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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(MARK ONE)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 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
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NEW YORK BAGEL ENTERPRISES, INC.
(Name of small business issuer in its charter)
KANSAS 73-1369185
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
115 EAST 8TH STREET
STILLWATER, OKLAHOMA 74074
405-624-3700
(Address, including zip code, and telephone number of Issuer's principal
executive offices)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHAGE ACT:
Common Stock, par value $0.01 per share
(Title of class)
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Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No .
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendments to this Form 10-KSB. (___)
The issuer's revenues for the fiscal year ended December 27, 1998
were $18,987,623.
As of February 26, 1999, the aggregate market value of the voting
and non-voting common equity held by non-affiliates of the registrant (based
upon the last reported sale price of the Common Stock of the registrant as
quoted on the OTC Bulletin Board of The Nasdaq Stock Market, Inc.) was
$885,845.16. (For purposes of calculating the preceding amount only, all
directors, executive officers and stockholders holding 5% or greater of the
registrant's Common Stock are assumed to be affiliates). The number of shares
of Common Stock of the registrant outstanding as of March 1, 1999 was
4,657,100.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement for its annual
meeting of stockholders to be held on May 21, 1999 are incorporated by
reference into Items 9, 10, 11 and 12 of Part III. The registrant intends to
file such Proxy Statement no later than 120 days after the end of the fiscal
year covered by this Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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NEW YORK BAGEL ENTERPRISES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1998
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PAGE
PART I ----
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Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Risk Factors 13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 17
Item 6. Management's Discussion and Analysis or Plan of Operation 18
Item 7. Financial Statements 23
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 23
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the 24
Exchange Act
Item 10. Executive Compensation 24
Item 11. Security Ownership of Certain Beneficial Owners and Management 24
Item 12. Certain Relationships and Related Transactions 24
Item 13. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
INDEX TO EXHIBITS E-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
THIS FORM 10-KSB 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-KSB 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-KSB 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 THIS FORM 10-KSB
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 PARTNER, THE TRANSITION TO THE YEAR 2000, ACCEPTANCE OF NEW
PRODUCT OFFERINGS, COMPETITION, MANAGEMENT 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 OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY SUCH FACTORS.
ITEM 1. BUSINESS
GENERAL
The Company opened its first restaurant in 1986. As of March 1,
1999, New York Bagel Enterprises, Inc. (the "Company") owned and franchised
46 quick-service New York Bagel restaurants and eight Lots A' Bagels
restaurants in 11 states that serve generous portions of fresh, high quality
food with fast, friendly service at an attractive price-value relationship.
Historically, the Company has grown by developing Company-owned restaurants,
making acquisitions and by selectively adding franchisees. As of March 1,
1999, there were 37 Company-owned restaurants located in Oklahoma, Kansas,
Tennessee, Texas, Colorado and Alabama and 17 franchised restaurants located
in nine states operated by 10 franchisees. In addition, the Company is a
joint venture partner with Western Country Clubs, Inc. in a cobranded New
York Bagel and Atomic Burrito restaurant located in Oklahoma and an Atomic
Burrito restaurant located in Kansas, both of which are being converted from
New York Bagel restaurants. In addition to developing new restaurants, as of
March 1, 1999 the Company has acquired one bagel restaurant in Tennessee,
seven Lots A' Bagels restaurants and a bagel commissary in Colorado, and four
franchised New York Bagel restaurants in Texas and Kansas. See Note 10 of the
Notes to Consolidated Financial Statements.
The Company's business was previously operated through six separate
entities each of which was owned by one or more stockholders that existed
prior to the Company's initial public offering (collectively, the "Prior
Entities"). The Company was incorporated in December 1995 under the laws of
Kansas and on December 31, 1995, the Prior Entities were merged into the
Company (the "Reorganization"). The Company completed its initial public
offering of its Common Stock on August 27, 1996. Reference to "New York
Bagel" restaurants include the Company's Lots A' Bagels restaurants unless
otherwise indicated.
THE NEW YORK BAGEL CONCEPT
PREPARE FRESH, HIGH QUALITY PRODUCTS. New York Bagel restaurants
serve up to 20 varieties of bagels that are made from scratch, boiled and
baked throughout the day in the traditional "New York style." The Company
believes its five-ounce bagel is larger than those served by many of its
competitors. Menu items are prepared in accordance with the Company's
specifications using high quality ingredients such as Philadelphia-Registered
Trademark- Brand cream cheese, Kraft-Registered Trademark- cheeses and
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premium deli meats. Generous portions of cream cheese are applied on its
breakfast bagel and generous portions of meat are served on each of its deli
sandwiches. The Company believes that the quality and portion size of its
menu items generally equals or exceeds those of its competitors. Because its
menu pricing is competitive, the Company believes that it offers customers an
attractive price-value relationship.
MAXIMIZE TRAFFIC THROUGHOUT THE DAY. Management has recognized the
versatility of the bagel and has developed a menu to attract customers
throughout the day. The breakfast menu at New York Bagel restaurants includes
a variety of bagels and custom-blended cream cheeses, breakfast sandwiches on
bagels, gourmet coffees, muffins and croissants. Lunch and dinner items
include a wide range of delicatessen sandwiches made on bagels or other
breads, salads, cookies and soft drinks. The Company also has been able to
successfully operate drive-through windows at certain New York Bagel
restaurants.
COMMITMENT TO TIMELY SERVICE. The Company believes that timely
service is essential in the quick-service restaurant business. Service time
is minimized through the division of employee functions, efficient store
layout and design and queuing mechanisms.
FOCUS ON TRAINING. The Company believes that comprehensive training
is essential to the efficiency and consistency of its operations. The Company
conducts a 28-day training program for its restaurant managers and
franchisees that places an emphasis on these areas while maintaining the
operational systems of an actual New York Bagel restaurant. In addition, the
Company provides on-site assistance during the initial days of operation at
each Company-owned restaurant and at a franchisee's initial franchised
restaurant.
COMPANY STRATEGY
FOCUS ON OPERATIONS; LIMITED DEVELOPMENT. The Company completed its
initial public offering in August 1996 in which it raised $14.7 million that
enabled the Company to grow and expand. From August 1996 through February
1998, the Company utilized such proceeds to develop 26 new restaurants and to
acquire eleven additional restaurants. Consequently, Company-owned
restaurants have increased from 20 restaurants just prior to the initial
public offering to 37 Company-owned restaurants as of March 1, 1999. During
1998, the Company shifted its strategy from that of aggressive growth to that
of limited growth with an enhanced focus on operations and closure of
underperforming restaurants in an attempt to achieve profitability. The
Company anticipates continuing this strategy during 1999. The strategy
includes new product initiatives that are anticipated to stimulate sales
growth from existing restaurants. It also includes a focus on cost controls,
primarily cost of sales and restaurant operating expenses. The Company
anticipates that its limited development and enhanced focus on operations
will position the Company to renew restaurant development and growth. In
addition, the Company has entered into a joint venture agreement with Western
Country Clubs, Inc., parent of the Atomic Burrito fresh mex restaurant
concept, to open up to six joint venture restaurants. As of March 1, 1999,
two joint venture restaurants are under development.
EMPHASIZE MID-SIZED AND SMALLER METROPOLITAN MARKETS. The Company's
restaurants are in mid-sized and smaller metropolitan markets. Management
believes that these markets are attractive because they typically have fewer
competing bagel restaurants and more favorable lease and labor environments
than larger metropolitan markets.
ESTABLISH STRONG MARKET PRESENCE. Because the bagel industry is
highly fragmented and increasingly competitive, the Company seeks to
establish a strong market presence in its targeted markets. To develop a
strong market presence rapidly and efficiently, the Company employs a
multiple store strategy involving a bakery restaurant which produces bagels
for itself and one or more nearby satellite restaurants. By entering
underserved markets and opening multiple restaurants, the Company seeks to
maximize market share and establish brand awareness.
CURRENT YEAR DEVELOPMENT/COMPANY-OWNED RESTAURANTS
During 1998 and through March 1, 1999, the Company developed five new
restaurants located in Oklahoma (1), Alabama (2), Texas (1) and Colorado (1).
The Company continued restaurant closures with a total of 11 restaurants being
closed. As a result of the above activity, Company-owned restaurants have
decreased from 45 as of the beginning of fiscal
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1998 to 37 as of March 1, 1999. There is currently one joint venture
cobranded New York Bagel and Atomic Burrito restaurant located in Oklahoma
and one joint venture Atomic Burrito restaurant located in Kansas, both of
which are being converted from New York Bagel restaurants.
ACQUISITIONS
On December 6, 1996, the Company acquired substantially all of the
operating assets, business operations and facilities of Lots A' Bagels, Inc.
("Lots A' Bagels"), including seven restaurants and a bagel commissary
located in Colorado Springs and Monument, Colorado for cash payments of
$2,615,000 and the assumption of certain liabilities of Lots A' Bagels.
In 1997, the Company acquired two franchised restaurants located in
Austin, Texas and one franchised restaurant located in San Antonio, Texas.
Total cash purchase price for the three franchised restaurants was $738,000.
The Company's source of cash for the above acquisitions was a
portion of the net proceeds from the Company's initial public offering of
Common Stock completed in August 1996. See "Management's Discussion and
Analysis or Plan of Operation."
RESTAURANT DESIGN AND SITE SELECTION
The Company's prototypical New York Bagel restaurant is decorated in
rich colors and dark woods and contains a mixture of booth, table and
barstool seating and, where available, outdoor seating. Exposed ceilings with
drop lighting and a combination of tile and carpeted flooring are used to
enhance its comfortable ambiance. Walls are covered with black and white
photographs depicting classic New York scenes. The Company's restaurants are
configured to facilitate a smooth flow of dine-in and carry-out traffic while
retaining a casual, cafe atmosphere. Bagels and other baked products are
displayed prominently behind a glass counter while other items such as
salads, packaged cream cheese for take-out and specialty sodas and drinks are
located in an open, self-serve refrigerated area next to the cash register.
Restaurant staff prepare sandwich and other menu items behind the counter for
dine-in and take-out customers. Dine-in customers' food is delivered directly
to the table. The restaurants serve cappuccino and espresso and a fountain
drink and gourmet coffee station are placed in the dining area for customer
convenience. Retail merchandise, including logo clothing, coffee mugs and
gift items, are displayed throughout the restaurant.
The Company believes that the layout and design of each restaurant
contributes to the success of its operations. The Company continually reviews
the restaurant design package for its restaurants and remodels as required.
Pursuant to the franchise agreement, franchised restaurants' decor must be
updated every five years or upon renewal of each particular franchise
agreement. Remodeling typically requires closing the restaurant for one to
four weeks. Although restaurants may vary in size, layout and design are
generally consistent.
The Company considers the location of a restaurant to be important,
and, therefore, devotes significant resources to the investigation and
evaluation of potential sites. The site selection process focuses on area
demographics, including population density, traffic patterns, income levels
and competitive factors. Historically, the Company generally targeted
locations that possess a population density of at least 50,000 residents
within a three mile radius and are situated on the morning side of commuter
traffic. The Company's restaurants are typically located in strip shopping
centers or free-standing buildings that provide visibility, curb appeal and
accessibility. Certain limited hour satellite restaurants are located in
office buildings and are open during business hours Monday through Friday.
The Company's restaurant design may be configured to fit a wide variety of
building shapes and sizes thereby increasing the number of suitable sites for
new locations.
UNIT ECONOMICS
In targeted markets, the Company employs a multiple store strategy
involving a bakery restaurant which produces bagels for itself and one or more
nearby satellite restaurants. The Company's approach to opening new restaurants
has been to minimize its required investment by leasing substantially all of its
locations. The Company believes that bakery restaurants can be opened for an
initial investment, including leasehold improvements, furniture, fixtures,
equipment, initial
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working capital and pre-opening expenses, excluding real estate, of
approximately $275,000, with satellite restaurants requiring approximately
$175,000. By averaging these initial investment amounts within a particular
market, the Company believes it achieves attractive returns on investment
within markets.
OPERATIONS
RESTAURANT PERSONNEL. A typical New York Bagel restaurant employs a
restaurant manager, an assistant manager and approximately 25 to 30 hourly
employees for a bakery restaurant and 15 to 20 hourly employees for a
satellite restaurant, most of whom work part-time. The restaurant manager is
responsible for the day-to-day operation of the restaurant and for compliance
with Company-established operating standards. The Company seeks to hire
experienced restaurant managers and staff and to motivate and retain them by
providing opportunities for advancement and performance-based, financial
incentives. Training and compensation programs are intended to instill
restaurant managers and area managers with a sense of ownership in their
restaurants.
REPORTING. The Company's restaurant managers prepare daily and
weekly reports of sales, cash deposits and operating costs. Physical
inventories of all food and beverage items are taken weekly. The Company
conducts monthly meetings with area general managers to discuss restaurant
sales, profitability and operations, personnel needs and product quality.
HOURS OF OPERATIONS. The restaurants are generally open Monday
through Saturday from 6:30 a.m. to 8:00 p.m. and on Sunday from 8:00 a.m. to
5:00 p.m. Although the majority of restaurants are open seven days a week,
certain satellite restaurants are located in downtown business districts and
are open during business hours Monday through Friday.
TRAINING
The Company believes that comprehensive training is essential to the
efficiency and consistency of its restaurants. The Company conducts a 28-day
training program for its restaurant managers and franchisees that places an
emphasis on these areas while maintaining the operational systems of an
actual New York Bagel restaurant. In addition, the Company provides on-site
assistance during the initial days of operation at each Company-owned
restaurant and at a franchisee's initial franchised restaurant.
PURCHASING AND DISTRIBUTION
The Company establishes quality standards and specifications for
food products and equipment used in New York Bagel restaurants and designates
primary and secondary suppliers for all food items and restaurant supplies.
In order to ensure product quality and consistency, franchisees purchase
certain products from the Company's approved distributors. To obtain
competitive prices, the Company contracts centrally for certain food products
and supplies and negotiates volume discounts for the benefit of Company-owned
and franchised restaurants. Most Company-owned and franchised restaurants
purchase the majority of their food and non-food items from a nationally
recognized distributor. The Company believes that the loss of this
distributor would not materially affect the Company's results of operations.
MARKETING AND ADVERTISING
The Company and its franchisees advertise primarily through
newspapers, direct mail and radio. All advertising materials must be produced
or pre-approved by the Company. The Company provides restaurants with
pre-opening, grand opening and ongoing advertising and in-store promotional
material. Franchisees maintain sole discretion over the placement of
advertisements in their market.
FRANCHISE PROGRAM
The Company commenced franchising its restaurant concept in 1993 and,
as of March 1, 1999, has 10 franchisees operating 17 New York Bagel restaurants
in nine states. During 1998 and through March 1, 1999, activity within the
franchise program included the following: four new restaurants were developed in
North Dakota (1), Tennessee (1),
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Alabama (1) and Florida (1) and nine restaurants were closed and/or
disenfranchised in Nebraska (3), Texas (1), Arkansas (1), Colorado (2),
Washington (1) and California (1). As a result, the total number of
franchised restaurants has decreased from 23 as of March 1, 1998, to 17 as of
March 1, 1999. There are currently two franchised restaurants under
development, one located in North Dakota and one located in Texas. The
Company is not currently seeking new franchisees. Therefore, future growth in
the Company's franchise program will probably be limited to current
franchisees.
DEVELOPMENT AGREEMENT. The Company enters into a development
agreement with each franchisee (a "Development Agreement") for the exclusive
development of a predetermined number of New York Bagel restaurants within a
designated market area (the "Area of Exclusivity"). The Area of Exclusivity
is negotiated prior to the signing of a Development Agreement and varies by
agreement as to size, number of New York Bagel restaurants required and the
schedule for restaurant development and opening. A Development Agreement
generally requires a franchisee to develop the first restaurant within 12
months of signing the Development Agreement and the second restaurant within
18 months. Subsequent restaurants are generally required to be opened in
six-month intervals thereafter. Development schedules vary based upon the
size of the territory and the number of restaurants to be developed.
Development Agreements contain cross-default provisions and a failure to
develop the restaurants on schedule may result in a loss of exclusivity
within the Area of Exclusivity. Under the Company's Development Agreement,
the franchisee is required to pay, at the time of signing, a non-refundable
fee equal to one-third of the initial franchise fee per restaurant covered by
the Development Agreement. The amount is credited against the Company's
standard franchisee fee, the remainder of which is payable to the Company
upon signing the franchise agreement for a specific location.
FRANCHISE AGREEMENT. After signing a Development Agreement, the
Company enters into a franchise agreement (a "Franchise Agreement"),
generally when a franchisee secures a location. The Franchise Agreement
provides for a term of ten years with one ten-year renewal option and
contains cross-default provisions. The Company has the right to terminate any
Franchise Agreement under certain specified circumstances, including a
franchisee's failure to make payments when due or failure to adhere to the
Company's standards or procedures. Many state franchise laws limit the
ability of a franchisor to terminate or refuse to renew a franchise. The most
current Franchise Agreement contains a right of first refusal for the Company
to purchase an interest in the franchise and the franchisee. The most current
Franchise Agreement provides for an initial franchise fee of $21,000 for each
bakery restaurant and $12,000 for each satellite restaurant. During 1995, the
initial franchise fees for a bakery restaurant and a satellite restaurant
were $18,000 and $9,000, respectively. Under the most current Franchise
Agreement, the franchisee pays the Company a monthly royalty fee increasing
up to 4% of gross sales. Upon renewal of the Franchise Agreement, the monthly
royalty fee cannot be increased to an amount greater than the monthly royalty
fee then in effect for new franchisees. See "Business-Government Regulation."
SERVICES. The Company assists each franchisee in the site selection
and development of restaurants and provides the physical specifications and
plans for each franchised location. Each franchisee is responsible for
recommending the location for its restaurants, but must obtain Company
approval of each restaurant design and each location based on Company
requirements. Company personnel also visit each site in connection with the
site-approval process. The Company provides standard design plans and
equipment layout and specifications for most franchisees. In addition,
Company personnel provide telephone support with respect to operations issues.
QUALITY CONTROL. All franchisees are required to operate their New
York Bagel restaurants in compliance with the Company's policies, standards
and specifications, including matters such as menu items, ingredients,
materials, supplies, fixtures, furnishings, decor and signage. Each
franchisee has full discretion, however, to determine the prices to charge
its customers. The Company collects sales and other operating information
from its franchisees on a monthly, quarterly and annual basis. The Company
monitors each franchisee's operations through periodic field visits and
review of information provided by the franchisees. These overview mechanisms
allow the Company to quickly identify potential problems and provide
operational, marketing or accounting assistance.
FRANCHISE TRAINING AND SUPPORT. Each franchisee is required to have a
restaurant manager, approved by the Company, who satisfactorily completes the
Company's training program and who devotes such franchisee's full business time
and efforts to the operation of the franchisee's restaurant. In addition to this
program, the Company also provides on-site training during the opening of the
franchisee's initial restaurant and ongoing supervision thereafter. Multi-unit
franchisees are encouraged to hire a full-time training coordinator to train new
employees for their restaurants. The
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Company regularly communicates with its franchisees and encourages active
communication among its franchisees through telephone communications and
periodic meetings.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws
affecting its business. Each of the Company's restaurants is subject to
licensing and regulation by a number of governmental authorities, which
include health, safety, sanitation, building and fire agencies in the state
or municipality in which the restaurant is located. Difficulties in obtaining
or failures to obtain required licenses or approvals could delay or prevent
the opening of a new restaurant in a particular area.
The Company is subject to Federal Trade Commission ("FTC")
regulation and various state laws which regulate the offer and sale of
franchises. Several state laws also regulate substantive aspects of the
franchisor-franchisee relationship. The FTC requires the Company to furnish
to prospective franchisees a franchise offering circular containing
prescribed information. The Company is currently required to register as a
franchisor in three states. A number of states in which the Company does not
anticipate franchising also regulate the sale of franchises and require
registration of the franchise offering circular with state authorities.
Substantive state laws that regulate the franchisor-franchisee relationship
presently exist in many states and bills have been introduced in Congress
from time-to-time which would provide for Federal registration of the
franchisor-franchisee relationship in certain respects. State laws often
limit, among other things, the duration and scope of non-competition
provisions and the ability of a franchisor to terminate or refuse to renew a
franchise.
The Company's operations are also subject to federal and state laws
governing such matters as wages, working conditions, citizenship requirements
and overtime. The Company is also subject to the Americans with Disabilities
Act of 1990, which, among other things, could require certain renovations to
its restaurants in order to meet federal mandates. If such renovations are
required, the Company believes the cost thereof will not materially affect
the Company's results of operations. The Company believes it is in
substantial compliance with all material laws.
COMPETITION
The quick-service restaurant industry is intensely competitive and
generally characterized by low barriers to entry. There are a growing number
of significant national, regional and local bagel restaurant chains operating
both owned and franchised bagel restaurants including Einstein/Noah Bagel
Corp., Brueggers Bagel Bakery, Manhattan Bagel Company, Inc. and BAB
Holdings, Inc., many of which have greater financial resources than the
Company. New York Bagel restaurants also compete with other well established
quick-service restaurants that have greater product and name recognition,
larger financial and other resources than the Company and longer operating
histories, as well as numerous local food establishments, supermarkets and
convenience stores that offer similar products. The Company believes that New
York Bagel restaurants compete favorably in terms of taste, food quality,
portions, service, convenience and value, which the Company believes are
important factors to its targeted customers. The Company's continued success
is dependent to a substantial extent on its reputation for providing high
quality and value with respect to its service, products and franchises and
this reputation may be affected not only by the performance of Company-owned
restaurants, but also by the performance of its franchised restaurants over
which the Company has limited operational control.
TRADEMARKS AND SERVICE MARKS
The Company operates and franchises bagel restaurants under the
names "New York Bagel Shop & Delicatessen," "New York Bagel Shop & Deli," "NY
Bagel Cafe," "New York Bagel Cafe & Deli," "NYB New York Bagel" and "the New
York Bagel Shop." The Company's trademark, "New York Bagel Shop &
Delicatessen," and service mark, "Like Bread With An Attitude," are
registered under applicable federal trademark law. Under federal trademark
law, the Company is required to renew these marks every 20 years. The
Company's trademark "Lots A' Bagels, Inc." is registered in the State of
Colorado. The Company claims common-law rights to the marks "New York Bagel
Shop & Delicatessen," "NYB," "The City's Best Bagel," "Where Yeast Meets
West," and "Talkin' Soup," but there have been no judicial determinations of
the existence, validity, or extent of the Company's rights. Certain marks are
licensed by the Company to franchisees pursuant to franchise agreements.
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The Company is aware of the use by other persons and entities in
certain geographic areas of names and marks which are the same or similar to
the Company's marks. Some of these persons or entities may have prior rights
to those names or marks in their respective localities. Therefore, there is
no assurance that the "New York Bagel Shop & Delicatessen" mark or any other
marks are available in all locations.
EMPLOYEES
As of March 1, 1999, the Company employed 465 persons, 76 of which
are employed full-time. None of the Company's employees is subject to any
collective-bargaining agreements and management considers its relations with
its employees to be good.
JOINT VENTURE
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 and cash in certain
instances to a joint venture entity with Western Country Clubs, Inc.
("Western") and Western 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
entities concerning Tulsa, Oklahoma and Wichita, Kansas. Western will oversee
the restaurant conversion, the day-to-day operations and accounting matters
of the Atomic Burrito restaurants. Furthermore, Western can elect to convert
only five restaurants, instead of the aforementioned seven, 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. As of March 1, 1999 there was one
cobranded New York Bagel and Atomic Burrito restaurant located in Tulsa,
Oklahoma, and one Atomic Burrito restaurant located in Wichita, Kansas, both
of which are being converted from New York Bagel restaurants.
ITEM 2. PROPERTIES
The average New York Bagel bakery restaurant contains approximately
2,750 square feet, and the average satellite restaurant contains
approximately 2,000 square feet. Approximately 1,200 square feet of a bakery
restaurant is used for dough production, baking and food preparation while
approximately 500 square feet of a satellite restaurant is used for food
preparation. The Lots A' Bagel restaurants are approximately 2,000 square
feet, 500 square feet of which is used for food preparation. The restaurants
have an average seating capacity of approximately 60 persons. As of March 1,
1999, the Company leases approximately 1,200 to 4,000 square feet of space
for 37 of its Company-owned restaurant sites. The Company also leases a
19,479 square-foot bagel commissary located at 4325 Northpark Drive, Colorado
Springs, Colorado 80915, that provides all of the dough production, baking
and food preparation for the eight Lots A' Bagels restaurants and a 5,800
square foot bagel commissary located at 238 Cleveland, Wichita, Kansas 67214,
that provides all the dough production and bakery preparation for the four
New York Bagel restaurants in Wichita. Such leases expire during June 2004
and April 2000, respectively. Through March 1, 1999, the Company has also
entered into agreements whereby the Company sold and leased back ten
restaurant facilities (nine land and buildings and one building only) to an
entity owned by an officer of the Company and a significant stockholder, both
of whom are members of the Board of Directors of the Company. The Company
believes the terms and conditions of both the real estate sales and the
related leasebacks are fair and reasonable and were on terms at least as
favorable as would be available from non-affiliated parties. Although the
terms of its leases for Company-owned restaurants vary, the Company typically
seeks to obtain an initial five-year term lease with two or three five-year
option terms. The following table sets forth certain information as of March
1, 1999 with respect to Company-owned and franchised restaurants currently in
operation, under development or closed during 1997 or 1998. Restaurants under
development include locations for which leases have been signed, a real
estate purchase agreement has been executed, or construction has commenced,
but are not currently in operation.
9
<PAGE>
COMPANY-OWNED RESTAURANTS
<TABLE>
<CAPTION>
DATE TYPE OF
LOCATION OPENED/ACQUIRED RESTAURANT
- -------- --------------- ----------
<S> <C> <C> <C>
NEW YORK BAGEL RESTAURANTS
Stillwater, OK Elm Street January 1986 Bakery
Stillwater, OK Downtown August 1986 Satellite
Oklahoma City, OK Casady Square August 1988 Bakery
Oklahoma City, OK Leadership Square October 1989 Satellite
Tulsa, OK Yale and 71st Street January 1990 Bakery
Edmond, OK Broadway Extension September 1991 Satellite
Wichita, KS East Central Avenue July 1992 Bakery
Wichita, KS Downtown April 1993 Satellite
Oklahoma City, OK Brixton Square July 1993 Satellite
Norman, OK Lindsey Avenue August 1994 Bakery
Norman, OK Campus September 1994 Satellite
Tulsa, OK Peoria Avenue September 1995 Bakery
Nashville, TN West End Avenue December 1995 Bakery
Nashville, TN Hillsboro Village March 1996 Satellite
Tulsa, OK Downtown March 1996 Satellite
Stillwater, OK Perkins Road September 1996 Satellite
Lubbock, TX Quaker Avenue November 1996 Bakery
Tulsa, OK 51st Street December 1996 Satellite
Oklahoma City, OK Walnut Square December 1996 Bakery
Wichita, KS 21st Street and Rock Road June 1997 Satellite
Wichita, KS 21st Street and Tyler Road July 1997 Satellite
Tulsa, OK East 61st Street August 1997 Satellite
Midland, TX Desta Drive October 1997 Bakery
Mobile, AL Azaela Road October 1997 Bakery
Tuscaloosa, AL McFarland Road October 1997 Bakery
Manhattan, KS Belmont Avenue November 1997 Bakery
Oklahoma City, OK A. May Avenue February 1998 Satellite
Mobile, AL Hillcrest Road March 1998 Satellite
Montgomery, AL Carmichael Road April 1998 Bakery
</TABLE>
<TABLE>
<CAPTION>
DATE TYPE OF
LOCATION OPENED/ACQUIRED RESTAURANT
- -------- --------------- ----------
<S> <C> <C> <C>
LOTS A' BAGELS RESTAURANTS
Colorado Springs, CO East Cheyenne Mountain Blvd. December 1996 Satellite
Colorado Springs, CO North Academy December 1996 Satellite
Colorado Springs, CO West Colorado Avenue December 1996 Satellite
Colorado Springs, CO Austin Bluff Parkway December 1996 Satellite
Colorado Springs, CO Centennial Boulevard December 1996 Satellite
Colorado Springs, CO North Academy December 1996 Satellite
Monument, CO Highway 105 December 1996 Satellite
Pueblo, CO Highway 50 April 1998 Satellite
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
DATE TYPE OF
LOCATION OPENED/ACQUIRED RESTAURANT
- -------- --------------- ----------
<S> <C> <C> <C>
COBRANDED JOINT VENTURE RESTAURANT
Tulsa, OK Cherry Street Under Development --
</TABLE>
<TABLE>
<CAPTION>
DATE TYPE OF
LOCATION OPENED/ACQUIRED RESTAURANT
- -------- --------------- ----------
<S> <C> <C> <C>
JOINT VENTURE RESTAURANT
Wichita, KS Rock Road Under Development --
</TABLE>
<TABLE>
<CAPTION>
TYPE OF
LOCATION DATE CLOSED RESTAURANT
- -------- --------------- ----------
<S> <C> <C> <C>
CLOSED COMPANY RESTAURANTS
Nashville, TN L&C Tower November 1997 Satellite
Santa Fe, NM St. Michaels Boulevard November 1997 Bakery
Santa Fe, NM Montezuma Street November 1997 Satellite
Waco, TX South 5th Street November 1997 Satellite
Austin, TX Jefferson Street January 1998 Satellite
Louisville, KY Shelbyville Road March 1998 Bakery
Nashville, TN White Bridge Road June 1998 Satellite
Springfield, MO Campbell Avenue July 1998 Bakery
Springfield, MO Sunshine Avenue July 1998 Satellite
Austin, TX Research Boulevard September 1998 Bakery
Austin, TX Research Boulevard September 1998 Satellite
Temple, TX General Bruce Drive December 1998 Bakery
San Antonio, TX East Basse Road December 1998 Satellite
San Antonio, TX Embassy Oaks December 1998 Bakery
Waco, TX West Waco Drive December 1998 Bakery
</TABLE>
FRANCHISED RESTAURANTS
<TABLE>
<CAPTION>
DATE TYPE OF
LOCATION OPENED/ACQUIRED RESTAURANT
- -------- --------------- ----------
<S> <C> <C> <C>
Knoxville, TN Kingston Pike March 1994 Bakery
Little Rock, AR Markham Avenue November 1994 Bakery
Littleton, CO West Bowles Avenue April 1995 Bakery
Plano, TX Legacy Drive April 1995 Bakery
Knoxville, TN Gay Street July 1995 Satellite
Columbia, SC Harden Street September 1995 Bakery
Irving, TX North MacArthur Boulevard March 1996 Satellite
New Orleans, LA Veteran's Boulevard March 1996 Bakery
Birmingham, AL 20th Street South June 1996 Bakery
Littleton, CO Wadsworth Avenue September 1996 Satellite
Columbia, SC Palmetto Plaza October 1996 Satellite
Tyler, TX Loop 323 February 1997 Bakery
Ft. Myers, FL Tamiami Trail December 1997 Bakery
Birmingham, AL Acton Road January 1998 Satellite
Ft. Myers, FL Topaz Court February 1998 Satellite
Clarksville, TN Madison Road March 1998 Bakery
Bismarck, ND East Bismark Expressway November 1998 Bakery
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
TYPE OF
LOCATION DATE CLOSED RESTAURANT
- -------- --------------- ----------
<S> <C> <C> <C>
CLOSED FRANCHISED RESTAURANTS
San Antonio, TX Broadway Avenue May 1997 Satellite
Aurora, CO East Mississippi Street July 1997 Satellite
Little Rock, AR Center Street July 1997 Satellite
Tampa, FL North Dal Mabry Highway September 1997 Bakery
Tucson, AZ North Oracle Avenue September 1997 Satellite
Springdale, AR West Sunset October 1997 Bakery
Fayetteville, AR Mission Boulevard October 1997 Satellite
Lincoln, NE 13th Street October 1997 Satellite
Amarillo, TX West Georgia Street November 1997 Satellite
Amarillo, TX Soncy Road November 1997 Bakery
Dallas, TX Lemmon Avenue December 1997 Bakery
Tucson, AZ East Broadway December 1997 Bakery
El Paso, TX North Mesa Avenue March 1998 Bakery
Omaha, NE South 106th December 1998 Bakery
Omaha, NE Farnam Street December 1998 Satellite
Longview, WA Ocean Beach Highway December 1998 Bakery
Omaha, NE Pacific Street December 1998 Satellite
Englewood, CO Holly Street December 1998 Bakery
Little Rock, AR Fairway Avenue December 1998 Satellite
Aurora, CO Parker Road February 1999 Satellite
San Carlos, CA Redwood Shores Parkway February 1999 Bakery
</TABLE>
The Company's principal executive offices are located at 300 I.M.A.
Plaza, 250 North Water Street, Wichita, Kansas 67202-1213, where the Company
subleases approximately 2,158 square feet of office space pursuant to a
sublease agreement with Murfin Drilling Company, Inc., a wholly owned
subsidiary of Murfin, Inc., on a month-to-month basis. The Company has the
option to terminate such sublease upon 30 days' notice. David L. Murfin, a
Director of the Company, is a 21.2% stockholder of Murfin, Inc. The Company
believes that alternative office space is available at comparable rates from
third parties. The Company's operational offices are located at 115 East 8th,
Stillwater, Oklahoma 74074, where the Company leases approximately 2,200
square feet of office space and 1,000 square feet of storage space pursuant
to a lease agreement that expires during December 2001. The Company conducts
its management and franchisee training at its Casady Square, Oklahoma City,
Oklahoma, facility in an approximately 3,400 square foot space contiguous to
the restaurant. Such facility is subject to a lease that expires during July
2003. The Company is transitioning its principal executive offices to
Stillwater, Oklahoma, from Wichita, Kansas. The Company anticipates that such
transition will be completed during April 1999. The Company believes that its
current executive offices, operational offices and training facilities are
adequate for the near future and does not anticipate the need for significant
expansion of these facilities in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time-to-time in various legal
proceedings and claims incident to the normal conduct of its business. The
Company believes that such legal proceedings and claims, individually and in
the aggregate, are not likely to have a material adverse effect on its
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
<PAGE>
RISK FACTORS
THIS FORM 10-KSB 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-KSB 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-KSB 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 HEREIN, 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 PARTNER, THE TRANSITION TO THE
YEAR 2000, ACCEPTANCE OF NEW PRODUCT OFFERINGS, COMPETITION, MANAGEMENT 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 OR PERSONS ACTING ON ITS BEHALF ARE
EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS.
