SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
JRECK SUBS GROUP, INC.
Name of Small Business Issuer in its charter)
Colorado 84-1317674
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
24685 New York State Route 37, Watertown, New York 13601
(Address of principal executive offices) (Zip Code)
(315) 782-0760
(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of Each Exchange on which
to be so registered each class is to be registered
None None
Securities to be registered pursuant to section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
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PART I
Item 1. Description of Business
Background
In the summer of 1969 five school teachers from the Carthage, New York
Central School System - named Jerry, Richard, Ellis, Charles and Keith - JRECK -
commenced a business of preparing and serving submarine style sandwiches from an
old school bus just outside of the main gate of Camp Drum. The business was
incorporated in 1974 in the State of New York under the name JRECK Subs, Inc.
In May, 1996 the Company concluded a reverse acquisition wherein all of
its capital stock was acquired by Circa Media, Inc., a Colorado corporation
formerly engaged in reproducing archival, public domain art and photographs in
digital form. Circa Media, Inc. was incorporated on July 19, 1995, and changed
its name to JRECK Subs Group, Inc. ("Company") on May 7, 1996. The former common
shareholders of JRECK Subs, Inc. received 5,000,000 shares of Common Stock of
the Company in the acquisition, or 56% of the outstanding shares, and the former
Series A and Series B Preferred Stocholders of Jreck Subs, Inc. received 700,000
shares of Series A Preferred Stock and 350,000 shares of Series B Preferred
Stock of the Company, respectively.
The Company consists of JRECK Subs Group, Inc. and its wholly-owned
subsidiaries including JRECK
Subs, Inc., a New York corporation, Leovera, Inc. ("Leovera"), a Florida
corporation, Admiral Subs of Washington,
Inc. ("ASWI"), a Washington corporation, Little King, Inc. ("Little King"), a
Delaware corporation, Pastry Products
Producers, LLC, a New York limited liability company ("Pastry Products"), and
Admiral's Fleet, Inc. ("AFI"), a
Washington corporation and AFI's wholly-owned subsidiaries, Richey Enterprises,
Inc., a Washington corporation,
and Quality Franchise Systems, Inc., a Delaware corporation.
Company Operations
The Company is a multiple-concept franchisor. The Company began with
the JRECK Subs franchise which currently has 51 restaurants. JRECK Subs offers a
menu of high quality, fresh submarine sandwiches, soups and hot and cold side
order items as well as a full line of bagel offerings in selected franchise
locations based on the Lox, Stock & Bagel menu which certain proprietary rights
were acquired by the Company in 1990.
During 1997, the Company commenced a growth strategy through strategic
alliances and acquisitions which included the following:
C Hymie's Bagels, a 8 unit chain of company owned bagel shops in Tampa,
Florida along with a bakery;
C Seawest Subs, a 54 unit submarine sandwich chain primarily located in
Seattle, Washington;
C Little King, a 51 unit submarine sandwich chain primarily located in
Nebraska;
C Georgio's, a 6 unit submarine sandwich chain primarily located in
Seattle, Washington;
C Mountain Mike's Pizza, a 75-unit pizza chain primarily located in
northern and central California; and
C The completed acquisition of a 100% interest in Pastry Products Producers, LLC
which supplies the JRECK Subs restaurants with all of their bakery products.
JRECK Subs Menu and Stores
The Company's JRECK Subs franchises offer a menu of different submarine
sandwiches, as well as a full line of bagel offerings and additional breakfast
items in selected franchise locations based on the Lox, Stock & Bagel menu.
JRECK Subs' emphasis in the submarine sandwich business is to offer a wider
selection of menu items and higher quality ingredients (such as rib-eye steak)
cooked on the premises. The food preparation area is open to customer view to
engage customer interest and to showcase freshness and cleanliness. The food
preparation process is designed to deliver a completed food order within 60
seconds. Sandwich menu prices range from $2.50 to $5.00.
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In addition, JRECK Subs offers a selection of soft drinks, on-premises baked
cookies and deep fried items such as french fries, mushrooms, and cheese sticks.
As of September 30, 1997 there were 51 JRECK Subs franchisees, all of
which are located in New York State. Each location is designed as a "dine in"
location, although a number of franchises have drive up windows as well. Located
in strip shopping centers, shopping malls, and free standing buildings,
restaurants generally range from 1,000 to 2,000 square feet in size with 1,400
to 1,500 square feet being typical. The typical JRECK Subs store is decorated
with wood, brass tables and chairs, and brass lamps with green shades to impart
a friendly and cozy atmosphere. The green and white color scheme of the JRECK
"Admiral" signage is carried throughout the interior.
As is typical in sandwich shops, a majority of store sales occur during
lunch and the remainder during the dinner hours. Dine in and take out (including
delivery) typically comprise 60% and 40% of sales, respectively.
Individual franchisees can elect to offer catering services or home delivery.
Each franchisee leases or owns store facilities. Neither the Company
nor any of its affiliates leases store premises to franchisors.
Franchise Program
As of September 30, 1997 the Company had approximately 250 restaurants
of which 230 are franchised locations. The Company obtains prospective
franchisees, from its current and former employees, from referrals from existing
franchisees and from franchise shows.
With respect to its JRECK Subs store, the Company assists franchisees
with selecting suitable locations by the use of demographic and traffic pattern
analysis, an analysis of the proximity of business and community resources, and
competition; advises on the negotiation of lease terms and store design; assists
with sourcing of food product supply; and purchase of furniture and fixtures.
The Company's experience is that smaller towns with populations under 10,000 are
prime locations for its franchisees due to the lack of competition from larger
fast food chains and the high quality of its products. Franchisees are required
to purchase all their baked goods from the Company, such as submarine sandwich
rolls. Bakery products are supplied by the Company's bakeries in Watertown, New
York and Tampa, Florida to franchises in those states.
The current franchise fee for a JRECK Subs restaurant is $10,000, plus
a continuing franchise royalty equal to 6% of revenues. A JRECK Subs restaurant
typically requires an additional $35,000 to $50,000 in equipment, furniture,
fixtures, advertising, inventory and other pre-opening costs.
The Company's future growth will be focused on increasing the number of
franchised Restaurants, through both traditional and non-traditional
Restaurants.
The primary criteria considered by the Company in the review and
approval of franchisees are prior experience in operating restaurants or other
comparable business experience, and capital available for investment.
The Company maintains a staff of operations personnel to train and
assist franchisees in opening new Restaurants and to monitor the operations of
existing Restaurants. These services are provided as part of the Company's
franchise program. New franchisees are required to complete a two-week training
program which consists of formal classroom training and in--restaurant training,
including human resources, accounting, purchasing and labor and food handling
laws. Upon the opening of a new franchised Restaurant, Company representatives
are typically sent to the Restaurant to assist the franchisee during the opening
period. These Company representatives work in the Restaurant to monitor
compliance with the Company's standards and provide additional on-site training
of the franchisee's restaurant personnel.
The Company also provides development and construction support service
to its franchisees. Plans and
specifications for the restaurants must be approved by the Company before
improvements begin. The Company's
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personnel typically visit the facility during construction of leasehold
improvements to meet with the franchisee's site contractor and to verify that
construction standards are met.
To maintain uniformly high standards of appearance, service, food and
beverage quality, the Company has adopted policies and implemented a monitoring
program. Franchisees are required to adhere to the Company's specifications and
standards in connection with the selection and purchase of products used in the
operation of the Restaurant. Detailed specifications are provided for the
products used, and franchisees must request the Company's approval for any
deviations. Except for submarine sandwich rolls, and other baked goods, the
Company does not generally sell equipment, supplies or products to its
franchisees. The various franchise agreements require franchisees to operate
their restaurants in accordance with the Company's requirements. Ongoing advice
and assistance is provided to franchisees in connection with the operation and
management of each restaurant.
Suppliers
In October 1997, the Company completed its acquisition of Pastry
Products in Watertown, New York. Pastry Products supplies the Company's JRECK
Subs franchises with all of its bakery products. Pastry Products sells
approximately 95% of its products to JRECK Subs franchises. The Company does not
believe that it would have difficulty in obtaining an alternate supplier to
Pastry Products due to the large number of alternate bakeries in New York State.
In connection with the Company's purchase of Hymie's Bagels, the
acquisition included a bakery which provides the bagels for all of the Hymie's
Bagel shops. The Company does not believe that it would have difficulty in
obtaining an alternate supplier to the Hymie's Bagels chain due to the large
number of alternate bakeries in Florida.
The Company's various franchisees obtain meat, cheese, vegetable and
paper products from several suppliers. Other than rolls used at the Company's
Little King and Seawest Subs restaurants, only fresh, never frozen, and Grade A
products are used.
Recent Acquisitions
In June 1997, the Company acquired all of the outstanding shares of
Leovera, a company which operates the Hymie's Bagel 8 unit chain and a bagel
bakery in Tampa, Florida, for $200,000 in cash and the issuance of 367,500
shares of the Company's Common Stock. The Company is adding submarine sandwich
counters to each location. In connection with acquisition, the Company entered
in a five-year management agreement with a principal of Leovera with an initial
management fee of $85,000 for the first year.
In June 1997, the Company, through its ASWI subsdiary, acquired all of
the outstanding shares of Seawest Sub Shops, Inc., headquartered in Bellevue,
Washington. Seawest Subs has 53 franchised submarine sandwich shops and one
company-owned store. The consideration included $172,000 in cash, the issuance
of options to purchase 100,000 shares of the Company's common stock at a price
of $.001 per share for 15 years (valued at $350,000) and the assumption of
certain liabilities personally guaranteed by the former president of Seawest Sub
Shops, Inc. The optionees have the right to require the Company to repurchase
these shares at the greater of their "fair market value" (defined to be the
average of the high and low sales prices on a public market) or $3.25 per share,
but in no event more than 10,000 shares per month. The optionees were also
granted piggy back registration rights. The options become exercisable on a
cumulative basis at 25% on each of December 19, 1997, May 19, 1998, November 19,
1998 and May 19, 1999. In connection with this acquisition, the Company entered
into a noncompete agreement with the former president of Seawest Sub which calls
for monthly payments of $8,000 which commenced in June 1997 for a twelve month
period.
In June 1997, ASWI sold the net assets of Seawest Sub to Admiral's Subs
Group, Inc. ("ASGI"), a company wholly-owned by a director of the Company. The
Company also issued a $350,000 note to ASGI personally guaranteed by this
director. In October 1997, ASGI defaulted on the note and the Company accepted
the net assets of Seawest Sub for satisfaction of the note and the release of
the personal guarantee of this director.
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In July 1997, the Company acquired all of the outstanding stock of
Little King, Inc., a 51-unit submarine shop including the assets of nine
corporately-owned restaurants. The consideration consisted of $250,000 cash,
500,000 shares of the Company's common stock immediately issued, 700,000 shares
of the Company's common stock to be issued within 12 months plus 50,000
contingent shares based on Little King franchising revenues or total revenues
exceeding certain parameters for the year ending December 31, 1998. The
acquisition also provided the principal of Little King an option to repurchase
Little King from the Company if the stock price of the Company is not at least
$1.50 per share on the second anniversary of the closing with the repurchase
based on the Company receiving back all of the Company's shares issued, any
funds invested by the Company into Little King and a fair market value
determination. The term of the acquisition also provided that in the event the
Company files bankruptcy within three years of the closing and the bankruptcy is
not dismissed within 90 days, the principal of Little King is granted the first
option to repurchase the Little King stock from the Company for $25,000. In
connection with the acquisition of Little King, the company entered into
employment agreements with Sid Wertheim and Robert Wertheim to act as president
and vice-president of Little King respectively. Mr. Sid Wertheim's employment
agreement is for a seven-year period with an initial salary of $54,000 subject
to annual increases up to 20% based on operating performance. Mr. Robert
Wertheim's employment agreement is for a ten-year period with an initial salary
of $45,000 subject to annual increases up to 20% based on operating performance.
In August 1997, the Company through its AFI subsidiary acquired all of
the outstanding stock of Richey Enterprises, Inc., a Washington corporation,
which operates 6 Georgio's Sub shops of which two are corporately-owned. The
consideration consisted of 93,794 shares of the Company's common stock and a
stock price guarantee if any sale of the Company's stock by the seller within 30
days after the anniversary of the date of the close of escrow is less than 80%
of the price of the stock at the close of escrow. In connection with the
acquisition of Georgio's Sub, the Company entered into a consulting/noncompete
agreement with William and Colleen Richey which calls for a sixty-day agreement
with an initial fee of $10,000 and a monthly consulting fee of $3,750. After the
initial sixty-days, the agreement is subject to mutual renewal on a
month-to-month basis. The noncompete agreement is in effect during the period of
the consulting agreement and two years after any termination of the consulting
agreement.
In September 1997 the Company, through its AFI subsidiary acquired all
of the outstanding shares of Quality Franchise Systems, Inc., the franchisor of
Mountain Mike's Pizza, a 75-unit pizza chain located primarily in northern and
central California. The consideration consisted of 899,967 shares of the
Company's common stock, 120 shares of the Company's Series C preferred stock and
$250,000 cash. In addition, the shareholders of QFS are eligible to receive
150,000 additional shares of the Company's common stock if the stock price does
not exceed $3.50 for 21 consecutive days between October 1, 1997 and January 31,
1998, and up to 500,000 additional shares if the Mountain Mike's income from
franchising operations, as defined, exceed $500,000 for any consecutive
twelve-month period from October 1, 1997 to December 31, 1998.
Acquisition of Sobik's - In December 1997, the Company entered into an agreement
to acquire SBK Franchise Systems, Inc., franchiser of 48 Sobik's Sandwich Shops
located primarily in central Florida from Interfoods of America, Inc. The
purchase price consisted of $100,000 in cash, a $500,000 note and approximately
186,000 shares of the Company's common stock. The acquisition is pending a
fairness hearing scheduled in January 1998 by SBK Franchise Systems, Inc.
shareholders.
Acquisition of Li'l Dino's - In December 1997, the Company acquired Li'l Dino
Corporation, franchiser of 43 Li'l Dino's Bagel Deli Grill located primarily in
North Carolina. The purchase price consisted of a $400,000 note and
approximately 731,000 shares of
the Company's common stock.
The Company has also entered into co-branding agreements with Manhattan
Bagels, and with two convenience store chains in New York State: Expressmart and
Pit Stop. The Company's experience with co-branding has been favorable, with the
Lox, Stock & Bagels food menu which was incorporated as the breakfast menu for
its JRECK Subs locations. Management believes that co-branding will enable it to
achieve penetration in additional markets with relatively little capital
expenditure.
Starbucks Coffee is currently test marketing its products in five JRECK
Subs franchised locations. If this test marketing is successful, the Company
will expand the Starbucks program to additional JRECK Subs franchised locations.
Competition
The fast food restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional or
national economic conditions, changes in consumer tastes, consumer concerns
about the nutritional quality of quick-service food and increases in the number
of, and particular locations of, competing restaurants. Factors such as
inflation, increases in food, labor and energy costs, the availability and cost
of suitable sites, fluctuating interest and insurance rates, state and local
regulations and licensing requirements and
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the availability of an adequate number of hourly paid employees can also
adversely affect the fast food restaurant industry. Multi-unit restaurant chains
like the Company can also be substantially adversely affected by publicity
resulting from food quality, illness, injury, or other health concerns. Major
chains, which have substantially greater financial resources and longer
operating histories than the Company, dominate the fast food restaurant
industry. The Company competes primarily on the basis of location, food quality
and price. Changes in pricing or other marketing strategies by these competitors
can have an adverse impact on the Company's sales, earnings and growth. There
can be no assurance that the Company will be able to compete effectively against
its competitors. In addition, with respect to the sale of franchises, the
Company competes with many franchisors of restaurants and other business
concepts for qualified and financially capable franchisees.
Regulation
The Company is subject to a variety of federal, state, and local laws
affecting the conduct of its business. Operating restaurants are subject to
various sanitation, health, fire and safety standards and restaurants under, or
proposed for construction, are subject to state and local building codes, zoning
restrictions and alcoholic beverage regulations. Difficulties in obtaining or
failure to obtain required licenses or approvals could delay or prevent the
development or opening of a new restaurant in a particular area. The Company is
also subject to the Federal Fair Labor Standards Act, which governs minimum
wages, overtime, working conditions and other matters, and the Americans with
Disabilities Act, which became effective in January 1992. The Company believes
that it is in compliance with such laws, and that its Restaurants have all
applicable licenses as required by governmental authorities.
The Company believes that it is in compliance with the applicable
federal and state laws concerning designated non-smoking and smoking areas in
its Company operated restaurants.
The Company is subject to regulations of the Federal Trade Commission
(the "FTC") and various states relating to disclosure and other requirements in
the sale of franchises and franchise operations. The FTC's regulations require
the Company to timely furnish prospective franchisees a franchise offering
circular containing prescribed information. Certain state laws also require
registration of the franchise offering with state authorities. Other states
regulate the franchise relationship, particularly concerning termination and
renewal of the franchise agreement. The Company believes that it is in
compliance with the applicable franchise disclosure and registration regulations
of the FTC and the various states that it operates in.
While the Company intends to comply with all federal, state and foreign
laws and regulations, there can be no assurance that it will continue to meet
the requirements of such laws and regulations, which, in turn, could result in a
withdrawal of approval to franchise in one or more jurisdictions. Any such loss
of approval may have a material adverse effect upon the Company's ability to
successfully market its franchises. Violations of franchising laws and/or state
laws and regulations regulating substantive aspects of doing business in a
particular state could subject the Company and its affiliates to rescission
offers, monetary damages, penalties, and/or injunctive proceedings. The state
laws and regulations concerning termination and non-renewal of franchisees are
not expected to have a material impact on the Company's operations. In addition,
under court decisions in certain states, absolute vicarious liability may be
imposed upon franchisors based upon claims, there can be no assurance that
existing or future franchise regulations will not have any adverse effect on the
Company's ability to expand its franchise program.
Business Strategy
The Company's business strategy is to increase its franchise revenue
base through continuing franchising of JRECK Subs shops and the affiliated
regional companies it has acquired. Each of these companies has a strong track
record of regional franchise brand recognition and long-term franchise operating
history in their respective markets.
The Company's core business, JRECK Subs, will continue to expand in New
York, Florida and other eastern seaboard areas. The Company seeks to be the
dominant sub chain in the New York state region. It believes there is
significant opportunity to increase store sales penetration and franchise
revenue through its existing franchisees.
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The typical fast food customer frequents one franchise for the majority
of purchases but also relies on one or two additional concepts and a number of
specialty restaurants. Increasing sales and franchise revenues through existing
franchisees is generally more profitable than through new franchises because
they do not require significant additional financing expenses, training calls or
other additional administrative expenses.
The Company intends to continue to supplement internal growth with
strategic acquisitions of existing fast food franchisees. The strategic
acquisition of complementary brands which are proven revenue generators in their
established markets allows the Company to grow more rapidly at less cost than
would be possible through internal growth alone. The Company has the facilities
and the management to support a larger distribution operation, therefore it
believes that it can reduce the operating expenses of the acquired businesses as
well as use economies of scale to increase gross sales, franchise revenue,
market share, and net profits. The Company is currently seeking attractive fast
food franchise businesses to acquire, but there are no assurances that the
Company will be able to acquire an ongoing business at a favorable price or that
any such acquisition would ultimately be successful.
Employees
As of September 30, 1997, the Company had approximately 170 employees
consisting of 30 administrative employees, 110 employees in the Company's 20
corporate restaurants and 30 employees in bakery operations.
Trademarks
The Company markets several products under the JRECK Subs, Seawest Sub
Shops, Little King and Mountain Mike's Pizza labels in addition to the Georgio's
and Hymie's Bagel labels.
With respect to the "JRECK Subs" label, the Company has registered this
Mark on the Principal Register of the United States and Trademark Office ("PTO")
on October 14, 1975 (Registration No. 1,022,898) and the Company has filed all
required affidavits for, and has renewed, this Mark. On May 9, 1997, the Company
filed an application with the PTO for registration of one of its principal
trademarks, the "Admiral J" logo (Application 75/289578). As of September 30,
1997, the Company has yet to receive Principal Register federal registration for
the "Admiral J" logo.
The "Seawest Sub Shops" has registered trademarks, names, symbols and
designs on the Principal Register
of the PTO on the following: "Original Deli Taste Without The Cost Logo"
(Registration No. 1,675,510, dated
February 11, 1992), "Full Boat" (Registration No. 1,761,574, dated March 30,
1993), "Destroyer" (Registration No.
1,761,573, dated March 30, 1993), "Enough for two or just for you" (Registration
No. 1,764,733, dated April 13,
1993), "Seawest Sub Shops" (Registration No. 1,703,897, dated July 28, 1992),
"Substantially More:" (Registration
No. 1,772,028, dated May 18, 1993 and "Sub Shop" (and Design) (Registration No.
1,862,112, dated November 8,
1994). In addition the trade name "Seawest Sub Shops" is registered as a
service mark with the State of Washington,
under Registration Number 020443 as of March 29, 1991. The Company has also
registered in Canada its
"Submarine Design Logo" (TMA 407,629), dated February 5, 1993.
The "Little King" service mark and design was registered on the
Principal Register of the PTO on April 12, 1977 (Service Mark No. 1,063,555).
The service mark "Royal Treat" was registered on the Principal Register of the
PTO on October 29, 1991 (Service Mark No. 1,662,623). The service mark "Little
King B America's Greatest Hero" was registered in Nebraska on February 2, 1983.
The service mark "The Little King - Where a Sandwich is a Complete Meal" and
design was registered in Iowa on December 22, 1975 and in California on December
30, 1975.
All required affidavits of use and renewals have been filed.
The "Mountain Mike's" name, service mark and design was registered on
the Principal Register of the PTO on September 15, 1992 (Registration Nos.
1,716,962 and 1,716,963). The Company's new mark and design for "Mountain Mike's
Pizza" was registered on the Principal Register of the PTO on October 1, 1996
(Registration No. 2,004,536). The Company filed for registration the slogan
"Pizza the way it oughta be" on the PTO in September 1996 (Application No.
75/174377). The Company has been informed by the PTO of a potential conflict
between its slogan and the slogan "Pizza, the way Pizza was meant to be" used by
Godfather's Pizza. The Company and its
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trademark counsel are evaluating options regarding the registration of this
slogan. The slogan is still in use in the Mountain Mike's Pizza system.
Item 2. Management's Discussion and Analysis or Plan of Operation
Jreck Subs Group, Inc.
The following discussion regarding the financial statements of the
Company should be read in conjunction with the financial statements and notes
thereto.
The following discussion and analysis contains forward-looking
statements involving risks and uncertainties that may cause the Company's actual
results to differ materially. Those risks and uncertainties include, but are not
limited to, economic, competitive, industry and market factors affecting the
operations, market products and prices of not only the company but also its
franchisees.
Results of Operations
The results of operations for the nine and three months ended September
30, 1997 reflect three months of operations from Hymie's Bagels, and one month
each from Little King Subs and Georgio's Subs. The results of operations do not
reflect any results from the Company's acquisitions of Mountain Mike's Pizza and
Seawest Sub since they were completed near or after September 30, 1997 and are
considered immaterial.
The Company had a net loss of $1,662,887 for the nine months ended
September 30, 1997, compared to a net loss of $41,231 for the same period in
1996. The increase in the net loss is primarily the result of costs associated
with acquisitions and equity financing during the first nine months of 1997.
The revenue of the Company increased $202,195 or 51.5% to $594,453 for
the nine months ended September 30, 1997, from $392,258 for the same period in
1996. The revenue of the Company increased $256,885 or 182.7% to $397,468 for
the three months ended September 30, 1997, from $140,583 for the same period in
1996. The increase is primarily due to the acquisitions of businesses made
during the quarter.
Cost and expenses applicable to revenue increased $107,262 or 700.0% to
$122,658 for the nine months ended September 30, 1997 from $15,396 for the same
period in 1996. Cost and expenses applicable to revenue increased $106,965 or
1707.1% to $113,231 for the three months ended September 30, 1997 from $6,266
for the same period in 1996. This increase is primarily due to the acquisitions
of businesses made during the quarter.
Selling, general and administrative costs increased $285,001, or
108.3%, to $548,144 for the nine months ended September 30, 1997 from $263,143
for the same period in 1996. Selling, general and administrative costs increased
$252,650 or 215.6% to $369,818 for the three months ended September 30, 1997
from $117,168 for the same period in 1996. The increase is primarily due to
increased costs associated with the acquisitions of businesses made during the
quarter.
Income from the Company's bakery subsidiary was $22,680 for the nine
months ended September 30, 1997 and $0 for the quarter ended September 30, 1997.
There was no income from that source during the same periods in 1996.
Liquidity and Capital Resources
Working capital at September 30, 1997 was a deficit of $616,294
compared with $541,873 at December 31, 1996, an increase of $74,421 or 13.7%.
The increase is attributable to increases in accounts payable and accrued
expenses of $566,438 and an increase in loans payable of $514,030 resulting from
the assumption of certain liabilities in connection with the Company's
acquisitions of businesses during the quarter.
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Goodwill and other assets at September 30, 1997 were $6,281,916
compared with $2,812,294 at December 31, 1996, an increase of $3,469,622. The
increase is primarily attributable to the Company's acquisition of Hymie's
Bagel, Georgio's Subs, Little King and Mountain Mike's Pizza.
The Company's primarily capital requirements are for repayment of
$1,250,042 in loans payable. The Company's capital requirements are anticipated
to be funded through debt and/or equity financing. There is no assurance that
additional funding will be available, or that, if available, it can be obtained
on terms favorable to the Company. Failure to obtain such funding could
adversely affect the Company's financial condition.
Little King:
Operations as the Little King subsidiary of the Company commenced on
September 1, 1997. Income for the month of September 1997 amounts to $34,526.
There were no costs and expenses applicable to revenue for the period. Selling,
general and administrative costs were $45,547. Amortization of goodwill amounted
to $16,635.
Georgio's:
Operations of the Georgio's subsidiary (through the Company's AFI
subsidiary) commenced in August 1997. Sales for the period ended September 30,
1997 were $61,551. Costs and expenses applicable to revenue for the period
amounted to $25,736. Selling, general and administrative costs were $30,302.
Other income totaled $2,954.
Hymie's Bagels:
In July 1997, the Company acquired the stock of Leovera which owned
eight Hymie's Bagels along with a bakery that principally produces bagels. Sales
for the period ended September 30, 1997 totaled $174,703. Costs and expenses
applicable to revenue for the period amounted to $70,367. Selling, general and
administrative costs were $197,591. Amortization of goodwill was $6,310.
Mountain Mike's Pizza:
In September 1997, the Company, through its AFI subsidiary, acquired
Mountain Mike's Pizza. Operations commenced on October 1, 1997 and therefore
there was no operations for the period ended September 30, 1997.
Quality Franchise Systems, Inc.
As of September 30, 1997 and
for the Nine Months Ended September 30, 1997 and 1996
The following discussion should be read in conjunction with the Quality
Franchise's consolidated financial statements and notes thereto included herein.
BACKGROUND
Quality Franchise Systems, Inc. ("Quality") is the franchisor of Mountain Mike's
Pizza Restaurants. Quality franchises casual sit-down family-dining restaurants
serving high-quality pizza, sandwiches, salads, soft drinks, and beer and wine.
The restaurants also provide delivery and take-out service in all of Quality's
operating markets.
At September 30, 1997, Quality had seventy-five (75) restaurants in operation in
the states of California, Oregon, Nevada, Arizona, Michigan and Florida.
Quality engages in Area Development as its primary growth strategy. Using this
strategy Quality markets and sells the rights to develop a major geographic
market to a Development Agent. The Development Agent, with Quality's assistance
and approval, is responsible for developing his market through establishing
locations, selling franchises and providing franchises with ongoing supervision
and operational support. Quality believes that it will franchise and open
restaurants more rapidly throughout a broader geographic range because of its
strategic alignment with
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<PAGE>
Development Agents and that by entering Area Development Agreements, it will
sell and develop franchises more rapidly at less cost than could be accomplished
by directly franchising restaurants on its own. Quality also believes that this
will result in providing a greater franchise fee and royalty revenue stream.
Development Agents acquire the rights to a specific geographic market for a fee
payable to Quality. The fee is determined based upon the population of the
specific market. The Development Agent is responsible for 1.) sourcing
franchisee prospects for approval by the Company, 2.) developing and opening the
restaurant within the market; and 3.) providing the ongoing operational support.
The Development Agent receives 50% of the initial franchise fee for all
franchises sold in the market and 40% of the royalty payment (2% of restaurant
sales) for the operational support services.
In late September 1997, Quality was merged with Admiral's Fleet, Inc., a
Washington corporation, and wholly-owned subsidiary of Jreck Subs Group, Inc.
("JSGI"). JSGI is a franchising company with seven concepts encompassing
approximately 300 restaurants.
Results of Operations
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996.
Revenues of $1,478,038 for the nine months ended September 30, 1997 increased
11.4% compared to revenues of $1,326,726 for the same period in the prior year.
The increase was primarily attributable to more franchise royalties and initial
franchise and transfer fees from more franchised restaurants in 1997 compared to
1996. Vendor funds from manufacturers increased 126.5% to $229,850 from $101,496
resulting from a one time fee of $85,000 received from Pepsi from the Mountain
Mike's Pizza restaurants changing their fountain beverages from Coca Cola
products.
With respect to franchise royalties, the increase was attributed to the net
increase of four restaurants to 75 restaurants at September 30, 1997 compared to
71 and 65 restaurants at December 31, 1997 and 1996, respectively, and the
better performance of the restaurants opened under the Area Development Program.
Operating expenses decreased 29.1% to $1,168,010 for the nine months ended
September 30, 1997 from $1,647,158 for the same period in the prior year
resulting primarily from the decrease in general and administrative expenses and
area development expenses.
General and administrative expenses decreased 21.9% to $496,581 for the nine
months ended September 30, 1997 from $636,093 for the same period in the prior
year generally as a result of two fewer employees in 1997 and reduced
professional expenses. Area development expense decreased to $43,125 from
$364,664 as Quality focused its expansion on existing areas as opposed to
marketing and developing new areas as was the case in the previous year.
Restaurant servicing and area developer share of fees decreased to $581,553 from
$600,020 as Quality reduced its operating staff but is sharing more of its
franchise royalties with area developers for servicing the expanded locations
where Quality has restaurants.
As a result of the increased revenues and the decreased operating expenses,
operating income was $310,028 compared to an operating loss of $(320,432) for
the nine months ended September 30, 1997 and 1996, respectively.
Other non-operating expenses for the nine months ended September 30, 1997
included $84,010 from the operation and disposition of a corporately-owned
restaurant located in Boulder, Colorado which Quality disposed in April 1997 and
$98,630 related to costs associated with unsuccessful business combinations
prior to the successful merger with JSGI's Admiral's Fleet, Inc. subsidiary.
Interest expense decreased to $92,430 from $121,247 as a result of the
conversion of $495,000 of 12.75% convertible notes to preferred stock in June
1996.
Preferred dividends increased to $52,992 from $21,957 as the $545,000 in
preferred stock which accrues dividends at 13% was outstanding for the entire
period of the nine months ended September 30, 1997 compared to only 4 months for
the same period in 1996.
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Liquidity and Capital Resources
Working capital at September 30, 1997 was a deficit $(469,355) compared to a
deficit $(705,008) at December 31, 1996. The decrease in deficit was primarily
the result of a compromise of a $185,000 note due to the Chairman of Quality as
payment to Quality for shares acquired by the Chairman in 1996 and the
negotiation and reduction of approximately $95,000 from amounts Quality owed to
two creditors.
Quality's primary capital requirements include debt service on negotiated
payables and interest on the Company's convertible notes and working capital.
Quality's ability to make scheduled payments of principal, interest or to fund
working capital, will depend upon its future performance, which, in turn, is
subject to various factors both with and beyond its control. In connection with
Quality's acquisition by JSGI, Quality is due $250,000 from JSGI which Quality
expects to receive in full by the first quarter of 1998. Based upon current
levels of operations and anticipated growth in revenues and cost savings,
Quality believes that Quality's cash flow from operations and from the amounts
due from JSGI will be adequate to meet its anticipated future requirements for
working capital, interest on its convertible notes payable of $530,000 due in
April 2000 and scheduled payments on its negotiated indebtedness.
Seawest Sub Shops, Inc.
As of June 30, 1997 and
for the Six Months Ended June 30, 1997 and 1996
The following discussion should be read in conjunction with the Seawest's
financial statements and notes thereto included herein.
Background
Seawest Sub Shops, Inc. ("Seawest") is the franchisor of Seawest Sub Shops
Restaurants. Seawest sells franchise rights, primarily in and around the Seattle
area, and provides guidance and assistance to the franchisees in areas such as
the preparation, packaging and sale of products; purchasing equipment; marketing
and administrative support and conducting employee training programs.
At June 30, 1997, Seawest had fifty-four (54) restaurants in operation primarily
in and around the Seattle area of which one was corporately owned and managed.
In late June 1997, Seawest was acquired by Admiral's Subs of Washington, Inc.
("ASWI"), a Washington corporation, and wholly-owned subsidiary of Jreck Subs
Group, Inc. ("JSGI"). JSGI is a franchising company with seven concepts
encompassing approximately 300 restaurants.
Results of Operations
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996.
Revenues of $339,354 for six nine months ended June 30, 1997 increased 2.6%
compared to revenues of $330,704 for the same period in the prior year. The
increase was primarily attributable to more franchise royalties from more
franchised restaurants in 1997 and the revenues of one corporately owned
restaurant of $151,044. The increase in these two items more than offset the
decrease in initial franchise fees of $20,500, the decrease in territorial
franchising rights of $32,225, and the decrease in marketing fees and marketing
rebates totaling $85,142.
The increase in revenues with the decrease in costs and expenses applicable to
sales revenue resulted in gross profit increasing 14.1% to $278,937 for the six
months ended June 30, 1997 compared to $244,413 for the same period in the prior
year.
Selling, general and administrative expenses increased 54.9% to $311,669 for the
six months ended June 30, 1997 compared to $201,241 for the same period in the
prior year as a result of costs associated with litigation and disputes with
franchisees.
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<PAGE>
Net other expenses decreased to $32,335 from $103,234 for the six months ended
June 30, 1997 and 1996, respectively, as a result of a non-recurring expense of
$87,811 for costs associated with store repossessions and closures in 1996.
Liquidity and Capital resources
Working capital at June 30, 1997 was a deficit $(266,727) compared to a deficit
$(174,322) at December 31, 1996. The increase in deficit was primarily the
result of $54,000 borrowed from Seawest's new parent, JSGI.
Seawest's primary capital requirements include debt service on negotiated
payables and interest on the Company's long-term debt and working capital.
Seawest's ability to make scheduled payments of principal, interest or to fund
working capital, will depend upon its future performance, which, in turn, is
subject to various factors both with and beyond its control. Based upon current
levels of operations and anticipated growth in revenues and cost savings,
Seawest believes that the Company's cash flow from operations and from
borrowings from JSGI will be adequate to meet its anticipated future
requirements for working capital, debt service and scheduled payments on its
negotiated indebtedness.
Pastry Products Producers, LLC
As of June 30, 1997 and
for the Six Months Ended June 30, 1997 and 1996
The following discussion should be read in conjunction with Pastry Products'
financial statements and notes thereto included herein.
Background
Pastry Products Producers, LLC ("Pastry Products") commenced operations in the
second quarter of 1996 and was 50% owned by Jreck Subs Group, Inc. ("JSGI"), a
franchising company with seven concepts encompassing approximately 300
restaurants. One of JSGI's concepts is the Jreck Subs Sandwiches. Pastry
Products supplies the Jreck Sub franchises with all of its bakery products.
Pastry Products sells approximately 95% of its products to Jreck Sub
franchisees.
In October 1997, JSGI completed its acquisition of Pastry Products and now owns
100%of Pastry Products.
Results of Operations
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996.
Revenues of 454,989 for six nine months ended June 30, 1997 increased 145.2%
compared to revenues of $185,595 for the same period in the prior year (Pastry
Products commenced operations in the second quarter of 1996). Gross profit was
$270,993 and $121,866 for the six months ended June 30, 1997 and 1996,
respectively, or 59.6% and 65.7% of revenues, respectively.
Liquidity and Capital Resources
Working capital at June 30, 1997 was a $9,725 compared to $33,947 at December
31, 1996. The decrease in working capital is due to financing on Pastry
Products' bakery equipment which matures in 1998.
Pastry Products' primary capital requirements include debt service including
principal and interest on the Company's long-term debt and working capital.
Pastry Products' ability to make scheduled payments of principal, interest or to
fund working capital, will depend upon its future performance, which, in turn,
is subject to various factors both with and beyond its control. Based upon
current levels of operations and anticipated growth in revenues and cost
savings, Pastry Products believes that Pastry Products' cash flow from
operations, the expansion of the Jreck Subs
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<PAGE>
franchise concept which should increase the demand for bakery products will be
adequate to meet its anticipated future requirements for working capital and
debt service.
Item 3. Description of Property
The Company's corporate offices and Pastry Products bakery are located
in a 15,000 square foot facility in Watertown, New York which the Company
completed acquiring in October 1997. Under the terms of the acquisition, the
Company assumed an existing note on the facility of $150,222 at 10% payable in
84 equal installments of $2,494 beginning December 1, 1997.
The Company also leases corporate space for the operations of its restaurant
concepts through its subsidiaries. These leases generally are less than two year
leases, except for one lease in Omaha, Nebraska which expires in 2008 and calls
for annual lease payments of $39,000. Total annual lease payments for 1998 for
these corporate leases are approximately $80,000.
The Company also leases the space for its 20 corporate restaurants (1 Seawest
Sub Shop, 2 Georgio's, 9 Little King Subs and 8 Hymie's Bagels. Minimum lease
payments due for the next 5 years are as follows:
1998 $ 429,000
1999 285,000
2000 237,000
2001 181,000
2002 176,000
---------
TOTAL $ 1,308,000
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information relating to the beneficial
ownership of Company common stock by those persons beneficially holding more
than 5% of the Company's common stock, by the Company's directors and executive
officers, and by all of the Company's directors and executive officers as a
group as of November 30, 1997. The address of each person is care of the Company
unless noted.
<TABLE>
<CAPTION>
Percentage
Name of Number of of Outstanding
Stockholder Shares Owned(1) Common Stock
<S> <C> <C>
Christopher M. Swartz(2)(3) 4,422,500 32.1%
Bradley L. Gordon 589,160 4.2%
Eric T. Swartz -0- --
Kelly A. Swartz -0- --
Jeremiah J. Haley(4) 175,000 1.3%
CEDE and Co. 5,354,089 38.8%
All executive officers and
directors as a group (5 persons)(2)(3)(4) 5,186,660 37.6%
</TABLE>
(1) As used in this table, "beneficial ownership" means the sole or shared
power to vote, or to direct the voting of, a security, or the sole or
shared investment power with respect to a security (i.e., the power to
dispose of, or to direct the disposition of, a security). In addition,
for purposes of this table, a person is deemed, as of any date, to have
"beneficial ownership" of any security that such person has the right
to acquire within 60 days after such date.
(2) Includes 350,000 shares (100%) of the Class B Preferred Stock which is
convertible at the option of the Company into 350,000 shares of Common
Stock.
