________________
Name: Name:
____________________________________ Spouse:_____________________________
Name: Name:
G-4
<PAGE>
EXHIBIT H
TO THE EINSTEIN/NOAH BAGEL CORP.
FRANCHISE AGREEMENT
BY AND BETWEEN
EINSTEIN/NOAH BAGEL CORP.
AND
_________________________________
DATED __________
CONFIDENTIALITY AND NON-COMPETE AGREEMENT
-----------------------------------------
<PAGE>
EXHIBIT H
CONFIDENTIALITY AND NON-COMPETE AGREEMENT
-----------------------------------------
H-1
<PAGE>
EINSTEIN/NOAH BAGEL CORP.
CONFIDENTIALITY AND NONCOMPETE AGREEMENT
----------------------------------------
WHEREAS, the undersigned (the "Undersigned") is a current or prospective
employee ("Employee"), owner ("Owner") of an interest in, or supplier, agent,
researcher, consultant, service provider, or vendor ("Vendor") of, Einstein/Noah
Bagel Corp. ("Company") and/or one or more of its affiliates, subsidiaries, area
developers, franchisees, or joint venturers (each a "Related Party");
WHEREAS, the Undersigned has been or may be given access to certain
confidential and proprietary information of Company and/or its Related Parties
previously not available to the Undersigned.
WHEREAS, the Company and/or the Related Party signatory hereto, as the case
may be, is only willing to commence or continue its relationship with
Undersigned in the event Undersigned enters into this Agreement; and
WHEREAS, the Company and/or the Related Party signatory hereto has entered
into this Agreement with the Undersigned in order to ensure the confidentiality
of Proprietary Information in accordance with the terms of this Agreement, to
ensure that the Undersigned does not utilize such information to compete with
the Company or unfairly disadvantage the Company, and/or to protect the
investment made by the Company and/or the Related Party signatory hereto in the
training and instruction of its Employees and/or in negotiation with and
education of Owners and Vendors, as the case may be.
NOW, THEREFORE, the Undersigned hereby agrees as follows:
1. RECITALS. The recitals set forth above are incorporated herein by this
--------
reference and shall be part of this Agreement.
2. PROPRIETARY INFORMATION. As used in this Agreement, the term
-----------------------
"Proprietary Information" shall mean the business concepts, recipes, food
preparation methods, equipment, operating techniques, marketing methods,
financial information, demographic and trade area information, prospective site
locations, market penetration techniques, plans, or schedules, customer
profiles, preferences, or statistics, menu breakdowns, itemized costs,
franchisee composition, territories, and development plans, and all related
trade secrets or confidential or proprietary information treated as such by the
Company and/or the Related Party signatory hereto, as the case may be, whether
by course of conduct, by letter or report, or by the use of any appropriate
proprietary stamp or legend designating such information or item to be
confidential or proprietary, by any communication to such effect made prior to
or at the time any such Proprietary Information is disclosed to the Undersigned,
or otherwise.
H-2
<PAGE>
3. USE AND DISCLOSURE OF PROPRIETARY INFORMATION. The Undersigned shall
---------------------------------------------
hold all Proprietary Information in strict confidence, shall use such
Proprietary Information only for the benefit of the Company and/or the Related
Party and shall disclose such Proprietary Information only to the Undersigned's
employees and agents who have a need to know such Proprietary Information in
order to assist the Undersigned, provided such employees and agents each have
individually entered into this Agreement or a Confidentiality and Noncompete
Agreement substantially identical hereto or are otherwise obligated by a written
agreement with the Undersigned to maintain the confidence of the Proprietary
Information, which agreement the Undersigned hereby agrees may be directly
enforced by Company and/or the Related Party signatory hereto, as the case may
be. The Undersigned shall not disclose Proprietary Information to any other
person or entity. The obligations hereunder to maintain the confidentiality of
Proprietary Information shall not expire.
4. LIMITATIONS ON OBLIGATIONS. The obligations of the Undersigned
--------------------------
specified in Section 3 shall not apply to any Proprietary Information which is
received from the Company and/or the Related Party signatory hereto, as the case
may be, which (a) is disclosed in a printed publication available to the public,
or is otherwise in the public domain through no act of the Undersigned or its
employees, agents or other person or entity which has received such Proprietary
Information from or through the Undersigned, (b) is approved for release by
written authorization of an officer of the Company and/or the Related Party
signatory hereto, as the case may be, or (c) is required to be disclosed by
proper order of a court of applicable jurisdiction after adequate notice to the
Company and/or the Related Party signatory hereto, as the case may be,
sufficient to permit them to seek a protective order therefor, the imposition of
which protective order the Undersigned agrees to approve and support.
5. RETURN OF DOCUMENTS. The Undersigned (and each employee, agent, or
-------------------
other person or entity which has received such Proprietary Information from or
through the Undersigned) shall, upon the request of the Company and/or the
Related Party signatory hereto, as the case may be, return all documents and
other tangible manifestations of Proprietary Information received form the
Company and/or the Related Party signatory hereto, as the case may be, including
all copies and reproductions thereof.
6. NONCOMPETE. During the Applicable Term (as defined in Section 10
----------
hereof) and for two years after the later of (i) the end of the Applicable Term
or (ii) the date on which Undersigned returns any Proprietary Information
pursuant to Section 5 hereof, Undersigned (x) agrees (1) if Undersigned is an
Employee or Vendor, not to compete against the Company and/or the Related Party
signatory hereto, as the case may be, by directly or indirectly owning,
managing, operating, controlling, being employed by, participating in, or being
connected in any manner with the ownership, management, operation, or control of
(A) any food service establishment that prepares, serves, or sells and derives
more than 5% of its revenues from, bagels and/or bagel related products
(including but not limited to cream cheese and other spreads, bagel sandwiches
and bagel chips), or (B) any food service establishment, at least 15% of the
revenue of which is derived from coffee or any other product which accounts for
at least 15% of the revenue of any food service establishment owned or operated
by the Company and/or the Related Party signatory hereto, as the case may be, at
the time Undersigned commences or significantly increases its ownership,
management, or other participation therein, which food
H-3
<PAGE>
service establishment described in either (A) or (B), above, is located within
five miles of any store owned or operated by the Company and/or the Related
Party signatory hereto, as the case may be, or within any standard metropolitan
statistical area, trade area or "area of dominant influence" (as defined by
Arbitron Ratings Company) in which the Company and/or the Related Party
signatory hereto, as the case may be, engage, or have developed specific plans
to engage, in business or (2) if Undersigned is an Owner, to comply with the
confidentiality and noncompete provisions in any applicable Area Development
Agreement as if Owner were Developer or to comply with the confidentiality and
noncompete provisions in any applicable Franchise Agreement as if Owner were
Franchise Owner, in each case within the geographic area therein specified, and
(y) agrees not to solicit employees from the Company and/or the Related Party
signatory hereto, as the case may be, it being understood that this Section 6
shall not prevent the Undersigned from participating as an investor, officer, or
director in any restaurant venture not covered by the foregoing applicable
restrictions, and does not prevent the Undersigned from investing so as to hold
less than 2% of the outstanding shares of any company which is a "reporting
company" under the Securities Exchange Act of 1934, as amended. It is the
intention of the parties that this Section 6 be interpreted so as to be valid
under applicable law and, if required for validity, any court or applicable
tribunal may reduce or alter the geographic scope and duration of this Section
6, by substitution of words or otherwise, so as to create the broadest
permissible protection to the Company and/or the Related Party signatory hereto,
as the case may be.
7. NO WAIVER. No delays or omissions by the Company and/or the Related
---------
Party signatory hereto, as the case may be, in exercising any right under this
Agreement will operate as a waiver of that or any other right. A waiver or
consent given by the Company and/or the Related Party signatory hereto, as the
case may be, on any one occasion is effective only in that instance and will not
be construed as a bar to or waiver of any right on any other occasion.
8. NOTICES. Any notice, request, information, or other document to be
-------
given hereunder to any of the parties by any other party shall be in writing and
delivered personally, sent by facsimile transmission or registered or certified
mail, postage prepaid, or overnight delivery service, as follows:
If to the Company, addressed to:
Einstein/Noah Bagel Corp.
1526 Cole Boulevard
Suite 200
Golden, Colorado 80401
Attention: General Counsel
Facsimile: (303) 202-3490
H-4
<PAGE>
If to the Related Party signatory hereto, addressed to:
_________________________________________
_________________________________________
_________________________________________
_________________________________________
If to the Undersigned, address to:
_________________________________________ (Name)
_________________________________________ (Address)
_________________________________________ (City, State, Zip)
_________________________________________ (Attention)
_________________________________________ (Phone Number)
_________________________________________ (Facsimile)
Any party hereto may change the place at which notices are to be received
by it by the giving of notice of such change in the manner set forth above.
9. EQUITABLE RELIEF. Undersigned acknowledges that Company and/or the
----------------
Related Party signatory hereto, as the case may be, will be irreparably harmed
by any breach hereof, that monetary damages would be inadequate and that Company
and/or the Related Party signatory hereto, as the case may be, shall have the
right to have an injunction or other equitable remedies imposed in relief of, or
to prevent or restrain, such breach. The Undersigned agrees that Company and/or
the Related Party signatory hereto, as the case may be, shall also be entitled
to any and all other relief available under law or equity for such breach.
10. APPLICABLE TERM. The Applicable Term of Section 6 of this Agreement
---------------
shall be (i) the term of employment in the event Undersigned is an Employee, it
being understood and acknowledged that Employee is employed at will and may be
terminated at any time by Company and/or the Related Party signatory hereto, as
the case may be, (ii) the term of the applicable Area Development Agreement or
Franchise Agreement in the event Undersigned is an Owner, or (iii) three years
in the event the Undersigned is a Vendor, provided that in the case of this
clause (iii), the Applicable Term shall automatically be extended one year on
each anniversary of the date of execution hereof, unless either party has given
written notice to the other not more than 90 days prior thereto stating that
such extensions shall not occur.
11. MISCELLANEOUS.
-------------
a. This Agreement shall not be construed to grant to the Undersigned
any patents, licenses, or similar rights to Proprietary Information
disclosed to the Undersigned hereunder, all of which rights and interests
shall be deemed to reside or be vested in the Company.
b. This Agreement, does not supersede, but rather is in addition to
and cumulative with, all prior agreements, written or oral, between the
parties relating to the
H-5
<PAGE>
subject matter of this Agreement. This A greement may not be modified,
changed or discharged, in whole or in part, except by an agreement in
writing signed by the parties.
c. This Agreement will be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns.
d. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
e. This Agreement shall be construed and interpreted in accordance
with the laws of the State of Colorado.
EXECUTED as of the ______ day of ____________________, 199____.
EINSTEIN/NOAH BAGEL CORP. UNDERSIGNED
____________________________________
(Entity Name, if any)
By:________________________________
Title:____________________________ By:_________________________________
Print Name:
Print Title:
RELATED PARTY
___________________________________
(Name)
By:________________________________
Title:____________________________
H-6
<PAGE>
EXHIBIT I
TO THE FRANCHISE AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND
_______________________________________________________ ("FRANCHISE
OWNER")
DATED _________________________
AUTHORIZATION AGREEMENT FOR PREARRANGED PAYMENTS
(DIRECT DEBITS)
-------------
<PAGE>
AUTHORIZATION AGREEMENT FOR PREARRANGED PAYMENTS
(DIRECT DEBITS)
-------------
Name of DEPOSITOR:_____________________________________________________________
DEPOSITOR Identification Number:_______________________________________________
The undersigned depositor ("DEPOSITOR") hereby authorizes Einstein/Noah Bagel
Corp. ("COMPANY") to initiate debit entries and/or credit correction entries to
the undersigned's checking and/or savings account(s) indicated below and the
depository designated below ("DEPOSITORY") to debit such account pursuant to
COMPANY's instructions.
____________________________________ ____________________________________
DEPOSITORY Branch
____________________________________ ____________________________________
Address City, State and Zip Code
____________________________________ ____________________________________
Bank Transit/ABA Number Account Number
This authority is to remain in full and force and effect until DEPOSITORY has
received joint written notification from COMPANY and DEPOSITOR of the
DEPOSITOR's termination of such authority in such time and in such manner as to
afford DEPOSITORY a reasonable opportunity to act on it. If an erroneous debit
entry is initiated to DEPOSITOR's account, DEPOSITOR shall have the right to
have the amount of such entry credited to such account by DEPOSITORY, if (a)
within fifteen (15) calendar days following the date on which DEPOSITORY sent to
DEPOSITOR a statement of account or a written notice pertaining to such entry or
(b) forty-five (45) days after posting, whichever occurs first, DEPOSITOR shall
have sent to DEPOSITORY a written notice identifying such entry, stating that
such entry was in error and requesting DEPOSITORY to credit the amount thereof
to such account. These rights are in addition to any rights DEPOSITOR may have
under federal and state banking laws.
___________________________________ ____________________________________
DEPOSITOR DEPOSITORY
By:________________________________ By:_________________________________
Title:___________________________ Title:____________________________
Date:______________________________ Date:_______________________________
I-1
<PAGE>
EXHIBIT J
TO THE FRANCHISE AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND
_______________________________________________________ ("FRANCHISE OWNER")
DATED__________________________
COLLATERAL ASSIGNMENT OF TELEPHONE NUMBERS AND LISTINGS
-------------------------------------------------------
<PAGE>
COLLATERAL ASSIGNMENT OF TELEPHONE NUMBERS AND LISTINGS
-------------------------------------------------------
THIS ASSIGNMENT is entered into this ___ day of _____________, 19__, in
accordance with the terms of that certain Einstein/Noah Bagel Corp. Franchise
Agreement (the "FRANCHISE AGREEMENT") between _________________________________
("FRANCHISE OWNER") and Einstein/Noah Bagel Corp., a Delaware corporation
("COMPANY"), executed concurrently with this Assignment, under which COMPANY
granted FRANCHISE OWNER the right to own and operate a UNIT located at
________________________________________________________________________________
___________ (the "STORE").
FOR VALUE RECEIVED, FRANCHISE OWNER hereby assigns to COMPANY, all of
FRANCHISE OWNER's right, title and interest in and to those certain telephone
numbers and regular, classified or other telephone directory listings
(collectively, the "TELEPHONE NUMBERS AND LISTINGS") associated with COMPANY's
trade and service marks and used from time to time in connection with the
operation of the Store at the address provided above. This Assignment is for
collateral purposes only and, except as specified herein, COMPANY shall have no
liability or obligation of any kind whatsoever arising from or in connection
with this Assignment, unless COMPANY shall notify the telephone company and/or
the listing agencies with which FRANCHISE OWNER has placed telephone directory
listings (all such entities are collectively referred to herein as the
"TELEPHONE COMPANY") to effectuate the assignment pursuant to the terms hereof.
Upon termination or expiration of the Franchise Agreement (without renewal
or extension), COMPANY shall have the right and is hereby empowered to
effectuate the assignment of the Telephone Numbers and Listings, and, in such
event, FRANCHISE OWNER shall have no further right, title or interest in the
Telephone Numbers and Listings and shall remain liable to the Telephone Company
for all past due fees owing to the Telephone Company on or before the effective
date of the assignment hereunder.
FRANCHISE OWNER agrees and acknowledges that as between COMPANY and
FRANCHISE OWNER, upon termination or expiration of the Franchise Agreement,
COMPANY shall have the sole right to and interest in the Telephone Numbers and
Listings, and FRANCHISEE appoints COMPANY as FRANCHISE OWNER's true and lawful
attorney-in-fact to direct the Telephone Company to assign same to COMPANY, and
execute such documents and take such actions as may be necessary to effectuate
the assignment. Upon such event, FRANCHISE OWNER shall immediately notify the
Telephone Company to assign the Telephone Numbers and Listings to COMPANY. If
FRANCHISE OWNER fails to promptly direct the Telephone Company to assign the
Telephone Numbers and Listings to COMPANY, COMPANY shall direct the Telephone
Company to effectuate the assignment contemplated hereunder to COMPANY. The
parties agree that the Telephone Company may accept COMPANY's written direction,
the Franchise Agreement or this Assignment as conclusive proof of COMPANY's
exclusive rights in and to the Telephone Numbers and Listings upon such
termination or expiration and that such assignment shall be made automatically
and effective immediately upon Telephone Company's receipt of such notice from
COMPANY or FRANCHISE OWNER. The parties further agree that if the Telephone
Company requires that the parties execute the
J-1
<PAGE>
Telephone Company's assignment forms or other documentation at the time of
termination or expiration of the Franchise Agreement, COMPANY's execution of
such forms or documentation on behalf of FRANCHISE OWNER shall effectuate
FRANCHISE OWNER's consent and agreement to the assignment. The parties agree
that at any time after the date hereof, they will perform such acts and execute
and deliver such documents as may be necessary to assist in or accomplish the
assignment described herein upon termination or expiration of the Franchise
Agreement.
ASSIGNEE: ASSIGNOR:
- -------- --------
EINSTEIN/NOAH BAGEL CORP. _____________________________________
(FRANCHISE OWNER)
By:_____________________________ By:___________________________________
Its:__________________________ Its:________________________________
ACCEPTED AND AGREED TO BY:
_____________________________
(Telephone Company Authorized
Representative)
_____________________________
(Name of Telephone Company)
J-2
<PAGE>
EXHIBIT K
TO THE FRANCHISE AGREEMENT
BY AND BETWEEN EINSTEIN/NOAH BAGEL CORP.
AND
_______________________________________________________ ("FRANCHISE OWNER")
DATED__________________________
PRINCIPAL MARKS TO BE USED BY FRANCHISE OWNER
---------------------------------------------
The Store to be developed pursuant to this Agreement shall be identified by
the following Principal Marks (subject to the rights of COMPANY to discontinue
or modify such Principal Marks pursuant to Section 6 of this Agreement) and
shall be operated in accordance with COMPANY'S requirements, including but not
limited to the System designated for the Store associated with such Principal
Marks as in effect from time to time:
COMPANY will provide FRANCHISE OWNER with the Store Manual(s), as modified
from time to time, that describes and provides standards and specifications for
operation of a Store under the Principal Marks and the System associated
therewith.
<PAGE>
EXHIBIT D
---------
EINSTEIN/NOAH BAGEL CORP.
ADDENDUM TO LEASE
-----------------
<PAGE>
EXHIBIT D
---------
LOCATION:________________________
___________________________
STORE NO.:_______________________
ADDENDUM TO LEASE/1/
-----------------
THIS ADDENDUM TO LEASE (this "Addendum"), is to the Lease (the
"Lease"), dated as of _______________ 19___, by and between ____________________
a ("Landlord") and ______________________ a ("Tenant") as of the date of final
execution of the Lease and this Addendum (the "Effective Date").
The following shall amend and be incorporated into the Lease. In the
event of any conflict, inconsistency or ambiguity between the terms of the Lease
and the terms of this Addendum, then the terms of this Addendum shall control.
Any terms that are capitalized in this Addendum but not defined in the Addendum
that are capitalized and defined in the Lease shall have the respective meanings
set forth in the Lease.
1. DESCRIPTION OF LEASED PREMISES. In addition to the Leased
Premises, Landlord hereby leases and grants to Tenant, as an appurtenance to the
Leased Premises (a) all rights, easements and appurtenances belonging or
appertaining to the Leased Premises [or the Shopping Center], (b) all right,
title and interest of Landlord in and to any and all roads, streets, alleys and
ways bounding the Leased Premises [or the Shopping Center], [(c) all common ways
and areas within the Shopping Center, (d) a nonexclusive easement for vehicular
parking and vehicular and pedestrian ingress and egress to and from the Leased
Premises over, upon and across the parking areas, driveways, exits and entrances
of the Shopping Center, and (e) all such areas of the Shopping Center which
Tenant requires for (i) installation, maintenance and operation of sewer, water,
gas, power and other utility lines and for heating, ventilation and air
condition equipment, (ii) adequate trash receptacle, trash compactor and
delivery areas adjacent to the Leased Premises, and (iii) loading and unloading
its supplies. The Leased Premises and the Shopping Center may hereinafter
collectively referred to alternatively as the "Property" or
--------
____________________
/1/ To be used in event Landlord insists on using its form lease. Can be
used for in-line and freestanding sites. Should not be used for ground lease
sites. Make sure definitions are consistent with definitions used in Landlord's
form lease. Bolded areas should be revised and/or deleted as appropriate,
depending upon whether Leased Premises are part of a Shopping Center.
Provisions may be deleted in their entirety in the event they are materially
consistent with the terms contained in the Landlord's lease.
<PAGE>
the "Shopping Center". The parking areas, driveways, exits and entrances of the
Shopping Center which are crosshatched on Exhibit ___ may not be modified,
reduced and/or relocated without the consent of Tenant.]
2. PERCENTAGE RENT.
---------------
(a) Tenant shall also pay to Landlord, at the time and in the manner set
forth herein, a sum (the "Percentage Rent") equivalent to the amount, if any, of
---------------
_____ percent [3%, but never to exceed 6%] of Gross Sales (hereafter defined)
in excess of Base Gross Sales (hereafter defined) for each of Tenant's Fiscal
Years (hereafter defined) during the Term of this Lease. The term "Gross Sales"
-----------
as used in this Lease shall mean the entire gross receipts of every kind and
nature from rental or sales of merchandise and services made in, upon, or from
the Leased Premises, and all other receipts of business conducted in or from the
Leased Premises and all mail or telephone orders received at the Leased
Premises, whether for credit or cash, in every department operating in the
Leased Premises, whether operated by the Tenant or by any subtenant,
concessionaire or licensee or any other person, excepting: (1) the selling price
of all merchandise refused by customers and accepted for full credit or the
amount of discounts and allowances made thereon; (2) goods refused to sources,
or produced on the Leased Premises and transferred to another store or warehouse
owned by or affiliated with Tenant for sale or storage at such store or
warehouse; (3) sums and credits received in the settlement of claims for loss of
or damage to merchandise, to the extent previously reported as Gross Sales; (4)
the price allowed on all merchandise traded in by customers for credit or the
amount of credit for discounts and allowances made in lieu of acceptance
thereof, (5) cash refunds made to customers in the ordinary course of business,
but this exclusion shall not include any amount paid or payable for what are
commonly referred to as trading stamps; (6) receipts from public telephones,
stamp machines, public toilet locks, or vending machines installed solely for
the use of Tenant's employees; and (7) sales taxes, luxury taxes, consumer's
excise taxes, gross receipts taxes, and other similar taxes now or hereafter
imposed upon the sale of merchandise or services. The term "Base Gross Sales"
----------------
as used in this Lease shall mean the amount determined by dividing the total
annual Rent for the Fiscal Year in question by _____ percent [3%, but never to
exceed 6%].
(b) Within ninety (90) days after the end of each of Tenant's four (4) 13-
week fiscal periods (a "Fiscal Year"), Tenant shall furnish to Landlord a
-----------
written report ("Annual Gross Sales Report"), certified by Tenant to be correct,
-------------------------
setting forth the Gross Sales made in, upon or from the Leased Premises during
the preceding Fiscal Year. Each annual Gross Sales Report shall be accompanied
by a payment of all Percentage Rent owed to Landlord under the terms of this
Lease.
(a) Tenant shall keep accurate accounts of its Gross Sales. Landlord
shall have the right, upon prior written notice and during Tenant's regular
business hours, to examine and inspect any of Tenant's sales tax reports for the
Leased Premises for the purpose of investigating and veri@g the accuracy of the
Annual Gross Sales Report. If, subsequent to Landlord's
2
<PAGE>
inspection, the Annual Gross Sales Report shall be found to have understated
Tenant's Gross Sales by three percent (3%) or more, then Tenant shall pay to
Landlord, on demand, the amount equal to such understatement, together with
interest thereon at the Prime Rate (hereafter defined). Tenant shall maintain
all records related to the calculation of Gross Sales for a period of three (3)
years after the expiration of any Fiscal Year.
3. OTHER AGREEMENTS. Landlord agrees upon request of Tenant to execute,
----------------
and record in recordable form, a written (a) memorandum of lease, (b) term
commencement agreement, and (c) each Non-Disturbance and Attornment Agreement
required in Section ___ hereof. Tenant shall bear the cost of any such
recording.
4. TENANT'S USES [EXCLUSIVE USE]. Tenant may use the Leased Premises
-----------------------------
[and the Property] for (i) the operation of a bagel bakery and restaurant
("Tenant's Use") or (ii) any other lawful use, provided Tenant receives the
consent of Landlord which consent shall not be unreasonably withheld,
conditioned or delayed. Landlord acknowledges that Tenant's Use shall include
but not be limited to the preparation and sale of bagels, baked goods, specially
and gourmet coffees and teas, soft drinks, dessert items, deli and other
sandwiches and sideorder items, for in-store service and consumption, delivery
and take-out service, and for catering services provided for off-premises
preparation or consumption by customers and other establishments. If permitted
by local ordinance, Tenant may, at its discretion, operate a drivethrough from
the Leased Premises, and Landlord shall cooperate with Tenant's application for
any permits required in connection therewith, and shall make available any
portion of the common areas that will facilitate such use. [Landlord agrees that
during the Term and any Extension, Tenant shall have the exclusive right to sell
bagels and bagel-related products and gourmet coffee for on or off-premises
consumption at the Shopping Center. Landlord agrees to enforce this covenant
against other tenants in the Shopping Center using all reasonable legal means.]
Landlord acknowledges that odors and smoke are emitted during the operation of
Tenant's Use and shall not be deemed noxious or offensive.
5. RIGHTS OF OTHER TENANTS. Landlord represents and warrants that there
-----------------------
are no tenants or any other parties in the Shopping Center who have leases or
agreements which prohibit, restrict or interfere with Tenant's Use.]
6. INSPECTION. Landlord shall provide to Tenant plans and specifications
----------
of the Leased Premises including, but not limited to, the floor plan and the
floor bearing capacity of the Leased Premises within five (5) days after the
Effective Date. Also within such five (5) day period, Landlord shall deliver to
Tenant an existing title policy on the [Shopping Center or] Leased Premises and
all appurtenant easements, including legible copies of all documents affecting
the [Property or] Leased Premises. At any tune after the Effective Date,
Landlord shall permit Tenant to enter upon the [Property or] Leased Premises to
make a topographic and boundary survey, determine the location of utilities,
performing engineering studies and/or environmental audits ("Inspections") to
-----------
determine the Leased Premises' suitability for Tenant's
3
<PAGE>
Use. Landlord agrees to remove, at its sole cost and expense, any asbestos or
asbestos containing materials located on the Leased Premises. Tenant shall be
permitted to make adequate openings in walls, floors and ceilings during
Inspections. If the Inspections indicate conditions not satisfactory to Tenant
for Tenant's Use, Tenant may terminate this I-ease and the parties shall be
released from further liability. If Tenant shall terminate this Lease pursuant
to this Section, it shall as soon as reasonably possible repair any openings in
the walls, floors or ceilings it made during Inspections. Tenant shall indemnity
and hold Landlord harmless from and against any and all liability arising out of
any negligence in the performance of the Inspections.
7. CONSTRUCTION OF LEASED PREMISES; ALLOWANCE.
------------------------------------------
(a) This Lease is contingent on Tenant's ability to secure all required
licenses, permits and approvals from applicable governmental authorities
necessary for it to operate its business, including, without limitation, Tenant
obtaining all licenses, permits and approvals necessary for Tenant to conduct
table-seated dining on the Leased Premises; otherwise, Tenant may elect to
terminate this Lease immediately upon written notice to Landlord. On or before
______________, 19___, Landlord agrees, at Landlord's expense, to perform all
work with respect to the Leased Premises as required by Tenant in accordance
with the terms of Exhibit ___ attached hereto and made a part hereof. Within
sixty (60) days from the substantial completion of Landlord's work and delivery
of possession of the Leased Premises to Tenant, Tenant shall commence and
complete all work on the Leased Premises other than those "punch list" items
remaining to be performed by Landlord. Each party's respective work obligations
shall be commenced and completed in a good, workmanlike and lien free manner, in
accordance with all applicable laws, including the Americans with Disabilities
Act of 1990, as amended (the within the time periods provided herein and in such
work letter.
(b) Landlord agrees to provide Tenant with a cash allowance (the
"Allowance") of $______ per square foot (or $_______ in total) for the purpose
of Tenant constructing its leasehold improvements. Landlord agrees that the
Allowance shall be due and payable within ten (10) days following (i) receipt of
a copy of Tenant's certificate of occupancy, (ii) Tenant's opening for business,
and (iii) Tenant's furnishing Landlord with all properly executed lien waiver
forms. Landlord and Tenant hereby agree that the Allowance shall be amortized
over a period of ten (10) years and shall bear interest at the Prime Rate
(hereafter defined). For purposes of this Lease, the term "Prime Rate" shall
----------
mean the rate per annum from time to term determined by ____________ as its
Prime Rate of interest, as reflected in the Bank's Prime Rate history book
maintained at its principal office in ________________, as the Prime Rate may
change from time to time. Landlord hereby agrees that Tenant shall have the
right to repay the Allowance to Landlord at any tune and any such repayment
shall reduce the Rent payable hereunder.
