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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________ to_____________
Commission file number: 0-26075
AMERICAN KIOSK CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 59-3452641
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 PGA Boulevard, Suite 500
Palm Beach Gardens, FL 33410
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (561) 627-9002
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock.
Check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes NO X
Check if there is no disclosure of delinquent filers in response to item 405 of Regulation S-B contained in
this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB.
The issuer's net revenues for its most recent fiscal year was $119,431.
The number of shares outstanding of the registrant's Common Stock, $.0001 Par Value, as of December
31, 1999 was 4,282,180 shares.
Documents incorporated by reference: None
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
History and Industry Overview
The Company was incorporated in Delaware in May, 1997 to develop and implement a
national brand franchise system of stand alone, in-line and drive-thru retail outlets to deliver
popular food products to consumers. The Company initially focused on brick oven pizza.
With the recent acquisition of certain assets of Zero's Mr. Submarine Inc., the franchisor of a
55 unit hot submarine sandwich chain, located in Virginia Beach, VA, the Company has
changed its focus and direction. The Company's management team intends to focus its energy
and expertise to the expansion and improvement of the Zero's concept.
Zero's Mr. Submarine, Inc. is a franchisor of quick service restaurants featuring "Hot,
Oven-Baked sandwiches and pizzas. Eugene Schmidt, Founder, Martin Palacios, and John
Schmidt have opened Zero's restaurants since 1967. Zero's Mr. Submarine, Inc. was formed
in 1989 to franchise the original restaurant concept.
Since 1989, Zero's has opened 55 franchise restaurants in Virginia, North Carolina and
Phoenix, Arizona. In April, 1998, Zero's signed its first Area Development Agreement which
calls for the development of 10 Zero's restaurants in the Raleigh-Durham, North Carolina area
over 5 years. In January, 1999, Zero's signed Territorial Development agreements for
restaurants in the following markets: North Carolina, South Carolina, and Tampa Florida for
a total of 76 restaurants.
Acquisition of Zeros
In October, 1999, the Company signed a letter of intent to acquire certain assets of
Zero's Mr. Submarine Inc., a Virginia corporation. Following a due diligence period, the
purchase was approved by Zero's stockholders on January 14, 2000 with the following terms:
The Company issued Zero's 1,500,000 shares of its common stock (or
approximately 25% of the Company's issued and outstanding shares)
The Company agreed to enter into consulting agreements with each of the three
principals of Zeros, Eugene Schmidt, Martin Palacios (who are both nominees
for director of the Company), and John Schmidt whereby the Company will pay
them $75,000 per year for the next five years payable upon closing and on each
anniversary thereafter; with the exception of Eugene Schmidt who will receive
$100,000 upon closing, $100,000 ninety (90) days thereafter, $75,000 on the
first one year anniversary, $75,000 on the second anniversary and $25,000 on
the third anniversary.
Under the consulting agreement, the Company shall issue stock options to
purchase an aggregate of 501,000 shares of common stock at exercise prices
between $1.00 and $3.00 per share.
1
Marketing Goals and Strategy
The Company's franchise marketing plan includes publications, both franchise and food
industry, classified newspapers, both local and national, and trade and business opportunity
shows.
In January, Zero's began its new market development initiative designed to accelerate
franchise development in select markets throughout the United States and internationally. The
Company plans to partner with individuals and companies capable of rapidly developing and
supporting Zero's franchisees within their local markets. Territorial Directors, under this new
development program will assist the Company in local recruitment of qualified prospects to
open Zero's Subs franchise locations and represent the Company in ongoing support to ensure
the integrity of the Zero's concept. This development strategy offers the Company an exciting
growth opportunity for the future.
Territorial Directors pay a fee for the territory and will share forty percent of the initial
franchise fees and royalty revenue from the franchises within their territory. Agreements have
been signed for seventy-six (76) restaurants to date. The Company is actively negotiating with
other prospective territorial directors in various U. S. markets.
Projected Revenue Stream
The Company anticipates revenues from franchise fees for new units, a 6% royalty fee
on gross sales by franchisees, and fees from, and franchisees purchased by, territorial
directors. Currently, franchise fees are $15,000, but the Company is considering raising them
to $20,000. Currently, Zero's franchisees are averaging about $350,000 in sales annually.
Year 2000 Compliance
To date the Company has not experienced any Year 2000 problems related to its
operations and no computer applications or hardware used in its operation required
replacement or modification as a result of the Year 2000 issue.
The Company believes that its significant vendors and suppliers are Year 2000
compliant, and the Company has not, to date, been made aware that any of its significant
vendors or suppliers have suffered Year 2000 disruption in their systems.
Accordingly, the Company does not anticipate incurring, material expense, or
experiencing any material operational disruptions, as a result of any Year 2000 problems.
2
Distribution
The Company has distribution contracts with various food suppliers. Virginia Foods
Services is a primary distributor. The Company does not believe that it is dependent upon any
one distributor.
Competition
From its market research, the Company concluded that the rapidly expanding
"submarine segment" is one of the fastest growing segments of the restaurant marketplace.
Industry studies indicate the market demand for this category of fast food is in excess of $10
billion and growing at 2 percent plus each year.
Further evidencing the depth of the market has been the success of several submarine
concepts in recent years. This includes such high-growth companies as Subway, Blimpie,
Quizno's Cousins, and Jersey Mike's. Notwithstanding the success of other sandwich
concepts, the Company's research and investigations suggest that the market is still
underdeveloped and ripe for a "hot oven-baked submarine" concept. Just as the well-
documented success of Subway's "cold-sub" concept, the Zero's "hot-sub" concept has
embraced this high growth segment of the fast food market.
The primary national competition is Subway Sandwiches, with nearly 14,000 franchises
in the U.S. and more than 60 other countries, Arby's of Fort Lauderdale, FL with over 3,000
franchised units, and Blimpie, of Atlanta, GA with over 2,000 franchises worldwide. These
companies are each larger and more established than the Company and have substantially
greater capital resources, manpower, experience and financing than the Company.
Governmental Approvals and Regulations
The Company and its franchisees are required to comply with federal, state and local
government regulations applicable to consumer food service businesses generally, as well as
zoning and construction regulations relating to the construction of the drive-thru units and
kiosks.
The Company's franchising operations are subject to regulation by the Federal Trade
Commission in compliance with the FTC's rule entitled "Disclosure Requirements and
Prohibitions Concerning Franchising and Business Opportunity Ventures." The FTC rules
require, among other things, that the Company prepare and update periodically the
comprehensive disclosure document known as the Uniform Franchise Offering Circular for
delivery to prospective franchisees. In addition, some states require a franchisor to register its
franchise with the state before it may offer the franchise. The Company is currently registered
to sell its franchises in 40 states.
3
In addition, the Company is also subject to a number of state laws that regulate
substantive aspects of a franchise or franchisee relationship. These laws generally govern the
termination and/or non-renewal of the franchise agreement, and by and large require the
franchisor to have good cause, reasonable cause or just cause in order to terminate the
franchise agreement or not renew the franchise agreement, regardless of the terms of the
agreement. In addition, some of these laws may provide a franchisee longer periods to cure a
default than are provided for in the Company's franchise agreement.
Violation by the Company of franchising laws and/or state laws and regulations
regulating substantive aspects of doing business in a particular state could require the Company
to offer rescission to franchisees, and subject the Company to monetary damages and penalties.
However, the Company believes that the state laws and regulations concerning termination and
non-renewal of franchises will not have a material impact on the Company's operations.
Trademarks and Patents
The Company has a registered trademark on the "Zero's" logo in connection with its
operations in the United States.
Employees
As of April 14, 2000, the Company had 12 employees, two of whom work on a part-
time basis.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company is currently operating out of a 2,547 square foot facility in Palm Beach
Gardens, Florida pursuant to a five-year lease terminating November 30, 2002. Annual base
rent for 1999 was $54,761.
The Company also rents space in Orlando, Florida at $2,500 per month for the non-
operating Pizza Place drive-thru unit.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently engaged in settlement negotiations over prior litigation with
Flatrock Partners, L.P., as the landlord of certain real property located in Orange County,
Florida for the the non-payment of rent. Though this action was filed in1999, a judgment was
entered by the Orange County, Florida, Circuit Court for the amount of $120,481.35.
The Company is not currently a party to any material litigation, nor to the knowledge
of management, is there any material litigation threatened or contemplated against the
Corporation.
4
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 which may result in a claim
for such indemnification.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
5
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The following sets forth for the calendar quarters as indicated the high and low bid
closing quotations for the Company's Common Stock in the over-the-counter market for the
period June 9, 1998 through December 31, 1999, as reported by in the pink sheets. Such
information reflects interdealer quotations, without retail mark-up, mark-down or
commissions, and may not necessarily represent actual transactions.
Period High Bid Low Bid
2nd Quarter
June 9, 1998 to
June 30, 1998 $2.50 $1.00
3rd Quarter
July 1, 1998 to
September 30, 1998 $2.06 $.87
4th Quarter
October 1, 1998 to
December 31, 1998 $2.12 $.87
1st Quarter
January 1, 1999 to
March 31, 1999 $1.62 $.875
2nd Quarter
April 1, 1999 to
June 30, 1999 $1.188 $.563
3rd Quarter
July 1, 1999 to
September 30, 1999 $1.563 $.438
4th Quarter
October 1, 1999
to December 31, 1999 $1.375 $.50
The Company has over 300 beneficial owners of its common stock.
6
Dividend Policy
The Company has never paid cash dividends on its common stock and does not
anticipate paying cash dividends in the foreseeable future, but rather intends instead to retain
future earnings, if any, for reinvestment in its business. The Company has agreed not to pay
dividends, or make distributions on its stock or purchase, redeem, or otherwise acquire or
retire any of its stock as long as certain indebtedness is outstanding. Any future determination
to pay cash dividends will be in compliance with the Company's contractual obligations, and
otherwise at the discretion of the Board of Directors and based upon the Company's financial
condition, results of operations, capital requirements and such other factors as the Board of
Directors deems relevant.
Recent Sales of Unregistered Securities
During the year ended December 31, 1999, the Company sold an aggregate of $1,592,500 of units,
(out of a total of $1,965,000), each comprising the Company's 11% senior secured promissory note in
the principal amount of $50,000 and 2,000 shares of Common Stock, to accredited investors. This
private placement of securities was conducted by Strategic Assets Inc., a NASD registered broker-
dealer, for sales commissions and fees of 10% of the gross amount sold an an aggregate of 39,300
shares of Common Stock. The placement agent also received an investment banking fee of $20,000
and 30,000 shares of the Company's Common Stock in connection with this offering, which was paid
in March 2000.
During the year ended December 31, 1999, the Company sold an aggregate of $366,00 of units,
each comprising the Company the Company's 12.5% senior secured promissory note in the principal
amount of $50,000 and 4,000 shares of Common Stock, to accredited investors. This continuing private
placement of securities is being conducted by Strategic Assets Inc., a NASD registered broker-dealer,
for sales commissions and fees of 10% of the gross amount sold plus an amount of shares equal to
500 shares per unit sold. As of December 31, 1999, an aggregate of 3,660 shares of Common
Stock were due the placement agent which were issued in March 2000. The placement agent
also recieved an investment banking fee of $15,000 and 25,000 shares of Common Stock in
connection with this offering, which was paid in March 2000.
The notes and shares issued in the above offerings were issued on the reliance on the exemption
provided by Rule 506 of Regulation D. The Company relied on Rule 506 as the investors were all
"accredited investors" as defined in Regulation D, no public solicitation was employed, the purchases
bought the securities with investment intent and the shares are restricted securities as that
term is defined in Rule 144.
7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
INTRODUCTORY STATEMENT
The following information should be read in conjunction with the financial statements
and notes appearing elsewhere in this report.
Certain statements included in this Form 10-KSB are forward looking and are based
upon the Company's current expectations and are subject to risks and uncertainties that could
cause actual results to differ significantly from results expressed or implied in any forward-
looking statements made by or on behalf of the Company. The Company assumes no
obligation to update any forward-looking statements contained herein or that may be made
from time to time by or on behalf of the Company.
BUSINESS
The Company, incorporated in Delaware in May, 1997, has developed and
implemented a national brand franchise system of stand alone, in-line, and drive-thru retail
outlets to deliver popular food products to consumers. The Company initially focused
primarily on brick oven pizza, however, since the recent acquisition of Zero's Mr.
Submarine Inc., the franchisor of a 55 unit hot submarine sandwich chain, located in Virginia
Beach, VA, the Company has changed its focus and direction. The Company now intends to
focus its resources on the expansion and improvement of the Zero's chain.
The Company is currently engaged in the sale of franchises to operate fast food outlets
from stand alone, in-line and drive-thru retail units. The Company's outlets sell proprietary
hot submarine sandwiches and other food products.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had a working capital deficiency of $377,971
compared to working capital of $54,388 at December 31, 1998.
RESULTS OF OPERATIONS:
REVENUES
Revenues for the year ended December 31, 1999, were $119,431 as compared to
$65,491 for the year ended December 31, 1998. The increase in revenue was derived from
the sale of pizza and pizza equipment.
8
COST OF GOODS
Cost of goods sold for the year ended December 31, 1999, were $127,968 as compared
to $22,659 for the year ended December 31, 1998.
SELLING EXPENSES & ADMINISTRATIVE COSTS
Selling, general and administrative costs and impairment charges for the year ended
December 31, 1999 were $1,896,999 as compared to $1,070,566 for the year ended December
31, 1998. This increase in costs is attributable to the costs incurred in the development of a
larger and more attractive drive-thru stand alone unit and the cost of raising capital through
debt financing instruments and the reduction in the carrying amount of certain assets due to the
Company's change in focus.
NET PROFIT/LOSS
The Company's net loss per share for the year ended December 31, 1999 was 55.0
cents as compared to 29.0 cents per share for the year ended December 31, 1998. This
increase in net loss per share is attributable to the expenses associated with the further
development of the drive-thru unit and the expense associated with raising capital through debt
instruments and the reduction in the carrying amount of certain assets due to the Company's
change in focus.
ADDITIONAL FUNDS RAISED
The Company, during the last year, raised $1,417,500 from a private placement
consisting of 11% secured notes. In addition, $175,000 rolled from a one-year bridge note,
into the 11% Private Placement, bringing the total raised under this plan to $1,965,000. The
Company also raised $366,000 from a second bridge loan consisting of 12.5% notes.
9
ITEM 7. FINANCIAL STATEMENTS Page
Number
Financial Statements:
Independent Auditors' Report F - 2
Balance Sheets as of December 31, 1999 and 1998 F - 3
Statements of Operations for the years ended
December 31, 1999 and 1998 and the period from April 26, 1997
(Inception) to December 31, 1999 F - 5
Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 1999 and 1998
and the period from April 26, 1997 (Inception) to
December 31, 1999 F - 6
Statements of Cash Flows for the years ended December 31, 1999
and 1998 and the period from April 26, 1997 (Inception) to
December 31, 1999 F - 7
Notes to the Financial Statements F - 9
10
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
American Kiosk Corporation
Palm Beach Gardens, Florida
We have audited the accompanying balance sheets of American Kiosk Corporation (A Development
Stage Company), as of December 31, 1999 and 1998 and the related statements of operations,
changes in stockholders' deficit and cash flows for the years then ended and for the period from April
26, 1997 (inception) to December 31, 1999. 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 audits in accordance with generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of American Kiosk Corporation, as of December 31, 1999 and 1998 and the results
of its operations and its cash flows for the years then ended and for the period from April 26, 1997
(inception) to December 31, 1999, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company will continue
as a going concern. As described in Note 17 to the financial statements, the Company incurred a net
loss of $2,331,890 during the year ended December 31, 1999, and as of that date had a working
capital deficiency of $377,971 and a stockholders deficit of $2,174,609. These conditions raise
substantial doubt about the Company's ability to continue as a going concern. Management's plans
in regard to this matter are also described in Notes 17 and 18. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
GOLDSTEIN LEWIN & CO.
Boca Raton, Florida
March 30, 2000
F-2
<PAGE>
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
BALANCE SHEETS
ASSETS
December 31,
1999 1998
CURRENT ASSETS
Cash $ 80,557 $ 335,136
Restricted Cash 60,834 15,000
Notes Receivable 57,720
Accounts Receivable, Net 7,674
Due from Officer 25,600 1,100
Other Receivables 3,049 2,049
Inventory 80,925
Deposits on Inventory 27,441
Deferred Loan Costs 123,060 37,431
Prepaid Expenses 50,000
Total Current Assets 400,820 506,756
PROPERTY AND EQUIPMENT, Net 44,046 38,559
OTHER ASSETS
Toppers License Agreement, Net 96,000
Franchise Development Costs 19,846
Deferred Loan Costs, Net 67,753 37,250
Other Deposits 28,524 28,799
96,277 181,895
$ 541,143 $ 727,210
The Accompanying Notes are an
Integral Part of These Fincancial Statements
F-3
<PAGE>
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
December 31,
1999 1998
CURRENT LIABILITIES
Convertible Notes Payable, Net of Discount $ 100,000 $ 293,125
Notes Payable, Net of Discount 351,360
Accounts Payable 194,480 117,198
Accrued Liabilities 17,951 2,095
Accrued Disposition Expenses 115,000
Deferred Franchise Fee Revenue 39,950
Total Current Liabilities 778,791 452,368
NOTES PAYABLE, Net of Discount 1,936,961 365,050
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred Stock, Par Value $.0001 Per Share;
Authorized 10,000,000 Shares; Issued 0 Shares
Common Stock, Par Value $.0001 Per Share;
Authorized 50,000,000 Shares; Issued 4,282,180
Shares and 4,149,900 Shares, Respectively 428 415
Additional Paid-in Capital 1,307,360 1,108,484
Unearned Compensation (48,600)
Deficit Accumulated During the Development Stage (3,482,397) (1,150,507)
Total Stockholders' Deficit (2,174,609) (90,208)
$ 541,143 $ 727,210
The Accompanying Notes are an
Integral Part of These Financial Statements
F-4
<PAGE>
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Period from
April 26, 1997
Year Ended December 31, (Inception to)
1999 1998 December 31, 1999
REVENUE
Franchise Fees $ 10,000 $ 25,000 $ 35,000
Merchandise and
Equipment Sales 109,431 40,491 149,922
Total Revenue 119,431 65,491 184,922
COST OF GOODS SOLD 127,968 22,659 150,627
Gross Profit (Loss) (8,537) 42,832 34,295
EXPENSES
Selling Expenses 198,213 114,477 312,690
General and
Administrative Expenses 1,447,575 956,089 2,506,303
Impairment Charges
(Notes 2, 12 and 18) 251,211 251,211
1,896,999 1,070,566 3,070,204
(Loss) from
Operations (1,905,536) (1,027,734) (3,035,909)
OTHER INCOME (EXPENSES)
Interest Income 3,147 3,147
Interest Expense (199,153) (10,625) (209,778)
Depreciation (7,710) (5,509) (13,219)
Licensing Fees (224,000) (4,000) (228,000)
Gain on Sale of Assets 1,362 1,362
Total Other
Income (Expenses) (426,354) (20,134) (446,488)
Net (Loss) $(2,331,890) $(1,047,868) $ (3,482,397)
Basic and Diluted
Net (Loss) Per Share $ (.55) $ (.29) $ (.95)
Weighted Average
Shares Outstanding 4,209,393 3,633,949 3,660,190
The Accompanying Notes are an
Integral Part of These Financial Statements
F-5
<PAGE>
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
Deficit
Accumulated
Additional During the
Common Stock Paid-In Unearned Development
Shares Amount Capital Compensation Stage
Initial Capitalization on
April 26, 1997 2,800,000 $ 280 $ 40,120 $ $
Issuance for:
Cash, Net of Offering Costs
of $12,044 in December 1997 212,000 21 199,935
Compensation to Employees 41,667
Franchise Development Costs 100,000 10 4,990
Net (Loss) (102,639)
Balance, December 31, 1997 3,112,000 311 286,712 (102,639)
Issuance for:
Cash, Net of Offering Costs
of $2,499 from February to
September 1998 531,650 53 529,098
Compensation to Employees 217,750 22 108,853 (25,000)
Services 255,600 26 127,774
Issuance in conjunction with:
Convertible Notes Payable 18,000 2 8,998
Notes Payable 14,900 1 7,449
Valuation of Stock Options
Issued for Services 39,600 (23,600)
Net (Loss) (1,047,868)
Balance, December 31, 1998 4,149,900 415 1,108,484 (48,600) (1,150,507)
Issuance for Services 39,300 $ 4 $ 19,646 $ $
Issuance in Conjunction with
Notes Payable 92,980 9 46,480
Compensation to Employees 25,000
Valuation of Stock Options
Issued for Services 132,750 23,600
Net (Loss) (2,331,890)
Balance, December 31, 1999 4,282,180 $ 428 $ 1,307,360 $ $(3,482,397)
The Accompanying Notes are an
Integral Part of These Financial Statements
F-6
<PAGE>
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Period from
April 26, 1997
(Inception)
Year Ended December 31, to December 31,
1999 1998 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) $(2,331,890) $(1,047,868) $(3,482,397)
Adjustments to Reconcile Net (Loss) to Net
Cash Used in Operating Activities:
Depreciation 7,710 5,509 13,219
Amortization 166,104 15,694 166,104
Amortization - Impairment 115,846 115,846
Disposition Expenses 115,000 115,000
Gain on Sale of Property and Equipment (1,362) (1,362)
Issuance of Shares for Compensation,
Services and Franchise Development Costs 198,675 245,332
Valuation of Stock Options for Services 132,750 16,000 148,750
Reduction of Officer Loan Receivable 40,000 40,000
Change in Assets and Liabilities
(Increase) Decrease in:
Restricted Cash (45,834) (15,000) (45,834)
Accounts Receivable 7,674 (7,674)
Other Receivables (1,000) (2,049) (3,049)
Inventory 62,658 (80,925)
Deposits on Inventory 27,441 (27,441)
Prepaid Expenses (50,000) (50,000)
Increase (Decrease) in:
Accounts Payable 77,282 100,839 194,480
Accrued Liabilities 15,856 2,095 17,951
Deferred Franchise Fee Revenue (39,950) 39,950
Net Cash Used in Operating Activities (1,741,715) (762,195) (2,525,960)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in Franchise Development Costs (19,846)
Increase in Toppers Agreement (75,000) (100,000)
Increase in Deferred Loan Costs (195,850) (71,250) (267,100)
Decrease in Deposit on Prototype Kiosk 27,472
Change in Other Deposits 275 (803) (28,524)
Increase in Officer Loan Receivable (24,500) (15,600) (65,600)
Increase in Notes Receivable (50,000) (50,000)
Proceeds from Sale of Property and Equipment 5,000 5,000
Acquisition of Property and Equipment (6,288) (38,351) (68,623)
Net Cash Used in Investing Activites (271,363) (173,532) (594,693)
The Accompanying Notes are an
Integral Part of These Financial Statements
F-7
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS (CONTINUED)
Period from
April 26, 1997
(Inception)
Year Ended December 31, to December 31,
1999 1998 1999
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Notes Payable $ (25,000) $ $(25,000)
Proceeds from the Issuance of Notes Payable 1,740,510 656,050 2,396,560
Proceeds from the Issuance of Common Stock 42,989 545,601 828,956
Net Cash Provided by Financing Activities 1,758,499 1,201,651 3,200,516
Increase (Decrease) in Cash (254,579) 265,924 80,557
Cash:
Beginning 335,136 69,212
Ending $ 80,557 $335,136 $ 80,557
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of Common Shares for Compensation,
Services and Franchise Development Costs $19,650 $38,000 $ 62,640
Valuation of Stock Options Issued for Services $132,750 $39,600 $172,350
Issuance of Common Stock for Conversion of
Convertible Notes Payable to Notes Payable $3,500 $ 3,500
Conversion of Convertible Notes Payable to Notes Payable $175,000 $175,000
Sale of Property and Equipment for Note Receivable $7,720 $ 7,720
Transfer of Inventory to Property and Equipment $18,267 $ 18,267
SUPPLEMENTAL DISCLOSURE
Cash Payments for Interest $ 199,153 $10,625 $209,778
The Accompanying Notes are an
Integral Part of These Financial Statements
F-8
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
American Kiosk Corp. (The "Company") was incorporated in Delaware on May 2, 1997. The
Company was established to engage in the development and implementation of a national brand
franchise system of kiosk and kiosk-style retail outlets to deliver popular food products to
consumers. As of December 31, 1999, the Company was in the development stage, planned
operations have not commenced and its activities were limited to developing the franchise system,
kiosk units and market testing.
The Company's current cash and available credit is not sufficient to support its proposed activities
for the next year. Accordingly, management will need to seek equity financing or other financing.
These financial statements have been prepared on the basis that adequate financing will be obtained
(Note 17).
Risk and Uncertainties
The Company is subject to all of the risks inherent in an early stage company in the fast food
franchise industry. These risks include, but are not limited to, a limited operating history, limited
management resources and dependence upon consumer acceptance of the concept. The
Company's operating results may be materially affected by the foregoing factors.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flow, the Company considers all highly liquid short-term
investments purchased with on original maturity date of three months or less to be cash
equivalents.
Advertising
The Company expenses advertising costs as they are incurred. Advertising expense aggregated
$86,411, $91,611 and $178,022 for the years ended December 31, 1999 and 1998, and the period
from April 26, 1997 to December 31, 1999, respectively.
F-9
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment is recorded at cost and is being depreciated over the estimated useful
lives of the related assets using the straight-line method.
Franchise Development Costs
The Company follows the policy of capitalizing certain costs related to the development of its
franchise program. These costs are to be amortized on a straight-line basis over three years
beginning with the opening of the first franchised Kiosk or Kiosk-style restaurant (Note 18).
Toppers License Agreement
The cost of the license agreement is being amortized over the 25-year term of the agreement
(Note 18).
Deferred Loan Costs
Costs directly attributable to the obtaining of loans are deferred, and are amortized on a straight-
line basis over the term of the associated loans.
Fair Value of Financial Instruments
The Company has a number of financial instruments, none of which are held for trading
purposes. The Company estimates that the fair value of all financial instruments at December 31,
1999 and 1998, do not differ materially from the aggregate carrying values of its financial
instruments recorded in the accompanying balance sheets.
The estimated fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. Considerable judgment is necessarily
required in interpreting market data to develop the estimates of fair value, and, accordingly, the
estimates are not necessarily indicative of the amounts that the Company could realize in a
current market exchange.
F-10
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Long-Lived Assets
The Company reviews for the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment
loss would be recognized when estimated future cash flows expected to result from the use of the
asset and its eventual disposition is less than its carrying amount.
Revenue Recognition
Revenue from sales of individual and area franchises is recognized when substantially all
significant initial services to be provided to the franchisee have been performed. When an
individual franchise is sold, the Company agrees to provide certain services to the franchisee.
Generally, these services include, among other items, assistance with site selection, training of
personnel, the loan of the Pizza Place manual, training and a pre-opening inspection. At
December 31, 1999, the Company had one franchisee.
Revenue related to the sale of equipment other than that provided with a franchise, food products
and supplies, is recognized when the items are shipped.
Stock Based Compensation
As permitted under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock Based Compensation, the Company has elected not to adopt the fair value based
method of accounting for its stock based compensation plan but to account for such
compensation using the intrinsic value method under the provisions of Accounting Principles
Board (APB) Opinion No. 25 (Note 14).
Net (Loss) Per Share
Basic net (loss) per share is computed by dividing net (loss) by the weighted average number of
shares outstanding. Fully diluted earning per share for all periods presented are the same as basic
earnings per share because in a period of net loss all exercisable or convertible securities are anti-
dilutive (Notes 13 and 14).
F-11
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
NOTES TO THE FINANCIAL STATMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The new statement requires all derivatives to be
recorded on the balance sheet at fair value and establishes new accounting rules for hedging
instruments. The statement is effective for years beginning after June 15, 2000. The Company is
assessing the impact this statement will have on the financial statements.
Reclassification of Prior Period
Certain amounts in the prior period's financial statements have been reclassified to conform to
the current year presentation.
NOTE 2: IMPAIRMENT CHARGES
As a result of the change in the Company's focus (Note 18), the Company recorded an
impairment loss associated with the pizza concept assets. The resulting adjustment of $251,211
was made to expense the book value of these assets consisting of inventory, unamortized
licensing agreements, accrued disposition expenses and franchise development costs.
NOTE 3: CONCENTRATION OF CREDIT RISK
The Company at times has cash in banks in excess of FDIC insurance limits and places its
temporary cash investments with high credit quality financial institutions. The Company
performs ongoing credit evaluations of its customers' financial condition and does not require
collateral from them. Reserves for credit losses are maintained at levels considered adequate by
management.
NOTE 4: TRANSACTIONS WITH RELATED PARTIES
Officer's net advances at December 31, 1999 and 1998 amounted to $25,600 and $1,100,
respectively. These advances are unsecured and provide no set repayment terms.
F-12
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5: RESTRICTED CASH
Restricted cash consists of a certificate of deposit pledged as collateral for the Company's credit card
limit and amounts escrowed for the payment of interest (Note 11).
NOTE 6: ACCOUNTS RECEIVABLE
Accounts receivable is presented net of an allowance for doubtful accounts of $2,995 as of December
31, 1998. Bad debt expense aggregated $2,449, $2,995 and $5,444 for the years ended December
31, 1999 and 1998 and the period from April 26, 1997 to December 31, 1999, respectively.
NOTE 7: NOTES RECEIVABLE
Notes receivable consist of the following at December 31, 1999:
A note receivable for the sale of certain
equipment. The note is payable in monthly
installments of $500, including principal and interest,
and bears interest at 8% per annum. Final maturity
of the note is December 1, 2000. The note is collateralized
by a lien on the equipment. $ 7,720
Two notes receivable from former area representatives.
The notes bear interest at 8% per annum and are due
July 21, 2000. The notes are collateralized by 100,000
shares of the Company's common stock.
50,000
$57,720
NOTE 8: INVENTORY
Inventory consisted of the following at December 31, 1998:
Food $ 1,515
Supplies 951
Equipment and Displays 48,459
Kiosks 30,000
$80,925
The Company did not maintain an inventory at December 31, 1999.
F-13
AMERICAN KIOSK CORPORATION
(A Developement Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9: DEFERRED LOAN COSTS
Deferred loan costs aggregated $215,500, $84,250 and $299,750 for the years ended December 31,
1999 and 1998, and the period from April 26, 1997 to December 31, 1999, respectively. The costs
are being amortized over periods of twelve or thirty months. Amortization aggregated $99,368,
$9,569 and $108,937 for the years ended December 31, 1999 and 1998, and the period from April
26, 1997 to December 31, 1999, respectively.
NOTE 10: PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31,:
Lives
1999 1998 (Years)
Furniture and Equipment $ 54,116 29,568 5
Mobil Unit 14,500 5
54,116 44,068
Less: Accumulated Depreciation (10,070) (5,509)
$ 44,046 $ 38,559
NOTE 11: NOTES PAYABLE
Notes payable consist of the following at December 31,:
1999 1998
12% convertible secured notes, net of unamortized
discount of $0 and $6,875, respectively $ 100,000 $ 293,125
11% secured notes, net of unamortized
discount of $28,039 and $7,450, respectively 1,936,961 365,050
12.5% secured notes, net of unamortized
discount of $14,640 351,360
2,388,321 658,175
Less Current Portion 451,360 293,125
$ 1,936,961 $365,050
F-14
AMERICAN KIOSK CORPORATION
(A Developement Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 11: NOTES PAYABLE (CONTINUED)
12% Convertible Secured Notes
The Company, in September and November 1998, issued twelve units ("Bridge Loan Units")
consisting of convertible secured notes ('Bridge Loan Notes") aggregating $300,000 and common
stock aggregating 18,000 shares. Each Bridge Loan Unit consisted of a $25,000 promissory note and
1,500 shares of common stock. The Bridge Loan Notes were collateralized by the equipment and
accounts receivable of the Company, and bear interest at 12%. Each Bridge Loan could have been
converted at any time into shares of the Company's common stock at a per share conversion price
equal to 115% of the closing bid price of the Company's common stock on the date of the
conversion. The Bridge Loan Notes matured one year from the date of issuance. The shares of
common stock have "piggyback" registration rights with any public offering of the Company's
common stock, otherwise the shares are restricted as to sale for a period of two years. The Bridge
Loan Notes were recorded at a discount of $9,000, reflecting a per share value of $0.50, discounted
for restrictions. The discount increased the effective interest rate to 15%. At December 31, 1999,
no Bridge Loan Notes had been converted into common stock. Upon maturity of the Bridge Loan
Notes, the noteholders were given the option of repayment or rolling the principal balance of their
note into the Company's offering of 11% secured notes. At December 31, 1999, seven Bridge Loan
Notes aggregating $175,000 had been rolled over; one Bridge Loan Note aggregating $25,000 had
been repaid; and four Bridge Loan Notes aggregating $100,000 remain outstanding. These notes are
in default and are classified as current in the accompanying financial statements.
11% Secured Notes
The Company in 1999 and 1998 offered, in a private placement, units ("Placement Units") consisting
of secured notes ("Placement Notes") and common stock. The minimum offering was ten units,
aggregating $500,000 in Placement Notes and 20,000 shares of common stock, and the maximum
offering was forty units aggregating $2,000,000 in Placement Notes and 80,000 shares of common
stock. Each Placement Unit consists of a $50,000 promissory note and 2,000 shares of common
stock. Fractional units were permitted to be offered. The offering terminated on December 15,
1999. The Placement Notes are collateralized by all of the assets of the Company, and bear interest
at 11% per annum. The Placement Notes mature thirty months from the date of issuance. The shares
of common stock have "piggyback" registration rights with any public offering of the Company's
common stock, otherwise the shares are restricted as to sale for a period of two years. These
Placement Notes have been recorded at a discount of $39,300 and $7,450 at December 31, 1999 and
1998, respectively, reflecting a per share value of $0.50. The discount increases the effective interest
rate to 11.8%. The Company has placed 39.30 units, including 3.50 units rolled over from the
Company's Bridge Loan Notes, and 7.45 units, consisting of an aggregate $1,965,000 and $372,500
of Placement Notes and 78,600 and 14,900 shares of common stock at December 31, 1999 and 1998,
respectively.
F-15
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
12.5% Secured Notes
The Company on December 1, 1999, began offering in a private placement, units ("Second Bridge
Loan Units") consisting of secured notes ("Second Bridge Loan Notes") and common stock. The
offering is for twelve units, aggregating $600,000 in Second Bridge Loan Notes and 48,000 shares
of common stock. Each Second Bridge Loan Unit consists of a $50,000 promissory note and 4,000
shares of common stock. Fractional units may be offered. The offering terminates upon the earlier
of the placement of all units or March 31, 2000. The Second Bridge Loan Notes are collateralized
by all of the assets of the Company and mature the earlier of one year from the date of issuance or
upon the completion of an equity on debt financing the net proceeds of which equals or exceeds
$1,100,000. The Second Bridge Loan Notes bear interest at 12.5% per annum. The Company may
repay the principal at any time. Regardless of the date of repayment, the Company has guaranteed
a minimum of six months interest will be paid. The shares of common stock have "piggyback"
registration rights with an offering of the Company's common stock, otherwise the shares are
restricted as to sale for a period of one year. These Second Bridge Loan Notes have been recorded
at a discount of $14,640, reflecting a per share value of $0.50. The discount increases the effective
interest rate to 16.9%. At December 31, 1999, the Company has placed 7.32 units consisting of an
aggregate $366,000 of Second Bridge Loan Notes and 29,280 shares of common stock. Subsequent
to December 31, 1999. The Company amended the offering to increase the size and duration of the
placement (Note 18).
Undiscounted future maturities of notes payable for the years subsequent to December 31, 1999
under the then existing agreements are as follows:
2000 $ 451,360
2001 1,527,500
2002 437,500
$ 2,416,360
NOTE 12: COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has entered into leases for office space and a retail location. The lease for office space
provides for a monthly base rent of $4,563 plus the Company's proportionate share of certain
common expenses. The lease requires annual increases in the base rent of $106 per month, and
expires on November 30, 2002.
F-16
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 12: COMMITMENTS AND CONTINGENCIES (CONTINUED)
The lease for the retail location provides for a monthly base rent of $2,083 plus assessments for
common area maintenance and real estate taxes. The base rent is subject to annual increase of the
greater of the annual increase in the Consumer Price Index or 4%. The lease expires on January 31,
2004 and may be extended for an additional five-year term. The Company has ceased operations of
the retail location and has accrued the remaining balance due on the lease as a disposition expense
aggregating $115,000. The disposition expense is presented as a current obligation.
Minimum future obligations over the primary terms of the Company's long-term leases at December
31, 1999 are as follows:
Year Ended December 31, Amount
2000 $ 171,034
2001 57,308
2002 58,581
$ 286,923
In addition, the Company periodically leases temporary housing and other facilities on a short-term
basis.
The Company has guaranteed payment of the first year's rent for a franchisee. The guarantee
aggregates $30,000.
Rent expense aggregated $91,569, $70,017 and $171,739 for the years ended December 31, 1999
and 1998 and the period from April 26, 1997 to December 31, 1999, respectively.
Agreement with Toppers
Toppers Brick Oven Pizza, Inc. ("Toppers") has given the Company exclusive rights to market
Toppers products to a network of corporate owned and franchised kiosks and/or kiosk-style retail
outlets in the United States. Under the terms of the agreement, Toppers will be the Company's sole
supplier of pizza, ovens and related products. The agreement expires in 2022, unless terminated
prior to expiration.
In 1999, the Company revised and amended its agreement with Toppers. The Company and
Toppers, under the revised agreement, agreed to licensing fees of $220,000 in 1999; $250,000 in
2000; and $300,000 in each year 2001-2003; and $350,000 in 2004 and each year thereafter for the
remaining term of the agreement.
F-17
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 12: COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is in negotiations to terminate the Agreement and has expensed, in 1999, the
unamortized amounts paid to Toppers under the license agreement amounting to $96,000 at
December 31, 1998 and $220,000 paid in 1999 (Note 18).
Manufacturing Agreements
The Company has entered into agreements with certain companies for the construction and
manufacture of kiosks, carts and other merchandising materials at fixed prices. Under the terms of
the agreements, the Company is required to make deposits when placing purchase orders. At
December 31, 1999 and 1998, deposits on kiosks, carts and other merchandise aggregated $0 and
$27,441, respectively.
Employment Agreements
The Company has entered into employment agreements with four key management personnel.
The agreements provide for base minimum annual salaries ranging from $27,500 to $120,000
each. The agreements have terms of one year, and are renewable at will. The contracts provide
for annual cash bonuses and other fringe benefits. The contracts also include severance
agreements and noncompete convenants. As compensation for services rendered prior to the
execution of the employment agreements, the contracts provide for the management personnel to
receive an aggregate 92,750 shares of the Company's common stock. Simultaneously with the
execution of the employment agreements, the management personnel entered into option
agreements with the Company (Note 14).
NOTE 13: CAPITAL STOCK
Preferred Stock
The Company has 10,000,000 shares of preferred stock (par value $.0001) authorized. The Board
has authority to issue the shares in one or more series and to fix the designation preferences, powers
and other rights as it deems appropriate. No shares of preferred stock have been issued.
Common Stock
The Company has 50,000,000 shares of common stock (par value $.0001) authorized. Common
stock has one vote per share for the election of directors and all other matters submitted to a vote of
stockholders. Shares of common stock do not have cumulative voting, preemptive redemption or
conversion rights. During the year ended December 31, 1998 and the period from April 26, 1997
through December 31, 1999, the Company directly issued 531,650 and 3,643,650 shares for cash of
$531,650 and $784,060, respectively.
F-18
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 13: CAPITAL STOCK (CONTINUED)
During the years ended December 31, 1999 and 1998, the Company issued 92,980 and 32,900
shares, respectively, to the subscribers of certain secured notes (Note 11). The Company valued the
shares at $.50 per share in accordance with the terms of the subscription agreements. The Company
recorded the $46,490 and $16,450 aggregate valuations as original issue discounts and accounted
for the excess of the valuation over the par value of the shares as additional paid-in capital.
Additionally, the Company issued to the placement agent 39,300 and 26,000 shares, respectively,
valued at $.50 per share as partial compensation for facilitating a placement.
