<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to __________________
Commission File Number 0-21205
NEW YORK BAGEL ENTERPRISES, INC.
(Exact name of small business issuer as specified in its charter)
Kansas 73-1369185
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 I.M.A. Plaza
250 North Water Street
Wichita, Kansas 67202-1213
(Address of principal executive offices and zip code)
(316) 267-7373
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. [X] Yes [ ] No
As of November 10, 1998, there were 4,657,100 shares of the registrant's Common
Stock outstanding.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL STATEMENTS
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 27, 1998
(unaudited), and December 28, 1997 3
Consolidated Statements of Operations for the
Thirty-Nine Weeks and Thirteen Weeks Ended
September 27, 1998 and September 28, 1997, (unaudited) 4
Consolidated Statements of Cash Flows
for the Thirty-Nine Weeks Ended September 27, 1998
and September 28, 1997, (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operation 9
PART II - OTHER INFORMATION
Item 5. Other Information 17
Item 6. Exhibits 19
SIGNATURES 20
</TABLE>
2
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PART I. FINANCIAL STATEMENTS
Item 1. Consolidated Financial Statements
NEW YORK BAGEL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 1998 AND DECEMBER 28, 1997
<TABLE>
<CAPTION>
September 27, December 28,
Assets 1998 1997 (a)
------ ------------- ------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 283,434 $ 872,949
Accounts receivable 127,196 171,068
Inventories 375,339 349,937
Income tax receivable 17,983 484,957
Prepaid expenses and other current assets 167,166 169,156
Property and equipment available for sale 86,648 193,256
------------- ------------
Total current assets 1,057,766 2,241,323
Property and equipment, net 6,700,990 10,281,696
Goodwill, net 807,606 1,220,441
Other assets 242,850 357,001
------------- ------------
Total assets $ 8,809,212 $ 14,100,461
------------- ------------
------------- ------------
Liabilities and Stockholders' Equity
------------------------------------
Current installments on long-term debt $ 1,886,528 $ 2,490,858
Accounts payable 415,515 715,453
Accrued payroll and benefits 133,627 292,321
Accrued liabilities 1,300,359 539,143
Current portion of deferred franchise fees 17,000 35,000
------------- ------------
Total current liabilities 3,753,029 4,072,775
Long-term debt, less current installments 28,750 28,750
Deferred rents payable 117,844 99,201
Other liabilities 230,017 133,724
------------- ------------
Total liabilities 4,129,640 4,334,450
Stockholders' equity:
Class A common stock, $.01 par value.
Authorized 30,000,000 shares; issued
and outstanding 4,667,500 shares. 46,675 46,675
Additional paid in capital 13,390,769 13,390,769
Accumulated deficit (8,739,898) (3,671,433)
Treasury stock, at cost, 10,400 shares at
June 28, 1998 (17,974) -
------------- ------------
Total stockholders' equity 4,679,572 9,766,011
------------- ------------
Total liabilities and stockholders' equity $ 8,809,212 $ 14,100,461
------------- ------------
------------- ------------
</TABLE>
(a) The balance sheet at December 28, 1997 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THIRTY-NINE WEEKS AND THIRTEEN WEEKS ENDED
SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Thirteen Weeks
Weeks Ended Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Sales from Company-owned restaurants $ 14,602,482 $ 13,758,705 $ 4,719,134 $ 4,753,958
Franchise revenues 115,776 349,775 18,511 60,705
------------ ------------ ------------ ------------
Total revenues 14,718,258 14,108,480 4,737,645 4,814,663
Costs and expenses:
Cost of sales 5,192,535 4,463,507 1,793,730 1,592,755
Restaurant operating expenses 8,282,222 7,381,975 2,755,408 2,773,109
General and administrative expenses 1,077,918 1,267,250 340,569 553,367
Depreciation and amortization 751,991 699,013 251,853 265,701
Provision for impairments and closures 4,374,197 3,557,733 3,268,472 3,557,733
------------ ------------ ------------ ------------
Total costs and expenses 19,678,863 17,369,478 8,410,032 8,742,665
Operating loss (4,960,605) (3,260,998) (3,672,386) (3,928,002)
Interest income (expense), net (107,860) 102,369 (36,641) 7,084
------------ ------------ ------------ ------------
Loss before income taxes (5,068,465) (3,158,629) (3,709,027) (3,920,918)
Income tax expense (benefit) - (1,032,226) - (1,324,947)
------------ ------------ ------------ ------------
Loss before cumulative
effect of accounting change (5,068,465) (2,126,403) (3,709,027) (2,595,971)
Cumulative effect of accounting change, net
of income tax benefit of $80,782 - (129,041) - -
------------ ------------ ------------ ------------
Net loss $ (5,068,465) $ (2,255,444) $ (3,709,027) $ (2,595,971)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss per share - basic and diluted:
Loss before cumulative effect
of accounting change $ (1.09) $ (0.45) $ (0.80) $ (0.56)
Cumulative effect of accounting change - (0.03) - -
------------ ------------ ------------ ------------
Net loss $ (1.09) $ (0.48) $ (0.80) $ (0.56)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of shares
outstanding-basic and diluted 4,659,318 4,667,500 4,657,100 4,667,500
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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NEW YORK BAGEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Thirty-Nine Weeks
Ended
Sept. 27, Sept. 28,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,068,465) $(2,255,444)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 751,991 699,013
Provision for impairments and closures 4,374,197 3,557,733
Cumulative effect of accounting change, net of
income tax benefit - 129,041
Increase (decrease) in cash resulting from changes
in listed items, net of effect from acquisitions:
Deferred income taxes - (1,140,144)
Inventory (25,402) (59,091)
Income taxes receivable 466,974 (210,382)
Property and equipment available for sale 106,608
Prepaid expenses and other current assets 1,990 (292,985)
Accounts receivable 43,872 97,690
Deferred costs 18,643 9,425
Other assets (14,046) (167,093)
Accounts payable (299,938) 352,825
Accrued liabilities and other liabilities (387,435) 19,375
Deferred franchise fees (18,000) (39,000)
----------- -----------
Net cash provided by (used in)operating activities (49,011) 700,963
Cash flows from investing activities:
Additions to property, plant and equipment (1,618,200) (5,679,499)
Acquisitions, net of cash acquired - (1,381,908)
Purchase of investment securities available for sale - (7,244,552)
Proceeds from sales and maturities of investment
securities available for sale - 11,510,414
Note receivable - -
Proceeds from sale-leaseback transactions 1,700,000 -
----------- -----------
Net cash provided by (used in) investing activities 81,800 (2,795,545)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 670,000 700,000
Principal payments on long-term debt (1,274,330) -
Debt issuance costs (13,459)
Bank overdraft 320,369
Decrease in distributions payable - (164,194)
Purchase of treasury stock (17,974) -
----------- -----------
Net cash provided by (used in) financing activities (622,304) 842,716
----------- -----------
Net decrease in cash (589,515) (1,251,866)
Cash at beginning of period 872,949 1,305,130
----------- -----------
Cash at end of period $ 283,434 $ 53,264
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS
The Company owns and franchises New York Bagel and Lots A' Bagels
restaurants that provide a wide variety of bagels that are made from
scratch, boiled and baked in the traditional "New York style." Breakfast
menu items include a wide variety of bagels and custom-blended cream
cheeses, gourmet coffees, muffins and croissants. Lunch and dinner items
include an assortment of bagel delicatessen sandwiches, prepared salads,
cookies and soft drinks. As of September 27, 1998, the Company has 45
Company-owned restaurants primarily located in Oklahoma, Kansas, Colorado,
Texas and Tennessee and 19 franchised restaurants located throughout the
United States.
(2) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are for
interim periods and consequently do not include all disclosures required by
generally accepted accounting principles for annual financial statements.
It is suggested that the accompanying unaudited consolidated financial
statements be read in conjunction with the annual consolidated financial
statements included in the Company's 1997 Form 10-K for the period ended
December 28, 1997. In the opinion of management of the Company, the
accompanying unaudited consolidated financial statements reflect all
adjustments (all of which were of a normal recurring nature) necessary to
present fairly the consolidated financial position of the Company and the
results of its operations and its cash flows for the interim periods. The
results of the interim period are not necessarily indicative of the results
of the full year.
(3) CHANGE IN ACCOUNTING PRINCIPLE
Effective September 28, 1997, the Company changed its accounting policy on
restaurant preopening costs. In prior periods, the Company initially
capitalized and then amortized pre-opening cost over the initial 12-months
of a restaurant's operation. Under the new method, the Company expenses
such restaurant pre-opening costs as incurred. Management believes the
change is preferable to obtain a better matching of expenses with revenues.
The effect of adopting the accounting change on earnings (loss) before
cumulative effect of accounting change, net earnings (loss), and net
earnings (loss) per share for the thirty-nine weeks ended September 28,
1997 is to decrease such amounts $(2,053), ($131,094) and ($0.03),
respectively. The change is considered a cumulative effect-type accounting
change and, accordingly, the cumulative effect as of the beginning of
fiscal 1997 has been reported in the accompanying unaudited consolidated
financial statement of operations for the thirty-nine week period ended
September 28, 1997. The accompanying unaudited consolidated financial
statements for the thirty-nine weeks ended September 28, 1997 have been
restated to reflect adoption of the new accounting policy.
6
<PAGE>
(4) IMPAIRMENT OF LONG-LIVED ASSETS AND STORE CLOSURES
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Recoverability of
assets to be held and used (including associated goodwill) is measured by a
comparison of the carrying amount of an asset to estimated future net cash
flows (undiscounted and without interest charges) expected to be generated
by the asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs
to sell.
For purposes of determining impairment, the Company groups long-lived
assets at a market level due to the bakery-satellite relationship which, in
management's estimation, results in the market level as the lowest level
for which there are cash flows that are largely independent of the cash
flows of other groups of assets.
The impairment charge, which amounted to $0 and $585,000 for the thirteen
weeks and thirty-nine weeks ended September 27, 1998 respectively,
represents a reduction of the carrying value of the impaired assets to
estimated fair value. Such impairment charge relates to long-lived
restaurant assets. The primary indicators of impairment are continued
operating losses or sufficient negative trends that management determines
impairment is probable. Estimated fair values were determined by using a
combination of discounted estimated future cash flows and valuation
multiples recently used by the Company in actual acquisitions. Management
judgement is inherent in the estimated fair value determination and,
accordingly, actual results could vary from such estimates.
Store closure costs are recognized when a decision is made to close a
restaurant within the next twelve months. Store closure costs, which
amounted to $3,268,472 and $3,789,197 for the thirteen weeks and
thirty-nine weeks ended September 27, 1998, include the costs of writing
down the carrying amount of restaurant assets to estimated fair value
less costs of disposal aggregating $2,230,332 and $2,702,593 for the
thirteen weeks and the thirty-nine weeks ended September 27, 1998
respectively, and the net present value of any remaining noncancelable
lease payments after the expected closure date net of estimated sublease
income considered by management to be probable aggregating $1,038,140 and
$1,086,604 for the thirteen weeks and the thirty-nine weeks ended
September 27, 1998, respectively.
The Company has entered into a joint venture agreement whereby the Company
will contribute certain restaurant equipment and leasehold improvements of
up to seven of its restaurant locations to the joint venture entity and the
other party to the joint venture will contribute cash (up to a stipulated
amount per restaurant) to convert such restaurant locations to a new
concept called "Atomic Burrito." The Company will have a 40% ownership
interest in the resulting joint venture entity. Of the aforementioned
seven restaurant locations to be converted to the Atomic Burrito concept,
the locations of two restaurants are stipulated in the joint venture
agreement and the remaining five locations will be selected by the other
party to the joint venture by January 1, 1999 from a list of twelve
restaurant locations included in the joint
7
<PAGE>
venture agreement. The other party to the joint venture will oversee the
restaurant conversion and the day-to-day operations of the Atomic Burrito
restaurants once opened. Furthermore, the other party to the joint venture
can elect to convert only three additional restaurants, instead of the
aforementioned five, by payment of a nominal amount to the Company. The
joint venture agreement also calls for the opening of one Atomic Burrito
restaurant in a location for which the Company currently holds an option
to lease.
During the thirteen weeks ended September 27, 1998, the Company closed two
restaurants and decided to close an additional eighteen restaurants and a
support facility. The two locations specified in the joint venture
agreement and the twelve locations listed in the joint venture agreement
from which the other party is to select five locations (three locations if
such party elects to make the nominal payment to the Company) to be
converted to Atomic Burrito restaurants are locations for which the Company
has closed or decided to close restaurants during the thirteen weeks ended
September 27, 1998.