8. UTILITIES. Landlord shall furnish to the Leased Premises at all times
---------
sufficient (i) sewer, gas, water and electric service lines in sufficient
capacity as is required by Tenant and
4
<PAGE>
(ii) sufficient heat, hot and cold water and air conditioning as required from
time to time by Tenant for all purposes, except during the making of necessary
repairs which repairs shall be completed as promptly as possible without
disruption to Tenant's business. such Landlord hereby represents and warrants to
Tenant that all utilities and any HVAC system servicing the Leased Premises are
in good working order, condition and repair as of the Effective Date.
9. [In-Line: MAINTENANCES PAYMENT. Landlord covenants and agrees to
--------------------
maintain in good condition and repair the Property (including structural
elements), the cannon areas, parking areas, walkways, access drives, driveways,
utility lines and foundations within the Property, throughout the Term and any
Extensions. In the event Landlord fails to promptly perform such necessary
maintenance and/or repairs, Tenant may perform such maintenance and/or repairs
and any costs expended by Tenant shall be deducted the Rent. Landlord shall
keep the parking area free of all ice, snow, debris and refuse so as to keep the
Shopping Center in a neat, clean and orderly condition. Landlord shall also
maintain adequate lighting for the parking area and driveways.
Tenant shall, within thirty (30) days upon receipt from Landlord of a
report certified by an authorized officer of Landlord, of the actual and
reasonable common area maintenance expenses incurred for the Property for the
previous calendar year, reimburse Landlord for payment of Tenant's proportionate
share of such expenses. Tenant shall have the right to audit and inspect the
books and records of Landlord with respect to any costs or item which is passed
through to Tenant upon ten (10) days written notice by Tenant to Landlord. If
the results of the audit show an overcharge to Tenant of more than two percent
(2%) of the actual amount owed by Tenant, Landlord shall pay the reasonable cost
of such audit and Landlord shall credit or refund to Tenant any overcharge of
such item as discovered by the audit within thirty (30) days of the completion
of such audit. In the event such audit discloses an undercharge of such items
as billed to Tenant, Tenant shall pay to Landlord the amount of such undercharge
within thirty (30) days of completion of such audit. Tenant's proportionate
share ("Proportionate Share") shall be a fraction, the
-------------------
numerator of which shall be the Leased Premises Floor Area and the denominator
of which shall be the gross leaseable floor area in the Property (whether or not
constructed, rented or occupied). Notwithstanding anything to the contrary
provided herein, Tenant shall not be required to pay any expenses which, in
accordance with generally accepted accounting principles, are not fully
chargeable as a current expense in the year the expenditure is incurred.]
Freestanding: MAINTENANCE; PAYMENT. Tenant covenants and agrees, at its
--------------------
expense, to maintain in good condition and repair the Leased Premises (including
structural elements), the common areas, parking areas, walkways, access drives,
driveways, utility lines and foundations within the Leased Premises, throughout
the Term and any Extensions. In the event Tenant fails to promptly perform such
necessary maintenance and/or repairs, Landlord may perform such maintenance
and/or repairs and any costs expended by Landlord shall be added to the Rent.
Tenant shall keep the parking area free of all ice, snow, debris and refuse so
as to keep the I-
5
<PAGE>
eased Premises in a neat, clean and orderly condition. Tenant shall also
maintain adequate lighting for the parking area and driveways.
10. MAJOR TENANTS. If one or more of the following tenants cease to
-------------
operate a business under its present trade name within the Shopping Center for a
period in excess of 90 days, and another tenant of substantially the same size,
quality and reputation in the business community, shall not have commenced
operation within such time, then Tenant reserves the right to terminate this
Lease or to reduce its Rent and other charges payable by Tenant in proportion to
the reduction in value of the Leased Premises, as reasonably
determined by Tenant: _______________________________.]
11. PROPERTY USE. Tenant has entered into this Lease in reliance upon
------------
representations by Landlord that no part of the Shopping Center shall be used as
a massage parlor or spa, blood bank, abortion clinic, or an adult book or adult
video tape store (which are defined as stores in which any portion of the
inventory is not available for sale or rental to children under 18 years old
because such inventory explicitly deals with or depicts human sexuality).]
12. NON-DISTURBANCE AND ATTORNMENT. Landlord, within thirty (30) days
------------------------------
after Effective Date, but in any event, prior to the Commencement Date, will
obtain from every senior landlord, mortgagee and holder of a deed of trust upon
the [Property or] Leased Premises (collectively, the "Senior Interest Holders"),
an agreement in recordable form acceptable to Tenant wherein the Senior Interest
Holders agree not to disturb Tenant's possession of the Leased Premises or
deprive Tenant of any rights or increase any of its obligations under this Lease
(the "Non-Disturbance and Attornment Agreement").
----------------------------------------
13. OPTION TO TERMINATE. Tenant shall have the right to terminate the
-------------------
Lease at any time after the second anniversary of the Commencement Date by
giving Landlord three (3) months written notice of its intention to do so. In
the event Tenant shall exercise this right of termination, Tenant shall pay as
consideration to Landlord on the date of termination a sum equal to three (3)
months' Rent.
14. In-Line: REAL ESTATE TAXES . Landlord shall pay before they become
-----------------
delinquent real estate taxes imposed during the Term and any Extensions upon or
against the Property ("Real Estate Taxes"). Landlord shall be solely responsible
-----------------
for payment of any and penalties imposed for any late payment. Tenant shall,
within thirty (30) days upon receipt from Landlord of a copy of the paid tax
bill and an invoice, reimburse Landlord for payment of Tenant's Proportionate
Share of Real Estate Taxes.
Real Estate Taxes for the year in which the Term shall begin and the year
in which the Lease shall terminate shall be prorated so that Tenant shall pay
only those portions thereof which correspond with the portion of said years as
are within the Term or the current Extension. Nothing herein contained shall
require Tenant to pay (a) corporation, franchise, income, estate,
6
<PAGE>
gift and inheritance taxes or charges imposed on Rent or other similar taxes,
charges or impositions which may be levied or assessed against Landlord, fee
owner, or their successor in title or (b) Real Estate Taxes on easement
parcels.]
15. Freestanding: REAL ESTATE TAXES. Tenant shall pay before they become
-----------------
delinquent real estate taxes imposed during the Term and any Extensions upon or
against the Leased Premises ("REAL ESTATE TAXES"). Real Estate Taxes for the
-----------------
year in which the Term shall begin and the year in which the Lease shall
terminate shall be prorated so that Tenant shall pay only those portions thereof
which correspond with the portion of said years as are within the Term or the
current Extension. Nothing herein contained shall require Tenant to pay (a)
corporation, franchise, income, estate, gift and inheritance taxes or charges
unposed on Rent or other similar taxes, charges or impositions which may be
levied or assessed against Landlord, fee owner, or their successor in title or
(b) Real Estate Taxes on easement parcels.
16. SIDEWALKS. Tenant shall be permitted to use the sidewalks and/or
---------
courtyards adjacent to the Leased Premises as an outdoor cafe free of any
additional charge. Landlord shall not cause or permit the street, sidewalks or
courtyards adjacent to the Leased Premises to be obstructed or blocked.]
[17. In-Line: INSURANCE.
---------
(a) LANDLORD. From the Effective Date and continuing throughout the Term
--------
and any Extensions, Tenant shall maintain the following insurance naming
Landlord as an additional insured: (i) commercial general liability and property
damage insurance in the amount of not less than $1,000,000.00 for bodily injury
or death or property damage of any one person and $1,000,000.00 for any one
occurrence, and (ii) fire and extended coverage insurance in an amount equal to
the full replacement cost of any improvements located on the Leased Premises,
established by agreed amount endorsement by Tenant, Landlord and the insurer.
Upon notice from Landlord, Tenant shall deliver to Landlord a certificate from
its insurer declaring such insurance to be in full force and effect.
(b) TENANT. From the Effective Date and continuing throughout the Term
------
and any Extensions, Tenant shall maintain commercial general liability insurance
naming Landlord as an additional insured in the amount of not less than
$1,000,000.00 for bodily injury or death or property damage of any one person
and $1,000,000.00 for any one occurrence. Upon notice from Landlord, Tenant
shall deliver to Landlord a certificate from its insurer declaring such
insurance to be in full force and effect.
(c) WAIVER OF SUBROGATION. Landlord and Tenant and all parties claiming
---------------------
by or through them mutually release and discharge each other from all claims and
liabilities arising from or caused by any casualty or hazard, covered or
required hereunder to be covered in whole or in part by insurance on the Leased
Premises or in connection with property on or activities
7
<PAGE>
conducted on the Leased Premises, and waive any right of subrogation which might
otherwise exist in or accrue to any person on account thereof.]
18. Freestanding: INSURANCE.
---------
(a) LANDLORD. From the Effective Date and continuing throughout the Term
--------
and any Extensions, Tenant shall maintain the following insurance naming Tenant
as an additional insured: (i) commercial general liability and property damage
insurance in the amount of not less than $500,000.00 for bodily injury or death
or property damage of any one person and $1,000,000.00 for any one occurrence,
(ii) fire and extended coverage insurance in an amount equal to the full
replacement cost of any improvements located on the Leased Premises, established
by agreed amount endorsement by Tenant, Landlord and the insurer, (iii) workers'
compensation insurance in statutory amounts, and (iv) contractual liability
insurance. Upon notice from Tenant, Landlord, its agents and contractors shall
deliver to Tenant a certificate from its insurer declaring such insurance to be
in full force and effect.
(b) WAIVER OF SUBROGATION. Landlord and Tenant and all parties claiming
---------------------
by or through them mutually release and discharge each other from all claims and
liabilities arising from or caused by any casualty or hazard, covered or
required hereunder to be covered in whole or in part by insurance on the
Property or in connection with property on or activities conducted on the
Property, and waive any right of subrogation which might otherwise exist in or
accrue to any person on account thereof.
19. LANDLORD'S TITLE AND QUIET ENJOYMENT. Landlord represents and
------------------------------------
warrants that Landlord is seized in fee simple title to the [Property or] Leased
Premises, free, clear and unencumbered except as otherwise disclosed herein.
Landlord covenants that so long as Tenant fulfills the conditions and covenants
required of it to be performed, Tenant will have peaceful and quiet possession
thereof. Landlord further represents and warrants that it has good right, full
power and lawful authority to enter into the Lease for the Term and any
Extensions.
20. IMPROVEMENTS AND ALTERATIONS. Tenant shall have the right to (i)
----------------------------
alter, renovate, add, remodel, modify, and/or change the Leased Premises and/or
other improvements upon the Leased Premises as Tenant may deem desirable, and
(ii) install pylon signage on any [Shopping Center] pylon [on the Leased
Premises] or may install a freestanding pylon or affix fascia signs, canopies,
awnings and/or flags on the exterior walls of the Leased Premises if permitted
by local ordinance. landlord hereby grants to Tenant and its agents and
contractors, at Tenant's sole cost and expense, the right to install, maintain
and operate a mast mounted satellite dish antenna (the "Dish") and related
----
equipment, including cables from the exterior of the roof directly above the
Leased Premises to equipment inside the Leased Premises, necessary to the
operation of the Dish, as part of Tenant's integrated satellite business
network. Tenant may locate the Dish at or relocate the Dish to some other
location on or about the roof of the [Shopping Center or] Leased Premises for
purposes of adequate reception, subject to appropriate law, codes and
8
<PAGE>
regulations. Any improvements constructed upon the [Property or Leased Premises
by Tenant shall be and remain the property of Tenant during the Term and any
Extensions. Tenant shall not be required to remove the improvements upon the
[Property or] Leased Premises and Tenant's failure to do so after the expiration
of such period shall be deemed to be an abandonment thereof, whereby title shall
become vested in the Landlord.
21. In-Line: DAMAGE OR DESTRUCTION. If the Leased Premises and/or the
---------------------
Property shall be damaged or destroyed by fire or other casualty, Landlord shall
continence to repair or rebuild the Leased Premises and/or the Property to their
condition immediately prior to such damage or destruction and shall complete
same within a reasonable time thereafter. In the event Landlord has not
commenced to so repair or rebuild the Leased Premises and/or the Property,
Tenant may at any time thereafter and without further notice to Landlord
commence to repair or rebuild the Leased Premises, or Tenant may terminate the
Lease and the parties shall be released from further liability. In the event
Tenant elects to repair or rebuild the Leased Premises, Landlord shall make
available to Tenant all insurance proceeds or such portion thereof necessary for
this purpose. In the event the insurance proceeds are insufficient to cover the
costs of the repairs or rebuilding, the excess costs shall be borne by Landlord,
which costs shall be deducted from the Rent. In the event the repair or
rebuilding of the Leased Premises has not been completed within a period of
ninety (90) days from the date of the damage or destruction, or if the casualty
occurs within the last year of the Term or any Extension regardless of the time
necessary to complete the repair or rebuilding, Tenant may, at its option,
terminate the Lease and the parties shall be released from further liability.
In such event, Tenant shall be entitled to all proceeds of insurance and rights
of recovery against insurers on policies covering such damage or destruction for
any improvements constructed upon the Property by Tenant. During any period
that the damage or destruction is as to render the use of the Leased Premises
impractical or impossible, as determined by Tenant, the Rent and other charges
payable by Tenant shall abate.]
22. Freestanding: DAMAGE OR DESTRUCTION. If the Leased Premises shall be
---------------------
damaged or destroyed by fire or other casualty, Tenant may, at its option, (i)
commence to repair or rebuild the Leased Premises to its condition immediately
prior to such damage or destruction and shall complete same within a reasonable
time thereafter, or (ii) terminate the Lease and the parties shall be released
from further liability. In the event Tenant elects to repair or rebuild the
Leased Premises, Landlord shall make available to Tenant all insurance proceeds
or such portion thereof necessary for this purpose. If the casualty occurs
within the last year of the Term or any Extension regardless of the time
necessary to complete the repair or rebuilding, Tenant may, at its option,
terminate the Lease and the parties shall be released from further liability.
In such event, Tenant shall be entitled to all proceeds of insurance and rights
of recovery against insurers on policies covering such damage or destruction for
any improvements constructed upon the Leased Premises by Tenant. During any
period that the damage or destruction is such as to render the use of the Leased
Premises impractical or impossible, as determined by Tenant, the Rent and other
charges payable by Tenant shall abate.]
9
<PAGE>
23. LIENS. Landlord and Tenant covenant each with the other not to permit
-----
any judgment, attachment and/or lien (an "Encumbrance") to be filed against the
-----------
Leased Premises. Should any judgment, attachment and/or lien of any nature be
filed against the Leased Premises, the party from whose fault or alleged debt
such lien arises shall within thirty (30) days cause such Encumbrance to be
removed by substitution of collateral or otherwise.
24. WAIVER OF LANDLORD'S LIEN. In the event Tenant, its subtenants or
-------------------------
assigns acquires and/or leases personal property to be installed and used upon
the Leased Premises subject to a conditional sales contract, chattel mortgage or
other security agreement or lease, Landlord agrees to execute and deliver to any
such secured creditor and/or lessor a waiver of any lien Landlord may have upon
such personal property. Such waiver will be on a form provided by Tenant
authorizing the secured creditor and/or lessor to enter upon the Leased Premises
and remove such personal property in the event of default under the terms of the
conditional sales contract, chattel mortgage, security agreement and/or lease.
This Section shall not be interpreted as creating a lien in favor of Landlord.
25. DEFAULT. In the event Tenant shall fail to pay the Rent when due or
-------
shall fail to perform any of its other obligations under the Lease, after notice
of such default shall have been given as provided below, Landlord may as its
sole and exclusive remedy elect either: (a) to re-enter the Leased Premises by
summary or similar proceedings and re-let the Leased Premises, using reasonable
efforts therefor, and receiving the Rent therefrom, applying the same first to
the payment of Rent accruing hereunder, the balance, if any, to be paid to
Tenant; but, Tenant shall remain liable for the equivalent of the amount of all
Rent reserved herein less the receipts of reletting, if any, and such amount
shall be due and payable to Landlord as damages or rent, as the case may be, on
the successive Rent days provided above, and Landlord may recover such amount
periodically on such successive days; or (b) to terminate the Lease and to
resume possession of the Leased Premises wholly discharged from the Lease.
Such election shall be made by written notice to Tenant at any time on or
before the doing of any act or the commencement of any proceedings to recover
possession of the Leased Premises and shall be final. If Landlord shall elect to
terminate the Lease, all rights and obligations of Tenant relating to the
unexpired portion of the Lease shall cease. Within ten (10) days after receipt
by Tenant of notice of election by Landlord to terminate the Lease, the parties
shall by an instrument in writing in recordable form, terminate the Lease and
Tenant shall surrender and deliver to Landlord the Leased Premises, except that
Tenant may remove its trade fixtures, signs, equipment and other personal
property from and de-identify the Leased Premises.
Neither bankruptcy, insolvency, nor the appointment of a receiver or
trustee shall affect the Lease so long as the obligations of Tenant are
performed by Tenant, its successors or assigns.
10
<PAGE>
No default hereunder shall be deemed to have occurred on the part of Tenant
until ten (10) days after written notice of any monetary default and thirty (30)
days after written notice of any non-monetary default shall have been given to
Tenant, and Tenant wi@ such time shall have failed to remedy such default. If
any default by Tenant, except payment of the rent, cannot reasonably be cured
within thirty (30) days after notice then Tenant shall have additional time as
may be reasonably necessary to cure such default.
26. CONDEMNATION. If any portion of or interest in the [Property or]
------------
Leased Premises shall be permanently or temporarily taken under any right of
eminent domain or any transfer in lieu thereof, and such taking renders the
Leased Premises [or the Property] unsuitable in the reasonable judgment of
Tenant for Tenant's Use, Tenant may terminate this Lease by notice to Landlord
within thirty (30) days after such taking deprives Tenant of possession of any
portion of the Leased Premises or of any other rights of Tenant under this
Lease. Nothing contained herein shall prevent Landlord and Tenant from
prosecuting claims in any condemnation proceedings for the values of their
respective interests. Tenant shall have the exclusive right to claim any
proceeds for the taking of Tenant's trade fixtures, equipment or personal
property and for relocation expenses. Landlord acknowledges and agrees that any
remediation of Hazardous Substances (hereinafter defined) that interferes with
Tenant's Use shall be deemed to be a taking for purposes of this Section.
Landlord represents and warrants that, at the Effective Date, it has no
actual or constructive knowledge of any proposed condemnation or road or access
changes or impairment to the visibility of the [Property or] Leased Premises
including, but not limited to, restrictions, barriers or medians, overpasses,
underpasses or bypasses, that would affect the [Property or] Leased Premises or
Tenant's Use of any part of the [Property or] Leased Premises. In the event
that, prior to the Commencement Date, any of the foregoing actions is proposed
by any governmental or private authority, Tenant shall be under no obligation to
commence or continue construction of its work on the Leased Premises, and Tenant
shall have the option to (i) recover all rights, damages and awards pursuant to
the appropriate provisions of this Section, or (ii) terminate this Lease with a
reservation of its rights and remedies hereunder.
27. ASSIGNMENT OF TRANSFER.
----------------------
(a) LANDLORD. No assignment or transfer of the Lease by Landlord shall be
--------
binding on Tenant unless the assignee or transferee shall assume and agree to be
bound by the terms of the Lease.
(b) TENANT. Tenant shall have the (i) right to assign, sublet, license or
------
transfer any or all of its rights and privileges under the Lease provided that
no such assignment, sublease, license or transfer shall operate to relieve
Tenant of its obligations under the Lease, including the payment of Rent and
other charges and (ii) unrestricted right to execute and deliver a mortgage,
deed of trust, pledge and/or collateral assignment of the Lease as security for
any
11
<PAGE>
indebtedness in any form whatsoever. Landlord hereby consents to such collateral
assignment and agrees to execute any document required by Tenant's mortgagee to
effect such transaction.
28. TENANT. Tenant's customers shall have the exclusive right to park on
------
the portion of the parking area as crosshatched on Exhibit A during Tenant's
regular business hours. Tenant shall have the right to place signs reading
"Reserved Parking Tenant's Customers Only from 6:00 a.m. to 7:00 p.m." on such
parking spaces if and when Tenant, exercising reasonable judgment, shall
determine that other tenant's customers or employees are utilizing such spaces
to the detriment of Tenant's business. Tenant shall have the right to enforce
its exclusive parking rights under this paragraph by the ticketing and towing of
cars.]
29. REPRESENTATIONS AND WARRANTIES. Landlord represents and warrants:
------------------------------
(a) HAZARDOUS SUBSTANCES. The [Property or] Leased Premises does not
--------------------
presently contain and is free from all hazardous substances and/or wastes, toxic
and nontoxic pollutants and contaminants including, but not limited to,
petroleum products and asbestos (collectively, "Hazardous Substances").
--------------------
Landlord has not received any notification from any federal, state, county or
city agency or authority relating to Hazardous Substances, in or near the
[Property or] Leased Premises. Neither party shall cause or permit any
Hazardous Substances to be brought upon, kept or used in or about the [Property
or] Leased Premises by such party, its agents, employees, contractors, invitees,
tenants, subtenants or licensees without the prior written consent of the other
party. Neither party shall unreasonably withhold its consent thereto as long as
such party demonstrates to the other party's reasonable satisfaction that each
such Hazardous Substance is necessary or useful to its business or to the
business of its agents, employees, contractors, invitees, tenants, subtenants or
licensees, and will be used, kept and stored in a manner that complies with all
applicable federal, state and local environmental laws. If consented to, the
requesting party shall promptly deliver to the other party true and complete
copies of all notices received by such party from any governmental authority
with respect to the generation, storage or disposal of such Hazardous
Substances.
(b) LITIGATION. There are no claims, causes of action or other litigation
----------
or proceedings pending or, to the best of Landlord's knowledge, threatened in
respect to the ownership, operation or environmental condition of the [Property
or] Leased Premises or any part thereof, except for claims which are fully
insured and as to which the insurer has accepted defense without reservation.
(c) VIOLATION. There are no violations of any health, safety, pollution,
---------
zoning or other laws, ordinances, rules or regulations with respect to any
portion of the [Shopping Center or] Leased Premises which have not been
heretofore entirely corrected. In the event Landlord has knowledge of any such
violations, Landlord shall cure such violations prior to the Effective Date.
12
<PAGE>
(d) ZONING. The Shopping Center is currently zoned to allow the use of
------
the Leased Premises for Tenant's Use.
30. Freestanding: RIGHT OF FIRST LEASE; RIGHT OF FIRST REFUSAL.
----------------------------------------------------------
(a) If Landlord desires to accept a bona fide offer ("Lease Offer") to
lease the Leased Premises or any portion thereof for a term commencing on or
after the expiration of this Lease or to lease any portion of the premises
adjacent to the Leased Premises, Landlord shall notify Tenant and Tenant shall
have a right of first lease to lease the Leased Premises and/or the adjacent
premises upon the ten-ns and conditions of the Lease Offer.
(b) Tenant shall have the right to purchase the Leased Premises on the
same terms and conditions as those of any bona fide offer received by and
acceptable to Landlord. Prior to making any sale or any agreement to sale,
Landlord shall notify Tenant in writing of the terms and conditions of such
offer and Tenant, within 30 days after receipt of such notice, may exercise this
right by written notice to Landlord.
[31. In-Line: RIGHT OF FIRST LEASE. If Landlord desires to accept a bona
fide offer ("Lease Offer") to lease the Leased Premises or any portion thereof
for a term commencing on or after the expiration of this Lease or to lease any
portion of the premises adjacent to the Leased Premises, Landlord shall notify
Tenant and Tenant shall have a right of first lease to lease the Leased Premises
and/or the adjacent premises upon the terms and conditions of the Lease Offer.]
32. INDEMNIFICATION.
---------------
(a) Landlord hereby indemnities and holds Tenant, Tenant's nominees,
officers, directors, agents, employees, successors and assigns harmless from and
against any and all claims, demands, liabilities, and expenses, including
attorneys' fees and litigation expenses, arising from (i) the negligence or
wilful acts of Landlord or its agents, employees, or contractors occurring on
[the Leased Premises or] the Property or (ii) the presence of hazardous
substances or materials on [the Leased Premises or] the Property, except to the
extent caused by Tenant's negligence or wilful misconduct. In the event any
action or proceeding shall be brought against Tenant by reason of any such
claim, Landlord shall defend the same at Landlord's expense by counsel selected
by Tenant.
(b) Tenant hereby indemnities and holds Landlord, Landlord's nominees,
officers, directors, agents, employees, successors and assigns harmless from and
against any and all claims, demands, liabilities, and expenses, including
attorneys' fees and litigation expenses, arising from the negligence or wilful
acts of Tenant or its agents, employees, or contractors occurring on [the Leased
Premises or] the Property, except to the extent caused by Landlord's negligence
or wilful misconduct. In the event any action or proceeding shall be brought
against
13
<PAGE>
Landlord by reason of any such claim, Tenant shall defend the same at Tenant's
expense by counsel selected by Landlord.
33. MISCELLANEOUS.
-------------
(a) If either party is delayed or prevented from performing any of its
obligations under this Lease by reason of strike, lockouts, labor troubles,
failure of power, riots, insurrection, war, acts of God or any other cause
beyond such party's control, the period of such event or such prevention shall
be deemed added to the time period herein provided for the performance of any
such obligation by the applicable party.
(b) This Lease contains the entire agreement between the parties. No
modification, alteration or amendment of the Lease shall be binding unless in
writing and executed by the parties.
(c) The representations, warranties and indemnities contained in this
Lease shall survive the termination or expiration of this Lease.
(d) Landlord acknowledges that any plans or specifications of Tenant and
Tenant's trademarks and service marks, including, without limitation are the
sole property of Tenant, and Landlord shall not have any rights to same.
(e) Each party hereto has reviewed and revised (or requested revisions of)
this Lease, and therefore any usual rules of construction requiring that
ambiguities are to be resolved against a particular party shall not be
applicable in the construction and interpretation of this Lease or any Exhibits
hereto.
(f) Time is of the essence of this Lease and each provision; provided,
however, if the final (but not any interim) date of any period set forth herein
falls on a Saturday, Sunday or legal holiday under the laws of the United States
of America, the final date of such period shall be extended to the next business
day.
(g) Landlord agrees to pay all commissions due in connection with the
execution of this Lease.
(h) his Lease shall be governed by and construed and interpreted in
accordance with the laws of the state in which the Shopping Center is located.
(i) This Lease is contingent upon Tenant obtaining the requisite senior
management and Board of Director approval of this Lease and the Leased Premises
for Tenant's Use.
(j) Landlord and its agents, representatives, employees, partners,
officers and directors will not disclose the subject matter or terms of the
transaction contemplated by this
14
<PAGE>
Lease unless prior written consent to such disclosure is obtained from Tenant,
which consent may be withheld at Tenant's sole discretion.
(k) Landlord agrees that upon its execution of this Lease, neither it nor
its agents or employees shall (i) initiate, encourage the initiation by others
of discussions or negotiations with third parties or respond to solicitation by
third parties relating to the Leased Premises or any part thereof, (ii) fail to
immediately notify Tenant if any third party attempts to initiate any such
solicitation, discussion, or negotiation with Landlord and (iii) enter into any
agreement with any third party with respect to the Leased Premises or any part
thereof.
(l) The offer to lease set forth in this Lease must be accepted by
Landlord by the delivery of fully executed duplicate originals of this Lease
to Tenant by no later than _____________, ___.m., on _________________, ___,
19___; otherwise, this offer may, at Tenant's sole option, be terminated and be
of no further force or effect.
IN WITNESS WHEREOF, Landlord has caused this Addendum to Lease to be
executed and sealed this ___ day of______________, 199___.
WITNESSES: LANDLORD
_______________________________ ________________________________________
_______________________________ By:_____________________________________
Name:________________________________
Title:_______________________________
IN WITNESS WHEREOF, Tenant has caused this Addendum to Lease to be executed
and sealed this ___ day of ________________, 199___.
WITNESSES: LANDLORD
_______________________________________ ___________________________________
_______________________________________ By:________________________________
Name:___________________________
Title:__________________________
15
<PAGE>
EXHIBIT A
---------
SITE PLAN AND LEGAL DESCRIPTION OF THE
LEASED PREMISES [OR SHOPPING CENTER]
------------------------------------
16
<PAGE>
EXHIBIT B
---------
LEASE PLAN OF THE LEASED PREMISES
---------------------------------
17
<PAGE>
EXHIBIT C
---------
LANDLORD WORK
-------------
The Landlord shall, at its sole cost and expense, deliver the Leased
Premises in standard "vanilla shell" condition and shall complete the following
in a workmanlike manner, conforming with the Tenant's plans and specifications
and all local, state, national codes and UL and NFPA requirements, where
applicable:
Electrical Service -120/208 volts, 3-Phase, 4 wire; 200 amp service
installed at location as specified by Tenant.
Water Service - 1" domestic water line from local main to Leased Premises;
meter and backflow device located as specified by Tenant.
Gas Service - install adequate gas line and meter at rear of building
supplying not less than 700 CFH; meter location as specified by Tenant.
Building Sanity Sewer - 4" sanitary sewer line from the Leased Premises to
the authorized main sewer; sewer stub at location specified by Tenant.
Fire Sprinkler -provide and install NFPA, UL and code approved fire
protection system.
