GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
SPORTS GROUP INTERNATIONAL, INC.
(formerly known as Secretarial Services of Orlando, Inc.)
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(Name of Small Business Issuer in its Charter)
Florida 59-3474394
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7730 East Greenway Road, Suite 203 Scottsdale, Arizona 85260
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(Address of principal executive offices) (Zip Code)
(480) 443-0200
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Issuer's telephone number
NONE
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Securities to be registered pursuant to Section 12(b) of the Act.
COMMON STOCK
$.001 par value
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Securities to be registered pursuant to Section 12(g) of the Act.
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INDEX TO FORM 10-SB
Page No.
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PART I 1
ITEM 1. DESCRIPTION OF BUSINESS 1
Business Overview 1
Industry Overview 2
Business of Issuer 2
Business Development and Corporate Structure 2
Business of Subsidiaries: Frullati Cafe & Bakery
And Surf City Squeeze 4
Marketing 10
Competition and the Company's Position in the Industry 11
Sources and Availability of Raw Materials
& Principal Suppliers 11
Intellectual Property and Agreements 11
Franchise Agreements 12
Governmental Approvals or Regulations 12
Insurance 13
Research & Development 13
Employees 13
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
Results of Operations: 1999 to 1998 15
Liquidity and Capital Resources 16
Year 2000 18
Risk Factors 19
ITEM 3. DESCRIPTION OF PROPERTY 20
Retail Operations 20
Commercial Office Space and Warehousing 22
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 23
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS 24
Biographical Information 24
Committees of the Board of Directors 25
ITEM 6. EXECUTIVE COMPENSATION 26
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ITEM 7. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS 27
Future Transactions 28
ITEM 8. DESCRIPTION OF SECURITIES 28
Common Stock 29
Preferred Stock 29
Other Preferred Stock Voting Rights 31
PART II 32
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 32
Market Information 32
Holders 32
Dividends 33
ITEM 2. LEGAL PROCEEDINGS 33
SGI and Related Litigation 33
FranNet 34
Royal Marketing International, Inc. 35
Ziad S. Dalal 35
Landlords Claims Under the Plan of Reorganization 36
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 36
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES 36
ITEM 5. INDEMNIFICATION OF DIRECTORS & OFFICERS 37
PART III 39
ITEM 1. INDEX TO EXHIBITS 39
PART F/S 41
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS
FORM 10-SB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, ASSUMPTION
AND UNCERTAINTIES, WHICH ARE DIFFICULT TO PREDICT. WORDS SUCH AS "BELIEVE,"
"MAY," "COULD," "EXPECT," "LIKELY," AND VARIATIONS OF THESE WORDS, AND SIMILAR
EXPRESSIONS, ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THE SECTIONS ENTITLED "MANAGEMENT DISCUSSION AND
ANALYSIS" AND "RISK FACTORS," AS WELL AS THOSE DISCUSSED IN THIS PART AND
ELSEWHERE IN THIS FORM 10-SB.
BUSINESS OVERVIEW
The Company was incorporated in the state of Florida in September 1997, as
Secretarial Services of Orlando, Inc. and in March 1999 changed its name to
Sports Group International, Inc. The term "Company" refers to Sports Group
International, Inc. and its subsidiaries. The Company trades over-the-counter on
the Electronic Bulletin Board under the symbol "SPGK". The Company has developed
its business through the acquisition of the Frullati Cafe and Bakery and the
Surf City Squeeze franchise businesses, as described in more detail below.
The Company operates and franchises, under the Frullati Cafe and Bakery and
the Surf City Squeeze brand names, juice bars and health food cafes that serve
blended fruit drinks and healthy foods and snacks in shopping malls, airports,
hospitals and health clubs throughout the United States and Canada. The Company,
through its subsidiaries, has approximately 207 total locations, of which 166
are either franchised or licensed by third parties and 41 are directly owned and
operated by the Company or its subsidiaries. The Company's corporate stores
operate under the Frullati Cafe and Bakery brand name. The Company also sells
proprietary smoothie mixes and other nutrients and supplements to its
franchisees and licensees through its wholly owned subsidiaries.
The Company derives its revenues primarily from franchise and license fees,
sales from its company-owned stores, and sales of nutritional and health food
products to franchisees and licensees. The Company's long-term strategy is to
operate primarily as a franchisor, and through strategic acquisitions and
internal growth, to become one of the larger franchisors of juice bars, healthy
food cafes, and other retail food concepts in the United States and select
international markets. The Company also plans to operate a limited number of
company stores in certain key markets.
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INDUSTRY OVERVIEW
The U. S. market for juice and smoothie blended drinks is large, having
grown nearly 30% in the past year, according to the 1999 Juice and Smoothie Bar
Industry Analysis Report (the "Report"). The juice/smoothie segment of the
specialty-restaurant industry accounted for approximately $647 million in
revenue during the past year, with major chain operators (i.e., those with 30
units or more) posting roughly $450 million of the revenue and independent
operators accounting for about $197 million. The Report also found the
juice/smoothie segment's operators with 30 units or more are taking market share
from the independents operators. Specifically, the Report noted that the major
retail players, with approximately 1,817 stores in the smoothie segment, now
control 70 percent of the market, up from 55% in 1998 and 42% in 1997.
The Report stated that the growing smoothie-and-juice-bar segment is
quickly learning the importance of building a brand name, with most of the major
chains shifting their growth strategies to major franchise development
agreements and co-branding efforts. The Report also predicted that the major
chains, which are mainly based in the Pacific and Southeastern regions of the
country, will expand into other U.S. territories, where menu diversification
will be vital to success.
BUSINESS OF ISSUER
The Company is an operator and franchisor of juice bars and health food
cafes that serve blended fruit drinks and healthy food and snacks. The Company
conducts its business through two operating divisions: Frullati Cafe and Bakery,
which commenced operations in 1985, and Surf City Squeeze, which commenced
operations in 1989.
The stores operating under the Frullati Cafe and Bakery brand name are
located primarily in shopping malls, airports and hospitals in the midwest,
southwest, and southeastern United States. The average Frullati Cafe and Bakery
store derives approximately 60% of its total revenue from blended fruit drinks
and other beverage sales and approximately 40% from the sale of sandwiches,
baked goods and other healthy food items. The stores operating under the Surf
City Squeeze brand name are located in shopping malls and health clubs primarily
in California, Arizona and Canada. The average Surf City store derives the
majority of its revenue from the sale of blended fruit drinks and other
beverages, and nutrients and supplements that are added to the drinks.
BUSINESS DEVELOPMENT AND CORPORATE STRUCTURE
The Company's growth has been driven through acquisitions. On March 15,
1999, the Company purchased all of the outstanding common shares of Surf City
Acquisition Corporation II ("SCAC") by issuing 575,000 shares of its Series A
Convertible Preferred Stock ("Series A Preferred") and 2,000,000 shares of its
common stock par value $0.001 per share (the "Common Stock") in exchange for all
SCAC's issued and outstanding common stock, warrants, and the cancellation of a
Shareholder Voting Trust and Management Agreement among its shareholders. SCAC,
in turn, owns all of the common shares of Surf City Squeeze, Inc. ("Surf City").
Surf City is a franchiser of juice bars that sell blended fruit drinks and other
nutritional products.
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Surf City filed a voluntary petition under Chapter 11 of the United States
Bankruptcy Code on January 13, 1997, and emerged from bankruptcy when SCAC
purchased all of its Common Stock pursuant to the First Modified Joint Plan of
Reorganization Proposed by the Debtor and the Official Committee of Unsecured
Creditors in the United States Bankruptcy Court for the District of Arizona on
November 18, 1997 (the "Plan of Reorganization"). The Plan of Reorganization is
described in more detail below. See, BUSINESS DEVELOPMENT AND CORPORATE
STRUCTURE - SURF CITY'S PLAN OF REORGANIZATION, below.
On May 21, 1999, the Company issued, pursuant to a private placement exempt
from registration under the Securities Act of 1933, 650,000 shares of its Series
B Convertible Preferred Stock (the "Series B Preferred") to Robert E. Petersen
and Margaret M. Petersen, as Trustees of the R.E. & M. Petersen Living Trust
Dated January 17, 1983 (the "Petersen Trust"), at $10.00 per share and a warrant
to purchase 1,000,000 of the Company's Common Stock at $2.00 per share (the
"Petersen Transaction"). Simultaneously with the closing of the Peterson
Transaction, on May 21, 1999, the Company used the proceeds of the Petersen
Transaction to purchase all of the Common Stock of Selman Systems, Inc.