Because (i) the carrying value of restaurant assets and the net present
value of remaining noncancelable lease payments net of estimated sublease
income vary significantly from location to location and (ii) the
determination of exactly which closed restaurant locations will be
converted to Atomic Burrito is that of the other joint venture party and
not the Company (such determination to be made by January 1, 1999), the
Company is unable to estimate at this time the individual costs of every
component of the Company's decision to close the twenty restaurants and one
support facility.
The Company recorded store closure costs for the thirteen weeks ended
September 27, 1998 based upon the minimum of such costs which the Company
will incur from the aforementioned restaurant closures (i.e. the provision
for store closure costs is based upon the assumption that the other party
to the joint venture agreement will select the locations which will result
in the lowest store closure cost to the Company). After the restaurant
locations which will be converted have been selected, the Company may need
to record additional store closure costs applicable to the aforementioned
restaurant closings in the fourth quarter of 1998 and such additional costs
could range from $0 to $1.3 million depending upon which locations are
selected for conversion by the other party to the joint venture.
(5) NET EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
EARNINGS PER SHARE (Statement 128) which replaces the prior accounting
standard regarding computation and presentation of earnings per share.
Statement 128 requires a dual presentation of basic earnings per share
(based on the weighted average number of common shares outstanding) and
diluted earnings per share which reflects the potential dilution that could
occur if contracts to issue securities (such as stock options) were
exercised. The Company adopted Statement 128 as of December 28, 1997 and,
accordingly, earnings per share data for all periods presented has been
computed in accordance with Statement 128. For all periods presented,
there are no
8
<PAGE>
differences between net earnings (loss) and outstanding shares utilized in
the computation of basic and diluted earnings per share.
Options to purchase common stock were not included in the computation of
diluted earnings (loss) per share because the options' exercise price was
greater than the average market price of the common shares during such
period so the effect would not be dilutive. As of September 27, 1998,
there are 379,600 options outstanding at a weighted average exercise price
of $5.09, which may become dilutive in the future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
THIS FORM 10-QSB INCLUDES STATEMENTS THAT ARE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF
1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED, INCLUDING STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS,
HOPES, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL
STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS, INCLUDED IN THIS
FORM 10-QSB REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS STRATEGY
AND OTHER PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING
STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-QSB
ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND
THE COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING
STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS AND
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE,
IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN
CORRECT OR THAT THE COMPANY WILL TAKE ANY ACTIONS THAT MAY PRESENTLY BE
PLANNED. CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ARE DISCLOSED IN THE
"RISK FACTORS" SECTION OF THE COMPANY'S FORM 10-K ANNUAL REPORT, WHICH
INCLUDE, WITHOUT LIMITATION, THE COMPANY'S ABILITY TO DEVELOP, CONSTRUCT,
ACQUIRE OR FRANCHISE ADDITIONAL RESTAURANTS IN ACCORDANCE WITH THE
COMPANY'S DEVELOPMENT SCHEDULE, CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT
PLANS, AVAILABILITY AND TERMS OF CAPITAL, ABILITY TO SUCCESSFULLY CONVERT
CERTAIN RESTAURANTS TO ATOMIC BURRITO RESTAURANTS AND PARTICIPATE AS A
JOINT VENTURE PARNTER, ACCEPTANCE OF NEW PRODUCT OFFERINGS, COMPETITION,
MANGEMENT OF QUARTER TO QUARTER EARNINGS, INCREASES IN OPERATING COSTS AND
CHANGES IN GOVERNMENT REGULATION. ALL SUBSEQUENT WRITTEN OR ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY
9
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OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY
BY SUCH FACTORS.
OVERVIEW
The Company's revenues are derived from sales from Company-owned
restaurants and franchise revenues, which consist of royalties from
franchised restaurant sales as well as franchise and development fees.
Costs of sales include food, paper and beverage costs associated
with Company-owned restaurants. Restaurant operating expenses consist
primarily of labor costs, rent, advertising, utilities, maintenance and
insurance associated with Company-owned restaurants. General and
administrative expenses include corporate and administrative salaries,
accounting, legal and direct costs associated with franchise operations.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
operating statement data to total revenues, except as otherwise indicated:
<TABLE>
<CAPTION>
Thirty-Nine Weeks Thirteen Weeks
Ended Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 (1) 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Sales from Company-owned restaurants 99.2% 97.5% 99.6% 98.7%
Franchise revenues 0.8 2.5 0.4 1.3
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of sales (2) 35.6% 32.4% 38.0% 33.5%
Restaurant operating expenses (2) 56.7 53.7 58.4 58.3
General and administrative expenses 7.3 9.0 7.2 11.5
Depreciation and amortization 5.1 5.0 5.3 5.5
Provision for impairments and closures 29.7 25.2 69.0 73.9
Operating income (loss) (33.7) (23.1) (77.5) (81.6)
Interest income (expense), net (0.7) 0.7 (0.8) 0.1
Income tax expense (benefit) 0.0 (7.3) 0.0 (27.5)
Cumulative effect of accounting change 0.0 0.9 0.0 0.0
Net earnings (loss) (34.4) (16.0) (78.3) (53.9)
</TABLE>
(1) As restated for the change in accounting principle. See Note 3 to
unaudited consolidated financial statements.
10
<PAGE>
(2) As a percentage of sales from Company-owned restaurants.
THIRTEEN WEEKS ENDED SEPTEMBER 27, 1998
COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 28, 1997
Total revenues decreased by $100,000, or 1.6%, to $4.7 million for the
period ended September 27, 1998 compared to $4.8 million for the period ended
September 28, 1997, primarily due to a decrease in income from franchise
revenues.
Sales from Company-owned restaurants were consistent with the same period
for 1997. Sales decreased $35,000, or 0.7%, to $4.7 million for the period
ended September 27, 1998 compared to $4.7 million for the period ended September
28, 1997. The Company experienced a 15.0% decline in same store sales during
the third quarter of 1998 compared to the same period in 1997. This decline of
same store sales was offset by the addition of 14 new restaurants in new
markets. The decline in same store sales is primarily attributed to the
following: (i) increased competition, (ii) increased development within certain
markets, and (iii) the maturation of the bagel industry. The Company is
focusing on operational issues and new product offerings. At September 27,
1998 the Company had 45 Company-owned restaurants compared to 43 restaurants
at September 28, 1997.
Franchise revenues and royalties decreased by $42,000, or 69.5%, to $18,000
for the period ended September 27, 1998 compared to $60,000 for the period ended
September 28, 1997. The overall decrease is due to the discontinuance of royalty
revenue recognition on certain franchise restaurants due to collectibility
concerns and no new franchises have been introduced since 1997. As a result of
the above activity, management expects franchise revenues to continue to
decline. There were 19 franchised restaurants as of September 27, 1998 as
compared to 28 restaurants at September 28, 1997.
Cost of sales increased by $200,000, or 12.6%, to $1.8 million for the
period ended September 27, 1998 compared to $1.6 million for the period ended
September 28, 1997. As a percentage of Company-owned restaurant sales, cost of
sales increased to 38.0% for the period ended September 27, 1998 from 33.5% for
the period ended September 28, 1997, primarily as a result of certain markets
that incur higher food costs as a result of utilizing frozen-dough bagels and
pre-packaged cream cheeses. In addition, a large portion of the increase is due
to the increased cost of butterfat related items. Butterfat is used in cream
cheese, cheese, and other dairy products. Butterfat prices doubled during the
quarter.
Restaurant operating expenses decreased by $18,000, or 0.6%, to $2.7
million for the period ended September 27, 1998 compared to $2.7 million for the
period ended September 28, 1997. Such decrease is primarily due to the Company's
concerted effort to reduce controllable expenses. As a percentage of
Company-owned restaurant sales, restaurant operating expenses increased to
58.4% for the period ended September 27, 1998 from 58.3% for the period ended
September 28, 1997.
General and administrative expenses decreased $213,000 or 38.5%, to
$341,000 for the period ended September 27, 1998 compared to $553,000 for the
period ended September 28, 1997 primarily as a reduction in management staff.
The Company repositioned middle management area restaurant managers into the
restaurants during the third quarter of 1998.
11
<PAGE>
Depreciation and amortization decreased by $14,000, or 5.2%, to $252,000
for the period ended September 27, 1998 compared to $266,000 for the period
ended September 28, 1997. As a percentage of total revenues, depreciation and
amortization decreased to 5.3% for the period ended September 27, 1998 from 5.5%
for the period ended September 28, 1997. This nominal decrease is primarily the
result of the closing of certain restaurants, the impairing of other
restaurants, and the recognition of the sale-leaseback transactions that
occurred during 1998.
A provision for impairment and restaurant closures of $3.3 million was
recorded for the period ended September 27, 1998. The Company closed two
under-performing restaurants during the period resulting in restaurant
closure cost of $198,000. The restaurant closures relate to two restaurants
in which an impairment provision had been recorded during the first quarter
of 1998. Management continuously assesses whether or not to close
under-performing restaurants. During the thirteen weeks ended September 27,
1998 the Company identified a total of 18 additional restaurants for closure
that are not profitable and are not cash flow positive.
The Company has entered into a joint venture agreement whereby the Company
will contribute certain restaurant equipment and leasehold improvements of up to
seven of its restaurant locations to the joint venture entity and the joint
venture partner will contribute cash (up to a stipulated amount per restaurant)
to convert such restaurant locations to the new "Atomic Burrito" concept. The
Company has a 40% ownership interest in the joint venture entity. Of the seven
restaurant locations to be converted to the Atomic Burrito concept, two
restaurant locations are stipulated in the joint venture and the remaining five
locations will be selected by the joint venture partner by January 1, 1999
from a list of twelve restaurant locations included in the joint venture
agreement. The joint venture partner will oversee the restaurant conversion and
the day-to-day operations of the Atomic Burrito restaurants once opened.
Furthermore, the joint venture partner can elect to convert only three
additional restaurants, instead of the aforementioned five, by payment of a
nominal amount to the Company. The joint venture agreement also calls for the
opening of one Atomic Burrito restaurant in a location for which the Company
currently holds an option to lease.
During the thirteen weeks ended September 27, 1998, the Company closed two
restaurants and decided to close an additional eighteen restaurants and a
support facility. The two locations specified in the joint venture agreement
and the twelve locations listed in the joint venture agreement from which the
joint venture partner is to select five locations (three locations if such party
elects to make the nominal payments to the Company) to be converted to Atomic
Burrito restaurants are locations for which the Company has closed or decided to
close restaurants during the thirteen weeks ended September 27, 1998.
Because (i) the carrying value of restaurant assets and the net present
value of remaining noncancelable lease payments net of estimated sublease income
vary significantly from location to location and (ii) the determination of
exactly which closed restaurant locations will be converted to Atomic Burrito is
that of the joint venture partner and not the Company (such determination to be
made by January 1, 1999), the Company is unable to estimate at this time the
individual costs of every component of the Company's decision to close the
twenty restaurants and one support facility.
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The Company recorded restaurant closure costs for the thirteen weeks
ended September 27, 1998 based upon the minimum of such costs which the
Company will incur from the above restaurant closures (i.e. the provision for
restaurant closure costs is based upon the assumption that the joint venture
partner will select the locations which will result in the lowest restaurant
closure cost to the Company). After the restaurant locations which will be
converted have been selected for conversion, the Company may need to record
additional store closure costs applicable to the aforementioned restaurant
closings during the fourth quarter of 1998 and such additional costs could
range from $0 to $1.3 million depending upon which locations are selected for
conversion by the joint venture partner.
Net interest expense increased by $44,000, or 617.2%, to $37,000 for the
period ended September 27, 1998 compared to net interest income of $7,000 for
the period ended September 28, 1997. The increase in interest expense is due
to the borrowings from a bank that were initiated in September 1997. In
addition, during the period ended September 28, 1997 the Company still had a
portion of the proceeds from its initial public offering invested in
interest-bearing securities as such proceeds had not yet been expended.
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1998
COMPARED TO THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1997
Total revenues increased by $600,000, or 4.3%, to $14.7 million for the
period ended September 27, 1998 compared to $14.1 million for the period
ended September 28, 1997, primarily due to an increase in the number of
Company-owned restaurants in new markets.