RESTAURANT OPERATION. As of March 1, 1999, there were 54 restaurants
in operation, consisting of 29 New York Bagel Company-owned and 17 franchised
restaurants and eight Lots A' Bagels restaurants. In addition, there were two
Atomic Burrito joint venture restaurants (a cobranded New York Bagel and
Atomic Burrito restaurant and a Atomic Burrito restaurant) and two franchised
restaurants in various stages of development. The Company has used all of the
net proceeds of its initial public offering to develop and acquire
Company-owned restaurants. The opening of New York Bagel restaurants depends
on various factors, not all of which are within the control of the Company,
including customer acceptance of the Company's concept in markets, the
availability of suitable sites, the negotiation of acceptable lease or
purchase terms for new locations, the ability to introduce new products,
permit and regulatory compliance, the ability to meet construction schedules,
the financial and other capabilities of the Company and its franchisees, the
ability of the Company to successfully manage operations and to hire and
train personnel, and general economic and business conditions. Furthermore,
because of the Company's relatively small restaurant base, unsuccessful
restaurants have a more significant adverse effect on the Company's results
of operations than would be the case for a company with a larger restaurant
base. There can be no assurance that the Company will be able to manage its
operations effectively. There can be no assurance that the Company will
continue to experience growth in, or maintain its present level of, revenues.
See "Management's Discussion and Analysis or Plan of Operation" and
"Business-Company Strategy."
RESTAURANT DISPOSITIONS. As of March 1, 1999 the Company has closed
15 underperforming restaurants. The Company anticipates that it will close
approximately seven additional restaurants during 1999. All of the leases
that derived from the sale-leaseback transactions have initial terms of 15
years. There can be no assurance that the Company will be able to negotiate
the termination of restaurant real property leases on terms acceptable to the
Company.
JOINT VENTURE. The Company has entered into a joint venture agreement
with Western Country Clubs, Inc. ("Western") 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 cash in certain instances.
Also, Western will contribute cash to convert the restaurants to the Atomic
Burrito concept. As of March 1, 1999 there was one cobranded New York Bagel and
Atomic Burrito restaurant and one Atomic Burrito restaurant under development by
the joint venture. There can be no assurance that (i) the joint venture
restaurants can be converted on an economical basis, (ii) the joint venture
restaurants will operate profitably or (iii) the Company will successfully
participate as a joint venture partner. The opening and success of joint venture
restaurants will depend on various factors, most of which are outside of the
control of the Company, including Western's ability to economically convert the
restaurants, customer acceptance of the new Atomic Burrito concept, permit and
regulatory compliance, the financial capabilities of the Company, the ability of
Western to successfully manage this anticipated development and the restaurant
operations, personnel hiring and training, and general economic
13
<PAGE>
and business conditions. An unsuccessful restaurant could have a significant
adverse effect on the Company's results of operations. See "Management's
Discussion and Analysis or Plan of Operation."
DEPENDENCE ON FRANCHISEES. The Company realizes a portion of its
revenues from initial franchise fees and continuing royalty payments from its
franchisees. If the Company's franchisees encounter business or operational
difficulties, as several have, the Company's revenues from royalties will be
adversely affected. Such difficulties may also negatively impact the
Company's ability to sell new franchises. Consequently, the Company's
financial prospects are related to the success of its franchised restaurants,
over which the Company has limited direct operational control. There can be
no assurance that the Company's franchisees will be able to successfully
operate existing or develop and operate additional New York Bagel
restaurants. Through March 1, 1999, 21 franchised restaurants have been
closed or disenfranchised.
COMPETITION. The quick-service restaurant industry is intensely
competitive and characterized by relatively low barriers to entry. New York
Bagel restaurants compete against many well established, quick-service
restaurants, local food establishments, supermarkets and convenience stores,
many of which have greater product and name recognition and larger financial
and other resources than the Company. An increase in the number of
competitors, particularly bagel restaurants or delicatessens, in the
Company's territories could have an adverse impact on the Company's results
of operations and expansion plans. See "Business-Competition."
TERMS OF CREDIT FACILITY; NEED FOR ADDITIONAL CAPITAL. The Company's
ability to satisfy its debt obligations will depend upon its ability to
secure additional capital and its future operating performance, which will be
affected by prevailing economic, financial and business conditions and other
factors, some of which are beyond the control of the Company. The Company
anticipates that borrowings from the Credit Facility or the refinancing of
such Credit Facility and cash provided by operating activities may provide
sufficient funds to finance anticipated joint venture plans, meet its
operating expenses and service its debt requirements as they become due.
However, the Company anticipates attempting to raise additional funds through
the private sale of either equity or debt securities, even though no such
funds are committed. There can be no assurance that it will be able to raise
such capital or on satisfactory terms, if at all. See "Management's
Discussion and Analysis or Plan of Operation - Liquidity and Capital
Resources." The Company has entered into a loan agreement with revolving line
of credit and term loan facilities, as amended, which has a maximum aggregate
commitment of $2.5 million (the "Credit Facility") with NationsBank, N.A.
(the "Bank"). The Credit Facility provides for a $2.5 million revolving line
of credit commitment, subject to availability under a borrowing base
calculated by reference to the level of eligible equipment, inventory and
accounts receivable. The terms and conditions of the Credit Facility impose
restrictions that affect, among other things, the ability of the Company to
incur debt; make capital expenditures; redeem equity interests; loan funds to
any of the Company's officers, directors and employees and their respective
affiliates; merge; sell assets; make distributions; pay dividends; create or
incur liens; waste assets; change the senior management; change the name
and/or change the location of the assets. Availability of the Credit Facility
is also subject to certain financial covenants. As of December 27, 1998, the
Company was not in compliance with certain restrictive covenants contained in
the Credit Facility which require specified financial ratios. However, the
Company does not believe such noncompliance will adversely impact liquidity,
although there is no assurance of such. The Bank has waived such default for
the fiscal year ended 1998. In the event of a default, the Bank could elect
to declare the outstanding principal amount of the Credit Facility, all
interest thereon and all other amounts payable under the Credit Facility to
be immediately due and payable. If the Company were unable to repay such
amounts, the Bank could proceed against the collateral securing the Credit
Facility, substantially all of the Company's assets, to repay the
indebtedness and other obligations due and payable.
RESTAURANT INDUSTRY. The Company and the restaurant industry are
significantly affected by factors such as changes in local, regional or
national economic conditions; changes in consumer tastes and concerns about
the nutritional quality of quick-service foods. Multi-unit food service
chains such as the Company can also be substantially adversely affected by
publicity resulting from food quality, illness, injury or other health
concerns or operating issues stemming from one restaurant or a limited number
of restaurants. In addition, factors such as increases in food, labor and
energy costs; the availability and cost of suitable restaurant sites;
fluctuating insurance rates; state and local regulations and the availability
of an adequate number of hourly-paid employees can also adversely affect the
restaurant industry.
14
<PAGE>
DEPENDENCE ON KEY PERSONNEL. The Company's future success will be
highly dependent on the continued efforts of senior management. The Company
does not have employment agreements with any of its senior management. The
loss of the services of one or more of such key personnel could have a
materially adverse effect upon the Company's results of operations. The
Company's success is also dependent upon its ability to attract and retain
skilled restaurant managers and employees and the ability of its key
personnel to manage the Company's restaurants and integrate its operations.
There can be no assurance that the Company will be successful in attracting
and retaining such personnel.
INCREASES IN OPERATING COSTS; INTERRUPTIONS IN SUPPLIES. An increase
in operating costs could adversely affect the profitability of the Company.
Factors such as inflation; increased food and labor costs, including the
additional and any future increase in the minimum hourly wage requirement,
and employee benefit costs and the availability of qualified management and
other personnel may adversely affect the profitability of the Company. The
cost and availability of many restaurant commodities are subject to
fluctuations due to seasonality, weather, demand and other factors. The
Company's restaurants are dependent on frequent deliveries of food supplies
and any shortages or interruptions could have a material adverse effect on
the Company. See "Business-Purchasing and Distribution."
YEAR 2000. The Company believes that the transition to the Year 2000
will be a challenge to the Company and businesses generally. The Company
continues to address its material internal processes that may be affected by
the Year 2000 and has made inquiries of its material third-party suppliers.
If the Company experiences internal problems or if a material supplier is not
able to perform, the Company could incur material disruptions to its
business, which in turn could have a material adverse effect on the Company.
See "Management's Discussion and Analysis or Plan of Operation - Year 2000."
GEOGRAPHIC CONCENTRATION. All of the Company-owned restaurants are
located in Oklahoma, Kansas, Tennessee, Texas, Colorado and Alabama. As a
result, the Company's results of operations may be materially affected by
adverse business, economic or weather conditions in these states. There can
be no assurance that the current geographic concentration of the Company's
business will not have an adverse effect on its results of operations or
financial condition in the future.
FLUCTUATIONS IN QUARTERLY RESULTS. The timing of restaurant
openings, closings, remodelings or acquisitions, impairments, recognition of
franchise fee income and seasonal factors may result in fluctuations in
quarterly operating results of the Company. In accordance with generally
accepted accounting principles, franchise and development fees and the
corresponding deferred charges with respect to each franchise or development
agreement are not recognized as income or expense until a restaurant
commences operations. There can be no assurance that quarterly fluctuations
will not continue and, accordingly, the Company's financial results for a
particular quarter may not be indicative of results for an entire year.
CONTROL OF COMPANY. As of March 1, 1999 the directors and officers of
the Company beneficially owned approximately 45.3% of the outstanding Common
Stock of the Company. In addition, the stockholders that existed prior to the
Company's initial public offering and the Company are parties to a certain
stockholders' agreement (the "Stockholders' Agreement"), which, among other
things, sets forth certain agreements regarding the designation and election of
directors of the Company. Due to their ownership position and the Stockholders'
Agreement, such stockholders are anticipated to retain the power to direct the
Company's business and affairs through their ability to control the outcome of
elections of the Company's Board of Directors and to take other actions that
require the vote or approval of the stockholders of the Company. Such
stockholders' control may increase as a percentage of outstanding Common Stock
of the Company due to open-market purchases of the Common Stock by the Company
pursuant to the terms of the Stock Repurchase Program discussed below.
GOVERNMENT REGULATION. The Company is subject to numerous federal,
state and local government regulations, including those relating to the
preparation and sale of food, the sale of alcoholic beverages, public health and
building and zoning requirements. Also, the Company and its franchisees are
subject to laws governing their relationship with employees, including
minimum-wage requirements, overtime, working conditions and citizenship
requirements. The Company is also subject to federal regulation and certain
state laws which govern the offer and sale of franchises. Many state franchise
laws impose substantive requirements on franchise agreements, including
limitations on non-competition provisions and termination or non-renewal of a
franchise. Some states require that certain franchise offering materials be
15
<PAGE>
registered before franchises can be offered or sold in that state. The
failure to obtain or retain food licenses, alcoholic beverage licenses or
approvals to sell franchises could adversely affect the Company's and its
franchisees' results of operations. The future enactment, adoption or
amendment of laws or regulations, such as establishing basic franchisee
rights, increasing the minimum wage or other costs associated with employees,
could adversely affect the Company's results of operations. See
"Business-Franchise Program" and "Business-Government Regulation."
TRADEMARKS AND SERVICE MARKS. The Company is aware of the use by
other persons and entities in certain geographic areas of names and marks
that are the same as or similar to the Company's marks. Some of these persons
or entities may have prior rights to those names or marks in their respective
localities. Negative publicity surrounding such businesses may adversely
affect the Company's operations in those markets. In addition, the Company's
marks contain common descriptive words and thus may be subject to challenge
by users of these words, alone or in combination with other words, which
describe other services or products. Accordingly, there is no assurance that
the Company's marks will be available in all locations or that a challenge to
the Company's use of such marks will not result in adverse consequences,
including a judgment that would entail damages and/or the discontinuation of
the Company's use of its marks. It is the Company's policy to utilize other
compatible marks in areas where there are preexisting competing marks. See
"Business-Trademarks and Service Marks."
CLASSIFIED BOARD OF DIRECTORS. The Company's Restated and Amended
Articles of Incorporation and Restated and Amended Bylaws provide for a
classified Board of Directors. The terms of each class expire in consecutive
years so that only one class is elected in any given year. Such provisions
could delay, deter or prevent a merger, consolidation, tender offer or other
business combination or change of control involving the Company that some or
a majority of the Company's stockholders might consider to be in their best
interests, including offers or attempted takeovers that might otherwise
result in such stockholders receiving a premium over the market price for the
Common Stock.
PREFERRED STOCK. The Company's Restated and Amended Articles of
Incorporation and Restated and Amended Bylaws authorize shares of Preferred
Stock with respect to which the Board of Directors of the Company have the
power to fix the rights, preferences, privileges and restrictions without any
further vote or action by the stockholders. Depending upon the rights of such
Preferred Stock, the issuance of Preferred Stock could have an adverse effect
on holders of Common Stock by delaying or preventing a change in control of
the Company, diluting the voting rights of holders of Common Stock, making
removal of the present management of the Company more difficult or reducing
or restricting the payment of dividends and other distributions to the
holders of Common Stock, including, without limitation, any liquidation
preferences which may relate to such Preferred Stock. Such provisions could
delay, deter or prevent a merger, consolidation, tender offer, or other
business combination or change of control involving the Company that some or
a majority of the Company's stockholders might consider to be in their best
interests, including offers or attempted takeovers that might otherwise
result in such stockholders receiving a premium over the market price for the
Common Stock.
SUPERMAJORITY STOCKHOLDER VOTES. The Company's Restated and Amended
Articles of Incorporation and Restated and Amended Bylaws require the
affirmative vote of the holders of at least two-thirds of the outstanding
capital stock in order to remove directors for cause, amend the Bylaws and
approve certain business combinations with respect to a "related person."
Such provisions could delay, deter or prevent a merger, consolidation, tender
offer or other business combination or change of control involving the
Company that some or a majority of the Company's stockholders might consider
to be in their best interests, including offers or attempted takeovers that
might otherwise result in such stockholders receiving a premium over the
market price for the Common Stock.
ABSENCE OF ACTIVE MARKET; VOLATILITY OF STOCK PRICE. Generally, due to
the Company's Common Stock trading on the Nasdaq's OTC Bulletin Board, there can
be no assurance that any market for the Company's Common Stock will exist.
Therefore, a purchaser of the Common Stock may not be able to readily liquidate
its investment in the Common Stock. Market prices for the Common Stock may be
influenced by a number of factors, including the Company's operating results and
other factors affecting the Company specifically and the restaurant industry and
the financial markets generally, as well as the liquidity of the market for the
Common Stock. The Company believes that the market price of its Common Stock
reflects expectations that the Company will be able to operate its restaurants
profitably and to successfully participate as a joint venture partner in the
Atomic Burrito joint venture restaurants. If the Company is unable to operate
its restaurants profitably and successfully participate as a joint venture
partner in the Atomic Burrito restaurants at a pace that reflects the
16
<PAGE>
expectations of the market, investors could sell shares of the Common Stock
at or after the time that it becomes apparent that such expectations may not
be realized, resulting in a decrease in the market price of the Common Stock.
In recent years the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to their
operating performance.
SHARES ELIGIBLE FOR FUTURE SALE. Shares of Common Stock outstanding
prior to completion of the Company's initial public offering are "restricted
securities" as that term is defined in Rule 144 ("Rule 144") promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). These
"restricted securities," and any shares purchased by affiliates of the
Company in such offering or thereafter may be publicly sold only if
registered under the Securities Act or if sold in accordance with an
available exemption from registration, such as those provided by Rule 144. No
prediction can be made as to the effect, if any, that future sales of shares,
or the availability of shares for future sales, will have on the market price
of the Common Stock. The sale of substantial amounts of Common Stock, or the
perception that such sales could occur, could adversely affect the prevailing
market price for the Common Stock.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is currently traded on the Nasdaq OTC
Bulletin Board under the symbol "NYBS." From August 27, 1996 (the date of the
Company's initial public offering), through November 30, 1998, the Company's
Common Stock was traded on the Nasdaq National Market. Prices on the Nasdaq
OTC Bulletin Board reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
The table sets forth, for the periods indicated, the reported high
and low bid prices of the Company's Common Stock, as reported on the
respective Nasdaq National Market and the Nasdaq OTC Bulletin Board as
discussed above:
<TABLE>
<CAPTION>
1997
------------------------
HIGH BID LOW BID
-------- -------
<S> <C> <C>
First Quarter....................................... $7.63 $3.94
Second Quarter...................................... $5.31 $4.00
Third Quarter....................................... $4.31 $3.25
Fourth Quarter...................................... $4.00 $1.88
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------
HIGH BID LOW BID
-------- -------
<S> <C> <C>
First Quarter....................................... $2.50 $1.50
Second Quarter...................................... $1.88 $0.97
Third Quarter....................................... $1.06 $0.75
Fourth Quarter...................................... $0.88 $0.19
</TABLE>
STOCKHOLDERS
According to the records of the Company's transfer agent, the
Company had 129 holders of record of the Common Stock as of March 1, 1999.
The Company believes that a substantially larger number of beneficial owners
hold such shares in depository or nominee form.
DIVIDENDS AND DISTRIBUTIONS
S CORPORATION DISTRIBUTIONS. From January 1, 1994 until August 25,
1996 (the "Termination Date"), the Company and certain of the Prior Entities
were treated for federal and state income tax purposes as S corporations
under Subchapter S of the Internal Revenue Code of 1986, as amended (the
"Code"). During such period, the Company's earnings were taxed
17
<PAGE>
for federal and most state income tax purposes directly to the Company's
stockholders, rather than to the Company. The Company is responsible for the
payment of all federal and state income taxes on earnings subsequent to the
Termination Date and continuing thereafter.
Certain Prior Entities paid cash distributions to their stockholders
in the aggregate amounts of approximately $2.5 million during 1995. The
distributions made in 1995 were in excess of the earnings of such Prior
Entities and were partially funded by borrowings of such Prior Entities which
were assumed by the Company in connection with the Reorganization. The
Company repaid all of its bank borrowings with a portion of the net proceeds
of its initial public offering. The Company used a portion of the net
proceeds of its initial public offering to fund a distribution on March 4,
1997 of $156,000 to the stockholders that existed prior to the Company's
initial public offering in connection with their estimated federal and state
income tax obligations attributable to the Company's 1996 earnings through
the Termination Date. Under federal tax laws, if the Company failed to
distribute its undistributed S corporation earnings within a limited period
of time following the Termination Date, a later distribution could be taxed
as a dividend to the stockholders. No S corporation distributions have been
or are anticipated to be made to the stockholders in connection with the
Company's earnings for any period after the Termination Date.
DIVIDEND POLICY. The Company currently intends to retain all
earnings to provide funds for its operations and expansion and, therefore,
does not anticipate paying cash dividends or making any other distributions
on its shares of Common Stock in the foreseeable future. The Company's future
dividend policy will be determined by its Board of Directors based on various
factors, including the Company's results of operations, financial condition,
business opportunities, capital requirements, credit restrictions and such
other factors as the Board of Directors may deem relevant. The Company's
ability to pay dividends is restricted by the terms of the Credit Facility.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
THIS FORM 10-KSB 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-KSB 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-KSB 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 THIS FORM 10-KSB
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 PARTNER, THE TRANSITION TO THE YEAR 2000, ACCEPTANCE OF NEW
PRODUCT OFFERINGS, COMPETITION, MANAGEMENT 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 OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY SUCH FACTORS.
The Company opened its first restaurant in 1986, and, as of March 1,
1999, all of its Company-owned restaurants, including Lots A' Bagels
restaurants, operate in Oklahoma, Kansas, Tennessee, Texas, Alabama and
Colorado. In addition to developing new restaurants, as of March 1, 1999 the
Company has acquired one bagel restaurant in Tennessee, seven Lots A' Bagels
restaurants in Colorado and four franchised New York Bagel restaurants in
Kansas and Texas. The Company commenced franchising the New York Bagel
concept in 1993 and as of March 1, 1999 has 10 franchisees operating 17
restaurants.
18
<PAGE>
The Company's business was previously operated through the Prior
Entities. The Company was incorporated in December 1995 under the laws of
Kansas, and on December 31, 1995, the Prior Entities were merged into the
Company (the "Reorganization").
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. Franchise and
development fees are initially recorded as deferred revenue until each
franchised restaurant opens, at which time these fees are recorded as revenue.
Cost of sales includes 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.
The Company completed its initial public offering in August 1996 in
which it raised $14.7 million that enabled the Company to grow and expand.
From August 1996 through February 1998, the Company utilized such proceeds to
develop 26 new restaurants and to acquire 11 additional restaurants.
Consequently, Company-owned restaurants have increased from 20 restaurants
just prior to the initial public offering to 37 Company-owned restaurants as
of March 1, 1999. During 1998, the Company shifted its strategy from that of
aggressive growth to that of limited growth with an enhanced focus on
operations and closure of underperforming restaurants in an attempt to
achieve profitability. The Company anticipates continuing this strategy
during 1999. The strategy includes new product initiatives that are
anticipated to stimulate sales growth from existing restaurants. It also
includes a focus on cost controls, primarily cost of sales and restaurant
operating expenses. The Company anticipates that its limited development and
enhanced focus on operations will position the Company to renew restaurant
development and growth. In addition, the Company has entered into a joint
venture agreement with Western Country Clubs, Inc., parent of the Atomic
Burrito fresh mex restaurant concept, to open up to seven joint venture
restaurants. As of March 1, 1999, two joint venture restaurants are under
development through conversion of New York Bagel restaurants.
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>
FIFTY-TWO WEEKS ENDED
----------------------------
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Sales from Company-owned restaurants................................. 99.2% 97.8%
Franchise revenues................................................... 0.8 2.2
---- ----
Total revenues...................................................... 100.0% 100.0%
Costs and expenses:
Cost of sales(1)...................................................... 36.4% 33.3%
Restaurant operating expenses(1)..................................... 57.4 55.3
General and administrative expenses................................... 8.0 9.6
Depreciation and amortization......................................... 5.0 4.9
Provision for impairments and closures................................ 24.7 19.9
Operating income (loss)................................................. (30.7) (21.0)
Interest expense (income), net.......................................... (0.8) (0.4)
Cumulative effect of accounting change, net of tax benefit.............. - (0.7)
Net earnings (loss)................................................... (31.5) (20.6)
</TABLE>
- -----------------------------------
(1) As a percentage of sales from Company-owned restaurants.
19
<PAGE>
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Total revenues remained constant at $19.0 million for 1998 compared
to 1997. The additional revenue derived from the Company's restaurant
openings was offset by the revenues lost as a result of the Company's closing
certain restaurants as well as other factors discussed below.
Sales from Company-owned restaurants increased $273,000, or 1.5%, to
$18.8 million for 1998 compared to $18.6 million for 1997. This is primarily
the result of opening five additional Company-owned restaurants during 1998
and the full year sales from those restaurants opened during 1997. The
Company's closing 11 restaurants during 1998 offset the increase. In
addition, the Company experienced a 15.0% decrease in same restaurant sales
(sales from restaurants that were open during the entire period indicated and
the entire corresponding prior period) during 1998 primarily as a result of
the following: (i) increased competition; (ii) increased development within
certain markets; and (iii) the maturation of the bagel industry. The Company
anticipates closing seven additional restaurants during 1999. As of December
27, 1998, the Company had 38 Company-owned restaurants compared to 45
restaurants as of December 28, 1997.
Franchise revenues decreased by $273,000, or 65.6%, to $144,000 for
1998 compared to $417,000 for 1997. This decrease is primarily due to the
closing or disenfranchising of 10 franchise restaurants during 1998. There
were 19 franchised restaurants at the end of 1998 as compared to 25
franchised restaurants at the end of 1997. Consequently, franchise and
development fees decreased $100,000, or 67.8%, to $48,000 for 1998 compared
to $148,000 for 1997 and franchise royalty revenue decreased by $174,000, or
64.4%, to $96,000 for 1998 compared to $270,000 for 1997. Franchise royalty
revenue has also decreased due to the discontinuance of royalty revenue
recognition on certain franchise restaurants due to collectibility concerns.
Due to the aforementioned activity within the franchise program and because
the Company is not currently seeking new franchisees, management expects
franchise revenues to continue to decline.
Cost of sales increased by $700,000, or 10.8%, to $6.9 million for
1998 compared to $6.2 million for 1997. This increase is primarily
attributable to the increase in sales from Company-owned restaurants, as well
as the increased cost of butterfat related items, principally cream cheese
and processed cheeses, which increased substantially in price in 1998, and
closed restaurant food inventory that was not useable. As a percentage of
sales from Company-owned restaurants, cost of sales increased to 36.4% in
1998 from 33.3% in 1997 primarily as a result of the above increased price of
butterfat products.
Restaurant operating expenses increased by $500,000, or 5.3%, to
$10.8 million for 1998 compared to $10.3 million for 1997. This increase is
primarily due to the increase in labor, utility and rent costs. As a
percentage of sales from Company-owned restaurants, restaurant operating
expenses increased to 57.4% for 1998 from 55.3% for 1997. This increase is
primarily the result of the following: (i) rental payments concerning the
sale/leaseback restaurants; (ii) the increase in the minimum wage rate; and
(iii) the decrease in same-store sales as discussed above.
General and administrative expenses decreased by $300,000, or 16.7%,
to $1.5 million for 1998 compared to $1.8 million for 1997. This decrease is
primarily attributable to administrative staff reductions and related costs.
As a percentage of total revenues, general and administrative expenses
decreased to 8.0% in 1998 from 9.6% in 1997 primarily due to 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 $13,000, or 1.4%, to
$943,000 for 1998 compared to $930,000 for 1997. As a percentage of total
revenues, depreciation and amortization increased to 5.0% for 1998 from 4.9%
in 1997. This nominal increase is due to new restaurant fixtures and
equipment depreciation and amortization additions being offset by the
reduction in depreciation and amortization as a result of restaurant closings
and impairment provisions. Newly developed restaurants with increased
property and equipment costs incur higher depreciation and amortization as
compared to older restaurants that were not as expensive to develop. The
increase from new restaurant development has been offset, to a certain
extent, by the Company's recognition of either impairment charges against
assets or restaurant closures recognized during 1997 and 1998.
20
<PAGE>
A provision for impairment and restaurant closures of $4.7 million
was recorded in 1998 and $3.8 million was recorded in 1997. Based on
management's review of Company-owned operating markets, one market was
determined to be impaired in 1998 primarily due to current and historical
operating losses and four markets were impaired in 1997. The impairment
charge, which amounted to $585,000 in 1998 and $2.4 million in 1997,
represents a reduction of the carrying value of long-lived assets held and
used (property, equipment and goodwill) to their estimated fair value. In
addition, the Company closed or approved for closure 18 under-performing
restaurants in 1998. Accordingly, restaurant closure costs of $4.1 million
were recorded in 1998 and $1.4 million in 1997. Such costs included the write
down of the carrying amount of assets to estimated fair value of $2.9 million
and the present value of remaining noncancelable lease payments after the
closure date, net of estimated sublease income or the effect of early lease
termination, of $1.2 million.
Net interest expense increased by $227,000 to $154,000 for 1998
compared to net interest income of $73,000 for 1997. The increase in net
interest expense is due to the $1.8 million outstanding under the Credit
Facility as compared to the interest income earned from the remaining
proceeds of the Company's initial public offering that was completed in
August 1996 and a significant reduction in interest expense. The Company
expects that it will continue to incur interest expense in the foreseeable
future as the proceeds from the public offering have been fully utilized; the
Company has $1.8 million outstanding under its Credit Facility as of March 1,
1999, and the Company anticipates the need to raise additional capital to
fund operations.
No income tax benefit was recognized in 1998 as compared to income
tax benefit of $144,000 for 1997. The tax benefit is net of an increase in
the valuation allowance of $2.2 million in 1998 and $1.2 million in 1997.
Based on the cumulative net loss over the past three years, management
believes that the valuation allowance is appropriate due to the uncertainty
regarding the realization of the Company's net deferred tax assets.
During 1997, the Company changed its accounting policy concerning
restaurant preopening costs. In prior periods, the Company initially
capitalized and then amortized preopening costs over the initial 12-months of
a restaurant's operation. Under the new method, the Company expenses
restaurant preopening costs as incurred. As a result, restaurant preopening
costs, net of the cumulative effect of the accounting change discussed below,
are included in restaurant operating expenses in 1997 as compared to a
component of depreciation and amortization in 1996. Management believes the
change is preferable to obtain a better matching of expenses with revenues.
The change is considered a cumulative effect-type accounting change and,
accordingly, the cumulative effect as of the beginning of fiscal 1997 of
$129,000, net of tax benefit of $81,000, has been reported in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the development of new
restaurants, maintenance of existing Company-owned restaurants and the
participation as a joint venture partner in certain Atomic Burrito
restaurants. Capital expenditures totaled $7.3 million and $1.6 million for
1997 and 1998, respectively. Acquisition expenditures totaled $1.4 million in
1997. Historically, the Company has funded its capital expenditures with
proceeds from its initial public offering, proceeds from bank borrowings, and
cash flows from operating activities. Net cash provided by operating
activities was $672,000 and ($51,000) for 1997 and 1998, respectively. The
decrease in cash flow from operations from 1997 to 1998 is due primarily to
the underperforming restaurants that have been previously identified for
closure.
The Company distributed $156,000 on March 4, 1997 to the
stockholders existing prior to its initial public offering in connection with
their estimated federal and state income tax obligations attributable to the
Company's 1996 earnings prior to the Termination Date. No other dividends
were declared or paid in 1997 or 1998 and it is currently the Company's
intention to utilize all cash flows from operations to fund operations and
expansion. Thus, the Company does not anticipate paying cash dividends in the
foreseeable future.
Based on its contemplated limited expansion plans of new
Company-owned restaurants and participation as a joint venture partner in
certain Atomic Burrito restaurants, the Company estimates that its total
capital expenditures will be approximately $200,000 in 1999. The Company
expects that borrowings from the Credit Facility discussed below or the
refinancing of borrowings from such Credit Facility and cash provided by
operating activities may be sufficient to finance
21
<PAGE>
such capital expenditures. The Company anticipates the need to raise
additional funds through the private sale of either equity or debt securities
even though no such funds are committed.
CREDIT FACILITY. On September 5, 1997, the Company entered into a
loan agreement with a revolving line of credit and term loan facilities which
had a maximum aggregate commitment of $10.0 million (the "Credit Facility")
with NationsBank, N.A. (the "Bank"). The Credit Facility provided for a $10.0
million revolving line of credit commitment, subject to availability under a
borrowing base calculated by reference to the level of eligible equipment,
inventory and accounts receivable, and included a $2.0 million sublimit for
new construction, remodeling and acquisition of restaurant locations. The
Credit Facility also contained a "mini-perm" facility financing for new
construction, remodeling and acquisition of restaurant locations with a ten
year amortization and a balloon payment within five years. Interest on
borrowings outstanding under the revolving line of credit facility is payable
at an annual rate set forth in each note. All such notes currently
outstanding are at the Bank's prime rate plus one percent. The Credit
Facility is secured by substantially all of the Company's assets and matures
on September 15, 1999. The proceeds from the Credit Facility (which are
classified as a current liability at December 27, 1998) were primarily used
for acquisition of long-lived assets such as property and equipment. During
August 1998, the Company refinanced for an additional year, which now matures
on September 1, 1999. During this refinancing, all outstanding notes, other
than the $250,000 revolving note, were consolidated and the total commitment
was decreased to $2.5 million. The note is amortized over approximately a
seven-year period requiring monthly payments of principal and interest of
$29,000. As of March 1, 1999, the Company has approximately $1.8 million in
outstanding borrowings pursuant to the Credit Facility. As of December 27,
1998 the Company was not in compliance with certain restrictive covenants
contained in the Credit Facility which require specified financial ratios.
However, the Company does not believe such noncompliance will adversely
impact liquidity although there is no assurance of such. The Bank has waived
such default for the fiscal year ended 1998.
SALE-LEASEBACK TRANSACTIONS. During February 1998, July 1998 and
January 1999, the Company entered into agreements to sell and lease back five
restaurant sites with an entity owned by a prior officer of the Company and a
significant stockholder, both of whom are Directors. The sale-leaseback
transactions include five Company-owned restaurant locations (one was a
building only) in which the Company sold such properties to such entity for
approximately $1.9 million and leased them back for a 15-year period. The
Company believes that the terms and conditions of both the real estate sale
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 reduce borrowings under the Credit Facility
and to fund operations.
STOCKHOLDER LOANS. During January 1999, the Company borrowed
$200,000 in total from Messrs. Geresi, Murfin, Sorrentino (all Directors) and
Vrana (a significant stockholder). Each note is in the principal amount of
$50,000 and bears interest at 12.75% per annum which is paid quarterly
beginning March 31, 1999. The notes are due on December 31, 1999 with accrued
interest. The notes are not secured.
STOCK REPURCHASE PROGRAM. In 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 or the refinancing of such Credit
Facility. As of March 1, 1999, the Company had purchased 10,400 shares of
Common Stock for $17,974. The Company anticipates limited purchases, if any,
pursuant to the Stock Repurchase Program during fiscal 1999.
FINANCIAL CONDITION. Total assets at December 27, 1998 were $8.0
million as compared to $14.1 million at December 28, 1997. Cash and cash
equivalents and investment securities available for sale have significantly
decreased due to the Company's significant capital investments in developing
and acquiring Company-owned restaurants. This is the primary reason for the
$1.6 million overall decrease in current assets. Deferred costs have been
almost eliminated due to the change in accounting for restaurant preopening
costs, as previously discussed, and the limited new franchise development.