Since the Company's inception in April 1997, common stock has been issued at prices ranging from
$.0001 to $.05 per share through October 31, 1997, and $1.00 per share subsequently. In October
1997, 100,000 shares were issued at $.0001 per share for services rendered. The Company
recognized the difference, $4,990, between the market value at the time of issuance ($.05) and the
actual stock price paid ($.0001) as franchise development costs.
During the year ended December 31, 1998, the Company issued 473,350 shares as compensation for
services rendered by various employees, consultants and professionals. The Company in recording
the compensation valued the shares at $.50 per share. Total compensation related to those share
issuances amounted to $236,675. The excess of the valuation over the par value has been recorded
as an increase in additional paid in capital.
Other services provided to the Company affecting stockholders' equity during the period April 26,
1997 through December 31, 1999, include the following: attorneys' fees in the amount of $14,543
directly related to the offering of common stock are accounted for as a reduction of the proceeds
from the sale (a reduction of additional paid-in capital) and compensation expense recognized for
services provided by an officer of the Company and foregone, in the amount of $41,667 and
accounted for as an increase in additional paid in capital.
The Company, at December 31, 1999, has reserved 1,350,000 shares of common stock for issuance
relating to unexpired options.
NOTE 14: STOCK OPTIONS
During the year ended December 31, 1998, the Company entered into option agreements with key
management personnel, consultants and franchisees. The Agreements grant options to purchase an
aggregate 845,000 shares of common stock. The options on 365,000 shares vest and are exercisable
at various dates from September 1, 1999 to November 9, 2000. Options on 200,000 shares vest on
the later of various dates from January 1, 1999 to March 20, 1999, or the achievement of certain
sales goals. The options are exercisable from three to four years from the date of grant, and are
contingent upon each individual's continuing association with the Company at the date of exercise.
F-19
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 14: STOCK OPTIONS (CONTINUED)
Options on 180,000 shares, granted to a consulting company, vest on various dates from February
24, 1999 to November 24, 1999 as services are rendered.
Options may be exercised at various prices ranging from $1.00 to $4.00 per share.
Options on 50,000 shares were granted to a marketing and communications company. The options
are exercisable at $1.50 per share, are fully vested and expire May 31, 2000.
Options on 50,000 shares were granted to an area representative as part of their agreement. The
options are exercisable at $1.59 per share. The options expire on December 31, 2002 and vest as
follows:
1. 25,000 shares upon payment of $79,900 ($39,950 paid at December 31,
1999).
2. 25,000 shares when the Company has received from the area representative
deposits for ten franchises.
During 1999, 785,000 options granted in 1998 expired or were cancelled by the Company.
During the year ended December 31, 1999, the Company entered into option Agreements with key
management personnel, employees and consultants. The Agreements grant options to purchase an
aggregate 1,290,000 shares of common stock. The options are exercisable at various prices ranging
from $0.53 to $0.66 per share, are fully vested and expire at various dates from September 28, 2002
to September 28, 2009.
The following table summarizes stock option activity for the years ended December 31,
Price Per Share Weighted Average
Shares Range Exercise Price
Balance, January 1, 1998 $ $ $
Granted 845,000 1.00 - 4.00 1.48
Balance, December 31, 1998 845,000 1.48
Granted 1,290,000 0.53 - .66 .55
Cancelled or Expired (785,000) 1.00 - 4.00 1.46
Balance, December 31, 1999 1,350,000 $ .53 - $1.59 $.59
F-20
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 14: STOCK OPTIONS (CONTINUED)
The Company applied APB 25 and related interpretations in accounting for the options issued to
employees. Accordingly, no compensation cost has been recognized in the results of operations.
Had the Company recorded a charge for the fair value of options granted consistent with SFAS No.
123, the net loss for the years ended December 31, 1999 and 1998 and the period from April 26,
1997 to December 31, 1999, would have been increased by approximately $40,000, $128,000 and
$168,000, respectively. The impact of this charge on the basic net loss per weighted common share
would have been $.01, $.04 and $.05, respectively for the years ended December 31, 1999 and 1998
and the period from April 26, 1997 to December 31, 1999, respectively.
The fair value of each option grant is estimated on the date of the grant using the Black Scholes
option pricing model, with the following weighted average assumptions:
1999 1998
Risk-Free Interest Rat e 6.5% 5.7 %
Expected Option Lives 3 to 10 Years 1 to 4 Years
Expected Volatility 8% 29 %
Expected Dividend Yields 0% 0 %
The following summarizes information about stock options outstanding at December 31, 1999:
Options Outstanding
Number Weighted Average
Exercise Price Outstanding Remaining Life
$0.53 1,065,000 4.2
0.66 225,000 9.8
1.00 10,000 1.7
1.59 50,000 3.0
1,350,000 5.1
All options are currently exercisable.
NOTE 15: RESEARCH AND DEVELOPMENT COSTS
Research and development costs related to both future and present projects are charged to operations
as incurred. The Company recognized $310,086, $113,135 and $423,221 of research and
development costs for the years ended December 31, 1999 and 1998, and the period from April 26,
1997 to December 31, 1999, respectively.
F-21
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 16: INCOME TAXES
The deficit accumulated during the development stage (inception through December 31, 1999) of
approximately $3,482,000 will be capitalized for income tax purposes as accumulated start-up costs,
and is to be amortized over a sixty-month period beginning upon commencement of operations. The
Company has recorded a valuation allowance of approximately $1,309,000 with respect to any future
tax benefits arising from the amortization of the development costs due to the uncertainty of their
ultimate realization. The net increase in the valuation allowance was $923,000 for 1999.
NOTE 17: GOING CONCERN
As shown in the accompanying financial statements, the Company incurred a net loss of $3,482,397
during the period from April 26, 1997 (inception) to December 31, 1999, and as of that date, the
Company's total liabilities exceeded its total assets by $2,174,609. Those factors create an
uncertainty about the Company's ability to continue as a going concern. Management of the
Company is considering plans to obtain financing through issuance of debt, stock or the acquisition
of or merger with an operating company (Note 18). The ability of the Company to continue as a
going concern is dependent on their ability to continue to obtain financing and the successful
implementation of management's plan. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
NOTE 18: SUBSEQUENT EVENTS
Acquisition of Assets
In January 2000 the Company acquired certain assets of Zero's Mr. Submarine, Inc. ("Zero's"), a
franchiser of hot submarine sandwich restaurants, for 1,500,000 shares of the Company's
common stock. The acquisition will be accounted for as a purchase, and accordingly, the
operations of the acquired assets will be included in the Company's consolidated operating
results from the acquisition date. The cost of the acquisition is approximately $750,000 and will
be allocated on the basis of the estimated fair market values of the assets acquired and liabilities
assumed. Any excess of the purchase price over the estimated fair value of the acquired assets,
which is estimated to be approximately $690,000, will be recorded as goodwill and amortized
over 15 years. The purchase allocations will include virtually all of the assets and intellectual
property of Zero's, including: equipment, leased equipment, leased real estate, contracts,
franchise agreements, intangibles and know how. Zero's had sales of $784,890 and a net loss of
$219,933 for the year ended December 31, 1999.
F-22
AMERICAN KIOSK CORPORATION
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 18: SUBSEQUENT EVENTS (CONTINUED)
In addition, the Company entered into consulting agreements with Zero's three principals for a
five year term from the acquisition date. Each is to receive $375,000 over the term of the
agreements. The compensation may be foregone and replaced with the number of shares of the
Company's common stock that could be purchased at a discount of 25% of the fair market value.
Each was also granted 167,000 options to purchase shares of the Company's common stock at
exercise prices ranging from $1.00 to $3.00. Vesting in the options range from the issuance date
to two years after such date and expire five years from the issuance date. Also, each has entered
into agreements not to compete for a period of two years from the date of termination of their
employment.
Since the Zero's acquisition, the Company has determined that its principal focus is on the Zero's
concept as opposed to the pizza kiosk concept. As such, the Company is considering suspending
or otherwise disposing of all or a portion of the pizza kiosk concept. Accordingly, the Company
has reviewed the assets comprising the pizza kiosk concept and has determined that the carrying
amount of the assets may not be recoverable. Consequently, the related assets have been reduced
to zero at December 31, 1999 (Note 2).
12.5% Secured Notes
Subsequent to December 31, 1999, the Company increased the placement of Second Bridge Loan
Units to twenty units aggregating $1,000,000 in Second Bridge Loan Notes and 80,000 shares of
common stock. The termination date of the Placement was extended to the earlier of the
Placement of all units or June 30, 2000. Subsequent to December 31, 1999, the Company placed
an additional 8.46 Second Bridge Loan Units (Note 11), comprised of $423,000 of Second
Bridge Loan Notes and 33,840 shares of common stock. The subsequent Placement resulted in a
total of 15.78 Second Bridge Loan Units sold to March 30, 1999, aggregating $789,000 of
Second Bridge Loan Notes and 63,120 shares of common stock.
Stock Options Non-Employees
Subsequent to December 31, 1999, the Company cancelled options on 50,000 shares of common
stock. On January 4, 2000, the Company granted options for the purchase of 75,000 shares of the
Company's common stock at exercise prices ranging from $.63 to $1.12 per share. The options
expire January 4, 2003.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
10
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a)
Officers and Directors
Name Age Position
Richard J. Michael 63 Chairman of the Board, President and Chief
Executive Officer and Director
Larry E. Graybill 57 Vice President, CFO and Director
Ronald L. McDonald 53 Director
Randall S. Appel 54 Director
Philip L. Arvidson 62 Director
Gene T. Schmidt 54 Nominee for Director
Martin A. Palacios 52 Nominee for Director
Colin Wright 54 Nominee for Director
RICHARD J. MICHAEL has served as the Chairman of the Board, President, Chief
Executive Officer and a director of the Company since its inception. Prior to founding the
Company, Mr. Michael was Director of Distributor Relations of Toppers Brick Oven Pizza,
Inc. from December 1995 to August 1997. From May 1995 to December 1995, Mr. Michael
was a private investor. From May 1994 to August 1995, Mr. Michael was an account
representative for Corporate Relations Group, where he was involved in promotions to food
related companies. From 1992 to 1994, Mr. Michael was Marketing Director of Adelaide
Holdings, Inc., a distributor of national and international food products.
LARRY E. GRAYBILL has served as Vice President and Chief Financial Officer of
the Company since June 1998 and a director of the Company since November 1998. From
July 1990 until June 1998, Mr. Graybill served as Chief Financial Officer of Austin's
International, Inc., a public company engaged in the restaurant business whose operating
subsidiary filed for bankruptcy protection under Chapter 11 in July 1997. Mr. Graybill
received his diploma from The Southwestern Graduate School of Banking at Southern
Methodist University in 1974.
11
RONALD L. McDONALD has been a director of the Company since December 30,
1998. Mr. McDonald has owned and operated a number of restaurant operations and chains
over the past 30 years and since January, 1984 has been serving as a consultant to the food
industry. He is the author of a number of food industry materials, including The Complete
Hamburger, the Ronald L. McDonald McBarbecue Book and Ronald L. McDonald's Franchise
Buyer and Supply Guide. Since 1987 he has also been a real estate broker, mortgage broker
and a certified general contractor through wholly-owned companies.
RANDALL S. APPEL has served as a director of the Company since November 1998.
Mr. Appel has over 14 years of financial planning and broker-dealer experience. Since March
1987, Mr. Appel has been the President of Appel Financial Planning, Ltd., an investment
services firm. Since August 1994, he has also been the sole officer, director, shareholder, and
compliance officer of Strategic Assets Inc., a NASD registered broker-dealer. See
"RELATED TRANSACTIONS." From July 1990 to May 1995, Mr. Appel was a principal
and registered representative of Ameriprop, Inc., a NASD registered broker-dealer firm.
PHILIP L. ARVIDSON has served as a director of the Company since December
1998. Mr. Arvidson has served in various positions with the Pepsi-Cola Bottling Company
since January 1981 including serving as its President since 1995 until his retirement in June
1998. Mr. Arvidson will continue to serve as President Emeritus to gain and promote Pepsi
business. Prior to joining Pepsi-Cola, Mr. Arvidson was with General Cinema Corporation.
GENE T. SCHMIDT is a nominee for director of the Company. Upon completion of
the acquisition of Zeros he and Mr. Palacios will be elected to the Board of Directors (see
"THE COMPANY - Acquisition of Zero's Mr. Submarine, Inc." Mr. Schmidt is the founder
of the original Zero's Mr. Submarine concept restaurant in 1967 and has been employed by
X.S. Inc. dba Zero's Mr. Submarine, an affiliate of Zeros which owns 6 independent Zeros
Mr. Submarine sandwich restaurants in Virginia, since that time. He has served as Chairman
of The Board of Zeros since its formation in 1989 and is responsible for operations at the
restaurants owned by X.S. Inc. and the restaurants franchised through Zeros. Mr. Schmidt
received his B.A. degree from East Carolina University in 1966.
MARTIN A. PALACIOS is a nominee for director of the Company. Upon
completion of the acquisition of Zeros he and Mr. Schmidt will be elected to the Board of
Directors (see "THE COMPANY - Acquisition of Zero's Mr. Submarine, Inc.") Mr.
Palacios was employed by X.S. Inc. dba Zero's Mr. Submarine, an affiliate of Zeros which
owns 6 independent Zeros Mr. Submarine sandwich hops in Virginia, from 1971 through 1989
when Zeros was formed and began selling franchises. He has served as President of Zeros
since 1989 and has directed Zeros franchise sales and development program leading to the sale
of 55 Zeros franchises. In 1997, Mr. Palacios became Chief Executive Officer of Zeros. Mr.
Palacios attended San Jose City College.
12
COLIN WRIGHT has been nominated for election to the Board of Directors at the
next annual meeting of stockholders. From 1980 to 1999, Mr. Wright served as President of
PGA Resorts Company, a company engaged in the operation and development of golf and
tennis resorts and spas. Mr. Wright currently heads The National Golf Company, which also
develops and operates golf resorts nationally and internationally, and is currently a member of
the Florida Commission on Tourism, represents the State of Florida on the White House
Tourism Delegation and is Vice Chairman of the Palm Beach County Tourist Development
Council Mr. Wright received his B.A. degree in Business and Hotel Management from the
University of London in 1968.
Compliance with Section 16(a) of the Exchange Act.
The following individuals failed to file either a Form 4, Statement of Changes of
Beneficial Ownership of Securities, or Form 5, Annual Statement of Beneficial Ownership of
Securities disclosing either the sale of certain securities held by such individual or the issuance
to such individual of additional Company securities:
Richard Michael failed to file a Form 4 or 5 with respect to the cancellation of options
to purchase an aggregate of 200,000 shares of common stock and the reissuance to him of an
option to purchase 250,000 shares of common stock at $.53 per share on September 28, 1999.
Larry Graybill failed to file a Form 4 or 5 with respect to to the cancellation of options
to purchase an aggregate of 125,000 shares of common stock and the reissuance to him of an
option to purchase 175,000 shares of common stock at $.53 per share on September 28, 1999.
Randall S. Appel failed to file a Form 4 or 5 with respect to the cancellation of options
to purchase an aggregate of 50,000 shares of common stock, the reissuance to Mr. Appel of an
option to purchase 100,000 at $.53 per share and the issuance to him of an option to purchase
an aggregate of 400,000 shares of common stock at exercise prices ranging from $.53 per to
$.66 per share on September 28, 1999 and the issuance to Marand Holdings, LLC, a company
controlled by Mr. Appel, of 53,290 shares of common stock.
Ronald McDonald failed to file a Form 4 or 5 with respect to the cancellation of options
to purchase an aggregate of 100,000 shares of common stock and the reissuance to him of an
option to purchase 100,000 shares of common stock at $.53 per share on September 28, 1999
and the issuance of an option to purchase 50,000 shares of common stock at $.53 per share on
September 28, 1999.
Phillip Arvidson failed to file a Form 4 or 5 with respect to the cancellation of options
to purchase an aggregate of 50,000 shares of common stock and the reissuance issuance to him
of an option to purchase 100,000 shares of common stock at $.53 per share on September 28,
1999.
13
ITEM 10. EXECUTIVE COMPENSATION.
(a) Summary Compensation Table:
The following table sets forth information concerning compensation paid for services
rendered in all capacities awarded to, earned by or paid to Richard J. Michael, the Company's
President and Chief Executive Officer, in the years ended December 31, 1998 and 1999. No
other executive officers of the Company received compensation of $100,000 or more in 1998
or 1999.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards
Other Securities
Annual Underlying
Name and Principal Fiscal Compen- Options/
Position Year Salary($) Bonus($) sation($) SARs(#)
Richard J. Michael 1998 $ 60,000 $ 0 $10,000 150,000
President and 1999 $ 120,000 $ 0 $10,000 250,000
Chief Executive Officer
The $10,000 "Other Annual Compensation" represents the approximate amount of lease
payments paid by the Company for a vehicle provided to Mr. Michael. The option to purchase
150,000 shares of common stock issued in 1998 was cancelled in 1999. See "Report on Repricing
of Options/SARS" below.
(b) Options/SAR Grants in Last Fiscal Year.
Number of % of Total
Securities Options/SARs
Name and underlying Granted to Exercise or
Principal Position Options/SARs Employees in Base Price
Granted (#) Fiscal Year ($/Sh) Expiration Date
Richard J. Michael 250,000 22.2% $.53 9/28/02
On September 28, 1999, the Company cancelled options granted to Mr. Michael to
purchase 150,000 shares of common stock at $1.10 per share and and 50,000 shares at $1.17 and
reissued him options to purchase 250,000 shares of common stock at $.53 per share.
14
(c) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value:
No options were exercised in 1999 and the Company has never issued an SAR.
The following table sets forth information concerning the number of unexercised options,
and the value of such unexercised options, for each of the executive officers named in the
Summary Compensation Table.
Aggregated Option/SAR Exercised
In Last fiscal Year and Fiscal
Year-End Option/SAR Values
Number of Secuirites
Shares Value Underlying Unexercised Value of Unexercise In-
Acquired on Realized Options/SARs at Fiscal the-money Options/SARs
Name Exercise (#) ($) Year-End (#) at Fiscal Year-End ($)
Exercisable/ Exercisable/
Unexercisable Unexercisable
Richard J. Michael -0- -0- 250,000 (exercisable) $ -0-
-0- (unexercisable) $ -0-
As at December 31, 1999, none of Mr. Michael's stock options were in-the-money.
(e) Compensation of Directors:
During the fiscal years ended December 31, 1998 and 1999, no director of the Company
received any compensation for any services provided in such capacity. Directors of the Company
are reimbursed for expenses incurred by them in connection with their activities on behalf of the
Company.
(f) Employment Contracts and Termination of Employment, and Change in Control
Arrangements:
On October 1, 1998, the Company entered into an employment agreement with Richard
Michael which expired on June 30, 1999. Under such agreement, Richard Michael served as
President and Chief Executive Officer of the Company and provided the Company with all of his
business and professional services. Under the agreement, the Company paid Mr. Michael a base
salary of $120,000 per annum and was eligible to receive an incentive bonus based upon the
profitability of the Company, as determined by the Board of Directors. Mr. Michael was also
granted options for 150,000 shares of the Company's common stock under his employment
agreement. See "Repricing of Stock Options" below. Mr. Michael continues to be compensated
under the terms of his expired contract.
15
On October 1, 1998, the Company entered into an employment agreement with Larry E.
Graybill which expired on June 30, 1999. Under such agreement, Mr. Graybill served as Vice
President and Chief Financial Officer of the Company and provided the Company with all of his
business and professional services. Under the agreement, the Company paid Mr. Graybill a base
salary of $75,000 per annum and was eligible to receive an incentive bonus based upon the
profitability of the Company, as determined by the Board of Directors. Mr. Graybill was also
granted options for 75,000 shares under his employment agreement. See "Repricing of Stock
Options" below. Mr. Graybill received 32,750 shares of the Company's Common Stock in lieu
of cash compensation for his services from June 21, 1998 through September 21, 1998. Mr.
Graybill continues to be compensated under the terms of his expired contract.
On October 1, 1998, the Company entered into an agreement with Ronald McDonald. This
agreement expired September 30, 1999. Under that agreement, Mr. McDonald served as the
Company's Vice President of Business and Product Development. Mr. McDonald received a base
monthly fee of $4,000. In addition, Mr. McDonald received 50,000 shares of the Company
restricted common stock as of October 1, 1998, pursuant to the Employment Agreement. Mr.
McDonald also received options to purchase 100,000 shares of the Company's common stock at
$1.50 per share. See "Repricing of Stock Options" below.
Each Employment Agreement contains an agreement of the employee not to directly start
up or own any entity engaged in a business substantially similar to that of the Company or in direct
competition with the Company for two years after termination of his employment with the
Company. The Employment Agreements, however, do not prevent the employees from becoming
employed by another company already in business.
On December 8, 1999, subject to the approval of the stockholders of Zero's of the terms
of the terms of the acquisition by the Company of certain of Zero's assets, the Company agreed
to enter into consulting agreements with each of the three principals of Zeros, Eugene Schmidt,
Martin Palacios (who are both nominees for director of the Company), and John Schmidt whereby
the Company will pay them $75,000 per year for the next five years payable upon closing and on
each anniversary thereafter; with the exception of Eugene Schmidt who will receive $100,000
upon closing, $100,000 ninety (90) days thereafter, $75,000 on the first one year anniversary,
$75,000 on the second anniversary and $25,000 on the third anniversary.
Messrs. Gene Schmidt, Martin Palacios and John Schmidt have the right to forego their
cash compensation and receive that number of shares of the common stock in the Company that
could be purchased at a discount of 25% of the fair market value of the stock as determined by the
public market place on the date said payment is to be made.
(g) Report on Repricing of Options/SARS:
On September 28, 1999, the Company cancelled an option granted Mr. Michael to
purchase 150,000 shares of common stock at $1.10 per share and an option to purchase 50,000
16
shares at $1.17 per share and reissued him an option to purchase 250,000 shares of common stock
at $0.53 per share, the fair market price on the date of grant. All of these options have vested.
On the same day the Company also cancelled options to purchase an aggregate of 350,000
shares of common stock at exercise prices ranging from $1.00 per share to $1.50 per share and
reissued options to purchase an aggregate of 525,000 shares of common stock at $.53 per share.
All of these options are vested.
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17
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table identifies each person or entity known to the Corporation to be the
beneficial owner of more than five percent of the Corporation's Common Stock on April 18, 2000,
each director of the Corporation and all the directors and officers of the Company as a group, and
sets forth the number of shares of the Company's Common Stock beneficially owned by each such
person and such group and the percentage of the shares of the Company's outstanding Common
Stock owned by each such person and such group. In all cases, the named person has sole voting
power and sole investment power of the securities.
Number of Shares
of Common Stock Percentage of
Name and Address of of the Company Outstanding
Beneficial Owner (1) Beneficially Owned(2) Common Stock Owned
Richard J. Michael(2)(3) 1,153,000 18.8%
James Hightower 950,000 16.1%
602 N.W. Avens Street
Port St. Lucie, FL 34983
Larry E. Graybill(2)(4) 207,750 3.4%
Randall S. Appel(5) 611,700 9.6%
445 Broad Hollow Road
Suite 425
Melville, NY 11747
Philip L. Arvidson(6) 118,000 2.0%
4 Tarrington Cr.
Palm Beach Gardens, FL 33418
Ronald L. McDonald(7) 200,000 3.3%
4302 Middle Lake
Tampa, FL 33624
Gene T. Schmidt(8) 648,167 10.9%
2106 Pacific Avenue
Virginia Beach, VA 23451
Martin A. Palacios(9) 648,166 10.9%
2106 Pacific Avenue
Virginia Beach, VA 23451
18
Number of Shares
of Common Stock Percentage of
Name and Address of of the Company Outstanding
Beneficial Owner (1) Beneficially Owned(2) Common Stock Owned
Colin Wright(10) 62,000 1.0%
1000 Avenue of the Champions
Palm Beach Gardens, FL 33418
Zero's Mr. Submarine, Inc.(11) 1,500,000 25.5%
2106 Pacific Avenue
Virginia Beach, VA 23451
All officers, Directors and nominees 3,537,450 49.7%
for Director as a Group (8 persons)(3)(4)(5)(6)
(7)(8)(9)(10)
_______________________
(1) As used herein, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the
Securities Exchange Act of 1934 as consisting of sole or shared voting power (including the power to vote
or direct the vote) and/or sole or shared investment power (including the power to dispose or direct the
disposition of) with respect to the security through any contract, arrangement, understanding, relationship
or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted,
beneficial ownership consists of sole ownership, voting and investment rights. Does not include the
conversion by Investors of any of the Notes.
(2) The address of these stockholders are 4400 PGA Boulevard, Suite 500, Palm Beach Gardens, FL 33410.
(3) Includes options to purchase 250,000 shares at $.53, all of which are fully vested.
(4) Includes options to purchase 175,000 shares of common stock at $.53 per share, all of which are fully vested.
(5) Includes 111,700 shares of common stock held by Marand Holding, LLC, a company wholly-owned by Mr.
Appel and includes shares issuable upon completion of the Company's current private placement of securities.
Does not include any additional shares of common stock which may be issuable to Mr. Appel as additional
compensation for any Units sold by him in such offering. Also includes options to purchase 500,000 shares
of common stock at prices ranging from $.53 per share to $.66 per share, all of which are fully vested.
(6) Includes an option to purchase 100,000 shares of common stock at $.53 per share, all of which are fully
vested.
(7) Includes 50,000 shares of common stock issued pursuant to Mr. McDonald's employment with the Company
and a 3-year option to purchase 100,000 shares of common stock at $.53 per share and a 3-year option to
purchase 50,000 shares at $.53 per share, all of which are fully vested.
(8) Represents Mr. Schmidt's indirect ownership of Company common stock through his ownership of 1,175,000
shares of Zero's common stock but not including the exercise of any outstanding option to purchase shares
of Zero's common stock held by others. If all Zeros options were exercised, Mr. Schmidt would have an
indirect beneficial interest in 501,000 shares of Company common stock, or 8.5% after the Maximum. Also
19
includes an option to purchase an aggregate of 55,667 shares of common stock at $1.00 per share. Does not
include options to purchase 55,667 shares at $2.00 per share or 55,666 shares at $3.00 per share, which
options have not vested, or the indirect interest of approximately 226,500 shares, or 3.8% after the Maximum
(or 192,000 shares, or 3.2% after the Maximum if all Zeros options were exercised) held by Mr. Schmidt's
brother and which shares Mr. Schmidt has disclaimed all beneficial ownership.
(9) Represents Mr. Palacios' indirect ownership of Company common stock through his ownership of 1,175,000
shares of Zero's common stock but not including the exercise of any outstanding option to purchase shares
of Zero's common stock held by others. If all Zeros options were exercised, Mr. Palacios would have an
indirect beneficial interest in 501,000 shares of Company common stock, or 8.5% after the Maximum. Also
includes an option to purchase an aggregate of 55,666 shares of common stock at $1.00 per share Does not
include options to purchase 55,667 shares at $2.00 per share or 55,667 shares at $3.00 per share, which
options have not vested.
(10) Does not include 2,000 shares held by Mr. Wright's children which Mr. Wright has disclaimed beneficial
ownership of. Includes a 3-year option to purchase 50,000 shares at $.53 per share, all of which are fully
vested.
(11) Eugene T. Schmidt and Martin Palacios, along with Mr. Schmidt's brother, John Schmidt, are the principal
stockholders of Zero's Mr. Submarine, Inc. and the sole directors of the company and, therefore, are in a
position to vote all of the shares of Company common stock held by Zeros.
Other than as set forth above, the Corporation is not aware of any other shareholders who
beneficially own, individually or as a group, 5% or more of the outstanding shares of Common
Stock of the Corporation.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March, 1999, the Company sold a Pizza Place franchise to USA Foods, Inc., a
corporation owned by Michael Morgan and Arthur Scott. At the time of the sale, Michael Morgan
was the Company's Franchise Sales Manager and a Director of the Company. Also, at that time,
Mr. Scott was the Company's Director of Operations. USA Foods began operating the unit in
March, 1999. In November, 1998 USA Foods entered into an Area Representative Agreement
with the Company giving USA Foods exclusive rights to sell franchises in Alabama, Mississippi,
Louisiana, Arkansas, Tennessee, and portions of Florida. The terms of the Area Representative
Agreement required USA Foods to pay $65,000 for the initial franchise unit. The Company loaned
USA Foods the $65,000. On May 3, 1999, the Company acquired the unit from USA Foods for
$18,677 in cash and the assumption of approximately $14,000 of liabilities. In addition, the
Company forgave all other amounts owed by USA Foods for the purchase price of the initial unit,
and cancelled the franchise for that unit. Under the Area Representative Agreement, USA Foods
was to have purchased a second franchise unit. The Company and USA Foods do not intend to
consummate this purchase. The Company has cancelled the Area Representative Agreement.
The Company has an arrangement with a Florida based Pepsi Cola bottler under which the
Pepsi Cola bottler will provide advertising and promotional assistance in return for the Company's
agreement to use Pepsi Cola products in its operating units. This agreement has not been reduced
to writing. Philip Arvidson, an officer and shareholder of the Pepsi Cola bottler is a director of
20
the Company. To date, the Company has received advertising and promotional support from this
organization, but, as the Company has no operating units in that organization's geographic area,
the Company and the Company's franchisees have not provided any revenue to the Pepsi Cola
bottler.
Randall S. Appel, a director of the Company, is also the principal of Strategic Assets Inc.,
a NASD registered broker-dealer, which has been raising funds for the Company since 1998 and
which has raised an aggregate of $3,084,000 in three private placements of securities. Strategic
Assets Inc. has received sales commissions and fees equaling 10% of amount raised in such
offerings, plus investment banking fees equaling $45,000 and an aggregate of 75,000 shares of the
Company's common stock, which has been assigned to Marand Holdings, LLC, a company
controlled by Mr. Appel.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Number Description of Exhibit
2.1 Asset Purchase Agreement, dated December 8, 1999, by and among the Registrant,
Zero's Mr. Submarine, Inc., X.S., Inc., Eugene T. Schmidt, Martin Palacios and
John Schmidt.(1)
3.1 Certificate of Incorporation of the Corporation.(2)
3.2 By-Laws of the Corporation.(2)
4.1 Form of 12% Senior Secured Notes.(2)
4.2 Form of 11% Senior Secured Notes.(2)
4.3 Form of 12.5% Senior Secured Notes.
10.1 License Agreement, dated August 11, 1997 with Toppers Brick Oven Pizza, Inc.(2)
10.2 Amendment to License Agreement with Toppers Brick Oven Pizza, Inc. dated
April 15, 1999.(2)
10.3 Form of Pizza Place Franchise Agreement.(2)
10.4 Employment Agreement between the Company and Richard Michael.(2)
10.5 Employment Agreement between the Company and Larry Graybill.(2)
21
Number Description of Exhibit
10.6 Employment Agreement between the Company and Ronald McDonald.(2)
10.7 Area Representative Agreement with USA Foods, Inc.(2)
10.8 Promissory Notes and Stock Pledge Agreement relating to $50,000 loans from the
Company to Michael Morgan and Arthur Scott.(2)
10.9 Form of Zeros Mr. Submarine Franchise Agreement, with addendum.
10.10 Form of Franchise Offering Circular of Zeros Mr. Submarine, Inc., with Supplement.
10.11 Consulting Agreement between the Company and Eugene T. Schmidt.
10.12 Consulting Agreement between the Company and Martin Palacios
10.13 Consulting Agreement between the Company and John Schmidt.
10.14 Amendment to Consulting Agreement between the Company and Eugene T.
Schmidt.
10.15 Amendment to Consulting Agreement between the Company and Martin Palacios.
10.16 Amendment to Consulting Agreement between the Company and John Schmidt.
21 Subsidiaries of the Company.
27 Financial Data Schedule (included in EDGAR Filing Only).
- ---------------
(1) Incorporated by reference, filed as an exhibit to the Company's Current Report on Form
8-K and filed with the Securities and Exchange Commission on January 31, 2000.
(2) Incorporated by reference, filed as an exhibit to the Company's Registration Statement on
Form 10-SB as filed with the Securities and Exchange Commission on May 14, 1999.
B. Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on January 28, 2000 with respect to the
acquisition of the assets of Zero's Mr. Submarine, Inc. The pro forma financial statements of the
Company will be filed by an amendment to the Form 8-K.
22
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: April 20, 2000 AMERICAN KIOSK CORPORATION
By:S/S RICHARD J. MICHAEL
Richard J. Michael, Chief Executive Officer
In accordance with the Securities Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated
Signatures Title Date
S/S RICHARD J. MICHAEL Chief Executive Officer April 20, 2000
Richard J. Michael and Director
S/S LARRY E. GRAYBILL Chief Financial Officer April 20, 2000
Larry E. Graybill and Director
S/S RANDALL S. APPEL Director April 20, 2000
Randall S. Appel
</TABLE>
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<S><C>
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FORM OF PROMISSORY NOTE
THIS NOTE HAS NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT
BE ASSIGNED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THE
TRANSACTION RELATING THERETO COMPLIES WITH OR IS EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF THE ACT AND SUCH LAWS AND THE
COMPANY IS PROVIDED AN OPINION OF COUNSEL TO THAT EFFECT WHICH IS
SATISFACTORY TO IT.
AMERICAN KIOSK CORPORATION
12.5% Senior Secured Promissory Note
For value received, the undersigned, American Kiosk Corporation ("Borrower" or the
"Company"), promises to pay to the order of ______________ (the "Holder") the principal sum
of ________________ ($_________) DOLLARS, with interest at a rate of 12.5% per annum
(computed on the basis of a 365-day year and 12 equal calendar months). Principal and all
accrued but unpaid interest shall be paid the earlier of (a) upon the completion of an equity or debt
financing the net proceeds of which equals or shall exceed $1,100,000 or (b) twelve (12) months
from the date of issuance. Accrued interest shall be paid monthly in arrears commencing on the
first day of the month following the issuance of this Note. All payments shall be made at the
Holder's address set forth below, or such other place as may be designated in writing by Holder
and in U.S. funds. Any capitalized terms not defined herein shall have the meanings ascribed
them in that certain Loan and Security Agreement, dated as of ___________, ____.
Notwithstanding any provision contained herein to the contrary, the total amount which
may be due and payable pursuant hereto, including late charges, shall not exceed the maximum
amount of such interest permitted by law to be charged, collected or received, and if any payments
include interest in excess of such a maximum amount, the Company shall apply the excess to the
reduction of the unpaid principal amount due pursuant hereto, or if none is due, such excess shall
be refunded by the Holder. The Company may prepay this Note at any time and from time to
time. However, regardless of the date of prepayment, Investors shall receive a minimum of six
(6) month's interest on their investment.
This Note is one of a series of 12.50% Notes issued by the Company to be in the aggregate
principal amount of up to $600,000.
Events of Default; No Waiver; Notice.
a) The following events shall constitute events of default (any of which is referred to
as an "Event of Default") under this Note:
(i) failure to pay the principal amount of the Note or the accrued interest thereon when
due, if such failure is continued for more than 30 days;
(ii) a default in the performance, or a breach of any of the covenants of the Company
contained in this Agreement and continuance of such default or breach for a period
of 30 days after receipt of notice from the Holder as to such breach or after the
Company had or should have had knowledge of such breach;
(iii) a default or event of default which remains uncured following any applicable cure
period shall have occurred with respect to any Senior Debt or Junior Debt.
(iv) any representation, warranty or certification made by the Company pursuant to the
Note or this Agreement shall prove to have been false or misleading as of the date
made or thereafter in any material respect.
(v) the entry of one or more judgments for payments totalling $100,000 which are not
discharged within 60 days;
(vi) the occurrence of any lien, claim, encumbrance or debt in the aggregate exceeding
$1,000,000 which is senior in right of repayment to the Notes, including permitted
Senior Debt (as defined below);
(vii) certain events of bankruptcy, insolvency or reorganization with respect to the
issuer;
(viii) if Richard Michael shall cease serving as an executive officer of the Company;
(ix) if the Company fails to amend its insurance trust in order to include the Lenders
within ninety (90) days from the date hereof, which date may be extended at the
Agent's sole discretion; and
(x) if the Company fails to deliver any of the financial statements provided by the Loan
and Security Agreement to the Placement Agent and the Agent and the continuance
of such default or breach for a period of 15 days after receipt of notice from the
Agent or any Holder as to such breach or after the Company had or should have
had knowledge of such breach.
(b) Upon the occurrence of an Event of Default referred to in Section (a)(i) or (vii), this
Note shall become and be due and payable immediately, without presentation, demand, protest or
other formalities of any kind, all of which are expressly waived by the Company. Upon the
occurrence of an Event of Default other than one referred to in Sections (a)(i), or (vii), the Agent
or the Holders of not less than 50% in principal amount of then outstanding Notes (excluding any
Notes held by or for the account of the Company or any affiliate of the Company) may declare,
by written notice to the Company, all amounts due under the Notes to be due and payable
immediately, and upon such declaration the same shall become due and payable immediately,
without presentation, demand, protest or other formalities of any kind, all of which are expressly
waived by the Company.
2
(c) No failure or delay on the part of the Holder in the exercise of any power or right
in this Note shall operate as a waiver thereof, and no exercise or waiver of any single power or
right, or the partial exercise thereof, shall affect the Holder's rights with respect to any and all
other rights and powers.
(d) The Company shall give prompt written notice to the Agent (as hereinafter defined)
upon the occurrence of any Event of Default and shall provide regular reports to the Agent as to
the timely payment of any amounts due hereunder.
Prohibited Liens.
The Company will not, without the prior written consent of the Placement Agent,
mortgage, pledge, assign, grant a security interest in, cause a lien or encumbrance to attach to any
property owned by it except: (a) the lien and security interest to the Holders; (b) liens in the
ordinary course of business; (c) taxes and assessments not yet delinquent; (d) additional
indebtedness to be raised by the Placement Agent, (e) Senior Debt outstanding on the date hereof
or created hereafter with the express written consent of the Placement Agent, (iv) Capital Lease
Obligations, if any, (v) purchase money Indebtedness, and (vi) Junior Indebtedness. Upon the
failure of the Company to remove any such prohibited lien within thirty (30) days of the
Company's receipt of notice of its existence, all amounts owing hereunder shall, at the Holder's
option, become due and payable.
Miscellaneous.
(a) The Company waives presentation and demand for payment, notice of dishonor,
protest and notice of protest of this Note.
(b) The Company shall furnish to the agent appointed by the Company to act on behalf
of the Holders (the "Agent"), and to any Holder upon request during the continuance of an Event
of Default, a list of the names and addresses of, and principal amount of Notes held by, the
Holders.
(c) The provisions of this Note shall inure to the benefit of and extend to the Holder
or any holder hereof or any assigns of the Holder and be binding upon any successors of the
Company.
(d) Any notice given pursuant to this Note shall be in writing and shall be deemed to
have been given when delivered by hand or deposited for certified mail delivery in the United
States mail with postage prepaid and addressed to the party for whom it is intended at the address
for such party set forth above or at such other address as to which the parties may from time to
time notify each other in like manner.
3
(e) This Note shall be governed by and construed under the laws of the State of
Connecticut, without reference to and regardless of the application of any of its principles of
conflicts of laws.
(f) In the event of default and if this Note is placed in the hands of an attorney for the
collection hereof, the Company agrees to pay all reasonable costs of collection, including
reasonable attorney's fees.
IN WITNESS WHEREOF, the Company has caused this Note to be issued as of
the ____ day of _____________.
AMERICAN KIOSK CORPORATION
By:
Richard J. Michael, President
Attest:
Larry E. Graybill, Secretary
Holder's Name and Address:
4
</TABLE>
<TABLE>
<S><C>
FRANCHISE AGREEMENT
ZERO'S MR. SUBMARINE, INC.
THIS FRANCHISE AGREEMENT is made and entered into this ______ day of
_________________, 19 ____, by and between ZERO'S MR. SUBMARINE, INC., a corporation
formed under the laws of the Commonwealth of Virginia whose principal place of business is 2106
Pacific Avenue, Virginia Beach, VA 23451 (hereinafter referred to as the "Franchisor") and
______________________________________________, a ____________, with a current address of
____________________________________________________________________________________
_____________________________________________(hereinafter referred to as the "Franchisee").
WITNESSETH:
WHEREAS, X.S., INC., an affiliate of the Franchisor, has granted the Franchisor the non-
exclusive rights to a proprietary system which both the Franchisor and X.S., Inc. have developed through
significant expenditures of time, skill, effort and money (hereinafter the "System") relating to the
establishment, development and operation of a Zero's Mr. Submarine restaurant (hereinafter the
"Franchised Business" and signifying both franchised and company-managed outlets) which offers a
menu including a widely diverse selection of high quality subs, pizza, salads, and other products, that
cater to all age and income groups.
