SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
(Amendment No. 3)
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)
2101 West State Road 434, Suite 100, Longwood, FL 32779 (Address of principal
executive offices) (Zip Code)
(407) 682-6363
(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. Commencing
August 1995, Circa Media, Inc. issued 2,200,000 shares of common stock and 200
shares of preferred stock in reliance on Rule 504 of Regulation D. A Form D
reflecting this issuance was filed with the Securities and Exchange Commission
on August 21, 1995. Pursuant to an Agreement and Plan of Reorganization between
JRECK Subs, Inc. and Circa Media, Inc., Circa Media, Inc. changed its name to
JRECK Subs Group, Inc. ("Company") on May 7, 1996 and the former common
shareholders of JRECK Subs, Inc. received 5,000,000 shares of Common Stock of
the Company in the transaction, or 56% of the outstanding shares, and the former
Series A Preferred Stockholders of JRECK Subs, Inc. received 700,000 shares of
Series A Preferred Stock. The former business of Circa Media, Inc. was
discontinued prior to May 1996. The historical information presented prior to
May 1996 is that of Jreck Subs, Inc.
The Company now 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, owners of Seawest Subshops, Inc.
("Seawest"), Little King, Inc. ("Little King"), a Delaware corporation, Pastry
Products Producers, LLC, a New York limited liability company ("Pastry
Products"), SBK Franchise Systems, Inc. ("SBK"), a Florida corporation, Li'l
Dino Corporation ("Li'l Dino"), a North Carolina corporation, and Admiral's
Fleet, Inc. ("AFI"), a Washington corporation and AFI's wholly-owned
subsidiaries, Richey Enterprises, Inc. ("Georgio's"), a Washington corporation
and Quality Franchise Systems, Inc. ("Mountain Mike's"), a Delaware corporation.
Company Operations
The Company is a multiple-concept franchisor. The Company began with
the JRECK Subs franchise which currently has 47 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
acquisitions which included the following:
* Hymie's Bagels, a 8 unit chain of licensed bagel shops in Tampa,
Florida along with a bakery;
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* Seawest Subs, a 40 unit submarine sandwich chain primarily located in
Seattle, Washington;
* Little King, a 36 unit submarine sandwich chain primarily located in
Nebraska;
* Georgio's, a 6 unit submarine sandwich chain primarily located in
Seattle, Washington;
* Mountain Mike's Pizza, a 78-unit pizza chain primarily located in
northern and central California;
* Sobik's Sandwich Shops, a 41-unit submarine sandwich chain primarily
located in the Orlando, Florida area;
* Li'l Dino, a 43-unit submarine sandwich chain primarily located in
North Carolina; and
* 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. 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, 1998 there were 47 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 franchisees.
Franchise Program
As of September 30, 1998 the Company had approximately 288 restaurants
of which 284 are franchised locations. The Company obtains prospective
franchisees from its current and former employees, from referrals from existing
franchisees and from franchise shows.
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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. The Company has no formal policy with respect to
proximity of franchises, but deals with proximity issues on a case by case
basis. Certain franchisees are required to purchase all their baked goods from
the Company, such as submarine sandwich rolls. Bakery products for JRECK Subs
stores are supplied by the Company's bakery in Watertown, New York.
The Company intends to develop new franchise locations primarily
through existing franchisees. Management believes that the Company has a
national presence which it intends to strengthen by further developing each of
its regional concepts. The primary criteria considered by the Company in the
review and approval of franchisees are prior experience in operating restaurants
or other comparable businesses and capital available for investment.
Franchise fees in all franchising companies are to a large degree
competitively market driven. The Company intends to maintain franchise fees for
new franchised locations within industry norms of $10,000 to $12,500 for new
locations in the sandwich segment and $20,000 in the pizza segment. Franchise
fees are due upon execution of the Franchise agreement. The Company intends to
maintain royalty fees of 5% to 7% of sales for all new locations for each of its
brands on a going forward basis and advertising fees at 2% to 4% of sales. The
following table sets forth certain information regarding the Company's
franchises. <TABLE> <CAPTION>
- ------------------- -------------- --------------- ---------------- ----------------- -------------- ----------------
Concepts Franchised/LicensAve. Years Avg. Royalty Avg. Royalty on Price of New
Units Left on on Existing New Franchises Franchise Selling New
Contract Franchises Franchises
- ------------------- -------------- --------------- ---------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
JRECK Subs 47 9.2 4.3% 5.0% $10,000 Yes
Mountain Mike's 78 10.0 4.6% 5.0% $20,000(d) Yes
Pizza
SBK Sandwich Shops 41 6.8 4.6% 5.0% $10,000(e) Yes
Li'l Dino 43 16.0 5.9% 7.0%(c) $12,500(f) Yes
Seawest Subs Shops 40 6.5 5.0% 5.0% $10,000(g) Yes
Little King 25 9.9 4.9% 6.0% $12,000 Yes
Hymie's Bagels 8(a) N/A N/A N/A N/A No
Georgio's 6(b) 8.5 4.0% 5.0% $10,000 Yes
- ------------------- -------------- --------------- ---------------- ----------------- -------------- ----------------
</TABLE>
(a) All Hymie's units are operated under a license agreement.
(b) Three franchised and three operating under a license agreement.
(c) Li'l Dino's receives 6% royalties from university locations.
(d) The initial franchise fee is reduced to $10,000 for existing franchise
owners acquiring another franchise.
(e) The initial franchise fee is reduced to $4,000 for existing franchise
owners acquiring another franchise and is $1,000 for a non-traditional
restaurant (i.e. convenience stores).
(f) The initial franchise fee is $5,000 for a non-traditional store.
(g) The initial franchise fee is $2,500 for a regional developer.
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
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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 services
to its franchisees. Plans and specifications for the restaurants must be
approved by the Company before improvements begin. The Company's 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
On June 19, 1997, the Company, through its wholly-owned subsidiary,
Leovera, Inc., acquired all of the bakery equipment of Chai Enterprises, Inc.
("Chai"). Chai is the franchisor of the Hymie's bagel restaurant chain located
in Tampa, Florida. The aggregate purchase price of the Chai assets in the amount
of $1,331,156 consisted of 289,500 shares of the Company's Common Stock, valued
at $4.598 per share and $200,000 cash. In connection with the acquisition, the
Company entered into a five-year management agreement with a principal of
Leovera with an initial management fee of $85,000 for the first year. The
management agreement was terminated in February 1998 for $19,000.
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In June 1997, the Company, through its ASWI subsidiary, acquired all of
the outstanding shares of Seawest Sub Shops, Inc., headquartered in Bellevue,
Washington. Seawest Subs has 40 franchised submarine sandwich shops. The
consideration included $150,000 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 $406,000) 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 without the prior written agreement in any 3 month
period. The optionees were also granted piggyback 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 one year noncompete agreement with the
former president of Seawest Sub which calls for monthly payments of $8,000 which
commenced in June 1997.
In August 1997, the Company acquired all of the outstanding stock of
Little King, a 36-unit submarine shop including the assets of nine
corporately-owned restaurants. The consideration consisted of $50,000 cash, a
note for $100,000, 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 100,000 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's
Common Stock 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 commencing August 2, 1997 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 commencing August 2, 1997 with an initial salary of $45,000
subject to annual increases up to 20% based on operating performance. The
agreements are subject to termination based upon certain events or conditions
set forth in the agreements.
In August 1997, the Company through its AFI subsidiary acquired all of
the outstanding stock of Richey Enterprises, Inc., a Washington corporation,
which franchises 6 Georgio's Sub shops. 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 Common Stock sold by the seller to a third party, is valued within
30 days after the anniversary of the date of the close of escrow at less than
80% of the price of the Common 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 provided
for the provision of consulting services for sixty days for an initial fee of
$10,000, and a renewable consulting fee of $3,750 per month. After the initial
sixty-days, the consulting agreement was not renewed; however, the noncompete
agreement remained in effect during the period of the consulting agreement and
two years after termination of the consulting agreement.
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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 78-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 options to purchase 32,204 shares of Common Stock valued at $23,000. In
addition, the shareholders of QFS received 150,000 additional shares of the
Company's Common Stock since the stock price did not exceed $3.50 for 21
consecutive days between October 1, 1997 and January 31, 1998. 500,000
additional shares of Common Stock are to be issued if the Mountain Mike's income
from defined franchising operations exceed $500,000 for any consecutive
twelve-month period from October 1, 1997 to December 31, 1998.
On October 28, 1997, the Company acquired the remaining 50% interest of
Pastry Products, a bakery operation which primarily serves the JRECK restaurant
franchises. The $785,594 purchase price for the remaining 50% of Pastry Products
was paid by issuance of 262,500 shares of the Company's Common Stock valued at
$2.509 per share, options to purchase 37,500 shares of Common Stock valued at
$79,000 and other consideration valued at $48,000.
On December 4, 1997, the Company purchased the outstanding shares of
SBK, franchiser of 41 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 187,266 shares of the Company's Common
Stock valued at $2.509 per share. The prior owners of SBK may require the
Company to repurchase a maximum of 187,266 shares of the Company's Common Stock
at a purchase price of $2.67 per share. The repurchase obligation is limited to
a maximum of 37,453 shares in any 6 month period commencing 6 months following
the closing. The repurchase obligation is noncumulative and expires in June
2000.
In March 1998 the Company acquired Li'l Dino Corporation, a 43-unit
sandwich shop franchisor located in North Carolina. The $2,400,000 purchase
price was paid by issuance of 735,294 shares of Common Stock valued at $2.72 per
share and the assumption of $400,000 in debt. The acquisition closed in March
1998 upon completion of a state fairness hearing held in accordance with state
securities laws to approve the transactions as fair to Li'l Dino Corporation
shareholders.
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 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
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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 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
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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 November 20, 1998, the Company had approximately 66 employees
consisting of 30 administrative employees, 16 employees in the Company's 4
corporate restaurants and 20 employees in bakery operations.
Trademarks
The Company markets several products under the JRECK Subs, Seawest Sub
Shops, Little King, Li'l Dino's 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
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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 trademark counsel are evaluating options
regarding the registration of this slogan. The slogan is still in use in the
Mountain Mike's Pizza system.
The "Li'l Dino" service mark was registered on the Principal Register
of the PTO on September 30, 1986 (Registration No. 1,411,762). The "Li'l Dino
Bagel Deli Grille" service mark and design was registered on the Principal
Register of the PTO on September 30, 1997 (Registration No. 2,101,316).
The "Sobik's Subs" service mark was registered on the Principal
Register of the PTO on August 12, 1997 (Registration No. 2,087,639).
Item 2. Management's Discussion and Analysis or Plan of Operation
Overview
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.
Year 2000
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Such software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations leading to disruptions in the Company's
activities and operations (the "Year 2000" or " Y2K" issue). If the Company or
its significant suppliers or customers fail to make necessary modifications,
conversions, and contingency plans on a timely basis, the Year 2000 issue could
have a material adverse effect on the Company's business, operations, cash flow,
and financial condition. However, the effect cannot be quantified at this time
because the Company cannot accurately estimate the magnitude, duration, or
ultimate impact of non compliance by suppliers, customers and third parties that
have no direct relationship to the Company. The Company believes that its
competitors face a similar risk. Although not quantifiable, the disclosure below
is intended to summarize the Company's actions to minimize the risk.
The Company's information systems currently are made up of networked
computers which are used internally and are not linked to any outside sources
other than the browser used by the Company. The Company's future information
system will cover a spectrum of software applications for its operations,
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certain of these may be custom designed. Currently, the Company is updating all
of its software to provide uniformity among all of its recent acquisitions and
provide management with timely interaction about operations. As the Company has
already embarked on a software modernization program, it is anticipated that the
remediation costs of Y2K problems in its existing software will impose no
significant additional costs to the Company. The Company will need to assure
itself that it has achieved Year 2000 compliance for both packaged and
custom-designed software. The costs of compliance has not yet been determined.
The Company has initiated formal communication with all of its
significant suppliers to determine the extent to which the Company is vulnerable
to the failure of such suppliers to resolve their own Year 2000 problems. The
Company will grade the responses from low risk to high risk. In addition,
although many of the Company's franchisees have been communicating with the
Company regarding the Year 2000 issues, the Company has not made any formal
assessment of the effect which the failure of its larger franchisees to resolve
their own Year 2000 problems could have on the Company's operations. Despite
these efforts, there can be no assurance that the systems of other companies on
which the Company relies will be converted on a timely basis or that a failure
to resolve by one or more of the Company's franchisees or suppliers would not
have a material adverse effect on the Company.
Nine months ended September 30, 1998 compared to nine months ended September 30,
1997.
Results of Operations:
The Company had a net loss of $1,914,771 for the nine months ended
September 30, 1998 compared to a net loss of $2,836,136 for the same period in
1997. The decrease in net loss is primarily the result significant business
acquisitions had in shifting the business structure, coupled with a decrease of
$2,096,810 in 1998 in non-cash consulting and business development expenses that
were reflected in the first nine months of 1997. The aggregate sales of
$1,353,366 generated by the company owned stores in 1998, offset by food costs
and operating costs of $568,474 and $891,612, respectively, resulted in
contributing $106,721 to the 1998 nine month loss. The bakery operations
generated revenues of $736,171 offset by Product costs of $214,549 and operating
expenses of $546,380 thereby contributing $24,759 toward the 1998 nine month
loss. Other changes for the period ended September 30, 1998 were an increase
over 1997 of $630,548 in amortization and depreciation expense, and interest
expense increasing from $79,875 to $248,830, primarily as the result of debt
assumed and, originating from the Company's acquisitions. Business expansion
expenses were $2,528,493 in 1997 compared to $1,204,000 in the same period of
1998. The revenue of the Company increased $4,255,057 to $4,849,510 for the nine
months ended September 30, 1998 from $594,453 for the same period in 1997. The
increase is primarily due to the impact of businesses acquired in the3rd and 4th
quarters of 1997 generating $2,400,774 of additional franchising revenue and the
sales contributions of $1,353,366 and $736,171 in 1998 from the Company stores
and bakery, respectively, compared to $61,551 and $174,703 for each of the
activities in 1997.
Costs and operating expenses applicable to sales and revenue increased
$3,858,682 to $4,607,958 for the nine months ended September 30, 1998 from
$749,276 for the same period in 1997. This increase is primarily due to the
effects of business acquisitions made in 1997 including restaurant and bakery
food costs and operating expenses of $2,221,017 in 1998 compared to $324,266 in
1997. Additional franchise servicing costs of $1,358,298 in the first nine
months of 1998 over the same period in 1997 were the result of business
acquisitions made in 3rd and 4th quarter 1997.
11
<PAGE>
Liquidity and Capital Resources:
Working capital deficit at September 30, 1998 was $3,340,324 compared
with a deficit of $5,330,587 on December 31, 1997 a decrease of $1,990,263. The
decrease in deficit is primarily due to the Company's issuance of $ 2,500,000 in
Series D Preferred Stock in January of 1998. The proceed of this offering were
substantially used to pay down existing debt or to satisfy other obligations.
The Company's primary capital requirements are for repayments of
current loans payable, including those payable to related parties, of $1,508,625
and accounts payable and accrued expenses of $1,245,430. The Company's capital
requirements are anticipated to be funded through current operations
supplemented by additional debt or equity financing, as expansion plans require.
There is no assurance that additional funding will be available, or 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.
Year ended December 31, 1997 compared to year ended December 31, 1996.
The results of operations for the year ended December 31, 1997 reflect
six months of operations from Hymie's Bagels and Seawest Subs, four months each
from Little King Subs and Georgio's Subs, three months from Mountain Mike's
Pizza and one month from SBK.
The Company had a net loss of $8,903,644 for the year ended December
31, 1997, compared to a net loss of $39,657 for the year ended December 31,
1996. The increase in the net loss is primarily the result of consulting costs
associated with acquisitions and equity financing of $4,492,664 and a loss of
$862,029 related to an early extinguishment of debt.
The revenue of the Company increased $2,017,721 or 362% to $2,575,459
for the year ended December 31, 1997 from $557,738 for the same period in 1996.
The increase is primarily due to the acquisitions of businesses made during 1997
which included increased franchising related revenues of approximately $688,000
and sales from the Company's corporate restaurants and bakeries of approximately
$1,310,000.
Cost of Sales and operating expenses applicable to revenue increased
$3,895,110 or 935% to $4,311,597 for the year ended December 31, 1997 from
$416,488 for the same period in 1996. This increase is primarily due to the
acquisitions of businesses made during the year including cost of sales from the
Company's corporate restaurants and bakeries of $552,940, additional
depreciation and amortization expense of approximately $507,000 and additional
operating costs from the acquired businesses of approximately $1,725,000.
Consulting costs and investor relations were $4,492,664 for the year
ended December 31, 1997 and resulted from the Company's acquisition and capital
raising activities. Included in the costs of $4,492,664 were $3,301,302 of
valuation related to options for 2,275,000 shares of the Company's Common Stock.
Hymie's Bagels:
On June 19, 1997, the Company through Leovera, acquired all of the
bakery equipment of Chai, the franchiser of the Hymie's Bagel restaurant chain.
12
<PAGE>
Sales for the five months ended December 31, 1997 totaled $373,295. Costs and
expenses applicable to revenue for the period amounted to $581,003 and the
Company recognized a goodwill impairment charge of $993,820.
Seawest Sub Shops:
In June 1997, the Company acquired the stock of Seawest Sub Shops, Inc.
Revenues for the six months ended December 31, 1997 totaled $288,471. Costs and
expenses applicable to revenue for the period were $291,482. Amortization of
goodwill was $22,371 and amortization of a non-compete agreement was $83,667.
Little King:
Operations as the Little King subsidiary of the Company commenced on
September 1, 1997. Income for the four months ended December 31, 1997 was
$648,499. Costs and expenses applicable to revenue for the period were $812,554.
Amortization of goodwill amounted to $76,337.
Georgio's:
Operations of the Georgio's subsidiary (through the Company's AFI
subsidiary) commenced in September 1997. Sales for the four months ended
December 31, 1997 were $144,685. Costs and expenses applicable to revenue for
the period amounted to $164,898. Amortization of goodwill amounted to $6,465.
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 revenues for
the three months ended December 31, 1997 were $462,524. Costs and expenses
applicable to revenue for the period were $242,342. Net interest expense was
$18,830 and amortization of goodwill was $49,365.
SBK:
On December 4, 1997, the Company purchased SBK Franchise Systems, Inc.,
the franchisor of Sobik's Subs. Revenues for the period from December 4, 1997 to
December 31, 1997 were $17,840. Costs and expenses applicable to revenue for the
period were $65,439. Amortization of goodwill was $4,693.
Pastry Products:
On October 28, 1997, the Company acquired the remaining 50% interest of
Pastry Products Producers, LLC. Pastry Products is a bakery operation which
primarily serves the Jreck restaurant franchisees. Sales for the two months
ended December 31, 1997 were $102,989. Costs and expenses applicable to sales
for the period were $145,168. Interest expense was $11,431 and amortization of
goodwill was $9,412.
Liquidity and Capital Resources
Working capital at December 31, 1997 was a deficit of $5,330,587
compared with a deficit of $541,873 at December 31, 1996, an increase of
$4,788,714. The increase is primarily attributable to debt assumed or originated
13
<PAGE>
with the Company's acquisitions during 1997. These debts consist of $3,736,831,
a liability to issue 700,000 shares of the Company's Common Stock related to the
Company's Little King acquisition valued at $2,143,750 and a liability to issue
150,000 shares of the Company's Common Stock related to the Company's Quality
Franchise Systems, Inc. acquisition valued at $440,625.
During 1997, the Company raised approximately $1,310,000 in cash from
the sale of capital stock and the exercise of stock options of which $408,417
was expended in conjunction with its acquisitions of businesses.
During 1997, the Company acquired certain assets of Hymie's Bagels,
Seawest Subs, Georgio's Subs, Little King, Mountain Mike's Pizza, SBK Subs and
the remaining 50% of Pastry Products for an aggregate purchase price of
$10,985,714, which resulted in excess of cost over fair value of net assets
acquired of $13,061,710. For the year ended December 31, 1997, amortization and
depreciation expense was $506,742 and the net excess of cost over fair value of
net assets acquired was $11,521,526 at December 31, 1997. Taking into account
the acquisitions made by the Company through May 31, 1998, amortization expenses
are expected to be approximately $700,000 in fiscal 1998.
In January 1998, the Company issued $2,500,000 in Series D Preferred
Stock. The proceeds from this offering were substantially used to pay down
existing debt or to satisfy other obligations. The Company's primary capital
requirements are for repayment of current loans payable of $2,163,554 and
accounts payable of $1,020,101. 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.
In connection with the Company's acquisition of Quality Franchise
Systems, Inc. ("QFS") in September 1997 and for the continued employment and
services to be provided by Mr. Bradley Gordon, the president of QFS and
currently the chief operating officer and director of the Company and Mr.
Richard T. Silberman, a consultant to QFS and now a consultant to the Company,
Mr. Gordon and Mr. Silberman were sold 500,000 shares and 300,000 shares,
respectively, of the Company's common stock for $1,500,000 and $900,000,
respectively. The consideration for the shares were promissory notes, with
interest due at 9.5% per annum with principal and interest due in September
2000. Both Mr. Gordon and Mr. Silberman have the right to require the Company to
repurchase the shares of common stock for the cancellation of the promissory
notes.
The above transactions have no effect on the net stockholders equity of
the Company since the value of the value of the common shares issued of
$2,400,000 is offset by a contra to stockholders' equity of $2,400,000 of stock
subscriptions receivable. In the event that any time prior to September 2000,
either Mr. Gordon or Mr. Silberman pays the Company to retire the promissory
notes the Company's stockholders' equity will be increased by the principal and
interest income due from the promissory notes. In the event that either Mr.
Gordon or Mr. Silberman requires the Company to repurchase the shares of common
stock for the cancellation of the promissory notes, there is no effect on the
net stockholders' equity of the Company. Common stock would be reduced by the
same reduction in stock subscriptions receivable.
In connection with the Company's acquisition of Little King, Inc. in
August 1997, 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
14
<PAGE>
shares issued, any funds invested by the Company into Little King and a fair
market value determination. In the event Mr. Sid Wertheim repurchases Little
King from the Company, the transaction would be recorded as treasury stock of
the fair market value of the shares the Company reacquires plus the above
mentioned consideration with a reduction in the net assets relating to Little
King including the elimination of the net balance of excess of cost of net
assets acquired at the time of repurchase. Any difference is recorded as a
change to operations.
In connection with the Company's acquisition of SBK Franchise Systems,
Inc. on December 4, 1997, the Company issued 187,266 shares of its common stock
to Interfoods of America, Inc. ("IFA"). IFA shall have the non-cumulative right
to require the Company, beginning in June 1998 and continuing every six months
thereafter to require the Company to repurchase one-fifth of the common shares
issued to IFA in consideration of the repayment of $100,000. The 187,266 shares
valued at $500,000 was recorded as redeemable common stock and not as equity. In
May 1998, the Company was notified by IFA of its exercise of the right to have
the Company repurchase one-fifth of the shares on July 5, 1998. The repurchase
when consummated will be recorded as a reduction in cash and a reduction in
redeemable common stock.
In August 1998, the Company agreed to issued 500,000 shares of its
common stock to Mr. Bradley L. Gordon, chief operating officer and director of
the Company, 500,000 of its common stock to Mr. Michael Cronin, chief financial
officer of the Company, and 300,000 shares of its common stock to Mr. Richard T.
Silberman, consultant to the Company at a price of $1.375 per share to be paid
in the form of promissory notes with interest at 9.5% with interest and
principal due in August 2001. At any time prior to August 2001, these
individuals may require the Company to repurchase the 1,300,000 shares as
consideration for the cancellation of the notes. The Company anticipates the
agreements to be finalized during the fourth quarter of 1998.
The above transactions have no effect on the net stockholders' equity
of the Company since the value of the common shares issued of $1,787,500 is
offset by a contra to stockholders' equity of $1,787,500 of stock subscriptions
receivable. In the event that any time prior to August 2001, any of these
individuals pays the Company to retire the promissory notes, the Company's
stockholders' equity will be increased by the principal and interest income due
from the promissory notes. In the event that any of the individuals requires the
Company to repurchase the shares of common stock for the cancellation of the
promissory notes, there is no effect on the net stockholders' equity of the
Company. Common stock would be reduced by the same reduction in stock
subscriptions receivable.
Item 3: Description of Property
The Company's corporate offices are located in a 1,500 square foot
leased facility situated in Longwood, Florida. The lease expires on December 31,
2000. The Company also maintains offices and the Pastry Products bakery in a
8,188 square foot facility in Watertown, New York which the Company acquired in
October 1997. Under the terms of the acquisition of the Pastry Products
facility, 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 $123,000.
The Company also leases the space for its 4 Little King corporate
restaurants.
15
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information relating to the beneficial
ownership of the Company's 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 20, 1998. The address of each person is care of the
Company unless noted.
Percentage
Name of Number of of Outstanding
Stockholder Shares Owned (1) Common Stock
Christopher M. Swartz(2)(3)(4) 5,925,000 35.2%
Bradley L. Gordon 1,095,113 6.0%
Michael F. Cronin 500,000 2.8%
Eric T. Swartz -0- --
Kelly A. Swartz -0- --
Jeremiah J. Haley(5) 190,000 1.0%
All executive officers and 7,710,113 0%
directors as a group (6 persons)(2)(3)(4)
(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 from the full conversion of Series B Preferred
Stock into the Company's Common Stock in June 1998.
(3) Includes 3,350,000 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) Includes 2,000,000 shares subject to options currently exercisable by
Mr. Christopher M. Swartz and 225,000 shares subject to options
currently exercisable by Tri-Emp Enterprises, Inc.
(5) Mr. Haley owns 25,000 shares of Common Stock and 165,000 shares of
Common Stock from his conversion of 150,000 shares of the Series A
Preferred Stock into the Company's Common Stock in June 1998.
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 28 Chairman, President and Chief Executive Officer
Bradley L. Gordon 45 Chief Operating Officer and Director
Eric T. Swartz 29 Secretary and Director
Michael F. Cronin 43 Chief Financial Officer
Kelly A. Swartz 27 Director
Jeremiah J. Haley 59 Director
Gary E. Rowe 44 Controller
16
<PAGE>
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 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-operations and vice president-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.
Michael F. Cronin has been Chief Financial Officer of the Company since March
1998. He is a Certified Public Accountant who has managed his own practice since
February 1985 specializing in SEC audits and business and tax planning. He has
been licensed in New York State for 16 years. Mr. Cronin, a graduate of St. John
Fisher College, began his career in public accounting in Rochester, NY in 1979.
From 1979 to 1985 Mr. Cronin was employed as Staff Accountant and Partner in a
regional public accounting firm in upstate New York. Prior to attending college,
Mr. Cronin served for three years in the United States Marine Corps.
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. 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.
17
<PAGE>
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.
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.
18
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
- ----------------------------------------------------------------------------- -----------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
- ----------------------------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Name and Other Annual Awards Payouts All
Principal Position Year Salary Bonus Compensation Other
Restricted Options/ HTIP
Stock(a) SARs(a) Payouts
- --------------------------- ---------- --------- --------- ----------------- ---------- ----------- ---------- --------
1997 115,393 0 0 0 1,000,000 0 0
---------- --------- --------- ------------------ --------- ----------- ---------- --------
Christopher M. Swartz 1996 26,000 0 0 0 0 0 0
President and CEO
---------- --------- --------- ------------------ --------- ----------- ---------- --------
1995 0 0 0 0 0 0 0
- --------------------------- ---------- --------- --------- ------------------ --------- ----------- ---------- --------
1997 52,600 0 0 0
---------- --------- --------- ------------------ --------- ----------- ---------- --------
Gary E. Rowe 1996 46,350 0 0 0 0 0
Controller
---------- --------- --------- ------------------ --------- ----------- ---------- --------
1995 39,000 0 0 0 0 0
- --------------------------- ---------- --------- --------- ------------------ --------- ----------- ---------- --------
Bradley L. Gordon 1997(a) 37,500 0 0 0 0 0 0
Chief Operating
Officer
- --------------------------- ---------- --------- --------- ------------------ --------- ----------- ---------- --------
</TABLE>
(a) For the period October 1, 1997 to December 31, 1997.
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 and Michael Cronin. Other than
a 401(k) plan maintained at the Mountain Mike's division of Admiral's Fleet,
Inc., 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 September 22, 1997, 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 an annual interest of 9.5% 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. In July, 1998 Mr.
19
<PAGE>
Gordon purchased 500,000 shares of the Company's Common Stock for $685,000 which
was paid by a promissory note payable on or before July 30, 2001. The promissory
note bears interest at the rate of 9.5% per annum. Mr. Gordon has the right to
require the Company to repurchase the 500,000 shares as consideration for the
cancellation of the promissory note.
Mr. Michael F. Cronin joined the Company as chief financial officer in
March 1998. Under the terms of his three-year employment agreement commencing
July 31, 1998, Mr. Cronin receives an initial annual compensation of $125,000
subject to annual increases consistent with other executives of the Company. If
the employment agreement is terminated by the Company for other than "good
cause", Mr. Cronin continues to receive his base salary until the earlier of Mr.
Cronin finding new employment or twelve months after such termination date. Mr.
Cronin was also granted a right to purchase 500,000 shares of the Company's
Common Stock at a price of $1.375 per share which shares were issued in July
1998. The purchase price of $685,000 was paid in the form of a promissory note
to the Company which calls for an annual interest of 9.5% with principal and
interest due on July 31, 2001. At any time prior to July 31, 2001, Mr. Cronin
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. On December 29, 1997 the Company granted to Christopher Swartz an
option to purchase of 1,000,000 shares of the Company's Common Stock at $2.75
per share. The options are exercisable immediately and expire on December 29,
2000. On August 3, 1998 the Company granted to Christopher Swartz an option to
purchase of 1,000,000 shares of the Company's Common Stock at $1.55 per share.
The options are exercisable immediately and expire on Augsut 3, 2001. No stock
options have been issued to any other executive officers or directors.
Options Granted in Fiscal 1997 and Through 3rd Quarter 1998
Percentage of
Total Options
Granted to
Options Employees in Exercise Expiration
Granted Fiscal 1997 Price Date
------- ----------- ----- ----
Christopher Swartz 1,000,000 100% $ 2.75 December 29, 2000
Percentage of
Total Options
Granted to
Employees
through
Options September 30, Exercise Expiration
Granted 1998 Price Date
------- ---- ----- ----
Christopher Swartz 1,000,000 100% $ 1.55 August 3, 2001
The following table contains information concerning the exercise of stock
options and employment related options and information in unexercised stock
options held as of September 30, 1998 by the named executive officers:
20
<PAGE>
<TABLE>
<CAPTION>
Option Exercises and Year-end Value Table
Value of Unexercised
Options
Number of Unexercised at
Shares Options & Warrants September 30, 1998
Acquired on Value ------------------- ------------------
Exercise Realized(1) Exercisable NonExercisable Exercisable(2)
-------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Chistopher Swartz -0- -0- 2,000,000 0 -0-
</TABLE>
(1) Market Value at time of exercise less exercise price
(2) The closing sale price of the Common Stock at September 30, 1998 was
$.05625. Value realized equals the difference between market value and
exercise price, and is $0 at September 30, 1998 since the exercise
price for options granted in 1997 and in 1998 was higher than market
value.
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.
Tri-Emp Enterprises, Inc. borrowed $445,000 from 20 investors secured
by 445,000 shares of Jreck Sub Group Inc. Common Stock which were held by
Tri-Emp Enterprises, Inc. Tri-Emp Enterprises, Inc. loaned the $445,000 loan
proceeds to the Company. On October 8, 1997 the Company issued 495,000 shares of
Common Stock to the 20 noteholders in full satisfaction of the amounts owed by
Tri-Emp Enterprises, Inc.
The Company issued options to purchase 375,000 shares of Common Stock
to Gulf Atlantic Publishing Inc. on January 6, 1997, exercisable at $.75 per
share. On November 17, 1997 Gulf Atlantic assigned options to purchase 225,000
of these shares to Tri-Emp Enterprises, Inc. in conjunction with the purchase
from Tri-Emp Enterprises, Inc. of 225,000 shares by Gulf Atlantic.
In fiscal 1997, the Company wrote off a note receivable of $104,141
from Mr. Tom Swartz, a family member of Mr. Christopher Swartz.
In February, 1998 the Company converted $277,404 in notes payable owed
to Sid Wertheim into 112,783 shares of Common Stock.
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 1997. In July 1997, Mr. Haley converted 25,000 shares of Series A
Preferred Stock into 25,000 shares of Company Common Stock. In June 1998, Mr.
Haley converted the balance of 150,000 shares of Series A Preferred Stock into
165,000 shares of the Company's Common Stock. The conversion included 15,000
shares in consideration of accrued but unpaid dividends.
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<PAGE>
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 the Company's Common Stock in
exchange for all of the common stock of Jreck Subs, Inc. on May 6, 1996. Mr.
Swartz also received 350,000 shares of Series B Preferred Stock for 50% of
Pastry Products. 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. In June 1998, Mr. Swartz converted all 350,000 shares of
Series B Preferred Stock into 350,000 shares of the Company's Common Stock.
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 9.5% 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.
In a separate transaction Mr. Gordon purchased 500,000 shares of the Company's
Common Stock for $685,000 which was paid by a promissory note payable on or
before July 30, 2001. The promissory note bears interest at the rate of 9.5% per
annum. Mr. Gordon has the right to require the Company to repurchase the 500,000
shares as consideration for the cancellation of the promissory note.
Mr. Richard Silberman, a shareholder of the Company, purchased 300,000
shares of the Company's Common Stock for $900,000. The Company received a
promissory note from Mr. Silberman with interest at 9.5% per annum with
principal and interest due in September 2000. At any time prior to September
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
a separate transaction Mr. Silberman purchased 300,000 shares of the Company's
Common Stock for $411,000 which was paid by a promissory note payable on or
before July 31, 1998. The promissory note bears interest at the rate of 9.5% per
annum. Mr. Silberman has the right to require the Company to repurchase the
300,000 shares as consideration for the cancellation of the promissory note.
Michael Cronin, the chief financial officer of the Company purchased
500,000 shares of the Company's Common Stock for $685,000 which was paid by a
promissory note payable on or before July 31, 2001. The promissory note bears
interest at the rate of 9.5% per annum. Mr. Cronin has the right to require the
Company to repurchase the 500,000 shares as consideration for the cancellation
of the promissory note.
In connection with the acquisition of Little King, the Company provided
Mr. Sid Wertheim, the principal of Little King, an option to repurchase the
shares of Little King from the Company if the stock price of the Company's
Common Stock 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 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 with
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 which is controlled by Mr. Christopher Swartz,
chairman, president and chief executive officer of the Company. Under this
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<PAGE>
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,
Tri-Emp will obtain an acceptable stock sale for Mr. Sid Wertheim. If Mr. Sid
Wertheim receives an offer for substantially all of his Common Stock of the
Company, 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 that provided
to a third party bona fide purchaser.
In connection with the Company's acquisition of Seawest Subs, 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 $406,000) and the
assumption of certain liabilities personally guaranteed by the former president
of Seawest Subs. 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 the Company's acquisition of SBK on December 4,
1997, the Company issued 187,266 shares of its Common Stock to Interfoods of
America, Inc. ("IFA"). Commencing six months after the closing and continuing
every six months thereafter until June 2000, IFA shall have the non-cumulative
right to require the Company, to the extent legally permissible, to repurchase
one-fifth (1/5) of the Company's Common Stock issued to IFA in consideration of
the repayment of $100,000. In May 1998, the Company was notified by IFA of its
exercise of the right to have the Company repurchase one-fifth of the shares on
July 5, 1998 and the Company purchased those shares for $100,000. In November
1998, the Company was notified by IFA of its exercise of the right to have the
Company repurchase one-fifth of the shares which have not yet been re-purchased.
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 16,678,836
shares were outstanding as of September 1, 1998. Holders of Common Stock are
entitled to one vote for each share on all matters to be voted on by the
stockholders. Holders of Common Stock have no cumulative voting rights. Holders
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 C
Preferred Stock and Series D Preferred Stock. Pursuant to the Colorado Business
Corporations Act, dividends may be paid out of shareholder equity after
deductions for the liquidation preference for outstanding preferred stock. In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share pro rata in 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 1,000,000 shares of the Company's Common Stock issued
to Mr. Bradley Gordon, 600,000 shares of the Company's Common Stock issued to
Mr. Richard Silberman, and 500,000 shares issued to Mr. Michael Cronin.
Information regarding the issuance of capital stock in connection with
the Company's acquisitions is set forth at Item 4, Recent Sales of Unregistered
Securities.
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<PAGE>
Penny Stock Regulations - Restrictions on Marketability
The Securities and Exchange Commission (the "Commission") has adopted
regulations which generally define "penny stock" to be any equity security that
has a market price (as defined) less than $5.00 per share or an exercise price
of less than $5.00 per share, subject to certain exceptions. The Company's
securities may be covered by the penny stock rules, which impose additional
sales practice requirements on broker-dealers who sell such securities to
persons other than established customers and accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse). For transactions covered by the rule, the broker-dealers
must make a special suitability determination for the purchase and receive the
purchaser's written agreement of the transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers to sell the
Company's securities and also may affect the ability of purchasers to sell their
shares in the secondary market.
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
no shares of Series A Voting Nonredeemable Cumulative Convertible Preferred
Stock (the "Series A Preferred Stock") no shares of Series B Voting
Nonredeemable Convertible Preferred Stock (the "Series B Preferred Stock"), 120
shares of Series C Non-voting Nonredeemable Convertible Preferred Stock (the
"Series C Preferred Stock") outstanding and 2,500 shares of Series D Non-voting
Nonredeemable Convertible Preferred Stock (the "Series D Preferred Stock")
outstanding.
The following table summarizes the principal terms of each outstanding
series of Preferred Stock.(1) <TABLE> <CAPTION>
Number of Annual Common Stock
Series Shares Authorized & Dividends Cumulative Liquidation Conversion Voting/Election
Capital Account Per Share Dividends Preference Formula Rights
- ------- --------------- --------- --------- ---------- ---------------- --------------
# Shares Amount
-------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
C 120 120,000 $130.00 Yes Senior To All But 1:133.23 None
"A+B" Preferred
D 2,500 2,500,000 $80.00 Yes Senior Only to $1,000 divided None
Common Stock by 65% of market
value of Common
- ---------------------
</TABLE>
1. Series A Preferred Stock and Series B Preferred Stock
The Company was authorized to issue 700,000 shares of Series A Preferred
Stock, all of which were previously issued and none of which are currently
outstanding after the conversion of 100,000 shares of the Series A
Preferred Stock to Common Stock in July 1997 and 600,000 shares of the
Series A Preferred Stock to Common Stock in June 1998. Series A Preferred
Stock once converted have the status of authorized but unissued shares of
Preferred Stock without designation until such shares are once more
designated as part of a particular series by the Board of Directors
24
<PAGE>
The Company was authorized to issue 350,000 shares of Series B Preferred
Stock, all of which were previously issued and none of which are currently
outstanding. In June 1998, all 350,000 shares of Series B Preferred Stock
were converted to Common Stock. Series B Preferred Stock once converted
have the status of authorized but unissued shares of Preferred Stock
without designation until such shares are once more designated as part of a
particular series by the Board of Directors
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 the Common Stock, but not 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.
Series D Preferred Stock
The Company is authorized to issue 2,500 shares of Series D Preferred
Stock, all of which were issued in January 1998 for $1,000 per share. The
relative rights, preferences and limitations of the Series D Preferred Stock are
as follows:
Voting. The holders of Series D Preferred Stock have no voting rights
on matters for which stockholder may generally vote.
Dividends. The holders of the Series D Preferred Stock are entitled to
a cumulative annual dividend of $80 per share payable out of funds legally
available therefor or in Common Stock.
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<PAGE>
Right to Convert. Each holder of Series D 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 D Preferred Stock into shares of Common Stock at the
lower of (a) 65% of the closing bid price averaged over the 5 trading days
before the date of conversion, or (b) $1.96875. 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 D Conversion Ratio shall be equitably adjusted.
Shares Eligible for Future Sale
Of the outstanding shares of the Company, 9,644,884 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 one
year, 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 170,000 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 two 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.
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.
Quarter Ended
------------- Bid Price
---------
High Low
---- ---
December 31, 1996 3 7/8 1 1/4
March 31, 1997 4 1/8 1 3/4
June 30, 1997 8 1/4 3 1/4
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<PAGE>
September 30, 1997 4 1/8 3
December 31, 1997 3 7/16 2 1/8
March 31, 1998 3 1/8 1 13/16
June 30, 1998 2 11/16 1 3/4
September 30, 1998 1 1/16 9/16
(b) Holders
As of September 1, 1998, there were approximately 8,000 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 in the foreseeable future. Holders of Series C Convertible Preferred Stock
are entitled to annual cash dividends of $130.00 per share. Holders of Series D
Convertible Preferred Stock are entitled to annual cash dividends of $80.00 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 C and Series D Preferred Stock. The Company is under no other
contractual restrictions on the payment of dividends.
Item 2. Legal Proceedings
None.
Item 3. Changes in and Disagreements with Accountants.
On February 28, 1998, Michael F. Cronin resigned as accountant. The
Accountant's Report on the 1995 and 1996 financial statements of the Company
contained an unqualified opinion. There were no disagreements with the former
accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
Item 4. Recent Sales of Unregistered Securities
Commencing August 1995, Circa Media, Inc. issued 2,200,000 shares of
common stock and 200 shares of preferred stock for cash consideration of $3,950
in reliance on Rule 504 of Regulation D.
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
Securities Issued Exchanged
----------------- ---------
5,000,000 8,000,000 shares of
shares of Common Stock Common Stock
700,000 shares of 700,000 shares of Series
Series A Preferred A Preferred
27
<PAGE>
In addition, the Company issued 350,000 shares of Series B Preferred
for 50% of the Common Stock of Pastry Products. The sales were made in reliance
upon the exemption set forth in 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 to seven persons. 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 an 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 in reliance upon Section 4(2) of the Act
issued 45,000 shares to Gerharz Equipment, Inc. for the cancellation of a debt
of approximately $90,533. The Company believes that this transaction was exempt
under Section 4(2) of the Act as a transaction not involving a public offering.
In January 1997, the Company issued 415,095 shares of Common Stock in
an offering under Rule 504 of Regulation D to Corporate Relations Group and
Olympus Capital, Inc. Net proceeds of the offering were $220,000. No underwriter
was involved.
On February 28, 1997 the Company issued 94,650 shares of Common Stock
valued at $3.56 per share to four individuals for marketing services. The
Company believes that this transaction was exempt under Section 4(2) of the Act
as a transaction not involving a public offering.
In February 1997, the Company issued 230,000 shares of Common Stock
valued at $424,003 to two individuals in connection with the purchase of bakery
equipment located in Missouri. The Company believes that this transaction was
exempt under Section 4(2) of the Act as a transaction not involving a public
offering.
In April 1997, the Company issued 39,118 shares of Common Stock valued
at $144,248 to approximately 400 shareholders of Western Fast Food. The shares
were issued without consideration. Western Fast Food had been organized by
Company affiliates to develop the Company's franchise concepts but had been
unsuccessful. The Company believes that this transaction was exempt under
Section 4(2) of the Act as a transaction not involving a public offering.
On May 23, 1997, the Company issued options to purchase 180,000 shares
of Common Stock at $.50 per share to the Deegan Group in connection with
obtaining a $180,000 loan. 60,000 shares of Common Stock were issued upon
partial exercise of this option on November 21, 1997. The Company believes that
this transaction was exempt under Section 4(2) of the Act as a transaction not
involving a public offering.
Between June 19, 1997 and August 5, 1997 the Company issued 289,500
shares of Common Stock, respectively, to approximately 20 individuals in
connection with the acquisition of Hymie's Bagel equipment. The Company believes
that this transaction was exempt under Section 4(2) of the Act as a transaction
not involving a public offering.
28
<PAGE>
On July 8, 1997, Messrs. Jeremiah Haley (a director) Charles Lehman,
Douglas Nichols and Keith Waltz, holders of Series A Preferred Stock, converted
an aggregate of 100,000 shares of Series A Preferred Stock into 100,000 shares
of the Company's Common Stock. The issuance of the Series A Preferred Stock and
the issuance of Common Stock upon conversion were transactions not involving a
public offering.
On July 10, 1997 Corporate Relations Group, exercised its options to
purchase 300,000 shares of Common Stock at $.75 per share. The Company believes
that this transaction was exempt under Section 4(2) of the Act as a transaction
not involving a public offering.
On July 25, 1997 and on August 25, 1997 the Company issued 150,000 and
48,000 shares of Common Stock, respectively, to Corporate Relations Group in an
offering under Rule 504 of Regulation D at a price of $1.00 per share.
On July 30, 1997 the Company issued 55,000 shares of Common Stock to
two individuals for operations consulting valued at $3.8125 per share. On August
7, 1997 the Company issued 1,951 shares of Common Stock to Mark McKinnon, an
employee, valued at $3.6875 per share, and on August 18, 1997 issued 2,759
shares of Common Stock to another employee, Brick Brunton, valued at $3.75 per
share. The Company believes that all of these issuances were exempt under
Section 4(2) of the Act as transactions not involving a public offering.
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.
The Company believes that this transaction was exempt under Section 4(2) of the
Act as a transaction not involving a public offering.
In September 1997, the Company acquired all of the outstanding shares
of Little King by the issuance of 500,000 shares of its Common Stock. The
Company believes that this transaction was exempt under Section 4(2) of the Act
as a transaction not involving a public offering.
On September 17, 1997 the Company issued 75,000 shares of Common Stock
to Olympus Capital, Inc. for financial consulting services valued at $229,286.
The Company believes that this transaction was exempt under Section 4(2) of the
Act as a transaction not involving a public offering.
On October, 1997, the Company issued 495,000 shares of its Common Stock
to twenty individuals for the full satisfaction of debt of $445,000 and interest
of $102,800. The Company believes that all of these issuances were exempt under
Section 4(2) of the Act as transactions not involving a public offering.
On October 8, 1997 the Company acquired all of the outstanding shares
of QFS (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. The
Company believes that this transaction was exempt under Section 4(2) of the Act
as a transaction not involving a public offering.
On October 27, 1997, the Company issued 262,500 shares of its Common
Stock to three persons for the acquisition of the remaining 50% of the capital
stock of Pastry Products not already owned by it. The Company believes that this
transaction was exempt under Section 4(2) of the Act as a transaction not
involving a public offering.
29
<PAGE>
In November 1997, the Company issued 60,000 shares of its Common Stock
to three investors in consideration with obtaining a $250,000 loan. The Company
believes that this transaction was exempt under Section 4(2) of the Act as a
transaction not involving a public offering.
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 9.5% 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. The Company believes that this transaction was exempt
under Section 4(2) of the Act as a transaction not involving a public offering.
On November 6, 1997 the Company issued 61,111 shares of Common Stock to
three persons for cash of $2.25 per share, and issued 25,000 shares of Common
Stock to a fourth individual for $2.00 per share. The Company believes that all
of these issuances were exempt under Section 4(2) of the Act as transactions not
involving a public offering.
On December 4, 1997 the Company issued 187,266 shares of its Common
Stock to Interfoods of America, Inc. to acquire SBK. The Company believes that
this transaction was exempt under Section 4(2) of the Act as a transaction not
involving a public offering.
On January 5, 1998, the Company issued 2500 shares of its Series D
Preferred Stock to several investors for cash consideration of $2,500,000. The
Company believes that this transaction was exempt under Section 4(2) of the Act
as a transaction not involving a public offering.
On December 31, 1997 the Company issued 138,889 shares to Messrs.
Naddaff and Youngman for $250,000 cash and warrants to purchase up to 1,250,000
shares of the Company's Common Stock for consulting and fundraising services
valued at $1,517,500. The Company believes that this transaction was exempt
under Section 4(2) of the Act as a transaction not involving a public offering.
On February 9, 1998 25,000 shares of Common Stock were issued upon
exercise of options at $.01 per share; the options had been issued to in
connection with the acquisition of Seawest Subs. The Company believes that this
transaction was exempt under Section 4(2) of the Act as a transaction not
involving a public offering.
On February 9, 1998 the Company issued 11,550 shares of Common Stock to
its franchising attorney for services of $30,319. The Company believes that this
transaction was exempt under Section 4(2) of the Act as a transaction not
involving a public offering.
On March 16, 1998 the Company issued 9,400 shares of its Common Stock
to one individual for services valued at $22,913 and 50,000 shares to another
individual for services rendered valued at $121,875. The Company believes that
this transaction was exempt under Section 4(2) of the Act as a transaction not
involving a public offering.
On March 26, 1998 the Company issued 150,003 shares to shareholders of
QFS at a price of $2.9375 per share as part of the contingent share issuance
agreed to at the time of acquiring QFS in 1997. On the same day 52,631 shares
were issued to three shareholders of Seawest Corporation in connection with the
acquisition of Seawest Subs. The Company believes that this transaction was
exempt under Section 4(2) of the Act as a transaction not involving a public
offering.
30
<PAGE>
On April 29, 1998, 112,793 shares of Common Stock were issued to the
Wertheim family for satisfaction of $277,404 of Little King debt. The Company
believes that this transaction was exempt under Section 4(2) of the Act as a
transaction not involving a public offering.
On May 18, 1998, 735,294 shares of Common Stock were issued to
approximately 30 persons in connection with the acquisition of Li'l Dino
Corporation. The transaction was approved at a state fairness hearing in March
1998 and was exempt from registration under section 3(a)(10) of the Securities
Act of 1933.
On May 27, 1998 the Company issued 115,000 shares of Common Stock to
one individual for consulting services valued at $251,563. The Company believes
that this transaction was exempt under Section 4(2) of the Act as a transaction
not involving a public offering.
On August 3, 1998 the Company issued 500,000 shares to each of Bradley
L. Gordon and Michael Cronin, and 300,000 shares to Richard Silberman for
consideration of $1.3125 per share (the closing sales price of the Common Stock
on that date) paid in the form of promissory notes with interest at 9.5% with
interest and principal due on July 31, 2001. At any time prior to July 31, 2001,
these individuals may require the Company to repurchase the their respective
shares as consideration for the cancellation of the notes.
Since January, 1997, the Company has issued options and warrants as
follows:
<TABLE>
<CAPTION>
Date Name Number Exercise Price Purpose
---- ---- ------ -------------- -------
<S> <C> <C> <C> <C>
Jan. 6, 1997 Gulf Atlantic Publishing 375,000 $.75 Printing Services
Apr. 2, 1997 Corporate Relations Group 150,000 .75 Advertising and
Marketing Services
Sept. 15, 1997 Corporate Relations Group 100,000 2.81 Services
Sept. 15, 1997 Corporate Relations Group 100,000 3.37 Services
Sept. 15, 1997 Corporate Relations Group 100,000 3.93 Services
Sept. 12, 1997 Olympus Capital, Inc. 100,000 2.75 Investment Banking
Services
Sept. 12, 1997 Olympus Capital, Inc. 100,000 3.50 Services
Dec. 17, 1997 Naddoff & Youngman 375,000 1.92 Consulting Services
Dec. 17, 1997 Naddoff & Youngman 375,000 2.56 Services
Dec. 17, 1997 Naddoff & Youngman 375,000 3.20 Services
Dec. 17, 1997 Naddoff & Youngman 125,000 3.84 Services
Dec. 27, 1997 Christopher Swartz 1,000,000 2.75 Employee
Compensation
May 23, 1997 Richard Rudolf 60,000 .50 Compensation related
to loan
May 23, 1997 Thomas Larcomb 60,000 .50 Compensation related
to loan
May 23, 1997 William Deegan 60,000 .50 Compensation related
to loan
June 30, 1997 M. Day 100,000 .01 Acquisition of
Seawest Sub
Sept. 30, 1997 Spelman & Co. 18,704 3.08 Acquisition of QFS
Sept. 30, 1997 AB Laffer, VA Canto & Assoc. 13,500 3.08 Acquisition of QFS
31
<PAGE>
Oct. 27, 1997 R. Longley & P. Traux 37,500 * Acquisition of Pastry
Products
September 30, 1998 Wall Street Consultants 100,000 1.00 Consulting Services
August 3, 1998 Christopher Swartz 1,000,000 1.55 Employee
Compensation
</TABLE>
* 50% of mean of bid and ask on date of exercise.
Except for sales noted as made under Rule 504 of Regulation D and
Section 3(a)(10) of the Securities Act of 1933, the above sales were made in
reliance upon Section 4(2) of the Securities Act of 1933. As a condition to each
of the sales, in reliance on Section 4(2), the Company satisfied itself that
each issuance complied with Section 4(2). In this respect, there were no general
solicitations or advertisements. In some cases the Company relied on personal
knowledge of the purchaser and in other cases, the Company would receive
representations as to investment intent to not acquire the shares with a view to
further distribution. In all cases, the Company considered the sophistication of
the purchaser and the purchaser's understanding of the Company and the risk
inherent in the acquisition of the securities. The Company's officers and
directors provided information to the purchaser regarding the investment in the
Company and made the responded to inquiries. All securities issued pursuant to
available exemptions were legended.
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 December 31,
1997; Consolidated Statement of Operations for the Year Ended December
31, 1997; Consolidated Statement of Cash Flows for the Year Ended
December 31, 1997; Consolidated Statement of Changes in Stockholders'
Equity; Notes to Consolidated Financial Statements.
32
<PAGE>
JRECK Subs Group, Inc.
Independent Auditors' Report Consolidated Balance Sheets at December
31, 1996 and 1995; Consolidated Statements of Operations for the Years
Ended December 31, 1996 and 1995; Consolidated Statements of Cash Flows
for the Years Ended December 31, 1996 and 1995; Consolidated Statements
of Changes in Stockholders' Equity; Notes to Consolidated Financial
Statements.
JRECK Subs Group, Inc.
Independent Auditors' Report Consolidated Balance Sheet at September
30, 1998; Consolidated Statements of Operations for the Nine Month
Periods ending September 30, 1998 and 1997; Consolidated Statements of
Cash Flows for the Nine Month Periods ending September 30, 1998 and
1997;
Pastry Products Producers, LLC
Balance Sheet at December 31, 1996; Statements of Operations and
Stockholders' Equity for the Year Ended December 31, 1996; Statement of
Cash Flows for the Year Ended December 31, 1996; Notes to Financial
Statements.
Seawest Sub Shops, Inc.
Independent Auditors' Report:
Balance Sheet at December 31, 1996; Statement of Operations for the
Year Ended December 31, 1996; 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.
33
<PAGE>
PART III
The following exhibits required by Item 601 of Regulation S-B are filed
herewith:
Exhibit Document Description
No.
2. Plan of purchase, sale, reorganization, arrangement, liquidation or
succession.
2.1 Repurchase Agreement between Paul M. Traux and Robin Longley and Jreck
Subs, Inc., a New York corporation and Jreck Subs Group, Inc., a
Colorado corporation dated October. 28, 1997 (Pastry Products)
2.2 Agreement and Plan of Reorganization and Merger among 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")
57
<PAGE>
Exhibit Document Description
No.
2.5 Agreement and Plan of Reorganization among JRECK Subs Group, Inc., Li'l
Dino Management Corporation and Li'l Dino Corporation dated December
18, 1977
2.6 Purchase Agreement among JRECK Subs Group, Inc., Interfoods of America,
Inc. and SBK Franchise Systems, Inc. dated December 4, 1977 (Sobiks)
2.7 Agreement between Jreck Subs Group, Inc. and Little King, Inc. dated
July 23, 1997
2.8 Agreement among Jreck Subs, Inc. and Mitchell R. Day and Julie A. Day
to Purchase Seawest Sub Shops, Inc. 2.9 Stock Option Grants to acquire
Seawest Sub Shops, Inc. 2.10 Representation and Warranty Agreement
among Mitchell R. Day and Julie A. Day, and Admiral Subs of Washington
Inc. dated May 19, 1997. 2.11 Purchase and Sale Agreement between
Admiral's Fleet Inc., Jreck Subs Group, Inc. and RICHEY ENTERPRISES,
INC.
3. Articles of Incorporation and Bylaws
3.1. Articles of Incorporation - Circa Media
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.
3.5 Articles of Amendment to Articles of Incorporation Re Certificate of
Description of Jreck Subs Group, Inc. dated September 23, 1997 (Series
C)
3.6 Articles of Amendment File to Determine Rights of Shares (Certificate
of Determination) of JRECK Subs Group, Inc. dated January 5, 1998
(Series D)
3.7 Bylaws of Jreck Subs Group dated August 21,1995.
10. Material Contracts
10.1 Form of Franchise Agreement
10.2 Facility Lease between Springs Equity, Ltd and JRECK SUBS GROUP, INC.
dated December 16, 1997
10.3 Quality Franchise Systems, Inc.: Area Development Agreement
Quality Franchise Systems, Inc.
a) MKJ Holdings, Inc.
b) Master Franchising and Development Systems, Inc.
c) John E. and Ann M. Maddox - To be filed separately
d) David and Terri Laursen - To be filed separately
e) Alex Golshanara
10.4 Promissory Note from Bradley L. Gordon to Jreck Subs Group, Inc. dated
September 24, 1997.
10.5 Promissory Note from Richard T. Silberman to Jreck Subs Group, Inc.
dated September 24, 1997.
10.6 Promissory Note from Michael Cronin to Jreck Subs Group, Inc. dated
July 31, 1998.
10.7 Promissory Note from Richard T. Silberman to Jreck Subs Group, Inc.
dated July 31, 1998.
58
<PAGE>
Exhibit Document Description
No.
10.8 Promissory Note from Bradley L. Gordon to Jreck Subs Group, Inc. dated
July 31, 1998.
10.9 Employment Agreement between Bradley L. Gordon and Jreck Subs Group,
Inc. effective September 24, 1997
10.10 Employment Agreement between Michael Cronin and Jreck Subs Group, Inc.
effective July 31, 1998
10.11 Stock Option Grant Agreement between Jreck Subs Group, Inc. and
Christopher Swartz dated August 3, 1998
10.12 Stock Option Grant Agreement between Jreck Subs Group, Inc. and
Christopher Swartz dated December 29, 1997
10.13 1998 Jreck Subs Group, Inc.
16. Letter of change of certifying accountant
16.1 Item 304(a)(3)
21. Subsidiaries of the Registrant
27. Financial Data Schedule
27.1 September 30, 1998 Interim
59
<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: JRECK SUBS GROUP, INC.
By: /s/ Christopher M. Swartz
-------------------------------------
President and Chief Executive Officer
60
<PAGE>
JRECK Subs Group, Inc.
Contents
- --------------------------------------------------------------------------------
Page
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated balance sheet F-3 - F-4
Consolidated statement of operations F-5
Consolidated statement of stockholders' equity F-6
Consolidated statement of cash flows F-7
Summary of accounting policies F-8 - F-12
Notes to consolidated financial statements F-13 - F-39
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors:
JRECK Subs Group, Inc.
Longwood, Florida
We have audited the accompanying consolidated balance sheet of JRECK
Subs Group, Inc. as of December 31, 1997 and the related consolidated statements
of operations, stockholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also included
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of JRECK Subs
Group, Inc. at December 31, 1997, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Orlando, Florida
May 8, 1998, except for Note 12 (d),
which is as of June 30, 1998
F-2
<PAGE>
JRECK Subs Group, Inc.
Consolidated Balance Sheet
- ------------------------------------- ------------------------------------------
December 31, 1997
Assets
Current:
Cash and cash equivalents $ 427,420
Accounts receivable - trade, net of allowance
for doubtful accounts of $199,228 (Note 7) 391,567
Current portion of notes receivable 168,560
Prepaid expenses (Note 2) 730,811
- --------------------------------------------------------------------------------
Total current assets 1,718,358
- --------------------------------------------------------------------------------
Notes receivable 173,704
Property, plant and equipment, net (notes 3 and 7) 1,930,990
Goodwill, net of accumulated amortization
of $1,190,184 (Note 4) 11,521,526
Other assets:
Covenants note to compete, net of accumulated
amortization of $89,223 (Note 4) 512,777
Prepaid interest, net (Note 9) 597,760
Other 34,097
- --------------------------------------------------------------------------------
Total assets $16,489,212
================================================================================
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
JRECK Subs Group, Inc.
Consolidated Balance Sheet
- ------------------------------------- ------------------------------------------------
December 31, 1997
Liabilities and Stockholders' Equity
Current liabilities:
<S> <C>
Current portion of long-term debt (Note 7) $2,163,554
Current portion of notes payable to related parties (Note 6) 434,785
Accounts payable 1,020,101
Accrued liabilities (Note 5) 1,196,130
Liability to issue common stock (Note 4) 2,234,375
- --------------------------------------------------------------------------------------
Total current liabilities 7,048,945
- --------------------------------------------------------------------------------------
Long-term debt, less current portion (Note 7) 1,619,115
Notes payable to related parties, less current portion(Note 6) 323,032
- --------------------------------------------------------------------------------------
Total liabilities 8,991,092
- --------------------------------------------------------------------------------------
Redeemable common stock (Note 4) 500,000
- --------------------------------------------------------------------------------------
Commitments and contingencies (Note 8)
Stockholders' equity (Notes 4, 9 and 13):
Series A Convertible Preferred Stock, $2 par value, 1,200,000
700,000 shares authorized,600,000 issued and outstanding,
Series B Convertible Preferred Stock, $2 par value, 700,000
350,000 shares authorized, issued and outstanding,
Series C Convertible Preferred Stock, no par value, 120,000
120 shares authorized, issued and outstanding
Series D Convertible Preferred Stock, 2,500 shares authorized,
none issued and outstanding -
Common Stock, no par value, shares authorized 17,729,478
50,000,000; 14,365,600 issued and outstanding,
Accumulated deficit (10,351,358)
Less: Stock subscription receivable (2,400,000)
- --------------------------------------------------------------------------------------
Total stockholders equity 6,998,120.
- --------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $16,489,212.
- --------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-4
<PAGE>
JRECK Subs Group, Inc.
Consolidated Statement of Operations
- ------------------------------------- ------------------------------------------
Year Ended December 31, 1997
- -------------------------------------------------------------------------------
Revenues:
Retail sales: $1,310,205
Franchise revenues: 1,265,254
- -------------------------------------------------------------------------------
2,575,459
- -------------------------------------------------------------------------------
Operating costs and expenses:
Cost of sales: 552,940;
Operating expenses: 3,758,657
Consulting and investor relations: 4,492,664;
Goodwill writedown (Note 4): 993,820,
- -------------------------------------------------------------------------------
9,798,081
- -------------------------------------------------------------------------------
Operating loss (7,222,622)
- -------------------------------------------------------------------------------
Other income (expense):
Interest, net: (484,769);
Other: 55,733
- -------------------------------------------------------------------------------
Loss before income taxes and extraordinary item: (7,651,658)
Income tax expense (Note 10): (389,957)
- -------------------------------------------------------------------------------
Loss before extraordinary item: (8,041,615)
Extraordinary loss - early extinguishment of debt (Note 13): (862,029)
Net loss: (8,041,615)
Preferred Stock dividends: (57,506)
- -------------------------------------------------------------------------------
Net loss applicable to common stock: $(8,961,150)
- -------------------------------------------------------------------------------
Weighted average number of common shares outstanding: 10,807,267
- -------------------------------------------------------------------------------
Net loss per common share - basic and diluted:
Loss before extraordinary item: $ (.74)
Extraordinary item: (.08)
- -------------------------------------------------------------------------------
Net loss per common share: (.82)
- -------------------------------------------------------------------------------
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
JRECK Subs Group, Inc.
Consolidated Statement of Stockholders' Equity
- ---------------------------------------- -----------------------------------------------------------------------
Common Preferred Class A Preferred Class B Preferred Class C
Shares Amount Shares Amount Shares Amount Shares Amount
- ----------------------- ----------- ------------ ---------- ----------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1997 8,781,000 $ 700,000 $ 350,00 $ 700,000 - $
- 1,400,000 -
Conversion of
preferred Class
A to common
stock 100,000 200,000 (100,000) (200,000) - - - -
Common stock issued
for acquisitions 2,045,761 6,531,339 - - - - 120 120,000
Options issued in
connection with
acquisitions - 508,000 - - - - - -
Stock issued
for equipment 230,000 424,003 - - - - - -
Conversion of
debt to equity 445,000 1,307,029 - - - - - -
Stock issued for
payment of interest 50,000 146,857 - - - - - -
Other stock sales 1,077,213 1,055,500 - - - - - -
Stock sold for
subscription
notes receivable 800,000 2,400,000 - - - - - -
Stock issued for
services 229,360 805,048 - - - - - -
Exercise of options 360,000 255,000 - - - - - -
Issuance of options
and warrants for
services - 3,301,302 - - - - - -
Stock and options
issued in connection
with debt 60,000 795,400 - - - - - -
Preferred stock
dividend - - - - - - - -
Net loss - - - - - - - -
- ----------------------- ----------- ------------ ---------- ----------- -------- ----------- -------- ----------
Balance,
December 31, 1997 14,178,334 $17,729,478 600,000 $1,200,000 350,000 $ 700,000 120 $ 120,000
- --------------------------------------------- ----------- ------------ ---------- ----------- -------- ---------
Subscrip-
tion Accumulated Total
Notes Deficit Equity
------------ ------------- -----------
<S> <C> <C> <C>
Balance,
January 1, 1997 $ $ $ 709,792
- (1,390,208)
Conversion of
preferred Class
A to common
stock - - -
Common stock issued
for acquisitions - - 6,651,339
Options issued in
connection with
acquisitions - - 508,000
Stock issued
for equipment - - 424,003
Conversion of
debt to equity - - 1,307,029
Stock issued for
payment of interest - - 146,857
Other stock sales - - 1,055,500
Stock sold for
subscription
notes receivable (2,400,000) - -
Stock issued for
services - - 805,048
Exercise of options - - 255,000
Issuance of options
and warrants for
services - - 3,301,302
Stock and options
issued in connection
with debt - - 795,400
Preferred stock
dividend - (57,506) (57,506)
Net loss - (8,903,644) (8,903,644)
- ----------------------- ------------ ------------- -----------
Balance,
December 31, 1997 $(2,400,000)$(10,351,358) $ 6,998,120
----------- ------------ -----------
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
JRECK Subs Group, Inc.
Consolidated Statement of Cash Flows
- ------------------------------------- ------------------------------------------------------------------------------------------
Year ended December 31, 1997
- ----------------------------------------------------------------------------------------------- -------------------------
Cash flows from operating activities:
<S> <C>
Net loss: $(8,903,644)
Adjustments to reconcile net loss to net cash used:
Amortization and depreciation: 506,742
Writedown and goodwill: 993,820
Bad debts: 166,831
Gain on disposal of equipment: (2,365)
Stock issued for interest expense: 146,857
Stock and stock options issued as consideration for consulting and investor relations 4,038,249
expense:
Extraordinary loss resulting from issuance of stock on retirement of debt: 862,029:
Charge off of offering costs and deferred loan costs 67,267
Other: (36,595)
Changes in assets and liabilities, net of assets and liabilities acquired:
Increase in accounts receivable: (48,274)
Increase in prepaid expenses: (21,774)
Decrease in deferred tax asset: 387,846
Increase in accounts payable: 366,879
Increase in accrued liabilities: 204,494
- ----------------------------------------------------------------------------------------------- -------------------------
Net cash used in operating activities: (1,273,638)
- ----------------------------------------------------------------------------------------------- -------------------------
Cash flows from investing activities:
Purchase of property and equipment: (49,726)
Net cash paid in connection with acquisitions: (408,417)
Note receivable considered worthless: 104,141
Advances made on notes receivable: (246,497)
Payments from notes receivable: 86,982
- ----------------------------------------------------------------------------------------------- -------------------------
Net cash used in investing activities: (513,517)
- ----------------------------------------------------------------------------------------------- -------------------------
Cash flows from financing activities:
Proceeds from the sale of common stock: 1,055,500
Proceeds from exercise of stock options: 255,000
Proceeds from long-term debt: 840,758
Payments on long-term debt: (652,096)
Proceeds from related party notes payable: 792,748
Payments on related party notes payable: (124,703)
- ----------------------------------------------------------------------------------------------- -------------------------
Net cash provided by financing activities: 2,167,207
- ----------------------------------------------------------------------------------------------- -------------------------
Net increase in cash and cash equivalents: 380,052
- ----------------------------------------------------------------------------------------------- -------------------------
Cash and cash equivalents, beginning of year: 47,368
- ----------------------------------------------------------------------------------------------- -------------------------
Cash and cash equivalents, end of year: $ 427,420
=============================================================================================== =========================
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-7
<PAGE>
JRECK Subs Group, Inc.
Summary of Accounting Policies
- ------------------------------------- ------------------------------------------
Principles of The consolidated financial statements include the
Consolidation accounts of JRECK Subs Group, Inc. and its
wholly-owned subsidiaries ("the Company"). All
significant intercompany accounts and transactions
have been eliminated in consolidation.
Use of Estimates The preparation of financial statement in conformity
with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statement
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from the estimates.
Cash and Cash For financial presentation purposes, the Company
Equivalents considers those short-term highly liquid investments
with original maturities of three months or less to
be cash and cash equivalents.
Property Property and equipment are stated at cost.
and Equipment Depreciation expense is provided using the straight-
line method for financial statement purposes and
accelerated methods for federal income tax purposes
over the estimated useful lives of the various
assets, generally 5 to 40 years.
Intangible Assets Goodwill
Goodwill represents the excess of cost over the fair
value of net assets acquired and is being amortized
on a straight-line method over 20 years. The
realizability of goodwill is evaluated periodically
for impairment events or if changes in circumstances
indicate a possible inability to recover the carrying
amount. When any such impairment exists, the related
assets are written down to fair value.
Covenants Not to Compete
Covenants not to compete are amortized straight-line
over the estimated useful lives, ranging from three
to six years.
F-8
<PAGE>
JRECK Subs Group, Inc.
Summary of Accounting Policies
- ------------------------------------- ------------------------------------------
Revenue Recognition Continuing franchise fee revenue is
recognized as earned. Franchise fee revenue from an
individual franchise sale is recognized when all
material services or conditions relating to the sale
have been substantially performed. Revenues from
company-owned stores are recognized when received.
Stock-Based Stock-based compensation is accounted for by using
Compensation the intrinsic value based method in accordance with
Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB
25"). The company has adopted Statements of Financial
Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123") which
allows companies to either continue to account for
stock-based compensation to employees, or to adopt a
fair value based method of accounting. The Company
has continued with its current method of accounting
in accordance with APB 25 for employees, but has made
the required pro forma disclosures in accordance with
SFAS No. 123.
Fair Value of Financial Statement of Financial Accounting Standards No. 107,
Instruments "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value
information about financial instruments. Fair value
estimates discussed herein are based upon certain
market assumptions and pertinent information
available to management as of December 31, 1997.
The respective carrying value of certain
on-balance-sheet financial instruments approximated
their fair values. These financial instruments
include cash and equivalents, trade receivables,
accounts payable and accrued expenses. Fair values
were assumed to approximated carrying values for
these financial instruments since they are short term
in nature and their carrying amounts approximate fair
values or they are receivable or payable on demand.
The fair value of the Company's notes payable is
estimated based upon the quoted market prices for the
same or similar issues or on the current rates
offered to the Company for debt of the same remaining
maturities. The carrying value approximates the fair
value of the notes payable.
F-9
<PAGE>
JRECK Subs Group, Inc.
Summary of Accounting Policies
- ------------------------------------- ------------------------------------------
Net Loss Per Effective December 31, 1997, the company has adopted
Common Share the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No.
128"). SFAS No. 128 replaces the previously reported
primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share exclude
any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share
are computed similarly to fully diluted earnings per
share. The Company's calculation for basic and fully
diluted earnings per share is the same as the Company
has a loss, and the impact of potential common shares
is antidilutive. Potential common shares include
1,996,000 stock options, 1,250,000 warrants and
965,986 shares underlying the convertible preferred
stock. All loss per share amounts for all periods
presented have been restated to conform to the
requirements of SFAS No. 128.
Income Taxes The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," which requires
recognition of estimated income taxes payable or
refundable on income tax returns for the current year
and for the estimated future tax effect attributable
to temporary difference and carryforwards.
Measurement of deferred income tax is based on
enacted income tax assets being reduced by available
tax benefits not expected to be realized.
Impairment of The Company adopted Statement of Financial Accounting
Long-Lived Assets Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," (SFAS No. 121") during 1997. SFAS No.
121 requires impairment losses to be recorded on
long-lived assets used in operations and goodwill
when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying
amount.
F-10
<PAGE>
JRECK Subs Group, Inc.
Summary of Accounting Policies
- ------------------------------------- ------------------------------------------
Recent Accounting In June 1997, the Financial Accounting Standards
Pronouncements Board issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), and No. 131, "Disclosure about
Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS 130 establishes standards for
reporting and displaying comprehensive income, its
components and accumulated balances. SFAS 131
establishes standards for the way that public
companies report information about operating segments
in annual financial statements and requires reporting
of selected information about operating segments in
interim financial statements issued to the public.
Both SFAS 130 and SFAS 131 are effective for periods
beginning after December 15, 1997. The Company has
not determined the impact that the adoption of these
new accounting standards will have on its future
financial statements and disclosures.
In June 1998, the Financial Accounting Standards
Board issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133").
SFAS 133 requires companies to recognize all
derivatives contracts as either assets or liabilities
in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative
may be specifically designated as a hedge, the
objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable
to the hedged risk or (ii) the earnings effect of the
hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the fair or loss
is recognized in income in the period of change. SFAS
133 is effective for all fiscal quarters or fiscal
years beginning after June 15, 1999.
Historically, the Company has not entered into
derivatives contracts to hedge existing risks or for
speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1,
2000 to affect its financial statements.
F-11
<PAGE>
JRECK Subs Group, Inc.
Summary of Accounting Policies
- ------------------------------------- ------------------------------------------
Risk and The primary uncertainty which the Company faces
Uncertainties is its ability to locate knowledgeable franchises
who also have the financial resources to successfully
operate the stores. In addition, the Company needs to
be able to identify appropriate locations for its new
franchised stores. The company believes that it has
taken the steps necessary to minimize these risks.
F-12
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
1. Nature of Organization JRECK Subs Group, Inc., f/k/a/ Circa Media, Inc.,
(the "Company") was organized on July 19, 1995. On
May 7, 1996, the company acquired 100% of JRECK
Subs, Inc., a multi-concept franchisor of sandwich
shops in the state of New York. For financial
reporting purposes, the acquisition was accounted
for as a reverse merger, whereby JRECK Subs, Inc.
was deemed to be the acquiring entity. During 1997,
the Company acquired various other franchisor
companies located in various geographic locations
throughout the United States (see Note 4). The
company's headquarters are located in Longwood,
Florida. The various franchise agreements are for
terms ranging from 10 to 15 years and contain
various renewal options.
Currently, the company serves as the franchisor to
approximately 288 stores operating under various
trade names. Franchise arrangements include a
license to operate under the applicable trade name
and generally provide for the receipt of initial
fees, as well as continuing service fees and
royalties based upon a percentage of sales. In
addition, the Company offers guidance and assistance
to the franchisees in areas such as product
preparation, equipment purchasing, marketing,
administrative support and employee training. In
addition, the company owns and operates
approximately 11 of the franchised stores.
2. Prepaid Expenses Prepaid expenses are comprised of
the following at December 31, 1997:
-----------------------------------------------
Prepaid consulting fee: $ 618,056
Other: 112,755
-----------------------------------------------
$ 730,811
-----------------------------------------------
F-13
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
3. Property and
Equipment
Property and
equipment are
summarized as
follows 1997
-----------------------------------------------
Land and building: $ 370,000
Machinery and equipment: 1,707,064
Office and computer equipment: 64,744
Vehicles: 82,135
Leasehold improvements: 41,457
-----------------------------------------------
2,265,400
Less accumulated depreciation: (334,410)
-----------------------------------------------
Net property and equipment: $1,930,990
-----------------------------------------------
4. Acquisitions During the year, the Company acquired seven entities
through the purchase of assets or stock. The
acquisition have been accounted for using the
purchase method of accounting, and the results of the
acquired businesses have been included in the
consolidated financial statements since the date of
acquisition. The excess of the purchase price over
the fair values of the net assets acquired was
$13,061,710 and has been recorded as goodwill, which
is being amortized on a straight-line basis over 20
years based on the expected future undiscounted
operating cash flows of the related businesses
acquired.
Chai Enterprises, Inc
On June 19, 1997, the company, through its
wholly-owned subsidiary, Leovera, Inc., acquired
all of the bakery equipment of Chai Enterprises,
Inc. ("Chai"). Chai is the franchisor of the
Hymie's bagel restaurant chain located in Tampa,
Florida. The purchase price of the Chai assets
consisted of 289,500 shares of the Company's Common
Stock, valued at $4.598 per share ($1,331,156) and
$200,000 cash.
The transaction was recorded as follows:
F-14
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
----------------------------------------------------
Total consideration paid $1,531,156
Less, fair value of assets acquired (537,336)
----------------------------------------------------
Excess cost of net assets acquired $ 993,830
----------------------------------------------------
Seawest Sub Shops, Inc.
On June 30, 1997, the Company acquired all of the
outstanding shares of Seawest Sub Shops, Inc.
("Seawest"). Seawest is the franchisor of sandwich
restaurants in Seattle, Washington. The purchase
price of Seawest was $150,000 cash. In addition, the
Company entered into a noncompete agreement with the
former shareholder valued at $502,000. Consideration
for the agreement consisted of a $96,000 note payable
and stock options valued at $4.06 per share
($406,000).
The transaction was recorded as follows:
-----------------------------------------------------
-----------------------------------------------------
Total consideration paid $ 150,000
Less, fair value of assets acquired (231,281)
Liabilities assumed 976,106
----------------------------------------------------
Excess cost of net assets acquired $ 894,825
----------------------------------------------------
As noted above, options were granted to purchase up
to 100,000 shares of Company Common Stock to the
prior owners of Seawest. These options are
exercisable at $.001 per share during an 18-month
period between December 1997 and May 1999. Upon
requests of the prior owner of Seawest, the Company
is obligated to repurchase any exercised shares at
the greater of fair market value of $3.25 per share
over a mutually agreeable period of time which has
not been determined. Subsequent to year end, 25,000
options were exercised.
F-15
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
Richey Enterprises, Inc.
On August 15, 1997, the Company acquired all of the
outstanding common stock of Richey Enterprises, Inc.
("Richey"). Richey was the franchisor of the
Georgio's sandwich restaurants located in Seattle
Washington. The purchase price of Richey consisted of
93,794 shares of the Company's Common Stock, valued
at $3.625 per share.
The transaction was recorded as follows:
-----------------------------------------------------
Common stock issued in connection with
acquisition $ 340,000
Less, fair value of assets acquired: (95,174)
Liabilities assumed: 143,057
----------------------------------------------------
Excess cost of net assets acquired: $ 387,883
----------------------------------------------------
The Company is obligated to reimburse the prior
owners of Richey if the fair market value of the
Company's Common Stock falls below 80% of its value
on the original closing date. This contingency takes
effect only if the prior owners of Richey transfer
their shares to a third party during the first 30
days following the anniversary date of the closing.
F-16
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
Little King, Inc.
On August 31, 1997, the Company purchased the
outstanding share of Little King, Inc., a franchisor
of sandwich restaurants in Omaha, Nebraska. In
addition to the purchase of the Little King shares,
the Company purchased certain assets and assumed
certain liabilities from a separate entity related by
common ownership to the previous Little King Owners.
These assets and liabilities represent company-owned
stores. In addition, the Company entered into a
noncompete agreement with the former shareholder
valued at $100,000.
The purchase price of Little King and the
company-owned stores was $3,825,000 as follows:
----------------------------------------
500,000 shares of Company Common Stock 1,531,250
700,000 shares of Company Common Stock
(to be issued within 12 months) 2,143,750
Cash paid 50,000
Note payable 100,000
-----------------------------------------------------
Total acquisition price $3,825,000
-----------------------------------------------------
The 1,200,000 shares of Company Common Stock were
valued at $3.0625 per share.
The transaction was recorded as follows:
-----------------------------------------------------
Total consideration paid $3,825,000
Less, fair value of assets acquired (475,470)
Liabilities assumed 1,230,675
-----------------------------------------------------
Excess cost of net assets acquired $4,580,205
-----------------------------------------------------
Total consideration paid is subject to periodic
adjustment based
F-17
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
on the difference between the market value of the
700,000 shares of the Company's stock at date of
acquisition until such time as the shares are issued.
At December 31, 1997, goodwill and the liability to
issue common stock decreased by $350,000 due to a
decline in market value of the Company's stock. The
obligation to issue the additional 700,000 shares is
included in the "Liability to issue common stock" on
the accompanying consolidated balance sheet.
In addition to the consideration shown above, the
Company is contingently liable to the previous owners
of Little King for up to 100,000 shares of Company
Common Stock. The issuance of these shares is
contingent upon Little King achieving $900,000 in
continuing franchise fees or selling $400,000 of
initial franchise fees during 1998. No provision has
been provided for this contingency in the
accompanying consolidated financial statements.
In addition, the Company must provided the prior
owners of Little King the opportunity to repurchase
Little King, based on a fair market value, as
defined, if the quoted closing market price of
Company Common Stock is less than $1.50 per share on
the second anniversary of the closing of the
acquisition.
F-18
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
Quality Franchise Systems, Inc.
On September 30, 1997, the Company purchased all of
the outstanding shares of Quality Franchise Systems,
Inc. ("QFS"). QFS is the franchisor of Mountain
Mike's Pizza restaurants located in Northern
California through a newly created wholly-owned
subsidiary.
The purchase price of QFS is summarized as follows:
----------------------------------------------------
Company Common Stock $2,643,653
Liability to issue common stock 440,625
Company Series "C" Preferred Stock,
120 shares 120,000
Options for 32,204 shares of Company
Common Stock 23,000
----------------------------------------------------
Total acquisition price $3,227,278
----------------------------------------------------
The Company's Common Stock was valued at $2.9375 per
share. The Series "C" Preferred Stock is valued at
its par value of $1,000 per share. The value of the
stock options were computed using the market value at
the date of grant.
The transaction was recorded as follows:
----------------------------------------------------
Total consideration paid $3,227,278
Less, fair value of assets acquired (325,406)
Liabilities assumed 1,047,261
----------------------------------------------------
Excess cost of net assets acquired $3,949,133
----------------------------------------------------
The Company is contingently liable to the previous
owners of QFS for up to 650,000 shares of Company
Common Stock as a result of the following
arrangements:
F-19
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
(1) A payment of up to an additional 500,000 shares
based on the 1998 earnings of the Mountain
Mike's division, as defined. Since this
contingency is based on an uncertain future
event, no purchase price adjustment was made in
the accompanying financial statements.
(2) The contingency for the remaining 150,000
shares was based on the market price
performance of the Company's Common Stock for
the period of October 1, 1997 through January
31, 1998. Since the Company's stock did not
meet the required price levels, a purchase
price adjustment of $440,625 was made based on
the fair market value of the Company's stock at
the date of acquisition. In March 1998, the
Company issued these shares in satisfaction of
the obligation of this obligation.
Pastry Product Producers, LLC
On October 28, 1997, the Company acquired the
remaining 50% interest of Pastry Product Producers,
LLC ("Pastry"). Pastry is a bakery operation which
primarily serves the JRECK restaurant franchisees. In
1996, the Company purchased a 50% investment in
Pastry and accounted for it under the equity method.
The balance sheet of Pastry as of December 31, 1997
and its results of operation for the period between
the acquisition date of the remaining 50% ownership
and year end has been consolidated in the
accompanying financial statements. The Company's
share of operations prior to the acquisition have
been treated as a loss on equity investment and
classified as such in the statement of operations.
F-20
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
The carrying value of the original 50% of Pastry was
$743,984, consisting of 350,000 shares of $2 par
Series "B" preferred stock, plus $43,984 in
subsidiary equity earnings.
The purchase price of the remaining 50% of Pastry is
comprised of the following:
-----------------------------------------------------
Company Common Stock, 262,5000 shares $658,594
Options for 37,500 shares of Company
Common Stock: 79,000
Other 48,000
-----------------------------------------------------
Total acquisition price of remaining
50% share $785,594
-----------------------------------------------------
The Company's Common Stock was valued at $2.509 per
share. The value of the stock options were computed
based upon the market value at the date of grant.
The transaction was recorded as follows:
-----------------------------------------------------
Total consideration paid $785,594
Carrying value of initial 50% investment 743,984
Less, fair value of assets acquired (669,738)
Liabilities assumed 269,697
-----------------------------------------------------
Excess cost of net assets acquired $1,129,537
-----------------------------------------------------
F-21
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
SBK Franchise Systems, Inc.
On December 4, 1997, the company purchased the
outstanding shares of SBK Franchise Systems, Inc.
("SBK"). SBK is the franchisor of the SBK sandwich
restaurant chain in Central Florida.
The purchase price of SBK consisted of a note payable
for $500,000, cash of $100,000 and 187,266 shares of
the Company's Common Stock valued at $2.8125 per
share ($526,686).
The transaction was recorded as follows:
-----------------------------------------------------
Total consideration paid $1,126,686
Less, fair value of assets acquired (90,342)
Liabilities assumed 9,963
----------------------------------------------------
Excess cost of net assets acquired $1,126,307
----------------------------------------------------
The prior owners of SBK have the right to require the
Company to repurchase 187,266 shares at a purchase
price of $2.67 per share. The Company is only
required to repurchase a maximum of 37,453 shares in
any six-month period commencing six months from the
date of closing. The redeemable common stock purchase
obligation is noncumulative and expires June 2000.
F-22
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
Pro Forma Financial Information (Unaudited)
The following summarized unaudited pro forma
consolidated results of operation have been prepared
as if the preceding acquisitions occurred at the
beginning of 1997 and includes pro forma adjustments
for interest, depreciation amortization:
<TABLE>
<CAPTION>
-------------------------------------------------------- --------------------
<S> <C>
Revenue $ 5,929,447
Net loss before extraordinary item $ (9,066,438)
Loss from extraordinary item, net of taxes $ (862,029)
-------------------------------------------------------- --------------------
Net loss $ (9,928,467)
EPS - Basic and diluted:
Net loss before extraordinary item $ (.73)
Net loss from extraordinary item, net of taxes $ (.07)
-------------------------------------------------------- --------------------
Net loss $ (.80)
-------------------------------------------------------- --------------------
Weighted average number of common shares outstanding
$ 12,384,817
=============================================================================
</TABLE>
The pro forma consolidated results do not purport to
be indicative of results that would have occurred had
the acquisitions been in effect for the periods
presented, nor do they purport to be indicative of
the results that will be obtained in the future.
At December 31, 1997, the Company recognized a
goodwill impairment charge of $993,820 related to the
acquisition of Chai Enterprises. In determining the
amount of the impairment charge, the Company
developed its best estimate of the future operating
cash flows attributable to the assets purchased. In
the fourth quarter, the Company concluded that based
on current market
F-23
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
conditions, including the reduction in the number of
franchises, the anticipated future cash flows
indicated the recoverability of the goodwill was not
reasonably assured.
5. Accrued Accrued liabilities are comprised of the following at Liability
December 31, 1997:
-----------------------------------------------------
Accrued consulting fees $ 550,000
Deferred revenue 212,000
Accrued payroll and reltated 122,962
Other 311,168
-----------------------------------------------------
$1,196,130
-----------------------------------------------------
F-24
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
6. Notes Payable to Notes payable to related parties consist of the Related
Parties following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
<S> <C>
Notes payable to stockholder bearing interest at 9%
monthly interest-only payments through January 1999,
then monthly payments of $3,121, including principal
and interest through its maturity in December 2008.
The notes are unsecured. $ 323,032 Note payable to
stockholder, unsecured, bearing interest at 8%
payable in monthly interest-only payments until
December 1998, at which time all remaining unpaid
interest plus principal is due. 334,785
Note payable to stockholder bearing interest at 10%
principal and accrued interest due upon demand. This
note is unsecured. 100,000
---------------------------------------------------------------------------------
Total related party notes payable 757,817
Less current portion (434,785)
---------------------------------------------------------------------------------
Long-term portion of related party notes payable $ 323,032
=================================================================================
</TABLE>
Interest expense on the above related party debt
totaled $38,854 during 1997
F-25
<PAGE>
<TABLE>
<CAPTION>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
7. Long Term Debt Long term debt consists of the following:
<S> <C>
Year ended December 31, 1997
- --------------------------------------- ---------------------------------------------------------------------------------
Various uncollateralized notes payable, bearing interest at rates between 8% and 12% per annum, $ 553,642
maturing between March 1998 and February 2002
Convertible notes payable bearing interest at 12.75% per annum, interest payable quarterly and 530,000
principal due March 2000, collateralized by revenues generated from franchise agreements,
convertible into Common Stock at $10.86 per share.
Note payable to former owner of acquired subsidiary bearing interest at 7% per annum, interest 500,000
payable monthly and principal due in full in December 1998, collateralized by all royalty
revenues generated by SBK, Inc.
Uncollateralized non-interest bearing debt assumed in acquisition of Seawest,
348,000 principal payable monthly in amounts of $4,000 until paid in full.
Commercial paper, bearing interest at 10.5% per annum, interest and principal due September 283,630
1998, notes are uncollateralized.
FDIC promissory notes bearing interest at 10% per annum, accrued interest and principal due on 257,584
demand, notes are uncollateralized.
Uncollateralized notes payable, bearing interest at 15% per annum, interest payable monthly and 180,000
notes mature November 2004.
Uncollateralized note payable, net of unamortized original issue discount of 176,800
$73,200, bearing interest at 15% per annum, interest payable monthly
with principal due in March 1998.
Uncollateralized note payable, bearing interest at 10% per annum, payable in weekly principal 155,523
and interest payments of $1,750 until April 17, 1998, in which a balloon payment of $139,408 is
due. The Company is in the process of negotiating a modification of the terms of the debt.
Uncollateralized note payable, bearing interest at 10% per annum, payable in monthly interest 150,000
and principal payments of $2,494 through November 2004.
Bank note payable, bearing interest at 10.75% per annum, principal monthly in the amount of 138,435
$500 plus accrued interest, collateralized by equipment.
F-26
<PAGE>
<CAPTION>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------------------------------------------------------
<S> <C>
Bank note payable, bearing interest at 6.5% per annum, interest payable monthly 135,000
with principal balance due April 1998, guaranteed by prior owner of Little
Kings.
Bank note payable, bearing interest at 10.5% per annum, interest and principal payable monthly 124,111
in the amount of $1,750 through February 2002 with a balloon payment of $107,444
due March 2002, collateralized by certain accounts receivable, inventory and
fixed assets.
- ------------------------------------------------------------------------------------------------- -----------------------
3,782,669 Less current portion (2,163,554)
- ------------------------------------------------------------------------------------------------- -----------------------
Total long-term debt $ 1,619,115
================================================================================================= =======================
</TABLE>
Interest expense on long-term debt during 1997 amounted to $174,648
The annual maturities of long-term debt and related party debt for the five
years subsequent to year end are as follows:
<TABLE>
<CAPTION>
Long- Related
Term Party
Debt Debt Total
----------------------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1998 2,163,554 $ 434,785 $2,598,339
1999 192,683 39,636 232,319
2000 709,865 39,636 749,501
2001 216,533 39,636 256,169
2002 75,890 39,636 115,526
Thereafter 424,144 164,488 588,632
----------------------------- ----------------- ---------------- ----------------
$3,782,669 $ 757,817 $4,540,486
----------------------------- ----------------- ---------------- ----------------
</TABLE>
F-27
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
8. Commitments and The Company leases office and store space under Contingencies
certain operating leases which expire through 2008.