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<PAGE>
(3) Includes 4,072,500 shares of common stock owned by Tri-Emp Enterprises,
Inc. Mr. Christopher M. Swartz
is President and the sole shareholder of Tri-Emp Enterprises, Inc and
as such is deemed to have beneficial
ownership of the shares of the Company's stock owned by Tri-Emp
Enterprises, Inc.
(4) Mr. Haley owns 25,000 shares of Common Stock and 150,000 shares (25%)
of the Series A Preferred Stock, each of which is convertible at the
option of the Company into one share of common stock.
Item 5. Directors, Executive Officers, Promoters and Control Persons
The members of the Board of Directors of the Company serve until the
next annual meeting of stockholders, or until their successors have been
elected. The officers serve at the pleasure of the Board of Directors.
Information as to the directors, executive officers and key employees of the
Company is as follows.
Name Age Office
Christopher M. Swartz 26 Chairman, Presidentand Chief
Executive Officer
Bradley L. Gordon 45 Chief Operating Officer and Director
Eric T. Swartz 29 Secretary and Director
Kelly A. Swartz 27 Director
Jeremiah J. Haley 59 Director
Gary E. Rowe 44 Controller
Peter J. Whitmore 36 Franchise Director
Gary P. Baker 44 Financial Coordinator
James M. Cook 29 Operations Director
Christopher M. Swartz has been President, Chief Executive Officer, and
Chairman of the Company since
April 1996 and of JRECK Subs, Inc. since September 1995. From 1992 to September
1995, he was Director of
Operations of Lox, Stox & Bagels of Liverpool, Inc. Prior to 1992 Mr. Swartz
was a student at Syracuse University
where his concentration was in the field of management. Mr. Swartz is a magna
cum laude graduate of Syracuse
University who grew up in the subs business. He has worked in construction,
building sub shops and has managed
sub shops. He is the second generation of his family involved with JRECK. Mr.
Swartz is also the President of Tri-
Emp Enterprises, Inc. and the brother of Eric T. Swartz and Kelly A. Swartz.
Bradley L. Gordon has been Chief Operating Officer and Director of the
Company since September 1997. Prior to joining the Company, he was president
from September 1993 to September 1997 of Quality Franchise Systems, Inc.
("QFS"), the franchisor of Mountain Mike's Pizza, QFS's chief executive officer
since September 1992 and one of its directors since January 1993. Before joining
QFS, he held various positions at Pace Membership Warehouse, Inc. in Denver,
Colorado beginning in November 1983, including executive vice president - sales,
senior vice-president B operations and vice president B human resources.
Eric T. Swartz has been a Director and Secretary of the Company since
April 1996. He was awarded his
J.D. degree from Syracuse University College of Law and his Bachelor's Degree
from Syracuse University. He has
been a partner in the Swartz Law Firm, P.C. from October 1993 to the present.
From September 1992 to May 1993
he was associated with the law firm of Pease & Willer, which he joined after hi
graduation from law school in
1992. Mr. Swartz is the brother of Christopher M. Swartz and Kelly A. Swartz.
Kelly A. Swartz has been a Director of the Company since April 1996.
She is a graduate of the State University of New York, at Plattsburgh. Ms.
Swartz is an elementary school teacher at Apollo Elementary in Titusville,
Florida, where she has been employed since September, 1991. From May 1990 to
September 1991 she was employed in various capacities with JRECK Subs, Inc.,
including the management of several sub shops. Ms.
Swartz is the sister of Eric T. Swartz and Christopher M. Swartz.
Jeremiah J. Haley has been a Director of the Company since April 1996.
He was one of the original
founders of JRECK Subs, Inc. (the "J" in the name JRECK stands for the first
letter of Mr. Haley's first name). Mr.
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<PAGE>
Haley has a B.S. degree from Mansfield State College in Mansfield, Pennsylvania
. He also holds a Master's degree
from the State University of New York at Cortland. Mr. Haley has been President
of Haley Enterprises, Inc., a
JRECK Subs, Inc. franchisee, from 1975 to the present. He had also been a
teacher with the Carthage, New York
Central School District from 1965 until he retired in June 1993.
Gary Rowe has been the Corporate Controller since September 1993.
Prior to joining the Company, Mr.
Rowe was the controller of the quasi-independent New York State government
agency, the Development Authority
of the North Country. Mr. Rowe graduated from the State University of New York
at Albany in 1974 where he
received a Bachelor of Science Degree in accounting. Mr. Rowe is a Certified
Public Accountant.
Peter J. Whitmore has been the Franchise Director of the JRECK chain
since 1982. Mr. Whitmore is also
an instructor for the Watertown City School District and the Jefferson Community
College. Mr. Whitmore graduated
from the State University of New York at Cortland with a Bachelor or Arts degree
in history in 1982. Mr. Whitmore
is a member of the National Restaurant Association.
Gary P. Baker has been the Director of Operations of JRECK Subs chain
since 1990. Prior to joining the Company, he was the President and Chief
Executive Officer of U.S. Linen Systems, Inc., in Watertown, New York, from 1980
to 1990.
James Cook has been the Director of Operations of the Lox, Stocks &
Bagels division of JRECK Subs since November 1992. As such, Mr. Cook is
responsible for all aspects of wholesale production and sales. Prior to joining
the Company, Mr. Cook was the Operations Manager of a four store retail
submarine and roast beef sandwich chain located in Albany, New York from 1989 to
November 1992. Mr. Cook received his Bachelor of Science Degree in the field of
economics from the State University of New York at Cortland in 1988.
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<PAGE>
Item 6. Executive Compensation
The following table sets forth the cash compensation of the Company's
executive officers and directors during each of the last three fiscal years. The
remuneration described in the table does not include the cost to the Company of
benefits furnished to the named executive officers, including premiums for
health insurance and other benefits provided to such individual that are
extended in connection with the conduct of the Company's business. The value of
such benefits cannot be precisely determined, but the executive officers named
below did not receive other compensation in excess of the lesser of $25,000 or
10% of such officer's cash compensation.
<TABLE>
<CAPTION>
Summary Compensation Table
ANNUAL COMPENSATION LONG TERM COMPENSATION
Name and Other Annual Awards Payouts All
Principal Position Year Salary Bonus Compensation Other
RestrictedOptions/ LTIP
Stock ($)SARs(#) Payouts ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Christopher M. Swartz 1996 26,000 0 0 0 0 0 0
President and CEO 1995 0 0 0 0 0 0
1994 0 0 0 0 0 0
Gary E. Rowe 1996 46,350 0 0 0 0 0
Controller
1995 39,000 0 0 0 0 0
1994 37,250 0 0 0 0 0
</TABLE>
The Company carries no officers and directors liability insurance or
disability insurance benefits. The Company maintains a $3,000,000 key man life
insurance policy on Mr. Christopher Swartz of which the Company is the
beneficiary. No executive officer or director is currently covered by an
employment agreement except for Bradley L. Gordon. The Company does not maintain
any pension plan, profit sharing plan or similar retirement or employee benefit
plans.
Mr. Bradley L. Gordon joined the Company as chief operating officer in
September 1997. Under the terms of his three-year employment agreement
commencing, Mr. Gordon receives an initial annual compensation of $150,000
subject to annual increases consistent with other executives of the Company. If
the employment agreement is terminated by the Company, Mr. Gordon continues to
receive his base salary until the earlier of Mr. Gordon finding new employment
or twelve months after such termination date. Mr. Gordon was also granted a
right to purchase 500,000 shares of the Company's common stock at a price of
$3.00 per share which shares were issued in November 1997. The purchase price of
$1,500,000 was paid in the form of a promissory note to the Company which calls
for 10% with principal and interest due in September 2000. At any time prior to
September 2000, Mr. Gordon has the right to require the Company to repurchase
the 500,000 shares as consideration for the cancellation of the promissory note.
Directors currently receive no compensation for their duties as
directors. No stock options have been issued to any executive officers or
directors.
The Company has a board of director's
meeting scheduled for December 29, 1997 at which time the board is expected to
approve an option to be granted to its chairman and chief executive officer
Christopher Swartz for the purchase of 1,000,000 shares of the Company's common
stock at a price to be no less than 110% of the closing price on the date of the
grant. The options are to be exercisable immediately and to expire in December
29, 2000.
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<PAGE>
Item 7. Certain Relationships and Related Transactions
Conflicts of Interest
Kalin Enterprises, Inc. ("Kalin") is the franchisee for five JRECK Subs
restaurants. Mr. Christopher Swartz
is a 25% shareholder and an officer of Kalin.
Restaurant Management Corporation of New York, Inc. ("RMC") is the
franchisee for three JRECK Subs
restaurants. RMC is controlled by Mr. Christopher Swartz.
Mr. Jeremiah Haley, a director, received 175,000 shares of Series A
Preferred Stock in exchange for his shares of Jreck Subs, Inc. Series A
Preferred Stock on May 6, 1996. Mr. Haley was elected to the Board of Directors
pursuant to the right of holders of Series A Preferred Stock to elect one member
of the Board of Directors. Pursuant to the dividend rights of holders of Series
A Preferred Stock, Mr. Haley received $15,750 in dividends on his shares in
fiscal 1996.
Mr. Christopher Swartz, chairman and the Company's president and chief
executive officer, received (through Tri-Emp Enterprises, a company of which he
is the sole shareholder) 5,000,000 shares of Company Common Stock and 350,000
shares of Company Series B Preferred Stock in exchange for all of the Common
Stock and Series B Preferred Stock of Jreck Subs, Inc. on May 6, 1996. Mr.
Swartz was elected to the Board of Directors pursuant to the right of holders of
Series B Preferred Stock to elect one member of the Board of Directors.
Mr. Bradley Gordon, director and the Company's chief operating officer,
purchased 500,000 shares of the Company's common stock for $1,500,000. The
Company received a promissory note from Mr. Gordon with interest at 10% per
annum with principal and interest due in September 2000. At any time prior to
September 2000, Mr. Gordon has the right to require the Company to repurchase
the 500,000 shares as consideration for the cancellation of the promissory note.
shares of the Company's common
stock for $900,000. The Company received a promissory note from Mr. Silberman
with interest at 10% per annum
with principal and interest due in September 2000. At any time prior to Septembe
2000, Mr. Silberman has the right
to require the Company to repurchase the 300,000 shares as consideration for the
cancellation of the promissory note.
In June 1997, Mr. Eric Swartz, director of the Company and the sole
shareholder of Admiral Subs Group,
Inc. ("ASGI") acquired the net assets of Seawest Subs from the Company's
wholly-owned subsidiary ASWI. The
Company also issued a $350,000 note to ASGI personally guaranteed by Mr. Eric
Swartz. In October 1997, ASGI
defaulted on the note and the Company accepted the net assets of Seawest Sub fo
satisfaction of the note and the
release of the personal guarantee of Mr. Eric Swartz.
In connection with the acquisition of Little King, Inc., the Company
provided Mr. Sid Wertheim, the principal of Little King an option to repurchase
Little King from the Company if the stock price of the Company is not at least
$1.50 per share on the second anniversary of the closing with the repurchase
based on the Company receiving back all of the Company's shares issued, any
funds invested by the Company into Little King and a fair market value
determination. The term of the acquisition also provided that in the event the
Company files bankruptcy within three years of the closing and the bankruptcy is
not dismissed within 90 days, Mr. Wertheim of Little King is granted the first
option to repurchase the Little King stock from the Company for $25,000. The
agreement also provided the selling shareholders of Little King, Inc. with full
piggyback registration rights in the event the Company decides to register any
of its stock. The agreement also provides that in the event the Company
completes a secondary offering of its common stock on or prior to March 31,
1998, the Company will invest an amount equal to 4% of the proceeds the Company
receives for the development of the Little King concept. Mr. Sid Wertheim also
has an agreement with Tri-Emp Enterprises, Inc. ("Tri-Emp"). Tri-Emp is
controlled by Mr. Christopher Swartz, chairman, president and chief executive
officer of the Company. Under this agreement, if Tri-Emp receives an offer to
purchase its controlling interest during the first three years after the
Company's acquisition of Little King, Inc., Tri-Emp will obtain an acceptable
stock sale for Mr. Sid Wertheim. If Mr. Sid Wertheim
17
<PAGE>
receives an offer for a substantial of all of his stock position, he shall grant
Tri-Emp or its designee a first option to make such purchase. The option shall
be on the same terms and conditions as a third party bona fide purchaser.
In connection with the Company's acquisition of Seawest Sub Shop, Inc.,
the Company issued options to purchase 100,000 shares of the Company's common
stock at a price of $.001 per share for 15 years (valued at $350,000) and the
assumption of certain liabilities personally guaranteed by the former president
of Seawest Sub. The optionees have the right to require the Company to
repurchase these shares at the greater of their "fair market value" (defined to
be the average of the high and low sales prices on a public market) or $3.25 per
share, but in no event more than 10,000 shares per month. The optionees were
also granted piggy back registration rights. The options become exercisable on a
cumulative basis at 25% on each of December 19, 1997, May 19, 1998, November 19,
1998 and May 19, 1999.
Item 8. Description of Securities
Common Stock
The Company's Articles of Incorporation authorize the issuance of
50,000,000 shares of common stock, no par value per share, of which 13,437,444
shares were outstanding as of November 21, 1997. Holders of shares of common
stock are entitled to one vote for each share on all matters to be voted on by
the stockholders, subject to the right of holders of Series A Preferred Stock
and Series B Preferred Stock to each elect one member of the Board of Directors.
Holders of common stock have no cumulative voting rights. Holders of shares of
common stock are entitled to share ratably in dividends, if any, as may be
declared, from time to time, by the Board of Directors in its discretion, from
funds legally available therefor, after dividends are first paid on Series A
Preferred Stock and Series C Preferred Stock. In the event of a liquidation,
dissolution or winding up of the Company, the holders of shares of common stock
are entitled to share pro rata all assets remaining after payment in full of all
liabilities. Holders of common stock have no preemptive rights to purchase the
Company's common stock. There are no conversion rights or redemption or sinking
fund provisions with respect to the common stock. All of the outstanding shares
of common stock are fully paid and non-assessable except for 500,000 shares of
the Company's common stock issued to Mr. Bradley Gordon and 300,000 shares of
the Company's common stock issued to Mr. R.T.
Silberman.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock,
no par value per share (the "Preferred Stock"). The Preferred Stock may be
issued from time to time in one or more classes or series, each class or series
of which shall have the voting rights, designations, preferences and relative
rights as fixed by resolution of the Company's Board of Directors, without the
consent or approval of the Company's shareholders. The Preferred Stock may rank
senior to the Common Stock as to dividend rights, liquidation preferences, or
both, and may have extraordinary or limited voting rights. There are currently
700,000 shares of Series A Voting Nonredeemable Cumulative Convertible Preferred
Stock (the "Series A Preferred Stock") 350,000 shares of Series B Voting
Nonredeemable Convertible Preferred Stock (the "Series B Preferred Stock") and
120 shares of Series C Non-voting Nonredeemable Convertible Preferred Stock (the
"Series C Preferred Stock") outstanding.
Series A Preferred Stock
The Company is authorized to issue 700,000 shares of Series A Preferred
Stock, all of which are issued and of which 600,000 shares are outstanding after
the conversion of 100,000 shares of the Series A Preferred Stock to Common Stock
in July 1997. The relative rights, preferences and limitations of the Series A
Preferred Stock are as follows.
Voting. The holders of Series A Preferred Stock are entitled to one
non-cumulative vote per share on all
matter on which shareholders may vote at all meetings of shareholders. In
addition, such holders as a group are
entitled to elect one director to the Company's Board of Directors. Mr.
Jeremiah Haley is the current director
holding this position.
18
<PAGE>
Dividends. The holders of the Series A Preferred Stock are entitled to
a cumulative annual dividend of $.09 per share payable weekly out of funds
legally available therefor, which dividend shall have preference as to all other
dividends paid or declared by the Company. Such dividend shall be cumulative and
shall be paid in advance of any dividend paid to holders of Common Stock, Series
B Preferred Stock or Series C Preferred Stock.
Liquidation. The Series A Preferred Stock has a liquidation preference
over all classes of common stock and the Series B Preferred Stock and the Series
C Preferred Stock as to $1,200,000, together with the amount of any unpaid
dividends thereon, in the event of any dissolution, liquidation, or winding up
of the Company. If, upon any such dissolution, liquidation, or winding up of the
Company, the assets of the Company is distributable to the holders of the Series
A Preferred Stock shall be insufficient to permit payment in full of the
preferential amount aforesaid, then the entire assets of the Company shall be
distributed ratably among the holders of the Series A Preferred Stock according
to the respective number of shares of Series A Preferred Stock held by them.
Right to Convert. Each holder of Series A Preferred Stock may, only at
the discretion of the Board of Directors of the Company and upon surrender to
the Company of the certificate therefor at the principal office of the Company
or at such other place as the Company shall designate, convert all of such
holder's Series A Preferred Stock at the rate of one share of Series A Preferred
Stock for one share of Common Stock (the "Series A Conversion Ratio"). In the
event of either an increase or decrease in the number of the shares of the
Company's Common Stock as a result of a stock dividend, stock split,
recapitalization, combination, or reclassification, the Series A Conversion
Ratio shall be equitably adjusted.
Series B Preferred Stock
The Company is authorized to issue 350,000 shares of Series B Preferred
Stock, all of which are issued and outstanding and are owned by Tri-Emp
Enterprises, a corporation controlled by the Company's president and chief
executive officer. The relative rights, preferences and limitations of the
Series B Preferred Stock are as follows.
Voting. The holders of Series B Preferred Stock are entitled to one
non-cumulative vote per share on all
matters on which stockholders may vote at all meetings of shareholders. In
addition, such holders as a group are
entitled to elect one director to the Company's Board of Directors. Mr. Swartz
is the current designee of the holders
of the Series B Preferred Stock.
Dividends. The holders of the Series B Preferred Stock are entitled to
dividends only if and when declared
by the Company.
Liquidation. The Series B Preferred Stock has a liquidation preference
over all classes of common stock and the Series C Preferred Stock, but not
Series A Preferred Stock, as to $700,000, together with the amount of any unpaid
dividends thereon, in the event of any dissolution, liquidation, or winding up
of the Company. If, upon any such dissolution, liquidation, or winding up of the
Company, the assets of the Company is distributable to the holders of the Series
B Preferred Stock shall be insufficient to permit payment in full of the
preferential amount aforesaid, then the entire assets of the Company, after
payment of the holders of the Series A Preferred Stock, shall be distributed
ratably among the holders of the Series B Preferred Stock according to the
respective number of shares of Series B Preferred Stock held by them.
Right to Convert. Each holder of Series B Preferred Stock may, only at
the discretion of the Board of Directors of the Company and upon surrender to
the Company of the certificate therefor at the principal office of the Company
or at such other place as the Company shall designate, convert all of such
holder's Series B Preferred Stock into shares of Common Stock at the rate of one
share of Series B Preferred Stock for one share of Common Stock (the "Series B
Conversion Ratio"). In the event of either an increase or decrease in the number
of the shares of the Company's Common Stock as a result of a stock dividend,
stock split, recapitalization, combination, or reclassification, the Series B
Conversion Ratio shall be equitably adjusted.
19
<PAGE>
Series C Preferred Stock
The Company is authorized to issue 120 shares of Series C Preferred
Stock, all of which were issued in connection with the Company's acquisition of
QFS. The relative rights, preferences and limitations of the Series C Preferred
Stock are as follows.
Voting. The holders of Series C Preferred Stock are not entitled to
any vote on all matters on which
stockholders may vote at all meetings of shareholders.
Dividends. The holders of the Series C Preferred Stock are entitled to
a cumulative annual dividend of $130 per share payable out of funds legally
available therefor, which dividend shall be subordinate to all other dividends
on the Series A and Series B Preferred Stock.
Liquidation. The Series C Preferred Stock has a liquidation preference
over all classes of common stock, but not to the Series A Preferred Stock and
Series B Preferred Stock, as to $120,000, together with the amount of any unpaid
dividends thereon, in the event of any dissolution, liquidation, or winding up
of the Company. If, upon any such dissolution, liquidation, or winding up of the
Company, the assets of the Company is distributable to the holders of the Series
C Preferred Stock shall be insufficient to permit payment in full of the
preferential amount aforesaid, then the entire assets of the Company, after
payment of the holders of the Series A Preferred Stock and Series B Preferred
Stock, shall be distributed ratably among the holders of the Series C Preferred
Stock according to the respective number of shares of Series C Preferred Stock
held by them.
Right to Convert. Each holder of Series C Preferred Stock may and upon
surrender to the Company of the certificate therefor at the principal office of
the Company or at such other place as the Company shall designate, convert all
of such holder's Series C Preferred Stock into shares of Common Stock at the
rate of 133.23 shares of the Company's Common Stock for each share of Series C
Preferred Stock (the "Series C Conversion Ratio"). In the event of either an
increase or decrease in the number of the shares of the Company's Common Stock
as a result of a stock dividend, stock split, recapitalization, combination, or
reclassification, the Series C Conversion Ratio shall be equitably adjusted.
Shares Eligible for Future Sale
Of the outstanding shares of the Company, all but 1,536,000 shares are
subject to resale restrictions and, unless registered under the Securities Act
of 1933 (the "Act) or exempted under another provision of the Act, will be
ineligible for sale in the public market until one year from their issuance,
following which sales may be made under Rule 144.
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned shares privately
acquired or indirectly from the Company or from an affiliate, for at least two
years, or who is an affiliate, is entitled to sell within any three-month
period, a number of such shares that do not exceed the greater of 1% of the then
outstanding shares of the Company's Common Stock (approximately 139,000 shares)
or the average weekly trading volume in the Company's Common Stock during the
four calendar weeks immediately preceding such sale. Sales under Rule 144 are
also subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
at any time during the 90 days preceding a sale, and who has beneficially owned
shares for at least three years, is entitled to sell all such shares under Rule
144 without regard to the volume limitations, current public information
requirements, manner of sale provisions or notice requirements.
Sales of substantial amounts of the Common Stock of the Company in the
public market could adversely affect prevailing market prices.
20
<PAGE>
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters
(a) Market Information
The Company's Common Stock has been listed on the Electronic
Bulletin Board sponsored by the National Association of Securities Dealers, Inc.
since October, 1996. The prices reported reflect inter-dealer prices and are
without adjustments for retail markups, markdowns or commissions, and may not
necessarily represent actual transactions.
Bid Price
1997 High Low
April 1, 1997-
June 30, 1997 8 1/4 3 1/4
July 1, 1997-
September 30, 1997 4 1/8 3
(b) Holders
As of November 21, 1997, there were approximately 1,700 record
holders of the Company's
common stock.
(c) Dividends
The Company has not paid any dividends on its common stock.
The Company currently intends to retain any earnings for use in its business,
and therefore does not anticipate paying cash dividends to holders of common
stock holders in the foreseeable future. Holders of Series A Convertible
Preferred Stock are entitled to annual cash dividends of $.09 per share. Holder
of Series C Convertible Preferred Stock are entitled to annual cash dividends of
$130.00 per share. Pursuant to the Company's Articles of Incorporation, holders
of Common Stock are not entitled to receive dividends unless dividends have been
paid for prior calendar years and paid and set aside for the then current
calendar year on the Series A Preferred Stock and Series C Preferred Stock. The
Company is under no other contractual restrictions on the payment of dividends.
Item 2. Legal Proceedings
Not applicable.
Item 3. Changes in and Disagreements with Accountants.
Not applicable.
Item 4. Recent Sales of Unregistered Securities
On May 6, 1996, the Company issued the following securities in exchange
for all of the capital stock of JRECK Subs, Inc.:
Company JRECK Subs, Inc.
Securities Issued Securities Exchanged
5,000,000 8,000,000 shares of
shares of common stock common stock
21
<PAGE>
700,000 shares of 700,000 shares of
Series A Preferred Series A Preferred
350,000 shares of 350,000 shares of
Series B Preferred Series B Preferred
The sales were made in compliance with Section 4(2) of the Securities
Act of 1933. As a condition to each of the above sales, the purchaser consented
to a placement of a restrictive legend on the certificate representing the
securities.
In May 1996 the Company issued 1,100,000 restricted shares for $11,000
cash. No underwriter was involved and the holders agreed that a restrictive
legend would be placed upon the certificates representing the Shares. The
Company believes that this transaction was exempt under Section 4(2) of the Act
as a transaction not involving a public offering.
From May 1996 to December, 1996 the Company issued 1,536,000 shares of
Common Stock in a private offering under Rule 504 of Regulation D to
approximately 70 purchasers. Net proceeds of the offering were $648,150. No
underwriter was involved.
In December 1996, the Company issued 45,000 shares to Gerharz
Equipment, Inc. for the cancellation of a debt of approximately $90,533.
In January 1997, the Company issued 415,095 shares of common stock in a
private offering under Rule 504 of Regulation D to 2 purchasers. Net proceeds of
the offering were $220,000. No underwriter was involved.
In February 1997, the Company issued 230,000 shares of common stock to
two individuals in connection with the purchase of bakery equipment located in
Missouri.
In April 1997, the Company issued 39,118 shares of common stock to
approximately 400 shareholders of Western Fast Food. The Shares were issued
without consideration in satisfaction of a moral obligation of the Company and
its principals.
On June 19, 1997 and August 5, 1997 the Company issued, 270,000 and
67,500 shares of the Company's common stock, respectively, to approximately 20
individuals in connection with the acquisition of Hymie's Bagel Chain.
In July 1997, 4 shareholders of the Company's Series A Preferred Stock
converted 100,000 total Series A preferred shares into 100,000 shares of the
Company's common stock.
In July 1997, the Company issued 500,000 shares of its common stock for
$495,000.
In August 1997, the Company acquired all of the outstanding shares of
Richey Enterprises, Inc. (Georgio's Subs) for 93,794 shares of its common stock.
During the nine months ended September 30, 1997, the Company issued
391,478 shares of its common stock as payment for services performed during the
year in connection with the Company's merger and acquisition activities and
capital raising efforts.
In September 1997, the Company acquired all of the outstanding shares
of Little King, Inc. by the initial issuance of 500,000 shares of its common
stock.
On October 8, 1997 the Company acquired all of the outstanding shares
of Quality Franchise Systems, Inc. (Mountain Mike's Pizza) by the issuance of
120 shares of the Company's Series C preferred stock and 899,967 shares of the
Company's common stock.
22
<PAGE>
On October 27, 1997, the Company issued 212,500 shares of its common
stock for the completion of the acquisition of Pastry Products.
In November 1997, the Company issued 60,000 shares of its common stock
in consideration with the obtaining a $250,000 loan. In November 1997, the
Company issued 12,110 shares of its common stock for net proceeds of $167,500.
In November 1997, the Company issued 800,000 shares of its common stock
to two individuals for total consideration of $2,400,000 paid in the form of
promissory notes with interest at 10% with interest and principal due in
September 2000. At any time prior to September 2000, these individuals may
require the Company to repurchase the 800,000 shares as consideration for the
cancellation of the notes.
In connection with investment advisory
services provided by Corporation Relations Group ("CRG") to the Company, the
Company has committed to grant CRG options to purchase up to 300,000 shares of
the Company's common stock. Under the term of this option agreement the Company
shall grant an option for the purchase of 100,000 shares of the Company's common
stock at $2.81, $3.37 and $3.93 per share on each of the three years ending
September 15, 1998, 1999 and 2000, respectively
The above sales were made in compliance with Section 4(2) of the
Securities Act of 1933. As a condition to each of the above sales, the purchaser
consented to a placement of a restrictive legend on the certificate representing
the securities.
Item 5. Indemnification of Directors and Officers
As permitted under the Colorado General Corporation Law, directors and
officers are not liable to the Company or its stockholders for monetary damages
arising from a breach of their fiduciary duty of care as directors. Such
provisions do not, however, relieve liability for breach of a director's duty of
loyalty to the Company or its stockholders, liability for acts or omissions not
in good faith or involving intentional misconduct or knowing violations of law,
liability for transactions in which the director derived an improper personal
benefit or liability for the payment of a dividend in violation of Colorado law.
Further, the provisions do not relieve a director's liability for violation of,
or otherwise relieve the Company or its directors from the necessity of
complying with, federal or state securities laws or affect the availability of
equitable remedies such as injunctive relief or recision. However, as a
practical matter, equitable remedies may not be available in all situations and,
there may be instances in which no effective remedy is available or can be
timely obtained.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that may result in a claim for indemnification by any director or
officer.
PART F/S
Financial Statements
The following financial statements are included herein.
JRECK Subs Group, Inc.
Independent Auditors' Report
Consolidated Balance Sheet at September 30, 1997, December 31, 1996 and
1995
Consolidated Statement of Operations for the Nine Months ended
September 30, 1997 and 1996 and for the Years Ended December 31, 1996
and 1995
Consolidated Statement of Cash Flows for the Nine Months ended
September 30, 1997 and 1996 and for the Years Ended December 31, 1996
and 1995 Consolidated Statement of Changes in Stockholders' Equity
Notes to Consolidated Financial Statements
23
<PAGE>
Pastry Products Producers, LLC
Balance Sheet at June 30, 1997 and December 31, 1996
Statements of Operations and Stockholders' Equity for the Six Months
ended June 30, 1997 and 1996 and for the Years Ended December 31, 1996
and 1995 Statement of Cash Flows for the Six Months ended June 30, 1997
and 1996 and for the Years Ended December 31, 1996 and 1995 Notes to
Financial Statements
Seawest Sub Shops, Inc.
Independent Auditors' Report
Balance Sheets at June 30, 1997 and December 31, 1996
Statement of Operations for the Six Months ended June 30, 1997 and 1996
and for the Years Ended December 31, 1996 and 1995 Statement of Cash
Flows for the Six Months ended June 30, 1997 and 1996 and for the Years
Ended December 31, 1996 and 1995 Statement of Changes in Stockholders'
Equity Notes to Financial Statements
Quality Franchise Systems, Inc. and Subsidiary (unaudited)
Consolidated Balance Sheets at June 30, 1997 and December 31, 1996
Consolidated Statement of Operations for the Nine and Three Months
ended September 30, 1997 and 1996 Consolidatd Statement of Cash Flows
for the Nine Months ended September 30, 1997 and 1996 Notes to
Consolidated Financial Statements
Pro Forma Financial Statements
PART III
The following exhibits required by Item 601 of Regulation S-B
are filed herewith:
Exhibit No. Document Description
2. Plan of purchase, sale, reorganization, arrangement,
liquidation or succession.
2.1 Agreement and Plan of Reorganization between JRECK
Subs, Inc. and Circa Media, Inc.
2.2 Agreement and Plan of Reorganization and Merger amon
Jreck Subs Group, Inc.,
Admiral's Fleet, Inc. and Quality Franchise Systems,
Inc. ("Quality Agreement")
2.3 Amendment to Quality Agreement
2.4 Agreement between the Company and CHAI ENterprises,
Inc. ("Hymie's Bagel Chain")
2.5 Stock Option Grants to acquire Seawest Sub Shops, Inc.
3. Articles of Incorporation and Bylaws
3.1. Articles of Incorporation
3.2 Articles of Amendment of Circa Media
dated May 2, 1996 and filed May 7, 1996
3.3 Articles of Amendment of Jreck Subs filed May 7, 1996
3.4 Certificate of Correction to Articles of Amendment
filed July 24, 1996.
10. Material Contracts
10.1 Form of Jreck Franchise Agreement. To be filed
by amendment
21 Subsidiaries of the Registrant
24
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant has caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: December 17, 1997 JRECK SUBS GROUP, INC.
By: /s/ Christopher M. Swartz
President and Chief Executive Officer
25
<PAGE>
Board of Directors
Jreck Subs Group, Inc.
Watertown, New York
I have audited the accompanying consolidated balance sheet of Jreck Subs Group,
Inc. as of December 31, 1996 and 1995 and the related consolidated statements of
income, cash flows and stockholders' equity for the years then ended. The
financial statements are the responsibility of the directors. My responsibility
is to express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Jreck Subs Group, Inc. as of
December 31, 1996 and 1995 and the results of its operations, its cash flows and
changes in stockholders' equity for the years then ended in conformity with
generally accepted accounting principles.
January 22, 1997
Cronin & Co.
Certified Public Accountants
F-1
<PAGE>
<TABLE>
<CAPTION>
Jreck Subs Group, Inc.
Consolidated Balance Sheet
ASSETS
September 30, December 31,
1997 1996
Current Assets: (unaudited)
<S> <C> <C>
Cash and Cash Equivalents $ 226,552 $ 47,368
Royalty and Advertising Receivable 290,970 146,685
Stock Subscriptions Receivable 10,000 10,000
Prepaid Expenses 20,948 25,666
Area Development Fees 49,357 0
Inventory 4,858 0
Loans Receivable 644,660 0
Other Current Assets 9,022 0
Total Current Assets 1,256,367 229,719
Investment in Unconsolidated Subsidiary
(Note A and I) 729,679 729,679
Property & Equipment, Net of Accumulated
Depreciation (Note A) 1,714,021 50,188
Goodwill, Net of Accumulated Amortization 4,914,477 0
Other Assets (Note D) 1,367,439 2,812,294
Total Assets $ 9,981,983 $3,821,880
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Expenses 582,018 15,580
Accrued Dividends 20,601 0
Loans Payable (Note B) 1,250,042 736,012
Current Portion of Long Term Debt (Note C) 20,000 20,000
Total Current Liabilities 1,872,661 771,592
Long Term Debt (Note C) 2,514,661 46,456
Deferred Income (Note D) 0 2,294,041
Stockholders' Equity:
Common Stock 12,248,834 and 8,781,000
shares outstanding) 3,279,178 999,664
NonRedeemable Preferred Stock (Note F) 2,020,000 2,100,000
Treasury Stock (8,000,000 shares of Subsidiary) (1,600,000) (1,600,000)
Accumulated Deficit (2,497,331) (789,873)
Total Stockholder's Equity 5,594,661 709,791
Total Liabilities & Stockholders' Equity $ 9,981,983 $ 3,821,880
</TABLE>
See Notes to Financial Statements
F-2
<PAGE>
<TABLE>
<CAPTION>
Jreck Subs Group, Inc.
Consolidated Statement of Operations
Nine Months Ended
September 30, Fiscal Year Ended
1997 1996 1996 1995
<S> <C> <C> <C> <C>
Net Sales (Note A) $ 594,453 $ 392,258 $ 557,738 $ 435,639
Costs and Expenses Applicable to
Sales & Revenue 122,658 15,396 23,946 16,548
Gross Profit 471,795 376,862 533,792 419,091
Provision for Doubtful Accounts Receivable 0 0 0 137
Selling, General & Administrative Expenses 548,144 263,143 392,542 310,315
Income (Loss) From Operations (76,349) 113,719 141,250 108,639
Parent Share of Income (Loss) of Unconsolidated
Subsidiary (Note A-4) 22,680 0 (4,819) 0
Other Income:
Gain Recognized on Extinguishment of Debt
(Note C-2,3) 0 57,969 126,001 384,815
Miscellaneous Income 3,531 0 0 0
Other Expense:
Interest and Amortization 79,928 92,925 186,800 85,544
Loss on Disposal of Fixed Assets 3,980 0 0 0
Write off Territorial Rights, Rent Guarantees
& Other Payments (Note H) 0 120,000 126,082 128,978
Costs Associated with Mergers and Acquisitions1,528,492 0 0 0
Income (Loss) Before Income Taxes (1,662,538) (41,237) (50,450) 278,932
Income Tax Expense (Benefit) (Notes E) 349 0 (10,973) 121,891
Net Income (Loss) $ (1,662,887) $ (41,237) $ (39,657) $ 157,041
Loss Per Share $ (0.17) $ (0.01) $ 0.00 $ 0.02
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
<TABLE>
<CAPTION>
Jreck Subs Group, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended
September 30, Fiscal Year Ended
1997 1996 1996 1995
Operating Activities:
<S> <C> <C> <C> <C>
Net Income (Loss) $ (1,662,887) $ (41,237) $ (39,657) $ 157,041
Adjustments to Reconcile Net Income (Loss)
to Cash Provided (Consumed) by
Operating Activities:
Depreciation and Amortization of
Intangible Assets 72,945 89,164 14,518 21,763
Write off of Intangible Assets 0 0 0 128,978
Loss on Disposal of Property & Equipment 3,980 0 0 0
Interest in Income of Subsidiary 0 0 4,819 0
Adjustment for Tax Benefit of Net Operating
Loss Carryover 0 0 (11,135) 121,135
Forgiveness of Debt 0 0 (126,001) (384,815)
Issuance of common stock for services rendered 1,116,898 0 0 0
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Current Assets (942,997) (83,195) (104,576) (13,300)
Increase (Decrease) in Accounts Payable &
Accrued Expenses 74,374 (364,443) 13,277 (19,301)
Net Cash Provided (Consumed) by Operating Activities(1,337,687) (399,711) (248,755) 11,501
Investing Activities:
Purchase of Property & Equipment (18,673) 0 (5,172) (40,721)
Other Investments Made 0 0 (34,498) 0
Payment of Promissory Note Offering Costs 0 0 (14,786) (70,710)
Payment for Acquisitions, net of Cash Acquired (331,984) 0 0 0
Net Cash Used in Investing Activities (350,657) 0 (54,456) (111,431)
Financing Activities:
Proceeds of Common Stock Offering net of Costs 715,000 548,305 681,650 0
Increase (Decrease) in Debt 1,197,099 (126,130) (281,914) 105,573
Dividends Paid on Preferred Shares (44,571) (26,400) (54,800) 0
Net Cash Provided (Used) by Financing Activities 1,867,528 395,775 344,936 105,573
Net Change in Cash 179,184 (3,936) 41,725 5,643
Cash & Cash Equivalents at the Beginning of Period 47,368 5,643 5,643 0
Cash & Cash Equivalents at the End of Period $ 226,552 $ 1,707 $ 47,368 $ 5,643
Supplemental Disclosure of Cash Flow Information:
Decrease in Series A Preferred Stock $ (200,000)
F-4
<PAGE>
Increase in Common Stock $ 200,000
Acquisition of Equipment from the Issuance
of Common Stock $ 500,000
Schedule of Non-cash Investing and Financing Activity:
Fair Value of Assets Acquired $ 6,855,215
Liabilities Assumed (2,297,801)
Fair Value of Common Stock Issued (4,225,430)
Cash Paid, net of Cash Acquired $ 331,984
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
<TABLE>
<CAPTION>
Jreck Subs Group, Inc.