Current liabilities have decreased $800,000 primarily as a result of the
repayments made under the Credit Facility of $600,000 and a decrease of
accounts payable of $200,000 in 1998. Other long-term liabilities reflect the
noncurrent portion of the accrual for future noncancelable lease obligations
on closed restaurants. Stockholders' equity has decreased from $9.8 million
in 1997 to $3.7 million in 1998 primarily due to the $4.7 million charge for
impairments
22
<PAGE>
and restaurant closures incurred in 1998. The charge is primarily reflected
as a reduction in the carrying value of property and equipment.
YEAR 2000
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
upon which the Company could rely 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 previously
utilized data processing services from an entity controlled by a director of
the Company in connection with the Company's financial/management reporting
function. The Company has installed its own data processing capabilities
during 1999. The Company estimates the cost of a new data processing system,
which is Year 2000 compliant, to be less than $75,000. The costs of becoming
Year 2000 compliant, other than cost related to the implementation of the 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. In November 1998, the Company circulated a questionnaire
to its large vendors to determine their status regarding addressing the Year
2000 issue. The vendors that have responded to the questionnaire have
indicated that they have addressed the issue or will do so timely.
INFLATION
The Company believes that the relatively moderate rates of inflation
over the past few years have not had a significant impact on its results of
operations or total revenues.
CHANGE IN FISCAL YEAR
As of January 1999, the Company elected to change the Company's
fiscal year end from a 52/53 week fiscal year, ending on the last Sunday of
the year, to a 52/53 week fiscal year ending on the last Wednesday of the
year, which consists of four 13-week periods. This change in fiscal year end
was effective for the 1999 fiscal year beginning Monday, December 28, 1998,
and ending Wednesday, December 29, 1999. The report covering the transition
period will be filed on Form 10-QSB for the period ending March 31, 1999,
which report will include an additional three-day period due to the change in
fiscal year.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Consolidated Financial Statements referred
to in the Index on page F-1 setting forth the consolidated financial
statements of New York Bagel Enterprises, Inc., and Subsidiary, together with
the report of KPMG LLP dated March 12, 1999.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information required by this Item 9 is incorporated herein by
reference to "Directors and Executive Officers of the Company" in the
Company's Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this Item 10 is incorporated herein by
reference to "Executive Compensation -Compensation Committee Interlocks and
Insider Participation, -Summary Compensation Table, -Stock Option Grant
Table, -Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values Table, -Employment Arrangements, and -Incentive Plan" and
"Directors and Executive Officers of the Company-Compensation of Directors"
in the Company's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 11 is incorporated herein by
reference to "Security Ownership of Certain Beneficial Owners and Management"
in the Company's Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 12 is incorporated herein by
reference to "Certain Relationships and Related Transactions" in the
Company's Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. Reference is made to the Index to Exhibits on page E-1 for a
list of all exhibits filed as part of this Report.
(b) REPORTS ON FORM 8-K. None.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized this 25th day of March, 1999.
NEW YORK BAGEL ENTERPRISES, INC.
By: /s/ Robert J. Geresi
-------------------------------------
Robert J. Geresi
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ William J. Walsh, Jr. Chairman of the Board of Directors March 25, 1999
- -----------------------------
William J. Walsh, Jr.
/s/ Robert J. Geresi Chief Executive Officer, President and Director March 25, 1999
- ----------------------------- (Principal Executive Officer)
Robert J. Geresi
/s/ Richard Randall Webb Chief Financial Officer, Secretary and Treasurer March 25, 1999
- ----------------------------- (Principal Financial and Accounting Officer)
Richard Randall Webb
/s/ Paul T. Sorrentino Vice President-New Store Development and Director March 25, 1999
- -----------------------------
Paul T. Sorrentino
/s/ Paul R. Hoover Director March 25, 1999
- -----------------------------
Paul R. Hoover
/s/ David L. Murfin Director March 25, 1999
- -----------------------------
David L. Murfin
</TABLE>
25
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
2.1 Plan and Agreement of Merger dated December 27, 1995, by and
between New York Bagel Enterprises, Inc., a Kansas
corporation, and New York Bagel Enterprises, Inc., an Oklahoma
corporation (filed as Exhibit 2.1 to the Registration
Statement on Form S-1, File No. 333-05785), incorporated
herein by reference.
2.2 Plan and Agreement of Merger dated December 27, 1995, by and among New
York Bagel Enterprises, Inc., VPR Incorporated, New York Bagel Shop,
Inc., Bagel Boss, Inc., Bagels of Norman, Inc., New York Bagel Shop &
Delicatessen, Inc. (filed as Exhibit 2.2 to the Registration Statement
on Form S-1, File No. 333-05785), incorporated herein by reference.
2.3 Certificate of Ownership and Merger (Articles of Merger) Merging
Nashville Bagel Co. (a Tennessee corporation) into New York Bagel
Enterprises, Inc. (an Oklahoma corporation) (filed as Exhibit 2.3 to
the Registration Statement on Form S-1, File No. 333-05785),
incorporated herein by reference.
2.4 Asset Sale and Purchase Agreement dated December 27, 1995, by and
among New York Bagel Enterprises, Inc., Central & Ridge Yogurt, Inc.
and Paul R. Hoover (filed as Exhibit 2.4 to the Registration Statement
on Form S-1, File No. 333-05785), incorporated herein by reference.
2.5 Asset Purchase Agreement dated November 25, 1996 by and among LAB
Acquisition Corporation, New York Bagel Enterprises, Inc., Lots A'
Bagels, Inc., and Stephen K. Goldstone and Linda F. Goldstone (filed
as Exhibit 2 to Form 8-K, Date of Event: December 6, 1996),
incorporated herein by reference.
2.6 Post Closing Purchase Price Modification Agreement dated July 17, 1997
by and Among Lots A' Bagels, Inc., New York Bagel Enterprises, Inc.,
JBA Enterprises, Inc. and Stephen K. Goldstone and Linda F. Goldstone
(filed as Exhibit 2.6 to Form 10-K for the annual period ended
December 28, 1997), incorporated herein by reference.
2.7 Asset Sale and Purchase Agreement dated September 26, 1997, by and
Between New York Bagel Enterprises, Inc. and Il Vicino International,
L.L.C. (filed as Exhibit 2.7 to Form 10-K for the annual period ended
December 28, 1997), incorporated herein by reference.
3.1 Restated and Amended Articles of Incorporation of the Registrant
(filed as Exhibit 3.3 to the Registration Statement on Form S-1, File
No. 333-05785), incorporated herein by reference.
3.2 Restated and Amended Bylaws of the Registrant (filed as Exhibit 3.4 to
the Registration Statement on Form S-1, File No. 333-05785),
incorporated herein by reference.
4.1 Specimen of Common Stock Certificate (filed as Exhibit 4.1 to the
Registration Statement on Form S-1, File No. 333-05785), incorporated
herein by reference.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4.2 Form of New York Bagel Enterprises, Inc. Grant of Incentive Stock
Option (filed as Exhibit 4.2 to the Registration Statement on Form
S-1, File No. 333-05785), incorporated herein by reference.
4.3 Form of New York Bagel Enterprises, Inc. Grant of Nonqualified Stock
Option (filed as Exhibit 4.3 to the Registration Statement on Form
S-1, File No. 333-05785), incorporated herein by reference.
4.4 Form of New York Bagel Enterprises, Inc. Non-qualified Option
Agreement (filed as Exhibit 10.1 to Form 10-Q for the quarter period
ended September 28, 1997), incorporated herein by reference.
4.5 New York Bagel Enterprises, Inc. 4% Convertible and Subordinated
Debenture due December 14, 1999 (filed as Exhibit 4.4 to the
Registration Statement on Form S-1, File No. 333-05785), incorporated
herein by reference.
4.6 First Amendment to 4% Convertible and Subordinated Debenture due
December 14, 1999 dated January 25, 1999, by and between New York
Bagel Enterprises, Inc. and Dr. Lori Adelson.
4.7 New York Bagel Enterprises, Inc. Warrant to Purchase Common Stock
(filed as Exhibit 4 to Form 8-K, Date of Event: December 6, 1996),
incorporated herein by reference.
4.8 Schedule of Employees Receiving Stock Option Grants.
4.9 Schedule of Non-employees Receiving Stock Option Grants.
9.1 Contract for Sale of Stock dated June 21, 1994, by and between Robert
Geresi, Paul Sorrentino and Vince Vrana and David L. Murfin and Paul
R. Hoover (filed as Exhibit 9.1 to the Registration Statement on Form
S-1, File No. 333-05785), incorporated herein by reference.
9.2 Stockholders' Agreement dated January 1, 1996, by and among Robert J.
Geresi, Vincent J. Vrana, Paul T. Sorrentino, Paul R. Hoover, David L.
Murfin, Nancy Murfin Moxley, Mark A. Moxley, Barbara Murfin Murphy, V.
Richard Hoover, Philip Faubert, Rodney Joe Trizza, Brent Durham, John
R. Geresi, Chad E. Watkins, Markus K. Scholler and New York Bagel
Enterprises, Inc., a Kansas corporation (filed as Exhibit 9.2 to the
Registration Statement on Form S-1, File No. 333-05785), incorporated
herein by reference.
10.1 New York Bagel Enterprises, Inc. 1996 Incentive Plan (filed as Exhibit
10.1 to the Registration Statement on Form S-1, File No. 333-05785),
incorporated herein by reference.
10.2 First Amendment to New York Bagel Enterprises, Inc. 1996 Incentive
Plan dated May 21, 1997 (filed as Exhibit 10.2 to Form 10-K for the
annual period ended December 31, 1997), incorporated herein by
reference.
10.3 Representative Uniform Franchise Offering Circular dated March 27,
1997, including form of Franchise Agreement and form of Development
Agreement (filed as Exhibit 10.3 to Form 10-K for the annual period
ended December 31, 1997), incorporated herein by reference.
10.4 Lease Agreement dated June 1, 1994, by and between Bagel Land, Inc.
and Bagels of Norman, Inc. (filed as Exhibit 10.11 to the Registration
Statement on Form S-1, File No. 333-05785), incorporated herein by
reference.
10.5 Lease Agreement dated December 1, 1993, by and between Cherry Street
</TABLE>
E-2
<PAGE>
<TABLE>
<S> <C>
Land and Bagel Boss, Inc. (filed as Exhibit 10.12 to the Registration
Statement on Form S-1, File No. 333-05785), incorporated herein by
reference.
10.6 Sublease dated April 1, 1996, by and between Murfin Drilling Company
and New York Bagel Enterprises, Inc. (filed as Exhibit 10.13 to the
Registration Statement on Form S-1, File No. 333-05785), incorporated
herein by reference.
10.7 Real Estate Purchase Agreement dated October 10, 1996, by and between
New York Bagel Enterprises, Inc. and Bagel Land, Inc. (filed as
Exhibit 10.6 to Form 10-K for the annual period ended December 29,
1996), incorporated herein by reference.
10.8 Loan Agreement dated September 5, 1997, by and Among New York Bagel
Enterprises, Inc., Lots A' Bagels, Inc. and NationsBank, N.A. (filed
as Exhibit 10.2 to Form 10-Q for the quarter period ended September
28, 1997), incorporated herein by reference.
10.9 Form of Promissory Note of New York Bagel Enterprises, Inc. and Lots
A' Bagels, Inc. payable to the order of NationsBank, N.A. (filed as
Exhibit 10.11 to Form 10-K for the annual period ended December 28,
1997), incorporated herein by reference.
10.10 Schedule of Promissory Notes of New York Bagel Enterprises, Inc. and
Lots A' Bagels, Inc. payable to the order of NationsBank, N.A. (filed
as Exhibit 10.11.1 to Form 10-K for the annual period ended December
28, 1997), incorporated herein by reference.
10.11 First Amendment to Loan Agreement dated August 24, 1998 by New York
Bagel Enterprises, Inc., Lots A' Bagels, Inc. and NationsBank, N.A.
(filed as Exhibit 10.2 to Form 10-QSB for the quarter period ended
September 27, 1998), incorporated herein by reference.
10.12 Promissory Note dated August 24, 1998, of New York Bagel Enterprises,
Inc. and Lots A' Bagels, Inc. payable to the order of NationsBank,
N.A. (filed as Exhibit 10.7 to Form 10-QSB for the quarter period
ended September 27, 1998), incorporated herein by reference.
10.13 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.
10.14 Schedule of Agreements of Purchase and Sale by and Between New York
Bagel Enterprises, Inc. and Commercial Equity, Inc. (filed as Exhibit
10.4 to Form 10-QSB for the quarter period ended September 27, 1998),
incorporated herein by reference.
10.15 Form of Lease Between Commercial Equity, Inc., as Lessor, and 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.
10.16 Schedule of Leases by and Between New York Bagel Enterprises, Inc.
and Commercial Equity, Inc. (filed as Exhibit 10.6 to Form 10-QSB for
the quarter period ended September 27, 1998), incorporated herein by
reference.
10.17 Agreement of Purchase and Sale dated January 20, 1999 by and between
New York Bagel Enterprises, Inc. and Commercial Equity, Inc.
(concerning 8621 West 21st Street North, Wichita, Kansas).
</TABLE>
E-3
<PAGE>
<TABLE>
<S> <C>
10.18 Lease dated January 20, 1999 between Commercial Equity, Inc., as
Lessor, and New York Bagel Enterprises, Inc., as Lessee (concerning
8621 West 21st Street North, Wichita, Kansas).
10.19 Lease Between L.P.V. Properties, L.L.C. and New York Bagel
Enterprises, Inc. dated November 1, 1997 (filed as Exhibit 10.12 to
Form 10-K for the annual period ended December 28, 1997), incorporated
herein by reference.
10.20 Joint Venture Agreement by and between New York Bagel Enterprises,
Inc. and Western Country Clubs, Inc. dated October 27, 1998 (filed as
Exhibit 10.1 to Form 10-QSB for the quarter period ended September 27,
1998), incorporated herein by reference.
10.21 First Amendment to Joint Venture Agreement dated December 15, 1998,
by and between New York Bagel Enterprises, Inc. and Western Country
Clubs, Inc.
10.22 Form of January 1999 Promissory Note by New York Bagel Enterprises,
Inc. for the benefit of certain stockholders.
10.23 Schedule of January 1999 Promissory Notes of New York Bagel
Enterprises, Inc. payable to the order of certain stockholders.
18 Letter of KPMG Peat Marwick LLP dated November 11, 1997 regarding
change in accounting principle concerning restaurant preopening costs
(filed as Exhibit 18 to Form 10-Q for the quarter period ended
September 28, 1997), incorporated herein by reference.
21 Subsidiaries of the Company (filed as Exhibit 21 to Form 10-K for the
annual period ended December 28, 1997), incorporated herein by
reference.
27 Financial Data Schedule.
</TABLE>
E-4
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
New York Bagel Enterprises, Inc.:
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 27, 1998 and December 28, 1997 F-3
Consolidated Statements of Operations for the fifty-two weeks ended
December 27, 1998, December 28, 1997 and December 29, 1996 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the fifty-two
weeks ended December 27, 1998, December 28, 1997 and December 29, 1996 F-7
Consolidated Statements of Cash Flows for the fifty-two weeks ended
December 27, 1998, December 28, 1997 and December 29, 1996 F-8
Notes to Consolidated Financial Statements F-10
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
New York Bagel Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of New York
Bagel Enterprises, Inc. as of December 27, 1998 and December 28, 1997, and
the consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the fifty-two weeks ended December 27, 1998, December 28,
1997, and December 29, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of New York Bagel Enterprises, Inc. as of December 27, 1998 and December 28,
1997, and the results of its operations and its cash flows for the fifty-two
weeks ended December 27, 1998, December 28, 1997, and December 29, 1996, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
note 15 to the consolidated financial statements, the Company has suffered
recurring losses from operations and current liabilities exceed current
assets by approximately $2.6 million at December 27, 1998 that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 15.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
As discussed in note 1 of notes to consolidated financial statements, the
Company changed its method of accounting for restaurant preopening costs in
1997.
KPMG LLP
Wichita, Kansas
March 12, 1999
F-2
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Consolidated Balance Sheets
December 27, 1998 and December 28, 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 217,775 872,949
Accounts receivable 61,855 171,068
Inventories 310,850 349,937
Income tax receivable -- 484,957
Property and equipment available for sale -- 193,256
Prepaid expenses and other current assets 26,609 169,156
---------------- ----------------
Total current assets 617,089 2,241,323
Property and equipment, net 6,330,238 10,281,696
Other assets, net of accumulated amortization of $73,482 in
1998 and $47,412 in 1997 203,823 357,001
Goodwill, net of accumulated amortization of $47,087 in 1998
and $75,524 in 1997 805,028 1,220,441
---------------- ----------------
$ 7,956,178 14,100,461
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Consolidated Balance Sheets, Continued
December 27, 1998 and December 28, 1997
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
---------------- ----------------
<S> <C> <C>
Current liabilities:
Current installments of long-term debt $ 1,821,894 2,490,858
Accounts payable 440,387 715,453
Accrued payroll and benefits 241,844 292,321
Accrued liabilities 748,754 539,143
Deferred franchise fees -- 35,000
---------------- ----------------
Total current liabilities 3,252,879 4,072,775
Long-term debt, less current installments 49,464 28,750
Deferred rents payable 90,094 99,201
Other liabilities 798,662 133,724
---------------- ----------------
Total liabilities 4,191,099 4,334,450
---------------- ----------------
Stockholders' equity:
Class A common stock, $.01 par value. Authorized
30,000,000 shares; issued and outstanding 4,657,100 and
4,667,500 shares in 1998 and 1997, respectively 46,675 46,675
Additional paid-in capital 13,390,769 13,390,769
Accumulated deficit (9,654,391) (3,671,433)
Treasury stock, 10,400 common shares, at cost (17,974) --
---------------- ----------------
Total stockholders' equity 3,765,079 9,766,011
Commitments
---------------- ----------------
$ 7,956,178 14,100,461
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Consolidated Statements of Operations
For the fifty-two weeks ended December 27, 1998,
December 28, 1997, and December 29, 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
Revenues:
Sales from Company-owned restaurants $ 18,844,086 18,570,822 10,864,863
Franchise revenues 143,537 417,030 671,987
----------------- ----------------- ----------------
Total revenues 18,987,623 18,987,852 11,536,850
----------------- ----------------- ----------------
Costs and expenses:
Cost of sales 6,856,996 6,189,510 3,749,471
Restaurant operating expenses 10,818,673 10,273,538 5,185,362
General and administrative expenses 1,514,513 1,818,099 963,927
Depreciation and amortization 942,853 930,177 552,419
Provision for impairments and closures 4,683,645 3,773,580 --
----------------- ----------------- ----------------
Total costs and expenses 24,816,680 22,984,904 10,451,179
----------------- ----------------- ----------------
Operating income (loss) (5,829,057) (3,997,052) 1,085,671
----------------- ----------------- ----------------
Other income (expense):
Interest income 7,732 109,588 152,167
Interest expense (161,633) (36,734) (237,858)
----------------- ----------------- ----------------
Total other income (expense) (153,901) 72,854 (85,691)
----------------- ----------------- ----------------
Earnings (loss) before income taxes (5,982,958) (3,924,198) 999,980
Income tax expense (benefit) -- (144,417) 269,714
----------------- ----------------- ----------------
Earnings (loss) before cumulative
effect of accounting change (5,982,958) (3,779,781) 730,266
Cumulative effect of accounting change, net of
income tax benefit of $80,782 -- (129,041) --
----------------- ----------------- ----------------
Net earnings (loss) $ (5,982,958) (3,908,822) 730,266
----------------- ----------------- ----------------
----------------- ----------------- ----------------
</TABLE>
F-5
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Consolidated Statements of Operations, Continued
For the fifty-two weeks ended December 27, 1998,
December 28, 1997, and December 29, 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
Pro forma earnings to reflect income taxes:
Income tax expense $ 389,505
----------------
----------------
Net earnings $ 610,475
----------------
----------------
Earnings (loss) per share (basic and diluted):
Earnings (loss) before cumulative effect of
accounting change $ (1.28) (.81) .17
Cumulative effect of accounting change -- (.03) --
----------------- ----------------- ----------------
Net earnings (loss) $ (1.28) (.84) .17
----------------- ----------------- ----------------
----------------- ----------------- ----------------
Pro forma amounts assuming the new method of accounting for restaurant
preopening costs is applied retroactively:
Net earnings (loss) $ (3,779,781) 518,608
---------------- ----------------
Net earnings (loss) per share - basic and
diluted $ (.81) .15
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
For the fifty-two weeks ended December 27, 1998,
December 28, 1997, and December 29, 1996
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
COMMON STOCK PAID-IN (ACCUMULATED TREASURY
---------------------
CLASS A CLASS B CAPITAL DEFICIT) STOCK TOTAL
---------- --------- --------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 14,170 13,687 157,793 (1,764,115) -- (1,578,465)
Net earnings -- -- -- 730,266 -- 730,266
Issuance of 14,308 shares of common stock -- 143 (143) -- -- --
Issuance of 1,867,500 shares of common
stock pursuant to initial public
offering 18,675 -- 14,660,357 -- -- 14,679,032
Reclassification of accumulated deficit
pursuant to termination of
S corporation status at August 27, 1996 -- -- (1,427,238) 1,427,238 -- --
Conversion of 1,383,012 shares of Class B
common stock to Class A common stock
on a one-for-one basis pursuant to the
initial public offering 13,830 (13,830) -- -- -- --
Distributions to stockholders -- -- -- (156,000) -- (156,000)
---------- --------- --------------- -------------- ----------- -------------
Balance, December 29, 1996 46,675 -- 13,390,769 237,389 -- 13,674,833
Net loss -- -- -- (3,908,822) -- (3,908,822)
---------- --------- --------------- -------------- ----------- -------------
Balance, December 28, 1997 46,675 -- 13,390,769 (3,671,433) -- 9,766,011
Net loss -- -- -- (5,982,958) -- (5,982,958)
Acquisition of 10,400 shares -- -- -- -- (17,974) (17,974)
---------- --------- --------------- -------------- ----------- -------------
Balance, December 27, 1998 $ 46,675 -- 13,390,769 (9,654,391) (17,974) 3,765,079
---------- --------- --------------- -------------- ----------- -------------
---------- --------- --------------- -------------- ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Consolidated Statements of Cash Flows
For the fifty-two weeks ended December 27, 1998,
December 28, 1997, and December 29, 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (5,982,958) (3,908,822) 730,266
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 942,853 930,177 552,419
(Gain) loss on sale of equipment -- 18,957 (21,286)
Provision for impairments and closures 4,683,645 3,773,580 --
Cumulative effect of accounting change, net
of income tax benefit -- 129,041 --
Increase (decrease) in cash resulting from
changes in listed items, net of effects from
acquisitions:
Deferred income taxes -- (2,626) 83,408
Inventory 39,087 (60,780) (96,654)
Income taxes receivable 484,957 (397,174) (71,036)
Property and equipment available for sale 193,256 (193,256) --
Prepaid expenses and other current assets 142,547 (119,660) (90,312)
Accounts receivable 109,213 145,425 (123,545)
Deferred costs -- 24,453 (337,492)
Other assets 14,722 (121) --
Accounts payable (275,066) 200,247 352,034
Accrued liabilities, accrued payroll and
benefits, and deferred rents payable (368,443) 192,341 399,213
Deferred franchise fees (35,000) (60,000) (72,000)
---------------- ----------------- -----------------
Net cash provided by (used in) operating
activities (51,187) 671,782 1,305,015
---------------- ----------------- -----------------
Cash flows from investing activities:
Additions to property and equipment (1,637,763) (7,304,032) (4,716,867)
Acquisitions, net of cash acquired -- (1,373,456) (2,468,092)
Proceeds from sales of property and equipment including
proceeds from sale-leaseback transactions 1,700,000 1,238,632 21,722
Purchase of investment securities available for sale -- (7,244,550) (7,265,862)
Proceeds from sales and maturities of investment
securities available for sale -- 11,510,412 3,000,000
Purchase of other assets -- (186,154) (72,468)
---------------- ----------------- -----------------
Net cash provided by (used in) investing 62,237 (3,359,148) (11,501,567)
activities ---------------- ----------------- -----------------
(Continued)
</TABLE>
F-8
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Consolidated Statements of Cash Flows, Continued
For the fifty-two weeks ended December 27, 1998,
December 28, 1997, and December 29, 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of long-term debt 670,000 2,500,000 1,398,700
Principal payments on long-term debt (1,318,250) (66,642) (4,677,450)
Purchase of treasury stock (17,974) -- --
Proceeds from initial public offering of common
stock -- -- 14,679,032
Decrease in distributions payable -- (164,194) (40,499)
Debt issuance costs -- (13,979) --
Deferred offering costs -- -- 8,474
---------------- ----------------- -----------------
Net cash provided by (used in) financing
activities (666,224) 2,255,185 11,368,257
---------------- ----------------- -----------------
Net increase (decrease) in cash (655,174) (432,181) 1,171,705
Cash and cash equivalents at beginning of year 872,949 1,305,130 133,425
---------------- ----------------- -----------------
Cash and cash equivalents at end of year $ 217,775 872,949 1,305,130
---------------- ----------------- -----------------
---------------- ----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
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 December 27, 1998, the Company has 38 Company-owned
restaurants (45 at December 28, 1997) primarily located in
Oklahoma, Kansas, Colorado, Alabama, Texas, and Tennessee and 19
franchised restaurants (25 at December 28, 1997) located
throughout the United States.
The Company has entered into a joint venture agreement whereby the
Company will contribute certain restaurant equipment and leasehold
improvements in certain restaurant locations to the joint venture
entity and, in certain situations, some cash 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.
Currently, three restaurant locations have been identified to be
converted to the Atomic Burrito concept.
Effective August 27, 1996, the Company completed an initial public
offering (IPO) in which it sold 1,867,500 shares of its Class A
common stock and realized net proceeds, net of offering costs of
$951,943, of $14,679,032.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of New
York Bagel Enterprises, Inc. and its wholly-owned subsidiary. All
material intercompany activity has been eliminated.
(c) FISCAL PERIODS
The Company's 52/53-week fiscal year is comprised of four
thirteen-week periods which ends on the Sunday nearest to December
31.
(d) FRANCHISE REVENUES
Franchise agreements are executed for each franchise restaurant
and provide the terms of the franchise arrangement between the
Company and the franchisee. The franchise agreement requires the
franchisee to pay an initial, non-refundable franchise fee plus
continuing royalties based upon a percentage of restaurant sales.
Additionally, the Company executes development agreements with
certain franchisees which stipulates the area, the number of
restaurants, and the timeframe for development in exchange for an
initial, non-refundable development fee based on a standard price
per type of restaurant.
F-10 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
Initial franchise fees are recognized as revenue when the Company
performs substantially all initial services required by the
franchise agreement, which generally occurs shortly after
restaurant opening. Continuing royalties are recognized as earned
with an appropriate provision for estimated uncollectible amounts.
Initial franchise fees received applicable to restaurants for
which substantially all initial services required by the franchise
agreement have not been performed are recorded as deferred
franchise fees in the accompanying consolidated balance sheets.
Development fees are received upon signing the agreement and are
initially recorded as deferred franchise fees. Such fees are
applied to reduce the initial franchise fees paid for each
restaurant opened and are accounted for as a component of the
initial franchise fees.
Deferred initial and development fees that are expected to be
recognized within twelve months of the balance sheet date are
classified as current portion of deferred franchise fees in the
accompanying consolidated balance sheets.
Direct, incremental costs incurred to secure franchise agreements
are charged to expense in the same period the related initial
franchise fees are recognized as revenue. Costs applicable to
initial franchise fees not yet recognized as revenue are recorded
as deferred franchise costs.
(e) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, except for assets that
have been impaired in which the carrying amount is reduced to
estimated fair value. Depreciation is calculated using the
straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized on a straight-line
basis over the lesser of the remaining lease term, including
renewal periods when the Company intends to exercise renewal
options, or the estimated useful life of the asset. Estimated
useful lives are as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings 30 years
Restaurant and bakery equipment 5 - 10 years
Leasehold improvements 7 - 15 years
Delivery vehicles, office furniture and equipment 5 - 10 years
</TABLE>
(g) GOODWILL
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line
basis over thirty years. The Company periodically assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can
be recovered through undiscounted future operating cash flows of
the acquired operation. The amount of goodwill impairment, if any,
is measured based
F-11 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
on projected future operating cash flows discounted at a rate
commensurate with the risks involved. The assessment of the
recoverability of goodwill will be impacted if estimated future
operating cash flows are not achieved.
(h) INCOME TAXES
Effective January 1, 1994, New York Bagel Enterprises, Inc. and
certain of the restaurant entities elected and received approval
to become S corporations. During the periods the entities operated
as S corporations, income tax expense or benefit was not recorded
in the accompanying consolidated financial statements as the
entities' results of operations were reported to the entities'
stockholders for inclusion in their individual income tax returns.
Concurrent with the IPO, the Company terminated its S corporation
status. Accordingly, income taxes subsequent to the effective date
of the IPO are accounted for under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Any effect on deferred tax
assets and liabilities due to a change in tax rates is recognized
in income in the period that includes the enactment date.
Pro forma income tax expense, as set forth in the accompanying
1996 consolidated statement of operations, reflects what the
income tax expense of the Company would have been for the
fifty-two weeks ended December 29, 1996 if none of the entities
included in the financial statements had operated as S
corporations during such periods.
(i) CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of the consolidated statements of cash flows, the
Company considers cash and cash equivalents to include currency on
hand, demand deposits and money market funds.
Noncash investing and financing activities during 1998, 1997, and
1996 included:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Noncash distributions to stockholders:
Distributions payable $ -- -- 156,000
-------- -------- --------
-------- -------- --------
Property and equipment sale proceeds included
in accounts receivable and other assets $ -- 26,282 53,895
-------- -------- --------
-------- -------- --------
</TABLE>
Cash paid (received) during the years for interest and income taxes
is as follows:
F-12 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Interest $ 169,329 12,511 238,181
Taxes, net (484,957) 255,383 257,342
</TABLE>
F-13 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
(j) 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 preopening costs
over the initial twelve months of a restaurant's operation. Under
the new method, the Company expenses such restaurant preopening
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 1997 was to decrease such
amounts $40,388, $169,429, and $.04, respectively. The change is
considered a cumulative effect-type accounting change and,
accordingly, the cumulative effect as of January 1, 1997 has been
reported in the accompanying consolidated 1997 financial
statements. Financial statements for fiscal 1996 have not been
restated but net earnings and earnings per share computed on a pro
forma basis have been disclosed in the accompanying consolidated
financial statements for all periods presented as if the
accounting change had been applied consistently during all periods
affected.
(k) NET EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share is computed by dividing net
earnings (loss) per share by the weighted average number of shares
outstanding. Diluted loss per share reflects the potential
dilution that could occur if contracts to issue securities (such
as stock options) were exercised. See note 12.
(l) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent liabilities to prepare the
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
these estimates.
(m) STOCK AWARDS
The Company accounts for its stock options in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. As such, compensation
expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price.
In addition, SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, requires that pro forma net earnings and pro forma
earnings per share disclosures be provided for employee stock
option grants made in 1996 and subsequent years as if the
fair-value-based cost measurement method defined in SFAS No. 123
had been applied.
F-14 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
(n) IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an 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 exceed 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 to be held and used 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.
(o) STORE CLOSURE COSTS
Store closure costs are recognized when a decision is made to
close a restaurant within the next twelve months.
(2) FRANCHISE REVENUES
Franchise revenues for the fifty-two weeks ended December 27, 1998,
December 28, 1997, and December 29, 1996 consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Initial franchise and development fees $ 47,500 147,500 228,500
Royalty revenue 96,037 269,530 443,487
------------ ------------ ------------
Total $ 143,537 417,030 671,987
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-15
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
The associated franchise receivables included within accounts receivable
in the accompanying consolidated balance sheets at December 27, 1998 and
December 28, 1997 include initial and franchise fees of $-0- and
$26,000, respectively, royalties receivable of $-0- and $54,266,
respectively, and allowance for doubtful accounts of $-0- and $(20,000),
respectively.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment and accumulated depreciation as of
December 27, 1998 and December 28, 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
Land and buildings $ 299,022 1,841,773
Restaurant and bakery equipment 2,401,299 4,066,611
Leasehold improvements 4,453,557 5,536,480
Delivery vehicles, office furniture and equipment 944,638 232,908
----------------- ----------------
8,098,516 11,677,772
Less accumulated depreciation (1,768,278) (1,396,076)
----------------- ----------------
Net property and equipment $ 6,330,238 10,281,696
----------------- ----------------
----------------- ----------------
</TABLE>
(4) IMPAIRMENT OF LONG-LIVED ASSETS AND STORE CLOSURES
The provision for impairment of assets to be held and used, which
amounted to $584,631 and $2,342,766 for the fifty-two weeks ended
December 27, 1998 and December 28, 1997, 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
and associated goodwill. 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 judgment is inherent in the estimated fair value
determinations and, accordingly, actual results could vary from such
estimates.