Sales from Company-owned restaurants increased $800,000, or 6.1%, to
$14.6 million for the period ended September 27, 1998 compared to $13.8
million for the period ended September 28, 1997. This increase is largely
the result of 13 additional Company-owned restaurants being open for an
entire year during the period subsequent to September 28, 1997. Such
increase has been offset somewhat by the closing of nine Company-owned
restaurants since the third quarter of 1997. Because of the addition of
restaurants into established markets, the Company experienced a 14.9%
decrease in same store sales during the first thirty-nine weeks of 1998
compared to the same period in 1997. Such decline is primarily attributed to
the following: (i) increased competition, (ii) increased development within
certain markets, and (iii) the maturation of the bagel industry. The Company
is focusing on operational issues and new product offerings. At September
27, 1998 the Company had 45 Company-owned restaurants compared to 43
restaurants at September 28, 1997.
Franchise revenues decreased by $234,000, or 66.9%, to $116,000 for the
period ended September 27, 1998 compared to $350,000 for the period ended
September 28, 1997. Franchise and development fees decreased $69,000, or
59.0%, to $48,000 for the period ended September 27, 1998 as compared to
$116,000 for the comparable period in 1997 and royalty revenue decreased by
$166,000, or 70.8%, to $68,000 for 1998 compared to $234,000 for 1997. The
overall decrease is primarily due to the decrease in new restaurant
development within the franchise program as well as the closing or
disenfranchising of 14 franchise restaurants during the period subsequent to
September 28, 1997. Franchise royalty revenue has also decreased due to the
discontinuance of royalty revenue recognition on certain franchise
restaurants due to collectibility concerns. As a result of the above
activity,
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management expects franchise revenues to continue to decline. There were 19
franchised restaurants as of September 27, 1998 as compared to 28
restaurants at September 28, 1997.
Cost of sales increased by $700,000, or 16.3%, to $5.2 million for the
period ended September 27, 1998 compared to $4.5 million for the period ended
September 28, 1997, primarily due to the increase in Company-owned restaurant
sales discussed above. As a percentage of Company-owned restaurant sales,
cost of sales increased to 35.6% for the period ended September 27, 1998 from
32.4% for the period ended September 28, 1997, primarily as a result of
certain markets that incur higher food costs as a result of utilizing
frozen-dough bagels and pre-packaged cream cheeses. In addition, a large
portion of the increase is due to the increased cost of butterfat related
items. Butterfat is used in cream cheese, cheese, and other dairy products.
Butterfat prices doubled during the third quarter of 1998. Prices of the
Company's commodities (meat, flour and other bakery ingredients) have
generally remained fairly stable during the comparable periods.
Restaurant operating expenses increased by $900,000, or 12.2%, to $8.3
million for the period ended September 27, 1998 compared to $7.4 million for
the period ended September 28, 1997, primarily due to the increase in
Company-owned restaurant sales discussed above. As a percentage of
Company-owned restaurant sales, restaurant operating expenses increased to
56.7% for the period ended September 27, 1998 from 53.7% for the period ended
September 28, 1997. Such increase is primarily due to: (i) the increase in
direct labor costs of 3.0% from 26.9% in 1997 to 29.9% in 1998 and (ii) the
increase in occupancy costs (rent and utilities) of 2.9% from 9.7% in 1997 to
12.6% in 1998. These increases are attributable to the increase in the
minimum wage rate, the decrease in the same-store sales as discussed above
and certain of the Company's new restaurant developments in which sales
levels have not matured.
General and administrative expenses have decreased $200,000, or 14.9%,
to $1.0 million for the period ended September 27, 1998 compared to $1.2
million for the period ended September 28, 1997. This decrease is primarily
as a result of the reduction in management staff. The Company repositioned
middle management area restaurant managers into the restaurants during the
third quarter of 1998.
Depreciation and amortization increased by $53,000, or 7.6%, to $752,000
for the period ended September 27, 1998 compared to $699,000 for the period
ended September 28, 1997. As a percentage of total revenues, depreciation
and amortization increased to 5.1% for the period ended September 27, 1998
from 5.0% for the period ended September 28, 1997. This increase is
primarily the result of the significant addition of capital expenditures to
develop Company-owned restaurants for the period subsequent to September 28,
1997. Such increase is offset by the closing of certain restaurants, the
impairing of other restaurants, and the recognition of the sale-leaseback
transactions that occurred during February and August 1998.
A provision for impairment and restaurant closures of $4.4 million was
recorded for the period ended September 27, 1998. The Company closed four
under-performing restaurants during the period resulting in restaurant
closure cost of $719,000. The restaurant closures relate to two restaurants
in which an impairment provision of $585,000 had been recorded during the first
quarter of 1998 as well as an additional restaurant that was closed during the
first quarter. The remaining costs relate to the additional 18 restaurants the
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Company identified for closure during the thirteen weeks ended September 27,
1998 discussed above.
Net interest expense increased by $210,000, or 205.4%, to $108,000 for
the period ended September 27, 1998 compared to net interest income of
$102,000 for the period ended September 28, 1997. The increase in interest
expense is due to the borrowings from a bank that were initiated in September
1997. In addition, during the period ended September 28, 1997 the Company
still had a portion of the proceeds from its initial public offering invested
in interest-bearing securities as such proceeds had not yet been expended.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the development of new
restaurants. Capital expenditures totaled $1.6 million and $5.7 million for
the thirty-nine week periods ended September 27, 1998 and September 28, 1997,
respectively. The Company has funded its capital expenditures with proceeds
from its Credit Facility and sale-leaseback transactions discussed below and
cash flows from operating activities. Cash flows from operating activities
were $(49,000) and $701,000 for the periods ended September 27, 1998 and
September 28, 1997, respectively.
Based on its contemplated limited expansion plans, the Company estimates
that its capital expenditures for development of Company-owned restaurants
will be approximately $200,000 during the remainder of 1998. The Company
expects that proceeds from its Credit Facility, sale-leaseback transactions
and cash provided by operating activities will provide sufficient funds to
finance its capital expenditures through 1998.
The Company has incurred operating losses. While the Company is taking
corrective measures including the decision made during September, 1998 to
close 18 unprofitable restaurants, there is no assurance that future
operating losses will not be incurred and that the Company might have to seek
additional financing. Such additional financing is not committed at this
time.
CREDIT FACILITY. As previously disclosed in the Company's 1997 Form
10-K, the Company has a loan agreement with a revolving line of credit and
term loan facilities (the "Credit Facility") with NationsBank, N.A. (the
"Bank"). Borrowings from term loans during the thirty-nine week period ended
September 27, 1998 amounted to $670,000 and were used to fund new restaurant
development. In addition, the Company repaid $1.3 million of borrowings from
the Credit Facility during the thirty-nine week period ended September 27,
1998 primarily with the proceeds of the sale-leaseback transactions discussed
below and available cash. The Credit Facility is secured by substantially
all of the Company's assets. The proceeds from the Credit Facility (which are
classified as a current liability at September 27, 1998) were primarily used
for acquisition of long-lived assets such as property and equipment. During
August 1998 the Company refinanced the Credit Facility for an additional
year, which now matures in September 1, 1999. The note is amortized over a
seven year period requiring monthly payments of principal and interest of
$26,000. As of September 27, 1998, the Company had $1.9 million of outstanding
borrowings pursuant to the Credit Facility. The Company was not in
compliance with certain restrictive covenants contained in the Credit
Facility which require specified financial ratios in August 1998 when such
debt was refinanced and continues not to be in compliance. However, the
Company does not believe
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such noncompliance will adversely impact liquidity although there is no
assurance of such. The Company is current on all payments due under the
Credit Facility.
SALE-LEASEBACK TRANSACTIONS. During February 1998, the Company entered
into agreements to sell and lease back two restaurant sites with an entity
owned by a then officer of the Company and a significant stockholder, both of
whom are Directors. The sale-leaseback transactions include two owned
restaurant locations in which the Company sold such properties to such entity
for approximately $800,000 and leased back over a 15-year period. The leases
will be accounted for as operating leases. As a result of the sale-leaseback
transactions, the Company incurred a loss of $277,000 which has been deferred
for financial reporting purposes and is included within leasehold
improvements and is being amortized over the term of the related leases. The
Company believes that the terms and conditions of both the real estate sales
and the related lease back were fair and reasonable and were on terms at
least as favorable as would be available from non-affiliated parties. The
Company utilized the proceeds to fund new restaurant development and to
reduce borrowings under the Credit Facility.
During August 1998, the Company entered into an agreement to sell and
lease back two restaurant sites with an entity owned by two members of the
Board of Directors. The sale-leaseback transactions include two owned
restaurant locations in which the Company sold such properties to such entity
for approximately $900,000 and leased back over a 15-year period. The leases
will be accounted for as operating leases. As a result of the sale-leaseback
transactions, the Company incurred a loss of $274,000 which has been deferred
for financial reporting purposes and is included within leasehold
improvements and is being amortized over the term of the related leases. The
Company believes that the terms and conditions of both the real estate sales
and the related lease back were fair and reasonable and were on terms at
least as favorable as would be available from non-affiliated parties. The
Company utilized the proceeds to fund new restaurant development and to
reduce borrowings under the Credit Facility.
STOCK REPURCHASE PROGRAM. During January 1998, the Company's Board of
Directors approved a plan to repurchase up to 1.0 million shares of the
Company's Common Stock (the "Stock Repurchase Program"). Purchases pursuant
to the Stock Repurchase Program are to be made from time to time in the open
market or directly from stockholders at prevailing market prices. The Stock
Repurchase Program is anticipated to be funded with internally generated cash
and borrowings under the Credit Facility. As of September 27, 1998, the
Company had purchased 10,400 shares of Common Stock for $17,974.
FINANCIAL CONDITION. Total assets at September 27, 1998 are $8.8
million as compared to $14.1 million as of December 29, 1997. Cash and cash
equivalents have decreased by approximately $590,000 primarily due to capital
expenditures for new restaurant development. Income tax receivable has also
decreased as refunds for 1997 have been received from the Internal Revenue
Service. Property and equipment reflects an approximate $5.1 million
decrease despite significant new capital expenditures due to the provision
for impairments and closures related to twenty one restaurants and the
sale-leaseback of four previously owned restaurant locations. Current
liabilities have decreased approximately $320,000 primarily as a result of
repayments of certain term loans with the Bank but offset by the additional
accrual for liabilities applicable to restaurant closures. Stockholders'
equity has
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decreased $5.1 million due to the net loss for the thirty-nine week period
ended September 27, 1998, which loss is primarily due to the $4.4 million
provision for impairments and closures.
YEAR 2000 COMPLIANCE
The Company's Year 2000 issues involve (i) its restaurant point of sale
function, (ii) its outsourced payroll function, (iii) its
financial/management reporting function and (iv) its vendors.
The Company believes its point of sale equipment is Year 2000 compliant
and has been informed by the software and hardware provider that Year 2000
compliant software will be available to the Company during 1999. Also, the
Company believes that it has sufficient manual back-up procedures that the
Company could rely upon to continue operations, if required to do so. The
Company has been informed by the provider of its outsourced payroll services
that such services are Year 2000 compliant. The Company currently utilizes
data processing services from an entity controlled by a director of the Company
in connection with the Company's financial/management reporting function.
Independent of the Year 2000 issue, the Company is considering installing its
own data processing capabilities during 1999. If it proceeds, the Company
estimates the cost of a new data processing system, which would be Year 2000
compliant, to be less than $100,000. If the Company elects not to implement a
new system, the Company anticipates continuing to utilize data processing
services from the aforementioned entity. The Company has been informed by
such entity that Year 2000 compliant services will be available during 1999.
The costs of becoming Year 2000 compliant, other than cost related to the
possible implementation of a new internal data processing system, are not
expected to be material.
The Company purchases products and services from various vendors. If
the Company is not able to acquire such products and services due to any
vendor's inability to address the Year 2000 issue, the Company could incur a
disruptive effect on its business. However, the key providers of such
products and services are generally large and sophisticated entities, and the
Company does not expect to incur a material disruption to its business from
the Year 2000 issue. Beginning in November 1998, the Company is going to
circulate a questionnaire to its large vendors to determine their status
regarding addressing the Year 2000 issue.
PART II. OTHER INFORMATION
Item 5. Other Information
On April 17, 1998, the Company was notified by the Nasdaq Stock Market,
Inc. (Nasdaq) that it has failed to maintain the appropriate market value of
public float that is required to maintain the Company's listing on the Nasdaq
National Market. The Company appealed the potential delisting from the
Nasdaq National Market and appeared at a hearing before a committee on
September 3, 1998. As of the preparation of this report, there has been no
word received from Nasdaq as to the outcome of the hearing. If Nasdaq denies
the Company's continued listing on the Nasdaq National Market, the Company
intends to pursue
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listing under the Nasdaq SmallCap Market. To the extent the Nasdaq SmallCap
Market listing is not achievable, the Company's common stock would then be
traded over the counter. Until the results of the hearing are made final,
there will be no change in the Company's listing.