Statements of Changes in Stockholders' Equity
Treasury
Stock of Retained
Common Stock Preferred Stock Jreck Subs Earnings
Shares Amount Shares Amount Inc. (Deficit)
Inception July 14, 1995
Issuance of Shares Aug. 1995 net of Offering
<S> <C> <C> <C> <C> <C>
Costs of $3,700 1,100,000 $ 0 $ 0
Net income December 31, 1995
December 31, 1995 1,100,000 0 0
Issuance of Shares May 1996 1,100,000 11,000
Issuance of Shares May 1996 in Exchange for 100%
of the common stock of Jreck Subs, Inc. 5,000,000 318,014 $(1,600,000)
Consolidated Retained Earnings of Subsidiary (695,416)
Issuance of Series A NonRedeemable Convertible
Preferred Stock May 1996 in exchange for 100%
of Jreck Subs, Inc. Series A Preferred Stock 700,000 $ 1,400,000
Issuance of Series B NonRedeemable Convertible
Preferred Stock May 1996 in exchange for 100%
of Jreck Subs, Inc. Series B Preferred Stock 350,000 $ 700,000
Issuance of Shares pursuant to Section 504 Offering
under Regulation D, June 1996, net of offering costs 1,536,000 648,150
Issuance of Shares in Exchange for Cancellation of Debt 45,000 22,500
Payment of Preferred Dividends (54,800)
Consolidated net Loss Year Ended December 31, 1996 (39,657)
December 31, 1996 8,781,000 999,664 1,050,000 $ 2,100,000 $(1,600,000) $ (789,873)
Issuance of Shares for Purchase of Equipment 230,000 535,000
Conversion of Series A Preferred Stock to Common Stock 100,000 200,000 (100,000) (200,000)
Issuance of Shares for Services 391,478 1,116,898
Issuance of Shares 915,095 715,000
Issuance of Shares for Acquisitions 1,831,261 4,105,430 120 120,000
Payment of Preferred Dividends (44,571)
Net Loss for the Nine Months Ended September 30, 1997 (1,662,887)
September 30, 1997 12,248,834 $ 7,671,992 950,120 $ 2,020,000 $(1,600,000) $(2,497,331)
</TABLE>
See Notes to Financial Statements
F-6
<PAGE>
JRECK SUBS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies:
1. The Company was organized April 25, 1994. Previous operations focus
primarily on servicing 51 submarine sandwich shops (known as Jreck Subs) as the
parent franchising organization. During 1997, the Company through a series of
acquisitions purchased Hymie's Bagels, Little King Subs, Georgio's Subs and
Mountain Mike's Pizza and as of September 30, 1997 had approximately 250
restaurants of which 230 are franchised locations. The Company sells territorial
rights and provides guidance and assistance to the franchisees in areas such as
the preparation, packaging and sale of products; purchasing equipment, marketing
and administrative support and conducting employee training.
2. Revenue and Expense Recognition: Royalty revenue is recognized weekly
as a percentage of franchise net sales. Expenses
are charged to operations as incurred.
3. Property & Equipment are recorded on the basis of cost. Depreciation is
computed using either the straight-line method or double declining balance
method over the estimated useful lives of the assets. Depreciation expense for
the year ended December 31, 1996 was $14,518. Expenditures for renewals and
betterments are capitalized. Expenditures for repairs and maintenance are
charged to operations as incurred. Gain or loss upon sale or retirement due to
obsolescence is reflected in the operating results in the period the event takes
place. Details of the Property & Equipment are as follows:
<TABLE>
<CAPTION>
Sep 30, 1997 Dec. 31, 1996
<S> <C> <C>
Machinery & Equipment $ 1,756,875 $ 21,703
Vehicles 63,175 58,591
1,820,050 80,294
Less Accumulated Depreciation 106,029 30,106
Net Property & Equipment $ 1,714,021 $ 50,188
</TABLE>
4. Principles of Consolidation: Investments in affiliates that are 50% or
less owned are accounted for by the equity method of accounting. This requires
that the Company's share of the affiliate's net income be included in its income
statement and that it carry its investment at cost plus its interest in
undistributed net earnings.
5. Goodwill: The Company classifies as goodwill the cost in excess of fair
value of assets of the companies acquired in purchase
transactions. Goodwill is amortized over periods ranging from 20 to 40 years.
F-7
<PAGE>
B. Notes Payable:
<TABLE>
<CAPTION>
A summary of the various obligations are as follows:
Sep 30, 1997 Dec 31, 1996
<S> <C> <C>
Promissory Notes $ 618,929 $ 399,679
FDIC 0 259,334
Ed Mahar 57,008 76,999
Commercial Paper 314,680 0
Noncompete Agreement 72,000 0
Other 187,425 0
Total $ 1,250,042 $736,012
</TABLE>
C. Long Tern Debt:
A summary of obligations is as follows:
<TABLE>
<CAPTION>
Description of Obligation: Sep 30, 1997 Dec 31, 1996
--------------------------
<S> <C> <C>
Convertible Notes Payable $ 530,000 0
Due to Christopher Swartz (President) 549,677 0
Iseman and Kane 360,000 0
Deegan Group 180,000 0
SRW, Inc. 100,000 0
Sid Wertheim - Little King, Inc. 427,076 0
First National Bank - Little King, Inc. 135,000 0
Other Little King, Inc. obligations 70,603 0
Georgio's obligations 121,760 0
Other 60,545 66,456
2,534,661 66,456
Less Current Portion 20,000 20,000
Total Long Term Debt $ 2,514,661 $ 46,456
</TABLE>
The convertible notes payable of $530,000 bears interest at 12.75% payable
quarterly and are due in April 2000. The notes are convertible into the
Company's common stock at $11.82 per share.
F-8
<PAGE>
D. Other Assets:
Deferred Offering Costs are the capitalized expenses incurred in connection
with the Company's efforts to raise financing through the issuance of its 10.5%
Promissory Notes. These expenses are amortized over the life of the notes, In
1996 the Company restate its Franchise Agreement to require an annual minimum
franchise royalty payment for 10 years for all of its franchisees. The present
value of these minimum payments has been imputed at 9% and reflected as
Franchise Agreements in Other Assets and, correspondingly, Deferred Income under
Other Liabilities. In 1997, the Company decided to not carry the present value
of the minimum payments in Other Assets and Deferred Income.
<TABLE>
<CAPTION>
Description: Sep 30, 1997 Dec. 31, 1996
------------
<S> <C> <C>
Franchise Agreements $ 0 2,294,041
Deferred Offering Costs 0 14,786
Advances to Former Officer 257,114 115,641
Deferred Income Taxes (Note E) 387,846 387,846
Covenant Note to Compete 96,000 0
Other Intangibles 586,848 0
Miscellaneous 39,631 0
Total $ 1,367,439 $ 2,812,314
</TABLE>
E. Income Taxes:
The net non-current deferred tax asset as presented on the accompanying
balance sheets consist of the following deferred tax assets
<TABLE>
<CAPTION>
Sep 30, 1997 Dec 31, 1996
<S> <C> <C>
Federal and State Deferred Income Taxes $ 387,846 $ 387,846
Less Valuation Allowance 0 0
Total $ 387,846 $ 387,846
</TABLE>
The corporations have net operating loss carryforwards available of
$1,224,000 that may be used to offset future taxable income. These carryforwards
begin to expire in the fiscal year ending December 31, 2005.
F. Preferred Stock:
On November 22, 1995 the Company concluded an exchange offer in which
holders of the Notes Payable on the purchase of Treasury Stock would exchange
their notes for the Company's Series A nonredeemable Preferred Stock. 700,000
shares were issued and the notes, together with accrued interest of $363,165
were retired. Each shares of the Preferred Stock is convertible, at the
discretion of the Board of Directors, into one share of the Company's Common
Stock. Dividends on the Series A Preferred Stock accrue and become payable
weekly at the annual rate of 9 cents per share. The shares are nonredeemable.
The Company also issued its Series B Preferred Stock in exchange for 50% of the
voting common stock of its unconsolidated subsidiary (Note J). the rights and
preferences of the Series B preferred shares are similar to those of the series
A. In July 1997, 100,000 shares of the Series A Preferred Stock was converted
into 100,000 shares of the Company's Common Stock. In connection with the
Company's acquisition of Mountain Mike's Pizza, it issued 120 shares of the
Company's Series C nonredeemable Preferred Stock with a liquidation value of
$120,000. Dividends on the Series C Preferred Stock are $130 per share per
annum.
G. Common Stock Offering:
At December 31, 1996 the Company was actively engaged in a public offering
of its common stock. The offering is exempt from S.E.C. registration under Rule
504 of Regulation D. As of December 31, 1996 the Company had received $768,000
in cash and issued 1,536,000 shares of its common stock. The offering was
concluded in February, 1997 after receiving an additional $220,000 in cash.
All costs of the offering have been reflected as a reduction of the total amount
received.
F-9
<PAGE>
H. Payment of Contingent Liability:
In February, 1989, Jreck Subs, Inc. entered into an agreement to purchase
four stores from HLS Enterprises, Inc. In November, 1989 these stores were
subsequently resold to Bundeswehr, Inc. The sales agreement stipulated that all
debt owed by Jreck Subs, Inc. to HLS would be assumed and become an obligation
of Bundeswehr, Inc. In 1996 the Company paid $120,000 for full and complete
satisfaction of this liability. This payment has been charged against revenues
in the current period.
I. Investment in Unconsolidated Subsidiary:
In November, 1995 the Company acquired 50% of the voting common and 40% of
the preferred shares of Pastry Product Producers, LLC. This company currently
supplies the Jreck franchise stores with their baked goods and holds a 10 year
contract to supply submarine sandwich rolls for Jreck Subs, Inc. The investment
has been accounted for by the equity method (Note A). The Company also leases
its office space from its subsidiary for $500/month under a 10 year lease
agreement.
F-10
<PAGE>
<TABLE>
<CAPTION>
Pastry Product Producers, LLC
Balance Sheet
June 30, 1997 and December 31, 1996 (Unaudited)
Assets
June 30, 1997 Dec. 31, 1996
Current Assets:
<S> <C> <C>
Cash $ 3,264 $ 3,326
Accounts Receivable-Net 81,317 75,455
Prepaid Expenses 0 5,000
Total Current Assets 84,581 83,781
Property and Equipment (Note A):
Machinery and Equipment 218,250 218,250
Delivery Vehicles 13,180 13,180
Real Estate & Improvements 184,502 184,502
Total Cost of Property and Equipment 415,932 415,932
Less Accumulated Depreciation (105,113) (105,113)
Property and Equipment (Net) 310,819 310,819
Other Assets:
Organization Costs 8,680 8,680
Capitalized Franchise Fees (Note D) 1,655,564 1,655,564
Total Other Assets 1,664,244 1,664,244
Total Assets $ 2,059,644 $ 2,058,844
See Notes to Financial Statements
F-11
<PAGE>
Pastry Product Producers, LLC
Balance Sheet
June 30, 1997 and December 31, 1996 (Unaudited)
Liabilities and Stockholder's Equity
June 30, 1997 Dec. 31, 1996
Current Liabilities:
Accounts Payable $ 8,306 $ 0
Current Portion of Long Term Debt 66,550 49,834
Total Current Liabilities 74,856 49,834
Deferred Franchise Contract Income (Note D) 1,655,564 1,655,564
Long Term Debt (Note C) 0 26,550
Stockholders' Equity:
Stockholders' Equity 329,224 326,896
Total Liabilities and Stockholder's Equity $ 2,059,644 $ 2,058,844
</TABLE>
See Notes to Financial Statements
F-12
<PAGE>
<TABLE>
<CAPTION>
Pastry Products Producers, LLC
Statement of Operations and Stockholders' Equity
For the Six Months Ended June 30, 1997 and 1996 and
the Years Ended December 31, 1996 and 1995 (Unaudited)
June 30, 1997 June 30, 1996 Dec. 31, 1996 Dec. 31, 1995
<S> <C> <C> <C> <C>
Sales $ 454,989 $ 185,595 $ 708,296 $ 93,784
Cost of Sales:
Materials and Supplies 183,996 64,729 178,795 36,282
Gross Profit 270,993 121,866 529,501 57,502
Selling, General and
Administrative Expenses 221,029 130,403 539,438 57,502
Income (Loss) Before Other
Income and Income Taxes 49,964 (8,537) (9,937) 0
Other Income:
Gain on Sale of Equipment 0 0 300 0
Income (Loss) Before Taxes 49,964 (8,537) (9,637) 0
Income Taxes (Note B) 0 0 0 0
Net Income (Loss) 49,964 (8,537) (9,637) 0
Stockholders' Equity -Beginning of Year 326,896 231,625 231,625 0
Capital Contributions
net of Repayments (47,636) 0 104,908 231,625
Stockholders' Equity - End of Year $ 329,224 $ 223,088 $ 326,896 $ 231,625
</TABLE>
See Notes to Financial Statements
F-13
<PAGE>
<TABLE>
<CAPTION>
Pastry Product Producers, LLC
Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1996 and
the Years Ended December 31, 1996 and 1995 (Unaudited)
June 30, 1997 June 30, 1996 Dec. 31, 1996 Dec. 31, 1995
Operating Activities:
<S> <C> <C> <C> <C>
Net Income (Loss) $ 49,964 $ (8,537) $ (9,637) $ 0
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 0 0 38,294 0
Changes in operating assets
and liabilities:
(Increase) Decrease in
accounts receivable (5,862) (9,301) (75,455) (13,288)
(Increase) in prepaid expenses 5,000 0 (5,000) (4,000)
Increase in current liabilities 25,022 19,941 0 7,689
Total Cash Provided by Operating
Activities 74,124 2,103 (51,798) (9,599)
Investing Activities:
Purchase of equipment 0 0 0 (361,815)
Payment of Organization Costs Filing
Fees on Building 0 0 (10,811) 0
Cash Received on Sale of Equipment 0 0 157 0
Total Cash Used in Investing
Activities 0 0 (10,654) (361,815)
Financing Activities:
Increase in debt 0 0 0 375,176
Capital Contributions From Stockholders
(net of repayments) (47,636) 6,798 104,908 0
Principal payments on long term debt (26,550) 0 (42,892) 0
Total Cash Provided (Used) by
Financing Activities (74,186) 6,798 62,016 375,176
Increase (decrease) in cash (62) 8,901 (436) 3,762
Beginning cash 3,326 0 3,762 0
Ending Cash $ 3,264 $ 8,901 $ 3,326 $ 3,762
Other cash flow information -Interest paid $15,023
See Notes to Financial Statements
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
Pastry Product Producers, LLC
Schedule of Selling, General and Administrative Expenses
Year Ended December 31, 1996 (Unaudited)
Year Ended
Dec. 31, 1996
<S> <C>
Commissions $ 37,547
Delivery 37,008
Depreciation and Amortization 38,294
Insurance 14,490
Interest 15,023
Legal and Accounting 2,176
Office and Miscellaneous 17,464
Payroll and Fringe Benefits 274,739
Real Estate Taxes 5,516
Repair and Maintenance (Facilities) 22,132
Sales Tax Portion of Lease Payments 4,886
Supplies 39,911
Telephone 4,222
Utilities & Water 26,030
Total Selling, General and Administrative Expenses $ 539,438
</TABLE>
See Notes to Financial Statements
F-15
<PAGE>
Pastry Product Producers, LLC
Notes to Financial Statements
Year Ended December 31, 1996
A. Summary of Significant Accounting Policies:
Property and Equipment. All property is stated at original cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful life of the related assets as follows:
Bakery Equipment 7 years
Building & Improvements 39 years
Trucks 7 years
Depreciation expense is computed using IRS guidelines for the types of
assets owned by the Company. For the year ended December 31, 1996 depreciation
expense was $37,674.
B. Income Taxes:
In April of 1996 the Company converted its tax form of ownership from a
"C" corporation to a Limited Liability Corporation (LLC). New York State as well
as the U.S. Government taxes LLC's as partnerships. Partnerships, acting as a
flow through entity, normally do not incur any income tax. Therefore no
provision for income tax expense has been made.
C. Long Term Debt:
Long term debt consists of six separate financing arrangements made for
the acquisition of (and secured by) a substantial portion of the Company's
bakery equipment. Monthly payments total approximately $5,092. A summary of
maturities is as follows:
Year Ended Amount
December 31, 1997 $ 49,834
December 31, 1998 26,546
December 31, 1999 0
TOTAL $ 76,830
D. Contract Values/Deferred Income:
The Company has secured about 50 long term contracts for commitments of
a minimum amount of rolls & bagels to be delivered over a 10 year period. The
Company has computed the present value of these minimum deliveries over the 10
year period and reflected the corresponding value as an asset and deferred
income on the balance sheet.
F-16
<PAGE>
Cronin & Co.
Certified Public Accountants
12 Blandford Lane
Fairport, NY 14450
Board of Directors and Shareholders
Seawest Sub Shops, Inc.
Bellevue, WA
I have audited the accompanying balance sheet of Seawest Sub Shops, Inc. as of
December 31, 1996 and the related statements of income, cash flows and
stockholders' equity for the year then ended. The financial statements are the
responsibility of the directors. My responsibility is to express an opinion on
these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Seawest Sub shops, Inc. as of
December 31, 1996 and the results of its operations, in cash flows and changes
in the stockholder's equity for the year then ended in conformity with the
generally accepted accounting principles.
The December 31, 1995 financial statements were audited by other auditors, whose
report dated March 22, 1996, state that the balance sheet and related statements
of operations and cash flows as of and for the years then ended, were presented
fairly and in conformity with generally accepted accounting principles applied
on a consistent basis.
July 13, 1997
Cronin & Co.
Certified Public Accountants
F-17
<PAGE>
<TABLE>
<CAPTION>
SEAWEST SUB SHOPS, INC.
BALANCE SHEETS
ASSETS
June 30 December 31,
1997 1996
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents $ 24,424 $ 11,421
Receivables:
Trade 93,332 69,290
Employees 0 0
Related Parties 0 0
Inventories 76,262 3,561
Prepaid Expenses 5,000 5,179
Current Portion of Notes Receivable 4,397 59,265
Total Current Assets 203,415 148,716
Property & Equipment, Net of Accumulated
Depreciation (Note A) 64,241 64,241
Other Assets (Note B) 625,364 598,059
Total Assets $ 893,020 $ 811,016
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 95,365 $ 146,118
Deposits from Franchisees 11,750 6,750
Accrued Expenses 170,327 31,470
Jreck Subs 54,000 0
Current Portion of Long Term Debt (Note C) 138,700 138,700
Total Current Liabilities 470,142 323,038
Long Term Debt (Note C) 402,004 402,004
Deferred Income (Note D) 100,000 100,000
Contingent Liabilities (Note F)
Stockholders' Equity:
Common Stock (No par value, 5,000,000 shares authorized
2,271,000 shares outstanding) 220,497 220,497
Retained Earnings (Deficit) (299,623) (234,523)
Total Stockholders' Equity (79,126) (14,026)
Total Liabilities & Stockholders' Equity $ 893,020 $ 811,016
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
SEAWEST SUB SHOPS, INC.
STATEMENTS of OPERATIONS
Six Months Ended Fiscal Year Ended
June 30, December 31,
1997 1996 1996 1995
Revenue (Note A):
<S> <C> <C> <C> <C>
Initial Franchise Fees $ 0 $ 20,500 $ 41,000 $ 88,501
Continuing Franchise Fees 188,310 164,755 329,510 522,818
Territorial Franchising Rights 0 32,225 64,450 0
Marketing Fees 0 47,350 94,700 0
Marketing Co-op Rebates 0 37,792 75,583 0
Sales Generated by Corporate Operated
Sub Shops (Note G) 151,044 28,082 56,165 138,114
Total Revenues 339,354 330,704 661,408 749,433
Costs and Expenses Applicable to Sales Revenue:
Commissions on Sale & Resale of Franchises 0 6,811 13,622 29,281
Marketing and Advertising Expenditures 0 65,069 130,136 142,612
Food Costs Applicable to Sub Shop
Operations (Note G) 60,417 14,411 28,822 62,271
Total Costs & Expenses
Applicable to Sales 60,417 86,291 172,580 234,164
Gross Profit 278,937 244,413 488,828 515,269
Provision for Doubtful Accounts Receivable 33 0 20,177 64,515
Selling, General & Administrative Expenses 311,669 201,241 402,483 505,415
Income (Loss) From Operations (32,765) 43,172 66,168 (54,661)
Other Income:
Interest 3,924 10,668 21,335 35,416
Miscellaneous 1,750 24,027 48,056 36,099
Gains on Resale of Reacquired Stores 0 0 0 77,706
Other Expense:
Interest 5,009 11,281 22,562 50,305
Amortization of Intangibles 33,000 38,837 77,674 72,250
Losses on Store Repossessions and
Closures (Note G) 0 87,811 245,013 0
Total Other Income (Expense) (32,335) (103,234) (275,858) 26,666
Income (Loss) Before Income Taxes (65,100) (60,062) (209,690) (27,995)
Income Tax Expense (Benefit) (Notes E) 0 0 0 0
Net Income (Loss) $ (65,100) $ (60,062) $ (209,690) $ (27,995)
F-19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEAWEST SUB SHOPS, INC.
STATEMENTS OF CASH FLOWS
Six Months Ended Fiscal Year Ended
June 30, December 31,
1997 1996 1996 1995
Operating Activities:
<S> <C> <C> <C> <C>
Net Income (Loss) $ (65,100) $ (60,062) $ (209,690) $ (27,995)
Adjustments to Reconcile Net Income (Loss) to
Cash Provided (Consumed) by Operating Activities:
Depreciation and Amortization of
Intangible Assets 33,000 33,000 82,201 72,250
Write off Uncollectible Trade Accounts
Receivable 33 0 20,177 0
Loss on Sub Shops Sold/Closed 0 0 245,013 67,175
Expenses Recognized Through Issuance of
Common Stock 0 0 0 7,500
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Accounts & Notes
Receivable (24,042) (27,366) 62,933 45,619
(Increase) Decrease in Other
Current Assets (17,654) 27,877 9,954 12,830
Increase (Decrease) in Accounts Payable &
Accrued Expenses 147,085 (20,212) 42,909 (37,326)
Net Cash Provided (Consumed)
by Operating Activities 73,322 (46,763) 253,497 140,053
Investing Activities:
Purchase of Property & Equipment 0 0 (28,070) (30,431)
Collections on Notes Receivable 0 16,806 82,962 0
Increases on Notes Receivable (60,319) 0 (201,500) 0
Net Cash Used in Investing Activities (60,319) 16,806 (146,608) (30,431)
Financing Activities:
Payments on Long Term Debt 0 0 (105,213) (108,847)
Financing Proceeds 0 0 0 0
Net Cash Provided (Used) by
Financing Activities 0 0 (105,213) (108,847)
Net Change in Cash 13,003 (29,957) 1,676 775
Cash & Cash Equivalents at the
Beginning of Period 11,421 9,745 9,745 8,970
Cash & Cash Equivalents at the
End of Period $ 24,424 $ (20,212) $ 11,421 $ 9,745
</TABLE>
See Notes to Financial Statements
F-20
<PAGE>
<TABLE>
<CAPTION>
SEAWEST SUB SHOPS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
Shares Amount
Additional Retained
Paid-In Paid-In Earnings
Capital Capital (Deficit)
<S> <C> <C> <C> <C>
December 31, 1993 2,162,000 $ 0 $ 157,917 $ 223,586
Issuance of Shares in Exchange for Cancellation of Debt 79,000 45,080
Issuance of Shares in Exchange for Professional Services 15,000 7,500
Net Loss December 31, 1994 (220,424)
December 31, 1994 2,256,000 0 212,997 (3,162)
Issuance of Shares in Exchange for Professional Services 15,000 7,500
Net Income December 31, 1995 (27,995)
December 31, 1995 2,271,000 0 220,497 (24,833)
Net Loss December 31, 1996 (209,690)
December 31, 1996 2,271,000 0 220,497 (234,523)
Net Loss for the Six Months Ended June 30, 1997 (65,100)
June 30, 1997 2,271,000 $ 0 $ 220,497 $ (299,623)
</TABLE>
See Notes to Financial Statements
F-21
<PAGE>
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies:
1. The Company was organized December 30, 1985. Current operations focus
primarily servicing is chain of franchised submarine sandwich shops (known as
"Sub Shops") as the parent franchising organization. The Company sells franchise
rights, primarily in and around the Seattle area, and provides guidance and
assistance to the franchisees in areas such as the preparation, packaging and
sale of products; purchasing equipment; marketing and administrative support and
conducting employee training programs.
2. Revenue and Expense Recognition: Continuing franchise fee revenue is
recognized quarterly, monthly or weekly and is charged to the franchisees at 5%
of franchise net sales (a monthly or quarterly flat fee is required in
agreements made prior to 1992). Initial Franchise Fee revenue is recognized upon
the execution of the Franchise Agreement and is generally nonrefundable. In
addition to the continuing franchise fees, franchisees are required to remit 2%
of their sales in the form of a pooled marketing contribution. The Company has
no "Trust Fund" obligation with respect to these funds and, accordingly,
recognizes this form of revenue in the period in which the franchise obligation
becomes due and payable. The Company also receives marketing incentives, in the
form of rebates, from its major suppliers. Expenses, including
advertising/marketing, are charged to operations as incurred.
3. Property & Equipment are recorded on the basis of cost. Depreciation is
computed using either the straight-line method or double declining balance
method over the estimated useful lives of the assets. Depreciation expense for
the year ended December 31, 1996 was $4,527. Expenditures for renewals and
betterments are capitalized. Expenditures for repairs and maintenance are
charged to operations as incurred. Gain or loss upon sale or retirement due to
obsolescence is reflected in the operating results in the period the event takes
place.
B. Other Assets:
Other Assets consist of a 10 year covenant not to compete from former
shareholders pursuant to a 1991 stock sale agreement (see note C-1). The
covenant is amortized annually at a rate exactly equal to annual principal
reductions in the corresponding obligations to the former shareholders as
reflected in long-term debt; notes receivable on the sale/resale of its stores
and a 5 year non-compete covenant arising from the acquisition of 7 stores in
1993. This covenant is being amortized over the 5 year period.
F-22
<PAGE>
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
June 30, 1997 Dec. 31, 1996
Description of Asset:
<S> <C> <C>
Notes Receivable $ 373,047 $ 342,734
Less Valuation Allowance 124,379 124,739
Net Realizable Value of Notes Receivable 248,668 217,995
Equipment Lease Security Deposits 9,981 9,981
Corporate Covenant Not to Compete 700,000 700,000
Store Covenants Not to Compete 58,369 58,369
Less Accumulated Amortization 362,021 329,021
Net Carrying Value of Non-Compete Covenants 396,348 429,348
Total Other Assets 654,997 657,324
Less Current Portion of Notes Receivable 29,633 59,265
Total $ 625,364 $ 598,059
</TABLE>
C. Long Term Debt:
1. Due to Former Shareholders: On February 25, 1991 a stock purchase and sale
agreement was executed between Messrs. Kane & Isemen (the former shareholders
and sellers) and Mitchell Day (the current majority shareholder and purchaser).
This agreement bound the Company to pay $700,000 over 10 years for a 10 year
covenant not to compete from the former shareholders. The Notes are non-interest
bearing and are secured by the pledged stock of the purchaser. Minimum payments
over the 10 year period of the covenant are as follows:
PERIOD AMOUNT
April 1, 1991 - March 31, 1996 $ 4,000/Month
April 1, 1996 - March 31, 2001 $ 6,000/Month
May 1, 2001 $ 100,000
2. Note Payable - Graham & Dunn: On March 26, 1996 the Company converted unpaid
legal fees in the amount of $35,524 to an unsecured promissory note in the
amount of $20,524. The note bears interest at 12% and is payable over 16 months
commencing April 1, 1996.
3. Note Payable - Sternfeld: Arising from the settlement of a lawsuit in
1993, the note is unsecured,
F-23
<PAGE>
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
payable in monthly installments of $1,000 and bear interest at 12%.
4. Notes Payable on Store Reacquisitions: The Company engages in the
repossession, acquisition, reacquisition and resale of franchised Sub Shops
Stores from time to time. As a result of this activity, the Company may be
obligated to assume certain debts of the repossessed store or will incur an
obligation upon the outright purchase of a Sub Shop Store. These notes are
services by the Corporation during its term of ownership and may be secured by
certain equipment or be unsecured. The capitalized costs associated with the
acquisition of a store are reflected as an asset. Upon the subsequent sale or
closure of a store, these costs are treated as a reduction in the total amount
realized or as charge against earnings in the period the store is closed.
A summary of obligations is as follows:
<TABLE>
<CAPTION>
June 30, 1997 Dec. 31, 1996
Description of Obligation:
<S> <C> <C>
Due to Former Shareholders $ 406,000 $ 406,000
Graham & Dunn 11,707 11,707
Sternfeld 24,428 24,428
Payable on Store Reacquisitions 98,569 98,569
540,704 540,704
Less Current Portion 138,700 138,700
Total Long Term Debt $ 402,004 $ 402,004
</TABLE>
Five Year Maturities For Fiscal Years Ending December 31 Are As Follows:
1997 $ 138,700
1998 98,088
1999 78,837
2000 78,379
2001 79,056
2002 and After 67,644
Total $ 540,704
D. Deferred Income:
In 1996 the Company sold territory franchise rights covering Japan. The
contract calls for 3 annual installments of $50,000 each payable in November
1996, 1997 and 1998. Seawest has received the 1996
F-24
<PAGE>
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
payment and recognized $50,000 as income on the 1996 financial statements.
Management has elected to defer recognition of income on the balance until
collection can be reasonably assured.
E. Income Taxes:
The Corporation has net operating loss carryforwards available of
$317,690 that may be used to offset future taxable income. These carryforwards
begin to expire in the fiscal year ending December 31, 2011. The deferred tax
benefit arising from these loss carryforwards has been fully reserved.
F. Leases, Commitment and Contingent Liabilities:
The Company rents its current office space under a month to month
agreement. Rent expense for the year ended December 31, 1996 was $17,628. In
addition to its corporate offices, the Company pays rent on corporately owned
and operated Sub Shops and make payments on store equipment leases while these
stores are under corporate management. Store rent and equipment lease expense
for 1996 was $33,156. The Company is also contingently liable for equipment &
facility leases and rents as part of its franchise agreements.
Contingent future minimum lease payments are as follows:
1997 $ 213,376
1998 120,801
1999 121,672
2000 100,609
2001 50,146
$ 606,604
The Company is currently a defendant in several lawsuits and has 3
items in arbitration. Approximately 16 stores have asserted claims of franchisee
discrimination under the Franchise Investment Protection Act and are seeking a
recision of the franchise agreement along with damages in an unspecified sum.
Settlement discussions are likely whereby all parties will agree to dismiss
their respective claims without cost. Seawest is reviewing a $20,000 offer in
settlement of a store lease guarantee claim of $34,222. The Company is also a
defendant in several other legal actions regarding store lease breaches and
guarantees aggregating in the amount of $364,795. Management is unable to
estimate the amount of loss, if any, on these lease guarantees.
F-25
<PAGE>
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
G. Franchises Sold, Purchased or Operated:
During 1996 the Company wrote off the carrying value of 5 stores
previously sold for a total amount of $242,045. These write offs were the result
of store closures and the subsequent default on notes receivable. The Company
resold 1 store in its inventory for $18,000 realizing a loss of $2,968. Seawest
currently operates 1 store due to a foreclosure in July 1996. Summary operating
results of franchisor operated stores for 1996 are:
Sales $ 56,165
Food Costs 28,822
Gross Profit 27,343
Operating Expenses 56,014
Net Loss $ (28,671)
F-26
<PAGE>
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Quality Franchise Systems, Inc. and Subsidiary
Consolidated Balance Sheet
September 30, 1997 (Unaudited) and December 31, 1996
ASSETS
1997 1996
---- ----
Cash $ 125,233 $ 126,089
<S> <C> <C>
Royalties receivable, net 114,028 160,792
Current portion of area development fees receivable 10,795 25,991
Other current assets 8,040 25,110
------------ -----------
Total current assets 258,096 337,982
Interest-bearing deposit in bank 0 750,000
Notes and long-term royalties receivable, net 0 24,481
Area development fees receivable, less current portion 38,562 348,424
Deferred financing costs, net 38,635 63,805
Franchising rights, contracts and trademarks, net 203,278 249,910
Merger costs (Jreck Subs Group, Inc.) 64,777 0
Investment in restaurant 0 45,001
Furniture and equipment, net 9,622 41,840
------------ -----------
$ 612,970 $1,861,443
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 527,934 $ 633,595
Current portion of notes payable 6,667 26,545
Notes payable to shareholders 172,850 312,850
Deferred franchise fees 20,000 70,000
---------- ----------
Total current liabilities 727,451 1,042,990
Deferred area development fees 74,500 424,500
Convertible notes payable 530,000 530,000
----------
Total liabilities 1,331,951 1,997,490
--------- ---------
Shareholders' Equity (Deficit):
Preferred stock ($.001 par value, 2,000,000 shares
authorized, 545 shares issued and outstanding) 1 1
Common stock ($.001 par value, 10,000,000 shares
authorized, 353,650 shares issued and outstanding) 354 354
Class B common stock ($.001 par value, 10,000,000 shares
authorized, 2,229,496 and 2,464,100 shares issued and
outstanding) 2,229 2,464
Additional paid-in capital 1,859,472 2,588,845
Accumulated deficit (2,581,037) (2,563,003)
Treasury stock, at cost, 73,204 shares 0 (164,708)
------------- ----------
Total shareholders' equity (deficit) (718,981) (136,047)
---------- ----------
$ 612,970 $1,861,443
========== =========
</TABLE>
See notes to consolidated financial
statements.
F-27
<PAGE>
<TABLE>
<CAPTION>
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
Quality Franchise Systems, Inc. and Subsidiary
Consolidated Statement of Operations
For the Nine and Three Months Ended September 30, 1997 and 1996 (Unaudited)
Nine Month Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenue:
<S> <C> <C> <C> <C>
Franchise royalties $ 905,337 $ 848,897 $ 315,787 $ 311,776
Initial franchise and transfer fees 160,260 111,000 80,260 10,000
Area development fees 45,000 171,987 (15,000) (70,153)
Vendor funds 229,850 101,496 138,005 44,311
Other 137,591 93,346 57,491 32,335
----------- ----------- -------- -----------
1,478,038 1,326,726 576,543 327,909
Expenses:
General and administrative 496,581 636,093 157,846 233,430
Restaurant servicing and area developer
share of fees 581,553 600,020 208,269 246,042
Area development expense 43,125 364,664 (23,079) 126,294
Other 46,751 46,381 26,828 14,498
---------- ---------- -------- ----------
1,168,010 1,647,158 369,864 620,264
---------
Operating income (loss) 310,028 (320,432) 206,679 (292,355)
Other income (expense):
Loss from operation and (84,010) (23,807) (8,361) (23,807)
disposition of restaurant
Business expansion expense (98,630) - (98,630) -
Interest expense (92,430) (121,247) (32,642) (33,332)
-------- --------- -------- --------
Net income (loss) $ 34,958 $ (465,486) $ 67,046 $ (349,494)
Preferred stock dividends (52,992) (21,957) (17,858) (17,550)
-------- ---------- -------- ----------
Net income (loss) to common shareholders $ (18,034) $ (487,443) $ 49,188 $ (367,044)
======== ========= ======= =========
</TABLE>
See notes to consolidated financial
statements.
F-28
<PAGE>
SEAWEST SUB SHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Quality Franchise Systems, Inc. and Subsidiary
Statement of Cash Flows
For the Nine Months Ended September 30, 1997 and 1996 (Unaudited)
1997 1996
---- ----
Cash Flows from Operating Activities:
<S> <C> <C>
Net loss $ (18,034) $(487,443)
Adjustments to Reconcile Net Loss to Net
Cash Provided by Operating Activities:
Provision for uncollectible amounts and write-offs 84,481 50,000
Amortization of discount on non-interest bearing notes 27,514 31,823
Amortization and depreciation expense 61,176 49,198
Increase in current and long-term royalties receivable (13,236) (80,076)
(Increase) decrease in area development fees receivable (24,942) 28,159
(Increase) decrease in other current assets 17,070 (26,999)
Increase (decrease) in accounts payable and accrued (105,661) 11,970
expenses
Increase (decrease) in deferred area development fees - 304,500
Increase (decrease) in deferred franchise fees (50,000) (25,000)
--------- ----------
Net Cash Used in Operating Activities (21,632) (143,868)
Cash Flows from Investing Activities:
Net increase (decrease) in interest-bearing deposit 750,000 (800,000)
Merger costs (64,777)
Investment in restaurant 45,001 (45,508)
Sale (purchase) of equipment 17,674 (20,021)
--------- --------
Net Cash Provided (Used) in Investing Activities 747,898 (865,529)
Cash Flows from Financing Activities:
Issuance (repurchase) of common stock 564,900 805,000
Issuance of preferred stock for cash and conversion of
notes payable, net of costs - 8,716
Payments on notes payable (22,222) (22,222)
Borrowings (repayment) of notes payable to shareholders (140,000) 90,000
--------- --------
Net Cash Provided by (Used in) Financing Activities (727,122) 881,494
--------- -------
Net Increase (Decrease) in Cash (856) (127,903)
Cash at Beginning of Period 126,089 193,848
------- -------
Cash at End of Period $125,233 $ 65,945
======= ========
</TABLE>
The accompanying notes are an integral part of
these statements.
F-29
<PAGE>
NOTE A - ORGANIZATION AND NATURE OF BUSINESS
Quality Franchise Systems, Inc. (the "Company"), a Delaware corporation was
formed on February 10, 1995. On February 15, 1995, the Company was merged
with Q & S Management with the Company being the surviving entity.
Shareholders of Q & S Management are now the shareholders of the Company.
Quality Marketing Systems, Inc., a Delaware corporation, is a wholly-owned
subsidiary of the Company. It commenced operations on June 5, 1996 and was
formed to operate the Mountain Mike's Pizza restaurant in Boulder, Colorado
which was subsequently sold in April 1997.
On April 1, 1996, the Company filed a Restated Certificate of Incorporation
which increased its authorized shares of capital stock from 10,000,000
shares to 22,000,000 shares consisting of 2,000,000 shares of Preferred
Stock, 10,000,000 shares of Common Stock and 10,000,000 shares of Class B
Common Stock. All existing shareholders of the Company's capital stock at
April 1, 1996 became shareholders of the Company's Class B Common Stock. In
addition, at any time prior to July 2, 1996, each Class B Common Stock
shareholder could convert each share of Class B Common Stock into 1.1
shares of Common Stock. The shareholders of Class B Common Stock are
entitled to one vote per share and the shareholders of Common Stock are
entitled to one-tenth of one vote per share. Shareholders for 321,500
shares of Class B Common Stock converted to 353,650 shares of Common Stock.
The Company is a franchisor which enters into franchise agreements with
various franchisees to own and operate pizza restaurants, within defined
territories, under the name of Mountain Mike's Pizza. There are 75 and 71
franchised restaurants at September 30, 1997 and December 31, 1996,
respectively. The Company also enters into agreements with area developers
whereby the developer performs substantially all of the Company's
obligations under the franchise agreement in exchange for a portion of the
initial franchise fee and ongoing franchise royalties. These agreements
generally provide for the area developer to open a specified number of
franchises in each 12 month period in order for the agreement to remain in
force.
The Company is expanding into other national regions; however, the Company
currently derives substantially all of its revenues from restaurants
operating in the state of California.
F-30
<PAGE>
Quality Franchise Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1997 (Unaudited) and December 31, 1996
NOTE B - SUMMARY OF ACCOUNTING POLICIES
1. Principles of consolidation
The consolidated financial statements include the accounts of Quality
Franchise Systems, Inc. and its wholly-owned subsidiary Quality Marketing
Systems, Inc. All material intercompany accounts and transactions have been
eliminated.
2. Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from
those estimates.