("Selman") for $6,500,000 in cash and the assumption of certain debt. Selman,
through its wholly owned subsidiaries, owns and operates Frullati Cafe & Bakery
("Frullati"), a chain of franchised and company-owned cafes and bakeries serving
blended fruit drinks and other healthy foods and snacks, at locations throughout
the United States.
On July 7, 1999, the Company, through Selman, purchased all of the
outstanding common stock and warrants of Fru-Cor, Inc ("Fru-Cor"), an owner of
eight Frullati Cafe & Bakery locations in Texas, Mississippi and Louisiana. The
total amount Selman paid for Fru-Cor was $1,200,000, evidenced by a promissory
note between Selman and the former shareholders of Fru-Cor (the "Fru-Cor Note").
The Fru-Cor Note is due on May 20, 2000. The Fru-Cor Note is secured by a pledge
of all of Selman's common stock to Kenneth L. Musgrave, Ltd., Tony Condor and
Larry Pearce (the "Selman Note Holders"). The stock pledge between Selman and
the Selman Note Holders is subordinate to the pledge of the same stock to United
Texas Bank, described in more detail below.
Except for Surf City's voluntary Chapter 11 bankruptcy discussed above,
there have been no bankruptcy, receivership, or similar proceedings in the
Company's history.
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BUSINESS OF SUBSIDIARIES: FRULLATI CAFE & BAKERY AND SURF CITY SQUEEZE
The following is a description of the business and subsidiaries that
comprise the Company's two operating divisions, Frullati Cafe & Bakery and Surf
City Squeeze.
THE FRULLATI DIVISION
The Frullati division operates through Selman Systems, Inc. ("Selman"),
which the Company acquired in May 1999. Selman was formed in 1992, and operates
exclusively as the holding company for its six wholly owned subsidiaries:
Frullati Enterprises, Inc., Frullati, Inc., Frullati Franchise Systems, Inc.,
Frullati Systems, Inc., Tovali, Inc. and Fru-Cor. Selman and each of its wholly
owned subsidiaries, are Texas corporations in good standing.
The key operating unit of the Frullati Division is the Frullati Cafe &
Bakery Store. The Company both franchises Frullati Cafe & Bakery Stores and owns
and operates several stores for its own account. Frullati Cafe & Bakery stores
offer smoothies and other blended fruit drinks, as well as an expanded food
menu, including, salads, sandwiches and other health food items.
FRULLATI ENTERPRISES, INC.
Frullati Enterprises, Inc. was formed in 1996 to act as a holding company
for 18 company-owned Frullati Cafe & Bakery stores, some of which were
separately incorporated and subsequently merged into Frullati Enterprises, Inc.
The stores are located throughout the Eastern half of the United States.
FRULLATI, INC.
Frullati, Inc was formed in 1995 to act as a holding company for 15
company-owned Frullati Cafe & Bakery stores. These stores, some of which were
separately incorporated, were subsequently merged into Frullati Inc., and are
located in the Southeastern and Midwestern portion of the United States.
FRULLATI FRANCHISE SYSTEMS, INC.
Frullati Franchise Systems, Inc. ("Frullati Franchise") was formed in 1994
to act as a franchisor of Frullati Cafe & Bakery stores to third parties and to
provide continuing training and support for its franchisees. As of November 30,
1999, Frullati Franchise had 44 franchisees operating 54 locations in 13 states
across the United States. No single franchisee owns more than three Frullati
Cafe & Bakery locations. Frullati Cafe & Bakery franchisees typically pay an
initial $30,000 franchise fee to Frullati Franchise. Franchisees also agree to
pay a continuing royalty of 6% of gross revenues on a weekly basis and a weekly
advertising fee of a 0.25% of gross revenue. Frullati Franchise can increase the
advertising fee on 90 days notice, up to a maximum of 3% of gross revenues. The
typical term of a franchisee agreement is the lesser of ten years or the term of
the commercial real estate lease on the facility to be operated as a Frullati
Cafe & Bakery location by the franchisee.
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FRULLATI SYSTEMS, INC.
Frullati Systems, Inc. ("Frullati Systems") was formed in 1993 to act as
the real estate development arm of Selman. In this capacity, Frullati Systems
searches for new commercial sites throughout the United States for both
franchisees and company-owned Frullati Cafe & Bakery stores. Frullati Systems
negotiates leases for new franchise sites; contracts, oversees and manages the
build-out or improvements for these sites; and frequently serves as the tenant
under the real estate lease of the site. The typical real estate lease for a
Frullati Cafe & Bakery site is ten years.
When Frullati Systems acts as the tenant, it subleases the location to a
franchisee, but usually remains liable to the landlord for the lease
obligations. If a franchisee defaults, Frullati Systems can evict the franchisee
and take possession of the site. In addition, Frullati Franchise or Frullati
Systems has guaranteed commercial real estate leases between landlords and its
franchisees. As of November 30, 1999, Frullati Franchise Systems, Inc. or
Frullati, Inc. was a tenant under 49 commercial real estate leases, which were,
in turn, subleased to the franchisees and is a guarantor for its franchisees on
three real estate leases. In addition, Frullati Systems, Inc or affiliated
entities are liable to the landlord for the lease obligations of all
company-owned stores.
BOOSTERS, INC.
Boosters, Inc., dba Tovali Products Corp. ("Tovali"), was formed in 1999 to
serve as the developer and distributor of proprietary smoothie mixes and other
nutritional products and supplements that are sold to Frullati Cafe & Bakery
franchisees and company-owned stores. Tovali formulates its own proprietary
smoothie mixes and other nutritional products. Tovali outsources the
manufacturing of its products. The finished product is shipped directly to
Tovali for distribution to franchisees and licensees and then shipped to
franchisees and licenses on a C.O.D. basis.
FRU-COR, INC.
Fru-Cor, Inc. ("Fru-Cor") was acquired by Selman in July 1999. Fru-Cor was
formed in 1998 to act as the holding company for seven Frullati Cafe & Bakery
locations owned by unrelated third parties. These stores are all located in the
Southeastern United States. Selman currently manages and operates the Fru-Cor
locations as company-owned stores. Fru-Cor also owns all of the outstanding
shares of Texas Class, Inc., a Texas corporation, whose sole asset is a single
Frullati Cafe & Bakery location. It is the intention of the Company's management
to sell Fru-Cor's Frullati Cafe & Bakery sites to third party franchisees.
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SELMAN FINANCING ACTIVITIES
The Company has used the Common Stock of Selman to finance its purchase of
Selman, its purchase of Fru-Cor, and to finance certain other obligations.
By Agreement dated August 6, 1996, the Company pledged 49% of the Common
Stock of Selman to United Texas Bank as a security for a demand promissory note
(the "Note") in the original amount of $576,000. Selman and several of its
subsidiaries are liable on the Note. Although Selman has been current in all
monthly principal and interest payments due United Texas Bank, on October 13,
1999, the bank exercised its demand rights under the Note and requested payment
of the Note in full. At this time, the Note is unpaid, and the Company and
Selman are in negotiations with a bank to obtain a credit facility, the proceeds
of which will be applied to pay United Texas Bank in full. The principal balance
of the United Texas Bank Note is currently $475,000.
The Company has also used Selman's Common Stock to secure two additional
obligations. The rights of the pledgees, in each case, are junior and
subordinate, to the rights of United Texas Bank. Under a Pledge Agreement dated
July 7, 1999, the Company pledged all of Selman's Common Stock to the Selman
Note Holders to secure the $1,200,000 promissory note given by Selman as part of
the purchase price for Selman's purchase of Fru-Cor, Inc. Fru-Cor was the owner
of eight Frullati Cafe and Bakery locations in Texas, Mississippi and Louisiana.
The note is due May 20, 2000.
In addition, the Company also pledged all of Selman's Common Stock to Ziad
S. Dalal ("Dalal") to secure its promissory note, dated May 21, 1999, to Dalal,
in the principal amount of $300,000 (the "Dalal Note"). The Dalal Note is also
due and payable May 20, 2000, but Dalal asserts that the note is in default and
is immediately due and payable The Dalal Note is also the subject of pending
litigation discussed below. See, LEGAL PROCEEDINGS. The stock pledge between the
Company and Dalal is also subordinate to the rights of the Selman Note Holders
and to the rights of United Texas Bank.