Certain of these leases have been entered into with a
related party of the Company. Total rent expenses for
the year ended December 31, 1997 was $222,305, of
which $114,740 was allocable to the related party.
Future annual minimum lease payments due under these
operating leases at December 31, 1997 are as follows:
Related Third
Party Party
Leases Leases Total
------------ ------------ ----------- ------------
1998 $ 344,220 $ 98,616 $ 442,836
1999 185,820 83,616 269,436
2000 167,820 83,616 251,436
2001 167,820 26,916 194,736
2002 139,020 26,916 165,936
Thereafter 498,480 80,748 579,228
------------ ------------ ----------- ------------
$ 1,503,180 $ 400,428 $ 1,903,608
------------ ------------ ----------- ------------
As mentioned in Note 4, certain of the acquisitions
consummated during 1997 contained provisions for
contingent payment of options or shares of Company
Common Stock. In addition to these contingencies, the
company was also contingently liable for certain
consulting and investor relation services to third
party advisors. The following summarizes the
arrangements in which the Company is contingently
liable for consulting and investor relation services.
In December 1997, the Company entered into an
arrangement in which it was to receive certain
advisory services on capital and earnings growth. As
partial payment for these services, the Company is
contingently obligated to provide warrants for up to
500,000 shares of Company Common Stock in the event
the Company either raises $10,000,000 or achieves a
total store level of 630 units within three years.
The fair market value of these options at date of
issuance was
F-28
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
recorded as prepaid consulting expense of $512,500 as
management believes the Company will achieve the
630-store level through acquisitions.
During the year, the Company entered into an
agreement to have certain publishing services
performed. The consideration for these services
includes an obligation for the cash payment of
$550,000 and options to purchase up to 300,000 shares
of Company Common Stock at exercise prices ranging
from $2.81 to $3.93 per share. The fair value of the
options granted plus the $550,000 were recorded as a
consulting expense.
Franchise Agreements
Under the terms of the various franchise agreements,
the franchises are obligated for the payment of the
following fees to the Company:
Franchise Fees
In accordance with the terms of the franchise
agreements, the Company receives an initial
franchise fee of $5,000 to $25,000.
Royalties
The Company receives royalties ranging from 3% to
5% of gross sales from the franchisees' operations
of the restaurants.
Advertising Fund
The franchise agreements require the franchisees
to contribute to an advertising fund based upon 2%
to 4% of gross sales. The funds are maintained in
separate bank accounts, and their use is
restricted solely for advertising, marketing, and
public relations programs and materials to develop
the goodwill and public image of each of the
respective franchises.
F-29
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
9. Stockholders' The following is a synopsis of significant Equity transactions
involving Company Common and Preferred
Stock.
(a) In 1996, the Company designated and issued
700,000 shares of Series A voting nonredeemable
cumulative convertible preferred stock. The
preferred stock is entitled to cumulative,
preferential dividends at a rate of $.09 per
share and is convertible into common stock at a
conversion rate of one share of common stock for
each preferred share. The stock is redeemable in
liquidation at $2.00 per share. During 1997, the
holders of Series A preferred stock converted
100,000 shares into 100,000 shares of common
stock.
(b) In 1996, the Company designated and issued
350,000 shares of Series B voting nonredeemable
convertible preferred stock. The Series B
preferred stock is entitles to receive
noncumulative preferential dividends only when
and as declared by the Board of Directors and is
convertible into common stock at a conversion
rate of one share of common stock for each
preferred share. The stock is redeemable in
liquidation at $2.00 per share.
(c) In September 1997, the Company designated and
issued 120 shares of no par value Series C
convertible preferred stock in connection with
the acquisition of Quality Franchise Systems,
Inc. The Series C preferred stock is entitled to
cumulative dividends at a rate of $32.50 per
share per quarter and is convertible into common
stock ar a rate of 133.22 shares of common stock
for each preferred share with a face amount of
$1,000. The stock is redeemable at the option of
the Company or in liquidation at a rate of
$1,000 per share.
(d) In December 1997, the company designated 2,500
shares of Series D convertible preferred stock.
The Series D preferred stock is entitled to
cumulative dividends at a rate of 8% of the face
value per year and is convertible into common
stock at a rate of 65% of the average market
price of the common stock for five days
immediately prior to the conversion date. The
stock is redeemable in liquidation at a rate of
$1,300 per share.
F-30
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
As mentioned in Note 12 these shares were part
of a private placement offering which occurred
in January 1998.
(e) During 1997, the Company acquired equipment
valued at $424,003 in exchange for 230,000
restricted shares of common stock.
(f) As described further in Note 13, the Company
issued 495,000 shares of its restricted shares
of common stock.
(g) During 1997, the Company sold to accredited
investors a total of 1,077,213 shares of the
Company's freely-traded common stock at purchase
prices ranging from $.53 to $2.25 per share in
private transactions exempt from registration
under applicable Federal securities laws. The
Company collected proceeds of $1,055,500 in
connection with these transactions. No offering
costs were incurred as part of the transactions.
(h) As mentioned in Note 13, the Company sold
to an officer and a consultant 800,000 shares of
restricted common stock for $3.00 per share
(fair value) in exchange for subscription notes
in the amount of $2,400,000. The subscription
notes bear interest at 9.5% per annum and are
due on or before September 2000. The officer and
the consultant also retain the right to require
the Company to repurchase the shares in exchange
for cancellation of the notes throughout the
three year note terms.
(i) During the year ended December 31, 1997, the
company issued 229,360 shares of restricted
common stock, options to purchase 1,025,000
shares of common stock at exercise prices
ranging from $.75 to #3.93, and warrants to
purchase 1,250,000 shares of common stock at
exercise prices ranging from $1.92 to $3.84 in
connection with the compensation of certain
consultants. The weighted average fair value of
the warrants is $1.51. The total expense
recorded in connection with the transactions
amounted to $805,048 for the common stock based
upon the market value at the date of issuance
and $3,301,302 for the options and warrants
based upon the market value at the date of
grant.
F-31
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
(j) During May 1997, the company borrowed $180,000
from three unrelated individuals and granted
these individuals options to purchase 180,000
shares of common stock at $.50 per share as
additional compensation for the loans. The stock
options were valued at $649,000 which
represented the market value at the date of
grant. This amount was recorded as prepaid
interest and is being amortized as interest
expense over seven years based on the life of
the loans.
During November 1997, the Company borrowed
$250,000 from an unrelated company and granted
60,000 shares of restricted common stock. The
common stock was valued at $146,400 based upon
the market value at the date of issuance and was
recorded as an original issue discount to be
accredited over the life of the loan.
(k) During 1997, two consultants and a lender
exercised their options in exchange for 360,000
shares of Company Common Stock. In connection
with these transactions the Company received
cash proceeds of $225,000.
(l) In December 1997, the Board of Directors voted
to retire all outstanding shares of treasury
stock. As a result of retiring the treasury
stock, the Company reclassified the outstanding
$1,600,000 balance to common stock.
The Company applies APB Opinion 25, "Accounting for
Stock Issued to Employees," and related
interpretations in accounting for options issued to
employees. Accordingly, no compensation cost has been
recognized for options granted to employees at
exercise prices which equal or exceed the market
price of the company's common stock at the date of
grant. Options granted at exercise prices below
market prices are recognized as compensation cost
measured as the difference between market price and
exercise price at the date of grant.
F-32
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
SFAS No. 123 "Accounting for Stock-Based
Compensation." requires the Company to provide pro
forma information regarding net income and earnings
per share as if compensation cost for the Company's
employee stock options had been determined in
accordance with the fair value based method
prescribed in SFAS 123. The company estimates the
fair value of each stock option at the grant date by
using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for
grants in 1997; no dividend yield; an expected life
of five years; expected volatility of 64% and
risk-free interest rate of 6.0%.
Under the accounting provisions of SFAS 123, the
Company's net loss and loss per share would have been
reduced to the pro forma amounts indicated below:
1997
-----------------------------------------------------
Net loss
As reported $ (8,903,644)
Pro forma $(10,058,644)
Loss per share - basic and diluted
As Reported $ (.82)
Pro forma $ (.93)
-----------------------------------------------------
F-33
<PAGE>
<TABLE>
<CAPTION>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
A summary of the status of employee and nonemployee
options as of December 31, 1997 and changes during
the year ended on those dates are presented below:
1997
------------------------------
Weighted
Average
Exercise
Shares Price
-------------------------------------------------- ----------------- ------------
<S> <C> <C>
Balance at beginning of year - $ -
Granted 2,374,704 2.11
Less, options exercised during year 360,000 .71
Less, options expired during year 18,704 3.08
-------------------------------------------------- ----------------- ------------
Balance at end of year 1,996,000 2.36
-------------------------------------------------- ----------------- ------------
Options exercisable at year end 1,966,000 $2.36
Weighted average fair value of options granted
during the year $1.62
The following table summarizes information about
options under the plan outstanding at December 31,
1997:
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- -----------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at Dec. 31, 1997 Contractual Life Exercise Price at Dec. 31, 1997 Exercise Price
- ---------------------------- ---------------- ------------------ -------------------- ---------------- ------------------
<C> <C> <C> <C> <C> <C>
$.001 to 1.22 482,500 6.6 $ .57 482,500 $ .57
$2.75 to 3.93 1,513,500 3.5 2.93 1,513,500 2.93
- ---------------------------- ---------------- ------------------ -------------------- ---------------- ------------------
1,996,000 3.5 $2.36 1,996,000 $2.36
- ---------------------------- ---------------- ------------------ -------------------- ---------------- ------------------
</TABLE>
10. Income Taxes The components of net deferred income
taxes consist of the following:
F-34
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
1997
-----------------------------------------------------
Deferred income tax assets
Net operating loss carryforwards $ 1,470,000
Stock and stock options issued for
services of debt 1,573,000
Other 50,000
-----------------------------------------------------
Gross deferred income tax assets 3,093,000
Valuation allowance 3,093,000
-----------------------------------------------------
Total deferred income tax assets $ -
-----------------------------------------------------
The effect of deferred income tax liabilities are
nominal and have been netted with deferred tax assets
for financial statement disclosure purposes.
Unused net operating losses for income tax purposes,
expiring in various amounts from 2007 through 2011,
of approximately $3,870,000 are available at December
31, 1997 for carry forward against future year'
taxable income. Under Section 382 of the Internal
Revenue Code, the annual utilization of this loss may
be limited due to changes in ownership. A valuation
allowance has been offset against the tax benefit of
these losses in 1997 due to it being more likely than
not that the deferred income tax assets will not be
realized.
Income tax expense represents the change in the
estimated recoverability of the deferred tax asset
11.Supplemental Cash Flow Certain supplemental disclosure of cash flow
Information information and noncash investing and financing
activities for the year ended December 31, 1997 is as
follows:
The components of net deferred income taxes consist
of the following:
F-35
<PAGE>
<TABLE>
<CAPTION>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
1997
-------------------------------------------------------------- ------------------
<S> <C>
Cash paid for interest during 1997 $ 144,283
-------------------------------------------------------------- ------------------
Issuance of common stock in exchange for subscription 2,400,000
receivable:
Capitalized franchise agreements were written off
against 2,294,041 deferred revenue of the same
value:
Equipment classified as prepaid expense in 1996 was placed 9,500
in service in 1997 and reclassified to property and
equipment:
Equipment was purchased in exchange for common stock: 424,003
Stock and stock options issued in exchange for consulting 4,106,350
services:
Stock issued to pay down related party notes payable 1,307,029
($445,000) and record extraordinary loss ($862,029)
Stock and stock options issued in exchange for prepaid 795,400
interest ($649,000) and original issue discount ($146,400)
Conversion of Class A preferred to Common Stock: 200,000
Stock issued for payment of interest 146,857
Equipment valued at $47,635 was sold in exchange for note 50,000
receivable
-------------------------------------------------------------- ------------------
</TABLE>
In addition to the above non-cash items, the
following is a summary of non-cash transactions
entered into for the acquisitions listed in Note 4:
F-36
<PAGE>
<TABLE>
<CAPTION>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
-------------------------------------------------------------- ------------------
<S> <C>
Common stock and stock options issued: $(7,539,339)
Preferred Stock issued: (120,000)
Issuance of related party notes payable (100,000)
Issuance of long-term debt: (596,000)
Original 50% equity investments in wholly-owned subsidiary: (729,679)
Current year gain on equity investment: (14,304)
Liability to issue common stock: (2,234,375)
Miscellaneous accrued (48,000)
-------------------------------------------------------------- ------------------
Total non-cash consideration paid: (11,381,697)
-------------------------------------------------------------- ------------------
Accounts receivable acquired: 353,459
Prepaid expenses acquired: 60,029
Notes receivable acquired: 121,248
Property, plant and equipment acquired: 1,644,402
Goodwill acquired: 12,711,710
Other intangible assets acquired: 636,097
-------------------------------------------------------------- ------------------
Total non-cash acquisition of assets: 15,526,945
-------------------------------------------------------------- ------------------
Accounts payable assumed: (643,821)
Accrued liabilities assumed: (389,500);
Long-term debt assumed: (2,268,739)
Related party notes payable assumed: (434,771)
-------------------------------------------------------------- ------------------
Total non-cash assumption of liabilities: (3,736,831)
-------------------------------------------------------------- ------------------
Net cash paid: $408,417
-------------------------------------------------------------- ------------------
</TABLE>
12. Subsequent Events (a) Private Placement
In January 1998, the Company completed a private
placement offering of Class D Convertible
Preferred Stock. An aggregate of 2,500 shares of
this issuance was sold for $2,500,000. The
proceeds from this offering were substantially
used to pay down existing long-term debt or to
satisfy other obligations.
F-37
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
(b) Debt Conversions
In February 1998, the Company converted $277,404
of related party notes payable to 155,475 shares
of Company Common Stock. These shares had a fair
market value of $382,470 on the date of
transfer.
(c) Acquisition
In March 1998, the Company acquired the assets
of a franchisor of sandwich restaurants located
in North Carolina. The acquisition price of this
new entity was approximately $2,400,000. To
satisfy the purchase price, the Company agreed
to issue $2,000,000 of Common Stock and assume
approximately $400,000 of debt. Upon completion
of the acquisition, the Company issued 735,294
shares of its Common Stock having a market value
of $2.72 per share.
(d) Series A and B Convertible Preferred Stock
On June 30, 1998, the holders of the shares of
Series A and B convertible preferred stock
converted the remaining outstanding shares into
950,000 shares of common stock.
13. Related Party Significant related party transactions and balances
Transactions not previously disclosed are as follows:
During the year, the Company's major shareholder
incurred debt of $445,000 which was advanced
directly to the Company. This debt was
collateralized by the Shareholder's freely
traded shares of Company Common Stock. The debt
of the stockholder was subsequently satisfied by
the Company through the issuance of 445,000
shares valued at $2.94 per share ($1,307,029) of
its own restricted Common Stock. These shares
were issued directly to the note holders in
return for the satisfaction of the original debt
of the Company's major shareholder. An
extraordinary loss on the early extinguishment
of debt in the amount of $862,029 was
F-38
<PAGE>
JRECK Subs Group, Inc.
Notes to Consolidated Financial Statements
- ------------------------------------- ------------------------------------------
recorded as a result of this transaction. In
addition, 50,000 shares valued at $2.94 per
share ($146,857) were issued, representing
additional interest expense in connection with
the retirement of debt.
The Company granted stock options for 1,800,000
shares of Common Stock to related parties during
1997. Options for 800,000 shares of Company
Common Stock were granted to the Chief Operating
Officer and a consultant. These options were
exercised with a note receivable for $2,400,000,
which was classified as a stock subscription
receivable at year end. The remaining options,
granted to the President and Chief Executive
Officer, are exercisable at $2.75 per share
until December 2000. The President has yet to
exercise any portion of these options.
F-39
<PAGE>
Cronin & Co.
Certified Public Accountants
12 Blandford Lane
Fairport, NY 14450
Board of Directors and Shareholders
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 year then ended in conformity with
generally accepted accounting principles.
The December 31, 1994, and 1993 financial statements were audited by other
auditors, whose report dated November 2, 1995, stated 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.
January 22, 1997
/s/ Michael F. Cronin
Cronin & Co.
Certified Public Accountants
F-40
<PAGE>
<TABLE>
<CAPTION>
JRECK SUBS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993
----------------- ----------------- ----------------- -----------------
Current Assets:
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 47,368 $ 5,643 $ 0 $ 0
Receivables:
Trade 146,665 55,620 48,644 121,601
Employees 0 0 6,447 2,322
Related Parties 0 0 7,164 5,279
Prepaid Expenses 25,666 22,135 0 0
----------------- ----------------- ----------------- -----------------
Total Current Assets 219,699 83,398 64,455 129,202
Investment in Unconsolidated Subsidiary
(Note A and I) 729,679 700,000 0 0
Property & Equipment, Net of Accumulated
Depreciation (Note A) 50,188 59,534 26,620 55,904
Other Assets (Note D) 2,812,314 435,636 496,670 583,105
Total Assets $ 3,811,880 $ 1,278,568 $ 589,745 $ 768,211
================= ================= ================= =================
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 9,445 $ 2,303 $ 21,604 $ 33,790
Notes Payable (Note B) 736,012 711,205 587,476 605,124
Current Portion of Long Term Debt (Note C) 20,000 85,000 240,956 174,975
Other Current Liabilities (Note C-1) 6,135 100,000 463,630 336,106
----------------- ----------------- ----------------- -----------------
Total Current Liabilities 771,592 898,508 1,313,866 1,149,995
Long Term Debt (Note C) 46,456 257,459 1,424,733 1,503,495
Deferred Income (Note _) 2,294,041 0 0 0
Stockholders' Equity:
Common Stock (8,781 million shares outstanding 0 1,200 3,600 3,600
Capital Stock Premium 0 316,814 300,000 300,000
Stock Subscriptions Receivable (10,000) 0 0 0
Accumulated Deficit (1,390,209) (695,413) (852,854) (588,879)
NonRedeemable Preferred Stock (Note F) 2,100,000 2,100,000 0 0
Treasury Stock (8 million shares of Subsidiary) 0 (1,660,000) (1,600,000) (1,600,000)
----------------- ----------------- ----------------- -----------------
Total Stockholders' Equity 699,791 122,601 (2,148,854) (1,885,279)
Total Liabilities & Stockholders' Equity $ 3,811,880 $ 1,278,568 $ 589,745 $ 768,211
================= ================= ================= =================
</TABLE>
See Notes to Financial Statements.
F-41
<PAGE>
<TABLE>
<CAPTION>
JRECK SUBS GROUP, INC.
CONSOLIDATED INCOME STATEMENTS
Fiscal Years Ended
-----------------------------------------------------------------------------
December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Sales (Note A) $ 557,738 $ 435,639 $ 468,762 $ 490,681
Costs and Expenses Applicable to Sales & Revenue 23,946 16,548 24,209 36,267
----------------- ----------------- ----------------- ----------------
Gross Profit 533,792 419,091 445,553 454,414
Provision for Doubtful Accounts Receivable 0 137 120,153 105,339
Selling, General & Administrative Expenses 392,542 310,315 272,048 262,873
----------------- ----------------- ----------------- ----------------
Income From Operations 141,250 106,639 52,352 86,202
Parent Sheare of Income (Loss) of Unconsolidated
Subsidiary (Note A-4) (4,819) 0 0 0
Other Income:
Gain Recognized on Extinguishment of Debt (Note C-2,3) 126,001 364,815 0 0
Other Expense:
Interest and Amortization of Debt Offering Costs 186,800 85,544 178,562 197,329
Loss on Disposal of Fixed Assets 0 0 52,564 0
Write off Territorial Rights, Rent Guarantees
& Other Payments (Note H) 126,082 128,978 159,598 0
----------------- ----------------- ----------------- ----------------
Income (Loss) Before Income Taxes (50,450) 278,932 (338,372) (111,127)
Income Tax Expense (Benefit)(Notes E) (10,793) 121,891 (74,979) (32,101)
----------------- ----------------- -----------------
Net Income (Loss) $ (39,657) $ 157,041 $ (263,575) $ (79,026)
================= ================= ================= ================
Per Share Amounts (Adjusted to Retroactively
Reflect Recapitalization and Common Stock
Offering-8.781 million shares) $ (0.004) $ 0.018 $ (0.030) $ (0.009)
================= ================= ================= ================
</TABLE>
See Notes to Financial Statements.
F-42
<PAGE>
<TABLE>
<CAPTION>
JRECK SUBS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended
-------------------------------------------------------------
Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
------------- ------------- ------------- -------------
Operating Activities:
<S> <C> <C> <C> <C>
Net Income (Loss) $ (39,657) $ 157,041 $ (263,575) $ (79,026)
Adjustments to Reconcile Net Income (Loss) to Cash Provided
(Consumed) by Operating Activities:
Depreciation and Amortization of Intangible Assets 14,516 21,763 4,054 45,764
Write off Intangible Assets 0 128,976 159,596 0
Write off Uncollectible Trade Accounts Receivable 0 0 120,153 72,308
Loss on Disposal of Property & Equipment 0 0 52,564 0
Interest in Income of Subsidiary 4,619 0 0 0
Adjustment for Tax Benefit of Net Operating Loss Carryover (11,135) 121,135 (75,163) (32,475)
Forgiveness of Debt (126,001) (384,815) 0 0
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Accounts & Notes Receivable (101,045) 8,835 (48,910) (176,329)
(Increase) Decrease in Other Current Assets (3,531) (22,135) 0 0
Increase (Decrease) in Accounts Payable & Accrued Expenses 13,277 (19,301) 115,538 164,749
----------- ----------- ----------- -----------
Net Cash Provided (Consumed) by Operating Activities (248,755) 11,501 64,259 (7,009)
Investing Activities:
Purchase of Property & Equipment (5,172) (40,721) (2,031) 0
Other Investments Made (34,496) 0 (6,496) (4,623)
Payment of Promissory Note Offering Costs (14,786) (70,710) 0 0
----------- ----------- ----------- -----------
Net Cash Used in Investing Activities (54,456) (111,431) (8,527) (4,823)
Financing Activities:
Proceeds of Common Stock Offering net of Costs 681,650 0 0 0
Payments on Long Term Debt and Accrued Interest (287,577) (93,920) (52,886) (39,104)
Financing Proceeds 62,379 371,386 5,002 42,937
(Payments to) Advances From Former Officers (56,716) (171,893) (7,848) 6,535
Dividends Paid on Perferred Shares (54,800) 0 0 0
----------- ----------- ----------- -----------
Net Cash Provided (Used) by Financing Activities 344,936 105,573 (56,732) 10,368
Net Change in Cash 41,725 5,643 0 (1,464)
Cash & Cash Equivalents at the Beginning of Period 5,643 0 0 1,464
----------- ----------- ----------- -----------
Cash & Cash Equivalents at the End of Period $ 47,368 $ 5,643 $ 0 $ 0
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-43
<PAGE>
<TABLE>
<CAPTION>
JRECK SUBS GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Preferred Stock Treasury Retained
Shares Amount Shares Amount Stock of Earnings
Jreck Subs, Inc. (Deficit)
<S> <C> <C> <C> <C> <C> <C>
Inception July 14, 1995
Issuance of Shares Aug. 1995 net of
Offering Costs of $3,700 1,100,000 $ 0
Net Income December 31, 1995 $ 0
--------- ------- ---------
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 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)
Constructive Retirement of Treasury Stock (999,664) 1,600,000 (600,336)
Consolidated Net Loss Year Ended
December 31, 1996 (39,657)
--------- ------- --------- ----------- ----------- -----------
December 31, 1996 6,781,000 $ 0 1,050,000 $ 2,100,000 $ 0 $(1,390,209)
========= ======= ========= =========== =========== ===========
</TABLE>
See Notes To Financials Statements.
F-44
<PAGE>
JRECK SUBS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies:
1. The Company was organized April 25, 1974. Current operations focus primarily
servicing 47 submarine sandwich shops (known as Jreck Subs) as the parent
franchising organization. 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 programs. Jreck Subs
Group, Inc. (Group)(Formeerly Circa Media, Inc.) was incorporated in the state
of Colorado on July 19, 1995. On May 7, 1996, pursuant to a stock exchange
agreement, Jreck Subs Group, Inc. acquired all of the stock of Jreck Subs, Inc.
in exchange for 5,000,000 shares of common stock or 56% of its outstanding
common shares. The former series A preferred shareholders received 700,000 of
series A preferred of Jreck Subs Group, Inc. Group acquisition of Jreck Subs,
Inc. by Jreck Subs Group, Inc. was accounted for as a purchase of the net
liabilities of Group consisting principally of an insignificant amount of
accounts payable.
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. 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 franchisee obligation becomes due and
payable. The Company also receives marketing incentives, in the form of rebates,
from it major suppliers. The Company has no Area Developers. 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 5-10year useful lives of the assets. Depreciation expense for
the year ended December 31, 1996 was $14,518. Expenditures for renewals and
betterment's 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 accounts are as follows:
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.
<TABLE>
<CAPTION>
Estimated Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
Life ------------- ------------- ------------- -------------
----
<S> <C> <C> <C> <C>
Leasehold Improvement $ 0 $ 0 $ 0 $ 94,848
Machinery & Equipment 7 Yr. 21,703 16,531 10,116 82,970
Vehicles 5 Yr. 58,591 58,591 24,285 4,175
------------- ------------- ------------- -------------
80,294 75,122 34,401 181,993
Less Accumulated Depreciation 30,106 15,588 7,781 126,089
------------- ------------- ------------- -------------
Net Property & Equipment $ 50,188 $ 59,534 $ 26,620 $ 55,904
============= ============= ============= =============
</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. Any excess of cost over the fair value of the
underlying assets will be treated as goodwill and amortized over 20 years.
5. Impairment of Long Lived Assets: The Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long Lived
Assets and for Long Lived Assets to be Disposed of," ("SFAS 121"). SFAS 121
requires impairment losses to be recorded on long lived assets used in
operations and goodwill when indications of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of the asset.
F-45
<PAGE>
Notes to Financial Statements (Continued)
6. Impact of Recent Pronouncements: Effective for periods beginning after
December 15, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
131") and Statement of Financial Accounting Standards No. 131, "Disclosure about
segment of an Enterprise and Related Information," ("SFAS 131"). SFAS 130
established standards for reporting and displaying comprehensive income, its
components and accumulated balances. SFAS 131 establishes standards for the way
that public companies report information about operating segments in annual
financial statements and requires reporting of selected information about
operating statements in interim financial statements issued to the public. The
Company has not determined the impact adoption of these new accounting standards
will have on its future financial statements and disclosures.
B. Notes Payable:
The Promissory Notes bear interest at 10.5% and are due in May, 1997. A summary
of the various obligations are as follows:
<TABLE>
<CAPTION>
Payee Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
- ----- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Promissory Notes* $ 399,679 $ 337,300 $ 0 $ 0
FDIC 0 0 69,344 76,036
FDIC 259,334 259,334 259,334 268,813
Ed Mahar 75,999 96,999 96,999 96,999
Daniel Patterson 0 0 23,465 23,465
Mett Management 0 0 14,414 14,414
Charles Lehman 0 15,000 15,000 15,000
Employees 0 2,572 6,371 0
Stockholder 0 0 102,549 110,397
------------- ------------- ------------- -------------
Total $ 736,012 $ 711,205 $ 587,476 $ 605,124
============= ============= ============= =============
</TABLE>
*Secured/Unsecured
C. Long Term Debt:
1. Due on Purchase of Treasury Stock bears interest at 10% and was personally
guaranteed by a former officer. This obligation was retired upon the issuance of
Series A Preferred Stock. All but $100,000 of unpaid and accrued interest at the
time of conversion ($463,165) was forgiven. In addition, $21,650 of the
principal was forgiven. As a result of the conversion, the Company has realized
income on the forgiveness of these obligations in the amount of $384,815 in
1995.
2. Chase Manhattan Bank, NA. Secured by equipment, furniture and fixtures and a
personal guarantee of a former officer. Interest is computed at prime plus 2%.
The loan was settled at $60,000 paid in full in 1996. The excess of the balance
of the loan obligation over the settlement amount has been recognized in the
current period as a gain on the extinguishment of debt.
3. Gerhartz Equipment, Inc. Secured by equipment and bears interest at prime
plus 2%. This obligation was converted to 45,000 shares of common stock in 1996.
The conversion was valued at the Company's public stock offering price of $0.50
per share (or $22,500). The balance of $68,033 has been reflected on the income
statement in the current period as gain on extinguishment of debt.
4. Gencarelli and Algiere is an interest free, unsecured obligation resulting
from an arbitrated settlement of a third party guarantee whereby the Company
agreed to pay $500 per month. The original amount of the obligation was $24,000.
5. Sullivan Secured by a corporate vehicle, payable in monthly installment of
$583 bearing interest at 10%.
F-46
<PAGE>
Notes to Consolidated Financial Statements (Continued)
6. Due to Margot is a vehicle loan payable in monthly installments of $376
bearing interest at 8%.
7. S. Foy and Associates payable in monthly installments of $481 and bears
interest at 14%.
A summary of obligations is as follows:
<TABLE>
<CAPTION>
Description of Obligation: Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
- ------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Elliott $ 0 $ 64,300 $ 0 $ 0
Due on Purchase of Treasury Stock 0 0 1,421,649 1,421,649
Chase Manhattan Bank, NA* 0 115,335 119,602 137,606
Gerhatrz Equipment, Inc. 0 90,533 81,695 81,000
Gencarelli & Algiere 23,695 23,695 23,695 23,500
Mark Russell 0 0 0 4,729
Key Bank 0 0 16,985 0
Margot 7,994 11,704 0 0
S. Foy Associates 15,405 13,284 0 0
Morris Realty 0 0 851 4,351
Peter Whitmore 0 0 1,212 3,584
Masterlease Corporation 0 0 0 2,051
Sullivan 19,362 22,608 0 0
------------- ------------- ------------- -------------
66,456 342,459 1,665,689 1,678,470
Less Current Portion 20,000 85,000 240,956 174,975
------------- ------------- ------------- -------------
Total Long Term Debt $ 46,456 $ 257,459 $ 1,424,733 $ 1,503,495
============= ============= ============= =============
</TABLE>
*Secured/Unsecured
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 9 month life of the
notes. In 1996 the Company restated 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.
<TABLE>
<CAPTION>
Description: Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
- ------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Investments $ 0 $ 0 $ 824 $ 824
Franchise Agreements 2,294,041 0 0 0
Reacquired Franchise Rights 0 0 0 18,400
Reacquired Operating Rights 0 0 0 141,198
Deferred Offering Costs 14,786 0 0 0
Advances to Former Officer 115,641 58,925 0 0
Deferred Income Taxes (Note E) 387,846 376,711 497,946 422,683
------------- ------------- ------------- -------------
Total $ 2,812,314 $ 435,636 $ 498,670 $ 583,105
============= ============= ============= =============
<CAPTION>
E. Income Taxes: The net non-current deferred tax asset as presented on the
accompanying balance sheets consist of the following deferred tax assets
Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Federal & State Deferred Income
Tax Assets $ 387,846 $ 376,711 $ 497,946 $ 422,883
Less Valuation Allowance 0 0 0 0
------------- ------------- ------------- -------------
Total $ 387,846 $ 376,711 $ 497,946 $ 422,883
============= ============= ============= =============
</TABLE>
The deferred tax asset balances are the result of net operating loss
carryforwards. As it is more likely than not that all future tax benefits will
be realized, no valuation allowance has been recorded for the deferred
F-47
<PAGE>
Notes to Consolidated Financial Statements (Continued)
tax assets. There was no prior balance in the valuation allowance, and
therefore, there was no change in the valuation allowance for this period.
The components of the income tax provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Federal $ 7,049 $ 98,120 $ 60,846 $ 26,289
New York State 4,086 23,771 14,317 6,186
------------- ------------- ------------- -------------
Total $ 11,135 $ 121,891 $ 75,163 $ 32,475
============= ============= ============= =============
</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 excluded an exchange offer in
which holders of the Notes Payable on the purchase of Treasury Stock could
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 share 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 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.
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.
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 and obligation
of Bundeswehr, Inc. In 1996 the Company paid $120,000 in 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 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-48
<PAGE>
Michael F. Cronin
Certified Public Accountant
12 Blandford Lane
Fairport, New York 14450
716-248-5790
Pastry Product Producers, LLC
Watertown, New York
I have audited the accompanying balance sheets of Pastry Product Producers, LLC.
as of December 31, 1996, and the related statements of income, partners' equity,
and cash flows for the year the 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 Pastry Product Producers, LLC as of
December 31, 1996 and the results of its operations, its cash flows and changes
in owners' equity for the year then ended in conformity with generally accepted
accounting principles.
September 29, 1997
/s/ Michael F. Cronin
Michael F. Cronin
Certified Public Accountant
F-49
<PAGE>
<TABLE>
<CAPTION>
Pastry Product Producers, LLC
Balance Sbeet
December 31, 1996
Assets
Dec. 31, 1996
Current Assets: -------------
<S> <C>
Cash $ 3,326
Accounts Receivable-Net 75,455
Prepaid Expenses 5,000
-------------
Total Current Assets 83,781
Property and Equipment (Note A):
Machinery and Equipment 218,250
Delivery Vehicles 13,180
Real Estate & Improvements 184,502
-------------
Total Cost of Property and Equipment 415,932
Less Accumulated Depreciation (105,113)
-------------
Property and Equipment (Net) 310,819
Other Assets:
Organization Costs 8,680
Capitalized Franchise Fees (Note D) 1,655,564
-------------
Total Other Assets 1,664,244
Total Assets $ 2,058,844
=============
</TABLE>
See Notes to Financial Statements
F-50
<PAGE>
<TABLE>
<CAPTION>
Liabilities and Stockholder's Equity
Dec. 31, 1996
Current Liabilities: -------------
<S> <C>
Accounts Payable $ 0
Current Portion of Long Term Debt 49,834
-------------
Total Current Liabilities 49,834
Deferred Franchise Contract Income (Note D) 1,655,564
Long Term Debt (Note C) 26,550
Partners' Equity:
Partners' Equity 326,896
Total Liabilities and Stockholder's Equity $ 2,058,844
=============
</TABLE>
F-51
<PAGE>
<TABLE>
<CAPTION>
Pastry Product Producers, LLC
Statement of Income and Retained Earnings
Year Ended December 31, 1996
Year Ended
Dec. 31, 1996
-------------
<S> <C>
Sales $ 708,296
Cost of Sales:
Materials and Supplies 178,795
-------------
Gross Profit 529,501
Selling, General and Administrative Expenses 539,438
-------------
Income (Loss) Before Other Income and Income Taxes (9,937)
Other Income;
Gain on Sale of Equipment 300
-------------
Income (Loss) Before Taxes (9,637)
Income Taxes (Note B) 0
Net Income (Loss) (9,637)
Partners' Equity-Beginning of Year 231,625
Partners' Capital Contributions net of Repayments 104,908
-------------
Partners' Equity-End of Year $ 326,896
=============
</TABLE>
See Notes to Financial Statements.
F-52
<PAGE>
<TABLE>
<CAPTION>
Pastry Product Producers, LLC
Statements of Cash Flows
Year Ended December 31, 1996
Year Ended
Dec. 31, 1996
Operating Activities: -------------
<S> <C>
Net Income (Loss) $ (9,637)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 38,294
Changes in operating assets and liabilities
(Increase) Decrease in accounts receivable (75,455)
(Increase) in prepaid expenses (5,000)
-------------
Total Cash (Consumed) Provided by Operating Activities (51,798)
Investing Activities:
Payment of Organization Costs & Filing Fees on Building (10,511)
Cash Received on Sale of Equipment 300
-------------
Total Cash used in investing Activities (10,511)
Financing Activities:
Advances From Partners (net of repayments) 104,908
Principal payments on long term debt (42,892)
-------------
Total Cash Provided ( Used) by Financing Activities 62,016
Decrease in cash and cash equivalents (293)
Cash and cash equivalents-beginning 3,619
-------------
Cash and cash equivalents ending1 $ 3,326
=============
</TABLE>
Other cash flow information-Interest paid $15,023
See Notes to Financial Statements.
F-53
<PAGE>
<TABLE>
<CAPTION>
Pastry Product Producers, LLC
Schedule or Selling, General and Administrative Expenses
Year Ended December 31, 1996
Year Ended
Dec. 31, 1996
-------------
<S> <C>
Commissions $ 37,547
Delivery 370,008
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-54
<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, bearing interest
at 11%-14%, 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 $ 76,380
========
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-55
<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, its cash flows and changes
in stockholders' equity for the year then ended in conformity with generally
accepted accounting principles.
The December 31, 1995, and 1994 financial statements were audited by other
auditors, whose report dated March 22, 1996, stated 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
/s/ Michael F. Cronin
Cronin & Co.
Certified Public Accountants
F-56
<PAGE>
<TABLE>
<CAPTION>
SEAWEST SUB SHOPS, INC.
BALANCE SHEETS
ASSETS
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
Current Assests:
<S> <C> <C> <C>
Cash and Cash Equivalents $ 11,421 $ 9,745 $ 8,970
Receivables:
Trade 69,290 132,223 117,787
Employees 0 0 0
Related Parties 0 12,884 7,996
Inventories 3,561 0 6,463
Prepaid Expenses 5,179 0 0
Current Portion of Notes Receivable 59,265 72,195 56,547
----------------- ----------------- -----------------
Total Current Assests 148,716 227,047 197,763
Property & Equipment, Net of Accumulated
Depreciation (Note A) 64,241 36,364 85,683
Other Assets (Note B) 598,059 719,601 866,233
Total Assets $ 811,016 $ 983,012 $ 1,149,679
================= ================= =================
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 146,119 $ 134,680 $ 173,280
Deposits From Franchisees 6,750 6,750 26,000
Accrued Expenses 31,470 0 0
Current Portion of Long Term Debt (Note C) 138,700 105,213 142,614
----------------- ----------------- -----------------
Total Current Liabilities 323,039 246,643 341,894
Long Term Debt (Note C) 402,004 540,705 591,626
Deferred Income (Note D) 100,000 0 0
Contingent Liabilities (Note F)
Stockholders' Equity:
Common Stock (No par value, 5,000,000 shares authorized) 220,497 220,497 212,997
Retained Earnings (Deficit) (234,524) (24,833) 3,162
----------------- ----------------- -----------------
Total Stockholders' Equity (14,027) 195,664 216,156
Total Liabilities & Stockholders' Equity $ 811,016 $ 983,012 $ 1,149,679
================= ================= =================
</TABLE>
See Notes to Financial Statements.
F-57
<PAGE>
<TABLE>
<CAPTION>
SEAWEST SUB SHOPS, INC.
INCOME STATEMENTS
Fiscal Years Ended
-------------------------------------------------------------
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
Revenue (Note A):
<S> <C> <C> <C>
Initial Franchise Fees $ 41,000 $ 88,501 $ 85,400
Continuing Franchise Fees 329,510 522,818 503,528
Territorial Franchising Rights 64,450 0 0
Marketing Fees' 94,700 0 0
Marketing Co-Op Rebates' 75,583 0 0
Sales Generated by Corporately Operated Sub Shops (Note G) 56,165 138,114 918,882
----------------- ----------------- -----------------
Total Revenues 661,408 749,433 1,507,810
Costs and Expenses Applicable to Sales & Revenue:
Commissions on Sale & Resale of Franchises 13,622 29,281 57,584
Marketing and Advertising Expenditures 130,136 142,612 142,405
Food Costs Applicable to Sub Shop Operations (Note G) 28,822 62,271 386,720
----------------- ----------------- -----------------
Total Costs & Expenses Applicable to Sales & Revenue 172,580 234,164 586,709
Gross Profit 486,828 515,269 919,101
Provision for Doubtful Accounts Receivable 20,177 64,515 99,559
Selling, General & Admimistrative Expenses 402,483 396,093 1,041,808
----------------- ----------------- -----------------
Income From Operations 66,168 (54,661) (222,266)
Other Income:
Interest 21,335 35,416 12,659
Miscellaneous 46,056 36,099 7,409
Gains an Resale of Reacquired Stores 0 77,706 186,466
Other Expense:
Interest 22,562 50,305 99,559
Amortization of Intangibles 77,674 72,250 105,333
Losses on Store Repossession and Closures (Note G) 245,013 0 0
----------------- ----------------- -----------------
Total Other Income/Expenses 275,856 26,666 1,842
Income (Loss) Before Income Taxes (209,690) (27,995) (220,424)
Income Tax Expense (Benefit)(Notes E) 0 0 0
----------------- ----------------- -----------------
Net Income (Loss) $ (209,690) $ (27,995) $ (220,424)
================= ================= =================
</TABLE>
*No Data Available for Comparison in 1995 & 1994
See Notes to Financial Statements.
F-58
<PAGE>
<TABLE>
<CAPTION>
SEAWEST SUB SHOPS, INC.
STATEMENTS OF CASH FLOWS
Fiscal Years Ended
-------------------------------------------------------------
December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
Operating Activities:
<S> <C> <C> <C>
Net Income (Loss) $ (209,690) $ (27,995) $ (220,424)
Adjustments to Reconcile Net Income (Loss) to Cash Provided
(Consumed) by Operating Activities:
Depreciation and Amortization of Intangible Assets 82,201 72,250 106,333
Write off Uncollectible Trade Accounts Receivable 20,177 0 0
Loss on Sub Shops Sold/Closed 245,013 67,175 221,265
Expenses Recognized Through Issuance of Common Stock 0 7,500 7,500
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Accounts & Notes Receivable 62,933 45,619 (139,977)
(Increase) Decrease in Other Current Assets 9,954 12,830 9,813
Increase (Decrease) in Accounts Payable & Accrued Expenses 42,909 (37,326) 69,987
----------------- ----------------- -----------------
Net Cash Provided (Consumed) by Operating Activities 253,497 140,053 53,497
Investing Activities:
Purchase of Property & Equipment (26,070) (30,431) (1,443)
Collections on Notes Receivable 82,962 0 0
Increases on Notes Receivable (201,500) 0 0
----------------- ----------------- -----------------
Net Cash Used in Investing Activities (146,608) (30,431) (1,443)
Financing Activities:
Payments on Long Term Debt (105,213) (108,847) (81,000)
Financing Proceeds 0 0 7,904
----------------- ----------------- -----------------
Net Cash Provided (Used) by Financing Activities (105,213) (106,847) (73,096)
Net Change in Cash 1,676 775 (21,042)
Cash & Cash Equivalents at the Beginning of Period 9,745 6,970 30,012
----------------- ----------------- -----------------
Cash & Cash Equivalents at the End of Period $ 11,421 $ 9,745 $ 8,970
================= ================= =================
</TABLE>
See Notes to Financial Statements.
F-59
<PAGE>
<TABLE>
<CAPTION>
SEAWEST SUB SHOPS, INC.
STATEMENTS OF CHANGES STOCKHOLDERS' EQUITY
Common Stock Retained
Shares Amount Earnings
Additional (Deficit)
Paid-in Paid-in
Capital Capital
<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)
========= ======= ========= ===========
</TABLE>
See Notes To Financials Statements.
F-60
<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 franchisee obligation
becomes due and payable. The Company also receives marketing incentives, in the
form of rebates, from it 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
betterment's 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.
<TABLE>
<CAPTION>
Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- -------------
Description of Asset:
<S> <C> <C> <C>
Notes Receivable $ 342,734 $ 313,138 $ 351,187
Less Valuation Allowance 124,739 30,500 8,494
------------- ------------- -------------
Net Realizable Value of Notes Receivable 217,995 282,638 342,693
Equipment Lease Security Deposits 9,981 15,021 21,387
Corporate Covenant Not to Compete 700,000 700,000 700,000
Store Covenants Not to Compete 58,369 58,369 58,369
Less Accumulated Amortization 329,021 251,348 191,673
------------- ------------- -------------
Net Carrying Value of Non-Compete Covenants 432,348 507,021 566,693
Total Other Assets 657,324 904,680 930,773
Less Current Portion of Notes Receivable 59,265 85,079 64,543
------------- ------------- -------------
Total $ 508,059 $ 719,601 $ 566,230
============= ============= =============
</TABLE>
F-61
<PAGE>
Notes to Financial Statements (Continued)
C. Long Term Debt:
1. Due to Former Shareholders: On February 25, 1991 a stock purchase and sale
agreement was executed between Mssrs 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, 1906 the Company converted unpaid
paid 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, payable in monthly installments of $1,000 and bears interest
at 12%.
4. Notes Payable on Store Reacquisitions: The Company engages in the
repossession, acquisition, reacquisition and resale of franchised Sub Shop
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
serviced by the Corporation during its term of ownership and may be secured by
certain equipment or be unsecured and bear interest at 8%-11%. 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>
Description of Obligation: Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
- -------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Due to Former Shareholders $ 406,000 $ 472,000 $ 520,000
Graham & Dunn 11,707 0 0
Sternfeld 24,428 32,934 50,000
Payable on Store Reacquisitions 98,569 140,984 164,240
------------- ------------- -------------
540,704 645,918 734,240
Less Current Portion 136,700 105,213 142,614
------------- ------------- -------------
Total Long Term Debt $ 402,004 $ 540,705 $ 591,626
============= ============= =============
</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 79,058
2002 and After 67,644
------------
Total $ 540,704
============
F-62
AGREEMENT AND PLAN
OF REORGANIZATION
AMONG
JRECK SUBS GROUP, INC.
LI'L DINO MANAGEMENT CORPORATION AND
LI'L DINO CORPORATION
December 18, 1997
<PAGE>
AGREEMENT AND PLAN
OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of December 18, 1997 among Jreck Subs Group, Inc., a Colorado corporation
("Jreck"), Li'l Dino Management Corporation, a North Carolina corporation
("LDM"), and Li'l Dino Corporation, a North Carolina corporation ("Target"), a
wholly owned subsidiary of LDM.
RECITALS
A.The parties hereto desire that LDM shall transfer and convey to Jreck
substantially all of its assets including all the issued and outstanding common
stock, $1.00 par value, of Target in exchange for Jreck common stock as set
forth in this Agreement.
B.The parties hereto intend that, to the maximum extent possible, the
reorganization constitute a "tax free reorganization" under Section
368(a)(1)(C), 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 Data. 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 Reorganization.
1.3. Closing Date shall mean the delivery by Jreck and Target of the
various documents contemplated by this Agreement or otherwise required in order
to consummate the Reorganization.
1.4. Dissenting Shares shall mean all shares, if any, of the
outstanding capital stock of LDM for which dissenter's rights shall be perfected
under Article 13 of the North Carolina Business Corporation Act.
1.5. Target Shareholder shall mean the record owner of Target Common
immediately prior to the Reorganization.
1.6. Code shall mean the Internal Revenue Code of 1986, as amended.
1.7. Corporations Code shall collectively mean the Colorado General
Corporations Law (the "Colorado Corporations Code"), and the North Carolina
Business Corporation Act (the "North Carolina Business Corporation Act").
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1.8. Exchange Act shall mean the Securities and Exchange Act of 1934,
as amended, and the rules and regulations thereunder.
1.9. 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 CEO, President, CFO (or equivalent) and all
executive or senior vice presidents.
1.10. Reorganization shall mean the reorganization of LDM pursuant to
this Agreement.
1.11. 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.
1.12. Securities Act shall mean the Securities Act of 1933, as amended,
and the rules and regulations thereunder.
1.13. Target Common shall mean the voting common stock, $1.00 par
value, of Target.
2. CONVEYANCE OF ASSETS, EXCHANGE OF SHARES AND CLOSING.
2.1. Exchange. At the Closing, Jreck will acquire substantially all the
assets of LDM by exchanging and delivering to LDM the Jreck Common in accordance
with this Section 2 of this Agreement in consideration of the transfer,
conveyance and delivery to Jreck by LDM of all the issued and outstanding shares
of Target Common together with the assets of LDM listed on attached Exhibit A.
In addition, at Closing, Jreck will assume those LDM liabilities listed on
attached Exhibit B, and no others.
2.2. Closing. The Closing shall, in Jreck's discretion, take place
either at the offices of Wyatt Early Harris & Wheeler, L.L.P., 1912 Eastchester
Drive, Suite 400, High Point, North Carolina 27265, or by mail and facsimile, on
the date which is no more than fifteen (15) days following the date of approval
of this Agreement by LDM's shareholders 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 Reorganization set
forth in Articles 6 and 7 of this Agreement have been satisfied or waived.
2.3. Exchange of Shares. In accordance with this Plan of
Reorganization, Jreck shall convey, transfer and deliver to LDM _____ shares of
Jreck Common in exchange for LDM's conveyance, transfer and delivery of all of
the Target Common and LDM assets listed on Exhibit A.
2.4. Exchange of Certificate. Promptly after the Closing, Jreck shall
transfer and convey to LDM good and marketable title to the shares of Jreck
Common issuable pursuant to Section 2.3.
2.5. Dissenting Shares. Holders of Dissenting Shares shall have those
rights, but only those rights, of holders of "dissenting shares" under Articles
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13 of the North Carolina Business Corporation Act, if applicable. LDM shall give
Jreck prompt notice of any demand, purported demand or other communication
received by LDM with respect to any Dissenting Shares or shares claimed to be
Dissenting Shares. Any payments to Dissenting Shareholders prior to the Closing
shall be the responsibility of LDM.
2.6. Unregistered Shares. The Jreck Common to be issued in the
Reorganization to LDM 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 LDM understand that the Jreck Common has 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 3(a)(10) and/or 4(2) thereof, and that it
must be held by LDM indefinitely and LDM 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. LDM, shall
in writing notify its 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.
2.6.1. Other Resale Restrictions. With respect to any shares
of Jreck Common issued pursuant to this Agreement to any Target or LDM officer,
or five percent (5%) or more Target Shareholder, such shares and each such
Target Shareholder shall be subject to a further restriction providing that no
one such Target Shareholder, or its 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 issuance, stock split or other subdivision or
consolidation of shares after the date hereof. The foregoing restrictions set
forth in this Section 2.6.1 shall not prevent or limit the distribution of the
Jreck Common by LDM to its shareholders in liquidation and dissolution as
contemplated in Section 8.7.2 hereof, and thereafter the restrictions contained
in this Section 2.6.1 shall apply only to LDM officers and former LDM
shareholders who owned five percent (5%) or more of the outstanding common stock
of LDM at any time during the period commencing on the date hereof and ending
upon the completion of such liquidation and dissolution.
2.7. Piggyback/Demand 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 Registerable Securities (defined
below), Jreck at its sole cost and expense will: (i) promptly give LDM and any
other holders of Jreck Common received in the Reorganization (including any
stockholders of LDM who receive Jreck Common by distribution from LDM) (the
"Holders") written notice thereof (which notice shall include a list of the
jurisdictions in which Jreck 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 pursuant to Section 2.7.1,
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all the Registerable Securities which were issued under this Agreement and are
specified in a written request delivered to Jreck by said Holders within fifteen
(15) days after delivery of such written notice from Jreck.
2.7.1. Piggyback Registration Involving an Underwriting. If
the Registration of which Jreck gives notice is for a Registered public offering
involving an underwriting, Jreck shall so advise the Holders as a part of the
written notice given pursuant to this Section 2.7. In such event, the right of
the Holders to Registration of the Jreck Common received pursuant to the
Reorganization 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
2.7.1 and the Holders shall pay any incremental costs and fees related to the
piggyback Registration of their shares of Jreck Common. 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 and other Jreck
stockholders having registration rights, but in no event may the Holders
participate in any over allotment, if any, afforded to Jreck in connection with
such underwriting.
2.7.2. Demand/Registration Rights. If Jreck does not give to
the Holders the opportunity to Register all the Registerable Securities which
were issued under this Agreement on or before nine (9) months after the Closing,
LDM and any other holders of Jreck Common received in the Reorganization
(including any stockholders of LDM who receive Jreck Common by distribution from
LDM) (the "Holders") will have the right to make one written demand upon Jreck
to cause Jreck at its sole cost and expense to Register such Jreck Common on a
form that would be suitable for a registration involving solely Registerable
Securities. Promptly following such demand, Jreck shall file a registration
statement with the Securities and Exchange Commission (the "SEC"), pursuant to
the Securities Act of 1933 (the "1933 Act"), and thereafter use its best efforts
to cause the registration statement to become effective within one (1) year
after the Closing. Jreck shall use its best efforts to cause the registration
statement to remain effective, and to supplement and amend the registration
statement in accordance with the 1933 Act and applicable rules thereunder, for a
period of at least 90 days following the effective date of registration.
2.7.3. General Registration Covenants. With respect to any
piggyback or demand registration statement filed by Jreck pursuant to Paragraphs
2.7, 2.7.1 or 2.7.2 above, Jreck agrees as follows:
(i) The registration statement shall cover all shares of Jreck common
issued under this Agreement, including any additional shares of Jreck
common issued on such shares in stock dividends or stock split, at any time
prior to the expiration of 90 days following the registration date;
(ii) From time-to-time, Jreck will deliver copies of each preliminary
prospectus, prospectus and supplement filed with the SEC to LDM and any
former LDM shareholder, and to any broker, dealer or underwriters acting
for LDM or any LDM shareholder in such quantities as they may reasonably
request;
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(iii) Jreck shall bear all expenses in connection with the
registration, including, without limitation, legal and accounting fees,
registration and filing fees, printing costs, blue sky expenses, costs of
delivering preliminary prospectuses and prospectuses and supplements
thereto to LDM and LDM's former shareholders, and other customary expenses.
LDM (and/or LDM's selling shareholders) shall bear any brokerage
commissions and underwriting discounts applicable to the Registerable
Securities sold by them, any transfer fees or taxes applicable thereto and
the expenses of counsel, accountants and other advisers, if any, retained
by LDM or LDM's shareholders in connection with such registration and sale;
(iv) If Jreck has reason to believe that the registration statement or
any prospectus, as in effect at any time, requires amendment or
supplementation or otherwise includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing, then Jreck will immediately use its best
efforts to take all action necessary to make the registration statement
and/or prospectus not misleading and to permit the sale of shares of
Registerable Securities by LDM and/or former LDM shareholders in accordance
with the requirements of applicable federal and state securities laws
common laws and regulations thereunder;
(v) Jreck shall file a registration of the Jreck common stock on Form
10SB under the Securities Exchange Act of 1934 (the "1934 Act"), including
the Jreck common to be issued in the Reorganization, and will use its best
efforts to cause such registration to be approved, as promptly as
practicable after the Closing and in any event on or before the effective
date of the registration statement filed under the 1933 Act;
(vi) Jreck shall indemnify and hold harmless LDM and LDM's shareholders
(the "LDM Indemnified Persons") from and against any and all losses,
claims, demands, damages, liabilities and expenses, joint or several, to
which they or any of them may become subject under the 1933 Act, the 1934
Act, the rules and regulations of the SEC under such Acts, the common law
or otherwise and will reimburse each LDM Indemnified Persons for any legal
or other expenses incurred by it in connection with investigating or
defending any actions relating thereto, insofar as such losses, claims,
demands, damages, liabilities or expenses arise out of or are based on any
actual or alleged untrue statement of a material fact contained in the
Jreck registration statement, any prospectus thereunder or any amendment or
supplement thereto, including material incorporated by reference therein,
or arise out of or are based on any actual or alleged omission therein of a
material fact required to be stated therein or necessary to make the
statements therein not misleading; but there shall be excluded from the
foregoing indemnification any loss, claim, demand, damage, liability, or
expense arising out of or based on any actual or alleged untrue statement
or omission made in reliance upon and in conformity with information
furnished in writing to Jreck by or on behalf of any LDM Indemnified Person
expressly for use in the Jreck registration statement, such prospectus or
such amendment or supplement thereto. LDM Indemnified Persons shall
indemnify and hold harmless Jreck from and against any and all losses,
claims, demands, damages, liabilities and expenses, joint or several, to
which they or any of them may become subject under the 1933 Act, the 1934
Act, the rules and regulations of the SEC under such Acts, the common law
or otherwise and will reimburse Jreck for any legal or other expenses
incurred by it in connection with investigating or defending any actions
relating thereto, insofar as such losses, claims, demands, damages,
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liabilities or expenses arise out of or based on any actual or alleged
untrue statement or omission made in reliance upon and in conformity with
information furnished in writing to Jreck by or on behalf of any LDM
Indemnified Persons expressly for use in any such Jreck registration
statement, prospectus or amendment or supplement thereto, including
material incorporated by reference therein.
2.7.4. Co-Sale Rights. For purposes of this Agreement, "Block
Seller" shall mean Christopher Swartz, President of Jreck. Notwithstanding
anything contained in this Agreement to the contrary, if Block Seller at any
time, acting alone or in concert with other Jreck shareholders, propose to
transfer an aggregate number of shares of Jreck common stock (or common stock
equivalents) equal to or exceeding twenty-five percent (25.0%) of the
then-outstanding shares of Jreck common stock to a purchaser or related group of
purchasers in a single transaction or related series of transactions, then the
Block Seller shall provide at least fifteen (15) days' prior written notice of
the proposed sale (or series of sales) to LDM. If LDM has previously distributed
the Jreck shares to its shareholders, then Jreck shall provide such notice to
Larry C. Barrett, as LDM shareholder representative, who shall in turn forward
such notice to each former LDM shareholder. LDM or each former LDM shareholder,
as the case may be, shall have the right to require, as a condition to such
transfer, that the purchaser or purchasers purchase, on the same terms and
conditions and at the same price as offered to the Block Seller, that percentage
of the Jreck common stock held by LDM (or the former LDM shareholder) as equals
the percentage of all Jreck common stock (or common stock equivalents) owned by
the Block Seller in the aggregate which is included in the transaction. In that
event, the number of shares of Jreck stock to be sold by the Block Seller shall
be reduced accordingly. Notice of the exercise of the co-sale right provided by
this Paragraph 2.7.4 must be given to Jreck within the 15-day notice period in
order to be effective. Notwithstanding the foregoing, Block Seller may pledge,
hypothecate or gift any of his Jreck common stock and neither LDM nor any former
LDM shareholder, as the case may be, shall have any rights under this Section in
such event. Any recipient of a gift of Block Seller's Jreck common stock will be
bound by the terms of this Section 2.7.4 and Block Seller agrees to make any
such gift expressly subject to the terms of the co-sale rights set forth in this
Section 2.7.4.
2.7.5. Blue Sky in Piggyback Registration. In the event of any
Registration of Registerable Securities pursuant to this Section 2.7, 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,
provided such Registration will be made in those states in which LDM
shareholders reside) as shall be reasonably appropriate for the distribution of
such securities.
2.7.6. 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
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registration statement in compliance with the Securities Act ("Registration
Statement"), and the declaration or ordering of the effectiveness of such
Registration Statement.
(b) "Registerable 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.
2.8 Tax Free Reorganization. The parties intend to adopt this Agreement
as a tax free plan of reorganization and to consummate the Reorganization in
accordance with the provisions of Section 368(a)(1)(C) of the Code.
3.MUTUAL REPRESENTATIONS AND WARRANTIES. Each of Jreck, LDM and Target is a
"Company" for the purposes of this Article 3. Except as set forth in any
exhibits to this Agreement, 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 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
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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
4.13); (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.
3.3. Brokers and Finders. Except for Jreck's obligation to Robert Berg,
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.
3.4. Division Approval. LDM and Jreck each acknowledge the need to seek
approval from the Division (as defined in Section 8.2 below) of the terms and
conditions of the transactions provided for under this Agreement and shall
cooperate with each other in order to procure such approval.
4. REPRESENATIONS AND WARRANTIES OF TARGET. LDM and Target hereby represent
and warrant to Jreck that except as set forth in any exhibits to this Agreement:
4.1. Compliance with Law. To LDM's and 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 to LDM's
and Target's knowledge, there are no violations thereof which have not been
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. Target is not
in violation of any decree, judgment, order, and to LDM's and Target's knowledge
any law or regulation of any court or other governmental body (including without
limitation, applicable franchise legislation and regulations, 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.
4.2. Investments in Others. Other than LDM's ownership of Target, LDM
and Target do not conduct any part of their business operations through any
subsidiaries or through any other entity. Other than LDM's ownership of Target,
LDM and Target do 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.
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4.3. Tax Returns and Payments. All tax returns and reports with respect
to LDM and Target required by law to be filed under the laws of any
jurisdiction, domestic or foreign, have been duly and timely filed (except as
set fort herein) and all taxes, fees or other governmental charges of any nature
which were required to have been paid, have been paid or funds have been set
aside to provide for the payment of all such taxes. Exhibit D contains a true
and complete list of all types of taxes paid or required to be paid by LDM
and/or Target and each state to which LDM and Target pay sales or use tax
related to the sale of their products. LDM and Target have 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 LDM and/or Target
(except as set forth herein). LDM and Target have no knowledge of any tax audit
of LDM and/or Target by any taxing or other authority in connection with any of
its fiscal years; LDM and Target have no knowledge of any such audit currently
pending or threatened, and there are no tax liens on any of LDM's and/or
Target's properties. Notwithstanding the foregoing, LDM's consolidated federal
and state income tax returns for fiscal years 1994-1995 and 1995-1996 were not
timely filed, but such returns indicate no taxes due. LDM's consolidated federal
and state income tax returns for fiscal year 1996-1997 are not yet due. LDM will
indemnify Jreck pursuant to Section 10 below for any Claims arising from any
such untimely tax filings.
4.4. Absence of Certain Changes or Events. Since the date (the "Balance
Sheet Date") of the most recent financial statement delivered by LDM and Target
pursuant to Section 4.16 (the "Balance Sheet"), there have been no, nor as of
the Closing Date shall there be, material changes in the condition, financial or
otherwise, assets, liabilities, business or the results of operations of LDM
and/or Target, other than changes in the ordinary course of business which in
the aggregate have not been materially adverse.
4.5. Inventories. The inventories, if any, shown on the Balance Sheet
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 LDM and 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 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 and to the
extent listed on the Exhibit A asset list, the accounts receivable of LDM shown
on the Balance Sheet as of the Balance Sheet Date, or thereafter acquired by
Target prior to the date hereof and thereafter acquired by LDM prior to the date
hereof to the extent listed on the Exhibit A asset list as of Closing, have
been, are and shall be (as the case may be) valid and enforceable and generated
in the ordinary course of business.
4.7. Personal Property. LDM and Target have good title, free and clear
of all liens, encumbrances and security interests, to all of its machinery,
equipment, furniture, inventory, franchise agreements and other personal
property, except as set forth on Exhibit E. To LDM's and 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. LDM and Target do not own any real property.
Exhibit F contains a list of all leases for real property to which LDM and/or
Target are
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a party (as lessee, sublessor, sublessee or guarantor), the monthly rental with
respect to each lease and the expiration date of each lease. To LDM's and
Target's knowledge, all such leases are valid and enforceable and are not in
default. The real property leased or occupied by LDM and/or Target, the
improvements located thereon, and the furniture, fixtures and equipment relating
thereto, (including plumbing, heating, air conditioning and electrical systems),
to LDM's and 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 LDM and/or Target
for any material improvements made to the real property, leased or occupied by
LDM and/or Target that have not been paid for.
4.9. Patents, Trademarks, Trade Names and Copyrights. Exhibit G sets
forth all patents, trademarks, trade names, copyrights, and other intellectual
property owned or utilized by LDM and/or 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 LDM's and/or Target's business are owned or are useable by LDM and
Target. Upon the Reorganization all such items shall be owned or useable by
Jreck to the same extent as by LDM and/or Target immediately prior to the
Reorganization. To LDM's and Target's knowledge, the conduct of any business
conducted by LDM and 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 LDM and Target, has been
threatened against LDM and/or Target or any officer, director, shareholder,
employee or agent of LDM and/or 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 knowledge of LDM and Target, does any basis exist
for such litigation. To LDM's and 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 LDM and/or Target.
4.10. Warranties. LDM and Target have made no warranties or guarantees
relating to their products other than as implied or required by law.
4.11. Litigations. Except as set forth on Exhibit H, neither LDM and/or
Target nor any officer, director, shareholder, employee or agent of LDM and/or
Target is a party to any pending or, to LDM's and 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 LDM and/or Target, liabilities, business or results of operations
of LDM and/or Target; or (ii) the transactions contemplated by this Agreement,
nor, to LDM's and Target's knowledge, does any basis exist for any such action,
suit, proceeding or investigation. LDM and Target are not and have not been
subject to any pending, or to LDM's and Target's knowledge threatened, product
liability claim; nor to LDM's and Target's knowledge does any basis exist for
any such claim. LDM and Target are 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 LDM and/or Target or which
could prevent the transactions contemplated by this Agreement. Notwithstanding
the foregoing, the pending or threatened actions, suits, proceedings or
investigations set forth on Exhibit H could not in the aggregate have a material
adverse effect on: (i) the condition, financial or otherwise, assets or
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properties of LDM and/or Target, liabilities, business or results of operations
of LDM and/or Target or (ii) the transactions contemplated by this Agreement.
4.12. Personnel. Exhibit I contains a true and complete 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 LDM and/or Target are a
party or are subject as of the date of this Agreement; and (ii) all group
insurance programs in effect for employees of LDM and Target. LDM and Target are
not in default with respect to any of the obligations so listed. LDM and Target
have 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. LDM and Target have no union contracts or collective
bargaining agreements with, or any other obligations to, employee organizations
or groups relating to LDM's and Target's negotiations except in minor grievances
not involving any employee organization or group, nor, to the knowledge of LDM
and Target, is LDM and/or Target the subject of any union organization affecting
its business. There is no pending or, to LDM's and/or Target's knowledge,
threatened labor dispute, strike or work stoppage affecting LDM's and/or
Target's business. All plans described in Exhibit I 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. Exhibit I also lists the amounts currently payable
to employees of LDM and Target under any other fringe benefit plans.
4.13. Contracts. Exhibit J contains a true and complete list of all
oral or written agreements, notes, instruments, or contracts to which LDM and/or
Target are a party or by which its assets or properties may be bound which
involve the payment or receipt of more than $10,000 (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 franchise, employment or consulting
agreements (the "Contracts"). LDM and Target are not in default in performance
of their obligations under any material provisions of such Contracts. LDM and
Target have no knowledge of any violation of any Contract by any other party
thereto and have 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. To LDM's and Target's
knowledge, neither they nor, the real property at any time owned, leased or
occupied by LDM and/or Target are 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. To LDM's and Target's
knowledge, 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 LDM and/or Target during LDM's and/or 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 North Carolina or any other state where LDM and/or Target conduct
business, 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
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Environmental Response Compensation and Liability Act, 42 U.S.C. Section 9601 et
sect, as amended ("CERCLA"), and any regulations applicable thereunder. To LDM
and Target's knowledge, the real property at any time owned, leased or occupied
by LDM and/or 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 LDM and/or Target as to any of such
real property.
4.15. Capitalization. The authorized capital stock of Target is
1,000,000 shares of $1.00 par value common stock of which 50,000 shares are
outstanding. LDM owns all the issued and outstanding shares of Target. A list of
all of the shareholders of LDM and Target by name and address, with the number
of shares owned by each as of the date hereof, is contained in Exhibit K. All
such issued and outstanding shares have been duly authorized and validly issued,
are fully paid and non-assessable, and are free and clear of all liens,
encumbrances and security interests. Except as set forth in Exhibit K, there are
no outstanding warrants, options, agreements, convertible or exchangeable
securities or other commitments 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 "Option Agreements"). Notwithstanding the
foregoing, LDM and Target represent and warrant that as of the Closing and
thereafter, no Option Agreements will survive the Reorganization.
4.16. Financial Statements. LDM has delivered the following financial
statements of LDM (the "LDM Financial Statements") to Jreck attached as Exhibit
L: unaudited balance sheet and income statement of LDM for the years ending
October 31, 1996 and October 31, 1997; audited balance sheet of Target for the
year ending October 31, 1996; and schedule of marketing fund income and expense
for the year ending October 31, 1997. LDM shall deliver an audited balance sheet
and income statement of Target on or before the Closing for the year ending
October 31, 1997. Each LDM Financial Statement together with the notes thereto
is in accordance with the books and records of LDM, fairly presents the
financial position of LDM and Target and the results of operations of LDM and
Target for the period indicated, and has been prepared in accordance with
generally accepted accounting principles consistently applied, except that any
unaudited statement or schedule does not contain all the notes required under
generally accepted accounting principles and any internally prepared schedules
have not been prepared in accordance with generally accepted accounting
principles.
4.17. Absence of Undisclosed Liabilites. Except as set forth in such
Balance Sheet and Exhibit M, neither LDM nor Target 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, which in the aggregate
will not have a material adverse effect upon LDM's or Target's business, assets
or properties in an amount exceeding $5,000.00.
4.18. Employees. Exhibit N contains a true and complete list of the
names, current salary rates, bonuses paid during the last fiscal year, and
accrued vacation and sick leave for all Target employees.
4.19. 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.
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4.20. Bank Accounts. Exhibit O contains a true and complete list of all
Target bank accounts identifying the name of the bank, the account number, and
the authorized signatories to the account.
4.21. Power of Attorney: Suretyships. LDM and Target have no power of
attorney outstanding, nor have any obligation or liability, either actual,
accrued, accruing or contingent, as guarantor, surety, cosigner, endorser,
co-maker, indemnitor or otherwise in respect of the obligation of any other
person, corporation, partnership, joint venture, association, organization or
other entity.
4.22. Accuracy of UFOC. To LDM's and Target's knowledge, the "Li'l Dino
Management Corporation Franchise Offering Circular, effective date _________,
1997" ("LDM's UFOC"), attached as Exhibit P, complies with all legal
requirements of the State of North Carolina respecting franchise offering
circulars as well as all legal requirements of any other state where LDM and/or
Target are doing business or currently offering franchises. All of the
statements, financial data and other information contained in LDM's UFOC are
true and correct in all material respects as of the date hereof. LDM'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.
4.23. List of Franchisees. Exhibit Q ontains a true and complete list
of all of LDM's and/or Traget's franchisess.
4.24. Accurancy 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
LDM and Target to the other party hereto to the best of LDM's and Target's
knowledge, are and will be complete and correct in all material respects. No
representations or warranties made by LDM and 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 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.
4.25. Approvals. Except for LDM and Target shareholder and board
approvals of this Agreement, no consent from any third party, except as set
forth on Exhibit R, and no consent, approval or authorization of, or
declaration, filing or registration with, any government or regulatory
authority, excluding the Division, is required to be made or obtained by LDM
and/or Target in order to permit the execution, delivery or performance of this
Agreement or any other agreement to which LDM and/or Target 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.
5. REPRESENTATIONS AND WARRANTIES OF JRECK. Jreck hereby represents and
warrants to LDM and Target that:
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5.1. Compliance with Law. To Jreck's knowledge, Jreck holds, and has at
all times held, all licenses, permits and authorizations necessary for the
lawful conduct of Jreck'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 Jreck
or over any part of Jreck's operations' and to Jreck's knowledge, there are no
violations thereof which have not been cured. Jreck is not in violation of any
decree, judgment, order, and to the Jreck'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 Jreck.
5.2. Capitalization. The authorized capital stock of Jreck is
50,000,000 shares of common, no par, voting stock of which 13,877,444 shares
were issued and outstanding as of November 6, 1997, and 5,000,000 shares of
authorized preferred of which 700,000 shares of Series A voting nonredeemable
convertible preferred, 350,000 shares of Series B voting nonredeemable
convertible preferred, and 120 shares of Series C non-voting nonredeemable
convertible 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 of Jreck 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.
5.3 Financial Statements. Jreck has delivered the following financial
statements of Jreck (the "Jreck Financial Statements") to LDM and Target, or
will promptly furnish to LDM and Target after the date hereof, true and complete
copies of: (i) the Form 10-SB Registration of Jreck dated December, 1997 (the
"Jreck Form 10-SB") proposed to be filed with the SEC; (ii) the 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 (all or part of which may be included in Jreck Form
10-SB); (iii) the unaudited consolidated balance sheet of Jreck Subs Group, Inc.
as of September 30, 1997 and 1996, and the related statements of income, cash
flows and stockholders' equity for the nine-month periods then ended; (iv) each
report, if any (including, without limitation, reports in the form of a 10-K,
10-Q, 8-K, Schedule 13-D, etc.) prepared by Jreck, although not filed with the
SEC since Jreck is not a reporting company, and (v) each final prospectus and
definitive proxy statement furnished by Jreck to its stockholders since January
1, 1996. 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.
5.4 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 5.3 (the "Balance Sheet"), there have been no, nor as of the Closing
Date shall there, be material changes in the condition, financial or otherwise,
assets, liabilities, business or the results of operations of Jreck, other than
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changes in the ordinary course of business which in the aggregate have not been
materially adverse.
5.5. Litigation/Correspondence/Proceedings. Except as set forth on
Exhibit S, 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.
Jreck 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 Jreck or which could prevent the transaction contemplated by
this Agreement. Exhibit S accurately lists all written notices, correspondence
and written inquiries which Jreck has received on or after January 1, 1996, from
the Securities and Exchange Commission ("SEC"), the National Association of
Securities Dealers, Inc. ("NASD"), the Federal Trade Commission and the
securities or franchise commission of any state or from any other regulatory
agency with authority over the sale of securities or the offer and sale of
franchises in any jurisdiction (exclusive of routine notices, correspondence and
inquiries from such agencies concerning the registration or availability of an
exemption from registration for the offering of shares or franchises for sale in
such jurisdiction). Except as described in Exhibit S, neither Jreck nor any of
its officers or directors has ever been the subject of any SEC, Federal Trade
Commission or state regulatory agency stop order or censure or NASD disciplinary
proceeding or, to the knowledge of Jreck, the subject of any investigation with
respect to such proceeding.
5.6. Accuracy of UFOC. To Jreck's knowledge, the Jreck Uniform
Franchise Offering Circular not yet effective ("Jreck's UFOC"), the Mountain
Mike's Uniform Franchise Offering Circular ("Mountain Mike'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, the state of California with respect to the
Mountain Mike's UFOC and the state of Nebraska with respect to the Little Kings
UFOC, respecting franchise offering circulars as well as all legal requirements
of any other state where Jreck, Mountain Mike's 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 Mountain Mike's UFOC and
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
Mountain Mike's UFOC and 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 franchises
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
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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.
5.7. Tax Treatment of Reorganization. Jreck makes no representation or
warranty as to whether this Agreement and the consummation of the Reorganization
will be treated as a tax free plan of reorganization in accordance with the
provisions of Section 368(a)(1)(C) of the Code and is relying on LDM and Target
to consult with their tax advisors regarding the tax treatment of this
Agreement.
5.8. Tax Returns and Payments. All tax returns and reports with respect
to Jreck 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 funds have been set aside to provide for the payment of all
such taxes. Jreck 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 Jreck. Jreck has no knowledge of any tax audit of Jreck by any
taxing or other authority in connection with any of its fiscal years; Jreck has
no knowledge of any such audit currently pending or threatened, and there are no
tax liens on any of Jreck's properties.
5.9. Patents. Trademarks Trade Names and Copyrights. Exhibit T sets
forth all patents, trademarks, trade names, copyrights, and other intellectual
property owned or utilized by Jreck. 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
Jreck's business are owned or are useable by Jreck. To Jreck's knowledge, the
conduct of any business conducted by Jreck 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 Jreck, has
been threatened against Jreck or any officer, director, shareholder, employee or
agent of Jreck, 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 Jreck, does any basis exist for such litigation. To Jreck'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 Jreck.
5.10. Absence of Environmental Liabilities. Neither Jreck nor, to
Jreck's knowledge, neither it nor the real property at any time owned, leased or
occupied by Jreck 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. To Jreck's knowledge, 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 Jreck
during Jreck'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, 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
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Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C.
Section 9601 et sect, as amended ("CERCLA"), and any regulations applicable
thereunder. To Jreck's knowledge, the real property at any time owned, leased or
occupied by Jreck, 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 Jreck as to any of such real
property.
5.11. Jreck Information in LDM Shareholder Meeting Notice. All
information relating to and concerning Jreck contained in LDM's shareholder
meeting notice referred to in Section 8.2 including, without limitation, the
Jreck From 10-SB, will be true in all material respects and will not, as of the
date of mailing of LDM's shareholder meeting notice or as of the date of the LDM
shareholder's meeting, contain any untrue statement of material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements there, in light of the circumstances under which they are made, not
misleading. Jreck makes no representation or warranty as to any other statement,
information or omission in the LDM shareholder meeting notice. Jreck will
promptly inform LDM of any material changes in its business affairs, operations
or financial condition which would require any change in the LDM shareholder
meeting notice or the Jreck Form 10-SB contained therein.
5.12. 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
Jreck to the other parties hereto to the best of Jreck's knowledge, are and will
be complete and correct in all material respects. No representations or
warranties made by Jreck in this Agreement, nor any document, written
information, statement, financial statement, certificate, Schedule or Exhibit
furnished directly to the other parties hereto pursuant to this Agreement
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.
5.13. Non-Disposition of LDM. From and after the Closing Date, it is
Jreck's intention not to dispose of the assets of LDM acquired hereunder,
including the Target Common, except in the ordinary course of business provided,
however, Jreck shall be free to merge the operations of Target into Jreck in
continuance of Target's business enterprise.
5.14. Approvals. Except for Jreck board approval 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, excluding the Securities Exchange Commission and any state securities
regulatory body, is required to be made or obtained by Jreck in order to permit
the execution, delivery or performance of this Agreement or any other agreement
to which Jreck 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.
6. CONDITOINS OT THE OBLIGATION OF JRECK. The obligation of Jreck to
consummate the Reorganization 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.
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6.1. Representations and Warranties True at Closing. The
representations and warranties of LDM and 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 LDM and 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 LDM and
Target to the effect that the conditions set forth in Sections 6.1 and 6.2 have
been satisfied.
6.4. Shareholder/Board of Director Approval. This Agreement and the
Plan of Reorganization, to the extent required by law, shall have been duly
approved by the Board of Directors of LDM and Target as of the date hereof. Both
LDM and Target shall certify to Jreck at Closing that all 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 exceed seven and one-half percent (7.5%) of the aggregate of the outstanding
shares of LDM common stock outstanding immediately before the Reorganization.
6.6. Material Changes in the Business of LDM and/or Target. There shall
have been no material adverse change in the financial position, results of
operations, assets, liabilities or business of LDM and/or Target since the date
of this Agreement.
6.7. Consents. Jreck shall have received in writing any consents,
approvals, renewal of all bank loans, and waivers required in connection with
the Reorganization (a) from parties to LDM's and/or Target's agreements,
indentures, mortgages, franchises, licenses, permits, leases, and other
instruments set forth in exhibits to this Agreement, including without
limitation the Contracts and (b) from all governmental authorities.
6.8. Documenations. 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
Reorganization, 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.
6.9. Outstanding Securities. At the Closing, the only issued and
outstanding securities of Target shall be the Target Common, and there shall be
no other outstanding securities, options, warrants, stock option plans, or
securities entitlements of any kind.
6.10. Financial Condition. At the Closing, the LDM Financial Statements
shall reflect that Target's current liquid (cash or cash equivalent) assets are
equal to or greater than Target's current liabilities.
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7. CONDITIONS TO THE OBLIGATION OF TARGET. The obligation of LDM and Target
to consummate the Reorganization 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 and LDM:
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 or before the Closing pursuant to the terms of this Agreement shall
have been duly performed.
7.3. Shareholder Approval. This Agreement and the Reorganization, to
the extent required by law, shall have been duly approved by the shareholders of
LDM as of the date of Closing.
7.4. Consents. LDM and Target shall have received in writing any
consents, approvals, and waivers required in connection with the Reorganization
(a) from parties to Jreck's agreements, indentures, mortgages, franchises,
licenses, permits, leases, and other instruments set forth in exhibits to this
Agreement, and (b) from all governmental authorities.
7.5. Documentation. All actions, proceedings, instruments, resolutions,
certificates, and documents reasonably requested by LDM and Target to be
executed and delivered to LDM and Target in order to carry out this Agreement
and to consummate the Reorganization, and all of the relevant legal matters,
shall be reasonably satisfactory to LDM, Target and their counsel.
7.6. Certificate. At Closing, LDM and 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.
7.7. 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.
8. PRE-CLOSING COVENANTS
8.1. Pre-Closing Documents. During the period from the date of this
Agreement until the Closing, LDM, Target and Jreck covenant and agree as
follows:
8.1.1.Advice of Changes. Each of LDM, Target and Jreck will
promptly advise the other in writing (i) of any event occurring subsequent to
the date of this Agreement that would render any representation or warranty of
such party 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 such party's business.
8.1.2. Maintenance of Business. MLDM and Target will use their
reasonable best efforts to carry on and preserve their business and their
relationships with customers, suppliers, employees and others in substantially
the same manner as it has prior to the date hereof. If LDM or Target becomes
aware of a deterioration in the relationship with any customer, supplier or key
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employee, they will promptly bring such information to the attention of Jreck in
writing and, if requested by Jreck, will exert their reasonable 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, LDM and
Target covenant and agree that prior to the Closing:
(a)The business of LDM and Target shall be conducted
only in, and LDM and Target shall not take any action except in, the ordinary
course of business, and LDM and Target shall use their best efforts to maintain
and preserve their business organization, assets, employees and business
relationships, except that Target and LDM may pay the expenses set forth in
Section 12.1;
(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 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 LDM and/or Target to
obtain secured indebtedness for borrowed money on customary terms) any assets or
rights of LDM and/or 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 $10,000; (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;
(d) Target shall 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 LDM and/or Target, or (ii) with respect to any increase of benefits
payable under its current severance or termination pay policies other than any
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increase resulting from an increase in salaries granted in the ordinary course
and in accordance with past practices;
(e) Target shall 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 their books of account
and record and billing practices consistently with past practices; (ii) maintain
and keep their properties and assets in as good repair, working order and
condition as at present, except for ordinary wear and tear; (iii) promptly
notify Jreck of any change which would have a material adverse effect on LDM or
Target, or their business, assets or properties;
(g) Target shall 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 LDM and Target and their business, assets and properties
are subject, except where the failure to comply would not have, individually or
in the aggregate, a material adverse effect on LDM or Target, or their
respective businesses, assets or properties; 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. As promptly as practicable after the date
hereof, LDM shall file an application with the North Carolina Secretary of
State, Securities Division (the "Division"), to seek approval of the terms and
conditions of the transactions provided for under this Agreement pursuant to
N.C.G.S. ss. 78A-30. If the Division approves the transaction, then LDM shall,
as promptly as practicable after receipt of such approval, mail an appropriate
notice to LDM's shareholders seeking their approval of the terms of the
transaction provided for under this Agreement. If the Division denies approval
of the transaction, or if the application for approval is rejected or withdrawn
by LDM for any reason, then LDM shall nonetheless proceed promptly with the
mailing of notice to LDM's shareholders to seek approval of the transaction. In
either event, the shareholder meeting shall be held as promptly as practicable
after the date of mailing, subject to applicable statutory and LDM bylaw
requirements and the Closing shall be held no more than fifteen (15) days
following the date of approval by LDM's shareholders.
LDM and Jreck acknowledge that if approval of the transaction from the Division
is obtained, the issuance of Jreck shares to LDM will be effected under the
federal exemption from registration provided by ss. 3(a)(10) of the Securities
Act. The subsequent distribution by LDM of the Jreck shares to LDM's
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shareholders will require either an effective Jreck registration statement under
the Securities Act, or the availability of a federal and state exemption from
registration. In that event, LDM would proceed with its plan of liquidation and
dissolution and distribute the Jreck shares to LDM's shareholders as soon as the
distribution can be effected pursuant to a Jreck registration statement in
accordance with Section 2.7, or at such time as an exemption from federal and
state registration is available.
LDM and Jreck acknowledge that if approval of the transaction from the Division
is not obtained for any reason, then the ss. 3(a)(10) exemption will not be
available and issuance of Jreck shares to LDM will be effected under federal
exemption ss. 4(2). That exemption would require LDM to hold the Jreck stock for
a certain period of time to comply with the requirements of that exemption or
Rule 144 thereunder. LDM acknowledges that the sale transaction under that
scenario may not constitute a tax-free reorganization under applicable Code
rules and regulations.
8.3. Necessary Consents. Prior to the Closing, LDM and Target shall use
their reasonable 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 LDM and Target to carry on
their respective businesses after the Closing.
8.4. Exclusivity. From the date hereof until the earlier of termination
of this Agreement or consummation of the Reorganization, neither LDM, Target nor
any of their 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 any merger, consolidation, sale of assets, sale of majority control,
or other similar transaction involving LDM and/or 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 Disclosures. 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.
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8.7.1. Board Position. As soon after the Closing as
practicable, Jreck, its officers and directors, shall cause Larry C. Barrett to
be elected or appointed as a member of the Jreck Advisory Board of Directors.
8.7.2. Liquidation and Dissolution. LDM shall liquidate and
dissolve in accordance with North Carolina law as required in Section
368(a)(2)(G) of the Code.
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 Reorganization, 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 or the Plan of
Reorganization without the prior approval of the other party. Notwithstanding
the foregoing, and after reasonable consultation with LDM and Target, Jreck may
make such announcements regarding the Reorganization as, in the judgment of its
management after consultation with legal counsel, are necessary to comply with
any securities laws or regulations.
10. Indemnifications. LDM ("Indemnitor") hereby indemnifies Jreck
("Indemnitee") for ten (10) months after the Closing against all Claims (as
defined below) and all costs, expenses, and attorneys' fees incurred in the
defense of any of such Claims or any action or proceeding brought on any of such
Claims. For purposes of this Section, "Claims" shall mean all liabilities,
damages, losses, costs, expenses, attorneys' fees, and claims, arising from (a)
any breach or default in the performance of any obligation to be performed by
Target or LDM under this Agreement or (b) any breach of any representation,
warranty or covenant of Target or LDM set forth in this Agreement. If any action
or proceeding is brought against Indemnitee by reason of any such Claims,
Indemnitor upon notice from Indemnitee shall defend such action or proceeding at
Indemnitor's sole cost by legal counsel reasonably satisfactory to Indemnitee.
In addition to any other remedies available to Indemnitee in law or in equity,
Indemnitor's obligations under this Section 10 shall be secured by a pledge of
ten percent (10%) of the Jreck Common received by Indemnitor pursuant to the
terms of this Agreement, as set forth in the Pledge Agreement attached as
Exhibit U.
11. Termination.
11.1. Mutual Agreement. This Agreement may be terminated at any time
prior to the Closing by the unanimous mutual consent of Jreck, LDM and Target,
even if and after the shareholders of LDM have approved this Agreement and the
Reorganization.
11.2. Termination by Jreck. This Agreement may be terminated by Jreck
alone, by means of written notice to LDM and Target if (a) LDM and/or Target
fail to perform any material covenant of LDM and/or Target contained in this
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Agreement, or (b) on or before March 31, 1998, any of the conditions set forth
in Article 6 of this Agreement shall not have been satisfied by LDM and Target
or waived by Jreck.
11.3. Termination by LDM/Target. This Agreement may be terminated by
LDM and Target alone, by means of written notice to Jreck if (a) Jreck fails to
perform any material covenant of Jreck contained in this Agreement, (b) LDM's
Board of Directors fail to approve this Agreement on or before December 19,
1997, (c) LDM's shareholders fail to approve this Agreement on or before March
31, 1998, or (d) on or before March 31, 1998, any of the conditions set forth in
Article 7 of this Agreement shall not have been satisfied by Jreck or waived by
LDM and Target.
11.4. Break Up Fee. If this Agreement or the transactions contemplated
under this Agreement are terminated or abandoned by LDM or Target because LDM's
shareholders fail to approve this Agreement pursuant to Section 8.2 on or before
March 31, 1998, then LDM and Target shall promptly pay Jreck a fee equal to
$250,000.00.
12. Miscellaneous.
12.1. Expenses. Jreck 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. LDM and Target shall pay their 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.
12.2. Time. Time and strict and punctual performance are of the essence
with respect to each provision of this Agreement.
12.3. Governing Law. This Agreement is governed by and construed in
accordance with the laws of the State of North Carolina.
12.4. Headings. The paragraph headings in this Agreement: (a) are
included only for convenience, (b) do not in any manner modify or limit any of
the provisions of this Agreement, and (c) may not be used in the interpretation
of this Agreement.
12.5. Notices. Each notice and other communication required or
permitted to be given under this Agreement ("Notice") must be in writing. Notice
is duly given to another party upon: (a) hand delivery to the other party, (b)
receipt by the other party when sent by facsimile to the address and number for
such party set forth below (provided, however, that the Notice is not effective
unless a duplicate copy of the facsimile Notice is promptly given by one of the
other methods permitted under this paragraph), (c) three business days after the
Notice has been deposited with the United States postal service as first class
certified mail, return receipt requested, postage prepaid, and addressed to the
party as set forth below, or (d) the next business day after the Notice has been
deposited with a reputable overnight delivery service, postage prepaid,
addressed to the party as set forth below with next-business-day delivery
guaranteed, provided that the sending party receives a confirmation of delivery
from the delivery-service-provider.
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If to Jreck:
Jreck Subs Group, Inc.
P.O. Box 6
Watertown, NY 13601
Attention: Christopher Swartz
Facsimile: (315) 788-8954
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
If to LDM/Target:
Li'l Dino Management Corporation
1915 Lendew Street, Suite 104
Greensboro, NC 27408
Attention: Larry C. Barrett
Facsimile: (910) 545-8390
With a copy to:
Wyatt Early Harris & Wheeler, L.L.P.
1912 Eastchester Drive, Suite 400
High Point, NC 27261
Attention: Charles A. Alt, Esq.
Facsimile: (910) 889-5232
Each party shall make a reasonable, good faith effort to ensure that it will
accept or receive Notices to it that are given in accordance with this
paragraph. A party may change its address for purposes of this paragraph by
giving the other party(ies) written notice of a new address in the manner set
forth above.
12.6. Partial Invalidity. Each provision of this Agreement is valid and
enforceable to the fullest extent permitted by law. If any provision of this
Agreement (or the application of such provision to any person or circumstance)
is or becomes invalid or unenforceable, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, are not affected by such invalidity
or unenforceability unless such provision or the application of such provision
is essential to this Agreement.
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12.7. Survival of Representation, Warranties and Covenants. All
representations and warranties contained in this Agreement, including the
Exhibits, Schedules and other documents delivered pursuant to this Agreement
shall survive the Closing and shall expire one year thereafter. All covenants
contained in this Agreement which by their nature survive the Closing shall
survive the Closing unless otherwise limited in accordance with their terms
under this Agreement.
12.8. Waiver. Any waiver of a default or provision under this Agreement
must be in writing. No such waiver constitutes a waiver of any other default or
provision concerning the same or any other provision of this Agreement. No delay
or omission by a party in the exercise of any of its rights or remedies
constitutes a waiver of (or otherwise impairs) such right or remedy. A consent
to or approval of an act does not waive or render unnecessary the consent to or
approval of any other or subsequent act.
12.9. Successors in Interest and Assigns. Neither Target or LDM, on the
one hand, nor Jreck, on the other hand, may voluntarily or by operation of law
assign, hypothecate, delegate or otherwise transfer or encumber all or any part
of its rights, duties or other interests in this Agreement without the prior
written consent of the other party, which consent may be withheld in such
party's sole and absolute discretion. Any such transfer in violation of this
paragraph is void. Subject to the foregoing and any other restrictions on
transferability contained in this Agreement, this Agreement is binding upon and
inures to the benefit of the successors-in-interest and assigns of each party to
this Agreement.