Telephone Conduit -provide and install 2" telephone conduit, stubbed at
Tenant's specified location.
HVAC System -provide and install a minimum of 1 ton per 150 s.f. or provide
allowance of $1500 per ton for same.
Drywall and Ceiling System - provide and install standard 2' x 4' exposed
ceiling grid with standard grade lay-in ceiling tile. Provide and install
standard 5/8" drywall at demising walls and vinyl-coated drywall in service and
kitchen area.
Restrooms - provide functional handicap bathrooms as required by local
codes and ADA requirements; include janitor's closet or mop sink.
18
<PAGE>
EXHIBIT F
---------
FINANCED AREA DEVELOPER
PROGRAM LOAN AGREEMENT
----------------------
<PAGE>
SECURED LOAN AGREEMENT
----------------------
THIS SECURED LOAN AGREEMENT (the "Agreement") is made and entered into as
of the ___ day of ____________, 1996 between Einstein/Noah Bagel Corp., a
Delaware corporation (the "Company"), and ______________________, a Delaware
limited liability company ("DEVELOPER").
R E C I T A L S:
---------------
The Company and DEVELOPER have entered into an area development agreement
(as amended from time to time, the "Development Agreement") pursuant to which
DEVELOPER is required to establish and operate up to ____________ bagel stores
(the "Stores") in the area specified in the Development Agreement (the
"Development Area") in compliance with a development schedule set forth therein
and to enter into individual franchise agreements (each a "Franchise Agreement")
for such specific Stores. In order to facilitate the development of the Stores,
DEVELOPER desires to borrow up to $____________ from the Company, and the
Company desires to make such loan to DEVELOPER, upon the terms and subject to
the conditions set forth herein.
COVENANTS
---------
In consideration of the mutual representations, warranties, and covenants
set forth herein, and in consideration of any advances made hereunder to or for
the benefit of DEVELOPER by Company, the parties hereto agree as follows:
ARTICLE I
---------
THE LOAN
--------
1.1 THE LOAN. The Company agrees, on the terms and subject to the
--------
conditions hereinafter set forth, including without limitation the conditions to
loan advances set forth in Article III hereof, to advance at any time and from
time to time during the period commencing on the date hereof and ending on the
last day of the ____________ Retail Period (as defined in Section 1.7 below) in
the Company's fiscal year 199_ (the "Draw Loan Termination Date"), amounts
requested by DEVELOPER in an aggregate principal amount not to exceed
$________________ (the "Loan"). Each advance of the Loan shall be in a minimum
amount of $100,000 and shall be made by wire transfer of Company to the account
of DEVELOPER or by regular check of Company payable to DEVELOPER and forwarded
to DEVELOPER by overnight air express to its address as set forth herein for
delivery on the next regular business day. The Loan shall
<PAGE>
be evidenced by a promissory note (the "Note") of even date herewith in the form
attached hereto as Exhibit A.
1.2 PURPOSES OF THE LOAN. Proceeds of the Loan shall be used by DEVELOPER
--------------------
to pay fees and make payments to the Company, to fund Store operating costs, to
fund general corporate overhead, to pay fees to __________________ pursuant to
the Support Services Agreement (as each such term is defined in Section 6.3
hereof), to provide general working capital for DEVELOPER, and to finance the
purchase, design, construction and equipment of Stores in the Development Area
pursuant to and in accordance with the Development Agreement.
1.3 MAXIMUM PRINCIPAL BALANCE; ADDITIONAL LOAN AMOUNT.
-------------------------------------------------
(a) The aggregate outstanding principal balance of the Loan shall at
no time exceed $____________, less the principal amount of conversions
under Section 1.9 and option exercises under Section 1.10 (the "Maximum
Principal Balance").
(b) In the event that Einstein Bros. Equity Funding, L.L.C. (the
"Fund") exercises all or a portion of either or both of the options
("Additional Unit Options") to purchase up to an additional ____________
Units of DEVELOPER in the aggregate as provided in the unit purchase
agreement as of even date herewith by and between DEVELOPER and the Fund
("Unit Purchase Agreement"), the Maximum Principal Balance may be increased
by the Company at the Company's option by an amount to be determined by the
Company in its sole discretion not to exceed four times the total proceeds
received by DEVELOPER upon any exercise by the Fund of all or a portion of
either or both of the Additional Unit Options ("Additional Loan Amount").
(c) In the event and each time that the Company increases the Maximum
Principal Balance as provided in Section 1.3(b) above, DEVELOPER shall
execute a new promissory note, substantially in the form of the Note,
reflecting the Maximum Principal Balance under Section 1.3(b) plus the
Additional Loan Amount ("New Note"). Such New Note shall provide that the
Conversion Price (as defined in the Note) for purposes of converting the
Additional Loan Amount pursuant to Section 1.9 hereof or exercising the
Option for the Additional Loan Amount pursuant to Section 1.10 hereof shall
be $1.12 per Voting Unit, and all references in this Agreement, the Pledge
Agreements (as defined in Section 2.2 hereof) and Security Instruments (as
defined in Section 2.4 hereof) to the Note shall thereafter be references
to the New Note.
(d) As used in all other sections of this Agreement (including in
Sections 1.10 and 5.9 hereof), the term "Maximum Principal Balance" shall
mean $__________ plus, in the event that all or any portion of either or
both of the Additional Unit Options has been exercised, the Additional Loan
Amount less the dollar amount of all previous conversions under Section 1.9
hereof and exercises of the Option under Section 1.10 hereof.
F-2
<PAGE>
1.4 THE LOAN ACCOUNT. The Company shall maintain a loan account on its
----------------
books in which shall be recorded all advances under the Loan (collectively,
"Advances") made by Company to DEVELOPER pursuant to this Agreement, and all
payments made by DEVELOPER with respect to the Loan; provided, however, that
failure to maintain such account or record any advances therein shall not
relieve DEVELOPER of its obligations to repay the outstanding principal amount
of the Loan, all accrued interest thereon, and any amount payable with respect
thereto in accordance with the terms of this Agreement and the Note.
1.5 INTEREST RATE.
-------------
(a) Interest shall accrue daily on the aggregate outstanding
principal balance of the Loan, for the period commencing on the date the
Loan is made until the Loan is paid in full, at a per annum rate equal to
the rate designated and announced by Bank of America Illinois or its
successor in interest (the "Bank") from time to time as its "reference
rate" in effect at its principal office in Chicago, Illinois, plus 1%. The
interest rate shall be adjusted, from time to time, on the same day on
which the Bank adjusts its "reference rate." Interest on the outstanding
principal amount of the Loan shall be payable in arrears on the dates set
forth herein and at maturity (whether at stated maturity, by acceleration
or otherwise).
(b) Interest shall be computed on the basis of a 360-day year and the
actual number of days elapsed.
(c) Any principal payment due under the Note not paid when due,
whether at stated maturity, by notice of repayment, by acceleration or
otherwise, shall, to the extent permitted by applicable law, thereafter
bear interest (compounded monthly and payable upon demand) at a rate which
is 2% per annum in excess of the rate of interest otherwise payable under
this Agreement in respect of such principal amount until such unpaid amount
has been paid in full (whether before or after judgment).
1.6 PAYMENT OF INTEREST. During the Interest Payment Period (as defined
-------------------
below) DEVELOPER shall pay to the Company interest only on the outstanding
principal balance of the Loan on the first day of each Retail Period. The
"Interest Payment Period" shall mean the period commencing on the first day of
the Retail Period immediately following the first Retail Period in which
DEVELOPER initially draws on the Loan under this Agreement and continuing
through and including the Draw Loan Termination Date. Thereafter DEVELOPER
shall pay principal and interest as provided in Section 1.7 hereof.
1.7 REPAYMENT OF THE LOAN. If not earlier paid, or if not accelerated for
---------------------
payment, the outstanding principal amount of the Loan shall, at the close of
business on the Draw Loan Termination Date, thereafter become an amortized term
loan payable as follows: the principal balance of the Loan shall be payable to
the Company in 65 substantially equal periodic
F-3
<PAGE>
installments of principal (the amount of which periodic installments of
principal shall be determined at the close of business on the Draw Loan
Termination Date based on a schedule amortizing such outstanding principal
balance of the Loan as of such date in 130 substantially equal periodic
installments of principal), plus accrued but unpaid interest, on the first day
of each of the Company's 13 consecutive four-week accounting periods used for
accounting purposes (each a "Retail Period"), commencing on the first day of the
____________ Retail Period in the Company's fiscal year 19__ and continuing
until the first day of the ____________ Retail Period in the Company's fiscal
year 20__, when the entire remaining principal balance of the Loan and all
interest accrued thereon shall be due and payable.
1.8 TERM OF THIS AGREEMENT. This Agreement and all covenants and
----------------------
agreements of the Company hereunder shall be effective ____________, 1996
("Closing Date") and shall continue in effect until the last to occur of (i) the
exercise, expiration, or other termination of all remaining option rights
granted in Section 1.10 hereof, (ii) the exercise, expiration, or other
termination of all of the remaining conversion rights granted in Section 1.9
hereof, (iii) the date on which there is no amount (principal or interest)
remaining outstanding under the Note and (iv) the date on which the Company no
longer has an obligation to make any Advances hereunder if DEVELOPER were to
make a valid request for an Advance pursuant to and in accordance with Article
III hereof.
1.9 CONVERTIBILITY.
--------------
(a) On the terms and subject to the conditions set forth in the Note,
any portion of the outstanding principal balance of the Loan is convertible
at the election of the holder of the Note into Voting Units (as defined in
the DEVELOPER's limited liability company agreement dated ____________,
199__, as amended and as it may be further amended from time to time (the
"LLC Agreement")) of DEVELOPER at any time and from time to time after both
of the following have occurred: (i) the second anniversary of the Closing
Date, and (ii) such time as DEVELOPER has completed not less than 80% of
the Development Schedule set forth in the Development Agreement, and up to
the later of (x) the date on which DEVELOPER has properly repaid the
outstanding principal balance of the Loan and all accrued interest thereon
in full or (y) the first day of the ____________ Retail Period in the
Company's fiscal year 20__; provided, however, that nothing herein shall
impair, restrict or prohibit the exercise of remedies, including exercise
of the conversion right, under Section 8.2 hereof upon the occurrence of a
Default. Upon such conversion, that portion of principal so converted
shall be deemed to be paid in full. Conversion of any portion of the
principal balance of the Loan shall not relieve DEVELOPER of its obligation
to pay any accrued but unpaid interest to the date of conversion on the
portion of the principal balance of the Loan so converted. In no event
shall interest be convertible into Voting Units in DEVELOPER.
F-4
<PAGE>
(b) Upon any conversion under this Section 1.9, the Company's
obligation to make additional Advances to DEVELOPER under this Agreement
shall be reduced by an amount equal to the amount of the principal balance
of the Loan so converted.
1.10 OPTION.
------
(a) The Company shall have the option, at any time and from time to
time after both of the following have occurred: (i) the second anniversary
of the Closing Date, and (ii) such time as DEVELOPER has completed not less
than 80% of the Development Schedule set forth in the Development
Agreement, and up to the later of (x) the date on which DEVELOPER has
properly repaid the outstanding principal balance of the Loan and all
accrued interest thereon in full or (y) the first day of the ____________
Retail Period in the Company's fiscal year 20__, to purchase at the
Conversion Price (as defined in the Note) up to that number of Voting Units
equal to (A) the Option Amount, divided by (B) the Conversion Price (the
"Option"); provided, however, that nothing herein shall impair, restrict or
prohibit the exercise of remedies, including exercise of the Option, under
Section 8.2 hereof upon the occurrence of a Default. For purposes of this
Section 1.10, the Option Amount shall mean the Maximum Principal Balance
less the dollar amount of the outstanding principal balance of the Loan
(whether such amount is the result of a reduction in principal due to the
repayment of the Loan or the failure by DEVELOPER to request Advances
hereunder or otherwise) on the date the Company notifies DEVELOPER of its
intention to exercise the Option.
(b) Upon exercise of any portion of the Option under this Section
1.10, the Company's obligations to make additional Advances to DEVELOPER
under this Agreement shall be reduced by an aggregate amount equal to the
amount paid upon such option exercise.
(c) In case of any reclassification or change of outstanding Units
(as defined in the LLC Agreement), or in case of any consolidation or
merger of DEVELOPER with or into any partnership, corporation, or other
entity (other than a merger in which DEVELOPER is the surviving entity and
which does not result in any reclassification or change of outstanding
Units, other than a change in number of Units issuable upon exercise of the
Option) or in case of any sale or conveyance to any partnership,
corporation, or other entity of the property of DEVELOPER as an entirety or
substantially as an entirety, then the holder of the Note shall have the
right thereafter to exercise the Option for the kind and amount of units
and other securities and property receivable upon such reclassification,
change, consolidation, merger, sale, or conveyance by a holder of the
number of Voting Units of DEVELOPER issuable upon exercise of the Option
immediately prior to such reclassification, change, consolidation, merger,
sale, or conveyance, subject to adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for herein.
F-5
<PAGE>
1.11 ONE OBLIGATION. All Advances made hereunder, and all interest accrued
--------------
thereon, shall constitute one obligation of DEVELOPER secured by the security
interests granted by this Agreement and by all other security interests, liens,
claims, and encumbrances from time to time hereafter granted to the Company by
DEVELOPER.
1.12 CREDIT RESOURCES. DEVELOPER acknowledges that the Company has
----------------
informed it that the Company does not currently and may not from time to time in
the future have cash, cash equivalents, and credit resources sufficient to
permit the Company to necessarily make all requested Advances under this
Agreement and all other similar agreements with its financed area developers and
franchisees while maintaining sufficient working capital for the Company's
operating needs. DEVELOPER agrees that in the event the Company shall fail to
fund the Loan as and to the extent required hereby solely as a result of the
unavailability to the Company of cash and/or credit resources to fund the Loan
and not as a result of any failure of DEVELOPER to satisfy the conditions
precedent to Advances or of the occurrence of a Default or Event of Default
hereunder (a "Funding Default"), such Funding Default shall not (a) constitute
fraud (by any person or entity, including the Company and its successors and
assignees) or (b) give rise to any liability of any person or entity (other than
the Company and its successors and assignees) in any other tort, and DEVELOPER
further agrees that it shall be limited to its remedies in contract and in a
non-fraud tort action against the Company. The Company and DEVELOPER agree that
this Section 1.12 shall not diminish or otherwise affect in any way the amount
of damages for which the Company may be liable to DEVELOPER in a contract or
non-fraud tort action for a Funding Default.
1.13 PAYMENT METHOD; AUTHORIZATION TO ADVANCE FOR LIMITED PURPOSES.
-------------------------------------------------------------
(a) All payments to be made by DEVELOPER hereunder shall be made in
lawful money of the United States, in immediately available funds, without
set off, counterclaims, deduction or withholding of any type.
(b) So long as funds are still available to be drawn by DEVELOPER
hereunder, and DEVELOPER is not in Default under this Agreement, DEVELOPER
hereby authorizes the Company (i) to make daily Advances on behalf of
DEVELOPER under this Agreement in accordance with the Company's customary
practices and procedures solely to provide funds to DEVELOPER to cover
payables, intercompany charges and other charges previously approved by
DEVELOPER regardless of whether the DEVELOPER has specifically requested
such Advance and without waiver of any of the Company's rights hereunder,
and (ii) to make Advances under the Loan from time to time solely to pay
interest on the Loan if and only if DEVELOPER does not pay interest when
due hereunder. In the event that the Company makes any such daily
Advances, DEVELOPER agrees to deliver to the Company, every two calendar
weeks, a certificate of DEVELOPER in the form attached hereto as Exhibit B,
which shall be signed by a duly authorized officer of the manager of
DEVELOPER.
F-6
<PAGE>
ARTICLE II
----------
SECURITY AND COLLATERAL
-----------------------
2.1 SECURITY INTEREST. To secure payment and performance of DEVELOPER's
-----------------
obligations hereunder and under the Note, and any and all other indebtedness,
obligations or liabilities of any kind of DEVELOPER to the Company, whether now
existing or hereafter arising, direct or indirect, absolute or contingent, joint
and/or several, arising by operation of law or otherwise, DEVELOPER hereby
grants to the Company a continuing security interest in and to the following
property and interests in property, whether now owned or hereafter acquired by
DEVELOPER and wheresoever located:
(a) all of DEVELOPER's real estate, accounts, equipment (including,
but not limited to machinery, furniture, fixtures, tools, vehicles, and
other tangible property), inventory, leasehold improvements, contract
rights (including its rights as lessee under all leases of real property),
general intangibles, deposit accounts, tax refunds, chattel paper,
instruments, notes, letters of credit, documents, and documents of title,
capital stock or other ownership interests of all Subsidiaries (as defined
in Section 6.11 hereof) and all shares of common stock of the Company owned
by DEVELOPER;
(b) all insurance proceeds of or relating to any of the foregoing;
(c) all of DEVELOPER's books, records, and computer programs and data
relating to any of the foregoing; and
(d) all accessories and additions to, substitutions for, and
replacements, products, and proceeds of, any of the foregoing (all of the
foregoing, and all of the security described in Sections 2.2 and 2.3, being
referred to collectively as the "Collateral").
2.2 PLEDGE OF UNITS. In addition to the security interest in the
---------------
Collateral, DEVELOPER's obligations hereunder and under the Note and all other
obligations of DEVELOPER to Company shall be secured by the security interest
created pursuant to a unit pledge agreement between the Company and all of the
members of DEVELOPER holding Voting Units, other than the Fund (the "Members"),
substantially in the form attached hereto as Exhibit C (the "Unit Pledge
Agreement").
2.3 SUBSIDIARY SECURITY DOCUMENTS. DEVELOPER shall cause each person or
-----------------------------
entity becoming a Subsidiary of DEVELOPER from time to time to execute and
deliver to the Company, within five days after such person or entity becomes a
Subsidiary, a security agreement substantially in the form attached hereto as
Exhibit D, together with all financing
F-7
<PAGE>
statements and other related documents (including real estate mortgages) as the
Company may request and such closing documents with respect to such Subsidiary
of the type described in Article VII as the Company may request, sufficient to
grant to the Company liens and security interests in all assets of each
Subsidiary of the type described in Section 2.1. DEVELOPER shall from time to
time execute and deliver to the Company, within five days after a person or
entity becomes a Subsidiary of DEVELOPER, a pledge agreement substantially in
the form of Exhibit C, pursuant to which DEVELOPER shall grant a security
interest in favor of the Company in and to all shares of capital stock (or other
equity interests) of such Subsidiary, together with the stock certificates
evidencing such stock ownership (or other evidence of ownership) and accompanied
by a stock power (or equity assignment) executed in blank. Any such pledge
agreements executed by DEVELOPER and security agreements and other documents
executed by a Subsidiary of DEVELOPER from time to time shall be included in the
term "Security Instruments" used herein and the stock and assets of such
Subsidiary covered by such Security Instruments shall be included in the term
"Collateral" used herein.
2.4 PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS
---------------------------------------------------------------
THEREIN.
- -------
(a) DEVELOPER shall execute and deliver to the Company, concurrently
with the execution of this Agreement, and shall execute and deliver or
cause any Subsidiary of DEVELOPER to execute and deliver to the Company at
any time or times hereafter at the request of the Company or the Agent (as
defined in Section 2.5 below), all financing statements or other documents,
including mortgages on real estate owned by DEVELOPER or its Subsidiaries
and Subsidiary security agreements (the "Security Instruments") (and pay
the cost of filing or recording the same in all public offices deemed
necessary by the Company), as the Company or the Agent may request, in
forms satisfactory to the Company, and take all further action that the
Company or the Agent may request, or which may be reasonably necessary or
desirable, to perfect and keep perfected the security interest in the
Collateral granted by DEVELOPER to the Company, to create and perfect the
security interests in the assets of any Subsidiaries of DEVELOPER provided
in Section 2.3 hereof, or otherwise to protect and preserve the Collateral
and the Company's security interest therein. Should DEVELOPER fail to do
so, the Company is authorized to sign any such Security Instruments as
DEVELOPER's agent.
(b) DEVELOPER will furnish to the Company from time to time
statements and schedules further identifying and describing the Collateral
and such other reports in connection with the Collateral as the Company may
reasonably request, all in reasonable detail.
(c) DEVELOPER shall notify the Company, within five days after the
occurrence thereof, of the acquisition of any property by DEVELOPER that is
not subject to the existing liens and security interests, in favor of the
Company, of any person or entity's becoming a Subsidiary, and of any other
event or condition that may
F-8
<PAGE>
require additional action of any nature in order to create, preserve, or
perfect the liens and security interests of the Company.
(d) DEVELOPER shall, and shall cause each Subsidiary to, cause all
tangible Collateral to be maintained and preserved in the same condition, repair
and working order as when new, ordinary wear and tear excepted, and in
accordance with any manufacturer's manual.
2.5 ALTERNATE SECURITY AND UNIT PLEDGE AGREEMENTS. If requested by the
---------------------------------------------
Company in order for the transactions contemplated by this Agreement to comply
with the limitations and restrictions of any applicable agreement between the
Company and its lender or between its lender and its lender's banks and any bank
designated as agent for its lender's banks ("Agent"), as amended from time to
time, or to obtain a waiver therefrom, DEVELOPER hereby agrees that a security
interest as referred to in Section 2.1 hereof, a pledge of Units as referred to
in Section 2.2 hereof, and the additional security interests described in
Sections 2.3 and 2.4 hereof may be granted directly to the Company's lender or
to the Agent in lieu of or in addition to such grants to the Company, in which
event appropriate alterations may be made to this Article II and to the forms of
the other Security Agreements, and references herein to such security, pledges,
and deliveries thereof to the Company may be deemed to refer to the Agent, as
appropriate.
ARTICLE III
-----------
CONDITIONS TO ADVANCES
----------------------
Notwithstanding any other provisions contained in this Agreement, the
Company's obligations to make any Advance (including an initial Advance)
provided for in Section 1.1 shall be conditioned upon the following:
3.1 NO MATERIAL ADVERSE CHANGE. No material adverse change, as determined
--------------------------
by the Company in its sole discretion, in the financial condition, results of
operations, assets, or business of DEVELOPER, shall have occurred at any time or
times subsequent to the date thereof.
3.2 NO DEFAULT. Neither a Default (as that term is defined in Article
----------
VIII hereof) nor any event which, through the passage of time or the service of
notice or both, would mature into a Default (an "Event of Default") shall have
occurred and be continuing.
3.3 REPRESENTATIONS AND WARRANTIES. The representations and warranties
------------------------------
contained in Article IV hereof and in the Unit Pledge Agreement and the other
Security Instruments shall be true and correct on and as of the date such
Advance is made.
F-9
<PAGE>
3.4 SUPPORT SERVICES AGREEMENT; DEVELOPMENT SCHEDULE. DEVELOPER shall be
------------------------------------------------
in compliance with the terms of the Support Services Agreement and with the
Development Schedule (as defined in the Development Agreement).
3.5 OTHER REQUIREMENTS. The Company shall have received, in form and
------------------
substance satisfactory to it, all certificates, consents, affidavits, schedules,
instruments, and other doc uments which DEVELOPER is obligated to provide to the
Company hereunder or which the Company may at any time reasonably request.
3.6 ADVANCE REQUEST. Other than the initial Advance, the Company shall
---------------
have received, at least five business days prior to the day an Advance is to be
made hereunder, (i) a certificate of DEVELOPER in the form attached hereto as
Exhibit E, which shall be signed by the chief operating officer, chief financial
officer or other officer of the manager of DEVELOPER that the Company deems
appropriate, and (ii) copies of all other documents required to be delivered to
Company under Section 5.1 below or otherwise reasonably requested.
ARTICLE IV
----------
REPRESENTATIONS AND WARRANTIES
------------------------------
DEVELOPER represents and warrants that:
4.1 FINANCIAL STATEMENTS. The financial statements to be furnished to the
--------------------
Company or the Agent in accordance with Section 5.1 below will be prepared in
conformity with generally accepted accounting principles consistently applied
throughout the periods involved, and will fairly present the financial condition
of DEVELOPER and its Subsidiaries at the dates thereof and its results of
operations for the periods indicated (subject, in the case of financial
statements covering less than one full fiscal year, to normal recurring year-end
adjustments).
4.2 MEMBER UNITS. DEVELOPER has previously furnished to the Company a
------------
true and correct copy of the certificate of formation of DEVELOPER and the LLC
Agreement, including in each case all amendments thereto through the date of
this Agreement. The holders of record (and beneficial owners, if any) of Units
in DEVELOPER, and the number of Units owned of record by each such holder and
beneficially owned by each such beneficial owner, are set forth on Exhibit A to
the LLC Agreement, and the number of Units set forth on such Exhibit A
constitute 100% of the issued and outstanding ownership interests in DEVELOPER.
Except for the Additional Unit Options and except for options granted under
DEVELOPER's 1996 Unit Option Plan and except as otherwise provided herein and in
the Note, there are no outstanding options, warrants, rights, contracts or
agreements of any kind for the issuance or sale of any Units or for the issuance
or sale of any other member interests or obligations of DEVELOPER or for the
purchase of any of its member interests.
F-10
<PAGE>
4.3 NO MATERIAL ADVERSE CHANGE. Since the date hereof, there has been no
--------------------------
material adverse change in the financial condition, results of operations,
assets, or business of DEVELOPER and its Subsidiaries, taken as a whole.
4.4 NO PENDING MATERIAL LITIGATION OR PROCEEDINGS. There are no actions,
---------------------------------------------
suits, investigations or proceedings pending or, to the knowledge of DEVELOPER
or its Subsidiaries, threatened against or affecting DEVELOPER or its
Subsidiaries or the business or properties of DEVELOPER or its Subsidiaries, in
any court or before or by any governmental department, commission, board, agency
or instrumentality, or any arbitrator. Neither DEVELOPER nor any of its
Subsidiaries is in default with respect to any order, writ, injunction, or
decree of any court or arbitrator or governmental agency.
4.5 VALID ORGANIZATION; DUE AUTHORIZATION; VALID AND BINDING AGREEMENT.
------------------------------------------------------------------
(a) DEVELOPER is a limited liability company duly organized, validly
existing, and in good standing under the laws of the State of Delaware,
with power and authority to enter into and perform this Agreement and to
issue the Note and incur the indebtedness to be evidenced thereby.
DEVELOPER is qualified to do business and is in good standing in the States
of ______________________ and in each additional jurisdiction in which
failure to so qualify could have a material adverse affect on its property,
business, operations, or prospects.
(b) This Agreement, the Note and the Accounting and Administration
Services Agreement in the form attached hereto as Exhibit G have each been
duly authorized by all required action on the part of DEVELOPER, and each
of this Agreement, the Note and the Accounting and Administration Services
Agreement has been duly executed and delivered by DEVELOPER and constitutes
the legal, valid, and binding obligation of DEVELOPER enforceable in
accordance with its terms.
(c) The execution and delivery of this Agreement and the Note and the
performance by DEVELOPER of its obligations hereunder and thereunder are
not in contravention of any law, rule or regulation, including without
limitation Regulation G, T, U, or X of the Board of Governors of the
Federal Reserve System, and will not conflict with or result in any breach
of any of the provisions, or constitute a default under or result in the
creation or imposition of any lien or encumbrance (except as expressly
provided herein) upon any of the property of DEVELOPER pursuant to any of
the provisions of the certificate of formation of DEVELOPER or the LLC
Agreement or any agreement or instrument to which DEVELOPER is a party or
by which it or its assets is bound.
(d) No consent, authorization, approval, or other action by, and no
notice to or filing with, any governmental authority or regulatory body or
any other person, which
F-11
<PAGE>
has not been obtained or taken, is required for the execution and delivery
of, or the performance by DEVELOPER of its obligations under, this
Agreement or the Note.
4.6 CONDUCT OF BUSINESS. Since their inception, DEVELOPER and each
-------------------
Subsidiary has conducted its business and operations in a manner consistent with
that of a franchisee of Company and has not engaged in any business other than
the business of establishing, opening, and operating Stores.
4.7 ABSENCE OF MATERIAL LIABILITIES. Neither DEVELOPER nor any Subsidiary
-------------------------------
has any material liabilities or obligations, either accrued, absolute,
contingent, or otherwise, except (a) as set forth in its most recent unaudited
balance sheet, (b) normal liabilities and obligations incurred in the ordinary
course of business since the date of its most recent unaudited balance sheet,
(c) those assumed from the Company in and pursuant to that certain Asset
Purchase Agreement of even date herewith, and (d) obligations under contracts
and agreements entered into in the ordinary course of business.
4.8 TAX MATTERS.
-----------
(a) DEVELOPER and its Subsidiaries have filed all federal, state, and
local tax returns which are required to be filed, except for extensions
duly obtained, and has paid, or made provisions for the payment of, all
taxes which have become due pursuant to such returns or pursuant to any
assessment received by DEVELOPER or any Subsidiary, except such taxes, if
any, as are being contested in good faith and as to which adequate reserves
have been provided.
(b) DEVELOPER will be classified for tax purposes as a partnership
within the meaning of Section 7701(a)(2) of the Internal Revenue Code of
1986, as amended ("Code"), and DEVELOPER is not a "publicly traded
partnership" within the meaning of Section 7704 of the Code.