THE SURF CITY SQUEEZE DIVISION
The Company's Surf City Squeeze division offers primarily smoothies and
other nutritional drinks and supplements. Surf City Squeeze stores are almost
entirely operated by franchisees and offer a more limited food menu than
Frullati Cafe and Bakery, but offer a greater variety of nutritional drinks and
supplements.
SURF CITY ACQUISITION CORPORATION II
The Company acquired Surf City Acquisition Corporation II ("SCAC") in March
1999; SCAC owns all of the stock of Surf City. Surf City, in turn, has three
wholly owned subsidiaries: Surf City Franchising Corporation ("SCSFC"), Malibu
Smoothie Franchising Corporation ("Malibu Smoothie"), and Kona Coast Provisions,
Inc. ("Kona Coast"). SCAC, Surf City and each of its three wholly owned
subsidiaries are Arizona corporations in good standing.
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SCAC is the holding company of Surf City and its subsidiaries. SCAC was
formed in 1997 to acquire all of the outstanding stock of Surf City under the
Plan of Reorganization approved by the United States Bankruptcy Court.
SURF CITY SQUEEZE, INC.
Surf City Squeeze, Inc. ("Surf City") was formed in 1989 to operate juice
bars for its own account and to license the Surf City Squeeze juice bar concept
to third parties. Prior to 1995 and in certain other limited situations, Surf
City granted the purchaser of a company-owned store a license, rather than a
franchise, to continue operating the location as a Surf City Squeeze juice bar.
The license charge in these situations is included in the total sales price for
the property, and the term of the license is the lesser of ten years or the
remaining term of the commercial real estate lease. Under a license, the
licensee pays no ongoing royalty or advertising fees to Surf City, and the
support provided to the operator, by Surf City, is likewise limited. As of
November 30, 1999, Surf City had 34 locations operated by licensees.
In early 1995, Surf City ceased its licensing activities and turned its
focus to operating company-owned Surf City Squeeze stores and franchising juice
bars through a wholly owned subsidiary.
In late 1995, after receiving financing from Weider Health & Fitness
("Weider"), Surf City initiated a rapid expansion of its company-owned stores in
prime locations throughout the United States. As part of this expansion, Surf
City secured leases for numerous retail sites, with the intention of using the
revenue from existing company-owned stores to finance further expansion. When
Weider declined to fund the remaining $ 3 million of a $6.5 million line of
credit, Surf City did not have the financial ability to open new stores for
which it previously had signed lease commitments. The convergence of Weider's
failure to fund the line of credit and the liability for store leases, forced
Surf City to file for Chapter 11 bankruptcy reorganization on January 13, 1997.
During its bankruptcy reorganization, Surf City continued to operate and
manage its business as a debtor-in-possession. Surf City emerged from bankruptcy
when SCAC purchased all of its stock pursuant to the Plan of Reorganization. The
required majority of creditors approved the Plan of Reorganization and Surf City
is now operating under the Plan of Reorganization. The Plan of Reorganization
allowed Surf City to restructure its financial obligations with creditors and
landlords, and to assume or reject the leases on its stores throughout the
United States.
As part of its Plan of Reorganization, Surf City has either closed or sold
all company-owned stores. When selling company-owned stores, as part of the
selling price, Surf City, through a wholly owned subsidiary, grants the buyer a
franchise to operate as a Surf City Squeeze location for a set period of time.
The franchise term is usually the lesser of ten years or the remaining term of
the commercial real estate lease for the Surf City Squeeze location assumed by
the new franchisee. After the sale has closed, SCSFC provides support for the
new franchisee, and receives monthly royalty payments based on the gross revenue
of the new franchisee.
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SURF CITY SQUEEZE FRANCHISING CORPORATION
Surf City Franchising Corporation ("SCSFC") was formed in 1995 to franchise
Surf City Squeeze stores to third parties. As of November 30, 1999, SCSFC had 64
franchisees operating 78 locations in 11 states throughout the United States and
Canada. No single franchisee owns more than four Surf City Squeeze locations.
Franchisees pay an initial $30,000 franchise fee upon entering into the
franchise agreement with SCSFC. Franchisees also pay a continuing royalty of 6%
of gross revenues on a monthly basis. SCSFC occasionally pledges the monthly
royalty payments from certain franchisees as security for various SCSFC
financial obligations. The term of a Surf City franchise agreement is the lesser
of ten years or the term of the commercial real estate lease for the facility
being operated as a Surf City Squeeze location by the franchisee.
On July 7, 1998, SCSFC entered into a Master Franchise Agreement with
1238176 Ontario, Inc. (the "Master Franchisee"). The Master Franchise Agreement
grants the Master Franchisee the exclusive right to set-up, create, establish
and operate Master Franchisee-owned stores and to grant franchises for stores to
qualified persons in the country of Canada. Under the Master Franchise
Agreement, SCSFC receives a royalty 6% of monthly revenues for stores owned and
operated by the Master Franchisee and a reduced royalty of 2% of monthly
revenues for stores operated by third party franchisees. As of November 30,
1999, 14 stores have been opened and are operating in Canada under this Master
Franchise Agreement, with only one store owned and operated by the Master
Franchisee.
As part of its franchising business, SCSFC or Surf City commonly enter into
leases directly with the landlord for the Surf City Squeeze locations intended
to be franchised, and then sublease the location to the new franchisee.
Consequently, SCSFC or Surf City is frequently a tenant under, and thus liable
and responsible for, various real estate leases for the benefit of its
franchisees. In subleasing a Surf City Squeeze location, Surf City or SCSFC may
increase the rent to compensate for the lease risk they assume. As of November
30, 1999, SCSFC or Surf City were tenants under 70 real estate leases, which, in
turn, were sub-leased to franchisees. SCSFC or Surf City, as a sublessor, has
the right to evict a defaulting franchisee from the premises and relet the site.
SCSFC, Surf City, or other affiliates of the Company have and will likely
continue to "guarantee" real estate leases between landlords and its franchisees
and licensees. As of November 30, 1999, SCSFC or Surf City was guarantors for
its franchisee's or licensee's obligations on six real estate leases. The
typical commercial real estate lease for a Surf City location, whether SCSFC or
Surf City is the tenant or a guarantor, is five to eight years.
As of April 1998, SCSFC ceased to sell Surf City Squeeze franchises to new
franchisees and is currently restricting its operations to supporting its
existing franchisees at their respective locations. All new franchises for Surf
City Squeeze locations will be sold by Malibu Smoothie, which is discussed
below.
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MALIBU SMOOTHIE FRANCHISING CORPORATION
Malibu Smoothie Franchising Corporation ("Malibu Smoothie") was formed in
1998 to act as a franchisor for new Surf City Squeeze franchises and to simplify
the preparation of the franchisor's audited financial statements included in its
Uniform Franchise Offering Circular ("UFOC") during the period Surf City was
operating under the Plan of Reorganization. The franchise terms, royalties, and
treatment of the commercial real estate leases are substantially the same as
employed by SCSFC described above, except that the royalty payments are
collected from franchisees on a weekly basis.
KONA COAST PROVISIONS, INC.
Kona Coast Provisions, Inc. ("Kona Coast") was formed in 1994 to act as the
developer, and distributor of smoothie mixes and other nutritional products and
supplements. Kona Coast sells its proprietary nutritional products to
franchisees and licensees of Surf City Squeeze juice bars. Kona Coast outsources
all of the manufacturing of its products, which are shipped directly from the
manufacturer to Kona Coast's warehouse in Scottsdale, Arizona. Kona Coast
receives orders for its products directly from franchisees and licensees, and
ships its product directly to them on a C.O.D. basis.
SURF CITY'S PLAN OF REORGANIZATION
Surf City is currently operating under the Plan of Reorganization approved
by the United States Bankruptcy Court and the required majority of Surf City's
creditors. As part of the Plan of Reorganization, Surf City entered into
numerous stipulations and settlements with various creditors, including
landlords, that required either cure payments and, in certain cases, payments
made to creditors over time. The terms of the general unsecured claims under the
Plan of Reorganization require minimum aggregate payments of $1,225,000.
Specifically, beginning with the calendar year 1998, Surf City is required to
pay into an unsecured creditor distribution account, on the twentieth (20th) day
of each calendar quarter and continuing for seven years thereafter, the
following amounts: (i) $43,750; (ii) twenty-five percent (25%) of the first
$50,000 of Net Cash Flow (defined in the Plan of Reorganization as the net
consolidated cash flow of Surf City and its subsidiaries based on generally
accepted accounting principles) for the preceding calendar quarter on a
cumulative basis, taking into account the $43,750 payment in (i); and (iii)
forty percent (40%) of the Net Cash Flow in excess of $50,000 for the preceding
calendar quarter on a cumulative basis (items (ii) and (iii) are collectively
referred to as the "Contingency Payments"). At this time, Surf City cannot
reasonably estimate the amount of Contingency Payments that will ultimately be
payable to the unsecured creditor distribution account because of uncertainties
in the ability of Surf City and its subsidiaries to generate Net Cash Flow and
the Company's inability to estimate the timing of any such Net Cash Flow if it
does occur. As of November 30, 1999, Surf City has not made any Contingency
Payments to the unsecured creditors pool.