12.10. Counterparts and Exhibits. This Agreement may be executed in
counterparts, each of which is deemed an original and all of which together
constitute one document. All exhibits attached to and referenced in this
Agreement are incorporated into 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. If any such dispute is initiated by LDM or Target, such arbitration
shall be held in San Diego, California; however, if any such dispute is
initiated by Jreck, such arbitration shall be held in Greensboro, North
Carolina. The results, determination, finding, judgment or award rendered
through such arbitration(s), shall be final and binding on each of the parties
hereto and not subject to appeal.
12.13. Attorney Fees. The prevailing party(ies) in any litigation,
arbitration, mediation, bankruptcy, insolvency or other proceeding
("Proceeding") relating to the enforcement or interpretation of this Agreement
may recover from the unsuccessful party(ies) all costs, expenses, and actual
attorney's fees (including expert witness and other consultants' fees and costs)
relating to or arising out of (a) the Proceeding (whether or not the Proceeding
proceeds to judgment), and (b) any post-judgment or post-award proceeding
including, without limitation, one to enforce or collect any judgment or award
resulting from the Proceeding. All such judgments and awards shall contain a
26
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specific provision for the recovery of all such subsequently incurred costs,
expenses, and actual attorney's fees.
12.14. Prior Understandings. This Agreement and all documents
specifically referred to and executed in connection with this Agreement: (a)
contain the entire and final agreement of the parties to this Agreement with
respect to the subject matter of this Agreement, and (b) supersede all
negotiations, stipulations, understandings, agreements, letters of intent,
representations and warranties, if any, with respect to such subject matter,
which precede or accompany the execution of this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
JRECK SUBS GROUP, INC.
By: ______________________________
Christopher M. Swartz,
Chairman of the Board and
Chief Executive Officer
LI'L DINO CORPORATION
By: ______________________________
Larry C. Barrett,
Chairman of the Board and
Chief Executive Officer
LI'L DINO MANAGEMENT
CORPORATION
By: ______________________________
Larry C. Barrett,
Chairman of the Board and
Chief Executive Officer
28
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EXHIBIT A
ASSETS OF LDM
EXHIBIT B
LDM LIABILITIES
EXHIBIT C
PERMITS, LICENSES, AUTHORIZATIONS
EXHIBIT D
TAXES
EXHIBIT E
PERSONAL PROPERTY
EXHIBIT F
LIST OF LEASES
EXHIBIT G
LIST OF PATENTS, TRADEMARKS, TRADE NAMES AND COPYRIGHTS
EXHIBIT H
TARGET LITIGATION
EXHIBIT I
PERSONNEL
EXHIBIT J
CONTRACTS
EXHIBIT K
LDM/TARGET SHAREHOLDER LIST/OPTION AGREEMENTS
EXHIBIT L
FINANCIAL STATEMENTS
29
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EXHIBIT M
NON BALANCE SHEET LIABILITIES
EXHIBIT N
EMPLOYEES
EXHIBIT O
BANK ACCOUNTS
EXHIBIT P
TARGET UFOC
EXHIBIT Q
FRANCHISEES
EXHIBIT R
THIRD PARTY APPROVALS
EXHIBIT S
JRECK LITIGATION
EXHIBIT T
PATENTS, TRADEMARKS, TRADE NAMES AND COPYRIGHTS
EXHIBIT U
PLEDGE AGREEMENT
30
PURCHASE AGREEMENT
AMONG
JRECK SUBS GROUP, INC.
INTERFOODS OF AMERICA, INC. AND
SBK FRANCHISE SYSTEMS, INC.
December 4, 1997
<PAGE>
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (the "Agreement") is made as of December 4,
1997 among Jreck Subs Group, Inc., a Colorado corporation ("Jreck"), SBK
Franchise Systems, Inc., a Florida corporation ("Target"), and Interfoods of
America, Inc., a Nevada corporation ("IFA").
RECITALS
A.The parties hereto desire that Jreck acquire each share of the Common
Stock, no par value, of Target which is outstanding immediately prior to Closing
(as defined below) of this Agreement.
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.
1.3. Closing Date shall mean the delivery by Jreck and Target of the
various documents contemplated by this Agreement or otherwise required in order
to consummate this Agreement.
1.4. Corporations Code shall collectively mean the Delaware General
Corporations Law (the "Delaware Corporations Code"), and the Florida Statutes
(the "Florida Statutes").
1.5. Exchange Act shall mean the Securities and, Exchange Act of 1934,
as amended, and the rules and regulations thereunder.
1.6. 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.
1.7. 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.
1.8. Securities Act shall mean the Securities Act of 1933, as amended,
and the rules and regulations thereunder.
1.9. Target Common shall mean the voting common stock, $1.00 par value,
of SBK Franchise Systems, Inc.
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2. CLOSING AND TRANSFER OF SHARES.
2.1. Closing. The Closing shall, in Jreck's discretion, take place
either at the offices of Target, 9400 S. Dadeland Blvd., #720, Miami, FL 33156,
or by mail and facsimile, on December 4, 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 this Agreement as set
forth in Articles 6 and 7 have been satisfied or waived.
2.2. Transfer of Shares. At the Closing, each share of Target Common
outstanding immediately prior to the Closing shall be exchanged at and as of the
Closing into shares of Jreck Common valued at $500,000.00 for all Target Common.
With respect to this Section 2.2, the aggregate number of shares of Jreck Common
to be issued to IFA at the Closing shall be calculated at a price per share for
Jreck Common based on the average closing bid price for the publicly traded
shares of Jreck common stock for the five trading 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.
Commencing six months after the Closing and continuing every six months
thereafter until June 4, 2000, IFA shall have the non-cumulative right to
require Jreck, to the extent legally permissible, to repurchase one-fifth
(1/5th) of the Jreck Common issued to IFA under this Agreement in consideration
of the payment of $100,000.00 by IFA to Jreck (the "Options"). IFA shall
exercise any of the Options by notifying Jreck in writing of its election to
exercise such Option at least 30 days prior to the expiration of any such
six-month period and Jreck shall tender the $100,000.00 payment to IFA within 30
days after the expiration of any such six-month period. Any Option not exercised
at least 30 days prior to the expiration of the applicable 30-day period shall
lapse and not cumulate.
2.3. Additional Consideration. As additional consideration for the
acquisition of the Target Common, Jreck shall (a) pay IFA $100,000.00 in cash at
the Closing, (b) deliver to IFA at the Closing a $500,000.00 promissory note
(the "Note"), in the form of attached Exhibit A, in favor of IFA, and (c) assume
the rights and obligations under that certain Exclusive Trademark and Licensing
Agreement, attached as Exhibit B (the "Trademark Agreement").
2.4. Exchange of Certificate.
2.4.1. Promptly after the Closing, Jreck shall make available
for exchange in accordance with this Section 2.4, the shares of Jreck Common
issuable pursuant to Section 2.2 in exchange for all outstanding shares of
Target Common.
2.5. Unregistered Shares. The Jreck Common to be issued to IFA 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 IFA
understand that the Jreck Common has 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 IFA indefinitely and IFA 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. IFA acknowledges 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
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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.
2.5.1. Other Resale Restrictions. With respect to any shares
of Jreck Common issued pursuant to this Agreement to IFA, for so long as such
shares of Jreck Common remain unregistered, such shares and IFA shall be subject
to a further restriction providing that IFA, or its successor, shall not 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.
3. MUTUAL REPRESENTATIONS AND WARRANTIES. Each of Jreck, IFA and Target is
a "Company" for the purposes of this Article 3. Except as set forth in any
exhibits to this Agreement, 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 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
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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
4.13); (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.
3.3. 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 AND IFA. Target and IFA hereby
represent and warrant to Jreck that except as set forth in any exhibits to this
Agreement:
4.1. Compliance with Law. To Target's and IFA'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 neither
Target nor IFA knows of any violation thereof. Target is not in violation of any
decree, judgment, order, and to Target's and IFA's knowledge any law or
regulation of any court or other governmental body (including without
limitation, applicable franchise legislation and regulations, 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.
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 Returens 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. Neither Target nor IFA has
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.
Neither Target nor IFA has knowledge of any tax audit of Target by any taxing or
other authority in connection with any of its fiscal years; neither Target nor
IFA has knowledge of any such audit currently pending or threatened, and there
are no tax liens on any of Target's properties.
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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 4.16 (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 60 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, franchise agreements and other personal property. To
Target's and IFA'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. Exhibit C
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 and IFA'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, air conditioning and electrical systems), to Target's and IFA'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. Exhibit D 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 Closing all such
items shall be owned or useable by Jreck to the same extent as by Target
immediately prior to the Closing. To Target's and IFA'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 and IFA, 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 and IFA, does any basis exist for such litigation. To
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Target's and IFA'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. Except as set forth on Exhibit E, neither Target nor
any officer, director, shareholder, employee or agent of Target is a party to
any pending or, to Target's and IFA'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 and IFA'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 and IFA's knowledge threatened, product liability claim; nor to
Target's and IFA'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. Notwithstanding the foregoing, the pending or threatened
actions, suits, proceedings or investigations set forth on Exhibit E could not
in the aggregate 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.
4.12. Personnel. Exhibit F contains a true and complete 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 and IFA, is Target the subject of any
union organization affecting its business. There is no pending or, to Target's
and IFA's knowledge, threatened labor dispute, strike or work stoppage affecting
the Target's business. All plans described in Exhibit F 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. Exhibit F also lists the amount payable to
employees of Target under any other fringe benefit plans.
4.13. Contracts. Exhibit G contains a true and complete list of 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
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payment or receipt of more than $5,000 (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. Neither Target nor IFA has 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 Environmentals Liabilities. Neither Target nor, to
Target's and IFA'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 Florida,
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 sect, as
amended ("CERCLA"), and any regulations applicable thereunder. To Target's and
IFA'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
4,000,000 shares of $1.00 par value Common Stock of which 4,000,000 shares are
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 Exhibit H. All such issued and outstanding shares have been duly
authorized and validly issued, are fully paid and non-assessable, and are free
and clear of all liens, encumbrances and security interests. Except as set forth
in Exhibit H, there are no outstanding warrants, options, agreements,
convertible or exchangeable securities or other commitments 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 "Option Agreements").
Notwithstanding the foregoing, Target represents and warrants that as of the
Closing and thereafter, no Option Agreements will survive the Closing.
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 the year ending September 30,
1997, schedule of royalty income for the year ending September 30, 1997,
schedule of marketing fund income and expenses for the year ending September 30,
1997, and IFA Form 10-K filed with the Securities Exchange Commission for the
year ending September 30, 1997. Each Target Financial Statement together with
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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 included in Target Financial
Statements. Except as set forth in such Balance Sheet, 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. Exhibit I 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. Exhibit J 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. Exhibit K contains a true and complete 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. Exhibit L contains a true and complete 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 obligation of any other person,
corporation, partnership, joint venture, association, organization or other
entity.
4.24. Accuracy of UFOC. To Target's and IFA's knowledge, the "SBK
Franchise Systems, Inc. Franchise Offering Circular, effective date January 1,
1997" ("Target's UFOC"), attached as Exhibit M, complies with all legal
requirements of the State of Florida 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 January 1,
1997 and continue 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.
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4.25. List of Franchisees. Exhibit N contains a true and complete list
of all of Target's franchisees.
4.26. 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, 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 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.
4.27. Approvals. Except for Target shareholder and board approvals and
IFA board approval of this Agreement, no consent from any third party, including
without limitation IFA shareholders, and no consent, approval or authorization
of, or declaration, filing or registration with, any government or regulatory
authority, including without limitation the Securities Exchange Commission, is
required to be made or obtained by Target or IFA in order to permit the
execution, delivery or performance of this Agreement or any other agreement to
which Target or IFA 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.
5. REPRESENATIONS 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 13,877,444 shares
were issued and outstanding as of November 6, 1997, and 5,000,000 shares of
authorized preferred of which 700,000 shares of Series A voting nonredeemable
convertible preferred, 350,000 shares of Series B voting nonredeemable
convertible preferred, and 120 shares of Series C non-voting nonredeemable
convertible 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 September 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.
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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. Except as set forth on Exhibit O, 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. Accuracy of UFOC. To Jreck's knowledge, the Jreck Uniform
Franchise Offering Circular not yet effective ("Jreck's UFOC"), the Mountain
Mike's Uniform Franchise Offering Circular ("Mountain Mike'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, the state of California with respect to the
Mountain Mike's UFOC and the state of Nebraska with respect to the Little Kings
UFOC, respecting franchise offering circulars as well as all legal requirements
of any other state where Jreck, Mountain Mike's 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 Mountain Mike's UFOC and
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
Mountain Mike's UFOC and 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 franchises
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 this Agreement 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 and IFA contained in this Agreement
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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/Board of Director Approval. This Agreement, to the
extent required by law, shall have been duly approved by the shareholder and
Board of Directors of Target, and by the Board of Directors of Jreck and IFA 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. Materials 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.
6.6. Consents. Jreck shall have received in writing any consents,
approvals, and waivers required in connection with this Agreement (a) from
parties to Target's agreements, indentures, mortgages, franchises, licenses,
permits, leases, and other instruments set forth in exhibits to this Agreement,
including without limitation the Contracts and (b) from all governmental
authorities.
6.7. Documenation. 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 this
Agreement, 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.
6.8. Outstanding Securities. At the Closing, the only issued and
outstanding securities of Target shall be the Target Common, and there shall be
no other outstanding securities, options, warrants, stock option plans, or
securities entitlements of any kind.
6.9. Opinion of Counsel. At the Closing, Jreck shall have received an
opinion of IFA and Target counsel in the form of attached Exhibit P.
6.10. Financial Condition. At the Closing, the Target Financial
Statements shall reflect that Target's current liquid assets are equal to or
greater than Target's current liabilities and that Target has acquired those
certain assets listed on attached Exhibit Q, formerly owned by its affiliate,
Sobik's Restaurant Corp., a Florida corporation.
7. CONDITIONS TO THE OBLIGATION OF TARGET. The obligation of Target to
consummate this Agreement 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:
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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. Coventants Performed. All of the obligations of Jreck to be
performed at or before the Closing pursuant to the terms of this Agreement shall
have been duly performed.
7.3. 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 this
Agreement, and all of the relevant legal mattes, shall be reasonably
satisfactory to Target and its counsel.
7.4. 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.
7.5. 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.
8. PRE-CLOSING COVENANTS
8.1. Pre-Closing Documents. During the period from the date of this
Agreement until the Closing, Target, IFA 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 or IFA 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 in substantially the same manner as
it has prior to the date hereof. If Target or IFA becomes aware of a
deterioration in the relationship with any customer, supplier or key employee,
they 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 and
IFA covenant and agree 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;
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(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;
(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 Jreck 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;
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(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. Necessary Consents. Prior to the Closing, Target shall 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.
8.3. Exclusivity. From the date hereof until the earlier of termination
of this Agreement or consummation of this Agreement, 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 any
merger, consolidation, sale of assets, sale of majority control, or other
similar transaction involving Target.
8.4. 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.
8.5. Amendments to Dislosures. 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 8.5, 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.
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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 this Agreement, 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, without the
prior approval of the other party. Notwithstanding the foregoing, and after
reasonable consultation with Target and IFA, Jreck may make such announcements
regarding this Agreement as, in the judgment of its management after
consultation with legal counsel, are necessary to comply with any securities
laws or regulations.
10. Indemnification. IFA ("Indemnitor") hereby indemnifies Jreck
("Indemnitee") against all Claims (as defined below) and all costs, expenses,
and attorneys' fees incurred in the defense of any of such Claims or any action
or proceeding brought on any of such Claims. For purposes of this Paragraph,
"Claims" shall mean all liabilities, damages, losses, costs, expenses,
attorneys' fees, and claims, arising from (a) any breach or default in the
performance of any obligation to be performed by Target or IFA under this
Agreement or (b) any breach of any representation, warranty or covenant of
Target or IFA set forth in this Agreement. If any action or proceeding is
brought against Indemnitee by reason of any such Claims, Indemnitor upon notice
from Indemnitee shall defend such action or proceeding at Indemnitor's sole cost
by legal counsel reasonably satisfactory to Indemnitee. Without limiting the
foregoing, Indemnitee shall have the right to set off any damages incurred by
Indemnitee arising from any such Claims, against the payments due under the Note
or any other obligation due by Indemnitee to Indemnitor.
11. Termination.
11.1. Mutual Agreement. This Agreement may be terminated at any time
prior to the Closing by the unanimous mutual consent of Jreck and Target, even
if and after the shareholders of Target have approved this Agreement.
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
December 31, 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
December 31, 1997, any of the conditions set forth in Article 7 of this
Agreement shall not have been satisfied by Jreck or waived by Target.
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12. Miscellaneous.
12.1. Expenses. Jreck 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. IFA shall pay its own costs and expenses and
Target's 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.
12.2. Time. Time and strict and punctual performance are of the essence
with respect to each provision of this Agreement.
12.3. Governing Law. This Agreement is governed by and construed in
accordance with the laws of the State of California, irrespective of
California's choice-of-law principles.
12.4. Headings. The paragraph headings in this Agreement: (a) are
included only for convenience, (b) do not in any manner modify or limit any of
the provisions of this Agreement, and (c) may not be used in the interpretation
of this Agreement.
12.5. Notices. Each notice and other communication required or
permitted to be given under this Agreement ("Notice") must be in writing. Notice
is duly given to another party upon: (a) hand delivery to the other party, (b)
receipt by the other party when sent by facsimile to the address and number for
such party set forth below (provided, however, that the Notice is not effective
unless a duplicate copy of the facsimile Notice is promptly given by one of the
other methods permitted under this paragraph), (c) three business days after the
Notice has been deposited with the United States postal service as first class
certified mail, return receipt requested, postage prepaid, and addressed to the
party as set forth below, or (d) the next business day after the Notice has been
deposited with a reputable overnight delivery service, postage prepaid,
addressed to the party as set forth below with next-business-day delivery
guaranteed, provided that the sending party receives a confirmation of delivery
from the delivery-service-provider.
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:
Richard Seidenwurm, Esq.
Solomon, Ward, Seidenwurm & Smith, LLP
401 B Street Suite 1200
San Diego, CA 92101
Facsimile: (619) 231-4755
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If to Target:
SBK Franchise Systems, Inc.
9400 S. Dadeland Blvd., #720
Miami, FL 33156
Attention: Robert Berg
Facsimile: (305)670-0767
With a copy to:
Eric P. Littman, Esq.
7695 S.W. 104th Street, Suite 210
Miami, FL 33156
Facsimile: (305)668-0003
Each party shall make a reasonable, good faith effort to ensure that it will
accept or receive Notices to it that are given in accordance with this
paragraph. A party may change its address for purposes of this paragraph by
giving the other party(ies) written notice of a new address in the manner set
forth above.
12.6. Partial Invalidity. Each provision of this Agreement is valid and
enforceable to the fullest extent permitted by law. If any provision of this
Agreement (or the application of such provision to any person or circumstance)
is or becomes invalid or unenforceable, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, are not affected by such invalidity
or unenforceability unless such provision or the application of such provision
is essential to this Agreement.
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
Closing and shall expire one year thereafter.
12.8. Waiver. Any waiver of a default or provision under this Agreement
must be in writing. No such waiver constitutes a waiver of any other default or
provision concerning the same or any other provision of this Agreement. No delay
or omission by a party in the exercise of any of its rights or remedies
constitutes a waiver of (or otherwise impairs) such right or remedy. A consent
to or approval of an act does not waive or render unnecessary the consent to or
approval of any other or subsequent act.
12.9. Successors in Interest and Assigns. Neither Target nor IFA may
voluntarily or by operation of law assign, hypothecate, delegate or otherwise
transfer or encumber all or any part of its rights, duties or other interests in
this Agreement without the prior written consent of Jreck, which consent may be
withheld in Jreck's sole and absolute discretion. Any such transfer in violation
of this paragraph is void. Subject to the foregoing and any other restrictions
on transferability contained in this Agreement, this Agreement is binding upon
and inures to the benefit of the successors-in-interest and assigns of each
party to this Agreement.
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12.10. Counterparts and Exhibits. This Agreement may be executed in
counterparts, each of which is deemed an original and all of which together
constitute one document. All exhibits attached to and referenced in this
Agreement are incorporated into 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 San Diego, California, 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. The prevailing party(ies) in any litigation,
arbitration, mediation, bankruptcy, insolvency or other proceeding
("Proceeding") relating to the enforcement or interpretation of this Agreement
may recover from the unsuccessful party(ies) all costs, expenses, and actual
attorney's fees (including expert witness and other consultants' fees and costs)
relating to or arising out of (a) the Proceeding (whether or not the Proceeding
proceeds to judgment), and (b) any post-judgment or post-award proceeding
including, without limitation, one to enforce or collect any judgment or award
resulting from the Proceeding. All such judgments and awards shall contain a
specific provision for the recovery of all such subsequently incurred costs,
expenses, and actual attorney's fees.
12.14. Prior Understandings. This Agreement and all documents
specifically referred to and executed in connection with this Agreement: (a)
contain the entire and final agreement of the parties to this Agreement with
respect to the subject matter of this Agreement, and (b) supersede all
negotiations, stipulations, understandings, agreements, representations and
warranties, if any, with respect to such subject matter, which precede or
accompany the execution of this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
JRECK SUBS GROUP, INC.
By: _______________________________
Christopher M. Swartz,
Chairman of the Board and
Chief Executive Officer
INTERFOODS OF AMERICA, INC.
By: _______________________________
Robert Berg, CEO
SBK FRANCHISE SYSTEMS, INC.
By: _______________________________
Robert Berg, CEO
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EXHIBIT A
PROMISSORY NOTE
EXHIBIT B
EXCLUSIVE TRADEMARK AND LICENSING AGREEMENT
EXHIBIT C
LIST OF LEASES
EXHIBIT D
LIST OF PATENTS, TRADEMARKS, TRADE NAMES AND COPYRIGHTS
EXHIBIT E
TARGET LITIGATION
EXHIBIT F
PERSONNEL
EXHIBIT G
CONTRACTS
EXHIBIT H
SHAREHOLDERS/OPTION AGREEMENTS
EXHIBIT I
PERMITS, LICENSES, AUTHORIZATIONS
EXHIBIT J
TAXES
EXHIBIT K
EMPLOYEES
EXHIBIT L
BANK ACCOUNTS
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EXHIBIT M
TARGET UFOC
EXHIBIT N
FRANCHISEES
EXHIBIT O
JRECK LITIGATION
EXHIBIT P
OPINION OF COUNSEL
EXHIBIT Q
FORMER SOBIK'S RESTAURANT CORP. ASSETS
21
AGREEMENT
THIS AGREEMENT, with respect to the acquisition by Jreck Subs Group,
Inc. ("Jreck" or "Buyer"), a Colorado corporation, of (1) all the outstanding
shares of stock of Little King, Inc., a Delaware corporation ("Little King")
from Mr. Sidney B. Wertheim ("Wertheim") and its other shareholders and (2) all
of the equipment owned by Sidney B. Wertheim, presently used in the SRW stores
(Wertheim and the other shareholders of Little King collectively "Sellers").
The terms of said acquisition shall be as follows:
1. Acquisition of Stock. Buyer will acquire 100% of the issued and
outstanding capital stock of Little King from Sellers, and Sellers will sell the
same to Buyer, all in accordance with the terms set forth in this Agreement,
Buyer's acquisition of the stock shall transfer to Buyer all of the issued and
outstanding capital stock of Little King (the "Little King Stock"), as of the
Closing. At the time of closing, SRW shall transfer seven (7) Little King
restaurants, including all related personal property and all related intangible
assets, and including equipment, the name, contracts, accounts and notes
receivables, goodwill, trademarks, leases, licenses, franchise agreements and
subfranchise agreements related to the seven stores. The Little King Stock shall
be transferred subject to all liabilities and liens on the books of each as of
Closing.
2. Closing. Unless otherwise mutually agreed by Buyer and Sellers, the
purchase and sale of the Little King Stock shall occur no later than August 2,
1997, at the principal corporate offices of Little King (the "Closing"). At
Closing, the parties shall execute such further documents as are reasonably
necessary to complete the transactions contemplated herein.
3. Purchase Price of Little King Stock. The total purchase price for
the Little King Stock shall be 500,000 common shares of Jreck (the "Little King
Purchase Price") and an additional 700,000 common shares of Jreck within twelve
(12) months of the date of closing.
4. SRW. SRW shall manage the stores transferred to Little King, shall
pay the salary of Robert Wertheim and pay the debts of SRW as consideration for
the Management Agreement. Once the debts of SRW are paid, all store proceeds
shall belong to Little King.
5. Purchase Price of Equipment. The total purchase price for all of the
equipment presently being used in the SRW and Little King stores owned by Sidney
B. Wertheim shall be $250,000.
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6. Payment Terms:
6.1. The Little King Stock Purchase Price shall be paid as follows:
(a) 500,000 shares of Jreck common stock shall be issued and
delivered to the shareholders of Little King at Closing;
(b) 700,000 shares of Jreck common stock within twelve (12)
months of the closing.
6.2. The Equipment Purchase Price shall be paid to Sidney B.
Wertheim as follows:
(a) $150,000 shall be paid in cash to Wertheim at closing;
(b) $100,000 within sixty (60) days of closing.
7. Representations and Warranties. The Sellers and Buyer make the
following:
7.1 The lawful organization, good standing and corporate power and
authority of Little King and Jreck.
7.2 That the execution and delivery of the Agreements constitute
the valid and binding agreements of the parties hereto and
that such agreements do not violate or contravene the terms of
any agreement to which Little King, Jreck or Wertheim are a
party.
7.3 That Wertheim owns in excess of 95% of the outstanding and
issued Little King Stock and of all rights in and to such
Little King stock; the Little King Stock is represented by
share certificates, and Wertheim may transfer the Little King
Stock owned by him to Buyer pursuant to the Little King
Agreement without consent of approval of any person,
corporation, partnership, governmental authority or other
entity; his Little King Stock is fully paid and non-assessable
and, except as provided in a schedule to the Agreement,
Wertheim has not sold, transferred or assigned any of his
rights in or to any of his Little King Stock; his Little King
Stock is free and clear of any liens, claims, encumbrances and
restrictions of any kind; and there are no outstanding options
for his Little King stock held by any person or entity.
7.4 That Wertheim owns in excess of 95% of the outstanding and
issued SRW Stock and all rights in and to such SRW Stock; the
SRW Stock is represented by share certificates, and Wertheim
may transfer the SRW Stock owned by him to Buyer pursuant to
the SRW Formal Agreement without consent of approval of any
person, corporation, partnership, governmental authority or
other entity; his SRW Stock is fully paid and non-assessable
and, except as provided in a schedule to the Agreement,
Wertheim has not sold, transferred or assigned any of his
rights in or to any of his SRW stock; his SRW Stock is free
and clear of any liens, claims, encumbrances and restrictions
of any kind; and there are no outstanding options for his SRW
stock held by any person or entity.
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7.5 That all licenses, trademark registrations, franchise
registration and leases required in connection with the
ownership and operation of the businesses currently conducted
by Buyer and Little King are valid, maintained and in full
force and effect.
7.6 That all of Buyer's and Little King's financial statements and
other documents relating to their financial condition or
business operations which have been made available to the
other party(ties) are accurate in all material respects, not
misleading and do not omit any material information.
7.7 That to the knowledge of the relevant party, Buyer's, Sellers'
and Little King's ownership and operation of their respective
businesses are in compliance with all applicable federal,
state and local statutes, ordinances and regulations.
7.8 That all of Sellers' contracts, leases and other agreements or
instruments related to this transaction are binding upon
Sellers.
7.9 That the debts owed by Little King will be paid by Jreck. The
bank loans will be paid in regular monthly payments. The
$470,000 Wertheim loan will be resolved between the parties
without a regular payment schedule.
7.10. Jreck agree that if Little King's revenues for the calendar
year 1998 are equal to or greater than $900,000, Wertheim
shall receive an additional 50,000 shares of Jreck common
stock (the "Additional Shares"), which shares shall be issued
and delivered to Wertheim on or prior to March 31, 1999. In
the event Little King's franchise income is equal to or
greater than $400,000, notwithstanding the total revenues not
being raised to $900,000, Wertheim shall receive the 50,000
shares of Jreck common stock as if he met the revenue level
mentioned above. Within six (6) months of Closing, Jreck will
invest, or cause to be invested, $450,000 into Little King for
the development of the Little King concept. Jreck has also
indicated that it plans to complete secondary offering of its
common stock on or prior to March 31, 1998. Within ten (10)
days of completion of such secondary offering, Jreck will
invest, or cause to be invested, an amount equal to 4% of the
proceeds received by Jreck in such secondary offering into
Little King for development of the Little King concept;
provide Wertheim an option to buy Little King from Jreck after
the second anniversary of Closing if the stock price Jreck
Subs Group, Inc. is not at least at $1.50. The option price
shall be equal to the shares of Jreck common stock then owned
or controlled by Wertheim, plus the funds invested by Jreck
Subs Group, Inc., plus a fair market determination between
parties. If no agreement is made on fair determination, the
amount shall be determined by binding arbitration.
All representations, warranties shall survive the Closing for
periods to be negotiated.
7.11 After Closing, Jreck will establish an employee equity plan
for the employees of Little King, as well as the other
divisions of Jreck Subs Group, Inc. The employees of Little
King shall be entitled to participate in such plan to the same
extent as all key employees of various divisions of Jreck Subs
Group, Inc.
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8. Covenants:
8.1. At Closing, Jreck shall cause Little King to execute
"Employment Agreements" with each of Sid R. Wertheim and
Robert Wertheim (each as "Employee" or the "Employees") to
serve as President and Vice President of Little King as they
determine in their sole discretion. Each Employment Agreement
shall contain a reasonable noncompetition, nonsolicitation and
confidentiality covenants. Each Employee shall be terminable
only for "cause." With respect to Robert Wertheim, "Cause"
shall include the operation of Little King at a net loss for
three (3) consecutive years. The term of the Employment shall
be seven (7) years for Sid Wertheim and ten (10) years for
Robert Wertheim. The beginning annual salary shall be $54,000
for Sid Wertheim and $45,000 for Robert Wertheim. Salary
increases shall be based upon a percentage of increase
profits, not to exceed 20% in any one year. Sid Wertheim and
Robert Wertheim may terminate their respective Employment
Agreements within 90 days' and 180 days', respectively,
written notice subject in each case to the noncompetition,
nonsolicitation and confidentiality provisions. Jreck shall
consent to and acknowledge each Employment Agreement. At
Closing, Jreck shall grant each of Sid Wertheim and Robert
Wertheim's nonqualified stock options to acquire shares of
Jreck common stock at the same price as other insiders,
expiring five (5) years after Closing. The date of exercise
and purchase price shall be determined by the Board of
Directors of Jreck Subs Group, Inc.
8.2. Jreck shall cause Tri-Emp Enterprises, Inc., a New York
corporation (the "Majority Owner"), to enter into an agreement
wherein it agrees, for a period of three (3) years following
the Closing, not to sell more than 1% per quarter of Jreck
Subs Group, Inc. common stock or 10% of the volume traded in
any week.
8.3. If Tri-Emp Enterprises, Inc. receives an offer to purchase its
controlling interest during the first three (3) years, it will
obtain an acceptable stock sale for Sidney B. Wertheim. If
Sidney B. Wertheim receives an offer for a substantial or all
of his stock position, he shall grant Tri-Emp Enterprises,
Inc. 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.
8.4. The intention of this paragraph is to protect Sid Wertheim
from having a restricted stock with no market to recoup his
equity because the market has been destroyed or damaged.
8.5. Registration Rights.
8.5.1. Piggyback Registration and Inclusion of Registrable
Securities. 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 Sellers written notice thereof (which notice shall
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include a list of the states in which Jreck intends to attempt
to qualify such securities under the applicable Blue Sky or
other state securities laws) and (ii) make a best efforts
attempt to 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 Sellers within thirty (30) days after delivery of such
written notice of Jreck.
If the Registration of which Jreck shall give notice is
for a Registered public offering involving an underwriting,
Jreck shall so advise the Sellers' as a part of the written
notice given pursuant to this section 8.5. In such event, the
right of Sellers to Registration shall be conditioned upon
such underwriting and the underwriters agreement to include
Sellers shares in the underwriting. If Sellers 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 Sellers shall have no right to
participate in the selection of the underwriters for an
offering pursuant to this Section 8.5 and Sellers shall have
no liability for any costs and fees related thereto.
8.5.2. Blue Sky in Piggyback Registration. In the event of any
Registration of Registrable Securities pursuant to this
Section 8.5, 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 as shall be reasonably appropriate for the
distribution of such securities; provided, however, that Jreck
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.
8.5.3. Definitions. For purposes of this Agreement, the
following definitions shall apply:
"Register", "Registered", and "Registration" refer to a
registration affected 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.
"Registrable Securities" shall mean all Jreck shares not
previously sold to the public and issued or issuable upon
conversation or exercise of any of Jreck's Convertible
Securities purchased by or issued to the investors, including
shares issued or issuable pursuant to stock splits, stock
dividends and options, including the options hereunder.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the rules and
regulations of the Commission thereunder.
8.6 Until such time as all Jreck common stock issued to Sellers is
freely traceable and no longer subject to Rule 144 under the
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Act, Jreck shall timely make all public filings required under
Rule 144(c) in order to permit the use of Rule 144 by Sellers.
8.7. Within sixty (60) days after Closing, Jreck shall cause
Majority Owner or some other investor to purchase at market
shares of Jreck common stock from Wertheim in a private
transaction having a market value of $75,000.
9. Bankruptcy. In the event an involuntary or voluntary petition for
bankruptcy is filed with respect to Jreck under the Federal Bankruptcy Laws
within three years following the Closing, and is not thereafter dismissed within
ninety (90) days, Wertheim is hereby granted the first option to repurchase the
Little King Stock from Jreck for the total cash sum of $25,000. Such first right
to purchase shall be exercisable for a period of thirty (30) days following
notice to Wertheim of the bankruptcy and will require payment of the $25,000
within said thirty (30) day period.
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The parties have placed their hands and seals this 23rd day of July,
1997.
JRECK SUBS GROUP, INC.
By: /s/
--------------------------------
Christopher M. Swartz
President
LITTLE KING, INC.
By: /s/
---------------------------
Sidney B. Wertheim
/s/
-----------------------------
Sidney B. Wertheim, Individually
PURCHASE AND SALE AGREEMENT
This PURCHASE AND SALE AGREEMENT ("Agreement") is entered as of August ___,
1997, by and between Admiral's Fleet Inc. ("Purchaser") a Washington
corporation, Jreck Subs Group, Inc. ("JSUB"), a Colorado corporation, William C.
Richey and Colleen Richey (together the "Sellers"), and RICHEY ENTERPRISES, INC.
("Target"), a Washington corporation.
1. Purchaser desires to purchase from Sellers and Sellers desire to sell to
Purchaser all of the issued and outstanding stock of Target.
2. The PURCHASE PRICE shall be Three Hundred & Forty Thousand and no/100s
($340,000), to be paid as follows:
a. The PURCHASE PRICE shall be deposited with escrow holder at
the settlement and shall be in the form of validly issued,
fully paid, and nonassessable voting common stock of JSUB to
be valued at the lowest of the closing prices for the Ten (10)
business days immediately prior to the day of Close of Escrow.
The JSUB stock shall be subject to a restriction against
transfer for Twelve (12) months following the date of the
Close of Escrow, except for the transfer of stock to the
Broker to pay the Broker's Commission in which case the Broker
shall also be so limited as to the transfer of its JSUB stock.
b. For purposes of this definition, the PURCHASE PRICE does not
include assumed liabilities, agreements for consulting,
employment or management, security deposits and any other
service or expense for which additional money is promised or
otherwise agreed upon. The PURCHASE PRICE does include
inventory of saleable goods.
3. Additional conditions, covenants, warranties and representations are listed
in the attached ADDENDUM, which by this reference is made an integral part of
this Agreement.
4. For the purpose of completing this transaction, escrow shall be opened at the
office of Jerry A. Creim, Attorney, Williams, Kastner & Gibbs, LLP, located in
Seattle, Washington and closing shall take place on or before 5:00 PM on August
___, 1997, unless the parties hereto consent to the extension of this date to
accommodate reasonable delays in the transfer of license(s) and assignment of
leases.
5. The opening of escrow and closing costs shall be paid by Purchaser.
6. Any sales tax or use tax resulting from the transfers of Target stock shall
be paid by the Purchaser at the Close of Escrow and all other taxes and similar
expenses (such as lease deposits, license fees, etc.) shall be paid by
Purchaser.
7. Sellers and Target warrant that at the time physical possession of Target's
business is delivered to Purchaser, its equipment will be in working order, and
the premises will pass all inspections necessary to conduct such business.
Possession date shall be the date of the Close of Escrow. Seller will provide a
list of creditors and liabilities assumed, including vendors, lien holder, etc.
(attached hereto as Paragraph 6 of the Disclosure Schedule) to Purchasers prior
to the Close of Escrow.
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8. Escrow holder is authorized to draw the necessary escrow instructions for
consummation of this transaction. Sellers shall provide Purchaser a list of
Target's assets (attached hereto as Exhibit A). Purchaser and Sellers agree to
provide values to the assets of the business, including the furniture, fixture
and equipment, within Fourteen (14) days of mutual acceptance or the current
county assessed value of the equipment will be utilized.
9. This Agreement contains the entire understanding of the parties and there are
no oral agreements, understandings or representations relied upon by the
parties. Any modifications must be in writing and signed by all parties.
10. Sellers warrants that it has a good and clear title to the stock being sold
except as mentioned in the attached ADDENDUM. Target warrants that it has a good
and clear title to the business being sold except as mentioned in the attached
ADDENDUM. Sellers warrant and represent that as of date of closing, there will
be no liens, encumbrances or security interests against or upon the business to
be sold to the Purchaser except as noted in the attached ADDENDUM and warrant
the titles conveyed to the Purchaser will be free and clear. Seller shall
indemnify and hold Purchaser harmless from liabilities from Seller's operation
to the extent provided in the attached ADDENDUM.
11. Purchaser, Seller and Broker agree that in the event of any breach of this
Agreement or in the event litigation is instituted to collect any sum due Broker
to enforce or interpret any of the provisions of this Agreement, the prevailing
party or parties shall be entitled to recover from the other(s) their reasonable
attorney's fees and court costs, including appeals, as determined by the Court
in such action or suit. This Agreement shall be governed by, and constructed in
accordance with the laws of the State of Washington. The parties agree that
proper venue for any court proceeding related to this Agreement and the subject
matter hereof shall be in King County, State of Washington.
12. Purchaser will personally examine the Target's equipment, fixtures, stock on
hand, leasehold improvements and other assets of the business and will rely
solely on his/her personal evaluation and not upon any statements or
representations made by Broker, Seller or their agents, in deciding to purchase
or value the Target's stock.
13. AS TO PURCHASER: By signing this Agreement, Purchaser hereby acknowledges
that Purchaser is relying solely on Purchaser's own inspection of the business
and the representations of Seller, not of Broker, with regards to the prior
operating history of the business, the value of the assets being purchased and
all other material facts of Seller in making this offer. Purchaser acknowledges
that Broker has not verified, and will not verify, the representations of Seller
and should any such representations be untrue, Purchaser agrees to look solely
to Sellers for relief.
14. AS TO SELLERS: Sellers acknowledges that Broker has made no representations
concerning the credit-worthiness or ability of Purchaser to complete this
transaction, and relies solely on Purchaser's representations and not Broker
with respect thereto. Sellers acknowledge that Broker has not verified, and will
not verify the representations of the Purchaser and should any such
representations be untrue, Sellers agree to look solely to Purchaser for relief.
15. AGENCY DISCLOSURE: At the signing of this Agreement, RON BROMWELL of
EXECUTIVE REAL ESTATE, INC. ("Broker"), represented the Seller.
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a. Purchaser hereby agrees to buy on the terms set forth above and
acknowledges that a Broker's commission of Ten percent (10%) of
the Brokerage Amount shall be paid from the Seller's proceeds to
Broker.
b. Sellers hereby agree to sell on the terms set forth above and to
pay a Broker's commission of Ten percent (10%) of the Brokerage
Amount to Broker, such commission to be paid solely in JSUB stock.
The Brokerage Amount shall be the sum of the Purchase Price, the
balance on the liabilities listed in Paragraph 6(a) and 6(b) of
the Disclosure Schedule as of the date of the Close of Escrow, and
any payments to Sellers under the Consulting Agreement.
c. Each party signing this document confirms that oral and written
disclosure of "The law of real estate agency" was provided to such
party prior to entering into this transaction.
16. This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original but all of which together will constitute one and
the same instrument.
ADMIRAL'S FLEET INC. RICHEY ENTERPRISES, INC.
By: ______________________________ By:_____________________________
Its:______________________________ Its:____________________________
JRECK SUBS GROUP, INC. RON BROMWELL
of EXECUTIVE REAL ESTATE, INC.
By:_______________________________
Its:______________________________ ________________________________
WILLIAM C. RICHEY COLLEEN RICHEY
- ---------------------------------- --------------------------------
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ADDENDUM
This ADDENDUM is attached to and is an integral part of the PURCHASE AND SALE
AGREEMENT ("Agreement") dated August ___, 1997.
1. Definitions
"Addendum" means this Addendum to the Purchase and Sale Agreement.
"Agreement" means the Purchase and Sale Agreement. All references to
the Agreement shall include the
Addendum as an integral part of the Agreement.
"Broker" has the meaning set forth in Section 15 of the Agreement.
"Brokerage Amount" has the meaning set forth in Section 1 5(b) of the
Agreement.
"Close of Escrow" means the time at which the transactions contemplated
by this Agreement is closed.
"JSUB" has the meaning set forth in the introductory paragraph to the
Agreement.
"Purchaser" has the meaning set forth in the introductory paragraph to
the Agreement.
"Securities Act" means the Securities Act of 1933, as amended.
"Sellers" shall have the meaning set forth in the introductory
paragraph to the Agreement.
"Target" has the meaning set forth in the introductory paragraph to the
Agreement.
2. Representation and Warranties
a. Representations and Warranties of the Sellers. Each Seller
represents and warrants to the Purchaser that the statements
contained in this Section 2(a) are correct and complete as of
the date of this Agreement and will be correct and complete as
of the Close of Escrow, except as set forth in the Disclosure
Schedule
(1) Authorization of Transaction. Each Seller has full
power and authority to execute and deliver this
Agreement and to perform his or her obligations
hereunder. This Agreement constitutes the valid and
legally binding obligation of each Seller,
enforceable in accordance with its terms and
conditions.
(2) Target Shares. Each Seller holds of record and owns
beneficially the number of Target shares set forth
next to his or her name Section 2(c)(2) below, free
and clear of any restrictions on transfer (other than
restrictions under the Securities Act and state
securities laws).
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(3) Securities. Sellers understand that the JSUB stock
has 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 Sellers
indefinitely and Sellers 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.
Sellers are 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 144(f))
and the number of shares being sold during any
three-month period not exceeding specified
limitations. Sellers are 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,
Purchaser and JSUB do not warrant or represent that
Sellers are not an affiliate as of the date of this
Agreement or that Sellers will not be an affiliate at
any relevant times in the future.
b. Representations and Warranties of the Purchaser. The Purchaser
represents and warrants to the Sellers that the statements
contained in this Section 2(b) are correct and complete as of
the date of this Agreement and will be correct and complete as
of the Close of Escrow.
(1) Organization of the Purchaser. The Purchaser is a
corporation duly organized, validly existing, and in
good standing under the laws of the jurisdiction of
its incorporation.
(2) Authorization of Transaction. The Purchaser has full
power and authority to execute and deliver this
agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally
binding obligation of the Purchaser, enforceable in
accordance with its terms and conditions. The
Purchaser need not give any notice to, make any
filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in
order to consummate the transactions contemplated by
this agreement.
(3) Brokers' Fees. The Purchaser has no liability or
obligation to pay any fees or commissions to any
broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which
any Seller could become liable or obligated.
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c. Representations and Warranties Concerning the Target. The
Sellers represent and warrant to the Purchaser that the
statements contained in this Section 2(c) are correct and
complete as of the date of this Agreement and will be correct
and complete as of the Close of Escrow, except as set forth in
the Disclosure Schedule.
(1) Organization, Qualification, and Corporate Power. The
Target is a corporation duly organized, validly
existing, and in good standing under the laws of the
jurisdiction of its incorporation. The Target is duly
authorized to conduct business and is in good
standing under the laws of each jurisdiction where
such qualification is required, except where the lack
of such qualification would not have a material
adverse effect on the financial condition of the
Target. Target has full corporate power and authority
to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it.
(2) Capitalization. The entire authorized capital stock
of the Target consists of Fifty Thousand (50,000)
shares of common stock, with a par value of $1.00 per
share, of which One Thousand (1,000) shares are
issued and outstanding. All issued and outstanding
Target shares have been duly authorized, are validly
issued, fully paid, and nonassessable, and are held
of record by the respective Sellers as follows:
William C. Richey with 500 shares and Colleen Richey
with 500 shares. These shares are not represented by
stock certificates. There are no outstanding or
authorized options, warrants, subscription rights,
conversion rights or other commitments that could
require the Target to issue or sell any of its
capital stock.
(3) Tangible Assets. Exhibit A lists all of the tangible
assets used by Target in the conduct of its business.
(4) Real Property. Paragraph 2 of the Disclosure Schedule
lists all real property leased or subleased to the
Target. The Sellers have delivered to the Purchaser
correct and complete copies of the leases and
subleases listed in Paragraph 2 of the Disclosure
Schedule.
(5) Intellectual Property. Paragraph 3 of the Disclosure
Schedule identifies each intellectual property
registration which has been issued to the Target with
respect to any of its intellectual property, and
identifies each license, agreement, or other
permission which the Target has granted to any third
party with respect to its intellectual property.
(6) Contracts. Paragraph 4 of the Disclosure Schedule
lists all written contracts and to which Target is a
parry the performance of which will involve
consideration in excess of $1,000. The Sellers have
delivered to the Purchaser a correct and complete
copy of each such contract or other agreement.
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(7) Litigation. Paragraph 5 of the Disclosure Schedule
sets forth any instance in which the Target is
subject to any outstanding injunction, judgment,
order, decree, ruling, or charge, or is a party to
any action, suit or proceeding, or before any court,
quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction,
except where the injunction, judgment, order, decree,
ruling, or charge would not have a material adverse
effect on the financial condition of the Target.
(8) Liabilities. Except as listed in Paragraph 6 of the
Disclosure Schedule, Target has no material liability
outstanding and to the knowledge of either Seller,
Target has no material contingent liability
outstanding. For purposes of this paragraph,
"material" means any item of liability for an amount
in excess of $1,000.
(9) Franchises. No authorization, consent, or approval of
any franchisees or governmental agency will be
required with respect to either of Target's franchise
agreements to consummate the transactions
contemplated by this agreement.
d. Representations and Warranties of JSUB. JSUB represents and
warrants to the Sellers that the statements contained in this
Section 2(d) are correct and complete as of the date of this
Agreement and will be correct and complete as of the Close of
Escrow.
(1) Organization. Qualification and Corporate Power. JSUB
is a corporation duly organized, validly existing,
and in good standing under the laws of the
jurisdiction of its incorporation. JSUB is duly
authorized to conduct business and is in good
standing under the laws of each jurisdiction where
such qualification is required, except where the lack
of such qualification would not have a material
adverse effect on the financial condition of JSUB.
JSUB has full corporate power and authority to carry
on the businesses in which it is engaged and to own
and use the properties owned and used by it.
(2) Capitalization. The entire authorized capital stock
of JSUB consists of 50,000,000 shares of common
stock, with no par value, and 5,000,000 shares of
non-voting preferred stock, with no par value, of
which 10,364,863 shares of common stock are issued
and outstanding immediately prior to this Agreement.
All of the issued and outstanding shares of JSUB
stock have been duly authorized, are validly issued,
fully paid, and nonassessable. JSUB has granted
options to purchase 100,000 shares of common stock,
other than which there are no outstanding or
authorized options, warrants, subscription rights,
conversion rights or other commitments that could
require JSUB to issue or sell any of its capital
stock.
(3) Preclosing Covenants. The parties agree as follows
with respect to the period between the execution of
this Agreement and the Close of Escrow.
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a. General. Each of the parties will use his, her or its
reasonable best efforts to take all action and to do all
things necessary, proper, or advisable to consummate and make
effective the transactions contemplated by this agreement
(including satisfaction, but not waiver, of the closing
conditions set forth in Section 5, below).
b. Operation of Business. The Sellers will not cause or permit
the Target to engage in any practice, take any action, or
enter into any transaction outside the ordinary course of
business.
c. Access and Confidentiality. The Sellers will permit, and
will cause the Target to permit, representatives of the
Purchaser to have access at all reasonable times, and in a
manner so as not to interfere with the normal business
operations of the Target, to all premises, properties,
personnel, books, records (including tax records), contracts,
and documents of or pertaining to the Target. The Purchaser
will treat and hold as such any confidential information it
receives from the Sellers and the Target in connection with
this Agreement, will not use any of the confidential
information except in connection with this Agreement, and, if
this Agreement is terminated for any reason whatsoever, will
return to the Sellers and the Target all tangible embodiments
(and all copies) of the confidential information which are in
its possession.
4. Postclosing Covenants. The parties agree as follows with respect to the
period following the Close of Escrow.
a. General. In case at any time after the Close of Escrow any
further action is necessary to carry out the purposes of this
agreement, each of the parties will take such further action
(including the execution and delivery of such further
instruments and documents) as any other party reasonably may
request, at the sole cost and expense of the requesting party
(unless the requesting party is entitled to indemnification
therefor under Section 6, below).
b. Change of Corporate Name. Within Two (2) months after the date
of the Close of Escrow, Purchaser shall cause Target to change
its corporate name to eliminate the word "Richey."
c. Covenant Not to Compete. Neither Seller will engage, either
directly or indirectly, in Target's type of business within a
radius of Five (5) miles from any JSUB affiliate premises for
a term of Five (5) years from the date of the Close of Escrow.
d. Agreement to Pay Guaranteed Debts. For as long as either of
the Sellers or the Broker is a co-signer or a guarantor on any
liabilities of Target, Purchaser and JSUB agree to cause
Target to pay on a timely basis all such liabilities.
e. Operation of Business. For the period beginning on the date of
the Close of Escrow and ending on such date that (i) the
liabilities listed in Paragraph 6 of the Disclosure Schedule
are repaid in full or (ii) Sellers' and Broker's direct and
indirect obligations on all such liabilities are removed,
Purchaser and JSUB shall notify the Sellers before entering
into any transaction outside the ordinary course of business,
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including without limitation the sale of either the Pine Lake
or North Bend stores.
f. Subsequent Sale Proceeds. Purchaser and JSUB agree that in
the event Target sells or transfers any of its assets outside
the ordinary course of business, any proceeds from such sale
or transfer will be used (i) first, to pay down, to the extent
required by then-existing security interests in such assets,
the liabilities listed in Paragraph 6(b) of the Disclosure
Schedule, and (ii) second, to pay down the Washington Mutual
line of credit listed in Paragraph 6(a) of the Disclosure
Schedule, as follows: if the assets relate to the Pine Lake
store, then the proceeds shall be used to pay down the balance
allocated to the Pine Lake store, and if the assets relate to
the North Bend store, then the proceeds shall be used to pay
down the balance allocated to the North Bend store.
g. Stock Price Guarantee. JSUB agrees that to the extent the
Sellers sell any or all of their JSUB stock on any of the
first Thirty (30) business days in which the Sellers shall
have the right to transfer their stock (i.e., the first 30
business days starting on or after the anniversary of the date
of the Close of Escrow), and to the extent the Sellers sell
such stock during such period at a price that is less than 80%
of the price of the stock at the Close of Escrow, as defined
below, JSUB shall pay to Sellers the difference between the
sales price of the stock (before commission) and 80% of the
stock price at the Close of Escrow, within Five (5) business
days of the notice to JSUB of the sale of such stock. The
price of the stock at the Close of Escrow shall be the lowest
closing price of the JSUB stock during the Ten (10) business
days immediately prior to the date of Close of Escrow
h. Stock Sales. The Sellers agree to limit any sales of the JSUB
stock acquired under this Agreement to (i) 5,000 shares of
JSUB stock per business day (proportionately adjusted for any
increase or decrease in the number of issued shares of Common
Stock resulting from any stock split or other subdivision
consolidation of shares) or (ii) such amount as the market
will reasonably bear.
i. Tax Compliance. Each of the parties shall comply with rules
under the Internal Revenue Code of 1986, as amended ("Code")
consistent with the treatment of this transaction as a
tax-free reorganization within the meaning of Section 368(a)
of the Code.
j. Securities. JSUB shall exercise its best efforts to keep
its public information current pursuant to Rule 144(c) under
the Securities Act.
5. Conditions to Obligation to Close.
a. Conditions to Obligation of the Purchaser and JSUB. The
obligation of the Purchaser and JSUB to consummate the
transactions in connection with the Close of Escrow is subject
to satisfaction of the following conditions.
(1) The representations and warranties of the Sellers and
Target under this Agreement shall be true and correct
in all material respects as of date of the Close of
Escrow.
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(2) The Sellers and Target shall have performed and
complied with all of their covenants hereunder in all
material respects through the Close of Escrow.
(3) The Sellers shall have executed a Consulting
Agreement substantially in the form attached as
Exhibit B.
(4) All actions to be taken by the Sellers and Target in
connection with consummation of the transactions
contemplated hereby and all instruments and other
documents required to effect the transactions will be
reasonably satisfactory in form and substance to the
Purchaser. The Purchaser may waive any condition
specified in this Section 5(a) if it executes a
writing so stating at or prior to the Close of
Escrow.
b. Conditions to Obligation of the Sellers. The obligation of the
Sellers to consummate the transactions to be performed by them
in connection with the Close of Escrow is subject to
satisfaction of the following conditions:
(1) The representations and warranties of Purchaser and
JSUB under this Agreement shall be true and correct
in all material respects at and as of the date of the
Close of Escrow.
(2) The Purchaser shall have performed and complied with
all of its covenants hereunder in all material
respects through the Close of Escrow.
(3) The Boards of Directors of Purchaser and JSUB shall
have approved the Plan of Reorganization
substantially in the form attached as Exhibit C.
(4) Purchaser shall have executed a Consulting Agreement
substantially in the form attached as Exhibit B.
(5) All actions to be taken by the Purchaser in
connection with consummation of the transactions
contemplated hereby and all instruments and other
documents required to effect the transactions will be
reasonably satisfactory in form and substance to the
requisite Sellers. The requisite Sellers may waive
any condition specified in this Section 5(b) if they
execute a writing so stating at or prior to the Close
of Escrow.
6. Remedies for Breaches of this Agreement.
a. Survival of Representations and Warranties. All of the
representations and warranties of the parties contained in
this Agreement shall survive the Close of Escrow (unless the
damaged party knew or had, reason to know of any
misrepresentation or breach of warranty at the time of the
Close of Escrow).
b. Indemnification for Benefit of the Purchaser. In the event
either Seller breaches any of his or her representations,
warranties, and covenants contained herein, and provided that
the Purchaser makes a written claim for indemnification
against the Seller pursuant to Section 8(d) below, then such
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Seller agrees to indemnify the Purchaser from and against his
or her allocable portion of any adverse consequences the
Purchaser shall suffer through and after the date of the claim
for indemnification (but excluding any adverse consequences
the Purchaser shall suffer after the end of any applicable
survival period) caused by the breach; provided, however, that
the Sellers shall not have any obligation to indemnify the
Purchaser from and against any adverse consequences caused by
the breach until the Purchaser has suffered adverse
consequences by reason of all such breaches in excess of a
$2,000 aggregate deductible (after which point the Sellers
will be obligated only to indemnify the Purchaser from and
against such adverse consequences in excess of $2,000).
c. Indemnification for Benefit of the Sellers. In the event the
Purchaser or JSUB breaches any of its representations,
warranties, and covenants contained herein, and provided that
either of the Sellers makes a written claim for
indemnification against the Purchaser or JSUB pursuant to
Section 8(d) below, then the Purchaser and JSUB agree to
indemnify each Seller from and against the entirety of any
adverse consequences the Seller shall suffer through and after
the date of the claim for indemnification (excluding any
adverse consequences the Seller shall suffer after the end of
any applicable survival period) caused by the breach;
provided, however, that the Purchaser and JSUB shall not have
any obligation to indemnify the Sellers from and against any
adverse consequences caused by the breach until the Sellers
have suffered adverse consequences by reason of all such
breaches in excess of a $2,000 aggregate deductible (after
which point the Purchaser and JSUB will be obligated only to
indemnify the Sellers from and against such adverse
consequences in excess of $2,000).
d. Other Indemnification Provisions. The indemnification
provisions in this Section 6 are in addition to, and not in
derogation of, any statutory, equitable, or common law remedy
any party may have for breach of representation, warranty, or
covenant.
7. Termination.
a. Termination of Agreement. The parties may terminate this
Agreement as provided below.
(1) The parties may terminate this Agreement by mutual
written consent at any time prior to the Close of
Escrow.
(2) The Purchaser or JSUB may terminate this Agreement by
giving written notice to the Sellers at any time
prior to the Close of Escrow in the event:
(a) either Seller has breached any material
representation, warranty, or covenant
contained in this Agreement in any material
respect, the Purchaser has notified the
requisite Seller of the breach, and the
breach has continued without cure for a
period of 10 days after the notice of
breach; or
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<PAGE>
(b) the Close of Escrow has not occurred on or
before September 30, 1997, by reason of the
failure of any condition precedent under
Section 5(a) hereof (unless the failure
results primarily from the Purchaser or JSUB
itself breaching any representation,
warranty, or covenant contained in this
Agreement).
(3) Either Seller may terminate this Agreement by giving
written notice to the Purchaser at any time prior to
the Close of Escrow in the event:
(a) the Purchaser or JSUB has breached any
material representation, warranty, or
covenant contained in this Agreement in any
material respect, a Seller has notified the
Purchaser or JSUB of the breach, and the
breach has continued without cure for a
period of 10 days after the notice of
breach; or
(b) the Close of Escrow has not occurred on or
before September 30, 1997, by reason of the
failure of any condition precedent under
Section 3(b) hereof (unless the failure
results primarily from a Seller himself or
herself breaching any representation,
warranty, or covenant contained in this
Agreement).
b. Effect of Termination. If any party terminates this Agreement
pursuant to Section 7(a) above, all rights and obligations of
the parties hereunder shall terminate without any liability of
any party to any other party (except for any liability of any
party then in breach); provided, however, that the
confidentiality provisions contained in Section 3(c) above
shall survive termination.
8. Miscellaneous.
a. Succession and Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties named herein and
their respective successors and permitted assigns. No party
may assign either this Agreement or any of his, her or its
rights, interests, or obligations hereunder without the prior
written approval of the Purchaser and the Sellers.
b. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but
all of which together will constitute one and the same
instrument.
c. Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way
the meaning or interpretation of this Agreement.
d. Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. any notice,
request, demand, claim, or other communication hereunder shall
be deemed duly given if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed
to the intended recipient as set forth below:
If to Sellers: Copy to:
William C. and Colleen Richey Yuko Aimi
25724 NE 10th Street Graham & Dunn
Redmond, WA 98053 1420 Fifth Avenue, Suite 3300
Seattle, WA 98101
If to Purchaser: Copy to:
Admiral's Fleet Inc. Jerry Creim
One Lake Bellevue Drive, Suite 201 Williams, Kastner & Gibbs
Bellevue, WA 98005 601 Union St., Suite 4100
Attn: Brick Brunton Seattle, WA 98111-3926
If to JSUB: Copy to:
Jreck Subs Group, Inc. Jerry Creim
24685 NWS Route 37 Williams, Kastner & Gibbs
Watertown, NY 13601 601 Union St., Suite 4100
Attn: Christopher M. Swartz Seattle, WA 98111-3926
Any party may send any notice, request, demand, claim, or
other communication her eunder to the intended recipient at
the address set forth above using any other means (including
personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication
shall be deemed to have been duly given unless and until it
actually is received by the intended recipient. Any party may
change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered
by giving the other parties notice in the manner herein set
forth.
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<PAGE>
e. Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing
and signed by each party hereto. No waiver by any party of any
default, misrepresentation, or breach of warranty or covenant
hereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation,
or breach of warranty or covenant hereunder or affect in any
way any rights arising by virtue of any prior or subsequent
such occurrence.
f. Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction
shall not affect the validity or enforceability of the
remaining terms and provisions hereof or the validity or
enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
g. Expenses. Each of Purchaser, JSUB, the Sellers and Target will
bear his, her or its own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
h. Incorporation of Exhibits, Annexes, and Schedules. The
exhibits, annexes, and schedules identified in this Agreement
are incorporated herein by reference and made an integral part
hereof.
In witness whereof, the parties hereto have executed this Agreement and
Addendum as of the date first above written.
ADMIRAL'S FLEET INC. RICHEY ENTERPRISES, INC.
By: ______________________________ By:______________________________
Its:______________________________ Its:_____________________________
JRECK SUBS GROUP, INC. WILLIAM C. RICHEY
By:_______________________________
Its:______________________________ _________________________________
RON BROMWELL COLLEEN RICHEY
of EXECUTIVE REAL ESTATE, INC.
- ----------------------------------- ---------------------------------
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<PAGE>
DISCLOSURE SCHEDULE
1. Tangible Assets -- Addendum ss. 2(c)(3).
See Exhibit A.
2. Real property -- Addendum ss. 2(c)(4).
See Leases, Paragraph 6(c).
3. Intellectual Property -- Addendum ss. 2(c)(5).
Trade name: Georgio's Subs (not federally registered).
4. Contracts -- Addendum ss. 2(c)(6).
Unit Franchise Agreement dated April 3, 1996 between Target
and JRNL Investments, Inc.
Unit Franchise Agreement dated November 13, 1996 between
Target and A. Miner Co.
License Agreement dated August, 1994.
License Agreement dated September, 1995.
Agreement with Northwest Neon for lease of neon sign.
See also, Liabilities, Paragraph 6.
5. Litigation -- Addendum ss. 2(c)(7).
None.
6. Liabilities -- Addendum ss. 2(c)(8).
a. Liabilities: Balance as of 7/30/97
Line of Credit 5,949.86
Note Payable -- Wash Mutl LOC 11,679.89*
Note Payable -- NW Neon NB 2,302.14
* The balance on the Washington Mutual line of credit is
allocated between the Pine Lake and North Bend stores as
follows: 75% to Pine Lake, and 25% to North Bend.
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<PAGE>
Disclosure Schedule. Continued
b. Additional Liabilities Balance as of 7/30/97
Note Payable -- Issaquah 52,124.87
Note Payable -- N. Bend 71,000.00
c. Leases:
Issaquah Pine Lake Site
North Bend Site
2 of 2
<PAGE>
SCHEDULE OF ASSETS
GEORGIO'S SUBS at Pine Lake Village
1) ALL PICTURES AND ARTWORK
2) ALL SMALLWARES AND COOKING ITEMS
3) 11 COUNTER STOOLS
4) FULL SIZE WELLS WARMING UNIT
5) 11 QUART SOUP WARMER
6) 60" SANDWICH PREP TABLE/REFRIGERATOR
7) MICROWAVE
8) AUTO MEAT SLICER
9) 3 COMPARTMENT SINK
10) VEGETABLE PREP SINK - 1 COMPARTMENT
11) HAND SINK
12) MOP SINK 13) CASH REGISTER 14) 6X6 WALK-IN COOLER
15) 6X6 WALK-IN FREEZER
16) OVEN
17) PROOFER
18) BREAD TRANSPORT RACK
19) 2 BREAD HOLDING RACKS
20) WORKTABLE ON CASTERS
21) DIGITAL WEIGHT SCALE
22) ALL LIGHTING FIXTURES
23) AL PLUMBING FIXTURES
24) NEON "GEORGIO'S SUBS" SIGNS ON STOREFRONT
25) STEREO
26) ALL CABINETS, EATING COUNTERS INSTALLED IN STORE
27) MENU BOARDS
<PAGE>
SCHEDULE OF ASSETS
GEORGIO'S SUBS in North Bend
1) 2 EATING TABLES
2) 6 CHAIRS
3) 8 COUNTER STOOLS
4) FULL SIZE WELLS WARMING UNIT
5) 11 QUART SOUP WARMER
6) 60" SANDWICH PREP TABLE/REFRIGERATOR
7) MICROWAVE
8) AUTO MEAT SLICER
9) 3 COMPARTMENT SINK
10) VEGETABLE PREP SINK - 1 COMPARTMENT
11) HAND SINK
12) MOP SINK
13) ICE MAKER
14) 6X6 WALK-IN COOLER
15) 6X6 WALK-IN FREEZER
16) OVEN
17) PROOFER
18) BREAD TRANSPORT RACK
19) 2 BREAD HOLDING RACKS
20) WORKTABLE ON CASTERS
21) DIGITAL WEIGHT SCALE
22) ALL LIGHTING FIXTURES
23) AL PLUMBING FIXTURES (EXCEPT FOR BATHROOM)
24) NEON "GEORGIO'S SUBS" SIGN ON STOREFRONT
25) NEON "GEORGIO'S SUBS" SIGN IN STORE WINDOW
26) ALL CABINETS, EATING COUNTERS INSTALLED IN STORE
27) MENU BOARDS
28) STEREO
29) CASH REGISTER
30) ALL SMALL KITCHEN WARES AND COOKING ITEMS
31) ALL PICTURES AND ARTWORK
<PAGE>
EXHIBIT C
PLAN OF REORGANIZATION
This PLAN OF REORGANIZATION ("Plan") describes the transaction to be
undertaken by Jreck Subs Group, Inc., a Colorado corporation ("Parent"),
Admiral's Fleet Inc., a Washington corporation ("Acquiror"), Richey Enterprises,
Inc., a Washington corporation ("Target"), William Richey and Colleen Richey,
husband and wife ("Sellers"), (all collectively, the "Parties"), pursuant to the
Purchase and Sale Agreement to be executed by and between the Parties.
1. For Federal income tax purposes, the Parties intend that the
transaction will qualify as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code, as amended (the "Code").
2. Sellers are the holders of 100% of the issued and outstanding shares
of Target. Parent is a publicly traded corporation. Acquiror is a wholly owned
subsidiary of Parent.
3. At closing, Sellers will transfer all of their shares in Target
stock to Acquiror solely in exchange for shares of voting common stock in Parent
with approximately the same fair market value as the Target stock surrendered
4 After the transaction, Parent and Acquiror intend that Target will
continue its historic business or use a significant portion of its historic
business assets in a business. Target's name will be changed to eliminate the
word "Richey," the specific name to be chosen at the discretion of Parent and
Acquiror.
5. To assist in the transition of Target's business, Sellers will enter
into a consulting agreement with Parent and Acquiror to provide temporary
management and bookkeeping services to Target.
6. The Parties will pay each their respective expenses, if any,
incurred in connection with the transaction
7. Each Party will comply with the rules under the Code consistent with
the treatment of the transaction as a tax-free triangular "B" reorganization,
within the meaning of Section 368(a)(1)(B) of the Code.
REPURCHASE AGREEMENT
This REPURCHASE AGREEMENT (this "Agreement") is made as of the 28 day
of October, 1997, by Paul M. Truax, having an address at P.O. Box 215, Hammond,
New York 13646 ("Truax"), and Robin Longley, having an address at 3259 County
Rte, 2, Pulaski, New York 13142 ("Longley"), as the "Sellers", mid Jreck Subs,
Inc., a New York corporation ('"JSI") and Jreck Subs Group, Inc., a Colorado
corporation ("JSGI") each having an address at P.O. Box 6, Watertown, New York
13601.
WHEREAS, the Sellers are members of Pastry Product Producers LLC, a New
York limited liability company (the "LLC"), which owns and operates a bakery;
and
WHEREAS, JSI is also a member of the LLC; and
WHEREAS, JSI is a wholly-owned subsidiary of JSGI; and
WHEREAS, the Sellers desire to sell to JSI, and JSI desires to purchase
from the Sellers, all of the Sellers' right, title, and interest in and to the
LLC and the bakery business conducted by it, including, without limitation, any
right or interest they may have as shareholders, organizers, incorporators, or
promoters of a corporation named Pastry Product Producers, Inc.; and
WHEREAS, the LLC is obligated to Truax under Mortgage Note dated
September 20, 1996 (the "Note"), which is secured by a Mortgage by the LLC to
Truax, dated September 20, 1996 and recorded September 25, 1996 (the
"Mortgage"), on which the outstanding principal amount on the date of this
Agreement is $150,222.00; and
<PAGE>
WHEREAS, the agreed purchase price for the Sellers' LLC interests is
212,500 shares of common stock, no par value ("Common Stock") of JSGI, plus
options to purchase 37,500 shares of Common Stock, together with the additional
consideration set forth in this Agreement:
NOW, THEREFORE, the Sellers. JSI, and JSGI agree as follows:
1. The Sellers hereby sell, assign; and transfer to JSI all of their
respective right, title, and interest in and to Pastry Product Producers LLC,
including, without limitation, their respective membership interests therein.
2. Truax and Longley hereby sell, assign, and transfer to JSI all of
their respective right, title, and interest in and to Pastry Product Producers,
Inc., whether as shareholders, organizers, incorporators, or promoters. Truax
and Longley jointly and severally represent and warrant to JSI that Truax and
Longley (a) have not caused any corporation with such name or a similar name to
be incorporated and (b) own no stock certificates representing shares of stock
in any corporation with such name or a similar name.
3. JSGI hereby sells to Truax a total of 106,250 shares of Common Stock
and to Longley a total of 106,250 shares of Common Stock. Such shares are fully
paid and non-assemble. Upon the effectiveness of this Agreement JSGI shall
deliver to Truax and Longley certificates representing such shares.
4. JSGI hereby grants to Truax options to purchase a total of 18,750
shares of Common Stock and to Longley options to purchase a total of 18,750
shares of Common Stock. Such options shall be exercisable at any time between
October 28, 1998 and
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<PAGE>
October 28, 2008, in whole or in part and at one or more times. The option price
per share on each date of exercise shall be equal to fifty percent (50%) of (a)
the mean between the most recent bid and ask price per share as of such date, if
Common Stock is actively traded an established market on such date, or (b) the
fair market value per share of Common Stock as of such date, if Common Stock is
not actively traded on an established market on such date. The terms and
conditions of such grant are further set forth in the form of Option Agreement
attached as Exhibit A to this Agreement.
5. The Sellers are acquiring the shares of Common Stock and options
under this Agreement for their own account with the present intention of holding
such securities for purposes of investment, and they have no intention of
selling such securities in a public distribution in violation of the federal
securities laws or any applicable state securities laws. The Sellers understand
that such Common Stock and options have not been registered under the Securities
Act of 1933 and may not be offered or sold by them except in accordance with the
provisions of such Act and applicable state securities laws.
6. The terms of the Note shall be amended, effective on the date of
this Agreement, to provide for level monthly payments $2,493.84 each, which
shall amortize the principal over a period of 7 years, at the interest rate of
10% per annum. The Note shall be replaced by a Replacement Note in the form of
Exhibit B to this Agreement.
7. To secure the obligations of the LLC under this Agreement and the
Note, the LLC shall grant a security interest to Truax in accounts receivable,
under a Security Agreement in the form of Exhibit C to this Agreement and shall
deliver UCC-1 financing statements describing such collateral security to Truax
for filing with the Jefferson County
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<PAGE>
Clerk and the New York Secretary of State.
8. JSI and JSGI will pay all amounts payable under leases of the LLC's
equipment which have been guaranteed by Truax, and will cause all other
obligations incurred from time to time by the LLC, to be paid on a current
basis.
9. JSI and JSGI agree that the Sellers shall have the option of being
partners in the construction and operation of the next bakery to by built by
JSGI or any of its affiliates.
10. Each Seller covenants that such Seller will not, during the period
commencing an the date of this Agreement and ending October 31, 1999, either
alone, or jointly with, or a partner of, co-venturer of, owner of 10% or more of
the common stock of, or member of, any person or entity, compete with the LLC,
JSI, or JSGI in the business of owning or operating a bakery located in New York
State which sells or distributes bagels, sandwich rolls, or any other baked
goods to bagel stores or Jreck Subs shops.
11. JSI and JSGI shall jointly and severally defend and indemnify the
Sellers and their respective successors and assigns and hold them harmless from
and against any and all liabilities, obligations, damages, and expenses
resulting from any and all claims against the LLC or against or in connection
with the bakery business of the LLC or the accounts or business arrangements of
such bakery business.
12. This Agreement will become effective upon the delivery to the
Sellers of fully-executed copies of an Option Agreement substantially in the
form of Exhibit A, a Replacement Note substantially in the form of Exhibit B, a
security agreement substantially in one form of Exhibit C, UCC-1 financing
statements with respect to the accounts receivable of
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<PAGE>
the LLC to be pledged as collateral, and a Mortgage Modification Agreement with
respect to the Mortgage.
13. JSI and JSGI each represent and warrant to the Sellers that this
Agreement, the transactions contemplated by this Agreement and performance of
their respective obligations hereunder have been duly approved by their
respective Boards of Directors at meetings thereof or by unanimous written
consent.
14. All notices provided for under this Agreement shall be in writing
and shall be delivered by hand or sent by certified mail to the addresses set
forth above or to such other addresses that the respective parties may designate
in writing.
15. This Agreement shall be governed by and construed under the laws of
the State of New York without reference to conflict-of-law principles.
16. No term, condition, understanding or agreement purporting to modify
the terms of this Agreement shall be binding unless made in writing and signed
by all of the parties hereto.
17. No failure of a party to exercise any power given to such party
under this Agreement or to insist upon strict compliance with any obligation or
condition hereunder, and no custom or practice of the parties at variance with
the terms hereof, shall constitute a waiver by any party of such party's right
to demand exact compliance with the terms of this Agreement.
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<PAGE>
18. This Agreement shall be binding upon the parties and their
respective successors and assigns.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.
/s/ Paul M. Truax
--------------------------------
Paul M. Truax
/s/ Robin Longley
--------------------------------
Robin Longley
JRECK SUBS, INC.
By: /s/ Christopher M. Swartz
------------------------------
Name: Christopher M. Swartz
------------------------------
Title: President
JRECK SUBS GROUP, INC.
By: /s/ Christopher M. Swartz
------------------------------
Name: Christopher M. Swartz
------------------------------
Title: C.E.O.
EDWARD J. MCGOWAN, JR.
Notary Public, State of New York
Qualified in Jefferson County
Commission Expires Sept. 22, 1998
No. 4870284
/s/ Edward J. Mcgowan, Jr.
Notary Public
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<PAGE>
SECURITY AGREEMENT
In consideration of the Repurchase Agreement dated October 28, 1997
(the "Repurchase Agreement") between Paul M. Truax (the "Secured Party") and
Robin Longley, as the "Sellers," and Jreck Subs, Inc. ("JSI") and Jreck Subs
Groups, Inc. ("JSGI") and the transactions contemplated in such Repurchase
Agreement, the undersigned Pastry Producers LLC (the "LLC") agrees with the
Secured Party as follows:
1. Security Interest. The LLC hereby pledges to and grants the Secured
Party a security interest in the property described in Schedule "A* hereto (as
the same may be supplemented or amended hereafter) and any other property of the
LLC now or hereafter in the possession or control of the Secured Party for any
purpose, together with all attachments, parts, accessions and repairs now or
hereafter affixed thereto, any substitutes and replacements for any thereof, any
additions thereto, any dividends and distributions and all other rights in
connection therewith, and all products and proceeds in whatever form of any such
property (all of the foregoing hereafter collectively referred to as the
"Collateral").
2. Indebtedness. This security interest secures all indebtedness,
obligations and liabilities of the LLC or Christopher M. Swartz ("Swartz") to
the Secured Party of any kind, direct or contingent, now existing or hereafter
arising, including in connection therewith the obligations of the LLC or Swartz
under the Replacement Note referred to in the Repurchase Agreement and all other
principal, interest, costs and expenses or every kind (hereafter collectively
referred to, as the "Indebtedness").
3. The LLC's Representations and Warranties. The LLC hereby represents and
<PAGE>
warrants as follows: (a) the LLC is the true and sole owner of the Collateral;
(b) the Collateral is free and clear of all liens and encumbrances and there are
no financing statements, security agreements, or other similar documents
covering any of the Collateral; (c) this Agreement constitutes the legal, valid,
and binding obligation of the LLC; and (d) the granting of the security interest
by this Agreement will not contravene any contract provision binding upon the
LLC.
4. Covenants of the LLC. (a) The LLC will not sell, offer to sell,
grant a security interest in, or permit to exist any other lien or encumbrance
upon the Collateral or any interest therein without the written consent of the
Secured Party; (b) the LLC will preserve its existence as a New York limited
liability company; (c) the LLC will defend the Collateral against the claims and
demands of all other parties; (4) the LLC authorizes the Secured Party to file a
financing statement covering the Collateral without the LLC's signature and to
take any other action, in his own name or in the name of the LLC, as the LLC's
attorney-in-fact, which the Secured Party deems necessary or appropriate to
perfect the security interest granted hereby. The LLC agrees to take any action
requested by the Secured Party to perfect and enforce the rights of the Secured
Party granted by this Agreement; (e) the LLC authorizes the Secured Party to
inspect the LLC's books and records pertaining to the Collateral at any
reasonable time upon request, and the LLC shall cooperate with the Secured Party
in such inspection; provided, however, that, so long as no Event of Default has
occurred and is continuing, the LLC shall not be obligated to permit such
inspection more frequently than once every sixty days; (f) after an Event of
Default has occurred and is continuing, the LLC on demand shall pay the Secured
Party all his expenses (referred to herein as "Collateral
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<PAGE>
Expenses") related to the perfecting, taking, holding, preparing for
disposition, and disposing of the Collateral, including reasonable attorneys'
fees and legal expenses incurred in protecting and enforcing the Secured Party's
rights with respect to the Collateral.
5. Events of Default. The occurrence of any one of the following shall
be deemed an "Event of Default" under this Agreement: (a) default in any payment
of principal, interest, or other amount when due with respect to any part of the
Indebtedness and, if provided by any note or other writing evidencing such
Indebtedness, the continuance of such default for any grace period allowed after
the due date; (b) failure of the LLC or Swartz to fulfill or perform any term of
any instrument or agreement of the LLC or Swartz issued to or entered into with
the Secured Party; (c) dissolution of the LLC; or (d) commencement of any
bankruptcy, receivership or similar proceeding involving the LLC or Swartz as a
debtor.
6. The Secured Party Rights Following Default. Upon the occurrence of
any Event of Default as defined above, the Secured Party shall have all the
rights and remedies available to a secured party under the New York Uniform
Commercial Code and otherwise available to it by any agreement with the LLC or
Swartz or under the law of New York, including (a) those rights and remedies
available under any written instrument or agreement relating to any
Indebtedness; (b) to sell, lease, or otherwise dispose of, all or any part of
the Collateral at public or private sale; (c) to apply the proceeds from the
sale, lease, or other disposition of the Collateral to the payment of all
Collateral Expenses, and any balance to the payment of such of the Indebtedness,
and in such order, as the Secured Party may elect. The LLC shall pay any
deficiency remaining after such application. If a notice of intended disposition
of any of the Collateral is required by law, notice shall be deemed reasonably
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<PAGE>
given if received by the LLC at least five days prior to such disposition or if
mailed to the LLC at the LLC's last known address at least eight days prior to
such disposition.
7. Miscellaneous Provisions. (a) In addition to all other rights the
Secured Party may have, the Secured Party may, after the occurrence any Event of
Default: (j) notify the parties obligated on any of the Collateral to make
payment directly to the Secured Party on any amounts due or to become due
thereunder; (ii) enforce collection of any of the Collateral by suit or
otherwise; (iii) surrender, release or exchange all or any part of the
Collateral; (iv) compromise or extend or renew for any period (whether or not
longer than the original period) any Indebtedness; (v) take control of any
proceeds of the Collateral; and (vi) separately or concurrently with an exercise
of rights hereunder, exercise such additional rights and powers, if any, with
respect to any other security for or guaranty of any of the Indebtedness, as may
be provided in any written instrument. (b) The Secured Party shall be deemed to
have exercised reasonable care in the custody and preservation of the Collateral
if it takes such action as the LLC shall request in writing, but failure of the
Secured Party to comply with any such request shall not of itself be deemed a
failure to exercise reasonable care. A failure of the Secured Party to preserve
or protect any rights with respect to the Collateral against prior parties, or
to do any act with respect to preservation of the Collateral not so requested by
the LLC, shall not be deemed a failure to exercise reasonable care in the
custody of the Collateral. (c) No course of dealing between the Secured Party
and the LLC, nor any delay or omission on the part of the Secured Party in
exercising any right hereunder, shall operate as a waiver of such right or of
any other right under this Agreement. (d) No waiver, release, modification or
rescission pertaining to this Agreement shall be effective unless in writing and
signed by the Secured Party nor shall a waiver on one occasion be
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<PAGE>
construed as a waiver on any future occasion. (e) The LLC authorizes the Secured
Party and hereby constitutes and appoints the Secured Party as the LLC's true
and lawful attorney-in-fact, irrevocably to verify the existence and scope of,
protect, preserve and realize upon the Collateral, and to endorse checks, drafts
and orders received from the sale, lease or other disposition of the Collateral
and apply the proceeds of any such checks, drafts or orders upon the
Indebtedness in such order as the Secured Party in his discretion chooses. (f)
This Agreement shall be binding upon the heirs, successors and assigns of the
LLC. It shall be interpreted and construed in accordance with the laws of New
York State, without reference to conflict-of-laws principles.
DATED: October 28, 1997 PASTRY PRODUCT PRODUCERS LLC
By: /s/ Christopher M. Swartz
-------------------------------
Name: Christopher M. Swartz
-------------------------------
Title: President
EDWARD J. MCGOWAN, JR.
Notary Public, State of New York
Qualified in Jefferson County
Commission Expires Sept. 22, 1998
No. 4870284
/s/ Edward J. Mcgowan, Jr.
Notary Public
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<PAGE>
SCHEDULE "A" - PROPERTY
(1) All of the LLC's now owned or hereafter acquired accounts (including
but not limited to accounts receivable and contract rights), chattel
paper, documents and instruments, including the right to receive
payment under any of the foregoing.
(2) All proceeds of any of the foregoing.
<PAGE>
EXHIBIT C
SECURITY AGREEMENT
In consideration of the Repurchase Agreement dated October 28, 1997
(the "Repurchase Agreement") between Paul M. Truax (the "Secured Party") and
Robin Longley, as the "Sellers," and Jreck Subs, Inc. ("JSI") and Jreck Subs
Group, Inc. ("JSGI") and the transactions contemplated in such Repurchase
Agreement, the undersigned Pastry Product Producers LLC (the "LLC") agrees with
the Secured Party as follows:
1. Security Interest. The LLC hereby pledges to and grants the Secured
Party a security interest in the property described in Schedule "A" hereto (as
the same may be supplemented or amended hereafter) and any other property of the
LLC now or hereafter in the possession or control of the Secured Party for any
purpose, together with all attachments, parts, accessions and repairs now or
hereafter affixed thereto, any substitutes and replacements for any thereof, any
additions thereto, any dividends and distributions and all other rights in
connection therewith, and all products and proceeds in whatever form of any such
property (all of the foregoing hereafter collectively referred to as the
"Collateral").
2. Indebtedness. This security interest secures all indebtedness,
obligations and liabilities of the LLC or Christopher M. Swartz ("Swartz") to
the Secured Party of any kind, direct or contingent, now existing or hereafter
arising, including in connection therewith the obligations of the LLC or Swartz
under the Replacement Note referred to in the Repurchase Agreement and all other
principal, interest, costs and expenses of every kind (hereafter collectively
referred to as the "Indebtedness").
3. The LLC's Representations and Warranties. The LLC hereby represents
and
<PAGE>
warrants as follows: (a) the LLC is the true and sole owner of the Collateral;
(b) the Collateral is free and clear of all liens and encumbrances and there are
no financing statements, security agreements, or other similar documents
covering any of the Collateral; (c) this Agreement constitutes the legal, valid,
and binding obligation of the LLC; and (d) the granting of the security interest
by this Agreement will not contravene any contract provision binding upon the
LLC.
4. Covenants of the LLC. (a) The LLC will not sell, offer to sell,
grant a security interest in, or permit to exist any other lien or encumbrance
upon the Collateral or any interest therein without the written consent of the
Secured Party; (b) the LLC will preserve its existence as a New York limited
liability company; (c) the LLC will defend the Collateral against the claims and
demands of all other parties; (d) the LLC authorizes the Secured Party to file a
financing statement covering the Collateral without the LLC's signature and to
take any other action, in his own name or in the name of the LLC, as the LLC's
attorney-in- fact, which the Secured Party deems necessary or appropriate to
perfect the security interest granted hereby. The LLC agrees to take any action
requested by the Secured Party to perfect and enforce the rights of the Secured
Party granted by this Agreement; (e) the LLC authorizes the Secured Party to
inspect the LLC's books and records pertaining to the Collateral at any
reasonable time upon request, and the LLC shall cooperate with the Secured Party
in such inspection; provided however, that, so long as no Event of Default has
occurred and is continuing, the LLC shall not be obligated to permit such
inspection more frequently then once every sixty days; (f) after an Event of
Default has occurred and is continuing, the LLC on demand shall pay the Secured
Party all his expenses (referred to herein as "Collateral
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<PAGE>
Expenses") related to the perfecting, taking, holding, preparing for
disposition, and disposing of the Collateral, including reasonable attorneys'
fees and legal expenses incurred in protecting and enforcing the Secured Party's
rights with respect to the Collateral.
5. Events of Default. The occurrence of any one of the following shall
be deemed an "Event of Default" under this Agreement: (a) default in any payment
of principal, interest, or other amount when due with respect to any part of the
Indebtedness and, if provided by any note or other writing evidencing such
Indebtedness, continuance of such default for any grace period allowed after the
due date; (b) failure of the LLC or Swartz to fulfill or perform any term of any
instrument or agreement of the LLC or Swartz issued to or entered into with the
Secured Party; (c) dissolution of the LLC; or (d) commencement of any
bankruptcy, receivership or similar proceeding involving the LLC or Swartz as a
debtor.
6. The Secured Party's Rights following Default. Upon the occurrence of
any Event of Default as defined above, the Secured Party shall have all the
rights and remedies available to a secured party under the New York Uniform
Commercial Code and otherwise available to it by any agreement with the LLC or
Swartz or under the law of New York, including (a) those rights and remedies
available under any written instrument or agreement relating to any
Indebtedness; (b) to sell, lease, or otherwise dispose of, all or any part of
the Collateral at public or private sale; (c) to apply the proceeds from the
sale, lease, or other disposition of the Collateral to the payment of all
Collateral Expenses, and any balance to the payment of such of the Indebtedness,
and in such order, as the Secured Party may elect. The LLC shall pay any
deficiency remaining after such application. If a notice of intended disposition
of any of the Collateral is required by law, notice shall be deemed reasonably
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<PAGE>
given if received by the LLC at least five days prior to such disposition or if
mailed to the LLC at the LLC's last known address at least eight days prior to
such disposition.
7. Miscellaneous Provisions. (a) In addition to all other rights the
Secured Party may have, the Secured Party may, after the occurrence any Event of
Default: (i) notify the parties obligated on any of the Collateral to make
payment directly to the Secured Party on any amounts due or to become due
thereunder; (ii) enforce collection of any of the Collateral by suit or
otherwise; (iii) surrender, release or exchange all or any part of the
Collateral; (iv) compromise or extend or renew for any period (whether or not
longer than the original period) any Indebtedness; (v) take control of any
proceeds of the Collateral; and (vi) separately or concurrently with an exercise
of rights hereunder, exercise such additional rights and powers, if any, with
respect to any other security for or guaranty of any of the Indebtedness, as may
be provided in any written instrument. (b) The Secured Party shall be deemed to
have exercised reasonable care in the custody and preservation of the Collateral
if it takes such action as the LLC shall request in writing, but failure of the
Secured Party to comply with any such request shall not of itself be deemed a
failure to exercise reasonable care. A failure of the Secured Party to preserve
or protect any rights with respect to the Collateral against prior parties, or
to do any act with respect to preservation of the Collateral not so requested by
the LLC, shall not be deemed a failure to exercise reasonable care in the
custody of the Collateral. (c) No course of dealing between the Secured Party
and the LLC, nor any delay or omission on the part of the Secured Party in
exercising any right hereunder, shall operate as a waiver of such right or of
any other right under this Agreement. (d) No waiver, release, modification or
rescission pertaining to this Agreement shall be effective unless in writing and
signed by the Secured Party nor shall a waiver on one occasion be
-4-
<PAGE>
construed as a waiver on any figure occasion. (e) The LLC authorizes the Secured
Party and hereby constitutes and appoints the Secured Party as the LLC's true
and lawful attorney-in-fact, irrevocably to verify the existence and scope of,
protect, preserve and realize upon the Collateral, and to endorse checks, drafts
and orders received from the sale, lease or other disposition of the Collateral
and apply the proceeds of any such checks, draft or orders upon the Indebtedness
in such order as the Secured Party in his discretion chooses. (f) This Agreement
shall be binding upon the heirs, successors and assigns of the LLC. It shall be
interpreted and construed in accordance with the laws of New York State, without
reference to conflict-of-laws principles.
DATED: October 28, 1997 PASTRY PRODUCT PRODUCERS LLC
By: /s/ Christopher M. Swartz
-------------------------------
Name: Christopher M. Swartz
-------------------------------
Title: President
EDWARD J. MCGOWAN, JR.
Notary Public, State of New York
Qualified in Jefferson County
Commission Expires Sept. 22, 1998
No. 4870284
/s/ Edward J. Mcgowan, Jr.
Notary Public
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<PAGE>
EXHIBIT "A"
ALL THAT TRACT OR PARCEL Of LAND situate on the westerly side of Route 37, in
the Town of Pamelia, County of Jefferson, State of New York, being a 3.60 acre
portion of the 73.9 acre tract of land conveyed to Stephen C. Graham and Linda
L. Graham by the Willowbrook Country Club Inc. Nov. 10, 1983 (reference L. 935,
p. 695, Jefferson County Clerk's office) and further described as follows:
BEGINNING at a one inch diameter iron pipe set in the westerly margin of N.Y.
State Route 37 said iron pipe being situate S. 31(degrees) - 22' W. a distance
of 51.0 feet from an iron pin that is the southerly corner of a 3.08 acre parcel
of land formerly conveyed to Lewis R. Morgan by Willowbrook Country Club Inc.
1963, (ref. L. 735, P. 416 Jeff. Co. Clark's office) and presently owned by
Stephen C. and Linda L. Graham; said one inch dia. iron pipe being also the most
northerly corner of a 0.31 acre strip of land acquired for highway widening in
1931 (ref. L. 399 P. 439, Jeff. Co. Clark's office) Oscar E. Hinds to the County
of Jefferson:
THENCE S. 37(degrees) - 02' W. a distance of 222.0 feet along the westerly
boundary of said 0.31 acre strip of land conveyed to Jeff. County to a one inch
dia. iron pipe set:
THENCE S. 31(degrees) - 22' W. a distance of 229.0' along the westerly boundary
of said 0.31 acre strip of land conveyed to Jeff. County to a one. inch iron
pipe set:
THENCE N. 64(degrees) - 12' W. a distance of 350.0 feet to a one inch dia. iron
pipe set:
THENCE N. 31(degrees) - 22' E. a distance of 450.0 feet to a one inch dia. iron
pipe set:
THENCE S. 64(degrees) - 12' a distance of 360.9 feet to a one inch iron pipe set
in the westerly margin of N.Y. State Route 37, which is the point of beginning.