3. Revenue recognition
Franchise royalties are generally between 4% and 5% of the individual
franchisee's monthly gross sales (i.e., sales less promotions and
discounts) and are recognized as income when earned.
Initial franchise fees are recognized as income when the Company has
completed substantially all of its obligations in opening the restaurant.
Initial franchise fees are $20,000 to first time franchisees and $10,000 to
existing franchisees opening another restaurant. Deferred franchise fees at
September 30, 1997 and December 31, 1996 are $20,000 and $70,000,
respectively, for unopened restaurants.
Fees received in exchange for area development agreements are recognized as
income when the Company has performed substantially all of the initial
services required under the area development agreement and has no further
obligations to perform services or refund any fees received from the
developer. Fees for area development agreements which are dependent on the
establishment of future franchises or for which collectibility is not
reasonably estimable are deferred and recognized as income when received.
F-31
<PAGE>
Quality Franchise Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1997 (Unaudited) and December 31, 1996
4. Amortization
Amortization of franchising rights, contracts and trademarks (original
amount of $559,824) is provided on a straight-line basis over ten years.
Accumulated amortization at September 30, 1997 and December 31, 1996 is
$356,546 and $309,914, respectively.
5. Income Taxes
On June 5, 1996, the Company became a C corporation for purposes of
computing corporate Federal and state taxes. Prior to June 5, 1996, the
shareholders have elected to have the Company taxed pursuant to subchapter
S of the Internal Revenue Code which provides that, in lieu of Federal
corporate income taxes, the shareholders recognize their proportionate
share of the Company's taxable revenue and deductible expenses on their
individual tax returns. For California state purposes a corporate tax is
imposed on S corporations at the rate of 1.5% of taxable income.
The Company utilizes an asset and liability approach in accounting for
income taxes. This approach requires the recognition of the deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the financial statements carrying amounts and
tax basis of assets and liabilities. Deferred tax assets and liabilities
are reflected as currently enacted income tax rates applicable to the
period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for income
taxes.
6. Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified to conform to the presentation used in the current year.
NOTE C - CASH/INTEREST BEARING DEPOSIT IN BANK
In connection with the issuance of the convertible notes payable in 1995,
there were provisions which designated certain uses of the proceeds. One
provision was to set aside one quarter's interest payment on the
convertible notes payable (see note E). Another provision was to reserve
funds sufficient for the amortizing payments on the Second Priority Note
(see note D). Restricted cash at September 30, 1997 for the interest
reserve and for the retirement of the Second Priority Note was $17,291 and
$6,667, respectively. The savings account of $750,000 at December 31, 1996
was pledged as collateral for a personal loan of the Company's chairman
(see note H).
F-32
<PAGE>
Quality Franchise Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1997 (Unaudited) and December 31, 1996
September 30, 1997 (Unaudited) and December 31, 1996
NOTE D - NOTES PAYABLE
Notes payable consist of a Second Priority Note in the original amount of
$80,000. The Second Priority Note does not bear interest and is secured by
the assets of the Company. The Second Priority Note is payable in 36 equal
monthly installments with the last installment due in January 1998. The
unpaid balance on the second priority note is $6,667 and $28,889 at
September 30, 1997 and December 31, 1996, respectively. Unamortized
discount at September 30, 1997 and December 31, 1996 is $0 and $2,344,
respectively.
NOTE E - CONVERTIBLE NOTES PAYABLE/CONVERTIBLE PREFERRED STOCK
In 1995, the Company issued $1,025,000 of promissory notes in conjunction
with the Company's private placement including the conversion of a $100,000
note payable to a shareholder (see note H). The promissory notes are due on
March 24, 2000 and are secured by 22 specific franchise agreements of the
Company. The promissory notes call for interest at 12.75% payable quarterly
and are convertible into Class B Common Stock of the Company at $5.48 per
share.
The proceeds from the promissory notes less offering commissions and
expenses were used to retire indebtedness associated with the Company's
1991 acquisition of the "Mountain Mike's Pizza" restaurant chain and for
working capital purposes.
In connection with the issuance of the convertible promissory notes, the
Company granted the placement manager the right to purchase 18,704 shares
of the Company's Class B Common Stock at a price equal to $5.48 per share
at any time prior to December 5, 1997.
In 1996, the Company offered its convertible note holders to exchange their
notes for convertible preferred stock. The Company offered one share of its
Series A preferred stock for each $1,000 principal of notes. The Series A
preferred stock has a cumulative dividend rate of 13% and each $1,000
principal is convertible into 287.36 shares of the Company's Class B Common
Stock or 316.09 shares of Common Stock. On June 5, 1996, 495 shares of the
Company's Series A preferred stock were issued in exchange for $495,000 of
promissory notes. In July 1996, the Company issued 50 shares of its Series
A preferred stock for $50,000.
F-33
<PAGE>
Quality Franchise Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1997 (Unaudited) and December 31, 1996
NOTE F - INCOME TAXES
At December 31, 1996, the Company has accumulated net operating losses of
approximately $370,000. These losses can be carried forward and applied
against future income of the Company for federal and state income tax
purposes. The net operating losses will begin to expire in 2011. Management
has provided a valuation allowance for the net deferred tax asset due to
their assessment that this asset will "more likely than not" not be
realized.
<TABLE>
<CAPTION>
Deferred taxes at December 31, 1996 are as follows:
Deferred tax assets:
<S> <C>
Net operating loss carryforwards $ 148,800
Accounts payable and accrued liabilities 253,400
Franchise fees collected 28,000
----------
430,200
Deferred tax liabilities:
Royalties receivable and other (84,200)
Depreciation (3,000)
(87,200)
Net deferred tax asset 343,000
Valuation allowance (343,000)
$ -
=============
</TABLE>
NOTE G - EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan in which any eligible employee may
participate. The plan is a defined contribution plan 401(k) qualified under
the Internal Revenue Code. The Company made no discretionary contributions
to the plan in 1997, 1996 and 1995.
NOTE H - RELATED PARTY TRANSACTIONS
In May 1995, the Company amended its personal services contract with a
shareholder and the former president which contract was originally entered
in September 1993. Under the terms
F-34
<PAGE>
Quality Franchise Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1997 (Unaudited) and December 31, 1996
of the amended contract, the Company engages the former president to
provide consulting services to develop the "Mountain Mike's" Pizza
restaurant chain and compensates the former president through a base
monthly fee and a portion of certain other fees collected by the Company.
For the years ended December 31, 1996 and 1995, the Company paid $84,000
and $109,733, respectively, to the former president under the personal
services contract. In 1997, the Company and the former president mutually
agreed to cancel the personal services contract.
The Company had expended amounts and provided services to the former
president and companies controlled by the former president. In April 1995,
the Company and the former president agreed that the total amounts due to
the Company including those due from companies controlled by the former
president was $164,708. In April 1995, the Company acquired 73,204 shares
of Class B Common Stock owned by the former president at $2.25 per share
for satisfaction of the amounts due to the Company by the former president.
The Company has a month-to-month agreement with a shareholder to provide
general consulting services to the Company. The Company paid the
shareholder $84,000 in each of the two years ended December 31, 1996 for
consulting services.
Notes payable to shareholder of $172,850 at September 30, 1997 are payable
to the president of the Company and bears interest at 10%. In connection
with the merger of the Company with and into Admiral's Fleet, Inc., a
Washington corporation (and wholly-owned subsidiary of Jreck Subs Group,
Inc. ("JSGI"), the president accepted JSGI stock for satisfaction of this
note.
The Chairman of the Company personally obtained an $800,000 loan from a
bank with which he acquired 230,000 shares of the Company's Class B Common
Stock at $3.50 per share on June 4, 1996. The Company had pledged as
collateral a $750,000 savings account for the Chairman's loan. In September
1997, the Chairman returned 161,400 shares of the Company's Class B Common
Stock.
NOTE I - COMPANY-OPERATED RESTAURANT
In June 1996, the Company's wholly-owned subsidiary, Quality Marketing
Systems, Inc.
began operating a restaurant in Boulder, Colorado which was sold in April
1997.
F-35
<PAGE>
Quality Franchise Systems, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1997 (Unaudited) and December 31, 1996
September 30, 1997 (Unaudited) and December 31, 1996
From June 5, 1996 through December 31, 1996, the restaurant had a net loss
of approximately $70,100. For the period January 1, 1997 until the
restaurant was sold in April 1997, the restaurant had a net loss of
approximately $77,400 which included the loss on disposition.
F-36
<PAGE>
F-37
<PAGE>
F-38
<PAGE>
F-39
<PAGE>
Jreck Subs Group, Inc.
Notes to the Unaudited Proforma Combined Financial Statements
The unaudited proforma combined financial statements have been prepared using
the following assumptions:
1. Jreck Subs Group, Inc. ("JSGI") acquires Seawest Subs Shops, Inc., Little
King, Inc., Quality
Franchise Systems, Inc. (dba Mountain Mike's Pizza) and the remaining 50%
of the Pastry
Products Producers bakery effective January 1, 1996 with an estimated
aggregate
consideration value of approximately $4,800,000.
2. The aggregate consideration value has been preliminarily allocated to the
net assets (tangible and intangible) based on the estimated fair values at
the date of acquisition with the excess of cost over fair value of the
identifiable tangible and intangible assets to goodwill. Goodwill is
amortized over 20 to 40 years.
3. The proforma assumes that there are some general, selling and
administrative cost savings from the consolidation of similar functions and
that costs associated with mergers and acquisitions are nonrecurring and
eliminated for the proforma.
a. Certain of the subsidiaries record the present value of the minimum royalty
payments due from the franchise agreements as an assets with a
corresponding deferred income liability. To be consistent, the Company's
policy is to not record this asset and liability. The total adjustment to
both assets and liabilities is $3,949,605.
b. To record the acquisition of subsidiaries including recognizing goodwill
for the aggregate purchase price exceeding the fair value of assets
acquired. The initial goodwill is approximately $5,100,000 before
amortization.
c. The Company estimates that there is approximately $500,000 in annual cost
reductions from consolidating similar administrative functions.
d. Annual amortization of goodwill is estimated at $255,000 based on a
conservative twenty year
amortization period.
F-40
<PAGE>
AGREEMENT AND PLAN
OF REORGANIZATION AND MERGER
AMONG
JRECK SUBS GROUP, INC.
ADMIRAL'S FLEET, INC. AND
QUALITY FRANCHISE SYSTEMS, INC.
August __, 1997
<PAGE>
AGREEMENT AND PLAN
OF REORGANIZATION AND MERGER
THIS AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (the "Agreement")
is made as of August __, 1997 among Jreck Subs Group, Inc., a Colorado
corporation ("Jreck"), Admiral's Fleet, Inc., a Washington corporation
("Admiral"), and Quality Franchise Systems, Inc., a Delaware corporation
("Target").
RECITALS
A. The parties hereto desire that Target shall be merged with and into
Admiral; that Admiral shall be the surviving corporation; and that each share of
the Common Stock, no par value, of Target which is outstanding immediately prior
to the effective time of the merger, other than those shares which become
"dissenting shares" within the meaning of Section 1300(b) of the California
General Corporations Law, if applicable, and Section 262 of the Delaware General
Corporations Law, be exchanged and converted as set forth in this Agreement into
shares of the Common Stock, no par value, of Jreck as set forth in this
Agreement.
B. The parties hereto intend that the merger constitute
a "tax free
reorganization" under Section 368(a), of the Internal Revenue Code of 1986, as
amended.
THE PARTIES AGREE AS FOLLOWS:
1. DEFINITIONS. For purposes of this Agreement, the following
terms shall have
the meanings specified in this Article 1 unless the context expressly or by
necessary implication
otherwise requires:
1.1 Balance Sheet and Balance Sheet Date shall have the
meaning set forth in Section 4.4 of this Agreement.
1.2 Closing shall mean the delivery by Jreck and Target of the
various documents contemplated by this Agreement or otherwise required in order
to consummate the Merger.
1.3 Closing Date shall have the meaning set forth in
Section 2.2 of this
------------
Agreement.
1.4 Code shall mean the Internal Revenue Code of 1986,
as amended.
1.5 Corporations Code shall collectively mean the Delaware
General Corporations Law (the "Delaware Corporations Code"), and the California
General Corporations Law to the extent applicable under California Code Section
2115 (the "California Corporations Code").
<PAGE>
1.6 Disclosure Statement shall have the meaning set forth in
the first paragraph of Article 3 of this Agreement.
1.7 Dissenting Shares shall mean all shares, if any, of the
outstanding capital stock of Target for which dissenter's rights shall be
perfected under Section 1300(b) of the California Corporations Code, if
applicable, and Section 262 of the Delaware Corporations Code.
1.8 Effective Time shall mean the time when the Plan of Merger
is filed with the Secretary of State of the State of Washington and the Merger
becomes effective.
1.9 Escrow Agreement shall mean the Agreement relating to an
escrow of certain shares of Jreck Common pursuant to Section 2.4 of this
Agreement, in the form attached to this Agreement as Exhibit A.
1.10 Escrow Holder shall mean Williams, Kastner & Gibbs PLLC.
1.11 Exchange Act shall mean the Securities and Exchange Act
of 1934, as amended, and the rules and regulations thereunder.
1.12 Knowledge. Wherever in this Agreement a statement,
warranty or representation is to a party's "knowledge," knowledge shall mean all
facts actually known by such party's Board of Directors, CEO, President, CFO (or
equivalent) and all executive or senior vice presidents.
1.13 Merger shall mean the merger of Target with and into
Admiral in accordance with this Agreement, the Plan of Merger and applicable
law.
1.14 Plan of Merger shall mean the Plan of Merger between
Target and Admiral together with the Articles of Merger, in the form attached to
this Agreement as Exhibit B.
1.15 Jreck Common shall mean the unregistered voting common
stock, no par value, of Jreck issued subject to the restrictions of Rule 144 of
the Securities Act and any other restrictions specified in this Agreement.
1.16 Securities Act shall mean the Securities Act of 1933
as amended, and the
rules and regulations thereunder.
1.17 Shareholder Representative shall mean Bradley L. Gordon
and any substitute representatives selected in accordance with the Escrow
Agreement. The Shareholders Representative has been selected by Target's Board
of Directors and, in the event of inability or unwillingness to act prior to the
merger, a substitute Shareholder Representative shall be similarly selected. The
Shareholder Representative is authorized by this Agreement, as a specific term
and condition of the Merger, to act hereunder and under the Escrow Agreement
with the powers and authority provided for herein and therein. Approval of this
Agreement and the Merger at the special shareholders meeting of Target called to
consider and vote this Agreement and the Merger (or Action by unanimous written
consent in lieu of such meeting) shall constitute
<PAGE>
approval of the terms and conditions of the Shareholder Representative and of
his authority to act hereunder and under the Escrow Agreement on behalf of the
Target Shareholders and their successors.
1.18 Target Common shall mean the Class A and Class B voting
common stock, $.001 par value, of Quality Franchise Systems, Inc.
1.19 Target Shareholders shall mean the record owners of
Target Common and Target Preferred (as defined in Section 2.3.2) immediately
prior to the merger.
2. MERGER, CLOSING AND CONVERSION OF SHARES.
2.1 Merger. Subject to and in accordance with the terms and
conditions of this Agreement and the Plan of Merger, Target and Admiral shall
execute and file the Plan of Merger with the Secretary of State of the State of
Delaware and the Secretary of State of the State of Washington, whereupon Target
shall be merged with and into Admiral and Admiral shall be the surviving
corporation.
2.1.1 Articles and Bylaws. The Articles
of Incorporation and Bylaws of
Admiral, as in effect immediately prior to the Effective Date, shall be the
Articles and By-laws of the surviving corporation following the Merger until
amended as provided by law.
2.1.2 Directors and Officers. Subject to
the post-closing covenants of
Section 8.6.1 of this Agreement, the directors and officers of Admiral
immediately prior to the Effective Date shall be the officers and directors of
the surviving corporation following the Merger until replaced as provided in
Admiral's Articles and Bylaws.
2.2 Closing. The Closing shall, in Jreck's discretion, take
place either at the offices of Solomon, Ward, Seidenwurm & Smith, LLP, 401 B
Street, Suite 1200, San Diego, California 92101, or by mail and facsimile, on
September 26, 1997 at 10:00 a.m., or at such other day and time as Jreck and
Target shall agree (the "Closing Date") after all of the conditions to the
parties' obligations to consummate the Merger set forth in Articles 6 and 7 of
this Agreement have been satisfied or waived.
2.3 Conversion of Shares. In accordance with the Plan of
Merger, each share of Target Common outstanding immediately prior to the
Effective Time (except those shares of Target Common which are Dissenting Shares
and whose holder and Target do not thereafter agree in writing should not be
treated as Dissenting Shares) shall, by virtue of the Merger and without any
action on the part of the holder thereof be converted on a proportionate pro
rata basis, at and as of the Effective Time into shares of Jreck Common equal to
(a) an aggregate of 1,000,000 shares of Jreck Common as adjusted by Section
8.7.3 for all Target Common, (b) plus such additional shares of Jreck Common, if
any, as provided in Section 2.4(b) of this Agreement and the Escrow Agreement
executed pursuant thereto. With respect to this Section 2.3, the conversion
ratio for the conversion or exchange of Target Common into Jreck Common shall be
3.2711 shares of Target Common for one (1) share of Jreck Common assuming
3,271,140 shares of Target Common outstanding immediately prior to the Merger
and issuance of 1,000,000 shares
<PAGE>
of Jreck Common as adjusted by Section 8.7.3 pursuant to Section 2.3(a).
2.3.1 Fractional Shares. No fractional shares of Jreck Common
shall be issued upon conversion of Target Common to Jreck Common. The number of
full shares which shall be issuable upon conversion shall be computed on the
basis of the aggregate amount of Target Common surrendered at Closing. If,
except for the provisions of this Section 2.3.1, any holder of Target Common
(under this Agreement or the Escrow Agreement) would be entitled to a fractional
share of Jreck Common, Jreck shall pay to such holder an amount in cash equal to
the fractional conversion value of such fractional share as determined in
accordance with Section 2.10 of this Agreement.
2.3.2 Target Preferred Shares. As of the date hereof Target
has issued and outstanding 545 shares of Series A Preferred Stock on the terms
set forth in that certain Certificate of Designation of Quality Franchise
Systems, Inc. filed with the State of Delaware Office of Secretary of State on
May 24, 1996 (the "Target Preferred"). Target covenants to use its best efforts
to see that all holders of Target Preferred convert such shares into shares of
Target Common prior to the Closing. In the event not all holders of Target
Preferred convert to Target Common prior to the Closing, each share of Target
Preferred outstanding at Closing shall be converted into one (1) share of Jreck
preferred stock (to be created by Jreck prior to Closing) which preferred shares
shall carry, in substance, the same terms and conditions as the Target Preferred
(the "Jreck Preferred"), except, the conversion rights respecting such Jreck
Preferred shall provide for conversion into shares of unregistered Jreck common
at the same conversion ratio set forth in Section 2.3, above, respecting the
conversion of Target Common into Jreck Common.
2.3.3 Subsidiary Shares. In accordance with the Plan of
Merger, each and every share of Target's wholly owned subsidiary, Quality
Marketing Systems, Inc., a Delaware Corporation ("Target's Subsidiary"), shall
be delivered, transferred, conveyed and indorsed over to Jreck such that upon
the Closing Jreck shall be the sole owner of all issued and outstanding shares
of Target's Subsidiary and Target's Subsidiary shall be the wholly owned
subsidiary of Jreck. Neither Target or any Target shareholder or other person
shall be entitled to receive any Jreck shares or other consideration in exchange
for the transfer of the shares of Target's Subsidiary to Jreck.
2.4 Escrow. As a condition to Closing, the parties hereto
agree to execute the Escrow Agreement in the form attached hereto as Exhibit A
which escrow shall provide for the following:
(a) Contingent Shares. Subject to reduction under
Sections 2.4(b) and 2.6 below, and pursuant to Section 2.3(b) above, the parties
agree that if the franchise operations of Target achieve the earnings set forth
in Section 2.4(a)(i) below, an additional 500,000 shares of Jreck Common (in the
aggregate) or such lesser number of shares as provided in Section 2.4(a)(i),
shall be delivered to the Target Shareholders, proportionate with such
shareholder's ownership of Target Common Stock immediately prior to the Merger.
Delivery of such shares to the Shareholder Representative shall be deemed
delivery to the Target Shareholders hereunder and under the Escrow Agreement.
All escrowed shares not released to
<PAGE>
Target Shareholders as provided in this Section 2.4, or in the Escrow Agreement,
shall be returned to Jreck for cancellation by Escrow Holder. At closing, Jreck
shall deliver to Escrow Holder pursuant to the Escrow Agreement, Stock
Certificates of Jreck Common representing 500,000 shares of Jreck Common that
may be payable pursuant to this Section 2.4(a). Jreck Common shares held in
escrow pursuant to this Section 2.4(a) and the Escrow Agreement shall have no
voting rights until such shares are actually released to the party entitled
thereto under the Escrow Agreement, provided, such shares shall retain rights to
dividends, stock splits and similar distributions which shall be paid to Escrow
Holder in accordance with the Escrow Agreement. Any rights of the Target
Shareholders to receive any shares placed in escrow under this Section 2.4(a)
shall in no circumstances be sold, assigned or otherwise transferred by them
other than by will or pursuant to the laws of descent and distribution.
(i) Earnings Test. Within a
reasonable time of
December 31, 1998, the independent certified public accounting firm regularly
employed by Jreck (or another independent public accounting firm selected by
Jreck and reasonably acceptable to the Shareholder Representative) shall audit
the franchise operations of Target as of December 31, 1998 to determine the
greatest EBITDA for any consecutive 12-month period commencing following the
Effective Time and terminating December 31, 1998 (the "Highest EBITDA"). In the
event the Highest EBITDA is $500,000.00 or more, subject to reduction under
Sections 2.4(b) and 2.6, Escrow Holder shall deliver to Shareholder
Representative all 500,000 shares of Jreck Common for delivery to the Target
Shareholders listed on Exhibit C in proportion to their respective ownership of
Target Common immediately prior to the merger. In the event that the Highest
EBITDA is greater than zero and less than $500,000.00, and subject to reduction
under Section 2.4(b) and 2.6, Escrow Holder shall deliver to Shareholder
Representative for delivery to the Target Shareholders a number of shares of
Jreck Common determined by dividing the Highest EBITDA by $500,000.00 and
multiplying the resulting fraction by 500,000. As used herein, the term "EBITDA"
shall have the meaning set forth in Exhibit D to this Agreement.
(b) Security for Indemnification. In
order to provide for
indemnification under Article 10 of this Agreement, and pursuant to the terms of
the Escrow Agreement, 75,000 of the 500,000 shares of Jreck Common placed in
Escrow pursuant to Section 2.4(a) shall be available to satisfy any such Target
indemnity obligations in accordance with the terms of the Escrow Agreement which
terms are incorporated herein by reference. Any rights of the Target
Shareholders to receive any shares or cash so placed in Escrow shall in no
circumstances be sold, assigned or otherwise transferred by them other than by
will or pursuant to the laws of descent and distribution. Any dividends or other
distributions paid in respect to the shares of Jreck Common escrowed under
Section 2.4(b) shall be paid to the Escrow Holder in accordance with the terms
of the Escrow Agreement. All certificates representing shares delivered to the
Escrow Holder shall be accompanied by separate stock powers authorizing Escrow
Holder to act in accordance with the Escrow Agreement. Target Shareholders shall
have no voting, dividend or other rights with respect to the Jreck Common Shares
deposited with Escrow Holder in accordance with this Section 2.4(a) until such
shares are actually released to the Shareholder Representative in accordance
with the Escrow Agreement.
<PAGE>
2.5 Exchange of Certificate.
2.5.1 Contemporaneous with the Closing, Jreck shall
make available for
exchange in accordance with this Section 2.5, the 1,000,000 shares of Jreck
Common issuable pursuant to Section 2.3(a) in exchange for all outstanding
shares of Target Common, and the shares of Jreck Preferred issuable pursuant to
Section 2.3.2 in exchange for all outstanding shares of Target Preferred, if
any.
2.5.2 Upon surrender of a certificate of Target
Common, or Target
Preferred, for cancellation to Jreck duly executed, and subject to Section 2.4
and the Escrow Agreement with respect to Target Common, the holder of such
certificate shall be entitled to receive in exchange therefor the number of
shares of Jreck Common or Jreck Preferred as the case may be, to which the
Target Shareholder is entitled pursuant to Sections 2.3 and 2.3.2 hereof. The
certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Target Common or Target Preferred that is not
registered in the transfer records of Target, Jreck Common (or Jreck Preferred)
may be delivered to a transferee if the certificate representing such Target
Common or Target Preferred is presented to Jreck and accompanied by all
documents required to evidence and effect such transfer and to evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.5.2, and subject to Section 2.4, Section 2.6 and
the Escrow Agreement, each Target Common, or Target Preferred, certificate shall
be deemed at any time after the Closing Date to represent the right to receive
upon such surrender such number of shares of Jreck Common, or Jreck Preferred,
as provided by Sections 2.3 and 2.3.2, and the provisions of the Corporations
Code.
2.5.3 No dividends or distributions payable to
holders of record of Jreck
Common or Jreck Preferred after the Effective Time, shall be paid to the holder
of any unsurrendered Target Common Certificate until the holder of the
certificate shall surrender such certificate.
2.5.4 All Jreck Common, and any Jreck Preferred,
delivered to Shareholder
Representative upon the surrender for exchange of Target Common or Target
Preferred, in accordance with the terms hereof shall be deemed to have been
delivered to the persons entitled thereto in full satisfaction of all rights
under this Agreement and the Escrow Agreement pertaining to such shares of
Target Common and Target Preferred. There shall be no further registration of
transfers on the stock transfer books of Target or its transfer agent of the
shares of Target Common or Target Preferred that were outstanding immediately
prior to the Effective Time. If, after the Closing Date, Target certificates are
presented for any reason, they shall be canceled and exchanged as provided in
this Section 2.5.
2.6 Dissenting Shares. Holders of Dissenting Shares shall have
those rights, but only those rights, of holders of "dissenting shares" under
Section 1300(b) of the California Corporations Code, if applicable, and Section
262 of the Delaware Corporations Code. Target shall give Jreck prompt notice of
any demand, purported demand or other communication received by Target with
respect to any Dissenting Shares or shares claimed to be Dissenting Shares, and
Jreck shall have the right to participate in all negotiations and proceedings
with respect to such shares. Any payments to Dissenting Shareholders prior to
the Effective Time
<PAGE>
shall be the responsibility of Target, provided, if such payments are not due
and payable prior to the Effective Time and are therefore not paid until after
the Effective Time, any payments to Dissenting Shareholders shall be paid by
Admiral or Jreck and the amounts so paid shall reduce the number of Jreck Common
shares to be issued to Target Shareholders pursuant to Sections 2.4 and the
Escrow Agreement. Target agrees that, without the prior written consent of
Jreck, it shall not voluntarily make any payment with respect to, or settle or
offer to settle, any demand or purported demand respecting such dissenting
shares.
2.7 Unregistered Shares. The Jreck Common and Jreck Preferred
to be issued in the Merger to Target Shareholders shall not be registered under
the Securities Act and shall be subject to all relevant resale restrictions
under the Securities Act and State law. Target and its shareholders understand
that the Jreck Common and Jreck Preferred have not been registered under the
Securities Act by reason of its issuance in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act pursuant
to Section 4(2) thereof, and that it must be held by Target Shareholders
indefinitely and Target Shareholders must therefore bear the economic risk of
such investment indefinitely, unless a subsequent disposition thereof is
registered under the Securities Act or is exempt from registration. Target shall
in writing notify Target Shareholders of the provisions of Rule 144 promulgated
under the Securities Act which permit limited resale of shares purchased in a
private placement subject to the satisfaction of certain conditions, including,
among other things the existence of a public market for the shares, the
availability of certain current public information about Jreck, the resale
occurring not less than one year after a party has purchased and paid for the
security to be sold, the sale being through a "broker's transaction" or in
transactions directly with a "market maker" (as provided by Rule 144(f)) and the
number of shares being sold during any three-month period not exceeding
specified limitations. Target shall further notify Target Shareholders in
writing that, while many of the restrictions of Rule 144 do not apply to the
resale of shares by a person who owned those shares for at least two years prior
to their resale and who is not an "affiliate" (within the meaning of Rule
144(a)) of the issuer and has not been an affiliate of the issuer for at least
three months prior to the date of resale of the restricted securities, Admiral
and Jreck do not warrant or represent that Target Shareholders are not an
affiliate as of the date of this Agreement or that Target Shareholders will not
be an affiliate at any relevant times in the future.
2.7.1 Other Resale Restrictions. With respect to
any shares of Jreck
Common issued pursuant to this Agreement or the Escrow Agreement to any Target
Officer, director or five percent (5%) or more Target Shareholder, for so long
as such shares of Jreck Common remain unregistered, such shares and each such
Target Shareholder shall be subject to a further restriction providing that no
one such Target Shareholder, or successor, shall sell more than 5,000 shares of
Jreck Common in any one business day, proportionately adjusted for any increase
or decrease in the number of issued shares of Jreck common voting stock
resulting from any stock split or other subdivision or consolidation of shares.
2.8 Piggyback Registration Rights. Subject to the terms of
this Agreement, in the event Jreck decides to Register (defined below) any of
its stock (either for its own account or the account of a security holder or
holders exercising their respective demand registration rights) on a form that
would be suitable for a registration involving solely Registrable Securities
(defined below), Jreck at its sole cost and expense will: (i) promptly give the
holders of Jreck Common
<PAGE>
received in this Merger (the "Holders") written notice thereof (which notice
shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable Blue Sky or other state
securities laws) and (ii) include in such Registration (and any related
qualification under Blue Sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
delivered to Jreck by said Holders within fifteen (15) days after delivery of
such written notice from Jreck.
2.8.1 Piggyback Registration involving an
Underwriting. If the
Registration of which the Company gives notice is for a Registered public
offering involving an underwriting, the Company shall so advise the Holders as a
part of the written notice given pursuant to this Section 2.8. In such event,
the right of the Holders to Registration of the Jreck Common received pursuant
to the Merger shall be conditioned upon such underwriting. If the Holders desire
to distribute their securities through such underwriting, they shall (together
with Jreck and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement with the underwriter's
representative for such offering. The Holders shall have no right to participate
in the selection of the underwriters for an offering pursuant to this Section
2.8.1 and the Holders shall have no liability for any costs and fees related
thereto. In the event the underwriter places a limit on the number of
outstanding shares of Jreck Common to be included in the underwriting, the
Holders shall participate in the underwriting on a pro rata basis with Jreck
insiders.
2.8.2 Blue Sky in Piggyback Registration.
In the event of any
Registration of Registrable Securities pursuant to this Section 2.8, Jreck will
exercise its best efforts to Register and qualify the securities covered by the
Registration Statement under such other securities or Blue Sky laws of such
jurisdictions (not exceeding twenty (20) unless otherwise agreed to by Jreck) as
shall be reasonably appropriate for the distribution of such securities.
2.8.3 Definitions. For purposes of this
Agreement, the following
definitions shall apply:
(a) The terms "Register", "Registered",
and "Registration" refer
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act ("Registration Statement"), and the
declaration or ordering of the effectiveness of such Registration Statement.
(b) "Registrable Securities" shall mean
all Jreck common stock
not previously sold to the public, including stock issued or issuable pursuant
to stock splits, stock dividends and stock options.
2.9 Tax Free Reorganization. The parties intend to adopt
this Agreement as
a tax free plan of reorganization and to consummate the Merger in accordance
with the provisions
of Section 368(a) of the Code.
2.10 Share Value. For purposes of implementing the
provisions of
<PAGE>
Sections 2.4(b), 2.6, 8.7.3, 10.1 and the Escrow Agreement respecting reduction
of the number of Jreck Common Shares to be issued to Target shareholders by the
Escrow Holder, the parties hereto agree that the Jreck Common subject to such
reductions shall be valued at the average closing price for the publicly traded
shares of Jreck common stock for the five business day period immediately
preceding the date of the Closing, as reported on the NASDAQ Bulletin Board, and
as adjusted for stock splits, stock dividends, recapitalizations and the like.
3. MUTUAL REPRESENTATIONS AND WARRANTIES.
Each of Jreck and Target is a "Company" for the purposes of
this Article 3. Any disclosure delivered by one Company to the other pursuant to
this Article, Article 4 or Article 5 shall have been in writing and delivered on
or prior to the date hereof and certified by an executive officer of the
delivering Company as true, accurate and complete, shall specifically refer to
this Agreement and shall identify the Section of this Agreement requiring the
delivery of such disclosure (each such disclosure being referred to herein as a
"Disclosure Statement"). Except as set forth in a Disclosure Statement of such
Company, each Company represents and warrants to the other party hereto that:
3.1 Organization and Authority. The Company: (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation; (ii) has all necessary corporate power
to own and lease its properties, to carry on its business as now being conducted
and to enter into and perform this Agreement and all agreements to which the
Company is or will be a party that are exhibits to this Agreement; and (iii) is
qualified to do business in all jurisdictions in which the failure to so qualify
would have a material adverse effect on its business or financial condition. The
Company has made available to the other party for inspection complete and
correct copies of its Articles of Incorporation, as amended, and Bylaws as in
effect on the date hereof and a record of any and all proceedings and actions at
all meetings of, or taken by written consent by, its Board of Directors and
shareholders, from and after January 1, 1994, in each case, certified as true,
complete and correct copies by Company's Secretary.
3.2 Authority Relating to this Agreement; No Violation of
Other Instruments.
3.2.1 The execution and delivery of this Agreement
and all agreements to
which the Company is or will be a party that are exhibits to this Agreement and
the performance hereunder and thereunder by the Company have been duly
authorized by all necessary corporate action on the part of the Company and,
assuming execution of this Agreement and such other agreements by each of the
other parties thereto, this Agreement and such other agreements will constitute
legal, valid and binding obligations of the Company, enforceable against the
Company in accordance with their terms, subject as to enforcement: (i) to
bankruptcy, insolvency, reorganization, arrangement, moratorium and other laws
of general applicability relating to or affecting creditors' rights; and (ii) to
general principles of equity, whether such enforcement is considered in a
proceeding in equity or at law.
3.2.2 To the Company's knowledge, neither the
execution of this
Agreement or any other agreement to which the Company is or will be a party that
is an exhibit
<PAGE>
to this Agreement nor the performance of any of them by the Company will: (i)
conflict with or result in any breach or violation of the terms of any decree,
judgment, order, law or regulation of any court or other governmental body now
in effect applicable to the Company; (ii) conflict with, or result in, with or
without the passage of time or the giving of notice, any breach of any of the
terms, conditions and provisions of, or constitute a default under or otherwise
give another party the right to terminate, or result in the creation of any
lien, charge, or encumbrance upon any of the assets or properties of the Company
pursuant to, any indenture, mortgage, lease, agreement or other instrument to
which the Company is a party or by which it or any of its assets or properties
are bound, including all Contracts (as defined in Section 4.15); (iii) permit
the acceleration of the maturity of any material indebtedness of the Company or
of any other person secured by the assets or properties of the Company; or (iv)
violate or conflict with any provision of the Company's Articles of
Incorporation, Bylaws, or similar organizational instruments.
3.2.3 Except for the parties' respective shareholder
and board approvals
of this Agreement, no consent from any third party and no consent, approval or
authorization of, or declaration, filing or registration with, any government or
regulatory authority is required to be made or obtained by the Company in order
to permit the execution, delivery or performance of this Agreement or any other
agreement to which the Company is or will be a party that is an exhibit to this
Agreement, or the consummation of the transactions contemplated by this
Agreement and such other agreements.
3.3 Brokers and Finders. Neither the Company nor any
shareholder, director, officer, employee or agent of the Company has retained
any broker, finder or investment banker in connection with the transactions
contemplated by this Agreement. Each Company will indemnify and hold the other
parties hereto harmless against all claims for brokers', finders' or investment
bankers' fees made or asserted by any party claiming to have been employed by
such Company or any shareholder, director, officer, employee or agent of such
Company and all costs and expenses (including the reasonable fees of counsel) of
investigating and defending such claims.
4. REPRESENTATIONS AND WARRANTIES OF TARGET.
Target hereby represents and warrants to Admiral and Jreck that except
as set forth in Target's Disclosure Statement:
4.1 Compliance with Law. To Target's knowledge, Target holds,
and has at all times held, all licenses, permits and authorizations necessary
for the lawful conduct of Target's business wherever conducted pursuant to all
applicable statutes, laws, ordinances, rules and regulations of all governmental
bodies, agencies and subdivisions having, asserting or claiming jurisdiction
over Target or over any part of Target's operations, and the Target knows of no
violation thereof. Target is not in violation of any decree, judgment, order,
and to Target's knowledge any law or regulation of any court or other
governmental body (including without limitation, applicable environmental
protection legislation and regulations, equal employment and civil rights
regulations, wages, hours and the payment of social security taxes and
occupational health and safety legislation), which violation could have a
material adverse effect on the condition, financial or otherwise, assets,
liabilities, business or results of operations of Target.
<PAGE>
4.2 Investments in Others. Target does not conduct any part of
its business operations through any subsidiaries or through any other entity.
Target does not, directly or indirectly, own an equity or participation interest
in any other corporation, association, partnership, joint venture, limited
liability company or any other entity or venture.
4.3 Tax Returns and Payments. All tax returns and reports with
respect to Target required by law to be filed under the laws of any
jurisdiction, domestic or foreign, have been duly and timely filed and all
taxes, fees or other governmental charges of any nature which were required to
have been paid, have been paid or provided for. Target has no knowledge of any
actual or threatened assessment of deficiency or additional tax or other
governmental charge or a basis for such a claim against the Company. Target has
no knowledge of any tax audit of Target by any taxing or other authority in
connection with any of its fiscal years; Target has no knowledge of any such
audit currently pending or threatened, and there are no tax liens on any of
Target's properties.
4.4 Absence of Certain Changes or Events. Since the date (the
"Balance Sheet Date") of the most recent financial statement delivered by Target
pursuant to Section 4.19 (the "Balance Sheet"), there have been no material
changes in the condition, financial or otherwise, assets, liabilities, business
or the results of operations of Target, other than changes in the ordinary
course of business which in the aggregate have not been materially adverse.
4.5 Inventories. The inventories shown on the Balance Sheet of
Target are of a quantity and quality useable and saleable in accordance with
good business practices and represent a distribution of the types of inventories
utilized in the business of Target in accordance with good business practices.
Additions and deletions from the inventories since the Balance Sheet Date have
been in the ordinary course of business. The amounts shown for inventories on
the Balance Sheet of Target have been determined in accordance with U.S. GAAP on
a first-in, first-out basis and are stated at the lower of cost or market.
4.6 Accounts Receivable. The accounts receivable of Target
shown on the Balance Sheet as of the Balance Sheet Date, or thereafter acquired
by Target prior to the date hereof, have been and are (as the case may be)
collectible within 120 days after the Closing Date in amounts not less than the
aggregate amounts thereof carried on the books of Target reduced by the reserves
for discounts and bad debts taken on the Balance Sheet.