Under the Plan of Reorganization, beginning February 1, 1998, and
continuing for seven years thereafter, the salaries of certain Surf City
executives are limited to $100,000 each per calendar year, plus a percentage of
Net Cash Flow. The Plan of Reorganization defines "Executive Salaries" as all
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cash received by executives from Surf City, Kona Coast, and SCSFC, in the form
of salaries, exclusive of health, dental, life, disability, and similar
benefits. The percentage of Net Cash Flow available for Executive Salaries is
determined and paid on a quarterly basis, as follows: (i) seventy-five percent
(75%) of the first $50,000 of the Net Cash Flow for the preceding calendar
quarter; and (ii) thereafter, forty percent (40%) of the Net Cash Flow in excess
of $50,000 for the preceding calendar quarter. Net Cash Flow is defined as the
net consolidated cash flow of Surf City and its subsidiaries, based upon
generally accepted accounting principles. The Plan of Reorganization defines
"Executives" as Kevin Blackwell, President of Surf City, and David Guarino,
Chief Financial Officer of Surf City, or their respective successors. The Plan
of Reorganization does not restrict the payment of compensation by Sports Group
International, Inc. or any of the Company's Frullati subsidiaries.
Surf City is current with all payments due under the Plan of Reorganization
and is in substantial compliance with the Plan of Reorganization terms, except
as discussed further below and for certain creditors of Surf City who were
awarded claims under the Plan of Reorganization, but who have not yet demanded
the payment of those claims. All of these amounts are reflected on Surf City's
financial statements as current liabilities. It is Surf City's intention to
reflect these liabilities in its financial statements until the creditor demands
payment from Surf City (at which time the payment would be made) or the closing
of the Plan of Reorganization, estimated for late 2004.
MARKETING
In franchising its stores, the Company seeks locations that are heavily
trafficked which are likely to produce customers for the Company's healthy food
products, for example, airports, shopping malls, health clubs and hospitals. The
Company prefers to locate its stores on corners, in kiosks or in other highly
visible areas. The Company stores are built so that its primary products are
displayed with large backlit or front-lit pictures.
The Company does not engage in any general media or print advertising for
either its company-owned or its franchised or licensed stores. However,
individual franchisees and licensees use a wide variety of advertising and
marketing techniques to promote individual locations.
The Company is not currently advertising for new prospective franchisees
for either of its divisions, nor does the Company currently engage outsider
brokers or intermediaries to locate prospective franchisees.
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COMPETITION AND THE COMPANY'S POSITION IN THE INDUSTRY
The business of operating and franchising juice bars serving blended drinks
and healthy food cafes is highly competitive and fragmented. The Company
believes that it is the largest franchiser and operator of these types of
outlets in locations within airports, shopping malls, health clubs, and
hospitals. Management believes that the Company's largest competitor is Jamba
Juice. Jamba Juice has approximately the same number of outlets as the Company;
however, Jamba Juice's outlets are primarily located in strip centers and street
locations. There are also numerous smaller chains of juice bars serving blended
drinks and health food cafes throughout the United States that operate in both
strip centers and street locations and specialty locations within airports and
shopping malls.
SOURCES AND AVAILABILITY OF RAW MATERIALS & PRINCIPAL SUPPLIERS
Kona Coast and Tovali both use multiple manufacturers and suppliers to
produce their smoothie mixes, nutritional products and supplements. Neither
entity has experienced difficulty finding sources for its raw ingredients.
Additionally, neither Kona Coast nor Tovali are dependent upon any one
manufacturer or supplier.
The Company uses various food service distribution companies to supply
fruit, bakery products, other food supplies, and cleaning products to its
franchisees, licensee, and company-owned stores. The Company has not experienced
any difficulties finding available sources for these products. The Company also
periodically solicits bid requests for its food service programs to ensure the
best prices, service, and selection for its outlets.
INTELLECTUAL PROPERTY AND AGREEMENTS
The Company holds no patents or copyrights, and the Company does not
copyright its recipes for the proprietary smoothie mixes and other supplements
manufactured and distributed by Kona Coast and Tovali. The Company protects its
recipes through trade secret agreements and internal security measures, which
management believes are adequate.
The Company has registered numerous service marks and has applied for the
registration of various service marks with the United States Patent and
Trademark Office. The following table summarizes the status of the Company's
service marks:
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Registration No. Service Mark Description Registration Date
- - ---------------- ------------------------ -----------------
74/679438 Surf City Squeeze Name & Design March 12, 1996
2,255,749 Frullati Cafe & Bakery June 22, 1999
1,731,865 Frullati Name November 10, 1992
1,731.867 Frullati Name & All Natural Design November 10, 1992
1,989,162 Frullati Cafe and Design July 23, 1996
75/455272 Malibu Smoothie Name Pending
(filed March 2, 1998)
75/462365 Malibu Smoothie Mark and Logo Pending
(filed March 2, 1998)
The Company is currently in the process of registering each of these
service marks in Canada.
FRANCHISE AGREEMENTS
The Company has approximately 132 franchise agreements currently in effect
providing for royalties on both a weekly and monthly basis. Of these, four
franchise agreements are currently in default. The remaining franchise
agreements are currently in full force and effect, and to the Company's
knowledge, are not in default. Additionally, Surf City has 34 license agreements
in effect with third party purchasers of former company-owned Surf City Squeeze
locations. One license agreement is currently in default. To the Company's
knowledge, the remaining license agreements are currently in full force and
effect.
GOVERNMENTAL APPROVALS OR REGULATIONS
Except for complying with state and federal franchising regulations and
with state and local ordinances governing land use and the health and safety of
food service operations, the Company's principal products of fruit smoothie
drinks and other healthy foods and supplements are not subject to governmental
approval, nor does management know of any existing or proposed regulations of
its business that could have a material effect on its operations.
The Company's primary business is the sale of franchises. Accordingly, the
Company is required to comply with state and federal laws governing the sale of
franchises. The Company prepares, updates and distributes to its franchisees a
Uniform Franchising Circular, which complies with applicable state and federal
law.
The Company's corporate-owned stores and the stores of its franchisees are
subject to federal, state and local health regulation.
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The Company has not been involved in any judicial or regulatory proceedings
involving any alleged violation of environmental laws, and, to the best of
management's knowledge, the Company believes it is in compliance with all
applicable environmental laws.
INSURANCE
The Company and its subsidiaries maintain general liability and workers
compensation insurance at levels which management believes are adequate.
Additionally, all franchised and licensed Frullati and Surf City locations where
a subsidiary of the Company is either the tenant or a guarantor of the
commercial real estate lease for the location, maintain individual policies of
general liability coverage in accordance with the requirements of the applicable
real estate lease.
RESEARCH & DEVELOPMENT
All of the Company's research and development activities are performed by
Kona Coast and Tovali. These research and development activities are focused
primarily on the development of new nutritional products and include the
development of improved fructose and Nutrasweet-based smoothie mixes; vitamin
fortified smoothie mixes; shelf-stable smoothie mix (liquid) available for
grocery store distribution; frozen (liquid) smoothie mix for institutional use;
and pre-flavored smoothie mixes sold in individual packets for home use.
EMPLOYEES
As of November 30, 1999, the Company had a total of 90 full-time employees
and 168 part-time employees.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS
FORM 10-SB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, ASSUMPTION
AND UNCERTAINTIES, WHICH ARE DIFFICULT TO PREDICT. WORDS SUCH AS "BELIEVE,"
"MAY," "COULD," "EXPECT," "LIKELY," AND VARIATIONS OF THESE WORDS, AND SIMILAR
EXPRESSIONS, ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THE SECTIONS ENTITLED "MANAGEMENT DISCUSSION AND
ANALYSIS," "RISK FACTORS," AS WELL AS THOSE DISCUSSED IN THIS PART AND ELSEWHERE
IN THIS FORM 10-SB.