CONTAINING 3.60 acres more or less.
Being a part of premises conveyed from Willowbrook Country Club Inc. to Stephen
C. Graham and Linda L. Graham by deed dated and recorded November 11, 1983 in
Liber 935 of Deeds at Page 695.
More recently described as:
ALL that tract or parcel of land situate in the Town of Pamelia, County of
Jefferson, and State of New York, and further described as follows:
<PAGE>
EXHIBIT "A" continued
BEGINNING at a capped pin set in the westerly highway limits of NYS Route 37,
said capped pin is situate a direct tie of S 77(degrees) 57' W, 62.15 feet from
the intersection of the centerline of NYS Route 37 and the centerline of Hines
Road;
THENCE N 64(degrees) 12' W, a distance of 350.00 feet to a capped pin set;
THENCE N 31(degrees) 22' E, a distance of 447.78 feet to a capped pin set;
THENCE S 64(degrees) 12' E, a distance of 372.02 feet to a I" iron pipe found in
the westerly highway limits of NYS Route 37;
THENCE S 37(degreed) 02' W, along the westerly highway limits of NYS Route 37, a
distance of 222.00 feet to a capped pin set at an angle point in said highway
limits;
THENCE S 31(degrees) 22' W, along the westerly highway limits of NYS Route 37, a
distance of 229.00 feet to the point of beginning.
CONTAINING - 3.636 acres of land more or less.
SUBJECT to all covenants, casements and restrictions of record.
IT BRING the intent, to describe the parcel of land conveyed by Marcy R. Dembs,
Referee, to Key Bank of New York N.A. n/k/a Key Bank of New York by deed
recorded in the Jefferson County Clark's office in Liber 1345 at Page 226 on May
12, 1993.
-2-
<PAGE>
OPTION AGREEMENT
The undersigned JRECK SUBS GROUP, INC., a Colorado corporation with
offices at 24685 NYS Route 37, Watertown, New York 13601 (hereinafter referred
to as the "Company") hereby grants to PAUL M. TRUAX, having an address at P.O.
Box 215, Hammond, New York (the "Optionee"), options to purchase 18,750 shares
of the Company's common stock upon the terms and conditions hereinafter set
forth:
1. Grant of Options. By this Agreement, the Company grants to the
Optionee, on the terms and conditions set forth herein, options (individually or
collectively referred to as the "Options") to purchase 18,750 shares of its
common stock, no par value (the "Common Stock"), at the purchase price per share
(the "Exercise Price") equal to fifty percent (50%) of (a) the mean between the
most recent bid and ask price per share as of the date of exercise, if Common
Stock is actively traded on an established market on such date, or (b) the fair
market value per share of Common Stock as of the date of exercise, if Common
Stock is not actively traded on an established market at such date,
2. Term of Options. The Options shall be exercisable during the period
(the "Exercise Period") from and after October 31. 1998 and, shall terminate on
the close of business on October 31, 2008 (the "Expiration Date").
3. Exercise of Options. The Optionee may exercise the Options from time
to time, in whole or in part, at any time during the Exercise Period, by giving
written notice to the Company of such exercise and of the number of shares the
Optionee has elected to purchase. The purchase price per share of the Options
shall be the Exercise Price. The full Exercise Price of the shares as to which
the Options are being exercised shall be paid in cash or certified or cashier's
check.
4. Shareholder Rights. No Option shall confer any rights as a
shareholder with respect to the share subject to such option until the date the
Optionee exercises such Option. The Company shall deliver to the Optionee a
certificate representing the shares as to which Options have been exercised as
soon as administratively feasible following such exercise.
5. Adjustments.
a. If the Company shall at any time subdivide its outstanding
shares of common stock (or other securities at the time receivable upon the
exercise of the Options) by recapitalization, reclassification or split-up
thereof, or if the Company shall declare a stock dividend or distribute shares
of common stock (or any other security convertible into shares of common stock)
to its shareholders, the number of shares of common stock subject to this
Agreement immediately prior to such subdivision shall be proportionately
increased, and if the Company shall at any time combine the outstanding shares
of common stock by
<PAGE>
recapitalization, reclassification, reverse stock split, at combination thereof,
the number of shares of common stock subject to this Agreement immediately prior
to such combination shall be proportionately decreased.
b. In case of any reorganization of the Company (or any other
corporation, the securities of which are at the time receivable on the exercise
of Options) of if the Company (or any such other corporation) shall consolidate
with or merge into another corporation or convey all or substantially all of its
assets to another corporation, then, and in each such case, the Optionee, upon
the exercise of any Options at any time after the consummation of such
reorganization, consolidation, merger or conveyance, shall be entitled to
receive in lieu of the securities and property receivable upon the exercise of
the Options prior to such consummation, the securities or property to which the
Optionee would have been entitled upon such consummation if the Optionee had
exercised the Options immediately prior thereto; in each such case, the terms of
this Agreement shall be applicable to the securities or property received upon
the exercise of the Options after such consummation.
6. Reserved Shares. The Company shall reserve sufficient authorized but
unissued shares of its Common Stock (or other securities, its referred to in
Section 5 above) so that, at any time on or prior to the Expiration Date,
authorized shares of Common stock (or other securities, as referred to in
Section 5 above) may be issued upon the exercise of all Options under this
Agreement.
7. Notices. All notices provided for under this Agreement shall be in
writing and shall be delivered by hand or sent by certified mail to the
addresses set forth above or to such other addresses that the respective parties
may designate in writing.
8. Interpretation. This Agreement shall be governed by and construed
under the laws of the State of New York without reference to conflict-of-law
principles.
9. Amendment. No term, condition, understanding or agreement purporting
to modify the terms of this Agreement shall be binding unless made in writing
and signed by both parties hereto.
10. Waiver. No failure of a party to exercise any power given to it
under this Agreement or to insist upon strict compliance with any obligation or
condition hereunder, and no custom or practice of the parties at variance with
the terms hereof, shall constitute a waiver by such party of its rights to
demand exact compliance with the terms of this Agreement.
11. Binding, etc. This Agreement shall be binding upon the Company and
its successors and assigns and shall inure to the benefit of the Optionee and
his or her heirs, executors, and administrators.
-2-
<PAGE>
IN WITNESS WHEREOF, the undersigned JRECK SUBS GROUP, INC. has caused
this Option Agreement to be executed by its duly authorized officer as of the 28
day of October, 1997.
JRECK SUBS GROUP, INC,
By: Christopher M. Swartz
-------------------------------
Name: Christopher M. Swarz
-------------------------------
Title: C.E.O.
EDWARD J. MCGOWAN, JR.
Notary Public, State of New York
Qualified in Jefferson County
Commission Expires Sept. 22, 1998
No. 4870284
/s/ Edward J. Mcgowan, Jr.
Notary Public
-3-
<PAGE>
REPLACEMENT NOTE
$150,222.00 October 28,1997
FOR VALUE RECEIVED, PASTRY PRODUCT PRODUCERS LLC, having an address at
24685 NYS ROUTE 37, WATERTOWN, N.Y. 13601 (the "LLC"), and CHRISTOPHER M.
SWARTZ, having an address at 453 HARRIS DRIVE, WATERTOWN, N.Y. 13601 ("Swartz"
and, together with the LLC, collectively hereinafter referred to as "Maker"),
hereby jointly and severally covenant and promise to pay to PAUL M. TRUAX having
an address at BOX 215, HAMMOND, NEW YORK 13646 ("Payee"), or order, at Payee's
address first above written or at such other address as Payee may designate in
writing, One Hundred Fifty Thousand Two Hundred Twenty-Two Dollars
($150,222.00), lawful money of the United States of America, together with
interest thereon computed from the date hereof at the rate of 10 percent per
annum. Maker shall make 84 level monthly payments of combined principal and
interest of $2,493.84 each, commencing on the 1st day of December,1997, and
continuing on the1st day of each month thereafter. All outstanding principal and
interest shall be due and payable on November 1st, 2004, if not theretofore
paid.
The holder of this Note may declare the entire unpaid amount of
principal and interest under this Note to be immediately due and payable if (1)
Maker defaults in the due and punctual payment or performance of any obligation
under this Note or under any collateral security agreement or document in
connection herewith, and (2) Maker has not cured such default within 30 days
after Payee has sent notice of such default either to Swartz or to the LLC.
<PAGE>
Maker shall have the right to prepay the indebtedness evidenced by this
Note, in whole or in part, without penalty, upon ten calendar days prior written
notice to Payee. Each prepayment will be effective as at the end of a calendar
month which is at least ten calendar days after such prepayment. After such
prepayment, Payee shall recalculate the payment schedule so that Maker shall be
obligated to make level monthly payments from and after the date of such
prepayment through November1, 2004. Each payment or prepayment shall be applied
first to unpaid interest due and owing and the, balance, if any, to principal.
Maker hereby waives presentment for payment, demand, protest, notice of
protest, notice of nonpayment, and notice of dishonor of this Note. The parties
which comprise the Maker hereunder shall be the joint and several obligors under
this Note.
Any notice or demand required or permitted to be made or given
hereunder shall be deemed sufficiently made and given if given by personal
service or by the mailing of such notice or demand by certified or registered
mail, return receipt requested, addressed, if to Maker, either to Swartz or to
the LLC at their respective addresses first above written, or if to Payee, at
Payee's address first above written. Any party may change its address by like
notice to the other parties.
Maker agrees to pay all costs of collection and the reasonable
attorneys' fees of Payee in the event this Note is placed in the hands of an
attorney for collection.
This Note may not be changed or terminated orally, but only by an
agreement in writing signed by the party against whom enforcement of any change,
modification, termination, waiver, or discharge is sought. This Note shall be
construed and enforced in
-2-
<PAGE>
accordance with the laws of the State of New York, without reference to
conflict-of-laws principles.
This Note evidences an amendment of, and not a repayment or reborrowing
of, certain indebtedness evidenced by (1) a Promissory Note dated June 17, 1996
of Swartz in favor of Payee, and (2) a Mortgage Note dated September 20, 1996 of
the LLC in favor of Payee. Maker and Payee agree that Maker's obligations under
this Replacement Note replace Maker's obligations under such other Notes in
their entirety. IN WITNESS WHEREOF, Maker has executed this Note as of the date
first above written.
/s/ Christopher M. Swartz
-------------------------------
Christopher M. Swartz
PASTRY PRODUCT PRODUCERS LLC
By: /s/ Christopher M. Swartz
-------------------------------
Name: Christopher M. Swartz
-------------------------------
Title: President
/s/ Paul M. Truax
-------------------------------
Paul M. Truax
EDWARD J. MCGOWAN, JR.
Notary Public, State of New York
Qualified in Jefferson County
Commission Expires Sept. 22, 1998
No. 4870284
/s/ Edward J. Mcgowan, Jr.
Notary Public
-3-
<PAGE>
CONSULT YOUR LAWYER
BEFORE SIGNING THIS INSTRUMENT - THIS INSTRUMENT SHOULD 89 USED By LAWYERS ONLY.
MORTGAGE NOTE
$150,222.00 Watertown, New York, September 20, 1996
FOR VALUE RECEIVED, Pastry Product Producers LLC, a limited liability company
organized under New York law, and having so address of Route 37. Watertown, New
York 13601,
promised to pay to Paul M. Truax, having an address at P.O. Box 215, Hammond,
New York 13646,
or order, at Watertown, New York,
or at such other place as may be designated in writing by the holder of this
note, the principal sum of One Hundred Fifty Thousand, Two Hundred Twenty-Two
dollars and zero cents ($150,222.00) , said sum to be due and payable to full on
September 20, 2001,
with interest thereon to be computed from the date hereof, at the rate of Nine
(9) per centum per annum and to be paid on the lst day of January 1997, next
ensuing and each calendar quarter thereafter being the first day of each April,
July, October and January thereafter, until all amounts outstanding under this
Note are paid to full.
IT 15 HEREBY EXPRESSLY AGREE, that the said principal sum secured by this note
shall became due at the option of the holder thereof on the happening of any
default or event by which, under the terms of the mortgage securing this note,
said principal sum may or shall become due and payable; also, that all of the
covenants, conditions and agreements contained in said mortgage are hereby made
part of this instrument.
Presentment for payment, notice of dishonor, protest and notice of protest are
hereby waived.
This note is secured by a mortgage made by the maker to the payee of even date
herewith, on property situate in the Town of Pamelia, Jefferson County, New
York.
This note may not be changed or terminated orally.
PASTRY PRODUCT PRODUCERS LLC
-------------------------------
By: /s/ Christopher M. Swartz
-------------------------------
Christopher M. Swartz, President
ARTICLES OF AMENDMENT FILED TO DETERMINE RIGHTS OF SHARES
(CERTIFICATE OF DETERMINATION)
Christopher M. Swartz and Eric T. Swartz certify that they are the
President and Secretary, respectively, of JRECK Subs Group, Inc., a Colorado
corporation (hereafter referred to as the "Corporation" or the "Company"); that,
pursuant to the Articles of Incorporation, as amended, and Section 7-106-102 of
the Colorado Business Corporation Act, the Board of Directors of the Corporation
adopted the following resolutions on December 21, 1997; and that none of the
Series D Convertible Preferred Stock referred to in this document has been
issued.
1. Creation of Series D Convertible Preferred Stock. There is hereby
created a series of preferred stock consisting of 2,500 shares and designated as
the Series D Convertible Preferred Stock, having the voting powers, preferences,
relative, participating, limitations, qualifications optional and other special
rights and the qualifications, limitations and restrictions thereof that are set
forth below.
2. Dividend Provisions. The holders of shares of Series D Convertible
Preferred Stock shall be entitled to receive, an 8% annual dividend, equal in
value to $80.00 per share, payable on each July 1 commencing on July 1, 1998 on
conversion pro rata based on a 360-day year. In the opinion of the Corporation,
such dividend may be paid in cash or in Common Stock valued at the Conversion
Rate in effect as of such July 1 or the Conversion Date. Each share of Series D
Convertible Preferred Stock shall rank on a parity with each other share of
Series D Convertible Preferred Stock with respect to dividends.
3. Redemption Provisions. The Series D Convertible Preferred Stock is
not redeemable except with the written consent of the holders thereof.
4. Liquidation Provisions. In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, the Series D
Convertible Preferred Stock shall be entitled to receive an amount equal to
$1,300.00 per share. After the full preferential liquidation amount has been
paid to, or determined and set apart for the Series D Convertible Preferred
Stock and all other series of Preferred Stock hereafter authorized and issued,
if any, the remaining assets of the Corporation available for distribution to
shareholders shall be distributed ratably to the holders of the common stock. In
the event the assets of the Corporation available for distribution to its
shareholders are insufficient to pay the full preferential liquidation amount
per share required to be paid the Corporation's Series D Convertible Preferred
Stock, the entire amount of assets of the Corporation available for distribution
to shareholders shall be paid up to their respective final liquidation amounts
first to the Series D Convertible Preferred Stock, then to any other series of
Preferred Stock hereafter authorized and issued, all of which amounts shall be
distributed ratably among holders of each such series of Preferred Stock, and
the common stock shall receive nothing. A reorganization or any other
consolidation or merger of the Corporation with or into any other corporation,
or any other sale of all or substantially all of the assets of the Corporation,
shall not be deemed to be a liquidation, dissolution or winding up of the
Corporation within the meaning of this Section 4, and the Series D Convertible
Preferred Stock shall be entitled only to (i) the right provided in any
agreement or plan governing the reorganization or other consolidation, merger or
sale of assets transaction, (ii) the rights contained in the Colorado Business
Corporation Act and (iii) the rights contained in other Sections hereof.
5. Convertible Provisions. The holders of shares of Series D
Convertible Preferred Stock shall have conversion rights as follows (the
"Conversion Rights"):
<PAGE>
(a) Right to Convert. (1) Each share of Series D Convertible Preferred
Stock (the "Preferred Shares") shall be convertible, at the option of
its holder, at any time, into a number of shares of common stock of the
Company (the "Common Stock") at the initial conversion rate (the
"Conversion Rate") defined below. The initial Conversion Rate, subject
to the adjustments described below, shall be a number of shares of
Common Stock equal to $1,000 divided by the lower of (i) Sixty Five
Percent (65%) of the average Market Price of the Common Stock for the
five trading days immediately prior to the Conversion Date (defined
below) or (ii) [75% on day of first closing], increased proportionally
for any reverse stock split and decreased proportionally for any
forward stock split or stock dividend. For purposes of this Section
5(a)(1), Market Price for any date shall be the closing bid price of
the Common Stock on such date, as reported by the National Association
of Securities Dealers Automated Quotation System ("NASDAQ"), or the
closing bid price in the over-the-counter market if other than Nasdaq.
(2) No fractional shares of Common Stock shall be issued upon
conversion of the Preferred Shares, and in lieu thereof the number of
shares of Common Stock issuable for each Preferred Share converted
shall be rounded to the nearest whole number. Such number of whole
shares of Common Stock issuable upon the conversion of one Preferred
Share shall be multiplied by the number of Preferred Shares submitted
for conversion pursuant to the Notice of Conversion (defined below) to
determine the total number of shares of Common Stock issuable upon
connection with any conversion.
(3) In order to convert the Preferred Shares into shares of Common
Stock, the holder of the Preferred Shares shall: (i) complete, execute
and deliver to the Corporation the conversion certificate attached
hereto as Exhibit A (the "Notice of Conversion"); and (ii) surrender
the certificate or certificates representing the Preferred Shares being
converted (the "Converted Certificate") to the Corporation. The Notice
of Conversion shall be effective and in full force and effect if
delivered to the Corporation by facsimile transmission at (315)
788-8954. Provided that a copy of the Notice of Conversion is delivered
to the Corporation on such date by facsimile transmission or otherwise,
and provided that the original Notice of Conversion and the Converted
Certificate are delivered to the Corporation within three (3) business
days thereafter at 24685 New York State Route 37, Watertown, New York
13601, the date on which notice of conversion is given (the "Conversion
Date") shall be deemed to be the date set forth therefor in the Notice
of Conversion; and the person or persons entitled to receive the shares
of Common Stock issuable upon conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock
as of the Conversion Date. If the original Notice of Conversion and the
Converted Certificate are not delivered to the Corporation within three
(3) business days following the Conversion Date, the Notice of
Conversion shall become null and void as if it were never given and the
Corporation shall, within two (2) business days thereafter, return to
the holder by overnight courier any
<PAGE>
Converted Certificate that may have been submitted in connection with
any such conversion. In the event that any Converted Certificate
submitted represents a number of Preferred Shares that is greater than
the number of such shares that is being converted pursuant to the
Notice of Conversion delivered in connection therewith, the Corporation
shall deliver, together with the certificates for the shares of Common
Stock issuable upon such conversion as provided herein, a certificate
representing the remaining number of Preferred Shares not converted.
(4) Upon receipt of a Notice of Conversion, the Corporation shall
absolutely and unconditionally be obligated to cause a certificate of
certificates representing the number of shares of Common Stock to which
a converting holder of Preferred Shares shall be entitled as provided
herein, which shares shall constitute fully paid and nonassessable
shares of Common Stock that are freely transferable on the books and
records of the Corporation and its transfer agents, to be issued to,
delivered by overnight courier to, and received by such holder by the
fifth (5th) calendar day following the Conversion Date. Such delivery
shall be made at such address as such holder may designate therefor in
its Notice of Conversion or in its written instructions submitted
together therewith.
(5) No less than 25 shares of Series D Convertible Preferred Stock may
be converted at any one time, unless the holder then holds less than 25
shares and converts all shares at that time.
(b) Adjustments to Conversion Rate. (1) Reclassification, Exchange and
Substitution. If the Common Stock issuable on conversion of the Series
D Convertible Preferred Stock shall be changed into the same or a
different number of shares of any other class or classes of stock,
whether by capital reorganization, reclassification, reverse stock
split or forward stock split or stock dividend or otherwise (other than
a subdivision or combination of shares provided for above), the holders
of the Series D Convertible Preferred Stock shall, upon its conversion,
be entitled to receive, in lieu of the Common Stock which the holders
would have become entitled to receive but for such change, a number of
shares of such other class or classes of stock that would have been
subject to receipt by the holders if they had exercised their rights of
conversion of the Series D Convertible Preferred Stock immediately
before that change.
(2) Reorganizations, Mergers, Consolidations or Sale of Assets. If at
any time there shall be a capital reorganization of the Corporation's
common stock (other than a subdivision, combination, reclassification
or exchange of shares provided for elsewhere in this Section (5) or
merger of the Corporation into another corporation, or the sale of the
Corporation's properties and assets as, or substantially as, an
entirety to any other person, then, as a part of such reorganization,
merger or sale, lawful provision shall be made so that the holders of
the Series D Convertible Preferred Stock shall thereafter be entitled
to receive upon conversion of the Series D Convertible Preferred Stock,
the number of shares of stock or other securities or property of the
Corporation, or of the successor corporation resulting from such
merger, to which holders of the Common Stock deliverable upon
conversion of the Series D Convertible Preferred Stock would have been
entitled on such capital reorganization, merger or sale if the Series D
Convertible Preferred Stock had been converted immediately before that
capital reorganization, merger or sale to the end that the provisions
of this paragraph (b)(2) (including adjustment of the Conversion Rate
then in effect and number of shares purchasable upon conversion of the
Series D Convertible Preferred Stock) shall be applicable after that
event as nearly equivalently as may be practicable.
(3) Additional Shares. In the event (a) the Company does not file a
registration statement under the Securities Act of 1933 covering the
<PAGE>
Common Stock issuable upon conversion of the Series D Convertible
Preferred Stock within 30 days of ____________ (the "Closing Date"),
(b) the registration statement is not declared effective within _____
days of the Closing Date or (c) the Company does not issue the Common
Shares within the time limits set forth in the penultimate sentence of
Section 5(a)(1), the Conversion Rate shall be adjusted to increase the
number of shares of common stock assessable by 5%. The foregoing
adjustments are cumulative and not exclusive of each other, with the
intent that the adjustments under this section 3(b)(3) may be a total
of 5%, 10% or 15%.
(c) No Impairment. The Corporation will not, by amendment of its
Articles of Incorporation or through any reorganization,
recapitalization, transfer of assets, merger, dissolution, or any other
voluntary action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying
out of all the provision of this Section 5 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series D Convertible Preferred
Stock against impairment.
(d) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Rate for any shares of
Series D Convertible Preferred Stock, the Corporation at its expense
shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to each holder of Series
D Convertible Preferred Stock effected thereby a certificate setting
forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of Series D
Convertible Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion rate at the time in effect, and
(iii) the number of shares of Common Stock and the amount, if any, of
other property which at the time would be received upon the conversion
of such holder's shares of Series D Convertible Preferred Stock.
(e) Notices of Record Date. In the event of the establishment by the
Corporation of record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive
any dividend (other than a cash dividend) or other distribution, the
Corporation shall mail to each holder of Series D Preferred Stock at
least twenty (20) days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the
purpose of such dividend or distribution and the amount and character
of such dividend or distribution.
(f) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Series D Convertible Preferred Stock
such number of its shares of Common Stock as shall from time to time be
sufficient, based on the Conversion Rate then in effect, to effect the
conversion of all then outstanding shares of the Series D Preferred
Stock. If at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of the Preferred Stock, then, in addition to
all rights, claims and damages to which the holders of the Series D
Convertible Preferred Stock shall be entitled to receive at law or in
equity as a result of such failure by the Corporation to fulfill its
obligations to the holders hereunder, the Corporation will take any and
all corporate or other action as may, in the opinion of its counsel, be
<PAGE>
helpful, appropriate or necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be
sufficient for such purpose.
(g) Notices. Any notices required by the provisions hereof to be given
to the holders of shares of Series D Convertible Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid
and return receipt requested, and addressed to each holder of record at
its address appearing on the books of the Corporation or to such other
address of such holder or its representative as such holder may direct.
6. Voting Provisions. Except as otherwise expressly provided or
required by law, the Series D Convertible Preferred Stock shall have no voting
rights.
IN WITNESS WHEREOF, the Company has caused this Certificate of
Determination of Series D Convertible Preferred Stock to be duly executed by its
President and attested to by its Secretary this 5th day of January, 1998 who, by
signing their names hereto, acknowledge that this Certificate of Determination
is the act of the Company and state to the best of their knowledge information
and belief, under the penalties of perjury, that the above matters and facts are
true in all material respects.
JRECK SUBS GROUP, INC.
/s/
----------------------------------
Christopher M. Swartz, President
----------------------------------
Eric T. Swartz, Secretary
<PAGE>
EXHIBIT A
CONVERSION CERTIFICATE
JRECK SUBS GROUP, INC.
Series D Convertible Preferred Stock
The undersigned holder ( the "Holder") is surrendering to JRECK Subs
Group, Inc., a Colorado corporation (the "Company"), one or more certificates
representing shares of Series D Convertible Preferred Stock of the Company (the
"Preferred Stock") in connection with the conversion of all or a portion of the
Preferred Stock into shares of Common Stock, no par value per share, of the
Company (the "Common Stock") as set forth below.
1. The Holder understands that the Preferred Stock were issued by the
Company pursuant to the exemption from registration under the United States
Securities Act of 1933, as amended (the "Securities Act"), provided by
Regulation D promulgated thereunder.
2. The Holder represents and warrants that all offers and sales of the
Common Stock issued to the Holder upon such conversion of the Preferred Stock
shall be made (a) pursuant to an elective registration statement under the
Securities Act, (in which case the Holder represents that a prospectus has been
delivered) (b) in compliance with Rule 144, or (c) pursuant to some other
exemption from registration.
Number of Shares of Preferred Stock being converted:______________
Applicable Conversion Price:______________________________________
Number of Shares of Common Stock Issuable:________________________
Number of Dividend Shares:_______________________________________
Conversion Date:_________________________________________
Delivery Instructions for certificates of Common Stock and for new
certificates representing any remaining shares of Preferred Stock:
=======================================================================
=======================================================================
NAME OF HOLDER:
--------------------------------
--------------------------------
(Signature of Holder)
BYLAWS
OF
CIRCA MEDIA, INC.
ARTICLE I
Offices
The principal office of the Corporation n Colorado shall initially be
located in Denver, Colorado. The Corporation may have such other offices, either
within or outside the State of Colorado, as the Board of Directors may
designate, or as the business of the Corporation may require from time to time.
The registered office of the Corporation required by the Colorado
Business Corporation Act to be maintained in the State of Colorado may be, but
need not be, identical with the principal office, and the address of the
registered office may be changed from time to time by the Board of Directors.
ARTICLE II
Shareholders
Section 1. Annual Meeting.
The annual meeting of the shareholders shall be held pursuant to notice
given by the Board of Directors for the purpose of electing directors and for
the transaction of such other business as may come before the meeting.
Section 2. Special Meetings.
Special meetings of the shareholders, for any purpose, unless otherwise
prescribed by statute, ma be called by the President or by the Board of
Directors, and shall be called by the President at the request of the holders of
not less than ten (10%) percent of all the outstanding shares of the Corporation
entitled to vote at the meeting. Such request shall state the purposes of the
proposed meeting.
Section 3. Adjournment.
a. When the annual meeting is convened, or when any special meeting is
convened, the presiding officer may adjourn it for such period of time as may be
reasonably necessary to reconvene the meeting at another place and another time.
<PAGE>
b. The presiding officer shall have the power to adjourn any meeting of
the shareholders for any property purpose, including, but not limited to, lack
of a quorum, to secure a more adequate meeting place, to elect officials to
count and tabulate votes, to review any shareholder proposals or to pass upon
any challenge which may properly come before the meeting.
c. When a meeting is adjourned to another time or place, it shall not
be necessary to give any notice of the adjourned meeting if the time and place
to which the meeting is adjourned are announced at the meeting at which the
adjournment is taken, and any business may be transacted at the adjourned
meeting that might have been transacted on the original date of the meeting. If,
however, after the adjournment the Board fixes a new record date for the
adjourned meeting, a notice of the adjourned meeting shall be given in
compliance with Subsection (4)(a) of this Article II to each shareholder of
record on the new record date entitled to vote at such meeting.
Section 4. Notice of Meeting; Purpose of Meeting; Waiver
a. Each shareholder of record entitled to vote at any meeting shall be
given in person, or by first class mail, postage prepaid, written notice of such
meeting which, in the case of a special meeting, shall set forth the purpose(s)
for which the meeting is called, not less than ten (10) or more then fifty (50)
days before the date of such meeting. If mailed, such notice is to be sent to
the shareholder's address as it appears on the stock transfer books of the
Corporation unless the shareholder shall have requested of the Secretary in
writing at least fifteen (15) days prior to the distribution of any required
notice that any notice intended for him to be sent to some other address, in
which case the notice may be sent to the address so designated. Notwithstanding
any such request by a shareholder, notice sent to a shareholder's address as it
appears on the stock transfer books of this Corporation as of the record date
shall be deemed properly given. Any notice of a meeting sent by the United
States mail shall be deemed delivered when deposited with proper postage thereon
with the United States Postal Service or in any mail receptacle under its
control.
b. A shareholder waives notice of any meeting by attendance, either in
person or by proxy, at such meeting or by waiving notice in writing either
before, during or after such meeting. Attendance at a meeting for the express
purpose of objecting that the meeting was not lawfully called or convened,
however, will not constitute a waiver of notice by a shareholder stating at the
beginning of the meeting, his objection that the meeting is not lawfully called
or convened.
c. Whenever the holders of at least eighty (80%) percent of the capital
stock of the Corporation having the right to vote shall be present at any annual
or special meeting of shareholders, however called or notified, and shall sign a
written consent thereto on the minutes of such meeting, the meeting shall be
valid for all purposes.
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d. A Waiver of Notice signed by all shareholders entitled to vote at a
meeting of shareholders may also be used for any other proper purpose including,
but not limited to, designating any place within or without the State of
Colorado as the place for holding such a meeting.
e. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of shareholders need be specified in any written
Waiver of Notice.
Section 5. Closing of Transfer Books; Record Date; Shareholders' List.
a. In order to determine the holders of record of the capital stock of
the Corporation who are entitled to notice of meetings, to vote at a meeting or
adjournment thereof, or to receive payment of any dividend, or for any other
purpose, the Board of Directors may fix a date not more than fifty (50) days
prior to the date set for any of the above-mentioned activities for such
determination of shareholders.
b. If the stock transfer books shall be closed for the purpose of
determining shareholders entitled to notice of or to vote at a meeting of
shareholders, such books shall be closed for at least ten (10) days immediately
preceding such meeting.
c. In lieu of closing the stock transfer books, the Board of Directors
may fix in advance a date as the date for such determination of shareholders,
such date in any case to be not more than fifty (50) days and, in case of a
meeting of shareholders, not less than ten (10) days prior to the date on which
the particular action, requiring such determination of shareholders, is to be
taken.
d. If the stock transfer books are not closed and no record date is
fixed for the determination of shareholders entitled to notice or to vote at a
meeting of shareholders, or to receive payment of a dividend, the date on which
notice of the meeting is mailed or the date on which the resolution of the Board
of Directors declaring such dividend is adopted, as the case may be, shall be
the record date for such determination of shareholders.
e. When a determination of shareholders entitled to vote at any meeting
of shareholders has been made as provided in this section, such determination
shall apply to any adjournment thereof, unless the Board of Directors fixes a
new record date under this section for the adjourned meeting.
f. The officer or agent having charge of the stock transfer books of
the Corporation shall make, as of a date at least ten (10) days before each
meeting of shareholders, a complete list of the shareholders entitled to vote at
such meeting or any adjournment hereof, with the address of each shareholder and
the number and class and series, if any, of shares held by each shareholder.
Such list shall be kept on file at the registered office of the Corporation or
at the office of the transfer agent or registrar of the Corporation for a period
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<PAGE>
of ten (10) days prior to such meeting and shall be available for inspection by
any shareholder at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of any meeting of shareholders and
shall be subject to inspection by any shareholder at any time during the
meeting.
g. The original stock transfer books shall be prima facie evidence as
to the shareholders entitled to examine such list or stock transfer books or to
vote at any meeting of shareholders.
h. If the requirements of Subsection 5(f) of this Article II have not
been substantially complied with then, o the demand of any shareholder in person
or by proxy, the meeting shall be adjourned until such requirements are complied
with.
i. If no demand pursuant to Section 5(h) is made, failure to comply
with the requirements of this Section shall not affect the validity of any
action taken at such meeting.
j. Subsection 5(g) of this Article II shall be operative only at such
time(s) as the Corporation shall have six (6) or more shareholders.
Section 6. Quorum.
a. At any meeting of the shareholders of the Corporation, the presence,
in person or by proxy, of shareholders owning a majority of the issued and
outstanding shares of the capital stock of the Corporation entitled to vote
thereat shall be necessary to constitute a quorum for the transaction of any
business. If a quorum is present the affirmative vote of a majority of the
shares represented at such meeting and entitled to vote o the subject matter
shall be the act of the shareholders. If there shall not be a quorum at any
meeting of the shareholders of the Corporation, then the holders of a majority
of the shares of the capital stock of the Corporation who shall be present at
such meeting, in person or by proxy, may adjourn such meeting from time to time
until holders of a majority of the shares of the capital stock shall attend. At
any such adjourned meeting at which a quorum shall be present, any business may
be transacted which might have been transacted at the meeting as originally
scheduled.
b. The shareholders at a duly organized meting having a quorum may
continue to transact business until adjournment notwithstanding the withdrawal
of enough shareholders to leave less than a quorum.
Section 7. Presiding Officer; Order of Business.
a. Meetings of the shareholders shall be presided over by the Chairman
of the Board, or, if he is not present, by the President or, if he is not
present, by a Vice President or, if none of the Chairman of the Board, the
President, or a Vice President is present, the meeting shall be presided over by
a Chairman to be chosen by a plurality of the shareholders entitled to vote at
4
<PAGE>
the meeting who are present, in person or by proxy. The presiding officer of any
meeting of the shareholders may delegate the duties and obligations of the
presiding officer of the meeting as he sees fit.
b. The Secretary of the Corporation, or, in his absence, an Assistant
Secretary shall act as Secretary of every meeting of shareholders, but if
neither the Secretary nor an Assistant Secretary is present, the presiding
officer of the meeting shall choose any person present to act as Secretary of
the meeting.
c. The order of business shall be as follows:
1. Call of meeting to order.
2. Proof of notice of meeting.
3. Reading of minutes of last previous shareholders meeting or a
Waiver thereof.
4. Reports of officers.
5. Reports of committees.
6. Election of directors.
7. Regular and miscellaneous business.
8. Special matters.
9. Adjournment.
d. Notwithstanding the provisions of Article II, Section 7, Subsection
c, the order and topics of business to be transacted at any meeting shall be
determined by the presiding officer of the meeting in his sole discretion. In no
event shall any variation in the order of business or additions and deletions
from the order of business as specified in Article II, Section 7, Subsection c,
invalidate any actions properly taken at any meeting.
Section 8. Voting.
a. Unless otherwise provided for in the Certificate of Incorporation,
each shareholder shall be entitled, at each meeting and upon each proposal to be
voted upon, to one vote for each share of voting stock recorded in his name on
the books of the Corporation on the record date fixed as provided for in Article
II, Section 5.
b. The presiding officer at any meeting of the shareholders shall have
the power to determine the method and means of voting when any matter is to be
voted upon. The method and means of voting may include, but shall not be limited
to, vote by ballot, vote by hand or vote by voice. However, no method of voting
may be adopted which fails to take account of any shareholder's right to vote by
proxy as provided for in Section 10 of this Article II. In no event may any
method of voting be adopted which would prejudice the outcome of the vote.
Section 9. Action Without Meeting.
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<PAGE>
a. Any action required to be taken at any annual or special meeting of
shareholders of the Corporation, or any action which may be taken at any annual
or special meeting of such shareholders, may be taken without a meeting, without
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. If any class of shares is
entitled to vote thereon as a class, such written consent shall be required of
the holders of a majority of the shares of each class of shares entitled to vote
thereon.
b. Within ten (10) days after obtaining such authorization by written
consent, notice must be given to those shareholders who have not consented in
writing. The notice shall fairly summarize the material features of the
authorized action and, if the action be a merger, consolidation or sale or
exchange of assets for which dissenters' rights are provided under the Colorado
Business Corporation Act, the notice shall contain a clear statement of the
right of the shareholders dissenting therefrom to be paid the fair value of
their shares upon compliance with further provisions of the Colorado Business
Corporation Act regarding the rights of dissenting shareholders.
c. In the event that the action to which the shareholders' consent is
such as would have required the filing of a certificate under the Colorado
Business Corporation Act if such action had been voted on by shareholders at a
meeting thereof, the certificate filed under such other section shall state that
written consent has been given in accordance with the provisions of this Article
II, Section 9.
Section 10. Proxies.
a. Every shareholder entitled to vote at a meeting of shareholders or
to express consent or dissent without a meeting, or his duly authorized
attorney-in-fact may authorize another person or persons to act for him by
proxy.
b. Every proxy must be signed by the shareholder or his
attorney-in-fact. No proxy shall be valid after the expiration of eleven (11)
months from the date thereof unless otherwise provided in the proxy. Every proxy
shall be revocable at the pleasure of the shareholder executing it, except as
otherwise provided in this Article II, Section 10.
c. The authority of the holder of a proxy to act shall not be revoked
by the incompetence or death of the shareholder who executed the proxy unless,
before the authority is exercised, written notice of an adjudication of such
incompetence or of such death is received by the corporate officer responsible
for maintaining the list of shareholders.
d. Except when other provisions shall have been made by written
agreement between the parties, the record holder of shares held as pledges or
6
<PAGE>
otherwise as security or which belong to another, shall issue to the pledgor or
to such owner of such shares, upon demand therefor and payment of necessary
expenses thereof, a proxy to vote or take other action thereon.
e. A proxy which states that it is irrevocable is irrevocable when it
is held by any of the following or a nominee of any of the following: (i) a
pledgee; (ii) a person who has purchased or agreed to purchase the shares; (iii)
a creditor or creditors of the Corporation who extend or continue to extend
credit to the Corporation in consideration of the proxy, if the proxy states
that it was given in consideration of such extension or continuation of credit,
the amount thereof, and the name of the person extending or continuing credit;
(iv) a person who has contracted to perform services as an office of the
Corporation, if a proxy is required by the contract of employment, if the proxy
states that it was given in consideration of such contract of employment and
states the name of the employee and the period of employment contracted for; and
(v) a person designated by or under an agreement as provided in Article XI
hereof.
f. Notwithstanding a provision in a proxy stating that it is
irrevocable, the proxy becomes revocable after the pledge is redeemed, or the
debt of the Corporation is paid, or the period of employment provided for in the
contract of employment has terminated, or the agreement under Article XII
hereof, has terminated and, in a case provided for in Subsection 10(e)(iii) or
Subsection 10(e)(iv) of this Article II becomes irrevocable three years after
the date of the proxy or at the end of the period, if any, specified therein,
whichever period is less, unless the period of irrevocability is renewed from
time to time by the execution of a new irrevocable proxy as provided in this
Article II, Section 10. This Subsection 10(f) does not affect the duration of a
proxy under Subsection 10(b) of this Article II.
g. A proxy may be revoked, notwithstanding a provision making it
irrevocable, by a purchaser of shares without knowledge of the existence of the
provision unless the existence of the proxy and its irrevocability is noted
conspicuously on the face or back of the certificate representing such shares.
h. If a proxy for the same shares confers authority upon two (2) or
more persons and does not otherwise provide a majority of such persons present
at the meeting, or if only one is present, then that one may exercise all the
powers conferred by the proxy. If the proxy holders present at the meeting are
equally divided as to the right and manner of voting in any particular case, the
voting of such shares shall be prorated.
i. If a proxy expressly so provides, any proxy holder may appoint in
writing a substitute to act in his place.
Section 11. Voting of Shares by Shareholders.
a. Shares standing in the name of another corporation, domestic or
foreign, may be voted by the officer, agent, or proxy designated by the Bylaws
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<PAGE>
of the corporate shareholder; or, in the absence of any applicable Bylaw, by
such person as the Board of Directors of the corporate shareholder may
designate. Proof of such designation may be made by presentation of a certified
copy of the Bylaws or other instrument of the corporate shareholder. In the
absence of any such designation, or in case of conflicting designation by the
corporate shareholder, the Chairman of the Board, President, any vice president,
secretary and treasurer of the corporate shareholder, in that order shall be
presumed to possess authority to vote such shares.
b. Shares held by an administrator, executor, guardian or conservator
may be voted by him, either in person or by proxy, without a transfer of such
shares into his name. Shares standing in the name of a trustee may be voted by
him, either in person or by proxy, but no trustee shall be entitled to vote
shares held by him without a transfer of such shares into his name.
c. Shares standing in the name of a receiver may be voted by such
receiver. Shares held by or under the control of a receiver but not standing in
the name of such receiver, may be voted by such receiver without the transfer
thereof into his name if authority to do so is contained in an appropriate order
of the court by which such receiver was appointed.
d. A shareholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the pledge.
e. Shares of the capital stock of the Corporation belonging to the
Corporation or held by it in a fiduciary capacity shall not be voted, directly
or indirectly, at any meeting, and shall not be counted in determining the total
number of outstanding shares.
ARTICLE III
Directors
Section 1. Board of Directors; Exercise of Corporate Powers.
a. All corporate powers shall be exercised by or under the authority
of, and the business and affairs of the Corporation shall be managed under the
direction of the Board of Directors except as may be otherwise provided in the
Articles of Incorporation. If any such provision is made in the Articles of
Incorporation, the powers and duties conferred or imposed upon the Board of
Directors shall be exercised or performed to such extent and by such person or
persons as shall be provided in the Articles of Incorporation.
b. Directors need not be residents of the state of incorporation unless
the Articles of Incorporation so require.
c. The Board of Directors shall have authority to fix the compensation
of Directors unless otherwise provided in the Articles of Incorporation.
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d. A Director shall perform his duties as a Director, including his
duties as a member of any committee of the Board upon which he may serve, in
good faith, in a manner he reasonably believes to be in the best interests of
the Corporation, and with such care as an ordinarily prudent person in a like
position would use under similar circumstances.
e. In performing his duties, a Director shall be entitled to rely on
information, opinion, reports or statements, including financial data, in each
case prepared or presented by: (i) one or more officers or employees of the
Corporation whom the Director reasonably believes to be reliable and competent
in the matters presented; (ii) counsel, public accountants or other persons as
to matters which the Director reasonably believes to be within such persons'
professional or expert competence; or (iii) a committee of the Board upon which
he does not serve, duly designated in accordance with a provision of the
Articles of Incorporation or the Bylaws, as to matters within its designated
authority, which committee the Director reasonably believes to merit confidence.
f. A Director shall not be considered to be acting in good faith if he
has knowledge concerning the matter in question that would cause such reliance
described in Subsection 1(e) of this Article III to be unwarranted.
g. A person who performs his duties in compliance with this Article
III, Section 1 shall have no liability by reason of being or having been a
Director of the Corporation.
h. A Director of the Corporation who is present at a meeting of the
Board of Directors at which action on any corporate matter is taken consents
thereto unless he votes against such action or abstains from voting in respect
thereto because of an asserted conflict of interest.
Section 2. Number; Election; Classification of Directors; Vacancies.
a. The Board of Directors of this Corporation shall consist of not less
than three (3) nor more than seven (7) members, unless the number of
shareholders is less than three, in which the Corporation shall have as many
directors as there are shareholders. The number of directors shall be fixed by
the initial Board of Directors. The number of directors constituting the initial
Board of Directors shall be fixed by the Articles of Incorporation. The number
of directors may be increased from time to time by the Board of directors, but
no decrease shall have the effect of shortening the term of any incumbent
director.
b. Each person named in the Articles of Incorporation as a member of
the initial Board of Directors, shall hold office until the first annual meeting
of shareholders, and until his successor shall have been elected and qualified
or until his earlier resignation, removal from office or death.
c. At the first annual meeting of shareholders and at each annual
meeting thereafter the shareholders shall elect directors to hold office until
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the next succeeding annual meeting, except in case of the classification of
directors as permitted by the Colorado Business Corporation Act. Each director
shall hold office for the term for which he is elected and until his successor
shall have been elected and qualified or until his earlier resignation, removal
from office or death.
d. The shareholders, by amendment to these Bylaws, may provide that the
directors be divided into not more than four classes, as nearly equal in number
as possible, whose terms of office shall respectively expire at different times,
but no such term shall continue longer than four (4) years, and at least
one-fifth (1/5) in number of the directors shall be elected annually.
e. If directors are classified and the number of directors is
thereafter changed, any increase or decrease in directorships shall be so
apportioned among the classes as to make all classes as nearly equal in number
as possible.
f. Any vacancy occurring in the Board of Directors including any
vacancy created by reason of an increase in the number of directors, may be
filed by the affirmative vote of a majority of the remaining directors though
less than a quorum of the Board of Directors. A director elected to fill a
vacancy shall hold office only until the next election of directors by the
shareholders.
Section 3. Removal of Directors.
a. At a meeting of shareholders called expressly for that purpose,
directors may be removed in the manner provided in this Article III, Section 3.
Any director or the entire Board of Directors may be removed, with or without
cause, by a vote of the holders of a majority of the shares then entitled to
vote at an election of directors.
b. If the Corporation has cumulative voting, if less than the entire
Board is to be removed, no one of the directors may be removed if the votes cast
against his removal would be sufficient to elect him if then cumulatively voted
at an election of the entire Board of Directors, or, if there be classes of
directors, at an election of the class of directors of which he is a member.
Section 4. Director Quorum and Voting.
a. A majority of the number of directors fixed in the manner provided
in these Bylaws shall constitute a quorum for the transaction of business unless
a greater number if required elsewhere in these Bylaws.
b. A majority of the members of an Executive Committee or other
committee shall constitute a quorum for the transaction of business at any
meeting of such Executive Committee or other committee.
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c. The act of the majority of the directors present at a Board meeting
at which a quorum is present shall be the act of the Board of Directors.
d. The act of a majority of the members of an Executive Committee
present at an Executive Committee meeting at which a quorum is present shall be
the act of the Executive Committee.
e. The act of a majority of the members of any other committee present
at a committee meeting at which a quorum is present shall be the act of the
committee.
Section 5. Director Conflicts of Interest.
a. 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 on or more of its directors are directors or officers or are financially
interested, shall be either void or voidable because of a relationship or
interest or because such director or directors are present at the meeting of the
Board of Directors or a committee thereof which authorizes, approves or ratified
such contract or transaction or because his or their votes are counted for such
purpose, if:
(i) 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 or consents of such interested directors; or
(ii) The fact of such relationship or interest is disclosed or
known t the shareholders entitled to vote and they authorize, approve or ratify
such contract or transaction by vote or written consent; or
(iii) The contract or transaction is fair and reasonable as to
the Corporation at the time it is authorized by the Board, a committee, or the
shareholders.
b. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or a committee
thereof which authorizes, approves or ratifies such contract or transaction.
Section 6. Executive and Other Committees; Designation; Authority.
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a. The Board of Directors, by resolution adopted by a majority of the
full Board of Directors, may designate from among its members an Executive
Committee and one or more other committees each of which, to the extent provided
in such resolution or in the Articles of Incorporation or these Bylaws, shall
have and may exercise all the authority of the Board of Directors, except that
no such committee shall have the authority to: (i) approve or recommend to
shareholders actions or proposals required by the Colorado Business Corporation
Act to be approved by shareholders; (ii) designate candidates for the office of
director for purposes of proxy solicitation or otherwise; (iii) fill vacancies
on the Board of Directors or any committee thereof; (iv) amend the Bylaws; or
(v) authorize or approve the issuance or sale of, or any contract to issue or
sell, shares or designate the terms of a series of class of shares, unless the
Board of Directors, having acted regarding general authorization for the
issuance or sale of shares, or any contract therefor, and in the case of a
series, the designation thereof, has specified a general formula or method by
resolution or by adoption of a stock option or other plan, authorized a
committee to fix the terms upon which such shares may be issued or sold,
including, without limitation the price, the rate or manner of payment of
dividends, provisions for redemption, sinking fund, conversion, ad voting
preferential rights, and provisions for other features of a class of shares, or
a series of class of shares, with full power in such committee to adopt any
final resolution setting forth all the terms thereof and to authorize the
statement of the terms of a series for filing with the Secretary of State under
the Colorado Business Corporation Act.
b. The Board, by resolution adopted in accordance with Article III,
Subsection 6(a) may designate one or more directors as alternate members of any
such committee, who may act in the place and stead of any absent member or
members at any meeting of such committee.
c. Neither the designation of any such committee, the delegation
thereto of authority, nor action by such committee pursuant to such authority
shall alone constitute compliance by any member of the Board of Directors, not a
member of the committee in question, with his responsibility to act in good
faith, in a manner he reasonably believes to be in the best interests of the
Corporation, and with such care as an ordinarily prudent person in a like
position would use under similar circumstances.
Section 7. Place, Time, Notice, and Call of Directors' Meetings.
a. Meetings of the Board of Directors, regular or special, may be held
either within or without this state.
b. A regular meeting of the Board of Directors of the Corporation shall
be held for the election of officers of the Corporation and for the transaction
of such other business as may come before such meetings promptly as practicable
after the annual meeting of the shareholders of this Corporation without the
necessity of other notice than this Bylaw. Other regular meetings of the Board
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of Directors of the Corporation may be held at such times and at such places as
the Board of Directors of the Corporation may from time to time resolve without
other notice than such resolution. Special meetings of the Board of Directors
may be held at any time upon call of the Chairman of the Board or the President
or a majority of the Directors of the Corporation, at such time and at such
place as shall be specified in the call thereof. Notice of any special meeting
of the Board of Directors must be given at least two (2) days prior thereto, if
by written notice delivered personally; or at least five (5) days prior thereto,
if mailed; or at least two (2) days prior thereto, if by telegram; or at least
two (2) days prior thereto, if by telephone. If such notice is given by mail,
such notice shall be deemed to have been delivered when deposited with the
United States Postal Service addressed to the business address of such director
with postage thereon prepaid. If notice be given by telegram, such notice shall
be deemed delivered when the telegram is delivered to the telegraph company. If
notice is given by telephone, such notice shall be deemed delivered when the
call is completed.
c. Notice of a meeting of the Board of Directors need not be given to
any director who signs a waiver of notice either before or after the meeting.
Attendance of a director at a meeting shall constitute a waiver of notice of
such meeting and waiver of any and all objections to the place of the meeting,
the time of the meeting, or the manner in which it has been called or convened,
except when a director states, at the beginning of the meeting, any objection to
the transaction of business because the meeting is not lawfully called or
convened.
d. Neither the business to be transacted at, nor the purpose of any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
e. A majority of the directors present, whether or not a quorum exists,
may adjourn any meeting of the Board of Directors to another time and place.
Notice of any such adjourned meeting shall be given to the directors who were
not present at the time of the adjournment and, unless the time and place of the
adjourned meeting are announced at the time of the adjournment, to the other
directors.
f. Member of the Board of Directors may participate in a meeting of
such Board by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other at the same time. Participation by such means shall constitute
presence in person at a meeting.
Section 8. Action by Directors Without a Meeting.
Any action required by the Colorado Business Corporation Act to be
taken at a meeting of the directors of the Corporation, or a committee thereof,
may be taken without a meeting if a consent in writing, setting forth the action
so to be taken, signed by all of the directors, or all of the members of the
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committee, as the case may be, is filed in the minutes of the proceedings of the
Board or of the committee. Such consent shall have the same effect as a
unanimous vote.
Section 9. Compensation.
The directors and members of the Executive and any other committee of
the Board of Directors shall be entitled to such reasonable compensation for
their services and on such basis as shall be fixed from time to time by
resolution of the Board of Directors. The Board of Directors and members of any
committee of the Board of Directors shall be entitled to reimbursement for any
reasonable expenses incurred in attending any Board or committee meeting. Any
director receiving compensation under this section shall not be prevented from
serving the Corporation in any other capacity and shall not be prohibited from
receiving reasonable compensation for such other services.
Section 10. Resignation.
Any Director of the Corporation may resign at any time without
acceptance by the Corporation. Such resignation shall be in writing and may
provide that such resignation shall take effect immediately or on any future
date stated in such notice.
Section 11. Removal.
Any Director of the Corporation may be removed for cause by a majority
vote of the other members of the Board of Directors as then constituted or with
or without cause by the vote of the holders of a majority of the outstanding
shares of capital stock shareholders of the Corporation called for such purpose.
Section 12. Vacancies.
In the event that a vacancy shall occur on the Board of Directors of
the Corporation whether because of death, resignation, removal, an increase in
the number of directors or any other reason, such vacancy may be filed by the
vote of a majority of the remaining directors of the Corporation even though
such remaining directors represent less than a quorum. An increase in the number
of directors shall create vacancies for the purpose of this section. A director
of the Corporation elected to fill a vacancy shall hold office for the unexpired
term of his predecessor, or in the case of an increase in the number of
directors, until the election and qualification of directors at the next annual
meeting of the shareholders.
ARTICLE IV
Officers
Section 1. Election; Number; Terms of Office.
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a. The officers of the Corporation shall consist of a Chairman of the
Board, a President, a Secretary and a Treasurer, each of whom shall be elected
by the Board of Directors at such time and in such manner as may be prescribed
by these Bylaws. Such other officers and assistant officers and agents as may be
deemed necessary may be elected or appointed by the Board of Directors.
b. All officers and agents, as between themselves and the Corporation,
shall have such authority and perform such duties in the management of the
Corporation as are provided in these Bylaws, or as may be determined by
resolution of the Board of Directors not inconsistent with these Bylaws.
c. Any two (2) or more offices may be held by the same person except
the offices of the President and Secretary.
d. A failure to elect a Chairman of the Board, President, a Secretary
and a Treasurer shall not affect the existence of the Corporation.
Section 2. Removal.
An officer of the Corporation shall hold office until the election and
qualification of his successor; however, any officer of the Corporation may be
removed from office by the Board of Directors whenever in its judgment the best
interests of the Corporation will be served thereby. Such removal shall be
without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of any officer shall not of itself create any contract
right to employment or compensation.
Section 3. Vacancies.
Any vacancy in any office from any cause may be filed for the unexpired
portion of the term of such office by the Board of Directors.
Section 4. Powers and Duties.
a. The Chairman of the Board shall be the Chief Executive Officer of
the Corporation. The Chairman of the Board shall preside at all meetings of the
shareholders and of the Board of Directors. Except where by law the signature of
the President is required or unless the Board of Directors shall rule otherwise,
the Chairman of the Board shall possess the same power as the President to sign
all certificates, contracts and other instrument of the Corporation which may be
authorized by the Board of Directors. Unless a Chairman of the Board is
specifically elected, the President shall be deemed to be the Chairman of the
Board.
b. The President shall be the Chief Operating Officer of the
Corporation. He shall be responsible for the general day-to-day supervision of
the business and affairs of the Corporation. He shall sign or countersign all
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certificates, contracts or other instruments of the Corporation as authorized by
the Board of Directors. He may, but need not, be a member of the Board of
Directors. In the absence of the Chairman of the Board, the President shall be
the Chief Executive Officer of the Corporation and shall preside at all meetings
of the shareholders and the Board of Directors. He shall make reports to the
Board of Directors and shareholders. He shall perform such other duties as are
incident to his office or are properly required of him by the Board of
Directors. The Board of Directors will at all times retain the power to
expressly delegate the duties of the President to any other officer of the
Corporation.
c. The Vice-President(s), if any, in the order designated by the Board
of Directors, shall exercise the functions of the President during the absence,
disability, death, or refusal to act of the President. During the time that any
Vice-President is properly exercising the functions of the President, such
Vice-President shall have all the powers of and be subject to all the
restrictions upon the President. Each Vice-President shall have such other
duties as are assigned to him from time to time by the Board of Directors or by
the President of the Corporation.
d. The Secretary of the Corporation shall keep the minutes of the
meetings of the shareholders of the Corporation and, if so requested, the
Secretary shall keep the minutes of the meetings of the Board of Directors of
the Corporation. The Secretary shall be the custodian of the minute books of the
Corporation and such other books and records of the Corporation as the Board of
Directors of the Corporation may direct. The Secretary shall make or cause to be
made all proper entries in all corporate books that the Board of Directors of
the Corporation may direct. The Secretary shall have the general responsibility
for maintaining the stock transfer books of the Corporation, or of supervising
the maintenance of the stock transfer books of the Corporation by the transfer
agent, if any, of the Corporation. The Secretary shall be the custodian of the
corporate seal of the Corporation and shall affix the corporate seal of the
Corporation on contracts and other instruments as the Board of Directors of the
Corporation may direct. The Secretary shall perform such other duties as are
assigned to him from time to time by the Board of Directors or the President of
the Corporation.
e. The Treasurer of the Corporation shall have custody of all funds and
securities owned by the Corporation. The Treasurer of the Corporation shall
render a statement of cash, financial and other accounts of the Corporation
whenever he is directed to render such a statement by the Board of Directors or
by the President of the Corporation. The Treasurer shall at all reasonable times
make available the Corporation's books and financial accounts to any Director of
the Corporation during normal business hours. The Treasurer shall perform all
other acts incident to the office of the Treasurer of the Corporation, and he
shall have such other duties as are assigned to him from time to time by the
Board of Directors or the President of the Corporation.
f. Other subordinate or assistant officers appointed by the Board of
Directors or by the President, if such authority is delegated to him by the
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Board of Directors, shall exercise such powers and perform such duties as may be
delegated to them by the Board of Directors or by the President, as the case may
be.
g. In case of the absence or disability of any officer of the
Corporation and of any person authorized to act in his place during such period
of absence or disability, the Board of Directors may from time to time delegate
the powers and duties of such officer to any other officer or any director or
any other person whom it may select.
Section 5. Salaries
The salaries of all Officers of the Corporation shall be fixed by the
Board of Directors. No officer shall be ineligible to receive such salary by
reason of the fact that he is also a Director of the Corporation and receiving
compensation therefor.
ARTICLE V
Loans to Employees and Officers;
Guaranty of Obligations of Employees and Officers
This Corporation may lend money to, guarantee any obligation of, or
otherwise assist any officer or other employee of the Corporation or of any
subsidiary, including any officer or employee who is a Director of the
Corporation or of a subsidiary, whenever, in the judgment of the Directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
Corporation. The loan, guaranty or assistance may reasonably be expected to
benefit the Corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the Board
of Directors shall approve including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this Article shall be deemed to deny, limit
or restrict the powers of guaranty or warranty of this Corporation at common law
or under any statute.
ARTICLE VI
STOCK CERTIFICATES: VOTING TRUSTS: TRANSFERS
Section 1. Certificates Representing Shares.
a. Every holder of shares in this Corporation shall be entitled to one
or more certificates, representing all shares to which he is entitled and such
certificates shall be signed by the President or a Vice President and the
Secretary or an Assistant Secretary of the Corporation and may be sealed with
the seal of the Corporation or a facsimile thereof. The signatures of the
President or Vice President and the Secretary or Assistant Secretary may be
facsimiles if the certificate is manually signed on behalf of a transfer agent
or a registrar, other than the Corporation itself or an employee of the
Corporation. In case any officer who signed or whose facsimile signature has
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been placed upon such certificate shall have ceased to be such officer before
such certificate is issued, it may be used by the Corporation with the same
effect as if he were such officer at the date of its issuance.
b. Each certificate representing shares shall state upon the face
thereof: (i) the name of the Corporation; (ii) that the Corporation is organized
under the laws of this state; (iii) the name of the person or persons to whom
issued; (iv) the number and class of shares, and the designation of the series,
if any, which such certificate represents; and (v) the par value of each share
represented by such certificate, or a statement that the shares are without par
value.
c. No certificate shall be issued for any shares until such shares are
fully paid.
Section 2. Transfer Book.
The Corporation shall keep its registered office or principal place of
business or in the office of its transfer agent or registrar, a book (or books
where more than one kind, class, or series of stock is outstanding) to be known
as the Stock Book, containing the names, alphabetically arranged, addresses and
Social Security numbers of every shareholder, and the number of shares of each
kind, class or series of stock held of record. Where the Stock Book is kept in
the office of the transfer agent, the Corporation shall keep at its office in
the State of Colorado copies of the stock lists prepared from said Stock Book
and sent to it from time to time by said transfer agent. The Stock Book or stock
lists shall show the current status of the ownership of shares of the
Corporation provided, if the transfer agent of the Corporation be located
elsewhere, a reasonable time shall be allowed for transit or mail.
Section 3. Transfer of Shares.
a. The name(s) and address(s) of the person(s) to whom shares of stock
of this Corporation are issued, shall be entered on the Stock Transfer Books of
the Corporation, with the number of shares and date of issuance.
b. Transfer shares of the Corporation shall be made on the Stock
Transfer Books of the Corporation by the Secretary or the transfer agent, only
when the holder of record thereof or the legal representative of such holder of
record or the attorney-in-fact of such holder of record, authorized by power of
attorney duly executed and filed with the Secretary or transfer agent of the
Corporation, shall surrender the Certificate representing such shares of
cancellation. Lost, destroyed or stolen Stock Certificates shall be replaced
pursuant to Section 5 of this Article VI.
c. The person or persons in whose names shares stand on the books of
the Corporation shall be deemed by the Corporation to e the owner of such shares
for all purposes, except as otherwise provided pursuant to Section 10 and 11 of
Article II, or Section 4 of this Article VI.
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Section 4. Voting Trusts.
a. Any number of shareholders of the Corporation may create a voting
trust for the purpose of conferring upon a trustee or trustees the right to vote
or otherwise represent their shares, for a period not to exceed ten (10) years,
by: (i) entering into a written voting trust; (ii) depositing a counterpart of
the agreement with the Corporation at its registered office; and (iii)
transferring their shares to such trustee or trustees for the purposes of this
Agreement. Prior to the recording of the Agreement, the shareholder concerned
shall tender the stock certificate(s) described therein to the corporate
secretary who shall note on each certificate:
"This Certificate is subject to the provisions of a voting
trust agreement dated _________________, Recorded in Minute Book
_____________________, of the Corporation.
b. Upon the transfer of such shares, voting certificates shall be
issued by the trustee or trustees to the shareholders who transfer their shares
in trust. Such trustee or trustees shall keep a record of the holders of the
voting trust certificates evidencing a beneficial interest in the voting trust,
giving the names and addresses of all such holders and the number and class of
the shares in respect of which the voting trust certificates held by each are
issued, and shall deposit a copy of such record with the Corporation at its
registered office.
c. The counterpart of the voting trust agreement and the copy of such
record so deposited with the Corporation shall be subject to the same right or
examination by a shareholder of the Corporation, and such counterpart and such
copy of such record shall be subject to examination by any holder of record of
voting trust certificates either in person or by agent or attorney, at any
reasonable time for any proper purpose.
d. At any time before the expiration of a voting trust agreement as
originally fixed or as extended one or more times under this Article VI,
Subsection 4(d) one or more holders of voting trust certificates may, by
agreement in writing, extend the duration of such voting trust agreement,
nominating the same or substitute trustee or trustees, for an additional period
not exceeding ten (10) years. Such extension agreement shall not affect the
rights or obligations of persons not parties to the agreement, and such persons
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shall be entitled to remove their shares from the trust and promptly to have
their stock certificates reissued upon the expiration date of the original term
of the voting trust agreement. The extension agreement shall in every respect
comply with and be subject to all the provisions of this Article VI, Section 4
applicable to the original voting trust agreement except that the ten (10)year
maximum period of duration shall commence on the date of adoption of the
extension agreement.
e. The trustees under the terms of the agreements entered into under
the provisions of this Article VI, Section 4 shall not acquire the legal title
to the shares but shall be vested only with the legal right and title to the
voting power which is incident to the ownership of the shares.
Section 5. Lost, Destroyed, or Stolen Certificates.
No certificate representing shares of the stock in the Corporation
shall be issued in place of any Certificate alleged to have been lost,
destroyed, or stolen except on production of evidence, satisfactory to the Board
of Directors, of such loss, destruction or theft, and if the Board of Directors
so requires, upon the furnishing of an indemnity bond in such amount (but not to
exceed twice the fair market value of the shares represented by the Certificate)
and with such terms and with such surety as the Board of Directors may, in its
discretion, require.
ARTICLE VII
Books and Records
a. The Corporation shall keep correct and complete books and records of
account and shall keep minutes of the proceedings of its shareholders, Board of
Directors and committees of Directors.
b. Any books, records and minutes may be in written form or in any
other form capable of being converted into written form within a reasonable
time.
c. Any person who shall have been a holder of record of one quarter of
one percent of all shares or of voting trust certificates therefor at least six
months immediately preceding his demand or shall be the holder of record of, or
the holder of record of voting trust certificates for, at least five (5%)
percent of the outstanding shares of any class or series of the Corporation,
upon written demand stating the purpose thereof, shall have the right to
examine, in person or by agent or attorney, any reasonable time or times, for
any proper purpose, its relevant books and records of account, minutes and
record of shareholders and to make extracts therefrom.
d. No shareholder who within two (2) years has sold or offered for sale
any list of shareholders or of holders of voting trust certificates for shares
of this Corporation or any other Corporation; has aided or abetted any person in
procuring any list of shareholders or of holders of voting trust certificates
for any such purpose; or has improperly used any information secured through any
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prior examination of the books and records of account, minutes, or record of
shareholders or of holders of voting trust certificates for shares of the
Corporation or any other Corporation; shall be entitled to examine the documents
and records of the Corporation as provided in Subsection (c) of this Article
VII. No shareholder who does not act in good faith or for a proper purpose in
making his demand shall be entitled to examine the documents and records of the
Corporation as provided in Subsection (c) of this Article VII.
e. Unless modified by resolution of the shareholders, this Corporation
shall prepare not later than four (4) months after the close of each fiscal
year;
(i) A balance sheet showing in reasonable detail the financial
conditions of the Corporation as of the date of its fiscal year.
(ii) A profit and loss statement showing the results of its
operation during its fiscal year.
f. Upon the written request of any shareholder or holder of voting
trust certificates for shares of the Corporation, the Corporation shall mail to
such shareholder or holder of voting trust certificates a copy of its most
recent balance sheet and profit and loss statement.
g. Such balance sheets and profit and loss statements shall be filed
and kept for at least five (5) years in the registered office of the Corporation
in this state and shall be subject to inspection during business hours by any
shareholder or holder of voting trust certificates.
ARTICLE VIII
Dividends
The Board of Directors of the Corporation may, from time to time,
declare and the Corporation may pay dividends on its shares in cash, property or
its own shares, except when the Corporation is insolvent or when the payment
thereof would render the Corporation insolvent subject to the following
provisions:
a. Dividends in cash or property may be declared and paid, except as
otherwise provided in this Article VIII, only out of the unreserved and
unrestricted earned surplus of the Corporation or out of capital surplus,
however arising, but each dividend paid out of capital surplus shall be
identified as a distribution of capital surplus, and the amount per share paid
from such capital surplus shall be disclosed to the shareholders receiving the
same concurrently with the distribution.
b. Dividends may be declared and paid in the Corporation's treasury
shares.
c. Dividends may be declared and paid in the Corporation's authorized
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but unissued shares out of any unreserved and unrestricted surplus of the
Corporation upon the following conditions:
(i) If a dividend is payable in the Corporation's own shares
having a par value, such shares shall be issued at not less than the par value
thereof and there shall be transferred to stated capital at the time such
dividend is paid an amount of surplus equal to the aggregate par value of the
shares to be issued as a dividend.
(ii) If a dividend is payable in the Corporation's own shares
without par value, such shares shall be issued at such stated value as shall be
fixed by the Board of Directors by resolution adopted at the time such dividend
is declared, and there shall be transferred to stated capital at the time such
dividend is paid an amount of surplus equal to the aggregate stated value so
fixed in respect of such shares; and the amount per share so transferred to
stated capital shall be disclosed to the shareholders receiving such dividend
concurrently with the payment thereof.
d. No dividend payable in shares of any class shall be paid to the
holders of shares of any other class unless the Articles of Incorporation so
provide or such payment is authorized by the affirmative vote or written consent
of the holders of at least a majority of the outstanding shares of the class in
which the payment is to be made.
e. A split up or division of the issued shares of any class into a
greater number of shares of the same class without increasing the stated capital
of the Corporation shall not be construed to be a stock dividend within the
meaning of this Article VIII.
ARTICLE IX
Indemnification
Section 1. Action, etc. Other Than by or in the Right of the
Corporation.
The Corporation shall 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 or investigation, whether civil, criminal or administrative,
and whether external or internal to the Corporation, (other than a judicial
action or suit brought 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 that, being or having been such a director, officer, employee or
agent, he is or was serving at the request of the Corporation as a director,
officer, employee, or trustee or agent of another corporation, partnership,
joint venture, trust or other enterprise (all such persons being referred to
hereafter as an "Agent"), against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding, or any appeal
therein, if such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation, and
with respect to any criminal action or proceeding, had no reasonable cause to
believe such conduct was unlawful. The termination of any action, suit or
proceeding whether by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent - shall not of itself create a presumption
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that the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal action or proceeding, that such person had
reasonable cause to believe that his conduct was unlawful.
Section 2. Action, etc., by or in the Right of the Corporation.
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed judicial
action or suit brought by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was an Agent (as
defined above) against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense, settlement or appear
of such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation,
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for gross
negligence or willful misconduct in the performance of his or her duty to the
Corporation unless and only to the extent that the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper.
Section 3. Determination of Right of Indemnification.
Any indemnification under Section 1 or 2 (unless ordered by a court)
shall be made by the Corporation unless a determination is reasonably and
promptly made (i) by the Board by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (ii) if
such a quorum is not obtainable, or, even if obtainable, if a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (iii) by the stockholders, that such person acted in bad faith and
in a manner that such person did not believe to be in or not opposed to the best
interests of the Corporation, or, with respect to any criminal proceeding, that
such person believed or had reasonable cause to believe that his conduct was
unlawful.
Section 4. Indemnification Against Expenses of Successful Party.
Notwithstanding the other provisions of this Article, to the extent
that an Agent has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice or the settlement of an
action without admission of liability, in defense of any proceeding or in
defense of any claim, issue or matter therein, or on appeal from any such
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proceeding, action, claim or matter, such Agent shall be indemnified against all
expenses incurred in connection therewith.
Section 5. Advances of Expenses
Except as limited by Section 6 of this Article, sots, charges and
expenses (including attorneys' fees) incurred in any action, suit, proceeding or
investigation or any appear therefrom shall be paid by the Corporation in
advance of the final disposition of such matter, if the Agent shall undertake to
repay such amount in the event that it is ultimately determined, as provided
herein, that such person is not entitled to indemnification. Notwithstanding the
foregoing, no advance shall be made by the Corporation if a determination is
reasonably and promptly made by the Board of Directors or if a majority vote of
a quorum of disinterested directors cannot be obtained, then by independent
legal counsel in a written opinion, that, based upon the facts known to the
Board or counsel at the time such determination is made, such person acted in
bad faith and in a manner that such person did not believe to be in or not
opposed to the best interest of the Corporation, or, with respect to any
criminal proceeding, that such person believed or had reasonable cause to
believe his conduct was unlawful. In no event shall any advance be made in
instances where the Board or independent legal counsel reasonably determines
that such person deliberately breached his duty to the Corporation or its
shareholders.
Section 6. Right of Agent to Indemnification Upon Application:
Procedure Upon Application.
Any indemnification under Sections 1, 2 and 4 or advance under Section
5 of this article, shall be made promptly, and in any event within ninety (90)
days, upon the written request of the Agent, unless with respect to applications
under Sections 1, 2 or 5, a determination is reasonably and promptly made by the
Board of Directors by a majority vote of a quorum of disinterested directors
that such Agent acted in a manner set forth in such Sections as to justify the
Corporation's not indemnifying or making an advance to the Agent. In the event
no quorum of disinterested directors is obtainable, the Board of Directors shall
promptly direct that independent legal counsel shall decide whether the Agent
acted in the manner set forth in such Sections as to justify the Corporation's
not indemnifying or making an advance to the Agent. The right to indemnification
or advances as granted by this Article shall be enforceable by the Agent in any
court of competent jurisdiction, if the Board or independent legal counsel
denies the claim, in whole or in part, or if no disposition of such claim is
made within ninety (90) days. The Agent's costs and expenses incurred in
connection with successfully establishing his right to indemnification, in whole
or in part, in any such proceeding shall also be indemnified by the Corporation.
Section 7. Contribution.
In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Article is held
by a court of competent jurisdiction to be unavailable to an indemnitee in whole
or part, the Corporation shall, in such event, after taking into account, among
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other things, contributions by other directors and officers of the Corporation
pursuant to indemnification agreements or otherwise, and, in the absence of
personal enrichment, acts of intentional fraud or dishonesty or criminal conduct
on the part of the Agent, contribute to the payment of Agent's losses to the
extent that, after other contributions are taken into account, such losses
exceed: (i) in the case of a director of the Corporation or any of its
subsidiaries who is not an officer of the Corporation or any of such
subsidiaries, the amount of fees paid to him for serving as a director during
the 12 months preceding the commencement of the suit, proceeding or
investigation; or (ii) in the case of a director of the Corporation or any of
its subsidiaries who is also an officer of the Corporation or any of such
subsidiaries, the amount set forth in clause (i) plus 5% of the aggregate cash
compensation paid to said director for service in such office(s) during the 12
months preceding the commencement of the suit, proceeding or investigation; or
(iii) in the case of an officer of the Corporation or any of its subsidiaries,
5% of the aggregate cash compensation paid to such officer of service in such
office(s) during the 12 months preceding the commencement of such suit,
proceeding or investigation.
Section 8. Other Rights and Remedies.
The indemnification provided by this Article shall not be deemed
exclusive of, and shall not affect, any other rights to which an Agent seeking
indemnification may be entitled under the law, Bylaw, or charter provision,
agreement, vote of stockholders or disinterested directors or otherwise, 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 an
Agent and shall inure to the benefit of the heirs, executors and administrators
of such a person. All rights to indemnification under this Article shall be
deemed to be provided by a contract between the Corporation and the Agent who
serves in such capacity at any time while these Bylaws and other relevant
provisions of the general corporation law and other applicable law, if any are
in effect. Any repeal or modification thereof shall not affect any rights or
obligations then existing.
Section 9. Insurance.
Upon resolution passed by the Board, the Corporation may purchase and
maintain insurance on behalf of any person who is or was an Agent against any
liability asserted against such person 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 such person against such liability under the provisions
of this Article. The Corporation may create a trust fund, grant a security
interest or use other means (including, without limitation, a letter of credit)
to ensure the payment of such sums as may become necessary to effect
indemnification as provided herein.
Section 10. Constituent Corporation.
For the purposes of this Article, references to the "Corporation"
include all constituent corporations absorbed in a consolidation or merger as
well as the resulting or surviving corporation, so that any person who is or was
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a director, officer, employee, agent or trustee of such constituent corporation
or who, being or having been such a director, officer, employee or trustee, is
or was serving at the request of such constituent corporation as a director,
officer, employee, agent or trustee of another corporation, partnership, joint
venture, trust or other enterprise shall stand in the same position under the
provisions of this Article with respect to the resulting or surviving
corporation as such person would if he had served the resulting or surviving
corporation in the same capacity.
Section 11. Other Enterprises, Fines and Serving at Corporation's
Request.
For purposes of this Article, references to "other enterprise" in
Sections 1 and 10 shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on a person with respect to any employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service by Agent as director, officer, employee, trustee or
agent of the Corporation which imposes duties on, or involves services by, such
Agent with respect to any employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Article.
Section 12. Savings Clause.
If this Article or any portion thereof shall be invalidated on any
ground by any court of competent jurisdiction, then the Corporation shall
nevertheless indemnify each Agent as to expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement with respect to any action,
suit, appeal, proceeding or investigation, whether civil, criminal or
administrative, and whether internal or external, including a grand jury
proceeding and an action or suit brought by or in the right of the Corporation,
to the full extent permitted by any applicable portion of this Article that
shall not have been invalidated, or by any other applicable law.
ARTICLE X
Amendment of Bylaws
a. The Board of Directors shall have the power to amend, alter, or
appeal these Bylaws, and to adopt new Bylaws, from time to time.
b. The shareholders of the Corporation, may, at any annual meeting of
the shareholders of the Corporation or at any special meeting of the
shareholders of the Corporation called for the purpose of amending these Bylaws,
amend, alter, or repeal these Bylaws, and adopt new Bylaws, from time to time.
c. The Board of Directors shall not have the authority to adopt or
amend any Bylaw
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if such new Bylaw of such amendment would be inconsistent with any Bylaw
previously adopted by the shareholders of the Corporation. The shareholders may
prescribe in any Bylaw made by them that such Bylaw shall not be altered,
amended or repealed by the Board of Directors.
ARTICLE XI
Shareholder Agreements
Unless the shares of this Corporation are listed on a national
securities exchange or are regularly quoted by licensed securities dealers and
brokers, all the shareholders of this Corporation may enter into agreements
relating to any phase of business and affairs of the Corporation and which may
provide for, among other things, the election of directors of the Corporation in
a manner determined without reference to the number of shares of capital stock
of the Corporation owned by its shareholders, the determination of management
policy, and division of profits. Such agreement may restrict the discretion of
the Board of Directors and its management of the business of the Corporation or
may treat the Corporation as if it were a partnership of may arrange the
relationships of the shareholders in a manner that would be appropriate only
among partners. In the event such agreement shall be inconsistent in whole or in
part with the Articles of Incorporation and/or Bylaws of the Corporation, the
terms of such agreement shall govern. Such agreement shall be binding upon any
transferee of shares of this corporation provided such transferee has actual
notice thereof or a legend referring to such agreement is noted on the face or
back of the certificate or certificates representing the shares transferred to
such transferee.
ARTICLE XII
Fiscal Year
The Fiscal Year of this Corporation shall be determined by the Board of
Directors.
Date: August 21, 1995 /s/
-------------------------
Secretary
[SEAL]
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JRECK SUBS GROUP, INC.
FRANCHISE AGREEMENT
THIS FRANCHISE AGREEMENT (the "Agreement") is made and entered into
this ____ day of _____________, 199__, by and between JRECK SUBS GROUP, INC., a
Colorado corporation, with its principal business address at 2101 West State
Road 434, Suite 100, Longwood, Florida 32779 (referred to in this Agreement as
"we," "us" or "our"), and __________________________,
- ------------------------------------------------------------------------------
(referred to in this Agreement as "you," "your" or "Owner").
1. PREAMBLES, ACKNOWLEDGMENTS AND GRANT OF FRANCHISE
A. PREAMBLES
We and our predecessors have expended considerable time and
effort in developing and operating a sub Restaurant concept offering
delicatessen and submarine-type sandwiches, of other deli style sandwiches,
salads, soups, soft drinks, and other specialty food products and services.
These restaurants operate under "SOBIK'S SUBS(R)" trade name ("the Restaurants")
and have distinctive business formats, methods, procedures, designs, layouts,
standards and specifications, all of which have been. or may be, improved,
further developed or otherwise modified from time to time.
We use, promote and license certain trademarks, service marks
and other commercial symbols in operating the Restaurants, including the trade
and service mark SOBIK'S SUBS(R) which has gained and continues to gain public
acceptance and goodwill, and may continue to create, use and license additional
trademarks, service marks and commercial symbols in operating the Restaurants
(collectively, the "Marks").
We have chosen franchising as our business strategy for
creating and keeping customers for SOBIK'S SUBS(R) restaurants. We grant to
persons who meet our qualifications and are willing to undertake the investment
and effort a franchise to own and operate a SOBIK'S SUBS(R) Restaurant offering
the products and services we authorize and approve while utilizing our business
formats, methods, procedures, signs, designs, layouts, equipment, standards,
specifications and Marks (the "System").
As a franchise owner of a SOBIK'S SUBS(R) Restaurant, you will
work with us to create and keep customers for SOBIK'S SUBS(R) Restaurants.
You have applied for a franchise to own and operate a SOBIK'S
SUBS(R) Restaurant.
B. ACKNOWLEDGMENTS
You acknowledge:
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(1) That you have conducted an independent investigation of this
SOBIK'S SUBS franchise opportunity and recognize that, like any other business,
the nature of the business conducted by a SOBIK'S SUBS Restaurant may, and
probably will, evolve and change over time.
(2) That an investment in a SOBIK'S SUBS Restaurant involves business
risks.
(3) That your business abilities and efforts are vital to the success
of your SOBICK'S SUBS Restaurant.
(4) That creating customers for your SOBIK'S SUBS Restaurant will
require that you make consistent marketing efforts to your community through a
variety of mediums, including media advertising, direct mail advertising and
couponing, display and use of in-store promotional materials, participating in
community groups and making presentations to community organizations and
businesses.
(5) That keeping customers for your SOBIK'S SUBS Restaurant will
require you to execute a high level of customer service through strict adherence
to the System and our System Standards (defined below).
(6) That you are committed to maintaining SOBIK'S SUBS Restaurant
System Standards for product quality and service, employee hiring and training
and restaurant and employee cleanliness.
(7) That any information you have acquired from other SOBIK'S SUBS
Restaurant franchise owners relating to their sales, profits or cash flows does
not constitute information obtained from us, nor do we make any representation
as to the accuracy of any such information.
(8) That in all of their dealings with you, our officers, directors,
employees and agents have acted only in a representative, and not in an
individual, capacity and that business dealings between you and them as a result
of this Agreement are solely between you and us.
(9) That you have represented to us, as an inducement to our entry into
this Agreement, that all statements you have made and all materials you have
submitted to us in purchasing the
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franchise are accurate and complete and that you have made no misrepresentations
or material omissions in obtaining the franchise.
(10) That you have read this Agreement and our Franchise Offering
Circular and understand and accept that the terms, conditions and covenants
which are contained in this Agreement are reasonably necessary for us to
maintain our high standards of quality and service, as well as the uniformity of
those standards at each SOBIK'S SUBS Restaurant, and consequently protect and
preserve the goodwill of the Marks.
C. CORPORATION, LIMITED LIABILITY COMPANY OR PARTNERSHIP.
If you are at any time a corporation, limited liability company or
partnership, you agree and represent that:
(1) You will have the authority to execute, deliver and
perform your obligations under this Agreement, having obtained all
required board of directors or other consents, and are duly organized
or formed and validly existing in good standing under the laws of the
state of your incorporation or formation;
(2) Your organizational documents, operating agreement or
partnership agreement will recite that the issuance and transfer of any
ownership interests in you are restricted by the terms of this
Agreement, and all certificates and other documents representing
ownership interests in you will bear a legend referring to the
restrictions of this Agreement;
(3) Exhibit A to this Agreement will completely and accurately
describe all of your owners and their interests in you;
(4) Each of your owners at any time during the term of this
Agreement, including after an approved transfer under Section 12, will
execute an agreement in the form that we prescribe undertaking to be
bound jointly and severally by all provisions of this Agreement and any
ancillary agreements between you and us that bind you. You and your
owners agree to execute and deliver to us such revised Exhibits A as
may be necessary to reflect any changes in the information it contains
and to furnish such other information about your organization or
formation as we may request; and
(5) The RESTAURANT (as defined in Paragraph D below), and
other SOBIK'S SUBS Restaurants, will be the only businesses you
operate.
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D. GRANT OF FRANCHISE
You have applied for a franchise to own and operate a SOBIK'S SUBS
Restaurant at __________________________________________________________________
(the "Premises"). Subject to the terms of and upon the conditions contained in
this Agreement, we hereby grant you a franchise (the "Franchise") to operate a
SOBIK'S SUBS Restaurant (the "RESTAURANT") at the Premises, and to use the
System in its operation, for a term commencing on the date of this Agreement and
expiring ten (10) years from that date or at an earlier date co-terminous with
your lease for the Restaurant premises, unless sooner terminated in accordance
with Section 14 hereof. Except as otherwise provided in Paragraph E of this
Section, we (and our affiliates) will not establish, or grant to a franchise
owner the right to establish, another SOBIK'S SUBS Restaurant to be located
within the geographical area set forth in Exhibit B attached hereto (the
"Exclusive Area").
You agree that you will at all times faithfully, honestly and
diligently perform your obligations hereunder, continuously exert your best
efforts to promote and enhance the RESTAURANT and not engage in any other
business or activity that conflicts with your obligations to operate the
RESTAURANT in compliance with this Agreement. You may not operate the RESTAURANT
from any site other than the Premises without our prior written consent.
E. RIGHTS WE RESERVE
We (and our affiliates) retain the right in our sole discretion:
(6) to establish, and allow other franchise owners to
establish, SOBIK'S SUBS Restaurants at any location outside the
Exclusive Area (including at the boundary of the Exclusive Area) and on
any terms and conditions as we deem appropriate;
(7) to sell and deliver, and allow other franchise owners to
sell and deliver, products and services identified by the Marks to
customers located within the Exclusive Area from SOBIK'S SUBS
Restaurants located outside the Exclusive Area; and
(8) to sell products identified by the Marks, or other
trademarks or service marks, within or outside the Exclusive Area
through distribution channels other than SOBIK'S SUBS Restaurants
(including, but not limited to, mail order and grocery stores).
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2. SITE SELECTION, LEASE OF PREMISES AND DEVELOPMENT AND OPENING OF
RESTAURANT.
A. SITE SELECTION
You acknowledge that, before signing this Agreement, you (with or
without our assistance) located and we approved the site for the Premises. You
acknowledge and agree that our recommendation or approval of the Premises, and
any information regarding the Premises communicated to you, do not constitute a
representation or warranty of any kind, express or implied, as to the
suitability of the Premises for a SOBIK'S SUBS Restaurant or for any other
purpose. Our recommendation or approval of the Premises indicates only that we
believe that the Premises fall within the acceptable criteria for sites and
premises that we have established as of the time of our recommendation or
approval of the Premises. Application of criteria that have appeared effective
with respect to other sites and premises may not accurately reflect the
potential for all sites and premises, and, after our approval of a site,
demographic and/or other factors included in or excluded from our criteria could
change, thereby altering the potential of a site and premises. The uncertainty
and instability of these criteria are beyond our control, and we will not be
responsible for the failure of a site and premises we have recommended or
approved to meet expectations as to potential revenue or operational criteria.
You acknowledge and agree that your acceptance of the Franchise is based on your
own independent investigation of the suitability of the Premises.
B. LEASE OF PREMISES
You acknowledge that we and you have approved the lease or sublease for
the Premises (the "Lease") before signing this Agreement. You represent that a
copy of the signed Lease already has been delivered to us or will be delivered
to us within fifteen (15) days after its execution. At our request, you agree
that you will collaterally assign the Lease to us as security for your timely
performance of all obligations under this Agreement and secure the lessor's or
sublessor's consent to the collateral assignment. You acknowledge that our
approval of the Lease does not constitute a guarantee or warranty, express or
implied, of the successful operation or profitability of a SOBIK'S SUBS
Restaurant operated at the Premises. This approval indicates only that we
believe that the Premises and the terms of the Lease fall within the acceptable
criteria we have established as of the time of our approval.
C. RESTAURANT DEVELOPMENT.
You are responsible for developing the RESTAURANT. We will furnish you
with mandatory and suggested specifications and layouts for a SOBIK'S SUBS
Restaurant, including requirements for dimensions, design, image, interior
layout. decor. fixtures, equipment, signs,
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furnishings and color scheme. You are obligated to prepare all required
construction plans and specifications to suit the shape and dimensions of the
Premises and to insure that these plans and specifications comply with
applicable ordinances, building codes and permit requirements and with lease
requirements and restrictions. You are obligated to submit construction plans
and specifications to us for approval before construction of the RESTAURANT is
commenced and all revised or "as built" plans and specifications during the
course of construction. Our review is limited to your compliance with our design
requirements. We can periodically inspect the Premises during the RESTAURANT's
development.
You agree, at your own expense, to do the following to develop the
RESTAURANT at the Premises:
(1) secure all financing required to develop and operate the
RESTAURANT;
(2) obtain all building, utility, sign, health, sanitation,
business, liquor and other permits and licenses required to construct
and operate the RESTAURANT;
(3) construct all required improvements to the Premises and
decorate the RESTAURANT in compliance with plans and specifications we
have approved;
(4) purchase or lease and install all required fixtures,
furniture, equipment, furnishings and signs ("Operating Assets")
required for the RESTAURANT:
(5) purchase an opening inventory of authorized and approved
products, materials and supplies ("Supplies"); and
(6) give us copies of the documents that we periodically
require.
D. OPERATING ASSETS.
You agree to use in developing and operating the RESTAURANT only those
Operating Assets that we have approved for SOBIK'S SUBS Restaurants as meeting
our specifications and standards for quality, design, appearance, function and
performance. You agree to place or display at the Premises (interior and
exterior) only such signs, emblems, lettering, logos and display materials that
we approve from time to time. You agree to purchase or lease approved brands,
types or models of Operating Assets only from suppliers we have designated or
approved (which may include us and/or our affiliates).
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E. COMPUTER SYSTEM.
You agree to use in developing and operating the RESTAURANT the
computer equipment and operating software ("Computer System") that we specify
from time to time. We may require you to obtain specified computer hardware
(including a dedicated telephone modem) and/or software and may modify
specifications for and components of the Computer System from time to time. Our
modification of specifications for the components of the Computer System may
require you to incur costs to purchase, lease and/or license new or modified
computer hardware and/or software and to obtain service and support for the
Computer System during the term of this Agreement. You acknowledge that we
cannot estimate the future costs of the Computer System and that your cost of
obtaining the Computer System may not be fully amortizable over the remaining
term of this Agreement. Nonetheless, you agree to incur these costs in obtaining
the computer hardware and software comprising the Computer System (or additions
or modifications thereto). Within sixty (60) days after you receive notice from
us, you agree to obtain the components of the Computer System that we designate
and require. We also can charge you a reasonable systems fee for modifications
of and enhancements made to proprietary software that we license to you and
other maintenance and support services that we or our affiliates furnish to you
related to the Computer System.
F. RESTAURANT OPENING.
You agree not to open the RESTAURANT for business until:
(1) the RESTAURANT has been developed according to our
specifications and standards and we notify you in writing that the
RESTAURANT is acceptable:
(2) pre-opening training has been completed to our
satisfaction;
(3) the initial franchise fee and all other amounts then due
to us have been paid; and
(4) we have been furnished with copies of all insurance
policies required by this Agreement, or other evidence of insurance
coverage and payment of premiums that we request or accept.
Subject to your compliance with these conditions, you agree to open the
RESTAURANT for business within one hundred eighty (180) days after you sign this
Agreement or on or before the date specified in the Lease, whichever is earlier.
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3. FEES
A. INITIAL FRANCHISE FEE.
You agree to pay us a non-recurring and non-refundable initial
franchise fee in the amount of Twelve Thousand Dollars ($12,500.00), which we
will fully earn upon the execution of this Agreement. For additional franchises
offered to qualified franchise owners, we may reduce the initial franchise fee
to Five Thousand Dollars ($5,000.00).
B.. ROYALTY.