4.9 OWNERSHIP OF COLLATERAL; SECURITY INTEREST PRIORITY. At the time any
---------------------------------------------------
Collateral becomes subject to a security interest of the Company hereunder,
unless the Company shall otherwise consent, (a) DEVELOPER or a Subsidiary shall
be the lawful owner of such Collateral and have the right and authority to
subject the same to the security interest of the Company, (b) none of the
Collateral shall be subject to any lien or encumbrance other than that in favor
of the Company (and other than federal and state securities law restrictions on
shares of the Company's common stock), and (c) there shall be no effective
financing statement covering any of the Collateral on file in any public office,
other than in favor of the Company. This Agreement creates in favor of the
Company a valid and perfected first-priority security interest in the Collateral
enforceable against DEVELOPER or its Subsidiary, as the case may be, and all
third parties and secures the payment of DEVELOPER's obligations hereunder and
under the Note, and all other obligations of DEVELOPER to the Company, whether
now existing or hereafter arising, and all filings and other actions necessary
or desirable to create,
F-12
<PAGE>
preserve, or perfect such security interest have been duly taken.
Notwithstanding the foregoing provisions of this Section 4.9, clause (b) and (c)
and the immediately preceding sentence of this Section 4.9 shall not be
inaccurate by reason of any purchase money security interest (including pursuant
to a financing lease) in any equipment for DEVELOPER's Stores.
4.10 LOCATION OF OFFICES, RECORDS, AND FACILITIES. DEVELOPER's chief
--------------------------------------------
executive office and chief place of business and the office where DEVELOPER
keeps its records concerning its accounts, contract rights, chattel papers,
instruments, general intangibles, and other obligations arising out of or in
connection with the operation of its business or otherwise ("Receivables"), and
all originals of all leases and other chattel paper which evidence Receivables,
are located in the State of _____________, at the address of DEVELOPER set forth
in Section 9.4 hereof (as such address may be changed from time to time in
accordance therewith). The federal tax identification number of DEVELOPER is
________________. The name of DEVELOPER is "_________________________" and
DEVELOPER operates under no other names other than the name Einstein Bros.
Bagels on its Stores pursuant to and in accordance with any applicable Franchise
Agreement with the Company.
4.11 LOCATION OF INVENTORY, FIXTURES, MACHINERY, AND EQUIPMENT.
---------------------------------------------------------
(a) All Collateral consisting of inventory, fixtures, machinery, or
equipment is located within the Development Area and at no other locations
without the prior written consent of the Company.
(b) If the Collateral described in clause (a) is kept at leased
locations, DEVELOPER has used its best efforts to obtain appropriate
landlord lien waivers or subordination satisfactory to the Company, unless
such has been waived in writing by the Company for the particular instance.
(c) If the Collateral described in clause (a) is warehoused,
DEVELOPER has sent appropriate warehousemen's notices, each reasonably
satisfactory to the Company, unless such has been waived by the Company for
the particular instance.
4.12 INVESTMENT COMPANY ACT. DEVELOPER is not an "investment company", or
----------------------
a company "controlled" by an "investment company", within the meaning of the
Investment Company Act of 1940, as amended.
4.13 PUBLIC UTILITY HOLDING COMPANY ACT. DEVELOPER is not a "holding
----------------------------------
company", or an "affiliate" of a "holding company" or a "subsidiary company" of
a "holding company", within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
4.14 SUBSIDIARIES. DEVELOPER has no Subsidiaries as of the date of this
------------
Agreement.
F-13
<PAGE>
ARTICLE V
---------
AFFIRMATIVE COVENANTS
---------------------
DEVELOPER covenants and agrees that so long as this Agreement remains in
effect:
5.1 FINANCIAL STATEMENTS.
--------------------
(a) DEVELOPER shall cause to be furnished to the Company and, at the
Company's request, to the Company's lender or to the Agent: (i) as soon as
practicable and in any event within 20 days after the end of each interim
fiscal quarter, statements of income and cash flows of DEVELOPER and its
Subsidiaries for such period and for the period from the beginning of the
then current fiscal year to the end of such quarter and a balance sheet of
DEVELOPER and its Subsidiaries as of the end of such quarter, setting forth
in each case, in comparative form, figures for the corresponding periods in
the preceding fiscal year, certified as accurate by the chief financial
officer or treasurer of the manager of DEVELOPER, subject to changes
resulting from normal, recurring year-end adjustments; (ii) as soon as
practicable and in any event within 60 days after the end of each fiscal
year, statements of income and cash flows of DEVELOPER and its Subsidiaries
for such year, and a balance sheet of DEVELOPER and its Subsidiaries as of
the end of such year, setting forth in each case, in comparative form,
corresponding figures for the preceding fiscal year and as of the end of
the preceding fiscal year, audited by independent certified public
accountants selected by the Company and reasonably satisfactory to
DEVELOPER; and (iii) as soon as practicable (but in any event not more than
five business days after the president or chief financial officer of the
manager of DEVELOPER obtains knowledge of the occurrence of an event or the
existence of a circumstance giving rise to an Event of Default or a
Default), notice of any and all Events of Default or Defaults hereunder.
(b) All financial statements delivered to the Company, and if
applicable, the Company's lender or the Agent pursuant to the requirements
of Section 5.1(a) shall be prepared in accordance with generally accepted
accounting principles consistently applied. Together with each delivery of
financial statements required by Section 5.1(a), DEVELOPER shall deliver to
the Company an officer's certificate stating that there exists no Default
or Event of Default, or, if any Default or Event of Default exists,
specifying the nature thereof, the period of existence thereof and what
action DEVELOPER proposes to take or has taken with respect thereto.
Together with each delivery of financial statements required by Section
5.1(a)(ii) above, DEVELOPER shall deliver to the Company a certificate of
the accountants who performed the audit in connection with such statements
stating that in making the audit necessary to the issuance of a report on
such financial statements, they have obtained no knowledge of any Default
or Event of Default, or, if such accountants have obtained knowledge of a
Default or
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<PAGE>
Event of Default, specifying the nature and period of existence thereof.
Such accountants shall not be liable by reason of any failure to obtain
knowledge of any Default or Event of Default which would not be disclosed
in the ordinary course of an audit. DEVELOPER authorizes the Company to
discuss the financial condition of DEVELOPER with DEVELOPER's independent
public accountants and agrees that such discussion or communication shall
be without liability to either the Company or DEVELOPER's independent
public accountants.
5.2 INSPECTION. The Company, or any person designated from time to time
----------
by the Company, shall have the right, from time to time hereafter, to call at
DEVELOPER's or its Subsidiaries' place or places of business during ordinary
business hours, and, without hindrance or delay, (a) to inspect, audit, check,
and make copies of and extracts from DEVELOPER's and its Subsidiaries' books,
records, journals, orders, receipts, and any correspondence and other data
relating to the business of DEVELOPER or its Subsidiaries or to any transactions
between the parties hereto, and (b) to discuss the affairs, finances, and
business of DEVELOPER and its Subsidiaries with the officers of DEVELOPER and
its Subsidiaries.
5.3 CONDUCT OF BUSINESS.
-------------------
(a) DEVELOPER shall, and shall cause each Subsidiary to (i) maintain
its existence and qualification to do business in good standing in each
jurisdiction where the failure to be so qualified would have a material
adverse effect on the financial condition of DEVELOPER or its Subsidiaries,
(ii) maintain in full force and effect all licenses, bonds, franchises,
leases, patents, contracts, and other rights necessary to the conduct of
its business, and (iii) comply with all applicable laws and regulations of
any federal, state, or local governmental authority, including those
relating to environmental matters, labor and employment laws and employee
benefit matters.
(b) DEVELOPER shall, and shall cause its Subsidiaries to, duly pay
and discharge (i) all lawful claims, whether for labor, materials,
supplies, services, or anything else, which might or could, if unpaid,
become a lien or charge upon its property or assets, unless and to the
extent only that the validity thereof is being contested in good faith and
by such appropriate proceedings, (ii) all of its trade bills when due in
accordance with customary practice, and (iii) all taxes, unless and to the
extent that the validity thereof is being contested by DEVELOPER in good
faith and by appropriate proceedings.
(c) DEVELOPER shall, and shall cause each Subsidiary to, conduct its
business and operations in a manner consistent with that of a multi-unit
food service establishment, and shall not, and shall not permit any
Subsidiary to, engage in any business other than the business of
establishing, opening, and operating Stores in the Development Area.
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<PAGE>
5.4 INSURANCE.
---------
(a) DEVELOPER shall keep and maintain, and shall cause its
Subsidiaries to keep and maintain, at their sole cost and expense, (i)
insurance on their assets for at least 80% of the full replacement value
(or the full insurable value) thereof against loss or damage by fire,
theft, explosion, and all other hazards and risks ordinarily insured
against by other owners or users of such properties in similar businesses
similarly situated; and (ii) public liability insurance relating to
DEVELOPER's and its Subsidiaries' ownership and use of their assets.
(b) All such policies of insurance shall be in such form and in such
amounts as is customary in the case of other owners or users of like
properties in similar businesses, with insurers as shall be reasonably
satisfactory to the Company. Upon demand, DEVELOPER shall deliver to the
Company the original (or certified) copy of each policy of insurance, and
evidence of payment of all premiums for each such policy. Such policies of
insurance (except those of public liability) shall contain an endorsement
in form and substance acceptable to the Company, showing the Company as an
additional insured. Such endorsement, or an independent instrument
furnished to the Company, shall provide that all insurance companies will
give the Company at least 30 days prior written notice before any such
policy or policies of insurance shall be altered or canceled. DEVELOPER
and each Subsidiary hereby directs all insurers under such policies of
insurance (except those of public liability) to pay all proceeds payable
thereunder for claims in excess of the aggregate amount of $50,000 directly
to the Company, and DEVELOPER irrevocably appoints the Company (and all
officers, employees, or agents designated by the Company), as DEVELOPER's
and the Subsidiaries' true and lawful agent (and attorney-in-fact) for the
purpose of endorsing the name of DEVELOPER or such Subsidiary on any check,
draft, instrument, or other item of payment for such proceeds. Any
proceeds received by the Company shall be applied to DEVELOPER's
obligations hereunder, and any overage shall be paid to DEVELOPER.
DEVELOPER and each Subsidiary irrevocably appoints the Company, from and
after a Default or an Event of Default, as DEVELOPER's and each
Subsidiary's true and lawful agent (and attorney-in-fact) for the purpose
of making, settling, and adjusting claims under such policies of insurance
and for making all determinations and decisions with respect to such
policies of insurance. In the event DEVELOPER or any Subsidiary at any
time or times hereafter shall fail to obtain or maintain any of the
policies of insurance required above or to pay any premium in whole or in
part relating thereto, then the Company, without waiving or releasing any
Default or Event of Default hereunder, may at any time or times thereafter
(but shall be under no obligation to do so) obtain and maintain such
policies of insurance and pay such premium and take any other action with
respect thereto which the Company deems advisable. All sums so disbursed
by the Company, including reasonable attorneys' fees, court costs,
expenses, and other charges relating thereto, shall be part of DEVELOPER's
obligations hereunder, payable by DEVELOPER to the Company on demand.
F-16
<PAGE>
5.5 NOTICE OF SUIT OR ADVERSE CHANGE IN BUSINESS. DEVELOPER shall give
--------------------------------------------
written notice to the Company (a) as soon as possible, and in any event within
five business days after DEVELOPER receives actual notice (written or oral) of
any material proceeding(s) being instituted or threatened to be instituted by or
against DEVELOPER or any Subsidiary in any federal, state, or local court or
before any commission or other regulatory body (federal, state, or local), and
(b) as soon as possible, and in any event within five business days after
DEVELOPER learns of any material adverse change in the financial condition,
results of operations, business, or assets of DEVELOPER or any Subsidiary.
5.6 USE OF PROCEEDS. Except as otherwise authorized in writing by the
---------------
Company, DEVELOPER shall use the proceeds of the Loan solely for the purposes
set forth in Article I hereof. DEVELOPER will not, directly or indirectly, use
any part of such proceeds for the purpose of purchasing or carrying any margin
stock within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System or to extend credit to any person for the purpose of
purchasing or carrying any such margin stock.
5.7 REGISTRATION OF UNITS. DEVELOPER covenants that if any units to be
---------------------
issued upon conversion of the Note or exercise of the Option require
registration with or approval of any governmental authority under any Federal or
state law before such units may be issued upon such conversion of exercise,
DEVELOPER will, at its expense and as expeditiously as possible, cause such
units to be duly registered or approved, as the case may be.
5.8 ADDITIONAL MEMBERS. DEVELOPER agrees to cause each person (other than
------------------
the Company) becoming a Member holding Voting Units from time to time after the
date of the Unit Pledge Agreement to execute and deliver to the Company within
five days after such person becomes a Member a copy of the Unit Pledge
Agreement.
5.9 RIGHTS REGARDING FUTURE FINANCINGS. Except for the exercise of the
----------------------------------
Additional Unit Options, if, at any time after the Closing Date through the
later of the date on which the outstanding principal balance of the Loan and all
accrued interest thereon is paid in full or the expiration of the term of the
Option in accordance with the provisions of Section 1.10 hereof, advances of
debt and purchases of equity by the Company under this Agreement aggregate at
least 75% of the Maximum Principal Balance, and DEVELOPER determines that it
requires additional financing (whether debt or equity) (including, but not
limited to, all capital-type transactions and sale/leaseback transactions), it
agrees (a) to negotiate in good faith with the Company for a period of 60 days
with regard to any portion or the entire amount (at the option of the Company)
of such financing prior to negotiating with any other entity with regard
thereto, (b) in the event DEVELOPER has engaged in good faith negotiations under
clause (a) of this Section 5.9 and such negotiations have been unsuccessful, to
notify the Company of the existence of any other financing arrangement it
proposes to consummate and the terms and conditions thereof and grant to the
Company a right of first refusal with respect to such financing on the same
terms and subject to the same conditions contained therein and upon
F-17
<PAGE>
receipt of such notice (setting forth in detail all relevant terms and
conditions of such financing), in which event the Company shall have 30 days
thereafter in which to agree to assume all of the financing on the same terms
and conditions, and (c) with respect to any financing other than a pure debt
financing in which the debt instrument to be offered has no equity-type
features, to grant to the Company a right to participate therein on a fully
diluted basis for a period of 60 days, which right may be satisfied, at the
Company's option, by increasing the Maximum Principal Balance available to be
borrowed by DEVELOPER hereunder (with corresponding increases in the Company's
conversion and Option rights) rather than purchasing or otherwise participating
in the instrument or security to be offered by DEVELOPER. As used herein "a
right to participate therein on a fully diluted basis" shall mean the Company's
right to maintain the same percentage equity interest in DEVELOPER (calculated
by including as outstanding the units subject to all outstanding options and
warrants, including units which the Company then has a right to purchase
hereunder either through conversion pursuant to Section 1.9 or the exercise of
its Option pursuant to Section 1.10 hereof) after such financing is completed as
it had prior to such financing. The Company acknowledges that the right of
first negotiation as set forth in clause (a) above does not preclude DEVELOPER
from making inquiries in the relevant marketplace to obtain information
regarding the terms of a financing solely for purposes of comparison. The
failure by the Company to exercise its rights under any provision of this
Section 5.9 within the time period specified shall be deemed to constitute a
waiver of its rights under such provision.
5.10 COMPANY LOAN COMPLIANCE. DEVELOPER agrees that, at the time that it
-----------------------
becomes a subsidiary of the Company, if ever, it will not incur any indebtedness
or create any lien which would cause the Company to be in default of any lending
arrangement or credit agreement to which the Company or its parent company, if
any, is a party.
5.11 COMPANY LOAN AGREEMENT REPRESENTATIONS. DEVELOPER agrees that, at the
--------------------------------------
time that it becomes a subsidiary of the Company, if ever, it will conduct its
business and take such action (or refrain from taking such action) as to cause
to be true and correct at all relevant times the representations or warranties
applicable to a subsidiary contained in any lending arrangements or credit
agreements to which the Company and/or its parent company, if any, is a party.
5.12 COMPANY SUBSIDIARIES. Each corporation or other entity becoming a
--------------------
Subsidiary of DEVELOPER after the date hereof will be duly organized, validly
existing, and in good standing under the laws of its jurisdiction of
organization and will be duly qualified to do business in each additional
jurisdiction where the failure to be so qualified would have a material adverse
effect on such Subsidiary. Each Subsidiary of DEVELOPER will have all requisite
power to own or lease the properties used in its business and to carry on its
business as now being conducted and as proposed to be conducted. All
outstanding shares of capital stock or other units of ownership interest of each
class of each Subsidiary of DEVELOPER will be
F-18
<PAGE>
validly issued and will be fully paid and nonassessable and will be owned,
beneficially and of record, by DEVELOPER or another Subsidiary of DEVELOPER free
and clear of any liens.
5.13 PLACE OF BUSINESS. DEVELOPER will provide the Company with 60 days'
-----------------
prior written notice of any proposed change in the location of its chief
executive office. DEVELOPER shall not change its name without the prior written
consent of the Company.
5.14 LOCATION OF INVENTORY, FIXTURES, MACHINERY, AND EQUIPMENT.
---------------------------------------------------------
(a) All Collateral consisting of inventory, fixtures, machinery, and
equipment, shall at all times be located within the Development Area, and
at no other locations without the prior written consent of the Company.
(b) If the Collateral described in clause (a) is at any time kept at
leased locations, DEVELOPER shall use its best efforts to obtain
appropriate landlord lien waivers or subordination satisfactory to the
Company, unless such has been waived in writing by the Company for a
particular instance.
(c) If the Collateral described in clause (a) is at any time
warehoused, DEVELOPER shall send appropriate warehousemen's notices, each
satisfactory to the Company, unless such has been waived by the Company for
the particular instance.
5.15 HSR ACT COMPLIANCE. In the event the Company determines that any
------------------
filing is required under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act") in connection with any exercise of the
conversion rights pursuant to Section 1.9 hereof or of the Option pursuant to
Section 1.10 hereof, DEVELOPER agrees to prepare and file with the Federal Trade
Commission and the United States Department of Justice within 15 business days
from the date of notice from the Company any notification required to be filed
under the HSR Act or any rules or regulations promulgated thereunder. The
Company shall pay any filing fees required under the HSR Act in connection with
such filing. Any information about DEVELOPER or its Subsidiaries contained in
such filing shall be true and accurate in all material respects and responsive
to the requirements of the HSR Act and any such rules and regulations. Each of
DEVELOPER and the Company shall make available to the other party such
information as may be required for the preparation of any such notification or
related reports.
5.16 PARTNERSHIP STATUS FOR TAX PURPOSES. DEVELOPER will maintain at all
-----------------------------------
times its status for tax purposes as a "partnership" within the meaning of
Section 7701(a)(2) of the Code, and DEVELOPER will not take any action or omit
to take any action that would cause DEVELOPER to become a "publicly traded
partnership" within the meaning of Section 7704 of the Code.
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<PAGE>
5.17 DEVELOPER'S FISCAL YEAR. DEVELOPER shall adopt a fiscal year for tax
-----------------------
and financial reporting purposes consistent with the fiscal year adopted by the
Company from time to time. As of the date of this Agreement, DEVELOPER
acknowledges that the Company's fiscal year is the 52/53-week period ending on
the last Sunday in December and consists of 13 four-week period.
ARTICLE VI
----------
NEGATIVE COVENANTS
------------------
DEVELOPER covenants and agrees that, so long as this Agreement remains in
effect (unless the Company shall give its prior written consent thereto):
6.1 GUARANTEES; LOANS; ETC. DEVELOPER shall not, and shall not permit any
-----------------------
Subsidiary to (a) guarantee, endorse or otherwise in any way become or be
responsible for obli gations of any other person, whether by agreement to
purchase the indebtedness of any other person or through the purchase of goods,
supplies, or services, or by agreement to maintain net worth, working capital,
or other balance sheet covenants or conditions, or by way of stock purchase,
capital contribution, advance, or loan for the purpose of paying or discharging
any indebtedness or obligation of such other person or otherwise, except
endorsements of negotiable instruments for collection in the ordinary course of
business and (b) make loans or advances to any person, other than the loans
evidenced by the Member Notes (as defined in Section 7.7 hereof).
6.2 DISPOSAL OF PROPERTY. DEVELOPER shall not, and shall not permit any
--------------------
Subsidiary to, sell, lease, transfer, or otherwise dispose of any of its
properties, assets, and rights (or agree to sell, lease, transfer, or otherwise
dispose of any of its properties, assets, and rights) (including the Collateral)
to any party except in the ordinary course of business and except that DEVELOPER
may grant stock options on no more than ___ shares of common stock of the
Company owned by it pursuant to and in accordance with DEVELOPER's 1996 Stock
Option Plan.
6.3 COMPENSATION TO MEMBERS AND OTHERS. Other than (a) reasonable
----------------------------------
salaries and other normal benefits (including options granted pursuant to a 1996
Unit Option Plan and 1996 Stock Option Plan to be adopted by DEVELOPER with the
consent of the Company (together, the "Plans")) to be paid to Members of
DEVELOPER employed by DEVELOPER or the Manager, which salaries and benefits must
be approved by the Company, (b) the Member Notes (as defined in Section 7.7
hereof), and (c) management fees to be paid to _____________________
("_______________") under the Support Services Agreement of even date herewith
by and between _______________ and DEVELOPER ("Support Services Agreement"),
DEVELOPER shall not make any loans to, or pay any compensation, bonuses, fees,
options, or other amounts to any equity holder
F-20
<PAGE>
or to any of the affiliates or immediate family members of any such equity
holder. DEVELOPER shall not, without the prior written consent of the Company,
amend or modify the Plans or amend, modify or waive any default under the Member
Notes, the Support Services Agreement or any employment arrangement or agreement
with any equity holder or any affiliate or immediate family member of any equity
holder previously approved by the Company.
6.4 DISTRIBUTIONS AND REDEMPTIONS.
-----------------------------
(a) DEVELOPER shall not, directly or indirectly, (i) redeem,
purchase, or otherwise retire any of its Units, (ii) make any distributions
(in cash or securities) in any fiscal year or (iii) return capital of
DEVELOPER to its members.
(b) Notwithstanding anything to the contrary contained herein,
DEVELOPER shall make cash distributions to its members to the maximum
extent permitted under the laws of the state of its organization, (i) after
(A) satisfactory completion of the Development Schedule under each
Development Agreement between DEVELOPER and the Company, as each such
Development Agreement may be amended from time to time, and (B)
establishment of reasonably adequate reserves for working capital and
foreseeable contingencies, in each case so long as DEVELOPER is in
compliance with the terms and provisions of this Agreement and maintains at
all times Cash Flow during each fiscal quarter which is at least equal to
the Prospective Fixed Charges for the next succeeding fiscal quarter and
(ii) pursuant to and in accordance with Section 6.2 of the LLC Agreement.
(c) For purposes of this Section 6.4, the term "Cash Flow" for any
fiscal quarter shall mean the sum of Net Earnings during such fiscal
quarter plus all charges made by DEVELOPER during such quarter for
depreciation and amortization in respect of its fixed assets and interest
on the Loan, and any other long-term indebtedness, all as determined in
accordance with generally accepted accounting principles consistently
applied. The term "Net Earnings" shall mean the net income of DEVELOPER
during such period as computed in accordance with generally accepted
accounting principles consistently applied, and, without limiting the
foregoing, after deduction from gross income of all charges and reserves,
including charges and reserves for all taxes on or measured by income, but
excluding any profits or losses on the sale or other disposition not in the
ordinary course of business or fixed or capital assets or on the
acquisition, retirement, sale, or other disposition of securities of
DEVELOPER, and also excluding any taxes on such profits and any tax
deductions or credits on account of any such losses. The term "Prospective
Fixed Charges" shall mean for any fiscal quarter the same are to be
determined one-fourth of the sum of (x) any principal payments on the Loan
and on any other long term indebtedness (determined in accordance with
generally accepted accounting principles consistently applied) scheduled to
become due within such fiscal quarter and the succeeding three fiscal
quarters and (y) interest to be paid during such period on the Loan and on
any other long-term indebtedness. In the event any interest
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<PAGE>
required by this Section 6.4 to be included in the calculation of
Prospective Fixed Charges is charged on a floating-rate basis which cannot
be determined as to the future, then such interest shall be calculated for
such period at the rate then in effect.
6.5 ADDITIONAL INDEBTEDNESS. Except as provided in Section 5.9 hereof,
-----------------------
and except for trade payables and real estate lease obligations for Stores, in
each case entered into in the ordinary course of business, DEVELOPER shall not,
and shall not permit any Subsidiary to, incur additional indebtedness in excess
of $5,000 as to any one item and $50,000 in the aggregate without the consent of
the Company.
6.6 MERGERS, CONSOLIDATIONS, ACQUISITIONS, ETC. DEVELOPER shall not, and
------------------------------------------
shall not permit any Subsidiary (a) to be a party to any consolidation,
reorganization, or merger; (b) sell or otherwise transfer any part of its assets
(except in the ordinary course of business and except as part of a financing as
to which the Company has waived its rights pursuant to and in accordance with
Section 5.9 hereof); (c) except as provided in Section 5.9 hereof, to effect any
change in its capital structure or in any of its business objectives, purposes,
and operations; (d) to acquire any capital in or equity ownership of another
limited liability company, corporation, partnership, or other business
organization; (e) to engage in any business other than the operation of Stores;
or (f) to liquidate or dissolve or take any action with a view toward
liquidation or dissolution.
6.7 CERTIFICATE OF FORMATION AND LLC AGREEMENT. DEVELOPER shall not make
------------------------------------------
any changes in or amendments to its certificate of formation or the LLC
Agreement as they are in effect as of the date hereof; except that DEVELOPER may
amend its LLC Agreement solely to the extent necessary to consummate any
financing as to which the Company has waived its rights pursuant to and in
accordance with Section 5.9 hereof.
6.8 ISSUANCE OF UNITS; GRANT OF OPTIONS. Except for (i) Voting Units
-----------------------------------
which may be issued upon (A) exercise of options granted under DEVELOPER's 1996
Unit Option Plan, (B) exercise of the Option, (C) conversion of any portion of
the outstanding principal balance of the Loan as provided in the Note, and (D)
consummation of any financing as to which the Company has waived its rights
pursuant to and in accordance with Section 5.9 hereof, (ii) exercise of the
Additional Unit Options, (iii) options granted under the DEVELOPER's 1996 Unit
Option Plan which are approved by the Company, in its sole discretion, and (iv)
any increase in the Maximum Principal Balance as provided herein, DEVELOPER will
not issue any additional units of membership interests or grant any option,
warrant, or similar right to acquire units of membership interests.
6.9 LIENS. DEVELOPER shall not, and shall not permit any Subsidiary to,
-----
create, incur, or suffer to exist any lien on any of the assets, rights,
revenues or property, real, personal, or mixed, tangible or intangible, whether
now owned or hereafter acquired, of
F-22
<PAGE>
DEVELOPER or any Subsidiary, other than liens in favor of the Company and liens
otherwise permitted under Section 4.9 hereof.
6.10 TRANSACTIONS WITH AFFILIATES. DEVELOPER shall not, and shall not
----------------------------
permit any Subsidiary to, become a party to, or become liable in respect of, any
contract or undertaking with any Affiliate (as defined in Section 9.2 hereof)
except in the ordinary course of business and on terms not less favorable to
DEVELOPER or such Subsidiary than those which could be obtained if such contract
or undertaking was an arms length transaction with a person other than an
affiliate. The parties hereto acknowledge that the Support Services Agreement
has been negotiated at arms' length.
6.11 SUBSIDIARIES. DEVELOPER shall not, and shall not permit any
------------
Subsidiary to, create or otherwise invest in any corporation, partnership, or
other entity unless DEVELOPER or such Subsidiary owns directly 100% of the
issued and outstanding equity interests therein (such 100% owned entity to be
referred to herein as a "Subsidiary").
6.12 MANAGER. DEVELOPER shall not remove, or otherwise diminish the
-------
responsibilities of, the manager of DEVELOPER, for any reason whatsoever, nor
shall any interest in the manager of DEVELOPER be sold, transferred or otherwise
assigned, in each case without the Company's prior written consent.
ARTICLE VII
-----------
CONDITIONS OF CLOSING
---------------------
The Company's obligations hereunder shall be subject to (a) the performance
by DEVELOPER prior to or on the Closing Date of all of its covenants theretofore
to be performed under this Agreement, (b) the accuracy of DEVELOPER's
representations and warranties contained in this Agreement on the Closing Date,
and (c) the satisfaction, prior to or on the Closing Date, of the following
further conditions:
7.1 OPINIONS OF COUNSEL.
-------------------
(a) The Company shall have received on the Closing Date from
________________ an opinion, dated the Closing Date, in the form attached
hereto as Exhibit F with all blanks appropriately completed.
(b) The Company shall have received on the Closing Date from
_______________ an opinion, dated the Closing Date, that DEVELOPER will be
taxed as a partnership within the meaning of Section 7701(a)(2) of the Code
and that DEVELOPER will not be a "publicly traded partnership" within the
meaning of Section 7704 of the Code.