WHEREAS, the Franchisor and X.S., Inc. have developed a distinctive exterior and interior
design, decor, color scheme, fixtures and furnishings for the Franchised Business restaurant, and has
developed the uniform standards, specifications, methods, policies and procedures for the restaurant
operations, inventory and management control, training and assistance, and advertising and promotional
programs, all of which may be changed, improved upon, and further developed from time to time;
WHEREAS, the Franchisor and X.S., Inc., through dedicated operations, marketing methods,
and merchandising policies, has developed the reputation, public image and good will of its System and
established a firm foundation for its franchised retail operations consisting of the highest standards of
training, management, supervision, appearance, services and quality of products;
WHEREAS, the System is identified by means of certain trade names, service marks, trade
marks, logos, emblems and indicia of origin, including the mark "Zero's Mr. Submarine, Inc.", d/b/a
"Zero's Subs and logo, and such other trade names, service marks, and trademarks as are now, and may
hereafter be designated for use in connection with the System (the "Proprietary Marks");
WHEREAS, Our affiliate, X.S., Inc. owns the rights to the Proprietary Marks and has granted
the Franchisor the right and license to use and to license others to use the mark "Zero's Mr. Submarine,
Inc.;"
WHEREAS, the Franchisor has the right and license to sub-license and monitor the use of the
System and the Proprietary Marks in the United States;
WHEREAS, the Franchisor continues to develop, expand, use, control and add to the
Proprietary Marks and the System for the benefit of and use by the Franchisor and its franchisees in order
to identify for the public the source of the products and services marketed thereunder and to represent the
System's high standards of quality and service;
WHEREAS, the Franchisee desires to operate a Franchised Business under the System and the
Proprietary Marks and to obtain a license from the Franchisor for that purpose, as well as to receive the
training and other assistance provided by the Franchisor in connection therewith;
WHEREAS, the Franchisee hereby acknowledges that it has read this Agreement and the
Franchisor's Uniform Franchise Offering Circular, and that it has no knowledge of any representations
about the Franchised Business or about the Franchisor or its franchising program or policies made by the
Franchisor or by its officers, directors, shareholders, employees or agents which are contrary to the
statements in the Franchisor's Uniform Franchise Offering Circular or to the terms of this Agreement,
and that it understands and accepts the terms, conditions and covenants contained in this Agreement as
being reasonably necessary to maintain the Franchisor's high standards of quality and service and the
uniformity of those standards at all facilities which operate pursuant to the System and thereby to protect
and preserve the goodwill of the Proprietary Marks; and
WHEREAS, the Franchisee understands and acknowledges the importance of the Franchisor's
uniformly high standards of quality and service and the necessity of operating the Franchised Business
granted hereunder in strict conformity with the Franchisor's quality control standards and specifications.
NOW, THEREFORE, the parties, in consideration of the promises, undertakings and
commitments of each party to the other set forth herein, hereby mutually agree as follows:
I. GRANT OF FRANCHISE
A. Grant. The Franchisor hereby grants to the Franchisee and Franchisee accepts, upon
the terms and conditions herein contained, the non-exclusive and personal license, right and authority to
operate a Franchised Business in strict conformity with the Franchisor's quality control standards and
specifications which are a material part of the System, which may be changed, improved and further
developed from time to time, only at the specific location which will be selected by the Franchisee and
will be more particularly described in the Site Selection Addendum attached hereto as Attachment A.
The Franchisee hereby accepts such license and agrees to perform all of its obligations in connection
therewith as set forth herein.
B. Site Selection Area. Subject to the terms of this Agreement, the Franchisor hereby
grants to the Franchisee the non-exclusive right and license to select a site to operate the Franchised
Business within the jurisdictional boundaries of _______________________________________
____________________________________________________ (hereinafter the "site Selection Area").
C. Exclusive Territory. Provided the Franchisee has fully complied with its obligations
under this Agreement, the Franchisor agrees not to grant or establish another franchise location for a
Zero's Mr. Submarine restaurant within a two (2) mile radius of the location set forth in Attachment
A, unless such location is within the geographic boundaries of an area with a population greater than one
million persons ("Densely Populated Urban Area" or "DPUA") in which case the Franchisor agrees not
to grant another franchise location within a one (1) mile radius (the "Exclusive Territory"). The
Franchisor reserves the right to establish company-owned units, or license other franchisees to establish
Franchised Businesses, at any site the Franchisor deems appropriate outside of the protected territory set
forth above.
D. Relocation. Franchisee may relocate the Franchised Business to a new location in the
same territory upon the following conditions:
1. Franchisee shall not be in default of any provision of this Agreement or the lease
for the former location;
2. Franchisee shall deliver to Franchisor a current financial statement, including a
profit and loss statement for the Franchised Business during the last twelve (12) months of operation at
the former location, and a copy of the lease for the new location;
3. The new restaurant must be constructed, located and equipped in accordance
with Franchisor's then current design and other standards; and
4. Franchisee must be current on all of Franchisee's financial obligations to
Franchisor and its affiliates.
Franchisee must give Franchisor written notice of the proposed relocation ninety (90) days
before the relocation date. In the event that Franchisee fails to timely deliver such notice, this shall be
grounds for default with opportunity to cure as set forth in Section XIII.B herein. Relocation without
notice to the Franchisor shall be grounds for default without opportunity to cure as set forth in Section
XIII.A herein. The restaurant must open for business in the new location within thirty (30) days (which
may be extended for another thirty (30) days for good cause) of the date on which the restaurant in the
old location closed. Franchisee shall also enter into an amendment of this Agreement to conform this
Agreement to Franchisor's then current form of Franchise Agreement, including the then current royalty
rate, except that: (i) the term of such amended Franchise Agreement shall expire on the same day that
this Agreement would have expired; and (ii) there shall be no requirement for a new initial franchise fee.
E. Reservation of Certain Rights. Subject to Section I.C. hereinabove, the Franchisor
reserves the right to establish Franchised Businesses at any site the Franchisor deems appropriate. The
Franchisor also reserves the right to sell related products and services in other channels of distribution.
The Franchisor reserves the right to offer, grant and support franchises in similar and other lines of
business. The Franchisor makes no representation or warranty to the Franchisee that there will be any
right to participate in such franchises.
II. TERM AND RENEWAL
A. Initial Term. Except as otherwise provided herein, the term of this Agreement shall be
for (15) fifteen years commencing on the date of execution of this Agreement; provided, however, that if
the Franchisee leases its business premises and in the event that the lease agreement for the Franchisee's
business premises is terminated prior to the expiration of the term of this Agreement, then the Franchisor
may, at its option, terminate this Agreement.
B. Renewal Term. The Franchisee may, at its option, continue the Franchised Business
for an additional fifteen (15) year term, or such period as remains in the lease (including any renewal
options) underlying the initial term of this Agreement, if such period shall be shorter than fifteen (15)
years, subject to the following conditions which must be met prior to each renewal period, unless and to
the extent expressly waived in writing by the Franchisor:
1. The Franchisee shall give the Franchisor written notice of its election to renew
this Agreement not less than six (6) months prior to the end of the current term of this Agreement;
2. At least six (6) months prior to the expiration of the current term of this
Agreement, the Franchisor shall inspect the Franchised Business and give notice of all required
modifications to the nature and quality of the products and services offered at the Franchised Business,
the Franchisee's advertising, marketing and promotional programs, its financial and inventory control
systems, and the maintenance, refurbishing, equipment upgrade and replacement, renovating and
remodeling necessary to comply with the Franchisor's then current standards and specifications and with
the requirements of the lease for the Franchised Business. If the Franchisee elects to renew this
Agreement, then the Franchisee shall complete, to the Franchisor's satisfaction, all such required
modifications, as well as adopt and implement any new methods, programs, modifications, techniques or
operational systems required by the Franchisor's notice no later than two (2) months prior to expiration
of the current term of this Agreement;
3. The Franchisee shall not be in default of any provision of this Agreement, any
amendment hereof or successor hereto, or any other agreement between the Franchisee and the
Franchisor or its subsidiaries, affiliates and suppliers. The Franchisee shall have substantially complied
with all of the terms and conditions of such agreements during the terms thereof;
4. The Franchisee shall have satisfied all monetary obligations owed by the
Franchisee to the Franchisor and its subsidiaries, affiliates and suppliers and shall have timely met those
obligations throughout the term of this Agreement;
5. The Franchisee must execute upon renewal the Franchisor's then current form of
Franchise Agreement. The new Franchise Agreement shall supersede in all respects this Agreement, and
the terms of which may differ from the terms of this Agreement, including, without limitation, the
requirement of a higher percentage royalty fee and/or advertising contributions. In lieu of the then
current initial franchise fee or its equivalent for such renewal period, however, the Franchisee shall be
required to pay a renewal fee of ten percent (10%) of the then current initial franchise fee;
6. The Franchisee, its approved Franchisee/General Manager, and shift supervisor,
shall attend the Franchisor's then current qualification and training programs at the Franchisee's expense;
7. The Franchisee, its shareholders, directors and officers shall execute a general
release, in a form prescribed by the Franchisor, of any and all claims against the Franchisor and its
subsidiaries and affiliates, and their respective officers, directors, agents and employees. The Franchisee
shall not be required, however, to release the Franchisor for violations of or failure to comply with
federal or state franchise registration and disclosure laws;
8. The Franchisee shall present evidence satisfactory to the Franchisor that it has
the right to remain in possession of the premises where the Franchised Business is located for the
duration of the renewal term;
9. The Franchisee's operation and management of the Franchised Business shall be
in full compliance with the System; and
10. The Franchisee shall maintain and be in good standing with all of its necessary
and applicable licenses and permits.
In the event that any of the foregoing conditions to renewal have not been met at least two
months prior to the expiration of the current term of this Agreement, then the Franchisor shall have no
obligation to renew this Agreement and shall give the Franchisee at least thirty (30) days prior written
notice of its intent not to renew this Agreement, which notice shall set forth the reasons for such refusal
to renew.
III. DUTIES OF FRANCHISOR
A. Pre-Opening Obligations. The duties of the Franchisor prior to the opening of the
Franchised Business are as follows:
1. Grant the right to use the trademark "Zero's Mr. Submarine, Inc.", d/b/a,
Zero's Subs, in connection with Franchised Business and within Franchisee's area of primary trade
responsibility;
2. Designate an exclusive area of primary trade responsibility for the Franchised
Business;
3. Provide such location research and site selection assistance including real estate
and demographic analysis as Franchisor deems advisable, subject to the availability of personnel;
4. Assist in negotiation of the lease or property purchase for the franchise;
5. Loan to Franchisee a single copy of the Franchisor's confidential Manuals which
will include guidelines and specifications for equipment, supplies, inventory, management and operation
of the Franchised Business and which guidelines and specifications must be adopted by Franchisee. The
Manuals are confidential and remains the Franchisor's property. The Franchisor may modify the
Manuals from time to time, but these modifications will not alter the Franchisee's status and rights under
this Agreement.
6. Provide typical floor plans and site build-out specifications for the construction
of the Franchised Business;
7. Provide the Franchisee and a General Manager with a mandatory initial training
program related to the operation of your Franchised Business subject to no additional fees above the
initial franchise fee. However, the Franchisee is responsible for all costs of travel, lodging and meals
while training takes place; and
8. Make available to Franchisee a Supplemental Training Program which provides
on-site assistance both prior to and during the initial two weeks of operation of your Franchised Business
at the location of the Franchised Business for an additional fee of $150/ per day.
B. Post-Opening Obligations. The obligations of the Franchisor following the opening of
the Franchised Business are as follows:
1. Provide such general advisory assistance and field support deemed by Franchisor
to be helpful to Franchisee in the ongoing operation, advertising and promotion of the Franchised
Business.
2. Continue efforts to establish and maintain high standards of quality, cleanliness,
safety, customer satisfaction and service.
3. Provide Franchisee with updates, revisions and amendments to the Manuals.
4. Subject to the availability of Franchisor's staff, provide management consulting
services for special projects or assistance upon a mutually acceptable arrangement pertaining to fees and
expenses.
5. Administer a Regional Advertising Fund if such a fund is established by
Franchisor.
6. Coordinate and conduct periodic training programs for Franchisor's network of
Franchisees as Franchisor deems necessary and in sole discretion of Franchisor.
7. On a periodic basis, conduct, as Franchisor deems advisable, inspections of the
Franchised Business and its operations and evaluate the methods and staff employed by the Franchised
Business.
All of the obligations of the Franchisor hereunder are to the Franchisee, and no other party is
entitled to rely on, enforce or obtain relief for breach of such obligations either directly or by
subrogation.
IV. FEES
A. Payments to Franchisor. In consideration of the right and license to operate the
Franchised Business granted herein, the Franchisee shall pay to the Franchisor the following fees:
1. Initial Franchise Fee. The total initial franchise fee payable to the Franchisor by
the Franchisee is $15,000 which is payable upon execution of the Franchise Agreement. The initial
franchise fee is deemed fully earned upon receipt by the Franchisor, and is non-refundable.
2. Royalty Fees. Franchisee shall pay to Franchisor a continuing non-refundable
weekly royalty fee as described in Section III.B. hereof, of six percent (6%) of Gross Sales as that term is
defined herein. The royalty fee is non-refundable and shall be paid weekly and sent to the Franchisor by
electronic funds transfer due on Tuesday (for the preceding Sunday through Saturday period) or such
other specific day of the week which Franchisor will designate from time to time ("Due Date"). Prior to
the opening of a Franchise, Franchisee shall execute an Authorization Agreement for pre-authorized
payment of Royalty payments by electronic transfer of funds from Franchisee's bank account to
Franchisor's bank account, in the form attached to this Agreement as Attachment E. Franchisee shall
report to Franchisor by telephone, facsimile or e-mail as may be reasonably directed by Franchisor, no
later than 5:00 p.m. Monday (hereinafter referred to as "Reporting Date"), with such information and
pursuant to such standard transmittal procedures regarding Franchisee's Gross Sales and such additional
information as may be requested by Franchisor. Franchisor shall have the right to verify such Royalty
payments from time to time as it deems necessary, in any reasonable manner. In the event Franchisee
fails to have sufficient funds in its account or otherwise fails to pay any Royalties due as of the Due Date,
Franchisee shall owe a $50 penalty, and a late charge equivalent to 2% per month; however, in no event
shall Franchisee be required to pay a late payment at a rate greater than the maximum interest rate
permitted by applicable law.
3. Regional Advertising Fund Contribution. Pursuant to Section X.B. hereof, the
Franchisor reserves the right to establish a Regional Advertising Fund pursuant to which the Franchisee
shall be required to pay to the Franchisor a continuing non-refundable weekly advertising contribution of
up to two percent (2%) of the Franchisee's Gross Sales. The advertising fee is non-refundable and shall
be paid weekly and sent to the Franchisor by electronic funds transfer due on Tuesday (for the preceding
Sunday through Saturday period) or such other specific day of the week which Franchisor will designate
from time to time ("Due Date"). Prior to the opening of a Franchise, Franchisee shall execute an
Authorization Agreement for pre-authorized payment of Advertising payments by electronic transfer of
funds from Franchisee's bank account to Franchisor's bank account, in the form attached to this
Agreement as Attachment E. Franchisee shall report to Franchisor by telephone, facsimile or e-mail, or
as may be reasonably directed by Franchisor no later than 5:00 p.m. on Monday (hereinafter referred to
as "Reporting Date"), with such information and pursuant to such standard transmittal procedures
regarding Franchisee's Gross Sales and such additional information as may be requested by Franchisor.
Franchisor shall have the right to verify such Advertising payments from time to time as it deems
necessary, in any reasonable manner. In the event Franchisee fails to have sufficient funds in its account
or otherwise fails to pay any Advertising Fee due as of the Due Date, Franchisee shall owe, a $50
penalty, and a late charge equivalent to 2% per month; however, in no event shall Franchisee be required
to pay a late payment at a rate greater than the maximum interest rate permitted by applicable law.
If a Regional Advertising Fund is established, the Franchisor shall deposit and disburse the amounts
contributed in accordance with the provisions of Section X hereof and any other guidelines or standards
which the Franchisor may adopt.
At such time when the Regional Advertising Fund may be established, and in the sole discretion of
Franchisor, an advertising council composed of franchisees shall be formed to advise Franchisor of
advertising policies. After the first full year of operation of the Franchised Business, Franchisee's
contributions will be pre-calculated on the basis of the previous year's Gross Sales. Franchisee will be
required to make contributions to the regional Advertising Fund in addition to Franchisee's obligation to
conduct local marketing and promotion as set forth in Section IX.A.4 below.
4. Local Store Marketing Expenditures. Pursuant to Section X hereof and
independent of any Regional Advertising Fund contributions, the Franchisee shall be required to make
annual expenditures of at least two percent (2%) of the Franchisee's Gross Sales on local marketing and
promotion. This local marketing and promotion will be conducted by Franchisee either individually or in
conjunction with other franchisees and must comply with the policies and procedures established by
Franchisor for prior approval of all proposed marketing and promotion campaigns and materials.
Franchisee will be required to submit to Franchisor a report, on a form prescribed by Franchisor, that
demonstrates that Franchisee has fulfilled the minimum requirement for local marketing and promotion.
These local marketing and promotion requirements and fees exist independently of a Regional
Advertising Fund. Therefore, Franchisee is required to make minimum local marketing and promotion
expenditures whether or not a Regional Advertising Fund is established.
5. Late Fee and Interest Charge. If the Franchisee fails to report Royalty Sales by
the Reporting Date then the Franchisee shall be assessed a Late Fee of Seventy-five Dollars ($75) per
week until the sales are reported. If at any time Franchisor debits Franchisee's account for payment of
the Royalty or Advertising Fees and there are non-sufficient funds in Franchisee's account to pay the fee,
the fee will be considered late. Franchisee shall be assessed a penalty of Fifty Dollars ($50) each time a
payment is delinquent. All overdue amounts will bear interest, until paid, at the rate of two percent (2%)
per month on the date payment was due, however, in no event shall Franchisee be required to pay at a
rate greater then permitted by applicable state law. Interest shall be calculated on a daily basis. Late
Fees and Interest Charges are non-refundable.
6. Transfer Fee. A non-refundable transfer fee equal to thirty percent (30%) of the
then current initial franchise fee must be paid to the Franchisor by Franchisee to cover Franchisor's
administrative and other expenses in connection with the transfer of the Franchised Business, unless the
transfer is made by Franchisee to a corporation formed solely for the convenience of ownership. All
transfers must be in accordance with the terms of this Agreement and consistent with the transfer
guidelines provided to Franchisee by Franchisor. This transfer fee shall be fully paid prior to any such
transfer. In addition, at the transferee's expense, the transferee, its Franchisee/General Manager, and
shift supervisor shall complete any training programs then in effect for current Franchisees upon
Franchisor's reasonable terms and conditions. The transfer fee is non-refundable.
7. Training Expenses. Franchisor provides Franchisee with a mandatory initial
training program in restaurant operations and management for up to two (2) persons during a training
period of up to six (6) weeks at Franchisor's training facility and administrative offices in Virginia
Beach, VA. Franchisor requires Franchisee to attend the initial training program prior to the opening of
Franchisee's first Franchised Business and shall provide the initial training program, including
curriculum materials, at no cost to Franchisee. However, Franchisee will be solely responsible for
Franchisee's expenses and those of Franchisee's employees during the training program including the
costs of travel, lodging, meals, and the wages of Franchisee's employees.
8. Supplemental Training Fee. For an additional fee of $150/per day plus meal and
travel expenses the Franchisee may supplement the initial training program by having our field support
training staff provide two (2) weeks of additional training at the Franchisee's location prior to and during
the Grand Opening of the Franchised Business.
9. Public and Private Offering Prospectus Review Fee. For each proposed offering
by the Franchisee, Franchisee must pay to Franchisor a non-refundable document review fee of Two
Thousand Five Hundred Dollars ($2,500) or such greater amount as may be required to reimburse
Franchisor for its reasonable costs and expenses associated with reviewing the proposed offering
materials, including, without limitation, legal and accounting fees.
10. Management Consulting Fee. Franchisee may retain Franchisor to provide
management consulting services for special projects or assistance based upon availability of Franchisor's
personnel at the minimum rate of Two hundred dollars ($200) and a maximum of Four hundred dollars
($400) per person/per day plus reimbursement of all reasonable travel, lodging, meal and other expenses
incurred by Franchisor in connection with the rendering of such services. Franchisor reserves the right to
make reasonable adjustments from time to time to such daily rate at its discretion. These consulting fees
are non-refundable and must be paid to Franchisor in advance.
11. Costs of Major Alterations. Once every five to seven years, Franchisee will be
required to make such major alterations to the restaurant as Franchisor may require at Franchisee's own
expense.
12. Manuals Replacement Fee. In the event that a Manual is lost, stolen or
destroyed, Franchisee will be required to pay Franchisor a non-refundable replacement fee of One
Thousand dollars ($1,000) for each volume of the replacement Manual.
13. Renewal Fee. Franchisee must pay a non-refundable renewal fee upon the
expiration of the initial term or any renewal term of this Agreement in order to renew this Agreement.
The renewal fee is ten percent (10%) of the then current initial franchise fee.
B. Definition of Gross Sales. "Gross Sales" is defined as all sales generated through the
Franchised Business including fees for any and all services you perform, whether for cash or credit
(regardless of collectability), and billings of every kind related to the Franchised Business, including
revenues from the sale of merchandise of proprietary products or clothing, catering, use of jukeboxes,
vending machines, video games, pinball machines or similar arcade-like machines and from video lottery
terminals; provided, however, that "Gross Sales' shall not include any sales tax or other taxes collected
from customers by you for transmittal to the appropriate taxing authority.
V. DUTIES OF FRANCHISEE
A. Compliance with System. The Franchisee understands and acknowledges that
every detail of the appearance and operation of the Franchised Business in compliance with the System is
critical to the Franchisor, the Franchisee and other franchisees in order to:
1. Develop and maintain high and uniform operating standards;
2. Increase the demand for the products and services sold by franchisees;
and;
3. Protect the Proprietary Marks and the System, and the Franchisor's trade
secrets, reputation and goodwill.
B. Site Requirements. The Franchisee will have a period of 180 days after signing this
Agreement to locate a site for the Franchised Business, to obtain Franchisor's approval of the site and to
sign the lease. The Franchisor's approval of the Franchisee's site and the form of lease for such site is
required and Franchisor will approve or disapprove of the proposed site within ten (10) days after receipt
of all materials reasonably requested by the Franchisor. The Franchisor will be available from time to
time, and at its sole discretion, to provide general site selection assistance to the Franchisee. The
Franchisee must commence the operation of the Franchised Business within one hundred and twenty
(120) days after signing the lease for the Franchised Business site.
C. Pre-Opening Requirements. Before commencing any construction or leasehold
improvements of the Franchised Business, the Franchisee, at its expense, shall comply with all of the
following requirements:
1. The Franchisee shall have received the Franchisor's prior written approval of the
site selected by the Franchisee for the operation of the Franchised Business and the lease for such site, in
accordance with the terms of this Agreement. Such approval shall be evidenced by the Franchisor's and
the Franchisee's execution of the Site Selection Addendum, attached hereto as Attachment A;
2. The proposed site must be in compliance with all applicable local and state laws,
regulations and ordinances including all zoning, signage and parking requirements;
3. The Franchisee shall employ a qualified general contractor or such other
qualified person as the Franchisor may approve in its absolute and sole discretion for the purposes of
supervising the construction of the Franchised Business and ensuring the completion of all construction
or leasehold improvements, and the Franchisee shall submit to the Franchisor a statement identifying the
general contractor and describing the general contractor's qualifications and financial responsibility; and
4. The Franchisee shall obtain all business licenses, permits and certifications
required for lawful construction and ongoing operation of the Franchised Business (including, without
limitation, zoning, access, variances, health and safety, sign and fire requirements) and shall certify in
writing to the Franchisor that all such licenses, permits and certifications have been obtained.
D. Construction and Opening Requirements. Franchisee shall completely construct and
equip, at Franchisee's expense, the approved Franchise Location in accordance with Franchisor's
standards and specifications. During the period of construction, Franchisee shall provide to Franchisor
such periodic progress reports as Franchisor may in its discretion require, signed by Franchisee and its
general contractor, warranting that construction is proceeding on schedule and in accordance with the
approved final plans and with all applicable laws, ordinances and regulations. Franchisor and its agents
shall have the right to inspect the construction at all reasonable times. Franchisee shall complete
construction (including all exterior and interior carpentry, electrical, painting, and finishing work, and
installation of all furnishings, fixtures, equipment, and signs) in accordance with the approved final
plans, at Franchisee's expense, within one hundred and twenty (120) days after lease execution by Lessor
and Franchisee, or sooner if required by the lease (exclusive of time lost by reason of strikes, lockouts,
fire, and other casualties and acts of God). Franchisee shall promptly notify Franchisor of the date of
completion of construction and, within ten (10) days thereafter, Franchisor shall conduct a final
inspection of the restaurant and its premises. Franchisee shall not open the Franchised Business without
the express written authorization of Franchisor, and Franchisor's authorization to open may be
conditioned upon Franchisee's strict compliance with all initial inventory, fixtures, furnishings, and
equipment requirements. Franchisee shall open the Franchised Business for operation within ten (10)
days after receipt of Franchisor's written authorization to open, provided that the Franchised Business
has been fully staffed and that all employees have successfully completed training. Franchisor and
Franchisee agree that time is of the essence in the construction and opening of the Franchised Business.
E. Initial Training. In accordance with the terms and conditions set forth in Section III
hereinabove, the Franchisee/General Manager, and Shift Supervisor shall attend and complete, to the
Franchisor's reasonable satisfaction, the Franchisor's mandatory initial training program at least thirty
(30) days prior to the opening of the Franchised Business. Any person employed as Franchisee's General
Manager must attend and complete to the Franchisor's reasonable satisfaction this initial training
program within thirty (30) days of the General Manager's initial employment.
F. Supervision Requirements. For the first year from the date of the opening of the
Franchised Business, the Franchised Business shall at all times be under the direct, on-premises
supervision of the Franchisee, its General Manager or an operating partner ("Operating Partner")
designated by Franchisee and approved by Franchisor, who: (i) has attended and successfully completed
the Franchisor's training program; and (ii) must devote his or her full time and energy during business
hours to the supervision and management of the Franchised Business, unless otherwise exempted by
permission of the Franchisor.
G. Ongoing Training. The Franchisee shall cause its employees (including any person
subsequently acting as the General Manager of the Franchised Business) to attend and complete, to the
Franchisor's reasonable satisfaction, all of Franchisor's training and market development meetings as
may be scheduled by the Franchisor. Attendance by Franchisee or its Operating partner and the General
Manager of the Franchised Business is required. The Franchisor shall only provide and pay for
instruction and training materials in connection with such additional training. The Franchisee and/or its
Operating Partner and its employees shall be responsible for any other expenses incurred in training.
H. Operation of the Franchised Business. The Franchisee shall use the Franchised
Business solely for the operation of the Franchised Business that is licensed hereunder in strict
accordance with the Manuals; shall keep the Franchised Business open and in normal operation for such
minimum hours and days as the Franchisor may from time to time prescribe; and shall refrain at all times
from using or permitting the use of the premises of the Franchised Business for any other purpose or
activity other than as contemplated by this Agreement without first obtaining the written consent of the
Franchisor.
I. Maintenance. The Franchisee shall continuously maintain the Franchised Business in
the highest degree of sanitation, repair and condition as the Franchisor may reasonably require, and in
connection therewith shall make such additions, alterations, repairs and replacements thereto (but not
without the Franchisor's prior written consent) as may be required for that purpose, including without
limitation, such periodic redecorating, replacement of inventory and replacement of obsolete signs,
fixtures or materials as the Franchisor may reasonably direct, or as otherwise required under the lease for
the Franchised Business.
J. Health and Safety Standards. The Franchisee shall meet and maintain the highest
safety standards and ratings applicable to the operation and management of the Franchised Business and
its personnel as the Franchisor may reasonably require.
K. Working Capital. The Franchisee shall meet and maintain sufficient levels of
working capital for use in connection with the management and operation of the Franchised Business as
the Franchisor may reasonably require.
L. Design Modifications. At the Franchisor's request, the Franchisee shall refurbish the
Franchised Business, at its expense, to conform to the then current Franchised Business design and decor,
trade dress, color scheme and presentation of trademarks and service marks consistent with the design
concepts then in effect for new Franchised Businesses licensed to operate under the System and in
accordance with the Manuals, including, without limitation, such structural changes, remodeling,
redecoration and other modifications to existing improvements as deemed necessary by the Franchisor.
However, those modifications expected to cost Twenty-Five Thousand Dollars ($25,000) or more
("Major Design Modifications"), will not be required to be performed more often than once every seven
(7) years, unless required by the lease for the Franchised Business. Those modifications expected to cost
less than Twenty-Five Thousand Dollars ($25,000) (Minor Design Modifications") must be made by the
Franchisee at any time or frequency demanded by the Franchisor.
M. Compliance with Uniform Standards. The Franchisee shall operate the Franchised
Business in conformity with such uniform methods, standards and specifications as the Franchisor may
from time to time prescribe to ensure that the highest degree of product quality and service is uniformly
maintained. The Franchisee shall conduct its business in a manner which reflects favorably at all times
on the System and the Proprietary Marks. The Franchisee shall at no time engage in deceptive,
misleading or unethical practices or conduct any other act which may have a negative impact on the
reputation and goodwill of the Franchisor or any other franchisee operating under the System. Pursuant
to this ongoing responsibility, the Franchisee agrees:
1. To maintain in sufficient supply as the Franchisor may prescribe in the Manuals
or otherwise in writing and use at all times only such products and supplies as conform to the
Franchisor's standards and specifications as contained in the Manuals, and to refrain from deviating
therefrom without the Franchisor's prior written consent;
2. To sell or offer for sale only such products and services as meet the Franchisor's
uniform standards of quality, quantity and which have been expressly approved for sale in writing by the
Franchisor in accordance with the Franchisor's methods and techniques; to sell or offer for sale all
approved items; to refrain from any deviation from the Franchisor's standards and specifications for
serving or selling such products or services; and to discontinue selling and offering for sale any such
products or services as the Franchisor may, in its sole discretion, disapprove in writing at any time;
3. To lease or purchase and install at the Franchisee's expense all fixtures,
furnishings, signs and equipment as the Franchisor may reasonably specify from time to time in the
Manuals or otherwise in writing, and to refrain from installing or permitting to be installed on or about
the Franchised Business without the Franchisor's prior written consent any fixtures, furnishings, signs,
cards, promotional literature, equipment or other items not previously specifically approved as meeting
the Franchisor's standards and conforming to the Franchisor's specifications;
4. To purchase and maintain any and all signs for use at the Franchised Business,
whether for interior or exterior use, in conformity with the Franchisor's quality control standards and
specifications;
5. To employ such minimum number of employees as may be prescribed by the
Franchisor and to comply with all applicable federal, state and local laws, rules and regulations with
respect to such employees;
6. To maintain a competent, conscientious staff; and
7. To maintain all licenses and permits in good standing.
N. Purchase and Lease of Products, Equipment and Supplies. Franchisee shall lease or
purchase all products, initial inventory, equipment, supplies and other materials required for the
operation of the Franchised Business solely from approved suppliers who shall have proved, to the
continuing reasonable satisfaction of the Franchisor, the ability to meet the Franchisor's reasonable
standards and specifications for such products and related items. For certain proprietary products the
sole approved supplier may be the Franchisor. Such approved suppliers must meet all of the Franchisor's
specifications and standards as to content, quality, appearance, warranty, performance and serviceability
and must adequately demonstrate their capacity and facilities to supply the Franchisee's needs for an
effective and efficient operation of the Franchised Business as well as all Franchised Businesses
operating under the Franchisor's System.
O. Inspection of Premises. The Franchisee shall permit the Franchisor or its agents or
representatives to enter upon the premises of the Franchised Business at any reasonable time for
purposes of conducting inspections, taking photographs and interviewing employees and customers. The
Franchisee shall cooperate fully with the Franchisor's agents or representatives in such inspections by
rendering such assistance as they may reasonably request. Upon notice from the Franchisor or its agents
or representatives, and without limiting the Franchisor's other rights under this Agreement, the
Franchisee shall take such steps as may be necessary to immediately and diligently correct any
deficiencies detected during such inspections, including, without limitation, immediately ceasing and
preventing the further use of any products, equipment, inventory, advertising materials, supplies or other
items that do not conform to the Franchisor's then current specifications, standards or requirements. In
the event the Franchisee fails or refuses to correct such deficiencies, the Franchisor shall have the right to
enter upon the premises of the Franchised Business, without being guilty of trespass or any other tort, for
the purpose of making or causing to be made such corrections as may be required, at the sole expense of
the Franchisee, which the Franchisee agrees to pay upon demand.
P. Proprietary Methods. The Franchisee acknowledges and agrees that the Franchisor
has developed certain products, services, operational systems and management techniques and may
continue to develop additional products and proprietary methods and techniques for use in the operation
of the Franchised Business which are all highly confidential and which are trade secrets of the
Franchisor. Because of the importance of quality control, uniformity of product and the significance of
such proprietary products in the System, it is to the mutual benefit of the parties that the Franchisor
closely control the dissemination of this proprietary information. Accordingly, the Franchisee agrees that
in the event such information and techniques become a part of the System, the Franchisee shall comply
and strictly follow these techniques in the operation of its business and shall purchase from the
Franchisor or from an approved source designated by the Franchisor any supplies or materials necessary
to protect and implement such techniques.
Q. Development of the Market. The Franchisee shall at all times use its best efforts to
promote and increase the sales and consumer recognition of the products and services offered at the
Franchised Business pursuant to the System and the Manuals, to effect the widest and best possible
distribution of the Franchisor's products and services from the Franchised Business and to devote its best
efforts in controlling the Franchised Business, its managers, assistants and employees.
R. Display of Proprietary Marks and Logos. The Franchisee shall display the
Franchisor's Proprietary Marks and logos at the Franchised Business, on uniforms and otherwise in the
manner prescribed by the Franchisor. The color, design and location of said displays shall be specified
by the Franchisor and may be changed from time to time in the sole discretion of the Franchisor.
Specifically, the Franchisee shall conspicuously display to customers the sign or notice designated by the
Franchisor which will serve to notify and inform third parties that the Franchisor is engaged in the
business of franchising and which will provide sufficient information to enable third parties to contact
the Franchisor to inquire about prospective franchises. The Franchisee shall not display any signs or
posters at the premises or elsewhere without the prior written consent of the Franchisor.
S. The Franchisor Computerized Point-of-Sale and Information System. The
Franchisee must purchase and maintain the Franchisor's Computerized Point-of-Sale and Information
System or an equivalent subject to Franchisor's prior written approval. The Franchisor reserves the right
to poll (via modem) its franchisees' computer systems in order to compile sales data, consumer trends,
food and labor costs, and other such financial and marketing information as it may deem appropriate.
The Franchisor may distribute this data on a confidential basis to its franchisees.
T. Other Requirements. The Franchisee shall comply with all other requirements set
forth in this Agreement, in the Manuals or as the Franchisor may designate from time to time.
VI. PROPRIETARY MARKS
A. Grant of License. Franchisor's affiliate, X.S., Inc., own the rights to the Franchisor's
System and Proprietary Marks and has granted Franchisor the right and license to use and to license
franchisees to use the mark "Zero's Mr. Submarine, Inc.," a service mark approved for publication on
April 23, 1974 in the Principal Register of the U.S. Patent & Trademark Office. Franchisor's application
serial number is 0982670 for Franchisee's further reference and information.
The Franchisor hereby grants the Franchisee the right and license to use the "Zero's Mr.
Submarine, Inc.," mark and any logo derived therefrom in connection with the operation of its
Franchised Business and the provision of services and products to its customers. The Franchisor
represents with respect to the Proprietary Marks that: (1) the Franchisor has, to the best of the
Franchisor's knowledge, all rights, title and interest in and to the Proprietary Marks; (2) the Franchisor
has taken and continues to take all steps which it deems reasonably necessary to preserve and protect the
ownership and validity of such Proprietary Marks; and (3) the Franchisor will use and license the
Franchisee and other franchisees to use the Proprietary Marks only in accordance with the System and
the operating standards and quality control specifications attendant thereto which underlie the goodwill
associated with and symbolized by the Proprietary Marks.
B. Conditions for Use. With respect to the Franchisee's use of the Proprietary Marks
pursuant to the licensed granted under this Agreement, the Franchisee agrees that:
1. The Franchisee shall use only the Proprietary Marks
designated by the Franchisor and shall use them only in the manner required or
authorized and permitted by the Franchisor.
2. The Franchisee shall use the Proprietary Marks only in connection with the right
and license to operate the Franchised Business granted hereunder.
3. During the term of this Agreement and any renewal hereof, the Franchisee shall
identify itself as a licensee and not the owner of the Proprietary marks and shall make any necessary
filings under state law to reflect such status. To the extent feasible, the Franchisee shall identify itself as
a licensee of the Proprietary Marks on all invoices, order forms, receipts, business stationary and
contracts, as well as at the Franchised Business on a sign provided by the Franchisor that is
conspicuously displayed to customers.
4. The Franchisee's right to use the Proprietary Marks is limited to such uses as are
authorized under this Agreement or in the Manuals, and any unauthorized use thereof shall constitute an
infringement of the Franchisor's rights and grounds for termination of this Agreement.
5. The Franchisee shall not use the Proprietary Marks to incur or secure any
obligation or indebtedness.
6. The Franchisee shall not use the Proprietary Marks as part of its corporate or
other legal name.
7. The Franchisee shall comply with the Franchisor's instructions in filing and
maintaining the requisite trade name or fictitious name registrations, and shall execute any documents
deemed necessary by the Franchisor or its counsel to obtain protection for the Proprietary Marks or to
maintain their continued validity and enforceability.
8. In the event that the Franchisee becomes aware of any infringement of the
Proprietary Marks, or if the Franchisee's use of the Proprietary Marks is challenged by a third party, then
the Franchisee is obligated to immediately notify the Franchisor, and the Franchisor will have sole
discretion to take such action as it deems appropriate. If the Franchisor determines that no action to
protect the Proprietary Marks is necessary, then the Franchisee may take any action it deems necessary to
protect its own interest, at its own expense. If it becomes advisable at any time in the sole discretion of
the Franchisor to modify or discontinue the use of any name or mark and/or use one or more additional or
substitute names or marks, the Franchisee shall modify or discontinue the use of any such name or mark,
and use such additional or substitute name or mark, and shall be responsible for the tangible costs (such
as replacing signs and materials) of complying with this obligation. In the event that litigation alleging
that the Proprietary Marks infringe a third party's rights is instituted or threatened against the Franchisee,
the Franchisee shall promptly notify the Franchisor and shall cooperate fully in defending or settling such
litigation, at the Franchisor's sole legal expense..
C. Acknowledgments. The Franchisee expressly understands and acknowledges that:
1. The Franchisor and its affiliate X.S., Inc., own all rights, title and interest in and
to the Proprietary Marks and the goodwill associated with and symbolized by them;
2. The Proprietary Marks are valid and serve to identify the System and those who
are licensed to operate a Franchised Business in accordance with the System;
3. The Franchisee's use of the Proprietary Marks pursuant to this Agreement does
not give the Franchisee any ownership interest or other interest in, or to the Proprietary Marks, except the
non-exclusive license granted herein;
4. Any and all goodwill arising from the Franchisee's use of the Proprietary Marks
and/or the System will inure solely and exclusively to the Franchisor's benefit, and upon expiration or
termination of this Agreement no monetary amount shall be assigned as attributable to any goodwill
associated with the Franchisee's use of the System or the Proprietary marks;
5. The license and rights to use the Proprietary Marks granted hereunder to the
Franchisee are non-exclusive, and the Franchisor thus may: (a) itself use, and grant franchises and
licenses to others to use the Proprietary Marks and the System; (b) establish, develop and franchise other
systems different from the System licensed to the Franchisee herein without offering or providing the
Franchisee any rights in, to or under such other system; and (c) modify or change, in whole or in part, any
aspect of the Proprietary Marks or the System so long as the Franchisee's rights thereto are in no way
materially harmed thereby;
6. The Franchisor reserves the right to substitute different trade names, trademarks
and service marks for use in identifying the System, the Franchised Business and other Franchised
Businesses operating thereunder, all of which shall become Proprietary Marks;
7. The Franchisor shall have no liability to the Franchisee for any senior users that
may claim rights to the Proprietary Marks; and
8. The Franchisee shall not register or attempt to register the proprietary marks in
the Franchisee's name or that of any other person, firm, entity or corporation.