You agree to pay us a weekly royalty ("Royalty") in the amount of six
percent (5 %) of the RESTAURANT's gross sales (as defined in Paragraph C of this
Section). You must sign and deliver to us, before the RESTAURANT opens, the
documents we require to authorize us to debit your business checking account
automatically for the Royalty. Payments of Royalties shall be based on a Sunday
through Saturday work week, and is due and payable on each Monday for the
preceeding week.. On each Monday, you must report to us by telephone or
electronic means or in written form, as we direct, the RESTAURANT's true and
correct Gross Sales for the week ending on the immediately preceding Saturday.
We will debit your account on Monday for the Royalty that is due on account of
these Gross Sales. You agree to make the necessary funds available in your
account for withdrawal before each Monday.
If you fail to report the RESTAURANT's Gross Sales on a weekly basis as
required, we can debit your account each Monday for the same Royalty that we
debited during the previous week. If the Royalty we debit from your account is
less than the Royalty you actually owe us (once we have determined the
RESTAURANT's true and correct Gross Sales for the week), we will debit your
account for the balance of the Royalty due on the following Monday. If the
Royalty we debit from your account is greater than the Royalty you actually owe
us for the week, we will credit the excess against the amount we otherwise would
debit from your account on the following Monday.
We can require you to pay the Royalty by means other than automatic
debit (e.g., by check) whenever we deem appropriate, and you agree to comply
with our payment instructions.
C. DEFINITION OF "GROSS SALES"
As used in this Agreement, the term "Gross Sales" means all revenue you
derive from operating the RESTAURANT, including, but not limited to, all revenue
from jukeboxes, games and other vending machines and all amounts you receive at
or away from the Premises, and whether from cash, check, credit and debit card,
trade credit or credit transactions, but excluding (1) all federal, state or
municipal sales, use or service taxes collected from customers and paid to
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the appropriate taxing authority and (2) customer refunds, adjustments, credits
and allowances actually made by the RESTAURANT.
D. INTEREST ON LATE PAYMENTS
All amounts which you owe us, if more than seven (7) days late, will
bear interest beginning after their original due date at the rate of one and
one-half percent (1.5 %) per month or the highest contract rate of interest
permitted by law, whichever is lower. In addition, you agree to pay us a service
charge of either (1) ten percent (10%) of the past due amount, or (2) Fifty
Dollars ($50.00), whichever is higher, for each Royalty payment not made on or
before its original due date. This service charge is not interest or a penalty.
It is solely to compensate us for increased administrative and management costs
due to your late payment. We can debit your account for these amounts. You
acknowledge that this Paragraph does not constitute our agreement to accept any
payments after they are due or our commitment to extend credit to, or otherwise
finance your operation of, the RESTAURANT. Your failure to pay all amounts when
due constitutes grounds for termination of this Agreement, as provided in
Section 14 hereof, notwithstanding the provisions of this Paragraph.
E. APPLICATION OF PAYMENTS
Notwithstanding any designation you might make, we have sole discretion
to apply any of your payments to any of your past due indebtedness to us. You
acknowledge and agree that we can set off any amounts you or your owners owe us
against any amounts we might owe you or your owners. You cannot withhold payment
of any amounts owed to us due to our alleged nonperformance of any of our
obligations under this Agreement.
4. TRAINING AND ASSISTANCE.
A. TRAINING.
Before the RESTAURANT begins operating, we will furnish initial
training on the operation of a SOBIK'S SUBS Restaurant to you (or, if you are a
corporation, limited liability company or partnership, your managing
shareholder, partner or member ("Managing Owner")) and two (2) employees who
actually will manage the RESTAURANT on-site. Up to fifteen (15) days of training
for you (or your Managing Owner) and your managerial employee will be furnished
at our designated training facility and/or at an operating SOBIK'S SUBS
Restaurant. You (or your Managing Owner) and your managerial employee are
required to complete the initial training to our satisfaction and to participate
in all other activities required to operate the RESTAURANT. Although we will
furnish initial training to you (or your Managing Owner) and two (2) managerial
employee at no additional fee or other charge, you will be responsible for all
travel and living
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expenses which you (or your Managing Owner) or your employee incur while
training. We will provide up to ten (10) days (at our discretion) of additional
training at the RESTAURANT to all RESTAURANT personnel. This training will be
provided before and after the RESTAURANT begins operations. You agree to replace
the RESTAURANT's manager if we determine that he or she is not qualified to
serve in this capacity. If we determine that you (or your Managing Owner) are
unable to complete initial training to our satisfaction, we can terminate this
Agreement under Section 14 hereof.
We may require you (or your Managing Owner) and/or previously trained
and experienced managers to attend periodic refresher training courses at the
times and locations that we designate, for which we may charge fees. We also may
require you to pay us fees for training new managers hired after the
RESTAURANT's opening. You agree to give us reasonable assistance in training
other SOBIK'S SUBS Restaurant franchise owners. We will reimburse you for
providing this assistance.
B. GENERAL GUIDANCE.
We will advise you from time to time regarding the RESTAURANT's
operation based on reports you submit to us or inspections we make. In addition,
we will furnish guidance to you on:
(5) standards, specifications and operating procedures and methods
utilized by SOBIK'S SUBS Restaurants;
(6) purchasing required Operating Assets and Supplies:
(7) advertising and marketing programs;
(8) employee training; and
(9) administrative, bookkeeping and accounting procedures.
This guidance will, at our discretion, be furnished in our operating manual
("Operations Manual"), bulletins or other written materials and/or during
telephone consultations and/or consultations at our office or the RESTAURANT.
If you request or we require additional or special guidance, assistance
or training, all of the expenses that we incur, including per diem charges and
travel and living expenses for our personnel, will be your responsibility.
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C. OPERATIONS MANUAL.
We will loan you during the term of this Agreement one (1) copy of our
Operations Manual, consisting of the materials (including, as applicable, audio
tapes, videotapes, magnetic media, computer software and written materials) that
we generally furnish to franchise owners from time to time for use in operating
a SOBIK'S SUBS Restaurant. The Operations Manual contains mandatory and
suggested specifications, standards, operating procedures and rules ("System
Standards") that we prescribe from time to time for the operation of a SOBIK'S
SUBS Restaurant and information on your other obligations under this Agreement
and related agreements. We may modify the Operations Manual from time to time to
reflect changes in System Standards. You agree to keep your copy of the
Operations Manual current and in a secure location at the RESTAURANT. In the
event of a dispute over its contents, the master copy of the Operations Manual
we maintain at our principal office will be controlling. You may not at any time
copy, duplicate, record or otherwise reproduce any part of the Operations
Manual. If your copy of the Operations Manual is lost, destroyed or
significantly damaged, you agree to obtain a replacement copy at our then
applicable charge.
D. DELEGATION OF PERFORMANCE.
You agree that we have the right to delegate the performance of any
portion or all of our obligations and duties under this Agreement to designees,
whether these designees are our agents or independent contractors with whom we
have contracted to perform these obligations.
5. MARKS.
A. OWNERSHIP AND GOODWILL OF MARKS.
Your right to use the Marks is derived solely from this Agreement and
limited to your operation of the RESTAURANT pursuant to and in compliance with
this Agreement and all System Standards we prescribe from time to time during
its term. Your unauthorized use of the Marks will be a breach of this Agreement
and an infringement of our rights in and to the Marks. You acknowledge and agree
that your usage of the Marks and any goodwill established by this use will be
exclusively for our benefit and that this Agreement does not confer any goodwill
or other interests in the Marks upon you (other than the right to operate the
RESTAURANT under this Agreement). All provisions of this Agreement applicable to
the Marks apply to any additional proprietary trade and service marks and
commercial symbols we authorize you to use.
B. LIMITATIONS ON YOUR USE OF MARKS.
You agree to use the Marks as the sole identification of the
RESTAURANT, except that
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you agree to identify yourself as the independent owner in the manner we
prescribe. You may not use any Mark as part of any corporate or legal business
name or with any prefix, suffix or other modifying words, terms, designs or
symbols (other than logos we have licensed to you), or in any modified form, nor
may you use any Mark in selling any unauthorized services or products or in any
other manner we have not expressly authorized in writing. No Mark may be used in
any advertising concerning the transfer, sale or other disposition of the
RESTAURANT or an ownership interest in you. You agree to display the Marks
prominently in the manner we prescribe at the RESTAURANT and on forms,
advertising and marketing materials, supplies and other materials we designate.
You agree to give the notices of trade and service mark registrations that we
specify and to obtain any fictitious or assumed name registrations required
under applicable law.
C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS
You agree to notify us immediately of any apparent infringement or
challenge to your use of any Mark, or of any claim by any person of any rights
in any Mark, and not to communicate with any person other than us and our
attorneys, and your attorneys, in any infringement, challenge or claim. We have
sole discretion to take the action we deem appropriate and the right to control
exclusively any litigation, U.S. Patent and Trademark Office proceeding or any
other administrative proceeding arising out of any infringement, challenge or
claim or otherwise relating to any Mark. You agree to sign any and all
instruments and documents, render the assistance and do the acts and things
that, in the opinion of our attorneys, may be necessary or advisable to protect
and maintain our interests in any litigation or Patent and Trademark Office or
other proceeding or otherwise to protect and maintain our interests in the
Marks.
D. DISCONTINUANCE OF USE OF MARKS
If it becomes advisable at any time in our sole discretion for us
and/or you to modify or discontinue the use of any Mark and/or use one or more
additional or substitute trade or service marks, you agree to comply with our
directions within a reasonable time after receiving notice. We will reimburse
you for your reasonable direct expenses of changing the RESTAURANT's signs.
However, we will not be obligated to reimburse you for any loss of revenue
attributable to any modified or discontinued Mark or for any expenditures you
make to promote a modified or substitute trademark or service mark.
E. INDEMNIFICATION FOR USE OF MARKS
We agree to indemnify you against and to reimburse you for all damages
for which you are held liable in any proceeding arising out of your authorized
use of any Mark under this Agreement and for all costs you reasonably incur in
defending any such claim brought against you or any proceeding in which you are
named as a party, provided that you have timely notified us of the
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claim or proceeding and otherwise have complied with this Agreement. At our
option, we can defend and control the defense of any proceeding arising out of
your use of any Mark under this Agreement.
6. CONFIDENTIAL INFORMATION.
We possess (and will continue to develop and acquire) certain
confidential information (the "Confidential Information") relating to the
development and operation of SOBIK'S SUBS Restaurants, which includes (without
limitation):
(1) recipes;
(2) site selection criteria;
(3) methods, formats, specifications, standards, systems,
procedures, sales and marketing techniques, knowledge and experience
used in developing and operating SOBIK'S SUBS Restaurants;
(4) marketing and advertising programs for SOBIK'S SUBS
Restaurants;
(5) knowledge of specifications for and suppliers of certain
Operating Assets and Supplies; and
(6) knowledge of the operating results and financial
performance of SOBIK'S SUBS Restaurants other than the RESTAURANT.
You acknowledge and agree that you will not acquire any interest in
Confidential Information, other than the right to utilize Confidential
Information disclosed to you in operating the RESTAURANT during the term of this
Agreement, and that the use or duplication of any Confidential Information in
any other business would constitute an unfair method of competition. You further
acknowledge and agree that Confidential Information is proprietary, includes our
trade secrets and is disclosed to you solely on the condition that you agree,
and you do hereby agree, that you:
(a) will not use Confidential Information in any other
business or capacity;
(b) will maintain the absolute confidentiality of Confidential
Information during and after the term of this Agreement;
(c) will not make unauthorized copies of any portion of
Confidential
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Information disclosed via electronic medium or in written or other
tangible form; and
(d) will adopt and implement all reasonable procedures that we
prescribe from time to time to prevent unauthorized use or disclosure
of Confidential Information, including, without limitation,
restrictions on disclosure thereof to RESTAURANT personnel and others.
You agree that we (and our affiliates) will have the perpetual right to
use and authorize other SOBIK'S SUBS Restaurant franchise owners to use, and you
agree fully and promptly to disclose to us, all ideas, concepts, formulas,
recipes, techniques or materials relating to a SOBIK'S SUBS Restaurant that you
and/or your employees conceive or develop during the term of this Agreement.
Despite the foregoing, Confidential Information does not include
information, knowledge or know-how which a person can prove he or she knew
before becoming aware of it as a result of anything we or a franchise owner
provided directly or indirectly or before his or her operation of or presence at
the RESTAURANT. If we include any matter in Confidential Information, anyone who
claims that it is not Confidential Information has the burden of proving that
the exclusion provided in this paragraph is fulfilled.
7. EXCLUSIVE RELATIONSHIP
You acknowledge and agree that we would be unable to protect
Confidential Information against unauthorized use or disclosure or to encourage
a free exchange of ideas and information among SOBIK'S SUBS Restaurants if
franchise owners of SOBIK'S SUBS Restaurants were permitted to hold interests in
or perform services for a Competitive Business (defined below). You also
acknowledge that we have granted the Franchise to you in consideration of and
reliance upon your agreement to deal exclusively with us. You therefore agree
that, during the term of this Agreement, neither you nor any of your owners (nor
any of your or your owners' spouses) will:
(1) have any direct or indirect controlling interest as a
disclosed or beneficial owner in a Competitive Business, wherever
located;
(2) have any direct or indirect interest as a disclosed or
beneficial owner in a Competitive Business operating within twenty-five
(25) miles of the RESTAURANT;
(3) have any direct or indirect interest as a disclosed or
beneficial owner in a Competitive Business operating within ten (10)
miles of any SOBIK'S SUBS Restaurant other than the RESTAURANT;
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(4) perform services as a director, officer, manager,
employee, consultant, representative, agent or otherwise for a
Competitive Business, wherever located;
(5) recruit or hire any person who is our employee or the
employee of any SOBIK'S SUBS Restaurant without obtaining the prior
written permission of that person's employer;
(6) divert or attempt to divert any actual or potential
business or customer of the RESTAURANT to another business; or
(7) engage in any other activity which may injure the goodwill
of the Marks and System.
The term "Competitive Business" as used in this Agreement, means any business
operating, or granting franchises or licenses to others to operate, any
restaurant or food service business featuring submarine sandwiches as its
primary product (other than a SOBIK'S SUBS Restaurant operated under a franchise
agreement with us). You agree to obtain similar covenants from the personnel we
specify.
8. SYSTEM STANDARDS
A. COMPLIANCE WITH SYSTEM STANDARDS
You acknowledge and agree that your operation and maintenance of the
RESTAURANT according to System Standards are essential to preserve the goodwill
of the Marks and all SOBIK'S SUBS Restaurants. Therefore, at all times during
the term of this Agreement, you agree to operate and maintain the RESTAURANT
according to each and every System Standard, as we periodically modify and
supplement them during the term of this Agreement, even if you believe that a
System Standard, as originally issued or subsequently modified or supplemented,
is not in the System's or your RESTAURANT's best interests. System Standards may
regulate any one or more of the following for the RESTAURANT:
(1) design, layout, decor, appearance and lighting; periodic
maintenance, cleaning and sanitation; periodic remodeling; replacement
of obsolete or worn-out leasehold improvements and Operating Assets;
periodic painting; and use of interior and exterior signs, emblems,
lettering and logos;
(2) types, models and brands of required Operating Assets and
Supplies;
(3) required or authorized products and services and product
and service
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categories; product preparation, storage, handling and packaging
procedures; and product inventory requirements;
(4) designated or approved suppliers (which may be limited to
or include us) of Operating Assets and Supplies and supplier approval
procedures and criteria;
(5) terms and conditions of the sale and delivery of, and
terms and methods of payment for, Supplies and services that you obtain
from us or unaffiliated suppliers; our right not to sell any products
to you, or to sell products to you only on a "cash-on-delivery" or
other basis, if you are in default under any agreement with us; and our
right (without liability) to advise your suppliers and others with whom
you, we and other franchise owners deal that you are in default under
any agreement with us;
(6) sales, marketing, advertising and promotional programs and
materials and media used in these programs;
(7) use and display of the Marks;
(8) staffing levels for the RESTAURANT and matters relating to
managing the RESTAURANT; communication to us of the identities of the
RESTAURANT's personnel; and qualifications, training, dress and
appearance of employees (although you will have sole responsibility and
authority concerning the selection and promotion of your employees, the
hours they work, their rates of pay and other benefits, the work
assigned to them and their working conditions);
(9) days and hours of operation of the RESTAURANT;
(10) participation in market research and testing and product
and service development programs;
(11) acceptance of credit and debit cards, other payment
systems and check verification services;
(12) bookkeeping, accounting, data processing and record
keeping systems and forms; methods, formats, content and frequency of
reports to us of sales, revenue, financial performance and condition;
and furnishing tax returns and other operating and financial
information to us;
(13) types, amounts, terms and conditions of insurance
coverage required to be carried for the RESTAURANT and standards for
underwriters of policies providing
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required insurance coverage; our protection and rights under these
policies as an additional named insured; required or impermissible
insurance contract provisions; assignment of policy rights to us;
periodic verification of insurance coverage that must be furnished to
us; our right to obtain insurance coverage for the RESTAURANT at your
expense if you fail to obtain required coverage; our right to defend
claims; and similar matters relating to insured and uninsured claims;
(14) complying with applicable laws; obtaining required
licenses and permits; adhering to good business practices; observing
high standards of honesty, integrity, fair dealing and ethical business
conduct in all dealings with customers, suppliers and us; and notifying
us if any action, suit or proceeding is commenced against you or the
RESTAURANT or if you receive any report, citation or notice regarding
the RESTAURANT's failure to comply with any health, cleanliness or
safety standard; and
(15) regulation of any other aspects of the operation and
maintenance of the RESTAURANT that we determine from time to time to be
useful to preserve or enhance the efficient operation, image or
goodwill of the Marks and SOBIK'S SUBS Restaurants.
You agree that System Standards prescribed from time to time in the
Operations Manual, or otherwise communicated to you in writing or other tangible
form, constitute provisions of this Agreement as if fully set forth herein. All
references to this Agreement include all System Standards as periodically
modified.
B. MODIFICATION OF SYSTEM STANDARDS.
We may periodically modify System Standards, which may accommodate
regional or local variations as we determine, and any modifications may obligate
you to invest additional capital in the RESTAURANT ("Capital Modifications")
and/or incur higher operating costs. Except for the Computer System, we will not
obligate you to make any Capital Modifications during the first three (3) years
of the term of this Agreement or after that time when the investment cannot in
our reasonable judgment be amortized during the remaining term of this
Agreement, unless we agree to extend the term of this Agreement so that the
additional investment, in our reasonable judgment, may be amortized, or unless
the investment is necessary in order to comply with applicable laws. We agree to
give you sixty (60) days to comply with Capital Modifications we require that
will cost up to Five Thousand Dollars ($5,000.00), ninety (90) days to comply
with Capital Modifications we require that will cost between Five Thousand
Dollars ($5,000.00) and Ten Thousand Dollars ($10,000.00), and one hundred
twenty (120) days to comply with Capital Modifications we require that will cost
over Ten Thousand Dollars ($10,000.00). Your failure to comply with
modifications to System Standards within the required time periods is an
incurable default under this Agreement, as provided in Section 14.B. below.
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9. MARKETING.
A. MARKETING FUND
Recognizing the value of advertising and marketing to the goodwill and
public image of SOBIK'S SUBS Restaurants, we have established a marketing fund
(the "Marketing Fund") for the advertising, marketing and public relations
programs and materials we deem appropriate. You agree to contribute to the
Marketing Fund four percent (4%) of the Gross Sales of the RESTAURANT, payable
in the same manner as the Royalty due hereunder. SOBIK'S SUBS Restaurants that
we or our affiliates own will contribute to the Marketing Fund on the same basis
as our franchise owners.
We will direct all programs financed by the Marketing Fund, with sole
discretion over the creative concepts, materials and endorsements used and their
geographic, market and media placement and allocation. You agree that the
Marketing Fund may be used to pay the costs of preparing and producing video,
audio and written materials; administering regional and multi-regional marketing
and advertising programs, including, without limitation, purchasing trade
journal, direct mail and other media advertising and employing advertising,
promotion and marketing agencies to provide assistance; and supporting public
relations, market research and other advertising, promotion and marketing
activities. The Marketing Fund periodically will furnish you with samples of
advertising, marketing and promotional formats and materials at no cost.
Multiple copies of these materials will be furnished to you at our direct cost
of producing them, plus any related shipping, handling and storage charges.
The Marketing Fund will be accounted for separately from our other
funds and will not be used to defray any of our general operating expenses,
except for the reasonable salaries, administrative costs, travel expenses and
overhead we may incur in activities related to administering the Marketing Fund
and its programs, including, without limitation, conducting market research,
preparing advertising, promotion and marketing materials and collecting and
accounting for contributions to the Marketing Fund. The Marketing Fund will not
be our asset. All contributions to the Marketing Fund will be held for the
benefit of those who have contributed to the Marketing Fund and used solely for
the purposes for which the contributions were made. We may spend, on behalf of
the Marketing Fund, in any fiscal year an amount greater or less than the
aggregate contribution of all SOBIK'S SUBS Restaurants to the Marketing Fund in
that year, and the Marketing Fund may borrow from us or others to cover deficits
or invest any surplus for future use. All interest earned on moneys contributed
to the Marketing Fund will be used to pay advertising costs before other assets
of the Marketing Fund are expended. We will prepare an annual statement of
moneys collected and costs incurred by the Marketing Fund and furnish the
statement to you upon written request. We can have the Marketing Fund
incorporated or operated
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through a separate entity anytime we deem appropriate, and the successor entity
will have all of the rights and duties specified in this Section.
You acknowledge that the Marketing Fund is intended to maximize
recognition of the Marks and patronage of SOBIK'S SUBS Restaurants. Although we
will endeavor to utilize the Marketing Fund to develop advertising and marketing
materials and programs and to place advertising and marketing that will benefit
all SOBIK'S SUBS Restaurants, we undertake no obligation to ensure that
expenditures by the Marketing Fund in or affecting any geographic area are
proportionate or equivalent to the contributions to the Marketing Fund by
SOBIK'S SUBS Restaurants operating in that geographic area or that any SOBIK'S
SUBS Restaurant will benefit directly or in proportion to its contribution to
the Marketing Fund from the development of advertising and marketing materials
or the placement of advertising and marketing. Except as expressly provided in
this Section, we assume no direct or indirect liability or obligation to you for
collecting amounts due to, or maintaining, directing or administering, the
Marketing Fund.
We can defer or reduce contributions of a SOBIK'S SUBS Restaurant
franchise owner and, upon thirty (30) days' prior written notice to you, reduce
or suspend contributions to and operations of the Marketing Fund for one or more
periods of any length and terminate (and, if terminated, reinstate) the
Marketing Fund. If the Marketing Fund is terminated, all unspent moneys on the
date of termination will be distributed to our franchise owners and to us and
our affiliates in proportion to their and our respective contributions to the
Marketing Fund during the preceding twelve (12) month period.
B. ADVERTISING COOPERATIVES.
You agree that we may, in our sole discretion, designate any geographic
area in which two (2) or more SOBIK'S SUBS Restaurants are located as a region
in order to establish an advertising cooperative ("Cooperative"). The
Cooperative's members in any area will include all of SOBIK'S SUBS Restaurants
operating in that area. Each Cooperative will be organized and governed in a
form and manner, and begin operating on a date, that we determine in advance.
Each Cooperative's purpose is, with our approval, to administer advertising
programs and develop promotional materials for the area that the Cooperative
covers. If, as of the time you sign this Agreement, we have established a
Cooperative for the geographic area in which the RESTAURANT is located, or if we
establish a Cooperative in the area covering your RESTAURANT during this
Agreement's term, you must sign any documents we require to become a member of
the Cooperative and participate in the Cooperative as those documents require.
In addition to your Marketing Fund contribution in Paragraph A above,
you agree to contribute to the Cooperative the amounts that we prescribe from
time to time, not to exceed five
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percent (5%) of the RESTAURANT's Gross Sales, although the Cooperative's members
may increase the required contribution by a two-thirds (2/3) vote of all SOBIK'S
SUBS Restaurant franchise owners who are members of that Cooperative. Each
franchise owner will have one vote, regardless of the number of SOBIK'S SUBS
Restaurants that franchise owner (or its affiliates) operates within the
Cooperative's area. You must pay us your Cooperative contribution in the same
manner as the Royalty, and we will forward it for the Cooperative's use.
You agree to submit to us and the Cooperative any reports that we
require. We or our designee will maintain and administer the Cooperative's
account according to the Cooperative's governing documents. We will operate the
Cooperative solely to collect and spend Cooperative contributions for the
purposes described above. The Cooperative and its members may not use any
advertising or promotional plans or materials without our prior written consent.
C. BY YOU.
You agree that any advertising, promotion and marketing you conduct
will be completely clear and factual and not misleading and conform to the
highest standards of ethical advertising and marketing and the advertising and
marketing policies which we prescribe from time to time. Samples of all
advertising, promotional and marketing materials which we have not prepared or
previously approved must be submitted to us for approval before you use them. If
you do not receive written disapproval within fifteen (15) days after we receive
the materials, they will be considered approved. You may not use any
advertising, promotional or marketing materials that we have disapproved.
10. RECORDS, REPORTS AND FINANCIAL STATEMENTS.
You agree to establish and maintain at your own expense a bookkeeping,
accounting and record keeping system conforming to the requirements and formats
we prescribe from time to time. We may require you to use a Computer System in
order to maintain certain sales data and other information. You agree to furnish
to us in the manner and format that we prescribe from time to time:
(1) on Monday of each week, a report on the RESTAURANT's Gross
Sales during the week ending on the immediately preceding Sunday;
(2) within five (5) days after their filing, copies of all
sales tax returns for the RESTAURANT (you agree that we can
periodically verify with the appropriate tax authorities the sales
taxes that you have paid);
(3) within thirty (30) days after the end of each fiscal
quarter of the
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RESTAURANT, a profit and loss statement for the RESTAURANT for
the immediately preceding fiscal quarter and year-to-date and a balance
sheet as of the end of that fiscal quarter;
(4) within ninety (90) days after the end of the RESTAURANT's
fiscal year, annual profit and loss and source and use of funds
statements and a balance sheet for the RESTAURANT as of the end of that
fiscal year; and
(5) within ten (10) days after our request, exact copies of
federal and state income and other tax returns and the other forms,
records, books and other information we may periodically require.
You agree to verify and sign each report and financial statement in the manner
we prescribe. We can disclose data derived from these reports without
specifically identifying you or the RESTAURANT (unless we have your written
consent to do so). We also can require you, if you ever fail to comply with any
provision of this Agreement, to have audited financial statements prepared on an
annual basis. Moreover, we can, as often as we deem appropriate (including on a
daily basis), access all computer registers and other computer systems that you
maintain in operating the RESTAURANT and retrieve all information relating to
the RESTAURANT's operations.
11. INSPECTIONS AND AUDITS
A. OUR RIGHT TO INSPECT THE RESTAURANT.
To determine whether you and the RESTAURANT are complying with this
Agreement and all System Standards, we and our designated agents have the right
at any time during your regular business hours, and upon forty-eight (48) hours'
prior notice to you, to:
(1) inspect the RESTAURANT;
(2) observe, photograph and videotape the operations of the
RESTAURANT for consecutive or intermittent periods we deem necessary;
(3) remove samples of any Supplies for testing and analysis;
(4) interview personnel and customers of the RESTAURANT; and
(5) inspect and copy any books, records and documents relating
to your operation of the RESTAURANT.
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You agree to cooperate with us fully in these inspections, observations,
photographing, videotaping, product removal and interviews. If we exercise any
of these rights, we will use our best efforts not to interfere unreasonably with
the RESTAURANT's operations. You agree to present to your customers the
evaluation forms that we periodically prescribe and to participate and/or
request your customers to participate in any surveys performed by us or on our
behalf.
B. OUR RIGHT TO AUDIT
We have the right at any time during your business hours, and upon
forty-eight (48) hours' prior notice to you, to inspect and audit, or cause to
be inspected and audited, your (if you are a corporation, limited liability
company or partnership) and the RESTAURANT's business, bookkeeping and
accounting records, sales and income tax records and returns and other records.
You agree to cooperate fully with our representatives and independent
accountants we hire to conduct any inspection or audit. If any inspection or
audit discloses an understatement of the RESTAURANT's Gross Sales, we can debit
your account, as provided in Section 3.B. above, for the Royalty, Marketing Fund
contributions and Cooperative contributions due on the amount of the
understatement, plus interest from the date originally due until the date of
payment. Further, if an inspection or audit is made necessary by your failure to
furnish reports, supporting records or other information as required, or to
furnish these items on a timely basis, or if an understatement of Gross Sales is
greater than two percent (2%) for any period reviewed, you agree to reimburse us
for the cost of the inspection or audit, including, without limitation, the
charges of attorneys and independent accountants and the travel expenses, room
and board and compensation of our employees. These remedies are in addition to
our other remedies and rights under this Agreement and applicable law.
12. TRANSFER.
A. BY US.
This Agreement is fully transferable by us and will inure to the
benefit of any transferee or other legal successor to our interests herein.
B. BY YOU.
You understand and acknowledge that the rights and duties created by
this Agreement are personal to you (or, if you are a corporation, limited
liability company or partnership, to your owners) and that we have granted the
Franchise to you in reliance upon our perceptions of your (or your owners')
individual or collective character, skill, aptitude, attitude, business ability
and financial capacity. Accordingly, neither this Agreement (or any interest
herein) nor any ownership
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or other interest in you or the RESTAURANT may be transferred without our prior
written approval. Any transfer without this approval constitutes a breach of
this Agreement and is void and of no effect. As used in this Agreement, the term
"transfer" includes your (or your owners') voluntary, involuntary, direct or
indirect assignment, sale, gift or other disposition of any interest in:
(1) this Agreement;
(2) you; or
(3) the RESTAURANT.
An assignment, sale, gift or other disposition includes the following events:
(a) transfer of ownership of capital stock or a partnership
interest;
(b) merger or consolidation or issuance of additional
securities or interests representing an ownership interest in you;
(c) any sale of an ownership interest in you or any security
convertible to an ownership interest in you;
(d) transfer of an interest in you, this Agreement or the
RESTAURANT in a divorce, insolvency or corporate or partnership
dissolution proceeding or otherwise by operation of law;
(e) transfer of an interest in you, this Agreement or the
RESTAURANT, in the event of your death or the death of one of your
owners, by will, declaration of or transfer in trust or under the laws
of intestate succession; or
(f) pledge of this Agreement (to someone other than us) or of
an ownership interest in you as security, foreclosure upon the
RESTAURANT or your transfer, surrender or loss of possession, control
or management of the RESTAURANT.
C. CONDITIONS FOR APPROVAL OF TRANSFER
If you (and your owners) are in full compliance with this Agreement,
then, subject to the other provisions of this Section 12, we will approve a
transfer that meets all the applicable requirements of this Paragraph. A
non-controlling ownership interest in you (determined before the date on which a
proposed transfer is to occur) may be transferred as long as the proposed
transferee
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and its direct and indirect owners are individuals of good character and
otherwise meet our then applicable standards for SOBIK'S SUBS Restaurant
franchise owners. A transfer of ownership, possession or control of the
RESTAURANT may be made only in conjunction with a transfer of this Agreement. If
the transfer is of this Agreement or a controlling interest in you, or is one of
a series of transfers (regardless of the period of time over which these
transfers take place) which in the aggregate constitute the transfer of this
Agreement or a controlling interest in you, all of the following conditions must
be met prior to or concurrently with the effective date of the transfer:
(1) the transferee has sufficient business experience,
aptitude and financial resources to operate the RESTAURANT;
(2) you have paid all Royalties, Marketing Fund contributions,
Cooperative contributions, amounts owed for purchases from us and all
other amounts owed to us or to third-party creditors and have submitted
all required reports and statements;
(3) the transferee and its owners and affiliates are not
engaged in a Competitive Business;
(4) the transferee (or its managing owner) and its manager (if
different from your manager) have agreed to complete our standard
training program;
(5) you are allowed to transfer the Lease;
(6) the transferee has agreed to be bound by all of the terms
and conditions of this Agreement;
(7) you or the transferee pays us a transfer fee in the amount
of $2,500 to defray expenses we incur in the transfer, including the
costs of training the transferee (or its managing owner) and its other
personnel;
(8) you (and your transferring owners) have executed a general
release, in form satisfactory to us, of any and all claims against us
and our shareholders, officers, directors, employees and agents;
(9) we have approved the material terms and conditions of the
transfer and determined that the price and terms of payment will not
adversely affect the transferee's operation of the RESTAURANT;
(10) if you or your owners finance any part of the sale price
of the transferred interest, you and/or your owners have agreed that
all of the transferee's obligations under
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any promissory notes, agreements or security interests that you or your
owners have reserved in the RESTAURANT are subordinate to the
transferee's obligation to pay Royalties, Marketing Fund contributions
and other amounts due to us and otherwise to comply with this
Agreement;
(11) you and your transferring owners (and your and your
owners' spouses) have executed a non-competition covenant in favor of
us and the transferee agreeing to be bound, commencing on the effective
date of the transfer, by the restrictions contained in Section 15.D.
hereof; and
(12) you and your transferring owners have agreed that you and
they will not directly or indirectly at any time or in any manner
(except with other SOBIK'S SUBS Restaurants you own and operate)
identify yourself or themselves or any business as a current or former
SOBIK'S SUBS Restaurant, or as one of our licensees or franchise
owners, use any Mark, any colorable imitation thereof or other indicia
of a SOBIK'S SUBS Restaurant in any manner or for any purpose or
utilize for any purpose any trade name, trade or service mark or other
commercial symbol that suggests or indicates a connection or
association with us.
If the proposed transfer is among your owners, Subparagraph (7) of the above
requirements will not apply, although the transferee is required to reimburse us
for any administrative costs we incur in the transfer. We can review all
information regarding the RESTAURANT that you give the transferee, correct any
information that we believe is inaccurate and give the transferee copies of any
reports you have submitted to us or we have made regarding the RESTAURANT.
D. TRANSFER TO A WHOLLY-OWNED CORPORATION OR LIMITED
LIABILITY COMPANY.
Notwithstanding Paragraph C of this Section, if you are in full
compliance with this Agreement, you may transfer this Agreement to a corporation
or limited liability company which conducts no business other than the
RESTAURANT and, if applicable, other SOBIK'S SUBS Restaurants, in which you
maintain management control and of which you own and control one hundred percent
(100%) of the equity and voting power of all issued and outstanding capital
stock or other ownership interests, and further provided that all assets of the
RESTAURANT are owned, and the entire business of the RESTAURANT is conducted, by
a single corporation or limited liability company. Transfers of ownership
interests in this corporation or limited liability company will be subject to
the provisions of Paragraph C of this Section. You agree to remain personally
liable under this Agreement as if the transfer to the corporation or limited
liability company had not occurred.
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E. YOUR DEATH OR DISABILITY.
(1) Transfer Upon Death or Disability. Upon your death or disability
or, if you are a corporation, limited liability company or partnership, the
death or disability of the Managing Owner or the owner of a controlling interest
in you, your or the owner's executor, administrator, conservator, guardian or
other personal representative must transfer your interest in this Agreement or
the owner's interest in you to a third party. The disposition of this Agreement
or the interest in you (including, without limitation, transfer by bequest or
inheritance) must be completed within a reasonable time, not to exceed six (6)
months from the date of death or disability, and will be subject to all of the
terms and conditions applicable to transfers contained in this Section. A
failure to transfer your interest in this Agreement or the ownership interest in
you within this period of time constitutes a breach of this Agreement. In this
Agreement, the term "disability" means a mental or physical disability,
impairment or condition that is reasonably expected to prevent or actually does
prevent you, the Managing Owner or an owner of a controlling interest in you
from managing and operating the RESTAURANT.
(2) Operation Upon Death or Disability. If, upon your death or
disability or the death or disability of the Managing Owner or the owner of a
controlling interest in you, the RESTAURANT is not being managed by a trained
manager, your or the owner's executor, administrator, conservator, guardian or
other personal representative must within a reasonable time, not to exceed
fifteen (15) days from the date of death or disability, appoint a manager to
operate the RESTAURANT. The manager will be required to complete training at
your expense. Pending the appointment of a manager as provided above or if, in
our judgment, the RESTAURANT is not being managed properly any time after your
death or disability or after the death or disability of the Managing Owner or
the owner of a controlling interest in you, we have the right, but not the
obligation, to assume the management of the RESTAURANT. All funds from the
operation of the RESTAURANT during the period we have assumed its management
will be kept in a separate account, and all expenses of the RESTAURANT,
including compensation, other costs and travel and living expenses of our
manager, will be charged to this account. We also can charge a reasonable
management fee (in addition to the Royalty, Marketing Fund contributions and
Cooperative contributions payable under this Agreement), not to exceed fifteen
percent (15 %) of the RESTAURANT's Gross Sales, during the period we have
assumed the RESTAURANT's management. Operation of the RESTAURANT during any
period will be on your behalf, provided that we have a duty to utilize only our
reasonable efforts and will not be liable to you or your owners for any debts,
losses or obligations incurred by the RESTAURANT or to any of your creditors for
any Supplies or services the RESTAURANT purchases during any period in which we
have assumed its management.
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F. EFFECT OF CONSENT TO TRANSFER.
Our consent to a transfer of this Agreement and the RESTAURANT or any
interest in you does not constitute a representation as to the fairness of the
terms of any contract between you and the transferee, a guarantee of the
prospects of success of the RESTAURANT or transferee or a waiver of any claims
we may have against you (or your owners) or of our right to demand the
transferee's exact compliance with any of the terms or conditions of this
Agreement.
G. OUR RIGHT OF FIRST REFUSAL.
If you (or any of your owners) at any time determine to sell, assign or
transfer for consideration an interest in this Agreement and the RESTAURANT or
an ownership interest in you, you (or your owner) agree to obtain a bona fide,
executed written offer and earnest money deposit (in the amount of five percent
(5 %) or more of the offering price) from a responsible and fully disclosed
offeror (including lists of the owners of record and beneficially of any
corporate or limited liability company offeror and all general and limited
partners of any partnership offeror and, in the case of a publicly-held
corporation or limited partnership, copies of the most current annual and
quarterly reports and Form 10K) and immediately submit to us a true and complete
copy of the offer, which includes details of the payment terms. To be a valid,
bona fide offer, the proposed purchase price must be denominated in a dollar
amount. The offer must apply only to an interest in you or in this Agreement and
the RESTAURANT and may not include an offer to purchase any of your (or your
owners') other property or rights. However, if the offeror proposes to buy any
other property or rights from you (or your owners) under a separate,
contemporaneous offer, the separate, contemporaneous offer must be disclosed to
us, and the price and terms of purchase offered to you (or your owners) for the
interest in you or in this Agreement and the RESTAURANT must reflect the bona
fide price offered and not reflect any value for any other property or rights.
We have the right, exercisable by written notice delivered to you or
your selling owner(s) within thirty (30) days from the date of the delivery to
us of both an exact copy of the offer and all other information we request, to
purchase the interest for the price and on the terms and conditions contained in
the offer, provided that:
(1) we may substitute cash for any form of payment proposed in
the offer;
(2) our credit will be deemed equal to the credit of any
proposed purchaser;
(3) we will have not less than sixty (60) days after giving
notice of our election to purchase to prepare for closing; and
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(4) we are entitled to receive, and you and your owners agree
to make, all customary representations and warranties given by the
seller of the assets of a business or the capital stock of an
incorporated business, as applicable, including, without limitation,
representations and warranties as to:
(a) ownership and condition of and title to stock or other
forms of ownership interest and/or assets;
(b) liens and encumbrances relating to the stock or other
forms of ownership interest and/or assets; and
(c) validity of contracts and the liabilities, contingent or
otherwise, of the corporation whose stock is being purchased.
If we exercise our right of first refusal, you and your selling
owner(s) agree that, for a period of two (2) years commencing on the date of the
closing, you and they will be bound by the non-competition covenant contained in
Section 15.D. hereof.
If we do not exercise our right of first refusal, you or your owners
may complete the sale to the purchaser on the exact terms of the offer, subject
to our approval of the transfer as provided in Paragraphs B and C of this
Section, provided that, if the sale to the purchaser is not completed within
sixty (60) days after delivery of the offer to us, or if there is a material
change in the terms of the sale (which you agree promptly to communicate to us),
we will have an additional right of first refusal during the thirty (30) day
period following either the expiration of the sixty (60) day period or notice to
us of the material change(s) in the terms of the sale, either on the terms
originally offered or the modified terms, at our option.
13. EXPIRATION OF THIS AGREEMENT.
A. YOUR RIGHT TO ACQUIRE A SUCCESSOR FRANCHISE.
Upon expiration of the term of this Agreement, if you (and each of your
owners) have substantially complied with this Agreement during its term, and
provided that:
(1) you maintain possession of and agree to remodel and/or
expand the RESTAURANT, add or replace improvements and Operating Assets
and otherwise modify the RESTAURANT as we require to bring it into
compliance with specifications and standards then applicable for
SOBIK'S SUBS Restaurants, or
(2) if you are unable to maintain possession of the Premises,
or if in our
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judgment the RESTAURANT should be relocated, you secure substitute
premises we approve, develop these premises in compliance with
specifications and standards then applicable for SOBIK'S SUBS
Restaurants and continue to operate the RESTAURANT at the Premises
until operations are transferred to the substitute premises,
then, subject to the terms and conditions set forth in this Section 13, you can
acquire a successor franchise to operate the RESTAURANT as a SOBIK'S SUBS
Restaurant for a ten (10) year term on the terms and conditions of the franchise
agreement we then are using in granting franchises for SOBIK'S SUBS Restaurants
(modified as necessary to reflect the fact that it is for a successor
franchise), provided, however, that you only will have to pay a successor
franchise fee equal to 25 percent (25 %) of the then current initial franchise
fee charged under our standard franchise agreement, or Two Thousand Five Hundred
Dollars ($2,500), whichever is lower.
B. GRANT OF A SUCCESSOR FRANCHISE.
You agree to give us written notice of your election to acquire a
successor franchise no earlier than twelve (12) months and no later than nine
(9) months before the expiration of this Agreement. We agree to give you written
notice ("Our Notice"), not more than ninety (90) days after we receive your
notice, of our decision, in accordance with Paragraph A of this Section:
(1) to grant you a successor franchise;
(2) to grant you a successor franchise on the condition that
deficiencies of the RESTAURANT, or in your operation of the RESTAURANT,
are corrected; or
(3) not to grant you a successor franchise based on our
determination that you and your owners have not substantially complied
with this Agreement during its term.
If applicable, Our Notice will:
(a) describe the remodeling and/or expansion of the RESTAURANT
and other improvements or modifications required to bring the
RESTAURANT into compliance with then applicable specifications and
standards for SOBIK'S SUBS Restaurants; and
(b) state the actions you must take to correct operating
deficiencies and the time period in which these deficiencies must be
corrected.
If we elect not to grant a successor franchise, Our Notice will describe the
reasons for our decision. Your right to acquire a successor franchise is subject
to your continued compliance with all of the terms and conditions of this
Agreement through the date of its expiration, in addition to your
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compliance with the obligations described in Our Notice.
If Our Notice states that you must cure certain deficiencies of the
RESTAURANT or its operation as a condition to the grant of a successor
franchise, we will give you written notice of a decision not to grant a
successor franchise, based upon your failure to cure these deficiencies, not
less than ninety (90) days before the expiration of this Agreement, provided,
however, that we will not be required to give you this ninety (90) days notice
if we decide not to grant you a successor franchise due to your breach of this
Agreement during the ninety (90) day period before its expiration. If we fail to
give you:
(i) notice of deficiencies in the RESTAURANT, or in your
operation of the RESTAURANT, within ninety (90) days after we receive
your timely election to acquire a successor franchise (if we elect to
grant you a successor franchise under subparagraphs (2) and (b) above);
or
(ii) notice of our decision not to grant a successor franchise
at least ninety (90) days before the expiration of this Agreement, if
this notice is required,
we may extend the term of this Agreement for the period of time necessary in
order to provide you with either reasonable time to correct deficiencies or the
ninety (90) days notice of our refusal to grant a successor franchise required
under this Section. If you fail to notify us of your election to acquire a
successor franchise within the prescribed time period, we need not grant you a
successor franchise.
C. AGREEMENTS/RELEASES
If you satisfy all of the other conditions to the grant of a successor
franchise, you and your owners agree to execute the form of franchise agreement
and any ancillary agreements we then are customarily using in granting successor
franchises for SOBIK'S SUBS Restaurants (modified as necessary to reflect the
fact that it is for a successor franchise). You and your owners further agree to
execute general releases, in form satisfactory to us, of any and all claims
against us and our shareholders, officers, directors, employees, agents,
successors and assigns. Failure by you or your owners to sign these agreements
and releases and deliver them to us for acceptance and execution within sixty
(60) days after their delivery to you will be deemed an election not to acquire
a successor franchise.
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14. TERMINATION OF AGREEMENT.
A. BY YOU.
If you and your owners are in full compliance with this Agreement and
we materially fail to comply with this Agreement and do not correct the failure
within thirty (30) days after written notice of the material failure is
delivered to us or, if the failure cannot be corrected within thirty (30) days,
provide reasonable evidence of our effort to correct the failure within a
reasonable time, not to exceed sixty (60) days after your notice, you may
terminate this Agreement effective thirty (30) days after delivery to us of
written notice of termination. Your termination of this Agreement for any other
reason or without this notice will be deemed a termination without cause.
B. BY US.
We have the right to terminate this Agreement, effective upon delivery
of written notice of termination to you, if:
(1) you (or any of your owners) have made or make any material
misrepresentation or omission in purchasing the Franchise or operating
the RESTAURANT;
(2) you (or your Managing Owner) fail successfully to complete
initial training to our satisfaction;
(3) you fail to begin operating the RESTAURANT within one
hundred eighty (180) calendar days after the execution of this
Agreement;
(4) you abandon or fail actively to operate the RESTAURANT for
three (3) or more consecutive business days, unless the RESTAURANT has
been closed for a purpose we have approved or because of casualty or
government order;
(5) you surrender or transfer control of the operation of the
RESTAURANT without our prior written consent;
(6) you (or any of your owners) are or have been convicted by
a trial court of, or plead or have pleaded no contest to, a felony;
(7) you fail to maintain the insurance we require from time to
time;
(8) you interfere with our right to inspect the RESTAURANT or
observe its
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operations, as provided in Section 11 of this Agreement;
(9) you (or any of your owners) engage in any dishonest or
unethical conduct which may adversely affect the reputation of the
RESTAURANT or another SOBIK'S SUBS Restaurant or the goodwill
associated with the Marks;
(10) you (or any of your owners) make an unauthorized
assignment of this Agreement or of an ownership interest in you or the
RESTAURANT;
(11) in the event of your death or disability or the death or
disability of the Managing Owner or the owner of a controlling interest
in you, this Agreement or the owner's interest in you is not assigned
as required;
(12) you lose the right to possess the Premises;
(13) we have sent a notice of termination under any other
franchise agreement for a SOBIK'S SUBS Restaurant between you (or any
of your owners) and us;
(14) you (or any of your owners) make any unauthorized use or
disclosure of any Confidential Information or use, duplicate or
disclose any portion of the Operations Manual in violation of this
Agreement;
(15) you violate any health, safety or sanitation law,
ordinance or regulation and do not begin to cure the noncompliance or
violation immediately, and correct the noncompliance or violation
within seventy-two (72) hours, after written notice is delivered to
you;
(16) you fail to make payments of any amounts due to us and do
not correct the failure within ten (10) days after written notice of
the failure is delivered to you;
(17) you fail to pay when due any federal or state income,
service, sales or other taxes due on the operations of the RESTAURANT,
unless you are in good faith contesting your liability for these taxes;
(18) you fail to comply with modifications to System Standards
within the required time period;
(19) you (or any of your owners) fail on three (3) or more
separate occasions within any period of twelve (12) consecutive months
to do any one or more or combination of the following: (i) submit when
due reports or other data, information or supporting
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records, (ii) pay when due any amounts due to us or (iii) otherwise
comply with this Agreement, whether or not any of the failures set
forth in subparagraphs (i) through (iii) are corrected after written
notice of the failure is delivered to you;
(20) you make an assignment for the benefit of creditors or
admit in writing your insolvency or inability to pay your debts
generally as they become due; you consent to the appointment of a
receiver, trustee or liquidator of all or the substantial part of your
property; the RESTAURANT is attached, seized, subjected to a writ or
distress warrant or levied upon, unless the attachment, seizure, writ,
warrant or levy is vacated within thirty (30) days; or any order
appointing a receiver, trustee or liquidator of you or the RESTAURANT
is not vacated within thirty (30) days following the entry of the
order; or
(21) you (or any of your owners) fail to comply with any other
provision of this Agreement or any System Standard and do not correct
the failure within thirty (30) days after written notice of the failure
to comply is delivered to you.
C. ASSUMPTION OF MANAGEMENT.
We have the right (but not the obligation), under the circumstances
described below, to enter the Premises and assume the RESTAURANT's management on
your behalf for the period of time we deem appropriate. You will be obligated to
pay us our then current per diem charges, as well as the travel, living and
other expenses we incur, during the time we assume the RESTAURANT's management.
We also have the right to charge a reasonable management fee, not to exceed
fifteen percent (15 %) of the RESTAURANT's Gross Sales, during this time. If we
assume the RESTAURANT's management on your behalf, you acknowledge that we will
have a duty to utilize only reasonable efforts and will not be liable to you or
your owners for any debts, losses or obligations incurred by the RESTAURANT or
to any of your creditors for any Supplies or services the RESTAURANT purchases
during any period in which we have assumed its management.
We may assume the management of the RESTAURANT under the following
circumstances:
(1) if you abandon or fail actively to operate the RESTAURANT;
(2) if you fail to comply with any provision of this Agreement
or any System Standard and do not cure the failure within the time
period we specify in our notice to you; or
(3) if this Agreement expires or is terminated and we are
deciding whether to
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exercise our option to purchase the RESTAURANT under Section 15.E.
below.
Our exercise of any of the rights granted by subparagraphs (1) and (2) above
will not affect our right to terminate this Agreement under Section 14.B. above.
15. OUR AND YOUR RIGHTS AND OBLIGATIONS UPON TERMINATION OR EXPIRATION OF
THIS AGREEMENT.
A. PAYMENT OF AMOUNTS OWED TO US
You agree to pay us within fifteen (15) days after the effective date
of termination or expiration of this Agreement, or on any later date that the
amounts due to us are determined, the Royalties, Marketing Fund contributions,
Cooperative contributions, amounts owed for purchases from us, interest and all
other amounts owed to us which then are unpaid.
B. MARKS.
Upon the termination or expiration of this Agreement:
(1) you may not directly or indirectly at any time or in any
manner (except with other SOBIK'S SUBS Restaurants you own and operate)
identify yourself or any business as a current or former SOBIK'S SUBS
Restaurant, or as one of our licensees or franchise owners, use any
Mark, any colorable imitation thereof or other indicia of a SOBIK'S
SUBS Restaurant in any manner or for any purpose or utilize for any
purpose any trade name, trade or service mark or other commercial
symbol that indicates or suggests a connection or association with us;
(2) you agree to take the action required to cancel all
fictitious or assumed name or equivalent registrations relating to your
use of any Mark;
(3) you agree to deliver to us within thirty (30) days all
signs, sign-faces, sign-cabinets, marketing materials, forms and other
materials containing any Mark or otherwise identifying or relating to a
SOBIK'S SUBS Restaurant and allow us, without liability to you or third
parties, to remove all of these items from the RESTAURANT;
(4) if we do not have or do not exercise an option to purchase
the RESTAURANT under paragraph E of this Section, you agree that,
after, as applicable, the effective date of expiration of this
Agreement or the Notification Date, you will promptly and at your own
expense make the alterations we specify in our Operations Manual or
otherwise to distinguish the RESTAURANT clearly from its former
appearance and from
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other SOBIK'S SUBS Restaurants so as to prevent confusion of the
public;
(5) you agree to notify the telephone company and all
telephone directory publishers of the termination or expiration of your
right to use any telephone, telecopy or other numbers and any telephone
directory listings associated with any Mark, authorize the transfer of
these numbers and directory listings to us or at our direction and/or
instruct the telephone company to forward all calls made to your
telephone numbers to numbers we specify. If you fail to do so, we can
take whatever action and sign whatever documents we deem appropriate on
your behalf to effect these events; and
(6) you agree to furnish us, within thirty (30) days after, as
applicable, the effective date of expiration of this Agreement or the
Notification Date, with evidence satisfactory to us of your compliance
with the foregoing obligations.
C. CONFIDENTIAL INFORMATION
You agree that, upon termination or expiration of this Agreement, you
will immediately cease to use any of our Confidential Information (including
computer software we have licensed to you) in any business or otherwise and
return to us all copies of the Operations Manual and any other confidential
materials that we have loaned to you.
D. COVENANT NOT TO COMPETE
Upon
(1) our termination of this Agreement according to its terms
and conditions,
(2) your termination of this Agreement without cause, or
(3) expiration of this Agreement,
you and your owners agree that, for a period of two (2) years commencing on the
effective date of termination or expiration or the date on which all persons
restricted by this Paragraph begin to comply with this Paragraph, whichever is
later, neither you nor any of your owners will have any direct or indirect
interest (e.g,, through a spouse) as a disclosed or beneficial owner, investor,
partner, director, officer, employee, consultant, representative or agent or in
any other capacity in any Competitive Business (as defined in Section 7 above)
operating:
(a) at the Premises;
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(b) within the Exclusive Area;
(c) within one (1) mile of any other SOBIK'S SUBS Restaurant
in operation or under construction on the later of the effective date
of the termination or expiration or the date on which all persons
restricted by this Paragraph comply with this Paragraph.
If any person restricted by this Paragraph refuses voluntarily to
comply with the foregoing obligations, the two (2) year period will commence
with the entry of a court order enforcing this provision. You and your owners
expressly acknowledge that you possess skills and abilities of a general nature
and have other opportunities for exploiting such skills. Consequently,
enforcement of the covenants made in this Paragraph will not deprive you of your
personal goodwill or ability to earn a living.
E. OUR RIGHT TO PURCHASE RESTAURANT.
(1) Exercise of Option.
Upon
(a) our termination of this Agreement according to its terms
and conditions,
(b) your termination of this Agreement without cause, or
(c) expiration of this Agreement (if we offer, but you elect
not to acquire, a successor franchise),
we have the option, exercisable by giving you written notice within sixty (60)
days from the date of the termination or expiration, to purchase the RESTAURANT
from you, including the leasehold rights to the Premises. (The date on which we
notify you whether or not we are exercising our option is referred to in this
Agreement as the "Notification Date.") We have the unrestricted right to assign
this option to purchase the RESTAURANT. We will be entitled to all customary
warranties and representations in our asset purchase, including, without
limitation, representations and warranties as to ownership and condition of and
title to assets; liens and encumbrances on assets; validity of contracts and
agreements; and liabilities affecting the assets, contingent or otherwise.
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(2) Leasehold Rights.
You agree at our election:
(a) to assign your leasehold interest in the Premises to us;
or
(b) to enter into a sublease for the remainder of the Lease
term on the same terms (including renewal options) as the Lease.
(3) Purchase Price.
The purchase price for the RESTAURANT will be its fair market value,
determined in a manner consistent with reasonable depreciation of the
RESTAURANT's Operating Assets and Supplies, provided that the RESTAURANT will be
valued as an independent business and its value will not include any value for:
(a) the Franchise or any rights granted by this Agreement;
(b) the Marks; or
(c) participation in the network of SOBIK'S SUBS Restaurants.
The RESTAURANT's fair market value will include the goodwill you developed in
the market of the RESTAURANT that exists independent of the goodwill of the
Marks and the System.
We may exclude from the assets purchased cash or its equivalent and any
Operating Assets and Supplies that are not reasonably necessary (in function or
quality) to the RESTAURANT's operation or that we have not approved as meeting
standards for SOBIK'S SUBS Restaurants, and the purchase price will reflect
these exclusions.
(4) Appraisal
If we and you are unable to agree on the RESTAURANT's fair market
value, its fair market value will be determined by three (3) independent
appraisers, each of whom will conduct an independent appraisal. We will appoint
one appraiser, you will appoint one appraiser and these two appraisers will
appoint the third appraiser. You and we agree to select our respective
appraisers within fifteen (15) days after we notify you that we are exercising
our option to purchase the RESTAURANT, and the two appraisers so chosen are
obligated to appoint the third appraiser within fifteen (15) days after the date
on which the last of them was appointed. You and we will bear the cost of our
own appraisers and share equally the fees and expenses of the third appraiser
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chosen by the two appraisers. You agree that the appraisers will be instructed
to complete their appraisal within thirty (30) days after the third appraiser's
appointment. The RESTAURANT's fair market value will be deemed to be the median
appraisal of the three (3) independent appraisals.
(5) Closing.
The purchase price will be paid at the closing of the purchase, which
will take place not later than sixty (60) days after determination of the
purchase price. We have the right to set off against the purchase price, and
thereby reduce the purchase price by, any and all amounts you or your owners owe
to us. At the closing, you agree to deliver instruments transferring to us:
(a) good and merchantable title to the assets purchased, free
and dear of all liens and encumbrances (other than liens and security
interests acceptable to us), with all sales and other transfer taxes
paid by you;
(b) all licenses and permits of the RESTAURANT which may be
assigned or transferred; and
(c) the leasehold interest in the Premises and improvements
thereon.
If you cannot deliver clear title to all of the purchased assets, or if there
are other unresolved issues, the closing of the sale will be accomplished
through an escrow. You and your owners further agree to execute general
releases, in form satisfactory to us, of any and all claims against us and our
shareholders, officers, directors, employees, agents, successors and assigns.
F. CONTINUING OBLIGATIONS.
All of our and your (and your owners') obligations which expressly or
by their nature survive the expiration or termination of this Agreement will
continue in full force and effect subsequent to and notwithstanding its
expiration or termination and until they are satisfied in full or by their
nature expire.
16. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION.
A. INDEPENDENT CONTRACTORS.
You and we understand and agree that this Agreement does not create a
fiduciary relationship between you and us, that you and we are and will be
independent contractors and that nothing in this Agreement is intended to make
either you or us a general or special agent, joint venturer, partner or employee
of the other for any purpose. You agree to identify yourself
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conspicuously in all dealings with customers, suppliers, public officials,
RESTAURANT personnel and others as the owner of the RESTAURANT under a franchise
we have granted and to place notices of independent ownership on the forms,
business cards, stationery and advertising and other materials we require from
time to time.
B. NO LIABILITY FOR ACTS OF OTHER PARTY.
You agree not to employ any of the Marks in signing any contract or
applying for any license or permit, or in a manner that may result in our
liability for any of your indebtedness or obligations, and that you will not use
the Marks in any way we have not expressly authorized. Neither we nor you will
make any express or implied agreements, warranties, guarantees or
representations or incur any debt in the name or on behalf of the other,
represent that our respective relationship is other than franchisor and
franchise owner or be obligated by or have any liability under any agreements or
representations made by the other that are not expressly authorized in writing.
We will not be obligated for any damages to any person or property directly or
indirectly arising out of the RESTAURANT's operation or the business you conduct
under this Agreement.
C. TAXES.
We will have no liability for any sales, use, service, occupation,
excise, gross receipts, income, property or other taxes, whether levied upon you
or the RESTAURANT, due to the business you conduct (except any taxes we are
required by law to collect from you for purchases from us). Payment of all these
taxes is your responsibility.
D. INDEMNIFICATION.
(i) You agree to indemnify, defend and hold harmless us, our affiliates
and our respective shareholders, directors, officers, employees, agents,
successors and assignees (the "Indemnified Parties") against and to reimburse
any one or more of the Indemnified Parties for all claims, obligations and
damages described in this Paragraph, any and all taxes described in Paragraph C
of this Section and any and all claims and liabilities directly or indirectly
arising out of the RESTAURANT's operation or your breach of this Agreement. For
purposes of this indemnification, "claims" include all obligations, damages
(actual, consequential or otherwise) and costs reasonably incurred in the
defense of any claim against any of the Indemnified Parties, including, without
limitation, reasonable accountants', arbitrators', attorneys' and expert witness
fees, costs of investigation and proof of facts, court costs, other expenses of
litigation, arbitration or alternative dispute resolution and travel and living
expenses. We and each of the other Indemnified Parties have the right to defend
any claim against us and them and to agree to settlements or take any other
remedial, corrective or other actions we and/or they deem expedient. This
indemnity will continue in full force and effect subsequent to and
notwithstanding the expiration or termination of
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this Agreement.
Under no circumstances will we or any other Indemnified Party be
required to seek recovery from any insurer or other third party, or otherwise to
mitigate our, their or your losses and expenses, in order to maintain and
recover fully a claim against you. You agree that a failure to pursue this
recovery or mitigate a loss will in no way reduce or alter the amounts we or
another Indemnified Party may recover from you.
(ii) We agree to indemnify, defend and hold harmless you and your
shareholders, directors, officers, employees, agents, successors and assignees
(the "Franchise Owner Indemnified Parties") against and to reimburse you for all
claims, obligations and damages (as defined in subparagraph (i) above) for which
you are held liable in an action or proceeding asserted by a third party as a
result of our defaults, negligence or intentional misconduct toward such third
party.
Under no circumstances will you or any other Franchise Owner
Indemnified Party be required to seek recovery from any insurer or other third
party, or otherwise to mitigate your, their or our losses and expenses, in order
to maintain and recover fully a claim against us. We agree that a failure to
pursue this recovery or mitigate a loss will in no way reduce or alter the
amounts you or another Franchise Owner Indemnified Party may recover from us.
17. ENFORCEMENT.
A. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS.
Except as expressly provided to the contrary herein, each section,
paragraph, term and provision of this Agreement, and any portion thereof, will
be considered severable, and if, for any reason, any provision is held to be
invalid or contrary to or in conflict with any applicable present or future law
or regulation in a final, unappealable ruling issued by any court, agency or
tribunal with competent jurisdiction in a proceeding to which we are a party,
that ruling will not impair the operation of, or have any other effect upon, the
other portions of this Agreement that may remain otherwise intelligible, which
will continue to be given full force and effect and bind the parties hereto,
although any portion held to be invalid will be deemed not to be a part of this
Agreement from the date the time for appeal expires, if you are a party thereto,
otherwise upon your receipt from us of a notice of non-enforcement.
If any covenant in this Agreement which restricts competitive activity
is deemed unenforceable by virtue of its scope in terms of area, business
activity prohibited and/or length of time, but would be enforceable by reducing
any part or all thereof, you and we agree that the covenant will be enforced to
the fullest extent permissible under the laws and public policies applied in the
jurisdiction whose law is applicable to the validity of the covenant.
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If any applicable and binding law or rule of any jurisdiction requires
a greater prior notice than is required under this Agreement of the termination
of this Agreement or of our refusal to enter into a successor franchise
agreement, or the taking of some other action not required under this Agreement,
or if, under any applicable and binding law or rule of any jurisdiction, any
provision of this Agreement or any System Standard is invalid or unenforceable,
the prior notice and/or other action required by the law or rule will be
substituted for the comparable provisions hereof, and we will have the right, in
our sole discretion, to modify the invalid or unenforceable provision or System
Standard to the extent required to be valid and enforceable. You agree to be
bound by any promise or covenant imposing the maximum duty permitted by law
which is subsumed within the terms of any provision hereof, as though it were
separately articulated in and made a part of this Agreement, that may result
from striking from any of the provisions hereof, or any System Standard, any
portion or portions which a court or arbitrator may hold to be unenforceable in
a final decision to which we are a party, or from reducing the scope of any
promise or covenant to the extent required to comply with a court order or
arbitration award. These modifications to this Agreement will be effective only
in that jurisdiction, unless we elect to give them greater applicability, and
will be enforced as originally made and entered into in all other jurisdictions.
B. WAIVER OF OBLIGATIONS.
We and you may by written instrument unilaterally waive or reduce any
obligation of or restriction upon the other under this Agreement, effective upon
delivery of written notice to the other or another effective date stated in the
notice of waiver. Any waiver we grant will be without prejudice to any other
rights we may have, will be subject to our continuing review and may be revoked,
in our sole discretion, at any time and for any reason, effective upon delivery
to you of ten (10) days' prior written notice.
We and you will not be deemed to have waived or impaired any right,
power or option reserved by this Agreement (including, without limitation, our
right to demand exact compliance with every term, condition and covenant in this
Agreement or to declare any breach thereof to be a default and to terminate this
Agreement before the expiration of its term) by virtue of any custom or practice
at variance with the terms of this Agreement; our or your failure, refusal or
neglect to exercise any right under this Agreement or to insist upon exact
compliance by the other with our and your obligations under this Agreement,
including, without limitation, any System Standard; our waiver, forbearance,
delay, failure or omission to exercise any right, power or option, whether of
the same, similar or different nature, with other SOBIK'S SUBS Restaurants; the
existence of other franchise agreements for SOBIK'S SUBS Restaurants which
contain different provisions from those contained in this Agreement; or our
acceptance of any payments due from you after any breach of this Agreement. No
special or restrictive legend or endorsement on any check or similar item given
to us will constitute a waiver, compromise, settlement or accord and
satisfaction. We are
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authorized to remove or obliterate any legend or endorsement, which will have no
effect.
Neither we nor you will be liable for loss or damage or deemed to be in
breach of this Agreement if our or your failure to perform our or your
obligations results from:
(1) transportation shortages, inadequate supply of equipment,
products, supplies, labor, material or energy or the voluntary
foregoing of the right to acquire or use any of the foregoing in order
to accommodate or comply with the orders, requests, regulations,
recommendations or instructions of any federal, state or municipal
government or any department or agency thereof;
(2) acts of God;
(3) fires, strikes, embargoes, war or riot; or
(4) any other similar event or cause.
Any delay resulting from any of these causes will extend performance accordingly
or excuse performance, in whole or in part, as may be reasonable, except that
these causes will not excuse payments of amounts owed at the time of the
occurrence or payment of Royalties, Marketing Fund contributions or Cooperative
contributions due on any sales afterwards.
C. COSTS AND ATTORNEYS' FEES.
If we incur expenses due to your failure to pay when due amounts owed
to us, to submit when due any reports, information or supporting records or
otherwise to comply with this Agreement, you agree to reimburse us for any of
the costs and expenses which we incur, including, without limitation, reasonable
accounting, attorneys', arbitrators' and related fees.
D. YOU MAY NOT WITHHOLD PAYMENTS DUE TO US.
You agree that you will not withhold payment of any amounts owed to us
on the grounds of our alleged nonperformance of any of our obligations under
this Agreement. You agree that all claims will, if not otherwise resolved, be
submitted to arbitration as provided in Paragraph F of this Section.
E. RIGHTS OF PARTIES ARE CUMULATIVE.
Our and your rights under this Agreement are cumulative, and no
exercise or enforcement by us or you of any right or remedy under this Agreement
will preclude our or your exercise or
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enforcement of any other right or remedy under this Agreement which we or you
are entitled by law to enforce.
F. ARBITRATION.
EXCEPT FOR CONTROVERSIES, DISPUTES OR CLAIMS RELATED TO OR BASED ON
YOUR USE OF THE MARKS AFTER THE EXPIRATION OR TERMINATION OF THIS AGREEMENT, ALL
CONTROVERSIES, DISPUTES OR CLAIMS BETWEEN US AND OUR SHAREHOLDERS, OFFICERS,
DIRECTORS, AGENTS AND EMPLOYEES AND YOU (YOUR OWNERS, GUARANTORS, AFFILIATES AND
EMPLOYEES, IF APPLICABLE) ARISING OUT OF OR RELATED TO:
(1) THIS AGREEMENT OR ANY OTHER AGREEMENT BETWEEN YOU AND US
OR ANY PROVISION OF ANY OF THESE AGREEMENTS;
(2) OUR RELATIONSHIP WITH YOU;
(3) THE VALIDITY OF THIS AGREEMENT OR ANY OTHER AGREEMENT
BETWEEN YOU AND US OR ANY PROVISION OF ANY OF THOSE AGREEMENT; OR
(4) ANY SYSTEM STANDARD RELATING TO THE ESTABLISHMENT OR
OPERATION OF THE RESTAURANT;
WILL BE SUBMITTED FOR ARBITRATION, ON DEMAND OF EITHER PARTY, TO THE OFFICE OF
THE AMERICAN ARBITRATION ASSOCIATION CLOSEST TO OUR THEN EXISTING PRINCIPAL
BUSINESS ADDRESS. THE ARBITRATION PROCEEDINGS WILL BE CONDUCTED AT THAT AMERICAN
ARBITRATION ASSOCIATION OFFICE AND, EXCEPT AS OTHERWISE PROVIDED IN THIS
AGREEMENT, WILL BE HEARD BY ONE ARBITRATOR IN ACCORDANCE WITH THE THEN CURRENT
COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION. ALL
MATTERS RELATING TO ARBITRATION WILL BE GOVERNED BY THE FEDERAL ARBITRATION ACT
( 9 U.S.C. ss.ss. 1 ET SEQ.) AND NOT BY ANY STATE ARBITRATION LAW.
THE ARBITRATOR WILL HAVE THE RIGHT TO AWARD OR INCLUDE IN HIS AWARD ANY
RELIEF WHICH HE DEEMS PROPER IN THE CIRCUMSTANCES, INCLUDING, WITHOUT
LIMITATION, MONEY DAMAGES (WITH INTEREST ON UNPAID AMOUNTS FROM THE DATE DUE),
SPECIFIC PERFORMANCE,
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INJUNCTIVE RELIEF AND ATTORNEYS' FEES AND COSTS, PROVIDED THAT THE ARBITRATOR
WILL NOT HAVE THE RIGHT TO DECLARE ANY MARK GENERIC OR OTHERWISE INVALID OR,
EXCEPT AS OTHERWISE PROVIDED IN PARAGRAPH I OF THIS SECTION, TO AWARD EXEMPLARY
OR PUNITIVE DAMAGES. THE AWARD AND DECISION OF THE ARBITRATOR WILL BE CONCLUSIVE
AND BINDING UPON ALL PARTIES HERETO, AND JUDGMENT UPON THE AWARD MAY BE ENTERED
IN ANY COURT OF COMPETENT JURISDICTION.
WE AND YOU AGREE TO BE BOUND BY THE PROVISIONS OF ANY LIMITATION ON THE
PERIOD OF TIME IN WHICH CLAIMS MUST BE BROUGHT UNDER APPLICABLE LAW OR THIS
AGREEMENT, WHICHEVER EXPIRES EARLIER. WE AND YOU FURTHER AGREE THAT, IN
CONNECTION WITH ANY ARBITRATION PROCEEDING, EACH MUST SUBMIT OR FILE ANY CLAIM
WHICH WOULD CONSTITUTE A COMPULSORY COUNTERCLAIM (AS DEFINED BY RULE 13 OF THE
FEDERAL RULES OF CIVIL PROCEDURE) WITHIN THE SAME PROCEEDING AS THE CLAIM TO
WHICH IT RELATES. ANY CLAIM WHICH IS NOT SUBMITTED OR FILED AS DESCRIBED ABOVE
WILL BE FOREVER BARRED.
WE AND YOU AGREE THAT ARBITRATION WILL BE CONDUCTED ON AN INDIVIDUAL,
NOT A CLASS-WIDE, BASIS, AND THAT AN ARBITRATION PROCEEDING BETWEEN US AND OUR
SHAREHOLDERS, OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES AND YOU (AND/OR YOUR
OWNERS, GUARANTORS, AFFILIATES AND EMPLOYEES, IF APPLICABLE) MAY NOT BE
CONSOLIDATED WITH ANY OTHER ARBITRATION PROCEEDING BETWEEN US AND ANY OTHER
PERSON, CORPORATION OR PARTNERSHIP.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS PARAGRAPH,
WE AND YOU EACH HAVE THE RIGHT IN A PROPER CASE TO SEEK TEMPORARY RESTRAINING
ORDERS AND TEMPORARY OR PRELIMINARY INJUNCTIVE RELIEF FROM A COURT OF COMPETENT
JURISDICTION; PROVIDED, HOWEVER, THAT WE AND YOU MUST CONTEMPORANEOUSLY SUBMIT
OUR DISPUTE FOR ARBITRATION ON THE MERITS AS PROVIDED IN THIS SECTION.
THE PROVISIONS OF THIS PARAGRAPH ARE INTENDED TO BENEFIT AND BIND
CERTAIN THIRD PARTY NON-SIGNATORIES AND WILL CONTINUE IN FULL FORCE AND EFFECT
SUBSEQUENT TO AND NOTWITHSTANDING THE EXPIRATION OR TERMINATION OF THIS
AGREEMENT.
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G. GOVERNING LAW
ALL MATTERS RELATING TO ARBITRATION WILL BE GOVERNED BY THE FEDERAL
ARBITRATION ACT (9 U.S.C. ss.ss. 1 ET SEQ.). EXCEPT TO THE EXTENT GOVERNED BY
THE FEDERAL ARBITRATION ACT AS REQUIRED HEREBY, THE UNITED STATES TRADEMARK ACT
OF 1946 (LANHAM ACT, 15 U.S.C. SECTIONS 1051 ET SEQ.) OR OTHER FEDERAL LAW, THIS
AGREEMENT, THE FRANCHISE AND ALL CLAIMS ARISING FROM THE RELATIONSHIP BETWEEN US
AND YOU WILL BE GOVERNED BY THE LAWS OF THE STATE WHERE THE RESTAURANT IS
LOCATED, EXCEPT THAT ANY STATE LAW REGULATING THE SALE OF FRANCHISES OR
GOVERNING THE RELATIONSHIP OF A FRANCHISOR AND ITS FRANCHISEE WILL NOT APPLY
UNLESS ITS JURISDICTIONAL REQUIREMENTS ARE MET INDEPENDENTLY WITHOUT REFERENCE
TO THIS PARAGRAPH.
H. CONSENT TO JURISDICTION
SUBJECT TO SECTION 17.F. AND THE PROVISIONS BELOW, YOU AND YOUR OWNERS
AGREE THAT ALL ACTIONS ARISING UNDER THIS AGREEMENT OR OTHERWISE AS A RESULT OF
THE RELATIONSHIP BETWEEN YOU AND US SHALL BE COMMENCED IN THE STATE, AND IN THE
STATE OR FEDERAL COURT OF GENERAL JURISDICTION CLOSEST TO, WHERE OUR PRINCIPAL
BUSINESS ADDRESS THEN IS LOCATED, AND YOU (AND EACH OWNER) IRREVOCABLY SUBMIT TO
THE JURISDICTION OF SUCH COURTS AND WAIVE ANY OBJECTION YOU (AND EACH OWNER) MAY
HAVE TO EITHER THE JURISDICTION OF OR VENUE IN SUCH COURTS. NOTWITHSTANDING THE
FOREGOING, YOU AND YOUR OWNERS AGREE THAT WE MAY ENFORCE THIS AGREEMENT AND ANY
ARBITRATION ORDERS IN THE COURTS OF THE STATE OR STATES IN WHICH YOU ARE
DOMICILED OR THE RESTAURANT IS LOCATED.
I. WAIVER OF PUNITIVE DAMAGES AND JURY TRIAL
EXCEPT FOR YOUR OBLIGATION TO INDEMNIFY US UNDER SECTION 16.D. AND
CLAIMS WE BRING AGAINST YOU FOR YOUR UNAUTHORIZED USE OF THE MARKS OR
UNAUTHORIZED USE OR DISCLOSURE OF ANY CONFIDENTIAL INFORMATION, WE AND YOU AND
YOUR RESPECTIVE OWNERS WAIVE TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO
OR CLAIM FOR ANY PUNITIVE OR EXEMPLARY DAMAGES AGAINST THE OTHER AND AGREE THAT,
IN THE EVENT OF A DISPUTE BETWEEN US, THE PARTY MAKING A CLAIM WILL BE LIMITED
TO EQUITABLE RELIEF AND TO
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RECOVERY OF ANY ACTUAL DAMAGES IT SUSTAINS.
WE AND YOU IRREVOCABLY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM, WHETHER AT LAW OR IN EQUITY, BROUGHT BY EITHER OF US.
J. BINDING EFFECT
This Agreement is binding upon us and you and our respective executors,
administrators, heirs, beneficiaries, assigns and successors in interest and may
not be modified except by a written agreement signed by you and us.
K. LIMITATIONS OF CLAIMS.
Except for claims arising from your non-payment or underpayment of
amounts you owe us under this Agreement, any and all claims arising out of or
relating to this Agreement or our relationship with you will be barred unless a
judicial or arbitration proceeding is commenced within one (1) year from the
date on which the party asserting the claim knew or should have known of the
facts giving rise to the claims.
L. CONSTRUCTION.
The preambles and exhibits are a part of this Agreement which, together
with the Operations Manual and our other written policies, constitutes our and
your entire agreement except as provided below, and there are no other oral or
written understandings or agreements between us and you relating to the subject
matter of this Agreement, except that you acknowledge that we justifiably have
relied on your representations made before the execution of this Agreement, as
set forth in Section 1. Except as contemplated by the arbitration provisions of
Section 17.F., nothing in this Agreement is intended, nor is deemed, to confer
any rights or remedies upon any person or legal entity not a party hereto.
Except where this Agreement expressly obligates us reasonably to
approve or not unreasonably to withhold our approval of any of your actions or
requests, we have the absolute right to refuse any request you make or to
withhold our approval of any of your proposed, initiated or effected actions
that require our approval.
The headings of the several sections and paragraphs hereof are for
convenience only and do not define, limit or construe the contents of these
sections or paragraphs.
References in this Agreement to "we," "us" and "our," with respect to
all of our rights and
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all of your obligations to us under this Agreement, will be deemed to include
any of our affiliates with whom you deal. The term "affiliate," as used herein
with respect to you or us, means any person or entity directly or indirectly
owned or controlled by, under common control with or owning or controlling you
or us. For purposes of this definition, `control" means the power to direct or
cause the direction of management and policies.
If two or more persons are at any time the Owner hereunder, whether as
partners or joint venturers, their obligations and liabilities to us will be
joint and several. References to "owner" mean any person holding a direct or
indirect, legal or beneficial ownership interest or voting rights in you (or a
transferee of this Agreement and the RESTAURANT or an interest in you),
including, without limitation, any person who has a direct or indirect interest
in you (or a transferee), this Agreement, the Franchise or the RESTAURANT and
any person who has any other legal or equitable interest, or the power to vest
in himself or herself any legal or equitable interest, in the revenue, profits,
rights or assets thereof. References to a "controlling interest" in you mean the
percent of your voting shares or other voting rights resulting from dividing one
hundred percent (100%) of such ownership interests by the number of your owners
immediately before or after the time the determination must be made. "Person"
means any natural person, corporation, limited liability company, general or
limited partnership, unincorporated association, cooperative or other legal or
functional entity.
The term `RESTAURANT" includes all of the assets of SOBIK'S SUBS
Restaurant you operate under this Agreement, including its revenue and income
and the Lease.
This Agreement may be executed in multiple copies, each of which will
be deemed an original.
18. NOTICES AND PAYMENTS
All written notices, reports and payments permitted or required to be
delivered by the provisions of this Agreement or the Operations Manual will be
deemed so delivered:
(1) at the time delivered by hand;
(2) at the time delivered via computer transmission and, in
the case of the Royalty and Marketing Fund contributions, at the time
we actually debit your account;
(3) one (1) business day after transmission by telecopy,
facsimile or other electronic system;
(4) one (1) business day after being placed in the hands of a
commercial courier
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service for next business day delivery; or
(5) three (3) business days after placement in the United
States Mail by Registered or Certified Mail, Return Receipt Requested,
postage prepaid;
and must be addressed to the party to be notified at its most current principal
business address of which the notifying party has been notified. Any required
payment or report which we do not actually receive during regular business hours
on the date due (or postmarked by postal authorities at least two (2) days
before then) will be deemed delinquent.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement effective on the date stated on the first page hereof.
JRECK SUBS GROUP, INC. OWNER
a Colorado corporation
(IF CORPORATION, LIMITED
LIABILITY COMPANY OR
PARTNERSHIP):
-------------------------------
[Name]
By: ________________________________ By: ___________________________
Title:_________________________ Its:_______________________
DATED:______________________________ DATED:_________________________
(IF INDIVIDUAL(S)):
-------------------------------
[Signature]
-------------------------------
[Print Name]
-------------------------------
[Signature]
-------------------------------
[Print Name]
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EXHIBIT A
TO THE FRANCHISE AGREEMENT
BETWEEN JRECK SUBS GROUP, INC.
AND ______________________
DATED ________, 199
Effective Date: This Exhibit A is current and complete
as of __________, 199
You and Your Owners
1. Form of Owner.
(a) Proprietorship. Your owner(s) (is) (are) as follows:
----------------------------
----------------------------
----------------------------
(b) Corporation, Limited Liability Company or Partnership. You
were incorporated or formed on ________________, 19_, under the laws of
the State of ____________________ You have not conducted business under
any name other than your corporate, limited liability company or
partnership name and ____________________. The following is a list of
your directors, if applicable, and officers as of the effective date
shown above:
Name of Each Director/Officer Position(s) Held
------------------------------------- -----------------------
------------------------------------- -----------------------
------------------------------------- -----------------------
------------------------------------- -----------------------
------------------------------------- -----------------------
2. Owners. The following list includes the full name and mailing
address of each person who is one of your owners (as defined in the Franchise
Agreement) and fully describes the nature of each owner's interest (attach
additional pages if necessary).
Owner's Name and Address Description of Interest
(a) _____________________________________ _______________________
B-50
<PAGE>
(b) _____________________________________ _______________________
(c) _____________________________________ _______________________
(d) _____________________________________ _______________________
JRECK SUBS GROUP, INC. OWNER
a Colorado corporation
(IF CORPORATION, LIMITED
LIABILITY COMPANY OR
PARTNERSHIP):
-------------------------------
[Name]
By: ________________________________ By: __________________________
Title:_________________________ Its:______________________
(IF INDIVIDUAL(S)):
-------------------------------
[Signature]
-------------------------------
[Print Name]
-------------------------------
[Signature]
-------------------------------
[Print Name]
B-51
<PAGE>
EXHIBIT B
EXCLUSIVE AREA
1. The Exclusive Area referred to in Section 1.D. of the Franchise
Agreement shall be as follows:
================================================================================
================================================================================
If the Exclusive Area is identified by counties or other political
subdivisions, political boundaries shall be considered fixed as of the date of
this Agreement and shall not change for the purpose hereof, notwithstanding a
political reorganization or change to the boundaries or regions. All street
boundaries shall be deemed to end at the street center line unless otherwise
specified above.
JRECK SUBS GROUP, INC. OWNER
a Colorado corporation
(IF CORPORATION, LIMITED
LIABILITY COMPANY OR
PARTNERSHIP):
-------------------------------
[Name]
By: ________________________________ By: ___________________________
Title:__________________________ Its:_______________________
(IF INDIVIDUAL(S)):
- -------------------------------- -------------------------------
[Signature] [Signature]
- -------------------------------- -------------------------------
[Print Name] [Print Name]
B-52
<PAGE>
GUARANTY AND ASSUMPTION OF OBLIGATIONS
THIS GUARANTY AND ASSUMPTION OF OBLIGATIONS is given this _____ day of
_____________, 19_, by _________________________________________________________
================================================================================
- --------------------------------------------------------------------------------
In consideration of, and as an inducement to, the execution of that
certain Franchise Agreement of even date herewith (the "Agreement") by Jreck
Subs Group, Inc. ("us," "we" or "our"), each of the undersigned hereby
personally and unconditionally (a) guarantees to us and our successors and
assigns, for the term of the Agreement and thereafter as provided in the
Agreement, that ("Owner") will punctually pay and perform each and every
undertaking, agreement and covenant set forth in the Agreement and (b) agrees to
be personally bound by, and personally liable for the breach of, each and every
provision in the Agreement, both monetary obligations and obligations to take or
refrain from taking specific actions or to engage or refrain from engaging in
specific activities.
Each of the undersigned consents and agrees that: (1) his direct and
immediate liability under this guaranty will be joint and several; (2) he will
render any payment or performance required under the Agreement upon demand if
Owner fails or refuses punctually to do so; (3) such liability will not be
contingent or conditioned upon our pursuit of any remedies against Owner or any
other person; and (4) such liability will not be diminished, relieved or
otherwise affected by any extension of time, credit or other indulgence which we
may from time to time grant to Owner or to any other person, including, without
limitation, the acceptance of any partial payment or performance or the
compromise or release of any claims, none of which will in any way modify or
amend this guaranty, which will be continuing and irrevocable during the term of
the Agreement.
Each of the undersigned waives all rights to payments and claims for
reimbursement or subrogation which any of the undersigned may have against Owner
arising as a result of the undersigned's execution of and performance under this
guaranty.
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has affixed his signature
on the same day and year as the Agreement was executed.
GUARANTOR(S)
- ---------------------------- ----------------------------------
<PAGE>
JRECK SUBS GROUP, INC.
FRANCHISE AGREEMENT
-----------------------------------
OWNER
-----------------------------------
DATE OF AGREEMENT
-----------------------------------
ADDRESS OF RESTAURANT
-----------------------------------
-----------------------------------
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION.
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TABLE OF CONTENTS
Page
1. PREAMBLES, ACKNOWLEDGMENTS AND GRANT OF FRANCHISE
2. SITE SELECTION, LEASE OF PREMISES
AND DEVELOPMENT AND OPENING OF RESTAURANT.
3. FEES
4. TRAINING AND ASSISTANCE
5. MARKS
6. CONFIDENTIAL INFORMATION
7. EXCLUSIVE RELATIONSHIP
8. SYSTEM STANDARDS
9. MARKETING
10. RECORDS, REPORTS AND FINANCIAL STATEMENTS
11. INSPECTIONS AND AUDITS
12. TRANSFER
13. EXPIRATION OF THIS AGREEMENT
14. TERMINATION OF AGREEMENT
15. OUR AND YOUR RIGHTS AND OBLIGATIONS UPON
TERMINATION OR EXPIRATION OF THIS AGREEMENT
16. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION
17. ENFORCEMENT
18. NOTICES AND PAYMENTS
EXHIBITS
EXHIBIT A - LISTING OF OWNERSHIP INTERESTS
EXHIBIT B - EXCLUSIVE AREA
OFFICE LEASE
THIS LEASE dated Dec 16, 1997, by and between SPRINGS EQUITY, LTD., a
Florida limited partnership, having an office at 100 East Sybelia Avenue, Suite
225, Maitland, Florida 32751 ("Landlord"), and JRECK SUBS GROUP, INC., a
Colorado corporation with a notice address at 24685 New York State Route 37,
Watertown, New York 13601 ("Tenant").
I. DEMISE OF PREMISES
In consideration of the Rent and the covenants and agreements made
herein, including the General Terms, Covenants and Conditions attached hereto
and made a part hereof, Landlord leases to Tenant and Tenant accepts from
Landlord the Premises (as outlined on the plan attached hereto as Exhibit A)
located in the Building.
II. TERMS
As used in this Lease, the following terms shall have the following
meanings:
A. Building: the building on the real property situated at 2101 W.
State Road 434, Longwood, Seminole County, Florida (the "Land") and shown on
Exhibit B.
B. Premises: that part of the Building outlined on Exhibit A, called
Suite 100, on the 1st floor of the Building, including all tenant improvements
made by Landlord pursuant to the Work Letter attached hereto as Exhibit C. The
Premises shall contain approximately 3.064 gross leasable square feet.
C. Building Manager: Tricor International Realty Corporation or such
other person as Landlord may
designate.
D. Estimated Commencement Date: January 1. 1998
E. Termination Date: the last day of the month corresponding to the
month in which the Commencement Date occurs, of the year which is 3 years
following the year in which the Commencement Date occurs, unless sooner
terminated as provided in the Lease.
F. Term: a period commencing on the Commencement Date and expiring at
midnight on the Termination Date.
G. Base Rent: $56,700.00
H. Monthly Installments of Base Rent: $4,725.00
I. Tenant's Proportionate Share: 9.3%
J. Base Year Stop: $203,788
K. Security Deposit: $5,100.00
L. Landlord's Mailing Address: 100 East Sybelia Avenue, Suite 225
Maitland, Florida 32751.
Tenant's Mailing Address: 2101 West State Road 434, Suite 100
Longwood, Florida 32779
M. Normal Business Hours: the hours from 7:00 a.m. to 7 00 p.m. Monday
through Friday and 8:00 a.m. to 1:00 p.m. on Saturday, except recognized
holidays.
N. State: The State of Florida.
O. CPI: United States Bureau of Labor Statistics Consumer Price Index
for Urban Wage Earners and Clerical Workers (Revised Series), All Items,
Southeast Region. The CPI for a specific date (as required by this Lease) shall
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be deemed to mean the CPI published on that date or, if not published on that
date, the most recent publication of the CPI prior to such date. If publication
of the CPI shall be discontinued, "CPI" shall be such other source selected by
Landlord, in its reasonable judgment, as is most nearly comparable to the CPI as
defined above.
P. Permitted Use: general office purposes.
Q. Tenant's Representatives: Tenant's employees, agents, contractors,
licensees and invitees.
R. Common Areas: Lobby area, corridors and lavatories on the floor on
which the Premises are situated, stairways, elevators, shipping and receiving
areas, mechanical areas, plaza and other adjacent areas exterior to the
Building.
S. Property: the Land and the Building,, including all Common Areas.
III. EXHIBITS AND RIDERS
The exhibits and riders listed below arc incorporated in this Lease and are to
be constructed as part hereof:
"A" Plan showing the Premises
"B" Legal Description
"C" Work Letter
"D" Rules and Regulations
"E" Plans and Specifications of Leasehold Improvements and Tenant
Layout (if applicable)
"F" Guaranty of Lease
Riders (if applicable):
IN WITNESS WHEREOF, Landlord and Tenant have executed or caused to be
executed this lease as of the date first above written.
Witnesses: TENANT:
JRECK SUBS GROUP, INC.
______________________________ By:____________________________
Bradley L. Gordon
______________________________ Its: COO
LANDLORD:
SPRINGS EQUITY, LTD.
______________________________ By:____________________________
Marc L. Hagle, President
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GENERAL TERMS, COVENANTS AND CONDITIONS
1. Commencement Date
(a) The rights, duties and obligations of the parties under this Lease
shall be effective upon the execution hereof, except that Tenant's obligation to
pay rental hereunder shall commence upon the first to occur of the following
dated (the "Commencement Date"): (1) the date on which the Leasehold
Improvements in the Premises are substantially completed; or (2) thirty (30)
days following the date on which Tenant takes possession of and occupies the
Premises for installation of furniture or fixtures or otherwise; or (3) on the
Estimated Commencement Date, provided a Certificate of Occupancy or a Temporary
Certificate of Occupancy has been issued for the Premises by such date. The
Premises shall be deemed ready for occupancy when Landlord has substantially
completed the work described in Exhibit "C" attached hereto.
(b) If Landlord is unable to deliver possession of the Premises to
Tenant on the Estimated Commencement Date because of the holding-over by any
occupant of the Premises, or because the Premises are not substantially
completed, or for any other reason, this Lease shall continue in effect and
Landlord shall not be liable to Tenant or any third party for such inability;
provided, however, the Commencement Date shall be delayed (provided Tenant is
not responsible for its inability to take possession) until that date 15 days
after Landlord gives Tenant notice that the Premises are ready for occupancy. If
Landlord fails to give such notice within 180 days after the Estimated
Commencement Date, Tenant shall have the right to terminate this Lease by notice
to Landlord within 10 days of the end of said 180 day period. If Landlord fails
to give such notice within one year after the Estimated Commencement Date. this
Lease shall be null and void.