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<PAGE>
7.2 PROCEEDINGS AND DOCUMENTS. All proceedings to be taken in connection
-------------------------
with the transaction contemplated by this Agreement and all documents incident
to such transaction shall be satisfactory in form and substance to the Company
and its counsel, and the Company shall have received all documents or other
evidence which it and its counsel may reasonably have requested in connection
with such transaction, including copies of records of all proceedings in
connection with such transaction and compliance with the conditions set forth in
this Article VII, in form and substance satisfactory to the Company and its
counsel.
7.3 EXECUTED DOCUMENTS. DEVELOPER and its Subsidiaries, and to the extent
------------------
applicable, the members and their respective spouses, shall have each duly
executed the following documents to which they are parties, and shall have
delivered to the Company the following:
(a) this Agreement;
(b) the Note;
(c) the Accounting and Administration Services Agreement in
substantially the form of Exhibit G hereto;
(d) the Investor Representation Letter set forth as Exhibit H hereto
signed by each investor in the DEVELOPER;
(e) the Unit Pledge Agreement;
(f) the Subsidiary Security Agreement, where applicable;
(g) the Support Services Agreement;
(h) Collateral Assignments of Tenant's Interest in Lease for each
lease of real property to which DEVELOPER is a party (other than real
property subleased to DEVELOPER by the Company);
(i) certificates for all shares of common stock of the Company owned
by DEVELOPER in form available for transfer and multiple stock powers
executed in blank; and
(j) such financing statements or other documents for filing with
public officials with respect to the Security Instruments as the Company
may reasonably request, including without limitation financing statements
executed by each Member holding Voting Units.
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<PAGE>
7.4 NO DEFAULTS. There shall exist no Event of Default or Default.
-----------
7.5 ADDITIONAL DELIVERIES. The Company shall have received, in form and
---------------------
substance satisfactory to it, copies of the following documents:
(a) DEVELOPER's certificate of formation, certified as true and
correct by the Secretary of State of Delaware, dated within ten days prior
to the Closing Date, and certified as true and correct as of the Closing
Date by a duly authorized officer of the manager of DEVELOPER;
(b) the LLC Agreement, as it is in force and effect on the Closing
Date, certified as true and correct by the Secretary or Assistant Secretary
of the manager of the DEVELOPER;
(c) certificate of good standing of the DEVELOPER from the Secretary
of State of each of the States included within the Development Area dated
within ten days prior to the Closing Date; and
(d) evidence satisfactory in form and substance to the Company of all
required action taken by DEVELOPER to authorize, among other things, the
execution, delivery, and performance by DEVELOPER of this Agreement, the
Note, the Accounting and Administration Services Agreement, and the
Security Instruments and the consummation of the transactions contemplated
hereby, including authorization to enter into the Area Development
Agreement and any Franchise Agreement pursuant thereto and to issue Voting
Units upon the conversion of the Loan and the exercise of the Option,
certified as true and correct as of the Closing Date by a duly authorized
officer of the manager of DEVELOPER.
7.6 OPINION OF AUDITORS. The Company shall have received on the Closing
-------------------
Date from the Company's independent public accountants an opinion, dated the
Closing Date, in form and substance satisfactory to the Company, to the effect
that the Note and the obligations incurred hereunder are deemed to be debt, and
not equity, in accordance with generally accepted accounting principles.
7.7 MEMBERS' EQUITY. The Company shall have received evidence
---------------
satisfactory to it that DEVELOPER has, on the Closing Date, cash or cash
equivalents of at least $____________, and promissory notes, each dated
____________, 1996, from ____________, ____________________ and
__________________, in each case payable to DEVELOPER in the principal amounts
of $____________, $_______________ and $____________, respectively (the "Member
Notes"), and members' equity of at least $____________. On the Closing Date
DEVELOPER shall assign, endorse and deliver to the Company the original executed
Member Notes.
F-25
<PAGE>
7.8 COMPLIANCE WITH COMPANY CREDIT AGREEMENTS. The Company shall (a)
-----------------------------------------
determine in good faith that this Agreement complies with applicable
restrictions or limitations under any lending arrangements or credit agreements
to which Company is a party, (b) obtain a written waiver of noncompliance of the
transactions contemplated hereby with such agreements, or (c) deliver to its
lender or the Agent from DEVELOPER such pledges, collateral, and other
documentation as may be required to evidence compliance with such lending
arrangements or credit agreements of the transactions contemplated hereby.
ARTICLE VIII
------------
DEFAULT, RIGHTS AND REMEDIES OF THE COMPANY
-------------------------------------------
8.1 DEFAULT. The occurrence of any of the following events or acts shall
-------
constitute a default ("Default"):
(a) Default in the payment when due of any portion of the principal
on the Note and the continuance of such default for a period of three days;
(b) Default in the payment when due of any portion of the interest on
the outstanding principal of the Note and the continuance of such default
for a period of 10 days;
(c) any representation or warranty now or hereafter made in this
Agreement, the Accounting and Administration Services Agreement, the Unit
Pledge Agreement, the Subsidiary Security Agreement, the Note, any other
Security Instrument, or any certificate hereunder or thereunder shall not
be true, or any certificate, statement, report, financial data, or notice
furnished at any time by DEVELOPER to the Company shall be materially
inaccurate;
(d) any breach of, or failure to perform or observe, any covenant,
condition, or agreement contained in the Unit Pledge Agreement, the
Subsidiary Security Agreement or in any other Security Instrument, which in
each case shall continue unremedied for a period of 10 calendar days
following notice thereof from the Company, provided that such grace period
shall not apply, and DEVELOPER shall be in Default immediately upon such
breach, if, in the Company's judgment, such breach may not be reasonably
cured by DEVELOPER during such cure period;
(e) the breach of, or failure to perform or observe, any covenant,
condition, or agreement contained in Sections 5.6, 5.16, 5.17, 6.1, 6.2,
6.4, 6.6, 6.7, 6.8, 6.10 or 6.11 of this Agreement;
F-26
<PAGE>
(f) any breach of, or failure to perform or observe, any other
covenant, condition, or agreement contained in this Agreement or the Note
which shall continue unremedied for a period of 10 calendar days following
notice thereof from the Company, provided that such grace period shall not
apply, and DEVELOPER shall be in Default immediately upon such breach, if,
in the Company's judgment, such breach may not reasonably be cured by
DEVELOPER during such cure period;
(g) DEVELOPER or any Subsidiary shall (i) generally not, or shall be
unable to, or shall admit in writing its inability to pay its debts as such
debts become due, (ii) make an assignment for the benefit of creditors,
petition or apply to any tribunal for the appointment of a custodian,
receiver, or trustee for it or a substantial part of its assets, (iii)
commence any proceeding under any bankruptcy, reorganization, arrangements,
readjustment of debt, dissolution, or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect, (iv) have any such
petition or application filed or any such proceeding commenced against it
in which an order for relief is entered or adjudication or appointment is
made and which remains undismissed for a period of 60 days or more, (v) by
any act or omission, indicate its consent to, approval of, or knowing
acquiescence in any such petition, application, or proceeding, or order for
relief, or the appointment of a custodian, receiver, or trustee for all or
any substantial part of its properties, or (vi) suffer any such
custodianship, receivership, or trusteeship to continue undischarged for a
period of 60 days or more;
(h) the Support Services Agreement is terminated for any reason
whatsoever and DEVELOPER does not replace _____________ within 90 days
thereafter with an entity that is capable of performing similar services
which is acceptable to the Company in its sole discretion;
(i) DEVELOPER's default under, or breach of any provision of, the
Development Agreement (other than a default which constitutes a default
under Section 8.1(p) hereof);
(j) termination of the lesser of (i) 50 % or (ii) three, of the
Franchise Agreements to which DEVELOPER and the Company are parties;
(k) dissolution or liquidation of the Company;
(l) there occurs a material adverse change in the financial
condition, results of operations, assets, or business of DEVELOPER and its
Subsidiaries taken as a whole;
(m) DEVELOPER or any Subsidiary shall (a) fail to pay any
indebtedness for borrowed money (other than the Note) of DEVELOPER or such
Subsidiary, or any interest or premium thereon, when due (whether by
scheduled maturity, required prepayment, acceleration, demand, or
otherwise) and any applicable grace periods shall
F-27
<PAGE>
have expired, or (b) fail to perform or observe any term, covenant, or
condition on its part to be performed or observed under any agreement or
instrument relating to any such indebtedness, when required to be performed
or observed, if the effect of such failure to perform or observe is to
accelerate, or to permit the acceleration, after the giving of notice, of
the maturity of such indebtedness, or (c) default in the performance or
observance of any obligations under leases of real property if the effect
of such default is to permit the termination of such lease and any
applicable cure period therein has expired;
(n) one or more judgments, decrees or orders for the payment of money
in excess of $100,000 in the aggregate and not otherwise fully covered by
insurance shall be rendered against DEVELOPER or any of its Subsidiaries,
and such judgments, decrees, or orders shall continue unsatisfied and in
effect for a period of 20 consecutive days without being vacated,
discharged, satisfied, escorted, stayed, or bonded pending appeal;
(o) the Unit Pledge Agreement, the Subsidiary Security Agreement, any
other Security Instrument, or the security interests created under this
Agreement shall be terminated, invalidated, or set aside or be declared
ineffective or inoperative or in any way cease to give or provide to the
Company the benefits purported to be created thereby; or
(p) DEVELOPER fails to satisfy its development obligations for the
Development Area or any Sub-Area (as defined in the Development Agreement)
as set forth in Paragraph 3.C of the Development Agreement, so long as
during the 180-day period immediately preceding the event giving rise to
the default under this Section 8.1(p), both (i) there has been no Funding
Default by the Company hereunder, and (ii) DEVELOPER has had (A) access to
capital, either equity or debt, either directly or through sources provided
by the Company, on commercially reasonable terms for a similarly situated
restaurant business, or (B) income from operations, sufficient in either
case to complete its development obligations.
8.2 DEFAULT; REMEDIES.
-----------------
(a) In the event a Default shall exist or occur the Company may:
(i) terminate its obligations under this Agreement and cease
to make any further advances under Section 1.1, and shall have the
right to declare the Note due and payable in full, without demand,
presentment, or notice of any kind;
(ii) in its sole and absolute discretion, exercise any one or
more of the rights and remedies accruing to a secured party under the
Uniform Commercial
F-28
<PAGE>
Code with respect to the Collateral and any other applicable law upon
default by a debtor;
(iii) exercise its rights under the Unit Pledge Agreement and/or
the other Security Instruments;
(iv) convert any portion of the outstanding principal balance
of the Loan into Voting Units as provided in the Note;
(v) exercise all or a portion of the Option;
provided, however, that in the case of any event or condition described in
Section 8.1(g) with respect to DEVELOPER or any Subsidiary, the Company's
obligations under this Agreement shall automatically terminate forthwith and all
amounts owed by DEVELOPER hereunder and under the Note shall automatically
become immediately due and payable without notice, demand, presentment, protest,
diligence, notice of dishonor, or other formality, all of which are hereby
expressly waived, and provided further that, in the case of any event described
in Section 8.1(p), the Company's sole and exclusive remedies shall be the
remedies described in subparagraphs (iv) and (v) above.
(b) In connection with the exercise of the Company's rights and
remedies provided in Section 8.2(a)(ii), DEVELOPER hereby agrees to
assemble the Collateral and make it available to the Company at a place to
be designated by the Company which is reasonably convenient to both
parties, authorizes the Company to take possession of the Collateral with
or without demand and with or without process of law and to sell and
dispose of the same at public or private sale and to apply the proceeds of
such sale to the costs and expenses thereof (including reasonable
attorneys' fees and disbursements incurred by the Company) and then to the
payment and satisfaction of the Loan. Any requirement of reasonable notice
shall be met if the Company sends such notice to DEVELOPER, by registered
or certified mail, at least five days prior to the date of sale,
disposition, or other event giving rise to a required notice. The Company
may be the purchaser at any such sale. DEVELOPER expressly authorizes such
sale or sales of the Collateral in advance of and to the exclusion of any
sale or sales of or other realization upon any other collateral securing
the Loan. The Company shall have no obligation to preserve rights against
prior parties. DEVELOPER hereby waives as to the Company any right of
subrogation or marshaling of such Collateral and any other collateral for
the Loan. To this end, DEVELOPER hereby expressly agrees that any such
collateral or other security of DEVELOPER or any other party which the
Company may hold, or which may come to any of them or any of their
possession, may be dealt with in all respects and particulars as though
this Agreement were not in existence. The parties hereto further agree
that public sale of the Collateral by auction conducted in any county in
which any Collateral is located or in which the Company or DEVELOPER does
business after advertisement of the time and place thereof shall, among
other manners
F-29
<PAGE>
of public and private sale, be deemed to be a commercially reasonable
disposition of the Collateral. DEVELOPER shall be liable for any
deficiency remaining after disposition of the Collateral.
(c) All of the Company's rights and remedies under this Agreement are
cumulative and nonexclusive. Any conversion of, or exercise of the Option
with respect to, less than all of the principal balance outstanding under
the Note shall not affect the Company's rights and remedies with respect to
any portion not so converted or exercised.
8.3 NO WAIVER. The Company's failure, at any time or times hereafter, to
---------
require DEVELOPER's strict compliance with or performance of any provision of
this Agreement shall not waive, affect, or diminish any right of the Company
thereafter to demand such strict compli ance or performance therewith. Any
suspension or waiver by the Company of a Default or an Event of Default by the
Company under this Agreement or the Note shall not suspend, waive, or affect any
other Default or Event of Default by DEVELOPER under this Agreement or the Note,
whether the same is prior or subsequent thereto and whether of the same or of a
different kind or character. None of the undertakings, agreements, warranties,
covenants, and representa tions of DEVELOPER contained in this Agreement or the
Note and no Default or Event of Default by DEVELOPER under this Agreement or the
Note shall be deemed to have been suspended or waived by the Company unless such
suspension or waiver is in writing signed by an officer of the Company.
ARTICLE IX
----------
MISCELLANEOUS
-------------
9.1 NO ORAL CHANGE. This Agreement may not be changed orally, but only by
--------------
an agreement in writing and signed by the party against whom enforcement of any
waiver, change, modification, or discharge is sought.
9.2 ASSIGNMENT. DEVELOPER may not assign any of its rights or delegate
----------
any of its obligations under this Agreement without the Company's written
consent, which consent may be withheld in the Company's sole discretion. The
Company may assign any of its rights or delegate any of its obligations under
this Agreement (including assignment of this Agreement, the Note, the Unit
Pledge Agreement and the Security Instruments), (a) without notice to DEVELOPER,
(i) to any Affiliate of the Company (except DEVELOPER) or (ii) in connection
with any pledge of its assets under the Company's credit agreements and (b) with
notice, but without any requirement of consent or approval, to any other person
entity (except DEVELOPER). Any such assignment shall vest in the assignee all
of the benefits under the documents so assigned. For purposes of this
Agreement, the term "Affiliate" of a specified person shall mean any person or
entity which directly, or indirectly through one or more
F-30
<PAGE>
intermediaries, controls or is controlled by, or is under common control with,
the person specified.
9.3 COSTS AND ATTORNEYS' FEES.
-------------------------
(a) Except as provided in Section 2.4 hereof and subsection (b) or
(c) of this Section 9.3, each of the parties hereto shall pay its own
expenses (including accounting fees) incident to the negotiation and
execution of this Agreement and to the consummation of the transactions
contemplated hereby.
(b) DEVELOPER shall pay all reasonable attorneys' fees and any costs
and charges relating to or arising out of (i) the negotiation and drafting
of this Agreement and all related documents and (ii) the enforcement by the
Company of its rights to collect any portion of the Loan.
(c) In any action not founded solely on grounds covered by subsection
(b) of this Section 9.3, the party to the action who does not prevail shall
pay to the prevailing party the court costs and reasonable attorneys' fees
and other expenses (including, but not limited to, fees and expenses of
expert witnesses or consulting experts) incurred directly or indirectly by
the prevailing party in connection with its prosecution or defense of the
action, as the case may be.
9.4 COMMUNICATIONS AND NOTICES. All communications and notices provided
--------------------------
for in this Agreement or under the Note shall be in writing and shall be deemed
to have been duly given if delivered personally to the party to whose attention
the notice is directed or sent by overnight express, facsimile transmission,
express mail delivery service, or registered or certified mail, return receipt
requested, postage prepaid, and properly addressed as follows:
If to DEVELOPER: _____________________________________________
_____________________________________________
_____________________________________________
Attention: Manager
Facsimile: __________________________________
with a copy to: _____________________________________________
_____________________________________________
_____________________________________________
Attention: __________________________________
Facsimile: __________________________________
F-31
<PAGE>
If to the Company: Einstein/Noah Bagel Corp.
1526 Cole Blvd., Suite 200
Golden, CO 80401
Attention: Vice President, Franchise
Development
Facsimile: (303) 202-3490
with a copy to: Einstein/Noah Bagel Corp.
1526 Cole Blvd., Suite 200
Golden, CO 80401
Attention: General Counsel
Facsimile: (303) 202-3490
Any party may change the address to which notices hereunder are to be sent to it
by giving written notice of such change of address in the manner herein provided
for giving notice. Any notice delivered personally shall be deemed to have been
given when so delivered. Any notice delivered by facsimile transmission shall
be deemed to have been given on the earlier of the date it is actually received
or one day after such transmission. Any notice delivered by overnight express
courier will be deemed to have been given on the next succeeding business day
after the day it is sent to the intended recipient at the address set forth
above, and any notice delivered by registered or certified mail or express mail
delivery service shall be deemed to have been duly given on the earlier of the
date it is actually received or three business days after it is sent to the
intended recipient at the address set forth above.
9.5 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
-------------
AND GOVERNED BY THE LAWS OF THE STATE OF COLORADO APPLICABLE TO CONTRACTS MADE
AND TO BE PERFORMED THEREIN WITHOUT REGARD TO THE CONFLICTS OF LAW PROVISIONS
THEREOF.
9.6 HEADINGS. The headings of the sections of this Agreement are inserted
--------
for convenience only and shall not be deemed to constitute a part of this
Agreement.
9.7 SEVERABILITY. If any provision of this Agreement or the application
------------
thereof to any person or circumstance is held invalid or unenforceable, the
remainder of this Agreement and the application of such provision to other
persons or circumstances shall not be affected thereby, and the provisions of
this Agreement shall be severable in any such instance.
9.8 AVOIDANCE. To the extent that the Company receives any payment on
---------
account of DEVELOPER's obligations hereunder, and any such payment(s) and/or
proceeds or any part
F-32
<PAGE>
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside, subordinated, and/or required to be repaid to a trustee, receiver, or
any other party under any bankruptcy law, state or federal law, common law, or
equitable cause, then, to the extent of such payment(s) or proceeds received,
DEVELOPER's obligations hereunder, or part thereof intended to be satisfied,
shall be revived and continue in full force and effect, as if such payment(s)
and/or proceeds had not been received by the Company.
9.9 COUNTERPARTS. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
but one and the same instrument.
9.10 ENTIRE AGREEMENT. This Agreement, the Note, the Unit Pledge
----------------
Agreement, the Security Instruments and the exhibits to each of the foregoing
contain the entire agreement of the parties hereto with respect to the
transactions contemplated herein, and collectively supersede all prior
understandings and agreements of the parties with respect to the subject matter
hereof.
9.11 GENERAL INDEMNITY. In addition to the payments pursuant to Section
-----------------
9.3, DEVELOPER agrees to indemnify, pay, and hold the Company and any holder of
the Note, and the officers, directors, employees, agents, and Affiliates of the
Company and any such holder (collectively, the "Indemnitees"), harmless from and
against any and all other liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses, and disbursements of any
kind or nature whatsoever (including, without limitation, the reasonable fees
and disbursements of counsel for any of such Indemnitees in connection with any
investigative, administrative, or judicial proceeding commenced or threatened,
whether or not any of such Indemnitees shall be designated a party thereto) that
may be imposed on, incurred by, or asserted against any Indemnitee, in any
manner relating to or arising out of this Agreement, the Note, the Unit Pledge
Agreement, the Subsidiary Security Agreement, the Security Instruments and the
exhibits or any other agreements or document executed and delivered by DEVELOPER
in connection therewith, DEVELOPER's use and operation of the Stores, including
any damage to public or worker health and safety or the environment, the
Company's agreement to make the Loan hereunder, or the use or intended use of
the proceeds of the Loan (the "indemnified liabilities"); provided that
DEVELOPER shall have no obligation to an Indemnitee hereunder with respect to
indemnified liabilities arising from the gross negligence or willful misconduct
of such Indemnitee. To the extent that the undertaking to indemnify, pay, and
hold harmless set forth in the preceding sentence may be unenforceable because
it violates any law or public policy, DEVELOPER shall contribute the maximum
portion that it is permitted to pay under applicable law to the payment and
satisfaction of all indemnified liabilities incurred by the Indemnitees or any
of them. The provisions of the undertakings and indemnification set out in this
Section 9.11 shall survive satisfaction and payment of DEVELOPER's obligations
hereunder and termination of this Agreement.
F-33
<PAGE>
9.12 LIMITATION ON DAMAGES. Notwithstanding anything to the contrary
---------------------
herein no party hereto shall be liable for consequential, indirect, incidental,
special, speculative, or punitive damages (including, but not limited to, loss
of revenue or profit) whether such claim alleges breach of contract, tortious
conduct including, but not limited to, negligence, or any other theory, provided
that nothing herein shall limit or otherwise restrict DEVELOPER's obligation to
pay fees under the Accounting and Administration Services Agreement or
royalties, advertising fund contributions, fees and all other payments that may
become due under the Development Agreement or any Franchise Agreement entered
into pursuant thereto.
9.13 SUBMISSION TO JURISDICTION. DEVELOPER agrees that any legal action or
--------------------------
proceeding with respect to this Agreement, the Note, the Unit Pledge Agreement,
the Subsidiary Security Agreement, the Accounting and Administration Services
Agreement or any Security Instrument or the transactions contemplated hereby may
be brought in any court of the State of Colorado, or in any court of the United
States of America sitting in Colorado, and DEVELOPER hereby submits to and
accepts generally and unconditionally the jurisdiction of those courts with
respect to their respective person and property, and irrevocably consents to the
service of process in connection with any such action or proceeding by personal
delivery to DEVELOPER or by the mailing thereof by registered or certified mail,
postage prepaid to DEVELOPER at the address for DEVELOPER set forth in Section
9.4. Nothing in this paragraph shall affect the right of the Company to serve
process in any other manner permitted by law or limit the rights of the Company
to bring any such action or proceeding against DEVELOPER or property in the
courts of any other jurisdiction. DEVELOPER hereby irrevocably waives any
objection to the laying of venue of any such suit or proceeding in the above
described courts.
9.14 WAIVER OF JURY TRIAL. No party to this instrument, which includes any
--------------------
assignee, successor, heir or personal representative of a party, shall seek a
jury trial in any lawsuit, proceeding, counterclaim, or any other litigation
procedure based upon, or arising out of this Agreement, the Note, the Unit
Pledge Agreement, the Subsidiary Security Agreement, the Accounting and
Administration Services Agreement, any Security Instrument, any related
instrument, or the dealings or the relationship between the parties. No party
will seek to consolidate any such action, in which a jury has been waived, with
any other action in which a jury trial cannot or has not been waived.
THE PROVISIONS OF THIS SECTION 9.14 HAVE BEEN FULLY DISCUSSED BY THE
PARTIES HERETO, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY
HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS
OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. THIS PROVISION IS
A MATERIAL INDUCEMENT FOR THE COMPANY IN ENTERING INTO THIS AGREEMENT.
F-34
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement to be
effective as of the date and year first above written.
EINSTEIN/NOAH BAGEL CORP.
By:________________________________________
Title:________________________________
___________________________________________
By:___________________________________
its Manager
By:______________________________
Title: President
F-35
<PAGE>
EXHIBITS
--------
Exhibit A Convertible Secured Note
Exhibit B Borrowing Certificate
Exhibit C Unit Pledge Agreement
Exhibit D Subsidiary Security Agreement
Exhibit E Advance Certificate
Exhibit F Opinion of Counsel for DEVELOPER
Exhibit G Accounting and Administration Services Agreement
Exhibit H Investor Representation Letter
<PAGE>
EXHIBIT A
---------
CONVERTIBLE SECURED NOTE
------------------------
A-1
<PAGE>
CONVERTIBLE SECURED NOTE
------------------------
$__________ Golden, Colorado
_________, 1996
FOR VALUE RECEIVED, _________________________, a Delaware limited liability
company (the "DEVELOPER"), promises to pay to the order of Einstein/Noah Bagel
Corp., a Delaware corporation (the "Company"), pursuant to the Loan Agreement
(as hereinafter defined) at such place as the Company may from time to time
designate in writing, in lawful money of the United States of America and in
immediately available funds, the principal sum of ______ million dollars
($_________________) and any interest thereon, or, if less, the aggregate unpaid
amount of the Loan made pursuant to Section 1.1 of the Loan Agreement and any
interest thereon.
This Note evidences the Loan made under, and is referred to in and is
executed and delivered pursuant to, a Secured Loan Agreement as of even date
herewith between the DEVELOPER and the Company (the "Loan Agreement"), to which
reference is hereby made for a statement of the terms and conditions under which
this Note may be repaid and accelerated and for a description of the collateral
and security securing this Note. Capitalized terms not otherwise defined herein
shall have the meanings ascribed to them in the Loan Agreement.
Interest shall accrue daily on the aggregate outstanding principal balance
of the Loan for the period commencing on the date the Loan is made until the
Loan is paid in full, at a per annum rate equal to the rate designated and
announced by Bank of America Illinois or its successor in interest (the "Bank")
from time to time as its "reference rate" in effect at its principal office in
Chicago, Illinois, plus 1%. The interest rate shall be adjusted, from time to
time, on the same day on which the Bank adjusts its "reference rate." Interest
only on the outstanding principal amount of the Loan shall be payable in arrears
on the first day of each Retail Period during the Interest Payment Period.
Interest on the outstanding principal amount of the Loan shall also be payable
as otherwise provided herein in connection with principal payments and at
maturity (whether by acceleration or otherwise).
Interest shall be computed on the basis of a 360-day year and the actual
number of days elapsed.
Any principal payment due under this Note not paid when due, whether at
stated maturity, by notice of repayment, by acceleration or otherwise, shall, to
the extent permitted by applicable law, thereafter bear interest (compounded
monthly and payable upon demand) at a rate which is 2% per annum in excess of
the rate of interest otherwise payable under this Note in respect of such
principal amount until such unpaid amount has been paid in full (whether before
or after judgment).
A-2
<PAGE>
Except as otherwise provided in the Loan Agreement, unless accelerated, the
outstanding principal amount of the Loan shall be payable to the Company in 65
substantially equal periodic installments of principal (the amount of which
periodic installments of principal shall be determined at the close of business
on the Draw Loan Termination Date based on a schedule amortizing such
outstanding principal balance of the Loan as of such date in 130 substantially
equal periodic installments of principal), plus accrued but unpaid interest, on
the first day of each Retail Period, commencing on the first day of the
__________ Retail Period in the Company's fiscal year 19__ and continuing until
the first day of the ______ Retail Period in the Company's fiscal year 20__,
when the entire principal balance of the Loan and all interest accrued thereon
shall be due and payable.
This Note may be prepaid at any time without payment of penalty or premium.
All payments made hereunder shall be applied first to interest and then to
outstanding principal.
If payment hereunder becomes due and payable on a Saturday, Sunday, or
legal holiday, under the laws of the State of Colorado, the due date thereof
shall be extended to the next succeeding business day.
Demand, presentment, protest, diligence, notice of dishonor, and any other
formality are hereby expressly waived by the DEVELOPER and any endorser or
guarantor.
ARTICLE I
---------
CONVERSION OF NOTE
------------------
1.1 The holder of this Note shall have the right, at such holder's option,
to convert, subject to the terms, conditions and provisions of this Article I,
the outstanding principal balance of this Note or any portion thereof into
Voting Units at the price of $1.12 per Voting Unit, or, in the event an
adjustment of such price has occurred pursuant to the provisions of Section 1.3,
then at the price as last adjusted (referred to herein as the "Conversion
Price"), at any time after both of the following have occurred: (i) the second
anniversary of the Closing Date, and (ii) such time as DEVELOPER has completed
not less than 80% of the Development Schedule set forth in the Development
Agreement, and up to the later of (y) the date on which the DEVELOPER has
properly repaid the outstanding principal balance of the Loan and all accrued
interest thereon in full or (x) the first day of the ____________ Retail Period
in the Company's fiscal year 20__; provided, however, that nothing herein shall
impair, restrict or prohibit the exercise of remedies, including exercise of the
conversion right, under Section 8.2 of the Loan Agreement upon the occurrence of
a Default. In the event the outstanding principal balance of this Note is to be
converted, the holder shall surrender this Note to the DEVELOPER at any time
during usual business hours together with written notice (hereinafter referred
to as "Conversion Notice") that the holder elects to convert this Note into
Voting Units in accordance with the provisions of this Article I, and specifying
the name or names in which the certificate
A-3
<PAGE>
or certificates, if any, evidencing the Voting Units issuable upon such
conversion shall be registered, together with the addresses of the persons so
named. In the event this Note is to be converted in part only, the DEVELOPER
shall, upon surrender of this Note, execute and deliver to the holder thereof,
at the expense of the DEVELOPER, a new Note in principal amount equal to the
unconverted portion of this Note. In no event shall accrued interest be
convertible into Voting Units.