VII. CONFIDENTIAL MANUALS
A. Compliance. In order to protect the reputation and goodwill of the Franchisor and to
maintain uniform standards of operation in connection with the Proprietary marks, the Franchisee shall
conduct its business in strict compliance with the operational systems, procedures, policies, methods and
requirements prescribed in the Manuals and any supplemental bulletins, notices, revisions, modifications
or amendments thereto, all of which shall be deemed a part thereof. One registered set of the Manuals
shall be provided to the Franchisee on loan from the Franchisor during the training program, and the
Franchisee shall sign a corresponding receipt therefor.
B. Use. The Franchisee agrees to immediately adopt and use the programs, services,
methods, standards, materials, policies and procedures set forth in the Manuals, as they may be modified
by the Franchisor from time to time. The Franchisee acknowledges that the Franchisor is the owner or
licensee of all proprietary rights in, and to the System, and the Manuals, and any changes or supplements
thereto.
C. Confidentiality. The Franchisee shall at all times treat the Manuals, any other manuals
created for or approved for use in the operation of the Franchised Business and all of the information
contained therein as proprietary and confidential, and shall use all reasonable efforts to maintain such
information as confidential. The Manuals must remain on the premises of the Franchised Business at all
times.
D. Trade Secrets. The Franchisee acknowledges, knows and agrees that designated
portions of the Manuals are "trade secrets" owned and treated as such by the Franchisor.
E. Access. The trade secrets must be accorded maximum security consistent with the
Franchisee's need to make frequent reference thereto. The Franchisee shall strictly limit access to the
Manuals to employees who have a demonstrable and valid need to know the information contained
therein in order to perform their duties. The Franchisee shall strictly follow any provisions in the
Manuals regarding the care, storage and use of the Manuals and all related proprietary information.
F. Duplication. The Franchisee shall not at any time, without the Franchisor's prior
written consent, copy, duplicate, record or otherwise reproduce in any manner any part of the Manuals,
updates, supplements or related materials, in whole or in part, or otherwise make the same available to
any unauthorized person.
G. Franchisor's Property. The Manuals shall at all times remain the sole property of the
Franchisor. Upon the expiration or termination of this Agreement for any reason, the Franchisee shall
return to the Franchisor the Manuals and all supplements thereto.
H. Updates or Revisions. The Franchisor retains the right to prescribe additions to,
deletions from or revisions to the Manuals, which shall become binding upon the Franchisee upon being
mailed or otherwise delivered to the Franchisee, as if originally set forth therein. The Manuals, and any
such additions, deletions or revisions thereto, shall not alter the Franchisee's rights and obligations
hereunder.
I. Master Set. The Franchisee shall at all times insure that its set of the Manuals is kept
current and up-to-date, and in the event of any dispute as to the contents of the Manuals, the terms
contained in the master set (#0001) of the Manuals maintained by the Franchisor at the Franchisor's
headquarters shall be controlling.
J. Replacement Fee. If the Manuals are lost, stolen or destroyed, the Franchisee shall pay
the Franchisor a non-refundable replacement fee of One Thousand Dollars ($1,000) for each volume of
the replacement Manual.
VIII. CONFIDENTIAL INFORMATION
A. Confidential Relationship. The parties expressly understand and agree that the
relationship established between the Franchisor and the Franchisee by this Agreement is one of
confidence and trust, and that as a result, the Franchisor will be disclosing and transmitting to the
Franchisee certain trade secrets and other confidential and proprietary information concerning various
aspects of the Franchisee's operation of the Franchised Business, its methods of operation, techniques
and all proprietary systems, procedures and materials relevant thereto pursuant to the System and this
Agreement.
B. Obligations of Franchisee. In order to preserve and protect the trade secrets and the
confidential and proprietary information (the "Confidential Information") which are disclosed to the
Franchisee during the term of this Agreement, the Franchisee agrees that:
1. The Franchise shall treat and maintain the Confidential Information as
confidential both during the term of this Agreement and thereafter;
2. The Franchisee shall use the Confidential Information only for its operation of
the Franchised Business under this Agreement;
3. The Franchisee shall disclose the Confidential Information only as necessary to
its employees or agents who have a demonstrable and valid need to know the Confidential Information
and not to anyone else;
4. The Franchisee shall restrict disclosure of the Confidential Information to only
those of its employees or agents who are directly connected with the performance of work requiring
knowledge thereof and shall disclose only so much of the Confidential Information as is required to
enable those employees or agents to carry out their assigned duties;
5. The Franchisee shall advise its employees or agents of the confidential nature of
such information and the requirements of nondisclosure thereof; and
6. The Franchisor and the Franchisee shall conduct a review to determine which
employees will have access to the Confidential Information and to the Manuals. The Franchisee shall not
disclose any Confidential Information or provide access to the Manuals to such employee or agent until
that person executes a nondisclosure agreement in a form prescribed by the Franchisor, acknowledging
the confidential and proprietary nature of the Confidential Information and agreeing not to disclose such
information during the course of employment or thereafter. The Franchisor shall be designated a third-
party beneficiary of such nondisclosure agreements with the right to enforce its provisions independently
of the Franchisee.
C. Confidential Information Defined. Any and all information, knowledge, know-how,
systems, programs and other methods and techniques which the Franchisor designates as confidential
shall be deemed Confidential Information for purposes of this Agreement, except information which the
Franchisee can demonstrate came to its attention prior to its disclosure by the Franchisor or which, at the
time of its disclosure by the Franchisor to the Franchisee, had become a part of the public domain
through publication or communication by others or which, after disclosure to the Franchisee by the
Franchisor, becomes a part of the public domain through publication or communication by others. It is
understood and agreed that information, improvements to the System or techniques prepared, compiled or
developed by the Franchisee, its employees or agents during the term of this Agreement and relating to
the Franchise Business, whether developed separately or in conjunction with the Franchisor, shall be
considered as part of the Confidential Information. The Franchisee hereby grants to the Franchisor an
irrevocable, worldwide, exclusive, royalty-free license, with the right to sub-license such information,
improvement or technique.
D. Protection of Information. The Franchisee acknowledges that it has knowledge of
confidential matters, trade secrets, management and training techniques, operational, accounting, quality
control procedures, programs and other methods developed by the Franchisor through and in its System
which, for purposes of this Agreement, are owned by the Franchisor and which are necessary and
essential to the operation of the Franchised Business, without which information the Franchisee could not
efficiently, effectively and profitably operate the same. The Franchisee further acknowledges that such
Confidential Information was unknown to it prior to negotiation for, and execution of this Agreement and
that the unique and novel combination of "know how" and methods developed by the Franchisor and
licensed to the Franchisee by the Franchisor for the operation of the Franchised Business are peculiar to
the Franchisor. The Franchisee shall take all steps necessary, at its own expense, to protect the
Confidential Information and shall not divulge the same either during or upon the termination of this
Agreement without the prior written consent of the Franchisor.
E. Remedies. The Franchisee acknowledges that in addition to any remedies available
to the Franchisor under Section XIII hereunder, the Franchisor may attempt to obtain a temporary
restraining order and/or an injunction against violation of the requirements of this Section VIII.
F. Communication with Customers. In order to maintain the high standards of quality
control throughout the System, the Franchisor reserves the right to use test customers from time to time,
without prior notification to the Franchisee, in order to determine whether the Franchised Business is
maintaining high standards of quality, integrity, safety, appearance and customer service.
IX. ACCOUNTING, INSPECTIONS AND RECORDS
A. Maintenance of Books and Records. The Franchisee shall maintain during the term of
this Agreement and shall preserve for not less than five (5) years from the date of preparation full,
complete and accurate books, records and accounts in accordance with the System and in the form and
manner prescribed by the Franchisor in the Manuals or otherwise in writing from time to time.
B. Weekly Royalty Reports. A Weekly Royalty Report ("WRR") shall be made to
Franchisor. Each WRR shall cover a period from the proceeding Sunday through Saturday of the
preceding week. Such reports on the reported sales must be telephoned, facsimile or e-mailed on or
before 5:00 p.m. on the Monday (hereinafter referred to as "Reporting Date") following the end of the
reporting period. The WRR shall report the Gross Sales to Franchisor Corporate office and other such
information from which the royalty fee and advertising contributions are calculated for the preceding
week. Each WRR will be in the form and format prescribed by Franchisor, setting further certain
information as requested by Franchisor. All such WRRs received by Franchisor will be treated as
confidential information, and will not be made available to any third party without consent of the
Franchisor and the Franchisee. In the event Franchisor fails to receive a WRR on or before the Reporting
Date, following the end of the weekly reporting period, Franchisor shall assess and collect from the
Franchisee a late payment fee of Seventy Five Dollars ($75) each time. If Franchisee fails to report
Gross Sales by the Reporting Date, Franchisor shall draft Franchisee's account the minimum of Five
Hundred Dollars ($500) per week for Royalties and One Hundred Dollars ($100) for Advertising Fees;
greater if Franchisor reasonably estimates that the franchise location is generating higher Gross Sales.
C. Financial and Related Reporting. During the term of this Agreement, the Franchisee
shall, at the Franchisee's expense, submit to the Franchisor a quarterly balance sheet and monthly profit
and loss statement, which may be unaudited, for the Franchised Business in the form prescribed by the
Franchisor. The report shall include, but not be limited to, a statement of the sources of all income. The
report shall be due within fifteen (15) days of the end of each month of each year for which the
Franchised Business is open for business to the general public pursuant to the terms of this Agreement.
The Franchisee shall also submit, at the Franchisee's expense, an annual financial statement which shall
include an income statement and balance sheet prepared in accordance with generally accepted
accounting principles and copies of federal and state tax returns for the Franchisee within ninety (90)
days of the completion of the fiscal year of the Franchise.
D. Other Submissions. The Franchisee shall also submit to the Franchisor, for review and
auditing, such other forms and other reports, including annual accounting of local advertising
expenditures and any and all other information and data as the Franchisor may reasonably designate, in
the form and at the times and places reasonably required by the Franchisor, upon request and as specified
from time to time in the Manuals or otherwise in writing, at any time during the term of this Agreement.
E. Inspection. The Franchisor or its designated agents shall have the right at all
reasonable times to examine and copy, at its expense, the books, records, receipts and tax returns of the
Franchisee. The Franchisor shall also have the right, at any time, to have an independent audit made of
the books of the Franchisee. If an inspection should reveal that any payments to the Franchisor have
been understated in any report to the Franchisor, then the Franchisee shall immediately pay to the
Franchisor, upon demand, the amount understated plus interest calculated at the Default Rate on a daily
basis. If any inspection discloses an understatement in any report of two percent (2%) or more, the
Franchisee shall, in addition to the payment of interest thereon, reimburse the Franchisor for any and all
costs and expenses connected with the inspection (including, without limitation, reasonable accountants'
and attorneys' fees). The foregoing remedies shall be in addition to any other remedies available to the
Franchisor.
X. ADVERTISING
Recognizing the value of advertising, and the importance of the standardization of advertising
programs to the furtherance and protection of the Proprietary Marks, goodwill and public image of the
System, the parties agree as follows:
A. Submission and Approval of Promotional and Marketing Materials. All
promotional and marketing materials to be used by the Franchisee in any medium shall be presented in a
dignified manner and shall conform to such standards and requirements as the Franchisor may specify
from time to time in the Manuals or otherwise. The Franchisee shall submit to the Franchisor for its prior
written approval, samples of all promotional and marketing materials in whatever form that the
Franchisee desires to use at least ten (10) days before their insertion. The Franchisor shall have seventy-
two (72) hours from the time of receipt of such materials to approve, disapprove, or revise such materials.
The Franchisee shall comply with all revisions to said promotional and marketing materials which the
Franchisor may require prior to approving said promotional and marketing materials. The Franchisee
shall not use any advertising or promotional plans or materials which have not been approved in writing
by the Franchisor, and the Franchisee shall cease to use any plans or materials promptly upon notice by
the Franchisor. Failure by the Franchisee to obtain the prior written approval of the Franchisor for all
proposed advertising shall be deemed a default of this Agreement in accordance with Section XIII.B
hereof.
B. The Regional Advertising Fund Contribution. The Franchisor reserves the right to
establish and maintain a Regional Advertising Fund (the "Fund"). If such a Fund is established, the
Franchisee will pay to Franchisor a continuing, non-refundable, weekly contribution of up to two percent
(2%) of the Franchisee's Gross Sales for the preceding week for advertising, marketing and promotional
programs. Franchisor has established a direct debit program. The advertising sums paid by the Franchisee
shall be maintained in an account separate from any other monies of the Franchisor. Upon request by the
Franchisee, the Franchisor shall annually account for advertising funds expended, including a reasonable
allocation for the Franchisor's overhead expenses incurred in connection with administration and
management. It is understood and agreed that the Franchisor and Franchisee shall allocate advertising
funds as they deem appropriate. The allocation of the advertising fees will be applied to the DMA for a
territory where the Franchisee is located. Production cost may or may not be allocated to this fund by the
Ad Council.
C. The Local Store Marketing Expenditures. Independent of any Regional Advertising
Fund contributions, the Franchisee shall be required to make annual expenditures of at least two percent
(2%) of the Franchisee's Gross Sales on local marketing and promotion. This local marketing and
promotion will be conducted by Franchisee either individually or in conjunction with other franchisees
and must comply with the policies and procedures established by Franchisor for prior approval of all
proposed marketing and promotion campaigns and materials. Franchisee will be required to submit to
Franchisor a report, on a form prescribed by Franchisor, that demonstrates that Franchisee has fulfilled
the minimum requirement for local marketing and promotion. These local marketing and promotion
requirements and fees exist independently of a Regional Advertising Fund. Therefore, Franchisee is
required to make minimum local marketing and promotion expenditures whether or not a Regional
Advertising Fund is established.
XI. INSURANCE
A. Procurement. The Franchisee shall procure, prior to the commencement of any
operations under this Agreement, and thereafter maintain in full force and effect during the term of this
Agreement, at the Franchisee's expenses, an insurance policy or policies protecting the Franchisee and
the Franchisor, and their officers, directors, partners and employees, against any loss, liability, personal
injury, death, property damage or expense whatsoever from fire, lightning, theft, vandalism, malicious
mischief and the perils included in the extended coverage endorsement, arising or occurring upon or in
connection with the Franchised Business or the construction of or leasehold improvements to the
Franchised Business, or by reason of the operation or occupancy of the Franchised Business, as well as
such other insurance applicable to such other special risks, if any, as the Franchisor may reasonably
require for its own and the Franchisee's protection. The Franchisee shall be obligated to procure such
insurance and to submit Certificates of Insurance to the Franchisor thirty (30) days prior to the opening to
the public of the Franchised Business.
B. Minimum Coverage. Such policy or policies shall be written by an insurance company
satisfactory to the Franchisor in accordance with the standards and specifications set forth in the manuals
or otherwise in writing, and shall include, at a minimum (except as additional coverage and higher policy
limits may reasonably be specified from time to time by the Franchisor in the Manuals or otherwise in
writing) the following:
1. Comprehensive general liability insurance, including contractual liability, broad
form property damage, personal injury, advertising injury, product liability, completed operations and
independent contractors coverage, and fire damage coverage in the amount of One Million Dollars
($1,000,000), or such higher amount as required by the least, combined single limit, and naming the
Franchisor as an additional insured in each such policy or policies;
2. Worker's compensation and employer's liability insurance as well as such other
insurance as may be required by statute or rule of the state in which the Franchised Business is located
and operated;
3. Fire, vandalism and extended coverage insurance with primary and excess limits
of not less than the full replacement value of the Franchised Business and its furniture, fixtures and
equipment; and
4. Business interruption insurance in amounts equal to at least the average monthly
royalties, Advertising Fund Contributions and Local Store Marketing deposits payable to the Franchisor,
but in no event less than One Hundred Thousand Dollars ($100,000) annual coverage.
C. Construction Coverage. In connection with any construction, leasehold improvements,
renovation, refurbishment or remodeling of the premises of the Franchised Business, the Franchisee shall
cause the general contractor to maintain with a reputable insurer comprehensive general liability
insurance (with comprehensive automobile liability coverage for both owned and non-owned vehicles,
builder's risk, product liability and independent contractors coverage) in at least the amount of One
Million Dollars ($1,000,000) with the Franchisor named as an additional insured, and worker's
compensation and employer's liability insurance as required by state law. A copy of the Certificate of
Insurance for worker's compensation coverage shall be provided to the Franchisor.
D. Certificates. At least thirty (30) days prior to the grand opening of the Franchised
Business and on each policy renewal date thereafter, the Franchisee shall submit to the Franchisor a
Certificate of Insurance evidencing the required coverage. The evidence of insurance shall include a
statement by the insurer that the policy will not be canceled or materially altered without at least thirty
(30) days prior written notice to the Franchisor.
E. Independence of Coverage Requirements. The Franchisee's obligation to obtain and
maintain the foregoing policy or policies in the amounts specified shall not be limited in any way by
reason of any insurance which may be maintained by the Franchisor, and the Franchisee's performance
of that obligation shall not relieve it of liability under the indemnity provision set forth in Section XVIII
of this Agreement.
F. Failure to Procure. Should the Franchisee for any reason fail to procure or maintain
the insurance required by this Agreement, as revised from time to time for all franchisees by the Manuals
or otherwise in writing, the Franchisor shall have the right and authority (without, however, any
obligation) to immediately procure such insurance and to charge the same to the Franchisee, which
charges, together with a reasonable fee for the Franchisor's expenses in so acting, including all attorneys'
fees, shall be payable by the Franchisee immediately upon notice.
G. Third Parties. The Franchisee shall ensure that all third parties with which the
Franchisee conducts business, are properly insured.
XII. TRANSFER OF INTEREST
A. Transfer by Franchisor. The Franchisor shall have the right to assign this Agreement,
and all of its rights and privileges hereunder, to any person, firm, corporation or other entity provided
that, with respect to any assignment resulting in the subsequent performance by the assignee of the
functions of the Franchisor: (i) the assignee shall, at the time of such assignment, be capable of
performing the obligations of the Franchisor hereunder, and (ii) the assignee shall expressly assume and
agree to perform such obligations.
Specifically, and without limitation to the foregoing, the Franchisee expressly affirms and agrees
that the Franchisor may sell its assets, its rights to the Proprietary Marks and the System outright to a
third party; may go public; may engage in a private placement of some or all of it securities; may merge,
acquire other corporations, or be acquired by another corporation; may undertake a refinancing,
recapitalization, leveraged buy-out or other economic or financial restructuring.
Nothing contained in this Agreement shall require the Franchisor to remain in the restaurant
services business or to offer the same products and services, whether or not bearing the Franchisor's
Proprietary Marks, in the event that the Franchisor exercises its rights hereunder to assign its rights in
this Agreement.
B. Transfer by Franchisee.
1. Neither the Franchisee, any immediate or remote successor to any part of the
Franchisee's interest in the Franchised Business, any individual, partnership, corporation or other legal
entity which directly or indirectly controls the Franchisee, if the Franchisee is a corporation, nor any
general partner or any limited partner (including any corporation which controls, directly or indirectly,
any general or limited partner) if the Franchisee is a partnership, shall sell, assign, transfer, convey, give
away, pledge, mortgage or otherwise encumber any direct or indirect interest in the Franchisee or in the
Franchised Business without the prior written consent of the Franchisor; provided, however, that the
Franchisor's prior written consent shall not be required for a transfer of less than a five percent (5%)
interest in a publicly-held corporation or for transfer to a wholly-owned corporation of the Franchisee
formed expressly for that purpose. For such purposes, and under this Agreement in general, a publicly
held corporation is a "Reporting Company" as that term is defined by the Securities Exchange Act of
1934. The Franchisee must notify the Franchisor in writing at least sixty (60) days prior to the date of
the intended assignment. Any purported assignment or transfer, by operation of law or otherwise, not
having the written consent of the Franchisor shall be null and void and shall constitute a material breach
of this Agreement, for which the Franchisor may then terminate without opportunity to cure pursuant to
Section XIII.A. of this Agreement.
2. The Franchisor shall not unreasonably withhold its consent to a transfer of any
interest in the Franchisee or in this Agreement. If, however, a transfer, alone or together with other
previous, simultaneous or proposed transfers, would have the effect of transferring a controlling interest
in the Franchised Business, the Franchisor may, in its sole discretion, require any or all of the following
as conditions of its approval:
a. All of the Franchisee's accrued monetary obligations and all other
outstanding obligations to the Franchisor, its subsidiaries, affiliates and suppliers shall be up to date,
fully paid and satisfied;
b. The Franchisee shall not be in default of any provision of this
Agreement, any amendment hereof or successor hereto, any other franchise agreement or other
agreement between the Franchisee and the Franchisor, or its subsidiaries, affiliates or suppliers;
c. The Franchisee and each of its partners, shareholders, officers and
directors shall have executed a general release under seal, in a form satisfactory to the Franchisor, of any
and all claims against the Franchisor and its officers, directors, shareholders and employees in their
corporate and individual capacities, including, without limitation, claims arising under federal, state and
local laws, rules and ordinances; provided, however, that the Franchisee shall not be required to release
the Franchisor for violations of federal and state franchise registration and disclosure laws;
d. The transferee shall demonstrate to the Franchisor's satisfaction that the
transferee meets the Franchisor's educational, managerial and business standards; possesses a good moral
character, business reputation and credit rating; has the aptitude and ability to operate the Franchised
Business (as may be evidenced by prior related experience, Franchisor's testing criteria or otherwise);
has at least the same managerial and financial criteria required of new franchisees; and shall have
sufficient equity capital to operate the Franchised Business;
e. The transferee shall enter into a written assignment, under seal and in a
form satisfactory to the Franchisor, assuming and agreeing to discharge all of the Franchisee's
obligations under this Agreement. If the transferee is not an individual, then the shareholders, partners or
other owners of the transferee shall jointly and severally guarantee the obligations of the Franchisee
under this Agreement in writing in a form satisfactory to he Franchisor;
f. At the Franchisor's option, the transferee shall execute (and/or, upon
Franchisor's request, shall cause all interested parties to execute) for a term ending on the expiration date
of this Agreement and with such renewal term as may be provided by this Agreement, the standard form
of Franchise Agreement then being offered to new franchisees and such other ancillary agreements as the
Franchisor may require for the Franchised Business, which agreements shall supersede this Agreement in
all respects and the terms of which agreements may differ from the terms of this Agreement, including,
without limitation, a higher percentage royalty fee and advertising contributions and the implementation
of other fees;
g. The transferee shall upgrade, at the transferee's expense, the Franchised
Business to conform to the then current specifications then being used in new Franchised Businesses, and
shall complete the upgrading and other requirements within the time specified by the Franchisor;
h. The Franchisee shall remain liable for all direct and indirect obligations
to the Franchisor in connection with the Franchised Business prior to the effective date of the transfer,
shall continue to remain responsible for its obligations of nondisclosure, noncompetition and
indemnification as provided elsewhere in this Agreement and shall execute any and all instruments
reasonably requested by the Franchisor to further evidence such liability;
i. At the transferee's expense, the transferee and its Franchisee/General
Manager, and Shift Supervisor shall complete any training programs then in effect for current franchisees
upon such terms and conditions as the Franchisor may reasonably require unless such managers and
employees have been trained previously by the Franchisor;
j. The transferee shall have signed an Acknowledgment of Receipt of all
required legal documents, such as the Franchise Offering Circular and the then current Franchise
Agreement and ancillary agreements;
k. The transferor shall pay to the Franchisor a transfer fee equal to thirty
percent (30%) of the then current initial franchise fee to cover the Franchisor's administrative expenses
in connection with the proposed transfer; and
l. The transferor must provide the Franchisor with a copy of the
agreements of purchase and sale between the transferor and the transferee. The terms and price of the
proposed transaction between the transferor and a transferee shall be fair and reasonable in the sole
discretion and based upon the good faith judgment of the Franchisor. NOTE: THIS RIGHT OF
APPROVAL SHALL NOT CREATE ANY SPECIAL LIABILITY OR DUTY ON THE PART OF
THE FRANCHISOR TO THE PROPOSED TRANSFEREE.
3. The Franchisee shall grant no security interest in the Franchised Business or in
any of its assets unless the secured party agrees that in the event of any default by the Franchisee under
any documents related to the security interest, the Franchisor shall have the right and option to be
substituted as obligor to the secured party and to cure any default of the Franchisee. Notwithstanding the
foregoing, the Franchisor shall not be construed as a guarantor or surety for the Franchisee.
4. The Franchisee acknowledges and agrees that each of the foregoing conditions
of transfer which must be met by the Franchisee and the transferee are necessary and reasonable to assure
such transferee's full performance of the obligations hereunder.
C. Additional Requirements - Corporate Franchisees. The following requirements
shall apply to the Franchisee if the Franchisee is a corporation, in addition to those requirements set forth
elsewhere in this Agreement, the Manuals or otherwise:
1. The Franchisee shall be a newly organized corporation and its Articles of
Incorporation shall at all times provide that its activities are confined exclusively to operating the
Franchised Business or other approved businesses by the Franchisor.
2. The Articles of Incorporation, Bylaws and other governing documents, and any
amendments thereto, including the resolutions of the Board of Directors authorizing entry into this
Agreement, shall be promptly furnished to the Franchisor.
3. Each stock certificate of the Corporation issued to shareholders in the Franchised
Business shall have conspicuously endorsed upon its face a statement in a form satisfactory to the
Franchisor, such as:
"THE TRANSFER, PLEDGE OR ALIENATION OF THIS STOCK IS
SUBJECT TO THE TERMS AND RESTRICTIONS CONTAINED WITHIN
THE FRANCHISE AGREEMENT BETWEEN ZERO'S, MR. SUBMARINE,
INC. AND _______________________________________
____________________________________________________________."
4. The Franchisee shall maintain a current list of all owners of record and all
beneficial owners of any class of voting stock of the Franchisee and shall furnish the list to the
Franchisor upon request together with the addresses and phone numbers of each shareholder.
5. All shareholders of the Franchise shall jointly and severally guarantee the
Franchisee's performance hereunder and shall bind themselves to the terms of this Agreement; provided,
however, that the requirements of this Section XII.C.5. shall not apply to a publicly-held corporation.
D. Offerings by Franchisee. Securities or partnership interests in the Franchisee may be
offered to the public, by private offering or otherwise, but only with the prior written consent of the
Franchisor, whether or not the Franchisor's consent is required under Section XII.B. hereof, which
consent shall not be unreasonably withheld. All materials required for such offering by federal or state
law as well as any materials to be used in any exempt offering shall be submitted to the Franchisor for
review at least sixty (60) days prior to such documents being filed with any government agency or
distributed to investors. No offering by the Franchisee shall imply (by use of the Proprietary Marks or
otherwise) that the Franchisor is participating in an underwriting, issuance or offering of the Franchisee's
securities, and the Franchisor's review of any offering shall be limited solely to the subject of the
relationship between the Franchisee and the Franchisor. The Franchisee and any other participants in the
offering must fully indemnify the Franchisor in connection with the offering pursuant to an indemnity
agreement in form and substance satisfactory to the Franchisor and its counsel. For each proposed
offering, the Franchisee shall pay to the Franchisor a non-refundable fee of Two Thousand Five Hundred
Dollars ($2,500) or such greater amount as is necessary to reimburse the Franchisor for its reasonable
costs and expenses associated with reviewing the proposed offering, including, without limitation, legal
and accounting fees.
E. Franchisor's Right of First Refusal.
1. Any party who holds an interest (as reasonably determined by the Franchisor and
not including the Franchisor's System, Proprietary Marks or other property of the Franchisor) in the
Franchisee or in the Franchised Business and who desires to accept any bona fide offer from a third party
to purchase his interest shall notify the Franchisor in writing of each such offer and, except as otherwise
provided herein, the Franchisor shall have the right and option, exercisable within thirty (30) days after
receipt of such written notification, to send written notice to the seller that the Franchisor intends to
purchase the seller's interest on the same terms and conditions offered by the third party. Any material
change in the terms of any offer prior to closing shall constitute a new offer subject to the same right of
first refusal by the Franchisor as in the case of an initial offer. In the event that the Franchisor elects to
purchase the seller's interest, closing on such purchase must occur by the later of (i) the closing date
specified in the third party offer; or (ii) within sixty (60) days from the date of notice to the seller of the
Franchisor's election to purchase. Failure of the Franchisor to exercise the option afforded by this
Section XII.E. shall not constitute a waiver of any other provision of this Agreement, including all of the
requirements of this Section XII, with respect to a proposed transfer.
2. In the event the consideration, terms and/or conditions offered by a third party
are such that the Franchisor may not reasonably be required to furnish the same consideration, terms
and/or conditions, then the Franchisor may purchase the Franchised Business proposed to be sold for the
reasonable equivalent in cash. If the parties cannot agree, within a reasonable time, on the reasonable
equivalent in cash of the consideration, terms and/or conditions offered by a third party, an independent
appraiser shall be designated, and his determination shall be final and binding.
F. Transfer Upon Death or Mental Incapacity. Upon the death, mental incapacity or
disability of the Franchisee or a shareholder of a corporation or a general partner of a partnership which
has been formed to own and operate the Franchised Business pursuant to the System, the Franchisor shall
consent to the transfer of said interest in the Franchisee, the Franchised Business and this Agreement to
the spouse, heirs or relative by blood or by marriage, of said Franchisee, shareholder or partner, whether
such transfer is made by will or by operation of law, if, in the Franchisor's sole discretion and judgment,
such person or persons meet the Franchisor's educational, managerial and business standards; possess a
good moral character, business reputation and credit rating; have the aptitude and ability to conduct the
Franchised Business herein; have at least the same managerial and financial criteria required by new
franchisees and shall have sufficient equity capital to operate the Franchised Business. If said transfer is
not approved by the Franchisor, the executor, administrator or personal representative of such person
shall transfer his interest to a third party approved by the Franchisor within six (6) months after such
death, mental incapacity or disability. Such transfer shall be subject to the Franchisor's right of first
refusal and to the same conditions as any inter vivos transfer.
G. Non-Waiver of Claims. The Franchisor's consent to a transfer of any interest in the
Franchised Business shall not constitute a waiver of any claims it may have against the transferring party,
and it will not be deemed a waiver of the Franchisor's right to demand exact compliance with any of the
terms of this Agreement, or any other agreement to which the Franchisor and the transferee are parties,
by the transferee.
H. Operation of the Franchised Business by Franchisor. In order to prevent any
interruption of the business of the Franchised Business and any injury to the goodwill and reputation
thereof which would cause harm to the Franchised Business and thereby depreciate the value thereof, the
Franchisee hereby authorizes the Franchisor, and the Franchisor shall have the right, but not the
obligation, to operate said Franchised Business for so long as the Franchisor deems necessary and
practical, and without waiver of any other rights or remedies the Franchisor may have under this
Agreement, in the event: (i) any of the Franchisee's principals, shareholders or partners is absent or
incapacitated by reason of illness or death and the Franchisee is not, therefore, in the sole judgment of
the Franchisor, able to manage the business licensed hereunder, or (ii) any allegation or claim is made
against the Franchised Business, the Franchisee or any principals, directors, shareholders, partners or
employees of the Franchisee, involving or relating to misrepresentations or any fraudulent or deceptive
practice. All revenues from the operation of the Franchised Business during such period of operation by
the Franchisor shall be kept in a separate account and the expenses of the Franchised Business, including
reasonable royalty fees, advertising contributions, compensation and expenses for the Franchisor's
representative, shall be charged to said account.
XIII. DEFAULT AND TERMINATION
As a matter of policy, the Franchisor shall make every good faith effort to avoid terminating this
Agreement without having first employed all reasonable steps hereunder to cause the Franchisee to
correct and cure any default. Furthermore, the terms and conditions regarding default and termination
contained herein shall be subject to any applicable state statutes or regulations regarding the termination
of a franchise.
A. Default With No Opportunity To Cure. The Franchisee shall be deemed to be in
default and the Franchisor may, at its option, terminate this Agreement and all rights granted hereunder,
without affording the Franchisee any opportunity to cure the default, effective immediately upon receipt
of notice from the Franchisor to the Franchisee, upon the occurrence of any of the following events:
1. If the Franchisee becomes insolvent or makes a general assignment for the
benefit of creditors, or if a petition in bankruptcy is filed by the Franchisee or such a petition is filed
against and consented to by the Franchisee, or if the Franchisee is adjudicated as bankrupt, or if a bill in
equity or other proceeding for the appointment of a receiver of the Franchisee or other custodian for the
Franchisee's business or assets is filed and consented to by the Franchisee, or if a receiver or other
custodian (permanent or temporary) of the Franchisee's business or assets is appointed by any court of
competent jurisdiction, or if proceedings for a conference with a committee of creditors under any state,
federal or foreign law should be instituted by or against the Franchisee, or if a final judgment remains
unsatisfied or of record for thirty (30) days or longer (unless supersedeas bond is filed), or if execution is
levied against the Franchisee's operating location or property, or suit to foreclose any lien or mortgage
against the premises or equipment is instituted against the Franchisee and not dismissed within thirty (30)
days, or if any substantial real or personal property of the Franchised Business shall be sold after levy
thereupon by any sheriff, marshal or constable;
2. If the Franchisee ceases to do business at the Franchised Business for two (2) or
more consecutive days, excluding holidays, or loses the right to possession of the premises upon which
the Franchised Business is located or otherwise forfeits the right to do or transact business in the
jurisdiction where the Franchised Business is located; provided, however, that if any such loss of
possession results from the governmental exercise of the power of eminent domain, or if, through no fault
of the Franchisee, the premises are damaged or destroyed by a disaster such that they cannot, in the
Franchisor's judgment, reasonably be restored within one hundred twenty (120) days, then, in either such
event, the Franchisee shall have sixty (60) days to identify an alternative location within the Primary
Market Area for the operation of the Franchised Business (the "Substituted Site") and submit all
information reasonably requested by the Franchisor in connection with the Substituted Site for its review
and approval. The Franchisor's approval of the Substituted Site shall not be unreasonably withheld, but
may be conditioned upon the payment of an agreed minimum royalty fee to the Franchisor during the
period in which the Franchised Business is not in operation. Notwithstanding the foregoing, the
Franchisor shall have a right to terminate this Agreement if the Franchisee is not in possession of the
Substituted Site and open for business to the general public within five (5) months of its receipt of the
Franchisor's approval;
3. If the Franchisee fails to operate and maintain the Franchisor Computerized
Point-of-Sale and Information System or an equivalent subject to Franchisor's prior written approval in
accordance with the Franchisor's requirements and guidelines as outlined in the Manuals, or if
Franchisee attempts to modify such system without the prior written approval of Franchisor.
4. If the Franchisee understates by two percent (2%) or more its Gross Sales in
connection with any report required to be submitted to the Franchisor;
5. If the Franchisee has made any material misrepresentation or omission in this
Agreement or any other agreement to which the Franchisee and the Franchisor are parties;
6. If the Franchisee (or the principal stockholder or general partner of a corporation
or partnership franchisee) repeatedly engages in the excessive use of alcohol and/or abuse of drugs;
7. If the Franchisee, by act or omission, permits a continued violation in connection
with the operation of the Franchised Business of any law, ordinance, rule or regulation of a governmental
agency, in the absence of a good faith dispute over its application or legality and without promptly
resorting to an appropriate administrative or judicial forum for relief therefrom;
8. If the Franchisee fails to obtain and maintain all required licenses under state and
local law for the establishment and operation of a restaurant;
9. If the Franchisee misuses or makes any unauthorized use of the Proprietary
Marks, engages in any business or markets any service or products under a name or mark which is
confusingly similar to the Proprietary Marks, or otherwise materially impairs the goodwill associated
therewith or the Franchisor's rights therein;
10. If a threat or danger to public safety results from the construction, maintenance
or operation of the Franchised Business;
11. If the Franchisee is convicted of a crime of moral turpitude or similar felony or is
convicted of any other crime or offense that the Franchisor reasonably believes is likely to have an
adverse effect on the System, the Proprietary Marks, the goodwill associated therewith or the
Franchisor's interest herein;
12. If a judgment or a consent decree against the Franchisee, or any of its officers,
directors, shareholders or partners is entered in any case or proceeding involving allegations of fraud,
racketeering, unfair or improper trade practices or similar claim which is likely to have an adverse effect
on the System, or the Proprietary Marks, the goodwill associated therewith or the Franchisor's interest
therein;
13. If the Franchisee purports to transfer any rights or obligations under this
Agreement to any third party without the Franchisor's prior written consent, contrary to any of the terms
of Section XII of this Agreement;
14. If the Franchisee fails to comply with any of the
covenants contained in Section XV hereof;
15. If, contrary to Sections VII and VIII hereof, the Franchisee discloses or divulges
the contents of the Manuals or any other trade secrets or Confidential Information provided to the
Franchisee by the Franchisor;
16. If the Franchisee knowingly maintains false books or records or submits any
false statements, applications or reports to the Franchisor or any assignee of the Franchisor;
17. If the Franchisee fails to locate a site for the Franchised Business and obtain
Franchisor's approval of the site and sign the lease within one hundred and eight (180) days after
execution of this Agreement or fails to open for business to the general public within one hundred and
twenty (120) days after signing the lease;
18. If the Franchisee willfully and repeatedly engages in a course of conduct which
constitutes a misrepresentation or a deceptive or unlawful act or practice in connection with its sale of
the services and products offered at the Franchised Business;
19. If the Franchisee fails to strictly comply with the product and quality control
standards and specifications, fails to have suppliers approved by the Franchisor or otherwise fails to meet
any other significant specifications or guidelines set forth in the Manuals;
20. If any other franchise agreement issued to the Franchisee by the Franchisor is
terminated for any reason;
21. If the Franchisee receives three (3) or more notices of default under Section
XIII.B. hereof during the term of this Agreement whether or not such defaults are cured after notice;
22. If the Franchisee willfully engages in any illegal, immoral or unethical acts or
any act in violation of the mission of the Franchisor;
23. If the Franchisee defaults under its lease agreement for the premises on which
the Franchised Business is located or under any other agreement to which the Franchisee and the
Franchisor, or any parent or subsidiary corporation or any other affiliated entity of the Franchisor, are
parties and fails to cure said default within the grace period (if any) provided for in such agreement;
24. If the Franchisee relocates the Franchised Business without obtaining the prior
approval of the Franchisor; or
25. If the Franchisee buys or uses any goods in the operation of the Franchised
Business which have not been approved by the Franchisor.
B. Default With Thirty (30) Day Opportunity To Cure. Except as provided in Section
XIII.A. of this Agreement, the Franchisee shall have thirty (30) days after receiving from the Franchisor a
written notice of default within which to remedy any default described in this Section XIII.B. and provide
evidence thereof to the Franchisor. If any such default is not cured within that time, or such longer
period as applicable law may require, this Agreement, at Franchisor's option, shall terminate without
further notice to the Franchisee effective immediately upon the expiration of the thirty (30) day period or
such longer period as applicable law may require. The Franchisee shall be in default hereunder for any
failure to comply substantially with any of the requirements imposed by this Agreement, as it may from
time to time reasonably be supplemented by updates to the Manuals, or for any failure to carry out the
terms of this Agreement in good faith. Such defaults shall include, without limitation, the occurrence of
any of the following terms:
1. If the Franchisee fails, refuses or neglects to pay promptly any monies owing to
the Franchisor or its subsidiaries or affiliates or suppliers when due, or to submit the financial
information or other reports required by the Franchisor under this Agreement;
2. If the Franchisee fails to maintain any of the standards or procedures prescribed
by the Franchisor in this Agreement, the Manuals, any other franchise agreement between the Franchisor
and the Franchisee, or any other written agreements between the parties or otherwise;
3. If the Franchisee fails to comply with its duties set forth in Section V of this
Agreement or fails to perform any obligation owing to the Franchisor or to observe any covenant or
agreement made by the Franchisee, whether such obligation, covenant or agreement is set forth in this
Agreement or in any other agreement with the Franchisor including any other franchise agreement by and
between the Franchisor and the Franchisee or any entity related to the Franchisor;
4. If the Franchisee fails to adequately promote the Franchised Business as
provided in the Manuals or otherwise in writing;
5. If the Franchisee fails to maintain and submit to the Franchisor all reports
required pursuant to Section IX hereof, including financial statements, weekly, monthly and other reports
of Gross Sales and copies of tax returns;
6. If the Franchisee fails to maintain the Franchisor's quality control standards with
respect to it use of signage and other uses of the Proprietary Marks;
7. If the Franchisee fails to notify the Franchisor, within ninety (90) days of the
relocation date, of the Franchisee's intention to relocate the Franchised Business;
8. If the Franchisee, its Franchisee/General Manager, and Shift Supervisor fail to
attend and successfully complete any mandatory training program unless attendance is excused or
waived, in writing, by the Franchisor; or
9. If the Franchisee fails to obtain the prior written approval of the Franchisor of
any and all advertising, marketing or promotional plans and materials in whatever form used by the
Franchisee in connection with its promotion of the Franchised Business or otherwise fails to comply with
Franchisor's policies and procedures with respect to advertising, marketing or promotion.