4.7 Personal Property. Target has good title, free and clear
of all liens, encumbrances and security interests, to all of its machinery,
equipment, furniture, inventory and other personal property. To Target's
knowledge, all of the leases to personal property utilized in the business of
Target are valid and enforceable against Target and are not in default.
4.8 Real Property. Target does not own any real property.
Section 4.8 of the Disclosure Statement contains a list of all leases for real
property to which Target is a party (as lessee, sublessor, sublessee or
guarantor), the monthly rental with respect to each lease and the expiration
date of each lease. To Target's knowledge, all such leases are valid and
enforceable and are not in default. The real property leased or occupied by
Target, the improvements located thereon, and the furniture, fixtures and
equipment relating thereto, (including plumbing, heating,
<PAGE>
air conditioning and electrical systems), to Target's knowledge conform in all
material respects to any and all applicable health, fire, safety, zoning, land
use and building laws, ordinances and regulations. There are no outstanding
contracts made by Target for any material improvements made to the real
property, leased or occupied by Target that have not been paid for.
4.9 Patents, Trademarks, Trade Names and Copyrights. Section
4.9 of the Disclosure Statement sets forth all patents, trademarks, tradenames,
copyrights, and other intellectual property owned or utilized by Target. All
patents, trademarks, trade names, copyrights, processes, designs, formulas,
inventions, trade secrets, know-how, technology or other proprietary rights
which are necessary to the conduct of Target's business are owned or are useable
by Target. Upon the Merger all such items shall be owned or useable by Admiral
to the same
<PAGE>
extent as by Target immediately prior to the Merger. To Target's knowledge, the
conduct of any business conducted by Target does not infringe any patent,
trademark, trade name, copyright, trade secret, or other proprietary right of
any other person. No litigation is pending or, to the knowledge of Target, has
been threatened against Target or any officer, director, shareholder, employee
or agent of Target, for the infringement of any patents, trademarks or trade
names of any other party or for the misuse or misappropriation of any trade
secret, know-how or other proprietary right owned by any other party nor, to the
best knowledge of Target, does any basis exist for such litigation. To Target's
knowledge, there has been no infringement or unauthorized use by any other party
of any patent, trademark, trade name, copyright, process, design, formula,
invention, trade secret, know-how, technology or other proprietary right
belonging to Target.
4.10 Warranties. Target has made no warranties or
guarantees relating to its
products other than as implied or required by law.
4.11 Litigation. Neither Target nor any officer, director,
shareholder, employee or agent of Target is a party to any pending or, to
Target's knowledge, threatened action, suit, proceeding or investigation, at law
or in equity or otherwise in, for or by any court or other governmental body
which could have a material adverse effect on: (i) the condition, financial or
otherwise, assets or properties of Target, liabilities, business or results of
operations of Target; or (ii) the transactions contemplated by this Agreement;
nor, to Target's knowledge, does any basis exist for any such action, suit,
proceeding or investigation. Target is not and has not been subject to any
pending, or to Target's knowledge threatened, product liability claim; nor to
Target's knowledge does any basis exist for any such claim. Target is not
subject to any decree, judgment, order, law or regulation of any court or other
governmental body which could have a material adverse effect on the condition,
financial or otherwise, assets, liabilities, business or results of operations
of Target or which could prevent the transactions contemplated by this
Agreement.
4.12 Personnel. Section 4.12 of the Disclosure Statement
contains a list of: (i) any and all employment, bonus, profit sharing,
percentage compensation, employee benefit, incentive, pension or retirement,
stock purchase and stock option plans, oral or written contracts or agreements
with directors, officers, employees or unions, or consulting agreements, to
which Target is a party or is subject as of the date of this Agreement; and (ii)
all group insurance programs in effect for employees of Target. Target is not in
default with respect to any of the obligations so listed. Target has delivered
complete and correct copies of all such obligations (to the extent they are in
writing or written descriptions to the extent they are oral) to the other party
hereto. Target has no union contracts or collective bargaining agreements with,
or any other obligations to, employee organizations or groups relating to
Target's negotiations except in minor grievances not involving any employee
organization or group, nor, to the knowledge of Target, is Target the subject of
any union organization affecting its business. There is no pending or, to the
Target's knowledge, threatened labor dispute, strike or work stoppage affecting
the Target's business. All plans described in Section 4.12 of the Disclosure
Statement are in full compliance with applicable provisions of the Employees
Retirement Income Security Act of 1974 ("ERISA") and regulations issued under
ERISA, and there is no unfunded liability with respect to such plans. Section
4.12 of the Disclosure Statement also lists the amount payable to employees of
Target under any other fringe benefit plans.
<PAGE>
4.13 Contracts. Section 4.13 of the Disclosure Statement lists
all oral or written agreements, notes, instruments, or contracts to which Target
is a party or by which its assets or properties may be bound which involve the
payment or receipt of more than $20,000 (on an annual basis), or which have a
term of more than one year, or which involve the licensing or use of
intellectual property, or which are employment or consulting agreements (the
"Contracts"). Target is not in default in performance of its obligations under
any material provisions of such Contracts. Target has no knowledge of any
violation of any Contract by any other party thereto and has no knowledge of any
intent by any other party to a Contract not to perform its obligations under
such Contract.
4.14 Absence of Environmental Liabilities. Neither Target nor,
to the Target's knowledge after due inquiry, the real property at any time
owned, leased or occupied by Target is in violation of any applicable federal,
state or local law, ordinance, regulation or order relating to industrial
hygiene, worker safety, public health and safety, environmental protection, or
Hazardous Materials (as defined below) on, under or about such real property,
including the soil and ground water underlying such real property. Any handling,
transportation, storage, treatment or use of Hazardous Material (as defined
below) that has occurred on the real property owned, leased or occupied by
Target during Target's ownership, tenancy, or occupancy and prior to the Closing
Date has been and will be as of the Closing Date in compliance with all
applicable laws, ordinances, regulations and orders relating to Hazardous
Material. As used herein, the term "Hazardous Material" means any substance,
material or waste which is or becomes regulated as "hazardous," "toxic" or
"dangerous" by any local government authority, or the State of California,
including without limitation, any material or substance which is: (1) petroleum;
(2) asbestos; (3) lead containing paint; or (4) defined as a 'hazardous
substance' under Section 101 or Section 102 of the Comprehensive Environmental
Response Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., as
amended ("CERCLA"), and any regulations applicable thereunder. To Target's
knowledge after due inquiry, the real property at any time owned, leased or
occupied by Target, including without limitation, the soil and groundwater on or
under such real property, is free of any significant release of any Hazardous
Material. No notification of release of Hazardous Material pursuant to CERCLA or
the Federal Clean Water Act, or any state or local environmental law or
regulatory requirement has been received by Target as to any of such real
property.
4.15 Capitalization. The authorized capital stock of Target is
10,000,000 shares of $0.001 par value Common Stock of which 353,651 shares are
outstanding and 10,000,000 shares of $0.001 par value Class B Common Stock, of
which 2,390,896 shares are issued and outstanding, for a total of 2,744,547
shares of Target Common issued and outstanding; 2,000,000 shares of $0.001 par
value Series A Preferred stock of which 545 shares are issued and outstanding
("Target Preferred"); and $1,025,000 face amount of convertible 12.75%
promissory notes (convertible into Class B Common) pursuant to that certain
Trust Indenture dated December 1, 1994 (the "Trust Indenture") of which $530,000
remains outstanding. A list of all of the shareholders of the Company by name
and address, with the number of shares owned by each as of the date hereof, is
contained in Section 4.15 of the Disclosure Statement. All such issued and
outstanding shares have been duly authorized and validly issued, and are fully
paid and non-assessable. Except as set forth in the Disclosure Statement, there
are no outstanding warrants, options, agreements, convertible or exchangeable
securities or other commitments
<PAGE>
pursuant to which Target is or may become obligated to issue, sell, purchase,
retire or redeem any shares of capital stock or other securities (collectively
"Options"). Notwithstanding the Disclosure Statement, Target represents and
warrants that as of the Effective Time and thereafter, and other than the
Convertible Notes and Target Preferred, no Options will survive the merger.
4.16 Financial Statements. Target has delivered the following
financial statements of Target (the "Target Financial Statements") to Jreck:
audited balance sheet and income statement for year ending December 31, 1996,
unaudited balance sheet for month ending July 31, 1996 and unaudited income
statement for seven months ending July 31, 1997. Each Target Financial Statement
together with the notes thereto is in accordance with the books and records of
Target, fairly presents the financial position of Target and the results of
operations of Target for the period indicated, and has been prepared in
accordance with generally accepted accounting principles consistently applied.
4.17 Absence of Undisclosed Liabilities. As of the date
hereof, Target had no indebtedness or liability (absolute or contingent) which
is not shown or provided for in full on the Balance Sheet dated July 31, 1997
included in Target Financial Statements. Except as set forth in such Balance
Sheet dated July 31, 1997, Target does not have outstanding on the date hereof,
nor will it have outstanding on the Closing Date, any indebtedness or liability
(absolute or contingent) other than those incurred since the date of such
Balance Sheet in the ordinary course of business.
4.18 Compliance With Law. Section 4.25 of the Disclosure
Statement of Target contains a true and complete list of all licenses, permits
and authorizations necessary for the lawful conduct of Target's business
wherever conducted pursuant to all applicable statutes, laws, ordinances, rules
and regulations of all governmental bodies, agencies and subdivisions having,
asserting or claiming jurisdiction over Target or over any part of Target's
operations.
4.19 Taxes. Section 4.19 of the Disclosure Statement of Target
contains a true and complete list of all types of taxes paid or required to be
paid by Target and each state to which Target pays sales or use tax related to
the sale of its products.
4.20 Employees. Section 4.20 of the Disclosure Statement of
Target contains a list of the names, current salary rates, bonuses paid during
the last fiscal year, and accrued vacation and sick leave for all Target
employees.
4.21 Insurance. Copies of all Target insurance policies
and bonds have been
furnished to Jreck. All such insurance policies and bonds are in full force and
effect.
4.22 Bank Accounts. Section 4.22 of the Target Disclosure
Statement contains
a list of all Target bank accounts identifying the name of the bank, the account
number, and the
authorized signatories to the account.
4.23 Power of Attorney; Suretyships. Target has no power
of attorney
outstanding, nor has any obligation or liability, either actual, accrued,
accruing or contingent, as
guarantor, surety, cosigner, endorser, co-maker, indemnitor or otherwise in
respect of the
<PAGE>
obligation of any other person, corporation, partnership, joint venture,
association, organization or other entity.
4.24 Accuracy of UFOC. To Target's knowledge, the "Mountain
Mike's Pizza Uniform Franchise Offering Circular franchised by Quality Franchise
Systems, Inc., effective date May 1, 1997" ("Target's UFOC") complies with all
legal requirements of the State of California respecting franchise offering
circulars as well as all legal requirements of any other state where Target is
doing business or offering franchises. All of the statements, financial data and
other information contained in Target's UFOC were true and correct as of May 1,
1997 and continues to be true and correct in all material respects as of the
date hereof and the date of Closing. Target's UFOC, as of the date hereof and
Closing, does not contain any untrue statement of a material fact nor does it
omit to state a material fact necessary to make the statements or facts
contained therein not misleading.
4.25 Target's Subsidiary. With respect to Quality
Marketing Systems, Inc., a
Delaware corporation ("QMS"), Target represents and warrants the following:
(a) QMS is
a corporation in good standing under the laws of Delaware and Colorado, has paid
all taxes and
license fees due and owing, and holds all licenses and government authorizations
necessary to
conduct the business presently being conducted, if any; (b) Target owns all the
outstanding shares
or other securities of QMS and no other person or entity holds any options,
warrants or other
securities respecting QMS; (c) QMS has no outstanding or contingent liabilities,
account payables
or debts of any kind; and QMS is not a party to or the subject of any pending
litigation, or to
Target's knowledge threatened litigation claims.
4.26 Shareholder Disclosure. Target will provide Target
Shareholders with the
Target Financial Statements, Jreck Financial Statements and this Agreement.
Target has given
Target Shareholders the opportunity to request additional information pertinent
to making an
investment decision.
4.27 Accuracy of Documents and Information. As of the date of
Closing, the copies of all instruments, agreements, other documents and written
information set forth as, or referenced in, Schedules or Exhibits to this
Agreement or specifically required to be furnished pursuant to this Agreement by
Target to the other party hereto, including, without limitation, Target's
Disclosure Statement, are and will be complete and correct in all material
respects. No representations or warranties made by Target in this Agreement, nor
any document, written information, statement, financial statement, certificate,
Schedule or Exhibit furnished directly to the other party hereto pursuant to
this Agreement or in the Disclosure Statement of Target contains any untrue
statement of a material fact, or omits to state a material fact necessary to
make the statements or facts contained herein not misleading.
5. REPRESENTATIONS AND WARRANTIES OF JRECK.
Jreck hereby represents and warrants to Target that:
5.1 Capitalization. The authorized capital stock of
Jreck is 50,000,000 shares
of common, no par, voting stock of which 10,458,657 shares are issued and
outstanding, and
<PAGE>
5,000,000 shares of authorized nonvoting preferred of which 700,000 shares of
Series A nonredeemable convertible preferred and 350,000 shares of Series B
nonredeemable preferred are outstanding. All such issued and outstanding shares
have been duly authorized and validly issued, and are fully paid and
non-assessable. Jreck has outstanding options to purchase 100,000 shares of
common stock pursuant to a written agreement. Except as set forth in the
preceding sentence, there are no outstanding warrants, options, agreements,
convertible or exchangeable securities pursuant to which Jreck is or may become
obligated to issue, sell, purchase, retire or redeem any shares of capital stock
or other securities.
5.2 Financial Statements. Jreck has delivered the following
consolidated financial statements of Jreck (the "Jreck Financial Statements") to
Target: audited consolidated balance sheet and income statement for year ending
December 31, 1996, unaudited balance sheet and financial statement for quarter
ending June 30, 1997. Each Jreck Financial Statement together with the notes
thereto is in accordance with the books and records of Jreck, fairly presents
the financial position of Jreck the results of operations of Jreck for the
period indicated, and has been prepared in accordance with generally accepted
accounting principles consistently applied, except that any unaudited statement
does not contain all the notes required under generally accepted accounting
principles.
5.3 Absence of Certain Changes or Events. Since the date (the
"Balance Sheet Date") of the most recent financial statement delivered by Jreck
pursuant to Section 5.2 (the "Balance Sheet"), there have been no material
changes in the condition, financial or otherwise, assets, liabilities, business
or the results of operations of Jreck, other than changes in the ordinary course
of business which in the aggregate have not been materially adverse.
5.4 Litigation. Neither Jreck nor any officer, director,
shareholder, employee or agent of Jreck is a party to any pending or, to Jreck's
knowledge, threatened action, suit, proceeding or investigation, at law or in
equity or otherwise in, for or by any court or other governmental body which
could have a material adverse effect on: (i) the condition, financial or
otherwise, assets or properties of Jreck, liabilities, business or results of
operations of Jreck; or (ii) the transactions contemplated by this Agreement;
nor, to Jreck's knowledge, does any basis exist for any such action, suit,
proceeding or investigation. Jreck is not and has not been subject to any
pending, or to Jreck's knowledge threatened product liability claim; nor does
any basis exist for any such claim. Target is not subject to any decree,
judgment, order, law or regulation of any court or other governmental body which
could have a material adverse effect on the condition, financial or otherwise,
assets, liabilities, business or results of operations of Target or which could
prevent the transaction contemplated by this Agreement.
5.5 Quarterly Report. Jreck's quarterly report to
shareholders dated June 30,
1997 is true and correct in all material respects as of the date thereof.
5.6 Accuracy of UFOC. To Jreck's knowledge, the Jreck Uniform
Franchise Offering Circular not yet effective ("Jreck's UFOC") and the Little
Kings, Inc. Uniform Offering Circular not yet effective ("Little Kings UFOC")
comply or will comply with all legal requirements of the State of New York with
respect to the Jreck UFOC, and the state of Nebraska with respect to the Little
Kings UFOC, respecting franchise offering circulars as well as all legal
<PAGE>
requirements of any other state where Jreck or Little King are offering
franchises. All of the statements, financial data and other information
contained in Jreck's UFOC, and to Jreck's knowledge the Little Kings UFOC, were
true and correct as of the date thereof, and continues to be true and correct in
all material respects as of the date hereof and the date of Closing, except,
since the date of the Little Kings UFOC, Jreck has acquired all outstanding
common voting shares of Little Kings and has made certain management and
operational changes since the date of the acquisition which changes continue to
evolve. Jreck's UFOC, and to Jreck's knowledge the Little Kings UFOC, as of the
date hereof and Closing, do not contain any untrue statement of a material fact
nor do they omit to state a material fact necessary to make the statements or
facts contained therein not misleading. Jreck intends to cause its affiliate,
Admiral Subs Group, Inc. to prepare and file a UFOC with respect to the sale of
SeaWest Sub Shops in the State of Washington. At this time, Admiral Subs Group
needs to complete an audit and the UFOC must be prepared by legal counsel. Jreck
anticipates that the UFOC will be filed with the State of Washington by December
31, 1997. Once the UFOC is effective Jreck expects Admiral Subs Group to begin
selling SeaWest Sub Shop franchises.
6. CONDITIONS TO THE OBLIGATION OF JRECK.
The obligation of Jreck to consummate the Merger is subject to
the fulfillment, at or before the Closing of all the following conditions, any
one or more of which may be waived by Jreck.
6.1 Representations and Warranties True at Closing. The
representations and warranties of Target contained in this Agreement shall be
deemed to have been made again at and as of the Closing with respect to the
stated facts then existing and shall be true in all material respects.
6.2 Covenants Performed. All of the obligations of
Target to be performed at
or before the Closing pursuant to the terms of this Agreement shall have been
duly performed.
6.3 Certificate. At the Closing, Jreck shall have received a
certificate signed by the President and Chief Executive Officer of Target to the
effect that the conditions set forth in Sections 6.1 and 6.2 have been
satisfied.
6.4 Shareholder Approval. This Agreement and the Plan of
Merger, to the extent required by law, shall have been duly approved by the
shareholders and Boards of Directors of Target, and by the Board of Directors of
Jreck and Admiral as of the date hereof. Both Target and Jreck shall certify to
the other at Closing that all such shareholder and board of director approvals
continue to be effective as of the date of Closing.
6.5 Dissenting Shares. The aggregate number of
Dissenting Shares shall not
exceeds seven and one-half percent (7.5%) of the aggregate of the outstanding
shares of Target
Common outstanding immediately before the Merger.
6.6 Plan of Merger. The Plan of Merger shall have been filed
with the Secretary of State of the State of Washington and the Secretary of
State of the State of Delaware.
<PAGE>
6.7 Escrow Agreement. Jreck, Target, Bradley Gordon and
Escrow Holder
shall have executed the Escrow Agreement and delivered the same to EscrowHolder.
6.8 Disclosure Statement. Jreck shall have approved and
accepted Target's
Disclosure Statement. By Closing, Jreck shall be deemed to have accepted and
approved the
Disclosure Statement.
6.9 Material Changes in the Business of Target. There shall
have been no material adverse change in the financial position, results of
operations, assets, liabilities or business of Target since the date of this
Agreement or any subsequent pre-closing update to Target's Disclosure Statement.
6.10 Consents. Jreck shall have received in writing any
consents, approvals, and waivers required in connection with the Merger (a) from
parties to Target's agreements, indentures, mortgages, franchises, licenses,
permits, leases, and other instruments set forth in Target's Disclosure
Statement of Target, and (b) from all governmental authorities.
6.11 Documentation. All actions, proceedings, instruments,
resolutions, certificates, and documents reasonably requested by Jreck to be
executed and delivered to Jreck in order to carry out this Agreement and to
consummate the Merger, and all of the relevant legal matters, shall be
reasonably satisfactory to Jreck and its counsel including, without limitation
compliance with any applicable state or federal securities law or regulation.
6.12 Outstanding Securities. At the Effective Time, the only
issued and outstanding securities of Target shall be the Target Common, the
Convertible Notes, and Target Preferred if any, and there shall be no other
outstanding securities, options, warrants, stock option plans, or securities
entitlements of any kind.
6.13 Redemption of Chairman's Shares and Release of
Collateral. At the Effective Time, Target shall have provided to Jreck
acceptable documentation that Target's Chairman has returned his 230,000 Class B
Common Shares to Target in exchange for Target's release of a $750,000 savings
account held as collateral against the shares. The Chairman, in turn, shall
repay his personal bank loan used to acquire the shares.
7. CONDITIONS TO THE OBLIGATION OF TARGET.
The obligation of Target to consummate the Merger is subject
to the fulfillment, at or before the closing, of all of the following
conditions, any one or more of which may be waived by Target:
7.1 Representations and Warranties True at Closing. The
representations and warranties of Jreck contained in this Agreement shall be
deemed to have been made again at and as of the Closing with respect to the
stated facts then existing and shall be true in all material respects.
7.2 Covenants Performed. All of the obligations of Jreck
to be performed at
<PAGE>
or before the Closing pursuant to the terms of this Agreement shall have been
duly performed.
7.3 Plan of Merger. The Plan of Merger shall have been
filed with the
Secretary of State of the State of Washington.
7.4 Disclosure Statement. Jreck's Disclosure Statement,
if any, has been
approved and accepted by Target. By Closing, Target shall be deemed to have
accepted and
approved the Disclosure Statement.
7.5 Documentation. All actions, proceedings, instruments,
resolutions, certificates, and documents reasonably requested by Target to be
executed and delivered to Target in order to carry out this Agreement and to
consummate the Merger, and all of the relevant legal mattes, shall be reasonably
satisfactory to Target and its counsel.
7.6 Jreck Common Value. As of the date which is two (2) days
prior to the Effective Time, the closing price for the publicly traded common
shares of Jreck is $3.00 or more a share as reported on the NASDAQ Bulletin
Board.
7.7 Certificate. At Closing, Target shall have received a
certificate signed by the President and Chief Executive Officer of Jreck to the
effect that the conditions set forth in Sections 7.1 and 7.2 have been
satisfied.
7.8 Board Approval. This Agreement and the Plan of
Merger, shall have been
duly approved by the Board of Directors of both Jreck and Admiral.
7.9 Escrow Agreement. Jreck, Target, Bradley Gordon and
Escrow Holder
shall have executed the Escrow Agreement and delivered the same to the Escrow
Holder.
7.10 Material Changes in Business of Jreck. There shall have
been no material adverse change in the financial position, results of
operations, assets, liabilities or business of Jreck since the date of this
Agreement or any subsequent pre-closing update to Jreck's Disclosure Statement.
8. PRE-CLOSING COVENANTS.
8.1 Pre-closing Documents. During the period from the
date of this Agreement
until the Effective Time, Target and Jreck covenant and agree as follows:
8.1.1 Advice of Changes. Target will
promptly advise Jreck in writing
(i) of any event occurring subsequent to the date of this Agreement that would
render any representation or warranty of Target contained in this Agreement, if
made on or as of the date of such event or the Closing Date, untrue or
inaccurate in any material respect and (ii) of any material adverse change in
Target's business.
8.1.2 Maintenance of Business. Target
will use its best efforts to carry
on and preserve its business and its relationships with customers, suppliers,
employees and others
<PAGE>
in substantially the same manner as it has prior to the date hereof. If Target
becomes aware of a deterioration in the relationship with any customer, supplier
or key employee, it will promptly bring such information to the attention of
Jreck in writing and, if requested by Jreck, will exert its best efforts to
restore the relationship.
8.1.3 Conduct of Business. Unless Jreck
shall otherwise agree in writing
(which agreement shall be in Jreck's sole discretion) or as otherwise expressly
permitted or specifically contemplated by this Agreement, Target covenants and
agrees that prior to the Effective Date:
(a) The business of Target shall be
conducted only in, and
Target shall not take any action except in, the ordinary course of business, and
Target shall use its best efforts to maintain and preserve its business
organization, assets, employees and business relationships;
(b) Target shall not directly or
indirectly do any of the
following: (i) amend its Articles of Incorporation or By-laws; (ii) declare, set
aside or pay any dividend or other distribution or payment (whether in cash,
stock or property) in respect of shares of its capital stock owned by any
person, (iii) issue, grant, sell or pledge or agree to issue, grant, sell or
pledge any shares of capital stock of Target, or securities convertible into or
exchangeable or exercisable for, or otherwise evidencing a right to acquire,
shares of capital stock of Target; (iv) redeem, purchase or otherwise acquire
any outstanding shares of its capital stock or other securities (v) split,
combine or reclassify any shares of its capital stock; (vi) except as
contemplated herein, adopt a plan of liquidation or resolutions providing for
the capitalization, liquidation, dissolution, merger, consolidation or
reorganization of Target; or (vii) enter into or modify any contract, agreement,
commitment or arrangement with respect to any of the foregoing, except as
contemplated herein;
(c) Target shall not directly or
indirectly do any of the
following: (i) sell, lease, pledge, dispose of or encumber (except for such
encumbrances as will not interfere with the ability of Target to obtain secured
indebtedness for borrowed money on customary terms) any assets or rights of
Target except in the ordinary course of business; (ii) acquire any corporation,
partnership or other business organization or division thereof, or make any
investment either by purchase of stock or securities (other than acquisitions of
fixed-income securities with maturities of less than one year), contributions of
capital or property transfer; (iii) waive, release, grant or transfer any rights
of value or modify or change in any material respect any existing license or
contract, other than in the ordinary course of business or breach in any
material respect any of the terms of any existing license or contract; (iv)
enter into any agreement which cannot be performed within one year or canceled
within 30 days without penalty and which involves the expending, together with
all related expenditures, of more than $5,000; (v) incur or guarantee any
indebtedness for borrowed money other than unsecured indebtedness for borrowed
money incurred in the ordinary course of business which indebtedness is
prepayable without premium or penalty at anytime; or (vi) authorize or propose
any of the foregoing, or enter into or modify any contract, agreement,
commitment or arrangement to do any of the foregoing;
<PAGE>
(d) Target shall not take any action (i)
with respect to the grant
of any severance or termination pay to, or the entering into of any employment
agreement with, any employee, or with any executive officer or director of
Target, or (ii) with respect to any increase of benefits payable under its
current severance or termination pay policies other than any increase resulting
from an increase in salaries granted in the ordinary course and in accordance
with past practices;
(e) Target shall not adopt or amend any
bonus, profit sharing,
stock option, pension, retirement, deferred compensation or other similar plan,
agreement, trust, fund or arrangement for the benefit of employees, except as is
necessary to comply with the law or existing contractual or collective
bargaining obligations or other than discretionary stay-put or similar payments
(which discretionary stay-put or similar payments shall be made prior to the
date of the Effective Date);
(f) Target shall (i) maintain its books
of account and record and
billing practices consistently with past practices; (ii) maintain and keep its
properties and assets in as good repair, working order and condition as at
present, except for ordinary wear and tear; (iii) promptly notify the Purchaser
of any change which would have a material adverse effect;
(g) Target shall not take any action or
fail to take any action that
could reasonably be expected to result in the expiration, revocation, suspension
or modification of any of its licenses or fail to prosecute with due diligence
any applications to any governmental authority if such action or the failure to
take such action would have, individually or in the aggregate, a material
adverse effect;
(h) Target shall comply with all laws,
rules and regulations to
which Target and its business, assets and properties are subject, except where
the failure to comply would not have, individually or in the aggregate, a
material adverse effect; and
(i) Target will continue to pay when due
all income, sales,
payroll and other taxes which may be shown to be due on tax returns required to
be filed prior to the Closing Date.
8.2 Shareholder Meeting. Target will use its best efforts to
hold a special meeting of its shareholders at the earliest practicable date, or
obtain the appropriate shareholder consents in lieu of meetings approving this
Agreement as provided by law and Target's governing corporate documents, to
submit this Agreement and related matters for their consideration and approval,
which approval shall be recommended by Target's Board of Directors and senior
management.
8.3 Necessary Consents. Prior to the Closing, Target will use
its best efforts to obtain such written consents and take such other actions as
may be necessary or appropriate to allow the consummation of the transactions
contemplated hereby and to allow Target to carry on its business after the
Closing.
8.4 Exclusivity. From the date hereof until the earlier
of termination of this
<PAGE>
Agreement or consummation of the Merger, neither Target nor any of its officers,
directors, employees, representatives, agents or affiliates shall directly or
indirectly encourage, solicit, initiate or conduct discussions or negotiations
with, provide any information to, or enter into any agreement with, any
corporation, partnership, person or other entity or group concerning (a) any
merger, consolidation, sale of assets, sale of majority control, or other
similar transaction involving Target.
8.5 Due Diligence. Until the Closing, each party shall provide
the other (including accounting, legal, and investment banking representatives)
with access to its offices and its senior employees for the purpose of due
diligence, in accordance with procedures established by the parties to minimize
disruptions of their businesses.
8.6 Amendments to Disclosure Statements. If after execution of
this Agreement either party learns of a breach or violation of any
representation, warranty, covenant or agreement made by it herein, which it had
no knowledge of prior to its execution of this Agreement, such party (the
"initiating party") shall promptly notify the other party (the "receiving
party") in writing of such breach or violation. The other party shall then have
ten (10) days after receipt of such notice of a breach or violation to terminate
this Agreement by written notice to the initiating party, if such breach or
violation, individually, or together with other breaches or violations by the
initiating party of this Agreement, has or would have a material adverse effect
on the initiating party. If the receiving party does not send written notice
within such ten (10) days, the receiving party shall be deemed to have waived
such breach of violation; provided, however, in the event that the initiating
party notifies the receiving party in writing of a breach or violation
subsequent to any breach or violation which was so waived in accordance with
this Section 8.6, the receiving party may consider each breach or violation so
waived together with other breaches or violations by the initiating party in
determining whether a material adverse effect on the initiating party shall have
occurred with respect to such subsequent breach or violation.
8.7 Post-closing Covenants.
8.7.1 Board Position. As soon after
Closing and the Effective Time as
practicable, Jreck, its officers and directors, shall use their best efforts to
see that Bradley L. Gordon is elected or appointed as a director to the Jreck
Board of Directors and as a member of the Jreck Advisory Board of Directors.
8.7.2 Convertible Note Assumption. On and
after the Effective Time,
Jreck hereby fully assumes all of Target's obligations under the Convertible
Notes and related Trust Indenture in accordance with Article 13 of the Trust
Indenture, provided, the total outstanding face amount of all such Convertible
Notes does not exceed $530,000.
8.7.3 Adjustment for Certain Target Creditors. Prior to the Effective
Time, Target shall prepare and submit for attachment hereto as Exhibit E a list
of those Target creditors who:
(a) have accepted agreed to accept Jreck Common at closing in
exchange for
<PAGE>
cancellation of indebtedness, and the parties agree that such shares of
Jreck Common shall be deducted from the 1,000,000 shares of Jreck
Common otherwise distributable to holders of Target Common at closing;
and
(b) those Target creditors who have accepted promissory notes from
Target to evidence indebtedness owing to them, and the parties agree
that such promissory notes shall be assumed by Admiral at closing, and
that number of shares of Jreck Common determined by dividing the amount
of such notes by the share value established pursuant to Section 2.10
of this Agreement shall be deducted from the 1,000,000 shares of Jreck
Common otherwise distributable to holders of Target Common at closing.
9. CONFIDENTIALITY COVENANT AND ANNOUNCEMENTS.
9.1 Confidentiality. No party to this Agreement shall use or
disclose any non-public information obtained from another party for any purpose
unrelated to the Merger, and, if this Agreement is terminated for any reason
whatsoever, each party shall return to the other all originals and copies of all
documents and papers containing technical, financial, and other information
furnished to such party pursuant to this Agreement or during the negotiations
which preceded this Agreement, and shall neither use nor disclose any such
information except to the extent that such information is available to the
public, is rightfully obtained from third parties or is independently developed.
9.2 Announcements. No party to this Agreement shall issue a
press release or other public communication relating to this Agreement, the Plan
of Merger or the Merger without the prior approval of the other party.
Notwithstanding the foregoing, and after reasonable consultation with Target,
Jreck may make such announcements regarding the Merger as, in the judgment of
its management after consultation with legal counsel, are necessary to comply
with any securities laws or regulations.
10. Indemnification.
10.1 Indemnification Relating to Agreement. To the extent and
in the manner set forth in the Escrow Agreement and this Article 10, Target
agrees, and by approval of this Agreement and the Merger at the special
shareholders' meeting of Target (or by unanimous written consent in lieu of a
meeting), the shareholders of Target agree to defend, indemnify and hold Jreck
harmless from and against, and to reimburse Jreck with respect to, any and all
losses, damages, liabilities, claims, judgments, settlements, costs and expenses
(including reasonable attorneys' fees) of every nature which separately or in
the aggregate exceed $25,000, and incurred by Jreck by reason of or arising out
of or in connection with (i) any material breach by Target of any representation
or warranty of Target contained in this Agreement or in any certificate or other
document delivered to Jreck pursuant to the provisions of this Agreement,
including, without limitation, the Disclosure Statement of Target, or (ii) the
failure, partial or total, of Target to perform any agreement or covenant
required by this Agreement to be performed by it, and that up to 75,000 shares
of Jreck Common deposited in escrow pursuant to Section 2.4 of this Agreement
shall be used to secure and pay the above described indemnity obligation as set
forth in the Escrow Agreement.
<PAGE>
10.2 Exclusive Remedy. Except for acts of fraud or other
intentional misrepresentation by Target or Target Shareholders, Jreck and Target
agree that the escrow of Jreck Common pursuant to the above Section 10.1 and the
Jreck Escrow Agreement shall be and constitute Jreck's sole and exclusive remedy
for the indemnity obligations set forth in Section 10.1 above. However, in the
event of fraud or other intentional misrepresentation, the escrow arrangement
shall not constitute Jreck's sole and exclusive remedy and Jreck shall be
entitled to pursue any and all remedies at law or equity for any damages
proximately caused by such fraud or other intentional misrepresentation.
11. Termination.
11.1 Mutual Agreement. This Agreement may be terminated at any
time prior to the Effective Time by the unanimous mutual consent of Jreck and
Target, even if and after the shareholders of Target have approved this
Agreement and the Plan of Merger.
11.2 Termination by Jreck. This Agreement may be terminated by
Jreck alone, by means of written notice to Target if (a) Target fails to perform
any material covenant of Target contained in this Agreement, or (b) on or before
October 1, 1997, any of the conditions set forth in Article 6 of this Agreement
shall not have been satisfied by Target or waived by Jreck.
11.3 Termination by Target. This Agreement may be terminated
by Target alone, by means of written notice to Jreck if (a) Jreck fails to
perform any material covenant of Jreck contained in this Agreement or (b) on or
before October 1, 1997, any of the conditions set forth in Article 7 of this
Agreement shall not have been satisfied by Jreck or waived by Target.
12. Miscellaneous.
12.1 Expenses. Jreck shall pay the costs of the Escrow. Each
of Jreck and Target shall pay its own costs and expenses, including legal,
accounting and investment banking fees and expenses, relating to this Agreement,
the negotiations leading up to this Agreement and the transactions contemplated
by this Agreement; provided that Target's expenses shall not exceed $50,000 and
any excess shall be paid by the shareholders of Target.
12.2 Time; Amendment. Time is of the essence of this
Agreement. This Agreement shall not be amended except by a writing duly executed
by both parties.
12.3 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of this State of Washington and venue of
any action shall be the state and federal courts of the State of Washington and
Target hereby consents to the jurisdiction of such state and federal courts.
12.4 Headings. The headings contained in this Agreement
are intended for
convenience and shall not be used to determine the rights of the parties.
12.5 Notices. All notices, requests, demands, and other
communications made
<PAGE>
in connection with this Agreement shall be in writing and shall be deemed to
have been duly given on the date of delivery if delivered by hand delivery or by
facsimile to the persons identified below for five days after mailing if mailed
by certified or registered mail postage prepaid return receipt requested
addressed as follows:
If to Jreck:
Jreck Subs Group, Inc.
P.O. Box 6
Watertown, N.Y. 13601
Attention: Christopher Swartz
Facsimile: (315) 788-8954
With a copy to:
Jerry A. Creim, Esq.
Williams, Kastner & Gibbs PLLC
Two Union Square
601 Union Street, Suite 4100
P.O. Box 21926
Seattle, WA 98111-3926
If to Target:
Quality Franchise Systems, Inc.
3841 N. Freeway Blvd., Suite 290
Sacramento, CA 95834
Attention: Bradley L. Gordon
Facsimile: (916) 929-6018
With a copy to:
Richard Seidenwurm, Esq.
Solomon, Ward, Seidenwurm & Smith, LLP
401 B Street Suite 1200
San Diego, CA 92101
Facsimile: (619) 231-4755
Such addresses may be changed, from time to time by means of a
notice given in the matter provided in this section.
12.6 Severability. If any provision of this Agreement is held
to be unenforceable for any reason, it shall be adjusted rather than voided, if
possible, in order to achieve the intent of the parties to the extent possible.
In any event all other provisions of this Agreement shall be deemed valid and
enforceable to the full extent possible.
<PAGE>
12.7 Survival of Representation and Warranties. All
representations and warranties contained in this Agreement, including the
Exhibits, Schedules and other documents delivered pursuant to this Agreement
shall survive the Effective Time and shall expire one year thereafter.
12.8 Waiver. Waiver of any term or condition of this Agreement
by any party shall not be construed as a waiver of a subsequent breach or
failure of the same term or condition, or a waiver of any other term or
condition in this Agreement.
12.9 Assignment. Neither party may assign, by operation of law
or otherwise, all or any portion of its rights or duties under this Agreement
without the prior written consent of the other party, which consent may be
withheld in the absolute discretion of the party asked to give consent.
12.10 Counterpart/Facsimile Signature. This Agreement may be
signed by facsimile and in counterparts with the same effect as if the
signatures of each party were original upon a single instrument. All such
facsimiles and counterparts shall be deemed an original of this Agreement.
12.11 Other Remedies. Unless expressly provided otherwise, no
remedies contained in this Agreement or in any of the Exhibits or Schedules
hereto shall be in lieu of, or constitute a waiver of, any remedies at law or in
equity (not based upon negligent misrepresentations) that one party may
otherwise have against the other party hereto or against any present or former
officer, director or controlling shareholder of such party.
12.12 Arbitration. The parties hereto agree that any disputes
between the parties relating to or arising from this Agreement shall be
submitted to binding arbitration in accordance with the rules of the American
Arbitration Association with such arbitration to be held in Denver, Colorado, or
such other location if mutually agreed to by both parties. The results,
determination, finding, judgment or award rendered through such arbitration,
shall be final and binding on each of the parties hereto and not subject to
appeal.
12.13 Attorney Fees. In the event of a dispute between the
parties hereto relating to this Agreement or the Escrow Agreement, the
prevailing party shall be entitled to recover from the other party its
reasonable attorney fees and costs incurred in any action or arbitration in
addition to any other damages or type of relief.
12.14 Entire Agreement. This Agreement, including the Exhibit,
Schedules, Disclosure Statements, and other documents delivered pursuant to this
Agreement, contains all the terms and conditions agreed upon by the parties
relating to the subject matter of this Agreement and supersedes all prior
agreements, negotiations, correspondence, undertakings, and communications of
the parties, whether oral or written, respecting that subject matter.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
JRECK SUBS GROUP, INC.