F-16 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
Store closure costs, which amounted to $4,099,014 and $1,430,814 for the
fifty-two weeks ended December 27, 1998 and December 28, 1997,
respectively, include a provision for writing down the carrying amount
of restaurant assets to estimated fair value less costs of disposal
aggregating $2,914,884 and $1,113,800, respectively, and a provision for
the net present value of any remaining noncancelable lease payments
after the expected closure date net of estimated sublease income or the
effect of early lease terminations considered by management to be
probable aggregating $1,184,130 and $317,014, respectively. The
liability for expected future lease costs related to store closures is
reflected in the accompanying balance sheets as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
<S> <C> <C>
Accrued liabilities $ 368,194 169,186
Other liabilities 798,662 133,724
-------------- ------------
Total $ 1,166,856 302,910
-------------- ------------
-------------- ------------
</TABLE>
Activity in the liability for expected future lease costs for 1998 is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Provision for closures approved in
in 1998 $ 1,302,765
Net adjustments to beginning of year
liability for effect of changes in
estimates due primarily to lease
termination and sublease activity (118,635)
---------------
Net provision 1,184,130
Payments made (320,184)
---------------
Increase in liability during 1998 $ 863,946
---------------
---------------
</TABLE>
During the fifty-two weeks ended December 27, 1998, the Company closed
11 restaurants and decided to close an additional seven restaurants and
a support facility which will be closed at various times prior to August
31, 1999. During the fifty-two weeks ended December 28, 1997, the
Company closed four restaurants and decided to close one additional
restaurant. The carrying amount of assets at December 27, 1998 and
December 28, 1997 applicable to restaurants which have been closed or
approved for closure amounted $112,500 and $196,630, respectively, net
of provisions for impairment.
F-17 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
The revenues and operating income (loss) from the eleven restaurants
closed during 1998 and the seven additional restaurants and support
facility approved for closure during 1998 for the fifty-two weeks ended
December 27, 1998, December 28, 1997 are as follows:
<TABLE>
<CAPTION>
STORES
APPROVED
STORES FOR
CLOSED CLOSURE TOTAL
------------- -------------- --------------
<S> <C> <C> <C>
1998:
Revenues $ 1,720,122 2,237,664 3,957,786
Net operating income (loss) (442,436) (263,134) (705,570)
1997:
Revenues 2,135,601 2,080,427 4,216,028
Net operating income (loss) (455,620) (79,424) (535,044)
1996:
Revenues 690,858 1,973,199 2,664,057
Net operating income (loss) (35,758) 95,487 59,729
</TABLE>
(5) LEASES
The Company leases several restaurant facilities under noncancelable
operating leases. These leases generally contain renewal options for
periods ranging from three to fifteen years and require the Company to
pay executory costs such as maintenance and insurance. Rent expense for
operating leases aggregated $1,814,051, $1,363,563, and $631,021 for the
fifty-two weeks ended December 27, 1998, December 28, 1997, and December
29, 1996, respectively.
Future minimum lease payments under noncancelable operating leases with
initial or remaining lease terms in excess of one year as of December
27, 1998 are:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 1,547,997
2000 1,472,748
2001 1,285,902
2002 1,153,560
2003 1,051,794
Thereafter 5,598,909
----------------
Total minimum lease payments $ 12,110,910
----------------
----------------
</TABLE>
The Company is party to certain operating leases with companies that are
owned by certain
F-18 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
stockholders of the Company. Rent paid to these related companies pursuant
to lease agreements aggregated $255,440, $101,863, and $60,177 in 1998,
1997, and 1996, respectively.
Deferred rents payable in the accompanying balance sheets represent
accruals for escalating rental payments on operating leases.
SALE-LEASEBACK TRANSACTIONS
The Company entered into agreements to sell and lease back four and
three restaurant facilities (land and buildings) during 1998 and 1997,
respectively, with an entity owned by an officer of the Company and a
significant stockholder, both of whom are members of the Board of
Directors of the Company. The proceeds from the sale-leaseback
transactions amounted to approximately $1.7 million and $1.2 million in
1998 and 1997, respectively, and the primary leaseback term is 15 years.
As a result of the sale-leaseback transactions, the Company incurred
losses of $551,655 and $379,752 in 1998 and 1997, respectively, which
were deferred for financial reporting purposes and included within
leasehold improvements and are being amortized over the term of the
related leases (unless subject to provision for impairment or closure
(see note 4). The Company believes that the terms and conditions of both
the real estate sales and the related leasebacks are 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.
(6) LONG-TERM DEBT
Long-term debt at December 27, 1998 and December 28, 1997 consists of
the following:
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
<S> <C> <C>
Prime rate (7.75% at December 27, 1998) note payable to
bank pursuant to credit facility described below $ 1,593,858 2,462,108
Line of credit to bank pursuant to credit facility described
below 220,000 --
Subordinated debenture payable in monthly installments
of $1,000 including interest at 6% through December
2002 with final payment of $22,255 due January 2003 57,500 57,500
---------------- ---------------
Total long-term debt 1,871,358 2,519,608
Less current installments of long-term debt 1,821,894 2,490,858
---------------- ---------------
Long-term debt, less current installments $ 49,464 28,750
---------------- ---------------
---------------- ---------------
</TABLE>
In 1997, the Company entered into a loan agreement for a revolving line
of credit and term loan facilities with a bank. The loan agreement, as
amended August 1998, provides for a maximum
F-19 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
aggregate commitment of $2.5 million subject to availability under a
borrowing base calculated based on the level of eligible equipment,
inventory, and accounts receivable and compliance with certain financial
covenants. Each borrowing under the loan agreement is represented by a
promissory note that provides specific terms. Notes issued pursuant to
the loan agreement are secured by substantially all of the Company's
assets and mature in 1999. The loan agreement contains customary
restrictive covenants including certain financial ratios. At December
31, 1998, the Company was not in compliance with certain of the
restrictive covenants; however, the Company has obtained a waiver from
the lender for such noncompliance.
The proceeds from the note payable to bank (such note payable is
classified as a current liability at December 27, 1998) were primarily
used for acquisition of long-lived assets such as property and
equipment. To the extent such note is not otherwise repaid in the normal
course of business prior to maturity on September 15, 1999, the Company
anticipates that it will refinance the outstanding balance of such note
payable although the Company does not currently have a commitment from
the lender to refinance such note payable.
At December 27, 1998, the Company has $220,000 outstanding on revolving
line of credit pursuant to the loan agreement. The line of credit
matured March 10, 1999 with interest payable at prime rate (7.75% at
December 27, 1998). The line of credit was renewed to mature on May 10,
1999.
The subordinated debenture was refinanced in 1998 to extend the maturity
date to January 2003. The debenture included a conversion feature
whereby the debenture holder had the right to convert all or a portion
of the debenture principal into shares of the Company's common stock.
The conversion feature expired unexercised June 13, 1997. The debenture
is subordinate to all other liabilities of the Company.
The aggregate maturities of long-term debt for each of the years
subsequent to December 27, 1998 are as follows: 1999 - $1,821,894; 2000
- $9,285; 2001 - $9,857; 2002 - $10,465; and 2003 - $19,857.
(7) INCOME TAXES
Income tax expense (benefit) for the fifty-two weeks ended December 27,
1998, and December 28, 1997, and December 29, 1996 consists of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Current $ -- (141,791) 186,306
Deferred -- (2,626) 83,408
-------------- -------------- -------------
Total $ -- (144,417) 269,714
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
Certain entities included in the consolidated financial statements were
S corporations during 1995 and part of 1996, and as a result did not pay
corporate income taxes. Concurrent with the IPO, the
F-20 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
Company terminated its S corporation status and, consequently, incurred
a one-time charge of $74,000 to deferred tax expense to properly record
deferred tax assets and liabilities that existed as of the effective
date of the IPO.
F-21 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
Actual income tax expense (benefit) differs from the "expected" tax expense
computed by applying the U. S. federal corporate tax rate of 34% to earnings
(loss) before income taxes for the fifty-two weeks ended December 27, 1998,
December 28, 1997, and December 29, 1996 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ----------- ---------
<S> <C> <C> <C>
Computed expected tax expense (benefit) $ (2,034,206) (1,334,227) 339,993
S corporation earnings allocated to stockholders -- -- (167,578)
S corporation termination deferred tax charge -- -- 74,000
State taxes, net of federal income tax benefit (236,925) (141,516) 19,503
Nondeductible goodwill impairment and
amortization -- 139,988 2,462
Change in valuation allowance 2,197,214 1,189,251 --
Other 73,917 2,087 1,334
------------ ----------- ---------
$ -- (144,417) 269,714
------------ ----------- ---------
------------ ----------- ---------
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 27, 1998 and December 28,
1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accrued and other liabilities, due to accrual for financial
reporting purposes $ 475,217 159,472
Property and equipment, due to provision for impairments
and closures for financial reporting purposes, net of
accelerated depreciation for tax reporting purposes 1,403,573 976,460
Net operating loss carryforward 1,631,552 198,624
----------- -----------
Total deferred tax assets 3,510,342 1,334,556
Valuation allowance (3,386,465) (1,189,251)
----------- -----------
Net deferred tax assets 123,877 145,305
----------- -----------
Deferred tax liabilities:
Deferred loss on sale-leaseback transactions recognized
for tax reporting purposes 123,877 144,306
Other -- 999
----------- -----------
Total deferred tax liabilities 123,877 145,305
----------- -----------
</TABLE>
F-22 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
<TABLE>
<S> <C> <C>
Net deferred tax liability $-- --
----------- -----------
----------- -----------
</TABLE>
F-23 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
The net change in the total valuation allowance for the fifty-two weeks
ended December 27, 1998 and December 28, 1997 was an increase of
$2,197,214 and $1,189,251, respectively. In assessing the realizability
of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Based on the cumulative net loss over the past three fiscal
years, management believes the valuation allowance is appropriate due to
the uncertainty regarding the realization of the deferred tax assets.
At December 27, 1998, the Company has net operating loss carryforwards
for federal and state income tax purposes of $4,532,131 and $724,903,
respectively, which are available to offset future taxable income at
various dates through 2018.
(8) STOCKHOLDERS' EQUITY
During 1998, the Company's Board of Directors approved a plan to
repurchase up to one 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 December 27, 1998, the
Company had purchased 10,400 shares of Common Stock for $17,974.
In 1996, as a result of the Company's termination of its S corporation
status immediately prior to the effective date of the IPO, the Company
declared a distribution to the then current stockholders in an amount
commensurate with their federal and state income tax obligations arising
from the Company's 1996 results of operations while an S corporation
which are reported to the stockholders for inclusion in their individual
income tax returns.
The Company is authorized to issue 5,000,000 shares of preferred stock
with no par value. There were no shares issued or outstanding at
December 27, 1998 or December 28, 1997.
(9) FINANCIAL INSTRUMENTS FAIR VALUE INFORMATION
The carrying value of the Company's long-term debt approximates its fair
value based on current interest rates of similar instruments. The
carrying values of the Company's other financial instruments at December
27, 1998 and December 28, 1997, including cash and cash equivalents,
accounts receivable, other current assets, and accounts payable
approximate their fair values because of their short maturity.
(10) ACQUISITIONS
Effective February 28, 1997, the Company purchased substantially all of
the operating assets and business operations of Bagel Buds, Inc. for
$415,000. The acquisition has been accounted for by the purchase method
of accounting and, accordingly, the operations of Bagel Buds, Inc. have
been included in the accompanying statements of operations subsequent to
February 28, 1997. The initial purchase price has been allocated to the
assets acquired based on their estimated fair values at date of
F-24 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
acquisition. Goodwill arising from the acquisition amounted to $248,240.
F-25 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
Effective May 9, 1997, the Company purchased substantially all of the
operating assets and business operations of M.Y. Bagel Shop, Inc. for
$323,000. The acquisition has been accounted for by the purchase
method of accounting and, accordingly, the operations of M.Y. Bagel
Shop, Inc. have been included in the accompanying statements of
operations subsequent to May 9, 1997. The initial purchase price has
been allocated to the assets acquired based on their estimated fair
values at date of acquisition. Goodwill arising from the acquisition
amounted to $148,975.
The aggregate pro forma effect of the aforementioned 1997 acquired
operations on revenues, net earnings (loss), and earnings (loss) per
share for the fifty-two weeks ended December 28, 1997 and December 29,
1996 is not material and, accordingly, no related pro forma information
is provided.
Effective December 6, 1996, the Company purchased substantially all of
the operating assets and business operations and assumed certain
liabilities of Lots A' Bagels, Inc. for an initial cash payment of
$2,100,000. In addition, certain contingent consideration was to be paid
as additional purchase price based on Lots A' Bagels, Inc.'s earnings
(as defined in the purchase agreement) for the period July 1, 1996
through March 30, 1997. On July 17, 1997, the Company paid $515,000 as
full payment of the contingent consideration, which was recorded as
additional goodwill at that time. Total acquisition expenses amounted to
$139,761. The acquisition has been accounted for by the purchase method
of accounting and, accordingly, the operations of Lots A' Bagels, Inc.
have been included in the accompanying statements of operations
subsequent to December 6, 1996. The purchase price has been allocated to
the assets acquired and liabilities assumed based on their estimated
fair values at date of acquisition. Goodwill as of December 27, 1998 and
December 28, 1997 arising from the acquisition amounted to $805,028 and
$852,116, respectively.
Effective September 27, 1996, the Company purchased certain assets of
Jeff Eateries Limited Partnership for $245,000. The acquisition has been
accounted for by the purchase method of accounting. The purchase price
has been allocated to the assets acquired based on their estimated fair
values at date of acquisition. Goodwill arising from the acquisition
amounted to $94,182.
The following table summarizes the pro forma results of operations for
the fifty-two weeks ended December 29, 1996 as if the acquisitions
consummated in 1996 had been consummated at the beginning of 1996. In
presenting the pro forma information, depreciation, amortization and
interest expense have been adjusted to reflect the purchase accounting
recorded in the acquisitions and income taxes have been recognized as if
none of the entities included in the pro forma results had operated as
an S corporation. For purposes of determining pro forma results of
operations, the acquisition cost of Lots A' Bagels, Inc. includes the
contingent consideration paid in 1997. The pro forma results do not
necessarily reflect what would have occurred if the acquisitions had
been made at the beginning of the respective periods or the results that
may occur in the future.
<TABLE>
<CAPTION>
1996
----------------
<S> <C>
Revenues $ 15,314,832
Net earnings 604,741
</TABLE>
F-26 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
<TABLE>
<S> <C>
Net earnings per share - basic and diluted .17
</TABLE>
F-27 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
(11) STOCK AWARDS
In 1996, the Company adopted the 1996 Incentive Plan (the Plan) pursuant
to which the Company may grant incentive stock options, nonqualified
stock options or restricted stock to officers, directors, employees,
consultants and advisors. The Plan, as amended, authorizes grants of up
to 500,000 shares of authorized but unissued common stock. In addition
to the stock options granted under the Plan, the Company entered into
nonqualified stock option agreements with four of its non-employee
directors to purchase a total of 170,000 shares of authorized but
unissued common stock. Stock options are granted with an exercise price
equal to the stock's fair market value at the date of grant except for
options granted to employees and directors that are also greater than
10% stockholders of the Company in which case such options are granted
with an exercise price equal to 110% of the stock's fair market value at
the date of grant. Stock options granted have terms of either five years
or ten years. The majority of options granted vest (i) 20% exercisable
six months after date of grant and, (ii) 20% exercisable on each of the
first four anniversaries of the date of grant. Certain options granted
in 1997, however, were immediately vested as of the grant date.
In October 1997, the Company modified the terms of options to acquire
276,000 shares that were originally granted in 1996 and options to
acquire 8,500 shares that were originally granted in January 1997. The
modification consisted of reducing the original exercise price of such
options which ranged from $6.13 to $9.90 for 207,000 options and $6.05
for 77,500 options. Vesting periods were not modified and are calculated
from the original grant date. The exercise prices for the modified
options were greater than the market price of the stock on the
modification date. The weighted average exercise price for the modified
options is $5.65 and the weighted average fair value of the modified
options is $1.13. The modified options are reflected in the table of
stock option activity below as 1997 granted options and 1997 canceled
options. The incremental value as a result of the modified terms is
included in the pro forma compensation cost disclosed below.
In December 1998, the Company modified the terms of 197,000 options that
were originally granted in 1997. The modification consisted of reducing
the original exercise price of such options which ranged from $3.69 to
$6.05. Vesting periods were not modified and are calculated from the
original grant date. The exercise prices for the modified options were
greater than the market price of the stock on the modification date. The
exercise price for the modified options is $1.00 and the fair value of
the modified options is $.05. The modified options are reflected in the
table of stock option activity below as 1998 granted options and 1998
canceled options. The incremental value as a result of the modified
terms is included in the proforma compensation cost disclosed below.
At December 27, 1998, there were 293,000 additional shares available for
grant under the Plan. The per share weighted average fair value of stock
options granted during 1998 and 1997 was $.09 and $1.32 on the date of
grant using the Black Scholes option-pricing model with the following
weighted average assumptions for 1998 and 1997, respectively: expected
dividend yield of 0% for both years, expected volatility of 44.99% and
40.35%, risk-free interest rate of 4.54% and 5.93%, and an expected life
of five years for both years.
F-28 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
The Company applies APB Opinion No. 25 in accounting for its stock
options and, accordingly, no compensation cost has been recognized for
its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's 1998 and 1997
net loss and loss per share would have been the amounts indicated below.
<TABLE>
<CAPTION>
1998 1997
------------------ ---------------
<S> <C> <C> <C>
Net loss As reported $ (5,982,958) (3,908,822)
Pro forma for SFAS No. 123 (6,013,810) (4,277,606)
Loss per share - basic and As reported (1.28) (.84)
diluted Pro forma for SFAS No. 123 (1.29) (.92)
</TABLE>
Stock option activity during 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------------- --------------------------
<S> <C> <C>
Balance at December 31, 1995 -- $ --
Granted 331,000 8.77
Exercised -- --
Forfeited (34,500) 9.00
--------------- --------------------------
Balance at December 29, 1996 296,500 8.74
Granted 441,000 5.14
Exercised -- --
Forfeited (27,500) 8.23
Canceled (284,500) 8.65
--------------- --------------------------
Balance at December 28, 1997 425,500 5.10
Granted 307,000 .91
Exercised -- --
Forfeited (158,500) 5.01
Canceled (197,000) 4.98
--------------- --------------------------
Balance at December 27, 1998 377,000 $ 1.79
--------------- --------------------------
--------------- --------------------------
</TABLE>
At December 27, 1998 and December 28, 1997, the number of options
exercisable was 276,900 and 206,900 and the weighted average exercise
price of those options was $.91 and $4.84, respectively.
At December 27, 1998, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $.75 - $1.00 for
307,000 shares and $5.50 - $6.05 for 70,000 shares and 5.67 years,
respectively.
F-29 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
(12) EARNINGS PER SHARE
The following is a reconciliation of the net earnings (loss) and
outstanding shares utilized in the computation of earnings (loss) per
share.
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C>
Earnings (loss) before cumulative effect of
accounting change - basic $ (5,982,958) (3,779,781) 730,266
Pro forma adjustment to income tax expense -- -- (119,791)
--------------- --------------- --------------
Pro forma net earnings (loss) - basic (5,982,958) (3,779,781) 610,475
Debenture interest adjustment, net of income
tax effect -- -- 2,852
--------------- --------------- --------------
Adjusted net earnings (loss)
for diluted calculation $ (5,982,958) (3,779,781) 613,327
--------------- --------------- --------------
--------------- --------------- --------------
Outstanding shares:
Weighted average shares outstanding - basic $ 4,658,763 4,667,500 3,565,464
Effect of dilutive convertible debenture -- -- 19,121
--------------- --------------- --------------
As adjusted for diluted calculation $ 4,658,763 4,667,500 3,584,585
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
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 December 27,
1998, there are 377,000 options outstanding at a weighted average
exercise price of $1.79 which may become dilutive in the future.
The weighted average shares outstanding for 1996 include pro forma
shares of 145,292 based on the assumed number of shares whose proceeds
would be sufficient (based upon the net initial public offering price)
to replace the excess of distributions to stockholders over net earnings
for the year ended December 29, 1995.
(13) SUBSEQUENT EVENT
During January 1999, the Company entered into an agreement to sell and
lease back one restaurant site with an entity owned by an officer of the
Company and a significant stockholder, both of whom are members of the
Board of Directors of the Company. The proceeds from the transaction
approximated $180,000 and the primary leaseback term is 15 years.
F-30 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
(14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Financial results by quarter are as follows (all dollars in thousands
except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
1998:
Total revenues $ 4,842 5,139 4,737 4,270
Gross profit (a) 3,140 3,344 2,926 2,577
Provision for impairments and closures (b) 1,106 -- 3,268 310
Operating loss (1,187) (101) (3,673) (868)
Net loss (1,222) (137) (3,709) (915)
Net loss per share - basic and diluted (.26) (.03) (.80) (.19)
1997:
Total revenues $ 4,474 4,819 4,815 4,880
Gross profit (a) 2,925 3,208 3,161 3,087
Provision for impairments and closures -- -- 3,558 216
Operating income (loss) 411 255 (3,928) (735)
Earnings (loss) before cumulative effect
of accounting change (c) 289 179 (2,596) (1,652)
Cumulative effect of accounting change (129) -- -- --
Net earnings (loss) (c) 160 179 (2,596) (1,652)
Net earnings (loss) per share - basic and
diluted (c) .03 .04 (.56) (.35)
</TABLE>
(a) Gross profit is sales from Company-owned restaurants less cost
of sales.
(b) The fourth quarter provision is due to changes in accounting
estimates applicable to restaurants previously approved for
closure.
(c) Includes effect of establishing a valuation allowance for
deferred tax assets of $1,189,251. See note 7.
F-31 (Continued)
<PAGE>
NEW YORK BAGEL ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 27, 1998 and December 28, 1997
(15) OPERATIONS AND LIQUIDITY
The Company has incurred substantial net losses in 1998 and 1997 and
current liabilities exceed current assets at December 27, 1998 by
approximately $2.6 million. While a substantial portion of the net loss
before income tax in each year was due to provisions for impairment and
restaurant closures, the pre-tax loss exclusive of such provisions
amounted to $1,299,313 in 1998 and $150,618 in 1997.
Since January 1, 1996, the Company has opened or acquired 39
restaurants. The Company was unable to achieve, or maintain, profitable
operations in certain of these restaurants, primarily due to not
achieving expected sales levels. Furthermore, the Company experienced a
same store restaurant sales decline in 1998 of approximately 15.0%.
The Company's ability to continue as a going concern is dependent upon
obtaining sufficient financing and ultimately upon achieving sufficient
cash flows from operations to enable the Company to meet its
obligations.
Management's plans to address the above issues include (i) the closure
of 11 unprofitable restaurants during 1998 and the determination during
1998 to close seven additional restaurants and a support facility prior
to August 31, 1999 (see note 4), (ii) the planned reduction of
approximately $500,000 in overhead costs in 1999, (iii) an increased
focus on controlling restaurant level operating costs, (iv) new product
initiatives designed to stimulate sales growth in existing restaurants
and (v) converting certain restaurants to the Atomic Burrito concept
pursuant to the joint venture arrangement discussed in note 1(a).
The Company borrowed $200,000 from certain officers and directors
subsequent to December 27, 1998, and entered into a sale-leaseback
arrangement which generated approximately $180,000 in proceeds.
Management expects to seek additional debt or equity financing but
currently does not have any commitments to obtain such additional
financing.
Management anticipates that it will refinance its notes payable to bank
(see note 6) at maturity on September 15, 1999 although the Company
currently does not have a commitment from the lender to refinance such
notes payable. As discussed in note 6, the Company was not in compliance
with certain restrictive covenants in the loan agreement with the bank
at December 27, 1998; however, the Company has obtained a waiver from
the lender for such noncompliance.
The ability of the Company to achieve sufficient financing and cash
flows from operations and thereby continue as a going concern is
dependent upon the extent to which management can achieve such plans.
F-32
<PAGE>
EXHIBIT 4.6
FIRST AMENDMENT TO 4% CONVERTIBLE AND
SUBORDINATED DEBENTURE DUE DECEMBER 14, 1999
THIS FIRST AMENDMENT TO 4% CONVERTIBLE AND SUBORDINATED DEBENTURE DUE
DECEMBER 14, 1999 (this "Amendment") is made and entered into as of this 25th
day of January, 1999,
BY AND BETWEEN NEW YORK BAGEL ENTERPRISES, INC.,
a Kansas Corporation,
hereinafter referred to as
"CORPORATION"
AND DR. LORI ADELSON,
an individual,
hereinafter referred to as
"HOLDER"
WITNESSETH:
WHEREAS, Corporation and Holder entered into that certain 4%
Convertible and Subordinated Debenture Due December 14, 1999, dated December
14, 1995 (the "Debenture");
WHEREAS, Corporation has previously paid Holder two (2) principal
payments of Twenty-eight Thousand Seven Hundred Fifty Dollars ($28,750) with
interest thereon at the rate of four percent (4%) per annum;
WHEREAS, Pursuant to the terms of the Debenture, Corporation owes
Holder the two (2) principal payments due on December 14, 1998, and December
14, 1999, respectively, in the principal amount of Twenty-eight Thousand
Seven Hundred Fifty Dollars ($28,750) each plus related interest; and
WHEREAS, Corporation and Holder desire to amend the Debenture by
restructuring all remaining indebtedness.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
1. INCORPORATION OF RECITALS. The parties agree that the Debenture
is hereby modified, altered and amended to incorporate the whereas clause
recitals set forth above.
2. AMENDMENT TO SECTION 1. Section 1 of the Debenture is hereby
amended by deleting the same in its entirety and inserting in lieu thereof
the following:
<PAGE>
SECTION 1. TERMS. The parties acknowledge and agree that New York
Bagel Enterprises, Inc., a Kansas corporation ("Corporation") has paid
Dr. Lori Adelson, successor to the Estate of Stephen Z. Plotkin, a
Tennessee probate estate ("Payee"; Payee and any permitted subsequent
holder(s) hereof are hereinafter referred to collectively as "Holder")
two installments of Twenty-eight Thousand Seven Hundred Fifty Dollars
($28,750) on December 14, 1996, and December 14, 1997, with related
interest at four percent (4%) per annum. Subject to Section 6 herein,
Corporation shall pay Holder the remaining principal balance of
Fifty-seven Thousand Five Hundred and No/100 Dollars ($57,500.00) as
follows: (i) a monthly payment of One Thousand Dollars ($1,000) for
forty-eight (48) months beginning on February 1, 1999 and payable on
the first day of each month through and including January 1, 2003 (the
"Maturity Date"); and (ii) Twenty-one Thousand Two Hundred Fifty-five
and 32/100 Dollars ($21,255.32) on January 1, 2003, which amount
includes remaining principal and interest at six percent (6%) per
annum and interest at four percent (4%) for one year. If any of the
principal or interest is not so paid, and at the option of Holder, or
its assigns, all principal and interest shall become immediately due
and payable.
3. AMENDMENT TO SECTION 16. Section 16 of the Debenture is hereby
amended by deleting the same in its entirety and inserting in lieu thereof
the following:
SECTION 16. NOTICES. All notices and other communications
required or permitted under this Debenture shall be validly given,
made, or served if in writing and delivered personally or sent by
registered mail at the following address:
If to Corporation: Robert J. Geresi, Chief Executive Officer
New York Bagel Enterprises, Inc.
115 E. 8th Street
Stillwater, Oklahoma 74074
with a copy to: Gregory B. Klenda, Esq.
Klenda, Mitchell, Austerman & Zuercher, L.L.C.
1600 Epic Center
301 North Main Street
Wichita, Kansas 67202-4888
If to Holder: Dr. Lori Adelson
6 Warwick Lane
Nashville, Tennessee 37205
with a copy to: Alan L. Saturn
Saturn and Mazer
212 Third Avenue, North
Nashville, Tennessee 37201
2
<PAGE>
4. OTHER TERMS. All other terms and conditions in the Debenture
shall remain unchanged and nothing herein shall affect the rights and
obligations of the parties hereto under the Debenture except as modified
herein.
5. AMENDMENT AND MODIFICATIONS. This Amendment may only be amended
or modified in writing signed by the parties.
6. ENTIRE AGREEMENT. This Amendment contains the entire agreement
between the parties and supersedes all prior agreements, arrangements and
understandings relating to the subject matter hereof.
7. COUNTERPARTS AND FACSIMILE SIGNATURES. This Amendment may be
executed simultaneously in two (2) or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the
same instrument. Facsimile signatures of the parties hereto shall be binding.
8. HEADINGS. The headings contained in this Amendment are for
convenience and reference purposes only and shall not affect the meaning or
interpretation of this Amendment.
9. GOVERNING LAW. This Amendment shall be governed by and construed
in accordance with the laws of the State of Oklahoma.
10. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
permitted assigns, heirs and personal representatives.
11. TERMS AND WORDS. All terms and words used in this Amendment,
regardless of numbers and genders in which they are used, shall be deemed to
include singular or plural and all genders as the context or sense of this
Amendment or any paragraph or clause herein may require.
IN WITNESS WHEREOF, the parties have executed this Amendment the day
and year first above written.
NEW YORK BAGEL ENTERPRISES, INC.
By: /s/ Robert J. Geresi
-----------------------------------------
Robert J. Geresi, Chief Executive Officer
"CORPORATION"
/s/ Lori Adelson
-----------------------------------------
DR. LORI ADELSON
as successor in interest to
The Estate of Stephen Z. Plotkin
"HOLDER"
3
<PAGE>
EXHIBIT 4.8
SCHEDULE OF EMPLOYEES RECEIVING STOCK OPTION GRANTS
NEW YORK BAGEL ENTERPRISES, INC.
1998 GRANTS
INCENTIVE STOCK OPTIONS
<TABLE>
<CAPTION>
Date Shares Strike
Granted Director/Employee Granted Price
------- ----------------- ------- -----
<S> <C> <C> <C> <C>
REPRICED ALL OUTSTANDING INCENTIVE STOCK OPTIONS
1 December 1, 1998 Paul Murphy 6,000 $1.000
2 December 1, 1998 Chris Cohea 6,000 $1.000
3 December 1, 1998 Andrew Lee 6,000 $1.000
4 December 1, 1998 Kyle Shipley 6,000 $1.000
5 December 1, 1998 Stephanie Baker 1,000 $1.000
6 December 1, 1998 Barbara Spillane 1,000 $1.000
7 December 1, 1998 Todd Bacon 2,500 $1.000
8 December 1, 1998 Jon Phelps 1,000 $1.000
9 December 1, 1998 Justin Fransung 1,000 $1.000
10 December 1, 1998 Billy Seamster 500 $1.000
11 December 1, 1998 Celeste Ramirez 500 $1.000
12 December 1, 1998 Alan Bounds 1,000 $1.000
13 December 1, 1998 Stephanie Barnes 1,000 $1.000
14 December 1, 1998 Robert Geresi 20,000 $1.000
15 December 1, 1998 Paul Sorrentino 20,000 $1.000
16 December 1, 1998 Vince Vrana 20,000 $1.000
17 December 1, 1998 Joe Trizza 20,000 $1.000
18 December 1, 1998 Chris Moorman 5,000 $1.000
19 December 1, 1998 Suzi Lindsey 5,000 $1.000
20 December 1, 1998 Andy Stafford 2,500 $1.000
21 December 1, 1998 Craig Wallace 1,000 $1.000
22 December 1, 1998 Robert Maldanado 1,000 $1.000
23 December 1, 1998 Rhonda Edwards 1,000 $1.000
24 December 1, 1998 Mark White 1,000 $1.000
25 December 1, 1998 Ethel Ruggles 1,000 $1.000
26 December 1, 1998 Jay Gates 500 $1.000
27 December 1, 1998 Steve Frazier 2,500 $1.000
28 December 1, 1998 Kenny Dove 1,000 $1.000
29 December 1, 1998 Theresa Morgan 1,000 $1.000
30 December 1, 1998 Tracy Percifield 1,000 $1.000
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
31 December 1, 1998 Robert Geresi 20,000 $1.000
32 December 1, 1998 Paul Sorrentino 10,000 $1.000
33 December 1, 1998 Vince Vrana 10,000 $1.000
34 December 1, 1998 Steve Frazier 10,000 $1.000
35 December 1, 1998 Joe Trizza 10,000 $1.000
-------
197,000
-------
-------
October 9, 1998 Richard R. Webb 10,000 $0.750
-------
-------
GRAND TOTALS 207,000
-------
</TABLE>
* These issuances are a result of the Board of Directors meeting dated
December 1, 1998 in which the Board repriced outstanding options by canceling
and re-issuing on a one-for-one basis at an exercise price of $1.00 per share
which is greater than 100% of the quoted bid price of the stock of the
corporation. In addition, such re-priced options are to vest as originally
granted such that the new vesting periods shall be modified to give credit
for the prior holding periods.
2
<PAGE>
EXHIBIT 4.9
SCHEDULE OF NON-EMPLOYEES RECEIVING
STOCK OPTION GRANTS
NEW YORK BAGEL ENTERPRISES,
INC.
NONQUALIFIED STOCK OPTIONS
<TABLE>
<CAPTION>
Date Shares Strike Exercised
Granted Director Granted Price (Cancelled)
------- -------- ------- ----- -----------
<S> <C> <C> <C> <C>
1 October 6, 1997 David Murfin a 17,500 $6.050 * -
2 October 6, 1997 Bill Walsh a 17,500 $5.500 * -
3 October 9, 1998 Bill Walsh a 100,000 $0.750
4 January 28, 1999 Paul R. Hoover 17,500 $0.750
------- -----------
152,500 -
------- -----------
------- -----------
</TABLE>
a Nonqualified Stock Options have been issued outside of the New York
Bagel Enterprises, Inc. Incentive Stock Plan to the above named members
of the Board of Directors.
* These issuances are a result of the Board of Directors meeting dated
October 6, 1997 in which the Board repriced outstanding options by
canceling and re-issuing on a one-for-one basis at an exercise price of
$5.50 per share which is greater than 100% of the quoted close price of
the stock of the corporation in The Wall Street Journal. In addition,
such re-priced options are to vest as originally granted such that the
new vesting periods shall be modified to give credit for the prior
holding periods.