1.2 As promptly as practicable after the surrender, as herein provided, of
this Note for conversion and the receipt of the Conversion Notice relating
thereto, the DEVELOPER shall deliver to or upon the written order of the holder
of this Note a certificate or certificates, or other evidence of ownership if
Voting Units are uncertificated, representing the number of Voting Units of the
DEVELOPER into which this Note may be converted in accordance with the
provisions of this Article I and a new Note for any unconverted portion of the
principal amount hereof. Subject to the following provisions of this Section
1.2, such conversion shall be deemed to have been made immediately before the
close of business on the date that this Note shall have been surrendered for
conversion together with the Conversion Notice, so that the rights of the holder
of this Note as a Noteholder shall cease at such time and the person or persons
entitled to receive the Voting Units upon conversion of this Note shall be
treated for all purposes as having become the record holder or holders of such
Voting Units at such time, and such conversion shall be at the Conversion Price
in effect at such time. If the last day for the exercise of the conversion
right shall not be a business day, then such conversion right may be exercised
on the next succeeding business day.
1.3 (a) In case of any reclassification or change of outstanding Units,
or in case of any consolidation or merger of the DEVELOPER with or into any
partnership, corporation, or other entity (other than a merger in which the
DEVELOPER is the surviving entity and which does not result in any
reclassification or change of outstanding Units, other than a change in
number of Units issuable upon conversion of this Note) or in case of any
sale or conveyance to any partnership, corporation, or other entity of the
property of the DEVELOPER as an entirety or substantially as an entirety,
then the holder of this Note shall have the right thereafter to convert
this Note into the kind and amount of units and other securities and
property receivable upon such reclassification, change, consolidation,
merger, sale, or conveyance by a holder of the number of Voting Units of
the DEVELOPER issuable upon conversion of this Note immediately prior to
such reclassification, change, consolidation, merger, sale, or conveyance,
subject to adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for herein.
(b) The Conversion Price shall be adjusted in the event the DEVELOPER
shall at any time (i) make a subdivision of or combine Units outstanding or
(ii) make a distribution in cash, in kind, or in securities of any kind
(including, but not limited to, any Unit split, other than cash
distributions permitted pursuant to the provisions of Section 6.4 of the
Loan Agreement ("Permitted Distributions")). In the event the
A-4
<PAGE>
DEVELOPER makes a subdivision of Units or makes a distribution in cash, in
kind, or in securities of any kind (other than Permitted Distributions),
the Conversion Price in effect immediately prior to such action shall be
appropriately decreased, and in the event the DEVELOPER shall at any time
combine Units outstanding, the Conversion Price in effect immediately prior
to such combination shall be appropriately increased. An adjustment made
pursuant to this Section 1.3(b) shall, in the event of a subdivision or
combination, become effective retroactively immediately after the effective
date thereof, and shall, in the event of a distribution, become effective
retroactively immediately after the record date for the determination of
members entitled thereto. Whenever the Conversion Price is adjusted,
pursuant to this Section 1.3(b), the DEVELOPER shall promptly cause a
notice to be given to such holder of this Note which will state the
adjusted Conversion Price.
(c) The DEVELOPER covenants that if any Units to be issued upon
conversion of this Note require registration with or approval of any
governmental authority under any federal or state law before such Units may
be issued upon conversion, the DEVELOPER will, at its expense and as
expeditiously as possible, cause such Units to be duly registered or
approved, as the case may be.
(d) Any issuance of certificates, or other evidence of ownership if
Voting Units are uncertificated, for Voting Units upon the conversion of
this Note shall be made without charge to the converting Noteholder for any
tax in respect of the issuance of such certificates or other evidence of
ownership, and such certificates or other evidence of ownership shall be
issued in the respective names of, or in such names as may be directed by,
the holder of this Note; provided, however, that the DEVELOPER shall not be
required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate or other
evidence of ownership in a name other than that of the holder of this Note,
and the DEVELOPER shall not be required to issue or deliver such
certificates or other evidence of ownership unless and until the person or
persons requesting the issuance thereof shall have paid to the DEVELOPER
the amount of such tax or shall have established to the reasonable
satisfaction of the DEVELOPER that such tax has been paid.
(e) Conversion of any portion of the principal balance of this Note
shall not relieve the DEVELOPER of its obligation to pay any accrued but
unpaid interest as of the date of conversion on the portion of the
principal balance of this Note so converted.
(f) To the extent that any portion of this Note is not converted into
Voting Units, such portion shall remain a secured debt of the DEVELOPER
payable in accordance with the terms of the Loan Agreement.
A-5
<PAGE>
ARTICLE II
----------
ADVANCES
--------
2.1 Loan advances may be made from time to time by the Company to the
DEVELOPER in the manner and on the terms and subject to the conditions set forth
in the Loan Agreement. Upon granting each loan advance, the Company shall
record the making and amount of such advance on its books in a separate loan
account, and shall also record in the loan account all payments made by the
DEVELOPER with respect to the Loan. The aggregate amount of all Advances, less
the amounts of payment of principal made by the DEVELOPER, shall be the
principal amount outstanding under this Note. The loan account shall be prima
facie evidence of the unpaid amount of principal outstanding under this Note;
provided, however, that failure to maintain such account or record any advances
therein shall not relieve the DEVELOPER of its obligations to repay the
outstanding principal amount of the Loan, all accrued interest thereon, and any
amount payable with respect thereto in accordance with the terms of this Note.
ARTICLE III
-----------
DEFAULT, RIGHTS AND REMEDIES OF HOLDER
--------------------------------------
3.1 The occurrence of a Default shall be a default under this Note. Upon
any default under this Note, the holder of this Note may declare this Note due
and payable in full and exercise such other rights and remedies as are available
to the holder under the Loan Agreement or applicable law.
3.2 If there is any default under this Note, and this Note is placed in
the hands of an attorney for collection, or is collected through any court,
including any bankruptcy court, the DEVELOPER promises to pay to the order of
the holder hereof such holder's reasonable attorneys' fees and court costs
incurred in collecting or attempting to collect or securing or attempting to
secure this Note or enforcing the holder's rights with respect to the
Collateral, to the extent allowed by the laws of the State of Colorado or any
state in which any Collateral is situated.
ARTICLE IV
----------
MISCELLANEOUS
-------------
4.1 THIS NOTE HAS BEEN DELIVERED IN, AND SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF, THE STATE OF
A-6
<PAGE>
COLORADO APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED THEREIN WITHOUT REGARD
TO THE CONFLICTS OF LAW PROVISIONS THEREOF.
4.2 The holder of this Note may, with or without notice to any party, and
without affecting the obligations of any maker, surety, guarantor, endorser,
accommodation party, or any other party to this Note (i) extend the time for
payment of either principal or interest from time to time, (ii) release or
discharge any one or more parties liable on this Note, (iii) suspend the right
to enforce this Note with respect to any persons, (iv) change, exchange, or
release any property in which the holder has any interest securing this Note,
(v) justifiably or otherwise, impair any of the Collateral or suspend the right
to enforce against any such Collateral, and (vi) at any time it deems it
necessary or proper, call for and, should it be made available, accept, as
additional security, the signature or signatures of additional parties or a
security interest in property of any kind or description or both.
4.3 Any provision herein, or in the Loan Agreement, or any other document
executed or delivered in connection herewith or therewith, or in any other
agreement or commitment, whether written or oral, expressed or implied, to the
contrary notwithstanding, neither the Company nor any holder hereof shall in any
event be entitled to receive or collect, nor shall any amounts received
hereunder be credited, so that the Company or any holder hereof shall be paid,
as interest, a sum greater than the maximum amount permitted by applicable law
to be charged to the person primarily obligated to pay this Note at the time in
question. If any construction of this Note or the Loan Agreement, or any and all
other papers, agreements or commitments, indicate a different right given to the
Company or any holder hereof to ask for, demand, or receive any larger sum as
interest, such is a mistake in calculation or wording which this clause shall
override and control, it being the intention of the parties that this Note, the
Loan Agreement, and all other documents executed or delivered in connection
herewith shall in all ways comply with applicable law and proper adjustments
shall automatically be made accordingly. In the event that the Company or any
holder hereof ever receives, collects, or applies as interest, any sum in excess
of the maximum amount permitted by applicable law, if any, such excess amount
shall be applied to the reduction of the unpaid principal balance of this Note,
and if this Note is paid in full, any remaining excess shall be paid to the
DEVELOPER. In determining whether or not the interest paid or payable, under any
specific contingency, exceeds the maximum amount permitted by applicable law, if
any, the DEVELOPER and any holder hereof shall, to the maximum extent permitted
under applicable law: (a) characterize any non-principal payment as an expense
or fee rather than as interest, and (b) "spread" the total amount of interest
throughout the entire term of this Note.
A-7
<PAGE>
IN WITNESS WHEREOF, the DEVELOPER has caused this Note to be executed in
its corporate name by the undersigned officer, thereunto duly authorized.
____________________________________________
By:_________________________________________
its Manager
By:____________________________________
Title:______________________________
A-8
<PAGE>
EXHIBIT B
---------
BORROWING CERTIFICATE
---------------------
B-1
<PAGE>
BORROWING CERTIFICATE
---------------------
The undersigned, the __________ of _______________, Inc., the manager of
_________________________________ (the "DEVELOPER"), borrower under that certain
Secured Loan Agreement dated ____________, 1996 (the "Loan Agreement") between
the DEVELOPER and Einstein/Noah Bagel Corp. (the "Company"), hereby certifies to
the Company as follows:
1. Loan proceeds in the aggregate amount of $__________ were disbursed by
the Company for the benefit of DEVELOPER under the Loan Agreement during the
two-week borrowing period ended ____________, 199_ (the "Borrowing Period").
DEVELOPER confirms that (a) the Company was authorized to disburse such amount
on behalf of DEVELOPER, and (b) such amount was required and used by DEVELOPER
for the purposes permitted under the Loan Agreement and for no other purpose.
2. As of __________, 1996, the outstanding principal balance of the Loan
is $_____________.
3. The representations and warranties contained in Article IV of the Loan
Agreement and in the Security Instruments delivered in connection therewith were
true and correct at all times during the Borrowing Period, are true and correct
on and as of the date hereof, and will be true and correct at all times during
the next succeeding two-week borrowing period.
4. No Default or Event of Default has occurred and is continuing.
5. DEVELOPER is in compliance with the Development Schedule (as defined
in the Development Agreement).
The Company is entitled to rely on this Certificate and the representations
contained herein when disbursing loan proceeds during the next succeeding two-
week borrowing period.
Capitalized terms used but not defined herein have the meanings ascribed
thereto in the Loan Agreement.
___________________________________
B-2
<PAGE>
EXHIBIT C
---------
UNIT PLEDGE AGREEMENT
---------------------
C-1
<PAGE>
UNIT PLEDGE AGREEMENT
---------------------
THIS UNIT PLEDGE AGREEMENT ("Pledge Agreement"), dated __________, 1996, is
made and entered into by and between Einstein/Noah Bagel Corp., a Delaware
corporation (the "Company"), and all of the holders (other than the Company and
Einstein Bros. Equity Funding, L.L.C.) of Voting Units in
____________________________, a Delaware limited liability company (the
"DEVELOPER"), and their spouses listed on the signature pages hereof and any
other persons who, after the date of this Pledge Agreement, become holders of
Voting Units in the DEVELOPER and their spouses (collectively, the "Members").
RECITALS
--------
1. The Members own 100% of the issued and outstanding Voting Units in
the DEVELOPER, in the amounts set forth on Schedule A hereto.
2. The DEVELOPER has entered into a Secured Loan Agreement of even date
herewith (the " Loan Agreement") with the Company pursuant to which the Company
has agreed on the terms and subject to the conditions therein, to make the Loan
(as defined in the Loan Agreement) to the DEVELOPER, which Loan is evidenced by
a promissory note of even date herewith from the DEVELOPER to the Company (the "
Note").
3. Certain of the Members have executed promissory notes of even date
herewith to DEVELOPER pursuant to which DEVELOPER has loaned such Members the
money necessary for such Members to purchase certain of the Voting Units owned
by them (each, a "Member Note"). To secure his obligation under his Member
Note, each such Member has granted to DEVELOPER a security interest in and to
the Voting Units (the "Second Pledge Agreement").
4. As an inducement to the Company to enter into the Loan Agreement and
as a condition to the effectiveness of the Company 's obligations under the Loan
Agreement, the Members have agreed, among other things, to pledge to the
Company, and grant a first-priority security interest to the Company, in and to,
100% of the issued and outstanding Voting Units in the DEVELOPER, and DEVELOPER
has agreed that the pledge to it of, and its security interest in and to, the
Voting Units will be junior to the pledge of and security interest in and to the
Voting Units granted to the Company as provided herein.
NOW, THEREFORE, the Company and the Members have agreed as follows:
1. CERTAIN DEFINITIONS. The capitalized terms and phrases not otherwise
-------------------
defined herein, shall have the meanings given them in the Loan Agreement, and
the following terms or phrases shall have the following meanings:
C-1
<PAGE>
"Affiliate" shall mean, with respect to a specified person, any other
person that directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with, the person
specified.
"Collateral" shall mean the Pledged Units and any other property in
which the Company acquires a security interest pursuant to this Pledge
Agreement to secure any indebtedness or other obligation of the DEVELOPER
to the Company.
"Default" shall have the meaning given it in Section 10 of this Pledge
Agreement.
"Pledged Units" shall mean all the issued and outstanding Voting Units
in the DEVELOPER now or hereafter owned by the Members.
"Secured Obligations" shall mean the obligations secured by this
Pledge Agreement described in Section 3 of this Pledge Agreement.
"Voting Units" shall have the meaning ascribed thereto in the limited
liability company agreement of DEVELOPER dated ___________, 1996, as
amended.
2. GRANT OF SECURITY INTEREST.
--------------------------
(a) The Members hereby grant to the Company a security interest in
all of their respective right, title, and interest in and to the Pledged
Units whether now owned or hereafter acquired. The Members further grant to
the Company a security interest in any rights to subscribe, liquidating
distributions, distributions paid in units of ownership interest, new
securities, or any other property to which the Members are or may hereafter
become entitled to receive whether on account of the Pledged Units or
otherwise other than cash distributions permitted pursuant to the
provisions of Section 6.4 of the Loan Agreement. If the Members receive
additional property of such nature, they shall immediately deliver such
property to the Company to be held by the Company in the same manner as the
property held pursuant to this Pledge Agreement.
(b) The Members grant a further security interest to the Company in
the proceeds or products of any sale or other disposition of the Pledged
Units.
3. OBLIGATIONS SECURED. The security interest created hereby secures
-------------------
payment and performance of (a) the indebtedness evidenced by the Note, and all
obligations contained in the Note, (b) all of the other obligations, agreements,
covenants, and representations of the DEVELOPER under the Loan Agreement whether
or not, either on the date of this Pledge Agreement or thereafter, evidenced by
any note, instrument, or other writing, and (c) any and all other indebtedness,
obligation, or liability of the DEVELOPER to the Company, however evidenced,
whether existing on the date of this Pledge Agreement or arising thereafter,
direct or indirect, absolute or contingent, joint and/or several.
C-2
<PAGE>
4. REPRESENTATIONS AND WARRANTIES. To induce the Company to enter into
------------------------------
this Pledge Agreement, each of the Members represents and warrants for himself
as follows:
(a) The Member has full right, power, and capacity to enter into and
perform this Pledge Agreement; and this Pledge Agreement has been duly
authorized, executed and delivered and constitutes a legal, valid, and
binding obligation of the Member enforceable in accordance with its terms.
(b) The Member has good and marketable title to the Pledged Units
owned by him, and such Pledged Units are not subject to any lien, charge,
pledge, encumbrance, claim, or security interest other than a second
priority lien on the Pledged Units (the "Second Lien") in favor of
DEVELOPER pursuant to the Second Pledge Agreement, if applicable, and the
security interest created by this Pledge Agreement.
(c) The Pledged Units owned by him constitute one hundred percent
(100%) of the issued and outstanding equity interest of the DEVELOPER owned
by him.
(d) The Pledged Units owned by him are fully paid and nonassessable.
(e) Other than the LLC Agreement, the Member has not entered into any
restriction or purchase agreement with respect to the Pledged Units, which
would in any way restrict the sale, pledge, or other transfer of the
Pledged Units or of any interest in or to the Pledged Units.
5. DURATION OF SECURITY INTEREST. The Company, its successors and
-----------------------------
assigns, shall hold the Pledged Units and security interest created hereby upon
the terms of this Pledge Agree ment, and this security interest shall continue
until all the Secured Obligations have been paid in full.
6. MAINTAINING FREEDOM FROM LIENS. The Members shall keep the Pledged
------------------------------
Units and other Collateral free and clear of liens, other than the lien granted
hereunder and, if applicable, the Second Lien, and shall pay all amounts,
including taxes, assessments, or charges, which might result in a lien against
the Pledged Units or other Collateral if left unpaid. If any such lien,
assessment, claim, or charge shall nevertheless exist, and the Members fail to
pay such amounts promptly, the Company may, but is not obligated to, pay such
amounts, and such payment shall be conclusive evidence of the legality or
validity thereof. The Members shall promptly reimburse the Company for any such
payments, and until reimbursement, such payments shall be a part of the Secured
Obligations.
C-3
<PAGE>
7. CERTAIN RIGHTS RESPECTING PLEDGED UNITS.
---------------------------------------
(a) The Members shall continue to be the owner of the Pledged Units
and other Collateral so long as no Default has occurred and is continuing
and may collect and retain all cash distributions now or hereafter payable
on or on account of the Pledged Units and other Collateral which are
permitted under the Loan Agreement, and, so long as no Default has
occurred, may exercise voting rights with respect to the Pledged Units and
other Collateral.
(b) The Members shall not sell, transfer, or attempt to sell or
transfer the Pledged Units or other Collateral, or any part thereof or
interest therein, without the prior express written consent of the Company.
Any such consent of the Company shall not constitute the release by the
Company of its interest in the Pledged Units or other Collateral, and any
such sale or transfer consented to shall transfer the Pledged Units or
other Collateral subject to the security interest of the Company. Any such
transfer shall be subject to the transferee member's agreement to be bound
by the terms and subject to the conditions of this Pledge Agreement, such
agreement to be evidenced by the transferee member's execution of this
Pledge Agreement. The parties agree that a sale or transfer of Pledged
Units or other Collateral pursuant to and in accordance with the terms and
provisions of each Development Agreement and Franchise Agreement relating
thereto between the DEVELOPER and the Company shall be deemed to be a sale
or transfer of such Pledged Units or Collateral with the Company's prior
express written consent hereunder, provided that any such transferee agrees
to and does pledge to the Company such Pledged Units or Collateral as
provided herein.
(c) The Company, at its option upon any Default, may exercise all
voting rights and privileges whatsoever with respect to the Pledged Units
and other Collateral, including, without limitation, the right to receive
distributions, and to that end the Members hereby constitute any officer of
the Company as their proxy and attorney-in-fact for all purposes of voting
the Pledged Units and other Collateral after any Default at any annual
regular or special meeting of the DEVELOPER, and this appointment shall be
deemed coupled with an interest and is and shall be irrevocable until all
of the Secured Obligations have been fully paid and terminated, and all
persons whatsoever shall be conclusively entitled to rely upon any oral or
written certification of the Company that it is entitled to vote the
Pledged Units and other Collateral hereunder. The Members shall execute
and deliver to the Company any additional proxies and powers of attorney
that the Company may desire in its own name in order to exercise the rights
expressly granted to the Company under this Section 7(c). In addition to
any other voting rights, the Company may, upon any Default, vote the
Pledged Units and other Collateral to remove the managers of the DEVELOPER,
or any of them, and to elect new managers of the DEVELOPER, who may
thereafter manage the affairs of the DEVELOPER, operate its properties and
carry on its business and otherwise take any action with respect thereto as
it shall deem necessary and appropriate, and may also
C-4
<PAGE>
liquidate its business, and may authorize the borrowing of money in the
name of the DEVELOPER, and the pledge of its assets to secure such
borrowing.
8. ISSUANCE OR ACQUISITION OF NEW UNITS; MERGERS, SALES AND OTHER
--------------------------------------------------------------
DISPOSITION OF ASSETS. The Members shall not permit the DEVELOPER to (a) issue
- ----------------------
new units of ownership interest in DEVELOPER, or any options, subscription
rights, or warrants with respect thereto (except as contemplated in and
permitted by the Loan Agreement), (b) merge into or with or consolidate with any
other entity, (c) sell or otherwise transfer any part of its assets (except in
the ordinary course of business) or (d) liquidate or dissolve or take any action
with a view toward liquidation or dissolution, in each case without the
Company's prior written consent.
9. DELIVERY OF CERTIFICATES AND TRANSFER DOCUMENTS; PLEDGE OF ADDITIONAL
---------------------------------------------------------------------
UNITS. If the Pledged Units are at any time represented by certificates, the
- -----
Members shall deliver to the Company such certificates in form suitable for
transfer together with executed blank assignment or transfer documents, and the
Company shall hold the certificates as bailee for DEVELOPER. If for any reason
any of the Members acquires any interest in any additional membership units of
the DEVELOPER (voting and nonvoting) such Member shall immediately deliver
certificates representing those units in form suitable for transfer and blank
assignment or transfer documents to the Company to be held by the Company in the
same manner as the Pledged Units, and such units shall be pledged under this
Pledge Agreement and constitute a part of the Collateral. With respect to any
additional Voting Units acquired by any of the Members, the Company will hold
certificates representing those Voting Units as bailee for DEVELOPER.
10. DEFAULT. At the option of the Company, the occurrence of any Default
-------
(as defined in the Loan Agreement) under the Loan Agreement shall constitute a
default under this Pledge Agreement.
11. REMEDIES.
--------
(a) Upon the occurrence of any Default, the Company shall have all of
the rights and remedies provided by law and/or by this Pledge Agreement,
including but not limited to all of the rights and remedies of a secured
party under the Uniform Commercial Code, and the Members hereby authorize
the Company to hold such Pledged Units or to sell all or any part of the
Pledged Units at public or private sale and to apply the proceeds of such
sale to the costs and expenses thereof (including the reasonable attorneys'
fees and disbursements incurred by the Company) and then to the payment of
the other Secured Obligations. The Company may be the purchaser at any
such sale. The Members expressly authorize such sale or sales of the
Pledged Units in advance of and to the exclusion of any sale or sales of or
other realization upon any other collateral securing indebtedness or other
obligations owed to the Company. The Company shall be under no obligation
to preserve rights against prior parties.
C-5
<PAGE>
(b) The Members agree and acknowledge that because there may be no
public market for the Pledged Units and because of applicable securities
laws, a public sale of the Pledged Units may not be possible or advisable
and sales at a private sale may be on terms less favorable than if such
Pledged Units were sold at a public sale and may be at a price less
favorable than a public sale. The Members agree that all such private
sales made under the foregoing circumstances shall be deemed to have been
made in a commercially reasonable manner.
12. EXERCISE OF REMEDIES. The rights and remedies of the Company shall be
--------------------
deemed to be cumulative, and any exercise of any right or remedy shall not be
deemed to be an election of that right or remedy to the exclusion of any other
right or remedy. Notwithstanding the foregoing, the Company shall be entitled
to recover by the cumulative exercise of all remedies no more than the sum of
(a) the Secured Obligations remaining outstanding at the time of the exercise of
remedies, plus (b) the costs, fees, and expenses the Company is otherwise
entitled to recover.
13. RETURN OF COLLATERAL. If certificates representing the Pledged Units
--------------------
shall at any time have been delivered to the Company hereunder, the Company may
at any time deliver the Pledged Units or other Collateral, or any part thereof,
to the Members. The receipt by the Members of the Pledged Units or other
Collateral, or any part thereof, shall be a complete and full discharge of the
Company, and the Company shall be discharged from any liability or
responsibility with respect thereto.
14. COMMUNICATIONS AND NOTICES.
--------------------------
(a) Any requirement of the Uniform Commercial Code of reasonable
notice shall be met if such notice is given at least five business days
before the time of sale, disposition, or other event or thing giving rise
to the requirement of notice.
(b) All communications and notices shall be in writing and shall be
deemed to have been duly given if delivered personally to the party to
whose attention the notice is directed or sent by overnight express,
facsimile transmission, express mail delivery service, or registered or
certified mail, return receipt requested, postage prepaid, and properly
addressed as follows:
If to the Members: the addresses shown on the signature pages
C-6
<PAGE>
If to the Company: Einstein/Noah Bagel Corp.
1526 Cole Blvd., Suite 200
Golden, CO 80401
Attention: Vice President,
Franchise Development
Facsimile: (303) 202-3490
with a copy to: Einstein/Noah Bagel Corp.
1526 Cole Blvd., Suite 200
Golden, CO 80401
Attention: General Counsel
Facsimile: (303) 202-3490
Any party may change the address to which notices hereunder are to be sent to it
by giving written notice of such change of address in the manner herein provided
for giving notice. Any notice delivered personally shall be deemed to have been
given when so delivered. Any notice delivered by facsimile transmission shall
be deemed to have been given on the earlier of the date it is actually received
or one day after such transmission. Any notice delivered by overnight express
courier will be deemed to have been given on the next succeeding business day
after the day it is sent to the intended recipient at the address set forth
above, and any notice delivered by registered or certified mail or express mail
delivery service shall be deemed to have been duly given on the earlier of the
date it is actually received or three business days after it is sent to the
intended recipient at the address set forth above.
15. FURTHER ASSURANCES. The Members shall sign any such other documents
------------------
or instruments, including UCC financing statements, and take such other action,
as the Company may request to more fully create and maintain, or to verify,
ratify, or perfect the security interest intended to be created by this Pledge
Agreement.
16. MULTIPLE COUNTERPARTS. This Pledge Agreement may be executed in two
---------------------
or more counterparts, each of which shall be deemed an original, and it shall
not be necessary in making proof of this Pledge Agreement or the terms thereof
to produce or account for more than one such counterpart.
17. MISCELLANEOUS.
-------------
(a) Failure by the Company to exercise any right shall not be deemed
a waiver of that right, and any single or partial exercise of any right
shall not preclude the further exercise of that right. Every right of the
Company shall continue in full force and effect until such right is
specifically waived in writing signed by the Company.
C-7
<PAGE>
(b) If any provision of this Pledge Agreement or the application
thereof to any person or circumstance is held invalid or unenforceable, the
remainder of the Pledge Agreement and the application of such provision to
other persons or circumstances shall not be affected thereby, and the
provisions of this Pledge Agreement shall be severable in any such
instance.
(c) The headings of the sections of this Pledge Agreement are
inserted for convenience only and shall not be deemed to constitute a part
of this Pledge Agreement.
(d) This Pledge Agreement shall benefit the Company, its successors
and assigns, and all obligations of the Members shall bind their successors
and assigns. The Members acknowledge that the Company may assign or
otherwise transfer (in whole or in part) the Note, the Loan Agreement, or
this Pledge Agreement to any other person, and such other person shall
thereupon become vested with all of the benefits in respect thereof granted
to the Company thereunder (including the benefits under this Pledge
Agreement).
(E) THIS PLEDGE AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF COLORADO APPLICABLE TO CONTRACTS MADE
AND TO BE PERFORMED THEREIN WITHOUT REGARD TO THE CONFLICTS OF LAWS
PROVISIONS THEREOF.
(f) This Pledge Agreement and the Loan Agreement constitute the
entire agreement of the parties with respect to the subject matter hereof
and supersede all prior understandings with respect to the subject matter
hereof. No change, modification, addition, or termination of this Pledge
Agreement shall be enforceable unless in writing and signed by the party
against whom enforcement is sought.
(g) To the extent any spouse of a Member is deemed, under applicable
law or otherwise, to have an interest in the Collateral, such spouse hereby
waives, relinquishes, and forever releases such interest in such Collateral
and agrees that such Collateral is subject to all of the terms and
provisions of this Pledge Agreement, especially, without limitation,
Sections 10 and 11 hereof, and further agrees to be bound by the terms and
provisions hereof and to execute, acknowledge, and deliver such further
assignments, transfers, conveyances, powers of attorney, and assurances as
may be required to sell the Pledged Units as provided in Section 11 hereof,
and as may be otherwise appropriate to carry out the transactions
contemplated by this Pledge Agreement.