By:
Its: President and CEO
ADMIRAL'S FLEET, INC.
By:
Its President and CEO
QUALITY FRANCHISE SYSTEMS, INC.
By:
Its President and CEO
<PAGE>
AMENDMENT TO
AGREEMENT AND PLAN OF
REORGANIZATION AND MERGER
This Amendment to Agreement and Plan of Reorganization and Merger
("Amendment") is made and entered into as of September 19, 1997 by and between
Jreck Subs Group, Inc., a Colorado corporation ("Jreck"), Admiral's Fleet, Inc.,
a Washington corporation ("Admiral"), and Quality Franchise Systems, Inc., a
Delaware corporation ("Target") and amends that certain Agreement and Plan of
Reorganization and Merger dated as of August 28, 1997 among Jreck, Admiral, and
Target (the "Merger Agreement").
THE PARTIES AGREE AS FOLLOWS:
12.15 Definitions. For purposes of this Amendment, all capitalized
terms not otherwise expressly defined herein shall have the same meaning as
defined in the Merger Agreement, which definitions are incorporated herein by
reference.
12.16 Target Preferred Shares. Section 2.3.2 of the Merger
Agreement is hereby
amended by modifying Section 2.3.2 as follows:
12.16.1 Target Preferred Shares. As of the date hereof Target
has issued and outstanding 545 shares of Series A Preferred Stock on the terms
set forth in that certain Certificate of Designation of Quality Franchise
Systems, Inc. filed with the State of Delaware Office of Secretary of State on
May 24, 1996 (the "Target Preferred"). Target covenants to use its best efforts
to see that all holders of Target Preferred convert such shares into shares of
Target Common prior to the Closing. In the event not all holders of Target
Preferred convert to Target Common prior to the Closing, each share of Target
Preferred outstanding at Closing shall be converted into one (1) share of Jreck
preferred stock (to be created by Jreck prior to Closing) which preferred shares
shall carry, in substance, the same terms and conditions as the Target Preferred
(the "Jreck Preferred"), except, (i) The Jreck Preferred will be junior to
Jreck's existing Series A and Series B preferred stock; (ii) the Jreck Preferred
shall be convertible into Jreck Common at a rate of 133.22 shares of Jreck
Common for each share of Jreck Preferred with a face amount of $1,000.00; and
(iii) each share of Jreck Preferred shall carry an accrued dividend payable to
the holder thereof of $170.
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<PAGE>
12.17 Post-Closing Covenants. Section 8.7 of the Merger Agreement
is hereby amended
and modified by adding a new Section 8.7.4 as follows:
8.7.4 Additional Share Contingency. Following the Effective
Time, and with respect to the period October 1, 1997 through January
31, 1998 (the "Contingency Period"), if during the Contingency Period
the average daily closing price of the publicly traded shares of Jreck
common stock (as reported by the NASDAQ Bulletin Board) is not $3.50 or
more for at least one (1) consecutive 21-day period, then Jreck shall
deliver to the Shareholder Representative for delivery to the Target
Shareholders an additional 150,000 shares (in the aggregate) of Jreck
Common (the "Additional Contingent Shares") which Jreck shall deliver
to the Shareholder Representative within 30 days of the expiration of
the Contingency Period. Any and all Additional Contingent Shares shall
carry and be subject to all restrictions specified in the Merger
Agreement for shares of Jreck Common.
(a) Example. For illustrative purposes only, and by way of
example of how Section 8.7.4 is to be applied, if during any
consecutive 21-day period during the Contingency Period the average
daily closing price for publicly traded Jreck Common stock is $3.50 a
share for 21 consecutive days, no Additional Contingent Shares shall be
issued to the Target Shareholders. Conversely, if during the
Contingency Period there is no one (1) consecutive 21-day period during
which the average daily closing price for the publicly traded Jreck
Common stock is at least $3.50 a share for each day of such 21 day
period, then all 150,000 Additional Contingent Shares shall be issued
to the Target Shareholders and delivered to the Shareholder
Representative within 30 days of the expiration of the Contingency
Period.
12.18 Effect. This is the entire agreement of the parties with respect
to amendments to the Merger Agreement. The Merger Agreement, as amended hereby,
may only be further modified by a written document signed by all parties. Except
as expressly set forth herein, all terms and conditions of the Merger Agreement
shall continue in full force and effect.
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<PAGE>
12.19 Counterparts/Facsimile. This Amendment may be executed in
counterparts and
with facsimile signature.
Dated as of the first date written above.
JRECK SUBS GROUP, INC., a Colorado
Corporation
By
Its
ADMIRAL'S FLEET, INC., a Washington
Corporation
By
Its
QUALITY FRANCHISE SYSTEMS, INC.,
a Delaware Corporation
By
Its
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<PAGE>
AGREEMENT
This agreement made the ___ Day of April, 1997, between Jreck Subs
Group, Inc. A Colorado Corporation hereafter called the "Buyer" with an address
for doing business at P.O. Box 6, Watertown, N.Y. and CHAI Enterprises, Inc.
Doing business as Hymie's Bagel Chain, 343 Douglas Road, Tampa Bay, Florida,
hereafter called "Seller".
Whereas, The Seller is desirous of purchasing the Business of the Seller
including the bakery, bakery equipment, inventory, good will, telephone number,
customer lists, and covenant not to compete executed by key employees and
representatives of the business, and
Whereas, The Seller desires to sell all such assets, and covenants not to
compete not compete of such key employees and company representatives, and
Whereas the Seller has represented as consideration of the transfer of the
business that at least twelve of the Stores known as "Hymie's" in the Tampa Bay,
Florida market shall transfer their businesses to the Seller, it is therefore,
AGREED, as follows:
1. The Buyer shall pay the Seller the sum of Eight Hundred Thousand
($800,000) Dollars
for the business in the following manner.
a) Ten Thousand ($10,000) Dollars as a non-refundable down
payment. Such
payment shall be within ten days of the execution of the agreement.
b) Five Thousand ($5,000) Dollars within thirty days of the
execution of this
agreement.
c) One Hundred Eighty-Five Thousand ($600,000) Dollars shall be
delivered immediately, as soon as the due diligence report is filed and
signed by both parties, but in any event within sixty days from the
execution of this contract. The share value shall be a figure
representing a 25% discount from the market as of that date.
2. All leases involving the bakery and retail outlets are in D.R.A.
Enterprises, Inc. All of
the shares of the Corporation shall be transferred, with all franchise taxes
and reports up to date
and current. They shall be provided thirty days prior to closing for review
by the buyer.
3. CHAI Enterprises, Inc. Shall continue to manage the company for a five year
period with a management fee of Eighty-Five Thousand ($85,000) Dollars for the
first year. Subsequent years will be agreed between the parties based on a
schedule. The management agreement shall be drawn separately but attached hereto
as consideration and a part of this agreement.
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<PAGE>
4. Frank Christian shall as consideration of this agreement continue employment
for a three year period for no less that Thirty-Five Thousand ($35,000) Dollars
per year; Renee' Jones shall execute an employment contract for three years for
no less than Twenty-Five Thousand ($25,000) Dollars. These contracts shall be
executed separately together with covenants not to compete. These agreements
shall be attached hereto, as a part of the consideration of this agreement.
5. There are fourteen stores as of the execution of this contract. Four stores
will be treated by a cash plus stock purchase at approximately fifteen thousand
($15,000) Dollars. These stores shall receive Two Thousand Five Hundred ($2,500)
Dollars within thirty days, an additional Two Hundred Five Hundred ($2,500)
Dollars within sixty days and the balance of stock upon transfer of the retail
stores.
The balance of the stores shall be sold to the seller for Forty
Thousand ($40,000) Dollars worth of stock in the company. The stock shall be
valued at 25% discount to the market as of the date of issue.
6. Each store owner shall transfer the assets in exchange for stock of JSGI with
the understanding they shall continue to manage the store after the sale. They
shall supply their books and records for the last twelve months of operation
twenty days prior to closing. All furniture, fixtures, equipment, and inventory
shall be transferred as a part of the consideration of the purchase price. A
separate management agreement shall be drawn, together with a covenant not to
compete and attached to and made a part of this agreement. The transfer of the
stores shall take place at the same time as the transfer of the bakery.
7. The present store owner shall receive a salary of not less than five hundred
dollars per week so long as the store runs at least at a "break even" level
after payment of salary. Bonuses based on performance (food cost, labor, profit)
shall be available to all store managers. An ESOP program in contemplated by the
buyer within the next year.
7. Due Diligence. The seller has represented among other thins: The gross
revenues of the bakery is approximately Eleven Thousand ($11,000) Dollars of
baked products per week. The lowest of all average sales per retail unit is
Eight Hundred Dollars per week. The average monthly lease is Eight Hundred
Dollars. There are no liens against any of the assets being transferred. The
leases are current and not subject to cancellation for the reason of this
transfer or any other reason to the transferor. Eighty per cent of the stores
are at least at a "break-even" level after owner's compensation.
7. The financial statements of the Business and the last two years income tax
returns are supplied herein for review by the Buyer's accountant. The Seller
represents that the business has a positive cash flow for the last two years
before depreciation and personal expenses.
8. All attached documents yet to be drawn shall be executed within sixty
days.
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<PAGE>
9. In the event the shares are not delivered or the cash is not paid pursuant to
this contract, all sums advanced by the buyer to the seller shall belong to the
buyer as liquidated damages. There shall be mo other action arising for
non-performance under this contract.
In witness whereof, the parties have placed their hands and seals the day and
year first above.
By:
Jreck Subs Group, Inc.
By:
CHAI Enterprises, Inc.
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<PAGE>
GRANT OF STOCK OPTIONS
Date of Grant: May 19,1997
THIS GRANT of Stock Options (the "Agreement"), dated as of the Date of
Grant first stated above (the "Date of Grant"), is granted and delivered by
Jreck Subs Group, Inc., a New York corporation (the "Company") to Mitchell R.
Day and Julie A. Day, husband and wife (the "Grantee"), individuals residing in
the State of Washington.
RECITALS
WHEREAS, the Board of Directors of the Company approved of the purchase
of Grantee's shares of common stock in Seawest Sub Shops, Inc. pursuant to that
certain letter purchase agreement dated as of May 8, 1997 (the "Purchase
Agreement"); and
WHEREAS, pursuant to the Purchase Agreement, and as partial
consideration for certain non-competition covenants from Day, the Company is
granting Grantee irrevocable options ("Options") to purchase shares of the no
par value common voting stock of the Company (the "Stock") in accordance with
the terms and provisions hereof;
NOW, THEREFORE, the parties hereto intending to be legally bound hereby
agree as follows:
1. Grant of Option.
Subject to the terms and conditions hereinafter set forth, the company
hereby irrevocably grants to the Grantee, as of the Date of Grant, an option to
purchase up to 100,000 shares of Stock at a price of $.001 per share. Such
option is hereinafter referred to as the "Option(s)" and the shares of Stock
purchasable upon exercise of any or all of the Options are hereinafter sometimes
referred to as the "Option Shares." The Options are fully vested as of the Date
of Grant but may only be exercised at such times and n such manner as set forth
in Section 2 below.
2. Installment Exercise.
Unless Grantee is exercising Options pursuant to a plan of merger,
reorganization, Registration pursuant to Section 6 of this Agreement, sale of
substantially all the Company's assets or voluntary liquidation, in which case
the Options shall be immediately exercisable, the Options hereby granted shall
be exercisable only as follows:
Percentage of Option
Date of Exercise Which is Exercisable
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<PAGE>
after December 19, 1997 25%
after May 19,1998 50%
after December 19, 1998 75%
after May 19, 1999 100%
Each Option may only be exercised, in whole or in part, as et forth in
this Section 2; provided, however, that no fewer than 1000 shares (or the
remaining shares then purchasable under the Option if less than 1000 shares) may
be purchased upon any exercise of Option rights hereunder and only whole shares
will be issued pursuant to the exercise of any Option.
The notice of exercise shall specify the number of Option Shares as to
which the Option is to be exercised and the date of exercise thereof, which date
shall be at least five days after the giving of such notice unless an earlier
time shall have been mutually agreed upon. Full payment (in U.S. dollars) by the
Grantee at the Option price for the Option Shares purchased shall be made on or
before the exercise shall be, in substance, in substantially the form of the
notice attached hereto as Exhibit A.
On the exercise date specified in the Grantee's notice or as soon
thereafter as is practicable, the Company shall cause to be delivered to the
Grantee a certificate or certificates for the Option Shares then being purchased
upon full payment fort such Option Shares. If, at any time, the Company shall
determine, in its discretion, that the listing, registration or qualification of
the Options or the Option Shares upon any securities exchange or under any state
or federal law with the consent or approval of any governmental regulatory body
as necessary or desirable as a condition of or in connection with the Options or
the issuance or purchase of Stock thereunder, the Company shall undertake such
listing, registration of qualification so the Options may be exercised by the
Grantee as provided herein.
The date specified in the Grantee's notice as the dare of exercise
shall be deemed the date of exercise of the Option provided that payment in full
for the Option Shares to be purchased upon such exercise shall have been
received by such date.
3. termination of Option.
a. The Option, and all rights hereunder with respect thereto,
to the extent such rights shall not have been exercised, shall terminate and
become null and void after the expiration of fifteen (15) years from the Date of
Grant (the "Option Term").
b. In the event of the death of the Grantee, the Option
may be exercised by the
Grantee's legal representative, but only to the extent that the Option would
otherwise have been
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S1-510098.1
<PAGE>
exercisable by the Grantee.
4. Right to Require Repurchased.
a. Any time after Grantee has exercised any of Grantee's Options to
purchase Stock, in whole or in part, Grantee may require the Company to
repurchase the Stock at the greater of the Fair Market Value (as defined below)
or $3.25/share. Without the prior written agreement of the Company, Grantee may
not require the Company to repurchase more than 10,000 shares in any three month
period.
b. To exercise the right of repurchase set forth in this Section 4,
Grantee must give notice in writing to the company. The notice set forth the
number of shares to be repurchased and whether the repurchase price is to be at
the Fair Market Value (defined below) or $3.25/share. Within ten (10) days of
receipt of such notice, the Company must deliver cash or readily available funds
in the amount of the repurchase price to Grantee together with a replacement
stock certified for the amount of shares not repurchased, if any.
5. Adjustment of and Changes In Stock of the Company.
In the event of reorganization, recapitalization, change of shares,
stock split, spinoff, stock dividend, reclassification, subdivision, or
combination of shares, merger, consolidation, right offering, or any other
change in the corporate structure or shares of capital stock of the Company
(collectively "Capital Change"), the Company shall make such adjustments as it
deems appropriate in the number and kind of shares of Stock subject to the
Option, provided, the financial or economic benefits to Grantee hereunder
existing prior to any such Capital Change shall not be reduced or otherwise
limited as a result of any such adjustment.
6. Notice of Piggyback Registration and Inclusion of Registrable
Securities.
Subject to the terms of Agreement, in the event the Company decides to
Register (defined below) any of its Stock (either for its own account or the
account of a security holder or holders exercising their respective demand
registration rights) on a form that would be suitable for a registration
involving solely Registrable Securities (defined below), the company at its sole
cost and expense will: (i) promptly give Grantee written notice thereof (which
notice shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable Blue Sky or other state
securities laws) and (ii) include in such Registration (and any related
qualification under Blue Sky laws or other compliance), and in any underwriting
involved therein, all the registrable Securities specified in a written request
delivered to the Company by Grantee within fifteen (15) days after delivery of
such written notice from the Company.
a. Piggyback Registration involving an Underwriting. If
the registration of which the
Company gives notice is for a Registered public offering involving an
underwriting, the Company
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S1-510098.1
<PAGE>
shall so advise the Grantee as a part of the written notice given pursuant to
this Section 7. In such event, the right of grantee to Registration shall be
conditioned upon such underwriting. If Grantee desires to distribute their
securities through such underwriting, they shall (together with the Company and
the other holders distributing their securities through such underwriting) enter
into an underwriting agreement wight the underwriter's representative for such
offering. The Grantee shall have no right to participate in the selection of the
underwriters for an offering pursuant to this Section 7 and Grantee shall have
no liability for any costs and fees related thereto.
b. Blue Sky in Piggyback Registration. In the event of any Registration
of Registrable Securities pursuant to this Section 7, the Company will exercise
its best efforts to Register and qualify the securities covered by the
Registration Statement under such other securities or Blue Sky laws of such
jurisdictions (not exceeding twenty (20) unless otherwise agreed to by the
Company) as shall be reasonably appropriate for the distribution of such
securities; provided, however, that the company shall not be required to qualify
to do business or to file a general consent to service of process in any such
states or jurisdictions.
c. Definitions. For purposes of this Agreement, the following
definitions shall apply:
(1) The terms "Register", "Registered", and "Registration"
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act ("Registration Statement"), and
the declaration or ordering of the effectiveness of such Registration Statement.
(2) "Registrable Securities" shall mean all Stock not
previously sold to the public and issued or issuable upon conversion or exercise
of any of the Company's Convertible Securities purchased by or issued to the
Investors, including Stock issued or issuable pursuant to stock splits, stock
dividends and Stock Options, including the Options hereunder.
(3) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the rules and regulations of the
Commissions thereunder, all as the same shall be in effect at the time.
7. Fair market Value.
As used herein, the "Fair Market Value" of a share of Stock shall be
the average of the high and low sale prices per share of Stock as quoted by
NASDAQ or any exchange upon which the shares of Stock of the Company are then
traded as determined by the Company on the applicable date of reference
hereunder, or if there is no sale on such date, the Company shall determine the
Fair Market Value by resort to such sales prior to the applicable date or such
experts as the Company shall deem appropriate, which may include appraisal of
the shares of Stock for this purpose.
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<PAGE>
8. No Rights of Stockholders.
Neither the Grantee, nor any personal representative, shall be or shall
have any of the rights and privileges of a stockholder of the Company with
respect to any shares of Stock purchasable or issuable upon the exercise of the
Option, in whole or in part, prior to the date of actual exercise of the Option
in whole or in part.
9. Nontransferability of Option.
During the Grantee's lifetime, the Option hereunder shall be
exercisable only by the Grantee, or any guardian or legal representative of the
Grantee, and the Option shall not be transferable except, in case of the death
of the Grantee, by will or the laws of descent and distribution, nor shall the
Option be subject to attachment, execution, or other similar process. In the
event of (a) any attempt by the Grantee to alienate, assign, pledge,
hypothecate, or otherwise dispose of the Option except as provided for herein,
or (b) the levy of any attachment, execution, or similar process upon the rights
or interest hereby conferred, the Company may terminate the Option by notice to
the Grantee and the Option shall thereupon become null and void unless grantee
cures such default within thirty (30) days of the Company's notice.
10. Notice.
Any notice to the Company provided for in this instrument shall be
addressed to it in care of its secretary at its executive offices at 24685 NYS,
Rt. 37, Watertown, N.Y. 13601, and any notice to the Grantee shall be addressed
to the Grantee at 2846 W. Viewmont Way W., Seattle, WA 98199. Any notice shall
be deemed to be duly given if and when properly addressed and posted by
registered or certified mail, postage prepaid.
11. Representations and Warranties of Grantee and Restrictions on
Transfer Imposed
by the Securities Act.
a. Representations and Warranties by Grantee. Grantee represents
and warrants to the
Company as follows:
(1) Grantee is experienced in evaluating and investing in
restaurant and franchise companies such as the Company and have had the
opportunity to discuss the Company's business, management and financial affairs
with its Chief Executive Officer and have had the opportunity to review the
Company's plan of operations, its tax returns and current financial statement.
Grantee understands that such discussions, as well as any written information
issued by the Company, were intended to describe the aspects of the Company's
business and prospects which it believes to be material but were not necessarily
a thorough or exhaustive description.
(2) In the event Grantee exercises Grantee's Options, the Stock
will be acquired for your own account, for investment and not with a view to, or
for resale in connection with,
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any distribution or public offering thereof within the meaning of the Securities
Act.
(3) Grantee understands that neither the Options nor the Stock
have been registered under the Securities Act by reason of their issuance in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act pursuant to Section 4(2) thereof, and that they must be held
by Grantee indefinitely and Grantee must therefore bear the economic risk of
such investment indefinitely, unless a subsequent disposition thereof is
registered under the Securities Act or is exempt from registration. Grantee is
aware of the provisions of Rule 144 promulgated under the Securities Act which
permit limited resale of shares purchased in a private placement subject to the
satisfaction of certain conditions, including, among other things the existence
of a public market for the shares, the availability of certain current public
information about the Company, the resale occurring not less than one year after
a party has purchased and paid for the security to be sold, the sale being
through a "broker's transaction" or in transactions directly with a "market
maker" (as provided by Rule 44(f)) and the number of shares being sold during
any three-month period not exceeding specified limitations. Grantee is aware
also that, while many of the restrictions of rule 144 do not apply to the resale
of shares by a person who owned those shares for at least two years prior to
their resale and who is not an "affiliate" (within the meaning of Rule 144(a))
of the issuer and has not been an affiliate of the issuer for at least three
months prior to the date of resale of the restricted securities, the Company
does not warrant or represent that Grantee is not an affiliate as of the dare of
this Agreement or that Grantee will not be an affiliate at any relevant times in
the future,
(4) Grantee has the full right to, power and authority to enter
into and perform this Agreement, and this Agreement constitutes a legal, valid
and binding obligation upon Grantee except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws of general application
affecting enforcement of creditors' rights, and except as limited by application
of legal principles affecting the availability of equitable remedies.
b. Legends. Each instrument representing the Securities
may be endorsed with
the following legends:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS
THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH
RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY
SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER,
ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION
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AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH
ACT.
The Company need not register a transfer of legended Securities, and may also
instruct its transfer agent not to register the transfer of the Securities,
unless one of the conditions specified in each of the foregoing legends is
satisfied.
c. Removal of Legends and transfer Restrictions. Any legend
endorsed on an instrument pursuant to Section 11 hereof and the stop transfer
instructions with respect to such securities shall be removed, and the Company
shall issue an instrument without such legend to the holder of such Securities
if such Securities are registered under the Securities Act and a prospectus
meeting the requirements of Section 10 of the Securities Act is available or if
such holder provides the Company with an opinion of counsel for such holder of
the Securities, reasonably satisfactory to the Company, to the effect that a
public sale, transfer or assignment of such Securities may be made without
registration.
12. Governing Law.
the validity, construction, interpretation, and effect of this
instrumental shall exclusively be governed by and determined in accordance with
the internal laws of the State of Washington, except to the extent preempted by
federal law which shall to such extent govern. In the event of a dispute
hereunder, the prevailing party to any action shall be entitled to recover its
attorney's fees and costs in addition to any other amounts or type of relief.
DATED in Seattle, Washington, this 19th day of May, 1997.
JRECK SUBS GROUP, INC.
BY
Its
Accepted and Agreed to:
By
Mitchell R. Day
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By
Julie A. Day
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Exhibit A
NOTICE OF INTENT
TO EXERCISE OPTION
I, , hereby give notice to Jreck Subs Group, inc. that pursuant to the terms of
my Grant of Stock Options Agreement dated May 19, 1997 (the "Agreement"), I
intend to, and hereby do, exercise my options to
acquire____________________________ shares of common stock of Jreck Subs Group,
Inc.
Enclosed herewith is my check in the amount of________________________________
dollars ($_____) which represents the option exercise price of $.001 per share.
DATED:___________________
Mitchell R. Day
SSN#
Julie A. Day
SSN#
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May 8, 1997
Christopher M. Swartz
President
Jreck Subs Inc.
Box 6
Watertown, NY 13601-0006
RE: Purchase of Seawest Sub Shops, Inc Common Stock
Dear Chris:
This letter is intended to set forth terms and conditions of our agreement
regarding the acquisition
of common stock of Seawest Sub Shops, Inc. ("Seawest") from Mitchell r. Day and
Julie A. Day
("Day") by Jreck Subs, Inc. ("Jreck").
1. Purchase of Common Stock
a. Seawest has 5,000,000 authorized shares of common stock, no
par value, and
2,271,000 shares outstanding.
b. At closing, Jreck will purchase 2,000,000 shares of common
stock of Seawest
owned by Day for $150,000.
c. Within a reasonable time following the Closing, Jreck agrees to
offer to purchase all remaining all outstanding shares held by third parties for
the minimum price of $0.08 per share (i.e., the same share price paid to Day).
Jreck further agrees to indemnify, defend and hold Day harmless (including
attorneys fees) from and against any and all claims by Seawest minority
shareholders related to Jreck's purchase of Day's stock and this agreement.
d. Jreck acknowledges that it has had the opportunity to review
Seawest's books and records. Jreck is a sophisticated purchaser in a similar
business to Seawest's. Jreck acknowledges that Seawest is in litigation with
certain franchises and there are leases upon which Seawest has defaulted.
2. Jreck's Option to Repurchase Seawest Stores
a. As part of negotiations with a third party Seawest transferred
ownership of three Seawest owned stores on April 25, 1997 for total
consideration of $70,000:
(1) 2811 Colby, Space B, Everett, WA 98201
(2) 650-228th Avenue NE, Redmond, WA 98053
(3) 11014-19th Avenue SE, #218, Everett, WA 98208
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b. Under Seawest's agreement with the third party, Seawest may, at its
sole option, repurchase these three company stores from the third party for
$70,000 by payment to the third party no later than May 15, 1997.
c. If Jreck so chooses, at Jreck's sole discretion, Seawest will
repurchase the three
units with funds to be provided by Jreck.
3. Noncompetition Agreement
a. At closing, Day will enter into a Noncompetition Agreement with
Jreck which will prevent Day from franchising submarine sandwich shops (but not
multiple food concepts as currently contemplated by Food Court Systems, Inc.)
for a period of three years. Jreck will pay Day the following consideration for
the Noncompetition Agreement:
(1) For each month for the 12 month period commencing on the first of
June,1997, Jreck will pay Day $8,000 per month.
(2) Jreck will Issue Day, at Day's selection, either (a) 100,000
common shares, or (b) options to purchase 100,000 common shares for a total
consideration of $100, of Jreck common stock. Jreck and Day agree to negotiate
the terms of this payment in order to minimize income tax consequences to Day
related to this payment. Jreck will issue a "Put Option" which will allow Day to
sell the 100,000 shares back to Jreck, upon demand after a mutually agreeable
period of time, for not less than $3.25 per share in cash.
4. Liabilities of Seawest and Day. Jreck will assume all liabilities,
existing or contingent,
of Seawest and all liabilities of Seawest personally guaranteed by Day. Jreck
will indemnify Day
from any and all claims by Seawest creditors.
5. Transfer Tax. Jreck shall be responsible of all transfer taxes, if
any.
6. Closing. Closing for this Stock Purchase and Sale Agreement
("Closing"), and payment
of the purchase price, shall be at the offices of Williams, Kastner & Gibbs, in
Seattle,
Washington, on May 16, 1997 (unless extended by mutual agreement).
7. General Provisions.
a. Notices. Any notices and similar communications concerning
this Agreement
("Notice") shall be in writing and may be delivered by facsimile, followed by
regular mail.
b. Governing Law. This Agreement shall be governed by Washington
state law. The
venue of any action shall be King County, Washington. In the event of a disput
respecting this
agreement, the prevailing party shall be entitled to recover its costs and
reasonable attorneys fees
from the other party.
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c. Complete Agreement and Binding Effect. This Agreement shall become
binding upon execution by all of the parties hereto. This Agreement represents
the complete agreement of the parties and shall supersede all previous and
contemporaneous negotiations, correspondence, commitments, agreements and
understandings of the parties, whether oral or written, with respect to the
transactions contemplated hereby.
d. Counterparts. This Agreement may be executed in mutual
counterparts and sent
by facsimile and all such counterparts shall constitute one original.
8. Stock Purchase and Sale Agreement. The parties will enter into a Stock
Purchase and Sale Agreement which will contain customary representations,
warranties, indemnifications and covenants. However, mutual execution of the
Stock Purchase and Sale Agreement shall not be a condition to Closing. The
parties further agree to execute such further documentation, if any, which is
mutually deemed to be necessary and reasonable to accomplish the transactions
contemplated herein.
9. Acceptance. If the foregoing terms are acceptable to you, please
acknowledge your
acceptance by your signature below on or prior to 2:00 pm, Pacific Standard
Time, May 9, 1997.
Yours very truly, Yours very truly,
Mitchell R. Day Mitchell R. Day
President For Mitchell R. Day and Julie A. Day
The provisions of this Agreement are hereby acknowledged and accepted:
DATED_______________, 1997 JRECK SUBS, INC.
Christopher M. Swartz
President
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Addendum
It is the intention of the parties that the shares of Mitchell and Julie Day
shall be acquired by a wholly owned subsidiary of Jreck Subs Group, Inc. to be
formed prior to closing. The indemnifications given to Mitchell and Julie Day
shall be given by both the subsidiary and Jreck Subs Group, Inc.
by:_______________________ by:________________________________
Jreck Subs Group, Inc. Seawest Sub Shops, Inc.
-----------------------------------
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REPRESENTATION AND WARRANTY AGREEMENT
The undersigned purchaser ("Purchaser") has agreed to purchase Two
Million (2,000,000) shares of no par common voting stock (the "Shares") of
SEAWEST SUB SHOPS, INC., a Washington corporation, (the "Company") from MITCHELL
R. DAY and JULIE A. DAY, husband and wife, ("Sellers") pursuant to the terms of
that certain letter purchase agreement dated as of May 8, 1997 (the "Purchase
Agreement"). In connection with the purchase, purchaser represents and warrants
to Seller, and Seller represents and warrants to Purchaser, as set forth below.
1. Purchaser's Representations and Warranties.
Purchaser represents and warrants to Seller that each of the
following are true and correct as of the date hereof:
(a) Purchaser is purchasing the Shares solely for Purchaser's
own account for investment and not with a view to or for sale or distribution of
the Shares or any portion thereof and not with any present intention of selling,
offering to sell or otherwise disposing of or distributing the Shares or any
portion thereof in any transaction other than a transaction complying with the
registration requirements of the Securities Act of 1933, as amended (the "Act",
and applicable state securities or "blue sky" laws, or pursuant to an exemption
therefrom. Purchaser also represents that the entire legal and beneficial
interest of the Shares that Purchaser is purchasing is being purchased for, and
will be held for, Purchaser's account only, and neither in whole nor in part for
any other person or entity, except a wholly owned subsidiary of Purchaser.
(b) Purchaser acknowledges that it has received all such
information as Purchaser deems necessary and appropriate to enable it to
evaluate the financial risk inherent in making an investment in the Shares,
including but not limited to this Agreement and related materials, which include
a description of some of the risks inherent to an investment in the Company.
Purchaser further acknowledges that Purchaser has received satisfactory and
complete information concerning the business and financial condition of the
Company in response to all inquiries in resect thereof, including but not
limited to the pending litigation involving the Company as set forth on Exhibit
A and all UCC filings and other matters set forth in Exhibit B, both of which
are attached hereto. Purchaser relies upon the Affidavits of Mitchell and Julie
Day, dated as of the date hereof, in making such acknowledgment.
(c) Purchaser realizes that Purchaser's purchase of the Shares
involve a high degree of risk and will be a highly speculative investment, and
that he, she or it is able, without impairing Purchaser's financial condition,
to hold the Shares for an indefinite period of time.
(d) Purchaser alone, or with the assistance of
professional advisors, has such
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knowledge and experience in financial and business matters that the undersigned
is capable of evaluating the merits and risks of Purchaser's purchase of the
Shares, or has a preexisting personal or business relationship with the Company
or any of its officers, directors, or controlling persons of a duration and
nature that enables the undersigned to be aware of the character, business
acumen and general business financial circumstances of the Company or such other
person.
(e) Purchaser has carefully read this Agreement and the
Company and Sellers have made available to Purchaser or Purchaser's advisors all
information and documents requested by Purchaser relating to investment in the
Shares, and has provided answers to Purchaser's satisfaction to all of
Purchaser's questions concerning the Company and the Shares.
(f) Purchaser understands that neither the Company nor any of
its officers or directors has any obligation to register the Shares under any
federal or state securities act or law.
(g) Purchaser has relied solely upon this Agreement, the
Affidavit of Mitchell and Julie Day, the advice of his or her representatives,
if any, and independent investigations made by the Purchaser and/or his or her
purchaser representatives, if any, in making the decision to purchase the Shares
purchased herein and acknowledges that no representations or agreements other
then those set forth in this Agreement have been made to the Purchaser in
respect thereto.
2. Seller's Representations and Warranties. Except as expressly
set forth in this
paragraph 2, Purchaser is purchasing the shares "as is" and Purchaser assumes
all risk of loss
related thereto. Seller represents and warrants to Purchaser that each of the
following are true
and correct as of the date hereof:
(a) The Shares constitute 2,000,000 shares of the issued and
currently outstanding 2,271,000 shares of the Company. Except as set forth on
Exhibit D, no shares, options, or warrants have been or are contemplated being
issued after the execution of this document.
(b) The Shares are owned by Sellers and the Shares
constitute all of Sellers'
Shares in the Company.
(c) Except for that certain Security Pledge Agreement dated
February 25, 1991 (copy attached as Exhibit C hereto) and related agreements by
and between Seller, the Company, Bernard J. Kane and James P. Iseman, the Shares
are free and clear of liens and encumbrances.
3. Restricted Securities.
Purchaser acknowledges, and Sellers hereby disclose to Purchaser the
following:
(a) The Shares that Purchaser is purchasing have not been
registered under the
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Act or under the laws of the State of Washington, and the Shares must be held
indefinitely unless a transfer of them is subsequently registered under the Act
or an exemption from such registration is available; and
(b) The Sellers shall cause the Company to make a notation in
its records of the above-described restrictions on transfer and of the legend
noted in Paragraph 4 below.
4. Legend.
Purchaser agrees to cause the Company to endorse the following
endorsement on (or such legend as is substantially similar to the following) all
certifies representing any of the Shares subject to the provisions of this
Agreement:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER UNITED STATES FEDERAL OR STATE SECURITIES LAWS AND MAY
NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED ON THE
BOOKS OF THE CORPORATION, WITHOUT REGISTRATION OF SUCH
SECURITIES UNDER ALL APPLICABLE UNITED STATES FEDERAL OR STATE
SECURITIES LAWS OR COMPLIANCE WITH AN APPLICABLE EXEMPTION
THEREFROM, SUCH COMPLIANCE, AT THE OPTION OF THE CORPORATION,
TO BE EVIDENCED BY AN OPINION OF SHAREHOLDERS'S COUNSEL, IN
FORM ACCEPTABLE TO THE CORPORATION, THAT NO VIOLATION OF SUCH
REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED
TRANSFER OR ASSIGNMENT. THESE SHARES REPRESENT OWNERSHIP IN A
PRIVATELY HELD CORPORATION PURSUANT TO THE LAWS OF THE STATE
OF WASHINGTON."
5. Miscellaneous.
(a) On or after the date of this Agreement, each of the
parties shall, at the request of the other, furnish, execute and deliver such
documents and instruments and take such other actions as the requesting party
shall reasonably require as necessary or desirable to carry out the transactions
contemplated herein.
(b) This Agreement including all matters of construction,
validity and performance, shall be governed by and construed and enforced in
accordance with the laws of the State of Washington. The parties hereto agree
that the jurisdiction and venue for any action brought between the parties under
this Agreement shall be the state and federal courts sitting in King County,
Washington, and each of the parties hereby agrees and submits itself to the
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exclusive jurisdiction and venue of such courts for such purpose.
(c) This Agreement comprises the entire agreement between the
parties related to the subject matter herein. It may be changed only by further
written agreement, signed by both parties. this Agreement supersedes and merges
within it all prior agreements or understandings between parties, whether
written or oral relating to the subject matter herein. In interpreting or
construing this Agreement, the fact that one or the other of the parties may
have drafted this Agreement or any provision shall not be given any weight or
relevance.
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Dated as of May 19, 1997.
ADMIRAL SUBS OF
OF WASHINGTON INC.,
a Washington corporation
in formation
By: Address:
Its:
MITCHELL R. DAY Address:
Signature
JULIE A. DAY Address:
Signature
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EXHIBIT A
1. Carol Dungan, et al. v. Seawest Sub Shops, Inc., King County Superior
Court Cause No.
97-2-05279-3 SEA
2. Kwang K. Koh, et al. v. Seawest Sub Shops, Inc., American Arbitration
Association
3. Christopher P. Ameny, et al. v. Seawest Sub Shops, Inc., American
Arbitration Association
4. Theodore N. Clark, et al. v. Seawest Sub Shops, Inc./Seawest Sub Shops,
Inc., Third-party
Plaintiff v. Clark, et al., King County Superior Court Cause No.
97-2-05275-1 SEA
5. Seawest Sub Shops, Inc. v. Tooley, et al., American Arbitration
Association
6. Wesbild, Inc. v. Seawest Sub Shops, Inc., Kitsap County Superior
Court Cause No
96-2-02666-4
7. John B. Florance, et ux. v. Seawest Sub Shops, Inc., King County
District Court, Bellevue
Division, Cause No. 9705597
8. DBSI Realty Corp. v. Seawest Sub Shops, Inc., et al., district Court,
Fourth Judicial
District, Ada County, State of Idaho, Cause No. CV OC 9606512D
9. TOPCO Financial Services, Inc. v. Seawest Sub Shops, Inc., King County
District Court,
Bellevue Division, Cause No. 9706111
10. Lakewood Real Estate L.L.C. v. Seawest Sub Shops, Inc., et al.,
(NOT FORMALLY
FILED)
11. Seawest Sub Shops, Inc. v. H.S.M. Corporation, et al.,
(NOT FORMALLY FILED)
12. Bjorn Olson, et al. v. Seawest Sub Shops, Inc., et al.,
(NOT FORMALLY FILED)
13. The Quizno's Corporation v. Seawest Sub Shops, Inc., District Court,
City and County of
Denver
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EXHIBIT B
CHART
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EXHIBIT C
SECURITY PLEDGE AGREEMENT
THIS SECURITY PLEDGE AGREEMENT ("Agreement"), dated Feb. 25, 1991, by
and
between Mitchell R. Day and Julie A. Day, husband and wife, and all successors
or additional
shareholders of the Corporation ("Pledgor") and Bernard J. Kane and James P.
Iseman and
successors ("Pledgee"),
WITNESSETH:
WHEREAS, Pledgor and pledgee are parties to a Stock Purchase and Sale
Agreement dated
Feb. 25, 1991, and all related agreements (the "Purchase Agreement"); and
WHEREAS, pursuant to such Purchase Agreement, Seawest Sub Shops, Inc. (the
"Corporation") owes Pledgee certain amounts for which Pledgor has executed a
personal guaranty;
and
WHEREAS, Pledgee desires that security be provided for such debt;
NOW THEREFORE, in consideration of the foregoing, and intending to be
legally bound hereby, the parties agree as follows:
1. Pledged Stock. The term "Pledged Stock" means the shares described in
the attached Schedule I, together with all subsequently issued stock or
certificates, options, rights, or other distributions issued as an addition to,
in substitution or in exchange for, or on account of, any such shares, and all
proceeds of all of the foregoing, now or hereafter owned or acquired by Pledgor.