C. No Right or Remedy. No right or remedy herein conferred upon or reserved to the
Franchisor is exclusive of any other right or remedy provided or permitted by law or equity.
D. Default and Termination. The events of default and grounds for termination described
in this Section XIII shall be in addition to any other grounds for termination contained elsewhere in this
Agreement or otherwise.
E. Right to Purchase. In the event of termination of this Agreement for any reason,
including a default under this Section XIII, the Franchisor shall have the right and option to purchase the
Franchisee's interest in the tangible assets of the Franchised Business as set forth in Paragraph XIV.K.
below. In the event that the Franchisor elects to purchase the Franchisee's interest in said assets, the
Franchisee shall also execute an assignment of the lease for the premises of the Franchised Business.
XIV. OBLIGATIONS UPON TERMINATION
Upon termination or expiration of this Agreement, all rights granted hereunder to the Franchisee
shall forthwith terminate, and Franchisee shall observe and perform the following:
A. Cessation of Operation. The Franchisee shall immediately cease to operate the
Franchised Business and shall not thereafter, directly or indirectly, represent to the public or hold itself
out as a franchisee of the Franchisor.
B. Cessation of Use of Proprietary Marks. The Franchisee shall immediately and
permanently cease to use, in any manner whatsoever, any equipment, format, confidential methods,
customer data base, programs, literature, procedures and techniques associated with the System, the name
"Zero's Mr. Submarine" and any Proprietary Marks and distinctive trade dress, forms, slogans,
uniforms, signs, symbols or devices associated with the System. In particular, the Franchisee shall cease
to use, without limitation, all signs, fixtures, furniture, equipment, advertising materials or promotional
displays, uniforms, stationary, forms and any other articles which display the Proprietary Marks
associated with the System.
C. Cancellation of Name. The Franchisee shall take such action as may be necessary to
cancel any assumed name or equivalent registration which contains the Proprietary Marks or any other
trademark, trade name or service mark of the Franchisor, and the Franchisee shall furnish the Franchisor
with evidence satisfactory to the Franchisor of compliance with this obligation within thirty (30) days
after termination or expiration of this Agreement.
D. Optional Assignment of Lease (Attachment B). The Franchisee shall, at the
Franchisor's option pursuant to Section XIII.E., above, assign to the Franchisor any interest which the
Franchisee has in any lease or sublease for the premises of the Franchised Business. In the event the
Franchisor elects to exercise its option to acquire such lease or sublease, the Franchisor shall pay for any
furniture, equipment, supplies and signs acquired by the Franchisor as a result of such assignment, at the
Franchisee's cost or fair market value (whichever is less, less any sums of money owed by the Franchisee
to the Franchisor and less any sums of money necessary to upgrade and renovate the premises to meet the
Franchisor's then current standards for its Franchised Business and less any sums necessary to acquire
clear title to the lease or sublease interest. In the event that the Franchisor and the Franchisee are unable
to agree on the fair market value of said items, an independent appraiser shall be appointed to determine
the fair market value of said items. The determination of said appraiser shall be final and binding upon
the parties. The costs and expenses associated with the appointment of an independent appraiser shall be
paid by both Franchisee and Franchisor.
In the event that the Franchisor does not elect to exercise its option to acquire such lease or
sublease, the Franchisee shall make such modifications or alterations to the premises of the Franchised
Business immediately upon termination or expiration of this Agreement as may be necessary to
distinguish the appearance of said premises from that of other Franchised Businesses under the System,
and shall make such specific additional changes thereto as the Franchisor may reasonably request for that
purpose. In the event the Franchisee fails or refuses to comply with the requirement of this Section XIV,
the Franchisor shall have the right to enter upon the premises of the Franchised Business without being
guilty of trespass or any other tort for the purpose of making or causing to be made such changes as may
be required, at the expense of the Franchisee, which expense the Franchisee agrees to pay upon demand.
E. Franchisor's Right to Continue Operations. In the event this Agreement is
terminated, the Franchisor may, at its option, immediately enter the premises of the Franchised Business
and continue to provide services to customers of the Franchised Business and apply receipts therefrom to
debts owed to the Franchisor by the Franchisee. The Franchisor shall have no other obligations to the
Franchisee in connection with the Franchisor's operation of the Franchised Business following said
termination.
F. Non-Usage of Marks. The Franchisee agrees, in the event it continues to operate or
subsequently begins to operate any other business, not to use any reproduction, counterfeit, copy or
colorable imitation of the Proprietary Marks or trade dress, either in connection with such other business
or the promotion thereof, which is likely to cause confusion, mistake or deception, or which is likely to
dilute the Franchisor's exclusive rights in and to the Proprietary Marks or trade dress, and agrees not to
utilize any designation of origin or description or representation which falsely suggests or represents an
association or connection with the Franchisor so as to constitute unfair competition.
G. Prompt Payment Upon Default. The Franchisee shall promptly pay all sums owing to
the Franchisor and its subsidiaries, affiliates and suppliers. In the event of termination for any default of
the Franchisee, such sums shall include all damages, costs and expenses, including reasonable attorneys'
fees, incurred by the Franchisor as a result of the default, which obligation shall give rise to and remain,
until paid in full, a lien in favor of the Franchisor against any and all of the personal property, machinery,
fixtures, equipment and inventory owned by the Franchisee and on the premises of the Franchised
Business at the time of default.
H. Payment of Costs. The Franchisee shall pay to the Franchisor all damages, costs and
expenses, including reasonable attorneys' fees, incurred by the Franchisor subsequent to the termination
or expiration of this Agreement in obtaining injunctive or other relief for the enforcement of any
provision of this Section XIV or any other obligation under this Agreement.
I. Return of Materials. The Franchisee shall immediately turn over to the Franchisor all
copies of all materials in the Franchisee's possession including the Manuals, all records, files,
instructions, correspondence, customer database, brochures, agreements, disclosure statements and any
and all other materials relating to the operation of the Franchised Business in the Franchisee's
possession, and all copies thereof (all of which are acknowledged to be the Franchisor's property), and
shall retain no copy or record of any of the foregoing, excepting only the Franchisee's copy of this
Agreement, any correspondence between the parties and any other documents which the Franchisee
reasonably needs for compliance with any provision of law. In addition to the foregoing, the Franchisee
shall deliver to the Franchisor a complete list of all persons employed by the Franchisee during the three
(3) years immediately proceeding termination, together with copies of all employment files of each
employee on such list. All costs of delivering all materials required by this Section XIV.I. shall be borne
by the Franchisee.
J. Assignment of Telephone Listings. The Franchisee shall promptly notify the
appropriate telephone company and all telephone directory listing agencies of the termination or
expiration of its right to use any telephone number and any regular, classified or other telephone
directory listings associated with any Proprietary Marks and authorize the transfer of same to or at the
direction of the Franchisor. In connection therewith, the Franchisee shall execute a Telephone
Assignment Agreement in the form of Attachment C attached hereto. The Franchisee agrees to execute
updated letters of direction to any telephone companies and telephone directory listing agencies directing
termination and/or transfer of the Franchisee's right to use any telephone number associated with the
Proprietary Marks, which the Franchisor may hold until termination or expiration hereof. The Franchisee
acknowledges that as between the Franchisor and the Franchisee, the Franchisor has the sole right to and
interest in all telephone numbers and directory listings associated with any Proprietary Marks. The
Franchisee authorizes the Franchisor and hereby appoints the Franchisor and any officer of the
Franchisor as its attorney in fact, to direct the appropriate telephone company and all listing agencies to
transfer all such listings to the Franchisor upon termination of this Agreement.
K. Option to Purchase. The Franchisor shall have the right, but not the obligation, to
purchase any or all of the tangible assets of the Franchised Business, including the signs, advertising
materials, promotional displays, supplies, forms, inventory, software, furniture or other items bearing the
Proprietary marks, at the Franchisee's cost or fair market value, whichever is less. If the parties cannot
agree on fair market value within a reasonable time, an independent appraiser shall be designated by the
Franchisor, and the appraiser's determination shall be final and binding. The Franchisor's election to
purchase provided for herein must be exercised by written notice to the Franchisee within thirty (30) days
after termination or expiration of this Agreement. If the Franchisor elects to exercise any option to
purchase provided herein it shall have the right to set off all amounts due from the Franchisee under this
Agreement and the cost of the appraisal, if any, against any payment therefor.
L. Covenant of Further Assurances. The Franchisee shall execute any legal document
that may be necessary to effectuate the termination hereunder and shall furnish to the Franchisor, within
thirty (30) days after the effective date of termination, written evidence satisfactory to the Franchisor of
the Franchisee's compliance with the foregoing obligations.
M. Compliance with Covenants. The Franchisee shall comply with all applicable
covenants contained in Section XV of this Agreement.
N. No Further Interest. Other than as specifically set forth above, the Franchisee shall
have no interest in the Franchised Business upon termination or expiration of this Agreement.
XV. COVENANTS
A. Best Efforts. The Franchisee covenants that during the term of this Agreement, and
subject to the post-termination provisions contained herein, and except as otherwise approved in writing
by the Franchisor, the Franchisee devotes his or her full time, energy and best efforts to the efficient and
effective management and operation of the Franchised Business.
B. Non-Solicitation and Non-Competition. The Franchisee has heretofore specifically
acknowledged that pursuant to this Agreement, the Franchisee shall receive valuable specialized training
and confidential and other information regarding the business, promotional, sales, marketing and
operational methods and techniques of the Franchisor and the System. The Franchisee covenants that
during the term of this Agreement and subject to the post-termination provisions contained herein, and
except as otherwise approved in writing by the Franchisor, the Franchisee shall not, either directly or
indirectly, for itself or through, on behalf of or in conjunction with any person, persons, partners or
corporation:
1. Divert or attempt to divert any business or customer of the Franchised Business
to any competitor, by direct or indirect inducement or otherwise, or do or perform, directly or indirectly,
any other act injurious or prejudicial to the goodwill associated with the Proprietary Marks and the
System;
2. Employ or seek to employ any person who is at that time employed by the
Franchisor or by any other franchisee or multi-unit operator of the Franchisor, or otherwise directly or
indirectly induce such person to leave his or her employment;
3. Own, maintain, engage in, be employed by, advise, assist, invest in, franchise,
make loans to or have any interest in any business which is the same as or substantially similar to the
Franchised Business; or
4. Sell goods or services in any venue other than through, and on the premises of,
the Franchised Business (with the exception of any catering activities carried out through the Franchised
Business).
C. Restrictive Covenants. The Franchisee covenants that, except as otherwise approved
in writing by the Franchisor, for a continuous uninterrupted period commencing upon the expiration or
termination of this Agreement, regardless of the cause for termination, and continuing for two (2) years
thereafter, the Franchisee will not either directly or indirectly, for itself or through, on behalf of or in
injunction with any person, persons, partnership or corporation, own, maintain, engage in, be employed
by, advise, assist, invest in, franchise, make loans to or have any interest in any business which is the
same as or substantially similar to the Franchised Business and which is located within a radius of five
(5) miles of the approved site or the location of any Franchisor-owned or operated or franchisee-operated
Franchised Business which is in existence on the date of expiration or termination of this Agreement.
If the period of time or the area specified above, should be adjudged unreasonable in any
proceeding, then the period of time will be reduced by such number of months or the area will be reduced
by the elimination of such portion thereof, or both, so that such restrictions may be enforced in such area
and for such time as is adjudged to be reasonable.
D. No Undue Hardship. The Franchisee acknowledges and agrees that the covenants not
to compete set forth in this Agreement are fair and reasonable and will not impose any undue hardship on
the Franchisee, or the Franchisee's shareholders or partners, if the Franchisee is a corporation or
partnership, since the Franchisee, its shareholders or partners have other considerable skills, experience
and education which afford the Franchisee, its shareholders or partners the opportunity to derive income
from other endeavors.
E. Inapplicability of Restrictions. Section XV.B.3. and XV.C. shall not apply to the
ownership by the Franchisee of less than a five percent (5%) beneficial interest in the outstanding equity
securities of any publicly-held corporation.
F. Independence of Covenants. The parties agree that each of the covenants in this
Agreement shall be construed as independent of any other covenant or provision of this Agreement. If
any or all portions of the covenants in this Section XV is held unreasonable or unenforceable by a court
or agency having valid jurisdiction in an unappealed final decision to which the Franchisor is a party, the
Franchisee expressly agrees to be bound by any lesser covenant subsumed within the terms of such
covenant that imposes the maximum duty permitted by law, as if the resulting covenant were separately
stated in and made a part of this Agreement.
G. Mission. The Franchisee agrees to support the Franchisor's mission and to conduct the
Franchised Business in accordance with the Franchisor's operating policies and stated principles.
H. Modification of Covenants. The Franchisee understands and acknowledges that the
Franchisor shall have the right, in its sole discretion, to reduce the scope of any covenant set forth in this
Section XV or any portion thereof, without the Franchisee's consent, effective immediately upon receipt
by the Franchisee of written notice thereof, and the Franchisee agrees that it shall forthwith comply with
any covenant as so modified, which shall be fully enforceable notwithstanding the provisions of Section
XXIII hereof.
I. Enforcement of Covenants. The Franchisee expressly agrees that the existence of any
claims it may have against the Franchisor, whether or not arising from this Agreement, shall not
constitute a defense to the enforcement by the Franchisor of the covenants in this Agreement. The
Franchisee agrees to pay all costs and expenses (including reasonable attorneys' fees) incurred by the
Franchisor in connection with the enforcement of the covenants set forth in this Agreement if the court
awards such reimbursement.
J. Written Agreements. At the Franchisor's request, the Franchisee shall require and
obtain execution of covenants similar to those set forth in this Section XV (including covenants
applicable upon the termination of a person's relationship with Franchisee) from the Franchisee's
officers, directors, and shareholders. All covenants required by this Section XV.K. shall be in forms
satisfactory to Franchisor, including, without limitation, specific identification of Franchisor as a third
party beneficiary of such covenants with the independent right to enforce them. Failure by Franchisee to
obtain execution of a covenant required by this Section XV.K. shall constitute a default under Section
XIII.B. hereof.
XVI. CHANGES AND MODIFICATIONS
The Franchisor may modify this Agreement only upon the execution of a written agreement by
the Franchisor and the Franchisee. The Franchisor reserves and shall have the sole right to make changes
in the Manuals, the System, the Franchisor Computerized Point-of-Sale and Information System, or an
equivalent subject to Franchisor's prior written approval, and the Proprietary Marks at any time and
without prior notice to Franchisee. Franchisee shall promptly alter any signs, products, business
materials or related items, at its sole cost and expense, upon written receipt of written notice of such
change or modification in order to conform with the Franchisor's revised specifications. In the event that
any improvement or addition to the Manuals, the System or the Proprietary Marks is developed by the
Franchisee, then the Franchisee agrees to grant to the Franchisor in irrevocable, world-wide, exclusive,
royalty-free license, with the right to sublicense such improvement or addition.
The Franchisee understands and agrees that due to changes in competitive circumstances,
presently unforeseen changes in the needs of customers, and/or presently unforeseen technological
innovations, the Franchisor's System must not remain static, in order that it best serve the interests of
Franchisor, franchisees and the System. Accordingly, Franchisee expressly understands and agrees that
Franchisor may from time to time change the components of the System, including altering the programs,
services, methods, standards, forms, policies and procedures of that System; adding to, deleting from or
modifying those programs, products and services which the Franchised Business is authorized to offer;
and changing, improving or modifying the Proprietary Marks. Subject to the other provisions of this
Agreement, Franchisee expressly agrees to abide by any such modifications, changes, additions, deletions
and alterations.
XVII. TAXES AND INDEBTEDNESS
A. Payment. The Franchisee shall promptly pay, when due, all taxes levied or assessed by
any federal, state or local tax authority and any and all other indebtedness incurred by the Franchisee in
the operation of the Franchised Business.
B. Dispute. In the event of any bona fide dispute as to liability for taxes assessed or other
indebtedness, the Franchisee may contest the validity or the amount of the tax or indebtedness in
accordance with procedures of the taxing authority or applicable law; provided, however, in no event
shall the Franchisee permit a tax sale or seizure by levy of execution or similar writ or warrant, or
attachment by a creditor, to occur against the premises of the Franchised Business or any improvements
thereon.
C. Compliance with Federal, State and Local Laws. The Franchisee shall comply with
all federal, state, and local laws, rules and regulations, and shall timely obtain any and all permits,
certificates, licenses and bonds necessary for the full and proper operation and management of the
Franchised Business, including, without limitation, a license to do business and provide services,
fictitious name registration and sales tax permits. Copies of all subsequent inspection reports, warnings,
certificates and ratings, issued by any governmental entity during the term of this Agreement in
connection with the conduct of the Franchised Business which indicate Franchisee's failure to meet or
maintain the highest governmental standards or less than full compliance by Franchisee with any
applicable law, rule or regulation, shall be forwarded to Franchisor by Franchisee within three (3) days of
Franchisee's receipt thereof.
D. Duty to Notify. The Franchisee shall notify the Franchisor in writing within three (3)
days of the commencement of any action, suit or proceeding, and of the issuance of any order, writ,
injunction, award or decree of any court, agency or other governmental instrumentality, which may
adversely affect the operation or financial condition of the Franchised Business. Additionally, any and
all consumer related complaints shall be answered by the Franchisee within fifteen (15) days after receipt
thereof or such shorter period of time as may be provided in said complaint. A copy of said answer shall
be forwarded to the Franchisor within three (3) days of the date that said answer is forwarded to the
complainant.
XVIII. INDEPENDENT CONTRACTOR AND INDEMNIFICATION
A. Independent Contractor
1. It is understood and agreed by the parties hereto that this Agreement does not
create a fiduciary relationship between them, that the Franchisee shall be an independent contractor, and
that nothing in this Agreement is intended to make either party an agent, legal representative, subsidiary,
joint venturer, partner, employee or servant of the other for any purpose whatsoever.
2. During the term of this Agreement and any extensions hereof, the Franchisee
shall hold itself out to the public as an independent contractor operating the Franchised Business
pursuant to a license from the Franchisor and as an authorized user of the System and the Proprietary
marks which are owned by the Franchisor. The Franchisee agrees to take such affirmative action as may
be necessary to do so, including, without limitation, exhibiting to customers the sign provided by
Franchisor in a conspicuous place on the premises of the Franchised Business.
3. The Franchisor shall not have the power to hire or fire the Franchisee's
employees, and except as herein expressly provided, the Franchisor may not control or have access to the
Franchisee's funds or the expenditures thereof, or in any other way exercise dominion or control over the
Franchised Business.
B. No Liability. It is understood and agreed that nothing in this Agreement authorizes the
Franchisee to make any contract, agreement, warranty or representation on the Franchisor's behalf, or to
incur any debt or other obligation in the Franchisor's name, and that the Franchisor shall in no event
assume liability for or be deemed liable hereunder as a result of any such action or by reason of any act
or omission of the Franchisee in the Franchisee's conduct of the Franchised Business or any claim or
judgment arising therefrom against the Franchisor. The Franchisee agrees at all times to defend at his
own cost, and to indemnify and hold harmless to the fullest extent permitted by law, the Franchisor, its
corporate parent, the corporate subsidiaries, affiliates, successors, assigns and designees of either entity,
and the respective directors, officers, employees, agents, shareholders, designees, and representatives of
each (Franchisor and all other hereinafter referred to collectively as "Indemnities") from all losses and
expenses incurred in connection with any action, suit, proceeding, claim, demand, investigation, or
formal or informal inquiry (regardless of whether same is reduced to judgment) or any settlement thereof
which arises out of or is based upon any of the following: (1) the Franchisee's infringement or any other
violation or any other alleged violation of any patent, trademark or copyright or other proprietary right
owned or controlled by third parties; (2) the Franchisee's violation or breach of any contract, federal,
state or local law, regulation, ruling, standard or directive of any industry standard; (3) libel, slander or
any other form of defamation by the Franchisee; (4) the Franchisee's violation or breach of any warranty,
representation, agreement or obligation in this Agreement; (5) any acts, errors or omissions of the
Franchisee or any of its agents, servants, employees, contractors, partners, proprietors, affiliates, or
representatives; (6) latent or other defects in the Franchised Business, whether or not discoverable by the
Franchisor or the Franchisee; (7) the inaccuracy, lack of authenticity or nondisclosure of any information
by any customer of the Franchised Business; (8) any services or products provided by the Franchisee at,
from or related to the operation at the Franchised Business; (9) any services or products provided by any
affiliated or nonaffiliated participating entity; (10) any action against the Franchised Business by any
customer of the Franchised Business, unless a court rules that Franchisor is held responsible.
C. No False Representations. Except as otherwise expressly authorized by this
Agreement, neither party hereto will make any express or implied agreements, warranties, guarantees or
representations or incur any debt in the name of or on behalf of the other party, or represent that the
relationship between the Franchisor and the Franchisee is other than that of Franchisor and Franchisee.
The Franchisor does not assume any liability, and will not be deemed liable, for any agreements,
representations, or warranties made by the Franchisee which are not expressly authorized under this
Agreement, nor will the Franchisor be obligated for any damages to any person or property which
directly or indirectly arise from or relate to the operation of the Franchised Business franchised hereby.
XIX. APPROVALS AND WAIVERS
A. Written Consent. Whenever this Agreement requires the prior approval or consent of
the Franchisor, the Franchisee shall make a timely written request to Franchisor therefor and such
approval or consent shall be obtained in writing.
B. No Waiver. No failure of the Franchisor to exercise any power reserved to it by this
Agreement, or to insist upon strict compliance by the Franchisee with any obligation or condition
hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a
waiver of the Franchisor's right to demand exact compliance with any of the terms herein. Waiver by the
Franchisor of any particular default by the Franchisee shall not affect or impair the Franchisor's rights
with respect to any subsequent default of the same, similar or different nature, nor shall any delay,
forbearance or omission of the Franchisor to exercise any power or right arising out of any breach or
default by the Franchisee of any of the terms, provisions or covenants hereof affect or impair the
Franchisor's right to exercise the same, nor shall such constitute a waiver by the Franchisor of any right
hereunder or the right to declare any subsequent breach or default and to terminate this Franchise prior to
the expiration of its term. Subsequent acceptance by the Franchisor of any payments due to it hereunder
shall not be deemed to be a waiver by the Franchisor of any proceeding breach by the Franchisee of any
terms, covenants or conditions of this Agreement.
XX. NOTICES
Any and all notices required or permitted under this Agreement shall be in writing and shall be
personally delivered or mailed by certified mail, return receipt requested, or dispatched by overnight
delivery envelope, to the respective parties at the following addresses unless and until a different address
has been designated by written notice to the other party:
Notices to Franchisor: Zero's Mr. Submarine, Inc.
2106 Pacific Avenue
Virginia Beach, VA 23451
With Copies To: Vincent R. Olivieri, Attorney at Law
McCardell & Inman, P.L.C.
2840 S. Lynnhaven Road
Virginia Beach, VA 23452
Notices to Franchisee: _____________________________________
_____________________________________
_____________________________________
_____________________________________
With Copies To: _____________________________________
_____________________________________
_____________________________________
_____________________________________
Any notice sent by certified mail shall be deemed to have been given at the date and time of
mailing.
XXI. RELEASE OF PRIOR CLAIMS
By executing this Agreement, the Franchisee, individually and on behalf of the Franchisee's
heirs, legal representatives, successors and assigns, and each assignee of this Agreement by accepting
assignment of the same, hereby forever releases and discharges the Franchisor and its officers, directors,
employees, agents and servants, including the Franchisor's subsidiary and affiliated corporations, their
respective officers, directors, employees, agents and servants, from any and all claims relating to or
arising under any franchise agreement or any other agreement between the parties executed prior to the
date of this Agreement including any and all claims, whether presently known or unknown, suspected or
unsuspected, arising under the franchise, securities or antitrust laws of the United States or of any state or
territory thereof.
XXII. DISCLOSURE STATEMENT AND DISCLAIMER
A. Compliance with Applicable Law. The Franchisee acknowledges, by its signature
hereto, that it received from the Franchisor a Federal Trade Commission or Uniform Franchise Offering
Circular for the State in which the Franchised Business will be located, or the Franchisee's place of
residence, as appropriate, at least ten (10) business days prior to the execution of this Agreement.
_______ [ Please initial to acknowledge that Franchisee have read and understand this
Paragraph XXII.A.]
B. Receipt of Agreement. The Franchisee acknowledges that it received from the
Franchisor this Agreement with all blanks filled in at least five (5) days prior to the execution of this
Agreement. The Franchisee represents that it has read this Agreement in its entirety and that it has been
given the opportunity to clarify any provisions that it did not understand and to consult with an attorney
or other professional advisor. The Franchisee further represents that it understands the terms, conditions
and obligations of this Agreement and agrees to be bound thereby.
_______ [ Please initial to acknowledge that Franchisee have read and understand this
Paragraph XXII.B.]
C. Acknowledgment. The Franchisee acknowledges and accepts the following:
THE SUCCESS OF THE FRANCHISEE IN OPERATING A
FRANCHISE IS SPECULATIVE AND WILL DEPEND ON MANY
FACTORS INCLUDING, TO A LARGE EXTENT, THE
FRANCHISEE'S INDEPENDENT BUSINESS ABILITY. THIS
OFFERING IS NOT A SECURITY AS THAT TERM IS DEFINED
UNDER APPLICABLE FEDERAL AND STATE SECURITIES LAWS.
THE OBLIGATION TO TRAIN, MANAGE, PAY, RECRUIT AND
SUPERVISE EMPLOYEES OF THE FRANCHISED BUSINESS RESTS
SOLELY WITH THE FRANCHISEE. THE FRANCHISEE HAS NOT
RELIED ON ANY WARRANTY OR REPRESENTATION, EXPRESSED
OR IMPLIED, AS TO THE POTENTIAL SUCCESS OR PROJECTED
INCOME OF THE BUSINESS VENTURE CONTEMPLATED HEREBY.
NO REPRESENTATIONS OR PROMISES HAVE BEEN MADE BY
THE FRANCHISOR TO INDUCE THE FRANCHISEE TO ENTER
INTO THIS AGREEMENT EXCEPT AS SPECIFICALLY INCLUDED
HEREIN. THE FRANCHISOR HAS NOT MADE ANY
REPRESENTATION, WARRANTY OR GUARANTY, EXPRESS OR
IMPLIED, AS TO THE POTENTIAL REVENUES, PROFITS OR
SERVICES OF THE BUSINESS VENTURE TO THE FRANCHISEE
AND CANNOT, EXCEPT UNDER THE TERMS OF THIS
AGREEMENT, EXERCISE CONTROL OVER THE FRANCHISEE'S
BUSINESS. THE FRANCHISEE ACKNOWLEDGES AND AGREES
THAT IT HAS NO KNOWLEDGE OF ANY REPRESENTATION
MADE BY THE FRANCHISOR OR ITS REPRESENTATIVES OF ANY
INFORMATION THAT IS CONTRARY TO THE TERMS CONTAINED
HEREIN.
XXIII. ENTIRE AGREEMENT
This Agreement, the documents referred to herein and the Attachments hereto, if any, constitute
the entire, full and complete Agreement between the parties hereto concerning the subject matter hereof,
and supersede all prior agreements with no other representations having induced Franchisee to execute
this Agreement. No amendment, change or variance from this Agreement shall be binding on the parties
hereto unless mutually agreed to by the parties and executed by themselves or their authorized officers or
agents in writing.
XXIV. SEVERABILITY AND CONSTRUCTION
A. Severability. Except as expressly provided to the contrary herein, each section, part,
term and/or provision of this Agreement shall be considered severable, and if, for any reason, any
section, part, term and/or provision herein is determined to be invalid and contrary to, or in conflict with,
any existing or future law or regulation by a court or agency having valid jurisdiction, such shall not
impair the operation of, or have any other effect upon, such other portions, sections, parts, terms and/or
provisions of this Agreement as may remain otherwise intelligible, and the latter shall continue to be
given full force and effect and bind the parties hereto, and said invalid sections, parts, terms and/or
provisions shall be deemed not to be a part of this Agreement; provided, however, that if the Franchisor
determines that such finding of invalidity or illegality adversely affects the basic consideration of this
Agreement, the Franchisor, at its option, may terminate this Agreement.
B. Covenants. The Franchisee expressly agrees 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 any portion or portions which a court may hold to be
unreasonable and unenforceable in a final decision to which the Franchisor is a party, or from reducing
the scope of any promise or covenant to the extent required to comply with such a court order.
C. Captions. All captions in this Agreement are intended solely for the convenience of the
parties, and none of the captions shall be deemed to affect the meaning or construction of any provision
hereof.
D. References. All references herein to the masculine, neuter or singular shall be
construed to include the masculine, feminine, neuter or plural, where applicable, and all
acknowledgments, promises, covenants, agreements and obligations herein made or undertaken by the
Franchisee shall be deemed jointly and severally undertaken by all of the parties executing this
Agreement in his individual capacity on behalf of the Franchisee. This Agreement may be executed in
one or more originals, each of which shall be deemed an original.
E. Definition of Franchisee. As used in this Agreement, the term "Franchisee" shall
include all persons who succeed to the interest of the original Franchisee by transfer or operation of law
and shall be deemed to include not only the individual or entity defined as the "Franchisee" in the
introductory paragraph of this Agreement, but shall also include all partners of the entity that executes
this Agreement, in the event said entity is a partnership; all shareholders, officers and directors of the
entity that executes this Agreement, in the event said entity is a corporation; and all members of the
entity that executes this Agreement, in the event said entity is a limited liability company. By their
signature hereto, all partners, shareholders, officers and directors of the entity that signs this Agreement
as Franchisee acknowledge and accept the duties and obligations imposed upon each of them,
individually, by the terms of this Agreement.
F. Force Majeure. If, as a result of hurricane, tornado, typhoon, flooding, lightning,
blizzard and other unusually severe weather, earthquake, avalanche, volcanic eruption, fire, riot,
insurrection, war, explosion, unavoidable calamity or other act of God (a "Force Majeure"), compliance
by any party with the terms of this Agreement is rendered impossible or would otherwise create an undue
hardship upon any party, all parties shall be excused from their respective obligations hereunder for the
duration of the Force Majeure and for a reasonable recovery period thereafter, but otherwise this
Agreement shall continue in full force and effect.
XXV. APPLICABLE LAW
A. Governing Law. This Agreement takes effect upon its acceptance and execution by the
Franchisor. This Agreement shall be interpreted and construed under the laws of the Commonwealth of
Virginia except to the extent governed by the United States Trademark Act of 1946 (Lanham Act, 15
U.S.C. Section 1051 et seq.). (Illinois Franchisees, see Addendum to Franchise Agreement).
B. Jurisdiction and Venue. Except as otherwise expressly provided by applicable state
law or regulation, the parties agree that any action brought by either party against the other shall be
brought in the Commonwealth of Virginia and the parties do hereby waive all questions of personal
jurisdiction or venue for the purpose of carrying out this provision.
C. Remedy. No right or remedy conferred upon or reserved by the Franchisor or the
Franchisee by this Agreement is intended and it shall not be deemed to be exclusive of any other right or
remedy provided or permitted herein, by law or at equity, but each right or remedy shall be cumulative of
every other right or remedy.
D. Injunctive Relief. Nothing herein contained shall bar the Franchisor's right to obtain
injunctive relief against threatened conduct that will cause it loss or damage under the usual equity rules,
including the applicable rules for obtaining restraining orders and preliminary injunctions.
XXVI. ARBITRATION
Except as specifically otherwise provided in this Agreement, the parties agree that any and all
disputes between them and any claim by either party that cannot be amicably settled shall be determined
solely and exclusively by arbitration under the rules of the American Arbitration Association. Said rules
are hereby modified to provide that each party shall be entitled to conduct discovery in accordance with
the Federal Rules of Civil Procedure. Upon the demand of either party to any dispute for arbitration,
each shall select a representative to act in its behalf. The two (2) elected representatives shall meet
within two weeks of the time demand is made, unless the parties otherwise agree in writing. The two (2)
representatives shall agree upon a single arbitrator (the "Arbitrator"), who shall be a member of the
Commonwealth of Virginia Bar Association and the American Bar Association and have been in "good
standing" for at least fifteen (15) years. The Arbitrator shall hear the dispute within two (2) weeks of the
date of the meeting of the representatives. Except as otherwise expressly provided by applicable state
law or regulation, the Arbitrator shall hear the dispute in the Commonwealth of Virginia or at such other
location as may be designated by the Franchisor, and may properly consider any and all matters related
thereto that would be admissible in a non-jury trial under applicable Federal Rules of Civil Procedure or
Evidence. The Arbitrator's award shall be announced within seven (7) days of the hearing of the dispute
and shall include all fees, costs and attorneys' fees to the prevailing party. Judgment upon the award of
the Arbitrator shall be binding and shall be entered in a court of competent jurisdiction. The Franchisee
knows, understands and agrees that it is the intent of the parties that any arbitration between the
Franchisor and the Franchisee shall be of the Franchisee's individual claims and that the claims subject
to arbitration shall not be arbitrated on a classwide basis. In many instances, arbitration may be the sole
proceeding available to the parties, who may also be required by the Arbitrator to pay a filing fee.
Notwithstanding any provision contained in this Section XXVI, the Franchisor may, at its sole
option, institute an action or actions for temporary, preliminary, or permanent injunctive relief or seeking
any other equitable relief against the Franchisee in addition to any other rights and remedies provided
herein. In no event shall the Franchisee be entitled to make, the Franchisee shall not make, and the
Franchisee hereby waives, any claim for money damages by way of set-off, counterclaim, defense or
otherwise based upon any claim or assertion by the Franchisee that the Franchisor has unreasonably
withheld or unreasonably delayed any consent or approval to a proposed act by the Franchisee under any
of the terms of this Franchise Agreement. The Franchisee's sole remedy for any such claim shall be an
action or proceeding to enforce any such provisions, for specific performance or declaratory judgment.
XXVII. SURVIVAL
The Franchisee acknowledges that it has conducted an independent investigation of all aspects
relating to the Franchised Business and recognizes that the business venture contemplated by this
Agreement involves business risks and that its success will be largely dependent upon the skills and
ability of the Franchisee as an independent business person or organization. The Franchisee
acknowledges that it has received, read and understands this Agreement, the Attachments hereto and
agreements relating thereto, and that the Franchisor has accorded the Franchisee ample time and
opportunity to consult with advisors of the Franchisee's own choosing about the potential benefits and
risks of entering into this Agreement.
_______ (Please initial to acknowledge that you have read and understand this
Paragraph XXVII)
IN WITNESS WHEREOF, the parties hereto have duly executed, sealed and delivered this
Agreement in triplicate on the day and year first above written.
ATTEST: FRANCHISOR:
ZERO'S MR. SUBMARINE, INC.
___________________ By: ________________________________ _______
WITNESS:
Charles J. McCotter, EVP Development
(Date)
___________________ By: ________________________________ _______
WITNESS:
Martin A. Palacios, President & CEO (Date)
FRANCHISEE:
___________________ By: ________________________________ _______
WITNESS:
____________________,____________ (Date)
(Name) (Title)
ATTACHMENT A
SITE SELECTION ADDENDUM
THIS ADDENDUM is made this _____ day of ______________, 19 _____, by and between
Zero's Mr. Submarine, Inc. (the "Franchisor") and ___________________________________ (the
"Franchisee").
WITNESSETH:
WHEREAS, the Franchisor and the Franchisee are parties to a Franchise Agreement dated the
_______ day of ____________, 19 ____ by the terms of which the Franchisor has granted to the
Franchisee the right and license to operate a Zero's Mr. Submarine franchise pursuant to the
Franchisor's System and Proprietary Marks; and
WHEREAS, the Franchisee has selected and presented a site to the Franchisor which has been
approved by the Franchisor;
NOW, THEREFORE, the parties hereto, intending to be bound, agree as follows:
1. Approved Location. The Approved Location within the Exclusive Territory shall be
located as follows:
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
2. Franchisee's Representations and Warranties. The Franchisee represents and warrants
that it has negotiated, but not yet executed, a lease for the premises for the Franchised Business, a copy
of which has been provided to the Franchisor, and the Franchisee warrants and represents as follows:
a. That the initial term of the lease, or the initial term together with any renewal
terms (for which rent shall be set forth in the lease), shall be for not less than ______ years; and
b. That the lessor has consented to the Franchisee's use of the Proprietary Marks
and initial signage as the Franchisor may prescribe for the Franchised Business.
3. Approved Location. The Approved Location described in Paragraph 1 hereof shall
constitute the site referred to in Paragraph I.A. of the Franchise Agreement.
4. Miscellaneous.
a. All capitalized terms not defined herein shall have the meaning given to them in
the Franchise Agreement.
b. This Site Selection Addendum constitutes an integral part of the Franchise
Agreement, and the terms of this Site Selection Addendum shall be controlling with respect to the subject
matter hereof. Except as modified or supplemented by this Site Selection Addendum, the terms of the
Franchise Agreement are hereby ratified and confirmed.
IN WITNESS WHEREOF, the parties hereto have duly executed, sealed and delivered this
Addendum on the day and year first above written.
FRANCHISOR:
ZERO'S MR. SUBMARINE, INC.
WITNESS:
______________________________ By: _______________________________________
_________________________, _____________
FRANCHISEE:
WITNESS: ________________________________ (Name)
_______________________________ _____________________________________
Each of the undersigned owns a twenty percent (20%) or greater beneficial interest in the
Franchisee; each has read this Site Selection Addendum and each agrees to be individually bound by its
terms.
WITNESS
________________________________ _____________________________________
________________________________ _____________________________________
________________________________ _____________________________________
ATTACHMENT B
MANDATORY ADDENDUM TO LEASE AGREEMENT
THIS AGREEMENT is made and entered into this _______ day of ____________, 19 ____, by
and among ZERO'S MR. SUBMARINE, INC., (hereinafter referred to as "Franchisor"), a Virginia
Corporation formed under the laws of the Commonwealth of Virginia;
__________________________(hereinafter referred to as the "Landlord"), with its principal offices at
__________________________________________________________________________________;
and _____________(hereinafter referred to as the "Tenant"), with its principal offices at
__________________________________________________________________________________.
WITNESSETH:
WHEREAS, the Landlord and the Tenant have executed a lease agreement dated ___________,
(the "Lease") for the premises located at __________________________________________________
__________________________________________________
__________________________________(the "Leased Premises") for use by the Tenant as a business to
be operated pursuant to Franchisor's proprietary marks and system in connection with a written
Franchise Agreement dated __________________, by and between Franchisor and the Tenant (the
"Franchise Agreement");
WHEREAS, a condition to the approval of the Tenant's specific location by the Franchisor is
that the Lease for the Leased Premises designated for the operation of a Zero's Mr. Submarine
restaurant (hereinafter the "Franchised Business") contain the agreements set forth herein;
WHEREAS, the Landlord acknowledges that the Franchisor requires the modifications to the
Lease set forth herein as a condition to its approving the Leased Premises as a site for the Franchised
Business, and that the Landlord agrees to modify and amend the Lease in accordance with the terms and
conditions contained herein;
WHEREAS, according to Section XIV.D. of the Franchise Agreement, all rights, title and
interest in and to the Lease may be assigned to Franchisor upon the termination of the Franchise
Agreement; and
WHEREAS, it is the intent of the parties hereto to provide Franchisor with the opportunity to
preserve the leased premises as a Franchised Business in the event of any default or termination of said
lease or Franchise Agreement and to assure the Landlord that in the event Franchisor exercises its rights
herein contained, any defaults of the Tenant under the Lease will be cured by Franchisor before it takes
possession of the Leased Premises.