The Company has entered into a joint venture agreement whereby the
Company will contribute certain restaurant equipment and leasehold
improvements of up to seven of its restaurant locations to the joint venture
entity and the joint venture partner will contribute cash (up to a stipulated
amount per restaurant) to convert such restaurant locations to the new
"Atomic Burrito" concept. The Company has a 40% ownership interest in the
joint venture entity. Of the seven restaurant locations to be converted to
the Atomic Burrito concept, two restaurants locations are stipulated in the
joint venture and the remaining five locations will be selected by the other
joint venture partner by January 1, 1999 from a list of twelve restaurant
locations included in the joint venture agreement. The joint venture partner
will oversee the restaurant conversion and the day-to-day operations of the
Atomic Burrito restaurants once opened. Furthermore, the joint venture
partner can elect to convert only three additional restaurants, instead of
the aforementioned five, by payment of a nominal amount to the Company. The
joint venture agreement also calls for the opening of one Atomic Burrito
restaurant in a location for which the Company currently holds an option to
lease.
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Item 6. (a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
10.1 Joint Venture Agreement by and between New York Bagel
Enterprises, Inc. and Western Country Clubs, Inc. dated
October 27, 1998.
10.2 First Amendment to Loan Agreement dated August 24, 1998
by New York Bagel Enterprises, Inc., Lots A' Bagels, Inc.
and NationsBank, N.A.
10.3 Form of Agreement of Purchase and Sale by and between New
York Bagel Enterprises, Inc. and Commercial Equity, Inc.
(filed as Exhibit 10.9 to Form 10-K for the annual period
ended December 28, 1997), incorporated herein by reference.
10.4 Schedule of Agreements of Purchase and Sale by and between
New York Bagel Enterprises, Inc. and Commercial Equity, Inc.
10.5 Form of Lease between Commercial Equity, Inc., as Lessor,
New York Bagel Enterprises, Inc., as Lessee (filed as
Exhibit 10.4 to Form 10-Q for the quarter period ended
September 28, 1997), incorporated herein by reference.
10.6 Schedule of Leases by and between New York Bagel
Enterprises, Inc. and Commercial Equity, Inc.
10.7 Promissory Note dated August 24, 1998 of New York Bagel
Enterprises, Inc. and Lots A' Bagel, Inc. payable to the
order of NationsBank, N.A.
27 Financial Data Schedule.
</TABLE>
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 12th day of November, 1998.
NEW YORK BAGEL ENTERPRISES, INC.
By: /s/ ROBERT J. GERESI
-------------------------------
Robert J. Geresi
Chief Executive Officer
and President
By: /s/ RICHARD R. WEBB
-------------------------------
Richard R. Webb
Chief Financial Officer,
Secretary and Treasurer
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JOINT VENTURE AGREEMENT
This Agreement is made as of the 27th day of October, 1998, by and
among NEW YORK BAGEL ENTERPRISES, INC., a Kansas corporation ("NYBE") and
WESTERN COUNTRY CLUBS, INC., a Colorado corporation ("WCCI").
R E C I T A L S:
A. NYBE and WCCI have agreed to form a joint venture for the purpose of
converting various New York Bagel Cafe-Registered Trademark- restaurants into
Atomic Burrito-Registered Trademark- restaurants; and
B. WCCI shall cause its subsidiary, Atomic Burrito, Inc., an Oklahoma
corporation, to negotiate in good faith with NYBE, such that it is contemplated
that NYBE shall be granted a master license to develop Atomic Burrito-Registered
Trademark- restaurants; and
C. The parties are entering into this Agreement to set forth their mutual
understanding and agreements with respect to the terms and conditions of such
joint venture.
NOW, THEREFORE, in consideration of the mutual covenants and promises set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE 1
DEFINITIONS
In addition to the other definitions contained herein, the following
definitions shall apply for purposes of this Agreement:
1.1 AFFILIATE. "Affiliate," when such term is used with respect to
another Person which is a legal entity, means (a) any Person who directly or
indirectly Controls, is Controlled by or is under common Control with such other
Person, (b) any Person who is a director or officer of a privately-owned
company, member in or trustee of, or who serves in a similar capacity with
respect to, such other Person, or (c) any Person who directly or indirectly is
the beneficial owner of 20% or more of such other Person. When the term
"Affiliate" is used with respect to another Person who is an individual, it
means any corporation, partnership, limited liability company, trust or other
entity of which such other Person serves as an officer, director, general
partner, manager, trustee or in a similar capacity.
1.2 ANCILLARY AGREEMENTS. "Ancillary Agreements" means all of the
agreements executed and delivered by NYBE and/or WCCI, pursuant to this
Agreement or in connection with the transactions contemplated by this Agreement.
1.3 CAPITAL INVESTMENT SCHEDULE. "Capital Investment Schedule" means
the schedule attached as Schedule 3.2.
<PAGE>
1.4 CLOSING. "Closing" means the closing of the transactions provided
for in this Agreement, which shall take place on the Closing Date at the offices
of NYBE in Wichita, Kansas, or such other place as the parties may agree upon.
1.5 CLOSING DATE. "Closing Date" means the date on which a Closing
occurs.
1.6 CONTROL. "Control" as applied to a Person means the direct or
indirect ownership of more than 50% of the voting common stock (in the case of a
corporation) or other voting interests (in the case of a legal entity which is
not a corporation).
1.7 DEVELOPMENT TERM. "Development Term" means the twelve (12) month
period commencing on December 1, 1998. However, either party may terminate this
Agreement during the Development Term immediately upon written notice if either
party materially fails to perform its duties hereunder. Providing, such
termination shall not affect the obligations of WCCI and NYBE to complete the
conversion of any Facilities then under construction.
1.8 FACILITY. "Facility" means the leased premises and improvements
thereon constituting New York Bagel Cafe-Registered Trademark- restaurants,
identified in Schedule 1.8, which are to be converted into Atomic
Burrito-Registered Trademark- restaurants pursuant to or as contemplated by this
Agreement.
1.9 LICENSE AGREEMENT. "License Agreement" means the License Agreement
substantially the form of Exhibit "A," attached hereto.
1.10 NYBE RESPONSIBILITIES SCHEDULE. "NYBE Responsibilities Schedule"
means the schedule attached as Exhibit 3.4(A).
1.11 OPERATING AGREEMENT. "Operating Agreement" means an Operating
Agreement in substantially the form of Exhibit "B," attached hereto.
1.12 PERCENTAGE INTEREST. "Percentage Interest" means, as applied to
the Project Entity, the ownership interest of NYBE or WCCI in such Project
Entity.
1.13 PERSON. "Person" means a natural person, corporation, trust,
partnership, limited liability company, governmental entity (or agency, branch
or department thereof) or any other legal entity.
1.14 PROJECT ENTITY. "Project Entity" means any limited partnership,
limited liability company or other entity which, directly or indirectly, owns
the Facilities.
1.15 TERRITORY. "Territory" means the geographic area described on the
attached Schedule 1.15.
1.16 WCCI'S RESPONSIBILITIES SCHEDULE. "WCCI's Responsibilities
Schedule" means the schedule attached as Exhibit 3.4(B).
2
<PAGE>
ARTICLE 2
PURPOSE OF JOINT VENTURE
The parties are entering into the joint venture contemplated by this
Agreement in order for NYBE and WCCI, through a jointly owned limited liability
company to convert, own, operate and finance, the Facilities in targeted market
areas throughout the Territory. The Facilities that shall be subject to
conversion to Atomic Burrito-Registered Trademark- restaurants pursuant to the
terms of this Agreement are set forth in the attached Schedule 1.8.
ARTICLE 3
COVENANTS
3.1 FORMATION AND CAPITALIZATION OF PROJECT ENTITY. At the Closing,
NYBE and WCCI shall form the Project Entity contemplated by this Agreement by
entering into the Operating Agreement. It is contemplated by the parties that
the Operating Agreement will contain a provision for incentivising store level
managers by allowing them to participate in the net profits of particular
Facilities.
3.2 CAPITALIZATION OF PROJECT ENTITY. During the Development Term, the
parties shall make mandatory capital contributions to the Project Entity as more
fully set forth in the Capital Investment Schedule, attached hereto as Schedule
3.2, unless the parties otherwise agree. Neither NYBE nor WCCI shall have
any obligation to make any expenditure, provide capital or loan funds to the
Project Entity, except as may specifically be required by this Agreement, any
Ancillary Agreement (including the Operating Agreement), by applicable law, or
as otherwise agreed by NYBE and WCCI from time to time.
3.3 PROJECT ENTITY FINANCING. In the event it is deemed necessary by
the parties hereto, the parties will use their best efforts to cause the Project
Entity to obtain the necessary financing; and the parties hereto shall jointly
be the guarantors of such financing if a guaranty is required.
3.4 RESPONSIBILITIES OF THE PARTIES.
A) NYBE shall be responsible for the duties and activities set forth
on the NYBE Responsibilities Schedule. To the extent that NYBE is
to be reimbursed or compensated for such services, the terms and
conditions of same shall be set forth on the NYBE Responsibilities
Schedule.
B) WCCI shall be responsible for the duties and activities set forth
on the WCCI's Responsibilities Schedule. To the extent that WCCI
is to be reimbursed or compensated for such services, the terms and
conditions of same shall be set forth on the WCCI Responsibilities
Schedule.
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<PAGE>
C) All charges associated with the foregoing services provided by NYBE
or WCCI or any Affiliate shall be paid by the Project Entity or as
agreed on by both parties in writing.
3.5 FACILITY DEVELOPMENT. With respect to the Facilities, WCCI shall
begin construction on converting the Facilities pursuant to the following
development schedule (*):
A) December 1, 1998 Facility located at 310 North Rock Road,
Wichita, Kansas
B) December 15, 1998 Facility located at 5048 South Sheridan,
Tulsa, Oklahoma
C) January 15, 1999 Facility located at 1520 East 15th Street,
Tulsa, Oklahoma (**)
D) March 1, 1999 Facility to be selected at sole discretion of
WCCI, no later than January 1, 1999
E) May 1, 1999 Facility to be selected at sole discretion of
WCCI, no later than January 1, 1999
F) July 1, 1999 Facility to be selected at sole discretion of
WCCI, no later than January 1, 1999
G) September 15, 1999 Facility to be selected at sole discretion of
WCCI, no later than January 1, 1999
H) December 1, 1999 Facility to be selected at sole discretion of
WCCI, no later than January 1, 1999
In the event WCCI elects not to develop the Facilities identified as (G) and (H)
above, WCCI shall pay to NYBE the sum of Two Thousand Five Hundred Dollars
($2,500.00) per Facility and, shall
- ------------------------
(*)Prior to the commencement of construction on any Facility, WCCI shall
obtain a bid for the costs and expenses associated with the conversion and
opening of that Facility and shall deliver such bid to NYBE. It is understood
and agreed by the parties hereto that WCCI shall pay the first One Hundred Fifty
Thousand Dollars ($150,000.00) of the conversion costs with respect to any
particular Facility, and the Project Entity shall pay the additional costs and
expenses associated with the conversion. In the event WCCI fails to meet the
development schedule, its obligation to contribute the first One Hundred Fifty
Thousand Dollars ($150,000) shall increase each month by the amount of rent for
the particular Facility that is behind schedule until such time as construction
begins.
(**)Notwithstanding anything to the contrary contained herein, it is
understood and agreed by the parties hereto that WCCI shall pay seventy percent
(70%) and NYBE shall pay thirty percent (30%), respectively, of the pre-opening
costs and expenses, relating to the construction and opening of this Facility.
4
<PAGE>
thereafter be released from its obligation to convert these Facilities. WCCI
shall have the right to substitute Facilities into the development schedule, or
rearrange the order in which the Facilities are to be developed, provided that
the development schedule timing is not affected.
3.6 OPERATION OF FACILITIES. The Project Entity shall be solely
responsible for all costs and expenses associated with (i) funding each Facility
after the completion of the construction, these expenses include, without
limitation, all pre-opening marketing activities, pre-opening cost of inventory
and all post-opening operational expenses; (ii) the assumption of the lease
agreement for a particular Facility from the earlier of the respective dates set
forth in Section 3.5 or the date construction begins for a particular Facility
(if acceptable to the landlord, the Project Entity shall enter into a new lease
agreement (on terms no less favorable than those experienced by NYBE), at which
time NYBE shall be released from its obligations under the current lease;
provided, if NYBE is to remain or otherwise guaranty any such lease agreement,
then WCCI shall also, jointly and severally, guaranty such lease agreement); and
(iii) paying for all insurance and utility expenses with respect to each
Facility. In addition to the foregoing, it is understood by the parties that
WCCI shall have operational control (at the store level), relative to the
day-to-day operation of the converted Facilities.