The Company's unaudited consolidated financial statements as of September
30, 1999, include the accounts and results of operations of the Company and its
wholly owned subsidiaries for the nine months then ended. The results of
operations include that of Selman and Fru-Cor for the period May 21, 1999, and
July 7, 1999 (the dates for the Company's acquisition of Selman and Fru-Cor)
through September 30, 1999, respectively. The Company's acquisition of SCAC was
effected through an exchange of Common Stock and Preferred Stock which resulted
in 100% of the Common stock of SCAC being held by the Company and the existing
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shareholders of SCAC owning approximately 69% of the Company's issued and
outstanding shares. For financial accounting purposes, the acquisition was a
reverse merger and was treated as a recapitalization with SCAC as the acquirer.
The Company is the holding company for its operating subsidiaries. The
results of operations are dependent upon the sales volumes at both company-owned
and franchised stores. The Company earns royalties based on a percentage of the
revenues of the franchised operations. It also earns revenue from direct sales
at the company-owned stores and from sales of proprietary products to
franchisees. The Company also earns franchise fees through the sale of new
franchised stores.
The Company is subject to seasonality in its business. Volume is generally
higher from the middle of spring through the summer and again in December. These
variances in volume can be attributed to the increased volume in shopping malls
and airports where a majority of the Company's stores are located.
The Company has closed the administrative offices of Selman and Fru-Cor,
which it acquired in 1999. The Company may sell certain company-owned locations,
as it deems appropriate in order to focus on franchising. The Company also
intends to seek additional acquisitions that provide operating synergies
compatible with its current operations. The Company will attempt to implement
certain cost reductions through bulk buying of its raw materials and managing
store locations in certain geographic clusters.
The success of the stores is dependent upon the selection of appropriate
store sites. The Company evaluates numerous criteria when selecting store sites.
However, even after careful analysis, there can be no assurances that a store
location will be successful.
The Company is named as the lessee on the majority of its store locations.
The Company then subleases the store to the franchisee, typically for a rental
amount commensurate with the amount of its rent to the lessor. The Company is
subject to ongoing commitments without sublease rentals if a store location is
not successful.
The Company has continuing obligations under Surf City's Plan of
Reorganization. SEE BUSINESS DEVELOPMENT AND CORPORATE STRUCTURE - SURF CITY'S
PLAN OF REORGANIZATION, above. Repayment of these obligations will require the
Company to carefully manage its growth and monitor its profitability.
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RESULTS OF OPERATIONS: 1999 TO 1998
Comparison of historical operating results is presented on a pro forma
basis because of the significance of the acquisitions of Selman and Fru-Cor.
There were no significant operations in Sports Group International, Inc. prior
to its merger with SCAC. The Sports Group International, Inc. and SCAC
transaction was accounted for as a recapitalization of SCAC with SCAC as the
acquirer. 1999 TO 1998
Consolidated revenues for the nine months ended September 30, 1999, were
$6,826,000. Revenues on a pro forma basis for the nine months ended September
30, 1999, were $12,718,000, assuming the acquisitions of Selman and Fru-Cor had
occurred at the beginning of the year. For the year ended December 31, 1998,
revenues on a combined basis were $16,947,000; and revenues on a pro forma basis
for the year ended December 31, 1998, assuming the acquisitions of Selman and
Fru-Cor had occurred at January 1, 1998, would have been $16,805,000. On an
annualized basis, pro forma revenue for the nine months ended September 30,
1999, is consistent with that of 1998.
The Company's consolidated operating income increased to $143,000 for the
nine months ended September 30, 1999, from an operating loss of $434,000 on a
combined basis for the year ended December 31, 1998. Operating income on a pro
forma basis for the nine months ended September 30, 1999, was $259,000, assuming
that the acquisitions of Selman and Fru-Cor had occurred at the beginning of
1999. On a pro forma basis for the year ended December 31, 1998, assuming the
acquisitions of Selman and Fru-Cor occurred at January 1, 1998, the Company
would have had an operating loss of $33,000. On a pro forma basis, the Company's
operating income was greater in 1999 due to reductions in overhead items
resulting from the consolidation of the administrative functions of Surf City,
Selman and Fru-Cor.
Cost of product sales remained constant at approximately 32% of product
sales on a pro forma basis, for the nine months ended September 30, 1999,
compared to the year ended December 31, 1998.
Personnel costs were $1,606,000 for the nine months ended September 30,
1999, compared to $5,081,000 on a combined basis for the year ended December 31,
1998. Personnel costs on a pro forma basis for the nine months ended September
30, 1999, were $3,434,000, assuming the acquisitions of Selman and Fru-Cor had
occurred at the beginning of the year. On a pro forma basis for the year ended
December 31, 1998, assuming the acquisitions of Selman and Fru-Cor had occurred
at January 1, 1998, personnel costs would have been $4,808,000. Personnel costs
declined due to immediate reductions in personnel upon the acquisition of Selman
and Fru-Cor. The owners' salaries attributable to Selman and Fru-Cor were
immediately eliminated and certain departments within Selman were reduced.
General and administrative expenses were $1,217,000 for the nine months
ended September 30, 1999, compared to $3,446,000 on a combined basis for the
year ended December 31, 1998. General and administrative expense, on a pro forma
basis for the nine months ended September 30, 1999, was $1,603,000, assuming the
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acquisitions of Selman and Fru-Cor had occurred at the beginning of 1999.
General and administrative expenses, on a pro forma basis for the year ended
December 31, 1998, assuming the acquisitions of Selman and Fru-Cor had occurred
at January 1, 1998, would have been $3,445,000. Overall, general and
administrative expenses have decreased for the nine months ended September 30,
1999, due to expense reductions related to the consolidation of operations of
Selman, Fru-Cor and Surf City. The Company has experienced an increase in
professional fees for the nine months ended September 30, 1999 due to its
mergers and acquisitions and legal proceedings.
Interest expense was $130,000 for the nine months ended September 30, 1999,
compared to $252,000 on a combined basis for the year ended December 31, 1998.
Interest expense on a pro forma basis for the nine months ended September 30,
1999 was $246,000, assuming the acquisitions of Selman and Fru-Cor had occurred
at the beginning of 1999. Interest expense, on a pro forma basis for the year
ended December 31, 1998, assuming the acquisition of Selman and Fru-Cor had
occurred at January 1, 1998, would have been $360,000. The increase in interest
expense is due to the additional borrowings of $322,500 from the holder of the
Company's Series B Preferred Stock and the $1,200,000 indebtedness the Company
incurred to purchase Fru-Cor. See FRULLATI CAFE & BAKERY - SELMAN FINANCING
ACTIVITIES.
Depreciation and amortization expense was $283,000 for the nine months
ended September 30, 1999, compared to $607,000 on a combined basis for the year
ended December 31, 1998. Depreciation and amortization expense on a pro forma
basis for the nine months ended September 30, 1999, was $584,000, assuming the
acquisitions of Selman and Fru-Cor had occurred at the beginning of 1999.
Interest expense on a pro forma basis for the year ended December 31, 1998,
assuming the acquisitions of Selman and Fru-Cor occurred at January 1, 1998,
would have been $803,000. The Company will have greater depreciation and
amortization expense due to the stepped-up basis of depreciable assets and the
goodwill associated with the Selman and Fru-Cor acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that it will have sufficient liquidity to sustain
its operations over the next twelve months, provided that the Company is
successful in obtaining a $1,000,000 credit facility and selling certain
company-owned stores, and further provided that the Company is able to
successfully resolve the litigation in which it is presently engaged. There can
be no assurances that the Company will be successful in all of these efforts.
The Company historically has had a working capital deficiency. The Company
believes that many companies in its industry operate with working capital
deficiencies. The Company had a net working capital deficit of $3,677,000 at
September 30, 1999, compared to a deficiency on a pro forma basis of $1,827,000
at December 31, 1998. The Company has borrowed $322,500 from the holder of its
Series B Preferred Stock, and borrowed $1,200,000 under a promissory note
related to the Company's acquisition of Fru-Cor; these amounts are reflected in
the Company's September 30, 1999 balance sheet as current liabilities. In
addition, the obligations of Selman to United Texas Bank were called due to the
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change in ownership of Selman and are now all classified as current liabilities.
The Company is currently negotiating with a bank to refinance the Selman bank
debt. In that process, the Company is attempting to acquire a $1,000,000 line of
credit with a bank. The Company believes that this process will be completed in
the very near future.