<PAGE>
EXHIBIT 10.17
AGREEMENT OF PURCHASE AND SALE
THIS AGREEMENT OF PURCHASE AND SALE (this "Agreement") is made as of
the 20th day of January, 1999,
BY AND BETWEEN NEW YORK BAGEL ENTERPRISES, INC.,
a Kansas corporation,
hereinafter referred to as
"SELLER"
AND COMMERCIAL EQUITY, INC.,
a Kansas corporation,
hereinafter referred to as
"BUYER"
W I T N E S S E T H :
WHEREAS, Seller is the current lessee of certain real property located
at 21st and Tyler in the city of Wichita, Kansas, and more particular described
in Exhibit "A" ("Wichita Land"), subject to that certain Ground Lease by and
between Kenneth R. Reichenberger and Mary Ellen Reichenberger, as lessors, and
Seller, as lessee, attached hereto as Exhibit "B" (the "Ground Lease") and the
owner of all buildings, structures, facilities, improvements and fixtures
located thereon, including, without limitation, a facility currently used as a
New York Bagel Cafe restaurant ("Wichita Improvements"); provided, however, that
upon expiration of Ground Lease all the Wichita Improvements shall revert to the
lessors of the Ground Lease. The Wichita Land, the Wichita Improvements and the
Ground Lease are hereinafter collectively referred to as the "Wichita Facility";
and
WHEREAS, Seller desires to sell all of its right, title and interest in
and to the Wichita Facility to Buyer, and Buyer desires to purchase all of
Seller's right, title and interest in and to the Wichita Facility from Seller,
all on the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the covenants and agreements
contained herein, the parties hereto agree as follows:
1. PURCHASE AND SALE. Seller agrees to sell all of its right, title and
interest in and to all the Wichita Facility to Buyer, and Buyer agrees to
purchase all of Seller's right, title and interest in and to all the Wichita
Facility from Seller, on the terms and conditions hereinafter set forth in this
Agreement.
<PAGE>
2. PURCHASE PRICE.
2.1 The aggregate purchase price ("Purchase Price") for the
Wichita Facility shall be One Hundred Eighty Thousand Dollars
($180,000).
2.2 The Purchase Price shall be paid at the Closing (as
hereinafter defined) by delivering the Purchase Price to Seller by
wire transfer of immediately available federal funds.
3. CONDITION OF TITLE TO WICHITA FACILITY.
3.1 At Closing, Seller shall assign to Buyer all of its right,
title and interest to the Wichita Facility free and clear of all
liens, except for (i) liens securing real property taxes and
assessments, which constitute liens not yet due and payable; and (ii)
such other exceptions and reservations (other than liens) shown on the
Preliminary Title Report ("Preliminary Report") issued by the title
company set forth in Exhibit "C" ("Title Company") for the Wichita
Facility which are approved in writing by Buyer. All exceptions to
title permitted pursuant to this Paragraph 3.1 are referred to in this
Agreement as "Permitted Exceptions." Seller shall provide Buyer with a
copy of the Preliminary Report and a copy of all exceptions described
therein as soon as possible. Buyer shall have ten (10) business days
after the date of Buyer's receipt thereof within which to notify
Seller in writing of Buyer's disapproval of any exceptions set forth
in the Preliminary Report. In the event of Buyer's disapproval of any
exception in the Preliminary Report, this Agreement shall thereupon
terminate.
3.2 At the Closing, Buyer's right, title and interest in and to
the Wichita Facility shall be evidenced by the commitment of the title
company to issue an ALTA Owner's and Loan Leasehold policy of title
insurance with all endorsements required by Buyer, with liability in
the amount of the Purchase Price, showing a leasehold interest in the
Wichita Facility vested in Buyer, subject only to the Permitted
Exceptions (the "Title Policy") and the standard printed exceptions
(except that the exceptions relating to mechanic's liens and survey
matters shall be deleted from the final title insurance policy).
4. BUYER'S CONTINGENCIES. Buyer's obligation to purchase the Wichita
Facility is subject to satisfaction of the following contingencies described in
Subparagraphs (a) through (f) in this Paragraph 4 ("Contingencies") prior to the
Closing Date (as hereinafter defined) or earlier date set forth below. Each and
all of the following Contingencies are for the sole benefit of Buyer and may be
waived or deemed satisfied by Buyer in Buyer's sole and absolute discretion:
Buyer shall have approved and both Buyer and Seller shall have
executed that certain lease ("Lease") between Buyer, as the lessor,
and Seller, as the lessee, relating to the Wichita Facility, upon
terms and conditions mutually satisfactory to the parties, each of
which Lease shall by its terms have the Closing Date as the
"Commencement Date" thereunder.
2
<PAGE>
Buyer shall have reviewed and approved the Preliminary Report and all
recorded exceptions to title thereon, as and when provided under
Paragraph 3 hereof, and Title Company shall be committed to issue the
Title Policy as required hereunder without expense to Buyer.
Seller shall have delivered to Buyer no later than five (5) days prior
to the date scheduled for Closing, and Buyer shall have reviewed and
approved, an ALTA land title survey for the Wichita Facility, prepared
by a professional land surveyor entirely satisfactory to Buyer,
showing all improvements located thereon, plotting all record
easements, covenants and other encumbrances located thereon, with the
record legal description of appearing on the face thereof.
Seller shall have delivered to Buyer, and Buyer shall have reviewed
and approved, a tax lien search as to the Wichita Facility, updated as
of not earlier than thirty (30) days prior to the Closing Date.
Seller shall have delivered to Buyer, and Buyer shall have reviewed
and approved, a Phase I Environmental Site Assessment as to the
Wichita Facility dated within three hundred and sixty (360) days of
the Closing Date.
Buyer shall have approved its inspection and examination of the
physical condition of the Wichita Facility. Buyer shall have access to
the Wichita Facility at reasonable times and shall have the right to
conduct, at Buyer's expense, soil tests, engineering feasibility
studies, environmental investigations and such other studies with
respect to the physical condition of the Wichita Facility as Buyer may
desire. Buyer shall hold and save Seller harmless from and against any
and all loss, cost, damage, liability, entry or expense, arising out
of or in any way related to damage to property, injury to or death of
persons, or the assertion of lien claims caused by such entry,
inspection and implementation of soil tests, environmental
investigations and other studies with respect to the physical
condition of the Wichita Facility; provided, however, that
notwithstanding any contrary provision contained herein, Buyer shall
have no liability to Seller for any diminution in value of the Wichita
Facility directly or indirectly resulting from or related to any
information pertaining to the Wichita Facility discovered by Buyer and
reported to Seller or its agents pursuant to the terms of this
Agreement. If Buyer elects to terminate this Agreement by reason of
failure of the Contingencies set forth in this Paragraph 4(d), Buyer
shall promptly upon such election deliver to Seller all written
reports, studies and information prepared by third parties for Buyer
which pertain to the physical condition of the Wichita Facility.
Seller shall have delivered to Buyer all corporate resolutions,
certificates and other documentation as may be reasonably required by
Buyer.
3
<PAGE>
Buyer's obligation to purchase the Wichita Facility is conditioned on
Buyer obtaining on or before the Closing financing of the Purchase
Price on terms and conditions acceptable to Buyer in Buyer's sole
discretion. In the event this contingency is not met by the Closing
Date, this Agreement shall, at Buyer's option, terminate without any
remaining liability of any party.
Seller shall have delivered to Buyer a duly executed assignment of the
Ground Lease.
If Buyer disapproves any Contingency prior to the Closing or earlier
date set forth above, Buyer's sole remedy shall be to terminate this Agreement
and Seller shall have no obligation to remedy any Contingency which Buyer
disapproves.
5. REPRESENTATIONS AND WARRANTIES BY SELLER.
5.1 Seller makes the representations and warranties in this
Paragraph 5, each and all of which shall survive any and all inquiries
and investigations made by Buyer and shall survive the Closing:
(a) Seller is a corporation duly organized, validly existing and
good standing under the laws of the State of Kansas which
has the power and authority to enter into this Agreement and
to consummate the transactions contemplated hereby. Seller,
and the specific, individual parties signing this Agreement
on behalf of Seller, represent and warrant that the parties
signing this Agreement on behalf of Seller have the full
legal power, authority and right to execute and deliver this
Agreement.
(b) Neither the entering into this Agreement nor the performance
of any of Seller's obligations under this Agreement will
violate the terms of any contract, agreement or instrument
to which Seller is a party.
(c) The Wichita Facility is zoned to permit the operation of a
restaurant thereon, and all improvements on the Wichita
Facility conform to all existing building, zoning,
environmental or other laws and ordinances, and is in good
operating condition and repair as of the Closing Date.
Seller has not received any notice of any presently uncured
violation of any law, ordinance, rule or regulation
(including, without limitation, those relating to zoning,
building, fire, health and safety) of any governmental,
quasi-governmental authority bearing on the construction,
operation, ownership or use of the Wichita Facility.
(d) Seller has not received any notice of any pending widening,
modification or realignment of any street or highway
contiguous to either property or any existing or proposed
eminent domain proceeding which would result in a taking of
all or any part of the Wichita Facility.
4
<PAGE>
(e) None of the easements, covenants, conditions, restrictions
or agreements to which the Wichita Facility is subject
interferes with or is breached by the use or operation of
the Wichita Facility as presently used and operated as a
restaurant.
(f) Seller has not been served with any litigation, and no
arbitration proceedings have been commenced, which do or
will affect any aspect of the Wichita Facility or Seller's
ability to perform its obligations under this Agreement. In
addition, Seller has not been threatened in writing with any
litigation (or arbitration) by a third party which would
affect any aspect of the Wichita Facility or Seller's
ability to perform its obligations under this Agreement.
(g) Adequate gas, telephone, electricity, water and sewer
facilities are available to all the Wichita Facility, and
all such facilities serving the Wichita Facility have been
paid for such that Buyer will not be subject to charges or
assessments for capital or hookup costs relating to such
facilities.
(h) There are not any written commitments to, or written
agreements with, any governmental or quasi-governmental
authority or agency materially affecting the Wichita
Facility which have not been heretofore disclosed by Seller
to Buyer in writing.
(i) All expenses in connection with the construction of all the
improvements on the Wichita Land have been fully paid, such
that there is no possibility of any mechanics' or
materialmens' liens being asserted or filed in the future
against the Wichita Facility in respect of any initial
construction activities undertaken prior to the Closing.
(j) Seller has not been served or notified by any governmental
or quasi-governmental authority that (i) the Wichita
Facility, or any adjoining property, contains or may contain
any "Hazardous Materials" in violation of any "Environmental
Regulations" (as those terms are defined in Paragraph 5.1(k)
below); or (ii) Hazardous Materials have heretofore been
stored, used or maintained on, in or under the Wichita
Facility in violation of any Environmental Regulations. In
addition, to the best of Seller's knowledge, but without any
specific investigation therefore, there are no Hazardous
Materials located in, on or under all or any portion of the
Wichita Facility or the area surrounding the Wichita
Facility.
(k) As used in this Agreement, the terms "Environmental
Regulations" and "Hazardous Materials" shall have the
following meanings:
(i) "ENVIRONMENTAL REGULATIONS" shall mean all applicable
statutes, regulations, rules, ordinances, codes,
license, permits, orders,
5
<PAGE>
approvals, plans, authorizations, and similar items,
of all governmental agencies, departments,
commissions, boards, bureaus or instrumentalities of
the United States, states and political subdivisions
thereof and all applicable judicial and
administrative and regulatory decrees, judgments and
orders relating to the protection of human health or
the environment, including, without limitation:
(1) all requirements, including, without limitation,
those pertaining to reporting, licensing,
permitting, investigation and remediation of
emissions, discharges, releases or threatened
releases of Hazardous Materials, whether solid,
liquid or gaseous in nature, into the air, surface
water, groundwater or land, or relating to the
manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling
of Hazardous Materials, whether solid, liquid or
gaseous in nature; and (2) all requirements
pertaining to the protection of the health and
safety of employees or the public.
(ii) "HAZARDOUS MATERIALS" shall mean (1) any flammables,
explosive or radioactive materials, hazardous waste,
toxic substances or related materials including,
without limitation, substances defined as "hazardous
substances," "hazardous materials," "toxic substances"
or "solid waste" in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as
amended, 42 U.S.C. Sec. 9601, ET SEQ.; the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801,
ET SEQ.; the Toxic Substances Control Act, 15 U.S.C.,
Section 2601 ET SEQ.; the Resource Conservation and
Recovery Act of 1976, 42 U.S.C. Section 6901 ET SEQ.;
Occupational Safety and Health Act, 29 U.S.C.
Section 651, ET SEQ.; and any and all similar state
and local laws and ordinances, and the regulations
now or hereafter adopted, published and/or
promulgated pursuant thereto; (2) those substances
listed in the United States Department of
Transportation Table (49 C.F.R. 172.101 and
amendments thereto) or by the Environmental
Protection Agency (or any successor agency) as
hazardous substances (40 C.F.R. Part 302 and
amendments thereto); (3) those substances defined as
"hazardous wastes," "hazardous substances" or "toxic
substances" in any similar federal, state or local
laws or in the regulations adopted and publications
promulgated pursuant to any of the foregoing laws or
which otherwise are regulated by any governmental
authority, agency, department, commission, board or
instrumentality of the United States of America, the
State of Kansas or any political subdivision
thereof; (4) any pollutant or contaminant or
hazardous, dangerous or toxic chemicals, materials,
or substances within the meaning of any other
applicable federal, state, or local law, regulation,
ordinance, or requirement (including consent decrees
and administrative orders)
6
<PAGE>
relating to or imposing liability or standards of
conduct concerning any hazardous, toxic or dangerous
waste, substance or material, all as amended;
(5) petroleum or any by-products thereof; (6) any
radioactive material, including any source, special
nuclear or by-product material as defined at 42 U.S.C.
Sections 2011 ET SEQ., as amended, and in the
regulations adopted and publications promulgated
pursuant to said law; (7) asbestos in any form or
condition; and (8) polychlorinated biphenyls.
(l) Other than the Ground Lease, there are no other written
agreements for the use, occupancy or possession of the
Wichita Facility, or any portion thereof. There are no oral
agreements for the use, occupancy or possession of the
Wichita Facility or any portion thereof.
(m) Until the Closing, the Wichita Facility will continue to be
operated in substantially the same manner as operated as of
the date of this Agreement. Seller will not do or cause
anything to be done that would change, alter or modify the
operation of the Wichita Facility in the manner in which it
is operated as of the date of this Agreement, without the
prior written consent of Buyer.
(n) Seller has neither engaged nor dealt with any broker or
finder in connection with the sale contemplated by this
Agreement and Seller shall indemnify, defend and hold Buyer
harmless from and against, any commission or finder's fee
payable to any party who represents or claims to represent
Seller.
(o) Seller will not alter the physical condition of the Wichita
Facility from and after the date of this Agreement through,
and including, the Closing Date, reasonable wear and tear
excepted. Subject to Paragraphs 10 and 11 hereof, if,
through no fault of Seller, the physical condition of the
Wichita Facility is different as of the Closing from that as
of the date of this Agreement, the terms and conditions of
Paragraph 5.2, below shall apply.
5.2 Each and all of the representations and warranties set
forth in Paragraph 5.1 above shall be true and correct as of the
Closing; provided that, if, prior to the Closing, new events have
occurred which were beyond the control of Seller (other than
pursuant to Paragraphs 10 and 11 hereof) and which render any
previously true representation or warranty untrue, Seller shall
immediately disclose those matters by written notice to Buyer.
Buyer shall have ten (10) business days after the earlier of
(i) such disclosure; or (ii) Buyer's independent discovery that such
representation or warranty has become untrue, to elect, in its sole
and absolute discretion, and as its sole remedy, by written notice
to Seller within said ten (10) business day period, whether (i) to
purchase the Wichita Facility or (ii) terminate this Agreement. If
Buyer fails to notify Seller of its election to terminate this
Agreement within said ten (10) business day period provided above,
Buyer shall be deemed to have
7
<PAGE>
accepted the modified representations and warranties and elected to
purchase the Wichita Facility.
6. REPRESENTATIONS AND WARRANTIES BY BUYER.
Buyer makes the following representations and warranties in this
Paragraph 6, each and all of which shall survive any and all inquiries and
investigations made by Seller and shall survive the Closing:
6.1 Buyer is a corporation duly organized, validly existing and
good standing under the laws of the State of Kansas which has the
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. Buyer, and the specific, individual
parties signing this Agreement on behalf of Buyer represent and
warrant that the parties signing this Agreement on behalf of Buyer
have the full legal power, authority and right to execute and deliver
this Agreement.
6.2 Buyer has neither engaged nor dealt with any broker or finder
in connection with the sale contemplated by this Agreement and Buyer
shall indemnify, defend and hold Seller harmless from and against, any
commission or finder's fee payable to any party who represents or
claims to represent Buyer.
7. INDEMNIFICATION.
7.1 Subject to any other provisions of this Agreement to the
contrary, each party agrees to indemnify ("Indemnitor") and hold the
other party ("Indemnitee") harmless from and against any claim, loss,
damage or expense, including any reasonable attorneys' fees (including
attorneys' fees on appeal), asserted against or suffered by the
Indemnitee resulting from:
(a) Any breach by the Indemnitor of this Agreement; or
(b) The inaccuracy or breach of any of the representations,
warranties or covenants made by the Indemnitor in this
Agreement.
7.2 The Indemnitee shall submit any claim for indemnification
under this Agreement to the Indemnitor in writing within a reasonable
time after Indemnitee determines that an event has occurred which has
given rise to a right of indemnification under this Paragraph 7 and
shall give Indemnitor a reasonable opportunity to investigate and cure
any default of Indemnitor under this Agreement and eliminate or remove
any claim by a third party. Notwithstanding the foregoing, if the
nature of Indemnitor's default or the third party claim is such that
it would be impracticable or unreasonable to give Indemnitor an
opportunity to investigate and cure such default and remove such
claim, Indemnitee need not give Indemnitor such opportunity.
8
<PAGE>
7.3 If such claim for indemnification relates to a claim or
demand presented in writing by a third party against Indemnitee,
Indemnitor shall have the right to employ counsel reasonably
acceptable to Indemnitee to defend any such claim or demand, and
Indemnitee shall make available to Indemnitor, or its representatives,
all records and other materials in its possession or under its control
reasonably required by Indemnitor for its use in contesting such
liability. If Indemnitor does not elect to defend any such claim or
demand, Indemnitee may do so at its option, but shall not have any
obligation to do so.
8. CLOSING.
8.1 Provided that all Contingencies set forth in Paragraph 4 have
been satisfied or waived, as provided therein, the parties shall close
the transactions ("Closing") on January 20, 1999 or earlier date
agreed upon by the parties ("Closing Date"). Upon the Closing, Seller
shall deliver exclusive right of possession of each of the Properties
to Buyer subject only to the permitted exceptions.
8.2 At the Closing, Buyer shall deliver to Seller the following
funds and documents:
(a) The Purchase Price (in the aggregate amount specified in
Paragraph 2), as adjusted pursuant to this Agreement;
and
(b) Duly executed Lease between Buyer, as lessor, and
Seller, as lessee, relating to the Wichita Facility.
8.3 Upon the Closing, Seller shall pay all closing costs and
expenses incurred by both Seller and Buyer in connection with this
transaction, including, without limitation, (a) the entire cost of any
title policies; (b) all recording fees; and (c) all of Buyer's costs
and expenses as defined below. "Buyer's costs and expenses" shall mean
all costs and expenses incurred by Buyer, including, without
limitation, Buyer's attorneys' fees and expenses not to exceed Five
Thousand Dollars ($5,000) in connection with the negotiation,
drafting, due diligence review and investigation, and the closing of
the transactions contemplated herein. Buyer is to incur no direct cost
or expense in connection with the Closing of the transactions
contemplated herein.
8.4 If the Closing fails to occur as provided hereunder as a
result of the default of this Agreement by a party, the defaulting
party shall pay all title charges; provided, however, that nothing in
this Paragraph 8 shall be deemed to limit, and the provisions of this
Paragraph 8 shall be in addition to, all other rights and remedies of
the nondefaulting party.
9. PRORATIONS. There shall be no prorations of any costs or expenses
related to the Wichita Facility owing to the fact that the Lease is a so-called
triple-net lease and all costs and expenses which would otherwise be prorated
shall be paid by Seller pursuant to the Lease.
9
<PAGE>
10. DAMAGE OR DESTRUCTION PRIOR TO CLOSING. If the Wichita Facility, or
any portion thereof, is damaged or destroyed prior to the Closing from any cause
whatsoever, whether insured risk or not, including, without limitation, fire,
flood, accident or other casualty which, according to Buyer's and Seller's best
estimate, would cost more than Ten Thousand Dollars ($10,000) to repair, Buyer
shall have the option, upon written notice to Seller, to either (i) terminate
this Agreement, or (ii) purchase all the Wichita Facility. If Buyer elects to
purchase the Wichita Facility, Seller shall promptly repair such Property. In
the event that Buyer's and Seller's best estimate of the cost of repair is Ten
Thousand Dollars ($10,000) or less, Buyer shall purchase the Wichita Facility
and Seller shall promptly repair such Property. Should any damage or destruction
occur prior to the Closing, the date scheduled for the Closing shall be extended
for a period of time not to extend thirty (30) days, for the purpose of allowing
Buyer and Seller sufficient time to estimate the cost of repair. If Buyer fails
to notify Seller of its election under this Paragraph 10, Buyer shall be deemed
to have elected to purchase the Wichita Facility.
11. EMINENT DOMAIN.
11.1 The words "condemnation" or "condemned" as used in this
Paragraph 11 shall mean the exercise of, or intent to exercise, the
power of eminent domain expressed in writing, as well as the filing of
any action or proceeding for such purpose, by any person, entity,
body, agency or authority having the right or power of eminent domain
(the "condemning authority").
11.2 If Seller receives written notice from a condemning
authority advising of a condemnation of all or any portion of the
Wichita Facility ("Condemnation Notice"), Seller shall immediately
advise Buyer of same in writing and deliver therewith a copy of the
Condemnation Notice. Within three (3) days after Buyer's receipt of
the Condemnation Notice, Buyer shall notify Seller of its election to
either (i) terminate this Agreement or (ii) purchase the Wichita
Facility. If Buyer elects to purchase the Wichita Facility, Seller
shall transfer to Buyer at the Closing all proceeds from condemnation
or Seller's right to receive all such proceeds. If Buyer fails to
notify Seller of its election under this Paragraph 11, Buyer shall be
deemed to have elected to purchase the Wichita Facility.
12. SURVIVAL OF REPRESENTATIONS. All representations, warranties,
covenants, conditions, agreements and obligations contained in or relating to
this Agreement shall survive the Closing.
13. NOTICES. All notices to be given pursuant to this Agreement shall
be either (i) personally delivered; (ii) sent via certified or registered mail,
postage prepaid; or (iii) overnight courier. If sent via personal delivery,
receipt shall be deemed effective on the day of delivery. If sent via certified
or registered mail, receipt shall be deemed effective the second business day
after being deposited in the United States mail. If sent via overnight courier,
receipt shall be deemed effective the next business day after the sending
thereof. All notices to be given pursuant to this Agreement shall be given to
the parties at the following respective address:
10
<PAGE>
To Buyer: Commercial Equity, Inc.
300 I.M.A. Plaza
250 North Water Street
Wichita, Kansas 67202-1213
Attention: David L. Murfin, President
Telecopier No.: 316-267-6004
with a copy to: Foulston & Siefkin L.L.P.
700 NationsBank Financial Center
Wichita, Kansas 67202
Attention: William R. Wood II
Telecopier No.: 316-267-6345
To Seller: New York Bagel Enterprises, Inc.
300 I.M.A. Plaza
250 North Water Street
Wichita, Kansas 67202-1213
Attention: Robert J. Geresi
CEO and President
Telecopier No.: (316) 267-8154
with a copy to: Klenda, Mitchell, Austerman & Zuercher, L.L.C.
1600 Epic Center
301 North Main Street
Wichita, Kansas 67202-4888
Attention: Gregory B. Klenda
Telecopier No.: (316) 267-0333
14. ENTIRE AGREEMENT. This Agreement, and the exhibits attached hereto,
represent the entire Agreement between the parties in connection with the
transactions contemplated hereby and the subject matter hereof and this
Agreement supersedes and replaces any and all prior and contemporaneous
agreements, understandings and communications between the parties, whether oral
or written, with regard to the subject matter hereof. There are no oral or
written agreements, representations or inducements of any kind existing between
the parties relating to this transaction which are not expressly set forth
herein. This Agreement may not be modified except by a written agreement signed
by both Buyer and Seller.
15. BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the parties hereto, their respective heirs, legal
representatives, administrators, successors in interest and assigns.
16. WAIVER. No waiver by any party at any time of any breach of any
provision of this Agreement shall be deemed a waiver or a breach of any other
provision herein or a consent to any subsequent breach of the same or another
provision. If any action by any party shall require the
11
<PAGE>
consent or approval of another party, such consent or approval of such action
on any one occasion shall not be deemed a consent to or approval of such
action on any subsequent occasion or a consent to or approval of any other
action.
17. CAPTIONS AND HEADINGS. The captions and paragraph numbers appearing
in this Agreement are inserted only as a matter of convenience and do not
define, limit, construe, or describe the scope or intent of this Agreement.
18. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be considered an original and all of which taken together shall
constitute one and the same instrument.
19. GOVERNING LAW. This Agreement has been prepared, negotiated and
executed in, and shall be construed in accordance with, the laws of the State of
Kansas.
20. ATTORNEYS' FEES. If either party named herein brings an action or
proceeding to enforce the terms hereof or declare rights hereunder, the
prevailing party in any such action (or proceeding), on trial or appeal, shall
be entitled to its reasonable attorneys' fees to be paid by the losing party as
fixed by the Court (or if applicable, the arbitrator).
21. TIME OF ESSENCE. Time is of the essence with respect to all matters
contained in this Agreement.
22. DATE OF AGREEMENT. All references in this Agreement to "the date of
this Agreement" or "the date hereof" shall be deemed to refer to the date set
forth in the first paragraph of this Agreement.
23. INVALIDITY OF ANY PROVISION. If any provision (or any portion of
any provision) of this Agreement is held to be illegal, invalid, or
unenforceable under present or future laws effective during the term of this
Agreement, the legality, validity, and enforceability of the remaining
provisions (or the balance of such provision) shall not be affected thereby.
24. DRAFTING OF AGREEMENT. Buyer and Seller acknowledge that this
Agreement has been negotiated at arm's length, that each party has been
represented by independent counsel and that this Agreement has been drafted by
both parties and no one party shall be construed as the draftsperson.
25. NO THIRD PARTY BENEFICIARY RIGHTS. This Agreement is entered into
for the sole benefit of Buyer and Seller and no other parties are intended to be
direct or incidental beneficiaries of this Agreement and no third party shall
have any right in, under or to this Agreement.
26. INCORPORATION OF EXHIBITS. Each and all of the exhibits to this
Agreement are incorporated herein as if set forth in full in this Agreement.
12
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27. PUBLIC ANNOUNCEMENTS. The parties agree that all statements and/or
public announcements, including those to the media, concerning this transaction
shall be subject to the parties' collective approval, which approval shall not
be unreasonably or untimely withheld.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth in the first paragraph of this Agreement.
NEW YORK BAGEL ENTERPRISES, INC.,
a Kansas corporation
By: /s/ Richard Randall Webb
-------------------------------------
Richard Randall Webb, Secretary
"SELLER"
COMMERCIAL EQUITY, INC.,
a Kansas corporation
By: /s/ Paul R. Hoover
-------------------------------------
Paul R. Hoover, Vice-President
"BUYER"
13
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
8621 West 21st North, Wichita, Kansas 67205
Lot 1, Westwind 5th Addition, to Wichita, Sedgwick County, Kansas,
containing 18,864 square feet, more or less.
<PAGE>
EXHIBIT 10.18
LEASE
BETWEEN
COMMERCIAL EQUITY, INC., AS LESSOR
AND
NEW YORK BAGEL ENTERPRISES, INC., AS LESSEE
JANUARY 20, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I..............................................................................5
1.1 Leased Property......................................................5
1.2 Term.................................................................6
1.3 Lessee Bound by Ground Lease.........................................6
1.4 Early Termination....................................................6
ARTICLE II.............................................................................6
2. Definitions..........................................................6
ARTICLE III...........................................................................10
3.1 Minimum Rent........................................................10
3.2 Additional Charges..................................................10
3.3 Net Lease...........................................................11
3.4 Late Charge.........................................................11
ARTICLE IV............................................................................11
4.1 Payment of Impositions..............................................11
4.2 Notice of Impositions...............................................12
4.3 Utility Charges.....................................................13
4.4 Insurance Premiums..................................................13
4.5 Payables............................................................13
ARTICLE V.............................................................................13
5.1 No Termination, Abatement, etc. ....................................13
5.2 Abatement Procedures................................................13
ARTICLE VI............................................................................14
6.1 Ownership of the Leased Property....................................14
ARTICLE VII...........................................................................14
7.1 Condition of Leased Property........................................14
7.2 Use of the Leased Property..........................................14
ARTICLE VIII..........................................................................15
8.1 Compliance with Legal and Insurance Requirements,
Instruments, etc. ................................................15
8.2 Legal Requirement Covenants.........................................15
ARTICLE IX............................................................................15
9.1 Maintenance and Repair..............................................15
9.2 Encroachments, Restrictions, etc. ..................................16
ARTICLE X.............................................................................17
10.1 Lessee's Obligations for Hazardous Materials........................17
10.2 Definition of Hazardous Materials...................................17
</TABLE>
i
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<TABLE>
<S> <C>
ARTICLE XI............................................................................17
11. No Liens............................................................17
ARTICLE XII...........................................................................18
12. Permitted Contests..................................................18
ARTICLE XIII..........................................................................18
13.1 General Insurance Requirements......................................18
13.2 Replacement Cost....................................................19
13.3 Additional Insurance................................................19
13.4 Waiver of Subrogation...............................................19
13.5 Form Satisfactory, etc. ............................................20
13.6 Increase in Limits..................................................20
13.7 Blanket Policy......................................................20
13.8 No Separate Insurance...............................................20
13.9 Continuous Coverage.................................................20
ARTICLE XIV...........................................................................21
14.1 Insurance Proceeds..................................................21
14.2 Reconstruction in the Event of Damage or Destruction Covered
by Insurance Proceeds.............................................21
14.3 Reconstruction in the Event of Damage or Destruction Not Covered
by Insurance......................................................22
14.4 Lessee's Property...................................................22
14.5 Restoration of Lessee's Property....................................22
14.6 No Abatement of Rent................................................22
14.7 Termination of Option to Extend.....................................22
14.8 Waiver..............................................................22
ARTICLE XV............................................................................22
15.1 Definitions.........................................................22
15.2 Parties' Rights and Obligations.....................................23
15.3 Total Condemnation..................................................23
15.4 Allocation of Portion of Award......................................23
15.5 Partial Taking......................................................23
15.6 Temporary Taking....................................................24
ARTICLE XVI...........................................................................24
16.1 Events of Default...................................................24
16.2 Certain Remedies....................................................26
16.3 Damages.............................................................26
16.4 Waiver..............................................................27
16.5 Application of Funds................................................27
</TABLE>
ii
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<TABLE>
<S> <C>
ARTICLE XVII..........................................................................28
17. Lessor's Right to Cure Lessee's Default.............................28
ARTICLE XVIII.........................................................................28
18.1 Options to Extend...................................................28
18.2 Minimum Rent During Extended Terms..................................28
ARTICLE XIX...........................................................................29
19. Holding Over........................................................29
ARTICLE XX............................................................................29
20. Risk of Loss........................................................29
ARTICLE XXI...........................................................................29
21. Indemnification.....................................................29
ARTICLE XXII..........................................................................30
22.1 Subletting and Assignment...........................................30
22.2 Attornment..........................................................30
ARTICLE XXIII.........................................................................31
23. Officers' Certificates..............................................31
ARTICLE XXIV..........................................................................31
24. Lessor's Right to Inspect...........................................31
ARTICLE XXV...........................................................................31
25. No Waiver...........................................................31
ARTICLE XXVI..........................................................................31
26. Remedies Cumulative.................................................31
ARTICLE XXVII.........................................................................32
27. Acceptance of Surrender.............................................32
ARTICLE XXVIII........................................................................32
28. No Merger of Title..................................................32
ARTICLE XXIX..........................................................................32
29. Conveyance by Lessor................................................32
ARTICLE XXX...........................................................................32
30. Quiet Enjoyment.....................................................32
ARTICLE XXXI..........................................................................32
31. Notices.............................................................32
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
ARTICLE XXXII.........................................................................33
32.1 Lessor May Grant Liens..............................................33
32.2 Lessee's Right to Cure..............................................34
32.3 Breach by Lessor....................................................34
ARTICLE XXXIII........................................................................34
33.1 Survival of Obligations.............................................34
33.2 Late Charges; Interest..............................................34
33.3 Limits of Lessor's Liability........................................34
33.4 Addendum, Amendments and Exhibits...................................35
33.5 Headings............................................................35
33.6 Time................................................................35
33.7 Days................................................................35
33.8 Rent................................................................35
33.9 Applicable Law......................................................35
33.10 Successors and Assigns..............................................35
33.11 Recordation.........................................................35
33.12 Prior and Future Agreements.........................................35
33.13 Partial Invalidity..................................................35
33.14 Attorneys' Fees.....................................................36
33.15 Authority of Lessor and Lessee......................................36
33.16 Relationship of the Parties.........................................36
33.17 Counterparts........................................................36
33.18 Brokers.............................................................36
33.19 Computer Disc. .....................................................36
</TABLE>
iv
<PAGE>
LEASE
THIS LEASE (this "Lease") is made as of this 20th day of January, 1999,
by and between COMMERCIAL EQUITY, INC., a Kansas corporation, herein called
"Lessor," and NEW YORK BAGEL ENTERPRISES, INC., a Kansas corporation, herein
called "Lessee," subject to the terms, conditions and contingencies set forth
below.