3.7 ADDITIONAL NYBE RESTAURANTS. During the Development Term, NYBE
shall pursue the disposition of NYBE restaurants. In the event NYBE identifies
a disposition plan for any of it restaurants (other than the Facilities), which
NYBE intends on pursuing, NYBE shall notify WCCI of its intent to dispose of
that specific NYBE restaurant; and WCCI shall have fourteen (14) days from the
date of such notice to evaluate such NYBE restaurant. In the event WCCI is
interested in such NYBE restaurant, WCCI shall notify NYBE of its desire to
convert such NYBE restaurant to an Atomic Burrito-Registered Trademark-
restaurant and the parties shall either (i) amend this Agreement and insert such
NYBE restaurant into the development schedule or (ii) WCCI shall, with the
consent of NYBE, have the right to convert such NYBE restaurant outside of this
Agreement. If NYBE does not consent to option (ii), the parties shall enter
into a subsequent Joint Venture Agreement with NYBE having the relative
percentage ownership that the offer to purchase such NYBE restaurant by a third
party or the fair marker value of such NYBE Restaurant's assets, as the case may
be, bears to the total costs associated with the conversion of such NYBE
restaurant. Also, NYBE shall have the right to contribute cash to the
subsequent Joint Venture in an amount necessary to bring its ownership
percentage up to forty percent (40%). Provided, however, in the event WCCI
elects to convert such NYBE restaurant, the construction of such NYBE restaurant
shall begin no later than one hundred twenty (120) days from the date WCCI
receives notice from NYBE of its rights hereunder.
3.8 MASTER LICENSING AGREEMENT. As partial consideration for this
Agreement, the parties hereby agree that NYBE and Atomic Burrito, Inc., shall
enter into a Master Licensing Agreement pursuant to which NYBE shall have the
right to license or develop up to fifty (50) Atomic Burrito-Registered
Trademark- restaurants within an exclusive territory. It is contemplated by the
parties that this Master Licensing Agreement shall be executed no later than the
earlier of (i) December 1, 1998, or (ii) the date the first Facility's lease is
assumed by the Project Entity.
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3.9 RESTRICTIONS ON TRANSFERABILITY OF INTERESTS. From and after the
Closing Date, neither NYBE nor WCCI shall transfer its ownership interest in the
Project Entity except to the other party; provided, however, that either party
may transfer a portion of its interest to an Affiliate prior to the exercise of
a put or call option pursuant to Section 3.11 so as to preserve the existence of
the Project Entity following such purchase. A transfer means any disposition of
an interest or any interest therein, including, without limitation, any sale,
gift, assignment, pledge or encumbrance, whether such disposition occurs
voluntarily, by operation of law or otherwise.
3.10 NON-COMPETITION.
A) During the period in which the Project Entity is a licensee of
WCCI, without the prior written consent of NYBE, WCCI shall not
directly or indirectly own, operate, develop, construct, manage or
participate in the ownership, development, construction, operation
or management of any restaurant engaged in the sale of bagels or
bagel related products located in the Territory.
B) During the period in which the Project Entity is a licensee of
WCCI, without the prior written consent of NYBE, WCCI shall not
directly or indirectly own, operate, develop, construct, manage or
participate in the ownership, development, construction, operation
or management of quick service fresh-mex Mexican restaurants,
located within the Designated Market Area or Areas identified by
the then current Nielson Well Map, published by the A.C. Nielson
Company, in which the Project Entity is operating an Atomic
Burrito-Registered Trademark- restaurant.
C) The restrictions on WCCI set forth in Section 3.10(A) and (B) shall
also apply to any entities or Persons directly or indirectly
controlled by WCCI.
D) The restrictions set forth in Section 3.10(A) are subject to the
following exceptions:
i) such restrictions shall not be considered violated by reason
of WCCI owning and/or constructing any restaurant engaged in
the sale of bagels or bagel related products, located
outside the Territory;
ii) such restrictions shall not be considered violated by reason
of WCCI owning less than a five percent (5%) interest in a
legal entity that owns, develops, constructs, operates or
manages any restaurant engaged in the sale of bagels or
bagel related products;
E) During the period in which the Project Entity is a licensee of
WCCI, without the prior written consent of WCCI, NYBE shall not
directly or indirectly own, operate, develop, construct, manage or
participate in the ownership, development, construction, operation
or management of quick service fresh-mex Mexican restaurants
located in the Territory.
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F) The restrictions on NYBE set forth in Section 3.10(E) shall also
apply to any entities or Persons directly or indirectly controlled
by NYBE.
G) The restrictions set forth in Section 3.10(E) shall not be
considered violated by reason of NYBE owning less than a five
percent (5%) interest in a legal entity that owns, develops,
constructs, operates or manages any quick service fresh-mex Mexican
restaurants;
H) Each party hereby agrees that the restrictions set forth in this
Section 3.10 are founded on valuable consideration and are
reasonable in duration and geographic area in view of the
circumstances under which this Agreement is executed and that such
restrictions are necessary to protect the legitimate interests of
the parties. In the event that any provision of this Section 3.10
is determined to be invalid by any arbitrator or court of competent
jurisdiction, the provisions of this Section 3.10 shall be deemed
to have been amended and the parties agree to execute any documents
and take whatever action is necessary to evidence such amendment,
so as to eliminate or modify any such invalid provision and to
carry out the intent of this Section 3.10 to render the terms of
this Section 3.10 enforceable in all respects as so modified.
I) Each party acknowledges and agrees that irreparable injury may
result to the other party and/or a Project Entity if the other
party breaches any covenant contained in this Section 3.10 and that
the remedy at law for the breach of any such covenant will be
inadequate. Therefore, if any party shall engage in any act in
violation of any of the provisions of this Section 3.10, the other
party shall be entitled, in addition to such other remedies and
damages as may be available to either or both of them at law or
under this Agreement, to injunctive relief to enforce the
provisions of this Section 3.10.
3.11 CONFIDENTIALITY. The parties will at all times hold and cause
their consultants and advisors to hold in confidence the information contained
in this Agreement. In addition, each party (the "receiving party") will at all
times hold and cause its advisors and representatives to hold in strict
confidence all documents, materials and other information concerning the other
parties (the "disclosing party"), which have been or will be furnished by the
disclosing party to the receiving parties or their employees, advisors and
representatives in connection with the transactions contemplated by this
Agreement and which are designated as confidential. All such information shall
be disclosed by a receiving party only to its employees, advisors and
representatives engaged in the evaluation of such information. If the
transactions contemplated by this Agreement are not consummated, regardless of
the reason therefor, such confidence will be maintained by the receiving party,
except to the extent such information (a) was previously known to the receiving
party prior to disclosure by the disclosing party, (b) is in the public domain
through no fault of the receiving party, (c) is lawfully acquired by the
receiving party from a third party under no obligation of confidence to the
disclosing party, or (d) is required by any law or by any governmental or
judicial body to be disclosed. Such documents and information will not be used
to the detriment of the disclosing party or otherwise in any manner and all
documents, materials and other written
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information provided by the disclosing party to the receiving party,
including all copies and extracts thereof, will be returned to the disclosing
party immediately upon its written request.
3.12 FURTHER ASSURANCES. Following the Closing, each party shall
execute such further documents and perform such further acts as may be
reasonably necessary to consummate the transactions contemplated by this
Agreement and the Ancillary Agreements in accordance with the terms hereof and
thereof and to more effectively carry out the transactions contemplated hereby
and thereby.
3.13 LIENS AND ENCUMBRANCES. Each of NYBE and WCCI, acquiring an
interest in the Project Entity, agrees to keep its ownership interest in each
such entity free and clear from any and all security interests, liens and
restrictions in favor of third parties.
3.14 PUBLIC STATEMENT. NYBE and WCCI shall consult with each other
prior to issuing any press release or making any other public statement
(including, direct communications with third parties) with respect to the
transactions contemplated hereby and will not issue any such release or make any
such statement without the approval of the other party, except as required
pursuant to any state or federal securities law or by the rules and regulations
of any relevant securities exchange or quotation system upon which a party's
securities are then traded. NYBE and WCCI acknowledge that its breach of the
provisions of this Section 3.14, may result in the assessment of fines,
penalties and/or civil liabilities by the Securities and Exchange Commission,
state securities commissions, and others.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES AND ADDITIONAL
COVENANTS OF NYBE
NYBE hereby represents and warrants to WCCI, as of the date of this
Agreement and further covenants that NYBE shall hereafter represent and warrant
to WCCI as of the Closing Date that:
4.1 ORGANIZATION. NYBE is a corporation validly existing and in good
standing under the laws of the State of Kansas and has full corporate power and
corporate authority to conduct its business as presently conducted and to become
an owner of the Project Entity. NYBE is duly qualified to transact business as
a foreign corporation in the State of domicile of each Facility.
4.2 AUTHORIZATION; ENFORCEABILITY. The execution, delivery and
performance by NYBE of this Agreement and the Ancillary Agreements are within
the corporate power of NYBE and have been duly authorized by all necessary
corporate action by NYBE. This Agreement and the Ancillary Agreements, when
executed and delivered by NYBE, will be the valid and binding obligations of
NYBE, enforceable against NYBE in accordance with their respective terms.
4.3 NO VIOLATION OR CONFLICT. The execution, delivery and performance
by NYBE of this Agreement and of the Ancillary Agreements will not conflict with
or violate any law, judgment, order, or decree, the Articles of Incorporation or
Bylaws of NYBE, or any contract or agreement to which either is a party or by
which it is respectively bound.
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4.4 BROKERS. NYBE has not incurred any brokers', finders' or any
similar fee in connection with the transactions contemplated by this Agreement
or the Ancillary Agreements.
4.5 LITIGATION. There is no litigation, arbitration, proceeding,
governmental investigation, citation or action of any kind pending or, to the
knowledge of NYBE, proposed or threatened, against NYBE which could have a
material adverse effect on the transactions contemplated hereby. There is no
action, suit or proceeding against NYBE by any person or entity which questions
the validity, legality or propriety of the transactions contemplated by this
Agreement or the Ancillary Agreements.
4.6 GOVERNMENTAL APPROVALS. No permission, approval, determination,
consent or waiver by, or any declaration, filing or registration with, any
governmental or regulatory authority is required on the part of NYBE in
connection with its execution and delivery of this Agreement and the Ancillary
Agreements and the consummation by it of the transactions contemplated hereby
and thereby.
4.7 REQUIRED CONSENTS. There are no approvals or consents which NYBE
is required to obtain from any third parties to enter into this Agreement or the
Ancillary Agreements which have not been obtained.
4.8 REPRESENTATIONS AND WARRANTIES TRUE AND CORRECT AT CLOSING. Except
as specifically disclosed by NYBE to WCCI in writing prior to or at the Closing
Date with respect to matters arising after the date of this Agreement, the
representations and warranties of NYBE set forth in this Article 4 shall be true
and correct as of the Closing.
4.9 DISPOSITION OF NYBE FACILITIES. Except as otherwise contemplated
herein, during the Development Term, NYBE shall not dispose of any New York
Bagel Cafe-Registered Trademark- restaurant without giving WCCI a first option,
which option shall be exercised if at all within ninety (90) days of receipt of
written notification by NYBE, to convert such New York Bagel Cafe-Registered
Trademark- restaurant(s) into Atomic Burrito-Registered Trademark- restaurant(s)
pursuant to the terms of a subsequent Join Venture Agreement, substantially in
the form of this Agreement.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES AND ADDITIONAL
COVENANTS OF WCCI
WCCI hereby represents and warrants to NYBE, as of the date of this
Agreement, and further covenants that WCCI shall hereinafter represent and
warrant to NYBE as of the Closing Date that:
5.1 ORGANIZATION. WCCI is a corporation, validly existing and in good
standing under the laws of the State of Colorado and has full power and
authority to conduct its business as presently conducted and to become an owner
of the Project Entity. WCCI is duly qualified to transact business as a foreign
corporation in the State of domicile of each Facility.