2. (a) Security Interest. As security for the prompt
satisfaction of the obligations
under the Purchase Agreement and this Agreement, Pledgor to Pledgee the Pledged
Stock and
grants Pledgee a lien on and security interest therein.
(b) Possession. Pledgee shall be entitled to possession of the
collateral until all obligations and undertakings of Pledgor secured hereby have
been fully paid and performed.
(c) Distributions. If Pledgor shall become entitled to receive
or shall receive, in connection with any of the Pledged Stock, any:
(i) Stock certificate, including, but without
limitation, any certificate
representing a stock dividend or issued in connection with any increase or
reduction of capital, reclassification, merger, consolidation, sale of assets,
combination of shares, stock split, spin-off,
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or split-off;
(ii) Option, warrant, or tight, whether as an
addition to or in substitution
or in exchange for any of the Pledged Stock, or otherwise, then:
Pledgor shall accept the same as Pledgee's agent, in trust for Pledgee,
and shall deliver them forthwith to Pledgee in the exact form received with, as
applicable, Pledgor's endorsement when necessary, or appropriate stock powers
duly executed in blank, to be held by Pledgee, subject to the terms hereof, as
part of the Pledged Stock.
(d) Voting Rights. Pledgor shall have and retain all voting
rights with respect to the Pledged stock, so long as Pledgor's obligations under
this Agreement are not in default (an "Event of Default"). Upon the occurrence
of an Event of Default, if Pledgor does not cure such default as provided in the
Purchase Agreement or related agreements, Pledgor or its nominee shall have,
with respect to the Pledged Stock, the right to exercise all voting rights as to
all shares of the Company's stock, including all other corporate rights and all
conversion, exchange, subscription or other rights, privileges or options
pertaining thereto as if it were the absolute owner thereof, including, without
limitation, the right to exchange any or all of the Pledged Stock, and in
connection therewith, to deliver any of the Pledged Stock to any committee,
depository, transfer agent, registrar or other designated agency upon such terms
and conditions as it may determine, all without liability except to account for
property actually received by it; but Pledgee shall have no duty to exercise any
of the aforesaid rights, privileges or options and shall not be responsible for
any failure to do so or delay in so doing.
(e) Cash Dividends Before Default. Unless an Event of
Default shall have
occurred and be continuing, Pledgor shall be entitled to receive for its own use
cash dividends
on the Pledged Stock.
(f) Default and Sale of Pledged Shares. Upon the occurrences
of an Event of Default, if Pledgor does not cure such default as provided in the
Purchase Agreement, Pledgee may forthwith realize upon the Pledged Stock or any
part thereof, and may forthwith, or agree to, sell or otherwise dispose of and
deliver the Pledged Stock or any part thereof or interest therein, in one or
more parcels at public or private sale or sales, at any exchange, broker's board
at any of Pledgee's offices or elsewhere, at such prices and on such terms
(including, but without limitation, a requirement that any purchaser of all or
any part of the Pledged Stock purchase the shares constituting the Pledged Stock
for investment and without any intention to make a distribution thereof) as it
may deem best, for cash or on credit, or for future delivery without assumption
of any credit risk, with the right to Pledgee or any purchaser to purchase upon
any such sale the whole or any part of the Pledged Stock.
(g) Disposition of Sale Proceeds. The proceeds of any such
disposition or other
action by Pledgee shall be applied as follows:
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(i) first, to the costs and expenses incurred in
connection therewith or
incidental thereto or to the care or safekeeping of any of the Pledged Stock or
in any way relating to the rights of Pledgee hereunder, including reasonable
attorney's fees and legal expenses;
(ii) Second, to the satisfaction of Pledgor's
obligations under the Purchase
Agreement and this Agreement;
(iii) Third, to the payment of any other amounts
required by applicable
law (including, without limitation, section 9-504(1)(c) of the Uniform
Commercial Code); and
(h) Notice of Sale. Pledgee need not give more than thirty
(30) days' notice of the time and place of any public sale or of the time after
which a private sale may take place, which notice Pledgor hereby deems
reasonable.
3. Pledgor's Warranties. Pledgor represents and warrants as of
the execution date of
this Agreement that:
(a) It has, and had duly exercised, all requisite power and
authority to enter into this Agreement, to pledge the Pledged Stock for the
purposes described in paragraph 2(a), and to carry out the transactions
contemplated by this Agreement;
(b) It is the legal and beneficial owner of all of the
Pledged Stock; and
(c) The execution and delivery of this Agreement, and the
performance of its terms, will not result in any violation of any provision of
the Corporation's certificate of incorporation or bylaws, or violate or
constitute a default under the terms of any agreement, indenture or other
governmental rule or regulation, applicable to the Corporation or any of its
property.
4. Pledgor's Covenants. Pledgor hereby covenants that, until all
of the obligations
have been satisfied in full, it will not:
(a) Sell, convey, or otherwise dispose of any of the Pledged
Stock or any interest therein or create, incur, or permit to exist any pledge,
mortgage, lien, charge, encumbrance or any security interest whatsoever in or
with respect to any of the Pledged Stock or the proceeds thereof, other than
that created hereby; or
(b) Consent to or approve the issuance of any additional
shares of any class of capital stock in the issuer of the Pledged Stock; or any
securities convertible voluntarily by the holder thereof or automatically upon
the occurrences or nonoccurrence of any event or condition into, or exchangeable
for, any such shares; or any warrants, options, rights, or other commitments
entitling any person to purchase or otherwise acquire any such shares.
(c) Notwithstanding the foregoing or any other provision
herein, Pledgor shall be
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entitled to sell or transfer all or a portion of the Pledged Stock (or issue new
stock) to relatives of Pledgor without restriction as long as such stock remains
subject to this Agreement.
5. Notice from Third Parties. Pledgor will promptly deliver to Pledgee
all written notices, and will promptly give Pledgee written notice of any other
notices, received by it with respect to Pledged Stock, and Pledgee will promptly
give like notice to Pledgor of any such notices received by it or its nominee.
6. Endorsement, Proxies. Pledgor shall at any time, and from time to
time, upon the written request of Pledgee, execute and deliver such further
documents and do such further acts and things as Pledgee may reasonably request
to effect the purposes of this Agreement, including, without limitation,
delivering to Pledgee upon the occurrence of an Event of Default that has not
been cured as provided in the Purchase Agreement and related agreements, such
endorsements, forms, writings and irrevocable proxies with respect to the
Pledged Stock in a form satisfactory to Pledgee as shall be necessary to carry
out the terms and purposes of this Agreement. Until receipt thereof, this
Agreement shall constitute Pledgor's proxy to Pledgee or its nominee to vote all
shares of Pledged Stock then registered in Pledgor's name.
7. Termination. Upon the satisfaction in full of all obligations and the
satisfaction of all additional costs and expenses of the corporation and Pledgor
under the Purchase Agreement as provided herein, this Agreement shall terminate
and Pledgee shall deliver to Pledgor, at Pledgor's expense, such of the Pledged
Stock as shall not have been sold or otherwise applied pursuant to this
Agreement.
8. Pledgee's Rights and Duties.
(a) Care. Beyond the exercise of reasonable care to assume the
safe custody of Pledged Stock while held hereunder, Pledgee shall have no duty
or liability to preserve rights pertaining thereto and shall be relieved of all
responsibility for the Pledged Stock upon surrendering it or tendering surrender
of it to Pledgor.
(b) No Waiver. No course of dealing between Pledgor and
Pledgee, nor any failure to exercise, nor any delay in exercising, any right,
power or privilege of Pledgee hereunder or under the Purchase Agreement shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, power or privilege hereunder or thereunder preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
(c) No election of Remedies. The rights and remedies provided
herein and in the Agreement and in all other agreements, instruments, and
documents delivered pursuant to or in connection with the Agreement, are
cumulative and are in addition to and not exclusive of any rights or remedies
provided by law, including, but without limitation, the rights and remedies of a
secured party under the Uniform Commercial Code of the State of Washington.
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(d) Severability. The provisions of this Agreement are
severable, and if any clause or provisions shall be held invalid or
unenforceable in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect only such clause or provision or part thereof in
such jurisdiction and shall not in any manner affect such clause of provision in
any other clause or provision in this Agreement in any jurisdiction.
9. Notice. Any notice required or permitted by this Pledge
Agreement shall be
effective if given in accordance with the provisions if the Agreement.
10. Successors. This Agreement shall inure to the benefit of and
shall be binding upon
the successors and assigns of the parties hereto.
11. Uniform Commercial Code. The provisions of this Agreement
shall be governed
by the provisions of the Uniform Commercial Code, as enacted in Washington in
Chapter 62A
RCW.
12. Choice of Law. This Agreement shall be construed in
accordance with the
substantive law of the State of Washington.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date and year first above written.
"Pledgor"
Mitchell R. Day Bernard J. Kane
Julie A. Day James P. Iseman
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<PAGE>
ARTICLES OF INCORPORATION
OF
CIRCA MEDIA, INC.
KNOW ALL MEN BY THESE PRESENTS that
the
undersigned Incorporator being a natural person of the age of eighteen years of
age or older and desiring to form a body corporate under the laws of the State
of Colorado does hereby sign, verify and deliver in duplicate to the Secretary
of State of the State of Colorado these Articles of Incorporation;
ARTICLE I
NAME
The name of the Corporation is CIRCA
MEDIA, INC.
ARTICLE II
Period of Duration
This Corporation shall exist in
perpetuity, from and after the date of filing these Articles of Incorporation
with the Secretary of State of Colorado unless and until dissolved according to
the laws of the State of Colorado.
ARTICLE III
Purposes
Section 1. Specific Purposes
A.To engage in the
business of reproducing archival, public dominion art
and photographs in digital form for release on computer based
support media.
B.To provide
management services to corporations engaged in the business
of computer based media.
Section 2. General Purposes
A.To own, operate
and maintain such real or personal property as may be
necessary to conduct such business and to do all things in connection with the
real or personal property which might be done by an individual.
B.To hire and
employ agents and employees, and to enter into agreements of
employment and collective bargaining agreements for the purpose of advancement
and performance of the purposes of this corporation.
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C.To carry on any other business, whether or not related to the foregoing,
including the transaction of all lawful business for which corporations may be
organized pursuant to the Colorado Corporation Act, to have and exercise all
powers, privileges and immunities now or hereafter conferred upon or permitted
to corporations by the laws of the State of Colorado, and to do any and all
things herein set forth to the same extent as natural persons could do insofar
as permitted by the laws of the State of colorado.
D.To do those things which are authorized and permitted by the Colorado
Corporations Code.
E.To do all things
authorized by law or incidental thereto.
ARTICLE IV
Powers
The powers of the Corporation shall be
those powers granted by Article two of the Colorado Corporation Code under which
this Corporation is formed. In addition, the Corporation shall have the
following specific powers:
Section 1.Officers. The Corporation shall have the power to elect or appoint
officers and agents of the Corporation and fix their compensation.
Section 2.Capacity. The Corporation shall have the power to act as an agent for
any individual, association, partnership, corporation or other legal entity, and
to act as general partner for any limited partnership.
Section 3.Acquisitions. The
Corporation shall have the power to receive, acquire,
hold, exercise rights arising out of the ownership or possession thereof, sell,
or otherwise dispose of, shares or other interests in, or obligations of,
individuals, associations, partnerships, corporations or governments.
Section 4.Earned Surplus. The
Corporation shall have power to receive, acquire,
hold, pledge, transfer, or otherwise dispose of shares of the Corporation, but
such shares may only be purchased, directly or indirectly, out of earned
surplus.
Section 5.Gifts. The Corporation shall have the power to make gifts or
contributions for the public welfare or for charitable, scientific
or educational purposes.
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ARTICLE V
Capital Structure
Section 1.Authorized Capital. The aggregate number of shares and the amount of
the total authorized capital of said Corporation shall consist of 50,000,000
shares of common stock, no par value per share, and 5,000,000 shares of
non-voting preferred stock, no par value per share.
Section 2.Share Status. All common shares will be equal to each other, and when
issued, shall be fully paid and nonassessable, and the private property of
shareholders shall not be liable for corporate debts. Preferred shares shall
have such preferences as the Directors may assign to them prior to issuance.
Each holder of a common share of record shall have one vote for each share of
stock outstanding in his name on the books of the Corporation and shall be
entitled to vote said stock.
Section 3.Consideration for Shares. The common stock of the Corporation shall be
issued for such consideration as shall be fixed from time to time by the Board
of Directors. In the absence of fraud, the judgement of the Directors as to the
value of any property or services received in full or partial payment for shares
shall be conclusive. When shares are issued upon payment of the consideration
fixed by the Board of Directors, such shares shall be taken to be fully paid
stock and shall be nonassessable.
Section 4.Pre-Emptive Rights.Except as may otherwise be provided by the Board of
Directors, holders of shares of stock of the Corporation shall have no
pre-emptive right to purchase, subscribe for or otherwise acquire shares of
stock of the Corporation, rights, warrants or options to purchase stocks or
securities of any kind convertible into stock of the Corporation.
Section 5. Dividends.
Dividends in cash, property or shares of the Corporation may be paid, as and
when declared by the Board of Directors, out of funds of the Corporation to the
extent and in the manner permitted by law.
Section 6.Distribution in Liquidation. Upon any liquidation, dissolution or
winding up of the Corporation, and after paying or adequately providing for the
payment of all its obligations, the remainder of the assets of the Corporation
shall be distributed, either in cash or kind, pro rata to the holders of the
common stock, subject to preferences, if any, granted to holders of the
preferred shares. The Board of Directors may, from time to time, distribute to
the shareholders in partial liquidation from stated capital of the Corporation,
in cash or property, without the vote of the shareholders, in the manner
permitted and upon compliance with limitations imposed by law.
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ARTICLE VI
Voting by Shareholders
Section 1.Voting Rights; Cumulative Voting. Each outstanding share of common
stock is entitled to one vote and each fractional share of common stock is
entitled to a corresponding fractional vote on each matter submitted to a vote
of shareholders. Cumulative voting shall not be allowed in the election of
Directors of the Corporation and every shareholder entitled to vote at such
election shall have the right to vote the number of shares owned by him for as
many persons as there are Directors to be elected, and for whose election he has
the right to vote. Preferred shares have no voting rights unless granted by
amendment to these Articles of Incorporation.
Section 2.Majority Vote. When, with respect to any action to be taken by the
Shareholders of the Corporation, the Colorado Corporation Code requires the vote
or concurrence of the holders of two-thirds of the outstanding shares entitled
to vote thereon, or of any class or series, any and every such action shall be
taken, notwithstanding such requirements of the Colorado Corporation Code, by
the vote or concurrence of the holders of a majority of the outstanding shares
entitled to vote thereon, or any class or series.
ARTICLE VII
Registered and Initial Principal Office and Registered Agent
The registered office and initial
principal office of the Corporation is located at 1291 South Lincoln Street,
Denver, Colorado 80210, and the name of the registered agent of the Corporation
at such address is Edward H.
Hawkins.
ARTICLE VIII
Incorporator
The name and address of the Incorporator
is Edward H. Hawkins, 1291 South Lincoln Street, Denver, Colorado
80210.
ARTICLE IX
Board of Directors
Section 1. The corporate powers shall be
exercised by a majority of the Board of Directors. the number of individuals to
serve on the Board of Directors shall be set forth in the Bylaws of the
Corporation; provided, however, that the initial Board of Directors shall
consist of one person below-named to manage the affairs of the Corporation until
such time as he resigns or his successor is elected by a majority vote of the
Shareholders:
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Name of Director
Address
Edward H. Hawkins 1291 So. Lincoln St.
Denver, CO 80210
Section 2. If in the interval between the annual meetings of
shareholders of the Corporation, the Board of Directors of the Corporation deems
it desirable that the number of Directors be increased, additional Directors may
be elected by a unanimous vote of the Board of Directors of the Corporation then
in office, or as otherwise set forth in the Bylaws of the Corporation.
Section 3. The number of Directors comprising the whole Board of
Directors may be increased or decreased from time to time within such foregoing
limit as set forth in the Bylaws of the Corporation.
ARTICLE X
Powers of the Board of Directors
In furtherance and not on limitation of the powers conferred by the
State if Colorado, the Board of Directors is expressly authorized and empowered:
Section 1.Bylaws. To make,
alter, amend and repeal the Bylaws, subject to the power of the
shareholders to alter or repeal the Bylaws made by the Board of
Directors.
Section 2. Books and Records.
Subject to the applicable provisions of the Bylaws then in effect,
to determine, from time to time, whether and to what extent, and at what times
and places, and under what conditions and regulations, the accounts and books of
the Corporation or any of them, shall be open to shareholder inspection. No
shareholder shall have any right to inspect any of the accounts, books, or
documents of the Corporation, except as permitted by law, unless and until
authorized to do so by resolution of the Board of Directors or of the
shareholders of the Corporation.
Section 3. Power to Borrow. To
authorize and issue, without shareholder consent, obligations of
the Corporation, secured and unsecured, under such terms and conditions as the
Board, in its sole discretion, may determine, and pledge, or mortgage, as
security thereof, any real or personal property of the Corporation, including
after-acquired property.
Section 4. Dividends. To
determine whether any and, if so, what part, of the earned surplus
of the Corporation shall be paid in dividends to the shareholders,
and to direct and determine other use and disposition of any such
earned surplus.
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Section 5. Profits. To fix, from
time to time, the amount of the profits of the Corporation to be
reserved as working capital or for any other lawful purposes.
Section 6. Emoloyees' Plans.
From time to time to provide and carry out and to recall, abolish,
revise, amend, alter, or change a plan or plans for the participation by all or
any of the employees, including Directors and officers of this Corporation or of
any corporation in which or in the welfare of which the Corporation has any
interest, and those actively engaged in the conduct of this Corporation's
business, in the profits of this Corporation or of any branch or division
thereof, as a part of this Corporation's legitimate expenses, and for the
furnishing to such employees and persons, or any of them, at this Corporation's
expense, of medical services, insurance against accident, sickness, or death,
pensions during old age, disability, or unemployment, education, housing, social
services, recreation, or other similar aids for their relief or general welfare,
in such manner and upon such terms and conditions as may be determined by the
Board of Directors.
Section 7. Warrants and Options.
The Corporation, by resolution or resolutions of its Board of
Directors, shall have power to create and issue, whether or not in connection
with the issue and sale of any shares of any other securities of the
Corporation, warrants, rights, or options entitling the holders thereof to
purchase from the Corporation any shares of any class or classes of any other
securities of the Corporation, such warrants, rights or options to be evidenced
by or in such instrument or instruments as shall be approved by the Board of
Directors. the terms upon which, the time or times (which may be limited or
unlimited in duration), and the price or prices (not less than the minimum
amount prescribed by law, if any) at which any such warrants, rights, or options
may be issued and any such shares or other securities may be purchased from the
Corporation upon exercise of such warrant, right, or option shall be such as
shall be fixed and stated in the resolution or resolutions of the Board of
Directors providing for the creation and issue of such warrants, rights or
options. The Board of Directors is hereby authorized to create and issue any
such warrants, rights or options from time to time for such consideration, and
to such persons, firms, or corporations, as the Board of Directors may
determine.
Section 8. Compensation. To
provide for the reasonable compensation of its own members, and to
fix the terms and conditions upon which such compensation will be
paid.
Section 9. Not in Limitation. In
addition to the powers and authority hereinabove, or by statute
expressly conferred upon it, the Board of Directors may exercise
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all such powers and do all such acts and things as may be exercised or done by
the Corporation, subject, nevertheless, to the provisions of the laws of the
State of Colorado, of the Articles of Incorporation and of the Bylaws of the
Corporation.
ARTICLE XI
Right of Directors to Contract with Corporation
No contract or other transaction between this Corporation and one or
more of its Directors or any other corporation, firm, association, or entity in
which one or more of its Directors are directors or officers or are financially
interested shall be either void or voidable solely because of such relationship
or interest or solely because such directors are present at the meeting of the
Board of Directors or a committee thereof which authorizes, approves, or
ratifies such contract or transaction or solely because their votes are counted
for such purpose if:
A. The fact of such relationship or interest is disclosed or
known to the Board of Directors or committee which authorizes,
approves, or ratifies the contract or transaction by a vote or
consent sufficient for the purpose without counting the votes of
consents of such interested Directors; or
B. The fact of such relationship or interest is disclosed or
known to the shareholders entitled to vote and the authorize,
approve, or ratify such contract or transaction by vote or written
consent; or
C. The contract or transaction is fair and reasonable to the
Corporation.
ARTICLE XII
Corporate Opportunity
The officers, Directors and other members of management of this
Corporation shall be subject to the doctrine of "corporate opportunities" only
insofar as it applies to business opportunities in which this Corporation has
expressed an interest as determined from time to time by this Corporation's
Board of Directors as evidenced b resolutions appearing in the Corporation's
minutes. Once such areas of interest are delineated, all such business
opportunities within such areas of interest which come to the attention of the
officers, Directors, and other members of management of this Corporation shall
be disclosed promptly to this Corporation and made available to it. The Board of
Directors may reject any business opportunity presented to it and thereafter any
officer, Director or other member of management may avail himself of such
opportunity. Until such time as this Corporation, through its Board of
Directors, has designated an area of interest, the officers, Directors and other
members of management of this corporation shall be free to engage in such areas
of interest on
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their own and this doctrine shall not limit the right of any officer, Director
or other member of management of this Corporation to continue a business
existing prior to the time that such area of interest is designated by the
Corporation. This provision shall not be construed to release any employee of
this Corporation (other than an officer, Director or member of management) from
any duties which he may have to this Corporation.
ARTICLE XIII
Indemnification of Officers, Directors and Others
The Board of Directors of the Corporation shall have the power to:
A. Indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation), by reason of the fact that he is or was
a director, officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees), judgements, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in the best interests of the Corporation and, with
respect to any criminal action or proceedings, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgement, order, settlement or conviction or upon a plea of nolo
contendere or its equivalent shall not of itself create a presumption that the
person did not act in good faith and in a manner which he reasonably believed to
be in the best interests of the Corporation and, with respect to any criminal
action or proceeding, had reasonable cause to believe that his conduct was
unlawful.
B. Indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or suit
in the right of the Corporation to procure a judgement in its favor by reason of
the fact that he is or was a director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of the Corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorney's fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in the best interests of the Corporation; but no
indemnification shall be made in respect of any claim, issue
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or matter as to which such person has been adjudged to be liable for negligence
or misconduct in the performance of his duty to the Corporation unless and only
to the extent that the court in which such action or suit was brought determines
upon application that, despite the adjudication of liability, but in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnification for such expenses which such court deems proper.
C. Indemnify a Director, officer, employee or agent of the Corporation
to the extent that such person has been successful on the merits in defense of
any action, suit or proceeding referred to in Subparagraph A or B of this
Article or in defense of any claim, issue, or matter therein, against expenses
(including attorney's fees) actually and reasonably incurred by him in
connection therewith.
D. Authorize indemnification under Subparagraph A or B of this Article
(unless ordered by a court) in the specific case upon a determination that
indemnification of the Director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
said Subparagraph A or B. Such determination shall be made by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or, if such a quorum is not
obtainable or even if obtainable a quorum of disinterested directors so directs,
by independent legal counsel in a written opinion, or by the shareholders.
E. Authorize payment of expenses (including attorney's fees) incurred
in defending a civil or criminal action, suit or proceeding in advance of the
final disposition of such action, suit or proceeding as authorized in
Subparagraph D of this Article upon receipt of an undertaking by or on behalf of
the Director, officer, employee or agent to repay such amount unless it is
ultimately determined that he is entitled to be indemnified by the Corporation
as authorized in this Article.
F. Purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the Corporation or who is or was
serving at the request of the Corporation as a Director, officer, employee ar
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by him in any
such capacity or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provision of this Article.
The indemnification provided by this Article shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
these Articles of Incorporation, and Bylaws,
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agreement, vote of shareholders or disinterested directors or otherwise, and any
procedure provided for by any of the foregoing, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a Director,
officer, employee or agent and shall inure to the benefit of heirs, executors
and administrators of such a person.
Article XIV
Right to Amend
the right is expressly reserved to amend, alter, change, or repeal any
provision or provisions contained in these Article of Incorporation or any
Article herein by a majority vote of the members of the Board of Directors, and
a majority vote of the shareholders of the Corporation.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 13th
day of July, 1995.
CONSENT OF AGENT
The undersigned hereby consents to the appointment as agent for the
above named corporation under the Section 105 of the Colorado Business
Corporation Act, until such time as he resigns such position.
Edward H. Hawkins, Agent
1291 So. Lincoln St., Denver, CO 80210
ARTICLES OF AMENDMENT Exhibit 3.2
OF
CIRCA MEDIA, INC.
CIRCA MEDIA, INC., a Colorado corporation (the "Company"), by and
through Christopher M. Swartz, its President, does hereby certify that:
1. By a Written Consent of Directors Without a Meeting dated April 30,
1996, the Company's Board of Directors adopted a resolution (a) proposing to
amend the Title Article I if the Company's Articles of Incorporation to change
the Company's name to "JRECK SUBS GROUP, INC.," and to amend Article V thereof
to change the authorized capital stock of the Company and (b) directing that the
proposed amendments be submitted to a vote of the Company's Shareholders for
approval; and
2. By a Written Consent of Shareholders Without a Meeting dated May 1,
1996, the Company's Shareholders, by a number of votes sufficient for approval,
adopted the proposed amendments so that the Title and Articles I and V of the
Company's Articles of Incorporation, in lieu of their present language, shall
read as follows:
ARTICLES OF INCORPORATION
OF
JRECK SUBS GROUP, INC.
ARTICLE I
Name
The name of the Corporation is JRECK SUBS GROUP, INC. (the
"Corporation").
ARTICLE V
Capital Structure
The maximum number of shares of stock which this Corporation is
authorized to issue or to have outstanding at any time shall be 55,000,000
shares, of which 50,000,000 shares shall be common stock, no par value per
share, and of which 5,000,000 shares shall be preferred stock, no par value per
share.
The holders of common stock shall have one vote for each share of such
stock held.
The holders of record of the preferred stock shall be entitled to cash
dividends when, as and if declared by the Board of
<PAGE>
Directors at the time, in the manner and at the rate per share determined by the
Board of Directors in the resolution authorizing each series of preferred stock.
Dividends payable on the preferred stock must be paid or set apart for payment
before any dividends may be declared and paid on the common stock with respect
to the same time period.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of this corporation, the holders of record of the outstanding
preferred stock shall be entitled to the amount payable upon their shares as
determined by the Board of Directors in the resolution authorizing each series
of preferred stock. After payment to the holders of the preferred stock of the
amount payable to them as above set forth, the remaining assets of this
corporation shall be payable to, and distributed ratably among, the holders of
record of the common stock.
The common stock may also be subject to other rights and preferences
that the Board of Directors may give to any series of the preferred stock.
The Board of Directors is hereby expressly authorized to issue the
preferred stock of this corporation in one or more series as it may determine by
resolution from time to time. In the resolution establishing a series, the Board
of Directors shall gibe to the series a distinctive designation so as to
distinguish it from all other series and classes of stock, shall determine the
number of shares in such series and shall fix the preferences, limitations and
relative rights thereof. All of the shares of any one series shall be alike in
every particular. Except to the extent otherwise provided in the description of
each series, all of the shares of all series of preferred stock shall be alike
in every particular.
All stock of this corporation, whether common stock or preferred stock,
shall be issued only upon the receipt of the full consideration fixed for the
issuance of such stock. Such stock, once issued, shall be fully paid and
nonassessable.
No holder of shares of any class of this corporation shall have (1) any
preemptive right to subscribe for or acquire additional shares of this
corporation of the same of any other class, whether such shares shall be hereby
or hereafter authorized, or (2) any right to acquire any shares which may be
held in the treasury of this corporation. All such additional or treasury shares
may be issued or reissued for such consideration, at such time, and to such
persons as the Board of Directors may from time to time determine.
IN WITNESS WHEREOF, the Company has caused these Articles of Amendment
to be executed in its name by its proper officer thereunto duly authorized, this
2nd day of May, 1996.
CIRCA MEDIA, INC.
<PAGE>
By:
Christopher M. Swartz,
President
<PAGE>
Exhibit 2
JRECK SUBS GROUP, INC.
STATEMENT OF DESIGNATIONS, POWERS, PREFERENCES AND RIGHTS OF
SERIES B VOTING NONREDEEMABLE CONVERTIBLE PREFERRED STOCK
A. Dividends.
The holders of Series B Voting Nonredeemable Convertible Preferred
Stock, no par value per share (the "Series B Preferred Stock"), shall be
entitled to receive noncumulative preferential dividends, payable out of funds
legally available for the payment of dividends, only when and as declared by the
Board of Directors of the Company. If any dividends have been declared on the
Series B Preferred Stock that have preference as to dividends, so long as any
Series B Preferred Stock remains outstanding:
(a) no dividend whatsoever shall be declared or paid upon or set apart
for payment, and no distribution shall be ordered or made in respect of (i) the
Company's common stock, no par value per share (the "Common Stock") or any other
outstanding common stock of the Company or (ii) any other class of stock or
series thereof ranking junior to the Series B Preferred Stock in the payment of
dividends; and
(b) no shares of Common Stock and no shares of any other class of stock
or series thereof ranking junior to the Series B Preferred Stock in the payment
of dividends shall be redeemed or purchased by the Company or any subsidiary
thereof; and
(c) no moneys, funds or other assets shall be paid to or made available
for a sinking fund for the redemption or purchase of any shares of: (i) Common
Stock or (ii) any other class of stock or series thereof ranking junior to the
Series B Preferred Stock in the payment of dividends;
unless, in each instance, full dividends on all outstanding shares of Series B
Preferred Stock (i) for all past dividend periods shall have been paid and (ii)
for the then current calendar year shall have been paid or declared as set aside
for payment.
Cash dividends upon shares of Series B Preferred Stock shall commence
to accrue and be cumulative from the date of payment in any declaration thereof.
Such dividends shall be deemed to accrue from day to day regardless of whether
or not the Company shall have funds or assets available for the payment of such
dividends, but accumulation of dividends on shares of Series B Preferred Stock
shall not bear interest. For purposes of dividends, the Series B Preferred Stock
shall be subordinate and inferior to the Company's Series A Preferred Stock.
B. Voting Rights.
The holders of Series B Preferred Stock shall be entitled to
<PAGE>
vote upon any matter relating to the business or affairs of the Company or for
any other purpose. In addition, the holders of Series B Preferred Stock shall be
entitled to elect one Director of the Company, which right shall be subject to
the right granted by the Company's Bylaws to the Company's Board of Directors to
increase or decrease the number of Directors constituting the Company's Board of
Directors from time to time.
C. Conversion Rights.
The shares of Series B Preferred Stock shall be convertible, only at
the option of the Company's Board of Directors. If the Board of Directors
authorizes such conversion, then the shares of Series B Preferred Stock shall be
convertible at any time at the office of any duly appointed transfer agent for
the Series B Preferred Stock and at such other office or offices, if any, as the
Board of Directors of the Company may determine, into fully paid and
non-assessable shares of Common Stock at a conversion rate of one shares of
Common Stock for each share of Series B Preferred Stock tendered by the holder
for conversion, provided, however, that, in the case of redemption of any shares
of Series B Preferred Stock, such right of conversion shall cease and terminate,
as to the shares called for redemption, at the close of business on the day
prior to the date fixed for redemption.
Before any holder of Series B Preferred Stock shall be entitled to
convert the Series B Preferred Stock into Common Stock, he shall surrender the
certificate or certificates for such Series B Preferred Stock, at any office
hereinabove mentioned, such certificate or certificates shall be duly endorsed
to the Company or in blank or accompanied by proper instruments of transfer to
the Company or in blank, unless the Company shall waive such requirement, and
shall give written notice to the Company at any of said offices that he elects
so to convert said Series B Preferred Stock, and shall state in writing therein
the name or names in which he wishes the certificate or certificates for Common
Stock to be issued.
The Company will, as soon as practicable after such surrender of
certificates for Series B Preferred Stock accompanied by the written notice and
the statement above prescribed, issue and deliver at the office of any transfer
agent appointed as aforesaid, or at such other office or offices, if any, to the
person for whose account such Series B Preferred Stock was so surrendered or to
his nominee or nominees, certificates for the number of shares of Common Stock
to which he shall be entitled. Subject to the following provisions of this
paragraph, such conversion shall be deemed to have been made as of the date of
such surrender of the Series B Preferred Stock to be converted and the rights of
the converting holder of the shares of the Series B Preferred Stock as such
holder shall cease and the person or persons in whose name or names the
certificates for shares of Common Stock upon conversion of such Series B
Preferred Stock are to be issued shall be treated for all purposes as the record
holder or holders of such Common
<PAGE>
Stock at the close of business on such date. The Company shall not be required
to convert, and no surrender of Series B Preferred Stock shall be effective for
that purpose, while the stock transfer books of the Company are closed for any
purpose, but the surrender of Series B Preferred Stock for conversion during any
period while such books are so closed shall become effective for conversion
immediately upon the reopening of such books, as if the conversion had been made
on the date such Series B Preferred Stock was surrendered, and at the conversion
rate in effect at the date of such surrender. In the event of any liquidation,
dissolution or winding up of the affairs of the Company, all conversion rights
of the holders of Series B Preferred Stock shall terminate on the date fixed by
resolution of the Board of Directors of the Company, which date shall not be
later than 10 days nor earlier than 20 days prior to such liquidation,
dissolution or winding up.
If the Company shall at any time pay a dividend on its Common Stock in
Common Stock, subdivide its outstanding shares of Common Stock into a larger
number of shares or combine its outstanding shares of Common Stock into a small
number of shares by reclassification or otherwise, the conversion rate in effect
immediately prior thereto shall be adjusted so that each share of Series B
Preferred Stock shall thereafter be convertible into the number of shares of
Common Stock that the holder of a share of Series B Preferred Stock would have
been entitled to receive after the happening of any of the events described
above had such share been converted immediately prior to the happening of such
event. An adjustment made pursuant to this paragraph shall become effective
retroactively to the record date in the case of a dividend and shall become
effective on the effective date in the case of a subdivision or combination.
If the Company shall distribute to all holders of shares of Common
Stock any assets (other than any dividend payable solely in cash out of retained
earnings), any rights to subscribe or any evidence of indebtedness or other
securities of the Company (other than Common Stock), then in each case the
conversion rate of the Series B Preferred Stock shall be adjusted so that the
same shall take into account the fair market value (as determined in a
resolution adopted by the Board of Directors of the Company, which shall be
conclusive evidence of such fair market value) of the portion of the assets or
evidence of indebtedness or securities so distributed or of such subscription
rights applicable to one share of Common Stock divided by two. Such adjustment
shall become effective retroactively immediately after the record date.
In case of any capital reorganization or any reclassification of the
capital stock of the Company or in case of the consolidation or merger of the
Company with another corporation (other than a merger not involving any
reclassification, conversion, or exchange of Common Stock, in which the Company
is the surviving corporation), or in case of any sale or conveyance of all or
substantially all of the property of the Company, each share of Series B
Preferred Stock shall thereafter be convertible into the
<PAGE>
number of shares of stock (of any class or classes) or other securities or
property receivable upon such capital reorganization, reclassification of
capital stock, consolidation, merger, sale or conveyance, as the case may be, by
a holder of a fraction of a share of Common Stock into which such share of
Series B Preferred Stock was convertible immediately prior to such capital
reorganization, reclassification of capital stock, consolidation, merger, sale
or conveyance; and, in any case, appropriate adjustment (as determined by the
Board of Directors of the Company) shall be made in the application of the
provisions herein set forth with respect to rights and interests thereafter of
the holders of the Series B Preferred Stock, to the end that the provisions set
forth herein including the specified changes in and other adjustments of the
conversion rate) shall thereafter be applicable, as near as reasonably
practical, in relation to any share of stock or other securities or other
property thereafter deliverable upon the conversion of the Series B Preferred
Stock.
Whenever the conversion rate is adjusted as herein provided, the
Company shall forthwith file with any transfer agent or agents for the Series B
Preferred Stock appointed as aforesaid a certificate signed by the President or
one of the Vice Presidents of the Company and by its Treasurer or an Assistant
Treasurer, stating the adjusted conversion rate determined as provided above and
in reasonable detail the facts requiring such adjustment. Such transfer agent(s)
shall be under no duty to make any inquiry or investigation as to the statements
contained in any such certificate or as to the manner in which any computation
was made, but may accept such certificate as conclusive evidence of the
statements therein contained, and each transfer agent shall be fully protected
with respect to any and all acts done or action taken or suffered by it in
reliance thereon. No transfer agent in its capacity as transfer agent shall be
deemed to have any knowledge with respect to any change of capital structure of
the Company unless and until it receives a notice thereof pursuant to the
provisions of this paragraph and in default of any such notice each transfer
agent may conclusively assume that there has been no such change.
The Company shall at all times reserve and keep available, out of its
authorized and unissued or treasury shares of Common Stock, or other stock or
securities deliverable upon conversion pursuant to this section, solely for the
purpose of effecting the conversion of the Series B Preferred Stock, such number
of shares as shall from time to time be sufficient to effect the conversion of
all shares of Series B Preferred Stock from time to time outstanding. The
Company shall from time to time, in accordance with the laws of Delaware,
increase the authorized amount of its Common Stock if at any time the number of
shares of Common Stock remaining unissued or treasury shares of Common Stock
shall not be sufficient to permit the conversion of all the then outstanding
Series B Preferred Stock.
The Company will pay any and all issue and other taxes that
<PAGE>
may be payable in respect of any issue or delivery of shares of Common Stock on
conversion of Series B Preferred Stock pursuant hereto. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of Common Stock in a name other than
that in which the Series B Preferred Stock so converted was registered, and no
such issue or delivery shall be made unless and until the person requesting such
issue has paid to the Company the amount of any such tax, or has established, to
the satisfaction of the Company, that such tax has been paid.
D. No Redemption. The Series B Preferred Stock may not be
redeemed, in whole or in part, without the prior written consent of
each holder thereof after the same offer of redemption has been
made to all holders thereof.
E. Liquidation Rights. In the event of any liquidation,
dissolution or winding up of the Company, whether voluntary or
involuntary, before any distribution or payment shall be made to
the holder of any Common Stock or of any stock ranking junior to
the Series B Preferred Stock in respect to distribution of assets,
the holders of the Series B Preferred Stock shall be entitled to
receive $2.00 per share, plus an amount equal to any accrued and
unpaid dividends on the Series B Preferred Stock to the date fixed
for distribution and no more.
In the event the assets of the Company available for distribution to
the holders of shares of the Series B Preferred Stock upon dissolution,
liquidation or winding up of the Company shall be insufficient to pay in full
all amounts to which such holders are entitled pursuant to the immediately
preceding paragraph, no such distribution shall be made on account of any shares
of any other class or series of capital stock of the Company ranking on a parity
with or junior to the shares of the Series B Preferred Stock, except that a
proportionate distributive amount shall be paid on account of the shares of the
Series B Preferred Stock and any other class of shares ranking on a parity with
the Series B Preferred Stock, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively entitled
upon such dissolution, liquidation or winding up. For purposes of distribution
upon dissolution, liquidation or winding up of the Company, the Series F
Preferred Stock shall be subordinate and inferior to the Company's Series A
Preferred Stock.