The Company intends to sell certain company-owned stores that do not fit
its current business plan. If successful, cash raised from the sale of these
stores will be used to pay the Fru-Cor Note. The Company believes that if it is
able to sell company-owned store locations that are not part of its business
plan, its working capital position will be improved. The Company may sell from
ten to 15 company-owned locations over the next year. The Company does not
consider the strategy of selling certain stores as a down-sizing. Rather it
believes that it is selecting and keeping the locations that best suit its
business plan and allow it to expand future operations. The Company will retain
the franchise rights and the related royalty revenue stream on any of the stores
it may sell.
The Company has not experienced material losses on trade receivables from
its customers who are primarily franchisees. Notes receivable principally result
from the financing of the initial franchise fees required from franchisees and
the sale of company-owned stores. The notes are generally guaranteed by the
franchisee or purchaser and are collateralized by the related juice bar business
and related equipment and leasehold improvements. The Company intends to
eliminate this practice and therefore reduce its requirement for capital to
carry these notes. The Company does not believe that this change in practice
will adversely affect the volume of new franchises it seeks to sell. The Company
has experienced credit losses under notes receivable and has generally
foreclosed on the related stores and attempted to re-franchise those locations.
If the Company is able to expand through the franchising of new stores, as it
will seek to do, cash will be required for lease deposits and leasehold
improvements. Much of this cash requirement should provided directly by the new
franchisee.
The Company does not anticipate the need for significant capital
expenditures in the near future. However, if certain prospective store locations
would be better as company-owned stores rather than franchised locations, the
Company may require significant capital to build and open those prospective
stores.
The Company's trade accounts payable decreased to $701,000 at September 30,
1999, compared to $1,115,000 on a pro forma basis at December 31, 1998. The
decrease is attributable to a $531,000 reduction in trade accounts payable in
the Selman subsidiary, resulting primarily from the seasonality of business.
December is a higher volume month and trade payables will typically be higher at
the end of December than at other times of the year.
Accrued liabilities increased to $998,000 at September 30, 1999, compared
to $510,000 on a pro forma basis at December 31, 1998. The largest component of
that increase was a $300,000 accrual for certain contingencies related to the
Company's acquisition of Selman and Fru-Cor involving primarily a dispute with
the former owner. See LEGAL PROCEEDINGS, below. Other components of the accrued
liabilities include deferred rent, accrued interest and accrued payroll.
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Inventories decreased to $178,000 at September 30, 1999, compared to
$210,000 on a pro forma basis at December 31, 1998.
The Company continues to reduce the confirmed bankruptcy liabilities of
Surf City. Surf City's bankruptcy liabilities decreased to $1,465,000 at
September 30, 1999, from $1,900,000 at December 31, 1998. The Company believes
that it will be able to generate adequate cash flow from operations to meet the
bankruptcy obligations on a timely basis. Repayment of these obligations will
require the Company to carefully manage its growth and monitor its
profitability.
The Company has an annual Preferred Stock dividend obligation of
$1,225,000. During the nine months ended September 30, 1999, the Company paid
its dividend obligation through the issuance of Common Stock. Because the
holders of the Preferred Stock are significant owners of the Company, it is
anticipated that the holders will continue to elect to take Common Stock as the
dividend payment or that the Preferred Stock will be converted to Common Stock.
If holders of Preferred Stock should demand that dividends be paid in cash, the
Company's liquidity could be adversely affected.
The Company is attempting to raise additional debt or equity capital to
allow it to expand its current level of operations. The Company is also seeking
capital for potential future acquisitions. The Company believes that it can
effectively implement its growth plans for the current operations if it can
obtain the $1,000,000 credit facility discussed above. To obtain this credit
facility, the Company will need to have the obligation guaranteed by a major
shareholder of the Company, and the Company will be required to compensate the
shareholder for the guarantee. The Company must also be successful in selling
certain store locations to pay the Fru-Cor Note and may be required to apply a
portion of the cash realized from the sale of company-owned stores to meet other
obligations. The Company may also require additional capital to continue
expanding sales volume, which would require higher levels of inventory, accounts
receivable, and greater operating expenses for marketing. There can be no
assurances that the Company will be successful in obtaining such capital.
YEAR 2000
The Company has assessed its computerized systems to determine their
ability to correctly identify the year 2000 and is devoting the internal and
external resources to replace, upgrade or modify all significant systems related
to the year 2000. The Company's assessment, purchase of new equipment,
installation of new software, conversion and testing of data are substantially
completed. The Company does not believe that it will encounter significant
internal year 2000 problems, because most of the Company's critical records are
manually maintained.
The Company does not anticipate difficulties with vendors relative to the
year 2000 issue. The Company's relationship with its vendors is such that it is
not materially dependent upon their information technology systems.
The Company believes that any year 2000 impact on its franchisee base
should have no material effect on the Company because sales information is not
currently communicated through computer systems. Through the assessment of the
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Company's non-information technology systems, management has determined that no
modifications are required for year 2000 compliance in this area. The Company
will continue to assess and develop contingency plans, if needed, throughout the
remainder of 1999.
RISK FACTORS
There are a number of factors over which the Company has little or no
control that may adversely affect the Company's operating results. The price and
availability of the raw materials used in the Company's stores, particularly
frozen fruits and supplements, are governed by economic factors over which the
Company has little or no control. The Company's ability to both find and enter
into favorable leases in prime retail locations throughout the United States
could adversely affect the Company's ability to grow and attract new
franchisees. The growth of the Internet and its use by consumers for shopping as
an alternative to visiting local malls and retail centers could result in a
decrease in mall traffic, which in turn could lead to a decrease in the
Company's sales in stores located in shopping malls. A decline in the popularity
of blended fruit drinks and healthy snacks could also adversely affect the
companies' financial performance.
Because the Company's franchising strategy requires that it lease franchise
sites and sublease those sites to franchisees or guarantee franchisees' leases,
the Company has significant liabilities to various landlords, if franchisees
should default under their lease agreements. By subleasing to franchisees, the
Company assumes a lease risk, but ensures that it continues to control the
franchise premise in the event of default by the franchisee. Defaults by
franchisees under subleases from the Company would require the Company to pay
the lease obligations and seek a new franchisee for the location.
The Company's future growth plans contemplate the acquisition of juice bars
and health food cafe operations. The Company's ability to execute this plan is
dependent on the availability of cost-effective financing to make the
acquisitions. The current availability of financing, through either third party
sources or the issuance of the Company's Common Stock, is unknown. If the
Company's plans for growth through the acquisition of other health food
operations are successful, the Company will also need to attract and retain
qualified individuals to manage that growth, and the Company's performance could
be adversely affected if it is unable to attract and retain such managerial
talent.
The Company also faces competition from other juice and health food vendors
and franchisors throughout the United States, including subsidiaries of other
national successful retail businesses. The Company's ability to continue to
attract capital and qualified franchisees, and find favorable retail locations
and qualified management personnel will be affected by competitors seeking these
same resources. The healthy food and snack business is also highly fragmented
and competitive.
Surf City is currently operating under a Plan of Reorganization
administered by the United States Bankruptcy Court for the District of Arizona.
Under the Plan of Reorganization and related settlement agreements with
creditors, Surf City is obligated to make periodic payments to creditors. If
Surf City should fail to make those payments, then the Company may loan Surf
City the funds to enable it to make those payments, although the Company is not
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obligated to do so. Additionally, creditors or other parties subject to the Plan
of Reorganization could petition the Bankruptcy Court to reopen the Plan of
Reorganization for modification, if Surf City does not substantially perform
under the terms of the Plan of Reorganization. The specific terms of the Plan of
Reorganization could also hinder the Company's ability to grow and attract
capital.
The Company has pledged the common stock of Selman to secure amounts owed
by the Company to United Texas Bank, the Selman Note Holders and the Dalal Note.
See, BUSINESS AND DEVELOPMENT OF CORPORATE STRUCTURES - SELMAN FINANCING
ACTIVITIES, ABOVE. These obligations total $1,975,000. Of this amount, $475,000
is currently due United Texas Bank and $1,500,000 will be due the Selman Note
Holders and Dalal on May 20, 2000. To pay these amounts, the Company will be
required to obtain a credit facility of at least $1,000,000 and sell
company-owned stores or obtain new franchisees, or both. If for any reason the
Company should be unable to do so, the Company could lose the Frullati Cafe &
Bakery franchise operation and stores it acquired through its purchase of Selman
and Fru-Cor.
The Company is involved in several lawsuits, one or more of which, if
resolved against the Company, could materially and adversely affect the
Company's operations and financial condition. See, LEGAL PROCEEDINGS, below.