ARTICLE I
1.1 LEASED PROPERTY. Upon and subject to the terms and conditions
hereinafter set forth, Lessor leases to Lessee, and Lessee rents and hires
from Lessor all of the following (collectively, the "Leased Property"):
(i) The real property described in Exhibit "A" attached
hereto (the "Land");
(ii) All buildings, structures, Fixtures (as hereinafter
defined) and other improvements of every kind including, without limitation,
alleyways and connecting tunnels, sidewalks, utility pipes, conduits and
lines (on-site and off-site), parking areas and roadways appurtenant to such
buildings and structures presently situated upon the Land (collectively, the
"Leased Improvements");
(iii) All easements, rights and appurtenances relating to
the Land and the Leased Improvements; and
(iv) All permanently affixed equipment, machinery, fixtures,
and other items of real and/or personal property, including all components
thereof, permanently affixed to or incorporated into the Leased Improvements,
including, without limitation, all furnaces, boilers, heaters, electrical
equipment, heating, plumbing, lighting, ventilating, refrigerating,
incineration, air and water pollution control, waste disposal, air-cooling
and air conditioning systems and apparatus, sprinkler systems and fire and
theft protection equipment, all of which to the greatest extent permitted by
the law, are hereby deemed by the parties hereto to constitute real estate,
together with all replacements, modifications, alterations and additions
thereto, to the extent acquired by Lessor pursuant to the "Purchase
Agreement" as defined in Article II hereof (collectively, the "Fixtures").
The Leased Property is subject that certain Ground Lease dated
January 15, 1997 by and between Kenneth R. Reichenberger and Mary Ellen
Reichenberger, as landlords, and Lessee, as tenant (the "Ground Lease"), a
copy of which is attached hereto as Exhibit "B". The Leased Property
includes the Building operated as a New York Bagel Cafe restaurant and
located at the Location set forth in Schedule 1 attached hereto.
Notwithstanding the foregoing, the Leased Property shall not include any
property not acquired by Lessor from the Seller pursuant to the Purchase
Agreement. The Leased Property is further subject to all covenants,
conditions, restrictions, easements, and other matters of record, and all
other matters that affect title, zoning and any other matters set forth in
that certain title policy issued by the title company set forth in Schedule 1
attached hereto concurrently with Lessor's purchase of the Leased Property
(the "Permitted Title Matters").
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1.2 TERM. The initial term of this Lease (the "Initial Term")
shall be the period commencing on the closing (the "Closing") under the
Purchase Agreement (the "Commencement Date") and shall expire upon the
earlier of April 1, 2007, upon the termination of the Ground Lease or in
accordance with Paragraph 1.4. Lessee has the right to extend the term of
this Lease, at Lessee's option, as provided in Article XVIII, below. (The
Initial Term plus all validly exercised options to extend, if any, shall be
referred to herein as the "Term").
1.3 LESSEE BOUND BY GROUND LEASE. Except as is otherwise provided
in this Lease, Lessor and Lessee hereby agree that all of the terms,
covenants, promises and conditions of the Ground Lease are hereby
incorporated in this Lease by reference, and Lessee hereby agrees to comply
with and be bound by all of the terms, covenants, promises and conditions of
the Ground Lease as applicable therein to Lessee.
1.4 EARLY TERMINATION. Lessor and Lessee shall each have the
right to terminate this Lease at anytime upon at least six (6) months prior
written notice to the other party. In the event Lessor terminates the Lease
pursuant to this paragraph, then Lessee shall not be required to remit
Minimum Rent hereunder during the last three (3) months of the Term and
Lessor shall indemnify and hold Lessee harmless for any and all obligations
under the Ground Lease. In the event Lessee terminates the Lease pursuant to
this paragraph, then Lessee shall be required to remit the Minimum Rent
hereunder until such time as the Lease is terminated.
ARTICLE II
2. DEFINITIONS. For all purposes of this Lease, except as otherwise
expressly provided, (i) the terms defined in this Article II have the
meanings assigned to them in this Article II and include the plural as well
as the singular; (ii) all accounting terms not otherwise defined herein have
the meanings assigned to them in accordance with generally accepted
accounting principles at the time applicable; and (iii) the words "herein,"
"hereof" and "hereunder" and other words of similar import refer to this
Lease as a whole and not to any particular Article, Paragraph or other
subdivision:
ADDITIONAL CHARGES. As defined in Paragraph 3.2.
AFFILIATE. When used with respect to any corporation, the term
"Affiliate" shall mean any person or entity (including any trust) which,
directly or indirectly, controls or is controlled by or is under common
control with such corporation. For the purposes of this definition,
"control" (including the correlative meanings of the terms "controlled by"
and "under common control with"), as used with respect to any person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such person, through the
ownership of voting securities, partnership interests or other equity
interests. For the purposes of this definition, "person" shall mean any
natural person, trust, partnership, corporation, joint venture or other legal
entity.
BUILDING. That certain building currently operated as a New York
Bagel Cafe restaurant which is part of the Leased Property, as defined in
Article I, above.
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BUILDING MORTGAGE. As defined in Article XIII.
BUILDING MORTGAGEE. As defined in Article XIII.
BUSINESS DAY. Each Monday, Tuesday, Wednesday, Thursday, and
Friday, which is not a day on which national banks in the State of Kansas are
authorized or obligated, by law or executive order, to close.
CALENDAR YEAR. The period from January 1 through and including
December 31 in the same calendar year.
CODE. The Internal Revenue Code of 1986, as amended.
ENCUMBRANCE. As defined in Article XXXII.
EVENT OF DEFAULT. As defined in Article XVI.
EXTENDED TERM. As defined in Article XVIII.
FIXTURES. As defined in Article I.
GROUND LEASE. As defined in Article I.
GROUND RENT. The rent attributable to the lease of the land in the
amounts set forth in the Ground Lease.
IMPOSITIONS. Collectively, all taxes (including, without
limitation, all ad valorem, sales and use or any other taxes as the same
relate to or are imposed upon Lessee or Lessor or the business conducted upon
the Leased Property), assessments (including, without limitation, all
assessments for public improvements or benefits, whether or not commenced or
completed prior to the date hereof and whether or not to be completed within
the Term), water, sewer or other rents and charges, excises, tax levies, fees
(including, without limitation, license, permit, inspection, authorization
and similar fees), and all other governmental charges, in each case whether
general or special, ordinary or extraordinary, or foreseen or unforeseen, of
every character in respect of the Leased Property, Lessor, or the business
conducted thereon by Lessee (including all interest and penalties thereon due
to any failure in payment by Lessee), and all increases in all the above from
any cause whatsoever, including reassessment, which at any time prior to,
during or in respect of the Term may be assessed or imposed on or in respect
of or be a lien upon (a) Lessor's interest in the Leased Property or any part
thereof; (b) the Leased Property or any part thereof; or (c) any occupancy,
operation, use or possession of, or sales from, or activity conducted on, or
in connection with the Leased Property or the leasing or use of the Leased
Property or any part thereof by Lessee. Without limiting the foregoing, the
term "Imposition" shall include any sales tax paid under this Lease,
depreciation recapture, any other taxes (except for the specific exclusions
stated below), fees or charges imposed by the State and any potential
subdivision thereof relating to the Leased Property, or this Lease, whether
relating to any period prior to or after the Commencement Date. Nothing
contained in this Lease shall be construed to require Lessee to pay (1) the
following taxes
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and fees to the extent they relate to Lessor's business generally (as opposed
to relating specifically to Lessor's ownership of the Building, lease thereof
to Lessee or income therefrom): any federal, state or local income tax of
Lessor, taxes based on outstanding corporate shares of Lessor or Lessor's
equity or capitalization, regardless of whether denominated as an income tax,
franchise tax, capital tax or otherwise; (2) any income or capital gain tax
imposed with respect to the sale, exchange or other disposition, or
operation, by Lessor of any Leased Property or the proceeds thereof; or (3)
estate, inheritance, gift taxes or documentary transfer taxes.
INSURANCE REQUIREMENTS. All terms of any insurance policy required
by this Lease and all requirements of the issuer of any such policy.
LAND. As defined in Article I.
LEASE. As defined in the Preamble.
LEASE YEAR. The twelve (12) month period from January 1 to
December 31 in each calendar year. In the case of the beginning of the
Initial Term, the provision "Lease Year" shall mean the period from the
Commencement Date (defined in Paragraph 1.2, above) to December 31, 1999; in
the case of the end of the Term, the provision "Lease Year" shall mean the
period from the last January 1 to occur in the Term to the date of expiration
of the Lease. The Lease Year 1999 shall mean the Commencement Date through
December 31, 1999; the Lease Year 2000 shall mean January 1, 2000 through
December 31, 2000, and so on.
LEASED IMPROVEMENTS; LEASED PROPERTY. Each as defined in Article I.
LEGAL REQUIREMENTS. All federal, state, county, municipal, and
other governmental statutes, laws, rules, orders, regulations, ordinances,
judgments, decrees, and injunctions affecting either the Leased Property or
the construction, use or alteration thereof whether now or hereafter enacted
and in force, including any which may (i) require repairs, modifications or
alterations in or to the Leased Property; or (ii) in any way adversely affect
the use and enjoyment thereof, and all permits, licenses and authorizations
and regulations thereto, and all covenants, agreements, restrictions, and
encumbrances contained in any instruments, either of record or known to
Lessee, at any time in force affecting the Leased Property.
LESSEE. New York Bagel Enterprises, Inc., a Kansas corporation
(and any assignee permitted subject to the terms and conditions in this
Lease).
LESSEE'S PERSONAL PROPERTY. All machinery, equipment, furniture,
furnishings, movable walls or partitions, computers, or movable trade
fixtures or other personal property, and consumable inventory and supplies,
owned by Lessee and used or useful in Lessee's business on the Leased
Property, including, without limitation, all items of furniture, furnishings,
equipment, supplies and inventory, except items acquired by Lessor pursuant
to the Purchase Agreement.
LESSOR. Commercial Equity, Inc., a Kansas corporation, and its
successors and assigns. Unless Lessee is notified by Lessor otherwise,
Lessor's address is: Commercial Equity, Inc.,
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300 I.M.A. Plaza, 250 North Water Street, Wichita, Kansas 67202-1213,
Attention: David L. Murfin, President.
MINIMUM RENT. As defined in Paragraph 3.1.
NOTICE. A notice given pursuant to Article XXXI hereof.
OFFICERS' CERTIFICATE. A certificate of Lessee signed by (i) the
Chairman of the Board of Directors, Chief Executive Officer or the President
or any authorized Vice President; and (ii) the Secretary, or another officer
authorized by appropriate resolution to so sign by the Board of Directors.
Any signature required above may be substituted with a signature of another
person whose power and authority to act has been authorized by an appropriate
corporate resolution.
OVERDUE RATE. On any date, a rate equal to the Prime Rate (defined
below), plus five percent (5%); provided, however, that it is the intent of
Lessor and Lessee that the Overdue Rate (and all other interest rates
provided for hereunder) be in strict compliance with applicable usury laws of
the State of Kansas, and that in the event the Overdue Rate (or other
interest rate provided for hereunder) shall be deemed to exceed that
permitted to be charged by the laws of the State of Kansas, any and all
excess sums collected by Lessor shall be credited against the Rent payable
under this Lease or if there is no Rent due, promptly refunded to Lessee.
PAYMENT DATE. Any due date for the payment of the installments of
Minimum Rent or any other payments required under this Lease.
PRIMARY INTENDED USE. As defined in Paragraph 7.2.2.
PRIME RATE. On any date, a rate equal to the annual rate on such
date announced by NationsBank, N.A. to be its prime rate for 90-day unsecured
loans to its corporate borrowers of the highest credit standing or, if not
available, such other rate as may be published by THE WALL STREET JOURNAL as
the prime rate in its listing of "MONEY RATES."
PURCHASE AGREEMENT. That certain Agreement of Purchase and Sale,
dated January 20, 1999, between Lessee as "Seller" and Lessor as "Buyer"
providing for Lessor's acquisition of all of Lessee's interest in and to the
Leased Property.
RENT. Any and all monetary obligations of Lessee owing under this
Lease.
STATE. As defined in Schedule 1 attached hereto and incorporated
herein.
SUBSIDIARIES. Corporations, of which either Lessee or Lessor owns,
directly or indirectly, more than 50% of the voting stock (individually, a
"Subsidiary").
TERM. Collectively, the Initial Term plus any Extended Terms, as
the context may require, unless earlier terminated pursuant to the provisions
hereof.
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UNSUITABLE FOR ITS PRIMARY INTENDED USE. A state of condition of
the Building such that by reason of damage or destruction, or a partial
taking by Condemnation, in the good faith judgment of Lessor, reasonably
exercised, the Building cannot be operated on a commercially practicable
basis for its Primary Intended Use taking into account.
UNAVOIDABLE DELAYS. Delays due to strikes, lock-outs, inability to
procure materials, power failure, acts of God, governmental restrictions,
enemy action, civil commotion, fire, unavoidable casualty or other causes
beyond the control of the party responsible for performing an obligation
hereunder; provided that lack of funds shall not be deemed a cause beyond the
control of either party hereto unless such lack of funds available to Lessor
results from Lessee's failure to perform any of its obligations under this
Lease.
The above does not include all the definitions to be used in this
Lease. Various definitions of other terms are included in the other Articles
of this Lease.
ARTICLE III
3.1 MINIMUM RENT. Lessee will pay to Lessor in lawful money of
the United States of America which shall be legal tender for the payment of
public and private debts, at Lessor's address set forth above or at such
other place or to such other person, firms or corporations as Lessor from
time-to-time may designate in a Notice, Minimum Rent (as defined below),
during the Term, as follows:
(a) INITIAL TERM. The "Minimum Rent" shall be the annual
sums as stated in Schedule 1 attached hereto and incorporated herein. The
Minimum Rent shall be paid in advance in equal, consecutive monthly
installments on the first day of each calendar month of the Term. Minimum
Rent shall be prorated for any partial month at the beginning or end of the
Term.
(b) EXTENDED TERMS. The Minimum Rent during the Extended
Terms shall be as stated in Article XVIII, below.
3.2 ADDITIONAL CHARGES. In addition to the Minimum Rent, (1)
Lessee will also pay and discharge as and when due and payable all other
amounts, liabilities, obligations and Impositions which Lessee assumes or
agrees to pay under this Lease and the Ground Lease, and (2) in the event of
any failure on the part of Lessee to pay any of those items referred to in
the immediately preceding clause (1) above, Lessee will also promptly pay and
discharge every fine, penalty, interest and cost which may be added for
non-payment or late payment of such items (the items referred to in clauses
(1) and (2) above being referred to herein collectively as the "Additional
Charges"), and Lessor shall have all legal, equitable and contractual rights,
powers and remedies provided either in this Lease or by statute or otherwise
in the case of non-payment of the Additional Charges. If any elements of
Additional Charges shall not be paid within seven (7) Business Days after its
due date and Lessor pays any such amount (which Lessor shall have the right,
but not the obligation, to do), then, in addition to Lessor's other rights
and remedies, Lessee will pay Lessor on demand, as Additional Charges,
interest on such unpaid Additional Charges computed at the Overdue Rate from
the due date of such installment to the date of Lessee's payment thereof.
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3.3 NET LEASE. Subject to the provisions of Article V, below,
without limiting any provision of this Lease, the Rent shall be paid
absolutely net to Lessor, so that this Lease shall yield to Lessor the full
amount of the installments of Minimum Rent throughout the Term, all as more
fully set forth in Articles IV, VIII, IX and XIII, and other provisions of
this Lease, so that, accordingly, Lessee shall pay all Additional Charges and
any other expenses of any kind associated with this Lease and the Leased
Property to insure that Lessor receives the Minimum Rent, net of all
expenses. Further, because Lessee, prior to the date of this Lease, is the
leasehold interest holder to the Leased Property, Lessee shall be responsible
for all Additional Charges and all other amounts due under this Lease and the
Ground Lease for any period prior to and during the Term.
3.4 LATE CHARGE. LESSEE HEREBY ACKNOWLEDGES THAT LATE PAYMENT BY
LESSEE TO LESSOR OF RENT (INCLUDING, WITHOUT LIMITATION MINIMUM RENT AND
ADDITIONAL CHARGES) WILL CAUSE LESSOR TO INCUR COSTS NOT CONTEMPLATED BY THIS
LEASE, THE EXACT AMOUNT OF WHICH WILL BE EXTREMELY DIFFICULT TO ASCERTAIN.
SUCH COSTS INCLUDE, WITHOUT LIMITATION, PROCESSING AND ACCOUNTING CHARGES.
ACCORDINGLY, IF ANY INSTALLMENT OF MINIMUM RENT OR ANY OTHER SUM DUE FROM
LESSEE SHALL NOT BE RECEIVED BY LESSOR WITHIN FIVE (5) BUSINESS DAYS AFTER
SUCH AMOUNT SHALL BE DUE, THEN WITHOUT ANY REQUIREMENT FOR NOTICE TO LESSEE,
LESSEE SHALL PAY TO LESSOR A LATE CHARGE EQUAL TO FIVE PERCENT (5%) OF SUCH
OVERDUE AMOUNT. THE PARTIES HEREBY AGREE THAT SUCH LATE CHARGE REPRESENTS A
FAIR AND REASONABLE ESTIMATE OF THE COSTS LESSOR WILL INCUR BY REASON OF LATE
PAYMENT BY LESSEE. ACCEPTANCE OF SUCH LATE CHARGE BY LESSOR SHALL IN NO EVENT
CONSTITUTE A WAIVER OF LESSEE'S DEFAULT OR BREACH WITH RESPECT TO ANY UNPAID
OVERDUE AMOUNTS, NOR PREVENT LESSOR FROM EXERCISING ANY OF THE OTHER RIGHTS
AND REMEDIES GRANTED UNDER THIS LEASE WITH RESPECT TO ANY SUCH UNPAID OVERDUE
AMOUNTS.
ARTICLE IV
4.1 PAYMENT OF IMPOSITIONS. Subject to Article XII relating to
permitted contests, Lessee will pay, or cause to be paid, all Impositions
coming due prior to or during the Term, or which relate to any period within
the Term or prior to the Term, before any fine, penalty, interest or cost may
be added for non-payment (or earlier if required by any taxing authority),
such payments to be made directly to the taxing authorities where feasible,
and will promptly furnish to Lessor copies of official receipts or other
satisfactory proof evidencing such payments. Lessee's obligation to pay
Impositions shall be deemed absolutely fixed upon the date such Impositions
become a lien upon the Leased Property or any part thereof. If any
Imposition may, at the option of the taxpayer, lawfully (without penalty) be
paid in installments (whether or not interest shall accrue on the unpaid
balance of such Imposition), Lessee may exercise the option to pay the same
(and any accrued interest on the unpaid balance of such Imposition) in
installments and in such event, shall pay such installments during the Term
hereof (subject to Lessee's right of contest pursuant to the provisions of
Article XII) as the same respectively become due and before any fine,
penalty, premium, further interest or cost may be added thereto. Lessee, at
its expense, shall, to the extent required or permitted by Legal
Requirements, prepare and file all tax returns and reports in respect of any
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Imposition as may be required by governmental authorities. If any refund
shall be due from any taxing authority in respect of any Imposition, the same
shall be paid over to or retained by Lessee if no Event of Default shall have
occurred hereunder and be continuing, but if such Event of Default has
occurred and is continuing (i.e., it has not been cured), such refund shall
be paid to Lessor and utilized to cure any such continuing Event of Default.
After fully curing such Event of Default, any excess funds from such refund
shall be paid by Lessor to Lessee. Any such funds retained by Lessor, a
provided above, shall be applied as provided in Article XVI. Lessor and
Lessee shall, upon request of the other, provide such data as is maintained
by the party to whom the request is made with respect to the Leased Property
as may be necessary to prepare any required returns and reports. In the
event governmental authorities classify any property covered by this Lease as
personal property, Lessee shall file all personal property tax returns in
such jurisdictions where it must legally so file. Lessor, to the extent it
possesses the same, and Lessee, to the extent it possesses the same, will
provide the other party, upon request, with cost and depreciation records
necessary for filing returns for any property so classified as personal
property. Where Lessor is legally required to file personal property tax
returns, Lessee will provide to Lessor copies of assessment notices
indicating a value in excess of the reported value in sufficient time for
Lessor to file a protest. Lessee may, upon notice to Lessor, at Lessee's
option and at Lessee's sole cost and expense, protest, appeal or institute
such proceedings as Lessee may deem appropriate to effect a reduction of real
estate or personal property assessments and Lessor, at Lessee's sole cost and
expense as aforesaid, shall fully cooperate with Lessee in such protest,
appeal, or other action, provided that Lessee may not withhold payments
pending such challenges except under the conditions set forth in Article XII.
Lessor shall have the right to require that Lessee pay to Lessor 1/12th of
the annual Impositions each month concurrently with the payment of Minimum
Rent, effective (a) upon the occurrence of any Event of Default relating to
the payment or nonpayment of Impositions (and irrespective of whether such
Event of Default is continuing or has been cured); (b) as to any Event of
Default not covered in the preceding subparagraph (a), upon the occurrence of
the second Event of Default under this Lease (and irrespective of whether any
such Events of Default ae continuing or have been cured); and (c) once any
Event of Default has occurred hereunder that has not been cured within sixty
(60) days. Unless Lessee is notified by Lessor otherwise, Lessee shall pay
all Impositions directly to the appropriate taxing or other authorities to
which payments are due, and Lessee shall provide Lessor written evidence and
notice that all such payments have been made. Without limiting any of the
other indemnities set forth in this Lease, Lessee hereby agrees to defend,
indemnify, protect and hold harmless Lessor in connection with any
Impositions that relate to any time prior to or during the Term, and Lessee
acknowledges and agrees that it will not make claims against, or otherwise
look to, Lessor to reimburse Lessee for payments made relating to any period
prior to the Commencement Date.
4.2 NOTICE OF IMPOSITIONS. Lessor shall give prompt Notice to
Lessee for all Impositions payable by Lessee hereunder of which Lessor has
knowledge, but Lessor's failure to give any such Notice shall in no way
diminish Lessee's obligations hereunder to pay such Impositions, but such
failure shall obviate any default hereunder for a reasonable time after
Lessee receives notice (from any source) of any Imposition which it is
obligated to pay. However, notwithstanding the foregoing, it shall be
Lessee's sole duty to inquire and determine all of the Impositions for which
it is liable as provided herein and shall promptly pay such Impositions when
due, and Lessor shall have no duty of inquiry concerning Impositions.
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4.3 UTILITY CHARGES. Lessee will pay or cause to be paid all
charges for electricity, power, gas, oil, water, sewer connection and all
other utilities used in or for the Leased Property during the Term.
4.4 INSURANCE PREMIUMS. Lessee will pay or cause to be paid all
premiums for the insurance coverage required to be maintained pursuant to
Article XIII during the Term.
4.5 PAYABLES. Lessee acknowledges and agrees that prior to the
Commencement Date, certain liabilities and other obligations were incurred
arising from the development, construction and operation of the Building for
which Lessee is and shall remain responsible and liable and Lessor shall have
no responsibility, liability or obligation whatsoever with respect to the
same. Therefore, Lessee agrees as part of this Lease to pay all liabilities
and obligations concerning the Building, whether arising before or after the
Commencement Date.
ARTICLE V
5.1 NO TERMINATION, ABATEMENT, ETC. Subject to the provisions of
Paragraph 5.2, Lessee shall not be entitled to any abatement, deduction,
deferment or reduction of Rent, or set-off against the Rent, nor shall the
respective obligations of Lessor and Lessee be otherwise affected by reasons
of (a) any damage to, or destruction of, any Leased Property or any portion
thereof; (b) the lawful or unlawful prohibition of, or restriction upon,
Lessee's use of the Leased Property, or any portion thereof, the interference
with such use by any person, corporation, partnership or other entity, or by
reason of eviction by paramount title; (c) any claim which Lessee has or
might have against Lessor or by reason of any default or breach of any
warranty by Lessor under this Lease or any other agreement between Lessor and
Lessee, or to which Lessor and Lessee are parties; (d) any bankruptcy,
insolvency, reorganization, composition, readjustment, liquidation,
dissolution, winding-up or other proceedings affecting Lessor or any assignee
or transferee of Lessor; or (e) for any other cause whether similar or
dissimilar to any of the foregoing other than a discharge of Lessee from any
such obligations as a matter of law. Lessee hereby specifically waives all
rights, arising from any occurrence whatsoever, which may now or hereafter be
conferred upon it by law to (i) modify, surrender or terminate this Lease or
quit or surrender the Leased Property or any portion thereof; or (ii) entitle
Lessee to any abatement, reduction, suspension or deferment of the Rent
payable under this Lease. The obligations of Lessor and Lessee hereunder
shall be separate and independent covenants and agreements and the Rent due
under this Lease shall continue to be payable in all events, irrespective of
Lessor's performance or non-performance under this Lease, unless the
obligations to pay the same shall be terminated pursuant to the express
provisions of this Lease or by termination of this Lease other than by reason
of an Event of Default.
5.2 ABATEMENT PROCEDURES. In the event Lessee is entitled to an
abatement of Minimum Rent under Article XV (by reason of any Condemnation as
provided thereunder), the Lease shall not terminate (except as provided in
Article XV) but the Minimum Rent shall be abated in proportion to the reduced
capacity of the Leased Property for the use made of the same by Lessee at
the time of the Condemnation. If Lessor and Lessee are unable to agree upon
the amount of such abatement within thirty (30) days after any partial taking
as provided under Article XV, the matter shall be submitted by either party
to a court of competent jurisdiction for resolution, but Lessee
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during such resolution shall continue to perform its obligations hereunder,
including, without limitation, payment of that portion of the Minimum Rent
which is not then in dispute.
ARTICLE VI
6.1 OWNERSHIP OF THE LEASED PROPERTY. Lessee acknowledges and
agrees that the Leased Property, except the Land, is the property of Lessor
and that Lessee has only the right to the exclusive possession and use of the
Leased Property upon the terms and conditions of this Lease and the Ground
Lease.
6.2 LESSEE'S PERSONAL PROPERTY. Subject to the Ground Lease,
Lessee may (and shall as provided hereinbelow), at its expense, install,
assemble or place on any parcels of the Land or in any of the Leased
Improvements, any items of Lessee's Personal Property, and Lessee may,
subject to the conditions set forth below, remove the same upon the
expiration or any prior termination of the Term. All of Lessee's Personal
Property not removed by Lessee upon the termination of this Lease shall be
considered abandoned by Lessee and may be used, appropriated, sold,
destroyed, or otherwise disposed of by Lessor without first giving notice
thereof to Lessee and without any payment to Lessee and without any
obligation to account therefor. Lessee shall, at its sole cost and expense,
repair any damage to the Land or the Leased Improvements occasioned by the
installation, maintenance or removal of Lessee's Personal Property, and
restore the Land or Leased Improvements to its condition immediately prior to
any such installation. To the extent allowed by law, Lessor and Lessee agree
that the provisions of this Paragraph 6.2 shall be in substitution of any
statutory obligations Lessor may have to give Lessee notice of demand for
removal of Lessee's Personal Property and notice of sale of Lessee's Personal
Property. Lessor and Lessee agree that Lessor shall not be required to sell
Lessee's Personal Property or account to Lessee therefor.
ARTICLE VII
7.1 CONDITION OF LEASED PROPERTY. Lessee acknowledges receipt and
delivery of possession of the Leased Property and further acknowledges that
Lessee has examined and otherwise has knowledge of the condition of the
Leased Property prior to the execution and delivery of this Lease and has
found the same to be in good order and repair and satisfactory for it
purposes hereunder. Lessee is leasing the Leased Property "AS-IS" in its
present condition. Lessee waives any claim or action against Lessor in
respect of the condition of the Leased Property. LESSOR MAKES NO WARRANTY OR
REPRESENTATIONS, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY OR ANY
PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR THE
MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL
SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE LEASED
PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT.
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7.2 USE OF THE LEASED PROPERTY.
7.2.1 Lessee covenants that it will obtain and, at all
times during the Term, maintain all approvals needed to use and operate the
Leased Property under applicable federal, state and local law.
7.2.2 After the Commencement Date and during the entire
Term, Lessee shall use or cause to be used the Leased Property in accordance
with the use requirements set forth in the Ground Lease and as a New York
Bagel Cafe restaurant or other restaurant (the particular such use to which
the Leased Property is put at any particular time is herein referred to as
the "Primary Intended Use"). Lessee shall not use the Leased Property or any
portion thereof for any other use without the prior written consent of
Lessor, which consent shall not be unreasonably withheld or delayed.
7.2.3 Lessee shall not commit or suffer to be committed
any waste on the Leased Property, or in the Building nor shall Lessee cause
or permit any nuisance thereon.
7.2.4 Lessee shall neither suffer nor permit the Leased
Property to be used in such a manner as (i) might reasonably tend to impair
Lessor's title thereto or to any portion thereof; or (ii) may reasonably make
possible a claim or claims of adverse usage or adverse possession by the
public, as such, or of implied dedication of the Leased Property or any
portion thereof.
ARTICLE VIII
8.1 COMPLIANCE WITH LEGAL AND INSURANCE REQUIREMENTS, INSTRUMENTS,
ETC. Subject to Article XII relating to permitted contests, Lessee, at its
sole cost and expense, will promptly comply with all applicable Legal
Requirements and Insurance Requirements in respect of the use, operation,
maintenance, repair, and restoration of the Leased Property, whether or not
compliance therewith shall require structural changes in any of the Leased
Improvements or interfere with the use and enjoyment of the Leased Property.
8.2 LEGAL REQUIREMENT COVENANTS. Lessee covenants and agrees that
the Leased Property and Lessee's Personal Property shall not be used for any
unlawful purpose. Lessee further warrants and represents that Lessee has
obtained all necessary approvals and has given all necessary notices to allow
Lessee to operate the Leased Property for its Primary Intended Use.
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ARTICLE IX
9.1 MAINTENANCE AND REPAIR.
9.1.1 Lessee, at its sole cost and expense, will keep the
Leased Property and all sidewalks and curbs appurtenant thereto and which are
under Lessee's control in good order and repair (whether or not the need for
such repairs occurs as a result of Lessee's use, any prior use, the elements or
the age of the Leased Property, or any portion thereof), and, except as
otherwise provided in Article XIV, with reasonable promptness, make all
necessary and appropriate repairs thereto of every kind and nature, whether
interior or exterior, structural or non-structural, ordinary or extraordinary,
foreseen or unforeseen or arising by reason of a condition existing prior to the
Commencement Date (concealed or otherwise). All repairs shall, to the extent
reasonably achievable, be at least equivalent in quality to the original work.
Lessee will not take or omit to take any action the taking or omission of which
may materially or adversely impair the value or the usefulness of the Leased
Property or any part thereof for its Primary Intended Use. Any repair work
performed by Lessee shall be paid for so that no lien (i.e., mechanics',
materialmen's or other liens) shall attach to the Leased Property, subject to
the provisions of Article XII.
9.1.2 Lessor shall not under any circumstances be required in
connection with this Lease to build or rebuild any improvements on the Leased
Property, or to make any repairs, replacements, alterations, restorations, or
renewals of any nature or description to the Leased Property, whether ordinary
or extraordinary, structural or non-structural, foreseen or unforeseen, or to
make any expenditure whatsoever with respect thereto, or to maintain the Leased
Property in any way. Lessee hereby waives, to the extent permitted by law, the
right to make repairs at the expense of Lessor pursuant to any law in effect at
the time of the execution of this Lease or hereafter enacted. Lessor shall have
the right to give, record and post, as appropriate, notices of
non-responsibility (or similar notices) under any mechanics' or materialmen's
lien laws now or hereafter existing.
9.1.3 Lessee shall not make any modifications, alterations or
improvements to the Leased Improvements or any portion thereof, whether by
addition or deletion, without Lessor's prior written consent, which consent
shall not be unreasonably withheld or delayed.
9.1.4 Lessee will, upon the expiration or prior termination
of the Term, vacate and surrender the Leased Property in the condition in which
the Leased Property was originally received from Lessor, except as repaired,
rebuilt, restored, altered or added to as permitted or required under this Lease
and except for ordinary wear and tear (subject to the obligation of Lessee to
maintain the Leased Property in good order and repair during the entire Term).
9.2 ENCROACHMENTS, RESTRICTIONS, ETC. If any of the Leased
Improvements shall, at any time, encroach upon any property, street or
right-of-way adjacent to the Leased Property, or shall violate the agreements or
conditions contained in any lawful restrictive covenant or other agreement
affecting the Leased Property, or any part thereof, or shall impair the rights
of others under any easement or right-of-way to which the Leased Property is
subject, then promptly upon the request of Lessor at the behest of any person
affected by any such encroachment, violation or impairment, Lessee shall, at its
sole cost and expense, (and after Lessor's prior approval) subject to
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Lessee's right to sue Lessor's predecessors in title with respect thereto or
to contest the existence of any such encroachment, violation or impairment
and, in such case, in the event of an adverse final determination, either (i)
obtain valid and effective waivers or settlements of all claims, liabilities
and damages resulting from each such encroachment, violation or impairment,
whether the same shall affect Lessor or the Leased Property; or (ii) make
such changes in the Leased Improvements, and take such other actions, as
Lessee in the good faith exercise of its judgment deems reasonably
practicable, to remove such encroachment, and to end such violation or
impairment, including, if necessary, the alteration of any of the Leased
Improvements, and in any event take all such actions as may be necessary in
order to be able to continue the operation of the Leased Improvements for the
Primary Intended Use substantially in the manner and to the extent the Leased
Improvements were operated prior to the assertion of such violation,
impairment or encroachment. Lessee's obligations under this Paragraph 9.2
shall be in addition to and shall in no way discharge or diminish any
obligation of any insurer under any policy of title or other insurance.