F. No Sinking Fund. The shares of Series B Preferred Stock shall
not be entitled to the benefit of any sinking fund to be applied to
the purchase or redemption of such shares.
G. Status of Redeemed or Converted Shares. Any shares of the
Series B Preferred Stock that at any time shall have been converted
or that shall have been redeemed or that have been otherwise
repurchased by the Company, shall after such conversion, redemption
or repurchase have the status of authorized but unissued shares of
<PAGE>
Preferred Stock, without designation as to series until such shares are once
more designated as part of a particular series by the Board of Directors.
<PAGE>
ARTICLES OF AMENDMENT Exhibit 3.3
OF
JRECK SUBS GROUP, INC.
JRECK SUBS GROUP, INC., a Colorado corporation (the
"Company"), by and through Christopher M. Swartz, its President,
does hereby certify that:
1. By a Written Consent of Directors Without a Meeting dated May 6,
1996, the Company's Board of Directors adopted a resolution amending the
Company's Articles of Incorporation to provide for the designation of Series A
Voting Nonredeemable Cumulative Preferred Stock and Series B Voting
Nonredeemable Convertible Preferred Stock and further to provide for teh
respective designations, powers, preferences, and relative, participating,
optional and other special rights thereof, and the qualifications, limitations
or restrictions thereof, all as set forth in the "Statement of Designations,
Powers, Preferences and Rights of Series A Voting Nonredeemable Cumulative
Convertible Preferred Stock" and "Statement of Designations, Powers, Preferences
and Rights of Series B Voting Nonredeemable Convertible Preferred Stock"
attached hereto as Exhibit 1 and 2, respectively; and
2. Pursuant to the Company's Articles of Incorporation,
action by the Company's shareholders to approve the foregoing
amendment is not required.
IN WITNESS WHEREOF, the Company has caused these Articles of Amendment
to be executed in its name by its proper officer thereunto duly authorized, this
6th day of May, 1996.
JRECK SUBS GROUP, INC.
By:
Christopher M. Swartz,
President
<PAGE>
Exhibit 1
JRECK SUBS GROUP, INC.
STATEMENT OF DESIGNATIONS, POWERS, PREFERENCES AND RIGHTS OF
SERIES A VOTING NONREDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED
STOCK
A. Dividends.
The holders of Series A Voting Nonredeemable Cumulative Convertible
Preferred Stock, no par value per share (the "Series A Preferred Stock"), shall
be entitled to receive noncumulative preferential dividends at the rate of $.09
per share per annum, payable weekly out of funds legally available for the
payment of dividens. So long as any Series A Preferred Stock remains
outstanding:
(a) no dividend whatsoever shall be declared or paid upon or set apart
for payment, and no distribution shall be ordered or made in respect of (i) the
Company's common stock, no par value per share (the "Common Stock") or any other
outstanding common stock of the Company or (ii) any other class of stock or
series thereof ranking junior to the Series A Preferred Stock in the payment of
dividends; and
(b) no shares of Common Stock and no shares of any other class of stock
or series thereof ranking junior to the Series A Preferred Stock in the payment
of dividends shall be redeemed or purchased by the Company or any subsidiary
thereof; and
(c) no moneys, funds or other assets shall be paid to or made available
for a sinking fund for the redemption or purchase of any shares of: (i) Common
Stock or (ii) any other class of stock or series thereof ranking junior to the
Series A Preferred Stock in the payment of dividends;
unless, in each instance, full dividends on all outstanding shares of Series A
Preferred Stock (i) for all past dividend periods shall have been paid and (ii)
for the then current calendar year shall have been paid or declared as set aside
for payment.
Cash dividends upon shares of Series A Preferred Stock shall commence
to accrue and be cumulative from the date of issue thereof. Such dividends shall
be deemed to accrue from day to day regardless of whether or not the Company
shall have funds or assets available for the payment of such dividends, but
accumulation of dividends on shares of Series A Preferred Stock shall not bear
interest.
B. Voting Rights.
The holders of Series A Preferred Stock shall be entitled to vote upon
any matter relating to the business or affairs of the Company or for any other
purpose. In addition, the holders of
<PAGE>
Series A Preferred Stock shall be entitled to elect one Director of the Company,
which right shall be subject to the right granted by the Company's Bylaws to the
Company's Board of Directors to increase or decrease the number of Directors
constituting the Company's Board of Directors from time to time.
C. Conversion Rights.
The shares of Series A Preferred Stock shall be convertible, only at
the option of the Company's Board of Directors. If the Board of Directors
authorizes such conversion, then the shares of Series A Preferred Stock shall be
convertible at any time at the office of any duly appointed transfer agent for
the Series A Preferred Stock and at such other office or offices, if any, as the
Board of Directors of the Company may determine, into fully paid and
non-assessable shares of Common Stock at a conversion rate of one shares of
Common Stock for each share of Series A Preferred Stock tendered by the holder
for conversion, provided, however, that, in the case of redemption of any shares
of Series A Preferred Stock, such right of conversion shall cease and terminate,
as to the shares called for redemption, at the close of business on the day
prior to the date fixed for redemption.
Before any holder of Series A Preferred Stock shall be entitled to
convert the Series A Preferred Stock into Common Stock, he shall surrender the
certificate or certificates for such Series A Preferred Stock, at any office
hereinabove mentioned, such certificate or certificates shall be duly endorsed
to the Company or in blank or accompanied by proper instruments of transfer to
the Company or in blank, unless the Company shall waive such requirement, and
shall give written notice to the Company at any of said offices that he elects
so to convert said Series A Preferred Stock, and shall state in writing therein
the name or names in which he wishes the certificate or certificates for Common
Stock to be issued.
The Company will, as soon as practicable after such surrender of
certificates for Series A Preferred Stock accompanied by the written notice and
the statement above prescribed, issue and deliver at the office of any transfer
agent appointed as aforesaid, or at such other office or offices, if any, to the
person for whose account such Series A Preferred Stock was so surrendered or to
his nominee or nominees, certificates for the number of shares of Common Stock
to which he shall be entitled. Subject to the following provisions of this
paragraph, such conversion shall be deemed to have been made as of the date of
such surrender of the Series A Preferred Stock to be converted and the rights of
the converting holder of the shares of the Series A Preferred Stock as such
holder shall cease and the person or persons in whose name or names the
certificates for shares of Common Stock upon conversion of such Series A
Preferred Stock are to be issued shall be treated for all purposes as the record
holder or holders of such Common Stock at the close of business on such date.
The Company shall not be required to convert, and no surrender of Series A
Preferred
<PAGE>
Stock shall be effective for that purpose, while the stock transfer books of the
Company are closed for any purpose, but the surrender of Series A Preferred
Stock for conversion during any period while such books are so closed shall
become effective for conversion immediately upon the reopening of such books, as
if the conversion had been made on the date such Series A Preferred Stock was
surrendered, and at the conversion rate in effect at the date of such surrender.
In the event of any liquidation, dissolution or winding up of the affairs of the
Company, all conversion rights of the holders of Series A Preferred Stock shall
terminate on the date fixed by resolution of the Board of Directors of the
Company, which date shall not be later than 10 days nor earlier than 20 days
prior to such liquidation, dissolution or winding up.
If the Company shall at any time pay a dividend on its Common Stock in
Common Stock, subdivide its outstanding shares of Common Stock into a larger
number of shares or combine its outstanding shares of Common Stock into a small
number of shares by reclassification or otherwise, the conversion rate in effect
immediately prior thereto shall be adjusted so that each share of Series A
Preferred Stock shall thereafter be convertible into the number of shares of
Common Stock that the holder of a share of Series A Preferred Stock would have
been entitled to receive after the happening of any of the events described
above had such share been converted immediately prior to the happening of such
event. An adjustment made pursuant to this paragraph shall become effective
retroactively to the record date in the case of a dividend and shall become
effective on the effective date in the case of a subdivision or combination.
If the Company shall distribute to all holders of shares of Common
Stock any assets (other than any dividend payable solely in cash out of retained
earnings), any rights to subscribe or any evidence of indebtedness or other
securities of the Company (other than Common Stock), then in each case the
conversion rate of the Series A Preferred Stock shall be adjusted so that the
same shall take into account the fair market value (as determined in a
resolution adopted by the Board of Directors of the Company, which shall be
conclusive evidence of such fair market value) of the portion of the assets or
evidence of indebtedness or securities so distributed or of such subscription
rights applicable to one share of Common Stock divided by two. Such adjustment
shall become effective retroactively immediately after the record date.
In case of any capital reorganization or any reclassification of the
capital stock of the Company or in case of the consolidation or merger of the
Company with another corporation (other than a merger not involving any
reclassification, conversion, or exchange of Common Stock, in which the Company
is the surviving corporation), or in case of any sale or conveyance of all or
substantially all of the property of the Company, each share of Series A
Preferred Stock shall thereafter be convertible into the number of shares of
stock (of any class or classes) or other securities or property receivable upon
such capital reorganization,
<PAGE>
reclassification of capital stock, consolidation, merger, sale or conveyance, as
the case may be, by a holder of a fraction of a share of Common Stock into which
such share of Series A Preferred Stock was convertible immediately prior to such
capital reorganization, reclassification of capital stock, consolidation,
merger, sale or conveyance; and, in any case, appropriate adjustment (as
determined by the Board of Directors of the Company) shall be made in the
application of the provisions herein set forth with respect to rights and
interests thereafter of the holders of the Series A Preferred Stock, to the end
that the provisions set forth herein including the specified changes in and
other adjustments of the conversion rate) shall thereafter be applicable, as
near as reasonably practical, in relation to any share of stock or other
securities or other property thereafter deliverable upon the conversion of the
Series A Preferred Stock.
Whenever the conversion rate is adjusted as herein provided, the
Company shall forthwith file with any transfer agent or agents for the Series A
Preferred Stock appointed as aforesaid a certificate signed by the President or
one of the Vice Presidents of the Company and by its Treasurer or an Assistant
Treasurer, stating the adjusted conversion rate determined as provided above and
in reasonable detail the facts requiring such adjustment. Such transfer agent(s)
shall be under no duty to make any inquiry or investigation as to the statements
contained in any such certificate or as to the manner in which any computation
was made, but may accept such certificate as conclusive evidence of the
statements therein contained, and each transfer agent shall be fully protected
with respect to any and all acts done or action taken or suffered by it in
reliance thereon. No transfer agent in its capacity as transfer agent shall be
deemed to have any knowledge with respect to any change of capital structure of
the Company unless and until it receives a notice thereof pursuant to the
provisions of this paragraph and in default of any such notice each transfer
agent may conclusively assume that there has been no such change.
The Company shall at all times reserve and keep available, out of its
authorized and unissued or treasury shares of Common Stock, or other stock or
securities deliverable upon conversion pursuant to this section, solely for the
purpose of effecting the conversion of the Series A Preferred Stock, such number
of shares as shall from time to time be sufficient to effect the conversion of
all shares of Series A Preferred Stock from time to time outstanding. The
Company shall from time to time, in accordance with the laws of Delaware,
increase the authorized amount of its Common Stock if at any time the number of
shares of Common Stock remaining unissued or treasury shares of Common Stock
shall not be sufficient to permit the conversion of all the then outstanding
Series A Preferred Stock.
The Company will pay any and all issue and other taxes that may be
payable in respect of any issue or delivery of shares of Common Stock on
conversion of Series A Preferred Stock pursuant
<PAGE>
hereto. The Company shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issue and delivery of Common
Stock in a name other than that in which the Series A Preferred Stock so
converted was registered, and no such issue or delivery shall be made unless and
until the person requesting such issue has paid to the Company the amount of any
such tax, or has established, to the satisfaction of the Company, that such tax
has been paid.
D. No Redemption. The Series A Preferred Stock may not be
redeemed, in whole or in part, without the prior written consent of
each holder thereof after the same offer of redemption has been
made to all holders thereof.
E. Liquidation Rights. In the event of any liquidation,
dissolution or winding up of the Company, whether voluntary or
involuntary, before any distribution or payment shall be made to
the holder of any Common Stock or of any stock ranking junior to
the Series A Preferred Stock in respect to distribution of assets,
the holders of the Series A Preferred Stock shall be entitled to
receive $2.00 per share, plus an amount equal to any accrued and
unpaid dividends on the Series A Preferred Stock to the date fixed
for distribution and no more.
In the event the assets of the Company available for distribution to
the holders of shares of the Series A Preferred Stock upon dissolution,
liquidation or winding up of the Company shall be insufficient to pay in full
all amounts to which such holders are entitled pursuant to the immediately
preceding paragraph, no such distribution shall be made on account of any shares
of any other class or series of capital stock of the Company ranking on a parity
with or junior to the shares of the Series A Preferred Stock, except that a
proportionate distributive amount shall be paid on account of the shares of the
Series A Preferred Stock and any other class of shares ranking on a parity with
the Series A Preferred Stock, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively entitled
upon such dissolution, liquidation or winding up.
F. No Sinking Fund. The shares of Series A Preferred Stock shall
not be entitled to the benefit of any sinking fund to be applied to
the purchase or redemption of such shares.
G. Status of Redeemed or Converted Shares. Any shares of the Series A Preferred
Stock that at any time shall have been converted or that shall have been
redeemed or that have been otherwise repurchased by the Company, shall after
such conversion, redemption or repurchase have the status of authorized but
unissued shares of Preferred Stock, without designation as to series until such
shares are once more designated as part of a particular series by the Board of
Directors.
<PAGE>
Exhibit 2
JRECK SUBS GROUP, INC.
STATEMENT OF DESIGNATIONS, POWERS, PREFERENCES AND RIGHTS OF
SERIES B VOTING NONREDEEMABLE CONVERTIBLE PREFERRED STOCK
A. Dividends.
The holders of Series B Voting Nonredeemable Convertible Preferred
Stock, no par value per share (the "Series B Preferred Stock"), shall be
entitled to receive noncumulative preferential dividends, payable out of funds
legally available for the payment of dividends, only when and as declared by the
Board of Directors of the Company. If any dividends have been declared on the
Series B Preferred Stock that have preference as to dividends, so long as any
Series B Preferred Stock remains outstanding:
(a) no dividend whatsoever shall be declared or paid upon or set apart
for payment, and no distribution shall be ordered or made in respect of (i) the
Company's common stock, no par value per share (the "Common Stock") or any other
outstanding common stock of the Company or (ii) any other class of stock or
series thereof ranking junior to the Series B Preferred Stock in the payment of
dividends; and
(b) no shares of Common Stock and no shares of any other class of stock
or series thereof ranking junior to the Series B Preferred Stock in the payment
of dividends shall be redeemed or purchased by the Company or any subsidiary
thereof; and
(c) no moneys, funds or other assets shall be paid to or made available
for a sinking fund for the redemption or purchase of any shares of: (i) Common
Stock or (ii) any other class of stock or series thereof ranking junior to the
Series B Preferred Stock in the payment of dividends;
unless, in each instance, full dividends on all outstanding shares of Series B
Preferred Stock (i) for all past dividend periods shall have been paid and (ii)
for the then current calendar year shall have been paid or declared as set aside
for payment.
Cash dividends upon shares of Series B Preferred Stock shall commence
to accrue and be cumulative from the date of payment in any declaration thereof.
Such dividends shall be deemed to accrue from day to day regardless of whether
or not the Company shall have funds or assets available for the payment of such
dividends, but accumulation of dividends on shares of Series B Preferred Stock
shall not bear interest. For purposes of dividends, the Series B Preferred Stock
shall be subordinate and inferior to the Company's Series A Preferred Stock.
B. Voting Rights.
The holders of Series B Preferred Stock shall be entitled to
<PAGE>
vote upon any matter relating to the business or affairs of the Company or for
any other purpose. In addition, the holders of Series B Preferred Stock shall be
entitled to elect one Director of the Company, which right shall be subject to
the right granted by the Company's Bylaws to the Company's Board of Directors to
increase or decrease the number of Directors constituting the Company's Board of
Directors from time to time.
C. Conversion Rights.
The shares of Series B Preferred Stock shall be convertible, only at
the option of the Company's Board of Directors. If the Board of Directors
authorizes such conversion, then the shares of Series B Preferred Stock shall be
convertible at any time at the office of any duly appointed transfer agent for
the Series B Preferred Stock and at such other office or offices, if any, as the
Board of Directors of the Company may determine, into fully paid and
non-assessable shares of Common Stock at a conversion rate of one shares of
Common Stock for each share of Series B Preferred Stock tendered by the holder
for conversion, provided, however, that, in the case of redemption of any shares
of Series B Preferred Stock, such right of conversion shall cease and terminate,
as to the shares called for redemption, at the close of business on the day
prior to the date fixed for redemption.
Before any holder of Series B Preferred Stock shall be entitled to
convert the Series B Preferred Stock into Common Stock, he shall surrender the
certificate or certificates for such Series B Preferred Stock, at any office
hereinabove mentioned, such certificate or certificates shall be duly endorsed
to the Company or in blank or accompanied by proper instruments of transfer to
the Company or in blank, unless the Company shall waive such requirement, and
shall give written notice to the Company at any of said offices that he elects
so to convert said Series B Preferred Stock, and shall state in writing therein
the name or names in which he wishes the certificate or certificates for Common
Stock to be issued.
The Company will, as soon as practicable after such surrender of
certificates for Series B Preferred Stock accompanied by the written notice and
the statement above prescribed, issue and deliver at the office of any transfer
agent appointed as aforesaid, or at such other office or offices, if any, to the
person for whose account such Series B Preferred Stock was so surrendered or to
his nominee or nominees, certificates for the number of shares of Common Stock
to which he shall be entitled. Subject to the following provisions of this
paragraph, such conversion shall be deemed to have been made as of the date of
such surrender of the Series B Preferred Stock to be converted and the rights of
the converting holder of the shares of the Series B Preferred Stock as such
holder shall cease and the person or persons in whose name or names the
certificates for shares of Common Stock upon conversion of such Series B
Preferred Stock are to be issued shall be treated for all purposes as the record
holder or holders of such Common
<PAGE>
Stock at the close of business on such date. The Company shall not be required
to convert, and no surrender of Series B Preferred Stock shall be effective for
that purpose, while the stock transfer books of the Company are closed for any
purpose, but the surrender of Series B Preferred Stock for conversion during any
period while such books are so closed shall become effective for conversion
immediately upon the reopening of such books, as if the conversion had been made
on the date such Series B Preferred Stock was surrendered, and at the conversion
rate in effect at the date of such surrender. In the event of any liquidation,
dissolution or winding up of the affairs of the Company, all conversion rights
of the holders of Series B Preferred Stock shall terminate on the date fixed by
resolution of the Board of Directors of the Company, which date shall not be
later than 10 days nor earlier than 20 days prior to such liquidation,
dissolution or winding up.
If the Company shall at any time pay a dividend on its Common Stock in
Common Stock, subdivide its outstanding shares of Common Stock into a larger
number of shares or combine its outstanding shares of Common Stock into a small
number of shares by reclassification or otherwise, the conversion rate in effect
immediately prior thereto shall be adjusted so that each share of Series B
Preferred Stock shall thereafter be convertible into the number of shares of
Common Stock that the holder of a share of Series B Preferred Stock would have
been entitled to receive after the happening of any of the events described
above had such share been converted immediately prior to the happening of such
event. An adjustment made pursuant to this paragraph shall become effective
retroactively to the record date in the case of a dividend and shall become
effective on the effective date in the case of a subdivision or combination.
If the Company shall distribute to all holders of shares of Common
Stock any assets (other than any dividend payable solely in cash out of retained
earnings), any rights to subscribe or any evidence of indebtedness or other
securities of the Company (other than Common Stock), then in each case the
conversion rate of the Series B Preferred Stock shall be adjusted so that the
same shall take into account the fair market value (as determined in a
resolution adopted by the Board of Directors of the Company, which shall be
conclusive evidence of such fair market value) of the portion of the assets or
evidence of indebtedness or securities so distributed or of such subscription
rights applicable to one share of Common Stock divided by two. Such adjustment
shall become effective retroactively immediately after the record date.
In case of any capital reorganization or any reclassification of the
capital stock of the Company or in case of the consolidation or merger of the
Company with another corporation (other than a merger not involving any
reclassification, conversion, or exchange of Common Stock, in which the Company
is the surviving corporation), or in case of any sale or conveyance of all or
substantially all of the property of the Company, each share of Series B
Preferred Stock shall thereafter be convertible into the
<PAGE>
number of shares of stock (of any class or classes) or other securities or
property receivable upon such capital reorganization, reclassification of
capital stock, consolidation, merger, sale or conveyance, as the case may be, by
a holder of a fraction of a share of Common Stock into which such share of
Series B Preferred Stock was convertible immediately prior to such capital
reorganization, reclassification of capital stock, consolidation, merger, sale
or conveyance; and, in any case, appropriate adjustment (as determined by the
Board of Directors of the Company) shall be made in the application of the
provisions herein set forth with respect to rights and interests thereafter of
the holders of the Series B Preferred Stock, to the end that the provisions set
forth herein including the specified changes in and other adjustments of the
conversion rate) shall thereafter be applicable, as near as reasonably
practical, in relation to any share of stock or other securities or other
property thereafter deliverable upon the conversion of the Series B Preferred
Stock.
Whenever the conversion rate is adjusted as herein provided, the
Company shall forthwith file with any transfer agent or agents for the Series B
Preferred Stock appointed as aforesaid a certificate signed by the President or
one of the Vice Presidents of the Company and by its Treasurer or an Assistant
Treasurer, stating the adjusted conversion rate determined as provided above and
in reasonable detail the facts requiring such adjustment. Such transfer agent(s)
shall be under no duty to make any inquiry or investigation as to the statements
contained in any such certificate or as to the manner in which any computation
was made, but may accept such certificate as conclusive evidence of the
statements therein contained, and each transfer agent shall be fully protected
with respect to any and all acts done or action taken or suffered by it in
reliance thereon. No transfer agent in its capacity as transfer agent shall be
deemed to have any knowledge with respect to any change of capital structure of
the Company unless and until it receives a notice thereof pursuant to the
provisions of this paragraph and in default of any such notice each transfer
agent may conclusively assume that there has been no such change.
The Company shall at all times reserve and keep available, out of its
authorized and unissued or treasury shares of Common Stock, or other stock or
securities deliverable upon conversion pursuant to this section, solely for the
purpose of effecting the conversion of the Series B Preferred Stock, such number
of shares as shall from time to time be sufficient to effect the conversion of
all shares of Series B Preferred Stock from time to time outstanding. The
Company shall from time to time, in accordance with the laws of Delaware,
increase the authorized amount of its Common Stock if at any time the number of
shares of Common Stock remaining unissued or treasury shares of Common Stock
shall not be sufficient to permit the conversion of all the then outstanding
Series B Preferred Stock.
The Company will pay any and all issue and other taxes that
<PAGE>
may be payable in respect of any issue or delivery of shares of Common Stock on
conversion of Series B Preferred Stock pursuant hereto. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of Common Stock in a name other than
that in which the Series B Preferred Stock so converted was registered, and no
such issue or delivery shall be made unless and until the person requesting such
issue has paid to the Company the amount of any such tax, or has established, to
the satisfaction of the Company, that such tax has been paid.
D. No Redemption. The Series B Preferred Stock may not be
redeemed, in whole or in part, without the prior written consent of
each holder thereof after the same offer of redemption has been
made to all holders thereof.
E. Liquidation Rights. In the event of any liquidation,
dissolution or winding up of the Company, whether voluntary or
involuntary, before any distribution or payment shall be made to
the holder of any Common Stock or of any stock ranking junior to
the Series B Preferred Stock in respect to distribution of assets,
the holders of the Series B Preferred Stock shall be entitled to
receive $2.00 per share, plus an amount equal to any accrued and
unpaid dividends on the Series B Preferred Stock to the date fixed
for distribution and no more.
In the event the assets of the Company available for distribution to
the holders of shares of the Series B Preferred Stock upon dissolution,
liquidation or winding up of the Company shall be insufficient to pay in full
all amounts to which such holders are entitled pursuant to the immediately
preceding paragraph, no such distribution shall be made on account of any shares
of any other class or series of capital stock of the Company ranking on a parity
with or junior to the shares of the Series B Preferred Stock, except that a
proportionate distributive amount shall be paid on account of the shares of the
Series B Preferred Stock and any other class of shares ranking on a parity with
the Series B Preferred Stock, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively entitled
upon such dissolution, liquidation or winding up. For purposes of distribution
upon dissolution, liquidation or winding up of the Company, the Series F
Preferred Stock shall be subordinate and inferior to the Company's Series A
Preferred Stock.
F. No Sinking Fund. The shares of Series B Preferred Stock shall
not be entitled to the benefit of any sinking fund to be applied to
the purchase or redemption of such shares.
G. Status of Redeemed or Converted Shares. Any shares of the
Series B Preferred Stock that at any time shall have been converted
or that shall have been redeemed or that have been otherwise
repurchased by the Company, shall after such conversion, redemption
or repurchase have the status of authorized but unissued shares of
<PAGE>
Preferred Stock, without designation as to series until such shares are once
more designated as part of a particular series by the Board of Directors.
<PAGE>
ARTICLES OF CORRECTION Exhibit 3.4
TO
THE ARTICLES OF AMENDMENT
OF
JRECK SUBS GROUP, INC.
Pursuant to the provisions of the Colorado Business Corporation Act,
Jreck Subs Group, Inc. (the "Corporation"), hereby corrects the Articles of
Amendment of Articles of Incorporation which were filed with the Secretary of
State of Colorado on May 7,
1996:
FIRST: Exhibit 1 to the Articles of Amendment entitled
"Jreck Subs Group, Inc. - Statement of Designations, Powers,
Preferences and Rights of Series A Voting Nonredeemable Cumulative
Convertible Preferred Stock" is incorrect because it contains one
erroneous reference to the laws of the State of Delaware;
SECOND: Exhibit 1 to the Articles of Amendment entitled
"Jreck Subs Group, Inc. - Statement of Designations, Powers,
Preferences and Rights of Series A Voting Nonredeemable Cumulative
Convertible Preferred Stock" is hereby deleted in its entirety and
replaced by the attached and corrected Exhibit 1 "Jreck Subs Group,
Inc. - Statement of Designations, Powers, Preferences and Rights of
Series A Voting Nonredeemable Cumulative Convertible Preferred
Stock."
THIRD: Exhibit 2 to the Articles of Amendment entitled
"Jreck Subs Group, Inc. - Statement of Designations, Powers,
Preferences and Rights of Series B Voting Nonredeemable Convertible
Preferred Stock" is incorrect because it contains one erroenous
reference to the laws of the State of Delaware;
FOURTH: Exhibit 2 to the Articles of Amendment entitled
"Jreck Subs Group, Inc. - Statement of Designations, Powers,
Preferences and Rights of Series B Voting Nonredeemable Convertible
Preferred Stock" is hereby deleted in its entirety and replaced by
the attached and corrected Exhibit 2 "Jreck Subs Group, Inc. -
Statement of Designations, Powers, Preferences and Rights of Series
A Voting Nonredeemable Convertible Preferred Stock."
IN WITNESS WHEREOF, the Corporation has casued these articles of
Correctionto the Articles of Amendment of the Articles of Incorporation to be
executed this 30th day of May, 1996.
JRECK SUBS GROUP, INC.
By:
Christopher M. Swartz,
President
<PAGE>
Exhibit 1
JRECK SUBS GROUP, INC.
STATEMENT OF DESIGNATIONS, POWERS, PREFERENCES AND RIGHTS OF
SERIES A VOTING NONREDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED
STOCK
A. Dividends.
The holders of Series A Voting Nonredeemable Cumulative Convertible
Preferred Stock, no par value per share (the "Series A Preferred Stock"), shall
be entitled to receive cumulative preferential dividends at the rate of $.09 per
share per annum, payable weekly out of funds legally available for the payment
of dividends. So long as any Series A Preferred Stock remains outstanding:
(a) no dividend whatsoever shall be declared or paid upon or set apart
for payment, and no distribution shall be ordered or made in respect of (i) the
Company's common stock, no par value per share (the "Common Stock") or any other
outstanding common stock of the Company or (ii) any other class of stock or
series thereof ranking junior to the Series A Preferred Stock in the payment of
dividends; and
(b) no shares of Common Stock and no shares of any other class of stock
or series thereof ranking junior to the Series A Preferred Stock in the payment
of dividends shall be redeemed or purchased by the Company or any subsidiary
thereof; and
(c) no moneys, funds or other assets shall be paid to or made available
for a sinking fund for the redemption or purchase of any shares of: (i) Common
Stock or (ii) any other class of stock or series thereof ranking junior to the
Series A Preferred Stock in the payment of dividends;
unless, in each instance, full dividends on all outstanding shares of Series A
Preferred Stock (i) for all past dividend periods shall have been paid and (ii)
for the then current calendar year shall have been paid or declared as set aside
for payment.
Cash dividends upon shares of Series A Preferred Stock shall commence
to accrue and be cumulative from the date of issue thereof. Such dividends shall
be deemed to accrue from day to day regardless of whether or not the Company
shall have funds or assets available for the payment of such dividends, but
accumulation of dividends on shares of Series A Preferred Stock shall not bear
interest.
B. Voting Rights.
The holders of Series A Preferred Stock shall be entitled to vote upon
any matter relating to the business or affairs of the Company or for any other
purpose. In addition, the holders of
<PAGE>
Series A Preferred Stock shall be entitled to elect one Director of the Company,
which right shall be subject to the right granted by the Company's Bylaws to the
Company's Board of Directors to increase or decrease the number of Directors
constituting the Company's Board of Directors from time to time.
C. Conversion Rights.
The shares of Series A Preferred Stock shall be convertible, only at
the option of the Company's Board of Directors. If the Board of Directors
authorizes such conversion, then the shares of Series A Preferred Stock shall be
convertible at any time at the office of any duly appointed transfer agent for
the Series A Preferred Stock and at such other office or offices, if any, as the
Board of Directors of the Company may determine, into fully paid and
non-assessable shares of Common Stock at a conversion rate of one shares of
Common Stock for each share of Series A Preferred Stock tendered by the holder
for conversion, provided, however, that, in the case of redemption of any shares
of Series A Preferred Stock, such right of conversion shall cease and terminate,
as to the shares called for redemption, at the close of business on the day
prior to the date fixed for redemption.
Before any holder of Series A Preferred Stock shall be entitled to
convert the Series A Preferred Stock into Common Stock, he shall surrender the
certificate or certificates for such Series A Preferred Stock, at any office
hereinabove mentioned, which certificate or certificates shall be duly endorsed
to the Company or in blank or accompanied by proper instruments of transfer to
the Company or in blank, unless the Company shall waive such requirement, and
shall give written notice to the Company at any of said offices that he elects
so to convert said Series A Preferred Stock, and shall state in writing therein
the name or names in which he wishes the certificate or certificates for Common
Stock to be issued.
The Company will, as soon as practicable after such surrender of
certificates for Series A Preferred Stock accompanied by the written notice and
the statement above prescribed, issue and deliver at the office of any transfer
agent appointed as aforesaid, or at such other office or offices, if any, to the
person for whose account such Series A Preferred Stock was so surrendered or to
his nominee or nominees, certificates for the number of shares of Common Stock
to which he shall be entitled. Subject to the following provisions of this
paragraph, such conversion shall be deemed to have been made as of the date of
such surrender of the Series A Preferred Stock to be converted and the rights of
the converting holder of the shares of the Series A Preferred Stock as such
holder shall cease and the person or persons in whose name or names the
certificates for shares of Common Stock upon conversion of such Series A
Preferred Stock are to be issued shall be treated for all purposes as the record
holder or holders of such Common Stock at the close of business on such date.
The Company shall not be required to convert, and no surrender of Series A
Preferred
<PAGE>
Stock shall be effective for that purpose, while the stock transfer books of the
Company are closed for any purpose, but the surrender of Series A Preferred
Stock for conversion during any period while such books are so closed shall
become effective for conversion immediately upon the reopening of such books, as
if the conversion had been made on the date such Series A Preferred Stock was
surrendered, and at the conversion rate in effect at the date of such surrender.
In the event of any liquidation, dissolution or winding up of the affairs of the
Company, all conversion rights of the holders of Series A Preferred Stock shall
terminate on the date fixed by resolution of the Board of Directors of the
Company, which date shall not be later than 10 days nor earlier than 20 days
prior to such liquidation, dissolution or winding up.
If the Company shall at any time pay a dividend on its Common Stock in
Common Stock, subdivide its outstanding shares of Common Stock into a larger
number of shares or combine its outstanding shares of Common Stock into a
smaller number of shares by reclassification or otherwise, the conversion rate
in effect immediately prior thereto shall be adjusted so that each share of
Series A Preferred Stock shall thereafter be convertible into the number of
shares of Common Stock that the holder of a share of Series A Preferred Stock
would have been entitled to receive after the happening of any of the events
described above had such share been converted immediately prior to the happening
of such event. An adjustment made pursuant to this paragraph shall become
effective retroactively to the record date in the case of a dividend and shall
become effective on the effective date in the case of a subdivision or
combination.
If the Company shall distribute to all holders of shares of Common
Stock any assets (other than any dividend payable solely in cash out of retained
earnings), any rights to subscribe or any evidence of indebtedness or other
securities of the Company (other than Common Stock), then in each case the
conversion rate of the Series A Preferred Stock shall be adjusted so that the
same shall take into account the fair market value (as determined in a
resolution adopted by the Board of Directors of the Company, which shall be
conclusive evidence of such fair market value) of the portion of the assets or
evidence of indebtedness or securities so distributed or of such subscription
rights applicable to one share of Common Stock divided by two. Such adjustment
shall become effective retroactively immediately after the record date.
In case of any capital reorganization or any reclassification of the
capital stock of the Company or in case of the consolidation or merger of the
Company with another corporation (other than a merger not involving any
reclassification, conversion, or exchange of Common Stock, in which the Company
is the surviving corporation), or in case of any sale or conveyance of all or
substantially all of the property of the Company, each share of Series A
Preferred Stock shall thereafter be convertible into the number of shares of
stock (of any class or classes) or other securities or property receivable upon
such capital reorganization,
<PAGE>
reclassification of capital stock, consolidation, merger, sale or conveyance, as
the case may be, by a holder of a fraction of a share of Common Stock into which
such share of Series A Preferred Stock was convertible immediately prior to such
capital reorganization, reclassification of capital stock, consolidation,
merger, sale or conveyance; and, in any case, appropriate adjustment (as
determined by the Board of Directors of the Company) shall be made in the
application of the provisions herein set forth with respect to rights and
interests thereafter of the holder of the Series A Preferred Stock, to the end
that the provisions set forth herein (including the specified changes in and
other adjustments of the conversion rate) shall thereafter be applicable, as
near as reasonably practical, in relation to any share of stock or other
securities or other property thereafter deliverable upon the conversion of the
Series A Preferred Stock.
Whenever the conversion rate is adjusted as herein provided, the
Company shall forthwith file with any transfer agent or agents for the Series A
Preferred Stock appointed as aforesaid a certificate signed by the President or
one of the Vice Presidents of the Company and by its Treasurer or an Assistant
Treasurer, stating the adjusted conversion rate determined as provided above and
in reasonable detail the facts requiring such adjustment. Such transfer agent(s)
shall be under no duty to make any inquiry or investigation as to the statements
contained in any such certificate or as to the manner in which any computation
was made, but may accept such certificate as conclusive evidence of the
statements therein contained, and each transfer agent shall be fully protected
with respect to any and all acts done or action taken or suffered by it in
reliance thereon. No transfer agent in its capacity as transfer agent shall be
deemed to have any knowledge with respect to any change of capital structure of
the Company unless and until it receives a notice thereof pursuant to the
provisions of this paragraph and in default of any such notice each transfer
agent may conclusively assume that there has been no such change.
The Company shall at all times reserve and keep available, out of its
authorized and unissued or treasury shares of Common Stock, or other stock or
securities deliverable upon conversion pursuant to this section, solely for the
purpose of effecting the conversion of the Series A Preferred Stock, such number
of shares as shall from time to time be sufficient to effect the conversion of
all shares of Series A Preferred Stock from time to time outstanding. The
Company shall from time to time, in accordance with the laws of Colorado,
increase the authorized amount of its Common Stock if at any time the number of
shares of Common Stock remaining unissued or treasury shares of Common Stock
shall not be sufficient to permit the conversion of all the then outstanding
Series A Preferred Stock.
The Company will pay any and all issue and other taxes that may be
payable in respect of any issue or delivery of shares of Common Stock on
conversion of Series A Preferred Stock pursuant
<PAGE>
hereto. The Company shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issue and delivery of Common
Stock in a name other than that in which the Series A Preferred Stock so
converted was registered, and no such issue or delivery shall be made unless and
until the person requesting such issue has paid to the Company the amount of any
such tax, or has established, to the satisfaction of the Company, that such tax
has been paid.
D. No Redemption. The Series A Preferred Stock may not be
redeemed, in whole or in part, without the prior written consent of
each holder thereof after the same offer of redemption has been
made to all holders thereof.
E. Liquidation Rights. In the event of any liquidation,
dissolution or winding up of the Company, whether voluntary or
involuntary, before any distribution or payment shall be made to
the holder of any Common Stock or of any stock ranking junior to
the Series A Preferred Stock in respect to distribution of assets,
the holders of the Series A Preferred Stock shall be entitled to
receive $2.00 per share, plus an amount equal to any accrued and
unpaid dividends on the Series A Preferred Stock to the date fixed
for distribution and no more.
In the event the assets of the Company available for distribution to
the holders of shares of the Series A Preferred Stock upon dissolution,
liquidation or winding up of the Company shall be insufficient to pay in full
all amounts to which such holders are entitled pursuant to the immediately
preceding paragraph, no such distribution shall be made on account of any shares
of any other class or series of capital stock of the Company ranking on a parity
with or junior to the shares of the Series A Preferred Stock, except that a
proportionate distributive amount shall be paid on account of the shares of the
Series A Preferred Stock and any other class of shares ranking on a parity with
the Series A Preferred Stock, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively entitled
upon such dissolution, liquidation or winding up.
F. No Sinking Fund. The shares of Series A Preferred Stock shall
not be entitled to the benefit of any sinking fund to be applied to
the purchase or redemption of such shares.
G. Status of Redeemed or Converted Shares. Any shares of the Series A Preferred
Stock that at any time shall have been converted or that shall have been
redeemed or that have been otherwise repurchased by the Company, shall after
such conversion, redemption or repurchase have the status of authorized but
unissued shares of Preferred Stock, without designation as to series until such
shares are once more designated as part of a particular series by the Board of
Directors.
Exhibit 21 - Subsidiaries of the Registrant
<TABLE>
<CAPTION>
State of Trade Names
Name Incorporation (if any)
<S> <C> <C>
Jreck Subs, Inc. New York None
Leovera, Inc. Florida Hymies
Bagels
Admiril Subs of Washington, Inc. Washington Seawest Subs
Admiral's Fleet, Inc. Washington Seawest Subs
Little King, Inc. Delaware None
Richey Enterprises, Inc. Washington Georgia Subs
Pastry Products Producers, LLC New York None
Quality Franchise Systems, Inc. Delaware Mountain
Mikes Pizza
</TABLE>