ITEM 3. DESCRIPTION OF PROPERTY
The Company owns no real property. Locations for all of the Company's
franchised, licensed or company-owned Surf City Squeeze or Frullati Cafe &
Bakery stores are leased from independent third parties. The information set
forth below is as of November 30, 1999.
RETAIL OPERATIONS
Frullati Cafe & Bakery stores are either owned and operated by independent
franchisees or owned and operated directly by the Company through its
subsidiaries. Franchisees pay an initial franchise fee of $30,000, plus weekly
royalty and advertising fees to the Company of 6% and .25% of gross revenue,
respectively. The advertising fee can be increased up to a maximum of 3%.
Franchisees receive ongoing training and support from the Company. The term of a
franchise is the lesser of ten years or the remaining term of the commercial
real estate lease for the locations.
For Surf City Squeeze juice bars, the Company structures its operations
primarily in two ways. The retail outlets are either owned and operated by
independent franchisees or owned and operated by independent licensees.
Franchisees pay the Company a one-time franchise fee of $30,000, plus a royalty
fee of 6% of gross revenue on a monthly or weekly basis. Licensees pay a
one-time license fee to operate a Surf City Squeeze juice bar; this fee is
usually part of the total purchase price of an existing store. After payment of
the license fee, the licensees have no additional financial obligation to the
Company. For both franchisees and licensees, the term of the franchise or
license is the lesser of ten years or the remaining term of the commercial real
estate lease for the juice bar locations.
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As of November 30, 1999, approximately 64% of the Company's worldwide units
were operated by franchisees, approximately 16% were operated by licensees, and
approximately 20% were owned and operated by the Company. The Company is in the
process of selling some of the Frullati Cafe & Bakery stores owned by the
Company through franchise agreements.
The Company's retail outlets, described by ownership type, as of November
30, 1999, are summarized below:
COMPANY
FRANCHISED LICENSED OWNED TOTAL
---------- -------- ----- -----
Surf City Squeeze Juice Bar 78 34 -- 112
Frullati Cafe & Bakery 54 -- 41 95
Geographical Distribution of the Company's Retail Outlets:
` SURF CITY FRULLATI CAFE
SQUEEZE & BAKERY
------- --------
Arizona 7 --
Arkansas -- 3
California 60 --
Colorado 1 --
Connecticut 2 --
Florida 1 8
Idaho 1 --
Illinois 8 14
Indiana -- 4
Kentucky -- 1
Louisiana -- 6
Michigan 5 2
Minnesota -- 3
Mississippi -- 1
Missouri -- 4
New Mexico -- 1
New York 2 --
North Carolina -- 1
Ohio 2 5
Oklahoma -- 2
Pennsylvania 2 --
Tennessee -- 2
Texas -- 36
Virginia 2 2
Washington 5 --
Canada 14 --
---- ---
Totals 112 95
==== ===
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Of the Company's 41 Frullati Cafe & Bakery stores that are company-owned,
41, or 20% of the Company's total outlets, operate under commercial real estate
leases under which Selman, or one of its wholly owned subsidiaries, is the
tenant. Of the Company's 54 Frullati Cafe and Bakery franchised outlets, 49, or
24% of the Company's total outlets, are operated under commercial real estate
leases with third party landlords under which Selman (or one of its wholly-owned
subsidiaries) is the tenant and the franchisee is the sub-tenant. Of the
remaining five franchised Frullati Cafe and Bakery outlets, Selman, or one of
its wholly owned subsidiaries, is a guarantor of three of the commercial real
estate leases between the third party landlord and a Selman franchisee.
Of the Company's 112 Surf City Squeeze locations, 70, or 34% of the
Company's total outlets, operate under commercial real estate leases under which
either Surf City or SCSFC is the tenant and the franchisee is a sub-tenant. Surf
City is a guarantor of six commercial real estate leases, or 3% of the Company's
total retail outlets, between the franchisee or licensee and the landlord. Of
the remaining 36 Surf City Squeeze locations, the Company is not a party to the
commercial lease.
Of the Company's 207 total outlets, 21, or 10% are operated in retail space
leased from the Simon Group and its related entities; 22, or 11%, are operated
in retail space leased from the Taubman Companies and its related entities; 16,
or 8%, are operated in space leased from the Bally Total Fitness Corporation;
and 15, or 7%, are operated in space leased from 24-hour Fitness Corporation.
COMMERCIAL OFFICE SPACE AND WAREHOUSING
SCSFC currently leases 2,794 square feet of commercial office space in a
building located at 7730 E. Greenway Road, Suite 203, Scottsdale, Arizona 85260,
which serves as the Company's corporate headquarters. The modified gross rent is
$5,133.98 per month. The lease expires on August 31, 2000, and the Company
intends to relocate its corporate offices at that time to a new, larger facility
in Scottsdale, Arizona, which has not yet been identified.
The Company's Kona Coast subsidiary currently leases 2,997 square feet of
commercial office and warehouse space located at 8350 East Evans Road, Suite
D-1, Scottsdale, Arizona 85260. The triple net rent is $2,466.83 per month. The
current lease expires on December 31, 1999. Kevin Blackwell and his wife,
Kathryn Blackwell (the "Blackwells") renewed this lease on April 23, 1999, in
their own name for an additional two years, thereby extending the lease term to
December 31, 2001. Under the extension, Kona Coast will pay the rent directly to
the landlord, with the Blackwells receiving no compensation or additional
consideration for serving as tenants under the lease.
The Blackwells currently lease 2,225 square feet of warehouse and storage
space located at 7626 E. Greenway Road, Suite 102, Scottsdale, Arizona, 85260.
Under an agreement with the Blackwells, Kona Coast sublets this facility from
the Blackwells for storage and distribution of smoothie mixes and other
nutritional supplements. The monthly rent is $1,869, and it is paid directly by
Kona Coast to the landlord with the Blackwells receiving no compensation or
additional consideration for serving as tenants under the lease. The lease
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expires on January 31, 2000. When the lease expires, the Company intends to
renew a portion of the leased space in the name of Kona Coast, for an additional
six month term.
Frullati, Inc. leased 4,409 square feet of commercial office space located
at 5720 LBJ Freeway, Suite 370, Dallas, Texas 75240, which served as the
corporate headquarters for Selman Systems, Inc. The monthly triple net rent was
$5,445.11. The lease expired on November 30, 1999. The Company has vacated these
premises and consolidated the Selman Systems, Inc. corporate offices with the
Company's corporate headquarters in Scottsdale, Arizona.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth each person known by the Company to be the
beneficial owner of more than 5% of the Common Stock of the Company, assuming
the Company's Series A and B Preferred Stock are converted to Common Stock at
their respective conversion ratios. Shares owned include shares for which
options or warrants are exercisable currently or within 60 days. Each person has
sole voting and investment power with respect to the shares, as indicated.
Name and Address of Amount of Beneficial Percentage
Beneficial Owner Ownership of Class
---------------- --------- --------
R.E.M. Petersen Living Trust(1) (2) 8,368,698 35.7%
6420 Wilshire Boulevard, 20th Floor
Los Angeles, CA 90048
Weider Health & Fitness Corporation(3) 1,333,334 5.7%
21100 Erwin Street
Woodland Hills, CA 91367
Kevin Blackwell(3) 3,671,792 15.7%
7730 E. Greenway Rd., Suite 203
Scottsdale, AZ 85260
David Guarino(3) 3,848,663 16.4%
7730 E. Greenway Rd., Suite 203
Scottsdale, AZ 85260
Robert Corliss(3) 171,599 0.7%
The Athlete's Foot Group, Inc.
1950 Vaughn Road
Kennesaw, Georgia 30144
All Executive Officers and Directors as
a Group (4 persons) 7,845,854 33.5%
- - ----------
(1) Mr. Robert E. Petersen, and his wife, Margaret M. Petersen, are the
beneficiaries of the R.E.M. Petersen Living Trust, (the "Petersen Trust").
(2) The Petersen Trust owns 650,000 of Series B Preferred Stock that is
convertible into the Company's Common Stock at the ratio of 10 common
shares for each share of Series B Preferred Stock. The Petersen Trust also
holds an immediately exercisable warrant to purchase 1,000,000 common
shares of the Company at the price of $2.00 per share (the "Petersen
Warrant") at any time prior to May 20, 2007. The Petersen Trust's
beneficial ownership shown here assumes its Series B Preferred Stock is
converted into Common Stock and that the Petersen Warrant is fully
exercised.