(h) Each of the Members agrees that any legal action or proceeding
with respect to this Pledge Agreement or the transactions contemplated
hereby may be brought in any court of the State of Colorado, or in any
court of the United States of America
C-8
<PAGE>
sitting in Colorado, and each of the Members hereby submits to and accepts
generally and unconditionally the jurisdiction of those courts with respect
to its person and property, and irrevocably consents to the service of
process in connection with any such action or proceeding by personal
delivery to each of the Members or by the mailing thereof by registered or
certified mail, postage prepaid addressed to each of the Members at the
address for notices as provided in Section 14 hereof. Nothing in this
paragraph shall affect the right of the Company to serve process in any
other manner permitted by law or limit the right of the Company to bring
any such action or proceeding against the Members or property in the courts
of any other jurisdiction. Each of the Members hereby irrevocably waives
any objection to the laying of venue of any such suit or proceeding in the
above described courts.
18. WAIVER OF JURY TRIAL. No party to this instrument, which includes any
--------------------
assignee, successor, heir or personal representative of a party, shall seek a
jury trial in any lawsuit, proceeding, counterclaim, or any other litigation
procedure based upon, or arising out of this Agreement, any related instrument,
or the dealings or the relationship between the parties. If the subject matter
of any such litigation is one in which the waiver of a jury trial is prohibited,
if at all, under the controlling law of the applicable jurisdiction, by
constitutional or statutory provision, no party hereto will present as a defense
or counterclaim in such litigation any claim which would reduce or offset any
amount or right claimed under the provisions of this Pledge Agreement. No party
will seek to consolidate any such action, in which a jury has been waived, with
any other action in which a jury trial cannot or has not been waived.
THE PROVISIONS OF THIS Section 18 HAVE BEEN FULLY DISCUSSED BY THE PARTIES
HERETO, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY HAS IN
ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF
THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. THIS PROVISION IS A
MATERIAL INDUCEMENT FOR THE COMPANY IN ENTERING INTO THIS AGREEMENT.
C-9
<PAGE>
IN WITNESS WHEREOF, the parties hereto executed this Pledge Agreement to be
effective as of the date and year first above written.
EINSTEIN/NOAH BAGEL CORP.
By:_________________________________________
Its:_____________________________________
MEMBERS
Signature pages attached
DEVELOPER hereby executes this Pledge Agreement for purposes of acknowledging
and consenting to its execution by DEVELOPER's members and agrees that its
security interest in and to the Pledged Units is junior to the security interest
in and to the Pledged Units granted to the Company hereunder.
____________________________________________
By:_________________________________________
its Manager
By:____________________________________
Title:______________________________
C-10
<PAGE>
SCHEDULE A
TO
PLEDGE AGREEMENT
----------------
Pledged Units at _____ ___, 1996
NO. OF UNITS ISSUED TO
------------ ---------
C-11
<PAGE>
EXHIBIT D
---------
SUBSIDIARY SECURITY AGREEMENT
-----------------------------
D-1
<PAGE>
SUBSIDIARY SECURITY AGREEMENT
-----------------------------
THIS SECURITY AGREEMENT, dated as of __________, 199_ (this "Security
Agreement"), is made by __________________, a ____________ corporation (the
"Subsidiary"), in favor of Einstein/Noah Bagel Corp., a Delaware corporation
(the "Company").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, ______________________________, a Delaware limited liability
company (the "Borrower"), has entered into a Secured Loan Agreement dated
__________, 1996 (the "Loan Agreement"), with the Company pursuant to which the
Company has agreed on the terms and conditions therein, to make the Loan (as
defined in the Loan Agreement) to the Borrower; and
WHEREAS, the Subsidiary is a wholly-owned subsidiary of the Borrower;
WHEREAS, as a condition to the effectiveness of the Company's obligations
under the Loan Agreement, the Subsidiary has agreed, among other things, to
grant to the Company a first-priority security interest in and to the Collateral
hereinafter described;
NOW, THEREFORE, to secure (a) the payment of the principal sum of
_______________ Dollars ($____________), together with interest thereon, in
accordance with the terms of a promissory note dated ____________, 19___, issued
by the Borrower pursuant to the Loan Agreement (the "Note"), (b) the performance
of the covenants herein contained and any monies expended by the Company in
connection therewith, (c) the payment of all obligations and performance of all
covenants of the Borrower under the Loan Agreement, the Unit Pledge Agreements
and all other Security Instruments (as defined in the Loan Agreement) and any
other documents, agreements or instruments between the Borrower or the
Subsidiary and the Company given in connection therewith, and (d) any and all
other indebtedness, obligations and liabilities of any kind of the Borrower
and/or the Subsidiary to the Company now or hereafter existing, direct or
indirect, absolute or contingent, joint and/or several, secured or unsecured,
arising by operation of law or otherwise, and whether incurred by the Subsidiary
as principal, surety, endorser, guarantor, accommodation party or otherwise (all
of the aforesaid indebtedness, obligations and liabilities of the Borrower and/
or the Subsidiary being herein called the "Secured Obligations", and all of the
documents, agreements and instruments between the Subsidiary and the Company
evidencing or securing the repayment of, or otherwise pertaining to the Secured
Obligations being herein collectively called the "Operative Documents"), for
value received and pursuant to the Loan Agreement, the Subsidiary hereby grants,
assigns and transfers to the Company a security interest in and to the following
described property whether now owned or existing or hereafter acquired or
arising and wherever located (all of which is herein collectively called the
"Collateral"):
D-2
<PAGE>
(a) all of the Subsidiary's real estate, accounts, equipment
(including, but not limited to machinery, furniture, fixtures, tools,
vehicles, and other tangible property), inventory, leasehold improvements,
contract rights (including its rights as lessee under all leases of real
property), general intangibles, deposit accounts, tax refunds, chattel
paper, instruments, notes, letters of credit, documents, and documents of
title;
(b) all insurance proceeds of or relating to any of the foregoing;
(c) all of the Subsidiary's books, records, and computer programs and
data relating to any of the foregoing; and
(d) all accessories and additions to, and substitutions for, and
replacements, products and proceeds of, any of the foregoing.
1. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS. The Subsidiary
-----------------------------------------------------
further represents, warrants, covenants, and agrees with the Company as follows:
(a) OWNERSHIP OF COLLATERAL; SECURITY INTEREST PRIORITY. At the time
---------------------------------------------------
any Collateral becomes subject to a security interest of the Company
hereunder, unless the Company shall otherwise consent, the Subsidiary shall
be deemed to have represented and warranted that (i) the Subsidiary is the
lawful owner of such Collateral and has the right and authority to subject
the same to the security interest of the Company; (ii) none of the
Collateral is subject to any lien other than that in favor of the Company
and there is no effective financing statement covering any of the
Collateral on file in any public office, other than in favor of the
Company. This Security Agreement creates in favor of the Company a valid
and perfected first-priority security interest in the Collateral
enforceable against the Subsidiary and all third parties and securing the
payment of the Secured Obligations and all filings and other actions
necessary or desirable to create, preserve or perfect such security
interests have been duly taken.
(b) LOCATION OF OFFICES, RECORDS AND FACILITIES. The Subsidiary's
-------------------------------------------
chief executive office and chief place of business and the office where the
Subsidiary keeps its records concerning its accounts, contract rights,
chattel papers, instruments, general intangibles and other obligations
arising out of or in connection with the sale or lease of goods or the
rendering of services or otherwise ("Receivables"), and all originals of
all leases and other chattel paper which evidence Receivables, are located
in the State of ___________, County of ____________ at
______________________________. The Subsidiary will provide the Company
with prior written notice of any proposed change in the location of its
chief executive office and will not change the location of its chief
executive office without the prior written consent of the Company. The
federal tax identification number of the Subsidiary is ____________. The
name of the Subsidiary is ______________________, and the
D-3
<PAGE>
Subsidiary operates under no other names [except for
"________________________"]. The Subsidiary shall not change its name
without the prior written consent of the Company.
(c) LOCATION OF INVENTORY, FIXTURES, MACHINERY AND EQUIPMENT. All
--------------------------------------------------------
Collateral consisting of inventory, fixtures, machinery or equipment is,
and will be, located within the Development Area, and at no other locations
without the prior written consent of the Company. If the Collateral
described in this paragraph 1(c) is kept at leased locations or warehoused,
the Subsidiary has obtained appropriate landlord's lien waivers or
appropriate warehousemen's notices have been sent, each satisfactory to the
Company, unless waived by the Company.
(d) LIENS, ETC. The Subsidiary will keep the Collateral free at all
----------
times from any and all liens, security interests or encumbrances other than
those described in paragraph 1(a)(ii) hereof and those consented to in
writing by the Company. The Subsidiary will not, without the prior written
consent of the Company, sell or lease, or permit or suffer to be sold or
leased, any of the Collateral except inventory which is sold or, subject to
the Company's security interest therein, is leased in the ordinary course
of the Subsidiary's business, and tangible Collateral which is disposed of
in the ordinary course of the Subsidiary's business as being obsolete. The
Company or its attorneys may at any and all reasonable times inspect the
Collateral and for such purpose may enter upon any and all premises where
the Collateral is or might be kept or located.
(e) INSURANCE. The Subsidiary shall keep the tangible Collateral
---------
insured at all times against loss by theft, fire and other casualties and
shall otherwise comply with the insurance provisions set forth in Section
5.4 of the Loan Agreement.
(f) TAXES, ETC. The Subsidiary will pay promptly, and within the
----------
time that they can be paid without interest or penalty, any taxes,
assessments and similar imposts and charges, not being contested in good
faith, which are now or hereafter may become a lien, charge or encumbrance
upon any of the Collateral. If the Subsidiary fails to pay any such taxes,
assessments or other imposts or charges in accordance with this Section,
the Company shall have the option to do so and the Subsidiary agrees to
repay forthwith all amounts so expended by the Company with interest at the
default rate set forth in the Loan Agreement.
(g) FURTHER ASSURANCES. The Subsidiary will do all acts and things
------------------
and will execute all financing statements and writings requested by the
Company to establish, maintain and continue a perfected and valid security
interest of the Company in the Collateral, and will promptly on demand pay
all reasonable costs and expenses of filing and recording all instruments,
including the costs of any searches deemed necessary by the Company to
establish and determine the validity and the priority of the Company's
security interests. A carbon, photographic or other reproduction of this
Security
D-4
<PAGE>
Agreement or any financing statement covering the Collateral shall be
sufficient as a financing statement.
(h) MAINTENANCE OF TANGIBLE COLLATERAL. The Subsidiary will cause
----------------------------------
the tangible Collateral to be maintained and preserved in the same
condition, repair and working order as when new, ordinary wear and tear
excepted, and in accordance with any manufacturer's manual, and shall
forthwith, or, in the case of any loss or damage to any of the tangible
Collateral as quickly as practicable after the occurrence thereof, make or
cause to be made all repairs, replacements, and other improvements made in
connection therewith which are necessary or desirable to such end. The
Subsidiary shall promptly furnish to the Company a statement respecting any
loss or damage to any of the tangible Collateral.
(i) MAINTENANCE OF INTANGIBLE COLLATERAL. The Subsidiary shall
------------------------------------
preserve and maintain all rights of the Subsidiary and the Company in the
intangible Collateral, including without limitation the payment of all
maintenance fees and the taking of appropriate action at the Subsidiary's
expense to halt the infringement of any of the intangible Collateral.
(j) SPECIAL RIGHTS REGARDING ACCOUNTS RECEIVABLE. The Company or any
--------------------------------------------
of its agents may, at any time and from time to time in its sole discretion
and irrespective of the existence of any event of default under this
Security Agreement, verify directly with the Subsidiary's account debtors
the accounts pledged hereunder in any manner. The Company or any of its
agents may, at any time from time to time in its sole discretion, notify
the Subsidiary's account debtors of the security interest of the Company
in the Collateral and/or direct such account debtors that all payments in
connection with such obligations and the Collateral be made directly to the
Company in the Company's name. If the Company or any of its agents shall
collect such obligations directly from the Subsidiary's account debtors,
the Company or any of its agents shall have the right to resolve any
disputes relating to returned goods directly with the Subsidiary's account
debtors in such manner and on such terms as the Company or any of its
agents shall deem appropriate. The Subsidiary directs and authorizes any
and all of its present and future account debtors to comply with requests
for information from the Company, the Company's designees and agents and/or
auditors, relating to any and all business transactions between the
Subsidiary and the Subsidiary's account debtors. The Subsidiary further
directs and authorizes all of its account debtors upon receiving a notice
or request sent by the Company or the Company's agents or designees to pay
directly to the Company any and all sums of money or proceeds now or
hereafter owing by the Subsidiary's account debtors to the Subsidiary, and
any such payment shall act as a discharge of any debt of such account
debtor to the Subsidiary in the same manner as if such payment had been
made directly to the Subsidiary. The Subsidiary agrees to take
D-5
<PAGE>
any and all action as the Company may request to assist the Company in
exercising the rights described in this Section.
2. EVENTS OF DEFAULT. The occurrence of any Event of Default specified
-----------------
in the Loan Agreement shall be deemed an event of default under this Security
Agreement.
3. REMEDIES. Upon the occurrence of any such event of default, the
--------
Company shall have and may exercise any one or more of the rights and remedies
provided to it under this Security Agreement or any of the other Operative
Documents or provided by law, including but not limited to all of the rights and
remedies of a secured party under the Uniform Commercial Code, and the
Subsidiary hereby agrees to assemble the Collateral and make it available to the
Company at a place to be designated by the Company which is reasonably
convenient to both parties, authorizes the Company to take possession of the
Collateral with or without demand and with or without process of law and to sell
and dispose of the same at public or private sale and to apply the proceeds of
such sale to the costs and expenses thereof (including reasonable attorneys'
fees and disbursements, incurred by the Company) and then to the payment of the
indebtedness and satisfaction of other Secured Obligations. Any requirement of
reasonable notice shall be met if the Company sends such notice to the
Subsidiary, by registered or certified mail, at least five days prior to the
date of sale, disposition or other event giving rise to a required notice. The
Company may be the purchaser at any such sale. The Subsidiary expressly
authorizes such sale or sales of the Collateral in advance of and to the
exclusion of any sale or sales of or other realization upon any other collateral
securing the Secured Obligations. The Company shall have no obligation to
preserve rights against prior parties. The Subsidiary hereby waives as to the
Company any right of subrogation or marshaling of such Collateral and any other
collateral for the Secured Obligations. To this end, the Subsidiary hereby
expressly agrees that any such collateral or other security of the Subsidiary or
any other party which the Company may hold, or which may come to any of them or
any of their possession, may be dealt with in all respects and particulars as
though this Security Agreement were not in existence. The parties hereto
further agree that public sale of the Collateral by auction conducted in any
county in which any Collateral is located or in which the Company or the
Subsidiary does business after advertisement of the time and place thereof
shall, among other manners of public and private sale, be deemed to be a
commercially reasonable disposition of the Collateral. The Subsidiary shall be
liable for any deficiency remaining after disposition of the Collateral.
4. REMEDIES CUMULATIVE. No right or remedy conferred upon or reserved to
-------------------
the Company under any Operative Document is intended to be exclusive of any
other right or remedy, and every right and remedy shall be cumulative in
addition to every other right or remedy given hereunder or now or hereafter
existing under any applicable law. Every right and remedy of the Company under
any Operative Document or under applicable law may be exercised from time to
time and as is often as may be deemed expedient by the Company. To the extent
that it lawfully may, the Subsidiary agrees that it will not at any time insist
upon, plead, or in any manner whatever claim or take any benefit or advantage of
any applicable
D-6
<PAGE>
present or future stay, extension or moratorium law, which may effect observance
or performance of any provisions of any Operative Document; nor will it claim,
take or insist upon any benefit or advantage of any present or future law
providing for the valuation or appraisal of any security for its obligations
under any Operative Document prior to any sale or sales thereof which may be
made under or by virtue of any instrument governing the same; nor will it, after
any such sale or sales, claim or exercise any right, under any applicable law to
redeem any portion of such security so sold.
5. CONDUCT NO WAIVER. No waiver of default shall be effective unless in
-----------------
writing executed by the Company and waiver of any default or forbearance on the
part of the Company in enforcing any of its rights under this Security Agreement
shall not operate as a waiver of any other default or of the same default on a
future occasion or of such right.
6. GOVERNING LAW; DEFINITIONS. This Security Agreement is a contract
--------------------------
made under, and the rights and obligations of the parties hereunder shall be
governed by and construed in accordance with, the laws of the State of Colorado
applicable to contracts made and to be performed entirely within such State.
Terms used but not defined herein shall have the respective meaning ascribed
thereto in the Loan Agreement. Unless otherwise defined herein or in the Loan
Agreement, terms used in Article 9 of the Uniform Commercial Code in the State
of Colorado are used herein as therein defined on the date hereof. The headings
of the various subdivisions hereof are for convenience of reference only and
shall in no way modify any of the terms or provisions hereof.
7. NOTICES. All notices, demands, requests, consents and other
-------
communications hereunder shall be delivered and shall be effective in the manner
specified in Section 9.4 of the Loan Agreement.
8. RIGHTS NOT CONSTRUED AS DUTIES. The Company neither assumes nor
------------------------------
shall it have any duty of performance or other responsibility under any
contracts in which the Company has or obtains a security interest hereunder. If
the Subsidiary fails to perform any agreement contained herein, the Company may
but is in no way obligated to itself perform, or cause performance of, such
agreement, and the expenses of the Company incurred in connection therewith
shall be payable by the Subsidiary under paragraph 11.
9. AMENDMENTS. None of the terms and provisions of this Security
----------
Agreement may be modified or amended in any way except by an instrument in
writing executed by each of the parties hereto.
10. SEVERABILITY. If any one or more provisions of this Security
------------
Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected, impaired or prejudiced thereby.
D-7
<PAGE>
11. EXPENSES. The Subsidiary agrees to indemnify the Company from and
--------
against any and all claims, losses and liabilities growing out of or resulting
from this Security Agreement (including, without limitation, enforcement of this
Security Agreement), except claims, losses or liabilities resulting from the
Company's gross negligence or willful misconduct.
12. SUCCESSORS AND ASSIGNS; TERMINATION. This Security Agreement shall
-----------------------------------
create a continuing security interest in the Collateral and shall (a) remain in
full force and effect until full payment and performance of the Secured
Obligations (b) be binding upon the Subsidiary, its successors and assigns and
(c) inure, together with the rights and remedies of the Company hereunder, to
the benefit of the Company and its successors, transferees and assigns. Upon
the full payment and performance of the Secured Obligations the security
interests granted hereby shall terminate and all rights to the Collateral shall
revert to the Subsidiary. Upon any such termination, the Company will, at the
Subsidiary's expense, execute and deliver to the Subsidiary such documents as
the Subsidiary shall reasonably request to evidence such termination.
13. SUBMISSION TO JURISDICTION. The Subsidiary agrees that any legal
--------------------------
action or proceeding with respect to this Security Agreement or the transactions
contemplated hereby may be brought in any court of the State of Colorado, or in
any court of the United States of America sitting in Colorado, and the
Subsidiary hereby submits to and accepts generally and unconditionally the
jurisdiction of those courts with respect to their respective person and
property, and irrevocably consents to the service of process in connection with
any such action or proceeding by personal delivery to the Subsidiary or by the
mailing thereof by registered or certified mail, postage prepaid addressed to
the Subsidiary at the address for notices as provided in Section 7 hereof.
Nothing in this paragraph shall affect the right of the Company to serve process
in any other manner permitted by law or limit the right of the Company to bring
any such action or proceeding against the Subsidiary or property in the courts
of any other jurisdiction. The Subsidiary hereby irrevocably waives any
objection to the laying of venue of any such suit or proceeding in the above
described courts.
14. WAIVER OF JURY TRIAL. No party to this instrument, which includes any
--------------------
assignee, successor, heir or personal representative of a party, shall seek a
jury trial in any lawsuit, proceeding, counterclaim, or any other litigation
procedure based upon, or arising out of this Agreement, any related instrument,
or the dealings or the relationship between the parties. If the subject matter
of any such litigation is one in which the waiver of a jury trial is prohibited,
if at all, under the controlling law of the applicable jurisdiction, by
constitutional or statutory provision, no party hereto will present as a defense
or counterclaim in such litigation any claim which would reduce or offset any
amount or right claimed under the provisions of this Agreement. No party will
seek to consolidate any such action, in which a jury has been waived, with any
other action in which a jury trial cannot or has not been waived.
D-8
<PAGE>
THE PROVISIONS OF THIS Section 14 HAVE BEEN FULLY DISCUSSED BY THE PARTIES
HERETO, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY HAS IN
ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF
THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. THIS PROVISION IS A
MATERIAL INDUCEMENT FOR THE COMPANY IN ENTERING INTO THIS AGREEMENT.
IN WITNESS WHEREOF, the Subsidiary has caused this Security Agreement to be
duly executed as of the day and year first set forth above.
[NAME OF SUBSIDIARY]
By:_________________________________________
Its:_____________________________________
D-9
<PAGE>
EXHIBIT E
---------
FORM OF CERTIFICATE TO ACCOMPANY ADVANCES
-----------------------------------------
E-1
<PAGE>
CERTIFICATE FOR ADVANCES
------------------------
The undersigned, the _______________ of _________________, Inc., the
manager of ______________________________ (the "DEVELOPER"), borrower under that
certain Secured Loan Agreement dated ___________, 1996 (the "Loan Agreement")
between the DEVELOPER and Einstein/Noah Bagel Corp. (the "Company"), hereby
requests a Loan Advance in the amount of $__________ to be made on __________,
19__.
In support of this request, the DEVELOPER hereby represents and warrants to
the Company as follows:
1. The amount of the Advance is required and will be used by the
DEVELOPER for the purposes permitted under Section 1.2 of the Loan Agreement and
for no other purposes.
2. The representations and warranties contained in Article IV of the Loan
Agreement and in the Security Instruments delivered in connection therewith are
true and correct on and as of the date hereof, and will be true and correct on
the date such Advances are made.
3. No Default or Event of Default has occurred or is continuing.
4. All of the conditions to Advances set forth in Article III of the Loan
Agreement have been satisfied.
5. DEVELOPER has expended at least 75% of its equity capital (other than
equity represented by the Member Notes) for the purposes set forth in the Loan
Agreement and for no other purposes.
6. DEVELOPER is in compliance with the Development Schedule.
7. The amount of the requested Advance is the amount DEVELOPER reasonably
expects (and which DEVELOPER reasonably believes is necessary) to expend within
the 60-day period immediately following the receipt of the Advance to purchase,
design, construct and equip Stores in accordance with Section 1.2 of the Loan
Agreement that are scheduled to open within 6 months of the Advance date.
Capitalized terms used but not defined herein have the meanings ascribed
thereto in the Loan Agreement.
Date: ____________________, 199_
______________________________
E-2
<PAGE>
EXHIBIT F
---------
FORM OF OPINION OF COUNSEL
--------------------------
F-1
<PAGE>
[Form of Opinion of Counsel]
[Date]
Einstein/Noah Bagel Corp.
1526 Cole Blvd., Suite 200
Golden, CO 80401
Re:
Ladies and Gentlemen:
We have acted as counsel for ______________________________, a Delaware
limited liability company (the "Company") in connection with the preparation,
execution, and delivery of the Documents (as hereinafter defined). This opinion
is furnished to you pursuant to Section 7.1 of the Agreement (as hereinafter
defined). As used herein, the term "State" means the State of [opining
jurisdiction] and the term "UCC" means the Uniform Commercial Code as in effect
in the State on the date hereof. Other capitalized terms used herein and not
otherwise defined herein have the meanings provided in the Agreement.
The documents we have examined in rendering this opinion are the following:
(i) The following, collectively called the "Documents":
(a) the Secured Loan Agreement (the "Agreement"), of even date
herewith, between the Company and Einstein/Noah Bagel Corp. ("ENBC");
(b) the Convertible Secured Note of the Company, of even date
herewith and delivered pursuant to the Agreement (the " Note");
(c) the Unit Pledge Agreement (the "Pledge Agreement");
[(d) the Subsidiary Security Agreement, dated of even date
herewith between ____________________ and ENBC pursuant to the
Agreement (the "Subsidiary Security Agreement"); and]
(e) The Development Agreement, of even date herewith, by and
between the Company and ENBC, as amended by [as applicable] (the
"Development Agreement")
(f) [other documents as applicable]
F-2
<PAGE>
(ii) A certificate of the Secretary of the Company certifying as to
(A) the certificate of formation and LLC Agreement of the Company and (B)
evidence of authorization of the transactions contemplated by the
Documents;
(iii) Copies of those indentures, loan or credit agreements, leases,
guarantees, mortgages, security agreements, bonds, notes and other
agreements or instruments, and orders, writs, judgments, awards,
injunctions and decrees, which have been certified by the Secretary of the
Company as those documents which affect or purport to affect the Company's
right to borrow money under, or right to undertake and perform its
obligations under, the Documents (collectively, the "Other Agreements and
Court Orders"), a copy of which certificate is attached hereto as Exhibit
-------
A; and
-
(iv) A certificate of the Secretary of State of the State of
Delaware, dated ________________, attesting to the continued existence and
good standing of the Company in that state.
We have also examined such other documents and records, and other
certificates, opinions and instruments and have conducted such investigation as
we have deemed necessary as a basis for the opinions expressed below. As to
factual matters relevant to our opinions expressed below, we have, without
independent investigation, relied upon all of the foregoing, upon the factual
representations made by the Company in Article VI of the Agreement, upon
certificates of the officers of the Company and of public officials, and upon
public records.
Based upon and subject to the matters stated herein and upon such
investigation as we have deemed necessary, we are of the opinion that:
1. The Company is a limited liability company duly organized,
validly existing, and in good standing under the laws of the state of its
formation, with corporate power and authority to enter into the Agreement
and to issue the Note and incur the indebtedness to be evidenced thereby.
[2. The Subsidiary is a corporation duly organized, validly existing,
and in good standing under the laws of the state of its incorporation, with
corporate power and authority to enter into the Documents to which it is a
party.]
3. Each of the Documents to which the Company is a party has been
duly authorized by all required action on the part of the Company, and each
of them has been duly executed and delivered by the Company, and
constitutes the legal, valid, and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
[4. Each of the Documents to which the Subsidiary is a party has been
duly authorized by all required corporate action on the part of the
Subsidiary, and each of
F-3
<PAGE>
them has been duly executed and delivered by the Subsidiary, and
constitutes the legal, valid, and binding obligation of the Subsidiary,
enforceable against the Subsidiary in accordance with its terms.]
5. The execution and delivery of the Documents and the performance
by the Company of its obligations thereunder, will not conflict with or
result in any breach of any of the provisions of, or constitute a default
under, or result in the creation or imposition of any lien or encumbrance
upon any of the properties of the Company pursuant to the provisions of (a)
its certificate of formation or LLC Agreement, (b) any of the Other
Agreements and Court Orders, or (c) any law, rule, or regulation including
without limitation Regulation G, T, U or X of the Board of Governors of the
Federal Reserve.
[6. The execution and delivery of the Documents and the performance
by the Subsidiary of its obligations thereunder, will not conflict with or
result in any breach of any of the provisions of, or constitute a default
under, or result in the creation or imposition of any lien or encumbrance
upon any of the properties of the Subsidiary pursuant to the provisions of
(a) its Certificate of Incorporation or bylaws, (b) any of the Other
Agreements and Court Orders, or (c) any law, rule, or regulation including
without limitation Regulation G, T, U or X of the Board of Governors of the
Federal Reserve.]
7. To the best of our knowledge, no consent, authorization,
appraisal, or other action by, and no notice to or filing with, any
governmental authority or regulatory body or any other person, which has
not been obtained or taken, is required for the execution and delivery of,
or the performance by the Company [or the Subsidiary] of their respective
obligations under, each of the Documents.
8. Under applicable law, the Company's certificate of formation or
LLC Agreement, and all contracts, agreements, or restrictions known by us
to bind the Company, the vote of the holders of a majority of the Voting
Units is sufficient to elect the manager or managers of the Company,
approve the merger, consolidation, or sale of substantially all of the
assets of the Company, or take any other action whatsoever.
9. The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
10. The Company is not a "holding company", or a "subsidiary company"
of a "holding company", or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company" within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
F-4
<PAGE>
11. The Agreement creates a valid security interest in your favor as
security for the payment of the obligations of the Company under the
Agreement and the Note in all of the Company's right, title, and interest
in and to all personal property (the "Code Collateral") included within the
definition of the term Collateral (as defined in the Agreement) in which a
security interest can be granted under the UCC and Non-[opining
jurisdiction] Codes (as such term is hereinafter defined)./1/ We have
examined the financing statements (the "Financing Statements") to be filed
in the filing offices listed on Annex I attached hereto (the "Filing
-------
Offices") with respect to the security interests granted to ENBC pursuant
to the Agreement, and upon the filing of such Financing Statements in the
Filing Offices, and assuming that the representations made in the Agreement
with respect to the location of the Code Collateral and the chief executive
office of the Company are and remain true and correct: (a) all filings,
registrations and recordings necessary to perfect the security interest
granted to you under such Agreement in respect of all Code Collateral in
which a security interest may be perfected by filing a financing statement
in the Filing Offices will have been accomplished; and (b) the security
interests granted to you pursuant to such Agreement in and to such Code
Collat eral will be perfected to the extent that such security interests
may be perfected by filing financing statements in the Filing Offices under
the UCC and the Non-[opining jurisdiction] Codes.