1. Use Clause. The Leased Premises shall be used for the operation of a family
oriented fast food restaurant specializing in a wide variety of submarine sandwiches, pizza, salads and
other food and beverage products identified by the mark Zero's Mr. Submarine. The Leased Premises
must be able to accommodate:
__________________________________________________________________________
__________________________________________________________________________
_________________________________________________________.
The Landlord acknowledges that such use shall not violate any then existing exclusives granted
to any existing tenant of the Landlord. The Landlord further acknowledges that during the term of this
Lease or any extension thereof, the Landlord will not lease space within the location of the Franchised
Business to a business similar to the Tenant's.
Landlord represents and warrants that the Leased Premises has no existing building code
violations and is properly zones for its intended use.
2. Default of Lessee under Lease. The Landlord shall mail to Franchisor copies of
any notice of default or termination it gives to the Tenant concurrently with giving such notices to the
Tenant. If the Tenant fails to cure any default within the period provided in the Lease, if any, the
Landlord shall give Franchisor immediate written notice of such failure to cure. The Landlord shall
thereupon offer to Franchisor and Franchisor shall have the right to accept an assignment of the Lease or
a new lease containing the same terms and conditions of the Lease, whichever Franchisor elects. If
Franchisor elects to continue the use of the Leased Premises under an assignment of the Lease or a new
lease, it shall notify the Landlord in writing within thirty (30) days after it has received written notice
from the Landlord specifying the defaults the Tenant has failed to cure within the grace period specified
in the Lease. Upon receipt of such notice from Franchisor, the Landlord shall promptly execute and
deliver to Franchisor an assignment of the Lease or a new lease, whichever Franchisor requests, and shall
deliver to Franchisor possession of the Leased Premises, free and clear of any rights of the Tenant or any
third party. Franchisor, before taking possession of the Leased Premises, shall promptly cure the defaults
specified by the Landlord in its notice to Franchisor and shall execute and deliver to the Landlord its
acceptance of the assignment of the Lease or of the new lease, as the case may be.
In the event that the Franchisor elects to enter into a new lease with the Landlord, Landlord shall
do so upon terms and conditions no less favorable than those contained in the Lease.
3. Termination of the Franchise Agreement. If the Franchise Agreement between
Franchisor and the Tenant is terminated for any reason during the term of the Lease or any extension
thereof, the Tenant, upon the written request of Franchisor, shall assign to Franchisor all of its rights, title
and interest in and to the Lease. If Franchisor elects to accept the assignment of the Lease from the
Tenant, it shall give the Tenant and the Landlord written notice of its election to acquire the leasehold
interest. The Landlord hereby consents to the assignment of the Lease from the Tenant to Franchisor,
subject to the Tenant's and/or Franchisor's curing any defaults of the Tenant under the Lease before
Franchisor takes possession of the Leased Premises. Alternatively, in the event of a termination of the
Franchise Agreement, Franchisor may elect to enter into a new lease with the Landlord containing terms
and conditions no less favorable than the Lease. Upon the Landlord's receipt of written notice from
Franchisor advising the landlord that Franchisor elects to enter into a new lease, the Landlord shall
execute and deliver such new lease to Franchisor for its acceptance. The Landlord and the Tenant shall
deliver possession of the Leased Premises to Franchisor, free and clear of all rights of the Tenant or third
parties, subject to Franchisor's curing any defaults of the Tenant, under the Lease, and executing an
acceptance of the assignment of Lease or the new lease, as the case may be.
The Franchisor shall indemnify, defend and hold the Landlord harmless from any attempt to
terminate the Lease or dispossess the Tenant from the Leased Premises based upon a termination of the
Franchise Agreement.
4. Tenant's Agreement to Vacate Leased Premises. The Tenant agrees to
peaceably and promptly vacate the Leased Premises and (subject to Franchisor's right to acquire any
such property pursuant to its Franchise Agreement with the Tenant) to remove its personal property
therefrom upon the termination of the Franchise Agreement or upon the Tenant's failure to timely cure
all of its defaults under the Lease. Any property not removed or otherwise disposed of by the Tenant
shall be deemed abandoned.
5. Delivery of Possession. If it becomes necessary for the Landlord to pursue legal
action to evict the Tenant in order to deliver possession of the Leased Premises to the Franchisor, the
Franchisor shall, at the written request of the Landlord, pay into an interest-bearing escrow account all
amounts necessary to cure any default of the Tenant, pending delivery of the Leased Premises to the
Franchisor. If the Landlord may not legally obtain possession of the Leased Premises or if the Landlord
is unable to deliver the Leased Premises to the Franchisor within six (6) months from the date the
Franchisor notifies the Landlord of its election to continue the use of the Leased Premises, then the
Franchisor shall have the right at any time thereafter to rescind its election to acquire a leasehold interest
in the Leased Premises and to terminate the Lease or any new lease between it and the Landlord for the
Leased Premises, whereupon all amounts deposited by the Franchisor in escrow, together with interest
earned thereon, shall be returned forthwith to the Franchisor, and the Landlord shall release the
Franchisor from all of its obligations under the Lease or under any new lease.
6. Amendment of Lease. The Landlord and the Tenant agree not to amend the
Lease in any respect, except with the prior written consent of the Franchisor.
7. Franchisor Not a Guarantor. The Landlord acknowledges and agrees that
notwithstanding any terms or conditions contained in this Addendum or any other agreement, the
Franchisor shall in no way be construed as a guarantor or surety of the Tenant's obligations under the
Lease. Notwithstanding the foregoing, in the event the Franchisor becomes the Tenant by assignment of
the Lease in accordance with the terms hereof or enters into a new lease with Landlord, then the
Franchisor shall be liable for all of the obligations of the Tenant on its part to be performed or observed
under the Lease or a new lease.
8. Document to Govern. The terms and conditions contained herein modify and
supplement the Lease. Whenever any inconsistency or conflict exists between this Addendum and the
Lease, the terms of this Addendum shall prevail.
9. No Hazardous Materials. The Landlord warrants and represents that no part of
the Franchised Business location, including the walls, ceilings, structural steel, flooring, pipes or boilers
is wrapped, insulated, fire-proofed or surfaced with any asbestos-containing materials (hereinafter
"ACM") or other hazardous materials as the same may be identified from time to time by applicable
federal, state or local laws or regulations ("Hazardous Materials"), and that no ACM materials or
Hazardous Materials will be present in the Leased Premises as of the date Tenant takes possession
thereof.
10. Assignment and Subletting. Notwithstanding anything set forth in the Lease to
the contrary, the Tenant shall have the right to assign this Lease or any interest therein, or sublet the
Leased Premises or any portion thereof without the consent of Landlord:
(a) to any bona fide franchisee of the Franchisor; or
(b) to the Franchisor or any successor or affiliate thereof.
11. Subordination. The Landlord will subordinate its interest in the Tenant's
equipment to any lender financing the same, and the Landlord will further cooperate in executing all
required documents to recognize such subordination.
12. Waiver. Failure of Franchisor to enforce or exercise any of its rights hereunder
shall not constitute a waiver of the rights hereunder or a waiver of any subsequent enforcement or
exercise of its rights hereunder.
13. Amendment of Agreement. This Agreement may be amended only in writing
signed by all parties hereto.
14. Notices. All notices hereunder shall be by certified mail to the addresses set
forth above or to such other addresses as the parties hereto may, by written notice, designate.
15. Binding Effect. This Agreement shall be binding upon the parties hereto, their
heirs, executors, successors, assigns and legal representatives.
16. Severability. If any provision of this Agreement or any part thereof is declared
invalid by any court of competent jurisdiction, such act shall not affect the validity of this Agreement and
the remainder of this Agreement shall remain in full force and effect according to the terms of the
remaining provisions or part of provisions hereof.
17. Remedies. The rights and remedies created herein shall
be deemed cumulative and no one of such rights or remedies shall be exclusive
at law or in equity of the rights and remedies which Franchisor may have under
this or any other agreement to which Franchisor and the Tenant are parties.
18. Attorneys' Fees. If any action is instituted by any party to enforce any provision
of this Agreement, the prevailing party shall be entitled to recover all attorney's fees and costs incurred
in connection therewith.
19. Construction. This Agreement shall be governed by and construed in accordance
with the laws of the State in which the Leased Premises are located.
20. Certain Acknowledgments. The Landlord and the Tenant acknowledge and
agree that all interior and exterior signage and related items (collectively the "Leased/Licensed Assets")
are the sole property of the Franchisor. The Tenant shall have no right to pledge in any manner the
leased/Licensed Assets and the Landlord shall have no rights to place any liens on or make any other
claims to the Leased/Licensed Assets.
IN WITNESS WHEREOF, the parties hereto have caused this Option for Assignment of Lease
to be executed the day and year first above written.
<PAGE>
WITNESS:
______________________________ ___________________________________
Landlord
_______________________________ ___________________________________
Tenant
ATTEST: ZERO'S MR. SUBMARINE, INC.
________________________________ By: ____________________________________
Secretary ______________________________
ATTACHMENT C
TELEPHONE ASSIGNMENT AGREEMENT
THIS TELEPHONE ASSIGNMENT AGREEMENT is made as of this ____ day of
________, 19 ____ by and between _____________________________________ (hereinafter the
"Assignor") and Zero's Mr. Submarine, Inc., a Virginia Corporation formed under the laws of the
Commonwealth of Virginia (hereinafter the "Assignee").
WITNESSETH:
WHEREAS, the Assignee has developed and owns the proprietary system ("System") for the
operation of a restaurant under the trademark and logo Zero's Mr. Submarine (the "Franchised
Business");
WHEREAS, the Assignor has been granted a license to operate a Franchised Business pursuant
to a Franchise Agreement dated ____________________, in accordance with the System;
WHEREAS, in order to operate its Franchised Business, the Assignor shall be acquiring one or
more telephone numbers, telephone listings and telephone directory advertisements; and
WHEREAS, as a condition to the execution of the Franchise Agreement, the Assignee has
required that the Assignor assign all of its rights title and interest in its telephone numbers, telephone
listings, and telephone directory advertisements to the Assignee in the event of a termination of the
Franchise Agreement;
NOW, THEREFORE, in consideration of the foregoing, the mutual promises herein contained
and other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:
1. Assignment. In the event of termination of the Franchise Agreement, and in
order to secure continuity and stability of the operation of the System, the Assignor hereby sells, assigns,
transfers and conveys to the Assignee all of its rights, title and interest in and to certain telephone
numbers, telephone listings and telephone directory advertisements pursuant to which Assignor shall
operate its Franchised Business in accordance with the terms of the Franchise Agreement; provided,
however, such Assignment shall not be effective unless and until the Franchise Agreement is terminated
in accordance with the provisions thereof.
2. Representation and Warranties of the Assignor. The Assignor hereby
represents, warrants and covenants to the Assignee that:
(a) As of the effective date of the Assignment, all of the Assignor's obligations
and indebtedness for telephone, telephone listing services and telephone director advertisement services
shall be paid and current;
(b) As of the date hereof, the Assignor has full power and legal right to enter
into, execute, deliver and perform this Agreement;
(c) This Agreement is a legal and binding obligation of the Assignor, enforceable
in accordance with the terms hereof;
(d) The execution, delivery and performance of this Assignment does not
conflict with, violate, breach or constitute a default under any contract, agreement or instrument to which
the Assignor is a party or by which the Assignor is bound, and no consent of nor approval by any third
party is required in connection herewith; and
(e) The Assignor has the specific power to assign and transfer its rights, title
and interest in its telephone numbers, telephone listings and telephone directory advertisements, and the
Assignor has obtained all necessary consents to this Assignment.
3. Miscellaneous. The validity, construction and performance of this
Assignment shall be governed by the laws of the Commonwealth of Virginia. All agreements, covenants,
representations and warranties made herein shall survive the execution hereof. All rights of the Assignee
shall inure to its benefit and to the benefit of its successors and assigns.
IN WITNESS WHEREOF, each of the parties have executed this Assignment as of the day and
year first written above.
ASSIGNEE:
ZERO'S MR. SUBMARINE, INC.
By:______________________________________
____________________, ________________
ASSIGNOR:
By: _______________________________________
_____________________, _________________
ATTACHMENT D
GUARANTY
In consideration of, and as an inducement to, the execution of that certain Franchise Agreement,
and any revisions, modifications and amendments thereto, (hereinafter collectively the "Agreement")
dated _____________, 19 _____, by and between Zero's Mr. Submarine, Inc., a Virginia Corporation
formed under the laws of the Commonwealth of Virginia, (hereinafter the "Franchisor") and
________________________________ (hereinafter the "Franchisee"), each of the undersigned
Guarantors agrees as follows:
1. The Guarantors do hereby jointly and severally unconditionally guaranty the full, prompt
and complete performance of the Franchisee under the terms, covenants and conditions of the
Agreement, including without limitation the complete and prompt payment of all indebtedness to the
Franchisor under the Agreement. The word "indebtedness" is used herein in its most comprehensive
sense and includes without limitation any and all advances, debts, obligations and liabilities of the
Franchisee, now or hereafter incurred, either voluntarily or involuntarily, and whether due or not due,
absolute or contingent, liquidated or unliquidated, determined or undetermined, or whether recovery
thereof may be now or hereafter barred by any statute of limitation or is otherwise unenforceable.
2. The obligations of the Guarantors are independent of the obligations of the Franchisee
and a separate action or actions may be brought and prosecuted against any or all of the Guarantors,
whether or not actions are brought against the Franchisee or whether the Franchisee is joined in any such
action.
3. If the Franchisee is a corporation, partnership or limited liability company, the
Franchisor shall not be obligated to inquire into the power or authority of the Franchisee or its partners or
the officers, directors, agents, members or managers acting or purporting to act on the Franchisee's
behalf and any obligation or indebtedness made or created in reliance upon the exercise of such power
and authority shall be guaranteed hereunder. Where the Guarantors are corporations or partnerships it
shall be conclusively presumed that the Guarantors and the partners, agents, officers and directors acting
on their behalf have the express authority to bind such corporations or partnerships and that such
corporations or partnerships have the express power to act as the Guarantors pursuant to this Guaranty
and that such action directly promotes the business and is in the interest of such corporations or
partnerships.
4. The Franchisor, its successors and assigns, may from time to time, without notice to the
undersigned: (a) resort to the undersigned for payment of any of the indebtedness, whether or not it or its
successors have resorted to any property securing any of the indebtedness or proceeded against any other
of the undersigned or any party primarily or secondarily liable on any of the indebtedness; (b) release or
compromise any indebtedness of any of the undersigned hereunder or any indebtedness of any party or
parties primarily or secondarily liable on any of the indebtedness; (c) extend, renew or credit any of the
indebtedness for any period (whether or not to longer than the original period); (d) alter, amend or
exchange any of the indebtedness; or (e) give any other form of indulgence, whether under the
Agreement or otherwise.
5. The undersigned further waive presentment, demand, notice of dishonor, protest,
nonpayment and all other notices whatsoever, including without limitation: notice of acceptance hereof;
notice of all contracts and commitments; notice of the existence or creation of any liabilities under the
Agreement and of the amount and terms thereof; and notice of all defaults, disputes or controversies
between the Franchisee and the Franchisor resulting from the Agreement or otherwise, and the
settlement, compromise or adjustment thereof.
6. This Guaranty shall be enforceable by and against the respective administrators,
executors, successors and assigns of the Guarantors and the death of any Guarantor shall not terminate
the liability of such Guarantor or limit the liability of the other Guarantors hereunder.
7. If more than one person has executed this Guaranty, the term "the undersigned," as used
herein shall refer to each such person, and the liability of each of the undersigned hereunder shall be joint
and several and primary as sureties.
8. In each case where the spouse of a Franchisee has executed any documents in connection
with the granting of the Agreement, and the Franchisee subsequently divorces from such spouse then, in
the event that the Franchisee subsequently remarries, the new spouse of such Franchisee must execute,
and agree to be bound by the provisions of, each of the documents previously executed by the
Franchisee's original spouse.
IN WITNESS WHEREOF, each of the undersigned has executed this Guaranty under seal
effective as of the ______ day of _______________, 19 ____.
________________________________ ___________________________________
Signature Signature of Spouse (if married)
________________________________ ___________________________________
Printed Name Printed Name
________________________________ ___________________________________
________________________________ ___________________________________
________________________________ ___________________________________
Home Address Home Address
________________________________ ___________________________________
Home Telephone Home Telephone
________________________________ ___________________________________
Business Telephone Business Telephone
________________________________ ___________________________________
Date Date
<PAGE>
ATTACHMENT E
ADDENDUM TO FRANCHISE AGREEMENT
FINANCIAL STATEMENTS, SCHEDULE FOR
PAYMENT OF ROYALTIES AND ADVERTISING FEES,
AND DIRECT DEPOSIT AUTHORIZATION
THIS ADDENDUM to the Franchise Agreement ("Agreement") dated _____________________
herewith by and between Zero's Mr. Submarine, Inc. ("Franchisor") and
_________________________________ ("Franchisee") is made as of the same date to supplement
certain terms and conditions of the Agreement. In the event of any conflict between the terms of the
Agreement and the terms of this Addendum, the terms of this Addendum shall control. All capitalized
terms not otherwise defined in this Addendum shall have their respective meanings set forth in the
Agreement. Franchisor and Franchisee agree as follows:
1. Franchisee Reports
(a) Weekly summary reports will be submitted by no later than 5:00 p.m. on
Monday of each week, in a form specified by the Franchisor, containing sales
and other information relative to the previous weekly reporting period (Sunday
to Saturday).
(b) Within 15 business days after the end of each month, an income statement of
Franchisee's Restaurant for such month and for the fiscal year to date, prepared
in accordance with generally accepted accounting principles ("GAAP")
consistently applied, in Franchisor's recommended format if such statements are
available; and
(c) Within 90 days after the end of Franchisee's fiscal year, which shall be the
calendar year, an income statement and balance sheet of Franchisee's Restaurant
for such fiscal year (reflecting all year-end adjustments), and a statement of
changes in cash flow of the Restaurant, prepared in accordance with GAAP,
consistently applied, and in Franchisor's recommended format. Franchisor
reserves the right to require that Franchisee have reviewed financial statements
prepared on an annual basis.
2. Schedule For Payment Of Royalties And Advertising Fees
Royalty Fees. Franchisee shall pay to Franchisor a continuing non-refundable weekly
royalty fee as described in Section III.B. hereof, of six percent (6%) of Gross Sales as that term is defined
herein. The royalty fee is non-refundable and shall be paid weekly and sent to the Franchisor by
electronic funds transfer due on Tuesday (for the preceding Sunday through Saturday period) or such
other specific day of the week which Franchisor will designate from time to time ("Due Date"). Prior to
the opening of a Franchise, Franchisee shall execute an Authorization Agreement for pre-authorized
payment of Royalty payments by electronic transfer of funds from Franchisee's bank account to
Franchisor's bank account, in the form attached to this Agreement as Attachment E. Franchisee shall
report to Franchisor by telephone, facsimile or e-mail as may be reasonably directed by Franchisor, no
later than 5:00 p.m. Monday (hereinafter referred to as "Reporting Date"), with such information and
pursuant to such standard transmittal procedures regarding Franchisee's Gross Sales and such additional
information as may be requested by Franchisor. Franchisor shall have the right to verify such Royalty
payments from time to time as it deems necessary, in any reasonable manner. In the event Franchisee
fails to have sufficient funds in its account or otherwise fails to pay any Royalties due as of the Due Date,
Franchisee shall owe a $50 penalty, and a late charge equivalent to 2% per month; however, in no event
shall Franchisee be required to pay a late payment at a rate greater than the maximum interest rate
permitted by applicable law.
Regional Advertising Fund Contribution. Pursuant to Section X.B. hereof, the
Franchisor reserves the right to establish a Regional Advertising Fund pursuant to which the Franchisee
shall be required to pay to the Franchisor a continuing non-refundable weekly advertising contribution of
up to two percent (2%) of the Franchisee's Gross Sales. The advertising fee is non-refundable and shall
be paid weekly and sent to the Franchisor by electronic funds transfer due on Tuesday (for the preceding
Sunday through Saturday period) or such other specific day of the week which Franchisor will designate
from time to time ("Due Date"). Prior to the opening of a Franchise, Franchisee shall execute an
Authorization Agreement for pre-authorized payment of Advertising payments by electronic transfer of
funds from Franchisee's bank account to Franchisor's bank account, in the form attached to this
Agreement as Attachment E. Franchisee shall report to Franchisor by telephone, facsimile or e-mail, or
as may be reasonably directed by Franchisor no later than 5:00 p.m. on Monday (hereinafter referred to
as "Reporting Date"), with such information and pursuant to such standard transmittal procedures
regarding Franchisee's Gross Sales and such additional information as may be requested by Franchisor.
Franchisor shall have the right to verify such Advertising payments from time to time as it deems
necessary, in any reasonable manner. In the event Franchisee fails to have sufficient funds in its account
or otherwise fails to pay any Advertising Fee due as of the Due Date, Franchisee shall owe, a $50
penalty, and a late charge equivalent to 2% per month; however, in no event shall Franchisee be required
to pay a late payment at a rate greater than the maximum interest rate permitted by applicable law.
If a Regional Advertising Fund is established, the Franchisor shall deposit and disburse the amounts
contributed in accordance with the provisions of Section X hereof and any other guidelines or standards
which the Franchisor may adopt.
At such time when the Regional Advertising Fund may be established, and in the sole discretion of
Franchisor, an advertising council composed of franchisees shall be formed to advise Franchisor of
advertising policies. After the first full year of operation of the Franchised Business, Franchisee's
contributions will be pre-calculated on the basis of the previous year's Gross Sales. Franchisee will be
required to make contributions to the regional Advertising Fund in addition to Franchisee's obligation to
conduct local marketing and promotion as set forth in Section IX.A.4 below.
Late Fee and Interest Charge. If the Franchisee fails to report Royalty Sales by the
Reporting Date then the Franchisee shall be assessed a Late Fee of Seventy-five Dollars ($75) per week
until the sales are reported. If at any time Franchisor debits Franchisee's account for payment of the
Royalty or Advertising Fees and there are non-sufficient funds in Franchisee's account to pay the fee, the
fee will be considered late. Franchisee shall be assessed a penalty of Fifty Dollars ($50) each time a
payment is delinquent. All overdue amounts will bear interest, until paid, at the rate of two percent (2%)
per month on the date payment was due, however, in no event shall Franchisee be required to pay at a
rate greater then permitted by applicable state law. Interest shall be calculated on a daily basis. Late
Fees and Interest Charges are non-refundable.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed on
the date first set forth above
ZERO'S MR. SUBMARINE, INC FRANCHISEE
________________________
By: _____________________________________ By_____________________
Its: _____________________________________ Its _____________________
<PAGE>
AUTHORIZATION AGREEMENT FOR PREARRANGED PAYMENTS
(DIRECT DEBITS)
The undersigned depositor ("Depositor") hereby (1) authorizes Zero's Mr. Submarine, Inc ("Company")
to initiate debit entries and/or credit correction entries to the undersigned's checking and/or savings
account indicated below and (2) authorizes the depository designated below ("Depository") to debit such
account pursuant to Company's instructions.
____________________________________ ______________________________
Depository Branch
________________________ _______ _______________
City State Zip Code
__________________________________ ______________________________
Bank Transit/ABA Number Account Number
This authority is to remain full in force and effect until Depository has received joint written notification
from Company and Depositor of the Depositor's termination of such authority in such time and in such
manner as to afford Depository a reasonable opportunity to act on it. Notwithstanding the foregoing,
Depository shall provide Company and Depositor with 30 days prior written notice of the termination of
this authority. If an erroneous debit entry is initiated to Depositor's account, Depositor shall have the
right to have the amount of such entry credited to such account by Depository, if (a) within 15 calendar
days following the date on which Depository sent to Depositor a statement of account or a written notice
pertaining to such entry or (b) 45 days after posting, whichever occurs first, Depositor shall have sent to
Depository a written notice identifying such entry, stating that such entry was in error and requesting
Depository to credit the amount thereof to such account. These rights are in addition to any rights
Depositor may have under federal and state banking laws.
_______________________________________ ______________________________
DEPOSITOR (Print Name) DEPOSITORY (Print Name)
By: ______________________________ By: __________________________
Its: ______________________________ Its: __________________________
Date_____________________________ Date__________________________
</TABLE>
<TABLE>
<S><C>
<PAGE>
FRANCHISE OFFERING CIRCULAR
FOR PROSPECTIVE SINGLE-UNIT FRANCHISEES AND AREA
DEVELOPERS
ZERO'S MR. SUBMARINE, INC.
(A Virginia Corporation)
2106 Pacific Avenue
Virginia Beach, VA 23451
Telephone: (757) 425-5745
Facsimile: (757) 422-9157
The Franchisee will establish and operate a Zero's Mr. Submarine family oriented quick service
restaurant specializing in a wide variety of hot oven-baked submarine sandwiches, pizza, salads and other
food and beverage products, (referred to as the "Franchised Business" in this Offering Circular). Zero's
Mr. Submarine is identified by the mark "Zero's Mr. Submarine" d/b/a "Zero's" written above and the
word "Subs" written below the profile.
The initial franchise fee for the license to operate a single Franchised Business is $15,00012,500. At its
discretion, the Franchisor may offer an Area Development Agreement pursuant to which the Area
Developer would have the right to develop and operate a specified number of Franchised Businesses.
The total initial franchise fee for an Area Developer is $15,000 for the first Franchised Business plus
$7,500 for each additional Franchised Business to be developed. Area Developers are required to pay
$15,000 for the first Franchised Business and make a 50% non-refundable deposit for each additional
Franchised Business. The estimated initial investment required for a single Franchised Business ranged
from approximately $117,180 - $169,300.
Risk Factors:
THE FRANCHISE AGREEMENT PERMITS THE FRANCHISEE TO
ARBITRATE WITH ZERO'S ONLY IN VIRGINIA. OUT OF STATE
ARBITRATION MAY FORCE YOU TO ACCEPT A LESS FAVORABLE
SETTLEMENT FOR DISPUTES. IT MAY ALSO COST YOU MORE TO
ARBITRATE WITH ZERO'S IN VIRGINIA THAN IN YOUR HOME
STATE.
THE FRANCHISE AGREEMENT STATES THAT VIRGINIA LAW
GOVERNS THE AGREEMENT, AND THE LAW MAY NOT PROVIDE
THE SAME PROTECTIONS AND BENEFITS AS LOCAL LAW. YOU
MAY WANT TO COMPARE THESE LAWS.
THERE MAY BE OTHER RISKS CONCERNING THIS FRANCHISE.
Information about comparisons of Franchisors may be available. Call the state administrators listed in
Exhibit C or your public library for sources of information. Registration of this information about
comparisons of Franchisors may be available.
Registration of this franchise by a state does not mean that the state recommends it or has verified the
information in this Offering Circular. If you learn that anything in this Offering Circular is untrue,
contact the Federal Trade Commission and the Division of Securities and Retail Franchising of the State
Corporation listed in Exhibit C.
Effective Date: July 30, 1998
Amendment Date: January 14, 1999
Amendment Date: May 25, 1999
TABLE OF CONTENTS
ITEM PAGE
1. THE FRANCHISOR, ITS PREDECESSORS AND AFFILIATES............................................. 5
2. BUSINESS EXPERIENCE......................................................................... 7
3. LITIGATION................................................................................... 8
4. BANKRUPTCY.................................................................................. 8
5. INITIAL FRANCHISE FEE....................................................................... 8
6. OTHER FEES ............................................................................... 9
7. INITIAL INVESTMENT ....................................................................... 12
8. RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES ....................................... 14
9. FRANCHISEE'S OBLIGATIONS .............................................................. 15
10. FINANCING ............................................................................. 17
11. FRANCHISOR'S OBLIGATIONS ............................................................... 17
12. TERRITORY ...................................................................................... 21
13. TRADEMARKS ......................................................................................... 21
14. PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION ...................................... 22
15. OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE
FRANCHISED BUSINESS .......... 23
16. RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL .............................................. 23
17. RENEWAL, TERMINATION, TRANSFER & DISPUTE RESOLUTION ............................... 23
18. PUBLIC FIGURES .................................................................... 25
19. EARNINGS CLAIMS ................................................................... 26
20. LIST OF OUTLETS ................................................................... 28
21. FINANCIAL STATEMENTS ............................................................ .... 29
22. CONTRACTS ............................................................................ 29
23. RECEIPT................................................... .......................... . 30
* * * *
EXHIBITS
EXHIBIT A FRANCHISE AGREEMENT
EXHIBIT B ROSTER OF FRANCHISEES
EXHIBIT C LIST OF STATE ADMINISTRATORS &
AGENTS FOR SERVICE OF PROCESS
EXHIBIT D AREA DEVELOPMENT AGREEMENT
EXHIBIT E FINANCIAL STATEMENTS
EXHIBIT F COMPUTER HARDWARE AND
SOFTWARE SPECIFICATIONS
* * * * *
FRANCHISE OFFERING CIRCULAR
FOR PROSPECTIVE SINGLE-UNIT FRANCHISEES AND AREA DEVELOPERS
AS REQUIRED BY THE COMMONWEALTH OF VIRGINIA
ZERO'S MR. SUBMARINE, INC.
ITEM 1.
THE FRANCHISOR, ITS PREDECESSORS AND AFFILIATES
To simplify the language in this Offering Circular, "Zero's" and "we" and "us" and "ours" means Zero's
Mr. Submarine, Inc., the Franchisor. "Franchisee" and "you" means the person to whom the Franchised
Business is granted and includes the Franchisee's owners and co-investors if the Franchisee is a
corporation, partnership or other business entity.
The Franchisor, Its Predecessors and Affiliates
Zero's was organized on March 29, 1989. Our administrative offices are located at 2106 Pacific Avenue,
Virginia Beach, VA 23451 and our operating offices are at 2106 Pacific Avenue, Virginia Beach, VA
23451. We do business only under the name of "Zero's Mr. Submarine, Inc.," d/b/a Zero's Subs.
We are affiliated with X.S., Inc., (X.S.) that also maintains its administrative offices at 2106 Pacific
Avenue, Virginia Beach, VA 23451. X.S., Inc. owns the "Zero's Mr. Submarine, Inc." trademark and
has granted use of the license to use the mark to Zero's Mr. Submarine, Inc., and the rights to Zero's Mr.
Submarine, Inc. to sell the franchises.
The Business of the Franchisor
We grant Franchised Businesses to qualified candidates for the operation of a Zero's Mr. Submarine, Inc.
restaurant. We are not presently engaged in business activities other than the development of the "Zero's
Mr. Submarine" and the offer, sale and support of Franchised Businesses. Our affiliate, X.S., Inc. will
own and operate company-owned units.
The Franchised Business
Zero's Subs restaurants are specialty restaurants with a universal appeal. The menu includes a widely
diverse selection of high quality subs, pizzas, salads, and other products, that cater to all age and income
groups. Zero's restaurants offer seating for between 35 and 70 persons. Each restaurant operates
pursuant to a unique system ("System") developed by X.S. and us relating to the establishment,
development and operation of a Zero's restaurant. The System is characterized by distinctive exterior
and interior facility layout, design and color scheme; exclusively designed signage, decorations,
furnishings and materials; special recipes, formulae, menus and food and beverage designations; the
Zero's Manual of Operating Data ("MOD Manual"); food and beverage storage, preparation, service and
delivery procedures and techniques; operating procedures for sanitation and maintenance; and methods
and techniques for inventory and cost controls, record keeping and reporting, personnel management,
purchasing, sales promotion and advertising; all of which we may change and develop from time
to time.
We, along with X.S. have developed and continue to develop a proprietary line of specially formulated
meatballs, spice packets and other food products ("Trade Secret Food Products") which shall be sold to
customers from the restaurant.
In addition to our hot oven-baked submarine sandwiches, pizza and ice cream. In addition, we serve the
breakfast market by offering a moderate priced breakfast menu. A full array of soft drinks and snacks are
also offered for sale. In addition, beer is sold at various locations for on-premise consumption. We are
working on a drive-thru concept. Most items are sold for either on-premise, or carry-out consumption.
We also offer catering as part of the System. You can only offer catering and delivery with our prior
consent.
We offer a moderate priced product, which is attractive to all facets of the general public. We compete
directly with local restaurants as well as national fast food chains. Our stores are either freestanding
buildings or "in line" stores in retail strip shopping centers. We have no interior shopping mall locations
at the present time.
You will be licensed to use Zero's service mark "Zero's Mr. Submarine, Inc." and logo, as well as related
trademarks, service marks, logos and slogans (hereinafter the "Proprietary Marks"), and the proprietary
operating system (hereinafter the "System') developed by Zero's for the operation of a franchised
business. Franchisees are also licensed to utilize Zero's confidential Operations Manuals (hereinafter the
"Manuals") which sets forth the standards and specifications for the management and operation of the
franchised business.
We will grant to you a protected area in which you may establish and operate your franchised business
and we will provide you with guidelines and specifications for the operation and management of the
Franchised Business, including advertising and promotional techniques. Also, we will provide an initial
training program detailing the operation of the franchised business for up to two persons including a
Franchisee/General Manager, and a shift supervisor. The Franchisee may supplement the initial training
program by having our field support training staff provide up to two weeks of additional training at the
franchisee's location prior to and during the Grand Opening of the franchised business.
In certain areas of the U.S., Canada and abroad, the franchisor operates through Territorial Directors
whose duties include franchise sales, site location assistance and operational assistance to franchisees.
For their services rendered to Zero's, Territorial Directors are paid a portion of the initial franchise fee
and a portion of royalties collected.
Territorial Directors are prohibited from making any representations of sales or profits to prospective
purchasers of franchises. Additionally, Territorial Directors are obligated to abide by all federal and
state laws in the performance of their duties. Territorial Directors are independent contractors and not
employees of the franchisor. The franchisor disclaims responsibility for any acts or statements made by
Territorial Directors contrary to the disclosures made in the Offering Circular, the Franchise Agreement,
the Operating Manual and related contracts.
<PAGE>
Industry Specific Regulation
The restaurant industry is heavily regulated. Many of the laws, rules and regulations that apply to
business generally, such as The Americans With Disabilities Act, The Federal Wage and Hour Laws and
The Occupation, Health and Safety Act also apply to restaurants. However, other laws, rules and
regulations have particular applicability to restaurants and especially restaurants that offer full bar
service.
You must have a liquor license before you can sell beer in the restaurant. The difficulty and cost of
obtaining a liquor license, and the procedures for securing the license, vary greatly from area to area.
Also, there is wide variation in state and local laws and regulations that govern the sale of alcoholic
beverages. In addition, state dram shop laws may give rise to potential liability for injuries that are
directly or indirectly related to the sale and consumption of alcohol.
The U.S. Food and Drug Administration, the U.S. Department of Agriculture and state and local health
departments administer and enforce laws and regulations that govern good preparation and service and
restaurant sanitary conditions. State and local agencies inspect restaurants to ensure that they comply
with these laws and regulations.
Federal legislation known as The Clean Air Act and a variety of state laws require certain state and local
areas to meet national air quality standards by limiting emissions of ozone, carbon monoxide and
particulate matters, and placing caps on omissions from commercial food preparation. Also, some areas
have adopted or are considering proposals that would regulate indoor air quality. You should consider
these laws and regulations when evaluating your purchase of a franchise.
Prior Business Experience of Zero's
We have offered franchises in the Commonwealth of Virginia and North Carolina since 1990 and
currently have forty-five (405) such franchises in operation. Our affiliate, X.S. has been engaged in the
operation of Zero's restaurants since 1967. X.S., Inc., presently has six (6) locations in the cities of
Virginia Beach, Norfolk and Chesapeake, Virginia, for a total of forty-six (46) restaurants in operation..
Neither we, nor X.S. have operated any other kind of business, nor have we previously offered franchises
for any other type of business.
ITEM 2
BUSINESS EXPERIENCE
Eugene T. Schmidt, Chairman of the Board
Mr. Eugene T. Schmidt (the founder of Zero's affiliate, X.S., Inc.) has served as Zero's Secretary
and Treasurer since its inception in March 1989. From May 1967 to the present he concurrently serves
as President and CEO of Zero's affiliate, X.S., and supervises the entire operation.
Martin A. Palacios, President and CEO
Mr. Martin A. Palacios has served as President & CEO of Zero's since its inception in March
1989. From June 1971 to the present, he concurrently serves as Executive Vice President and Controller
of Zero's affiliate, X.S., Inc.
John A. Schmidt, Executive Vice President - Operation
Mr. John A. Schmidt has served as Executive Vice President since its inception in March 1989.
From October 1973 to the present he concurrently serves as Executive Vice President in charge of
operations and also as a buyer for Zero's affiliate, X.S.
Charles J. McCotter, III, Executive Vice President - Development
Mr. Charles J. McCotter has been directing our corporate development since January 1, 1998.
Prior to joining Zero's, Mr. McCotter served as President of JMAC, II, LTD. Between 1987 and 1995 in
Virginia Beach, Virginia and has served on the Board of Directors for several different companies.
Rachael S. Davanzo, Vice President - Franchising
Mrs. Rachael Schmidt-Davanzo has over 13 years experience in the restaurant industry in both
full service and quick service capabilities. Before joining the Company in 1993, she successfully
managed a full service restaurant. Presently, she sells franchises, prepares loan documents, consults
franchisees on financial matters and secures locations for the Company's franchises.
ITEM 3.
LITIGATION
No litigation is required to be disclosed in this Offering Circular.
ITEM 4.
BANKRUPTCY
No person previously identified in Items 1 or 2 of this Offering Circular has been involved as a debtor in
proceedings under the U.S. Bankruptcy Code require to be disclosed in this Item.
ITEM 5.
INITIAL FRANCHISE FEE
Single Unit Franchisees
The total initial franchise fee payable to Zero's by a Franchisee who is granted the right to operate a
single Franchised Business is $15,000 (Note: All dollar amounts are in U.S. Dollars in this Offering
Circular). This amount is payable in full upon the execution of the Franchise Agreement, a copy of
which is attached to this Offering Circular as Exhibit A.
Area Developers
Also, at our discretion, we may offer to qualified candidates an Area Development Agreement (See
Exhibit D) pursuant to which the Area Developer obtains the right to develop and operate a prescribed
number of Franchised Businesses. The total initial franchise fee under the Area Development Agreement
will be $15,000 for the first unit plus $7,500 for each additional unit to be developed. As part of the
initial fee, Area Developers are required to pay $15,000 for the first Franchised Business and make a
50% deposit for each additional Franchised Business. All initial franchise fees are deemed fully earned
by Zero's upon receipt and are non-refundable.
ITEM 6.
OTHER FEES
Name of Fee Amount Due Date Remarks
Royalty Fee (note 1) 6% of Gross Sales Payable on the day of the week we We will debit your bank
(note 2)(note 3) periodically designate (based on the account for Royalties
prior week's gross sales) due (note 3)
(note 3)
Advertising Fee, (note 4) Up to 2% of Gross Sales Payable on the day of the week we We will debit your bank
periodically designate (based on the account for Royalties
prior week's gross sales) due (Note 3)
Minimum Local Marketing 2% of Gross Sales As evidenced
and Promotion Expenditure
(note 5)
Late Fee (for not reporting $75 per week plus interest Due only if a payment is Overdue Payable the day after
royalty sales timely) & at two times the prime rate payment or other event
Interest on Late Payments per annum or the highest rate (such as required report) is
(note 6) permitted by applicable state, due
whichever is less
Transfer Fee (note 7) 30% of the then current 30 days prior to transfer
initial franchise fee for each
Franchised Business being
transferred
Audit Fee (note 8) Cost of Audit plus interest Due only if the audit shows an
on the underpayment at the understatement of 2% or more
Default Rate
Training Expenses (note 9) Variable During initial training
Supplemental Training Fee $150 per day plus expenses Prior to grand opening of
(note 10) Franchised Business
Indemnification (note 11) All losses and expenses incurred Upon being incurred by Zero's
Offering Prospectus $2,500 Upon review of Offering
Review Fee (note 12) Documents
Management Consulting $200 to $400 per day plus Prior to consultation
Fee (note 13) meals and expenses
Financial Statements Variable Monthly, within four months of the
(note 14) end of Franchisee's fiscal year
Alteration Costs (note 15) Variable Every five to seven years
Manuals Replacement Fee $1,000 per volume Due only if Manuals are lost,
(note 16) stolen, damaged, etc.