(c) If Landlord gives Tenant permission to enter into possession of the
Premises prior to the Commencement Date, such possession shall be deemed to be
upon all the terms, covenants, conditions and provisions of this Lease,
including payment of the Rent.
(d) If the substantial completion of the Premises by Landlord is
delayed due to any act or omission of Tenant or Tenant's Representatives,
including any delays by Tenant in the submission of plans, drawings,
specifications or other information or in approving any working drawings or
estimates or in giving any authorization or approval, the Premises shall be
deemed substantially completed on the date when they would have been ready but
for such delay.
(e) The Premises shall be deemed substantially completed and ready for
occupancy upon the issuance of a certificate of substantial completion by
Landlord's architect or of a certificate of occupancy by the local building
authority, notwithstanding that minor or insubstantial details of construction,
mechanical adjustment or decoration remain to be performed.
2. Rent
(a) Tenant shall pay Monthly Installments of Base Rent in advance on
the first day of each month of the Term. If the Term shall commence or end on a
day other than the first day of a month, such installments for the first or last
partial month shall be prorated on a per-diem basis.
(b) Tenant shall assume and pay to Landlord at the time of paying the
Rent any excise, sales, use, gross receipts or other taxes (other than a net
income or excess profits tax) which may be imposed on or measured by such Rent
or may be imposed on or on account of the letting and which Landlord may bc
required to pay or collect under any law now in effect or hereafter enacted.
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(c) All costs and expenses which Tenant assumes or agrees to pay and
any other sum payable by Tenant pursuant to this Lease shall be deemed
additional rent (together with Base Rent sometimes referred to as the "Rent").
The Rent shall be paid in lawful money of the United States of America to the
Building Manager or to each other person or at such other place as Landlord may
from time to time designate in writing, without any prior notice or demand
therefor and without any deduction or offset whatsoever.
(d) If any part of the Rent is not paid within ten (I0) days after it
is due, Tenant shall pay Landlord the greater of: (i) a late charge of five
percent (5%) of the amount due; or (ii) interest at eighteen percent (18%) per
annum, or the highest rate permitted by law, whichever is less, on the amount
due from its due date until paid.
3. Increases in Base Rent
Commencing the second lease year and each subsequent lease year of the
original term of this Lease and any renewal thereof, the Base Rent shall be
adjusted annually as follows:
(a) The Base Rent for the immediately preceding twelve months of the
term of this Lease shall be multiplied by a fraction, the denominator of which
shall be the CPI for the first month of the immediately preceding twelve (12)
month period, and the numerator of which shall be the CPI for the month
commencing the next ensuing year of said term.
(b) The figure resulting from the calculations set forth in subsection
(a) shall be the new Base Rent for the next ensuing year of the lease term.
(c) Notwithstanding any other provision herein to the contrary, in the
event the Base Rent figure obtained by the method specified in subsections (a)
and (b) above is less than six percent (6%) more than Tenant's current Base Rent
during the immediately preceding year, then the Base Rent figure to be used
during the next twelve months will be a sum equal to the Base Rent figure paid
by Tenant during the preceding twelve months plus six percent (6%) thereof.
4. Operating Expenses
(a) In addition to the Base Rent and the Common Area Maintenance
Charge, Tenant shall pay Landlord an amount equal to Tenant's Proportionate
Share of the total Operating Expenses (as hereinafter defined) incurred by
Landlord for or during each calendar year during the term in excess of the Base
Year Stop (such excess hereinafter referred to as the "Excess Expenses");
provided, however, in no event shall Tenant's Proportionate Share of the Excess
Expenses for any calendar year be Icss than that for the Base Year.
(b) (i) "Real Estate Taxes" shall mean and include: (1) all general and
special taxes, assessments, duties and levies, if any, payable (adjusted after
protest or 1itigation, if any) for any part of the Term, exclusive of penalties
or discounts on the Property; (2) any taxes which shall be levied on the rentals
of the Building in lieu of any such Real Estate Taxes in whole or in part; (3)
the reasonable expenses of contesting the amount or validity of any such taxes,
charges or assessments, such expense to be applicable to the period of time
contested
(ii) "Operating Expenses" shall mean all expenses paid or incurred by
Landlord or on Landlord's behalf in respect of the management, repair, operation
and maintenance of the Property, excluding, however, all expenses related to
space leased to First Union National Bank (notwithstanding any provisions herein
to the contrary). Tenant's Proportionate Share has been computed based upon an
exclusion of all space leased to First Union National Bank. Operating Expenses
shall include but not be limited to the following:
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(1) salaries, wages and benefits of employee of Landlord engaged in the
management, repair, operation and maintenance of the Property, (2) payroll
taxes, workmen's compensation, uniforms and related expenses for such employees;
(3) the cost of all charges for oil, gas, steam, electricity, any alternate
source of energy, heat, ventilation, air-conditioning, water, sewers and other
utilities furnished to the Building or Property (including the Common Areas and
leased areas thereof), together with any taxes on such utilities; (4) the cost
of painting non-tenant space; (5) the cost of all charges for rent, casualty,
liability and fidelity insurance with regard to the Property and the maintenance
or operation thereof; (6) the cost of all supplies (including cleaning
supplies), tools, materials and equipment, the rental thereof and sales and
other taxes thereon; (7) depreciation of hand tools and other removable
equipment used in the repair, operation or maintenance of the Building; (8) the
cost of all charges for window and other cleaning and janitorial, snow and ice
removal, and security services; (9) charges of independent contractors; (10)
repairs and replacements made by Landlord at its expense; (11) exterior and
interior landscaping; (12) alterations and improvements to the Building made by
reason of the laws and requirements of any public authorities or the
requirements of insurance bodies; (13) management fees or, if no managing agent
is employed hy Landlord, a sum in lieu thereof which is not in excess of the
then prevailing rates for management fees of other first class office buildings
in the area in which the Building is located; (14) the cost of any capital
improvements or additions to the Building which improve the comfort or amenities
available to tenants of the Building; (15) the cost of any capital improvements
or additions to the Building and of any machinery or equipment installed in the
Building which are made or become operational, as the case may be, during the
Term and which have the effect of reducing the expenses which otherwise would be
included in Operating Expenses to the extent of the lesser of (A) such cost, as
reasonably amortized by Landlord with interest on the unamortized amount at the
prime rate then generally available in the State, or (B) the amount of such
reduction in Operating Expenses; (16) reasonable legal, accounting and other
professional fees incurred in connection with the operation, maintenance and
management of the Property; (17) Real Estate Taxes; and (18) all other charges
properly allocable to the repair, operation and maintenance of the Building in
accordance with generally accepted accounting principles. Excluded from
Operating Expenses shall be the following: (aa) depreciation (except as provided
above); (bb) interest on and amortization of debts; (cc) leasehold improvements
including redecorating made for tenants of the Building, (dd) brokerage
commissions and advertising expenses for procuring new tenants of the Building;
(ee) refinancing costs; (ff) the cost of any repair or replacement, other than
as described in clauses (10), (12), (14) or (15) above, which would be required
to be capitalized under generally accepted accounting principles, except that if
under such principles such costs may be amortized over a period of not more than
10 years, then a proportionate part of such cost may be included each year in
Operating Expenses over the useful life (as reasonably estimated by Landlord) of
such repair or replacement; (gg) the cost of any item included in Operating
Expenses under clauses (1)-(18) to the extent that such cost is reimbursed by an
insurance company or a condemnor or a tenant (except as a reimbursement of
Operating Expenses) or any other party, but if at the time Operating Expenses
are determined for a calendar year such reimbursement has not been made, such
expenses may be included in Operating Expenses and an adjustment shall be made
when and if such reimbursement is actually received.
(c) In order to provide for current payments on account of Excess
Expenses. Tenant shall, at Landlord's request, pay as additional rent, an amount
equal to Tenant's Proportionate Share of the Excess Expenses due for the ensuing
12 months, as estimated by Landlord from time to time, in 12 equal monthly
installments, commencing on the first day of the month following the month in
which Landlord notifies Tenant of the amount. It is the intention hereunder to
estimate the amount of the Excess Expenses for each calendar year and then to
adjust such estimate in the following year based on the actual Excess Expenses
incurred or paid by Landlord.
(d) On or before March 1 of each calendar year (or as soon thereafter
as is practical), Landlord or the Building Manager shall deliver to Tenant a
statement, certified by an officer of Landlord, of Tenant's Proportionate Share
of the Excess Expenses for the preceding calendar
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year. If Tenant's Proportionate Share of the actual Excess Expenses for the
previous calendar year exceeds the aggregate of the estimated monthly payments
made by Tenant for such year, Tenant shall within 10 days of the receipt of the
statement, tender to Landlord an amount equal to such excess as additional rent.
If such aggregate of the estimated monthly payments exceeds Tenant's
Proportionate Share of the actual Excess Expenses for such calendar year, then
Landlord shall credit against Tenant's next ensuing monthly installment or
installments of the Rent an amount equal to such difference until the credit is
exhausted. (e) If a credit is due from Landlord on the Termination Date, Tenant
shall be entitled to receive the amount of the credit in the form of payment
from Landlord, provided, however, that Landlord may, in lieu of such payment,
apply the credit against any Rent which is due but not paid on said date. No
interest or penalties shall accrue on any amounts which Landlord is obliged to
credit or pay to Tenant by reason of this Section. The obligations of Tenant and
Landlord to make payments or credits required by this Section shall survive the
Termination Date.
(f) Each statement given by Landlord or the Building Manager pursuant
to this Section shall be conclusive and binding upon Tenant unless within 30
days after the receipt of such statement Tenant shall notify Landlord that it
disputes the correctness of the statement, specifying the particular respects in
which it is claimed to be incorrect. If such dispute shall not have been settled
by agreement, then, pending the legal determination of such dispute by a later
agreement or litigation, Tenant shall pay additional rent in accordance with
such statement and such payment shall be without prejudice to Tenant's position.
If the dispute shall be determined in Tenant's favor, Landlord shall forthwith
credit Tenant the amount of Tenant's overpayment of additional rent resulting
from compliance with Landlord's statement. Landlord shall grant Tenant
reasonable access to Landlord's books and records for the purpose of verifying
the Excess Expenses.
(g) If the Commencement Date is other than January 1, Tenant's
Proportionate Share of Excess Expenses for the calendar year in which the
Commencement Date occurs shall be multiplied by a fraction, the numerator of
which shall be the number of days from the Commencement Date to the following
December 31 and the denominator of which shall be 365.
5. Services
(a) Climate Control: Landlord shall provide climate control to the
Premises during Normal Business Hours as required in Landlord's reasonable
judgment for the comfortable use and occupation of the Premises. If Tenant
requires climate control at any other time, Land1ord shall use reasonable
efforts to furnish such service upon reasonable notice from Tenant, and Tenant
shall pay Landlord's charges therefor on demand.
The performance by Landlord of its obligations under this Section 5(a)
is subject to Tenant's compliance with the conditions of occupancy and connected
electrical load established by Landlord. Use of the Premises or any part thereof
in a manner exceeding the heating, ventilating or air conditioning design
conditions (including occupancy and connected electrical load), including
rearrangement of partitioning which interferes with normal operation of the
heating, ventilating or air conditioning in the Premises, or the use of computer
or data processing, machines or other machines or equipment, may require changes
in the heating, ventilating, air-conditioning or plumbing systems or controls
servicing the Premises or portions thereof, in order to provide comfortable
occupancy. Any such required change shall be made by Landlord at Tenant's
expense as alterations in accordance with the provisions of Section 7, but only
to the extent permitted and upon the conditions set forth in that Section.
(b) Elevator Service: Landlord shall furnish elevator service at all
times, to be used by Tenant in common with others.
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(c) Janitorial Services: Landlord shall make janitorial and cleaning
services available to the Premises. Tenant shall pay to Landlord on demand the
costs incurred by Landlord for (i) extra cleaning in the Premises required
because of (A) misuse or neglect on the part of Tenant or Tenant's
Representatives, (B) the use of portions of the Premises for special purposes
requiring greater or more difficult cleaning work than office areas, (C)
interior glass partitions or unusual quantities of interior glass surfaces and
(D) non-building standard materials or finishes installed by Tenant or at its
request; and, (ii) removal from the Premises of any refuse and rubbish of Tenant
in excess of that ordinarily accumulated in general office occupancy or at times
other than Landlord's standard cleaning times.
(d) Water and Electricity: (i) Landlord shall make available domestic
water in reasonable quantities to the Common Areas (and to the Premises if so
designated in Exhibit C) and cause electric service, sufficient to service the
electrical systems set forth in Exhibit C, to be supplied for lighting the
Premises and for the operation or ordinary office equipment. "Ordinary office
equipment" shall mean office equipment wired for 120 volt electric service and
rated and using less than 6 amperes or 750 watts of electric current. (ii)
Landlord shall have the exclusive right to make any replacement of lamps,
fluorescent tubes and lamp ballasts in the Premises. Landlord may adopt a system
of relamping and ballast replacement periodically on a group basis in accordance
with good management practice. (iii) Tenant's use of electric energy in the
Premises shall not at any time exceed the capacity of any of the risers, piping,
electrical conductors and other equipment in or serving the Premises. In order
to insure that such capacity is not exceeded and to avert any possible adverse
effect upon the Building's electrical system, Tenant sha11 not, without
Landlord's prior written consent in each instance, connect appliances or heavy
duty equipment, other than ordinary office equipment, to the Building's
electrical system or make any alteration or addition to the Building's electric
system. Should Landlord grant such consent, all additional risers, piping and
electrical conductors or other equipment therefor shall be provided by Landlord
and the cost thereof shall bc paid by Tenant within 10 days of Landlord's demand
therefor. As a condition to granting such consent, Landlord may require Tenant
to agree to an increase in Base Rent by the expected cost to Landlord of such
additional service, that is, the cost of the additional electric energy to be
made available to Tenant based upon the estimated additional capacity of such
additional risers, piping and electrical conductors or other equipment.
(e) Landlord may install separate meters for the Premises to register
the usage of all or any one of the utilities and in such event Tenant shall pay
for the cost of any utility usage as metered which is in excess of that usage
reasonably anticipated by Landlord. Tenant shall reimburse Landlord for the cost
of installation of meters if such usage exceeds such anticipated usage by more
than 10 percent. In any event, Landlord may require Tenant to reduce its
consumption to such anticipated usage.
(f) Landlord does not warrant that any of the services referred to
above, or any other services which Landlord may supply, will be free from
interruption, and Tenant acknowledges that any one or more such services may be
suspended by reason of accident, repair, inspections, alterations or
improvements necessary to be made, or by strikes or lockouts, or by reason of
operation of law, or causes beyond the reasonable control of Landlord. Any
interruption or discontinuance of service shall not be deemed an eviction or
disturbance of Tenant's use and possession of the Premises, or any part thereof,
nor render Landlord liable to Tenant for damages by abatement of the Rent or
otherwise, nor relieve Tenant from performance of Tenant's obligations under
this Lease. Landlord shall, however, exercise reasonable diligence to restore
any service so interrupted. In the event of any power failure, Tenant agrees to
evacuate all persons from the Premises for the duration of the power failure.
6. Condition of the Premises
Tenant's taking possession of the Premises shall be conclusive evidence
that the Premises were in good order, condition and repair when Tenant took
possession, except for such matters of which Tenant gives Landlord notice on or
before the Commencement Date. No promise of Landlord to alter, remodel, repair
or improve the Premises or the Building and no representation, either
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expressed or implied, respecting any matter or thing relating to the
Building or this Lease (including the condition of the Premises or the Building)
have been made by Landlord to Tenant, other than as may be contained herein or
in a separate Exhibit signed by Landlord and Tenant.
7. Repairs, Maintenance and Alterations
(a) Tenant shall keep the Premises, including the Leasehold
Improvements and Tenant's Property, neat, clean, and in good order and
condition. Tenant shall give Landlord prompt notice of any damage to or
defective condition in any part or appurtenance of the Premises, the Leasehold
Improvements, Tenant's Property, or the Building (including mechanical,
electrical, plumbing, heating, ventilating, air conditioning and other equipment
facilities and systems located within or serving the Building, hereinafter the
"Building Systems"). Tenant shall be responsible for al1 repairs, replacements
and alterations in and to the Premises, the Leasehold Improvements, and Tenant's
Property and for all repairs, replacements and alterations in and to the
Building and the Building Systems, the need for which arises out of: (i)
Tenant's misuse or occupancy of the Premises; (ii) the installation or use of
Tenant's Property in the Premises; (iii) the moving of Tenant's Property into or
out of the Building; or (iv) any other act or omission of Tenant or Tenant's
Representatives; provided, however, that such repairs, replacements or
alterations (other than to Tenant's Property) shall be made by Landlord and
Tenant shall pay Landlord within 10 days of demand the cost therefor plus 15
percent for Landlord's overhead and profit. Landlord may, before commencing any
such work or at any time thereafter, require Tenant to furnish to Landlord such
security in form (including a bond issued by a surety satisfactory to Landlord)
and amount as Landlord shall deem necessary.
(b) Landlord reserves the right to stop services on the heating, air
conditioning, elevator, plumbing and electrical systems, when in Landlord's
reasonable judgment, the same is deemed necessary by reason of accident,
emergency or for repairs, alterations, replacements or improvements thereto,
provided that except in case of emergency, Landlord will notify Tenant in
advance, if possible, of any such stoppage and, if ascertainable, its estimated
duration, and will proceed with the work necessary to resume such service as
promptly as possible and in a manner and at times, including after business
hours, so as not to unduly interfere with or impair Tenant's use and enjoyment
of the Premises.
(c) Tenant shall not place a load upon any floor of the Premises which
exceeds the load per square foot which such floor was designed to carry.
(d) Tenant shall not install business machines or mechanical equipment
which cause noise or vibration that may be transmitted to the structure of the
Building
(e) Landlord (except as provided in Section 7(a)) shall, at Land1ord's
expense, repair, replace and maintain the external and structural parts of the
Building which do not constitute a part of the Premises and are not leased to
others, and shall perform such repairs, replacements and maintenance with
reasonable dispatch, in a good and workmanlike manner.
(f) Except as provided herein, Landlord shall have no liability to
Tenant nor shall Tenant's covenants and obligations under this Lease be reduced
or abated in any manner whatsoever by reason of any inconvenience, annoyance,
interruption or injury to business arising from Landlord's making any repairs or
changes which Landlord is required or permitted by this Lease or by any other
tenant's lease or required by law to make in or to any portion of the Premises,
the Building or the Building Systems. Landlord shall nevertheless use its best
efforts to minimize any interference with Tenant's business in the Premises.
(g) Tenant shall not make any alteration in or to the Premises without
the prior written consent of Landlord. If alterations requested by Tenant are
made by Landlord, Tenant shall pay Landlord within ten days of demand the cost
therefor plus 15 percent for Landlord's overhead and profit. If
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Landlord gives its consent to the making of alterations by Tenant, all such work
shall be done in accordance with such requirements and upon such conditions as
Land1ord, in its sole discretion, may impose. Any review or approval by Landlord
of any plans or specifications with respect to any alteration is solely for
Landlord's benefit, and without any representation or warranty whatsoever to
Tenant with respect to the adequacy, correctness or efficiency thereof or
otherwise.
(h) Tenant shall defend, indemnify and save harmless Landlord from and
against any and all mechanics' and other liens and encumbrances filed by any
person claiming through or under Tenant, including security interests in any
materials, fixtures, equipment or any other improvements or appurtenances
installed in and constituting part of the Premises and against all costs,
expenses and liabilities (including reasonable attorneys' fees) incurred in
connection with any such lien or encumbrance or any action or proceeding brought
thereon. Tenant at its expense shall procure the satisfaction or discharge of
record of all such liens and encumbrances within 20 days after the filing
thereof. Under no circumstances shall the interest of Landlord in and to the
Land or the Building be subject to liens for improvements made by Tenant.
(i) If there now is or shall be installed in the Building a "sprinkler
system" and such system or any of its appliances shall be damaged or injured, by
reason of any act or omission of Tenant, or Tenant's agents, servants,
employees, licensees or visitors, Tenant shall forthwith restore the same to
good working condition at its own expense; and if the Board of Fire Underwriters
or any bureau, department or official of the state or city government having
jurisdiction shall require or recommend that any changes, modifications,
alterations or additional sprinkler heads or other equipment bc made or supplied
by reason of Tenant's business, or the location of partitions, trade fixtures,
or other contents of the Premises, after initial occupancy, or if any such
changes, modifications, alterations, additional sprinkler heads or other
equipment, become necessary to prevent the imposition of a penalty or charge
against the full allowance for a sprinkler system in the first insurance rate as
fixed by said exchange, or by a fire insurance company, Tenant shall, at
Tenant's expense, promptly make and supply such changes, modifications,
alterations, additional sprinkler heads or other equipment.
8. Use of the Premises; Rules and Regulations
(a) Tenant shall use the Premises only for the Permitted Use and all
other uses or purposes are strictly prohibited. Tenant shall not at any time use
or occupy, or suffer or permit anyone to use or occupy, the Premises or do or
permit anything to be done in the Premises which: (a) causes or is liable to
cause injury to persons, to the Building or its equipment, facilities or
systems; (b) impairs or tends to impair the character, reputation or appearance
of the Building as a first class office building; (c) impairs or tends to impair
the proper and economic maintenance, operation and repair of the Building or its
equipment, facilities or systems; or (d) annoys or inconveniences or tends to
annoy or inconvenience other tenants or occupants of the Building.
(b) Tenant shall comply with (and cause Tenant's Representatives to
comply with) the rules and regulations attached hereto as Exhibit D and with
such reasonable modifications thereof and additions thereto as Landlord may from
time to time make; provided, however, in no event shall such rules or
regulations contradict or abrogate any right or privilege herein expressly
granted to Tenant in this Lease. Landlord shall not be responsible for the
violation by anyone of any of said rules and regulations.
9. Construction of the Premises and Leasehold Improvements
(a) Landlord, at its sole cost and expense, except as otherwise
provided herein, shall do that portion of the construction and other items of
work in the Premises designated as "Landlord's Work" or "Building Standard
Improvements" as set forth in Exhibit "C" hereof. If Tenant desires improvements
other than the Building Standard Improvements, Tenant agrees to comply with the
provisions of Exhibit "C."
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(b) All fixtures, equipment, improvements and appurtenances attached to
or built into the Premises, whether or not by or at the expense of Tenant, and
any carpeting or other personal property in the Premises on the Commencement
Date installed by Landlord (collectively hereinafter "Leasehold Improvements"):
(i) shall be and remain a part of the Premises; (ii) shall be deemed the
property of Landlord; and (iii) shall not be removed by Tenant.
(c) All movable partitions, other business and trade fixtures,
furnishings, furniture, machinery and equipment, communications equipment, and
other personal property located in the Premises and acquired by or for the
account of Tenant, without expense to Landlord, which can be removed without
damage to the Building (collectively sometimes hereinafter called "Tenant's
Property"), shall be and shall remain the property of Tenant and, except as
otherwise prohibited by this Lease, may be removed by it at any time during the
Term; provided that, if any of Tenant's Property is removed, Tenant shall pay
the cost of repairing any damage to the Premises or to the Building resulting
from such removal in accordance with Section 7(a).
10. Memorandum of Lease
If Landlord so requests, Landlord and Tenant shall promptly execute,
acknowledge and deliver a memorandum with respect to this Lease sufficient for
recording. In no event shall this Lease be recorded and if Tenant records this
Lease in violation of the terms hereof, in addition to any other remedy
available to Landlord upon Tenant's default, Landlord shall have the option to
terminate this Lease by recording a notice to such effect. If a memorandum of
lease is recorded, on the Termination Date, Tenant shall execute, acknowledge
and deliver to Landlord an instrument in writing releasing and quitclaiming to
Landlord all right, title and interest of Tenant in and to the Premises by
reason of this Lease or otherwise.
11. Rights Reserved to Landlord
Landlord reserves the following rights, exercisable without liability
to Tenant for damage or injury to property, person or business and without
effecting an eviction, constructive or actual, or disturbance of Tenant's use or
possession or giving rise to any claim:
(a) To name the Building and to change the name or street address of
the Building;
(b) To install and maintain all signs on the exterior and interior of
the Building;
(c) To designate all sources furnishing sign painting and lettering;
(d) During the last 90 days of the Term, if Tenant has vacated the
Premises, to decorate, remodel, repair, alter or otherwise prepare the Premises
for reoccupancy, without affecting Tenant's obligation to pay Rent for the
Premises;
(e) To have pass keys to the Premises and all doors therein, excluding
Tenant's vaults and safes;
(f) On reasonable prior notice to Tenant, to exhibit the Premises to
any prospective purchaser, mortgagee or assignee of any mortgage on the Building
or Land and to others having an interest therein at any time during the Term,
and to prospective Tenants during the last six months of the Term;
(g) To take any and all measures, including entering the Premises for
the purpose of making inspections, repairs, alterations, additions and
improvements to the Premises or to the Building (including for the purpose of
checking, calibrating, adjusting and balancing controls and other parts of the
Building Systems), as may be necessary or desirable for the operation,
improvement, safety, protection or preservation of the Premises or the Building,
or in order to comply with all laws, orders and requirements of governmental or
other authority, or as may otherwise be permitted or required by this Lease;
provided, however, that Landlord shall use its best efforts (except in an
emergency) to minimize interference with Tenant's business in the Premises;
(h) To relocate various facilities within the Building and on the Land
if Landlord shall determine such location to be in the best interest of the
development of the Building and Land, provided that such relocation shall not
materially restrict access to the Premises; and
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(i) To install vending machines of all kinds in the Premises and the
Building and to receive all of the revenue derived therefrom, provided, however,
that no vending machines shall be installed by Landlord in the Premises unless
Tenant so requests.
12. Assignment and Subletting
Tenant shall not transfer, assign, mortgage or encumber this Lease or
sublet or permit the Premises to be used by others, without the prior written
consent of Landlord. In the event Tenant shall be a corporation, any transfer,
sale, pledge, or other disposition of a material stock interest of Tenant shall
be deemed an assignment of this Lease. If this Lease is assigned or if the
Premises or any part thereof is sublet or occupied by anyone other than Tenant
without the express written consent of Landlord, Landlord may collect rent from
the assignee, subtenant, or occupant and apply the net amounts collected to all
rent herein reserved, but no assignment, subletting, occupancy or collection
shall be deemed a waiver of the covenants contained herein or the acceptance of
the assignee, subtenant or occupant as Tenant or a release of the performance of
the covenants of Tenant's part herein contained. In the event Landlord's written
consent is given to an assignment or subletting, Tenant and any guarantor shall
nevertheless remain liable to perform all covenants and conditions hereof and to
guarantee such performance by the assignee or subtenant. If Landlord shall
consent to an assignment of this Lease, no further or additional assignments may
be made without the prior written consent of Landlord.
13. Holding Over
If Tenant retains possession of the Premises or any part thereof after
the Termination Date, Tenant's occupancy of the Premises shall be as a tenant at
will, terminable at any time by Landlord. Tenant shall pay Landlord rent for
such time as Tenant remains in possession at the rate of 200 percent of the
total amount of the Rent payable hereunder for the month immediately preceding
the Termination Date, and. in addition thereto, shall pay Landlord for all
damages sustained by reason of Tenant's retention of possession. The provisions
of this Section do not exclude Landlord's rights of re-entry or any other right
hereunder.
14. Surrender of the Premises
(a) Tenant, on the Termination Date, shall peaceably surrender the
Premises, including the Leasehold Improvements, in broom-clean condition and
otherwise in as good condition as when Tenant took possession. except for: (i)
reasonable wear and tear subsequent to the last repair, replacement,
restoration, alteration or renewal required by this Lease; (ii) loss by fire or
other casualty, and (iii) loss by condemnation. Tenant shall, on Landlord's
request, remove Tenant's Property on or before the Termination Date and pay the
cost of repairing all damage to the Premises or the Building caused by such
removal in accordance with Section 7(a).
(b) If Tenant abandons or surrenders the Premises, or is dispossessed
by process of law, or otherwise, any of Tenant's Property (except money,
securities and other like valuables) left on the Premises shall be deemed
abandoned; and title thereto shall automatically pass to Landlord under this
Lease as by a bill of sale. Thereafter, Landlord may in its sole and absolute
discretion choose to remove, store or otherwise dispose of such property in any
manner it may deem commercially reasonable. However, the proceeds from the
disposition of such property shall be applied first against the balance of any
sums owed to Landlord by Tenant and then against the costs of the removal or
disposition.
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(c) On the Termination Date, Tenant shall surrender all keys to the
Premises.
15. Destruction or Damage
(a) If the Building or the Premises are damaged or destroyed by fire or
other casualty, and this Lease is not terminated as provided below, Landlord
shall repair the damage and restore or rebuild the Building and the Premises (as
the case may be), at its expense, with reasonable dispatch after notice to it of
the damage or destruction; provided, however, that Landlord shall not be
required to repair or replace any of Tenant's Property or any alteration or
Leasehold Improvements made by Tenant.
(b) If the Premises are partially damaged or destroyed by fire or other
casualty, the Rent shall equitably abate, to the extent that the Premises are
rendered untenantable, for the period from the date of such damage or
destruction to the date the damage is repaired or restored.
(c) If the Building or the Premises is substantially damaged or
destroyed by fire or other casualty, Landlord may terminate this Lease by notice
to Tenant within 90 days after the date of the casualty, and this Lease shall
terminate upon the 30th day after such notice, by which date Tenant shall vacate
and surrender the Premises to Landlord. The Rent shall be prorated to the date
of the casualty. The Premises or Building (whether or not the Premises are
damaged) shall be deemed substantially damaged or destroyed if (i) Land1ord is
required to expend for repairs more than 20 percent of the replacement value of
the Building immediately prior to the casualty or (ii) restoration is not
possible in accordance with Landlord's reasonable estimate within 180 days
following the date the damage occurred.
(d) Tenant may not terminate this Lease or repair the Premises at
Landlord's expense as a result of a casualty, and no damages, compensation or
claim shall be payable by Landlord for any casualty, or any inconvenience, loss
of business or annoyance arising from any repair or restoration of any portion
of the Premises or of the Building pursuant to this Section. Landlord shall use
its best efforts to make such repair or restoration promptly and in such manner
as will not unreasonably interfere with Tenant's use and occupancy of the
Premises, but Landlord shall not be required to do such repair or restoration
work except during Normal Business Hours.
16. Eminent Domain
(a) If the whole of the Building is lawfully taken by condemnation or
any other manner for any public or quasi-public purpose, this Lease shall
terminate as of the date of vesting of title in such condemning authority (which
date is hereinafter also referred to as the "date of taking"), and the Rent
shall be prorated to such date. If any part of the Building or Land is so taken,
this Lease shall be unaffected by such taking, except that (i) Landlord may
terminate this Lease by notice to Tenant within 90 days after the date of
taking, and (ii) if 20 percent or more of the Premises shall be taken and the
remaining area of the Premises shall not be reasonably sufficient for Tenant to
continue operation of its business, Tenant may terminate this Lease by notice to
Landlord within 90 days after the date of taking. This Lease shall terminate on
the 30th day after such notice, by which date Tenant shall vacate and surrender
the Premises to Landlord. The Rent shall be prorated to the earlier of the
Termination Date or such date as Tenant is required to vacate the Premises by
reason of the taking. If this Lease continues in force upon such partial taking,
the Rent and Tenant's Proportionate Share shall be equitably adjusted according
to the rentable area of the Premises and Building remaining.
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(b) In the event of any taking, all of the proceeds of any award,
judgment or settlement payable by the condemning authority shall be and remain
the sole and exclusive property of Landlord, and Tenant hereby assigns all of
its right, title and interest in and to any such award, judgment or settlement
to Landlord. Tenant, however, shall have the right, to the extent that the same
shall not reduce or prejudice Landlord's award, to claim from the condemning
authority, but not from Landlord, such compensation as may be recoverable by
Tenant in its own right for moving expenses and damage to Tenant's Property.
17. Indemnification
[text missing]
18. [text missing]
[text missing]
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by insurance companies authorized to do business in the State with a financial
rating of at least an A+ as rated in the most recent edition of Best's Insurance
Reports, and in business for the past five (5) years. The aforesaid insurance
limits may be reasonably increased from time to time by Landlord.
(b) If during the Term insurance premiums on any insurance policy
carried by Landlord on the Building or the Premises are increased due to or
resulting from Tenant's occupancy hereunder, Tenant shal1 pay to Landlord as
additional rent the amount of such increase in insurance premiums. Any amount
payable by Tenant hereunder shall be paid to Landlord within 10 days after
notice to Tenant accompanied by the premium notice or other evidence of the
amount due.
19. Subordination and Attornment
(a) This Lease and all rights of Tenant hereunder shall be subordinate
to all ground leases (referred to as the "leases") of the Building or Land now
or hereafter existing and to all mortgages (referred to as the "mortgages")
which may now or hereafter affect the Building or Land, whether or not the
leases or mortgages shall also cover other lands, buildings, or leases, to all
renewals, modifications, replacements and extensions of the leases and mortgages
and to spreaders and consolidations of such mortgages. This Section shall be
self-operative and no further instruments of subordination shall be required. In
confirmation of such subordination, Tenant shall promptly execute, acknowledge
and deliver any instrument that Landlord, the lessor under any lease or the
holder of any mortgage or any of their respective assigns or successors in
interest may reasonably request to evidence such subordination. Any lease to
which this Lease is subject and subordinate is herein called "Superior Lease"
and the lessor under a Superior Lease or its assigns or successors in interest
is herein called "Superior Lessor," and any mortgage to which this Lease is
:subject and subordinate is herein called "Superior Mortgage" and the holder of
a Superior Mortgage is herein called "Superior Mortgagee." If a Superior Lessor
or Superior Mortgagee requires that such instruments be executed by Tenant,
Tenant's failure to do so within 10 days after request therefor shall be deemed
a material default under this Lease.
(b) If any Superior Lessor or Superior Mortgagee (or any purchaser at a
foreclosure sale) succeeds to the rights of Landlord under this Lease, whether
through possession or foreclosure action or delivery of a new lease or deed, (a
"Successor Landlord") Tenant shall attorn to and recognize such Successor
Landlord as Tenant s landlord under this Lease and shall promptly execute and
deliver any instrument that such Successor Landlord may reasonably request to
evidence such attornment. Landlord shall use its best efforts to obtain from
each Superior Lessor and Superior Mortgagee an agreement that if as a result of
the exercise of their rights they acquire Landlord's interest in and to the
Premises, then as Successor Landlord they shall recognize the validity and
continuance of this Lease and shall not disturb Tenant's possession of the
Premises so long as Tenant shall not be in default of this Lease, except that
Successor Landlord shall in no event: (i) be liable for any previous act or
omission of a prior landlord under this Lease; (ii) be subject to any offset for
a claim arising prior to its succession to the rights of Landlord under this
Lease; or, (iii) after notice to Tenant of the existence of a Superior Lessor or
a Superior Mortgagee, be bound by any subsequent modification of this Lease or
by any subsequent prepayment of more than one month's Rent, unless such
modification or prepayment shall have been expressly approved by the Successor
Landlord.
20. Estoppel Certificate By Tenant
(a) Tenant shall from time to time upon not less than ten days prior
request by Landlord deliver to Landlord a statement in writing certifying: (i)
that this Lease is unmodified and in full force and effect (or if there have
been modifications, identifying such modifications and certifying; that the
Lease, as modified, is in full force and effect); (ii) the dates to which the
Rent has been paid; (iii) that Landlord is not in default under any provision of
this Lease (or if Landlord is in default, specifying each such default); and,
(iv) the address to which notices to Tenant shall be sent; it being
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understood that any such statement so delivered may be relied upon in connection
with any lease, mortgage or transfer. Tenant's failure to do so within 10 days
after request therefor shall, at Landlord's option, be teemed a material default
under this Lease.
(b) Tenant's failure to deliver such statement within such time shall
he canclusive upon Tenant that: (i) this Lease is in full force and effect and
not modified except as Landlord may represent; (ii) not more than one month's
rent has been paid in advance; (iii) there are no such defaults; and, (iv)
notices to Tenant shall be sent to Tenant's Mailing Address as set forth in this
Lease. Notwithstanding the presumptions of this Section, Tenant shall not be
relieved of its obligation to deliver said statement.
21. Transfer of Landlord's Interest
The term "Landlord" as used in this Lease, so far as covenants or
agreements on the part of Landlord are concerned, shall be limited to mean and
include only the owner or owners of Landlord's interest in this Lease at the
time in question. Upon any transfer or transfers of such interest, Landlord
herein named (and in case of any subsequent transfer, the then transferor) shall
thereafter be relieved of all liability for the performance of any covenants or
agreements on the part of Landlord contained in this Lease.
22. Default
(a) The following shall be events of default under this Lease: (i) if
Tenant defaults in payment of the Rent for a period of five days after any
payment of the Rent shall become due and payable; (ii) if Tenant defaults in the
performance of any other term, covenant, condition or obligation of Tenant under
this Lease and fails to cure such default within a period of 20 days after
notice from Landlord specifying such default (or if such default specified by
Landlord is not capable of cure within such 20 day period, if Tenant fails
immediately after notice from Landlord to commence to cure such default and
diligently to pursue completion of such cure during and after such 20 day
period), (iii) if Tenant abandons or vacates any portion the Premises, or if the
Premises or a substantial part thereof remain unoccupied for a period of thirty
(30) days or more; (iv) if Tenant makes any transfer, assignment, conveyance,
sale. pledge or disposition of all or a substantial portion of Tenant's
Property, or removes a substantial portion of Tenant's Property from the
Premises other than by reason of an assignment or subletting of the Premises
permitted under this Lease; or, (v) if Tenant's interest herein is sold under
execution.
(b) Upon any such event of default, Landlord may without prejudice to
its other rights hereunder, do any one or more of the following:: (i) terminate
this Lease and re-enter and take possession of the Premises; (ii) recover
possession of the Premises in the manner prescribed by any statute relating to
summary process, and any demand for the Rent, re-entry for condition broken, and
any and all notices to quit, or other formalities of any nature, to which Tenant
may be entitled, are hereby specifically waived; (iii) Landlord may relet the
Premises as Landlord may see fit without thereby avoiding or terminating this
Lease, and for the purpose of such reletting, Landlord is authorized to make
such repairs to the Premises as may be necessary in the sole discretion of
Landlord for the purpose of such reletting, and if a sufficient sum is not
realized from such reletting (after payment of all costs and expenses of such
repairs and the expense of such reletting and the collection of rent accruing
therefrom) each month to equal the Rent, then Tenant shall pay such deficiency
each month upon demand therefor; and (iv) Landlord may declare immediately due
and payable all the remaining installments of the Rent and such amount, less the
fair rental value of the Premises for the remainder of the Term, shall be
construed as liquidated damages and shall constitute a debt provable in
bankruptcy or receivership. For purposes of this Section, "fair rental value of
the Premises" shall be deemed to be, at any time during the Term, 75 percent of
the Base Rent remaining to be paid. In computing such liquidated damages, there
shall be added to such deficiency any reasonable expenses as Landlord may incur
in connection with reletting, such as court costs, attorneys, fees and
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disbursements, brokerage fees, and for putting and keeping the Premises in good
order or for preparing the Premises for reletting. The failure of Landlord to
relet the Premises or any part thereof after recovery of possession shall not
release or affect Tenant's liability for damages. Landlord shall in no event be
liable in any way whatsoever for failure to relet the Premises. or in the event
that the Premises are relet, for failure to collect the Rent under such
reletting.
(c) After default, the acceptance of the Rent (or any portion thereof)
or failure to re-enter by Landlord shall not be held to be a waiver of its
rights to terminate this Lease, and Landlord may re-enter and take possession of
the Premises as if no Rent had been accepted after such default. All of the
remedies given to Landlord in this Lease in the event of default by Tenant are
in addition to all other rights or remedies to which Landlord may be entitled
under the laws of the State; all such remedies shall be deemed cumulative and
the election of one shall nor be deemed a waiver of any other or further rights
or remedies.
(d) Landlord shall not be deemed to be in default in the performance of
any obligation required to be performed by Landlord hereunder unless and until
it has failed to perform such obligation within thirty (30) days after receipt
of written notice thereof from Tenant to Landlord; provided, however, that if
the nature of Landlord's obligations is such that more than thirty (30) days are
required for its performance, then Landlord shall not be deemed to be in default
if it shall commence such performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
23. Bankruptcy
If Tenant shall file a voluntary petition pursuant to the Bankruptcy
Code or any successor thereto, or take the benefit of any insolvency act, or be
dissolved, or if an involuntary petition be filed against Tenant pursuant to the
Bankruptcy Code or any successor thereto, or if a receiver shall be appointed
for its business or its assets and the appointment of such receiver is not
vacated within 30 days after such appointment, or if it shall make an assignment
for the benefit of its creditors, then and forthwith thereafter Landlord shall
have all of the rights provided in Section 22 above in the event of nonpayment
of the Rent.
24. Brokerage Fees
Tenant warrants and represents that it has not dealt with any Realtor,
broker or agent in connection with this Lease except Galleria Realty
Corporation. Tenant shall indemnify and hold Landlord harmless from any cost.
expense or liability (including cost of suit and reasonable attorneys' fees) for
any compensation, commissions or charges claimed by any other Realtor, broker,
or agent in connection with this Lease or by reason of any act of Tenant.
25. Notices
All notices, demands or other communications ("notices") permitted or
required to be given hereunder shall be in writing and, if mailed postage
prepaid by certified or registered mail, return receipt request, shall be deemed
given three days after the date of mailing thereof or on the date of actual
receipt, if sooner; all other notice not so mailed shall be deemed given on the
date of actual receipt. Notices shall be addressed as follows: (a) if to
Landlord, to the Landlord's Mailing Address and to the Building Manager, and (b)
if to Tenant, to the Tenant's Mailing Address Landlord and Tenant may from time
to time by notice to the other designate such other place or places for the
receipt of future notices.
26. Government Energy or Utility Controls
In the event of the imposition of federal, state, or local governmental
controls, rules, regulations, or restrictions on the use or consumption of
energy or other utilities during the Term, both Landlord and Tenant shall be
bound thereby. In the event of a difference in interpretation of any
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governmental control, rule, regulation or restriction between Landlord and
Tenant, the interpretation of Landlord shall prevail, and Landlord shall have
the right to enforce compliance, including the right of entry into the Premises
to effect compliance.
27. Security Deposit
Tenant has deposited with Landlord the Security Deposit as security for
the full and faithful performance of every provision of this Lease to be
performed by Tenant. If Tenant defaults with respect to any provision of this
Lease, including payment of the Rent, Landlord may use, apply or retain all or
any part of she Security Deposit for the payment of any Rent, or to compensate
Landlord for any other loss, cost or damage which Landlord may suffer by reason
of Tenant's default. If any portion of the Security Deposit is so used or
applied, Tenant shall, within five days after notice thereof, deposit cash with
Landlord in an amount sufficient to restore the Security Deposit to its original
amount, and Tenant's failure to do so shall be a breach of this Lease. Landlord
shall not be required to keep the Security Deposit separate from its general
funds, nor pay interest to Tenant. If Tenant shall fully and faithfully perform
every provision of this Lease to be performed by it, the Security Deposit or any
balance thereof shall be returned to Tenant (or, at Landlord's option, to the
last transferee of Tenant's interest hereunder) at the expiration of the Term
and upon Tenant's vacation of the Premises. If the Building is sold, the
Security Deposit may be transferred to the new owner, and Landlord shall be
discharged from further 1iability with respect thereto.
28. Relocation of Premises
[text missing]
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29. Quiet Enjoyment
Tenant, upon paying the Rent and performing all of the terms on its
part to be performed, shall peaceably and guietly enjoy the Premises subject,
nevertheless. to the terms of this Lease and to any Superior Mortgage or
Superior Lease or other agreement to which this Lease is subordinated.
30. Observance of Law
(a) Tenant shall comply wish all provisions of law, including (federal,
state, county and city laws, ordinances and regulations, building codes and any
other governmental, quasi-governmental or municipal regulations which relate to
the partitioning, equipment operation, alteration, occupancy and use of the
Premises, and to the making of any repairs, replacements, additions changes,
substitutions or improvements of or to the Premises. Moreover, Tenant shall
comply with all police, fire and sanitary regulations imposed by any federal,
state, county or municipal authority, or made by insurance underwriters, and
shall observe and obey all other requirements governing the conduct of any
business conducted in the Premises.
(b) Notwithstanding the foregoing, it shall be Landlord's
responsibility to comply with all provisions of law, including federal, state,
county and city laws, ordinances and regulations, building codes, and any other
governmental. quasi-governmental or municipal regulations which relate to the
Building insofar as they may require structural changes in the Building,
provided nevertheless, that such changes shall be the responsibility of Tenant
if they are changes required by reason of a condition which has been created by
or at the instance of Tenant, or are required by reason of a default by Tenant
hereunder.
31. Force Majeure
Landlord shall be excused for the period of any delay in the
performance of any obli,6Ation hereunder when prevented from so doing by a cause
or causes beyond its control, including all labor disputes, civil commotion,
war, war-like operations, invasion, rebellion, hostilities, military or usurped
power, sabotage, governmental regulations or controls, fire or other casualty,
inability to obtain any material, services or financing, or through acts of God.
Tenant shall similarly be excused for delay in the performance of any obligation
hereunder provided:
(a) Nothing contained in this Section or elsewhere in this Lease shall
be deemed excuse or permit any delay in the payment of the Rent, or any delay in
the cure of any default which may be cured by the payment of money;
(b) No reliance by Tenant upon this Section shall limit or restrict in
any way Landlord's right of self-help as provided in this Lease; and
(c) Tenant shall not be entitled to rely upon this Section unless it
shall give Landlord notice of the existence of any force Majeure preventing the
performance of an obligation of Tenant within five days after the commencement
of the force majeure.
32. Curing Tenant's Defaults; Additional Rent
(a) If Tenant defaults in the performance of any of its obligations
under this Lease, Landlord without thereby waiving such default may (but shall
not be obligated to) perform the same for the account and at the expense of
Tenant, without notice in a case of emergency, and in any other case only if
such default continues after the expiration of the later of: (i) 10 days from
the date Landlord gives Tenant notice of its intention so to do; or, (ii) the
expiration of the applicable grace period provided in Section 22 or elsewhere in
this Lease for cure of such default.
(b) Any costs or expenses incurred by Landlord, including reasonable
attorneys' fees (both at trial and on appea1), involved in collection or
endeavoring to collect the Rent or any part thereof or enforcing or endeavoring
to enforce any rights against Tenant, including the rights set
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forth in this Section 32, or curing or endeavoring to cure any default of
Tenant, under or in connection with this Lease, or pursuant to law, including
any such cost, expense or disbursement involved in instituting and prosecuting
summary proceedings, shall be due and payable within 10 days of Landlord's
demand therefor as additional rent.
33. Limitation of Landlord's Liability
(a) If Landlord becomes obligated to pay Tenant a money judgment
arising out of any failure by Landlord to perform or observe any of the terms,
covenants, conditions or provisions to be performed or observed by Landlord
hereunder, Tenant shall be limited for the satisfaction of said money judgment
solely to Landlord's interest in the Building and Land or any proceeds arising
from the sa1e thereof and no other property or assets of Landlord or the
individual partners, directors, officers, or shareholders of Landlord shall be
subject to levy, execution or other enforcement procedure whatsoever for the
satisfaction of said money judgment.
(b) Landlord's obligations hereunder shall be binding upon Landlord
only for the period of time that Landlord is in ownership of the Building; and,
upon termination of that ownership, Tenant, except as to any obligations which
have then matured, shall look solely to Landlord's successor in interest in the
Building for the satisfaction of each and every obligation of Landlord
hereunder.
34. Shoring
If any excavation Or construction is made adjacent to, upon or within
the Building, or any part thereof, Tenant shall afford to any and all persons
causing or authorized to cause such excavation or construction license to enter
upon the Premises for the purpose of doing such work as such persons shall deem
necessary to preserve the Building or any portion thereof from injury or damage
and to support the same by proper foundations, braces and supports, without any
claim for damages or indemnity or abatement of the Rent, or of a constructive or
actual eviction of Tenant.
35. Sign Control
Tenant shall not obstruct or permit the obstruction of light, halls,
Common Areas, roofs, parapets, stairways or entrances to the Building or the
Premises and will not affix, paint, erect or inscribe any sign, projection,
awning, signal or advertisement of any kind to any part of the Property or the
Premises, including the inside or outside of the windows or doors, without the
written consent of Landlord. Landlord shall have the right to withdraw such
consent at any time and to require Tenant to remove any sign, projection,
awning, signal or advertisement to be affixed to the Property or the Premises.
If such work is done by Tenant through any person, firm or corporation not
designated by Landlord, or without the express written consent of Landlord,
Landlord shall have the right to remove such signs, projections, awnings,
signals or advertisements without being liable to the Tenant by reason thereof
and to charge the cost of such removal to Tenant as additional rent, payable
within 10 days of Landlord's demand therefor. Landlord at its option may require
all signs on the Property to be uniform and supplied by a person or firm of
Landlord's choosing.
36. Parking
(a) Tenant shall be entitled to the non-exclusive use of the Building's
parking areas.
(b) The parking areas provided for herein are provided solely for the
accommodation of Tenant, and Landlord assumes no responsibility or liability of
any kind whatsoever from whatever cause with respect to the automobile parking
areas, including adjoining streets, sidewalks, driveways, property and
passageways, or the use thereof by Tenant or Tenant's Representatives.
19
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37. Common Areas, Plaza, Pedestrian Way
All hallways, elevators, driveways, loading ramps, public corridors,
stairways, Common Areas, and other areas, facilities and improvements as may be
provided by Landlord from time to time for the general use, in common, by Tenant
and other tenants of the Building or of other buildings, their employees,
agents, invitees and licensees, shall at all times be subject to the exclusive
control and management of Landlord, and Landlord shall have the right from time
to rime to establish, modify and enforce reasonable rules and regulations with
respect to all such Common Areas, facilities and improvements. Tenant shall have
a non-exclusive easement for use of the Common Areas for pedestrian ingress and
egress, provided the substantial completion of the Common Areas is not a
condition precedent to the Commencement Date for this Lease.
38. Corporate Authority
If Tenant is a corporation (or partnership), each individual executing
this Lease on behalf of said corporation (or partnership) represents and
warrants that he is duly authorized to execute and deliver this Lease on behalf
of said corporation (or partnership) in accordance with the duly adopted
resolution of the Board of Directors of said corporation or in accordance with
the bylaws of said corporation (or under the pertinent partnership agreements),
and that this Lease is binding upon said corporation (or partnership) in
accordance with its terms.
39. Waiver
The failure of either party to insist in any one or more instances upon
the strict performance of any one or more of the obligations of this Lease, or
to exercise any election herein contained, shall not be construed as a waiver or
relinquishment for the future of the performance of such one or more obligations
of this Lease or of the right to exercise such election, but the same shall
continue and remain in full force and effect with respect to any subsequent
breach, act or omission. No agreement to accept a surrender of all or any part
of the Premises shall be valid unless in writing and signed by Landlord. The
receipt by Landlord of full or partial Rent with knowledge of a breach by Tenant
of any obligation of this Lease shall not be deemed a waiver of such breach.
40. Attorneys' Fees
In any action or proceeding which Landlord or Tenant may be required to
prosecute or enforce its respective rights hereunder. the unsuccessful party
agrees to pay all costs incurred by the prevailing party therein, including
reasonable attorneys' fees (including on any appeal).
41. Severability
If any clause or provision of this Lease is or becomes illegal or
unenforceable because of present or future laws or any rule or regulation of any
governmental body or entity, effective during the Term, the intention of the
parties hereto is that the remaining parts of this Lease shall not be affected
thereby unless such clause or provision is, in the reasonable determination of
Landlord, essential and material to its rights, in which event Landlord shall
have the right to terminate this Lease by notice to Tenant.
42. Proceedings
If Landlord commences any summary proceedings or an action for
nonpayment of Rent, Tenant shall not interpose any non-mandatory counterclaim of
any nature or description in any such proceedings or action. Tenant and Landlord
both waive a trial by jury of any or all issues arising in any action or
proceeding between the parties hereto or their successors, under or connected
with this Lease, or. any of its provisions. Venue for any action or proceeding
arising under this Lease shall be in Seminole County, Florida.
43. Binding Effect
Except as prohibited or limited by Sections 12, 21 and 33, all the
terms and provisions of this Lease shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs. lega1 representatives,
successors and assigns.
44. Applicable Law
20
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This Lease shall be deemed to have been made in and shal1 be construed
in accordance with the laws of the State.
45. Amendments
(a) This Lease sets forth all the covenants, promises, agreements,
conditions and understanding between Landlord and Tenant concerning the
Premises, Building and Land, and there are no covenants, promises, agreements,
conditions or understandings, either oral or written, between them other than as
are herein set forth. Except as herein otherwise provided, no subsequent
alteration, amendment, change or addition to this Lease shall be binding upon
Landlord or Tenant unless reduced to writing and signed by them.
If, in connection with obtaining financing or refinancing of the
Building of which the Premises form a part, a banking, insurance or other
institutional lender shall request reasonable modifications from time to time to
this Lease as a condition to such financing or refinancing, Tenant will not
unreasonably withhold, delay or defer its consent thereto, provided that such
modifications do not increase the obligations of Tenant hereunder (except to the
extent that Tenant may be required to give notices of any defaults by Landlord
to such lender and/or permit the curing of such defaults by such lender together
with the granting of such additional time for such curing as may be required for
such lender to get possession of the Building) or materially adversely affect
the leasehold interest hereby created. In no event shall a requirement that the
consent of any such lender be given for any modification of this Lease or for
any assignment or sublease, be deemed to materially adversely affect Tenant's
leasehold interest created by this Lease.
46. Captions
The captions appearing within the body of this Lease have been inserted
as a matter of convenience and for reference only and in no way define, limit or
enlarge the scope or meaning of this Lease or of any provision hereof.
47. Accord and Satisfaction
No payment by Tenant or receipt by Landlord of a lesser amount than the
Rent payment herein stipulated shall be deemed to be other than on account of
the Rent, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment as Rent he deemed an accord and satisfaction
(unless Landlord expressly agrees to an accord and satisfaction in a separate
agreement duly accepted by Landlord's appropriate officer of officers), and
Landlord may accept such check or payment without prejudice to Landlord's right
to recover the balance of such Rent, or pursue any other remedy provided in this
Lease. Landlord may receive and retain, absolutely and for itself, any and all
payments so tendered, notwithstanding any accompanying instructions by Tenant to
the contrary, and any such payment shall be treated by Landlord at its option as
being received solely on account of any amounts due and owing Landlord,
including the Rent, and to such items and in such order as Landlord in its sole
discretion shall determine.
48. Miscellaneous
(a) Tenant shall have no claim, and hereby waives the right to any
claim, against Landlord for money damages by reason of any refusal, withholding
or delaying by Landlord of any consent, approval or statement of satisfaction,
and in such event, Tenant's only remedies therefor shall be an action for
specific performance, injunction or declaratory judgment to enforce any such
requirement.
(b) If any provision contained in an exhibit, rider or addendum is
inconsistent with any other provision of this Lease, the provisions contained in
said exhibit, rider or addendum shall supersede said other provision, unless
otherwise provided in said exhibit, rider or addendum.
(c) The use of the neuter singular pronoun to refer to either party
shall be deemed a proper reference even though it may be an individual,
partnership, corporation or a group of two or more individuals or corporations.
The necessary grammatical changes required to make the provisions of this Lease
apply in the plural number where there is more than one Landlord or Tenant and
to either corporations, associations, partnerships or individuals, males or
females, shall in all instances be assumed as though in each case fully
expressed.
(d) This Lease may be executed in several counterparts, all of which
constitute one and the same instrument.
21
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(e) As used in this Lease, any list of one or more items preceded by
the word "including" shall not be deemed limited to the stated items but shall
be deemed without limitation Wl 1; .
(f) The language of this Lease shall be construed according to its
normal and usual meaning and not strictly for or against either Landlord or
Tenant.
(g) If more than one person or entity executes this Lease as Tenant,
each such person or entity shall be jointly and severally liable for observing
and performing each of the terms, covenants, conditions and provisions to be
observed or performed by Tenant.
(h) The voluntary or other surrender of this Lease by Tenant or a
mutual cancellation thereof shall not work a merger and shall, at Landlord's
option, either terminate all or any existing subleases or subtenancies or
operate as an assignment to Landlord of any or all of such subleases or
subtenancies.
22
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EXHIBIT "A"
PLAN SHOWING LAND AND BUILDING
[drawing]
A-1
<PAGE>
EXHIBIT "B"
LEGAL DESCRIPTION
Parcel 1:
From the Southwest corner of the Southwest 1/4 of Section 2, Township
21 South, Range 29 East, Seminole County, Florida, run North
00(0)08'16" West along the West line of said Southwest 1/4 a distance
of 1416.07 feet to the Northerly right of way line of State Road S-434;
thence run North 56(0)37'14" East along said Northerly right of way
line 619.00 feet to the Point of Beginning; thence run North
33(0)22'46" West 200.00 feet to a point on a curve concave Westerly and
having a radius of 65.00 feet; thence from a tangent bearing of North
56(0)37'14" East run Northerly along the arc of said curve 102.10 feet
through a central angle of 90(0)00'00" to the point of tangency; thence
run North 33(0)22'46" West 71.84 feet to the point of curvature of a
curve concave Easterly and having a radius of 35.00 feet; thence run
Northerly along the arc of said curve 54.90 feet through a central
angle of 90(0)00'00" to the point of tangency; thence run North
56(0)37'14" East, 97.74 feet; thence South 33(0)22'46" East 210.00
feet; thence North 56(0)37'14" East 160.00 feet to the new Westerly
right of way line of Markham Woods Road; thence South 06(0)42'46" East
along said new Westerly right of way line 181.13 feet to the
intersection point of said new Westerly right of way line of Markham
Woods Road and the aforesaid Northerly right of way line of State Road
S-434; thence South 56(0)37'14" West along said Northerly right of way
line 276.43 feet to the Point of Beginning.
LESS AND EXCEPT the following described property:
That part of the Southwest 1/4 of Section 2, Township 21 South, Range
29 East, Seminole County, Florida, being more particularly described as
follows:
Begin at the intersection of the Westerly right of way line of Markham
Woods Road with the Northerly right of way line of Longwood Avenue, (
S.R. 434 ); thence run North 06(0)42'46" West along said Westerly right
of way line of Markham Woods Road for a distance of 15.42 feet to the
point of cusp of a tangent circle concave Westerly having a radius of
25.00 feet; thence Southerly along the arc of said curve through a
central angle of 63(0)20'00" for a distance of 27.63 feet to the point
of tangency, said point being on the aforementioned Northerly right of
way line of Longwood Avenue ( S.R. 434 ); thence run North 56(0)37'14"
East along said Northerly right of way line for a distance of 15.42
feet to the Point of Beginning.
Parcel 2:
Together with a nonexclusive easement for vehicular parking and
pedestrian purposes, as set forth in that certain Parking Easement
dated November 7, 1984 and recorded in O.R. Book 1614, Page 1609,
Public Records of Seminole County, Florida.
Parcel 3:
Together with a nonexclusive easement for ingress, egress and parking,
as set forth in that certain Cross Parking Agreement dated February 11,
1985, and recorded in O.R. Book 1614, Page 1624, Public Records of
Seminole County, Florida.
B-1
<PAGE>
EXHIBIT "C"
SPRINGS BUILDING
WORK LETTER
1. Landlord's Building Standard Improvements. Landlord, at its own expense,
shall finish the Premises in accordance with the Building Standard Improvements
as specifically set forth in this paragraph.
1.1 Shell Improvements.
(a) Lay-in acoustical ceiling grid with acoustical ceiling tile
inventories stored on the floor of the premises.
(b) Central air conditioning and heating ducts in a placement
determined by Landlord to be standard.
1.2 Allowance Item. (Note: All items are allocated per 1,000 square
feel of Net Rentable Area within the Premises).
(a) Entry Doors - 3'-0" x 7'-10" solid core wood doors with lever
action lock set, one per tenant.
(b) Heat and air conditioning - Air distribution system of ductwork and
diffusers, installed.
(c) Walls - 8'0" interior partition consisting of 1/2" gypsum on metal
studs, taped, bedded, and painted with 2-1/2" building standard vinyl
base or carpet base at Landlord's discretion. Number - 100 linear feet
(including 25 linear feet of party walls).
(d) Interior Doors - 3'0" x 6'8" solid core veneer with orbit style set
hardware. Number - 3 each.
(e) Flooring - Building grade carpet - jute back, glue down - 28 ounce.
(f) Ceilings - 24" x 48" x 5/8" suspended acoustical tile lay-in
ceilings with painted exposed grid suspended system dropped in at 8'-0"
from floor, installed.
(g) Electrical - electrical outlet - Number: 8 each duplex type; 110
volt/20 amp; Light switch - Number 1 per suite-wall mounted; Telephone
outlet - Number: 5 each - wall mounted (does not include equipment
installation, wiring or preparation for special systems); Lighting - 2'
x 4' lay-in fluorescent Number: 12 each.
(h) Fire Protection: One fire horn and one exit light per tenant will
be provided when required.
2. Tenant's Improvements.
2.1 If Tenant desires improvements above the Building Standard
Improvements, Tenant will comply with the provisions hereafter set forth.
2.2 Tenant shall meet with Landlord's space planner within ___ days
after the date hereof. Landlord shall submit to Tenant final schematic drawings
and specifications of materials (as approved by Landlord) relating to all
Improvements,. and they shall be approved within ___ days by Tenant. All
drawings and specifications of materials shall be subject to Landlord's
approval.
C-1
<PAGE>
2.3 Final working drawings based upon the approved schematic drawings
relating to all Improvements in the Premises shall be submitted to Tenant and
approved within three working days by Tenant. Upon approval of such drawings,
Landlord and Tenant shall initial the drawings, and such drawings shall become a
part of the Lease, and attached to the Lease as Exhibit "E"
2.4 Should any material (such as wall covering, carpet, special
fixtures, or the like) that Tenant specifies have an unusually long delivery
date or cannot be located within a reasonable time in order for Landlord to meet
the ______________, 19__, deadline, or Landlord finds that any of the specified
materials has a long delivery time which would delay completion of the space on
schedule, Landlord will provide Tenant with written notification of that fact,
and Tenant shall have five (5) days to change the specifications to materials
which are readily available. If Tenant fails to change the specifications in
writing to Landlord within five (5) days, then the Premises will be deemed to be
substantially complete without those items having been installed.
2.5 Any material or items that Tenant may be supplying to Landlord for
Landlord's installation in the Premises must be delivered on site by
_____________, 19__, or the Premises will be deemed substantially complete
without those items having been installed.
3. Tenant to Pay for Cost of Tenant's Improvements.
3.1 All costs and expenses incurred in the construction of Tenant
Improvements above the cost of the Building Standard Improvements shall be paid
by Tenant (hereafter referred to as "Tenant's Costs"). Tenant's Costs shall
include architectural fees relating to the Premises (including architectural
fees incurred by Landlord in modifying Landlord's master working drawings to
incorporate Plans prepared by Tenant's architect, wherein an architect other
than Landlord's architect has prepared Tenant's workings, drawings, and
specifications).
3.2 Any modification or addition required to the Premises' life safety
system brought about by Tenant's final schematic drawings and specifications,
such as the addition or relocation of demising walls. sprinkler heads, exit
lights. emergency lighting, firehorns, or the like shall be included as a
Tenant's cost.
3.3 Tenant's Costs shall be payable as follows:
(a) Tenant shall pay to Landlord prior to the commencement of the
construction of the improvements, an amount equal to fifty percent
(50%) of the Tenant's Costs (as then estimated by Landlord).
(b) Prior to occupancy of the Premises, Tenant shall pay to Landlord
the unpaid balance (as such amount can then be reasonably
estimated based on available data) of Tenant's Costs, plus any
approved additions thereto. As soon as the final accounting can be
prepared and submitted to Tenant, Tenant shall pay to Landlord the
entire unpaid balance of the Tenant's Costs, or Landlord shall
reimburse Tenant any excess amounts paid, as the case may be.
3.4 The amounts payable hereunder shall constitute additional rent due
under the Lease and shall be due at the time specified herein. Tenant's failure
to make any such payments when due shall constitute a default under the Lease,
entitling Landlord to all of its remedies thereunder.
4. Changes.
4.1 If Tenant requests any changes in the specifications for the
Building Standard Improvements or in the approved plans and specifications for
Tenant Improvements, Tenant shall present Landlord with revised plans and
specifications. If Landlord approves such changes in the improvements, Landlord
shall incorporate such changes in the improvements; however, Landlord may
require prior to proceeding with any changes, additional cash advances against
the Tenant's Costs if Landlord determines that Tenant's proposed changes will
increase the amount of such costs.
C-2
<PAGE>
4.2 If Tenant requests changes in the Building Standard Improvements or
in the approved plans and specifications for Tenant Improvements and if such
changes shall delay the work to be performed hereunder, or if Tenant shall
otherwise delay the completion of the work, then, notwithstanding any provision
to the contrary in the Lease, Tenant's obligation to pay rent hereunder shall
nevertheless commence on the date the Premises would have been ready but for
such delay.
5. Contractor.
Landlord's Contractor shall perform the construction of all
Improvements in accordance with the working drawings approved by Landlord.
6. Interpretation.
All terms herein used shall have the same meaning as when used in the
Lease.
7. Special Conditions.
Notwithstanding anything herein to the contrary, the Tenant
acknowledges that the Premises have been previously occupied and as such, Tenant
agrees to accept the Premises in an "As Is" condition.
LANDLORD: TENANT:
SPRINGS EQUITY, LTD. JRECK SUBS GROUP, INC.
By:__________________________ By:__________________________
Marc L. Hagle Bradley L. Gordon
Title: President Title: COO
Date: 12/16/97 Date: 12-16-97
Address: 100 East Sybelia Avenue Address: 100 East Sybelia Avenue
Suite 225 Suite lOO
Maitland, PL 32151 Longwood, Florida 32779
Attention: Marc L. Hagle Attention: Bradley L. Gordon
C-3
<PAGE>
EXHIBIT "D"
BUILDING RULES AND REGULATIONS
Landlord has adopted the following Building Rules and Regulations for
the care, protection and benefit of your Premises and the Building and for the
general comfort and welfare of all Tenants. These Rules and Regulations are
subject to amendment by the Landlord from time to time.
1. Building Hours and Access
1.1 Normal Building Hours are from 8:00 a.m. to 6:00 p.m., Monday
through Friday, and on Saturday from 9:00 a.m. to 12:00 noon, except
recognized holidays.
1.2 [text missing]
1.3 Landlord reserves the right to designate the time when freight,
furniture, goods, merchandise and other articles may be brought into,
moved or taken from Premises or the Building. Tenants must make
arrangements with the management office when the elevator is required
for the purpose of carrying any kind of freight.
1.4 Landlord reserves the right at all times to exclude loiterers,
vendors, solicitors, and peddlers from the Building and to require
registration of satisfactory identification or credentials from all
persons seeking access to any part of the Building outside ordinary
business hours. The Landlord will exercise its best judgment in the
execution of such control but shall not be liable for the granting or
refusal of such access.
2. Building.
2.1 The sidewalks, entry passages, corridors, halls, elevators, and
stairways shall not be obstructed by the Tenant or used by it for other
than those of ingress and egress.
2.2 The floors, skylights and windows that reflect or admit light into
any place in the Building shall not be covered or obstructed by the
Tenant, except for Building Standard window treatment designated by
Landlord.
2.3 Restroom facilities, water fountains, and other water apparatus
shall not be used for any other purpose other than those for which they
were constructed, and no rubbish, or other obstructing substances shall
be thrown therein, and the expense of any breakage, stoppage, or damage
resulting from a violation of this provision shall be borne by Tenant,
who shall, or whose officers, employees, agents, patrons, customers.
licensees, visitors, or invitees, shall have caused it.
2.4 Tenant shall not injure, or overload or deface the Building, the
woodwork, or the walls of the Premises, nor carry on upon the Premises
any noxious, noisy or offensive business, nor store in the Building of
the Premises any flammable or odorous materials.
2.5 Tenant, its officers, agents. employees, patrons, customers,
licensees, invitees, and visitors shall not solicit in the buildings,
parking facilities or common areas, nor shall Tenant distribute any
handbills or other advertising matter in automobiles parked in the
Building's parking facilities.
D-1
<PAGE>
2.6 Landlord will not be responsible for lost or stolen property,
equipment, money, or any article taken from the Premises, Building or
parking facilities, regardless of how or when loss occurs.
3. Doors and Windows.
3.1 Tenant entrance doors should be kept closed at all times in
accordance with the fire code.
3.2 Tenant shall not put additional locks or latches upon any door
without the written consent of the Landlord.
3.3 Landlord will provide and install, at Tenant's cost, all letters,
or numerals at Premises entry. All such Letters and numbers shall be in
the standard graphics for the building, and no other shall be used or
permitted on the Premises without Landlord's prior written consent.
3.4 All glass, locks and trimmings in or upon the doors and windows of
the Building shall be kept whole and when any part thereof shall be
broken the same shall be immediately replaced or repaired and put in
good repair .
3.5 Window blinds of a uniform Building standard color and pattern only
shall be used throughout the Building to give uniform color exposure
through interior and exterior windows. These blinds shall remain in the
lower position at all times to provide uniform exposure for the
outside.
4. Premises Use.
4.1 Tenant shall not install in the Premises any heavy weight equipment
or fixtures or permit any concentration of excessive weight in any
portion thereof without first having obtained Landlord's written
consent.
4.2 Tenant shall not (without Landlord's written consent) install or
operate any main frame computer, duplicating or other large business
machine, equipment, or any other machinery upon the Premises or carry
on any mechanical business thereon. Tenant shall not operate any devise
which may emanate electrical waves which will impair radio or
television broadcasting or reception from or in the Building.
4.3 No wires of any kind or type (including but not limited to TV and
radio antennas) shall be attached to the outside of the Building and no
wires shall be run or installed in any part of the Building without
Landlord's prior written consent. Such wiring shall be done by the
electrician of the Building only, and no outside electrician shall be
allowed to do work of this kind unless by the written permission of
Landlord or its representatives.
4.4 If Tenant desires any signal, communication, alarm or other utility
service connection installed or changed, such work will be done at
expense of Tenant with the approval and under the direction of
Landlord.
4.5 No painting shall be done, nor shall any alterations be made, to
any part of the Building by putting up or changing any partition, doors
or windows, nor shall there be any nailing, boring, or screwing into
the woodwork or plastering, nor shall any connection be made to the
electric wires or electric fixtures without the consent in writing on
each occasion of Landlord or its agents.
4.6 All contractors or technicians performing work for Tenant within
Premises, Building or parking facilities shall be referred to Landlord
for approval before performing such work. This shall apply to all work
including, but not limited to, installation of telephones, telegraph
D-2
<PAGE>
equipment, electrical devices and attachments, and all installations
affecting floors, walls, windows, doors, ceilings, equipment or any
other physical feature of the Building, leased Premises or parking
facilities. None of this work shall be done by Tenant without
Landlord's prior written approval.
4.7 If Tenant must dispose of crates, boxes, etc., which will not fit
into office wastepaper baskets, it will be the responsibility of Tenant
with Landlord's assistance to dispose of same. In no event shall Tenant
set such items in the public hallways or other areas of building or
parking facilities, excepting Tenant's own Premises, for disposal.
4.8 Tenant will be responsible for any damage to the Premises,
including carpeting and flooring as a result of rust or corrosion of
file cabinets, roller chairs, metal objects or spills of any type of
liquid.
4.9 If the Premises demised to any Tenant become infested with vermin,
such Tenant, at its sole cost and expense, shall cause its premises to
be exterminated from time to time, to the satisfaction of Landlord, and
shall employ such exterminators therefor as shall be approved by
Landlord.
4.10 Tenant shall not conduct its business in such manner as to create
any nuisance, or interfere with, annoy or disturb any other Tenant in
the Building, or Landlord in its operation of the Building or commit
waste or suffer or permit waste to be committed in the Premises,
Building or parking facilities. In addition, Tenant shall not allow its
officers, agents, employees, patrons, customers, licensees or visitors
to conduct themselves in such manner as to create any nuisance or
interfere with, annoy or disturb any other Tenant in the Building or
Landlord in its operation of the Building or commit waste or suffer or
permit waste to be committed in the leased Premises, Building or
parking facilities.
4.11 Tenant shall give Landlord prompt notice of all accidents to or
defects in air conditioning equipment, plumbing, electric facilities or
any part or appurtenance of the Premises.
4.12 The work of Landlord's janitors or cleaning personnel shall not be
hindered by Tenant after 6:30 P.M. and such work may be done at any
time when the offices are vacant.
D-3
<PAGE>
EXHIBIT "E"
SPRINGS OFFICE BUILDING
SUITE 100
[drawing]
E-1
<PAGE>
EXHIBIT "E"
LEASEHOLD IMPROVEMENTS
The Landlord shall at its expense make the following modifications to the
premises:
* Remove wallpaper in all rooms (except the conference room) at Tenant's
option
* Patch holes and mud
* Replace ceiling tile above doorway with dry wall
* Paint suite, including concrete planter boxes, hut not raw concrete faces
* Replace soiled ceiling tiles
* Clean cabinets
* Clean doors
* Paint door jams
* Recarpet suite, except for conference room
Carpet Selection: ______________________________________________________
Paint Selection: ______________________________________________________
Signage: ______________________________________________________
TENANT.
JRECK SUBS GROUP, INC.
By: /s/
--------------------------
Date: 12-16-97
E-2
<PAGE>
TABLE OF CONTENTS
I DEMISE OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . 1
II TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
III EXHIBITS AND RIDERS . . . . . . . . . . . . . . . . . . . . . . . 1
GENERAL TERMS, COVENANTS AND CONDITIONS
1. Commencement Date . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. Increases in Base Rent . . . . . . . . . . . . . . . . . . . . . . 3
4. Operating Expenses. . . . . . . . . . . . . . . . . . . . . . . . 4
5. Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6. Condition of the Premises. . . . . . . . . . . . . . . . . . . . . 7
7. Repairs, Maintenance and Alterations. . . . . . . . . . . . . . . 8
8. Use of the Premises; Rules and Regulations . . . . . . . . . . . . 9
9. Construction of the Premise and Leasehold Improvements . . . . . . . 9
10. Memorandum of Lease . . . . . . . . . . . . . . . . . . . . . . . 10
11. Rights Reserved To Landlord . . . . . . . . . . . . . . . . . . . 10
12. Assignment and Subletting . . . . . . . . . . . . . . . . . . . . 11
13. Holding Over . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
14. Surrender of the Premises . . . . . . . . . . . . . . . . . . . . 11
15. Destruction or Damage. . . . . . . . . . . . . . . . . . . . . . . 12
16. Eminent Domain. . . . . . . . . . . . . . . . . . . . . . . . . . 12
17. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . 13
18. Tenant's Insurance. . . . . . . . . . . . . . . . . . . . . . . . 13
19. Subordination and Attornment. . . . . . . . . . . . . . . . . . . 14
20. Estoppel Certificate By Tenant . . . . . . . . . . . . . . . . . . 14
21. Transfer of Landlord's Interest . . . . . . . . . . . . . . . . . 15
22. Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
23. Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
24. Brokerage Fees. . . . . . . . . . . . . . . . . . . . . . . . . . 16
25. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
26. Government Energy or Utility Controls. . . . . . . . . . . . . . . 16
27. Security Deposit. . . . . . . . . . . . . . . . . . . . . . . . . 17
28. Relocation of Premises. . . . . . . . . . . . . . . . . . . . . . 17
29. Quiet Enjoyment. . . . . . . . . . . . . . . . . . . . . . . . . . 18
30. Observance of Law. . . . . . . . . . . . . . . . . . . . . . . . . 18
31. Force Majeure. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
32. Curing Tenant's Defaults; Additional Rent . . . . . . . . . . . . 18
33. Limitation of Landlord's Liability . . . . . . . . . . . . . . . . 19
34. Shoring. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
35. Sign Control. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
36. Parking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
37. Common Areas, Plaza, Pedestrian Way. . . . . . . . . . . . . . . . 20
38. Corporate Authority . . . . . . . . . . . . . . . . . . . . . . . 20
39. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
40. Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . . . 20
41. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
42. Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
43. Binding Effect. . . . . . . . . . . . . . . . . . . . . . . . . . 21
44. Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . . . 21
45. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
46. Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
47. Accord and Satisfaction . . . . . . . . . . . . . . . . . . . . . 21
48. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
QUALITY FRANCHISE SYSTEMS, INC.
DEVELOPMENT AGENT AGREEMENT
MJK Holdings LLC
DEVELOPMENT AGENT
June 30th 1996
DATE OF AGREEMENT
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION.
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TABLE OF CONTENTS
Page
1. PREAMBLES AND GRANT OF RIGHTS...........................................1
A. PREAMBLES....................................................1
B. GRANT OF RIGHTS..............................................2
2. YOUR OBLIGATIONS........................................................2
A. RECRUITING AND SERVICING.....................................2
B. MANAGEMENT OF YOUR BUSINESS..................................4
C. INSURANCE....................................................4
D. ADVERTISING..................................................4
E. ACCOUNTING, BOOKKEEPING AND REPORTING........................4
F. AGENT'S INSPECTIONS..........................................4
G. DEVELOPMENT AND PERFORMANCE OBLIGATIONS......................5
3. FEES .............................................................5
A. YOUR INITIAL FEE TO US.......................................5
B. OUR PAYMENTS TO YOU..........................................5
C. PAYMENTS ON OUR RESTAURANTS WITHIN THE TERRITORY.............6
D. REDUCTION OF FEES PAYABLE....................................6
4. MARKS .............................................................6
A. OWNERSHIP AND GOODWILL OF MARKS..............................6
B. LIMITATIONS ON YOUR USE OF MARKS.............................7
C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS.....................7
D. DISCONTINUANCE OF USE OF MARKS...............................7
E. INDEMNIFICATION FOR USE OF MARKS.............................8
5. CONFIDENTIAL INFORMATION................................................8
6. EXCLUSIVE RELATIONSHIP..................................................9
7. TRANSFER...............................................................10
A. BY US.......................................................10
B. BY YOU......................................................10
C. YOUR DEATH OR DISABILITY....................................11
8. TERMINATION OF AGREEMENT...............................................11
A. BY YOU......................................................11
BY US.......................................................11
9. OUR AND YOUR RIGHTS AND OBLIGATIONS UPON
TERMINATION OR EXPIRATION OF THIS AGREEMENT............................12
<PAGE>
Page
A. PAYMENT OF AMOUNTS OWED TO YOU..............................12
B. MARKS.......................................................12
C. CONFIDENTIAL INFORMATION....................................13
D. COVENANT NOT TO COMPETE.....................................13
E. CONTINUING OBLIGATIONS......................................14
10. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION............................14
A. INDEPENDENT CONTRACTORS.....................................14
B. NO LIABILITY FOR ACTS OF OTHER PARTY........................14
C. INDEMNIFICATION.............................................14
11. ENFORCEMENT............................................................15
A. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS...........15
B. WAIVER OF OBLIGATIONS.......................................16
C. COSTS AND ATTORNEYS' FEES...................................17
D. RIGHTS OF PARTIES ARE CUMULATIVE............................17
E. ARBITRATION.................................................17
F. GOVERNING LAW...............................................19
G. CONSENT TO JURISDICTION.....................................19
H. WAIVER OF PUNITIVE DAMAGES AND JURY TRIAL...................20
I. BINDING EFFECT..............................................20
J. LIMITATIONS OF CLAIMS.......................................20
K. CONSTRUCTION................................................20
12. NOTICES AND PAYMENTS...................................................21
13. ACKNOWLEDGMENTS........................................................21
EXHIBITS
EXHIBIT A - TERRITORY
EXHIBIT B - DEVELOPMENT SCHEDULE
GUARANTY AND ASSUMPTION OF OBLIGATIONS
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QUALITY FRANCHISE SYSTEMS, INC.
DEVELOPMENT AGENT AGREEMENT
THIS DEVELOPMENT AGENT AGREEMENT (the "Agreement") is made and entered
into this 30th day of June , 1996 , by and between QUALITY FRANCHISE SYSTEMS,
INC., a Delaware corporation, with its principal business address at 3841 North
Freeway Boulevard, Suite 290, Sacramento, California 95834 (referred to in this
Agreement as "we," "us" or "our"), and MKJ Holdings LLC, whose principal
business address is 427 Summerhill Terrace Alpine, CA 91901 (referred to in this
Agreement as "you" or "your").
1. PREAMBLES AND GRANT OF RIGHTS.
A. PREAMBLES.
(1) We and our predecessors have, since 1978, expended considerable
time and effort in developing and operating a pizza restaurant concept offering
pizza, sandwiches, salads and other food products and services. These
restaurants operate under the "Mountain Mike's Pizza" name ("Mountain Mike's
Pizza Restaurants") and have distinctive business formats, methods, procedures,
designs, layouts, standards and specifications, all of which have been, or may
be, improved, further developed or otherwise modified from time to time.
(2) We use, promote and license certain trademarks, service marks and
other commercial symbols in operating Mountain Mike's Pizza Restaurants,
including the trade and service mark "Mountain Mike's Pizza(R)," which have
gained and continue to gain public acceptance and goodwill, and may continue to
create, use and license additional trademarks, service marks and commercial
symbols in operating Mountain Mike's Pizza Restaurants (collectively, the
"Marks").
(3) We have chosen franchising as our business strategy for creating
and keeping customers for Mountain Mike's Pizza. We grant to persons who meet
our qualifications and are willing to undertake the investment and effort a
franchise to own and operate a Mountain Mike's Pizza Restaurant offering the
products and services we authorize and approve while utilizing our business
formats, methods, procedures, signs, designs, layouts, equipment, standards,
specifications and Marks (the "System").
(4) You have applied for the right to represent us as a development
agent within a certain territory.
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(5) We grant to certain franchise owners who meet our qualifications
the right to represent us as development agents, within defined geographic
markets with which they are familiar, in recruiting and assisting us in
providing certain services to other franchise owners.
B. GRANT OF RIGHTS.
(1) Initial Term. Subject to the terms of and upon the conditions
contained in this Agreement, we hereby appoint you to represent us as our
exclusive development agent during the term of this Agreement within the
territory described on Exhibit A (the "Territory"). You agree to perform your
obligations according to this Agreement and the standards and guidelines we
issue from time. The term of this Agreement is fifteen (15) years from the date
it is signed, unless sooner terminated under Section 8. Subject to Section 3.C.,
we (and our affiliates) can in our sole discretion (1) own and operate, and
recruit and grant prospective franchise owners the right to own and operate,
Mountain Mike's Pizza Restaurants at any locations within and outside the
Territory and on any terms and conditions we deem appropriate; and (2) engage in
any other distribution activities that we choose within and outside the
Territory. Except for our agreement not to allow another franchise owner to
represent us as a development agent within the Territory during the term of this
Agreement, your rights under this Agreement are non-exclusive.
(2) Successor Term. If you (and your owners) have complied with this
Agreement and all other agreements between you (or your owners) and us (and our
affiliates), then, when this Agreement expires, we will allow you to represent
us as a development agent within the Territory for an additional ten (10) year
term on the condition that you (and your owners) sign our then current form of
development agent agreement and you and we agree on the minimum number of new
Mountain Mike's Pizza Restaurants to be opened within the Territory during the
additional term.
(3) Your Operation Of Restaurant. You (or your owners) must at all
times during the term of this Agreement own and operate at least one (1)
franchised Mountain Mike's Pizza Restaurant within the Territory. You must open
your first Restaurant within the Territory within one hundred eighty (180) days
after the date of this Agreement. The initial franchise fee for that Restaurant
is included in the amount you must pay us under Section 3.A.
2. YOUR OBLIGATIONS.
A. RECRUITING AND SERVICING.
(1) General. You agree to develop and service Mountain Mike's Pizza
Restaurant franchises in the Territory. This responsibility includes, but is not
limited to, advertising for franchise prospects; providing prospects with
information about us on a timely basis according to our policies and federal,
state and local laws and regulations; screening and qualifying prospective
franchise owners; providing site selection, lease negotiation and construction
advice; assisting with Restaurant openings; inspecting Restaurants; conducting
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training; developing marketing; assisting in administering (as we direct)
cooperative advertising funds and programs operating in your Territory; and
providing business advice to franchise owners.
(2) Recruiting. You agree to submit to us for our review individuals
who are of good character, have adequate financial resources and meet our then
current criteria for franchise owners. You agree to have each prospective
franchise owner complete our then current application form for a Mountain Mike's
Pizza Restaurant franchise. These applications must be submitted to us with all
other information we then customarily require for franchise applicants,
including, without limitation, information concerning the site at which the
applicant proposes to operate its Restaurant.
We will approve or disapprove in writing applicants and/or sites you
propose for Restaurants. We will use our best efforts to notify you within
fifteen (15) calendar days after the later of our personal interview of the
applicant, if any, and our receipt of the complete application, site report,
financial statements and other required materials regarding the applicant. If we
determine, in our sole discretion, that the applicant possesses sufficient
financial and managerial capability and meets the other criteria we then utilize
in granting franchises, and that the proposed site is suitable, we agree to
offer a franchise to the applicant for a Mountain Mike's Pizza Restaurant. The
franchise will be evidenced by our and the applicant's execution of our then
current form of franchise agreement. You will not be a party to those franchise
agreements (unless you are the franchise owner under a particular agreement).
You acknowledge that we may, at our sole discretion, modify in any respect the
franchise agreement and related documents we customarily use in granting
Mountain Mike's Pizza Restaurant franchises. If an applicant fails to execute
the franchise agreement and related documents, deliver payment of the initial
franchise fee and obtain lawful possession of an approved site, we may withdraw
our offer of the franchise to the applicant.
(3) Legal Requirements. You acknowledge that we have advised you that
many jurisdictions have enacted laws concerning the sale, renewal and
termination of franchises and the continuing relationship between parties to a
franchise. We will explain these laws to you and advise you how to comply with
them in performing your obligations under this Agreement. You agree to comply
with all of these laws and legal requirements in force in the Territory and to
utilize only offering circulars that we have approved for use in the applicable
jurisdiction. Neither you, your owners nor any employees can solicit prospective
franchise owners: (a) until we have registered our franchise offering in all
applicable jurisdictions and/or have provided you with an offering circular
prepared in compliance with state and federal law; or (b) at any time if we
notify you that a registration is not then in effect or our documents are not
then in compliance with applicable law. If your activities under this Agreement
require the preparation, amendment, registration or filing of information or any
disclosure or other documents, only we can prepare and file all required
offering circulars, ancillary documents and registration applications. All
registrations must be secured before you may solicit prospective franchise
owners. You agree to provide all information and execute all documents we
reasonably require in order to prepare and file these documents. You agree to
review all materials that we prepare for you and that we will not be liable for
any errors or omissions which you have not brought to our attention.
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B. MANAGEMENT OF YOUR BUSINESS.
The business you operate under this Agreement must at all times be
under your (or, if you are a corporation, limited liability company or
partnership, your managing shareholder's, member's or partner's ("Managing
Owner")) direct, day-to-day, full-time supervision.
C. INSURANCE.
You must at all times during the term of this Agreement maintain in
force, at your own expense, the insurance coverage we require. This insurance
must cover the risks and entities, and be in the amounts, we specify from time
to time.
D. ADVERTISING.
You agree to use reasonable efforts and spend reasonable amounts to
advertise and promote the offer and sale of Mountain Mike's Pizza Restaurant
franchises. Before you use them, samples of all advertising and promotional
materials that we have not prepared or previously approved must be submitted to
us for approval, which we will not unreasonably withhold. If you do not receive
written disapproval within fifteen (15) days after we receive the materials, the
materials will be considered approved. You cannot use any advertising or
promotional materials that we have disapproved.
E. ACCOUNTING, BOOKKEEPING, RECORDS AND REPORTING.
Within fifteen (15) days after the end of each month during the term of
this Agreement, you agree to deliver to us a report of your business activities
during that month in the form and detail we specify, including information about
your efforts to solicit prospective franchise owners and find sites in the
Territory.
F. AGENT'S INSPECTIONS.
You agree to determine through field audits, reviews and inspections of
each franchise owner in the Territory whether that franchise owner has complied
satisfactorily with its Franchise Agreement and our Operations Manual and
promptly notify the franchise owner in writing, with a copy (and evaluation
report) to us, of any deficiencies. You understand and acknowledge that your
inspections and reports are advisory only and that we have: (1) all of the
rights to inspect and ascertain compliance as if this Agreement were not in
effect; (2) the exclusive right to send notices of default to the franchise
owner; (3) the exclusive right to terminate a Franchise Agreement; and (4) the
exclusive right to take any legal action as a result of any violation of a
Franchise Agreement. If you believe that any franchise owner in the Territory
has breached its Franchise Agreement, you agree to document in writing all of
the relevant facts and request us to investigate the breach. If, as a result of
our investigation, we determine that there is a breach, we can take any action
we deem appropriate.
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G. DEVELOPMENT AND PERFORMANCE OBLIGATIONS.
You agree to develop Mountain Mike's Pizza Restaurants in the Territory
to meet or exceed the development schedule identified on Exhibit B (the
"Development Schedule"). (Each yearly period described in the Development
Schedule is referred to as a "Development Period.") A Mountain Mike's Pizza
Restaurant will be included in the cumulative number of Restaurants required to
be opened and operating only if it actually is operating within the Territory
and complying with the terms of its Franchise Agreement; provided, however, that
a Restaurant which is, with our approval, permanently closed during the last
three (3) months of a Development Period after having been in operation will be
included in the cumulative number of Restaurants required to be opened and
operating during that particular Development Period (but not after). Any
Restaurants you (or your owners) own and operate within the Territory will be
included in the cumulative number of Restaurants required to be opened and
operating. If you fail to comply with the Development Schedule, we can (but need
not):
(a) terminate this Agreement under Section 8;
(b) reduce the size of the Territory to a lesser area that we
determine; or
(c) eliminate your exclusive right to solicit and service franchise
owners in the Territory.
3. FEES.
A. YOUR INITIAL FEE TO US.
You agree to pay us a nonrecurring and nonrefundable initial fee in the
amount of One Hundred Thousand Dollars ($ 100,000.00 ), which we will fully earn
when this Agreement is signed.
B. OUR PAYMENTS TO YOU.
We will pay you the following amounts during the term of this
Agreement:
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(1) Initial Fees. Fifty percent (50%) of the initial franchise fees we
actually collect (not accrued) during the term of this Agreement from selling
franchises in the Territory. We will pay you this amount within thirty (30) days
after each franchised Restaurant opens.
(2) Royalties. Forty percent (40%) of the Royalties, as defined in the
Franchise Agreement (not including marketing or advertising fees), we actually
collect (not accrued) during the term of this Agreement from Mountain Mike's
Pizza Restaurants opened in the Territory during the term of this Agreement. We
will pay you these amounts by the fifteenth (15th) day of each month following
the month during which we actually collect the Royalties.
(3) Transfer Fees. Fifty percent (50%) of any transfer fees we actually
collect (not accrued) due to any "transfers," as defined in the Franchise
Agreement, occurring during the term of this Agreement with respect to
franchises we have sold within the Territory during the term of this Agreement.
We will pay you these amounts within thirty (30) days after we actually collect
the transfer fees.