ARTICLE X
10.1 LESSEE'S OBLIGATIONS FOR HAZARDOUS MATERIALS. Lessee shall,
at its sole cost and expense, take all actions as required to cause the
Leased Property including, without limitation, the Land and all Leased
Improvements, to be free and clear of the presence of all Hazardous Materials
during the Term; provided, however, that Lessee shall be entitled to use and
maintain Hazardous Materials on the Leased Property in connection with
Lessee's business and in compliance with all applicable laws. In this
connection, Lessee shall, upon its discovery, belief or suspicion of the
presence of Hazardous Materials on, in or under any part of the Leased
Property, including, without limitation, the Land and all Leased
Improvements, immediately notify Lessor and, at no expense to Lessor, cause
any such Hazardous Materials to be removed immediately, in compliance with
all applicable laws and in a manner causing the least disruption of or
interference with the operation of Lessee's business. Lessee hereby agrees
to fully indemnify, protect, defend and hold harmless Lessor from any costs,
damages, claims, liability or loss of any kind or nature arising out of or in
any way in connection with the presence, suspected presence, removal or
remediation of Hazardous Materials in, on, or under the Leased Property, or
any part thereof.
10.2 DEFINITION OF HAZARDOUS MATERIALS. For purposes of this
Lease, "Hazardous Materials" shall include, without limitation, any
substance, material, waste, pollutant or contaminant, now or hereafter
defined, listed or regulated by the "Environmental Laws" (defined below) or
any other federal state or local law, regulation or order or by common law
decision. "Environmental Laws" means and includes any law, ordinance,
regulation or requirement now or hereinafter in effect relating to land use,
air, soil, surface water, groundwater (including the protection, cleanup,
removal, remediation or damage thereof), human health and safety or any other
environmental matter, including, without limitation, the following laws as
the same may be amended from time to time: Comprehensive Environmental
Response, Compensation and Liability Act of 1980, 42 U.S.C. Sec. 9601, et
seq.; Federal Resource Conservation and Recovery Act, 42 U.S.C. Sec. 6901, et
seq.; Clean Water Act, 33 U.S.C. Sec. 1251, et seq.; Toxic Substances Control
Act, 15 U.S.C. Sec. 2601, et seq.; Refuse Act, 33 U.S.C. Sec. 407;
Occupational Safety and Health Act, 29 U.S.C. Sec. 651, et seq.; Clean Air
Act, 42 U.S.C. Sec. 7401, et seq.; and any and all similar state and local
laws and ordinances and the regulations now or hereafter adopted, published
and/or promulgated pursuant thereto.
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ARTICLE XI
11. NO LIENS. Subject to the provisions of Article XII relating to
permitted contests, Lessee will not directly or indirectly, voluntarily or by
operation of law, create or allow to remain and will promptly discharge at its
expense any lien, mortgage, encumbrance, attachment, title retention agreement,
or claim upon the Leased Property or any attachment, levy, claim, or encumbrance
in respect of the Rent.
ARTICLE XII
12. PERMITTED CONTESTS. Lessee shall have the right to contest the amount
or validity of any Imposition or any Legal Requirement or Insurance Requirement
or any lien, attachment, levy, encumbrance, charge or claim ("Claims") not
otherwise permitted by Article XI, by appropriate legal proceedings in good
faith and with due diligence, and to delay payment if legally permitted;
provided this shall not be deemed or construed in any way as relieving,
modifying or extending Lessee's covenants to pay or its covenants to cause to be
paid any such charges at the time and in the manner as in this Lease provided
and further provided that, such legal proceedings (and delay in payment) shall
not cause the sale of the Leased Property, or any part thereof, to satisfy the
same or cause Lessor or Lessee to be in default under the Ground Lease or any
mortgage or deed of trust encumbering the Leased Property or any interest
therein or otherwise threaten to cause loss or damage to Lessor or the Leased
Property. Upon the reasonable request of Lessor, Lessee shall provide to Lessor
reasonable security satisfactory to Lessor to assure the payment of all Claims
which may be assessed against the Leased Property, together with interest and
penalties, if any, thereon. Lessor agrees to join in any such proceedings if
the same be required to legally prosecute such contest of the validity of such
Claims; provided, however, that Lessor shall not thereby be subjected to any
liability for the payment of any costs or expenses in connection with any
proceedings brought by Lessee; and Lessee covenants to indemnify and save
harmless Lessor from any such costs or expenses. In the event that Lessee fails
to pay any Claims when due or, upon Lessor's request, to provide the security
therefor as provided in this Article XII and to diligently prosecute any contest
of the same or in the event the same threatens to cause loss or damage to Lessor
or the Leased Property, Lessor may, upon thirty (30) days advance written Notice
to Lessee, pay such charges together with any inteest and penalties and the same
shall be repayable by Lessee to Lessor at the next Payment Date provided for in
this Lease. Provided, however, that should Lessor reasonably determine that the
giving of such Notice would risk loss to the Leased Property or otherwise
threaten to cause loss or damage to Lessor, then Lessor shall give such written
Notice as is practical under the circumstances. Lessee shall be entitled to any
refund of any Claims and such charges and penalties or interest thereon which
have been paid by Lessee or paid by Lessor and for which Lessor has been fully
reimbursed.
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ARTICLE XIII
13.1 GENERAL INSURANCE REQUIREMENTS. Subject to the provisions of
Paragraph 13.8, during the Term, Lessee shall at all times keep the Leased
Property, and all property located in or on the Leased Property, insured with
the kinds and amounts of insurance described below. This insurance shall be
written by companies authorized to do insurance business in the state in which
the Leased Property is located. The policies must name Lessor as loss payee and
additional named insured, shall contain a provision that such insurance may not
be canceled or amended without at least thirty (30) days' notice to Lessor and
shall be payable to Lessor as provided in Article XIV. In addition, upon
Lessor's written request, the policies shall name as mortgagee, loss payee and
additional insured the holder ("Building Mortgagee") of any mortgage, deed of
trust or other security agreement and any other Encumbrance placed on the Leased
Property in accordance with the provisions of Article XXXII, as well as any
other entity interested in the Leased Property ("Building Mortgage") by way of a
standard form of mortgagee's loss payable endorsement. Evidence of insurance
shall be deposited with Lessor and, if requested, with any Building
Mortgagee(s). The policies on the Leased Property, including the Leased
Improvements, Fixtures and Lessee's Personal Property, shall insure against the
following risks:
13.1.1 Loss or damage by fire, vandalism and malicious
mischief, extended coverage perils commonly known as "All Risk," and all
physical loss perils normally included in such All Risk insurance, including,
without limitation, sprinkler leakage, in an amount not less than one hundred
percent (100%) of the then full replacement cost thereof (as defined below in
Paragraph 13.2);
13.1.2 Claims for personal injury or property damage under a
policy of comprehensive general public liability insurance with amounts not less
than One Million Dollars ($1,000,000.00) per occurrence, and with an annual
aggregate of Three Million Dollars ($3,000,000.00);
13.1.3 Flood (if the Leased Property is located in whole or in
part within a flood plain area, as designated by any governmental or other
responsible agency and if such insurance is available pursuant to applicable
law) and such other hazards and in such amounts as may be customary for
comparable properties in the area; and
13.1.4 Any other kinds of insurance, and in such amounts, as
Lessor may reasonably require from time to time to the extent available in the
state where the Leased Property is located.
13.2 REPLACEMENT COST. The term "full replacement cost" as used
herein, shall mean the full actual replacement cost of the Leased Property as
determined from time-to-time upon the request of Lessor or Lessee (but not more
frequently than once in every 24 months), including an increased cost of
construction endorsement, less exclusions provided in the standard form of fire
insurance policy in the state where the Leased Property is located. Lessor and
Lessee agree that as of the Commencement Date the full replacement cost shall be
deemed to be that amount set forth in Schedule 1 attached hereto and
incorporated herein.
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13.3 ADDITIONAL INSURANCE. In addition to the insurance described
above, Lessee shall maintain such additional insurance as may be reasonably
required from time-to-time by Lessor or any Building Mortgagee (to the extent
available in the state where the Leased Property is located) and shall further
at all times maintain adequate worker's compensation insurance coverage for all
persons employed by Lessee on the Leased Property. Such worker's compensation
insurance shall be in accordance with the requirements of applicable federal,
state and local law.
13.4 WAIVER OF SUBROGATION. All insurance policies carried by either
party covering the Leased Property, the Fixtures, the Building, or Lessee's
Personal Property including, without limitation, contents, fire and casualty
insurance, shall expressly waive any right of subrogation on the part of the
insurer against the other party. The parties hereto agree that their policies
will include such waiver clause or endorsement so long as the same are
obtainable without extra cost, and in the event of such an extra charge the
other party, at its election, may pay the same, but shall not be obligated to do
so. Upon written request, each party shall provide the other party with a copy
of each insurance policy with the waiver clause or endorsement attached.
13.5 FORM SATISFACTORY, ETC. All of the policies of insurance
referred to in this Article XIII shall be written in a form reasonably
satisfactory to Lessor and by insurance companies reasonably satisfactory to
Lessor. Subject to the foregoing, Lessor agrees that it will not unreasonably
withhold its approval as to the form of the policies of insurance or as to the
insurance companies selected by Lessee. Lessee shall pay all of the premiums
therefor, and deliver such policies or certificates thereof to Lessor prior to
their effective date (and, with respect to any renewal policy, prior to the
expiration of the existing policy), and in the event of the failure of Lessee
either to effect such insurance as herein called for or to pay the premiums
therefor, or to deliver such policies or certificates thereof to Lessor at the
times required, Lessor shall be entitled, but shall have no obligation, to
effect such insurance and pay the premiums therefor, which premiums shall be
repayable by Lessee to Lessor upon written demand therefor, and failure to repay
the same shall constitute an Event of Default within the meaning of Paragraph
16.1(b). Each insurer mentioned in this Article XIII shall agree, by
endorsement on the policy or policies issued by it, or by independent instrument
furnished to Lessor, that will give to Lessor (and to any Building Mortgagee, if
required by the same) thirty (30) days written notice before the policy or
policies in questions shall be altered, allowed to expire or cancel.
13.6 INCREASE IN LIMITS. In the event that Lessor or a Building
Mortgagee shall at any reasonable time deem the limits of the personal injury or
property damage public liability insurance then carried to be insufficient,
Lessee shall thereafter carry the insurance with increased limits until further
change pursuant to the provisions of this Paragraph; provided that if Lessor
desires to increase the limits of insurance, and such is not pursuant to the
request of a Building Mortgagee, then Lessor may not demand an increase in
limits above the limits generally consistent with the requirements of owners of
restaurant facilities in the State.
13.7 BLANKET POLICY. Notwithstanding anything to the contrary
contained in this Article XIII, Lessee's obligations to carry the insurance
provided for herein may be brought within the coverage of a so-called blanket
policy or policies of insurance carried and maintained by Lessee; provided,
however, that the coverage afforded Lessor will not be reduced or diminished or
otherwise be different from that which would exist under a separate policy
meeting all other requirements of
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this Lease by reason of the use of such blanket policy of insurance, and
provided further that the requirements of this Article XIII are otherwise
satisfied.
13.8 NO SEPARATE INSURANCE. Lessee shall not on Lessee's own
initiative or pursuant to the request or requirement of any third party take out
separate insurance concurrent in form or contributing in the event of loss with
that required in this Article, to be furnished or which may reasonably be
required to be furnished, by Lessee or increase the amount of any then existing
insurance by securing any additional policy or additional policies, unless all
parties having an insurable interest in the subject matter of the insurance,
including in all cases Lessor and all Building Mortgagees, are included therein
as additional insureds, and the loss is payable under said insurance in the same
manner as losses are payable under the Lease. Lessee shall immediately notify
Lessor of the taking out of any such separate insurance or of the increasing of
any of the amount of the then existing insurance.
13.9 CONTINUOUS COVERAGE. Lessee was the owner of the Leased Property
prior to the date of this Lease. Therefore, Lessee already has in place
insurance with respect to the Leased Property. Lessee shall assure that there
is no gap in the insurance coverage provided in connection with the Building at
or after the Commencement Date, and therefore, the insurance provided by Lessee
shall be continuous, with the types and amounts of coverage, described herein to
be applicable on the Commencement Date. To the extent there is not full,
complete and continuous coverage for all issues, no matter when arising, claimed
or occurring, Lessee shall, at its sole cost, obtain such insurance.
ARTICLE XIV
14.1 INSURANCE PROCEEDS. All proceeds payable by reason of any loss
of or damage to the Leased Property, or any portion thereof, which is insured
under any policy of insurance required by Article XIII of this Lease, where the
total proceeds paid by the insurer are less than $150,000.00, shall be paid to
Lessee and applied to the reconstruction or repair, as the case may be, of any
damage to or destruction of the Leased Property, or any portion thereof. All
proceeds payable by reason of any loss of or damage to the Leased Property, or
any portion thereof, which is insured under any policy of insurance required by
Article XIII of this Lease where the total proceeds paid by the insurer are
equal to or in excess of $150,000.00 shall be paid to Lessor and held by Lessor
in trust (subject to the provisions of Paragraph 14.7) and shall be made
available for reconstruction or repair, as the case may be, of any damage to or
destruction of the Leased Property, or any portion thereof, and shall be paid
out by Lessor from time-to-time for the reasonable costs of such reconstruction
or repair. Any excess proceeds of insurance remaining after the completion of
the restoration or reconstruction of the Leased Property shall go to Lessee,
provided this Lease is in force and there exists no uncured Event of Default;
otherwise such excess shall be paid to Lessor for application as set forth in
Article XVI hereof. In the event neither Lessor nor Lessee is required or
elects to repair and restore, and this Lease is terminated as described in
Paragraph 14.7, all such insurance proceeds shall be retained by Lessor. All
salvage resulting from any risk covered by insurance shall belong to Lessor
except that any salvage relating to Lessee's Personal Property shall belong to
Lessee.
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14.2 RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION COVERED BY
INSURANCE PROCEEDS.
14.2.1 If during the Term, the Leased Property is totally or
partially destroyed by a risk covered by the insurance described in Article XIII
and whether or not the Building thereby is rendered Unsuitable for Its Primary
Intended Use, Lessee shall restore the Leased Property to substantially the same
condition as existed immediately before the damage or destruction.
14.2.2 If the cost of the repair or restoration exceeds the
amount of proceeds received by Lessee or Lessor from the insurance required
under Article XIII, Lessee shall be obligated to restore the Leased Property and
pay the extra cost therefor, provided that, prior to commencing the repair and
restoration, Lessee shall either (i) contribute any excess amount needed to
restore the Leased Property, or (ii) provide Lessor with satisfactory evidence
that such funds are, and throughout the entire period of reconstruction will be,
available. If Lessee contributes such excess in cash, such excess shall be paid
by Lessee to Lessor to be held in trust, together with any insurance proceeds,
for application to the cost of repair and restoration.
14.3 RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION NOT COVERED
BY INSURANCE. If during the Term, the Leased Property is damaged or destroyed
irrespective of the extent of the damage from a risk not covered by the
insurance described in Article XIII, whether or not such damage or renders the
Building Unsuitable for Its Primary Intended Use, Lessee shall restore the
Leased Property to substantially the same condition it was in immediately before
such damage or destruction and such damage or destruction shall not terminate
this Lease.
14.4 LESSEE'S PROPERTY. All insurance proceeds payable by reason of
any loss of or damage to any of Lessee's Personal Property shall be paid to
Lessee, and Lessee shall hold such insurance proceeds in trust to pay the cost
of repairing or replacing damaged Lessee's Personal Property. Any proceeds in
excess of the cost of repairing or replacing any such Lessee's Personal Property
shall belong to Lessee.
14.5 RESTORATION OF LESSEE'S PROPERTY. Without limiting Lessee's
obligation to restore the Leased Property as provided in Paragraphs 14.2 and
14.3, Lessee shall also pay the cost to restore all Alterations and other
improvements made by Lessee which Lessee elects to restore, including Lessee's
Personal Property to the extent that Lessee's Personal Property is necessary to
the operation of the Leased Property for its Primary Intended Use in accordance
with applicable Legal Requirements.
14.6 NO ABATEMENT OF RENT. This Lease shall remain in full force and
effect and Lessee's obligation to make rental payments and to pay all other
charges required by this Lease shall remain unabated during any period required
for repair and restoration.
14.7 TERMINATION OF OPTION TO EXTEND. Any termination of this Lease by
reason of damage to or destruction of the Leased Property shall cause any
options to extend the Lease under Article XVIII to be terminated and without
further force or effect.
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14.8 WAIVER. Lessee hereby waives any statutory rights of termination
which may arise by reason of any damage to or destruction of the Leased Property
which Lessor is obligated to restore or may restore under any of the provisions
of this Lease.
ARTICLE XV
15.1 DEFINITIONS.
15.1.1 "Condemnation" means (a) the exercise of any
governmental power, whether by legal proceedings or otherwise, by a Condemnor;
or (b) a voluntary sale or transfer by Lessor to any Condemnor, either under
threat of Condemnation or while legal proceedings for Condemnation are pending.
15.1.2 "Date of Taking" means the date the Condemnor has the
right to possession of the property being condemned.
15.1.3 "Award" means all compensation, sums or anything of
value awarded, paid or received on a total or partial Condemnation.
15.1.4 "Condemnor" means any public or quasi-public authority,
or private corporation or individual, having the power of Condemnation.
15.2 PARTIES' RIGHTS AND OBLIGATIONS. If during the Term there is any
taking of all or any part of the Leased Property or any interest in this Lease
by Condemnation, the rights and obligations of the parties shall be determined
by this Article XV.
15.3 TOTAL CONDEMNATION. If title to the fee of the whole of the
Leased Property shall be taken or condemned by any Condemnor, this Lease shall
cease and terminate as of the Date of Condemnation by said Condemnor. If title
to the fee of less than the whole of the Leased Property shall be so taken or
condemned, which nevertheless renders the Leased Property Unsuitable for Its
Primary Intended Use, as reasonably determined by Lessor and Lessee, Lessee and
Lessor shall each have the option by written Notice to the other, at any time at
or prior to the taking of possession by, or the date of vesting of title in,
such Condemnor, whichever first occurs, to terminate this Lease as of the date
of the occurrence of such first event. If such Notice has timely been given,
this Lease shall thereupon cease and terminate. Upon the termination of the
Lease, all Minimum Rent, and Additional Charges paid or payable by Lessee
hereunder shall be apportioned as of the date the Lease terminates.
15.4 ALLOCATION OF PORTION OF AWARD. The total Award made with respect
to all or any portion of the Leased Property or for loss of rent, or for loss of
business, whether or not beyond the Term of this Lease, or for the loss of
value of the leasehold shall be solely the property of and payable to Lessor and
Lessee hereby assigns to Lessor any and all rights in such Award; provided,
however, that Lessee shall be entitled to make a separate claim for the taking
of Lessee's Personal Property and relocation expense as long as any such claim
will not in any way diminish Lessor's Award, or for any other loss that can be
awarded to Lessee separately from Lessor's claim and which will not in any
respect whatsoever diminish or threaten to diminish the total amounts to be
awarded
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to Lessor, as set forth above or otherwise. To the extent Lessee's claim may
thereafter reduce Lessor's claim, Lessee shall, and hereby does, assign its
claim to Lessor. In any Condemnation proceedings, each of the Lessor and
Lessee shall seek its own claim in conformity herewith, at its own expense.
15.5 PARTIAL TAKING. If title to the fee of less than the whole of
the Leased Property shall be so taken or condemned, and the Leased Property is
still suitable for its Primary Intended Use, as reasonably determined by Lessor
and Lessee, or if Lessee or Lessor shall be so entitled, but shall not elect to
terminate this Lease as provided in Paragraph 15.3 hereof, Lessee, at its own
cost and expense (subject to Lessor's contribution described below), shall with
all reasonable dispatch restore the untaken portion of any Leased Improvements
on the Leased Property so that such Leased Improvements shall constitute a
complete architectural unit of the same general character and condition (as
nearly as may be possible under the circumstances) as the Leased Improvements
existed immediately prior to such Condemnation. Lessor shall contribute to the
cost of restoration that part of its Award specifically allocated to such
restoration, provided, however, the amount of such contribution shall not exceed
the cost of restoration. The Minimum Rent shall be reduced as set forth in
Paragraph 5.2.
15.6 TEMPORARY TAKING. Lessee agrees that if, at any time after the
date hereof, the whole or any part of the Leased Property or of Lessee's
interest under this Lease, shall be Condemned by any Condemnor for its temporary
use or occupancy, this Lease shall not terminate by reason thereof, and Lessee
shall continue to pay, in the manner and at the times herein specified, the full
amounts of Minimum Rent and Additional Charges. Except only to the extent that
Lessee may be prevented from doing so pursuant to the terms of the order of the
Condemnor, Lessee shall also continue to perform and observe all of the other
terms, covenants, conditions and obligations hereof, on the part of the Lessee
to be performed and observed, as though such Condemnation had not occurred. In
the event of any such Condemnation as in this Paragraph 15.6 described, the
entire amount of any such Award made for such temporary use, whether paid by way
of damages, rent or otherwise, shall be paid to Lessee to the extent
attributable to any period within the Initial Term (as extended by any already
exercised options to extend) and except as otherwise provided hereunder.
Notwithstanding the foregoing, in the event that any temporary use or occupancy
covered under this Paragraph 15.6 renders any portion of the Leased Property
Unsuitable for its Primary Intended Use (or otherwise reduces the number of
residents the Leased Property can accommodate) for a period in excess of twelve
(12) calendar months, Lessee shall have the right to elect a reduction in
Minimum Rent as set forth in Paragraph 5.2 commencing on the twelve (12) month
anniversary of any such use or occupancy and continuing so long as such
temporary use or occupancy continues, in which event any Award made for such
temporary use or occupancy shall be paid to Lessor to the extent attributable to
the period that Minimum Rent is so abated. Lessee covenants that upon the
termination of any such period of temporary use or occupancy as set forth in
this Paragraph 15.6, it will, at its sole cost and expense, retore the Leased
Property as nearly as may be reasonably possible, to the condition in which the
same was immediately prior to the Condemnation, unless such period of temporary
use or occupancy shall extend beyond the expiration of the Term, in which case
Lessee shall not be required to make such restoration, and in such case, Lessee
shall contribute to the cost of such restoration that portion of its entire
Award which is specifically allocated to such restoration in the judgment or
order of the court, if any.
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ARTICLE XVI
16.1 EVENTS OF DEFAULT. Any one or more of the following events shall
be an "Event of Default":
(a) if Lessee fails to make payment of the Rent payable by
Lessee under this Lease when the same becomes due and payable and such failure
is not cured by Lessee within a period of five (5) Business Days; or
(b) if Lessee fails to observe or perform any other term,
covenant or condition of this Lease and such failure is not cured by Lessee
within a period of thirty (30) days after Notice thereof from Lessor, unless
such failure cannot with due diligence be cured within a period of thirty (30)
days, in which case such failure shall not be deemed an Event of Default if
Lessee proceeds promptly and with due diligence to cure the failure and
diligently completes the curing thereof within ninety (90) days; or
(c) if Lessee does any of the following:
(i) admit in writing its inability to pay its debts
generally as they become due;
(ii) file a petition in bankruptcy or a petition to take
advantage of any insolvency law;
(iii) make an assignment for the benefit of creditors;
(iv) consent to the appointment of a receiver of itself or
of the whole or any substantial part of its property; or
(v) file a petition or answer seeking reorganization or
arrangement under the Federal bankruptcy laws or any other applicable law or
statute of the United States of America or any state thereof; or
(d) if Lessee, on a petition in bankruptcy filed against it, is
adjudicated a bankrupt or an order for relief thereunder is entered against it
or a court of competent jurisdiction shall enter an order or decree appointing,
without the consent of Lessee, a receiver for Lessee or of the whole or
substantially all of its property or the Building, or approving a petition filed
against Lessee seeking reorganization or arrangement of Lessee under the Federal
bankruptcy laws or other applicable law or statute of the United States of
America or any state thereof, and such judgment, order or decree shall not be
vacated or set aside within one hundred twenty (120) days from the date of the
entry thereof; or
(e) if Lessee shall be liquidated or dissolved, or shall begin
proceedings toward such liquidation or dissolution, or shall, in any manner,
permit the sale or divestiture of substantially all of its assets; or
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(f) subject to the provisions of Article XII hereof, if the
estate or interest of Lessee in the Leased Property or any part thereof be
levied upon or attached in a proceeding and the same shall not be vacated or
discharged within the later of ninety (90) days after commencement thereof or
thirty (30) days after Notice thereof from Lessor, or a mechanic's or similar
lien is filed with respect to the Leased Property and is not released or
bonded around for a period exceeding sixty (60) days after Lessee first has
knowledge of the same; or
(g) if Lessee voluntarily ceases operations on the Leased
Property for a period in excess of two (2) days other than for required
remodeling or if required by law; or
(h) if any of Lessee's representations or warranties expressly
set forth in this Lease (or financial statements provided to Lessor) proves to
be untrue when made in any material respect which materially and adversely
affects Lessor; or
(i) if Lessee attempts to assign or sublease, in violation of
the provisions of this Lease; or
(j) subject to the provisions of Article XII hereof, if Lessee
ceases to maintain in effect any license, permit, certificate or approval
necessary or otherwise required to operate the Building in accordance with its
Primary Intended Use.
Upon the occurrence of an Event of Default, in addition to all of
Lessor's other remedies, Lessor may terminate this Lease by giving Lessee not
less than ten (10) Business Days Notice of such termination and upon the
expiration of the time fixed in such Notice, the Term shall terminate and all
rights of Lessee under this Lease shall cease.
In the event litigation is commenced with respect to any alleged
default under this Lease, the prevailing party in such litigation shall receive,
in addition to its damages incurred, such sum as the court shall determine as
its reasonable attorneys' fees, and all costs and expenses incurred in
connection therewith, including reasonable attorneys' fees and costs incurred on
appeal.
16.2 CERTAIN REMEDIES. Lessor shall have all remedies and rights
provided under this Lease and/or otherwise available at law and in equity as a
result of an Event of Default or Lessee's other breach under this Lease,
including, to the extent permitted by the laws of the State, the right to
appoint a receiver as a matter of strict right without regard to the solvency of
Lessee, for the purpose of procuring the Leased Property, preventing waste,
protecting and otherwise enforcing the provisions of this Lease and for any and
all other purposes for which a receiver is allowed under the laws of the State.
Without limiting the foregoing, if an Event of Default occurs (and the event
giving rise to such Event of Default has not been cured within the curative
period, if any, relating thereto as set forth in this Lease) whether or not this
Lease has been terminated pursuant to Paragraph 16.1, Lessee shall, to the
extent permitted by law, and if required by Lessor to so do, immediately
surrender to Lessor the Leased Property pursuant to the provisions of Paragraph
16.1 and quit the same and Lessor may enter upon and repossess the Leased
Property, in person, by agent or by a court-appointed receiver, by reasonable
force, summary proceedings, ejectment or otherwise, and may remove Lessee and
all other persons and any and all personal property from the Leased Property
subject to any requirements of law. Without limiting all other rights and
remedies of
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Lessor under this Lease and under law, Lessor shall have the right to
accelerate all Rent (including Minimum Rent) and therefore, upon Lessee's
default, at Lessor's option, all such Rent shall become immediately due and
payable in accordance with Paragraph 16.3, below. Further, without limiting
all other rights and remedies of Lessor under this Lease and under law,
Lessor shall be entitled to recover from Lessee, and Lessee shall therefore
be liable for, all costs of recovering possession (including without
limitation all costs associated with any receiver) and renovating the Leased
Property for new lessee and all other costs of re-leasing, including, but
not limited to, broker's commissions and attorneys' fees, except as limited
by Paragraph 16.3 below.
16.3 DAMAGES. Neither (i) the termination of this Lease pursuant to
Section 16.1; (ii) the repossession of the Leased Property; (iii) the failure of
Lessor, notwithstanding reasonable good faith efforts, to relet the Leased
Property; nor (iv) the reletting of all or any portion thereof, shall relieve
Lessee of its liability and obligations hereunder, all of which shall survive
any such termination, repossession or reletting (except for proceeds received on
subletting). In the event of any such termination, Lessee shall forthwith pay
to Lessor all Rent due and payable with respect to the Leased Property to and
including the date of such termination.
(a) Lessor shall not be deemed to have terminated this Lease
unless Lessor delivers written Notice to Lessee of such election. If Lessee
voluntarily elects to terminate this Lease upon an Event of Default, then in
addition to all remedies available to Lessor, Lessor may recover the sum of:
(i) the worth at the time of award of the unpaid Rent
which had been earned at the time of termination;
(ii) the worth at the time of award of the amount by
which the unpaid Rent which would have been earned after termination until
the time of award exceeds the amount of such rental loss that Lessee proves
could have been reasonably avoided;
(iii) the worth at the time of award of the amount by
which the unpaid Rent for the balance of the Term after the time of award
exceeds the amount of such rental loss that Lessee proves could be reasonably
avoided; and
(iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would
be likely to result therefrom.
The "worth at the time of award" of the amounts referred to
in subparagraphs (i) and (ii) above is computed by allowing interest at the
Overdue Rate. The worth at the time of award of the amount referred to in
subparagraph (iii) is computed by discounting such amount at the discount rate
of the Federal Reserve Bank of Kansas City at the time of award plus one percent
(1%).
(b) Without limiting Lessor's other remedies provided herein and
provided by law, Lessor may continue the Lease in effect after Lessee's breach
and abandonment and recover Rent as it becomes due, provided that, in such
event, Lessee has the right to sublet or assign
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subject only to reasonable conditions imposed by Lessor. Accordingly,
without termination of Lessee's right to possession of the Leased Property,
Lessor may demand and recover each installment of Minimum Rent and other sums
payable by Lessee to Lessor under the Lease as the same becomes due and
payable, which Minimum Rent and other sums shall bear interest at the maximum
interest rate permitted in accordance with the laws of the State (or the
Overdue Rate, whichever is lower), from the date when due until paid, and
Lessor may enforce, by action or otherwise, any other term or covenant of
this Lease. If Lessor elects to recover each installment of Rent as it
becomes due, then Lessor may file any number of lawsuits for the recovery of
the amounts due hereunder.
16.4 WAIVER. If this Lease is terminated pursuant to Paragraph 16.1,
Lessee waives, to the extent permitted by applicable law, the benefit of any
laws now or hereafter in force exempting property from liability for rent or for
debt.
16.5 APPLICATION OF FUNDS. Any payments received by Lessor under any
of the provisions of this Lease during the existence or continuance of any Event
of Default shall be applied to Lessee's obligations in the order which Lessor
may determine or as may be prescribed by the laws of the State.
ARTICLE XVII
17. LESSOR'S RIGHT TO CURE LESSEE'S DEFAULT. If Lessee fails to make any
payment or to perform any act required to be made or performed under this Lease,
and to cure the same within the relevant time periods, if any, provided under
this Lease, Lessor, after fifteen (15) days' Notice to and demand upon Lessee,
and without waiving or releasing any obligation of Lessee or default, may (but
shall be under no obligation to) at any time thereafter make such payment or
perform such act for the account and at the expense of Lessee, and may, to the
extent permitted by law, enter upon the Leased Property, in person, by agent or
by court-appointed receiver, for such purpose and take all such action thereon
as, in Lessor's opinion, may be necessary or appropriate therefor. Provided,
however, that should Lessor reasonably determine that the giving of such Notice
would risk loss to the Leased Property, or cause damage to Lessor, then Lessor
shall give such written Notice as is practical under the circumstances. No such
entry shall be deemed an eviction of Lessee. In exercising any remedy under
this Article XVII, Lessor shall use its good faith efforts not to violate any
rights of residents of the Building. All sums so paid by Lessor and all costs
and expenses (including, without limitation, reasonable attorneys' fees and
expenses, in each case) so incurred, together with a late charge thereon (to the
extent permitted by law) at the Overdue Rate from the date on which sums or
expenses are paid or incurred by Lessor, shall be paid by Lessee to Lessor on
demand. The obligations of Lessee and rights of Lessor contained in this
Article shall survive the expiration or earlier termination of this Lease.
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ARTICLE XVIII
18.1 OPTIONS TO EXTEND. Provided there exists no uncured Event of
Default under this Lease at the time Lessee exercises any option to extend
(in accordance with this Article XVIII) and the option to extend the Ground
Lease is timely made, Lessee will have the right to extend this Lease for two
(2) periods of five (5) years each (each such additional term shall be
referred to herein as an "Extended Term"), commencing immediately following
the end of the Initial Term or the immediately preceding Extended Term, as
the case may be. The Lease during any Extended Term shall be on the same
terms and conditions as during the Initial Term, except that the Minimum Rent
shall be determined as set forth in Paragraph 18.2 below. In the event
Lessee desires to exercise any option to extend granted in this Article
XVIII, Lessee shall give Landlord written notice ("Notice to Extend") not
less than ninety (90) days prior to the expiration of the Initial Term or the
immediately preceding Extended Term, as the case may be. If Lessee fails to
give Landlord any such notice, then such option to extend and all future
options to extend granted in this Article XVIII shall be null and void and of
no further force or effect.
18.2 MINIMUM RENT DURING EXTENDED TERMS. The Minimum Rent at the
commencement of each Extended Term shall be the annual sums as stated in
Schedule 1 attached hereto and incorporated herein.
ARTICLE XIX
19. HOLDING OVER. If Lessee shall for any reason remain in possession
of the Leased Property after the expiration of the Term or earlier
termination of the Term hereof, such possession shall be as a month-to-month
tenant during which time Lessee shall pay as rental each month, one and
one-half times the aggregate of (i) one-twelfth of the aggregate Minimum Rent
payable with respect to the last Lease Year of the Term; (ii) all Additional
Charges accruing during the month; and (iii) all other sums payable by Lessee
pursuant to the provisions of this Lease. During such period of
month-to-month tenancy, Lessee shall be obligated to perform and observe all
of the terms, covenants and conditions of this Lease, but shall have no
rights hereunder other than the right, to the extent given by law to
month-to-month tenancies, to continue its occupancy and use of the Leased
Property. Nothing contained herein shall constitute the consent, express or
implied, of Lessor to the holding over of Lessee after the expiration or
earlier termination of this Lease.