Renewal Fee 10% of the then current Upon execution of Renewal
(note 17) initial franchise fee Agreement
Estimated Royalty (for not Minimum of $500 per week for Payable on the day of the week Payable only if you fail
reporting sales timely) and Royalties and $100 per week we periodically Designate (based to submit timely reports of
Advertising Fee Payments for Advertising Fee; greater on prior week's gross sales) Gross Sales to us; we will
if we reasonably estimate (note 3) reconcile these amounts with
that your Franchisee is the actual amounts owed after
generating higher Gross Sales you submit the reports. We will
debit your bank account for these
sums due (note 3)
Non-sufficient funds $50 per transmittal if funds Payable on the day of the week we We will debit your bank
are note available periodically designate account
Notes
1. Royalty Fee. In addition to the initial franchise fee discussed above in Item 5, you will
be required to pay to us a continuing non-refundable weekly royalty fee for each Franchised Business in
an amount equal to 6% of your Gross Sales, as that term is defined in note 2 below.
2. Gross Sales. "Gross Sales" is defined as all sales generated through the Franchised
Business including fees for any and all services you perform, whether for cash or credit (regardless of
collectability), and billings of every kind related to the Franchised Business, including revenues from the
sale of merchandise of proprietary products or clothing, catering, use of jukeboxes, vending machines,
video games, pinball machines or similar arcade-like machines from video lottery terminals; provided,
however, that "Gross Sales' shall not include any sales tax or other taxes collected from customers by
you for transmittal to the appropriate taxing authority.
3. Payment. The royalty fee is non-refundable and shall be paid weekly to Zero's.
Payable on the day of the week we periodically designate. Before opening you must sign ad deliver to us
and your bank all documents needed to permit us to debit your bank account for each week's Royalty and
Advertising payments and other payments that you make to us.
4. Regional Advertising Fund. We reserve the right to establish a Regional Advertising
Fund. At such time when the fund may be established, and in our sole discretion, we will form an
advertising council composed of franchisees that shall advise us on advertising policies. Pursuant to the
establishment of this fund, we will collect a weekly contribution from you of up to 2% of Gross Sales
weekly, payable on the day of the week we periodically designate by direct debit from your bank
account. After the first full year of operation of your Franchised Business, contributions will be pre-
calculated on the basis of the previous year's Gross Sales. You will be required to make contributions to
the fund in addition to your obligation to conduct local marketing and promotion as set forth in note 5
below.
5. Minimum Local Marketing and Promotion Expenditure. Annually, you will be required
to spend at least 2% of Gross Sales on your own local marketing and promotion. This local marketing
and promotion will be conducted by you either individually or in conjunction with other franchisees and
must comply with the policies and procedures established by us for our prior approval of all proposed
marketing and promotion campaigns and materials. You will be required to submit to us a report on a
form prescribed by us that demonstrated that you have fulfilled your requirement for local marketing and
promotion. These local marketing and promotion requirements and fees exist independently of a
Regional Advertising Fund. Therefore, you are required to make minimum local marketing and
promotion expenditures whether or not a Regional Advertising Fund is established.
6. Late Fee & Interest. If any sums required to be paid by you to Zero's under the
Franchise Agreement are not paid when due, a late payment fee of $75 will be assessed each time, and
for each subsequent week thereafter, that the payment is delinquent, and all overdue amounts will bear
interest, payable the day after payment or other event (such as required report) is due, at the rate of two
times the prime rate then being charged by Chase Manhattan Bank, N.A. on the date payment was due or
the highest rate permitted by applicable state law, whichever is less (the "Default Rate"). Interest shall
be calculated on a daily basis. Interest charges are non-refundable.
7. Transfer Fee. Under the Franchise Agreement and Area Development Agreement a
non-refundable transfer fee equal to 30% of the then current initial franchise fee must be paid to us by
you in order to cover our administrative and other expenses in connection with the transfer of the
Franchised Business, unless the transfer is made by you to a corporation formed solely for the
convenience of ownership. All transfers must be in accordance with the terms of the Franchise
Agreement and consistent with the transfer guidelines provided to you by us. This transfer fee shall be
fully paid prior to any such transfer. In addition, the transferee, its Franchisee/General Manager, and key
kitchen employee shall complete any training program then in effect for current franchisees upon our
reasonable terms and conditions, and at the transferee's expense. The transfer fee is non-refundable.
8. Audit Fee and Related Financial Reporting Obligations. We have the right to audit the
books and records of the Franchised Business. Audits will be conducted at our expense, unless an audit
discloses an understatement in any report of 2% or more, in which case you must pay for any and all
costs and expenses incurred by us in connection with the audit (including, without limitation, reasonable
accountants' and attorneys' fees), together with interest on the undisclosed or under-reported sums at the
Default Rate which will be payable immediately upon your receipt of written notice from us. All such
audit fees, costs and expenses, as well as the interest thereon, are non-refundable.
9. Training Expenses. We provide you with a mandatory initial training program in
restaurant operations and management for up to two persons during a training period of up to six weeks
at our training facility and our a administrative offices in Virginia Beach, VA or a designated training
facility. We require you to attend the initial training program prior to the opening of your first
Franchised Business and shall provide the initial training program, including curriculum materials, at no
cost to you. However, you will be solely responsible for your expenses and those of your employees
during the training program including the costs of travel, lodging, meals, and the wages of your
employees.
10. Supplemental Training Fee. For an additional fee of $150 per day, plus meal and
travel expenses, the Franchisee may supplement the initial training program by having our field support
training person provide up to two weeks of additional training at the Franchisee's location prior to and
during the grand opening of the Franchised Business.
11. Indemnification. Under the Franchise Agreement, you are obligated to indemnify us
from all losses and expenses incurred in connection with any action, suit, proceeding, claim, demand,
investigation, or formal or informal inquiry (regardless of whether same is reduced to judgment) or any
settlement thereof which arises out of, or is based upon any of the items listed in the section of the
Franchise Agreement labeled "Indemnification."
12. Public and Private Offering Prospectus Review Fee. For each proposed offering, you
must pay to us a non-refundable document review fee of $2,500 or such greater amount as may be
required to reimburse us for our reasonable costs and expenses associated with reviewing the proposed
offering materials, including, without limitation, legal and accounting fees.
13. Management Consulting Fee. You may retain us to provide management consulting
services for special projects or assistance based upon availability of our personnel at the minimum rate of
$200 and a maximum rate of $400 per person per day plus reimbursement of all reasonable travel,
lodging, meal and other expenses incurred by us in connection with the rendering of such services. We
reserve the right to make reasonable adjustments from time to time to such daily rate at our discretion.
These consulting fees are non-refundable and must be paid to us in advance.
14. Financial Statements. You will be required to provide us annually, within four months
of the end of your fiscal year, with financial statements of the previous fiscal year certified by an Officer
of the Franchisee. Upon our request, you shall also provide us with monthly financial statements. The
cost of preparation of these financial statements will be borne by you.
15. Costs of Major Alterations. Once every five to seven years, you will be required to
make such major alterations to the restaurant as we may require, and at your own expense.
16. Manuals Replacement Fee. In the event that a Manual is lost, stolen or destroyed,
you will be required to pay us a non-refundable replacement fee of $1,000 for each volume of the
replacement Manuals.
17. Renewal Fee. You must pay a non-refundable renewal fee upon the expiration of the
initial term or any renewal term of the Franchise Agreement in order to renew the Franchise Agreement.
The renewal fee is 10% of the then current initial franchise fee.
ITEM 7.
INITIAL INVESTMENT
We are unable to calculate the exact investment required of each Franchisee of a Franchised Business
due to the many factors that influence the total project costs. Your initial investment will also vary
considerably depending upon the method and amount of financing that you use. The table below does
not reflect an amount for investment in real estate, since it is assumed that you will lease the premises of
the Franchised Business. The initial franchise fee and other items are shown in full, although they may
be financed or leased by third parties.
YOUR ESTIMATED INITIAL INVESTMENT
AMOUNT
METHOD
WHEN DUE
TO
WHOM
Franchise Fee
a) Single Unit
Franchisees
$15,000
Lump Sum
At signing of
Franchise Agreement
Zero's
b) Area
Developers
$15,000 plus 50% of
each additional initial
franchise fee
Lump Sum
At signing of Franchise
Agreement
Zero's
Pre-Operating Expenses
(including legal assistance,
accounting, food and
training)
$6,000
As arranged
As incurred
Suppliers
Leasehold Improvements
$44,000
As arranged
As incurred
Suppliers
Organizational Costs
$1,500
As arranged
As incurred
Suppliers
Furniture and fixtures
$8,000
As arranged
As incurred
Suppliers
Equipment
$60,000
As arranged
As incurred
Suppliers
Computer
Equipment
$13,000
As arranged
As incurred
Suppliers
Signage (interior and
exterior)
$3,500
As arranged
As incurred
Suppliers
Entertainment Systems
(televisions,satellite
dish and stereo, etc.)
$800
As arranged
As incurred
Suppliers
Decoration (i.e., plants,
pictures & wall hangings)
$1,500
As arranged
As incurred
Suppliers
Lease & Utility Deposits
$1,500
As arranged
As incurred
Landlord
Menus & Printing
$500
As arranged
As incurred
Printer
Smallwares & Supplies
$2,000
As arranged
As incurred
Supplies
Inventory (including retail
items and uniforms)
$4,000
As arranged
As incurred
Supplier
Supplemental Training Fee
N/A
As arranged
As incurred
Zero's
Reserves for Working
Capital - 3 months
$7,000
As arranged
As incurred
Third
Parties
Miscellaneous
$1,000
As arranged
As incurred
Third
Parties
ESTIMATED TOTAL
$169,300
Notes
1. Initial Franchise Fee. As described in Item 5, the initial franchise fee that you will pay
is $15,000. This fee is payable in a lump sum upon execution of the Franchise Agreement. The entire
initial franchise fee is deemed fully earned upon receipt by us and is non-refundable.
2. Leasehold Improvements. These amounts are our best estimates for finish-out
costs. The amounts indicated for construction and improvements of the premises are based on
construction of locations in Virginia Beach, Virginia. Labor and material costs may vary significantly in
accordance with local variations in wage rates, labor efficiency, union restrictions and availability, and
price of materials. Finish-out costs are based on leasing unfinished space that consists of walls;
plumbing; concrete slab; lighting; heat, ventilation and air conditioning ("HVAC"); and electricity.
3. Equipment, Supplies and Signage. We require that you purchase certain basic
supplies from us or suppliers that we designate (and to maintain a sufficient supply of basic supplies) in
accordance with our confidential standard operating procedures and the Manuals. Such supplies must be
appropriately identified as associated with the Franchised Business.
4. Inventory. You are required to purchase an initial inventory of certain retail items
including paper products, commodities and food products and uniforms from an approved source, or us
and maintain an adequate supply of inventory as stated in the Manuals.
5. Working Capital - 3 months. Expenditures payable out of working capital funds are
intended to cover such items as operating losses, additional insurance, security deposits, miscellaneous
additional pre-opening costs, salaries, additional legal and accounting fees, and payments to any
governmental agency that are necessary to open the Franchised Business for approximately three months.
In addition, you should be prepared to have cash available to pay your personal living expenses during
the first six to twelve months of operation. The necessary amount of working capital will vary
considerably with each franchisee.
ITEM 8.
RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES
Required or Approved Sources
We estimate that your purchases from required or approved sources will be less than 10% of your total
initial investment and less than 20% of your ongoing expenses in the operation of the Franchised
Business. These amounts may vary.
Purchases According to Specification
In order to maintain the uniformly high standards and reputation of the System, you will be required to
purchase or lease certain items either from us or the approved suppliers which meet our specifications.
These specifications may include minimum standards for quality, quantity, delivery, performance,
design, appearance, durability, style, warranties, price range and other related restrictions. All meat,
special spice, design and build-out standards, signage, uniforms, displays, and inventory must be
purchased from our approved supplier or us. You may obtain other products, including food, beverage,
ingredients (other than the special spice), paper goods and standard equipment from any source that
meets our specifications and approval. We consider these specifications to be of critical importance to
the success of the System. The Manuals sets forth these specifications in further detail.
If you propose to purchase or lease any items not previously approved in writing by us, but which you
believe meet our quality control specifications, you must first notify us. We may require, among other
things, submission of sufficient samples, specifications, photographs, drawings, and other related
information to determine whether such items meet our specifications.
We apply the following general criteria, among other things, in considering whether the supplier will be
designated as an approved supplier:
1. Ability to produce the products, services, supplies or equipment and meet our
standards and specifications for quality and uniformity;
2. Production and delivery capabilities and ability to meet supply commitments;
3. Integrity of ownership (to assure that its association with us would not be
inconsistent with our image or damage our goodwill);
4. Financial stability; and
5. The negotiation of a mutually satisfactory license to protect our intellectual
property.
We will advise you within a reasonable time whether the proposed supplier meets our specifications and
our approval will not be unreasonably withheld. You will be notified in writing of our approval or
disapproval and of revocation of approved suppliers. Suppliers must maintain our standards in
accordance with our written specifications and any modifications thereto. Failure to correct a deviation
from the System's specifications will result in termination of status as an approved supplier.
We do not negotiate discounted prices for products with suppliers. There are no purchasing or
distribution cooperatives serving the System. We do not provide any material benefits to franchisees for
use of designated or approved sources.
Except as set forth above in this Item 8, there are no other requirements for you to purchase or lease in
accordance with specifications or from approved suppliers.
ITEM 9.
FRANCHISEE'S OBLIGATIONS
THIS TABLE LISTS YOUR PRINCIPAL OBLIGATIONS UNDER THE FRANCHISE AND OTHER
AGREEMENTS. IT WILL HELP YOU FIND MORE DETAILED INFORMATION ABOUT YOUR
OBLIGATIONS IN THESE AGREEMENTS AND IN OTHER ITEMS OF THIS OFFERING
CIRCULAR.
Single Unit Franchisees
Obligation
Section in
Franchise Agreement
Items in
Offering Circular
a. Site selection and
acquisition/lease
Section V.B. of Franchise Agreement
Item 11
b. Pre-opening purchases/leases
Section V.C. of Franchise Agreement
Items 7 and 8
c. Site development and other
pre-opening requirements
Section V.D. of Franchise Agreement
Item 7 and 11
d. Initial and ongoing training
Section V.E. & V.G. of Franchise Agreement
Item 11
e. Opening
Section V.D. of Franchise Agreement
Item 11
f. Fees
Section IV of Franchise Agreement
Items 5 and 6
g. Compliance with standards and
policies/operating manual
Section VII of Franchise Agreement
Item 11
h. Trademarks and proprietary
information
Sections VI, VII, VIII of Franchise Agreement
Items 13 and 14
i. Restrictions on products/
services offered
Section V.M. of Franchise Agreement
Item 16
j. Warranty and customer
service requirements
None
None
k. Ongoing product/service
purchases
Section V.N. of Franchise Agreement
Item 8
l. Maintenance, appearance
and remodeling requirements
Section V.I of Franchise Agreement
None
m. Insurance
Section XI of Franchise Agreement
None
n. Advertising
Section X of Franchise Agreement
Items 6 and 11
o. Indemnification
Section XVIII of Franchise Agreement
Item 6
p. Owner's participation/
management/staffing
Section V.F. of Franchise Agreement
Items 11 and 15
q. Records and reports
Section IX of Franchise Agreement
Item 17
r. Inspections and audits
Sections III.B. and IX.E. of Franchise Agreement
Items 6 and 11
s. Transfer
Section XII of Franchise Agreement
Items 6 and 17
t. Renewal
Section II.B. of Franchise Agreement
Items 6 and 17
u. Post-termination obligations
Section XIV of Franchise Agreement
Item 17
v. Non-competition covenants
Section XV.B of Franchise Agreement
Item 17
w. Dispute resolution
Section XXV & XXVI of Franchise Agreement
Item 17
Additional provisions for Area Developers
Obligation
Section in
Area Development Agreement
Items in
Offering Circular
a. Site selection and acquisition/
lease
Section V of the Area Development Agreement
Item 11
b. Pre-opening purchases/leases
None
Items 7 and 8
c. Site development and other
pre-opening requirements
None
Items 7 and 11
d. Initial and ongoing training
Section III. of the Area Development Agreement
Item 11
e. Opening
Section III. & IV of the Area Development
Agreement
Item 11
f. Fees
Section III of the Area Development Agreement
Items 5 and 6
g. Compliance with standards
and policies/Operating Manuals
None
Item 11
h. Trademarks and proprietary
Information
Section X of the Area Development Agreement
Items 13 and 14
i. Restrictions on products/
services offered
None
Item 16
j. Warranty and customer
service requirements
None
None
k. Territorial development or
sales quotas
Section IV of the Area Development Agreement
Item 12
l. Ongoing product/service
purchases
None
Item 8
m. Maintenance, appearance
and remodeling requirements
None
None
n. Insurance
None
None
o. Advertising
None
Items 6 and 11
p. Indemnification
Section XIV of the Area Development Agreement
Item 6
q. Owner's participation/
management/staffing
I.D. of the Area Development Agreement
Items 11 and 15
r. Records and reports
Section XIII of Area Development Agreement
Item 17
s. Inspections and audits
None
Items 6 and 11
t. Transfer
Section VIII of Area Development Agreement
Items 6 and 17
u. Renewal
Section II of the Area Development Agreement
Items 6 and 17
v. Post-termination obligations
Sections VII and XI of Area Development
Agreement
Item 17
w. Non-competition covenants
Section XI of the Area Development Agreement
Item 17
x. Dispute resolution
Section XXI of the Area Development Agreement
Item 17
ITEM 10.
FINANCING
We do not offer direct or indirect financing, nor do we guarantee your note, lease or obligation.
ITEM 11.
FRANCHISOR'S OBLIGATIONS
Except as listed below, we need not provide any assistance to you.
Before you open your business, we will:
1. Grant you the right to use the trademark "Zero's Mr. Submarine, Inc." in
connection with your Franchised Business and within your area of primary
trade responsibility. (Section III.A.1, page 5 of the Franchise Agreement).
2. Designate an exclusive area of primary trade responsibility for the Franchised
Business. (Section III.A.2., page 5 of the Franchise Agreement).
3. Provide such location research and site selection assistance including real
estate and demographic analysis as Franchisor deems advisable, subject to the
availability of personnel. (Section III.A.3., page 5 of the Franchise Agreement).
4. Assist in negotiation of the lease or property purchase for the franchise.
(Section III.A.4., page 5 of the Franchise Agreement).
5. Loan to you a single copy of our confidential manuals which will include specifications
for equipment, supplies, inventory, management and operation of the Franchised
Business and which guidelines and specifications must be adopted by you. The Manuals
are confidential and remain our property. We may modify the manuals from time to
time, but these modifications will not alter your status and rights under the Franchise
Agreement. (Section III.A.5., page 5 of the Franchise Agreement).
6. Provide typical floor plans and site build-out specifications for the construction
of the Franchised Business. (Section III.A.6., page 5 of the Franchise
Agreement).
7. Provide you and one (1) key employee with a mandatory initial training
program related to the operation and management of your Franchised
Business. (As noted in Item 6, there is no additional charge payable to Zero's
for the initial training program. However, you are responsible for all costs of
travel, lodging and meals while training takes place) (Section IV.A.7.,
page 9 of the Franchise Agreement).
8. Make available to you a Supplemental Training Program, which provides on-
site assistance both prior to and during the initial two weeks of operation of
your Franchised Business. (As noted in Item 6, the Supplemental Training
Program is available for an additional fee of $150 per day) (Section III.A.8.,
page 8 of the Franchise Agreement).
During the operation of the Franchised Business, we will:
1. Provide such general advisory assistance and field support deemed by us to be
helpful to you in the ongoing operation, advertising and promotion of the
Franchised Business. (Section III.B.1, page 6 of the Franchise Agreement)
2. Continue our efforts to establish and maintain high standards of quality,
cleanliness, safety, customer satisfaction and service. (Section III.B.2, page 6
of the Franchise Agreement)
3. Provide you with updates, revisions and amendments to the Manuals. (Section
III.B.3, page 6 of the Franchise Agreement)
4. Subject to the availability of our staff, provide management consulting services
for special projects or assistance upon a mutually acceptable arrangement
pertaining to fees and expenses. (Section III.B.4, page 6 of the Franchise
Agreement)
5. Administer a Regional Advertising Fund if such a fund is established by us.
(Section III.B.5, page 6 of the Franchise Agreement)
6. Coordinate and conduct periodic training programs for its network of
franchisees, as we deem necessary and in our sole discretion. (Section III.B.6,
page 6 of the Franchise Agreement)
7. On a periodic basis, conduct, as we deem advisable, inspections of the
Franchised Business and its operations and evaluate the methods and staff
employed by the Franchised Business. Copies of the resulting inspection
reports shall be circulated to the Franchisee and the Franchisee's General
Manager. (Section III.B.7, page 6 of the Franchise Agreement)
Site Selection
In the Franchise Agreement, we grant you a Site Selection Area in which to select the site for your
Franchised Business. We must approve your site. The criteria that we use to evaluate the site selected
include visibility, traffic count, demographics, and local competition. We will approve or disapprove
your proposed site within 10 days after receipt of all materials reasonably requested by us. You will have
a period of 120 days after signing the Franchise Agreement to locate a site for the Franchised Business,
to obtain our approval of the site and to sign the lease. We will be available from time to time, and at our
sole discretion, to provide general site selection assistance to you. The Franchisee must commence the
operation of the Franchised Business within one hundred and twenty (120) days after signing the lease
for the Franchised Business site.
Advertising
We reserve the right to establish a Regional Advertising Fund (hereinafter "Fund"). At such time when
the Fund may be established, and in our sole discretion, we will form an advertising council composed of
franchisees to advise us on advertising policies. Zero's, or our designated suppliers, will be the source of
the advertising materials and you will not be permitted to use your own advertising materials without our
prior written consent.
At such time when the Fund is established, all franchisees will contribute to the Fund on the same basis.
Any company-owned units established by us or one of our affiliates will contribute to the Fund on the
same basis as franchisees. Please see Item 6 for information on the amounts you will be required to
contribute to the Fund.
The Fund will be audited upon the request of a franchisee but will not be audited more frequently than
annually. If an audit is conducted, all franchisees are permitted to review the Fund's financial statements
upon request. We will deduct reasonable administrative fees from the Fund to cover our expenses in
administering the Fund.
The Fund will be administered entirely by us, and we have the right to allocate advertising funds to
specific regions and apportion expenditures as we see fit. Some of the factors considered by us in
making allocations include advertising benefits from other markets, competitive pressure and estimated
market capabilities, and specific local market opportunities. You will not necessarily receive a
significant direct benefit from the allocation of advertising funds and we are not required to spend any
amount on advertising in the area where your Franchised Business is located.
If all of the advertising fees are not spent in the fiscal year in which they accrue, they will remain in the
Fund for use during the following year. However, advertising funds may not be used for the solicitation
of other franchisees. (See also Items 6, 8, and 9 of this Offering Circular).
Training
We provide a mandatory initial training program to the Franchisee, which is to be a minimum of six (6)
weeks before the expected completion and opening of the Franchisee's restaurant. The initial training
program is conducted at Zero's training facility, which is an operating Zero's restaurant, and our
Administrative Offices located at 2106 Pacific Avenue, Virginia Beach, VA 23451, or other designated
training facilities.
The initial training program provides instruction related to the operation of the Franchised Business for
up to two persons. The Franchisee/General Manager will be required to complete a six week training
program that includes three weeks of kitchen procedural training, two weeks of training in cost controls,
general administration, marketing and operations, and one week of review and actual running of the
restaurant without assistance, for a total of 240 training hours. The shift supervisor will undergo four
weeks of training in kitchen management procedures, including quality specifications, ordering/receiving,
employee training, and cost controls.
For an additional fee of $150/per day plus meals and travel costs, you may supplement the initial training
program with our Supplemental Training Program. Pursuant to the Supplemental Training Program, our
field support training staff provides you up to two weeks of additional training at the location of your
Franchised Business prior to and during its initial operation.
Within the six weeks prior to opening of your Franchised Business, we will train you as follows:
Position
Covered Materials
Hours of
Classroom
Training
Hours of
on-the-Job
Training
Instructor
General Manager
All Operations Manuals
120
120
Shift Supervisor
Kitchen & Management Manuals
60
100
The initial training program is mandatory. You must complete the training program to our satisfaction
prior to the opening of the Franchised Business. All training occurs at our training facility,
administrative offices, or at locations otherwise designated by us. Additional training programs and
refresher courses may also be required.
Computer and Cash Register Requirements
You must purchase and maintain our Computerized Point-of-Sale and Information System or an
equivalent subject to our prior written approval. We reserve the right to poll (via modem) your computer
systems in order to compile sales data, consumer trends, food and labor costs, and other such financial
and marketing information, as it may deem appropriate. We may distribute this data on a confidential
basis to franchisees. Refer to Exhibit F for Hardware and Software specifications.
Operations Manuals
We permit prospective franchisees to view the Manuals at company headquarters or elsewhere as
arranged prior to the execution of the Franchise Agreement. To protect the confidentiality of the
Manuals, we require execution of a Confidentiality Agreement before reviewing the Manuals.
Opening
The typical length of time between the signing of the Franchise Agreement and the opening of the
Franchised Business is five months. Factors affecting this length of time usually include obtaining a
satisfactory site, financing arrangements, local ordinance compliance questions, and delivery and
installation of equipment.
<PAGE>
ITEM 12.
TERRITORY
Franchise Agreement
Provided you have fully complied with your obligations under the Franchise Agreement, we agree not to
grant another franchise location or establish a company-owned Franchise Business within a two mile
radius of the location of your Franchised Business, unless such location is within the geographic
boundaries of an area with a population greater than one million persons ("Densely Populated Urban
Area" or DPUA") in which case we agree not to grant another franchise location within a one mile radius
of the Franchised Business. Zero's and our affiliates reserve the right to establish company-owned units,
or to license other franchisees to establish Franchised Businesses, at any site we deem appropriate
outside of the protected territory set forth above. You may relocate your Franchised Business only with
our prior written approval.
We do not operate or franchise the operation of, or have any presently formulated plans or policy to
operate or franchise the operation of any Franchised Businesses providing products or services under
different trade names or trademarks similar to, or competitive with those to be offered by you. However,
the Franchise Agreement contains no limitations other than as stated above on our right to establish such
other franchises or outlets.
Area Development Agreement
The Area Developer will be granted an exclusive territory. In order to maintain exclusivity over an
exclusive territory, an Area Developer must establish between three and five Franchised Businesses
within the exclusive territory during implementation of the development schedule. During the term of
the Area Development Agreement, we do not have the right to establish our own, or to grant to others,
Franchised Businesses within the exclusive territory. While preservation of an exclusive territory is not
contingent upon sales volume, if an Area Developer does not meet his or her development schedule,
grounds for default exist. Loss of exclusivity could then result and we may elect to terminate the Area
Development Agreement, reduce the territorial exclusivity or reduce the size of the Area Developer's
territory.
Unless a renewal of the Area Development Agreement and an extension of the development schedule are
negotiated by the parties, the Area Developer will no longer have an exclusive territory upon the
expiration or termination of the Area Development Agreement. However, each Franchised Business will
retain its protected individual territory as set forth in the individual franchise agreements. You may
relocate the Franchised Businesses within your territory only with our prior written permission.
ITEM 13.
TRADEMARKS
In the Franchise Agreement, we grant you the right and license to operate a Franchised Business pursuant
to our System and Proprietary Marks. Our affiliate, X.S., Inc. owns the rights to the Proprietary Marks
and has granted us the right and license to use and to license others to use the mark "Zero's Mr.
Submarine, Inc." a service marked approved for publication on April 23, 1974 by the principal Register
of the U.S. Patent & Trademark Office. Our application serial number is 0982670 for your further
reference and information. Zero's and X.S., Inc. have established certain common law rights to the
above mark by virtue of our continuous, exclusive and extensive use and advertising. The Proprietary
Marks are not registered in any state.
You are required to use all names and marks in full compliance with the provisions of the Franchise
Agreement and in accordance with the rules prescribed from time to time by us. You are prohibited from
using any name or mark as a part of any corporate name with any prefix, suffix or other modifying words,
terms, designs or symbols (other than logos licensed to you by us). In addition, you may not use any
name or mark in connection with the sale of any unauthorized product or service in any other manner not
explicitly authorized by us.
There is no presently effective determination of the Patent & Trademark Office, Trademark Trial and
Appeal Board, the trademark administrator of any state, or any court, no pending interference, opposition
or cancellation proceeding or any pending material litigation involving the trademarks, service marks,
trade names, logotypes, or other commercial symbols of Zero's. There are no agreements currently in
effect that significantly limit our rights to use or license the use of such trademarks, service marks, trade
names, logotypes or other commercial symbols in any manner material to you. In the event of any
infringement of, or challenge to, your use of any name, mark or `symbol, you are obligated to
immediately notify us, and we will have sole discretion to take any such action as we deem appropriate in
order to preserve and protect the ownership, identity and validity of the Proprietary Marks. If it becomes
advisable at any time, and in our sole discretion, we may modify or discontinue the use of any name or
mark and/or use one or more additional or substitute names or marks, and you will be responsible for the
tangible costs (such as replacing signs and materials) associated therewith.
Under the Franchise Agreement, you agree not to contest, directly or indirectly, our ownership, title, right
or interest in the name or marks, trade secrets, methods, procedures and advertising techniques which are
part of the system or contest our right to register, use or license others to use such names, marks, trade
secrets, methods, procedures or techniques.
There are no infringing uses actually known to us which could materially affect your use of such
trademarks, service marks, trade names, logotypes or other commercial symbols in this state or any state
in which a Franchised Business is to be located.
ITEM 14.
PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION
We do not claim rights in any patents that are material to our business. However, we do claim
proprietary rights and common law copyrights in the confidential information contained in the Manuals
(As described in Item 11). We also claim common law copyrights in our operational materials and in
other proprietary materials specifically created by us in connection with our System, including the
proprietary advertisements, printed materials and forms used in connection with the operation of a
Franchised Business. The Manuals and other proprietary materials have not been registered with any
copyright office. You must promptly inform us regarding any unauthorized use of this proprietary
information. We are not obligated to take any action, but we will respond to this information, as we
deem appropriate. We will not indemnify you for losses brought by a third party concerning your use of
this information.
<PAGE>
ITEM 15.
OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISED
BUSINESS
You or your General Manager must personally participate in the direct operation of the Franchised
Business and the Franchised Business must be under the direct on-premises supervision of either you or
your General Manager at all times. If the General Manager is not the owner-operator of the Franchised
Business, then the Franchisee is encouraged to offer profit participation to the Franchisee's General
Manager.
Also, you or your General Manager must devote your best efforts to the supervision and management of
the Franchised Business during business hours. We believe that the success of the Franchised Business
will depend upon your direct personal and continued efforts, supervision and attention.
ITEM 16.
RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL
The Franchise Agreement provides that you must offer, and may only offer, the products and services
that we authorize in the Manuals, as it may be updated from time to time, or otherwise in writing. You
are prohibited from offering or selling products and services not authorized by us. We reserve the right
to change the types of authorized services and products. You are prohibited from soliciting other
franchisees either directly or indirectly for any other business or investment activity. There are no
limitations imposed by us on the persons or businesses to whom you may provide products and services,
except such as are imposed by the nature of the System itself.
ITEM 17.
RENEWAL, TERMINATION, TRANSFER & DISPUTE RESOLUTION
This table lists certain important provisions of the Franchise Agreement and the Area Development
Agreement. You should read these provisions in the Agreement attached to this Offering Circular.
Single Unit Franchisees
Provision
Section in Franchise
Agreement
Summary
a. Term of the franchise
Section II.A.
The term of the Franchise Agreement is 15 years
b. Renewal or extension of the
term
Section II.B.
You may renew for an additional 15 year term
c. Requirements for you to renew
or extend
Section II.B.
Give notice, pass inspection, sign new agreement,
retrain, sign release, and pay 10% of the then
current initial franchise fee
d. Termination by you
None
e. Termination by Zero's
without cause
None
f. Termination by Zero's
with cause
Section XIII
Zero's can only terminate you if you default
g. "Cause" defined - defaults
which can be cured
Section XIII.B.
You have 30 days to cure: non-payment of fees,
non-submission of reports, failure to complete
training, and any other default not listed in
Section XIII of the Franchise Agreement
h. "Cause" defined - defaults
which cannot be cured
Section XIII.A.
Non-curable defaults: bankruptcy, conviction of
felony, repeated defaults even if cured,
abandonment, trademark misuse, unproved
transfer, etc.
i. Your obligations on
termination/non-renewal
Section XIV
Obligations include cessation of operations,
complete de-identification, non-competition,
adherence to covenants, execution of release and
payment of amounts due (also see r, below)
j. Assignment of contract by
Zero's
Section XII.A.
No restriction on Zero's right to assign
k. Conditions for Zero's
approval of transfer
Section XII.B.
New franchisee qualifies and signs current
agreement, transfer fee paid, training arranged,
you sign release, etc. (see r, below)
l. Zero's right of first refusal to
acquire your business
Section XII.E.
Zero's may match any bona fide offer for your
business
m. Zero's option to purchase
your business
Section XII.E.
Zero's reserves the right to purchase upon
termination
n. Your death or disability
Section XII.F.
Zero's must approve transfer or estate must
transfer business to Zero's designee within six
months
o. Non-competition covenants
during the term of the
franchise
Section XV.B.
No involvement in competing business anywhere
p. Non-competition covenants
after the franchise is
terminated or expires
Section XV.C.
No competing business for two years within five
miles of the territory of any Zero's Franchised
Business
q. Modification of the
agreement
Section XVI
Modification only upon written agreement of the
parties
r. Integration/merger clause
Section XXIII
Only the terms of the Franchise Agreement and
its attachments are binding (subject to state law).
Any other promises may not be enforceable
s. Dispute resolution
Section XXVI
Arbitration
t. Choice of forum
Section XXV.B.
Litigation must be in Virginia
u. Choice of law
Section XXV.A.
Virginia law applies
Additional Provisions for Area Developers
Provision
Section in Area
Development
Agreement
Summary
a. Term of the Area Development
Agreement
Section II
The term of the Area Development Agreement
will be negotiated by the parties
b. Renewal or extension of the
term
Section II
Any renewal term must be negotiated by the
parties. You must be in good standing to renew
c. Requirements for you to renew
or extend
Sections II and VII
Not in default under the Area Development
Agreement or any Franchise Agreement
d. Termination by you
None
e. Termination by Zero's
without cause
None
f . Termination by Zero's with
cause
Section VII
Zero's can terminate you only if you are in
default
g. "Cause" defined - defaults
which can be cured
None
h. "cause" defined - defaults
which cannot be cured
Section VII
Failure to comply with Development Schedule,
failure to comply with any obligations in the Area
Development Agreement or any Franchise
Agreement, etc.
i Your obligations on
termination/non-renewal
Section XI
Non-competition
j. Assignment of contract by
Zero's
Section VIII.A.
No restriction on Zero's right to assign
k. "Transfer" by you - definition
Section VIII.B.
Includes transfer of contract, assets, any
Franchise Agreement or ownership change
l. Zero's approval of transfer by
Area Developer
Section VIII.B.
Zero's must approve all transfers and Zero's has
right of first refusal on all proposed transfers
m. Conditions for Zero's
approval of transfer
Section VIII.B.
Paid up, not in default, release signed, transfer
fee paid, transferee is approved, signs current
area development agreement and attends training,
etc. (see also r, below)
n. Our right of first refusal to
acquire your business
Section VIII.B.5
Zero's may match any bona fide offer for your
area development rights
o. Our option to purchase your
business
Section VIII.B.5
Zero's may match any bona fide offer for your
area development rights
p. Your death or disability
None
q. Non-competition covenants
after the franchise is
terminated or expires
Section XI.B.
No competing business for two years within five
miles of the territory of any Franchised Business
r. Modification of the Agreement
Section XII
Modifications only upon written agreement of the
parties
s. Integration/merger clause
Section XII
The Franchise Agreement, Area Development
Agreement and their attachments constitute the
entire agreement between the parties. Any other
promises may not be enforceable
t. Dispute resolution
Section XXI
Arbitration
u. Choice of forum
Section XVIII
Litigation must be in Virginia
v. Choice of law
Section XVIII
Virginia law applies
ITEM 18.
PUBLIC FIGURES
We do not use any public figures to promote the Franchised Business.
<PAGE>
ITEM 19.
EARNINGS CLAIMS
We do not make any representations or statements of actual, or average, or projected, or forecasted sales,
profits, or earnings to franchisees with respect to franchises, except for the statement of actual income
and expenses with respect to Zero's restaurants which appear under this item.
We do not furnish or authorize our sales persons to furnish any oral or written information concerning
the actual, average, projected, forecasted, or potential sales, costs, income, or profits of a franchise other
than as set forth in this Item.
We specifically instruct our sales personnel, agents, employees, and officers that they are not permitted
to make any claims or statements as to the earnings, sales, or profits, or prospects or chances of success,
nor do we authorize them to represent or estimate dollar figures as to any franchisee's operation. We
will not be bound by any unauthorized representations as to earnings, sales, profits, or prospects or
chances for success.
You should disregard any unauthorized information, whether oral or written, concerning the actual,
average, projected, forecasts, or potential sales, costs, income or profits, or the prospects or chances of
success, or representations or estimated dollar figures as to a franchisee's operation.
Actual results vary from franchise to franchise, and we cannot estimate the results of a particular
franchise. We recommend that you make your own independent investigation to determine whether or
not the franchise may be profitable, and consult with an attorney and other advisors prior to executing the
Development Agreement or Franchise Agreement.
The summary statement set forth is a statement of actual average annual income and expenses as of
December 31, 1998, for the five (5) Zero's Subs restaurants operated by Zero's affiliated, X.S., Inc.
which have been in operation at least six (6) months.
As of December 31, 1998, Zero's affiliate, X.S., Inc. operated six (6) restaurants. Five (5) of which have
been included in the summary statement below. (The sixth restaurant has been excluded due to a
contract of sale). Two (2) of these are free standing locations; one (1) a conversion of a fast food
operation; and two (2) are inline strip center locations, information for which is included in this earnings
claim. Restaurants utilize a building of approximately 1,200 3,200 square feet. These restaurants
provide seating for approximately 30 60 customers. Each of the restaurants is similar equipped.
We based the results of operations described in this Item upon the unaudited profit and loss statements
prepared by Zero's affiliate, X.S., Inc. in accordance with generally accepted accounting practices for the
period January 1, 1998 through December 31, 1998 with respect to the five (5) restaurants operated as of
December 31, 1998, which had been in operation for at least six (6) full calendar months as of that date.
The summary statement of average actual annual income, food costs and labor reflects only operating
expenses and does not include capital expenses, other controllable expenses, or fixed expenses including
any land, building or equipment rent, debt service, depreciation, advertising, administrative expenses
such as accounting or legal expenses, taxes, licenses or insurance, and does not include royalties payable
by a franchisee.
The five (5) restaurants operated by Zero's affiliate, X.S., Inc. are located in the state of Virginia.
Restaurants located in other geographic area may experience different results. A variety of factors
influence the results of operations, including location, demographics, local economic conditions and
weather.
SUCH ACTUAL SALES, INCOME, GROSS OR NET PROFITS ARE OF ZERO'S
AFFILIATE, X.S., INC. OWNED UNITS AND SHOULD NOT BE CONSIDERED AS THE
ACTUAL OR PROBABLE SALES, INCOME, GROSS OR NET PROFITS THAT WILL BE
REALIZED BY ANY FRANCHISEE. WE DO NOT REPRESENT THAT YOU CAN
EXPECT TO ATTAIN SUCH SALES, INCOME, GROSS OR NET PROFITS.