(4) Renewal or Successor Franchise Fees. Fifty percent (50%) of any
renewal or successor franchise fees we actually collect (not accrued) during the
term of this Agreement with respect to renewal or successor franchises that we
grant within the Territory during the term of this Agreement. We will pay you
these amounts within thirty (30) days after we actually collect the renewal or
successor franchise fees.
C. PAYMENTS ON OUR RESTAURANTS WITHIN THE TERRITORY.
If we (or our affiliates) establish and operate any Mountain Mike's
Pizza Restaurants within the Territory, we (or our affiliates) will pay you the
same fees that you would have been entitled to receive under Paragraph B above
had these Restaurants been operated as franchises. We will pay you these amounts
on the same due dates specified in Paragraph B.
D. REDUCTION OF FEES PAYABLE.
You acknowledge and agree that we (and our affiliates) can reduce any
amounts that we must pay you under this Agreement by (1) any amounts that you
(or your owners) owe us (or our affiliates) under Franchise Agreements or
otherwise and (2) your proportionate share of any expenses we incur with third
parties to collect amounts due from franchise owners.
4. MARKS.
A. OWNERSHIP AND GOODWILL OF MARKS.
Your right to use the Marks is derived solely from this Agreement and
limited to your representing us as a development agent pursuant to and in
compliance with this Agreement and all operating standards we prescribe from
time to time during its term. Your unauthorized use of the Marks will be a
breach of this Agreement and an infringement of our rights in and to the Marks.
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You acknowledge and agree that your usage of the Marks and any goodwill
established by this use will be exclusively for our benefit and that this
Agreement does not confer any goodwill or other interests in the Marks upon you
(other than the right to represent us as a development agent under this
Agreement). All provisions of this Agreement applicable to the Marks apply to
any additional proprietary trade and service marks and commercial symbols we
authorize you to use.
B. LIMITATIONS ON YOUR USE OF MARKS.
You may not use any Mark as part of any corporate or legal business
name or with any prefix, suffix or other modifying words, terms, designs or
symbols (other than logos we have licensed to you), or in any modified form, nor
may you use any Mark in any manner we have not expressly authorized in writing.
You agree to display the Marks prominently in the manner we prescribe on forms,
advertising and marketing materials, supplies and other materials we designate.
You agree to give the notices of trade and service mark registrations that we
specify and to obtain any fictitious or assumed name registrations required
under applicable law.
C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS.
You agree to notify us immediately of any apparent infringement or
challenge to your use of any Mark, or of any claim by any person of any rights
in any Mark, and not to communicate with any person other than us and our
attorneys, and your attorneys, in any infringement, challenge or claim. We can
take the action we deem appropriate and control exclusively any litigation, U.S.
Patent and Trademark Office proceeding or any other administrative proceeding
arising out of any infringement, challenge or claim or otherwise relating to any
Mark. You agree to sign any and all instruments and documents, render the
assistance and do the acts and things that, in the opinion of our attorneys, may
be necessary or advisable to protect and maintain our interests in any
litigation or Patent and Trademark Office or other proceeding or otherwise to
protect and maintain our interests in the Marks.
D. DISCONTINUANCE OF USE OF MARKS.
If it becomes advisable at any time in our sole discretion for us
and/or you to modify or discontinue the use of any Mark and/or use one or more
additional or substitute trade or service marks, you agree to comply with our
directions within a reasonable time after receiving notice. We will not be
obligated to reimburse you for any expenses you incur in doing so, for any loss
of revenue attributable to any modified or discontinued Mark or for any
expenditures you make to promote a modified or substitute trademark or service
mark.
E. INDEMNIFICATION FOR USE OF MARKS.
We agree to indemnify you against and to reimburse you for all damages
for which you are held liable in any proceeding arising out of your authorized
use of any Mark under this Agreement and for all costs you reasonably incur in
defending any such claim brought against you or any such proceeding in which you
are named as a party, provided that you have timely notified us of the claim or
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proceeding and otherwise have complied with this Agreement. At our option, we
can defend and control the defense of any proceeding arising out of your use of
any Mark under this Agreement.
5. CONFIDENTIAL INFORMATION.
We possess (and will continue to develop and acquire) certain
confidential information (the "Confidential Information") relating to the
development and operation of Mountain Mike's Pizza Restaurants, which includes
(without limitation):
(1) recipes;
(2) site selection criteria;
(3) methods, formats, specifications, standards, systems, procedures,
sales and marketing techniques, knowledge and experience used in developing
and operating Mountain Mike's Pizza Restaurants;
(4) marketing and advertising programs for Mountain Mike's Pizza
Restaurants;
(5) knowledge of specifications for and suppliers of certain equipment,
products, materials and supplies; and
(6) knowledge of the operating results and financial performance of
Mountain Mike's Pizza Restaurants.
You acknowledge and agree that you will not acquire any interest in
Confidential Information, other than the right to utilize Confidential
Information disclosed to you in representing us as a development agent during
the term of this Agreement, and that the use or duplication of any Confidential
Information in any other business would constitute an unfair method of
competition. You further acknowledge and agree that Confidential Information is
proprietary, includes our trade secrets and is disclosed to you solely on the
condition that you agree, and you do hereby agree, that you:
(a) will not use Confidential Information in any other
business or capacity;
(b) will maintain the absolute confidentiality of Confidential
Information during and after the term of this Agreement;
(c) will not make unauthorized copies of any portion of
Confidential Information disclosed via electronic medium or in
written or other tangible form; and
(d) will adopt and implement all reasonable procedures that we
prescribe from time to time to prevent unauthorized use or
8
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disclosure of Confidential Information, including, without
limitation, restrictions on its disclosure to your personnel and
others.
You agree that we (and our affiliates) will have the perpetual right to
use and authorize other Mountain Mike's Pizza Restaurant franchise owners to
use, and you agree fully and promptly to disclose to us, all ideas, concepts,
formulas, recipes, techniques or materials relating to a Mountain Mike's Pizza
Restaurant that you and/or your employees conceive or develop during the term of
this Agreement.
Despite the foregoing, Confidential Information does not include
information, knowledge or know-how which a person can prove he or she knew
before becoming aware of it as a result of anything we or a franchise owner
provided directly or indirectly or before his or her operation of or presence at
a Mountain Mike's Pizza Restaurant. If we include any matter in Confidential
Information, anyone who claims that it is not Confidential Information has the
burden of proving that the exclusion provided in this paragraph is fulfilled.
6. EXCLUSIVE RELATIONSHIP.
You acknowledge and agree that we would be unable to protect
Confidential Information against unauthorized use or disclosure or to encourage
a free exchange of ideas and information among Mountain Mike's Pizza Restaurants
if franchise owners of Mountain Mike's Pizza Restaurants and our development
agents were permitted to hold interests in or perform services for a Competitive
Business (defined below). You also acknowledge that we have granted these rights
to you in consideration of and reliance upon your agreement to deal exclusively
with us. You therefore agree that, during the term of this Agreement, neither
you nor any of your owners (nor any of your or your owners' spouses) will:
(1) have any direct or indirect controlling interest as a disclosed or
beneficial owner in a Competitive Business, wherever located;
(2) have any direct or indirect interest as a disclosed or beneficial
owner in a Competitive Business operating within the Territory;
(3) have any direct or indirect interest as a disclosed or beneficial
owner in a Competitive Business operating within ten (10) miles of any Mountain
Mike's Pizza Restaurant;
(4) perform services as a director, officer, manager, employee,
consultant, representative, agent or otherwise for a Competitive Business,
wherever located;
(5) recruit or hire any person who is our employee or the employee of
any Mountain Mike's Pizza Restaurant without obtaining the prior written
permission of that person's employer;
(6) divert or attempt to divert any actual or potential business or
customer of a Mountain Mike's Pizza Restaurant to another business; or
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(7) engage in any other activity which may injure the goodwill of the
Marks and System.
The term "Competitive Business," as used in this Agreement, means any business
operating, or granting franchises or licenses to others to operate, any
restaurant or food service business featuring pizza as its primary product
(other than a Mountain Mike's Pizza Restaurant operated under a franchise
agreement with us). You agree to obtain similar covenants from the personnel we
specify.
7. TRANSFER.
A. BY US.
This Agreement is fully transferable by us and will inure to the
benefit of any transferee or other legal successor to our interests in this
Agreement.
B. BY YOU.
You understand and acknowledge that the rights and duties created by
this Agreement are personal to you (or, if you are a corporation, limited
liability company or partnership, to your owners) and that we have granted these
rights to you in reliance upon our perceptions of your (or your owners')
individual or collective character, skill, aptitude, attitude, business ability
and financial capacity. Accordingly, neither this Agreement (or any interest
herein) nor any ownership or other interest in you may be transferred without
our prior written approval, which we can withhold for any or no reason. Any
transfer without this approval constitutes a breach of this Agreement and is
void and of no effect. As used in this Agreement, the term "transfer" includes
your (or your owners') voluntary, involuntary, direct or indirect assignment,
sale, gift or other disposition of any interest in this Agreement or you.
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C. YOUR DEATH OR DISABILITY.
Upon your or your Managing Owner's death or disability, we will allow
this Agreement or the Managing Owner's interest in you to be transferred to an
immediate family member if the transferee has sufficient business experience,
aptitude and financial resources to represent us as a development agent and
agrees to comply with this Agreement. This transfer must take place within six
(6) months after death or disability. The term "disability" means a mental or
physical disability, impairment or condition that is reasonably expected to
prevent or actually does prevent you or your Managing Owner from supervising the
development and servicing of Mountain Mike's Pizza Restaurants within the
Territory.
8. TERMINATION OF AGREEMENT.
A. BY YOU.
You can terminate this Agreement at any time by giving us at least
ninety (90) days' prior written notice of termination.
B. BY US.
We can terminate this Agreement, effective upon delivery of written
notice of termination to you, if:
(1) you (or any of your owners) have made or make any material
misrepresentation or omission in acquiring the rights granted under this
Agreement or while representing us as a development agent;
(2) you fail actively to perform your obligations under this Agreement;
(3) you (or any of your owners) are or have been convicted by a trial
court of, or plead or have pleaded no contest to, a felony;
(4) you (or any of your owners) engage in any dishonest or unethical
conduct which may adversely affect the reputation of Mountain Mike's Pizza
Restaurants or the goodwill associated with the Marks;
(5) you (or any of your owners) make an unauthorized assignment of this
Agreement or of an ownership interest in you;
(6) this Agreement or the Managing Owner's interest in you is not
assigned as required upon your or the Managing Owner's death or disability;
(7) you fail to meet the Development Schedule during any Development
Period;
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(8) we have sent a notice of termination under any Franchise Agreement
for a Mountain Mike's Pizza Restaurant between you (or any of your owners) and
us or you fail to own and operate at least one (1) Mountain Mike's Pizza
Restaurant within the Territory, as required under Section 1.B.;
(9) you (or any of your owners) make any unauthorized use or disclosure
of any Confidential Information in violation of this Agreement;
(10) you (or any of your owners) fail on three (3) or more separate
occasions within any period of twelve (12) consecutive months to comply with
this Agreement, whether or not the failures are corrected after written notice
of the failures is delivered to you;
(11) you make an assignment for the benefit of creditors or admit in
writing your insolvency or inability to pay your debts generally as they become
due; or
(12) you (or any of your owners) fail to comply with any other
provision of this Agreement or any of our operating standards and do not correct
the failure within thirty (30) days after written notice of the failure to
comply is delivered to you.
9. OUR AND YOUR RIGHTS AND OBLIGATIONS UPON TERMINATION OR EXPIRATION OF
THIS AGREEMENT.
A. PAYMENT OF AMOUNTS OWED TO YOU.
We agree to pay you within fifteen (15) days after the effective date
of termination or expiration of this Agreement, or on any later date that the
amounts due to you are determined, all amounts owed to you which then are unpaid
(subject to our rights under Section 3.D.). We are not obligated to pay you any
amounts that accrue after the effective date of termination or expiration.
B. MARKS.
Upon the termination or expiration of this Agreement:
(1) you may not directly or indirectly at any time or in any manner
(except with Mountain Mike's Pizza Restaurants you own and operate) identify
yourself or any business as a current or former development agent of Mountain
Mike's Pizza Restaurants, use any Mark, any colorable imitation thereof or other
indicia of a Mountain Mike's Pizza Restaurant in any manner or for any purpose
or utilize for any purpose any trade name, trade or service mark or other
commercial symbol that indicates or suggests a connection or association with
us;
(2) you agree to take the action required to cancel all fictitious or
assumed name or equivalent registrations relating to your use of any Mark; and
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(3) you agree to deliver to us within thirty (30) days all signs,
marketing materials, forms and other materials containing any Mark or otherwise
identifying or relating to a Mountain Mike's Pizza Restaurant and allow us,
without liability to you or third parties, to remove all of these items from
wherever they are located.
C. CONFIDENTIAL INFORMATION.
You agree that, upon termination or expiration of this Agreement, you
will immediately cease to use any of our Confidential Information in any
business or otherwise (except in operating Mountain Mike's Pizza Restaurants
under Franchise Agreements with us) and return to us all copies of any
confidential materials that we have loaned to you.
D. COVENANT NOT TO COMPETE.
Upon
(1) our termination of this Agreement according to its terms and
conditions,
(2) your termination of this Agreement, or
(3) expiration of this Agreement (without renewal),
you and your owners agree that, for a period of two (2) years commencing on the
effective date of termination or expiration or the date on which all persons
restricted by this Paragraph begin to comply with this Paragraph, whichever is
later, neither you nor any of your owners will have any direct or indirect
interest (e.g., through a spouse) as a disclosed or beneficial owner, investor,
partner, director, officer, employee, consultant, representative or agent or in
any other capacity in any Competitive Business (as defined in Section 6 above)
operating:
(a) within the Territory; or
(b) within one (1) mile of any Mountain Mike's Pizza
Restaurant in operation or under construction on the later of the
effective date of the termination or expiration or the date on
which all persons restricted by this Paragraph begin to comply
with this Paragraph.
If any person restricted by this Paragraph refuses voluntarily to
comply with these obligations, the two (2) year period will commence with the
entry of a court order enforcing this provision. You and your owners expressly
acknowledge that you possess skills and abilities of a general nature and have
other opportunities for exploiting these skills. Consequently, enforcement of
the covenants made in this Paragraph will not deprive you of your personal
goodwill or ability to earn a living.
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E. CONTINUING OBLIGATIONS.
All of our and your (and your owners') obligations which expressly or
by their nature survive the expiration or termination of this Agreement will
continue in full force and effect subsequent to and notwithstanding its
expiration or termination and until they are satisfied in full or by their
nature expire.
10. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION.
A. INDEPENDENT CONTRACTORS.
You and we understand and agree that this Agreement does not create a
fiduciary relationship between you and us, that you and we are and will be
independent contractors, that we have appointed you as our special agent for a
particular purpose and that nothing in this Agreement is intended to make either
you or us a general agent, joint venturer, partner or employee of the other for
any purpose. You agree to identify yourself conspicuously in all dealings with
existing and prospective franchise owners, lessors, suppliers, public officials
and others as the owner of a business under a development agent agreement we
have granted and to place notices of independent ownership on the forms,
business cards, stationery and advertising and other materials we require from
time to time.
B. NO LIABILITY FOR ACTS OF OTHER PARTY.
You agree not to employ any of the Marks in signing any contract or
applying for any license or permit, or in a manner that may result in our
liability for any of your indebtedness or obligations, and that you will not use
the Marks in any way we have not expressly authorized. Neither we nor you will
make any express or implied agreements, warranties, guarantees or
representations or incur any debt in the name or on behalf of the other,
represent that our respective relationship is other than franchisor and
development agent or be obligated by or have any liability under any agreements
or representations made by the other that are not expressly authorized in
writing. We will not be obligated for any damages to any person or property
directly or indirectly arising out of the business you conduct under this
Agreement.
C. INDEMNIFICATION.
(i) You agree to indemnify, defend and hold harmless us, our affiliates
and our respective shareholders, directors, officers, employees, agents,
successors and assignees (the "Indemnified Parties") against and to reimburse
any one or more of the Indemnified Parties for all claims, obligations and
damages described in this Paragraph and any and all claims and liabilities
directly or indirectly arising out of your activities under this Agreement or
your breach of this Agreement. For purposes of this indemnification, "claims"
include all obligations, damages (actual, consequential or otherwise) and costs
reasonably incurred in defending any claim against any of the Indemnified
Parties, including, without limitation, reasonable accountants', arbitrators',
attorneys' and expert witness fees, costs of investigation and proof of facts,
court costs, other expenses of litigation, arbitration or alternative dispute
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resolution and travel and living expenses. We and each of the other Indemnified
Parties can defend any claim against us and them and agree to settlements or
take any other remedial, corrective or other actions we and/or they deem
expedient. This indemnity will continue in full force and effect subsequent to
and notwithstanding the expiration or termination of this Agreement.
Under no circumstances will we or any other Indemnified Party be
required to seek recovery from any insurer or other third party, or otherwise to
mitigate our, their or your losses and expenses, in order to maintain and
recover fully a claim against you. You agree that a failure to pursue this
recovery or mitigate a loss will in no way reduce or alter the amounts we or
another Indemnified Party may recover from you.
(ii) We agree to indemnify, defend and hold harmless you and your
shareholders, directors, officers, employees, agents, successors and assignees
(the "Development Agent Indemnified Parties") against and to reimburse you for
all claims, obligations and damages (as defined in subparagraph (i) above) for
which you are held liable in an action or proceeding asserted by a third party
as a result of our defaults, negligence or intentional misconduct toward that
third party.
Under no circumstances will you or any other Development Agent
Indemnified Party be required to seek recovery from any insurer or other third
party, or otherwise to mitigate your, their or our losses and expenses, in order
to maintain and recover fully a claim against us. We agree that a failure to
pursue this recovery or mitigate a loss will in no way reduce or alter the
amounts you or another Development Agent Indemnified Party may recover from us.
11. ENFORCEMENT.
A. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS.
Except as expressly provided to the contrary in this Agreement, each
section, paragraph, term and provision of this Agreement will be considered
severable, and if, for any reason, any provision is held to be invalid or
contrary to or in conflict with any applicable present or future law or
regulation in a final, unappealable ruling issued by any court, agency or
tribunal with competent jurisdiction in a proceeding to which we are a party,
that ruling will not impair the operation of, or have any other effect upon, the
other portions of this Agreement that may remain otherwise intelligible, which
will continue to be given full force and effect and bind the parties, although
any portion held to be invalid will be deemed not to be a part of this Agreement
from the date the time for appeal expires, if you are a party to the proceeding,
otherwise upon your receipt from us of a notice of non-enforcement.
If any covenant in this Agreement which restricts competitive activity
is deemed unenforceable by virtue of its scope in terms of area, business
activity prohibited and/or length of time, but would be enforceable by reducing
any part or all of it, you and we agree that the covenant will be enforced to
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the fullest extent permissible under the laws and public policies applied in the
jurisdiction whose law is applicable to the validity of the covenant.
If any applicable and binding law or rule of any jurisdiction requires
a greater prior notice than is required under this Agreement of the termination
of this Agreement or of our refusal to enter into a successor development agent
agreement, or the taking of some other action not required under this Agreement,
or if, under any applicable and binding law or rule of any jurisdiction, any
provision of this Agreement or any operating standard is invalid or
unenforceable, the prior notice and/or other action required by the law or rule
will be substituted for the comparable provisions of this Agreement, and we will
have the right, in our sole discretion, to modify the invalid or unenforceable
provision or operating standard to the extent required to be valid and
enforceable. You agree to be bound by any promise or covenant imposing the
maximum duty permitted by law which is subsumed within the terms of any
provision of this Agreement, as though it were separately articulated in and
made a part of this Agreement, that may result from striking from any of the
provisions of this Agreement, or any operating standard, any portion or portions
which a court or arbitrator may hold to be unenforceable in a final decision to
which we are a party, or from reducing the scope of any promise or covenant to
the extent required to comply with a court order or arbitration award. These
modifications to this Agreement will be effective only in that jurisdiction,
unless we elect to give them greater applicability, and will be enforced as
originally made and entered into in all other jurisdictions.
B. WAIVER OF OBLIGATIONS.
We and you may by written instrument unilaterally waive or reduce any
obligation of or restriction upon the other under this Agreement, effective upon
delivery of written notice to the other or another effective date stated in the
notice of waiver. Any waiver we grant will be without prejudice to any other
rights we may have, will be subject to our continuing review and may be revoked,
in our sole discretion, at any time and for any reason, effective upon delivery
to you of ten (10) days' prior written notice.
We and you will not be deemed to have waived or impaired any right,
power or option reserved by this Agreement (including, without limitation, our
right to demand exact compliance with every term, condition and covenant in this
Agreement or to declare any breach to be a default and to terminate this
Agreement before the expiration of its term) by virtue of any custom or practice
at variance with the terms of this Agreement; our or your failure, refusal or
neglect to exercise any right under this Agreement or to insist upon exact
compliance by the other with our and your obligations under this Agreement; our
waiver, forbearance, delay, failure or omission to exercise any right, power or
option, whether of the same, similar or different nature, with other Mountain
Mike's Pizza Restaurant development agents; or the existence of other
development agent agreements for Mountain Mike's Pizza Restaurants which contain
different provisions from those contained in this Agreement.
C. COSTS AND ATTORNEYS' FEES.
If we incur expenses due to your failure to comply with this Agreement,
you agree to reimburse us for any of the costs and expenses which we incur,
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including, without limitation, reasonable accounting, attorneys', arbitrators'
and related fees.
D. RIGHTS OF PARTIES ARE CUMULATIVE.
Our and your rights under this Agreement are cumulative, and no
exercise or enforcement by us or you of any right or remedy under this Agreement
will preclude our or your exercise or enforcement of any other right or remedy
under this Agreement which we or you are entitled by law to enforce.
E. ARBITRATION.
EXCEPT FOR CONTROVERSIES, DISPUTES OR CLAIMS RELATED TO OR BASED ON
YOUR USE OF THE MARKS AFTER THE EXPIRATION OR TERMINATION OF THIS AGREEMENT, ALL
CONTROVERSIES, DISPUTES OR CLAIMS BETWEEN US AND OUR SHAREHOLDERS, OFFICERS,
DIRECTORS, AGENTS AND EMPLOYEES AND YOU (YOUR OWNERS, GUARANTORS, AFFILIATES AND
EMPLOYEES, IF APPLICABLE) ARISING OUT OF OR RELATED TO:
(1) THIS AGREEMENT OR ANY OTHER AGREEMENT BETWEEN YOU AND US OR ANY
PROVISION OF ANY OF THESE AGREEMENTS;
(2) OUR RELATIONSHIP WITH YOU;
(3) THE VALIDITY OF THIS AGREEMENT OR ANY OTHER AGREEMENT BETWEEN YOU
AND US OR ANY PROVISION OF ANY OF THESE AGREEMENTS; OR
(4) ANY OPERATING STANDARD RELATING TO THE DEVELOPMENT AND SERVICING OF
MOUNTAIN MIKE'S PIZZA RESTAURANTS;
WILL BE SUBMITTED FOR ARBITRATION, ON DEMAND OF EITHER PARTY, TO THE OFFICE OF
THE AMERICAN ARBITRATION ASSOCIATION CLOSEST TO OUR THEN EXISTING PRINCIPAL
BUSINESS ADDRESS. THE ARBITRATION PROCEEDINGS WILL BE CONDUCTED AT THAT AMERICAN
ARBITRATION ASSOCIATION OFFICE AND, EXCEPT AS OTHERWISE PROVIDED IN THIS
AGREEMENT, WILL BE HEARD BY ONE ARBITRATOR IN ACCORDANCE WITH THE THEN CURRENT
COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION. ALL
MATTERS RELATING TO ARBITRATION WILL BE GOVERNED BY THE FEDERAL ARBITRATION ACT
(9 U.S.C. SS. 1 ET SEQ.) AND NOT BY ANY STATE ARBITRATION LAW.
THE ARBITRATOR WILL HAVE THE RIGHT TO AWARD OR INCLUDE IN HIS AWARD ANY
RELIEF WHICH DEEMS PROPER IN THE CIRCUMSTANCES, INCLUDING, WITHOUT LIMITATION,
MONEY DAMAGES (WITH INTEREST ON UNPAID AMOUNTS FROM THE DATE DUE), SPECIFIC
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PERFORMANCE, INJUNCTIVE RELIEF AND ATTORNEYS' FEES AND COSTS, PROVIDED THAT THE
ARBITRATOR WILL NOT HAVE THE RIGHT TO DECLARE ANY MARK GENERIC OR OTHERWISE
INVALID OR, EXCEPT AS OTHERWISE PROVIDED IN PARAGRAPH H OF THIS SECTION, TO
AWARD EXEMPLARY OR PUNITIVE DAMAGES. THE AWARD AND DECISION OF THE ARBITRATOR
WILL BE CONCLUSIVE AND BINDING UPON ALL PARTIES HERETO, AND JUDGMENT UPON THE
AWARD MAY BE ENTERED IN ANY COURT OF COMPETENT JURISDICTION.
WE AND YOU AGREE TO BE BOUND BY THE PROVISIONS OF ANY LIMITATION ON THE
PERIOD OF TIME IN WHICH CLAIMS MUST BE BROUGHT UNDER APPLICABLE LAW OR THIS
AGREEMENT, WHICHEVER EXPIRES EARLIER. WE AND YOU FURTHER AGREE THAT, IN
CONNECTION WITH ANY ARBITRATION PROCEEDINGS, EACH MUST SUBMIT OR FILE ANY CLAIM
WHICH WOULD CONSTITUTE A COMPULSORY COUNTERCLAIM (AS DEFINED BY RULE 13 OF THE
FEDERAL RULES OF CIVIL PROCEDURE) WITHIN THE SAME PROCEEDING AS THE CLAIM TO
WHICH IT RELATES. ANY CLAIM WHICH IS NOT SUBMITTED OR FILED AS DESCRIBED ABOVE
WILL BE FOREVER BARRED.
WE AND YOU AGREE THAT ARBITRATION WILL BE CONDUCTED ON AN INDIVIDUAL,
NOT A CLASS-WIDE, BASIS, AND THAT AN ARBITRATION PROCEEDING BETWEEN US AND OUR
SHAREHOLDERS, OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES AND YOU (AND/OR YOUR
OWNERS, GUARANTORS, AFFILIATES AND EMPLOYEES, IF APPLICABLE) MAY NOT BE
CONSOLIDATED WITH ANY OTHER ARBITRATION PROCEEDING BETWEEN US AND ANY OTHER
PERSON, CORPORATION OR PARTNERSHIP.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS PARAGRAPH,
WE AND YOU EACH HAVE THE RIGHT IN A PROPER CASE TO SEEK TEMPORARY RESTRAINING
ORDERS AND TEMPORARY OR PRELIMINARY INJUNCTIVE RELIEF FROM A COURT OF COMPETENT
JURISDICTION: PROVIDED, HOWEVER, THAT WE AND YOU MUST CONTEMPORANEOUSLY SUBMIT
OUR DISPUTE FOR ARBITRATION ON THE MERITS AS PROVIDED IN THIS SECTION.
THE PROVISIONS OF THIS PARAGRAPH ARE INTENDED TO BENEFIT AND BIND
CERTAIN THIRD PARTY NON-SIGNATORIES AND WILL CONTINUE IN FULL FORCE AND EFFECT
SUBSEQUENT TO AND NOTWITHSTANDING THE EXPIRATION OR TERMINATION OF THIS
AGREEMENT.
F. GOVERNING LAW.
ALL MATTERS RELATING TO ARBITRATION WILL BE GOVERNED BY THE FEDERAL
ARBITRATION ACT (9 U.S.C. ss.ss. 1 ET SEQ.). EXCEPT TO THE EXTENT GOVERNED BY
THE FEDERAL ARBITRATION ACT, THE UNITED STATES TRADEMARK ACT OF 1946 (LANHAM
ACT, 15
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U.S.C. SECTIONS 1051 ET SEQ.) OR OTHER FEDERAL LAW, THIS AGREEMENT AND ALL
CLAIMS ARISING FROM THE RELATIONSHIP BETWEEN YOU AND US WILL BE GOVERNED BY THE
LAWS OF THE STATE IN WHICH THE TERRITORY IS LOCATED, EXCEPT THAT ANY STATE LAW
REGULATING THE SALE OF FRANCHISES (OR DEVELOPMENT AGENT RIGHTS) OR GOVERNING THE
RELATIONSHIP OF A FRANCHISOR AND ITS FRANCHISEE (OR DEVELOPMENT AGENT) WILL NOT
APPLY UNLESS ITS JURISDICTIONAL REQUIREMENTS ARE MET INDEPENDENTLY WITHOUT
REFERENCE TO THIS PARAGRAPH.
G. CONSENT TO JURISDICTION.
SUBJECT TO SECTION 11.E. AND THE PROVISIONS BELOW, YOU AND YOUR OWNERS
AGREE THAT ALL ACTIONS ARISING UNDER THIS AGREEMENT OR OTHERWISE AS A RESULT OF
THE RELATIONSHIP BETWEEN YOU AND US SHALL BE COMMENCED IN THE STATE, AND IN THE
STATE OR FEDERAL COURT OF GENERAL JURISDICTION CLOSEST TO, WHERE OUR PRINCIPAL
BUSINESS ADDRESS THEN IS LOCATED, AND YOU (AND EACH OWNER) IRREVOCABLY SUBMIT TO
THE JURISDICTION OF SUCH COURTS AND WAIVE ANY OBJECTION YOU (AND EACH OWNER) MAY
HAVE TO EITHER THE JURISDICTION OF OR VENUE IN SUCH COURTS. NOTWITHSTANDING THE
FOREGOING, YOU AND YOUR OWNERS AGREE THAT WE MAY ENFORCE THIS AGREEMENT AND ANY
ARBITRATION ORDERS IN THE COURTS OF THE STATE OR STATES IN WHICH YOU ARE
DOMICILED OR THE TERRITORY IS LOCATED.
H. WAIVER OF PUNITIVE DAMAGES AND JURY TRIAL.
EXCEPT FOR YOUR OBLIGATION TO INDEMNIFY US UNDER SECTION 10.C. AND
CLAIMS WE BRING AGAINST YOU FOR YOUR UNAUTHORIZED USE OF THE MARKS OR
UNAUTHORIZED USE OR DISCLOSURE OF ANY CONFIDENTIAL INFORMATION, WE AND YOU AND
YOUR RESPECTIVE OWNERS WAIVE TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO
OR CLAIM FOR ANY PUNITIVE OR EXEMPLARY DAMAGES AGAINST THE OTHER AND AGREE THAT,
IN THE EVENT OF A DISPUTE BETWEEN US, THE PARTY MAKING A CLAIM WILL BE LIMITED
TO EQUITABLE RELIEF AND TO RECOVERY OF ANY ACTUAL DAMAGES IT SUSTAINS.
WE AND YOU IRREVOCABLY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM, WHETHER AT LAW OR IN EQUITY, BROUGHT BY EITHER OF US.
I. BINDING EFFECT.
This Agreement is binding upon us and you and our respective executors,
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administrators, heirs, beneficiaries, assigns and successors in interest and may
not be modified except by a written agreement signed by you and us.
J. LIMITATIONS OF CLAIMS.
Any and all claims arising out of or relating to this Agreement or our
relationship with you will be barred unless a judicial or arbitration proceeding
is commenced within one (1) year from the date on which the party asserting the
claim knew or should have known of the facts giving rise to the claims.
K. CONSTRUCTION
The preambles and exhibits are a part of this Agreement which, together
with our written policies, constitutes our and your entire agreement, and there
are no other oral or written understandings or agreements between us and you
relating to the subject matter of this Agreement. Except as contemplated by the
arbitration provisions of Section 11.E., nothing in this Agreement is intended,
nor is deemed, to confer any rights or remedies upon any person or legal entity
not a party hereto.
Except where this Agreement expressly obligates us reasonably to
approve or not unreasonably to withhold our approval of any of your actions or
requests, we have the absolute right to refuse any request you make or to
withhold our approval of any of your proposed, initiated or effected actions
that require our approval. The headings of the several sections and paragraphs
hereof are for convenience only and do not define, limit or construe the
contents of these sections or paragraphs.
References in this Agreement to "we," "us" and "our," with respect to
all of our rights and all of your obligations to us under this Agreement, will
be deemed to include any of our affiliates with whom you deal. The term
"affiliate," as used herein with respect to you or us, means any person or
entity directly or indirectly owned or controlled by, under common control with
or owning or controlling you or us. For purposes of this definition, "control"
means the power to direct or cause the direction of management and policies.
If two or more persons are at any time the Development Agent under this
Agreement, whether as partners or joint venturers, their obligations and
liabilities to us will be joint and several. References to "owner" mean any
person holding a direct or indirect, legal or beneficial ownership interest or
voting rights in you, including, without limitation, any person who has a direct
or indirect interest in you or this Agreement and any person who has any other
legal or equitable interest, or the power to vest in himself or herself any
legal or equitable interest, in its revenue, profits, rights or assets. "Person"
means any natural person, corporation, limited liability company, general or
limited partnership, unincorporated association, cooperative or other legal or
functional entity.
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This Agreement may be executed in multiple copies, each of which will
be deemed an original.
12. NOTICES AND PAYMENTS.
All written notices, reports and payments permitted or required to be
delivered by the provisions of this Agreement will be deemed so delivered:
(1) at the time delivered by hand;
(2) at the time delivered via computer transmission;
(3) one (1) business day after transmission by telecopy, facsimile or
other electronic system;
(4) one (1) business day after being placed in the hands of a
commercial courier service for next business day delivery; or
(5) three (3) business days after placement in the United States Mail
by Registered or Certified Mail, Return Receipt Requested, postage prepaid;
and must be addressed to the party to be notified at its most current principal
business address of which the notifying party has been notified.
13. ACKNOWLEDGMENTS.
You acknowledge:
(1) That you have conducted an independent investigation of this
business opportunity and recognize that, like any other business, it involves
business risks.
(2) That your business abilities and efforts are vital to the success
of your business.
(3) That you are committed to maintaining the standards we prescribe
for development agents.
(4) That any information you have acquired from other Mountain Mike's
Pizza Restaurant development agents relating to their profits or cash flows does
not constitute information obtained from us, nor do we make any representation
as to the accuracy of any such information.
(5) That in all of their dealings with you, our officers, directors,
employees and agents have acted only in a representative, and not in an
individual, capacity and that business dealings between you and them as a result
of this Agreement are solely between you and us.
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(6) That you have represented to us, as an inducement to our entry into
this Agreement, that all statements you have made and all materials you have
submitted to us are accurate and complete and that you have made no
misrepresentations or material omissions in obtaining the rights granted by this
Agreement.
(7) That you have read this Agreement and our Franchise Offering
Circular and understand and accept that the terms, conditions and covenants
which are contained in this Agreement are reasonably necessary for us to
maintain our high standards of quality and service and consequently to protect
and preserve the goodwill of the Marks.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement effective on the date stated on the first page.
QUALITY FRANCHISE DEVELOPMENT AGENT
SYSTEMS, INC., a Delaware corporation
(IF CORPORATION, LIMITED LIABILITY
COMPANY OR PARTNERSHIP):
MKJ Holdings LLC
----------------------------------
[Name]
Members of MKJ Holdings LLC
----------------------------------
/s/ Bradley Gordon
- ------------------------------------- ----------------------------------
By: Bradley Gordon By: Michael J. Feinstein
- ------------------------------------- ----------------------------------
Title: President & CEO
/s/ Katherine K. Feinstein
----------------------------------
By: Katherine K. Feinstein
----------------------------------
/s/ J.D. Hade
----------------------------------
By: J. D. Hade
----------------------------------
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EXHIBIT A
EXCLUSIVE AREA
1. The Territory referred to in Section 1.B. of the Development Agent
Agreement will be as follows:
San Diego County
- --------------------------------------------------------------------------------
Imperial County
- --------------------------------------------------------------------------------
Riverside County
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If the Territory is identified by counties or other political
subdivisions, political boundaries will be considered fixed as of the date of
this Agreement and will not change, notwithstanding a political reorganization
or change to the boundaries or regions. All street boundaries will be deemed to
end at the street center line unless otherwise specified above.
QUALITY FRANCHISE DEVELOPMENT AGENT
SYSTEMS, INC., a Delaware
corporation (IF CORPORATION, LIMITED LIABILITY
COMPANY OR PARTNERSHIP):
/s/ Bradley Gordon
- ---------------------------------------
By: Bradley Gordon
- --------------------------------------- -----------------------------------
Title: President & CEO (Name)
Members of MKJ Holdings LLC
-----------------------------------
/s/ Michael J. Feinstein
-----------------------------------
By: Michael J. Feinstein
-----------------------------------
(Name) For MKJ LLC
/s/ Katherine K. Feinstein
-----------------------------------
By: Katherine K. Feinstein
-----------------------------------
(Name) For MKJ LLC
/s/ J.D. Hade
-----------------------------------
By: J. D. Hade
-----------------------------------
(Name) For MKJ LLC
<PAGE>
EXHIBIT B
DEVELOPMENT SCHEDULE
The Development Schedule referred to in Section 2.G. of the Development
Agent Agreement will be as follows:
Cumulative Number of
Number of New Restaurants to be
Restaurants to be Opened Operating Within
Within the Territory the Territory
Date Required~ By Specified Date~ By Specified Date~
6/1/97 3 3
6/1/98 3 6
6/1/99 3 9
6/1/00 3 12
6/1/01 3 15
- ----/----/-----
- ----/----/-----
- ----/----/-----
- ----/----/-----
- ----/----/-----
- ----/----/-----
- ----/----/-----
- ----/----/-----
QUALITY FRANCHISE DEVELOPMENT AGENT
SYSTEMS, INC., a Delaware
corporation (IF CORPORATION, LIMITED LIABILITY
COMPANY OR PARTNERSHIP):
By: /s/ Bradley Gordon MKJ Holdings LLC
- ---------------------------- -----------------------------------
Title: President & CEO [Name]
By: /s/ J.D. Hade
-----------------------------------
Title: Member
<PAGE>
Members of MKJ Holdings LLC
-----------------------------------
By: /s/ Michael J. Feinstein
-----------------------------------
(Name) For MKJ LLC
/s/ Katherine K. Feinstein
-----------------------------------
By: Katherine K. Feinstein
-----------------------------------
(Name) For MKJ LLC
/s/ J.D. Hade
-----------------------------------
By: J.D. Hade
-----------------------------------
(Name) For MKJ LLC
2
<PAGE>
GUARANTY AND ASSUMPTION OF OBLIGATIONS
THIS GUARANTY AND ASSUMPTION OF OBLIGATIONS is given this June 30th day
of 1996, by MKJ Holdings, LLC
In consideration of, and as an inducement to, the execution of that certain
Development Agent Agreement of even date herewith (the "Agreement") by Quality
Franchise Systems, Inc. ("us," "we" or "our"), each of the undersigned hereby
personally and unconditionally (a) guarantees to us and our successors and
assigns, for the term of the Agreement and thereafter as provided in the
Agreement, that ______________________ ("Development Agent") will punctually pay
and perform each and every undertaking, agreement and covenant set forth in the
Agreement and (b) agrees to be personally bound by, and personally liable for
the breach of, each and every provision in the Agreement, both monetary
obligations and obligations to take or refrain from taking specific actions or
to engage or refrain from engaging in specific activities.
Each of the undersigned consents and agrees that: (1) his or her direct and
immediate liability under this guaranty will be joint and several; (2) he or she
will render any payment or performance required under the Agreement upon demand
if Development Agent fails or refuses punctually to do so; (3) such liability
will not be contingent or conditioned upon our pursuit of any remedies against
Development Agent or any other person; and (4) such liability will not be
diminished, relieved or otherwise affected by any extension of time, credit or
other indulgence which we may from time to time grant to Development Agent or to
any other person, including, without limitation, the compromise or release of
any claims, none of which will in any way modify or amend this guaranty, which
will be continuing and irrevocable during the term of the Agreement.
Each of the undersigned waives all rights to payments and claims for
reimbursement or subrogation which any of the undersigned may have against
Development Agent arising as a result of the undersigned's execution of and
performance under this guaranty.
IN WITNESS WHEREOF, each of the undersigned has affixed his or her signature on
the same day and year as the Agreement was executed.
GUARANTOR(S)
/s/ Michael J. Feinstein /s/ J.D. Hade
- ----------------------------- -------------------------------
/s/ Katherine K. Feinstein
- -----------------------------
<PAGE>
QUALITY FRANCHISE SYSTEMS, INC.
DEVELOPMENT AGENT AGREEMENT
DEVELOPMENT AGENT
May 1, 1996
DATE OF AGREEMENT
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION.
<PAGE>
TABLE OF CONTENTS
Page
1. PREAMBLES AND GRANT OF RIGHTS....................................... 1
A. PREAMBLES.................................................. 1
B. GRANT OF RIGHTS............................................ 2
2. YOUR OBLIGATIONS.................................................... 2
A. RECRUITING AND SERVICING................................... 2
B. MANAGEMENT OF YOUR BUSINESS................................ 4
C. INSURANCE.................................................. 4
D. ADVERTISING................................................ 4
E. ACCOUNTING, BOOKKEEPING, RECORDS AND REPORTING............. 4
F. AGENT'S INSPECTIONS........................................ 4
G. DEVELOPMENT AND PERFORMANCE OBLIGATIONS.................... 5
3. FEES................................................................ 5
A. YOUR INITIAL FEE TO US..................................... 5
B. OUR PAYMENTS TO YOU........................................ 5
C. PAYMENTS ON OUR RESTAURANTS WITHIN THE TERRITORY........... 6
D. REDUCTION OF FEES PAYABLE.................................. 6
4. MARKS............................................................... 6
A. OWNERSHIP AND GOODWILL OF MARKS............................ 6
B. LIMITATIONS ON YOUR USE OF MARKS........................... 7
C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS................... 7
D. DISCONTINUANCE OF USE OF MARKS............................. 7
E. INDEMNIFICATION FOR USE OF MARKS........................... 8
5. CONFIDENTIAL INFORMATION............................................ 8
6. EXCLUSIVE RELATIONSHIP.............................................. 9
7. TRANSFER............................................................ 10
A. BY US...................................................... 10
B. BY YOU..................................................... 10
C. YOUR DEATH OR DISABILITY................................... 11
8. TERMINATION OF AGREEMENT............................................ 11
<PAGE>
A. BY YOU..................................................... 11
B. BY US...................................................... 11
9. OUR AND YOUR RIGHTS AND OBLIGATIONS UPON
TERMINATION OR EXPIRATION OF THIS AGREEMENT......................... 12
A. PAYMENT OF AMOUNTS OWED TO YOU............................. 12
B. MARKS...................................................... 12
C. CONFIDENTIAL INFORMATION................................... 13
D. COVENANT NOT TO COMPETE.................................... 13
E. CONTINUING OBLIGATIONS..................................... 14
10. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION......................... 14
A. INDEPENDENT CONTRACTORS.................................... 14
B. NO LIABILITY FOR ACTS OF OTHER PARTY....................... 14
C. INDEMNIFICATION............................................ 14
11. ENFORCEMENT......................................................... 15
A. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS.......... 15
B. WAIVER OF OBLIGATIONS...................................... 16
C. COSTS AND ATTORNEYS' FEES.................................. 17
D. RIGHTS OF PARTIES ARE CUMULATIVE........................... 17
E. ARBITRATION................................................ 17
F. GOVERNING LAW.............................................. 19
G. CONSENT TO JURISDICTION.................................... 19
H. WAIVER OF PUNITIVE DAMAGES AND JURY TRIAL.................. 20
I. BINDING EFFECT............................................. 20
J. LIMITATIONS OF CLAIMS...................................... 20
K. CONSTRUCTION............................................... 20
12. NOTICES AND PAYMENTS................................................ 21
13. ACKNOWLEDGMENTS..................................................... 22
EXHIBITS
EXHIBIT A - TERRITORY
EXHIBIT B - DEVELOPMENT SCHEDULE
ii
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QUALITY FRANCHISE SYSTEMS, INC.
DEVELOPMENT AGENT AGREEMENT
THIS DEVELOPMENT AGENT AGREEMENT (the "Agreement") is made and entered
into this __1__ day of May__________, 199_6_, by and between QUALITY FRANCHISE
SYSTEMS, INC., a Delaware corporation, with its principal business address at
3841 North Freeway Boulevard, Suite 290, Sacramento, California 95834 (referred
to in this Agreement as "we," "us" or "our"), and Master Franchising and
Development Systems, Inc., a Michigan corporation, whose principal business
address is 5968 Buttonwood, Haslett, MI 48840 (referred to in this Agreement as
"you" or "your").
1. PREAMBLES AND GRANT OF RIGHTS.
A. PREAMBLES.
(1) We and our predecessors have, since 1978, expended considerable
time and effort in developing and operating a pizza restaurant concept offering
pizza, sandwiches, salads and other food products and services. These
restaurants operate under the "Mountain Mike's Pizza" name ("Mountain Mike's
Pizza Restaurants") and have distinctive business formats, methods, procedures,
designs, layouts, standards and specifications, all of which have been, or may
be, improved, further developed or otherwise modified from time to time.
(2) We use, promote and license certain trademarks, service marks and
other commercial symbols in operating Mountain Mike's Pizza Restaurants,
including the trade and service mark "Mountain Mike's Pizza7," which have gained
and continue to gain public acceptance and goodwill, and may continue to create,
use and license additional trademarks, service marks and commercial symbols in
operating Mountain Mike's Pizza Restaurants (collectively, the "Marks").
(3) We have chosen franchising as our business strategy for creating
and keeping customers for Mountain Mike's Pizza. We grant to persons who meet
our qualifications and are willing to undertake the investment and effort a
franchise to own and operate a Mountain Mike's Pizza Restaurant offering the
products and services we authorize and approve while utilizing our business
formats, methods, procedures, signs, designs, layouts, equipment, standards,
specifications and Marks (the "System").
(4) We grant to certain franchise owners who meet our qualifications
the right to represent us as development agents, within defined geographic
<PAGE>
markets with which they are familiar, in recruiting and assisting us in
providing certain services to other franchise owners.
(5) You have applied for the right to represent us as a development
agent within a certain territory.
B. GRANT OF RIGHTS.
(1) Initial Term. Subject to the terms of and upon the conditions
contained in this Agreement, we hereby appoint you to represent us as our
exclusive development agent during the term of this Agreement within the
territory described on Exhibit A (the "Territory"). You agree to perform your
obligations according to this Agreement and the standards and guidelines we
issue from time. The term of this Agreement is fifteen (15) years from the date
it is signed, unless sooner terminated under Section 8. Subject to Section 3.C.,
we (and our affiliates) can in our sole discretion (1) own and operate, and
recruit and grant prospective franchise owners the right to own and operate,
Mountain Mike's Pizza Restaurants at any locations within and outside the
Territory and on any terms and conditions we deem appropriate; and (2) engage in
any other distribution activities that we choose within and outside the
Territory. Except for our agreement not to allow another franchise owner to
represent us as a development agent within the Territory during the term of this
Agreement, your rights under this Agreement are non-exclusive.
(2) Successor Term. If you (and your owners) have complied with this
Agreement and all other agreements between you (or your owners) and us (and our
affiliates), then, when this Agreement expires, we will allow you to represent
us as a development agent within the Territory for an additional ten (10) year
term on the condition that you (and your owners) sign our then current form of
development agent agreement and you and we agree on the minimum number of new
Mountain Mike's Pizza Restaurants to be opened within the Territory during the
additional term.
(3) Your Operation Of Restaurant. You (or your owners) must at all
times during the term of this Agreement own and operate at least one (1)
franchised Mountain Mike's Pizza Restaurant within the Territory. You must open
your first Restaurant within the Territory within one hundred eighty (180) days
after the date of this Agreement. The initial franchise fee for that Restaurant
is included in the amount you must pay us under Section 3.A.
2. YOUR OBLIGATIONS.
A. RECRUITING AND SERVICING.
(1) General. You agree to develop and service Mountain Mike's Pizza
Restaurant franchises in the Territory. This responsibility includes, but is not
2
<PAGE>
limited to, advertising for franchise prospects; providing prospects with
information about us on a timely basis according to our policies and federal,
state and local laws and regulations; screening and qualifying prospective
franchise owners; providing site selection, lease negotiation and construction
advice; assisting with Restaurant openings; inspecting Restaurants; conducting
training; developing marketing; assisting in administering (as we direct)
cooperative advertising funds and programs operating in your Territory; and
providing business advice to franchise owners.
(2) Recruiting. You agree to submit to us for our review individuals
who are of good character, have adequate financial resources and meet our then
current criteria for franchise owners. You agree to have each prospective
franchise owner complete our then current application form for a Mountain Mike's
Pizza Restaurant franchise. These applications must be submitted to us with all
other information we then customarily require for franchise applicants,
including, without limitation, information concerning the site at which the
applicant proposes to operate its Restaurant.
We will approve or disapprove in writing applicants and/or sites you
propose for Restaurants. We will use our best efforts to notify you within
fifteen (15) calendar days after the later of our personal interview of the
applicant, if any, and our receipt of the complete application, site report,
financial statements and other required materials regarding the applicant. If we
determine, in our sole discretion, that the applicant possesses sufficient
financial and managerial capability and meets the other criteria we then utilize
in granting franchises, and that the proposed site is suitable, we agree to
offer a franchise to the applicant for a Mountain Mike's Pizza Restaurant. The
franchise will be evidenced by our and the applicant's execution of our then
current form of franchise agreement. You will not be a party to those franchise
agreements (unless you are the franchise owner under a particular agreement).
You acknowledge that we may, at our sole discretion, modify in any respect the
franchise agreement and related documents we customarily use in granting
Mountain Mike's Pizza Restaurant franchises. If an applicant fails to execute
the franchise agreement and related documents, deliver payment of the initial
franchise fee and obtain lawful possession of an approved site, we may withdraw
our offer of the franchise to the applicant.
(3) Legal Requirements. You acknowledge that we have advised you that
many jurisdictions have enacted laws concerning the sale, renewal and
termination of franchises and the continuing relationship between parties to a
franchise. We will explain these laws to you and advise you how to comply with
them in performing your obligations under this Agreement. You agree to comply
with all of these laws and legal requirements in force in the Territory and to
utilize only offering circulars that we have approved for use in the applicable
jurisdiction. Neither you, your owners nor any employees can solicit prospective
franchise owners: (a) until we have registered our franchise offering in all
applicable jurisdictions and/or have provided you with an offering circular
prepared in compliance with state and federal law; or (b) at any time if we
3
<PAGE>
notify you that a registration is not then in effect or our documents are not
then in compliance with applicable law. If your activities under this Agreement
require the preparation, amendment, registration or filing of information or any
disclosure or other documents, only we can prepare and file all required
offering circulars, ancillary documents and registration applications. All
registrations must be secured before you may solicit prospective franchise
owners. You agree to provide all information and execute all documents we
reasonably require in order to prepare and file these documents. You agree to
review all materials that we prepare for you and that we will not be liable for
any errors or omissions which you have not brought to our attention.
B. MANAGEMENT OF YOUR BUSINESS.
The business you operate under this Agreement must at all times be
under your (or, if you are a corporation, limited liability company or
partnership, your managing shareholder's, member's or partner's ("Managing
Owner")) direct, day-to-day, full-time supervision.
C. INSURANCE.
You must at all times during the term of this Agreement maintain in
force, at your own expense, the insurance coverage we require. This insurance
must cover the risks and entities, and be in the amounts, we specify from time
to time.
D. ADVERTISING.
You agree to use reasonable efforts and spend reasonable amounts to
advertise and promote the offer and sale of Mountain Mike's Pizza Restaurant
franchises. Before you use them, samples of all advertising and promotional
materials that we have not prepared or previously approved must be submitted to
us for approval, which we will not unreasonably withhold. If you do not receive
written disapproval within fifteen (15) days after we receive the materials, the
materials will be considered approved. You cannot use any advertising or
promotional materials that we have disapproved.
E. ACCOUNTING, BOOKKEEPING, RECORDS AND REPORTING.
Within fifteen (15) days after the end of each month during the term of
this Agreement, you agree to deliver to us a report of your business activities
during that month in the form and detail we specify, including information about
your efforts to solicit prospective franchise owners and find sites in the
Territory.
F. AGENT'S INSPECTIONS.
4
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You agree to determine through field audits, reviews and inspections of
each franchise owner in the Territory whether that franchise owner has complied
satisfactorily with its Franchise Agreement and our Operations Manual and
promptly notify the franchise owner in writing, with a copy (and evaluation
report) to us, of any deficiencies. You understand and acknowledge that your
inspections and reports are advisory only and that we have: (1) all of the
rights to inspect and ascertain compliance as if this Agreement were not in
effect; (2) the exclusive right to send notices of default to the franchise
owner; (3) the exclusive right to terminate a Franchise Agreement; and (4) the
exclusive right to take any legal action as a result of any violation of a
Franchise Agreement.
If you believe that any franchise owner in the Territory has breached
its Franchise Agreement, you agree to document in writing all of the relevant
facts and request us to investigate the breach. If, as a result of our
investigation, we determine that there is a breach, we can take any action we
deem appropriate.
G. DEVELOPMENT AND PERFORMANCE OBLIGATIONS.
You agree to develop Mountain Mike's Pizza Restaurants in the Territory
to meet or exceed the development schedule identified on Exhibit B (the
"Development Schedule"). (Each yearly period described in the Development
Schedule is referred to as a "Development Period.") A Mountain Mike's Pizza
Restaurant will be included in the cumulative number of Restaurants required to
be opened and operating only if it actually is operating within the Territory
and complying with the terms of its Franchise Agreement; provided, however, that
a Restaurant which is, with our approval, permanently closed during the last
three (3) months of a Development Period after having been in operation will be
included in the cumulative number of Restaurants required to be opened and
operating during that particular Development Period (but not after). Any
Restaurants you (or your owners) own and operate within the Territory will be
included in the cumulative number of Restaurants required to be opened and
operating. If you fail to comply with the Development Schedule, we can (but need
not):
(a) terminate this Agreement under Section 8;
(b) reduce the size of the Territory to a lesser area that we
determine; or
(c) eliminate your exclusive right to solicit and service franchise
owners in the Territory.
3. FEES.
A. YOUR INITIAL FEE TO US.
5
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You agree to pay us a nonrecurring and nonrefundable initial fee in the
amount of _____________________________ Dollars ($_____________________), which
we will fully earn when this Agreement is signed.
B. OUR PAYMENTS TO YOU.
We will pay you the following amounts during the term of this
Agreement:
(1) Initial Fees. Fifty percent (50%) of the initial franchise fees we
actually collect (not accrued) during the term of this Agreement from selling
franchises in the Territory. We will pay you this amount within thirty (30) days
after each franchised Restaurant opens.
(2) Royalties. Forty percent (40%) of the Royalties, as defined in the
Franchise Agreement (not including marketing or advertising fees), we actually
collect (not accrued) during the term of this Agreement from Mountain Mike's
Pizza Restaurants opened in the Territory during the term of this Agreement. We
will pay you these amounts by the fifteenth (15th) day of each month following
the month during which we actually collect the Royalties.
(3) Transfer Fees. Fifty percent (50%) of any transfer fees we actually
collect (not accrued) due to any "transfers," as defined in the Franchise
Agreement, occurring during the term of this Agreement with respect to
franchises we have sold within the Territory during the term of this Agreement.
We will pay you these amounts within thirty (30) days after we actually collect
the transfer fees.
(4) Renewal or Successor Franchise Fees. Fifty percent (50%) of any
renewal or successor franchise fees we actually collect (not accrued) during the
term of this Agreement with respect to renewal or successor franchises that we
grant within the Territory during the term of this Agreement. We will pay you
these amounts within thirty (30) days after we actually collect the renewal or
successor franchise fees.
C. PAYMENTS ON OUR RESTAURANTS WITHIN THE TERRITORY.
If we (or our affiliates) establish and operate any Mountain Mike's
Pizza Restaurants within the Territory, we (or our affiliates) will pay you the
same fees that you would have been entitled to receive under Paragraph B above
had these Restaurants been operated as franchises. We will pay you these amounts
on the same due dates specified in Paragraph B.
6
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D. REDUCTION OF FEES PAYABLE.
You acknowledge and agree that we (and our affiliates) can reduce any
amounts that we must pay you under this Agreement by (1) any amounts that you
(or your owners) owe us (or our affiliates) under Franchise Agreements or
otherwise and (2) your proportionate share of any expenses we incur with third
parties to collect amounts due from franchise owners.
4. MARKS.
A. OWNERSHIP AND GOODWILL OF MARKS.
Your right to use the Marks is derived solely from this Agreement and
limited to your representing us as a development agent pursuant to and in
compliance with this Agreement and all operating standards we prescribe from
time to time during its term. Your unauthorized use of the Marks will be a
breach of this Agreement and an infringement of our rights in and to the Marks.
You acknowledge and agree that your usage of the Marks and any goodwill
established by this use will be exclusively for our benefit and that this
Agreement does not confer any goodwill or other interests in the Marks upon you
(other than the right to represent us as a development agent under this
Agreement). All provisions of this Agreement applicable to the Marks apply to
any additional proprietary trade and service marks and commercial symbols we
authorize you to use.
B. LIMITATIONS ON YOUR USE OF MARKS.
You may not use any Mark as part of any corporate or legal business
name or with any prefix, suffix or other modifying words, terms, designs or
symbols (other than logos we have licensed to you), or in any modified form, nor
may you use any Mark in any manner we have not expressly authorized in writing.
You agree to display the Marks prominently in the manner we prescribe on forms,
advertising and marketing materials, supplies and other materials we designate.
You agree to give the notices of trade and service mark registrations that we
specify and to obtain any fictitious or assumed name registrations required
under applicable law.
C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS.
You agree to notify us immediately of any apparent infringement or
challenge to your use of any Mark, or of any claim by any person of any rights
in any Mark, and not to communicate with any person other than us and our
attorneys, and your attorneys, in any infringement, challenge or claim. We can
take the action we deem appropriate and control exclusively any litigation, U.S.
Patent and Trademark Office proceeding or any other administrative proceeding
arising out of any infringement, challenge or claim or otherwise relating to any
Mark. You agree to sign any and all instruments and documents, render the
assistance and do the acts and things that, in the opinion of our attorneys, may
be necessary or advisable to protect and maintain our interests in any
litigation or Patent and Trademark Office or other proceeding or otherwise to
protect and maintain our interests in the Marks.
7
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D. DISCONTINUANCE OF USE OF MARKS.
If it becomes advisable at any time in our sole discretion for us
and/or you to modify or discontinue the use of any Mark and/or use one or more
additional or substitute trade or service marks, you agree to comply with our
directions within a reasonable time after receiving notice. We will not be
obligated to reimburse you for any expenses you incur in doing so, for any loss
of revenue attributable to any modified or discontinued Mark or for any
expenditures you make to promote a modified or substitute trademark or service
mark.
E. INDEMNIFICATION FOR USE OF MARKS.
We agree to indemnify you against and to reimburse you for all damages
for which you are held liable in any proceeding arising out of your authorized
use of any Mark under this Agreement and for all costs you reasonably incur in
defending any such claim brought against you or any such proceeding in which you
are named as a party, provided that you have timely notified us of the claim or
proceeding and otherwise have complied with this Agreement. At our option, we
can defend and control the defense of any proceeding arising out of your use of
any Mark under this Agreement.
5. CONFIDENTIAL INFORMATION.
We possess (and will continue to develop and acquire) certain
confidential information (the "Confidential Information") relating to the
development and operation of Mountain Mike's Pizza Restaurants, which includes
(without limitation):
(1) recipes;
(2) site selection criteria;
(3) methods, formats, specifications, standards, systems, procedures,
sales and marketing techniques, knowledge and experience used in developing and
operating Mountain Mike's Pizza Restaurants;
(4) marketing and advertising programs for Mountain Mike's Pizza
Restaurants;
(5) knowledge of specifications for and suppliers of certain equipment,
products, materials and supplies; and
(6) knowledge of the operating results and financial performance of
Mountain Mike's Pizza Restaurants.
You acknowledge and agree that you will not acquire any interest in
Confidential Information, other than the right to utilize Confidential
8
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Information disclosed to you in representing us as a development agent during
the term of this Agreement, and that the use or duplication of any Confidential
Information in any other business would constitute an unfair method of
competition. You further acknowledge and agree that Confidential Information is
proprietary, includes our trade secrets and is disclosed to you solely on the
condition that you agree, and you do hereby agree, that you:
(a) will not use Confidential Information in any other business or
capacity;
(b) will maintain the absolute confidentiality of Confidential
Information during and after the term of this Agreement;
(c) will not make unauthorized copies of any portion of Confidential
Information disclosed via electronic medium or in written or other tangible
form; and (d) will adopt and implement all reasonable procedures that we
prescribe from time to time to prevent unauthorized use or disclosure of
Confidential Information, including, without limitation, restrictions on its
disclosure to your personnel and others.
You agree that we (and our affiliates) will have the perpetual right to
use and authorize other Mountain Mike's Pizza Restaurant franchise owners to
use, and you agree fully and promptly to disclose to us, all ideas, concepts,
formulas, recipes, techniques or materials relating to a Mountain Mike's Pizza
Restaurant that you and/or your employees conceive or develop during the term of
this Agreement.
Despite the foregoing, Confidential Information does not include
information, knowledge or know-how which a person can prove he or she knew
before becoming aware of it as a result of anything we or a franchise owner
provided directly or indirectly or before his or her operation of or presence at
a Mountain Mike's Pizza Restaurant. If we include any matter in Confidential
Information, anyone who claims that it is not Confidential Information has the
burden of proving that the exclusion provided in this paragraph is fulfilled.
6. EXCLUSIVE RELATIONSHIP.
You acknowledge and agree that we would be unable to protect
Confidential Information against unauthorized use or disclosure or to encourage
a free exchange of ideas and information among Mountain Mike's Pizza Restaurants
if franchise owners of Mountain Mike's Pizza Restaurants and our development
agents were permitted to hold interests in or perform services for a Competitive
9
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Business (defined below). You also acknowledge that we have granted these rights
to you in consideration of and reliance upon your agreement to deal exclusively
with us. You therefore agree that, during the term of this Agreement, neither
you nor any of your owners (nor any of your or your owners' spouses) will:
(1) have any direct or indirect controlling interest as a disclosed or
beneficial owner in a Competitive Business, wherever located;
(2) have any direct or indirect interest as a disclosed or beneficial
owner in a Competitive Business operating within the Territory;
(3) have any direct or indirect interest as a disclosed or beneficial
owner in a Competitive Business operating within ten (10) miles of any Mountain
Mike's Pizza Restaurant;
(4) perform services as a director, officer, manager, employee,
consultant, representative, agent or otherwise for a Competitive Business,
wherever located;
(5) recruit or hire any person who is our employee or the employee of
any Mountain Mike's Pizza Restaurant without obtaining the prior written
permission of that person's employer; (6) divert or attempt to divert any actual
or potential business or customer of a Mountain Mike's Pizza Restaurant to
another business; or
(7) engage in any other activity which may injure the goodwill of the
Marks and System.
The term "Competitive Business," as used in this Agreement, means any business
operating, or granting franchises or licenses to others to operate, any
restaurant or food service business featuring pizza as its primary product
(other than a Mountain Mike's Pizza Restaurant operated under a franchise
agreement with us). You agree to obtain similar covenants from the personnel we
specify.
7. TRANSFER.
A. BY US.
This Agreement is fully transferable by us and will inure to the
benefit of any transferee or other legal successor to our interests in this
Agreement.
B. BY YOU.
You understand and acknowledge that the rights and duties created by
this Agreement are personal to you (or, if you are a corporation, limited
liability company or partnership, to your owners) and that we have granted these
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rights to you in reliance upon our perceptions of your (or your owners')
individual or collective character, skill, aptitude, attitude, business ability
and financial capacity. Accordingly, neither this Agreement (or any interest
herein) nor any ownership or other interest in you may be transferred without
our prior written approval, which we can withhold for any or no reason. Any
transfer without this approval constitutes a breach of this Agreement and is
void and of no effect. As used in this Agreement, the term "transfer" includes
your (or your owners') voluntary, involuntary, direct or indirect assignment,
sale, gift or other disposition of any interest in this Agreement or you.
C. YOUR DEATH OR DISABILITY.
Upon your or your Managing Owner's death or disability, we will allow
this Agreement or the Managing Owner's interest in you to be transferred to an
immediate family member if the transferee has sufficient business experience,
aptitude and financial resources to represent us as a development agent and
agrees to comply with this Agreement. This transfer must take place within six
(6) months after death or disability. The term "disability" means a mental or
physical disability, impairment or condition that is reasonably expected to
prevent or actually does prevent you or your Managing Owner from supervising the
development and servicing of Mountain Mike's Pizza Restaurants within the
Territory.
8. TERMINATION OF AGREEMENT.
A. BY YOU.
You can terminate this Agreement at any time by giving us at least
ninety (90) days' prior written notice of termination.
B. BY US.
We can terminate this Agreement, effective upon delivery of written
notice of termination to you, if:
(1) you (or any of your owners) have made or make any material
misrepresentation or omission in acquiring the rights granted under this
Agreement or while representing us as a development agent;
(2) you fail actively to perform your obligations under this Agreement;
(3) you (or any of your owners) are or have been convicted by a trial
court of, or plead or have pleaded no contest to, a felony;
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(4) you (or any of your owners) engage in any dishonest or unethical
conduct which may adversely affect the reputation of Mountain Mike's Pizza
Restaurants or the goodwill associated with the Marks;
(5) you (or any of your owners) make an unauthorized assignment of this
Agreement or of an ownership interest in you;
(6) this Agreement or the Managing Owner's interest in you is not
assigned as required upon your or the Managing Owner's death or disability;
(7) you fail to meet the Development Schedule during any Development
Period;
(8) we have sent a notice of termination under any Franchise Agreement
for a Mountain Mike's Pizza Restaurant between you (or any of your owners) and
us or you fail to own and operate at least one (1) Mountain Mike's Pizza
Restaurant within the Territory, as required under Section 1.B.;
(9) you (or any of your owners) make any unauthorized use or disclosure
of any Confidential Information in violation of this Agreement;
(10) you (or any of your owners) fail on three (3) or more separate
occasions within any period of twelve (12) consecutive months to comply with
this Agreement, whether or not the failures are corrected after written notice
of the failures is delivered to you;
(11) you make an assignment for the benefit of creditors or admit in
writing your insolvency or inability to pay your debts generally as they become
due; or
(12) you (or any of your owners) fail to comply with any other
provision of this Agreement or any of our operating standards and do not correct
the failure within thirty (30) days after written notice of the failure to
comply is delivered to you.
9. OUR AND YOUR RIGHTS AND OBLIGATIONS UPON TERMINATION OR EXPIRATION OF
THIS AGREEMENT.
A. PAYMENT OF AMOUNTS OWED TO YOU.
We agree to pay you within fifteen (15) days after the effective date
of termination or expiration of this Agreement, or on any later date that the
amounts due to you are determined, all amounts owed to you which then are unpaid
(subject to our rights under Section 3.D.). We are not obligated to pay you any
amounts that accrue after the effective date of termination or expiration.
B. MARKS.
Upon the termination or expiration of this Agreement:
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(1) you may not directly or indirectly at any time or in any manner
(except with Mountain Mike's Pizza Restaurants you own and operate) identify
yourself or any business as a current or former development agent of Mountain
Mike's Pizza Restaurants, use any Mark, any colorable imitation thereof or other
indicia of a Mountain Mike's Pizza Restaurant in any manner or for any purpose
or utilize for any purpose any trade name, trade or service mark or other
commercial symbol that indicates or suggests a connection or association with
us;
(2) you agree to take the action required to cancel all fictitious or
assumed name or equivalent registrations relating to your use of any Mark; and
(3) you agree to deliver to us within thirty (30) days all signs,
marketing materials, forms and other materials containing any Mark or otherwise
identifying or relating to a Mountain Mike's Pizza Restaurant and allow us,
without liability to you or third parties, to remove all of these items from
wherever they are located.
C. CONFIDENTIAL INFORMATION.
You agree that, upon termination or expiration of this Agreement, you
will immediately cease to use any of our Confidential Information in any
business or otherwise (except in operating Mountain Mike's Pizza Restaurants
under Franchise Agreements with us) and return to us all copies of any
confidential materials that we have loaned to you.
D. COVENANT NOT TO COMPETE.
Upon
(1) our termination of this Agreement according to its terms and
conditions,
(2) your termination of this Agreement, or
(3) expiration of this Agreement (without renewal),
you and your owners agree that, for a period of two (2) years commencing on the
effective date of termination or expiration or the date on which all persons
restricted by this Paragraph begin to comply with this Paragraph, whichever is
later, neither you nor any of your owners will have any direct or indirect
interest (e.g., through a spouse) as a disclosed or beneficial owner, investor,
partner, director, officer, employee, consultant, representative or agent or in
any other capacity in any Competitive Business (as defined in Section 6 above)
operating:
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(a) within the Territory; or
(b) within one (1) mile of any Mountain Mike's Pizza
Restaurant in operation or under construction on the later of the
effective date of the termination or expiration or the date on
which all persons restricted by this Paragraph begin to comply
with this Paragraph.
If any person restricted by this Paragraph refuses voluntarily to
comply with these obligations, the two (2) year period will commence with the
entry of a court order enforcing this provision. You and your owners expressly
acknowledge that you possess skills and abilities of a general nature and have
other opportunities for exploiting these skills. Consequently, enforcement of
the covenants made in this Paragraph will not deprive you of your personal
goodwill or ability to earn a living.
E. CONTINUING OBLIGATIONS.
All of our and your (and your owners') obligations which expressly or
by their nature survive the expiration or termination of this Agreement will
continue in full force and effect subsequent to and notwithstanding its
expiration or termination and until they are satisfied in full or by their
nature expire.
10. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION.
A. INDEPENDENT CONTRACTORS.
You and we understand and agree that this Agreement does not create a
fiduciary relationship between you and us, that you and we are and will be
independent contractors, that we have appointed you as our special agent for a
particular purpose and that nothing in this Agreement is intended to make either
you or us a general agent, joint venturer, partner or employee of the other for
any purpose. You agree to identify yourself conspicuously in all dealings with
existing and prospective franchise owners, lessors, suppliers, public officials
and others as the owner of a business under a development agent agreement we
have granted and to place notices of independent ownership on the forms,
business cards, stationery and advertising and other materials we require from
time to time.
B. NO LIABILITY FOR ACTS OF OTHER PARTY.
You agree not to employ any of the Marks in signing any contract or
applying for any license or permit, or in a manner that may result in our
liability for any of your indebtedness or obligations, and that you will not use
the Marks in any way we have not expressly authorized. Neither we nor you will
make any express or implied agreements, warranties, guarantees or
representations or incur any debt in the name or on behalf of the other,
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represent that our respective relationship is other than franchisor and
development agent or be obligated by or have any liability under any agreements
or representations made by the other that are not expressly authorized in
writing. We will not be obligated for any damages to any person or property
directly or indirectly arising out of the business you conduct under this
Agreement.
C. INDEMNIFICATION.
(i) You agree to indemnify, defend and hold harmless us, our affiliates
and our respective shareholders, directors, officers, employees, agents,
successors and assignees (the "Indemnified Parties") against and to reimburse
any one or more of the Indemnified Parties for all claims, obligations and
damages described in this Paragraph and any and all claims and liabilities
directly or indirectly arising out of your activities under this Agreement or
your breach of this Agreement. For purposes of this indemnification, "claims"
include all obligations, damages (actual, consequential or otherwise) and costs
reasonably incurred in defending any claim against any of the Indemnified
Parties, including, without limitation, reasonable accountants', arbitrators',
attorneys' and expert witness fees, costs of investigation and proof of facts,
court costs, other expenses of litigation, arbitration or alternative dispute
resolution and travel and living expenses. We and each of the other Indemnified
Parties can defend any claim against us and them and agree to settlements or
take any other remedial, corrective or other actions we and/or they deem
expedient. This indemnity will continue in full force and effect subsequent to
and notwithstanding the expiration or termination of this Agreement.
Under no circumstances will we or any other Indemnified Party be
required to seek recovery from any insurer or other third party, or otherwise to
mitigate our, their or your losses and expenses, in order to maintain and
recover fully a claim against you. You agree that a failure to pursue this
recovery or mitigate a loss will in no way reduce or alter the amounts we or
another Indemnified Party may recover from you.
(ii) We agree to indemnify, defend and hold harmless you and your
shareholders, directors, officers, employees, agents, successors and assignees
(the "Development Agent Indemnified Parties") against and to reimburse you for
all claims, obligations and damages (as defined in subparagraph (i) above) for
which you are held liable in an action or proceeding asserted by a third party
as a result of our defaults, negligence or intentional misconduct toward that
third party.
Under no circumstances will you or any other Development Agent
Indemnified Party be required to seek recovery from any insurer or other third
party, or otherwise to mitigate your, their or our losses and expenses, in order
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to maintain and recover fully a claim against us. We agree that a failure to
pursue this recovery or mitigate a loss will in no way reduce or alter the
amounts you or another Development Agent Indemnified Party may recover from us.
11. ENFORCEMENT.
A. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS.
Except as expressly provided to the contrary in this Agreement, each
section, paragraph, term and provision of this Agreement will be considered
severable, and if, for any reason, any provision is held to be invalid or
contrary to or in conflict with any applicable present or future law or
regulation in a final, unappealable ruling issued by any court, agency or
tribunal with competent jurisdiction in a proceeding to which we are a party,
that ruling will not impair the operation of, or have any other effect upon, the
other portions of this Agreement that may remain otherwise intelligible, which
will continue to be given full force and effect and bind the parties, although
any portion held to be invalid will be deemed not to be a part of this Agreement
from the date the time for appeal expires, if you are a party to the proceeding,
otherwise upon your receipt from us of a notice of non-enforcement.
If any covenant in this Agreement which restricts competitive activity
is deemed unenforceable by virtue of its scope in terms of area, business
activity prohibited and/or length of time, but would be enforceable by reducing
any part or all of it, you and we agree that the covenant will be enforced to
the fullest extent permissible under the laws and public policies applied in the
jurisdiction whose law is applicable to the validity of the covenant.
If any applicable and binding law or rule of any jurisdiction requires
a greater prior notice than is required under this Agreement of the termination
of this Agreement or of our refusal to enter into a successor development agent
agreement, or the taking of some other action not required under this Agreement,
or if, under any applicable and binding law or rule of any jurisdiction, any
provision of this Agreement or any operating standard is invalid or
unenforceable, the prior notice and/or other action required by the law or rule
will be substituted for the comparable provisions of this Agreement, and we will
have the right, in our sole discretion, to modify the invalid or unenforceable
provision or operating standard to the extent required to be valid and
enforceable. You agree to be bound by any promise or covenant imposing the
maximum duty permitted by law which is subsumed within the terms of any
provision of this Agreement, as though it were separately articulated in and
made a part of this Agreement, that may result from striking from any of the
provisions of this Agreement, or any operating standard, any portion or portions
which a court or arbitrator may hold to be unenforceable in a final decision to
which we are a party, or from reducing the scope of any promise or covenant to
the extent required to comply with a court order or arbitration award. These
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modifications to this Agreement will be effective only in that jurisdiction,
unless we elect to give them greater applicability, and will be enforced as
originally made and entered into in all other jurisdictions.
B. WAIVER OF OBLIGATIONS.
We and you may by written instrument unilaterally waive or reduce any
obligation of or restriction upon the other under this Agreement, effective upon
delivery of written notice to the other or another effective date stated in the
notice of waiver. Any waiver we grant will be without prejudice to any other
rights we may have, will be subject to our continuing review and may be revoked,
in our sole discretion, at any time and for any reason, effective upon delivery
to you of ten (10) days' prior written notice.
We and you will not be deemed to have waived or impaired any right,
power or option reserved by this Agreement (including, without limitation, our
right to demand exact compliance with every term, condition and covenant in this
Agreement or to declare any breach to be a default and to terminate this
Agreement before the expiration of its term) by virtue of any custom or practice
at variance with the terms of this Agreement; our or your failure, refusal or
neglect to exercise any right under this Agreement or to insist upon exact
compliance by the other with our and your obligations under this Agreement; our
waiver, forbearance, delay, failure or omission to exercise any right, power or
option, whether of the same, similar or different nature, with other Mountain
Mike's Pizza Restaurant development agents; or the existence of other
development agent agreements for Mountain Mike's Pizza Restaurants which contain
different provisions from those contained in this Agreement.
C. COSTS AND ATTORNEYS' FEES.
If we incur expenses due to your failure to comply with this Agreement,
you agree to reimburse us for any of the costs and expenses which we incur,
including, without limitation, reasonable accounting, attorneys', arbitrators'
and related fees.
D. RIGHTS OF PARTIES ARE CUMULATIVE.
Our and your rights under this Agreement are cumulative, and no
exercise or enforcement by us or you of any right or remedy under this Agreement
will preclude our or your exercise or enforcement of any other right or remedy
under this Agreement which we or you are entitled by law to enforce.
E. ARBITRATION.
EXCEPT FOR CONTROVERSIES, DISPUTES OR CLAIMS RELATED TO OR BASED ON
YOUR USE OF THE MARKS AFTER THE EXPIRATION OR TERMINATION OF THIS AGREEMENT, ALL
CONTROVERSIES, DISPUTES OR CLAIMS BETWEEN US AND OUR SHAREHOLDERS, OFFICERS,
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DIRECTORS, AGENTS AND EMPLOYEES AND YOU (YOUR OWNERS, GUARANTORS, AFFILIATES AND
EMPLOYEES, IF APPLICABLE) ARISING OUT OF OR RELATED TO:
(1) THIS AGREEMENT OR ANY OTHER AGREEMENT BETWEEN YOU AND US OR ANY
PROVISION OF ANY OF THESE AGREEMENTS;
(2) OUR RELATIONSHIP WITH YOU;
(3) THE VALIDITY OF THIS AGREEMENT OR ANY OTHER AGREEMENT BETWEEN YOU
AND US OR ANY PROVISION OF ANY OF THESE AGREEMENTS; OR
(4) ANY OPERATING STANDARD RELATING TO THE DEVELOPMENT AND SERVICING OF
MOUNTAIN MIKE'S PIZZA RESTAURANTS;
WILL BE SUBMITTED FOR ARBITRATION, ON DEMAND OF EITHER PARTY, TO THE OFFICE OF
THE AMERICAN ARBITRATION ASSOCIATION CLOSEST TO OUR THEN EXISTING PRINCIPAL
BUSINESS ADDRESS. THE ARBITRATION PROCEEDINGS WILL BE CONDUCTED AT THAT AMERICAN
ARBITRATION ASSOCIATION OFFICE AND, EXCEPT AS OTHERWISE PROVIDED IN THIS
AGREEMENT, WILL BE HEARD BY ONE ARBITRATOR IN ACCORDANCE WITH THE THEN CURRENT
COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION. ALL
MATTERS RELATING TO ARBITRATION WILL BE GOVERNED BY THE FEDERAL ARBITRATION ACT
(9 U.S.C. ss.ss. 1 ET SEQ.) AND NOT BY ANY STATE ARBITRATION LAW.
THE ARBITRATOR WILL HAVE THE RIGHT TO AWARD OR INCLUDE IN HIS AWARD ANY
RELIEF WHICH DEEMS PROPER IN THE CIRCUMSTANCES, INCLUDING, WITHOUT LIMITATION,
MONEY DAMAGES (WITH INTEREST ON UNPAID AMOUNTS FROM THE DATE DUE), SPECIFIC
PERFORMANCE, INJUNCTIVE RELIEF AND ATTORNEYS' FEES AND COSTS, PROVIDED THAT THE
ARBITRATOR WILL NOT HAVE THE RIGHT TO DECLARE ANY MARK GENERIC OR OTHERWISE
INVALID OR, EXCEPT AS OTHERWISE PROVIDED IN PARAGRAPH H OF THIS SECTION, TO
AWARD EXEMPLARY OR PUNITIVE DAMAGES. THE AWARD AND DECISION OF THE ARBITRATOR
WILL BE CONCLUSIVE AND BINDING UPON ALL PARTIES HERETO, AND JUDGMENT UPON THE
AWARD MAY BE ENTERED IN ANY COURT OF COMPETENT JURISDICTION.
WE AND YOU AGREE TO BE BOUND BY THE PROVISIONS OF ANY LIMITATION ON THE
PERIOD OF TIME IN WHICH CLAIMS MUST BE BROUGHT UNDER APPLICABLE LAW OR THIS
AGREEMENT, WHICHEVER EXPIRES EARLIER. WE AND YOU FURTHER AGREE THAT, IN
CONNECTION WITH ANY ARBITRATION PROCEEDINGS, EACH MUST SUBMIT OR FILE ANY CLAIM
WHICH WOULD CONSTITUTE A COMPULSORY COUNTERCLAIM (AS DEFINED BY RULE 13 OF THE
FEDERAL RULES OF CIVIL PROCEDURE) WITHIN THE SAME PROCEEDING AS THE CLAIM TO
WHICH IT RELATES. ANY CLAIM WHICH IS NOT SUBMITTED OR FILED AS DESCRIBED ABOVE
WILL BE FOREVER BARRED.
WE AND YOU AGREE THAT ARBITRATION WILL BE CONDUCTED ON AN INDIVIDUAL,
NOT A CLASS-WIDE, BASIS, AND THAT AN ARBITRATION PROCEEDING BETWEEN US AND OUR
SHAREHOLDERS, OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES AND YOU (AND/OR YOUR
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OWNERS, GUARANTORS, AFFILIATES AND EMPLOYEES, IF APPLICABLE) MAY NOT BE
CONSOLIDATED WITH ANY OTHER ARBITRATION PROCEEDING BETWEEN US AND ANY OTHER
PERSON, CORPORATION OR PARTNERSHIP.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS PARAGRAPH,
WE AND YOU EACH HAVE THE RIGHT IN A PROPER CASE TO SEEK TEMPORARY RESTRAINING
ORDERS AND TEMPORARY OR PRELIMINARY INJUNCTIVE RELIEF FROM A COURT OF COMPETENT
JURISDICTION: PROVIDED, HOWEVER, THAT WE AND YOU MUST CONTEMPORANEOUSLY SUBMIT
OUR DISPUTE FOR ARBITRATION ON THE MERITS AS PROVIDED IN THIS SECTION. THE
PROVISIONS OF THIS PARAGRAPH ARE INTENDED TO BENEFIT AND BIND CERTAIN THIRD
PARTY NON-SIGNATORIES AND WILL CONTINUE IN FULL FORCE AND EFFECT SUBSEQUENT TO
AND NOTWITHSTANDING THE EXPIRATION OR TERMINATION OF THIS AGREEMENT.
F. GOVERNING LAW.
ALL MATTERS RELATING TO ARBITRATION WILL BE GOVERNED BY THE FEDERAL
ARBITRATION ACT (9 U.S.C. ss.ss. 1 ET SEQ.). EXCEPT TO THE EXTENT GOVERNED BY
THE FEDERAL ARBITRATION ACT, THE UNITED STATES TRADEMARK ACT OF 1946 (LANHAM
ACT, 15 U.S.C. SECTIONS 1051 ET SEQ.) OR OTHER FEDERAL LAW, THIS AGREEMENT AND
ALL CLAIMS ARISING FROM THE RELATIONSHIP BETWEEN YOU AND US WILL BE GOVERNED BY
THE LAWS OF THE STATE IN WHICH THE TERRITORY IS LOCATED, EXCEPT THAT ANY STATE
LAW REGULATING THE SALE OF FRANCHISES (OR DEVELOPMENT AGENT RIGHTS) OR GOVERNING
THE RELATIONSHIP OF A FRANCHISOR AND ITS FRANCHISEE (OR DEVELOPMENT AGENT) WILL
NOT APPLY UNLESS ITS JURISDICTIONAL REQUIREMENTS ARE MET INDEPENDENTLY WITHOUT
REFERENCE TO THIS PARAGRAPH.
G. CONSENT TO JURISDICTION.
SUBJECT TO SECTION 11.E. AND THE PROVISIONS BELOW, YOU AND YOUR OWNERS
AGREE THAT ALL ACTIONS ARISING UNDER THIS AGREEMENT OR OTHERWISE AS A RESULT OF
THE RELATIONSHIP BETWEEN YOU AND US SHALL BE COMMENCED IN THE STATE, AND IN THE
STATE OR FEDERAL COURT OF GENERAL JURISDICTION CLOSEST TO, WHERE OUR PRINCIPAL
BUSINESS ADDRESS THEN IS LOCATED, AND YOU (AND EACH OWNER) IRREVOCABLY SUBMIT TO
THE JURISDICTION OF SUCH COURTS AND WAIVE ANY OBJECTION YOU (AND EACH OWNER) MAY
HAVE TO EITHER THE JURISDICTION OF OR VENUE IN SUCH COURTS. NOTWITHSTANDING THE
FOREGOING, YOU AND YOUR OWNERS AGREE THAT WE MAY ENFORCE THIS AGREEMENT AND ANY
ARBITRATION ORDERS IN THE COURTS OF THE STATE OR STATES IN WHICH YOU ARE
DOMICILED OR THE TERRITORY IS LOCATED.
H. WAIVER OF PUNITIVE DAMAGES AND JURY TRIAL.
EXCEPT FOR YOUR OBLIGATION TO INDEMNIFY US UNDER SECTION 10.C. AND
CLAIMS WE BRING AGAINST YOU FOR YOUR UNAUTHORIZED USE OF THE MARKS OR
UNAUTHORIZED USE OR DISCLOSURE OF ANY CONFIDENTIAL INFORMATION, WE AND YOU AND
YOUR RESPECTIVE OWNERS WAIVE TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO
OR CLAIM FOR ANY PUNITIVE OR EXEMPLARY DAMAGES AGAINST THE OTHER AND AGREE THAT,
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IN THE EVENT OF A DISPUTE BETWEEN US, THE PARTY MAKING A CLAIM WILL BE LIMITED
TO EQUITABLE RELIEF AND TO RECOVERY OF ANY ACTUAL DAMAGES IT SUSTAINS.
WE AND YOU IRREVOCABLY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM, WHETHER AT LAW OR IN EQUITY, BROUGHT BY EITHER OF US.
I. BINDING EFFECT.
This Agreement is binding upon us and you and our respective executors,
administrators, heirs, beneficiaries, assigns and successors in interest and may
not be modified except by a written agreement signed by you and us.
J. LIMITATIONS OF CLAIMS.
Any and all claims arising out of or relating to this Agreement or our
relationship with you will be barred unless a judicial or arbitration proceeding
is commenced within one (1) year from the date on which the party asserting the
claim knew or should have known of the facts giving rise to the claims.
K. CONSTRUCTION
The preambles and exhibits are a part of this Agreement which, together
with our written policies, constitutes our and your entire agreement, and there
are no other oral or written understandings or agreements between us and you
relating to the subject matter of this Agreement. Except as contemplated by the
arbitration provisions of Section 11.E., nothing in this Agreement is intended,
nor is deemed, to confer any rights or remedies upon any person or legal entity
not a party hereto.
Except where this Agreement expressly obligates us reasonably to
approve or not unreasonably to withhold our approval of any of your actions or
requests, we have the absolute right to refuse any request you make or to
withhold our approval of any of your proposed, initiated or effected actions
that require our approval.
The headings of the several sections and paragraphs hereof are for
convenience only and do not define, limit or construe the contents of these
sections or paragraphs.
References in this Agreement to "we," "us" and "our," with respect to
all of our rights and all of your obligations to us under this Agreement, will
be deemed to include any of our affiliates with whom you deal. The term
"affiliate," as used herein with respect to you or us, means any person or
entity directly or indirectly owned or controlled by, under common control with
or owning or controlling you or us. For purposes of this definition, "control"
means the power to direct or cause the direction of management and policies.
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If two or more persons are at any time the Development Agent under this
Agreement, whether as partners or joint venturers, their obligations and
liabilities to us will be joint and several. References to "owner" mean any
person holding a direct or indirect, legal or beneficial ownership interest or
voting rights in you, including, without limitation, any person who has a direct
or indirect interest in you or this Agreement and any person who has any other
legal or equitable interest, or the power to vest in himself or herself any
legal or equitable interest, in its revenue, profits, rights or assets. "Person"
means any natural person, corporation, limited liability company, general or
limited partnership, unincorporated association, cooperative or other legal or
functional entity.
This Agreement may be executed in multiple copies, each of which will
be deemed an original.
12. NOTICES AND PAYMENTS.
All written notices, reports and payments permitted or required to be
delivered by the provisions of this Agreement will be deemed so delivered:
(1) at the time delivered by hand;
(2) at the time delivered via computer transmission;
(3) one (1) business day after transmission by telecopy, facsimile or
other electronic system;
(4) one (1) business day after being placed in the hands of a
commercial courier service for next business day delivery; or
(5) three (3) business days after placement in the United States Mail
by Registered or Certified Mail, Return Receipt Requested, postage prepaid;
and must be addressed to the party to be notified at its most current principal
business address of which the notifying party has been notified.
13. ACKNOWLEDGMENTS.
You acknowledge:
(1) That you have conducted an independent investigation of this
business opportunity and recognize that, like any other business, it involves
business risks. (2) That your business abilities and efforts are vital to the
success of your business.
(3) That you are committed to maintaining the standards we prescribe
for development agents.
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(4) That any information you have acquired from other Mountain Mike's
Pizza Restaurant development agents relating to their profits or cash flows does
not constitute information obtained from us, nor do we make any representation
as to the accuracy of any such information.
(5) That in all of their dealings with you, our officers, directors,
employees and agents have acted only in a representative, and not in an
individual, capacity and that business dealings between you and them as a result
of this Agreement are solely between you and us.
(6) That you have represented to us, as an inducement to our entry into
this Agreement, that all statements you have made and all materials you have
submitted to us are accurate and complete and that you have made no
misrepresentations or material omissions in obtaining the rights granted by this
Agreement.
(7) That you have read this Agreement and our Franchise Offering
Circular and understand and accept that the terms, conditions and covenants
which are contained in this Agreement are reasonably necessary for us to
maintain our high standards of quality and service and consequently to protect
and preserve the goodwill of the Marks. (4) That any information you have
acquired from other Mountain Mike's Pizza Restaurant development agents relating
to their profits or cash flows does not constitute information obtained from us,
nor do we make any representation as to the accuracy of any such information.
(5) That in all of their dealings with you, our officers, directors,
employees and agents have acted only in a representative, and not in an
individual, capacity and that business dealings between you and them as a result
of this Agreement are solely between you and us.
(6) That you have represented to us, as an inducement to our entry into
this Agreement, that all statements you have made and all materials you have
submitted to us are accurate and complete and that you have made no
misrepresentations or material omissions in obtaining the rights granted by this
Agreement.
(7) That you have read this Agreement and our Franchise Offering
Circular and understand and accept that the terms, conditions and covenants
which are contained in this Agreement are reasonably necessary for us to
maintain our high standards of quality and service and consequently to protect
and preserve the goodwill of the Marks.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement effective on the date stated on the first page.
QUALITY FRANCHISE MASTER FRANCHISING AND
SYSTEMS, INC., a Delaware corporation DEVELOPMENTAL SYSTEMS, INC.,
a Michigan corporation
By:/s/ Bradley Gordon By:/s/ William R. Stewart
- ------------------------------------- -------------------------------
Title: President Title::President
- ------------------------------------- -------------------------------
DATED: 6/12/96 DATED: 5/1/96
- ------------------------------------- -------------------------------
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EXHIBIT A
EXCLUSIVE AREA
1. The Territory referred to in Section 1.B. of the Development Agent
Agreement will be as follows: the Michigan counties of Ingham, Jackson,
Hillsdale, Eaton and Clinton.