ARTICLE XX
20. RISK OF LOSS. During the Term of this Lease, the risk of loss or of
decrease in the enjoyment and beneficial use of the Leased Property in
consequence of the damage or destruction thereof by fire, the elements,
casualties, thefts, riots, wars or otherwise, or in consequence of
foreclosures (to the extent caused by or through Lessee), attachments, levies
or executions (other than those caused by or through Lessor) is assumed by
Lessee, and Lessor shall in no event be answerable or accountable therefor,
nor shall any of the events mentioned in this Paragraph entitle Lessee to any
abatement of Rent except as specifically provided in this Lease, or any right
to terminate this Lease, except as provided in Articles XIV or XV, above.
Without limiting the foregoing, Lessor shall not be liable for injury or
damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person
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in or about the Leased Property, whether such damage or injury is caused by
or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning, or lighting fixtures, or from
any other cause, whether the said injury or damage results from conditions
arising upon the Leased Property, or upon other portions of the Land, or any
part thereof, or from other sources or places, and regardless of whether the
cause of such damage or injury or the means of repairing the same is
accessible or not. Lessor shall not be liable for any damages arising from
any act or neglect of Lessee, or any other party named above. Lessor shall,
however, remain liable for any damages arising from Lessor's own gross
negligence or willful misconduct.
ARTICLE XXI
21. INDEMNIFICATION. Notwithstanding the existence of any insurance
provided for in Article XIII, and without regard to the policy limits of any
such insurance, Lessee will protect, indemnify, hold harmless and defend
Lessor from and against all liabilities, obligations, claims, demands,
damages, penalties, causes of action, costs, and expenses (including, without
limitation, actual reasonable attorneys' fees and expenses), to the extent
permitted by law, imposed upon or incurred by or asserted against Lessor by
reason of any of the following: (a) any accident, injury to or death of
persons or loss of or damage to property occurring on or about the Leased
Property or adjoining sidewalks, whether occurring prior to or after the
Commencement Date provided however, that if any such liability, obligation,
demand, claim or cause of action is covered by liability insurance pursuant
to Article XIII, and if the insurance carrier is providing a defense
acceptable to Lessor in the reasonable exercise of Lessor's discretion, or
has otherwise acknowledged coverage for same, then Lessee shall not be
obligated to duplicate the defense, investigation, adjustment, or other steps
being taken by the insurer; (b) any occupancy, use, misuse, non-use,
condition, maintenance, or repair by Lessee of the Leased Property; (c) any
Impositions (which are the obligations of Lessee to pay pursuant to the
applicable provisions of this Lease, which include any Impositions arising
prior to the Commencement Date); (d) any failure on the part of Lessee to
perform or comply with any of the terms of this Lease; (e) the
non-performance of any of the terms and provisions of any and all existing
and future subleases of the Leased Property to be performed by the landlord
(Lessee) thereunder; (f) any Hazardous Materials, as defined in Paragraph
10.2, above that now or hereafter during the Term may be located in, on or
around, or may potentially affect, any part of the Land or Leased
Improvements; and (g) any and all other matters pertaining to the Leased
Property or the peration of the Building after the date of this Lease or
otherwise during the Term. Any amounts which became payable by Lessee under
this Paragraph shall be paid within ten (10) days of the date the same
becomes due and if not timely paid, shall bear a late charge (to the extent
permitted by law) at the Overdue Rate from the date of such determination to
the date of payment. Lessee, at its expense, shall contest, resist and
defend any such claim, action or proceeding asserted or instituted against
Lessor or may compromise or otherwise dispose of the same as Lessee sees fit,
at Lessee's sole cost, but after consultation with and approval by Lessor.
Nothing herein shall be construed as indemnifying Lessor against its own
gross negligence or willful misconduct. Lessee's liability for a breach of
the provisions of this article arising during the Term hereof shall survive
any termination of this Lease.
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ARTICLE XXII
22.1 SUBLETTING AND ASSIGNMENT. Lessee may not assign, sublease or
sublet, encumber, appropriate, pledge or otherwise transfer, the Lease or the
leasehold or other interest in the Leased Property without the prior written
consent of Lessor, which consent shall not be unreasonably withheld or delayed.
Upon Lessor's consent, in the case of any assignment, any such assignee shall
assume in writing and agree to keep and perform all of the terms of this Lease
on the part of Lessee to be kept and performed and shall be, and become, jointly
and severally liable with Lessee for the performance thereof. In the case of
either an assignment or a subletting, (i) an original counterpart of each
sublease and assignment and assumption, duly executed by Lessee and such
sublessee or assignee, as the case may be, in form and substance satisfactory to
Lessor, shall be delivered promptly to Lessor, and (ii) Lessee shall remain
primarily liable, as principal rather than as surety, for the prompt payment of
the Rent and for the performance and observance of all of the covenants and
conditions to be performed by Lessee hereunder.
22.2 ATTORNMENT. Lessee shall insert in each sublease permitted
under Paragraph 22 provisions to that effect that (i) such sublease is
subject and subordinate to all of the terms and provisions of this Lease and
the rights of Lessor hereunder; (ii) in the event this Lease shall terminate
before the expiration of such sublease, the sublessee thereunder will, at
Lessor's option, attorn to Lessor and waive any right the sublessee may have
to terminate the sublease or to surrender possession thereunder, as a result
of the termination of this Lease; and (iii) in the event the sublessee
receives a written Notice from Lessor or Lessor's assignees, if any, stating
that Lessee is in default under this Lease, the sublessee shall thereafter be
obligated to pay all rentals accruing under said sublease directly to the
party giving such Notice, or as such party may direct. All rents received
from the sublessee by Lessor or Lessor's assignees, if any, as the case may
be, shall be credited against amounts owing by Lessee under this Lease.
ARTICLE XXIII
23. OFFICERS' CERTIFICATES. At any time from time-to-time upon not less
than twenty (20) days Notice by Lessor, Lessee will furnish to Lessor an
Officers' Certificate certifying that this Lease unmodified and in full force
and effect (or that this Lease is in full force and effect as modified and
setting forth the modifications), the date to which the Rent has been paid
and such other information concerning this Lease as may be reasonably
requested by Lessor. Any such certificate furnished pursuant to this
Paragraph may be relied upon by Lessor and any prospective purchaser or
lender of the Leased Property.
ARTICLE XXIV
24. LESSOR'S RIGHT TO INSPECT. Lessee shall permit Lessor and its
authorized representatives to inspect the Leased Property on at least one
Business Day's prior notice during usual business hours subject to any
security, health, safety, or confidentiality requirements of Lessee or any
governmental agency or insurance requirement relating to the Leased Property,
or imposed by law or applicable regulations.
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ARTICLE XXV
25. NO WAIVER. The waiver by Lessor or Lessee of any term, covenant or
condition in this Lease shall not be deemed to be a waiver of any other term,
covenant or condition or any subsequent waiver of the same or any other term,
covenant or condition contained in this Lease. The subsequent acceptance of
rent hereunder by Lessor or any payment by Lessee shall not be deemed to be a
waiver of any preceding default of any term, covenant or condition of this
Lease, other than the failure to pay the particular amount so received and
accepted, regardless of the knowledge of any preceding default at the time of
the receipt or acceptance.
ARTICLE XXVI
26. REMEDIES CUMULATIVE. To the extent permitted by law, each legal,
equitable or contractual right, power and remedy of each party now or
hereafter provided either in this Lease or by statute or otherwise shall be
cumulative and concurrent and shall be in addition to every other right,
power and remedy and the exercise or beginning of the exercise by each party
of any one or more of such rights, powers and remedies shall not preclude the
simultaneous or subsequent exercise by such party of any or all of such other
rights, powers and remedies.
ARTICLE XXVII
27. ACCEPTANCE OF SURRENDER. No surrender to Lessor of this Lease or
of the Leased Property or any part thereof, or of any interest therein, shall
be valid or effective unless agreed to and accepted in writing by Lessor and
no act by Lessor or any representative or agent of Lessor, other than such a
written acceptance by Lessor, shall constitute an acceptance of any such
surrender.
ARTICLE XXVIII
28. NO MERGER OF TITLE. There shall be no merger of this Lease or of
the leasehold estate created hereby by reason of the fact that the same
person, firm, corporation, or other entity may acquire, own or hold, directly
or indirectly, (a) this Lease or the leasehold estate created hereby or any
interest in this Lease or such leasehold estate; and (b) the fee estate in
the Leased Property.
ARTICLE XXIX
29. CONVEYANCE BY LESSOR. If Lessor or any successor owner of the
Leased Property shall transfer or assign Lessor's title or interest in the
Leased Property or this Lease other than as security for a debt, then,
subject to the provisions of this Article XXIX and provided the new owner has
agreed in writing for the benefit of Lessee to recognize this Lease and be
bound by all of the terms and conditions hereof, Lessor shall thereupon be
released from all future liabilities and obligations of Lessor under this
Lease arising or accruing from and after the date of such transfer or
assignment and all such future liabilities and obligations shall thereupon be
binding upon the new owner.
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ARTICLE XXX
30. QUIET ENJOYMENT. So long as Lessee shall pay all Rent as the same
becomes due and shall comply with all of the terms of this Lease and perform
its obligations hereunder, and except for any claims, actions, liens or
encumbrances arising from the acts or omissions of Lessee or otherwise from
events occurring prior to the Commencement Date here under, Lessee shall
peaceably and quietly have, hold and enjoy the Leased Property for the Term
hereof, free of any claim or other action by Lessor or anyone claiming by,
through or under Lessor, but subject to all liens and encumbrances of record
as of the date hereof or hereafter consented to by Lessee. Except as
otherwise provided in this Lease, no failure by Lessor to comply with the
foregoing covenant or any covenant of this Lease shall give Lessee any right
to cancel or terminate this Lease or abate, reduce or made a deduction from
or offset against the Rent or any other sum payable under this Lease, or to
fail to perform any other obligation of Lessee hereunder.
ARTICLE XXXI
31. NOTICES. All notices, demands, requests, consents, approvals, and
other communications ("Notice" or "Notices") hereunder shall be in writing
and personally served upon an Executive Officer of the party being served or
mailed (by registered or certified mail, return receipt requested and postage
prepaid), overnight delivery service addressed to the respective parties, as
follows:
If to Lessee: New York Bagel Enterprises, Inc.
300 I.M.A. Plaza
250 North Water Street
Wichita, Kansas 67202-1213
Attention: Mr. Robert J. Geresi
CEO and President
with a copy to: Klenda, Mitchell, Austerman & Zuercher, L.L.C.
1600 Epic Center
301 North Main Street
Wichita, Kansas 67202-4888
Attention: Mr. Gregory B. Klenda
If to Lessor: Commercial Equity, Inc.
300 I.M.A. Plaza
250 North Water Street
Wichita, Kansas 67202-1213
Attention: David L. Murfin, President
with a copy to: Foulston & Siefkin L.L.P.
700 NationsBank Financial Center
Wichita, Kansas 67202
Attention: William R. Wood II
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or to such other address as either party may hereafter designate by a Notice
pursuant to this Paragraph. Personally delivered Notice (including Notices
sent by overnight delivery service) shall be effective upon receipt, and
Notice given by mail shall be completed three (3) Business Days after the
time of deposit in the U.S. Mail system. For the purposes hereof, the term
"Executive Officer" shall mean the Chairman of the Board of Directors, the
Chief Executive Officers, the President, any Vice President, or the Secretary
of the corporation upon which service is to be made.
ARTICLE XXXII
32.1 LESSOR MAY GRANT LIENS. Lessor may, subject to the terms and
conditions set forth below in this Paragraph 32.1 and the Ground Lease, from
time-to-time, directly or indirectly, create or otherwise cause to exist any
lien or encumbrance or any other change of title ("Encumbrance") upon the
Leased Property, or any portion thereof or interest therein, whether to
secure any borrowing or other means of financing or refinancing. Any such
Encumbrance shall contain the right to prepay (whether or not subject to a
prepayment penalty) and shall provide that it is subject to the rights of
Lessee under this Lease, provided that any holder of an Encumbrance shall (a)
give Lessee the same notice, if any, given to Lessor of any default or
acceleration of any obligation underlying any such mortgage or any sale in
foreclosure under such mortgage; (b) permit Lessee to cure any such default
on Lessor's behalf within any applicable cure period, and Lessee shall be
reimbursed by Lessor or shall be entitled to offset against Minimum Rent
payments next accruing or coming due for any and all costs incurred in
effecting such cure, including, without limitation, out-of-pocket costs
incurred to effect any such cure (including reasonable attorneys' fees); (c)
permit Lessee to appear and to bid at any sale in foreclosure made with
respect to, and/or any sale by virtue of the exercise of the power of sale
contained in, any such mortgage, and (d) provide that in the event of
foreclosure or other possession of the Leased Property by the Mortgagee, that
the Mortgagee (or other purchaser) shall be bound by the terms and provisions
of this Lease. Upon the reasonable request of Lessor, Lessee shall execute
an agreement to the effect that this Lease shall be subject and subordinate
to the lien of a new mortgage on the Leased Property, and that in the event
of any default or foreclosure under such mortgage, Lessee shall attorn to the
new mortgagee, and as otherwise requested by Lessor on the condition that the
mortgagee execute a non-disturbance agreement recognizing ths Lease and
agreeing, for itself and its successor and assigns, to comply with the
provisions of this Article XXXII.
32.2 LESSEE'S RIGHT TO CURE. Subject to the provisions of Paragraph
32.3, if Lessor breaches any covenant to be performed by it under this Lease,
Lessee, after Notice to and demand upon Lessor, without waiving or releasing
any obligation hereunder, and in addition to any other remedies available to
Lessee, may (but shall be under no obligation at any time thereafter to) make
such payment or perform such act for the account and at the expense of
Lessor. All sums so paid by Lessee and all costs and expenses (including,
without limitation, reasonable attorneys' fees) so incurred, together with
interest thereon from the date on which such sums or expenses are paid or
incurred by Lessee, shall be paid by Lessor to Lessee on demand, but may not
be offset by Lessee against payments of Rent hereunder.
32.3 BREACH BY LESSOR. It shall be a breach of this Lease if Lessor
fails to observe or perform any term, covenant or condition of this Lease on
its part to be performed, and such failure shall continue for a period of
thirty (30) days after Notice thereof from Lessee unless such failure
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cannot with due diligence be cured within a period of thirty (30) days, in
which case such failure shall not be deemed to continue if Lessor, within
said thirty (30) day period, proceeds promptly, continuously and with due
diligence to cure the failure and diligently completes the curing thereof.
The time within which Lessor shall be obligated to cure any such failure
shall also be subject to extension of time due to the occurrence of any
Unavoidable Delay.
ARTICLE XXXIII
33.1 SURVIVAL OF OBLIGATIONS. Anything contained in this Lease to
the contrary notwithstanding, all claims against, and liabilities of, Lessee
or Lessor arising prior to, or in connection with any event occurring prior
to, the date of any expiration or termination of this Lease or the date of
Lessee's surrender of possession, whichever is later, shall survive such
termination or surrender of possession.
33.2 LATE CHARGES; INTEREST. If any interest rate provided for in
any provision of this Lease is based upon a rate in excess of the maximum
rate permitted by applicable law, the parties agree that such charges shall
be fixed at the maximum permissible rate.
33.3 LIMITS OF LESSOR'S LIABILITY. Lessee specifically agrees to
look solely to the assets of Lessor for recovery of any judgment against
Lessor, it being specifically agreed that no constituent shareholder, officer
or director of Lessor shall ever be personally liable for any such judgment
or the payment of any monetary obligation to Lessee. The provision contained
in the foregoing sentence is not intended to, and shall not, limit any right
that Lessee might otherwise have to obtain injunctive relief against Lessor
or Lessor's successors in interest, or any action not involving the personal
liability of Lessor (original or successor). Additionally, Lessor shall be
exonerated from any further liability under this Lease upon Lessor's transfer
or other divestiture of its ownership of the Leased Property, provided that
the assignee or grantee shall expressly assume in writing the obligations of
Lessor hereunder. Furthermore, in no event shall Lessor (original or
successor) ever be liable to Lessee for any indirect or consequential damages
suffered by Lessee from whatever cause.
33.4 ADDENDUM, AMENDMENTS AND EXHIBITS. Any addendum, amendments
and exhibits attached to this Lease are hereby incorporated in this Lease and
made a part of this Lease.
33.5 HEADINGS. The headings and paragraph titles in this Lease are
not a part of this Lease and shall have no effect upon the construction or
interpretation of any part of this Lease.
33.6 TIME. Time is of the essence of this Lease and each and all of
its provisions.
33.7 DAYS. Unless otherwise expressly indicated herein, any
reference to "days" in this Lease shall be deemed to refer to calendar days.
33.8 RENT. Each and every monetary obligation under this Lease
shall be deemed to be "Rent" under this Lease and for all other purposes
under law.
31
<PAGE>
33.9 APPLICABLE LAW. This Lease shall be governed by and construed
in accordance with the laws of the State, but not including its conflicts of
laws rules; thus the law that will apply is the law applicable to a
transaction solely within the State, including parties solely domiciled in
the State.
33.10 SUCCESSORS AND ASSIGNS. The covenants and conditions
contained in this Lease shall, subject to the provisions regarding assignment
(Article XXII), apply to and bind the heirs, successors, executors,
administrators, and assigns of Lessor and Lessee.
33.11 RECORDATION. Lessor and Lessee shall execute with
appropriate acknowledgments and record in the Official Records of the
applicable county, that certain Short Form Lease in the form and content of
Exhibit "C" attached hereto. Lessor and Lessee shall equally share the cost
of recording the Memorandum of Lease.
33.12 PRIOR AND FUTURE AGREEMENTS. This Lease contains all of
the agreements of Lessor and Lessee with respect to any matter covered or
mentioned in this Lease, and no prior agreements or understanding pertaining
to any such matters shall be effective for any purpose. No provision of this
Lease may be amended or supplemented except by an agreement in writing signed
by both Lessor and Lessee or their respective successors in interest. This
Lease shall not be effective or binding on any party until fully executed by
both Lessor and Lessee.
33.13 PARTIAL INVALIDITY. Any provision of this Lease which
shall be held by a court of competent jurisdiction to be invalid, void or
illegal shall in no way affect, impair or invalidate any other provision or
term of this Lease, and such other provision or terms shall remain in full
force and effect.
33.14 ATTORNEYS' FEES. In the event of any action or proceeding
brought by one party against the other under this Lease, the prevailing party
shall be entitled to recover its attorneys' fees in such action or proceeding
from the other party, including all attorneys' fees incurred in connection
with any appeals, and any post-judgment attorneys' fees incurred in efforts
to collect on any judgment.
33.15 AUTHORITY OF LESSOR AND LESSEE. Lessor and Lessee each
hereby represent and warrant that the individuals signing on its behalf are
duly authorized to execute and deliver this Lease on behalf of the
corporation, in accordance with the bylaws of the corporation, and that this
Lease is binding upon the corporation.
33.16 RELATIONSHIP OF THE PARTIES. Nothing contained in this
Lease shall be deemed or construed by Lessor or Lessee, nor by any third
party, as creating the relationship of principal and agent or a partnership,
or a joint venture by Lessor or Lessee, it being understood and agreed that
no provision contained in this Lease nor any acts of Lessor and Lessee shall
be deemed to create any relationship other than the relationship of landlord
and tenant.
33.17 COUNTERPARTS. This Lease may be executed in one or more
separate counterparts, each of which, once they are executed, shall be deemed
to be an original. Such counterparts shall be and constitute one and the
same instrument.
32
<PAGE>
33.18 BROKERS. Lessor and Lessee each warrants that it has had
no dealings with any real estate broker or agent in connection with the
negotiation of this Lease and it knows of no real estate broker or agent who
is entitled to a commission in connection with this Lease. Lessor and Lessee
hereby agree to indemnify the other and to hold the other harmless from and
against any and all costs, expenses, claims, damages, suits, including
attorneys' fees, in any way resulting from claims or demands for commissions
or other compensation from any real estate brokers claiming through such
party with respect to this Lease.
33.19 COMPUTER DISC. In order to facilitate the electronic
filing of this document with the United States Securities Exchange Commission
and other governmental agencies, Lessor shall provide or cause to be provided
to Lessee a computer disc containing all exhibits, schedules and ancillary
documents related to this Lease, formatted in WordPerfect 5.1 Times New Roman
Font 12, upon Lessee's one-time request for same.
33
<PAGE>
WHEREFORE, each of the parties has accepted and agreed by affixing their
respective authorized signatures below as of the date first above written.
"LESSEE" NEW YORK BAGEL ENTERPRISES, INC.,
a Kansas corporation
By: /s/ Richard R. Webb
-------------------------------------
Richard Randall Webb, Secretary
"LESSOR" COMMERCIAL EQUITY, INC.,
a Kansas corporation
By: /s/ Paul R. Hoover
-------------------------------------
Paul R. Hoover, Vice President
34
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION
8621 West 21st Street North, Wichita, Kansas
Lot 1, Westwind 5th Addition, to Wichita, Sedgwick County,
Kansas, containing 18,864 square feet.
<PAGE>
Schedule 1
Lessor: Commercial Equity, Inc.
Lessee: New York Bagel Enterprises, Inc.
Date of Lease: January 20, 1999
Location: 8621 West 21st Street, Wichita, Kansas
1.1 TITLE COMPANY Security Abstract and Title Co., Inc.
434 North Main
Wichita, Kansas 67202
2. STATE. For purposes of the Lease, the term "State" shall mean the State of
Kansas.
3.1 MINIMUM RENT DURING INITIAL TERM. The Minimum Rent during the Initial Term
shall be the aggregate of the following annual rates:
A. Lease Rent
(i) Years 1-5 $1,900
(ii) Years 6 through
end of term $2,090
B. Ground Lease Rent
(i) Commencement of Lease
through March 31, 2002 $1,800
(ii) April 1, 2002
through end of term $1,950
13.2 REPLACEMENT COST. $180,000
18.2 MINIMUM RENT DURING EXTENDED TERMS. The Minimum Rent during each of the
following Extended Terms shall be at the following annual rates:
1st Extended Term $4,603(1)
2nd Extended Term $5,135(1)
- -----------------------
(1) The Minimum Rent during the Extended Terms may be higher if the rent under
the Ground Lease for the Extend Terms determined by the Consumer Price Index
exceeds the minimum rent increase.
<PAGE>
EXHIBIT 10.21
FIRST AMENDMENT TO JOINT VENTURE AGREEMENT
------------------------------------------
THIS FIRST AMENDMENT TO JOINT VENTURE AGREEMENT (this "Amendment") is
made and entered into as of the 15th day of December, 1998,
BY AND BETWEEN NEW YORK BAGEL ENTERPRISES, INC.,
a Kansas corporation,
hereinafter referred to as
"NYBE"
AND WESTERN COUNTRY CLUBS, INC.,
a Colorado corporation,
hereinafter referred to as
"WCCI"
WHEREAS, NYBE and WCCI entered into that certain Joint Venture Agreement
dated October 27, 1998 (the "Agreement");
WHEREAS, the parties hereto acknowledge and agree that the Project Entity
shall assume the real property rental payments concerning the Facility (as such
term is defined in the Agreement) located at 310 North Rock Road, Wichita,
Kansas ("The Kansas Facility") beginning January 15, 1999;
WHEREAS, the parties hereto acknowledge and agree that WCCI shall own
sixty percent (60%) and NYBE shall own forty percent (40%) of the equity of the
Project Entity which owns the Kansas Facility; and
WHEREAS, the parties hereto desire to amend certain terms and conditions
of the Agreement as set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. INCORPORATION OF RECITALS. The parties agree that the Agreement is
hereby modified, altered and amended to incorporate the whereas clause recitals
set forth above.
1
<PAGE>
2. AMENDMENT TO SECTION 3.5. The footnote designated with an asterisk
("*") to Section 3.5 "Facility Development" of the Agreement is hereby modified,
altered and amended with respect to the Kansas Facility only. The footnote is
hereby amended and replaced as follows:
Prior to the commencement of construction on the Kansas 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
finance the conversion costs with respect to the Kansas Facility as
follows: WCCI shall pay in cash the first Eighty-seven Thousand Dollars
($87,000) as paid-in capital, Ten Thousand Dollars ($10,000) of which
shall be paid by the Project Entity to WCCI as a development/license
fee, and WCCI shall finance the next Seventy-five Thousand Dollars
($75,000) through the procurement of a loan with an interest rate of
seven percent (7%) and a duration of three (3) years. The Project
Entity shall then be responsible for any and all conversion costs with
respect to the Kansas Facility over the One Hundred Sixty-two Thousand
Dollars ($162,000) of combined equity and debt through an infusion of
additional equity.
3. AMENDMENT TO EXHIBIT 3.4(A). With regards to the Kansas Facility
only, the second sentence of Exhibit 3.4(A) entitled "NYBE Responsibilities
Schedule" is hereby amended by deleting the sentence and substituting in place
thereof the following:
In consideration for performing these services, the Project Entity
shall pay a fee of one percent (1%) of Net Sales to NYBE each month.
4. AMENDMENT TO EXHIBIT 3.4(B). With regards to the Kansas Facility
only, the second sentence of Exhibit 3.4(B) entitled "WCCI's Responsibilities
Schedule" is hereby amended by deleting the sentence and substituting in place
thereof the following:
Hire, supervise, manage and oversee the day to day operations of the
Atomic Burrito restaurants developed pursuant to the Agreement for a
management fee equal to three percent (3%) of the "Gross Receipts." Gross
Receipts as defined in this paragraph shall mean all gross revenue during
each month of every kind or nature related to the Kansas Facility,
including without limitation all restaurant revenue posted whether it is
collected or remains uncollected, all charges for other products,
services, and facilities and vending machine receipts, but excluding
sales taxes or other taxes collected from customers for transmittal to
appropriate taxing authorities.
5. OTHER TERMS. All other terms and conditions in the Agreement shall
remain unchanged and nothing herein shall affect the rights and obligations of
the parties hereto under the Agreement except as modified herein.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
First Amendment to Joint Venture Agreement as of the day and year first above
written.
NEW YORK BAGEL ENTERPRISES, INC.
By: /s/ Robert J. Geresi
-------------------------------------
(Name) Robert J. Geresi
(Title) Chief Executive Officer
"NYBE"
WESTERN COUNTRY CLUBS, INC.
By: /s/ James E. Blacketer
-------------------------------------
(Name) James E. Blacketer
(Title) Chief Executive Officer
"WCCI"
3
<PAGE>
EXHIBIT 10.22
PROMISSORY NOTE
Borrower: New York Bagel Enterprises, Inc. Lender: _____________________
115 East 8th Street _____________________
Stillwater, Oklahoma 74074 _____________________
---------------------------------------------------------------------------
Principal Amount: $50,000.00 Interest Rate: 12.750%
Date of Note: January __, 1999
PROMISE TO PAY. New York Bagel Enterprises, Inc. ("Borrower") promises to pay
to _________________ ("Lender"), or order, in lawful money of the United States
of America, the principal amount of Fifty Thousand & 00/100 Dollars
($50,000.00), together with interest at the rate of 12.750% per annum on the
unpaid principal balance from January __, 1999, until paid in full.
PAYMENT. Borrower will pay this loan in one principal payment of $50,000.00
plus interest on December 31, 1999. This payment due December 31, 1999, will
be for all principal and accrued interest not yet paid. In addition,
Borrower will pay regular quarterly payments of all accrued unpaid interest
due as of each payment date, beginning March 31, 1999, with all subsequent
interest payments to be due on the last day of each quarter after that. The
annual interest rate for this Note is computed on a 365/360 basis; that is,
by applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual
number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to any unpaid collection costs and any late
charges, then to any unpaid interest, and any remaining amount to principal.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue to
make payments under the payment schedule. Rather, they will reduce the
principal balance due.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other
agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this Note or
perform Borrower's obligations under this Note or any related document. (d)
Any representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now
or at the time made or furnished. (e) Borrower becomes insolvent, a receiver
is appointed for any part of Borrower's property, Borrower makes an
assignment for the benefit of creditors, or any proceeding is commenced
either by Borrower or against Borrower under any bankruptcy or insolvency
laws. (f) Any creditor tries to take any of Borrower's property on or in
which Lender has a lien or security interest. This includes a garnishment of
any of Borrower's accounts with Lender. (g) Any of the events described in
this default section occurs with respect to any guarantor of this Note. (h)
A material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the indebtedness is
impaired. (i) Lender in good faith deems itself insecure.
<PAGE>
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid balance
on this Note and all accrued unpaid interest immediately due, without notice,
and then Borrower will pay that amount. Upon default, including failure to
pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the interest rate on this Note to 25.000% per annum.
The interest rate will not exceed the maximum rate permitted by applicable
law. Lender may hire or pay someone else who is not a salaried employee of
Lender to help collect this Note if Borrower does not pay. Borrower will be
liable for all reasonable costs incurred in the collection of this Note,
including, without limitation, court costs, attorneys' fees, and collection
agency fees, except that such costs of collection shall not include the
recovery of both attorneys' fees and collection agency fees. This Note has
been delivered to Lender and accepted by Lender in the State of Kansas. If
there is a lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts of Sedgwick County, the State of Kansas. Lender
and Borrower hereby waive the right to any jury trial in any action,
proceeding, or counterclaim brought by either Lender or Borrower against the
other. Subject to the provisions on arbitration, this Note shall be governed
by and construed in accordance with the laws of the State of Kansas.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest
in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender
all Borrower's right, title and interest in and to, Borrower's accounts with
Lender (whether checking, savings, or some other account), including, without
limitation, all accounts held jointly with someone else and all accounts
Borrower may open in the future, and all trust accounts for which the grant
of a security interest would be prohibited by law. Borrower authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all
sums owing on this Note against any and all such accounts, and, at Lender's
option, to administratively freeze all such accounts to allow Lender to
protect Lender's charge and setoff rights provided in this paragraph.
ARBITRATION: Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Note or otherwise, including, without limitation, contract
and tort disputes, shall be arbitrated pursuant to the Rules of the American
Arbitration Association, upon request of either party. No act to take or
dispose of any collateral securing this Note shall constitute a waiver of
this arbitration agreement or be prohibited by this arbitration agreement.
This includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any collateral securing this Note,
including any claim to rescind, reform, or otherwise modify any agreement
relating to the collateral securing this Note, shall also be arbitrated;
provided, however, that no arbitrator shall have the right or the power to
enjoin or restrain any act of any party. Judgment upon any award rendered by
any arbitrator may be entered in any court having jurisdiction. Nothing in
this Note shall preclude any party from seeking equitable relief from a court
of competent jurisdiction. The statute of limitations, estoppel, waiver,
laches, and similar doctrines which would otherwise be applicable in an
action brought by a party shall be applicable in any arbitration proceeding,
and the commencement of an arbitration proceeding shall be deemed the
commencement of an action for these purposes. The Federal Arbitration Act
shall apply to the construction, interpretation, and enforcement of this
arbitration provision.
YEAR 2000 REPRESENTATIONS AND WARRANTIES. (1) Borrower has (i) begun
analyzing the operations of Borrower and its subsidiaries that could be
adversely affected by failure to become Year 2000 compliant (that is, that
computer applications, embedded microchips and other systems will be able to
2
<PAGE>
perform date-sensitive functions prior to and after December 31, 1999) and
(ii) developed a plan for becoming Year 2000 compliant in a timely manner,
the implementation of which is on schedule in all material respects.
Borrower reasonably believes that it will become Year 2000 compliant for its
operations and those of its subsidiaries on a timely basis except to the
extent that a failure to do so could not reasonably be expected to have a
material adverse effect upon the financial condition of Borrower.
(2) Borrower reasonably believes any suppliers and vendors that are material to
the operations of Borrower or its subsidiaries and affiliates will be Year
2000 compliant for their own computer applications except to the extent that
a failure to do so could not reasonably be expected to have a material
adverse effect upon the financial condition of Borrower.
(3) Borrower will promptly notify Lender in the event Borrower determines that
any computer application which is material to the operations of Borrower, its
subsidiaries, or any of its material vendors or suppliers will not be fully Year
2000 compliant on a timely basis, except to the extent that such failure could
not reasonably be expected to have a material effect upon the financial
condition of Borrower.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person
who signs, guarantees or endorses this Note, to the extent allowed by law,
waive presentment, demand for payment, protest and notice of dishonor. Upon
any change in the terms of this Note, and unless otherwise expressly stated
in writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length
of time) this loan, or release any party or guarantor or collateral, or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that the Lender
may modify this loan without the consent of or notice to anyone other than
the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES
RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
NEW YORK BAGEL ENTERPRISES, INC.
By_________________________________________________
Richard Randall Webb, Chief Financial Officer
3
<PAGE>
EXHIBIT 10.23
Schedule of January 1999 Promissory Notes of New York Bagel Enterprises, Inc.
payable to the order of certain stockholders.
Lender
1. Robert J. Geresi
2. Paul T. Sorrentino
3. Vincent J. Vrana
4. David L. Murfin
Promissory Note Date
1. January 15, 1999
2. January 18, 1999
3. January 18, 1999
4. January 15, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINACIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AS OF AND FOR THE
FIFTY-TWO WEEK PERIOD ENDED DECEMBER 27, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> DEC-27-1998
<CASH> 217,775
<SECURITIES> 0
<RECEIVABLES> 61,855
<ALLOWANCES> 0
<INVENTORY> 310,850
<CURRENT-ASSETS> 617,089
<PP&E> 8,089,516
<DEPRECIATION> 1,768,278
<TOTAL-ASSETS> 7,956,178
<CURRENT-LIABILITIES> 3,252,879
<BONDS> 49,464
0
0
<COMMON> 46,675
<OTHER-SE> 3,718,404
<TOTAL-LIABILITY-AND-EQUITY> 7,956,178
<SALES> 18,844,086
<TOTAL-REVENUES> 18,987,623
<CGS> 6,856,996
<TOTAL-COSTS> 20,129,135
<OTHER-EXPENSES> 4,683,645
<LOSS-PROVISION> 3,900
<INTEREST-EXPENSE> 153,901
<INCOME-PRETAX> (5,982,958)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,982,958)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,982,958)
<EPS-PRIMARY> (1.28)
<EPS-DILUTED> (1.28)
</TABLE>