SOME ZERO'S RESTAURANTS OWNED BY ZERO'S AFFILIATE, X.S., INC. HAVE SOLD THIS
AMOUNT. THERE IS NO ASSURANCE THAT YOU WILL DO AS WELL. IF YOU RELY UNPON
OUR FIGURES, YOU MUST ACCEPT THE RIST OF NOT DOING AS WELL.
The following table sets out the average annual net sales, food cost and labor related expenses. Based
upon actual annual sales for the period January 1, 1998 through December 31, 1998 for the five (5)
locations operated by X.S., Inc. which have been in operation for at least six (6) months as of such date.
ANNUAL
Amount Percentage of Average
Monthly Sales
Average Annual Sales (Note 1) $412,267 100%
Food Cost (Note 2) $108,720 26.38%
Labor Related Expenses (Note 3) $109,617 26.59%
The following restaurants were included in the summary statements:
Location Date of Opening
Virginia Beach, Virginia (Oceanfront) March 21, 1967
Norfolk, Virginia (Hampton Boulevard) August 1, 1968
Virginia Beach, Virginia (Hilltop) November 1, 1978
Virginia Beach, Virginia (Lynnhaven) March 1, 1986
Norfolk, Virginia (Wards Corner) May 20, 1994
Note 1: Net sales reflect total average sales exclusive of sales tax collected and paid to state and local
governmental authorities. These net sales are an average of the annual sales for each of the five (5)
restaurants included in the sample. Annual sales volume will also vary depending upon other factors
including location, demographics, general economic conditions, weather conditions, menu mix,
competition and other seasonal factors as well as the efforts of the individual restaurant management
team.
Note 2: Food costs are an average of the actual total costs for the five (5) Zero's restaurants included in
the summary statement. Food costs have been adjusted by three (3%) percent based on free food given
by coupon accounted for as advertising expense.
Note 3: Labor related expenses include the annual salary paid by X.S., Inc. to a Manager, one assistant
manager and one shift supervisor for each restaurant. Included in labor related expenses are amounts paid
or accrued by X.S., Inc. for employee payroll taxes, insurance and worker's compensation. X.S., Inc.
provides insurance at one hundred (100%) for it's manager in each restaurant.
Worker's compensation expense is based upon X.S., Inc.'s experience rating. The experience rating for a
franchisee may be different than X.S., Inc.'s experience rating.
Local market conditions and state and federal minimum wage requirements may affect wages and labor
related expenses.
UPON YOUR WRITTEN REQUEST WE WILL MAKE AVAILABLE TO YOU FOR
INSPECTION AND REVIEW ALL DATA UTILIZED IN FORMULATING THE ACTUAL
AVERAGE SALES, PROFITS OR EARNINGS CONTAINED IN THIS STATEMENT.
DATA UTLIZED IN DRAFTING THIS STATEMENT WAS PREPARED BASED UPON A
UNIFORM ACCOUNTING SYSTEM AND GENERALLY ACCEPTED ACCOUNTING
PRACTICES, AND THE INFORMATION PROVIDED HERETIN WAS PREPARED BASED
UPON THIS DATA.
ITEM 20.
LIST OF OUTLETS
FRANCHISED BUSINESS STATUS SUMMARY
FOR FISCAL YEARS ENDING 1998/1997/1996
State Transfers Canceled Or Not Reaquired Left the Total From Francxhise
Terminated Renewed by System Left Operating
Franchisor Other Columns (2) At Year
End
Virginia 1 2 0 0 0 0 36
North
Carolina 0 0 0 0 0 0 4
Arizona 0 0 0 0 0 0 1
1) Note: All numbers are as of December 31 for each year
2) The numbers in the "Total" column may exceed the number of stores affected because several events may have
affected the same store. For example, the same store may have had multiple owners.
STATUS OF COMPANY OPERATED STORES
FOR FISCAL YEARS ENDING 1998/1997/1996
State Stores Closed During Year Stores Opened During Total Stores Operating At
Year Year End
Virginia 0 6 6
North Carolina 0 0 0
PROJECTED OPENINGS
AS OF DECEMBER 31, 1998
State Franchise Agreements Projected Franchised New Projected Company
Signed But Store Not Open Stores In The Next Fiscal Owned Openings In Next
(1) Year Fiscal Year
Virginia 2 4 2
North Carolina 1 5 0
South Carolina 0 1 0
Arizona 0 1 0
California 0 1 0
New York 0 1 0
Maryland 0 1 0
China 1 1 0
Note (1) As of December 31, 1998
Attached to this Offering Circular, as Exhibit B is the Roster of Franchises & Area Developers
currently under Franchise and Area Development Agreements with us.
There are no franchisees who have had an outlet terminated, canceled, not renewed or otherwise
voluntarily or involuntarily ceased to do business under the Franchise Agreement during the last
fiscal year or who have not communicated with us within ten weeks of the application date.
ITEM 21.
FINANCIAL STATEMENTS
Audited financial statements for fiscal years ended December 31, 1996, December 31, 1997 and December 31, 1998,
and unaudited financial statements as of June 30, 1999, are attached hereto and marked as Exhibit E.
ITEM 22.
CONTRACTS
Copies of the Franchise Agreement and the Area Development Agreement are attached to this
Offering Circular as Exhibits A and D. These agreements and their attachments are the only
contracts proposed for use in conjunction with the offering of the Franchised Business.
This Offering Circular, the Franchise Agreement and the Area Development Agreement are
governed by the laws of the Commonwealth of Virginia.
ITEM 23.
RECEIPT
THIS OFFERING CIRCULAR SUMMARIZES PROVISIONS OF THE FRANCHISE
AGREEMENT AND OTHER INFORMATION IN PLAIN LANGUAGE. READ THIS
OFFERING CIRCULAR AND ALL AGREEMENTS CAREFULLY.
IF WE OFFER YOU A FRANCHISE, WE MUST PROVIDE THIS OFFERING CIRCULAR TO
YOU BY THE EARLIEST OF:
(1) THE FIRST PERSONAL MEETING TO DISCUSS OUR FRANCHISE; OR
(2) TEN BUSINESS DAYS BEFORE SIGNING OF A BIDING AGREEMENT; OR
(3) TEN BUSINESS DAYS BEFORE ANY PAYMENT TO ZERO'S.
YOU MUST ALSO RECEIVE A FRANCHISE AGREEMENT CONTAINING ALL MATERIAL
TERMS AT LEASE FIVE BUSINESS DAYS BEFORE YOU SIGN ANY FRANCHISE
AGREEMENT.
IF WE DO NOT DELIVER THIS OFFERING CIRCULAR ON TIME OR IF IT CONTAINS
FALSE OR MISLEADING STATEMENT, OR A MATERIAL OMISSION, A VIOLATION OF
FEDERAL AND STATE LAW MAY HAVE OCCURRED AND SHOULD BE REPORTED TO
THE FEDERAL TRADE COMMISSION, WASHINGTON, D.C. 20580 AND (STATE AGENCY).
We authorize Vincent R. Olivieri, Attorney at Law, 2840 S. Lynnhaven Road, Virginia Beach,
Virginia 23452 to receive process of service for Zero's.
I have received a Uniform Franchise Offering Circular dated ________________________. This
offering circular included the following Exhibits:
A. Franchise Agreement
B. Rooster of Franchises
C. List of State Administrators & Agents for Service of Process
D. Area Development Agreement
E. Financial Statements
F. Computer Hardware and Software Specifications
G. Accountants Consent
H. Certificate of Registration of Trademark
I. Authorization Agreement for Prearranged Payments (Direct Debits)
Date: ________________
FRANCHISEE: _____________________________
<PAGE>
SUPPLEMENT TO
ZERO'S MR. SUBMARINE FRANCHISE OFFERING CIRCULAR
1. The Effective Date of this Supplement ("Supplement") to Zero's Mr. Submarine
Franchise Offering Circular dated October 18, 1999 ("FOC") is February 1, 2000.
2. ITEM 1 is amended to add the following:
Pending Sale of Assets of Franchisor to American Kiosk Corporation
On December 8, 1999, our Affiliate, X.S., Inc., the Franchisor and the
Franchisor's shareholders entered into an Asset Purchase Agreement with American
Kiosk Corporation, a Delaware corporation whereby the Franchisor is selling to
American Kiosk Corporation all of its assets including the lease of its administrative
offices in Virginia Beach, Virginia, all of its Zero's Mr. Submarine Franchise
Agreements, Area Development Agreements and ancillary agreements, including the
ones you may be signing, all of its proprietary property including its "Zero's Mr.
Submarine" trademarks and copyrights, manuals, secret recipes and other confidential
information and other assets licensed or loaned to a franchisee as part of the franchise
system, subject to the approval of the Franchisor's shareholders. On January 14,
2000, the shareholders approved the sale.
The closing took place on January 14, 2000, at which time the assets were
transferred to a wholly owned subsidiary of American Kiosk Corporation, Zero's Mr.
Submarine, Inc., a Delaware corporation ("New Zero's"). The Franchisor, Zero's Mr.
Submarine, Inc., a Virginia corporation, has changed its corporate name to "Zero's
Mr. Submarine of Virginia, Inc." and will have no continued involvement with the
Zero's Mr. Submarine franchise system. New Zero's has assumed all of the
obligations of the Franchisor under all the Zero's Mr. Submarine Franchise
Agreements, Area Development Agreements and ancillary agreements.
New Zero's will operate separately from the other businesses operated by
American Kiosk Corporation including its Pizza Place franchise system. If you desire
more information about American Kiosk Corporation than is set forth in this
supplement, a copy of its Pizza Place Franchise Offering Circular is available upon
your request.
The existing corporate offices will be maintained. All employees will
continue in the same capacities for New Zero's as they did for the Franchisor. The
Franchisor's personnel described in ITEM 2 will be doing the following:
Eugene T. Schmidt- will become a director of New Zero's and of
American Kiosk Corporation
Martin A. Palacios - will become a director of New Zero's and of
American Kiosk Corporation
John A. Schmidt will not be involved in New Zero's
Charles J. McCotter, III will become director of Franchising
for New Zero's.
Rachael S. Davanzo - will not be involved in New Zero's
New Zero's is in the process of an audit and preparation of its Franchise
Offering Circular. In addition to the involvement of the foregoing individuals, the
following individuals associated with American Kiosk Corporation will be involved
in New Zero's.
Richard J. Michael, Director and President. Mr. Michael is also a Director
and President of American Kiosk Corporation since incorporation. From
December 1995 to May 1997, he was Director of Distribution Operations
for Toppers Brick Oven Pizza, Inc. in Willow Grove, Pennsylvania. From
May 1995 to December 1995, Mr. Michael was a private investor. From
May 1994 to May 1995, he was an Account Representative for Corporate
Relations Group in Orlando, Florida. From January 1992 to April 1994,
he was Director of Marketing for Adelaide Holdings, Inc. of Miami,
Florida.
Ronald L. McDonald, Vice President. Mr. McDonald is also Vice
President of American Kiosk Corporation since September 1998. From
January 1984 to November 1998, he acted as a private consultant to the
restaurant industry residing in Tampa, Florida and has appeared as a
regular guest on The Food Channel and on Sony's network of 1,200 radio
stations. Mr. McDonald was previously part owner of one of the largest
food and vegetable wholesalers in the United Kingdom, serving more than
50 countries. Mr. McDonald is a noted author of food industry materials,
including The Complete Hamburger (Birch Lane Press/Carol Publishing
Group), which was well received by food professionals around the world.
Mr. McDonald recently completed two new books, Ronald McDonald's
McBarbecue Book and Ronald McDonald's Franchise Buyer's Guide, and
will soon introduce Ronald McDonald's McPizza Book and Shrimply
Delicious. He recently authored a feature article published in the August
issue of ICON Magazine, and is working on a children's' educational
television series.
Randall Appel, Director. Mr. Appel has served as a Director of American
Kiosk Corporation since November 1998, Mr. Appel has over 14 years of
financial planning and broker-dealer experience. Since March 1987, Mr.
Appel has been the President of Appel Financial Planning, Ltd., an
investment services firm located in Melville, New York. Since August
1994, he has also been the sole officer, director, shareholder and
compliance officer of Strategic Assets Inc., a NASD registered broker-
dealer located in Melville, New York. From July 1990 to May 1995, Mr.
Appel was a principal and registered representative of Ameriprop, Inc., a
NASD registered broker-dealer firm located in Melville, New York.
Larry Graybill, Vice President/CFO/Secretary/Treasurer. Mr. Graybill
joined American Kiosk Corporation's management team as a director and
Vice President/CFO/Secretary/Treasurer in June 1998. Mr. Graybill was
most recently President and CFO of Austin's International Inc., a publicly
traded restaurant company located in Fort Lauderdale, Florida from July
1990 to June 1998. From 1988 to 1990, he held the position of Controller
with Outrigger Lodging Services, a hotel management company located in
Los Angeles. From 1985 to 1988, he was General Manager for Pine
Plantation Inc., a corporation that owned a hotel and two
restaurant/nightclubs in Fort Lauderdale, Florida. From 1980 to 1985, Mr.
Graybill was President of First Family Savings and Loan in Heber Springs,
Arkansas.
There can be no assurance that these persons will remain affiliated
with Newco indefinitely or for any time, or that the scope of their
involvement will not change.
Litigaton and Bankruptcy
No litigation will be required to be disclosed in New Zero's Franchise
Offering Circular relating to New Zero's or any of individuals mentioned above.
Neither New Zero's nor its officers have been involved as a debtor in
proceedings under the U.S. Bankruptcy Code required to be disclosed in ITEM of
New Zero's Franchise Offering Circular except: Mr. Graybill was the President
and Chief Financial Officer of Austin International, Inc., a Delaware corporation,
whose subsidiary, Austin International Inc., a Florida corporation filed a Chapter
11 Proceeding on July 18, 1997 in the U.S. Bankruptcy Court, Southern District of
Florida, Case No. 97-24528 BKC RBR. A hearing for final payments and case
dismissal is scheduled for December 7, 1998.
Other than this 1 action, no person previously identified above has been
involved as a debtor in proceedings under the U.S. Bankruptcy Code required to
be disclosed in ITEM 3 of New Zero's Franchise Offering Circular.
3. Upon any inconsistency between the FOC and this Supplement, this Supplement
supersedes and controls. In all other respects the terms of the FOC are ratified and confirmed.
RECEIPT OF SUPPLEMENT
THIS SUPPLEMENT TO THE FRANCHISE OFFERING CIRCULAR SUMMARIZES
CERTAIN MATERIAL CHANGES TO THE FRANCHISE OFFERING CIRCULAR IN PLAIN
LANGUAGE. READ THIS SUPPLEMENT CAREFULLY.
Please date and sign this receipt and return a copy to:
Charles J. McCotter, III
Executive Vice President- Development
Zero's Mr. Submarine, Inc.
2106 Pacific Avenue
Virginia Beach, VA 23451
____________, 2000
__________________________
Franchisee
</TABLE>
<TABLE>
<S><C>
<PAGE>
CONSULTING AGREEMENT
THIS AGREEMENT ("Agreement"), made as of the 8th day of December 1999, by
and between AMERICAN KIOSK CORPORATION, a Delaware corporation, having offices at
4400 PGA Boulevard, Suite 500, Palm Beach Gardens, FL 33410 (the "Company"), and
EUGENE T. SCHMIDT, an individual with an address at
______________________________, ______________ ("Schmidt").
WHEREAS, pursuant to that certain Asset Purchase Agreement of even date herewith
(the "Agreement"), the Company is acquiring substantially all of the assets of Zero's Mr.
Submarine, Inc., a Virginia corporation, which franchises submarine sandwich shops (the
"Business"); and
WHEREAS, the Company desires to secure the continued consulting services of
Schmidt in connection with the Business and Schmidt desires to continue to provide such
services to the Company as set forth of Schedule A annexed hereto;
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties hereto agree as follows:
1. Schmidt hereby agrees that he will render to the Company, as requested by the
Company, such services as the Company shall reasonably request with respect to the operation
of the Business (the "Services").
2. The term of this Agreement shall commence as of December 8, 1999 and shall
continue for a period of five (5) years through December 7, 2004 (the "Term").
3. In partial consideration of the Services to be rendered and performed by Schmidt
during the Term, the Company hereby agrees to pay Schmidt an aggregate of $375,000 as
follows: $200,000 within ninety (90) days hereof; $75,000 on December 8, 2000; $75,000 on
December 8, 2001; and $25,000 on December 8, 2002.
Schmidt will have the right to forego his cash compensation and receive that
number of shares of the common stock in the Company that could be purchased at a discount
of 25% of the fair market value of the stock as determined by the public market place on the
date said payment is to be made. This option shall apply to each annual payment to be made
by the Company to Schmidt.
In the event of a default of any of the aforementioned annual payments, after
expiration of all applicable cure periods, or in the event that the Company uses funds from the
Company's pending private placement of securities in a manner which is materially
inconsistent with the Intended Use of Proceeds form to be delivered to Schmidt prior to such
financing, without the prior written consent of Schmidt, Schmidt shall be granted a security
interest in the revenue stream from the franchises acquired by the Company pursuant to the
Agreement.
4. As additional compensation for the Services to be rendered by Schmidt during
the Term, the Company hereby grants Schmidt the following options to purchase shares of the
Company's common stock:
# of shares exercise price Vesting
55,667 $1.00 At issuance
55,667 $2.00 1 Year from issuance
55,666 $3.00 2 Years from issuance
Total: 167,000
These options shall expire five years after vesting. Following the vesting dates, the
Company hereby agrees that it shall review the exercise prices of the options as they relate to
the market value of its shares of common stock on such dates with a view towards adjustment
(downward only) if so warranted.
5. Schmidt will use his best efforts to perform the Services for the Company in a
timely and professional manner, subject to his commitments and obligations to other businesses
for which he performs services, and he shall make himself personally available to the Company
in connection with his performance of the Services.
6. Schmidt agrees that neither he nor his employees, affiliates or agents will,
during the Term, or at any time thereafter, disclose or divulge or use, directly or indirectly,
for his own, or their own, benefit, any confidential information, data, trade secrets, or similar
information relating to the Company or any of its subsidiaries or to the businesses of the
Company or any of its subsidiaries obtained in connection with the performance of the
Services. The provisions of this paragraph shall survive the termination of this Agreement and
shall continue until such information, data, trade secrets, or similar information becomes
public knowledge through no fault of Schmidt or any of his employees, affiliates or agents.
7. As a consultant under the terms or this Agreement, Schmidt may at all times
reasonably rely upon the information supplied to Schmidt by the Company's authorized
officers, directors, agents and employees as to accuracy and completeness. Therefore, the
Company agrees to indemnify, hold harmless and defend Schmidt, his employees and agents
from and against any and all claims, actions, proceedings, losses, liabilities, costs and expenses
(including, without limitation, reasonable attorneys' fees), incurred by any or all of them in
connection with or as the result of any inaccuracy, incompleteness or omission of information
given to Schmidt by such authorized personnel of the Company, unless such misstatement or
omission is the result of any inaccurate, incomplete or erroneous information published by
Schmidt through no fault of the Company or its personnel or agents.
8. Schmidt agrees to indemnify, hold harmless and defend the Company and its
subsidiaries, and the directors, officers, employees and agents of the Company and its
subsidiaries, from and against any and all claims, actions, proceedings, losses, liabilities, costs
and expenses (including, without limitation, reasonable attorneys' fees), incurred by any or all
of them in connection with or as the result of any inaccurate or incomplete statements or
omission made by Schmidt or his employees, affiliates or agents.
9. In the event an action or proceeding is commenced with respect to this
Agreement, the prevailing party shall be entitled to receive payment from the other party of its
reasonable legal fees and expenses.
10. This Agreement may be terminated by Schmidt upon thirty (30) days' prior
written/fax notice to such effect. In the event Schmidt elects to so terminate this Contract, the
provisions of Paragraphs 6 and 8 shall survive such termination indefinitely.
11. This Agreement may not be assigned (including by operation of law) by either
party hereto and shall be interpreted under the laws of the State of Florida.
12. The parties hereto acknowledge and agree that Schmidt is acting in the capacity
as an independent contractor, and shall not be deemed an employee or agent of the Company
for any purpose, nor shall Schmidt hold himself out as being able to bind the Company in
connection with any matter. All statements proposed to be published or mailings proposed to
be disseminated by Schmidt in the name of or on behalf of the Company shall be submitted in
advance to a representative of the Company and to legal counsel to the Company for prior
approval.
13. This Agreement expresses the complete agreement and understanding of the
parties and may not be changed except in writing signed by both parties hereto.
14. This Agreement may be sign in one or more counterparts, all of which
counterparts together shall be deemed one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this contract on the date
above written.
AMERICAN KIOSK CORPORATION
By:_______________________________
Richard J. Michael, President
___________________________________
EUGENE T. SCHMIDT
<PAGE>
SCHEDULE A
</TABLE>
<TABLE>
<S><C>
<PAGE>
CONSULTING AGREEMENT
THIS AGREEMENT ("Agreement"), made as of the 8th day of December 1999, by
and between AMERICAN KIOSK CORPORATION, a Delaware corporation, having offices at
4400 PGA Boulevard, Suite 500, Palm Beach Gardens, FL 33410 (the "Company"), and
MARTIN PALACIOS, an individual with an address at ______________________________,
______________ ("Palacios").
WHEREAS, pursuant to that certain Asset Purchase Agreement of even date herewith
(the "Agreement"), the Company is acquiring substantially all of the assets of Zero's Mr.
Submarine, Inc., a Virginia corporation, which franchises submarine sandwich shops (the
"Business"); and
WHEREAS, the Company desires to secure the continued consulting services of
Palacios in connection with the Business and Palacios desires to continue to provide such
services to the Company as set forth of Schedule A annexed hereto;
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties hereto agree as follows:
1. Palacios hereby agrees that he will render to the Company, as requested by the
Company, such services as the Company shall reasonably request with respect to the operation
of the Business (the "Services").
2. The term of this Agreement shall commence as of December 8, 1999 and shall
continue for a period of five (5) years through December 7, 2004 (the "Term").
3. In partial consideration of the Services to be rendered and performed by
Palacios during the Term, the Company hereby agrees to pay Palacios an aggregate of
$375,000 as follows: $75,000 within ninety (90) days hereof; $75,000 on December 8, 2000;
$75,000 on December 8, 2001; $25,000 on December 8, 2002; and $75,000 on December 9,
2003.
Palacios will have the right to forego his cash compensation and receive that
number of shares of the common stock in the Company that could be purchased at a discount
of 25% of the fair market value of the stock as determined by the public market place on the
date said payment is to be made. This option shall apply to each annual payment to be made
by the Company to Palacios.
In the event of a default of any of the aforementioned annual payments, after
expiration of all applicable cure periods, or in the event that the Company uses funds from the
Company's pending private placement of securities in a manner which is materially
inconsistent with the Intended Use of Proceeds form to be delivered to Palacios prior to such
financing, without the prior written consent of Palacios, Palacios shall be granted a security
interest in the revenue stream from the franchises acquired by the Company pursuant to the
Agreement.
4. As additional compensation for the Services to be rendered by Palacios during
the Term, the Company hereby grants Palacios the following options to purchase shares of the
Company's common stock:
# of shares exercise price Vesting
55,666 $1.00 At issuance
55,667 $2.00 1 Year from issuance
55,667 $3.00 2 Years from issuance
Total: 167,000
These options shall expire five years after vesting. Following the vesting dates, the
Company hereby agrees that it shall review the exercise prices of the options as they relate to
the market value of its shares of common stock on such dates with a view towards adjustment
(downward only) if so warranted.
5. Palacios will use his best efforts to perform the Services for the Company in a
timely and professional manner, subject to his commitments and obligations to other businesses
for which he performs services, and he shall make himself personally available to the Company
in connection with his performance of the Services.
6. Palacios agrees that neither he nor his employees, affiliates or agents will,
during the Term, or at any time thereafter, disclose or divulge or use, directly or indirectly,
for his own, or their own, benefit, any confidential information, data, trade secrets, or similar
information relating to the Company or any of its subsidiaries or to the businesses of the
Company or any of its subsidiaries obtained in connection with the performance of the
Services. The provisions of this paragraph shall survive the termination of this Agreement and
shall continue until such information, data, trade secrets, or similar information becomes
public knowledge through no fault of Palacios or any of his employees, affiliates or agents.
7. As a consultant under the terms or this Agreement, Palacios may at all times
reasonably rely upon the information supplied to Palacios by the Company's authorized
officers, directors, agents and employees as to accuracy and completeness. Therefore, the
Company agrees to indemnify, hold harmless and defend Palacios, his employees and agents
from and against any and all claims, actions, proceedings, losses, liabilities, costs and expenses
(including, without limitation, reasonable attorneys' fees), incurred by any or all of them in
connection with or as the result of any inaccuracy, incompleteness or omission of information
given to Palacios by such authorized personnel of the Company, unless such misstatement or
omission is the result of any inaccurate, incomplete or erroneous information published by
Palacios through no fault of the Company or its personnel or agents.
8. Palacios agrees to indemnify, hold harmless and defend the Company and its
subsidiaries, and the directors, officers, employees and agents of the Company and its
subsidiaries, from and against any and all claims, actions, proceedings, losses, liabilities, costs
and expenses (including, without limitation, reasonable attorneys' fees), incurred by any or all
of them in connection with or as the result of any inaccurate or incomplete statements or
omission made by Palacios or his employees, affiliates or agents.
9. In the event an action or proceeding is commenced with respect to this
Agreement, the prevailing party shall be entitled to receive payment from the other party of its
reasonable legal fees and expenses.
10. This Agreement may be terminated by Palacios upon thirty (30) days' prior
written/fax notice to such effect. In the event Palacios elects to so terminate this Contract, the
provisions of Paragraphs 6 and 8 shall survive such termination indefinitely.
11. This Agreement may not be assigned (including by operation of law) by either
party hereto and shall be interpreted under the laws of the State of Florida.
12. The parties hereto acknowledge and agree that Palacios is acting in the capacity
as an independent contractor, and shall not be deemed an employee or agent of the Company
for any purpose, nor shall Palacios hold himself out as being able to bind the Company in
connection with any matter. All statements proposed to be published or mailings proposed to
be disseminated by Palacios in the name of or on behalf of the Company shall be submitted in
advance to a representative of the Company and to legal counsel to the Company for prior
approval.
13. This Agreement expresses the complete agreement and understanding of the
parties and may not be changed except in writing signed by both parties hereto.
14. This Agreement may be sign in one or more counterparts, all of which
counterparts together shall be deemed one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this contract on the date
above written.
AMERICAN KIOSK CORPORATION
By:_______________________________
Richard J. Michael, President
___________________________________
MARTIN PALACIOS
<PAGE>
SCHEDULE A
</TABLE>
<TABLE>
<S><C>
<PAGE>
CONSULTING AGREEMENT
THIS AGREEMENT ("Agreement"), made as of the 8th day of December 1999, by
and between AMERICAN KIOSK CORPORATION, a Delaware corporation, having offices at
4400 PGA Boulevard, Suite 500, Palm Beach Gardens, FL 33410 (the "Company"), and
JOHN SCHMIDT, an individual with an address at ______________________________,
______________ ("Schmidt").
WHEREAS, pursuant to that certain Asset Purchase Agreement of even date herewith
(the "Agreement"), the Company is acquiring substantially all of the assets of Zero's Mr.
Submarine, Inc., a Virginia corporation, which franchises submarine sandwich shops (the
"Business"); and
WHEREAS, the Company desires to secure the continued consulting services of
Schmidt in connection with the Business and Schmidt desires to continue to provide such
services to the Company as set forth of Schedule A annexed hereto;
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties hereto agree as follows:
1. Schmidt hereby agrees that he will render to the Company, as requested by the
Company, such services as the Company shall reasonably request with respect to the operation
of the Business (the "Services").
2. The term of this Agreement shall commence as of December 8, 1999 and shall
continue for a period of five (5) years through December 7, 2004 (the "Term").
3. In partial consideration of the Services to be rendered and performed by Schmidt
during the Term, the Company hereby agrees to pay Schmidt an aggregate of $375,000 as
follows: $75,000 within ninety (90) days hereof; $75,000 on December 8, 2000; $75,000 on
December 8, 2001; $25,000 on December 8, 2002; and $75,000 on December 9, 2003.
Schmidt will have the right to forego his cash compensation and receive that
number of shares of the common stock in the Company that could be purchased at a discount
of 25% of the fair market value of the stock as determined by the public market place on the
date said payment is to be made. This option shall apply to each annual payment to be made
by the Company to Schmidt.
In the event of a default of any of the aforementioned annual payments, after
expiration of all applicable cure periods, or in the event that the Company uses funds from the
Company's pending private placement of securities in a manner which is materially
inconsistent with the Intended Use of Proceeds form to be delivered to Schmidt prior to such
financing, without the prior written consent of Schmidt, Schmidt shall be granted a security
interest in the revenue stream from the franchises acquired by the Company pursuant to the
Agreement.
4. As additional compensation for the Services to be rendered by Schmidt during
the Term, the Company hereby grants Schmidt the following options to purchase shares of the
Company's common stock:
# of shares exercise price Vesting
55,667 $1.00 At issuance
55,666 $2.00 1 Year from issuance
55,667 $3.00 2 Years from issuance
Total: 167,000
These options shall expire five years after vesting. Following the vesting dates, the
Company hereby agrees that it shall review the exercise prices of the options as they relate to
the market value of its shares of common stock on such dates with a view towards adjustment
(downward only) if so warranted.
5. Schmidt will use his best efforts to perform the Services for the Company in a
timely and professional manner, subject to his commitments and obligations to other businesses
for which he performs services, and he shall make himself personally available to the Company
in connection with his performance of the Services.
6. Schmidt agrees that neither he nor his employees, affiliates or agents will,
during the Term, or at any time thereafter, disclose or divulge or use, directly or indirectly,
for his own, or their own, benefit, any confidential information, data, trade secrets, or similar
information relating to the Company or any of its subsidiaries or to the businesses of the
Company or any of its subsidiaries obtained in connection with the performance of the
Services. The provisions of this paragraph shall survive the termination of this Agreement and
shall continue until such information, data, trade secrets, or similar information becomes
public knowledge through no fault of Schmidt or any of his employees, affiliates or agents.
7. As a consultant under the terms or this Agreement, Schmidt may at all times
reasonably rely upon the information supplied to Schmidt by the Company's authorized
officers, directors, agents and employees as to accuracy and completeness. Therefore, the
Company agrees to indemnify, hold harmless and defend Schmidt, his employees and agents
from and against any and all claims, actions, proceedings, losses, liabilities, costs and expenses
(including, without limitation, reasonable attorneys' fees), incurred by any or all of them in
connection with or as the result of any inaccuracy, incompleteness or omission of information
given to Schmidt by such authorized personnel of the Company, unless such misstatement or
omission is the result of any inaccurate, incomplete or erroneous information published by
Schmidt through no fault of the Company or its personnel or agents.
8. Schmidt agrees to indemnify, hold harmless and defend the Company and its
subsidiaries, and the directors, officers, employees and agents of the Company and its
subsidiaries, from and against any and all claims, actions, proceedings, losses, liabilities, costs
and expenses (including, without limitation, reasonable attorneys' fees), incurred by any or all
of them in connection with or as the result of any inaccurate or incomplete statements or
omission made by Schmidt or his employees, affiliates or agents.
9. In the event an action or proceeding is commenced with respect to this
Agreement, the prevailing party shall be entitled to receive payment from the other party of its
reasonable legal fees and expenses.
10. This Agreement may be terminated by Schmidt upon thirty (30) days' prior
written/fax notice to such effect. In the event Schmidt elects to so terminate this Contract, the
provisions of Paragraphs 6 and 8 shall survive such termination indefinitely.
11. This Agreement may not be assigned (including by operation of law) by either
party hereto and shall be interpreted under the laws of the State of Florida.
12. The parties hereto acknowledge and agree that Schmidt is acting in the capacity
as an independent contractor, and shall not be deemed an employee or agent of the Company
for any purpose, nor shall Schmidt hold himself out as being able to bind the Company in
connection with any matter. All statements proposed to be published or mailings proposed to
be disseminated by Schmidt in the name of or on behalf of the Company shall be submitted in
advance to a representative of the Company and to legal counsel to the Company for prior
approval.
13. This Agreement expresses the complete agreement and understanding of the
parties and may not be changed except in writing signed by both parties hereto.
14. This Agreement may be sign in one or more counterparts, all of which
counterparts together shall be deemed one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this contract on the date
above written.
AMERICAN KIOSK CORPORATION
By:_______________________________
Richard J. Michael, President
___________________________________
JOHN SCHMIDT
<PAGE>
SCHEDULE A
</TABLE>
<TABLE>
<S><C>
<PAGE>
AMENDMENT NO. 1
TO
CONSULTING AGREEMENT
This AMENDMENT NO. 1 TO CONSULTING AGREEMENT ("Agreement"), dated as of
December 23, 1999, by and between AMERICAN KIOSK CORPORATION, a Delaware corporation
(the "Company"), and EUGENE T. SCHMIDT ("Schmidt").
W I T N E S S E T H
WHEREAS, the Company and the Schmidt are parties to a Consulting Areement, dated as of
December 8, 1999 (the "Consulting Agreement"); and
WHEREAS, the Company and Zero's Mr. Submarine, Inc., a Virginia corporation ("Zeros"),
are parties to a certain asset purchase agreement, dated as of December 8, 1999 (the "Purchase
Agreement"); and
WHEREAS, the effectiveness of the Purchase Agreement is contingent upon the approval of
the stockholders of Zeros; and
WHEREAS, the Company and Schmidt have agreed to amend the Consulting Agreement to
provide that the Term, as defined therein, shall commence upon the approval of the Zeros stockholders
of the Purchase Agreement.
NOW, THEREFORE, for good and valuable considerations, the receipt and adequacy of which
are hereby acknowledged by each of the parties hereto, the parties hereby agree as follows:
1. Section 2 of the Consulting Agreement is hereby amended in its entirety as follows:
"The term of this Agreement shall commence on the date the stockholders of Zero's
Mr. Submarine, Inc., a Virginia corporation ("Zeros"), approve the terms and conditions of that
certain Asset Purchase Agreement, by and among the Company, Schmidt, Martin Palacios, John
Schmidt and X.S., Inc., and shall continue for a period of five (5) years thereafter (the "Term")."
2. Subject to the modification set forth herein, the Consulting Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first
set forth above.
AMERICAN KIOSK CORP.
By:
Larry E. Graybill, Chief Financial Officer
_______________________________________
Eugene T. Schmidt
</TABLE>
<TABLE>
<S><C>
<PAGE>
AMENDMENT NO. 1
TO
CONSULTING AGREEMENT
This AMENDMENT NO. 1 TO CONSULTING AGREEMENT ("Agreement"), dated as of
December 23, 1999, by and between AMERICAN KIOSK CORPORATION, a Delaware corporation
(the "Company"), and MARTIN PALACIOS ("Palacios").
W I T N E S S E T H
WHEREAS, the Company and the Palacios are parties to a Consulting Areement, dated as of
December 8, 1999 (the "Consulting Agreement"); and
WHEREAS, the Company and Zero's Mr. Submarine, Inc., a Virginia corporation ("Zeros"),
are parties to a certain asset purchase agreement, dated as of December 8, 1999 (the "Purchase
Agreement"); and
WHEREAS, the effectiveness of the Purchase Agreement is contingent upon the approval of
the stockholders of Zeros; and
WHEREAS, the Company and Palacios have agreed to amend the Consulting Agreement to
provide that the Term, as defined therein, shall commence upon the approval of the Zeros stockholders
of the Purchase Agreement.
NOW, THEREFORE, for good and valuable considerations, the receipt and adequacy of which
are hereby acknowledged by each of the parties hereto, the parties hereby agree as follows:
1. Section 2 of the Consulting Agreement is hereby amended in its entirety as follows:
"The term of this Agreement shall commence on the date the stockholders of Zero's
Mr. Submarine, Inc., a Virginia corporation ("Zeros"), approve the terms and conditions of that
certain Asset Purchase Agreement, by and among the Company, Palacios, Eugene T. Schmidt, John
Schmidt and X.S., Inc., and shall continue for a period of five (5) years thereafter (the "Term")."
2. Subject to the modification set forth herein, the Consulting Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first
set forth above.
AMERICAN KIOSK CORP.
By:
Larry E. Graybill, Chief Financial Officer
_______________________________________
Martin Palacios
</TABLE>
<TABLE>
<S><C>
<PAGE>
AMENDMENT NO. 1
TO
CONSULTING AGREEMENT
This AMENDMENT NO. 1 TO CONSULTING AGREEMENT ("Agreement"), dated as of
December 23, 1999, by and between AMERICAN KIOSK CORPORATION, a Delaware
corporation (the "Company"), and JOHN SCHMIDT ("Schmidt").
W I T N E S S E T H
WHEREAS, the Company and the Schmidt are parties to a Consulting Areement, dated as of
December 8, 1999 (the "Consulting Agreement"); and
WHEREAS, the Company and Zero's Mr. Submarine, Inc., a Virginia corporation ("Zeros"),
are parties to a certain asset purchase agreement, dated as of December 8, 1999 (the "Purchase
Agreement"); and
WHEREAS, the effectiveness of the Purchase Agreement is contingent upon the approval of
the stockholders of Zeros; and
WHEREAS, the Company and Schmidt have agreed to amend the Consulting Agreement to
provide that the Term, as defined therein, shall commence upon the approval of the Zeros stockholders
of the Purchase Agreement.
NOW, THEREFORE, for good and valuable considerations, the receipt and adequacy of
which are hereby acknowledged by each of the parties hereto, the parties hereby agree as follows:
1. Section 2 of the Consulting Agreement is hereby amended in its entirety as follows:
"The term of this Agreement shall commence on the date the stockholders of Zero's
Mr. Submarine, Inc., a Virginia corporation ("Zeros"), approve the terms and conditions of that
certain Asset Purchase Agreement, by and among the Company, Schmidt, Martin Palacios, Eugene T.
Schmidt and X.S., Inc., and shall continue for a period of five (5) years thereafter (the "Term")."
2. Subject to the modification set forth herein, the Consulting Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first
set forth above.
AMERICAN KIOSK CORP.
By:
Larry E. Graybill, Chief Financial Officer
_______________________________________
John Schmidt
</TABLE>
<TABLE>
<S><C>
<PAGE>
Exhibit 21
The Company owns all of the issued and outstanding common stock of Zero's Mr.
Submarine, Inc., a Delaware corporation
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<S><C>
<ARTICLE> 5
<S> <C>
[PERIOD] 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH AND CASH ITEMS> 141,391
<MARKETABLE SECURITIES> 0
<NOTES AND ACCOUNTS RECEIVABLE - TRADE> 57,720
<ALLOWANCE FOR DOUBTFUL ACCOUNTS> 0
<INVENTORY> 0
<TOTAL CURRENT ASSETS> 400,820
<PROPERTY, PLANT AND EQUIPMENT> 54,116
<ACCUMULATED DEPRECIATION> (10,070)
<TOTAL ASSETS> 541,143
<TOTAL CURRENT LIABILITIES> 778,791
<BONDS, MORTGAGES AND SIMILAR DEBT> 1,936,961
0
0
<COMMON STOCK> 428
<OTHER STOCKHOLDERS' EQUITY> (2,175,037)
<TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY> 541,143
<NET SALES OF TANGIBLE PRODUCTS> 109,431
<TOTAL REVENUES> 119,431
<COST OF TANGIBLE GOODS SOLD> (127,968)
<TOTAL COSTS AND EXPENSES APPLICABLE TO SALES AND REVENUE> (127,968)
<OTHER COSTS AND EXPENSES> 0
<PROVISION FOR DOUBTFUL ACCOUNTS AND NOTES> 0
<INTEREST AND AMORTIZATION OF DEBT DISCOUNT> 199,153
<INCOME BEFORE TAXED AND OTHER ITEMS> (2,331,890)
<INCOME TAX EXPENSE> 0
<INCOME/LOSS CONTINUING OPERATIONS> (2,331,890)
<DISCONTINUED OPERATIONS> 0
<EXTRAORDINARY ITEMS> 0
<CUMULATIVE EFFECT-CHANGES IN ACCOUNTING PRINCIPALS> 0
<NET INCOME OR LOSS> (2,331,890)
<EARNINGS PER SHARE - BASIC> (0.55)
<EARNINGS PER SHARE - DILUTED> (0.55)
</TABLE>