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5.2 AUTHORIZATION; ENFORCEABILITY. The execution, delivery and
performance by WCCI of this Agreement and the Ancillary Agreements are within
the power of WCCI and have been duly authorized by all necessary action by WCCI.
This Agreement and the Ancillary Agreements, when executed and delivered by
WCCI, will be the valid and binding obligations of WCCI, enforceable against it
in accordance with their respective terms.
5.3 NO VIOLATION OR CONFLICT. The execution, delivery and performance
by WCCI of this Agreement and the Ancillary Agreements will not conflict with or
violate any judgment, order or decree, the Articles of Incorporation or Bylaws
of WCCI, or any contract or agreement to which WCCI is a party or by which WCCI
is bound.
5.4 NO BROKER. WCCI has not incurred any brokers', finders' or any
similar fee in connection with the transactions contemplated by this Agreement
or the Ancillary Agreements.
5.5 NO LITIGATION. There is no litigation, arbitration, proceeding,
governmental investigation, citation or action of any kind pending or, to the
knowledge of WCCI, proposed or threatened, against WCCI which could have a
material adverse effect on the transactions contemplated hereby. There is no
action, suit or proceeding by any person or governmental agency against WCCI
which questions the legality, validity or propriety of the transactions
contemplated by this Agreement or the Ancillary Agreements.
5.6 GOVERNMENTAL APPROVALS. No permission, approval, determination,
consent or waiver by, or any declaration, filing or registration with, any
governmental or regulatory authority is required on the part of WCCI in
connection with its execution and delivery of this Agreement and the Ancillary
Agreements and the consummation by it of the transactions contemplated hereby
and thereby.
5.7 REQUIRED CONSENTS. There are no approvals or consents which WCCI
is required to obtain from third parties to enter into this Agreement or the
Ancillary Agreements which have not been obtained.
5.8 REPRESENTATIONS AND WARRANTIES TRUE AND CORRECT AT CLOSING. Except
as specifically disclosed by WCCI to NYBE in writing prior to or at the Initial
Closing Date with respect to matters arising after the date of this Agreement,
the representations and warranties of WCCI set forth in this Article 5 shall be
true and correct as of the Closing.
ARTICLE 6
CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF WCCI
Each and every obligation of WCCI to be performed on the Closing Date shall
be subject to the satisfaction prior to or at Closing of the following
conditions:
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6.1 COMPLIANCE WITH AGREEMENT. NYBE shall have performed and complied
with all of its obligations under this Agreement which are to be performed or
complied with by it prior to or at Closing.
6.2 PROCEEDINGS AND INSTRUMENTS SATISFACTORY. All proceedings,
corporate or otherwise, to be taken by NYBE in connection with the transactions
contemplated by this Agreement, and all documents incident thereto, shall be
reasonably satisfactory in form and substance to WCCI, and NYBE shall have made
available to WCCI for examination the originals or true and correct copies of
all documents which WCCI may reasonably request and NYBE can reasonably obtain
in connection with the transactions contemplated by this Agreement.
6.3 NO LITIGATION. No investigation, suit, action or other proceeding
shall be threatened or pending before any court or governmental agency that
seeks restraint, prohibition, damages or other relief in connection with this
Agreement or the consummation of the transactions contemplated hereby.
6.4 REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by NYBE in this Agreement shall be true and correct as of the Closing Date
with the same force and effect as though such representations and warranties had
been made on the Closing Date.
6.5 DELIVERIES AT CLOSING. NYBE, as the case may be, shall have
delivered or caused to be delivered to WCCI the documents provided for in this
Agreement, together with such certificates and documents of officers of NYBE and
of public officials as shall be reasonably requested by WCCI's counsel to
establish the existence and status of NYBE and the due authorization by NYBE of
this Agreement, the Ancillary Agreements to which either is a party and the
consummation by NYBE of the transactions contemplated hereby and thereby.
ARTICLE 7
CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF NYBE
Each and every respective obligation of NYBE to be performed on the Closing
Date shall be subject to the satisfaction prior to or at the Closing of the
following conditions:
7.1 COMPLIANCE WITH AGREEMENT. WCCI shall have performed and complied
with all of its obligations under this Agreement which are to be performed or
complied with by it prior to or at such Closing.
7.2 PROCEEDINGS AND INSTRUMENTS SATISFACTORY. All proceedings to be
taken by WCCI in connection with the transactions contemplated by this
Agreement, and all documents incident thereto, shall be reasonably satisfactory
in form and substance to NYBE, and WCCI shall have made available to NYBE for
examination the originals or true and correct copies of all documents which NYBE
may reasonably request and WCCI can reasonably obtain in connection with the
transactions contemplated by this Agreement.
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7.3 NO LITIGATION. No investigation, suit, action or other proceeding
shall be threatened or pending before any court or governmental agency that
seeks restraint, prohibition, damages or other relief in connection with this
Agreement or the consummation of the transactions contemplated hereby.
7.4 REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by WCCI in this Agreement shall be true and correct as of the Closing Date
with the same force and effect as though such representations and warranties had
been made on the Closing Date.
7.5 DELIVERIES AT CLOSING. WCCI shall have delivered or caused to be
delivered to NYBE the documents provided for in this Agreement, together with
such certificates and documents of officers of WCCI and of public officials as
shall be reasonably requested by either NYBE's counsel to establish the
existence and status of WCCI and the due authorization by WCCI of this
Agreement, the Ancillary Agreement to which it is a party and the consummation
by WCCI of the transactions contemplated hereby or thereby.
ARTICLE 8
CLOSING; DELIVERIES AT CLOSING
8.1 CLOSING. The Closing shall occur on the date the parties hereto
may mutually agree upon in writing.
8.2 ACTIONS AT CLOSING. At the Closing, NYBE and/or WCCI, as
applicable, shall take or cause to be taken the following actions:
A) OPERATING AGREEMENT. NYBE and WCCI shall enter into the Operating
Agreement pursuant to which NYBE and WCCI shall form the Project
Entity. In addition, at the Closing NYBE and WCCI shall remit the
capital contributions to the Project Entity referred to in the
Capital Investment Schedule.
B) OTHER ACTIONS AND DELIVERIES. Each party shall have deliver or
cause to be delivered to the other party such other certificates
and documents as may be reasonably requested by such other party's
counsel to establish the existence and status of the first party,
the due authorization by the first party of this Agreement and the
Ancillary Agreements to which the first party is a party and the
consummation by the first party of the transactions contemplated
hereby and thereby.
ARTICLE 9
INDEMNIFICATION
9.1 WCCI'S INDEMNITY. WCCI hereby agrees to indemnify NYBE for and
hold it harmless from and against any and all losses, damages, costs, expenses,
liabilities, obligations and claims of any kind (including, without limitation,
reasonable attorneys' fees and other reasonable legal costs and expenses) which
they may at any time suffer or incur, or become subject to, as a result of or in
connection with:
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A) any breach or inaccuracy of any of the representations and
warranties made by WCCI in this Agreement or in any Ancillary
Agreement;
B) any failure by WCCI to carry out, perform, satisfy or discharge any
of its covenants, agreements, undertakings, liabilities or
obligations under this Agreement or under any Ancillary Agreement;
C) any payments by NYBE, with respect to any obligations of a Project
Entity which is jointly owned by NYBE and WCCI, which at the time
of payment have been jointly guaranteed by NYBE and WCCI, to the
extent such payments by either or both of them exceed NYBE's
proportionate share of such obligations, based on its Percentage
Interest in such Project Entity; or
D) any suit, action or other proceeding brought by any Person against
NYBE, arising out of, or in any way related to, any of the matters
referred to in Section 9.1(A), 9.1(B) or 9.1(C) hereof.
9.2 NYBE'S INDEMNITY. NYBE hereby agrees to indemnify WCCI for and
hold it harmless from and against any and all losses, damages, costs, expenses,
liabilities, obligations and claims of any kind (including without limitation,
reasonable attorneys' fees and other reasonable legal costs and expenses) which
they may at any time suffer or incur, or become subject to, as a result of or in
connection with:
A) any breach or inaccuracy of any of the representations and
warranties made by NYBE in this Agreement or in any Ancillary
Agreement;
B) any failure by NYBE to carry out, perform, satisfy or discharge any
of its covenants, agreements, undertakings, liabilities or
obligations under this Agreement or under any Ancillary Agreement;
C) any payments by WCCI with respect to any obligations of the Project
Entity which have been jointly guaranteed by WCCI and NYBE, to the
extent such payments exceed WCCI's proportionate share of such
obligations, based on its Percentage Interest in the Project
Entity; or
D) any suit, action or other proceeding brought by any Person against
WCCI, arising out of, or in any way related to, any of the matters
referred to in Section 9.2(A), 9.2(B) or 9.2(C) hereof.
9.3 PROVISIONS REGARDING INDEMNITIES.
A) The indemnification obligations of WCCI and NYBE under Sections 9.1
and 9.2, respectively, shall survive for the applicable statute of
limitations. Delivery of any written demand for indemnification by
an indemnified party shall toll the survival
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period for the subject of the particular demand and, once notice is
given, the indemnified party may pursue the particular claim to its
conclusion to the extent permitted by applicable law.
B) The indemnified party shall promptly notify the indemnifying party
in writing and in reasonable detail of any claim, demand, action or
proceeding for which indemnification will be sought under Section
9.1 or Section 9.2 of this Agreement, and if such claim, demand,
action or proceeding is a third party claim, demand, action or
proceeding, the indemnifying party will have the right at its
expense to assume the defense thereof using counsel reasonably
acceptable to the indemnified party. The indemnified party shall
have the right to participate, at its own expense, with respect to
any such third party claim, demand, action or proceeding. In
connection with any such third party claim, demand, action or
proceeding, the parties shall cooperate with each other and provide
each other with access to relevant books and records in their
possession. No such third party claim, demand, action or
proceeding shall be settled without the prior written consent of
the indemnified party, such consent not to be unreasonably withheld
or delayed.
ARTICLE 10
TERMINATION
10.1 TERMINATION. The parties acknowledge that time is of the essence
hereof. This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time hereafter as follows:
A) by mutual written agreement of NYBE and WCCI;
B) by WCCI if any of the conditions set forth in Article 6 of this
Agreement have not been timely fulfilled by NYBE; or
C) by NYBE if any of the conditions set forth in Article 7 of this
Agreement have not been timely fulfilled by WCCI.
In the event of termination by WCCI or NYBE pursuant to Section 10.1(B) or
10.1(C), respectively, as a result of a breach by the other party of any of its
representations, warranties, agreements or obligations contained herein, the
terminating party shall be entitled to any remedies available to it at law or in
equity.
ARTICLE 11
MISCELLANEOUS
11.1 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
agreements and documents executed in connection herewith, constitute the entire
agreement between the parties pertaining to the subject matter of this
Agreement, and supersedes all prior agreements, promises, covenants,
arrangements, communications, representations or warranties, whether oral or
written,
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by any officer, employee or representative of any party hereto. No
amendment, supplement, modification or waiver of this Agreement shall be
binding unless executed in writing by the party to be bound thereby.
11.2 FEES AND EXPENSES. Whether or not the transactions contemplated by
this Agreement are consummated, and except as expressly provided herein or in
any Ancillary Agreement, each of the parties hereto shall pay the fees and
expenses of its respective counsel, accountants, brokers, consultants,
investment bankers and other experts incident to the negotiation of this
Agreement. However, the Project Entity shall be responsible for the fees and
expenses related to the preparation of this Agreement and the consummation of
the transactions contemplated by this Agreement.
11.3 APPLICABLE LAW. All questions concerning the construction,
validity, and interpretation of this Agreement and the performance of the
obligations imposed by this Agreement shall be governed by the internal law, not
the law of conflicts, of the State of Kansas.
11.4 BINDING EFFECT; ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto without the prior written consent of the other party,
whether by operation of law or otherwise.
11.5 FACILITY ATMOSPHERE. The Project Entity shall take input from
executive management of NYBE, concerning the tenant improvements with respect to
ensuring that the improvements will result in an "adult friendly," yet fun,
friendly and festive atmosphere. NYBE hereby agrees that WCCI shall have the
right to determine if it is appropriate to serve alcohol at any or all of the
Facilities.
11.6 NOTICES. Each notice, request, demand or other communication
("Notice") by either party to the other party pursuant to this Agreement shall
be in writing and shall be personally delivered or sent by U.S. certified mail,
return receipt requested, postage prepaid, or by nationally recognized overnight
commercial courier, charges prepaid, or by facsimile transmission (but each such
Notice sent by facsimile transmission shall be confirmed by sending an original
thereof to the other party by U.S. mail or commercial courier as provided herein
no later than the following business day), addressed to the address of the
receiving party set forth below or to such other address as such party shall
have communicated to the other party in accordance with this Section. Any
Notice hereunder shall be deemed to have been given and received on the date
when personally delivered, on the date of sending when sent by facsimile, on the
third business day following the date of sending when sent by mail or on the
first business day following the date of sending when sent by commercial
courier.