[12. The Subsidiary Security Agreement creates a valid security
interest in your favor as security for the payment of the obligations of
the Company under the Agreement and the Note in all of the Subsidiary's
right, title, and interest in and to all personal property (the "Code
Collateral") included within the definition of the term Collateral (as
defined in the Agreement) in which a security interest can be granted under
the UCC and Non-[opining jurisdiction] Codes (as such term is hereinafter
defined)./2/ We have examined the financing statements (the "Financing
Statements") to be filed in the filing offices listed on Annex I attached
-------
hereto (the "Filing Offices") with respect to the security interests
granted to ENBC pursuant to the Subsidiary Security Agreement, and upon the
filing of such Financing Statements in the Filing Offices, and assuming
that the representations made in the Subsidiary Security Agreement with
respect to the location of the Code Collateral and the chief executive
office of the Subsidiary are and remain true and correct: (a) all filings,
registrations and recordings necessary to perfect the security interest
granted to you under such Subsidiary Security Agreement in respect of all
Code Collateral in which a security interest may be perfected by filing a
financing
______________________
/1/* Opinion with respect to the perfection of security interests in Non-Opining
Jurisdictions is only required when the Company has code Collateral or its chief
executive office outside of the Non-Opining Jurisdiction.
/2/* Opinion with respect to the perfection of security interests in Non-Opining
Jurisdictions is only required when the Company has code Collateral or its chief
executive office outside of the Non-Opining Jurisdiction.
F-5
<PAGE>
statement in the Filing Offices will have been accomplished; and (b) the
security interests granted to you pursuant to such Subsidiary Security
Agreement in and to such Code Collateral will be perfected to the extent
that such security interests may be perfected by filing financing
statements in the Filing Offices under the UCC and the Non-[opining
jurisdiction] Codes.]
13. The Pledge Agreement create a valid security interest in your
favor as security for payment of the Secured Obligations in the Collateral
(as such terms are defined in the Pledge Agreement). The security
interests created in your favor under the Pledge Agreement with respect to
such Pledged Units constitute perfected security interests in such Pledged
Units.
In addition to any assumptions, qualifications and other matters set forth
elsewhere herein, the opinions set forth above are subject to the following:
(a) For the purposes of this opinion, we have assumed that the Code
Collateral exists and the Company and the Subsidiary have rights or title
to each item thereof, that all natural persons have legal capacity, that
all items submitted to us as originals are authentic and all signatures
thereon are genuine, that all items submitted to us as copies conform to
the originals and each such original or copy is complete and has been duly
executed and delivered by each party (other than the Company and the
Subsidiary) pursuant to due authorization as such party's legal, valid, and
binding obligation, enforceable against such party in accordance with its
respective terms.
(b) Our opinion with respect to the legality, validity, binding
effect, and enforceability of any document or agreement is subject to the
effect of any applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium, or similar law affecting creditors' rights
generally and to the effect of general principles of equity, including
(without limitation) concepts of materiality, reasonableness, good faith,
and fair dealing (regardless of whether considered in a proceeding in
equity or at law).
(c) We call your attention to the following matters (as well as those
matters set out in paragraph (d) below) as to which we express no opinion:
(i) the Company's agreement in the Agreement to indemnify you
against costs, expenses, or liability notwithstanding your acts of
gross negligence or willful misconduct;
(ii) the Company's agreements in the Agreement for payment or
reimbursement of costs, fees, and expenses or indemnification for
claims, losses, or liabilities to the extent any such provision may be
determined by a court or other tribunal to be in an unreasonable
amount, to constitute a penalty, or to be contrary to public policy;
F-6
<PAGE>
(iii) any of the waivers or remedies contained in the Documents,
whether or not any Document deems any such waiver or remedy
commercially reasonable, if such waivers or remedies are determined
(1) not to be commercially reasonable within the meaning of the UCC,
(2) to conflict with mandatory provisions under the UCC or other
applicable law, or (3) to be taken in a manner determined to be
unreasonable or not performed in good faith or with fair dealing or
with honesty in-fact;
(iv) certain other provisions contained in the Documents which
may be limited or rendered ineffective by applicable laws or judicial
decisions governing such provisions or holding their enforcement to be
unreasonable under the then-existing circumstances, but such laws and
judicial decisions do not, in our opinion, render the Documents
invalid as a whole or leave you without remedies; or
(v) the priority or continued perfection of any security
interest or lien granted by the Company to you under any of the
Documents.
(d) Our opinions set forth in paragraph 8 above are subject to the
following further qualifications, exclusions and assumptions:
(i) Our opinions are qualified by and subject to:
(A) in the case of proceeds, continuation of perfection
of your security interest therein is limited to the extent set
forth in Section 9-306 of the UCC;
(B) in the case of property which becomes collateral
after the date hereof, Section 547 of the United States
Bankruptcy Code (the "Bankruptcy Code") provides that a transfer
is not made until the debtor has rights in the property
transferred, so a security interest in after-acquired property
which is security for other than a contemporaneous advance may be
treated as a voidable preference under the conditions (and
subject to the exceptions) provided by Section 547;
(C) Section 552 of the Bankruptcy Code limits the extent
to which property acquired by a debtor after the commencement of
the case under the Bankruptcy Code may be subject to a security
interest arising from a security agreement entered into by the
debtor before the commencement of such case; and
F-7
<PAGE>
(D) Section 364 of the Bankruptcy Code provides that the
extension of secured credit after the commencement of a case
under the Bankruptcy Code requires court approval.
(ii) We express no opinion as to:
(A) the creation or perfection of any security interest
in any fixtures or property excluded from the provisions of the
UCC pursuant to 9-104; and
(B) the perfection of any security interest in accounts
that are an obligation of the Federal government or any agency or
political subdivision thereof to the extent that any applicable
laws require any actions in addition to filing of the Financing
Statements.
(iii) We have assumed with your permission that:
(A) the Company has right, title, and interest in and to
the collateral pledged by it;
(B) all items of collateral (including, without
limitation, money, Units, or additional instruments) pledged
under the Pledge Agreement, of which possession must be obtained
and retained by a secured party in order to perfect its security
interest pursuant to Section 9-103 and 9-304 of the UCC, are in
your actual or constructive possession and not in the possession
of the Company or any of its subsidiaries, affiliates, or agents;
(C) all items of collateral constitute items which are
mobile in nature and, if installed on any property, do not
constitute fixtures; and
(D) none of the collateral consists of consumer goods,
farm products, crops, timber, minerals, or the like (including
oil and gas), or accounts resulting from the sale thereof,
receivables due from any govern ment or agency or department
thereof, beneficial interests in a trust or a decedent's estate,
letters of credit, inventory which is subject of any negotiable
documents of title, such as a negotiable bill of lading or
warehouse receipt held by anyone other than you or on your
behalf, or items which are subject to a requirement of any
jurisdiction, including the State, which provides for a
registration or certificate of title or a filing other than under
the UCC.
Whenever our opinion with respect to the existence or absence of facts is
indicated to be based on our knowledge or awareness, we are referring solely to
the actual knowledge of the
F-8
<PAGE>
particular [firm name] attorneys who have represented the Company in connection
with the Documents. Except as expressly set forth herein, we have not
undertaken any independent investigation to determine the existence or absence
of such facts and no inference as to our knowledge concerning such facts should
be drawn from the fact that such representation has been undertaken by us.
Our opinions expressed herein are limited to the laws of the State of
[opining jurisdiction], [the general corporation law of the state of the
Company's and Subsidiary's incorporation if different than the opining
jurisdiction] and the federal laws of the United States, and we do not express
any opinion herein concerning any other law except as expressly set forth in
paragraph 8 above. With respect to our opinions in paragraph 8, to the extent
our opinions are not governed by federal or [opining jurisdiction] law, our
opinions are based solely and exclusively on a review of Subsections 9-103(3),
9-203(1) and (2), 9-302(1), 9-303, 9-401(1) and 9-402(1) and (3) of the Uniform
Commercial Codes as reported by [Commerce Clearing House, Inc. in the Secured
Transactions Guide for the states listed on Annex I] (collectively, the states
listed on Annex I are sometimes referred to herein as the "Non-[opining
jurisdiction] Jurisdictions" and the Uniform Commercial Codes as adopted and in
effect in such Non-[opining jurisdiction] Jurisdictions are sometimes called the
"Non-[opining jurisdiction] Codes"). We have not reviewed, and we express no
opinion on, local custom with respect to, and any other sections of, the Non-
[opining jurisdiction] Codes, including any provisions that are referred to in
the sections that we have reviewed which are noted above, nor have we reviewed
any other statutes of the Non-[opining jurisdiction] Jurisdictions or judicial
decisions construing or interpreting the laws of the Non-[opining jurisdiction]
Jurisdictions, including the Non-[opining jurisdiction] Codes. By rendering the
opinions set forth in paragraph 8 we do not intend to indicate that we are
experts on, or qualified to render opinions on, the laws of the Non-[opining
jurisdiction] Jurisdictions. Accordingly, we caution you that the opinions in
paragraph 8 could be materially affected by local custom, other provisions of
the Non-[opining jurisdiction] Codes, other statutes, laws, or regulations of
the Non-[opining jurisdiction] Jurisdictions or judicial decisions of courts
construing or interpreting the laws of the Non-[opining jurisdiction]
Jurisdictions, including the Non-[opining jurisdiction] Codes.
This opinion is furnished to you solely in connection with the transactions
described above and may not be relied upon by you (and to the extent indicated
in the previous sentence, your counsel) for any other purpose or by any other
person in any manner or for any purpose.
Very truly yours,
F-9
<PAGE>
Annex 1
UCC-1 Financing Statement filings to perfect a security interest in collateral
not constituting fixtures:
STATE FILING OFFICE REPORTING PUBLICATION
- ----- ------------- ---------------------
F-10
<PAGE>
EXHIBIT A
---------
CERTIFICATE
-----------
The undersigned hereby certifies that he is the duly elected Secretary of
___________________________, a Delaware limited liability company (the
"Company"), and further certifies that the following documents are the only
documents to which the Company is a party that affect or purport to affect the
Company's right to borrow money under, or the Company's right to undertake and
perform its obligations under, the Documents (as defined in the Secured Loan
Agreement, dated _______________, between the Company and Einstein/Noah Bagel
Corp.)
Date:______________________________
_____________________________________
Secretary
F-11
<PAGE>
EXHIBIT G
---------
ACCOUNTING AND ADMINISTRATION SERVICES AGREEMENT
------------------------------------------------
G-1
<PAGE>
ACCOUNTING AND ADMINISTRATION SERVICES AGREEMENT
------------------------------------------------
This Accounting and Administration Services Agreement ("Agreement") is made
the ___ day of _____, 1996, by and between _________________________, a Delaware
limited liability company ("DEVELOPER"), and Einstein/Noah Bagel Corp., a
Delaware corporation ("Company").
RECITALS
--------
1. Company and DEVELOPER have entered into an Area Development Agreement
dated _________, 1996, as amended (the "ADA"), and have entered into or propose
to enter into one or more franchise agreements (each a "Franchise Agreement"
and, collectively, the "Franchise Agreements"), each providing for the franchise
by the Company to DEVELOPER of the right to operate an einste!n Bros. store.
2. Pursuant to the ADA and/or the Franchise Agreements, DEVELOPER is
required to maintain certain accounting records and provide to Company certain
periodic financial reports and other data.
3. DEVELOPER has requested and Company has offered that Company assist
DEVELOPER in maintaining certain accounting records and preparing certain
financial reports required under the ADA and/or the Franchise Agreements.
4. DEVELOPER desires to enter into an agreement pursuant to which Company
would perform such services for DEVELOPER upon the terms and subject to the
conditions hereinafter provided.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein, as well as other good and valuable consideration, the
sufficiency and receipt of which are hereby acknowledged, the parties hereby
agree as follows:
1. ACCOUNTING SERVICES.
-------------------
1.1 Upon the terms and subject to the conditions set forth in this
Agreement, Company shall provide to DEVELOPER for each einste!n Bros. store and
for each bagel store to be converted into an einste!n Bros. store operated by
DEVELOPER pursuant to the ADA (each a "Unit") the following accounting services
(the "Services"):
G-2
<PAGE>
(a) per-Unit calculation of revenue and expenses by accounting
category per Company's standard chart of accounts and calculation of
Royalty Based Revenue and Royalty Fees (as each term is defined in the
Franchise Agreements);
(b) administration and maintenance of corporate payroll, and
administration of the processing of payroll and calculation of applicable
tax and other withholdings relating to the Units through Company's
designated payroll service bureau;
(c) administration of accounts payable (including check generation);
(d) administration of recurring cash transfers between DEVELOPER's
applicable Unit and corporate bank accounts;
(e) administration and maintenance of a DEVELOPER general ledger
trial balance, balance sheet, income statement and certain other corporate
and Unit reports by accounting category per Company's standard chart of
accounts and consistent with periodic reports Company customarily prepares
in the normal course of business to manage its financial affairs, and
periodic distribution of such reports to DEVELOPER using Company's Report
Distribution System;
(f) maintenance of all accounting records supporting DEVELOPER's
financial statements (consistent with Company's record retention program)
in reasonable fashion separate and discrete from the accounting records of
Company; and
(g) preparation of period end reconciliations and associated period
end journal entries for all DEVELOPER balance sheet accounts.
1.2 The Services shall not include any of the following, each of which is
the sole responsibility of DEVELOPER:
(a) selection of accounting policies to be applied to DEVELOPER's
books and records; however, Company will consistently apply the appropriate
policies selected by DEVELOPER;
(b) negotiation of terms and conditions between DEVELOPER and its
suppliers, vendors, and others, such as remittance due dates and discounts;
(c) quarterly review and edit of DEVELOPER's vendor masterfile for
current and accurate data; however, Company will appropriately apply
updates to the vendor masterfile as directed by DEVELOPER;
(d) signature and final release of trade accounts payable
disbursement checks in excess of $200,000;
G-3
<PAGE>
(e) final review and approval of annual financial statements;
(f) cash investment activities; however, Company will initiate and
manage repetitive and/or fixed cash management activities as directed in
writing by DEVELOPER;
(g) approval and coding of invoices for disbursement;
(h) preparation of budgets (except that Company will develop a budget
process and calendar to facilitate the preparation of annual budgets by
DEVELOPER, which DEVELOPER agrees to adopt and adhere to); and
(i) preparation, filing, or signing of any tax returns required to be
filed by DEVELOPER, with the exception of sales and use tax returns which
will be prepared, but not, however, filed or signed by Company.
1.3 DEVELOPER agrees to effectively apply locally the policies and
procedures defined in Company's Accounting Manual (and in particular Accounting
Policy and Procedures Bulletin 93-13), as the same may be modified and updated
from time to time, on a timely basis, which actions and compliance shall be a
condition to Company's obligations hereunder.
1.4 DEVELOPER agrees to utilize Company's designated auditors and tax
consultants for annual audit and tax return preparation activities.
1.5 DEVELOPER agrees to utilize Company's designated bankers (except for
Unit bank accounts) and credit card processors for all corporate cash management
activities.
1.6 DEVELOPER agrees to supply Company all information, materials, data,
and documents necessary or advisable to properly perform the Services in such
form, format, or media as Company may reasonably request, to make available the
officers of DEVELOPER to answer any inquiries in connection therewith, and to
cooperate with Company in the performance of its duties.
2. FEES FOR SERVICES AND EXPENSE REIMBURSEMENT.
-------------------------------------------
2.1 In consideration of the Services, DEVELOPER agrees to pay to Company,
separate and apart from any fee otherwise payable under the ADA or any Franchise
Agreement, an accounting services fee, as follows:
(a) a base fee for services to DEVELOPER payable by DEVELOPER for
each four-week accounting period of Company ("Accounting Period") of $4,500
(the "Base Fee"); and
G-4
<PAGE>
(b) a unit fee for each Unit open and operating during all or any
portion of such Accounting Period, which unit fee shall depend on the
number of Units directly owned and operated by DEVELOPER pursuant to the
ADA, and shall be equal to:
(i) $850 per Accounting Period for each such Unit open and
operating during all or any portion of such Accounting Period, until
DEVELOPER opens and operates 12 or more Units;
(ii) $750 per Accounting Period after DEVELOPER opens its 12th
Unit and prior to the opening of the 30th Unit open and operating
during all or any portion of such Accounting Period;
(iii) $650 per Accounting Period after DEVELOPER opens its 30th
Unit and prior to the opening of the 50th Unit open and operating
during all or any portion of such Accounting Period;
(iv) $550 per Accounting Period after DEVELOPER opens its 50th
Unit and prior to the opening of the 100th Unit open and operating
during all or any portion of such Accounting Period;
(v) $450 per Accounting Period after DEVELOPER opens its 100th
Unit and prior to the opening of the 200th Unit open and operating
during all or any portion of such Accounting Period; and
(vi) $350 per Accounting Period after DEVELOPER opens its 200th
Unit and for all Units opened thereafter during all or any portion of
such Accounting Period.
In the event that DEVELOPER and the Units meet certain reporting
requirements, administrative procedure compliance requirements, and timeliness
deadlines as Company may establish and announce from time to time in its sole
discretion, the unit fees set forth in (i) through (vi), above shall be reduced
for DEVELOPER to $700, $600, $500, $400, $300, and $250, respectively.
DEVELOPER agrees that the foregoing fees (base fee and unit fees) may be
increased cumulatively by not more than 10% per fiscal year at the sole
discretion of Company effective upon written notice thereof.
2.2 In addition to the payment of fees as specified in Section 2.1 of this
Agreement, DEVELOPER shall reimburse Company for all non-ordinary, out-of-pocket
expenses incurred by Company or its affiliates in connection with the Services
rendered by them hereunder, including, but not limited to, travel expenses,
legal fees, fees of experts, audit fees, tax fees, payroll service fees, etc.
All non-ordinary, out-of-pocket expenses, however, must be approved
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<PAGE>
by DEVELOPER prior to incurring such expense. Expenses payable under this
Section 2.2 shall be paid promptly in the manner specified in Section 4.1 of
this Agreement. These expenses will not include any expenses associated with
computer system enhancements at the Company's Support Center, except as
otherwise agreed to by the parties.
3. TERM OF SERVICES.
----------------
3.1 The term of this Agreement shall be for one year from the effective
date hereof unless the parties mutually agree to extend such term; provided that
either party hereto may terminate this Agreement during the term upon 180 days'
prior written notice to the other party; and provided further that Company may
terminate this Agreement without notice and cease rendering the Services, also
without notice, upon any non-payment by DEVELOPER of the fees and expenses
provided for herein when such fees and expenses are due and payable.
3.2 Termination of this Agreement shall terminate Company's obligations to
provide the Services. Upon termination of this Agreement, DEVELOPER shall pay
to Company the fees due Company in accordance with Section 2.1 hereof for the
Services rendered by Company through the date of termination and reimburse
Company in accordance with Section 2.2 hereof for expenses incurred by Company
in connection with the Services rendered by Company through the date of
termination.
4. PAYMENT OF AMOUNTS DUE HEREUNDER; LIABILITY.
-------------------------------------------
4.1 Company will calculate and DEVELOPER hereby authorizes Company to
collect through electronic funds transfer, at the end of each Accounting Period,
the total dollar amount of all fees and expenses due to Company hereunder.
4.2 Company shall not be liable for any cost, damage, expense, or loss of
DEVELOPER or its owners, partners, shareholders, officers, members, directors,
employees, suppliers, or vendors, or any other person or entity arising or
resulting, directly or indirectly, from (i) the failure of Company to perform
any of the Services for DEVELOPER or the misperformance of any such Services,
except to the extent such failure to perform or such misperformance is the
result of Company's willful misconduct or gross negligence, in which event
Company's liability shall not exceed its fee for such hereunder for the
Accounting Period in question, or (ii) reliance by DEVELOPER, its owners,
partners, shareholders, officers, members, directors, employees, suppliers, or
vendors, or any other person or entity on any data or advice Company may provide
pursuant to this Agreement. In no event will Company be liable for indirect,
incidental, consequential, special, speculative, exemplary, or punitive damages
(including, but not limited to, loss of revenue or profit).
4.3 COMPANY MAKES NO WARRANTY OR REPRESENTATION, EITHER EXPRESS OR
IMPLIED, WITH RESPECT TO THE SERVICES PROVIDED HEREUNDER, INCLUDING, BUT NOT
LIMITED TO, THEIR ADEQUACY, QUALITY,
G-6
<PAGE>
PERFORMANCE, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE.
5. MISCELLANEOUS.
-------------
5.1 In performing the Services set forth in this Agreement, Company will
have neither express nor implied power to execute agreements on behalf of
DEVELOPER or in any manner bind DEVELOPER as to any matter not within the scope
of this Agreement.
5.2 All notices provided for in this Agreement shall be in writing and
shall be deemed to have been duly given if delivered personally or sent by
overnight express or facsimile transmission or registered or certified mail,
return receipt requested, postage prepaid, and properly addressed as follows:
If to DEVELOPER: _____________________________________________
_____________________________________________
_____________________________________________
Attn: _______________________________________
Facsimile:___________________________________
If to Company: Einstein/Noah Bagel Corp.
1526 Cole Blvd., Suite 200
Golden, CO 80401
Attention: Chief Financial Officer
Facsimile: (303) 202-3360
with a copy to: Einstein/Noah Bagel Corp.
1526 Cole Blvd., Suite 200
Golden, CO 80401
Attention: General Counsel
Facsimile: (303) 202-3490
Any party may change the address to which notices hereunder are to be sent to it
by giving written notice of such change of address in the manner herein provided
for giving notice. Any notice delivered personally or by overnight express
courier or facsimile transmission shall be deemed to have been given on the date
it is so delivered, and any notice delivered by registered or certified mail
delivery service shall be deemed to have been duly given three business days
after it is sent to the intended recipient at the address set forth above.
5.3 THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF COLORADO APPLICABLE TO
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<PAGE>
CONTRACTS MADE AND TO BE PERFORMED THEREIN WITHOUT REGARD TO THE CONFLICT OF LAW
PROVISIONS THEREOF.
5.4 A failure of any party to insist in any instance upon the strict and
punctual performance of any provision of this Agreement shall not constitute a
continuing waiver of such provision. No party shall be deemed to have waived any
rights, power, or privilege under this Agreement or any provisions hereof unless
such waiver shall have been in writing and duly executed by the party to be
charged with such waiver, and such waiver shall be a waiver only with respect to
the specific instance involved and shall in no way impair the rights of the
waiving party or the obligations of the other party or parties in any other
respect or at any other time. If any provision of this Agreement shall be
waived, or be invalid, illegal, or unenforceable, the remaining provisions of
this Agreement shall be unaffected thereby and shall remain binding and in full
force and effect.
5.5 This Agreement may be amended or modified only by a written instrument
signed by each of the parties hereto.
5.6 This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof, and supersedes all prior
agreements and understandings, either or oral or written, with respect thereto.
5.7 Nothing contained in this Agreement is intended, nor shall it be
construed, to create any rights in any person not a party to this Agreement.
5.8 This Agreement may not be assigned by DEVELOPER without the prior
written consent of Company.
G-8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
EINSTEIN/NOAH BAGEL CORP.
By:_________________________________________
Title:___________________________________
____________________________________________
By:_____________________________, Inc.,
its Manager
By:_______________________________
Title:_________________________
G-9
<PAGE>
EXHIBIT H
---------
INVESTOR REPRESENTATION LETTER
------------------------------
H-1
<PAGE>
LETTER HEAD OF INVESTOR
Einstein/Noah Bagel Corp.
1526 Cole Boulevard, Suite 200
Golden, Colorado 80401
Ladies and Gentlemen:
The undersigned hereby makes the following representations to Einstein/Noah
Bagel Corp. (the "Company") in connection with and as an inducement to and of
the consummation of certain transactions with ______________________________, a
Delaware limited liability company (the "Developer").
The undersigned has conducted an investigation of the Developer, including
the management and current and proposed operations of the Developer, and of the
locations, characteristics and demographics of (i) the sites for einste!n Bros.
stores in the Development Area (as defined in the Development Agreement by and
between the Company and the Developer of even date herewith) subject to executed
leases or purchase contracts (the "Leased and Contracted Sites"), and (ii) the
potential sites for einste!n Bros. stores being negotiated in the Development
Area (the "Sites in Progress"), in each case to be purchased by the Developer
from the Company. The undersigned has reviewed all of the documents, records,
reports and other available materials relating to the Developer's operations,
the Leased and Contracted Sites and the Sites in Progress, and is familiar with
their content. The undersigned acknowledges that it has been given access to and
has visited and examined the Developer's operations and the Leased and
Contracted Sites and the Sites in Progress, and is satisfied with the condition
thereof and that all inquiries have been answered to its satisfaction. For
purposes of conducting these investigations, the undersigned has employed the
services of its own agents, representatives, experts and consultants. In all
matters affecting the undersigned's decision to invest in the Developer, the
undersigned is relying upon the advice and opinions of its own agents,
representatives, experts and consultants and not upon any information or
statement, oral or written, of or provided by the Company or its officers,
directors, agents, representatives or attorneys.
Very truly yours,
H-2
<PAGE>
ITEM 23
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RECEIPT
THIS OFFERING CIRCULAR SUMMARIZES PROVISIONS OF THE FRANCHISE AGREEMENT AND
OTHER INFORMATION IN PLAIN LANGUAGE. READ THIS OFFERING CIRCULAR AND ALL
AGREEMENTS CAREFULLY.
IF ENBC OFFERS YOU A FRANCHISE, IT MUST PROVIDE THIS OFFERING CIRCULAR TO YOU BY
THE EARLIEST OF:
A. THE FIRST PERSONAL MEETING TO DISCUSS ENBC's FRANCHISE; OR
B. TEN BUSINESS DAYS BEFORE SIGNING OF A BINDING AGREEMENT; OR
C. TEN BUSINESS DAYS BEFORE ANY PAYMENT TO ENBC.
YOU MUST ALSO RECEIVE A FRANCHISE AGREEMENT CONTAINING ALL MATERIAL TERMS AT
LEAST FIVE BUSINESS DAYS BEFORE YOU SIGN ANY FRANCHISE AGREEMENT.
IF ENBC DOES NOT DELIVER THIS OFFERING CIRCULAR ON TIME OR IF IT CONTAINS A
FALSE OR MISLEADING STATEMENT, OR A MATERIAL OMISSION, A VIOLATION OF FEDERAL
AND STATE LAW MAY HAVE OCCURRED AND SHOULD BE REPORTED TO THE FEDERAL TRADE
COMMISSION, WASHINGTON, D.C. 20580 AND THE APPROPRIATE STATE AGENCY IDENTIFIED
ON EXHIBIT A.
ENBC authorizes the respective state agencies identified on Exhibit A to receive
service of process for Einstein/Noah Bagel Corp. in the particular state.
I have received a Uniform Franchise Offering Circular dated March 29, 1996, as
amended September 1, 1996. This offering circular included the following
Exhibits:
A. State Agencies/Agents for Service of Process/Effective Dates
B. Development Agreement
C. Franchise Agreement
D. Addendum to Lease
E. Financial Statements
F. Financed Area Developer Loan Agreement
___________________________________ _______________________________________
Date Franchisee
<PAGE>
RECEIPT
THIS OFFERING CIRCULAR SUMMARIZES PROVISIONS OF THE FRANCHISE AGREEMENT AND
OTHER INFORMATION IN PLAIN LANGUAGE. READ THIS OFFERING CIRCULAR AND ALL
AGREEMENTS CAREFULLY.
IF ENBC OFFERS YOU A FRANCHISE, IT MUST PROVIDE THIS OFFERING CIRCULAR TO YOU BY
THE EARLIEST OF:
A. THE FIRST PERSONAL MEETING TO DISCUSS ENBC's FRANCHISE; OR
B. TEN BUSINESS DAYS BEFORE SIGNING OF A BINDING AGREEMENT; OR
C. TEN BUSINESS DAYS BEFORE ANY PAYMENT TO ENBC.
YOU MUST ALSO RECEIVE A FRANCHISE AGREEMENT CONTAINING ALL MATERIAL TERMS AT
LEAST FIVE BUSINESS DAYS BEFORE YOU SIGN ANY FRANCHISE AGREEMENT.
IF ENBC DOES NOT DELIVER THIS OFFERING CIRCULAR ON TIME OR IF IT CONTAINS A
FALSE OR MISLEADING STATEMENT, OR A MATERIAL OMISSION, A VIOLATION OF FEDERAL
AND STATE LAW MAY HAVE OCCURRED AND SHOULD BE REPORTED TO THE FEDERAL TRADE
COMMISSION, WASHINGTON, D.C. 20580 AND THE APPROPRIATE STATE AGENCY IDENTIFIED
ON EXHIBIT A.
ENBC authorizes the respective state agencies identified on Exhibit A to receive
---------
service of process for Einstein/Noah Bagel Corp. in the particular state.
I have received a Uniform Franchise Offering Circular dated March 29, 1996, as
amended September 1, 1996. This offering circular included the following
Exhibits:
A. State Agencies/Agents for Service of Process/Effective Dates
B. Development Agreement
C. Franchise Agreement
D. Addendum to Lease
E. Financial Statements
F. Financed Area Developer Loan Agreement
____________________________________ _______________________________________
Date Franchisee