If the Territory is identified by counties or other political
subdivisions, political boundaries will be considered fixed as of the date of
this Agreement and will not change, notwithstanding a political reorganization
or change to the boundaries or regions. All street boundaries will be deemed to
end at the street center line unless otherwise specified above.
QUALITY FRANCHISE MASTER FRANCHISING AND
SYSTEMS, INC., a Delaware DEVELOPMENTAL SYSTEMS, INC.
corporation a Michigan corporation
By:/s/ Bradley Gordon By: /s/ William R. Stewart
- -------------------------------- -------------------------------
Title: President Title: President
- -------------------------------- -------------------------------
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EXHIBIT B
DEVELOPMENT SCHEDULE
The Development Schedule referred to in Section 2.G. of the Development
Agent Agreement will be as follows:
Cumulative Number of
Number of New Restaurants to be
Restaurants to be Opened Operating Within
Within the Territory the Territory
Date Required By Specified Date By Specified Date
- ----------------- ------------------------ ---------------------
8/31/97 2 2
8/31/98 2 4
8/31/97 2 6
QUALITY FRANCHISE MASTER FRANCHISING AND
SYSTEMS, INC., a Delaware DEVELOPMENTAL SYSTEMS, INC.
corporation a Michigan corporation
By:/s/ Bradley Gordon By:/s/ William R. Stewart
- -------------------------- ------------------------------
Title:President Title: President
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EXHIBIT C
ADDENDUM TO A DEVELOPMENT AGENT AGREEMENT
BETWEEN QUALITY FRANCHISE SYSTEMS, INC.
AND MASTER FRANCHISING AND DEVELOPMENTAL
SYSTEMS, INC. DATED 5/1/96
This addendum ("Addendum") is made and entered into this 1 day of May, 1996, by
and between Quality Franchise Systems, Inc., a Delaware corporation, (referred
to in this Addendum as "we," "us" or "our") and., Master Franchising
Developmental Systems, Inc. a Michigan corporation, referred to in this Addendum
as "you," "your" or "agent").
We and you are parties to that certain Development Agent Agreement (the
"Agreement") being executed concurrently with this Addendum. The terms of this
Addendum augment and modify the Agreement and, except as otherwise provided in
this Addendum, the Agreement will remain in full force and effect as originally
written.
Paragraph 1 In reference to Section 7(B), we will agree to waive our
rights to withhold approval of any transfer of this Agreement
provided that the following conditions are met:
(1) the transferee has sufficient business experience, aptitude and
financial resources to fulfill your obligations as included in this Agreement;
(2) the transferee and its owners and affiliates are not engaged in a
Competitive Business;
(3) the transferee (or its managing owner) has agreed to
complete our standard training program;
(5) the transferee has agreed to be bound by the terms and conditions
of the Agreement;
(6) you (and your transferring owners) have executed a general release,
in a form satisfactory to us, of any and all claims against us and our
shareholders, officers, directors, employees and agents;
(7) we have approved the material terms and conditions of the transfer
and determined that the price and terms of payment will not adversely affect the
transferee's ability to meet the obligations as they are contained in the
Agreement;
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(8) you and your transferring owners (and your owners' spouses) have
executed a non-competition covenant in favor of us and the transferee, agreeing
to be bound, commencing on the effective date of the transfer, by the
restrictions contained in Section 6 of the Agreement, for a period of 3 years
from the date of the transfer.
Paragraph 2 The Development Agent fee includes the initial franchise
fees for the first 2 franchised Restaurants opened by you
within the Territory.
Paragraph 3 We shall remit 70% of all marketing funds we actually collect
from Mountain Mike's Pizza franchises in your Territory to you
for the purpose of expending these funds under our direction
in the Territory. We shall retain final approval over all of
the programs and expenditures financed by these marketing
funds in your Territory. You agree to account for the funds
separately, to not co-mingle these funds with any other funds,
and to not use the funds for any other purpose.
Paragraph 4 Through April 30, 1997, you shall have the right, upon written
notice to us, to cancel the Agreement. Should you exercise
this right, we shall cancel the Agreement and credit of
$45,000 to your royalty account with us for the franchised
restaurant(s) of your choice. In the event you sell any
franchised restaurant which has a credit balance, said credit
balance may be transferred to the transferee's account with
us.
Paragraph 5 Upon payment in full of The Development Agent Agreement,
executed with this Exhibit, and for a period of 3 years, you
shall have the right of first refusal on the remainder of
those Designated Market Areas ("DMAs" as determined by the
Nielsen Station Index), which are primarily located in
Michigan's lower peninsula. This right of first refusal shall
commence upon our written notification to you that we have a
qualified candidate for any territory(ies) within the
described DMAs, and will run for a period of 30 days. In the
event that you do not exercise your right, and a
territory(ies) is purchased by said candidate, this right of
first refusal shall be canceled. If you exercise your right
and subsequently sell to the same candidate, or to an entity
in which the candidate is a shareholder, you will remit to us
an amount equal to 40% of the purchase price in compensation
for our efforts.
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If you choose to exercise your right of first refusal, the
following conditions will apply:
1. You will provide us with written notice exercising your
right within 30 days of your receipt of our notification;
2. The price shall be $200,000 and shall include the
remainder of the counties within Michigan's lower
peninsula DMAs as described above;
3. Within 5 days of our receipt of your notice, you shall
execute an Addendum to Exhibit A (Exclusive Area) of your
Agreement. You shall also execute an Addendum to Exhibit
B which shall include a Development Schedule for the
Territory (exclusive of the Lansing DMA) as listed below:
Year 1 1 stores
Year 2 2 stores
Year 3 3 stores
Year 4 4 stores
Year 5 5 stores
Year 6 5 stores;
4. The Development Schedule for the Lansing DMA as listed on
Exhibit B of this Agreement shall remain in force;
5. You shall issue us a promissory note for $200,000 at 10%
interest amortized over a period of 5 years per a payment
schedule to be issued at the time of execution of the
Addendum. There will be no pre-payment penalty and you
may choose to credit your portion of any and all
franchise fees to the balance owed.
Paragraph 6 In the event that Michigan's economy (as determined by the Z
Michigan Department of Commerce) is declared to be in a depression, we shall
suspend both our rights to terminate for non-performance as listed in Section
2(G) and the Development Schedule as listed in Exhibit B and this Addendum. Said
Schedule and rights will be re-initiated at the point at which Michigan's
economy emerges from said depression.
Paragraph 7 We hereby acknowledge that you and William R. And Linda L. Stewart
are owners and principals in Subway restaurants and that said ownership does not
violate any non-compete clauses in the Agreement.
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Paragraph 8 We hereby acknowledge that it is your intent to cross promote your
Mountain Mike's Pizza restaurants with Subway restaurants and that said
cross-promotion does not violate any non-compete clauses in the Agreement.
Quality Franchise Systems, Inc. Master Franchising and Developmental
Systems, Inc.
By:/s/ Bradley Gordon By:/s/ William R. Stewart
- -------------------------------- -------------------------------------
Bradley Gordon William R. Stewart
President President
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AGREEMENT
This agreement ("Agreement"),dated this 28 day of August, 1993, is by and
between Q & S Management, a California corporation (hereinafter"Grantor","Q &
S") and Alex Golshanara, an individual (hereinafter "Grantee", "Golshanara").
Recitals
A. Q & S, as the franchisor of the "Mountain Mike's Pizza restaurant chain,
seeks to establish additional franchised locations in the geographical area
described in the exclusive territory as herein defined.
B. Golshanara, having experience in the restaurant and franchise industries and
a familiarity with the markets of said Exclusive Territory, desires to develop
franchised locations in the Exclusive Territory for Q&S in exchange for sharing
in the initial and continuing income generated by the locations.
C. The parties hereby enter this Agreement to formalize the terms and conditions
of their arrangement to jointly develop and establish Mountain Mike's Pizza
franchised locations in the exclusive Territory.
Terms
1. Grant of Exclusive Territory. Q&S grants to Golshanara the exclusive right to
establish Mountain Mike's Pizza restaurants in the area described in Exhibit `A"
attached hereto and incorporated by reference. This area is referred to herein
as "Exclusive Territory."
2. Consideration. In consideration for receiving the rights granted in this
Agreement,Golshanara shall pay Q&S Fifty thousand Dollars ($50,000.00).
3. Term:Minimum Units. The rights granted herein shall be for a period of five
(5) years from the date of this Agreement, provided that during the five (5)
year period there shall be established and put into operation in the Exclusive
Territory a minimum of six (6) additional Mountain Mike's Pizza restaurants. Any
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restaurants established in the territory by Q&S during the term hereof, as
hereinafter provided, shall be counted in determining said minimum number.
4. Extension. Provided that the minimum units outlined in paragraph 3 are
established during the first five year term of this Agreement, the rights shall
be extended to Grantee for additional successive five (5) year periods, on the
same terms and conditions as described in this Agreement, with the exclusion of
Paragraph 2 (no additional fee required), provided that six (6) Mountain Mike's
Pizza restaurants are established during each five year period, any restaurants
established by Q&S being counted in determining the minimum number.
5. Granting Franchises. For each of the Mountain Mike's Pizza restaurants
established in the Exclusive Territory hereunder, a separate franchise agreement
and other related agreements shall be entered into between Q&S and the
franchisee. The terms of each franchise shall be those contained in the then
current version of the franchise agreement ("Franchise Agreement").
6. Grantee not Subfranchisor. Grantee is not a subfranchisor of Q&S and (unless
specifically granted or assigned rights or responsibilities of the Franchisor in
the future) is not a party to the Franchise Agreements entered into and shall
not be responsible or liable for the Franchisor's obligations under the
Franchise Agreements in Grantee's Exclusive Territory. Grantee may be a party to
the Franchise Agreements as franchisee, which status shall not alter his rights
under this agreement.
7. Existing Franchised Units. The parties acknowledge that thirteen (13)
Mountain Mike's locations have been established in the Exclusive Territory prior
to the date of this Agreement and that the rights granted to Grantee by this
Agreement specifically do not apply to these previously established locations
listed in Exhibit "A" . In the event any of the existing units close.Grantor
shall retain the exclusive right for six (6) months to secure a franchisee for
said closed location;should a Franchise Agreement be executed and the restaurant
is re-opened within the six-month period the re-opened location shall be
considered an existing franchised unit for the purpose of this Agreement.
however, should any of the existing units closed and re-open or is sub-franchise
by the Grantee, the same shall be subject to all the terms and conditions of
this agreement.
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7.a. Exclusive Areas-Franchisees. For all new units established in the
Exclusive Territory, the exclusive area granted under the franchise agreement
shall not exceed a 1.5 mile radius. This 1.5 mile limitation applies also to
existing franchised units which close and subsequently reopen or which franchise
agreement expires and subsequently renew.
8. Payments to Grantee-Fees. Grantee shall be entitled to Fifty percent (50%) of
the initial franchise fee,renewal fee, and transfer fee collected by Q&S in
connection with the granting of a franchise in the Exclusive Territory exclusive
of the existing franchised units. Grantor shall distribute these funds to
Grantee within thirty (30) days from the date of opening of each franchised
location.
9. Payments to Grantee - Royalties. Grantee shall be entitled to a percentage of
collected royalties (Collected Royalty Proceeds"), as detailed in 9.b below,
received by Q&S from all franchised units established in the Exclusive Territory
during the term of this Agreement. Grantor shall rebate to Grantee Collected
Royalty Proceeds within thirty (30) days of receipt by Grantor.
9.a. Collected Royalty Proceeds. For the purpose of this Agreement,
"Collected Royalty Proceeds" shall refer to the entire royalty fees received by
Q&S from all franchised locations established hereunder, less any extraordinary
expenses incurred by Q&S in their collection,provided that these expenses are
specifically defined and documented by Grantor and approved by Grantee. Grantor
and Grantee shall share these extraordinary collection expenses in direct
proportion to the Fraction of Collected Royalty Proceeds payable to Grantor and
Grantee. Grantor shall not reduce or waive any Royalty Fee without Grantee
consent.
9.b. Royalty Payments to Grantee- Franchised Locations Operated by
Third Parties. Grantee shall received a portion of the Collected Royalty
Proceeds according to the following schedule for each individual location that
is established under this Agreement:
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Fraction of Collected
Royalty Proceeds Payable
MONTHS AFTER OPENING DATE to Grantee
One(1) to twelve(12) One Fifth (1/5th)
Thirteen (13) to twenty-four (24) Three Tenths (3/10ths)
Twenty-Five (25) thereafter Two Fifths (2/5ths)
9.c. Royalty Payments for Grantee-operated locations. For those
locations opened and operated by Grantee in the Exclusive Territory under this
Agreement shall not required Initial Franchise fee or any Transfer Fee. Grantee
shall pay 2.5% (Two and one-half percent) of gross sales as a royalty for the
period Grantee owns the locations,regardless of the provisions in the Franchise
agreement for such location. The schedule in paragraph 9.b above shall apply in
the event of sale of a location by Grantee.
9.d. Royalty Payments Continue Beyond This Agreement. Regardless of the
continued existence of the Exclusive Territory rights under this agreement, the
Grantee shall receive the Royalty Payments for the life of any location
established hereunder, and any extension of the relevant franchise, whether the
franchise remain in operation at the original location or be moved.
10. Payments to Grantee - Performance Payments. Grantor shall pay Grantee
$25,000.00 (Twenty Five Thousand Dollars) upon the opening of the sixth (6th)
unit under this Agreement in the Exclusive Territory and Grantee's other
exclusive territories . Additionally, Grantor shall pay Grantee $25,000.00
(Twenty Five Thousand Dollars) upon the opening of the eleventh (11th) location
within the Exclusive Territory and grantee's other exclusive territories. For
the purpose of these performance payments, locations opened by Grantor in
Grantee's exclusive territories shall apply.
11. Description of Right. Grantee shall have the exclusive right to sell or
transfer through sale Mountain Mike's Pizza franchises within the Exclusive
Territory as detailed in Exhibit "A", subject to the following terms and
conditions:
11.a. Each franchisee shall submit complete financial data to Q&S for
its review and approval.
11.b. Each franchise shall execute the then current Q&S Franchise
Agreement and agree to be bound by the terms and conditions of said agreement.
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11.c. A full initial franchisee fee or transfer fee as appropriate
shall be required for each franchised location under the then-existing Franchise
Agreement.
11.d. Q&S shall be solely responsible for the supervision of and
enforcement of the Franchise Agreements granted in the Exclusive Territory. The
parties agree that Grantor may delegate training responsibility on a
case-by-case basis. (For those locations that Golshanara opens and subsequently
sells, Golshanara shall be responsible for providing initial training only. All
subsequent training shall be by Grantor. In the event a location is established
within the Exclusive Territory that is not opened by Golshanara, then only the
Grantor shall be responsible for providing training.)
12. Grantor's Right to Establish Locations. Grantor retains the rights to
establish Mountain Mike's Pizza restaurants in Grantee's Exclusive
Territory;provided,however,that Grantee shall be entitled to receive from
Grantor the fees outlined in this Agreement on any and all franchises
established by Grantor in the Exclusive Territory during the term of this
Agreement and any extension thereof. This specifically does not apply to those
locations established prior to the date of this Agreement. Grantor and Grantee
shall mutually approve of the location of new franchised locations within the
Exclusive Territory, and neither party shall unreasonably withhold its approval.
13. Breach;Termination. The failure of Grantee to perform any of the terms and
conditions of this Agreement,or any breach hereof,including but not limited to
the failure to pay amounts due to Grantor within thirty (30) days of written
notice to do so,shall be deemed a breach of this Agreement. In the event of a
breach of this Agreement,this Agreement shall terminate unless arbitration is
requested by Grantee. Any arbitration regarding a breach by Grantee of this
Agreement shall be conducted under the rules of the American Arbitration
Association.However,Golshanara shall remain entitled to received royalty
payments describes in paragraph 9 for the life of the Franchise Agreements
granted in the exclusive Territory hereunder which are open and operating prior
to the date this Agreement terminates.
14. Assignment. This Agreement may not be assigned,sold or transferred without
the prior written consent of Grantor,which consent shall not be unreasonably
withheld. The consent of the Grantor is not required for assignment and transfer
of this Agreement by Golshanara to a corporation so long as Golshanara retains
PAGE 5
<PAGE>
fifty-one percent (51%) of the controlling shares of said corporation, nor is
such consent required upon transfer or assignment to a partnership where Grantee
is and remains a general partner holding fifty percent (50%) or more of the
controlling interest.The parties agree that the interest of Grantee under this
agreement may be transferred inter vivos to the heirs of said Grantee or to a
trust and held thereby, or may pass by will or applicable laws of intestate
succession. Any attempt to assign this Agreement other than that outlined in
this paragraph 14, or the rights hereunder without the prior written consent of
Grantor shall be null and void.
15. Continuation of Payments to Grantee. If for whatever reason this Exclusive
territory Agreement expires, is not renewed,or is otherwise canceled, Grantee
shall continue to received royalty payments as described hereinabove for all
locations open and operating at the time this Agreement expires, Payments shall
continue for the life of the Franchise Agreements established
hereunder,including any and all renewals and any moved locations.
16. No Maximum Number of Franchised locations. Notwithstanding the minimum
performance requirements described in paragraph 3 above, there is no limit as to
the number of franchised locations which may be established in Grantee's
Exclusive Territory.
17. Grantor's Retained Authority. While Grantor may rely on or defer to the
judgment of Grantee from time to time in various matters, the parties agree that
Grantor retains the ultimate authority to approve or disapprove of items
regarding the Mountain Mike's name, concept and Franchise Agreement in the
Exclusive Territory. These items include but are not limited to site
registration,plan approval, equipment approval, franchise sales materials and
advertising,restaurant advertising,products and product specifications,and
distribution and distribution sources. Grantor shall use its reasonable
discretion in exercising its authority.
18. Notices. All notices shall be sent to the parties hereto at their respective
addresses set for the below:
GRANTOR: GRANTEE:
Q & S Management Alex Golshanara 1014 2nd Street, 3rd Floor P.O.Box
2017 Old Sacramento, CA 95814 Watsonville, CA 95077
Attn:Bradley Gordon
PAGE 6
<PAGE>
19. Severability. Should any one or more parts of this Agreement be declared
invalid by any court of competent jurisdiction for any reason, such decision
shall not effect the validity of any remaining portions which shall remain in
full force and effect
20. Mutual Indemnification. Each party agrees to hold the other party harmless
from all bills,debts,obligations and liabilities incurred in the operation of
their respective businesses. Furthermore,Grantor shall indemnify Grantee from
any liability that may arise from the Franchise Agreements executed hereunder
and from Grantor's activities in the Exclusive Territory,and Grantee shall
indemnify Grantor from any liability that may arise from Grantee's sales and
development efforts in the Exclusive Territory.
21. Covenant Not to Compete. Grantee agrees that neither Grantee nor its
principal officers or shareholders shall undertake any activities,during the
term of this Agreement, in direct competition to the Mountain Mike's Pizza
restaurants in the Exclusive Territory. Grantee's operation of a Mountain Mike's
Pizza restaurant under franchise shall not be considered as being in
competition.
22. Definitions. The Exclusive territory Rights include, but are not limited to,
the right to own, be franchised,develop, open,operate,and/or sell or resell a
restaurant, and also the right to discover and furnish to Q&S third parties
ready,willing and able to purchase a Mountain Mike franchise and operate a
restaurant within the said exclusive territory. The term "operator" shall mean
the Grantee if he be the owner and operator of a restaurant, or a third party or
parties who are successors of the Grantee or who were obtained as franchisees
under the provisions of this Agreement.
23. First Right of Refusal-Closed Units. In the event any Mountain Mike's
restaurant within Santa Clara County should close,including any existing
franchised unit Grantee shall have the first right of refusal to take over the
closed location, without payment of additional Franchise Fees, Service fees
after takeover shall be as provided by the Franchise agreement subject to the
terms hereof.
24. [TEXT MISSING]
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25. Registration Provisions. To comply with California laws regarding the sale
of Franchises, Q&S agrees to register Grantee with the State, and any other
governmental authority where required, as its representative for the Exclusive
Territory. This does not impose upon Q&S any employer obligations except as may
be specifically set forth herein. Grantee is an independent contractor,not an
employee. Grantee may elect to register independently with the State, and other
governmental authorities,whether or not required. Should the Grantee so elect
Q&S will use its best efforts to assist in said independent registration and
will furnish to Grantee all records and other documents which the government
entity may require,at no cost to Grantee except that Grantee will be responsible
for payment of all costs of such registration. Neither party may cancel this
agreement because of governmental registration requirements. In the event any
provision of this agreement is contrary to law or governmental regulations, the
same shall be amended in such fashion as to bring the agreement into compliance
without altering the rights of the Grantee.
26. Transfer by Q&S. Should Q&S transfer its rights to franchise Mountain Mike's
Restaurants, in whole or in part,voluntarily or involuntarily, or should Q&S be
merged with another corporation or entity, this agreement shall survive such
transfer or merger, and the rights herein shall remain in full force and effect
as to the subsequent person or entity obtaining said Franchising rights.
27. Sole Agreement. This is the only agreement between the parties in respect to
the exclusive rights for Santa Clara County. There are no oral agreements. This
agreement does not modify in any respect other agreements between the parties
relative to other Counties.
28. Attorney Fees and Costs. In Arbitration or Litigation in respect to this
agreement the prevailing party shall be entitled to judgment or award of
attorney fees and costs.
29. Time of Essence. Time is the essence of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement this 28 day of
August, 1993. Executed in duplicated original.
Q & S MANAGEMENT ALEX GOLSHANARA
/s/ Bradley L. Gordon /s/ Alex Golshanara
- -------------------------- ---------------------------
Bradley Gordon Alex Golshanara
Chief Executive Officer
PAGE 9
<PAGE>
EXHIBIT A
EXCLUSIVE TERRITORY
The Exclusive Territory as defined in the Agreement between Q & S Management and
Alex Golshanara is the entire County of Santa Clara,California, except for those
areas in Santa Clara County
listed below:
(NOTE: Specific descriptions of each of the exclusive areas for the locations
below shall be provided with the final draft of this Agreement)
Morgan Hill
Hamilton
Camden/Almaden
Los Gatos
Gilroy
Branham/Pearl
Mountain View # 1
Santa Teresa/Cottle
Blossom Hill
Capitol/McKee
Mountain View # 2
Sunnyvale # 2
Kiely/Benton
In the event any of the Franchise Agreements protecting the above-referenced
areas expire or terminate the area shall become part of Grantee's Exclusive
Territory.
PAGE 10
PROMISSORY NOTE
$1,500,000.00 SACRAMENTO, CA. SEPTEMBER 24, 1997
BRADLEY L. GORDON, a resident of California ("Maker"), promises to pay
to JRECK SUBS GROUP, INC., a Colorado corporation ("Holder"), at P. O. Box 6,
Watertown, New York 13601, the principal sum of the amount set forth in the
upper left-hand corner of this Note, with interest on such principal sum from
the date of this Note until paid, at the rate of 9.5% percent per annum, payable
as more fully set forth below:
1. Payments. Principal and interest under this Note shall be payable as
follows:
1.1. On or before September 24, 2000, all unpaid principal and
accrued interest under this Note shall become due and payable.
2. Manner of Payments. All payments by Maker under this Note shall be
(a) made in lawful money of the United States of America without set-off,
deduction or counterclaim of any kind whatsoever, (b) credited first to amounts
for Holder's costs of enforcing this Note, if any, second to any accrued
interest under this Note and finally to the principal balance under this Note,
and (c) deemed paid by Maker upon their actual receipt by Holder. Interest for
any period less than one year shall be calculated on the basis of 1/360th of one
year's interest multiplied by the number of days during such period.
3. Commercial Purposes. Maker acknowledges that the loan evidenced by
this Note is obtained for business or commercial purposes and that the proceeds
of such loan will not be used primarily for personal, family, household or
agricultural purposes.
4. Note Waivers. Maker waives presentment, demand, protest, notice of
demand and dishonor.
5. Prepayment Without Penalty. This Note may be prepaid in whole or in
part at any time without penalty.
6. Governing Law. This Note is governed by and construed in accordance
with the laws of the State of California, irrespective of California's
choice-of-law principles.
7. Further Assurances. Each party to this Note shall execute and
deliver all instruments and documents and take all actions as may be reasonably
required or appropriate to carry out the purposes of this Note.
8. Attorney's Fees. The prevailing party in any litigation,
arbitration, or other proceeding relating to the enforcement or interpretation
of this Note may recover from the unsuccessful party all its costs, expenses,
and actual attorney's fees.
1
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9. Modification. This Note may be modified only by a contract in writing
executed by the party to this Note against whom enforcement of the modification
is sought.
-------------------------------
BRADLEY L. GORDON
2
PROMISSORY NOTE
$900,000.00 SAN FRANCISCO, CA. SEPTEMBER 24, 1997
RICHARD T. SILBERMAN, a resident of California ("Maker"), promises to
pay to JRECK SUBS GROUP, INC., a Colorado corporation ("Holder"), at P. O. Box
6, Watertown, New York 13601, the principal sum of the amount set forth in the
upper left-hand corner of this Note, with interest on such principal sum from
the date of this Note until paid, at the rate of 9.5% percent per annum, payable
as more fully set forth below:
1. Payments. Principal and interest under this Note shall be payable as
follows:
1.1. On or before September 24, 2000, all unpaid principal and
accrued interest under this Note shall become due and payable.
2. Manner of Payments. All payments by Maker under this Note shall be
(a) made in lawful money of the United States of America without set-off,
deduction or counterclaim of any kind whatsoever, (b) credited first to amounts
for Holder's costs of enforcing this Note, if any, second to any accrued
interest under this Note and finally to the principal balance under this Note,
and (c) deemed paid by Maker upon their actual receipt by Holder. Interest for
any period less than one year shall be calculated on the basis of 1/360th of one
year's interest multiplied by the number of days during such period.
3. Commercial Purposes. Maker acknowledges that the loan evidenced by
this Note is obtained for business or commercial purposes and that the proceeds
of such loan will not be used primarily for personal, family, household or
agricultural purposes.
4. Note Waivers. Maker waives presentment, demand, protest, notice of
demand and dishonor.
5. Prepayment Without Penalty. This Note may be prepaid in whole or in
part at any time without penalty.
6. Governing Law. This Note is governed by and construed in accordance
with the laws of the State of California, irrespective of California's
choice-of-law principles.
7. Further Assurances. Each party to this Note shall execute and
deliver all instruments and documents and take all actions as may be reasonably
required or appropriate to carry out the purposes of this Note.
8. Attorney's Fees. The prevailing party in any litigation,
arbitration, or other proceeding relating to the enforcement or interpretation
of this Note may recover from the unsuccessful party all its costs, expenses,
and actual attorney's fees.
1
<PAGE>
9. Modification. This Note may be modified only by a contract in writing
executed by the party to this Note against whom enforcement of the modification
is sought.
-------------------------------
RICHARD T. SILBERMAN
2
PROMISSORY NOTE
$687,500 ORLANDO, FL. JULY 31, 1998
MICHAEL CRONIN, a resident of Florida ("Maker"), promises to pay to JRECK SUBS
GROUP, INC., a Colorado corporation ("Holder"), at 2101 W. State Road 434, Suite
100, Longwood, FL 32779, the principal sum of the amount set forth in the upper
left-hand corner of this Note, with interest on such principal sum from the date
of this Note until paid, at the rate of 9.5% percent per annum, payable as more
fully set forth below:
1. Payments. Principal and interest under this Note shall be payable as
follows:
1.1. On or before July 30, 2001, all unpaid principal and
accrued interest under this Note shall become due and payable.
2. Manner of Payments. All payments by Maker under this Note shall be
(a) made in lawful money of the United States of America without set-off,
deduction or counterclaim of any kind whatsoever, (b) credited first to amounts
for Holder's costs of enforcing this Note, if any, second to any accrued
interest under this Note and finally to the principal balance under this Note,
and (c) deemed paid by Maker upon their actual receipt by Holder. Interest for
any period less than one year shall be calculated on the basis of 1/360th of one
year's interest multiplied by the number of days during such period.
3. Commercial Purposes. Maker acknowledges that the loan evidenced by
this Note is obtained for business or commercial purposes and that the proceeds
of such loan will not be used primarily for personal, family, household or
agricultural purposes.
4. Note Waivers. Maker waives presentment, demand, protest, notice of
demand and dishonor.
5. Prepayment Without Penalty. This Note may be prepaid in whole or in
part at any time without penalty.
6. Governing Law. This Note is governed by and construed in accordance
with the laws of the State of Florida, irrespective of Florida's choice-of-law
principles.
7. Further Assurances. Each party to this Note shall execute and
deliver all instruments and documents and take all actions as may be reasonably
required or appropriate to carry out the purposes of this Note.
8. Attorney's Fees. The prevailing party in any litigation,
arbitration, or other proceeding relating to the enforcement or interpretation
of this Note may recover from the unsuccessful party all its costs, expenses,
and actual attorney's fees.
1
<PAGE>
9. Modification. This Note may be modified only by a contract in writing
executed by the party to this Note against whom enforcement of the modification
is sought.
-------------------------------
MICHAEL CRONIN
2
PROMISSORY NOTE
$412,500 MILL VALLEY, CA. JULY 31, 1998
RICHARD T. SILBERMAN, a resident of California ("Maker"), promises to pay to
JRECK SUBS GROUP, INC., a Colorado corporation ("Holder"), at 2101 W. State Road
434, Suite 100, Longwood, FL 32779, the principal sum of the amount set forth in
the upper left-hand corner of this Note, with interest on such principal sum
from the date of this Note until paid, at the rate of 9.5% percent per annum,
payable as more fully set forth below:
1. Payments. Principal and interest under this Note shall be payable as
follows:
1.1. On or before July 30, 2001, all unpaid principal and
accrued interest under this Note shall become due and payable.
2. Manner of Payments. All payments by Maker under this Note shall be
(a) made in lawful money of the United States of America without set-off,
deduction or counterclaim of any kind whatsoever, (b) credited first to amounts
for Holder's costs of enforcing this Note, if any, second to any accrued
interest under this Note and finally to the principal balance under this Note,
and (c) deemed paid by Maker upon their actual receipt by Holder. Interest for
any period less than one year shall be calculated on the basis of 1/360th of one
year's interest multiplied by the number of days during such period.
3. Commercial Purposes. Maker acknowledges that the loan evidenced by
this Note is obtained for business or commercial purposes and that the proceeds
of such loan will not be used primarily for personal, family, household or
agricultural purposes.
4. Note Waivers. Maker waives presentment, demand, protest, notice of
demand and dishonor.
5. Prepayment Without Penalty. This Note may be prepaid in whole or in
part at any time without penalty.
6. Governing Law. This Note is governed by and construed in accordance
with the laws of the State of Florida, irrespective of Florida's choice-of-law
principles.
7. Further Assurances. Each party to this Note shall execute and
deliver all instruments and documents and take all actions as may be reasonably
required or appropriate to carry out the purposes of this Note.
8. Attorney's Fees. The prevailing party in any litigation,
arbitration, or other proceeding relating to the enforcement or interpretation
of this Note may recover from the unsuccessful party all its costs, expenses,
and actual attorney's fees.
1
<PAGE>
9. Modification. This Note may be modified only by a contract in writing
executed by the party to this Note against whom enforcement of the modification
is sought.
------------------------------
RICHARD T. SILBERMAN
2
PROMISSORY NOTE
$687,500 ORLANDO, FL. JULY 31, 1998
BRADLEY L. GORDON, a resident of Florida ("Maker"), promises to pay to JRECK
SUBS GROUP, INC., a Colorado corporation ("Holder"), at 2101 W. State Road 434,
Suite 100, Longwood, FL 32779, the principal sum of the amount set forth in the
upper left-hand corner of this Note, with interest on such principal sum from
the date of this Note until paid, at the rate of 9.5% percent per annum, payable
as more fully set forth below:
1. Payments. Principal and interest under this Note shall be payable as
follows:
1.1. On or before July 30, 2001, all unpaid principal and
accrued interest under this Note shall become due and payable.
2. Manner of Payments. All payments by Maker under this Note shall be
(a) made in lawful money of the United States of America without set-off,
deduction or counterclaim of any kind whatsoever, (b) credited first to amounts
for Holder's costs of enforcing this Note, if any, second to any accrued
interest under this Note and finally to the principal balance under this Note,
and (c) deemed paid by Maker upon their actual receipt by Holder. Interest for
any period less than one year shall be calculated on the basis of 1/360th of one
year's interest multiplied by the number of days during such period.
3. Commercial Purposes. Maker acknowledges that the loan evidenced by
this Note is obtained for business or commercial purposes and that the proceeds
of such loan will not be used primarily for personal, family, household or
agricultural purposes.
4. Note Waivers. Maker waives presentment, demand, protest, notice of
demand and dishonor.
5. Prepayment Without Penalty. This Note may be prepaid in whole or in
part at any time without penalty.
6. Governing Law. This Note is governed by and construed in accordance
with the laws of the State of Florida, irrespective of Florida's choice-of-law
principles.
7. Further Assurances. Each party to this Note shall execute and
deliver all instruments and documents and take all actions as may be reasonably
required or appropriate to carry out the purposes of this Note.
8. Attorney's Fees. The prevailing party in any litigation,
arbitration, or other proceeding relating to the enforcement or interpretation
of this Note may recover from the unsuccessful party all its costs, expenses,
and actual attorney's fees.
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9. Modification. This Note may be modified only by a contract in writing
executed by the party to this Note against whom enforcement of the modification
is sought.
-------------------------------
BRADLEY L. GORDON
2
AGREEMENT
This Agreement is executed effective September 24, 1997 between BRADLEY
L. GORDON, a resident of California ("Employee"), and JRECK SUBS GROUP, INC., a
Colorado corporation ("Employer"), who agree as follows:
1. Hiring. Employer hereby hires Employee as, and Employee hereby
agrees to act as, Chief Operating Officer. Employer shall cause Employee to be
elected to the Board of Directors of Employer at all times during the Term (as
defined below) of this Agreement.
2. Duties. Employee shall faithfully and diligently perform the duties
normally performed by a Chief Operating Officer on a full-time basis, devoting
Employee's entire productive time, ability and attention to such duties.
3. Term. The term of this Agreement shall commence on the date of this
Agreement, and, unless terminated earlier as set forth below, shall expire on
September 24, 2000 (the "Termination Date").
4. Termination. At any time that Good Cause (as defined below) exists
or has arisen, Employer may, at its election, terminate this Agreement by so
notifying Employee in writing (the "Good Cause Notice"). From and after the date
of this Agreement, Employer or Employee may terminate this Agreement by so
notifying the other in writing (the "Termination Notice"), for any reason
whatsoever or for no reason. Upon the earlier of the Termination Date,
immediately after the giving of the Good Cause Notice, or 30 days after the
giving of the Termination Notice, (a) this Agreement shall be deemed terminated,
(b) neither Employee nor Employer shall have any further rights or obligations
under this Agreement (except with respect to Employee's obligations under the
Paragraphs in this Agreement entitled "Confidentiality," and "Competition, " and
except with respect to Employer's obligations under the Paragraph in this
Agreement entitled "Termination Obligations," which obligations shall survive
any such termination), (c) Employee shall return to Employer all property
belonging to Employer, including without limitation all Confidential Material
(as defined below), promotional material, advertising information, samples,
price lists and similar items, and (d) Employer shall have no obligation to make
any further payments to Employee, except for amounts earned pursuant to this
Agreement by Employee prior to such termination and except for Employer's
obligations under the Paragraph in this Agreement entitled Termination
Obligations. For purposes of this Agreement, "Good Cause" shall mean the
existence or occurrence of any of the following:
4.1. If Employee is convicted of a felony, commits theft,
larceny, embezzlement, fraud, any acts of dishonesty, illegality, moral
turpitude or gross mismanagement in connection with the execution of his duties
for Employer, as determined in good faith by an 80% majority of the entire board
of directors of Employer.
4.2. The death of Employee.
4.3. If Employee becomes materially disabled to such an extent
that Employee is precluded from performing the duties set forth in this
Agreement for a period of 90 consecutive days, or 120 days in the aggregate
during any one-year period.
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5. Compensation/Benefits. Employee's total compensation under this
Agreement shall be $150,000 per year, subject to annual salary increases
consistent with other executives of Employer, payable on a monthly basis in
accordance with and at the same times as Employer's ordinary payroll procedures
("Base Salary"). Employee shall also be entitled to all benefits generally
available to other employees of Employer.
6. Purchase of Stock. Upon the execution of this Agreement, Employee
shall purchase 500,000 shares (the "Shares") of Employer's common stock at a
price per share equal to the closing price of such common stock on September 24,
1997. The purchase price for the Shares shall be paid in the form of the
promissory note (the "Note") attached as Exhibit A. At any time within three
years after the date of this Agreement, Employee shall have the right to require
Employer to repurchase the Shares in consideration of the cancellation of the
Note.
7. Termination Obligations. If this Agreement is terminated prior to
the Termination Date, Employee will be entitled to the following termination
benefits:
7.1. If this Agreement is terminated by Employer due to
Employee's disability as described in Paragraph 4.3 above after giving Employee
the Good Cause Notice, then Employee shall receive a severance benefit of twelve
(12) months Base Salary (the "Severance Payments"), less any amounts payable to
Employee under any applicable disability insurance maintained by Employer for
the benefit of Employee. The Severance Payments will be payable in equal
consecutive monthly installments commencing with the first of the month
following the effective date of the Good Cause Notice. Employee will also
receive all other benefits generally available to other employees of Employer
during such time as Employee receives the Severance Payments. Notwithstanding
the foregoing, Employee shall not be entitled to any benefits under this
paragraph if Employee accepts any position of employment or consulting with a
competitor of Employer at any time within twelve (12) months after the effective
date of such Good Cause Notice. Any such benefits previously paid to Employee
shall be immediately due and owing to Employer.
7.2. Upon the earlier of the Termination Date or such time as
this Agreement is terminated by Employer after giving Employee the Termination
Notice, Employer shall continue to pay Employee his Base Salary until the
earlier of such time that Employee finds new employment or twelve (12) months
after the date of such Termination Date or Termination Notice.
8. Relocation Expenses. If Employee's duties cause Employee to relocate
upon Employer's reasonable request, Employer will reimburse Employee for his
reasonable relocation expenses.
9. Confidentiality. Employee hereby acknowledges that Employer has made
(or may make) available to Employee certain customer lists, product design
information, performance standards and other confidential and/or proprietary
information of Employer or licensed to Employer, including without limitation
trade secrets and copyrighted materials (collectively, the "Confidential
Material"). Except as essential to Employee's obligations under this Agreement,
neither Employee nor any agent, employee, officer, or independent contractor of
or retained by Employee shall make any disclosure of this Agreement, the terms
of this Agreement, or any of the Confidential Material. Except as essential to
Employee's obligations under this Agreement, neither Employee nor any agent,
employee, officer, or independent contractor of or retained by Employee shall
make any duplication or other copy of any of the Confidential Material.
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<PAGE>
Immediately upon request from Employer, Employee shall return to Employer all
Confidential Material. Employee shall notify each person to whom any disclosure
is made that such disclosure is made in confidence, that the Confidential
Material shall be kept in confidence by such person, and that such person shall
be bound by the provisions of this Paragraph.
10. Competition. During the term of this Agreement, Employee shall not
own an interest in, operate or participate in, or be connected as an officer,
director, employee, agent, independent contractor, partner, shareholder or
principal of any business entity or person producing, designing, providing,
soliciting orders for, selling, distributing, or marketing products, goods,
equipment and/or services which compete with Employer's products, goods,
equipment and/or services.
11. Injunctive Relief. Each of Employer and Employee hereby acknowledge
(a) the unique nature of the provisions set forth in the Paragraphs of this
Agreement entitled "Confidentiality," and "Competition," (b) that Employer will
suffer irreparable harm if Employee breaches any of such provisions, and (c)
that monetary damages will be inadequate to compensate Employer for such breach.
Therefore, if Employee breaches any of such provisions, then Employer shall be
entitled to injunctive relief (in addition to any other remedies at law or
equity) to enforce such provisions.
12. Survival. The representations, warranties and covenants of the
parties in this Agreement shall survive any termination of this Agreement.
13. Governing Law. This Agreement is governed by and construed in
accordance with the laws of the State of California, irrespective of
California's choice-of-law principles.
14. Further Assurances. Each party to this Agreement shall execute and
deliver all instruments and documents and take all actions as may be reasonably
required or appropriate to carry out the purposes of this Agreement.
15. Venue and Jurisdiction. All actions and proceedings arising in
connection with this Agreement must be tried and litigated exclusively in the
State and Federal courts located in the county of Employee's residence, which
courts have personal jurisdiction and venue over each of the parties to this
Agreement for the purpose of adjudicating all matters arising out of or related
to this Agreement. Each party authorizes and accepts service of process
sufficient for personal jurisdiction in any action against it as contemplated by
this paragraph by registered or certified mail, return receipt requested,
postage prepaid, to its address for the giving of notices set forth in this
Agreement.
16. Counterparts and Exhibits. This Agreement may be executed in
counterparts, each of which is deemed an original and all of which together
constitute one document. All exhibits attached to and referenced in this
Agreement are incorporated into this Agreement.
17. Time of Essence. Time and strict and punctual performance are of
the essence with respect to each provision of this Agreement.
18. Attorney's Fees. The prevailing party(ies) in any litigation,
arbitration, mediation, bankruptcy, insolvency or other proceeding
("Proceeding") relating to the enforcement or interpretation of this Agreement
may recover from the unsuccessful party(ies) all costs, expenses, and actual
3
<PAGE>
attorney's fees (including expert witness and other consultants' fees and costs)
relating to or arising out of (a) the Proceeding (whether or not the Proceeding
proceeds to judgment), and (b) any post-judgment or post-award proceeding
including, without limitation, one to enforce or collect any judgment or award
resulting from the Proceeding. All such judgments and awards shall contain a
specific provision for the recovery of all such subsequently incurred costs,
expenses, and actual attorney's fees.
19. Modification. This Agreement may be modified only by a contract in
writing executed by the party to this Agreement against whom enforcement of the
modification is sought.
20. Headings. The paragraph headings in this Agreement: (a) are
included only for convenience, (b) do not in any manner modify or limit any of
the provisions of this Agreement, and (c) may not be used in the interpretation
of this Agreement.
21. Prior Understandings. This Agreement and all documents specifically
referred to and executed in connection with this Agreement: (a) contain the
entire and final agreement of the parties to this Agreement with respect to the
subject matter of this Agreement, and (b) supersede all negotiations,
stipulations, understandings, agreements, representations and warranties, if
any, with respect to such subject matter, which precede or accompany the
execution of this Agreement.
22. Interpretation. Whenever the context so requires in this Agreement,
all words used in the singular may include the plural (and vice versa) and the
word "person" includes a natural person, a corporation, a firm, a partnership, a
joint venture, a trust, an estate or any other entity. The terms "includes" and
"including" do not imply any limitation. For purposes of this Agreement, the
term "day" means any calendar day and the term "business day" means any calendar
day other than a Saturday, Sunday or any other day designated as a holiday under
California Government Code Sections 6700-6701. Any act permitted or required to
be performed under this Agreement upon a particular day which is not a business
day may be performed on the next business day with the same effect as if it had
been performed upon the day appointed. No remedy or election under this
Agreement is exclusive, but rather, to the extent permitted by applicable law,
each such remedy and election is cumulative with all other remedies at law or in
equity.
23. Partial Invalidity. Each provision of this Agreement is valid and
enforceable to the fullest extent permitted by law. If any provision of this
Agreement (or the application of such provision to any person or circumstance)
is or becomes invalid or unenforceable, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, are not affected by such invalidity
or unenforceability unless such provision or the application of such provision
is essential to this Agreement.
24. Successors-in-Interest and Assigns. Employee may not voluntarily or
by operation of law assign, hypothecate, delegate or otherwise transfer or
encumber all or any part of its rights, duties or other interests in this
Agreement without the prior written consent of Employer, which consent may be
withheld in Employer's sole and absolute discretion. Any such transfer in
violation of this paragraph is void. Subject to the foregoing and any other
restrictions on transferability contained in this Agreement, this Agreement is
binding upon and inures to the benefit of the successors-in-interest and assigns
of each party to this Agreement, including without limitation any person that
acquires a controlling interest in Employer.
4
<PAGE>
25. Notices. Each notice and other communication required or permitted
to be given under this Agreement ("Notice") must be in writing. Notice is duly
given to another party upon: (a) hand delivery to the other party, (b) receipt
by the other party when sent by facsimile to the address and number for such
party set forth below (provided, however, that the Notice is not effective
unless a duplicate copy of the facsimile Notice is promptly given by one of the
other methods permitted under this paragraph), (c) three business days after the
Notice has been deposited with the United States postal service as first class
certified mail, return receipt requested, postage prepaid, and addressed to the
party as set forth below, or (d) the next business day after the Notice has been
deposited with a reputable overnight delivery service, postage prepaid,
addressed to the party as set forth below with next-business-day delivery
guaranteed, provided that the sending party receives a confirmation of delivery
from the delivery-service-provider.
To: Bradley L. Gordon
9066 Tarmac Way
Fair Oaks, California 95628
(916) 987-7391
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<PAGE>
To: JRECK SUBS GROUP, INC.
P. O. Box 6
Watertown, New York 13601
Attention: Christopher Swartz
(315) 788-8954
Each party shall make a reasonable, good faith effort to ensure that it will
accept or receive Notices to it that are given in accordance with this
paragraph. A party may change its address for purposes of this paragraph by
giving the other party(ies) written notice of a new address in the manner set
forth above.
26. Waiver. Any waiver of a default or provision under this Agreement
must be in writing. No such waiver constitutes a waiver of any other default or
provision concerning the same or any other provision of this Agreement. No delay
or omission by a party in the exercise of any of its rights or remedies
constitutes a waiver of (or otherwise impairs) such right or remedy. A consent
to or approval of an act does not waive or render unnecessary the consent to or
approval of any other or subsequent act.
27. Drafting Ambiguities. Each party to this Agreement has reviewed and
revised this Agreement and has had the opportunity to have such party's legal
counsel review and revise this Agreement. The rule of construction that
ambiguities are to be resolved against the drafting party or in favor of the
party receiving a particular benefit under an agreement may not be employed in
the interpretation of this Agreement or any amendment to this Agreement.
-------------------------------
BRADLEY L. GORDON
JRECK SUBS GROUP, INC.,
a Colorado corporation
By:______________________________
Name: ___________________________
Its: ___________________________
6
AGREEMENT
This Agreement is executed effective July 31, 1998 between MICHAEL
CRONIN, a resident of Florida ("Employee"), and JRECK SUBS GROUP, INC., a
Colorado corporation ("Employer"), who agree as follows:
1. Hiring. Employer hereby hires Employee as, and Employee hereby
agrees to act as, Chief Financial Officer.
2. Duties. Employee shall faithfully and diligently perform the duties
normally performed by a Chief Operating Officer on a full-time basis, devoting
Employee's entire productive time, ability and attention to such duties, except
that Employee may continue to pursue the excluded activities described on
Exhibit A ("Excluded Activities"), so long as the pursuit of such the Excluded
Activities does not interfere with Employee's performance of his duties under
this Agreement.
3. Term. The term of this Agreement shall commence on the date of this
Agreement, and, unless terminated earlier as set forth below, shall expire on
July 30, 2001 (the "Termination Date").
4. Termination. At any time that Good Cause (as defined below) exists
or has arisen, Employer may, at its election, terminate this Agreement by so
notifying Employee in writing (the "Good Cause Notice"). From and after the date
of this Agreement, Employer or Employee may terminate this Agreement by so
notifying the other in writing (the "Termination Notice"), for any reason
whatsoever or for no reason. Upon the earlier of the Termination Date,
immediately after the giving of the Good Cause Notice, or 30 days after the
giving of the Termination Notice, (a) this Agreement shall be deemed terminated,
(b) neither Employee nor Employer shall have any further rights or obligations
under this Agreement (except with respect to Employee's obligations under the
Paragraphs in this Agreement entitled "Confidentiality," and "Competition, " and
except with respect to Employer's obligations under the Paragraph in this
Agreement entitled "Termination Obligations," which obligations shall survive
any such termination), (c) Employee shall return to Employer all property
belonging to Employer, including without limitation all Confidential Material
(as defined below), promotional material, advertising information, samples,
price lists and similar items, and (d) Employer shall have no obligation to make
any further payments to Employee, except for amounts earned pursuant to this
Agreement by Employee prior to such termination and except for Employer's
obligations under the Paragraph in this Agreement entitled Termination
Obligations. For purposes of this Agreement, "Good Cause" shall mean the
existence or occurrence of any of the following:
4.1. If Employee is convicted of a felony, commits theft,
larceny, embezzlement, fraud, any acts of dishonesty, illegality, moral
turpitude or gross mismanagement in connection with the execution of his duties
for Employer, as determined in good faith by an 80% majority of the entire board
of directors of Employer.
4.2. The death of Employee.
4.3. If Employee becomes materially disabled to such an extent
that Employee is precluded from performing the duties set forth in this
Agreement for a period of 90 consecutive days, or 120 days in the aggregate
during any one-year period.
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5. Compensation/Benefits. Employee's total compensation under this
Agreement shall be $125,000.00 per year, subject to annual salary increases
consistent with other executives of Employer, payable on a monthly basis in
accordance with and at the same times as Employer's ordinary payroll procedures
("Base Salary"). Employee shall also be entitled to all benefits generally
available to other employees of Employer.
6. Stock Options. Upon the execution of this Agreement, Employee shall
purchase 500,000 shares (the "Shares") of Employer's common stock at a price of
$1.375 per share. The purchase price for the Shares shall be paid in the form of
the promissory note (the "Note") attached as Exhibit B. At any time within three
years after the date of this Agreement, Employee shall have the right to require
Employer to repurchase the Shares in consideration of the cancellation of the
Note.
7. Termination Obligations. If this Agreement is terminated prior to
the Termination Date, Employee will be entitled to the following termination
benefits:
7.1. If this Agreement is terminated by Employer due to
Employee's death or disability as described in Paragraph 4.3 after giving
Employee the Good Cause Notice, then Employee shall receive a severance benefit
of six (6) months Base Salary (the "Severance Payments"), less any amounts
payable to Employee under any applicable disability insurance maintained by
Employer for the benefit of Employee. The Severance Payments will be payable in
equal consecutive monthly installments commencing with the first of the month
following the effective date of the Good Cause Notice. Employee will also
receive all other benefits generally available to other employees of Employer
during such time as Employee receives the Severance Payments. Notwithstanding
the foregoing, Employee shall not be entitled to any benefits under this
paragraph if Employee accepts any position of employment or consulting at any
time within six (6) months after the effective date of such Good Cause Notice.
Any such benefits previously paid to Employee shall be immediately due and owing
to Employer.
7.2. If this Agreement is terminated by Employer after giving
Employee the Termination Notice, Employer shall continue to pay Employee his
Base Salary until the earlier of such time that Employee finds new employment or
twelve (12) months after the date of such Termination Notice.
8. Confidentiality. Employee hereby acknowledges that Employer has made
(or may make) available to Employee certain customer lists, product design
information, performance standards and other confidential and/or proprietary
information of Employer or licensed to Employer, including without limitation
trade secrets and copyrighted materials (collectively, the "Confidential
Material"). Except as essential to Employee's obligations under this Agreement,
neither Employee nor any agent, employee, officer, or independent contractor of
or retained by Employee shall make any disclosure of this Agreement, the terms
of this Agreement, or any of the Confidential Material. Except as essential to
Employee's obligations under this Agreement, neither Employee nor any agent,
employee, officer, or independent contractor of or retained by Employee shall
make any duplication or other copy of any of the Confidential Material.
Immediately upon request from Employer, Employee shall return to Employer all
Confidential Material. Employee shall notify each person to whom any disclosure
is made that such disclosure is made in confidence, that the Confidential
Material shall be kept in confidence by such person, and that such person shall
be bound by the provisions of this Paragraph.
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<PAGE>
9. Competition. During the term of this Agreement, Employee shall not
own an interest in, operate or participate in, or be connected as an officer,
director, employee, agent, independent contractor, partner, shareholder or
principal of any business entity or person producing, designing, providing,
soliciting orders for, selling, distributing, or marketing products, goods,
equipment and/or services which compete with Employer's products, goods,
equipment and/or services.
10. Injunctive Relief. Each of Employer and Employee hereby acknowledge
(a) the unique nature of the provisions set forth in the Paragraphs of this
Agreement entitled "Confidentiality," and "Competition," (b) that Employer will
suffer irreparable harm if Employee breaches any of such provisions, and (c)
that monetary damages will be inadequate to compensate Employer for such breach.
Therefore, if Employee breaches any of such provisions, then Employer shall be
entitled to injunctive relief (in addition to any other remedies at law or
equity) to enforce such provisions.
11. Survival. The representations, warranties and covenants of the
parties in this Agreement shall survive any termination of this Agreement.
12. Governing Law. This Agreement is governed by and construed in
accordance with the laws of the State of Florida, irrespective of Florida's
choice-of-law principles.
13. Further Assurances. Each party to this Agreement shall execute and
deliver all instruments and documents and take all actions as may be reasonably
required or appropriate to carry out the purposes of this Agreement.
14. Venue and Jurisdiction. All actions and proceedings arising in
connection with this Agreement must be tried and litigated exclusively in the
State and Federal courts located in the county of Employer's business, which
courts have personal jurisdiction and venue over each of the parties to this
Agreement for the purpose of adjudicating all matters arising out of or related
to this Agreement. Each party authorizes and accepts service of process
sufficient for personal jurisdiction in any action against it as contemplated by
this paragraph by registered or certified mail, return receipt requested,
postage prepaid, to its address for the giving of notices set forth in this
Agreement.
15. Counterparts and Exhibits. This Agreement may be executed in
counterparts, each of which is deemed an original and all of which together
constitute one document. All exhibits attached to and referenced in this
Agreement are incorporated into this Agreement.
16. Time of Essence. Time and strict and punctual performance are of
the essence with respect to each provision of this Agreement.
17. Attorney's Fees. The prevailing party(ies) in any litigation,
arbitration, mediation, bankruptcy, insolvency or other proceeding
("Proceeding") relating to the enforcement or interpretation of this Agreement
may recover from the unsuccessful party(ies) all costs, expenses, and actual
attorney's fees (including expert witness and other consultants' fees and costs)
relating to or arising out of (a) the Proceeding (whether or not the Proceeding
proceeds to judgment), and (b) any post-judgment or post-award proceeding
including, without limitation, one to enforce or collect any judgment or award
3
<PAGE>
resulting from the Proceeding. All such judgments and awards shall contain a
specific provision for the recovery of all such subsequently incurred costs,
expenses, and actual attorney's fees.
18. Modification. This Agreement may be modified only by a contract in
writing executed by the party to this Agreement against whom enforcement of the
modification is sought.
19. Indemnification. Employee hereby indemnifies Employer against all
Claims (as defined below) and all costs, expenses and attorneys' fees incurred
in the defense of any such Claims or any action or proceeding brought on any
such Claims. For purposes of this Paragraph, "Claims" shall mean all
liabilities, damages, costs, expenses, attorneys' fees and claims, arising from
any activity, work or thing done, permitted or suffered by Employee or by any
agent, employee, officer, or independent contractor of or retained by Employee
in connection with the Excluded Activities. If any action or proceeding is
brought against Employer by reason of any such Claims, Employee upon notice from
Employer shall defend such action or proceeding at Employee's sole cost by
counsel reasonably satisfactory to Employer.
20. Headings. The paragraph headings in this Agreement: (a) are
included only for convenience, (b) do not in any manner modify or limit any of
the provisions of this Agreement, and (c) may not be used in the interpretation
of this Agreement.
21. Prior Understandings. This Agreement and all documents specifically
referred to and executed in connection with this Agreement: (a) contain the
entire and final agreement of the parties to this Agreement with respect to the
subject matter of this Agreement, and (b) supersede all negotiations,
stipulations, understandings, agreements, representations and warranties, if
any, with respect to such subject matter, which precede or accompany the
execution of this Agreement.
22. Partial Invalidity. Each provision of this Agreement is valid and
enforceable to the fullest extent permitted by law. If any provision of this
Agreement (or the application of such provision to any person or circumstance)
is or becomes invalid or unenforceable, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, are not affected by such invalidity
or unenforceability unless such provision or the application of such provision
is essential to this Agreement.
23. Successors-in-Interest and Assigns. Employee may not voluntarily or
by operation of law assign, hypothecate, delegate or otherwise transfer or
encumber all or any part of its rights, duties or other interests in this
Agreement without the prior written consent of Employer, which consent may be
withheld in Employer's sole and absolute discretion. Any such transfer in
violation of this paragraph is void. Subject to the foregoing and any other
restrictions on transferability contained in this Agreement, this Agreement is
binding upon and inures to the benefit of the successors-in-interest and assigns
of each party to this Agreement, including without limitation any person that
acquires a controlling interest in Employer.
24. Notices. Each notice and other communication required or permitted
to be given under this Agreement ("Notice") must be in writing. Notice is duly
given to another party upon: (a) hand delivery to the other party, (b) receipt
by the other party when sent by facsimile to the address and number for such
party set forth below (provided, however, that the Notice is not effective
unless a duplicate copy of the facsimile Notice is promptly given by one of the
4
<PAGE>
other methods permitted under this paragraph), (c) three business days after the
Notice has been deposited with the United States postal service as first class
certified mail, return receipt requested, postage prepaid, and addressed to the
party as set forth below, or (d) the next business day after the Notice has been
deposited with a reputable overnight delivery service, postage prepaid,
addressed to the party as set forth below with next-business-day delivery
guaranteed, provided that the sending party receives a confirmation of delivery
from the delivery-service-provider.
To: Michael Cronin
12 Blandford Lane
Fairport, NY 14450
(716) 385-0002
To: JRECK SUBS GROUP, INC.
2101 West State Road 434
Suite 100
Longwood, FL 32779
(407) 682-5522
Each party shall make a reasonable, good faith effort to ensure that it will
accept or receive Notices to it that are given in accordance with this
paragraph. A party may change its address for purposes of this paragraph by
giving the other party(ies) written notice of a new address in the manner set
forth above.
25. Waiver. Any waiver of a default or provision under this Agreement
must be in writing. No such waiver constitutes a waiver of any other default or
provision concerning the same or any other provision of this Agreement. No delay
or omission by a party in the exercise of any of its rights or remedies
constitutes a waiver of (or otherwise impairs) such right or remedy. A consent
to or approval of an act does not waive or render unnecessary the consent to or
approval of any other or subsequent act.
26. Drafting Ambiguities. Each party to this Agreement has reviewed and
revised this Agreement and has had the opportunity to have such party's legal
counsel review and revise this Agreement. The rule of construction that
ambiguities are to be resolved against the drafting party or in favor of the
party receiving a particular benefit under an agreement may not be employed in
the interpretation of this Agreement or any amendment to this Agreement.
27. ARBITRATION OF DISPUTES. ANY CONTROVERSY OR CLAIM RELATING TO THIS
AGREEMENT SHALL BE SETTLED IN ORLANDO, FLORIDA BY ARBITRATION IN ACCORDANCE WITH
THE NATIONAL RULES FOR THE RESOLUTION OF EMPLOYMENT DISPUTES OF THE AMERICAN
ARBITRATION ASSOCIATION, AND JUDGMENT UPON THE AWARD RENDERED BY THE
ARBITRATOR(S) MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. THE ARBITRATOR(S)
SHALL NOT HAVE THE AUTHORITY TO AWARD PUNITIVE DAMAGES AGAINST ANY PARTY(IES) TO
THIS AGREEMENT.
NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE
ARISING OUT OF THIS AGREEMENT DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY
FLORIDA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE
5
<PAGE>
DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU
ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL. IF YOU REFUSE TO
SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO
ARBITRATE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.
6
<PAGE>
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING
OUT OF THIS AGREEMENT TO NEUTRAL ARBITRATION.
Employer's Initials: ________ Employee's Initials: __________
-------------------------------
MICHAEL CRONIN
JRECK SUBS GROUP, INC.,
a Colorado corporation
By:____________________________
Christopher Swartz, President/
Chief Executive Officer
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Exhibit A
EXCLUDED ACTIVITIES
1. Corporate clients:
a.
b.
c.
2. Professional Group:
3. Mortgage Brokerage Firm:
8
<PAGE>
Exhibit B
PROMISSORY NOTE
9
STOCK OPTION GRANT AGREEMENT
The undersigned JRECK SUBS GROUP, INC., a Colorado corporation with offices
at 2101 West State Route 434 Suite 100 Longwood, Florida 32779 (hereinafter
referred to as the "Company") hereby grants to Christopher Swartz, having an
address at 1505 Shadwell Circle Lake Mary, Florida 32746 (the "optionee"),
options to purchase 1,000,000 shares of the Company's common stock upon the
terms and conditions hereinafter set forth:
1. Grant of Options. By this Agreement, the Company grants to the
Optionee, on the terms and conditions set forth herein, options
(individually or collectively referred to as the "Options") to purchase
1,000,000 shares of its common stock (the "Common Stock") at the purchase
price per share of $1.55 (the "Exercise Price").
2. Term of Options. The Options Shall terminate on August 3, 2001 (the
"Expiration Date").
3. Exercise of Options. The Optionee may exercise the Options from time
to time, in whole or in part, at any time on or before the Expiration Date,
by giving written notice to the Company of such exercise and of the number
of shares the Optionee has elected to purchase. The purchase price per
share of the Options shall be the Exercise Price. The full Exercise Price
of the shares as to which the Options are being exercised shall be paid in
cash or certified or cashier's check.
4. Shareholder Rights. No Option shall confer any rights as a
shareholder with respect to the share subject to such option until the date
the Optionee exercises such Option. The Company shall deliver to the
Optionee a certificate representing the shares as to which Options have
been exercised as soon as administratively feasible following such
exercise.
5. Adjustments.
(a) If the Company shall at any time subdivide its outstanding shares
of common stock (or other securities at the time receivable upon the
exercise of the Options) by recapitalization, reclassification or split-up
thereof, or if the Company shall declare a stock dividend or distribute
shares of common stock ( or any other security convertible into shares of
common stock) to its shareholders, the number of shares of common stock
subject to this Agreement immediately prior to such subdivision shall be
proportionately increased, and if the Company shall at any time combine the
outstanding shares of common stock by recapitalization, reclassification,
reverse stock split, or combination thereof, the number of shares of common
stock subject to
<PAGE>
this Agreement immediately prior to such combination shall be
proportionately decreased.
(b) Whenever the number of shares of common stock purchasable upon
the exercise of the Options is adjusted, the Exercise Price shall be
adjusted to the nearest cent by multiplying such Exercise Price immediately
prior to such adjustment by a fraction (x) the numerator of which shall be
the number of shares of common stock purchasable upon the exercise
immediately prior to such adjustment, and (y) the denominator of which
shall be the number of shares of common stock so purchasable immediately
thereafter.
(c) In case of any reorganization of the Company ( or any other
corporation, the securities of which are at the time receivable on the
exercise of Options) or if the Company (or any such other corporation)
shall consolidate with or merge into another corporation or convey all or
substantially all of its assets to another corporation, then, and in each
such case, the Optionee, upon the exercise of any Options at any time after
the consummation of such reorganization, consolidation, merger or
conveyance, shall be entitled to receive in lieu of the securities and
property receivable upon the exercise of the Options prior to such
consummation, the securities or property to which the Optionee would have
been entitled upon such consummation if the Optionee had exercised the
Options immediately prior thereto; in each such case, the terms of this
Agreement shall be applicable to the securities or property received upon
the exercise of the Options after such consummation.
6. Reserved Shares. The Company shall reserve sufficient authorized but
unissued shares of its stock ( or other securities, as referred to in
Section 5 above) so that, at any time on or prior to the Expiration Date,
authorized shares of common stock (or other securities, as referred to in
Section 5 above) may be issued upon the exercise of all Options under this
Agreement.
7. Notices. All notices provided for under this Agreement shall be in
writing and shall be delivered by hand or sent by certified mail to the
addresses set forth above or to such other addresses that the respective
parties may designate in writing.
8. Interpretation. This Agreement shall be governed by and construed
under the laws of the State of Colorado without reference to
conflict-of-law principles.
9. Amendment. No term, condition, understanding or agreement purporting
to modify the terms of this Agreement shall be binding unless made in
writing and signed by both parties hereto.
10. Waiver. No failure of a party to exercise any power given to it
under this Agreement or to insist upon strict compliance with any
obligation or condition hereunder, and no custom or practice of the parties
at variance with the terms hereof,
<PAGE>
shall constitute a waiver by such party of its rights to demand exact
compliance with the terms of this Agreement.
11. Binding, etc. This Agreement shall be binding upon the Company and
its successors and assigns and shall inure to the benefit of the Optionee
and his heirs, executors, and administrators.
IN WITNESS WHEREOF, the undersigned JRECK SUBS GROUP, INC. has caused this Stock
Option Grant Agreement to be executed by its duly authorized officer as of the
3rd day of August, 1998.
JRECK SUBS, INC.
By:______________________________
Name:
Title:
STOCK OPTION GRANT AGREEMENT
The undersigned JRECK SUBS GROUP, INC., a Colorado corporation with offices
at 2101 West State Route 434 Suite 100 Longwood, Florida 32779 (hereinafter
referred to as the "Company") hereby grants to Christopher Swartz, having an
address at 1505 Shadwell Circle Lake Mary, Florida 32746 (the "optionee"),
options to purchase 1,000,000 shares of the Company's common stock upon the
terms and conditions hereinafter set forth:
6. Grant of Options. By this Agreement, the Company grants to the
Optionee, on the terms and conditions set forth herein, options
(individually or collectively referred to as the "Options") to purchase
1,000,000 shares of its common stock (the "Common Stock") at the purchase
price per share of $2.75 (the "Exercise Price").
7. Term of Options. The Options Shall terminate on December 29, 2000
(the "Expiration Date").
8. Exercise of Options. The Optionee may exercise the Options from time
to time, in whole or in part, at any time on or before the Expiration Date,
by giving written notice to the Company of such exercise and of the number
of shares the Optionee has elected to purchase. The purchase price per
share of the Options shall be the Exercise Price. The full Exercise Price
of the shares as to which the Options are being exercised shall be paid in
cash or certified or cashier's check.
9. Shareholder Rights. No Option shall confer any rights as a
shareholder with respect to the share subject to such option until the date
the Optionee exercises such Option. The Company shall deliver to the
Optionee a certificate representing the shares as to which Options have
been exercised as soon as administratively feasible following such
exercise.
10. Adjustments.
(d) If the Company shall at any time subdivide its outstanding shares
of common stock (or other securities at the time receivable upon the
exercise of the Options) by recapitalization, reclassification or split-up
thereof, or if the Company shall declare a stock dividend or distribute
shares of common stock ( or any other security convertible into shares of
common stock) to its shareholders, the number of shares of
<PAGE>
common stock subject to this Agreement immediately prior to such
subdivision shall be proportionately increased, and if the Company shall at
any time combine the outstanding shares of common stock by
recapitalization, reclassification, reverse stock split, or combination
thereof, the number of shares of common stock subject to this Agreement
immediately prior to such combination shall be proportionately decreased.
(e) Whenever the number of shares of common stock purchasable upon
the exercise of the Options is adjusted, the Exercise Price shall be
adjusted to the nearest cent by multiplying such Exercise Price immediately
prior to such adjustment by a fraction (x) the numerator of which shall be
the number of shares of common stock purchasable upon the exercise
immediately prior to such adjustment, and (y) the denominator of which
shall be the number of shares of common stock so purchasable immediately
thereafter.
(f) In case of any reorganization of the Company ( or any other
corporation, the securities of which are at the time receivable on the
exercise of Options) or if the Company (or any such other corporation)
shall consolidate with or merge into another corporation or convey all or
substantially all of its assets to another corporation, then, and in each
such case, the Optionee, upon the exercise of any Options at any time after
the consummation of such reorganization, consolidation, merger or
conveyance, shall be entitled to receive in lieu of the securities and
property receivable upon the exercise of the Options prior to such
consummation, the securities or property to which the Optionee would have
been entitled upon such consummation if the Optionee had exercised the
Options immediately prior thereto; in each such case, the terms of this
Agreement shall be applicable to the securities or property received upon
the exercise of the Options after such consummation.
7. Reserved Shares. The Company shall reserve sufficient authorized but
unissued shares of its stock ( or other securities, as referred to in
Section 5 above) so that, at any time on or prior to the Expiration Date,
authorized shares of common stock (or other securities, as referred to in
Section 5 above) may be issued upon the exercise of all Options under this
Agreement.
12. Notices. All notices provided for under this Agreement shall be in
writing and shall be delivered by hand or sent by certified mail to the
addresses set forth above or to such other addresses that the respective
parties may designate in writing.
13. Interpretation. This Agreement shall be governed by and construed
under the laws of the State of Colorado without reference to
conflict-of-law principles.
14. Amendment. No term, condition, understanding or agreement
purporting to modify the terms of this Agreement shall be binding unless
made in writing and signed by both parties hereto.
<PAGE>
15. Waiver. No failure of a party to exercise any power given to it
under this Agreement or to insist upon strict compliance with any
obligation or condition hereunder, and no custom or practice of the parties
at variance with the terms hereof, shall constitute a waiver by such party
of its rights to demand exact compliance with the terms of this Agreement.
16. Binding, etc. This Agreement shall be binding upon the Company and
its successors and assigns and shall inure to the benefit of the Optionee
and his heirs, executors, and administrators.
IN WITNESS WHEREOF, the undersigned JRECK SUBS GROUP, INC. has caused this Stock
Option Grant Agreement to be executed by its duly authorized officer as of the
29th day of December, 1997.
JRECK SUBS, INC.
By: /s/
-------------------------
Name:
Title:
JRECK SUBS GROUP, INC.
1998 STOCK OPTION PLAN
1. PURPOSES.
(a) The purpose of this 1998 Stock Option Plan is to provide a
means by which Employees, Directors and Consultants of the Company, and its
Affiliates, may be given an opportunity to benefit from increases in value of
the common stock of the Company through the granting of (i) incentive stock
options, and (ii) non-statutory stock options.
(b) The Company, by means of this 1998 Stock Option Plan,
seeks to retain the services of persons who are now Employees, Directors, or
Consultants of the Company, to secure and retain the services of new Employees,
Directors and Consultants, and to provide incentives for such persons to exert
maximum efforts for the success of the Company.
(c) The Company intends that options issued under this Plan
shall, in the discretion of the Board or any Committee to which responsibility
for administration of the Plan has been delegated pursuant to subsection 3(c),
be either Incentive Stock Options and Non-statutory Stock Options. All Options
shall be separately designated Incentive Stock Options or Non-statutory Stock
Options at the time of grant, and in such form as issued pursuant to Section 6,
and a separate certificate or certificates will be issued for shares purchased
on exercise of each type of Option.
2. DEFINITIONS.
"Affiliate" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means a Committee appointed by the Board in accordance with
subsection 3(c) of the Plan.
"Company" means: Jreck Subs Group, Inc., a Colorado corporation.
"Consultant" means any person, including an advisor, engaged by the
Company or an Affiliate to render services and who is compensated for such
services; provided that the term "Consultant" shall not include Directors who
are paid only a director's fee by the Company or who are not compensated by the
Company for their services as Directors.
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"Continuous Status of Employee, Director or Consultant" means the
employment or relationship as a Director or Consultant is not interrupted or
terminated by the Company or any Affiliate. The Board in its sole discretion,
may determine whether Continuous Status as an Employee, Director or Consultant
shall be considered interrupted in the case of: (i) any leave of absence
approved by the Board, including sick leave, military leave, or any other
personal leave. For purposes of Incentive Stock Options, any such leave may not
exceed ninety (90) days, unless re-employment upon the expiration of such leave
is guaranteed by contract (including certain Company policies) or statute; or
(ii) transfers between locations of the Company or between the Company, its
Affiliates or its successor.
"Director" means a member of the Company's Board of Directors.
"Disability" means total and permanent disability as defined in Section
22(e)(3) of the Code.
"Employee" means any person, including Officers and Directors, employed
by the Company or any Affiliate of the Company. Neither service as a Director
nor payment of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means an amount per share of Stock as determined by
the Board by applying any reasonable valuation method determined without regard
to any restriction other than a restriction which, by its terms, will never
lapse. Despite the preceding sentence, if the Stock is traded upon an
established stock exchange or exchanges or quoted on the over-the-counter
market, then the "Fair Market Value" of Stock per share on a given date shall be
deemed to be the average of the highest and lowest selling price per share of
the Stock on the principal stock exchange on which the Stock is then trading or
on the over-the-counter market on such date, or, if there was no trading of the
Stock on that day, on the next preceding day on which there was such a trade; if
the Stock is not traded upon an established stock exchange or on the
over-the-counter market, the "Fair Market Value" of Stock on a given date shall
be deemed to be the mean between the closing representative "bid" and "ask"
prices per share of the Stock on such date, or, if there shall have been no
trading of the Stock on that day, on the next preceding day on which there was
such trading.
"Incentive Stock Option" means an Option granted pursuant to the Plan
which is designated as an incentive stock option by the Board, and qualifies as
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
"Non-statutory Stock Option" means an Option granted pursuant to the
Plan which is not an Incentive Stock Option.
"Officer" means a person who is an officer of the Company within the
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<PAGE>
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
"Option" means an option to purchase Stock granted pursuant to the
Plan.
"Option Agreement" means a written agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
"Option Price" shall mean the price per share of Stock to be paid by the
Optionee upon exercise of the Option and as set forth in the Option Agreement.
"Optionee" means an Employee, Director or Consultant who holds an
outstanding Option.
"Plan" means this 1998 Stock Option Plan, as may be amended from time
to time.
"Retirement" means that Optionee is not a full time employee of any
other person or entity, and otherwise meets the standard for being a retired
person under a qualified pension plan pursuant to the provisions of the Employee
Retirement Income Security Act and the rules thereunder, as amended from time to
time.
"Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with respect to the
Plan.
"Stock" shall mean the no par value common stock of the Company.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and
until the Board delegates administration to a Committee, as provided in
subsection 3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(1) To determine from time to time which of the
persons eligible under the Plan shall be granted Options; when and how Options
shall be granted; whether an Option will be an Incentive Stock Option or a
Non-statutory Stock Option, or a combination of the foregoing; the provisions of
each Option granted (which need not be identical), including the time or times
when a person shall be permitted to receive Stock pursuant to an Option Stock;
and the number of shares with respect to which Options shall be granted to each
such person.
(2) To construe and interpret the Plan and
Options granted under it, and to establish, amend and revoke rules and
regulations for its administration. The Board, in the exercise of this power,
may correct any defect, omission or inconsistency in the Plan or in any Option
3
<PAGE>
Agreement, in a manner and to the extent it shall deem necessary or expedient to
make the Plan fully effective.
(3) To amend the Plan as provided in Section 12.
(4) Generally, to exercise such powers and to
perform such acts as the Board deems necessary or expedient to promote the best
interests of the Company.
(c) The Board may delegate administration of the Plan to a
committee (the "Committee"). The Committee shall be composed of persons who meet
the requirements of Rule 16b-3 promulgated under the Exchange Act. If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers possessed by the
Board (and references in this Plan to the Board shall thereafter be to the
Committee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and re-vest in the Board the
administration of the Plan.
4. SHARES OF STOCK SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 11 relating to
adjustments upon changes in Stock, the Stock that may be issued pursuant Options
shall not exceed in the aggregate one million five hundred thousand (1,500,000)
shares. The number of shares available shall be adjusted as provided in Section
11. Stock issued under any other stock option plan of the Company shall not be
counted against the maximum number of shares that can be issued under the Plan.
If any Option shall for any reason expire or otherwise terminate without having
been exercised in full, the Stock not purchased under such Option shall again
become available for issuance under the Plan.
(b) The Stock subject to the Plan may be unissued shares or
reacquired shares.
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees.
Non- Qualified Stock Options may be granted only to Employees, Directors or
Consultants.
(b) A Director shall not be eligible for the benefits of the
Plan unless at the time of grant of an Option: (i) the Board has either approved
the grant of the Options or has delegated its discretionary authority over the
Plan to a Committee which consists solely of two or more non-employee directors
(as that term is defined by Rule 16b-3); and (ii) the Plan otherwise complies
with the requirements of Rule 16b-3.
(c) No person shall be eligible for the grant of an Option if,
at the time of grant, such person owns (or is deemed to own pursuant to Code
Section 424(d)) Stock possessing more than ten (10%) percent of the total
combined voting power of all classes of capital stock of the Company or of any
of its Affiliates unless the exercise price of such Option is at least one
4
<PAGE>
hundred ten (110%) percent of the Fair Market Value of the Stock at the date of
grant and the Option is not exercisable after the expiration of five (5) years
from the grant date.
6. TERMS OF OPTIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions of the Plan by reference in the Option or otherwise)
the substance of each of the following provisions:
(a) Term. No Option shall be exercisable after the expiration
of ten (10) years from the date it was granted; provided that an Option granted
to a person possessing ten (10%) percent or more of the combined voting power of
all classes of capital stock of the Company or its Affiliates shall have a term
not exceeding five (5) years.
(b) Price. The exercise price of each Incentive Stock Option
shall be not less than one hundred percent (100%) of the Fair Market Value of
the Stock subject to the Option on the date the Option is granted. The exercise
price of each Non-statutory Stock Option shall be not less than one hundred
percent (100%) of the Fair Market Value of the Stock subject to the Option on
the date the Option is granted. Despite the previous two sentences, the purchase
price for Options granted to a person who possesses more than ten percent (10%)
of the total combined voting power of all classes of capital stock of the
Company or its Affiliates shall be at least one hundred ten percent (110%) of
the Fair Market Value of the Stock at the date of grant.
(c) Consideration. The Option Price of Stock acquired pursuant
to an Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, either at the time of the grant or
exercise of the Option, (A) by delivery to the Company of other Stock of the
Company, (B) according to a deferred payment or other arrangement (which may
include, without limiting the generality of the foregoing, the use of other
Stock of the Company valued at Fair Market Value as provided herein) with the
person to whom the Option is granted or to whom the Option is transferred
pursuant to subsection 6(d), or (iii) an agreement with the Company whereby a
portion of the Optionee's Options are terminated, and where the Built in Gain on
any Options which are terminated as part of the agreement equals the aggregate
Option Price of the Option being exercised.
The Board may permit deemed or constructive transfer of shares in lieu of actual
transfer and physical delivery of certificates. Except to the extent prohibited
by applicable law, the Board may take any necessary or appropriate steps in
order to facilitate the payment of the Option Price. The Board, in its sole and
exclusive discretion, may require satisfaction of any rules or conditions in
connection with paying the Option Price at any particular time, in any
particular form, or with the Company's assistance.
In the event the Board determines in its sole discretion to provide an Optionee
with a deferred payment arrangement, interest shall be payable at least annually
and shall be charged at the minimum rate of interest necessary to avoid the
5
<PAGE>
treatment as interest, under any applicable provisions of the Internal Revenue
Code of 1986, of any amounts other than amounts stated to be interest under the
deferred payment arrangement. "Built in Gain" means the excess of the aggregate
Fair Market Value of Stock subject to an Option otherwise issuable on exercise
of a terminated Option over the aggregate Option Price otherwise due the Company
on such exercise. If Stock used to pay any Option Price is subject to any prior
restrictions imposed in connection with any stock option or stock purchase plan
or agreement of the Company (including this Plan), an equal number of the shares
of Stock acquired on exercise shall be made subject to such prior restrictions
in addition to any further restrictions imposed on the Stock by the terms of the
particular Agreement or by the Plan.
(d) Transferability. To the extent required by Code Section
422, Options, (or the rights of Optionees pursuant to the Agreement), shall not
be transferable in any manner, whether voluntary or involuntary, except by will
or the law of descent and distribution. A Non-statutory Stock Option may be
transferred to a trust for the benefit of the Optionee or members of his
immediate family provided such transfer does not violate the requirements of
applicable law and any restrictions on transfer set forth in this Plan or in the
Optionee's Option Agreement. An attempted non-permitted transfer shall be void
and shall immediately terminate the Option.
(e) Vesting. The total number of shares of Stock subject to an
Option may, but need not, be allotted in periodic installments (which may, but
need not, be equal). The Option Agreement may provide that from time to time
during each of such installment periods, the Option may become exercisable
("vest") with respect to some or all of the shares allotted to that period, and
may be exercised with respect to some or all of the shares allotted to such
period and/or any prior period as to which the Option became vested but was not
fully exercised. The vesting provisions of individual Options may vary but in
each case will provide for vesting of at least twenty percent (20%) of the total
number of shares subject to the Option per year. During the remainder of the
term of the Option (if its term extends beyond the end of the installment
periods), the option may be exercised from time to time with respect to any
shares then remaining subject to the Option. The provisions of this subsection
6(e) are subject to any Option provisions governing the minimum number of shares
as to which an Option may be exercised.
(f) Securities Law Compliance. The Company may require any
Optionee, or any person to whom an Option is transferred under subsection 6(d),
as a condition of exercising any such Option, to give written assurances
satisfactory to the Company, if any, that are necessary to ensure compliance
with federal securities laws. These requirements, and any assurances given
pursuant to such requirements, shall be inoperative if (i) the issuance of the
shares upon the exercise of the Option has been registered under a then
currently effective registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), or (ii) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws.
(g) Termination of Employment or Relationship as a Director or
Consultant. If an Optionee's Continuous Status as an Employee, Director or
Consultant terminates (other than "for cause", or upon the Optionee's death,
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<PAGE>
Retirement or Disability), the Optionee may exercise his or her Option, but only
within such period of time as is determined by the Board (which period shall not
be less than three (3) months from the date of such termination), and only to
the extent that the Optionee was entitled to exercise it at the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). If, at the date of termination,
the Optionee is not entitled to exercise his or her entire Option, the shares
covered by the unexercisable portion of the Option shall revert to the Plan. If,
after termination, the Optionee does not exercise his or her Option within the
time specified in the Option Agreement, the Option shall terminate, and the
shares covered by such Option shall revert to the Plan. If an Optionee's
Continuous Status as an Employee, Director or Consultant terminates "for cause",
the right to exercise the Option shall immediately cease.
(h) Disability or Retirement of Optionee. If an Optionee's
Continuous Status as an Employee, Director or Consultant terminates as a result
of the Optionee's Disability or Retirement, the Optionee may exercise his or her
Option, but only within such period of time as is determined by the Board (which
period from the date of such termination shall not be less than twelve (12)
months, and only to the extent that the Optionee was entitled to exercise it at
the date of such termination (but in no event later than the expiration of the
term of such Option as set forth in the Option Agreement). If, at the date of
termination, the Optionee is not entitled to exercise his or her entire Option,
the shares covered by the unexercisable portion of the Option shall revert to
the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall terminate, and the
shares covered by the Option shall revert to the Plan.
(i) Death of Optionee. In the event of the death of an
Optionee, the Option may be exercised, at any time within such period as is
determined by the Board (which period shall not be less than twelve (12) months
following the date of death) by the personal representative of the Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, and only to the extent the Optionee was entitled to exercise the
Option at the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Option Agreement). If, at the time of
death, the Optionee was not entitled to exercise his or her entire Option, the
shares covered by the unexercisable portion of the Option shall revert to the
Plan If, after death, the Optionee's estate or a person who acquired the right
to exercise the Option by bequest or inheritance does not exercise the Option
within the time specified herein, the Option shall terminate, and the shares
covered by such Option shall revert to the Plan.
(j) Withholding. To the extent provided by the terms of an
Option Agreement, the Optionee may satisfy any federal, state or local tax
withholding obligation relating to the exercise of such Option by any of the
following means or by a combination of such means: (1) tendering a cash payment;
(2) authorizing the Company to withhold shares from the shares of the Stock
otherwise issuable to the Optionee as a result of the exercise of the Option; or
(3) delivering to the Company unencumbered shares of Stock owned by Optionee.
7. CANCELLATION AND RE-GRANT OPTIONS.
7
<PAGE>
The Board or the Committee shall have the authority to effect, at any
time and from time to time, with the consent of the affected holders of Options,
(i) the re-pricing of any outstanding Options under the Plan and/or (ii) the
cancellation of any outstanding Options under the Plan and the grant in
substitution therefor of new Options under the Plan covering the same or
different numbers of shares of Stock, but having an exercise price per share not
less than one hundred (100%) percent of the Fair Market Value or, in the case of
a ten (10%) percent shareholder (as described in subsection 5(c)), not less than
one hundred ten (110%) percent of the Fair Market Value) per share of Stock on
the new grant date.
8. COVENANT OF THE COMPANY.
During the terms of the Options, the Company shall keep available at
all times the number of shares of Stock required to satisfy such Options up to
the number of shares of Stock authorized under the Plan.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of Stock pursuant to Options shall constitute
general funds of the Company.
10. MISCELLANEOUS.
(a) Neither an Optionee nor any person to whom an Option is
transferred under subsection 6(d) shall be deemed to be the holder of, or to
have any of the rights of a holder with respect to, any shares subject to such
Option unless and until such person has satisfied all requirements for exercise
of the Option pursuant to its terms.
(b) Throughout the term of any Option granted pursuant to the
Plan, the Company shall make available to the holder of such Option, not later
than one hundred twenty (120) days after the close of each of the Company's
fiscal years during the Option term, such financial and other information
regarding the Company as comprises the annual report to the stockholders of the
Company provided for in the bylaws of the Company.
(c) Nothing in the Plan or any instrument executed or Option
granted pursuant thereto shall confer upon any Employee, Director, Consultant,
Optionee, or other holder of an Option any right to continue in the employ of
the Company or any Affiliate (or to continue acting as a Director or Consultant)
or shall affect the right of the Company or any Affiliate to terminate the
employment of any Employee, or the relationship as a Director or Consultant of
any Director or Consultant with or without cause.
(d) To the extent that the aggregate Fair Market Value
(determined at the time of grant) of Stock with respect to which Incentive Stock
Options are exercisable for the first time by any Optionee during any calendar
year under all plans of the Company and its Affiliates exceeds one hundred
thousand dollars ($100,000), the Options or portions thereof which exceed such
8
<PAGE>
limit (according to the order in which they were granted) shall be treated as
Non-statutory Stock Options.
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the Stock subject to the Plan, or
subject to any Option (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or otherwise), the Plan and outstanding Options will be
appropriately adjusted in the class(es) and maximum number of shares subject to
the Plan and the class(es) and number of shares and price per share of Stock
subject to outstanding Options.
(b) In the event of: (1) a merger or consolidation in which
the Company is not the surviving corporation (2) a reverse merger in which the
Company is the surviving corporation but the shares of Stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property, whether in the form of securities, cash or otherwise, (3) a sale
(in one transaction or in a series of related transactions) of substantially all
of the assets of the Company (4) the transfer or issuance (in one transaction or
a series of transactions) of more than fifty percent (50%) of the capital stock
of the Company to a person or entity (or Affiliate thereof), or (5) the
dissolution or liquidation of the Company all "Corporate Change"), then, the
Options shall terminate upon the occurrence of a Corporate Change; provided,
however, that if the Options terminate under the provisions of this Section, the
vesting of all Options shall accelerate and be exercisable in full immediately
prior to Corporate Change, and if not exercised prior to a Corporate Change,
such Options outstanding under the Plan shall terminate. Despite the preceding
sentence, at the sole discretion of the Board and to the extent permitted by
applicable law, and upon Optionee's written consent: (i) any surviving entity
(including an acquiring entity or other acquiror) shall assume any Options
outstanding under the Plan or shall substitute similar Options for those
outstanding under the Plan, or (ii) such Options shall continue in full force
and effect. Despite the penultimate sentence, the written consent of Optionee
shall be required if acceleration would cause the disqualification of an Option
as an Incentive Stock Option; and absent such consent the Options shall
terminate upon a Corporate Change.
12. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend
the Plan. However, except as provided in Section 11 relating to adjustments upon
changes in Stock, any amendments shall be approved by the shareholders of the
Company where required by law. Despite the preceding sentence, the approval of a
majority of the outstanding shares is required if such amendment: (i) extend
beyond ten years the period within which Options may be granted under the Plan;
(ii) increase the aggregate number of shares of Common Stock to be optioned
under the Plan except as otherwise permitted in the Plan; (iii) materially
modify the requirements as to eligibility of Employees or changing the class of
Employees whom Options may be granted; (iv) materially increases the benefits to
Optionees under the Plan; (v) modify the provisions relating to the granting to
9
<PAGE>
Directors of non-statutory options under the Plan, or (vi) permit the grant of
Options under the Plan to Directors other than pursuant to the provisions
referred to in clause (v); (viii) would cause the Plan to fail to meet the
requirements of Rule 16b-3 under the Exchange Act, or (ix) may, except as
provided under the Plan, without the consent of the holder of an Option, (1)
terminate such Option or (2) adversely affect such person's rights in any
material respect. Notwithstanding the foregoing, the Board may alter, amend,
suspend, discontinue or terminate the Plan and any Option granted under the
Plan, without the approval of the shareholders of the Company or any holder of
any Option thereby affected, if necessary, in order to comply with Rule 16b-3 or
Sections 422 or 162(m) of the Code.
(b) It is expressly contemplated that the Board may amend the
Plan in any respect the Board deems necessary or advisable to provide Optionees
with the maximum benefits provided or to be provided under the provisions of the
Code and the regulations promulgated thereunder relating to Incentive Stock
Options and/or to bring the Plan and/or Incentive Stock Options granted under it
into compliance with the Code.
(c) Rights and obligations under any Option granted before
amendment of the Plan shall not be altered or impaired by any amendment of the
Plan unless (i) the Company requests the consent of the person to whom the
Option was granted and (ii) such person consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Plan shall terminate ten (10) years following its
effective date. Despite the preceding sentence, the Board may suspend or
terminate the Plan at any time pursuant to the provisions of Section 12. No
Options may be granted under the Plan while the Plan is suspended or after it is
terminated.
(b) Rights and obligations under any Options granted while the
Plan is in effect shall not be altered or impaired by suspension or termination
of the Plan, except with the consent of the person to whom the Option was
granted.
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective upon the date designated by the Board.
No Option granted hereunder shall take effect unless approved by a majority of
the outstanding shares of the Company, which approval must occur within a period
commencing twelve (12) months before and ending twelve (12) months after the
date the Plan is adopted by the Board.
10
Michael F. Cronin
Certified Public Accountant
1574 Eagle Nest Circle
Winter Springs, FL 32708
Securities & Exchange Commission November 19, 1998
Washington, DC 20549
Re: Jreck Subs Group, Inc.
Form 10-SB
Amendments 1, 2 & 3
File No. 0-23545
Dear Sirs:
This letter is written at the request of Jreck Subs Group, Inc. and is intended
to be filed as Exhibit 16, Form 10-SB as amended, as required by Item 304(a)(3)
of Regulation SB.
I have reviewed the Registrant's form 10-SB as amended, specifically Part II
Item 3. Changes in and Disagreements with Accountants. I agree with the
statements made by the issuer made therein.
Sincerely,
/s/ Michael F. Cronin
Michael F. Cronin
Certified Public Accountant
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