If to WCCI: Western Country Clubs, Inc.
1601 N.W. Expressway, Suite 1610
Oklahoma City, Oklahoma 73118
Facsimile: 405-848-0998
Attn: James E. Blacketer
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With a copy to: John Hudson, Esq.
1601 N.W. Expressway, Suite 1910
Oklahoma City, Oklahoma 73118
Facsimile: 405-840-4671
If to NYBE: New York Bagel Enterprises, Inc.
115 East 8th Street
Stillwater, Oklahoma 74076
Facsimile: 405-624-3722
Attn: Robert J. Geresi
With a copy to: Gregory B. Klenda
Klenda, Mitchell, Austerman & Zuercher, L.L.C.
1600 Epic Center
301 North Main Street
Wichita, Kansas 67202
Facsimile: 316-267-0333
11.7 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but such counterparts
shall together constitute but one and the same Agreement.
11.8 HEADINGS. The Article and Section headings shall be deemed an
original, but such counterparts shall together constitute but one and the same
Agreement.
11.9 CONSTRUCTION. Common nouns shall be deemed to refer to the
masculine, feminine, neuter, singular and plural, as the identity of the person
may in the context require. References to Sections herein include all
subsections which are subsidiary to the Section referred to. No provision of
this Agreement shall be construed in favor of or against any party hereto by
reason of the extent to which any such party or its counsel participated in the
drafting thereof.
11.10 SEVERABILITY. If any provision, clause or part of this Agreement,
or the application thereof under certain circumstances, is held invalid, the
remainder of this Agreement, or the application of such provision, clause or
part under other circumstances, shall not be affected thereby unless such
invalidity materially impairs the ability of the parties to consummate the
transactions contemplated by this Agreement.
11.11 KNOWLEDGE. Any representation, warranty, covenant or statement
which is made to the knowledge of any party to this Agreement shall require that
such party make reasonable investigation and inquiry with respect thereto to
ascertain the correctness and validity thereof.
11.12 SURVIVAL. All representations and warranties of the parties
contained in this Agreement or made pursuant to this Agreement shall survive the
Closing Date and the consummation of the transactions contemplated by this
Agreement for the applicable statute of limitations. All obligations under this
Agreement which expressly or implicitly by their nature
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survive the expiration or termination of this Agreement shall continue in
full force and effect subsequent to and notwithstanding the expiration or
termination of this Agreement and until they are satisfied in full or by
their nature expire.
11.13 WAIVER OF COMPLIANCE. Any failure of NYBE or WCCI to comply with
any obligation, covenant, agreement or condition contained herein may be
expressly waived in writing by WCCI or NYBE, respectively, but such waiver or
failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
11.14 THIRD PARTIES. Except as specifically set forth or referred to
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any Person other than the parties hereto and their
successors or assigns, any rights or remedies under or by reason of this
Agreement.
11.15 COSTS OF LITIGATION. In the event of any litigation arising among
the parties concerning this Agreement, the non-prevailing party shall pay the
reasonable attorney's fees and costs incurred by the prevailing party (or
parties) incurred as an incident to such litigation.
11.16 GUARANTY. In the event that either WCCI or NYBE causes a
subsidiary to enter into this Agreement, WCCI and/or NYBE, as the case may be,
hereby absolutely and unconditionally guarantees the due and punctual payment of
all amounts and the due and punctual performance of all of its obligation owed
under this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
NEW YORK BAGEL ENTERPRISES, INC.
By /s/ Robert J. Geresi
-------------------------------------------
Robert J. Geresi, Chief Executive Officer
"NYBE"
WESTERN COUNTRY CLUBS, INC.
By /s/ James E. Blacketer
-------------------------------------------
James E. Blacketer, Chief Executive Officer
"WCCI"
17
<PAGE>
EXHIBIT A
LICENSE AGREEMENT
<PAGE>
EXHIBIT B
OPERATING AGREEMENT
<PAGE>
EXHIBIT 1.15
EXCLUSIVE TERRITORY
This Agreement covers the Facilities located in:
1. Tulsa, Oklahoma
2. Manhattan and Wichita, Kansas
3. Lubbock, Waco, Austin, Midland, Temple and San Antonio, Texas
4. Springfield, Missouri
5. Nashville, Tennessee
<PAGE>
Schedule 1.18
FACILITIES
3801 South General Bruce Drive, Temple, Texas
500 West Wadley, Midland, Texas
9070 Research Boulevard, Suite 303, Austin, Texas
13450 North Research Boulevard, #243, Austin, Texas
7239 Quaker Avenue, Lubbock, Texas
5188 West Waco Drive, Waco, Texas
999 East Basse Road, Suite 199, San Antonio, Texas
3837 South Campbell, Springfield, Missouri
2456 East Sunshine, Springfield, Missouri
3009 West End Avenue, Nashville, Tennessee
1800 21st Avenue South, Nashville, Tennessee
1219 Bluemont Avenue, Manhattan, Kansas
<PAGE>
SCHEDULE 3.2
CAPITAL INVESTMENT SCHEDULE
As to the Project Facility, the parties shall contribute capital as follows:
NYBE
Within ten (10) days prior to the commencement of construction on any
Facility, NYBE shall contribute to the Project Entity (i) any and all
leases and leasehold improvements with respect to that Facility and (ii)
any and all equipment located at the Facility which WCCI identifies as
useful and desired for the operation of the Atomic Burrito-Registered
Trademark- restaurant at the Facility. All equipment not identified for
contribution by WCCI shall remain the sole property of NYBE, and NYBE shall
have the right to remove, at its sole cost and expense, said equipment at
any time.
WCCI
WCCI shall be required to contribute funds, on an ongoing basis, to the
Project Entity in amounts sufficient to cover the conversion costs of the
Facilities. It is contemplated by the parties hereto that the funds will
be in an amount necessary to cover the costs of construction and
pre-opening expenses, including, without limitation, all fixtures,
equipment, signage, required tenant improvements, training expenses,
pre-opening travel expenses and small wares.
<PAGE>
EXHIBIT 3.4(A)
NYBE RESPONSIBILITIES SCHEDULE
Perform all accounting functions for the Project Entity, including, without
limitation, cash management, bank account reconciliation and preparation of
monthly internal unaudited financial statements. In consideration for
performing these services, the Project Entity shall be pay a fee of one percent
(1%) of Net Sales to NYBE, up to a maximum of One Thousand Dollars ($1,000.00)
per Facility, per month. WCCI shall have the right to terminate NYBE's right to
perform these accounting functions if NYBE sells all or substantially all of
its assets.
<PAGE>
EXHIBIT 3.4(B)
WCCI'S RESPONSIBILITIES SCHEDULE
Design, construct and open the Atomic Burrito restaurants contemplated by this
Agreement
Hire, supervise, manage and oversee the day to day operations of the Atomic
Burrito restaurants developed pursuant to this Agreement.
<PAGE>
FIRST AMENDMENT TO LOAN AGREEMENT
NEW YORK BAGEL ENTERPRISES, INC.
THIS FIRST AMENDMENT TO LOAN AGREEMENT is made and entered into effective as
of August 24, 1998, by NEW YORK BAGEL ENTERPRISES, INC., a Kansas
corporation, and LOTS A'BAGELS, INC., a Kansas corporation (together with
their respective successors and assigns, "BORROWER"), and NationsBank, N.A., a
national banking association (together with its successors and assigns,
"BANK"), and amends and is a part of that certain Loan Agreement executed by
Borrower and Bank on September 5, 1997.
WHEREAS, Borrower has requested that Bank amend and supplement the terms and
conditions of its Loan to Borrower and to consolidate all existing notes of
Borrower in favor of Bank; and
WHEREAS, Bank is willing to undertake such an amendment and consolidation in
consideration of Borrower's agreement to additionally perform the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises, the benefits to be derived
therefrom and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE 1. NEW LOAN TERMS.
Section 1.1. CONSOLIDATION OF LOAN. With the exception of a single existing
note in the principal amount of $250,000.00 ("REVOLVER"), representing
Borrower's current revolving line of credit with Bank, the Notes shall be and
are hereby consolidated into one Note to be evidenced by that certain
promissory note of even date herewith executed by Borrower in favor of Bank
in the total principal amount of $1,655,444.57 ("TERM NOTE").
Section 1.2. REVISED COMMITMENT AMOUNT. Notwithstanding anything in the Loan
Agreement to the contrary, Bank's total commitment to make loans to Borrower
(including the Term Note and the Revolver) shall at no time exceed TWO
MILLION FIVE HUNDRED THOUSAND AND NO/100 ($2,500,000.00) in the aggregate.
The maturity
Section 1.3. MATURITY DATE. The Maturity Date, as that term is defined in the
Loan Agreement shall be and is hereby revised to September 1, 1999.
Section 1.4. YEAR 2000 COMPLIANCE. Borrower will (i) initiate a review and
assessment of all areas within its and each of its subsidiaries' businesses
and operations (including those affected by suppliers and vendors) that could
be adversely affected by the "Year 2000 Problem" (that is, the risk that
computer applications used by the Borrower or any of its subsidiaries
[or its suppliers and vendors] may be unable to recognize and perform
properly date-sensitive functions involving certain dates prior to and any
date after December 31, 1999); (ii) develop a plan and time line for
addressing the Year 2000 Problem on a timely basis, and (iii) to date,
implemented the plan in accordance with that timetable. Without having made
any investigation of Borrower's vendors or suppliers, Borrower reasonably
believes that all computer applications
<PAGE>
that are material to its or any of its subsidiaries' business operations will
on a timely basis be able to perform properly date-sensitive functions for
all dates before and after January 1, 2000 (that is be "Year 2000 Compliant"),
except to the extent that a failure to do so could not reasonably be expected
to have a Material Adverse Effect. Borrower shall make written inquiry of its
material suppliers and vendors during November 1998.
ARTICLE 2. RATIFICATION AND AFFIRMATION OF LOAN AGREEMENT.
Section 2.1 RATIFICATION OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. Borrower hereby ratifies and confirms that all representations
and warranties in the Loan Documents are and remain true and correct as of
the date hereof and Borrower is and remains bound by the terms of the Loan
Documents.
Section 2.2 NO SETOFFS, COUNTERCLAIMS, ETC. As of the date hereof, Borrower
hereby acknowledges and agrees that Borrower has no right of claim,
counterclaim, offset, defense or other cause of action, direct, indirect,
contingent, liquidated or unliquidated, against Bank, and that no Default or
Event of Default has occurred and is continuing.
Section 2.3 NO OTHER MODIFICATION. Except as expressly amended by this
Amendment, the remaining terms of the Loan Agreement shall remain unaffected
and in full force and effect.
ARTICLE 3. GENERAL PROVISIONS.
Section 3.1 BINDING EFFECT. This Amendment shall be binding upon, and shall
inure to the benefit of the parties' respective representatives, successors
and assigns.
Section 3.2 CONFORMING PROVISIONS. Any and all of the terms and provisions
of the Loan Documents are hereby amended and modified wherever necessary, and
even though not specifically addressed herein, so as to conform to the
amendments and modifications set forth in this Amendment.
THIS AMENDMENT, TOGETHER WITH THE RESTATED NOTE, LOAN AGREEMENT AND THE
OTHER LOAN DOCUMENTS, ARE THE FINAL EXPRESSION OF THE AGREEMENT BETWEEN BANK
AND BORROWER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR OR
CONTEMPORANEOUS ORAL AGREEMENT BETWEEN US. BANK _____________ AND BORROWER
_______/_______ HEREBY ACKNOWLEDGE AND AFFIRM THAT NO SUCH UNWRITTEN, ORAL
AGREEMENTS EXIST. EACH PARTY HERETO ACKNOWLEDGES THAT SUFFICIENT SPACE HAS
BEEN PROVIDED HEREIN FOR THE PLACEMENT OF NONSTANDARD TERMS.
FIRST AMENDMENT TO LOAN AGREEMENT
NationsBank, N.A./New York Bagel
Page 2
<PAGE>
IN WITNESS WHEREOF, Borrower has executed this First Amendment to Loan
Agreement as of the date and year first written above.
Borrower: NEW YORK BAGEL ENTERPRISES, INC.
By: Robert J. Geresi
------------------------------------------
Robert J. Geresi, Chairman & Chief
Executive Officer
STATE OF KANSAS )
) SS.
COUNTY OF SEDGWICK )
This instrument was acknowledged before me on August 27, 1998, by Robert J.
Geresi, Chairman & Chief Executive Officer of New York Bagel Enterprises, Inc.
Tracy Lusher By: Tracy Lusher
Notary Public --------------------------------------------
State of Kansas Signature of notarial officer
My Appointment Expires: August 26, 2000
LOTS A'BAGELS, INC.
By: Robert J. Geresi
------------------------------------------
Robert J. Geresi, President
STATE OF KANSAS )
) SS.
COUNTY OF SEDGWICK )
This instrument was acknowledged before me on August 27, 1998, by Robert J.
Geresi, as President of Lots A'Bagels, Inc.
Tracy Lusher By: Tracy Lusher
Notary Public --------------------------------------------
State of Kansas Signature of notarial officer
My Appointment Expires: August 26, 2000
FIRST AMENDMENT TO LOAN AGREEMENT
NationsBank, N.A./New York Bagel
Page 3
<PAGE>
Bank: NationsBank, N.A.
By: M. Drayton Alldritt
------------------------------------------
M. Drayton Alldritt, Senior Vice President
STATE OF KANSAS )
) SS.
COUNTY OF SEDGWICK )
This instrument was acknowledged before me on August 27, 1998, by M. Drayton
Alldritt as Senior Vice President of NationsBank, N.A.
Geneva M. Schulte By: /s/ Geneva M. Schulte
Notary Public ---------------------------------------------
State of Kansas Signature of notarial officer
My Appointment Expires: June 5, 2000
FIRST AMENDMENT TO LOAN AGREEMENT
NationsBank, N.A./New York Bagel
Page 4
<PAGE>
EXHIBIT 10.4
SCHEDULE OF AGREEMENTS OF PURCHASE AND SALE BY AND BETWEEN NEW
YORK BAGEL ENTERPRISES, INC. AND COMMERCIAL EQUITY, INC.
AGREEMENT DATE
1. October 21, 1997
2. January 26, 1998
3. June 29, 1998
REAL PROPERTY LOCATION
1. A. Stillwater, Oklahoma
B. Springfield, Missouri
C. Lubbock, Texas
2. A. Temple, Texas
B. Midland, Texas
3. A. Montgomery, Alabama
B. Mobile, Alabama
PURCHASE PRICE
1. A. $ 346,125
B. $ 425,000
C. $ 400,000
2. A. $ 400,000
B. $ 400,000
3. A. $ 450,000
B. $ 450,000
<PAGE>
EXHIBIT 10.6
SCHEDULE OF NEW YORK BAGEL ENTERPRISES, INC. SALE/LEASEBACK REAL PROPERTY LEASES
PURCHASER/LESSOR
1. Commercial Equity, Inc.
2. Commercial Equity, Inc.
3. Commercial Equity, Inc.
4. Commercial Equity, Inc.
5. Commercial Equity, Inc.
6. Commercial Equity, Inc.
7. Commercial Equity, Inc.
RESTAURANT LOCATION
1. 7239 Quaker Avenue, Lubbock, Texas
2. 414 North Perkins Road, Stillwater, Oklahoma
3. 2456 East Sunshine, Springfield, Missouri
4. 3801 General Bruce Drive, Temple, Texas
5. 500 W. Wadley, Midland, Texas
6. 4241 Carmichael Road, Montgomery, Alabama
7. 1281 Hillcrest Road, Mobile, Alabama
LEASE DATE
1. November 1, 1997
2. November 1, 1997
3. November 1, 1997
4. February 1, 1998
5. February 1, 1998
6. July 1, 1998
7. July 1, 1998
"STATE" - DEFINED TERM
1. Texas
2. Oklahoma
3. Missouri
4. Texas
5. Texas
6. Alabama
7. Alabama
MINIMUM ANNUAL RENT DURING INITIAL TERM
1. 1-5 $ 49,800.00
6-10 $ 54,780.00
11-15 $ 60,258.00
2. 1-5 $ 43,200.00
<PAGE>
6-10 $ 47,520.00
11-15 $ 52,272.00
3. 1-5 $ 52,800.00
6-10 $ 58,080.00
11-15 $ 63,888.00
4. 1-5 $ 49,800.00
6-10 $ 54,780.00
11-15 $ 60,258.00
5. 1-5 $ 49,800.00
6-10 $ 54,780.00
11-15 $ 60,258.00
6. 1-5 $ 57,000.00
6-10 $ 62,700.00
11-15 $ 68,970.00
7. 1-5 $ 57,000.00
6-10 $ 62,700.00
11-15 $ 68,970.00
REPLACEMENT COST
1. $333,667.00
2. $300,000.00
3. $300,000.00
4. $250,000.00
5. $350,000.00
6. $280,000.00
7. $260,000.00
MINIMUM ANNUAL RENT DURING EXTENDED TERMS
1. 16-20 $ 66,283.80
21-25 $ 72,912.24
2. 16-20 $ 57,499.20
21-25 $ 63,249.12
3. 16-20 $ 70,276.80
21-25 $ 77,304.48
4. 16-20 $ 66,283.80
21-25 $ 72,912.24
5. 16-20 $ 66,283.80
21-25 $ 72,912.24
6. 16-20 $ 75,867.00
21-25 $ 83,453.64
7. 16-20 $ 75,867.00
21-25 $ 83,453.64
<PAGE>
PROMISSORY NOTE
$1,655,444.57 AUGUST 24, 1998
- ---------------------- ----------------------
FOR VALUE RECEIVED, the undersigned ("Borrower") unconditionally (and jointly
and severally, if more than one) promise(s) to pay to the order of
NationsBank, N.A. ("Bank"), at its principal offices at 100 North Broadway,
Wichita, Kansas, 67202, the principal sum of ONE MILLION SIX HUNDRED
FIFTY-FIVE THOUSAND FOUR HUNDRED FORTY-FOUR DOLLARS AND 57/100 DOLLARS
($1,655,444.57), or such lesser principal sum as may have been advanced
hereunder, in lawful money of the United States of America, together with
interest from the date hereof on the unpaid principal balance hereunder,
computed daily, at the RATE per annum indicated below and in accordance with
the particular PAYMENT SCHEDULE indicated below.
The RATE shall be: NATIONSBANK Prime Rate Floating. After default the RATE
shall be NATIONSBANK PRIME RATE PLUS 2% per annum.
A RATE based on the Prime Rate of the Bank will change each time and as of
the date that the Prime Rate of the Bank changes, without prior notice to
Borrower.
INSTALLMENT-PRINCIPAL AND INTEREST:
Principal and interest shall be paid in TWELVE (12) monthly
installments of $26,265.64 each, which monthly payment is calculated at
the Floating Rate as of the date hereof based on a seven-year
amortization of the principal amount hereof, commencing on SEPTEMBER
15, 1998, and continuing on the same day of each successive month
thereafter with a final payment of all principal due on SEPTEMBER 15,
1999.
If any payment is not paid within TEN (10) days after the date when due,
Borrower shall pay to Bank a late charge, for the purpose of defraying Bank's
expenses in handling such late payment, in an amount equal to 1.0% of
scheduled payment.
COLLATERAL: Borrower hereby grants to the Bank a security interest in all
deposit accounts of Borrower now or hereafter at the Bank.
/X/ In addition, if the box is checked, this Note is secured by and is
entitled to the benefits from the following collateral documents and any
other collateral documents now or hereafter held by the Bank:
/X/ Security Agreement(s) dated any date, including, without limitation;
SEPTEMBER 5, 1997.
/X/ Other (describe): ASSIGNMENT OF PERMITS, LICENSES AND AGREEMENTS DATED
SEPTEMBER 5, 1997; AND LOAN AGREEMENT DATED SEPTEMBER 5, 1997.
ADDITIONAL TERMS AND CONDITIONS
1. Borrower and any co-maker and endorser hereof and any other party hereto
and any guarantor hereof (collectively "Obligors") and each of them: (i)
waive(s) presentment, demand, notice of demand, protest, notice of
protest and notice of nonpayment and any other notice required to be
given under the law to any of Obligors, in connection with the delivery,
acceptance, performance, default or enforcement of this Note, or any
endorsement or guaranty of this Note or of any document or instrument
evidencing any security for payment of this Note; and (ii) consent(s) to
any and all delays, extensions, renewals or other modifications of this
Note or waivers of any term hereof or release or discharge by Bank of
any of Obligors or release substitution or exchange of any security for
the payment hereof or the failure to act on the part of Bank or any
indulgence shown by Bank, from time to time and in one or more instances
(without notice to or further assent from any of Obligors) and agree(s)
that no such action, failure to act, or failure to exercise any right or
remedy on the part of the Bank shall in any way affect or impair the
obligations of any Obligor or be construed as a waiver by Bank of, or
to otherwise affect, any of Bank's rights under this Note, under any
endorsement or guaranty of this Note, or under any document or
instrument evidencing any security for payment of this Note.
2. Upon the occurrence of any of the following events of default, this Note
and any other obligation or liability of Borrower to the Bank shall, at
the option of the Bank, become immediately due and payable: (1) default
in the performance of any liability or obligation of Borrower or of any
co-maker, endorser, guarantor or surety of any liability of Borrower to
the Bank, including default in the payment of any part of the principal
of or interest upon this Note as the same becomes due; (2) failure of
Borrower promptly to furnish additional security when requested by the
Banks to do so; (3) Depreciation in value of the collateral or any
additions thereto or substitutions thereof, or any part thereof, to the
extent that this Note is not regarded by the Bank as properly secured;
(4) determination by an officer of the Bank that the collateral has
become unsatisfactory to the Bank; (5) determination by an officer of
the Bank that a material adverse change has occurred in the financial
condition of Borrower or of any co-maker, endorser, guarantor or surety
thereof; (6) any other event which causes the Bank, in good faith, to
deem itself insecure; (7) the events of default as set forth in the Loan
Agreement dated September 5, 1997 by and among Borrower and Bank.
3. If any one or more provisions of this Note shall for any reason be held
to be invalid, illegal or unenforceable, in whole or in part or in any
respect, or if any one or more of the provisions of this Note operate or
would prospectively operate to invalidate this Note, then and in either
of those events, such provision of provisions only shall be deemed null
and void and shall not affect any other provision of this Note and the
remaining provisions shall in no way be affected, prejudiced or
disturbed hereby.
4. The Bank shall, to the extent allowable by law, be entitled to recover
reasonable attorneys' fees and other reasonable costs incurred in the
collection of this Note.
5. No provision of this Note shall require the payment or permit the
collecting of interest in excess of the maximum rate permitted by
applicable law; and, if any sum is collected in access of the applicable
maximum rate it shall be construed as a mutual mistake of Borrower and
Bank and such excess sum shall be credited to principal or, if this Note
has been repaid in full, refunded to Borrower.
6. This Note is delivered in and shall be construed under the laws of the
State of Kansas.
"Borrower "Borrower"
New York Bagel Enterprises, Inc. Lots A' Bagels, Inc.
By: /s/ Robert J. Geresi By: /s/ Robert J. Geresi
-------------------------------- --------------------------------
Robert J. Geresi, Chairman and Robert J. Geresi, President
Chief Executive Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AS OF AND FOR
THE THIRTY-NINE WEEK PERIOD ENDED SEPTEMBER 27, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1998
<PERIOD-END> SEP-27-1998
<CASH> 283,434
<SECURITIES> 0
<RECEIVABLES> 147,196
<ALLOWANCES> (20,000)
<INVENTORY> 375,339
<CURRENT-ASSETS> 1,057,766
<PP&E> 9,133,380
<DEPRECIATION> 2,432,390
<TOTAL-ASSETS> 8,809,212
<CURRENT-LIABILITIES> 3,753,029
<BONDS> 28,750
0
0
<COMMON> 46,675
<OTHER-SE> 4,650,871
<TOTAL-LIABILITY-AND-EQUITY> 8,809,212
<SALES> 14,602,482
<TOTAL-REVENUES> 14,718,258
<CGS> 5,192,535
<TOTAL-COSTS> 15,300,766
<OTHER-EXPENSES> 4,374,197
<LOSS-PROVISION> 3,900
<INTEREST-EXPENSE> 107,860
<INCOME-PRETAX> (5,068,465)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,068,465)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,068,465)
<EPS-PRIMARY> (1.09)
<EPS-DILUTED> (1.09)
</TABLE>