(3) There are 575,000 shares of Series A Preferred Stock that are convertible
into the Company's Common Stock at the ratio of 13 1/3 common shares for
each share of Series A Preferred Stock. The Series A Preferred Stock is
owned as follows: Mr. Blackwell (225,000 shares), Mr. Guarino (237,500
shares), Weider Health & Fitness Corporation (100,000 shares) and Mr.
Corliss (12,500 shares). The beneficial ownership reported above assumes
the Series A Preferred Stock is converted into the Company's Common Stock.
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ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following are the companies' directors, officers and key employees:
Name Age Positions and Offices Held
------------ ------ -----------------------------------
Kevin Blackwell 44 President and Director
Kathryn Blackwell 34 Secretary, Treasurer, and Director
David Guarino 35 Vice-President, Chief Financial
Officer and Director
Gerald Conklin 46 President of Selman Systems, Inc.
Robert Corliss 47 Director
Don Plato 44 Director
All of the Company's directors were elected by a majority vote of the
shareholders of the Company at an annual meeting of shareholders held on October
12, 1999, and, unless a director resigns, will remain in office until the next
annual meeting of shareholders or until a successor is duly qualified and
elected. From March 15, 1999 until October 12, 1999, Mr. Kevin Blackwell and Ms.
Kathryn Blackwell served as the Company's sole directors. There are no
agreements that a director will resign at the request of another person and none
of the above named directors are acting on behalf of another person.
BIOGRAPHICAL INFORMATION
The following briefly summarize the experience of each of the Companies'
directors, officers, and key employees, during the past five years.
KEVIN BLACKWELL has been President and a Director of the Company since
March 15, 1999. Prior to March 1999, Mr. Blackwell was President and Director of
Surf City for more than five years. Mr. Blackwell, and his wife Kathryn, founded
the Surf City juice bar concept in 1981. Mr. Blackwell also serves on the
Company's Compensation Committee. Mr. Blackwell attended Eastern Washington
University, where his studies emphasized mathematics and business law.
KATHRYN BLACKWELL has been Secretary and a Director of the Company since
March 15, 1999. Prior to March 1999, Ms. Blackwell was Vice-President and
Secretary of Surf City for more than five years, and a director of Surf City
from its inception to January 1998. Ms. Blackwell completed four years of study
at San Jose University in 1988, where she concentrated on business management
and international business.
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ROBERT CORLISS has been President and CEO of Athlete's Foot Group, Inc.
from August 1998 to the present. Prior to August 1998, he was President and CEO
of Infinity Sports, and prior to that, he was President and CEO of Herman's
Sporting Goods, Inc. Mr. Corliss is also serves as a director of Xdogs.com (OTC:
SNOW). Mr. Corliss also serves on the Company's Audit and Compensation
Committees.
DAVID GUARINO is currently Vice-President-Chief Financial Officer and a
director of the Company. From March 15, 1999 to October 12, 1999, Mr. Guarino
was a consultant to the Company. From April 1997 to March 1999, and again from
December 1995 to July 1996, Mr. Guarino served as Vice-President-Chief Financial
Officer of Surf City. Mr. Guarino was also a director of Surf City from January
1998 to March 1999, and from December 1995 to July 1996. Prior to his employment
with Surf City, Mr. Guarino served as Senior Vice-President - Principal
Financial Officer of TLC Beatrice International Holdings, Inc. Mr. Guarino
graduated from the University of Denver in 1985 with a Masters and a Bachelors
of Science degree in accounting.
DON PLATO has been Chairman of Builder's National, Inc., a commercial and
residential general contractor, for more than five years. Mr. Plato and his wife
founded Builders National in 1993. Mr. Plato was also a member of Surf City's
Official Committee of Unsecured Creditors ("Unsecured Committee") from January
1997 to November 1997. Since November 1997, Mr. Plato has been a member of Surf
City's Creditors' Representative Committee, which is the successor to the
Unsecured Creditor's Committee. Mr. Plato also serves on the Company's Audit and
Compensation Committees.
GERALD CONKLIN has served as President of Selman Systems, Inc. since May
1999. From July 1998 to May 1999, Mr. Conklin served as Vice President of
Operations and Business Development for Selman Systems, Inc. From December 1995
to June 1998, Mr. Conklin was President of Custom Resources Management in
Frisco, Texas. From January 1994 to December 1995, Mr. Conklin was Director of
Marketing, Development and Operations for Allied-Domecq in Richardson, Texas.
Kevin and Kathryn Blackwell are husband and wife. Otherwise, there are no
family relationships among the directors, officers and significant employees of
the Company. Except for the Chapter 11 Bankruptcy of Surf City, none of the
directors, officers, and significant employees have had any bankruptcy petition
filed by or against any business of which the person was a general partner or
executive officer either at the time of the bankruptcy or within two years prior
to the bankruptcy.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors, on October 12, 1999, established two committees of
the Board, an Audit Committee and a Compensation Committee. Prior to that date,
the Board of Directors had no committees. The Audit Committee has held no
meetings to date. The Compensation Committee has held two meetings to date. The
first meeting, on November 17, 1999, was to approve the Company's grants of
stock options to key employees, other than Mr. Blackwell and Mr. Guarino. The
second meeting, on December 10, 1999, was to approve the Company's granting of
stock options to Mr. Blackwell and Mr. Guarino, and to approve and ratify their
respective employment agreements with the Company. Mr. Robert Corliss and Mr.
Don Plato are members of each Committee, with Mr. Kevin Blackwell also serving
on the Compensation Committee.
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ITEM 6. EXECUTIVE COMPENSATION
The Company had no operations, employees or paid executive officers during
fiscal year 1998. Mr. Kevin Blackwell, the President and CEO of the Company
since March 15, 1999, served as President and CEO of SCAC during all of fiscal
year 1998. The Company purchased SCAC on March 15, 1999, with Mr. Blackwell and
his management team immediately succeeding to the day-to-day control of the
Company. Accordingly, SCAC is the entity for which Executive Compensation is
disclosed for the 1998 fiscal year. Mr. Blackwell, as President and CEO of SCAC,
received $109,375 in compensation during fiscal year 1998. All of Mr.
Blackwell's compensation for fiscal year 1998 was paid by Surf City, a wholly
owned subsidiary of the Company. No other employee of SCAC received more than
$100,000 in annual compensation during fiscal year 1998.
The Company adopted the 1999 Sports Group International, Inc. Stock Option
Plan (the "Option Plan") on October 12, 1999. A total of 2,000,000 shares of the
Company's Common Stock have been reserved for issuance under this Option Plan.
On November 17, 1999, the Compensation Committee of the Company's Board of
Directors granted options to purchase 640,000 shares of the Company's Common
Stock pursuant to the Option Plan to key employees at an exercise price of
$0.50. On December 10, 1999, the Compensation Committee of the Company's Board
of Directors granted options to purchase 300,000 shares of the Company's Common
Stock to both Mr. Blackwell and Mr. Guarino at an exercise price of $1.00 per
share.
The independent members of the Company's Board of Directors (directors who
are not employees or 10% shareholders of the Company) automatically receive, as
compensation for their services, a nonqualified stock option to purchase 10,000
shares of the Company's Common Stock at a price equal to 85% of the Common
Stock's fair market value on the date the option is granted. This option grant
is made upon the independent director's election to the Board of Directors. The
independent directors are also paid all reasonable travel expenses to attend the
Company's quarterly Board meetings, wherever held. Otherwise, directors of the
Company receive no additional compensation for their service, including
participation on committees and special assignments.
The Company currently has two employment agreements in effect with its
Executive Officers. The Company is party to a three-year employment contract,
beginning as of October 1, 1999, with Mr. Kevin Blackwell (the "Blackwell
Contract") for his services as President and CEO of the Company.
The Company is also party to a three-year employment contract, beginning as
of October 1, 1999, with Mr. David Guarino (the "Guarino Contract") for his
services as Vice President-Chief Financial Officer of the Company.
The Blackwell Contract and Guarino Contract both provide for an annual base
salary of $150,000, of which $100,000 is paid by Surf City pursuant to the Plan
of Reorganization, an automobile allowance set by the Company's Board of
Directors, and other fringe benefits that are also made available to other
employees of the Company. The Blackwell Contract and Guarino Contract also both
provide for two years of severance pay upon termination of the employment
agreements for any reason other than "for cause," as defined in the employment
agreements, in exchange for restrictive covenants regarding the confidentiality
of the Company's Proprietary Information and the return of such information to
the Company upon termination. Both the Blackwell Contract and Guarino Contract
are attached as Exhibits to this Form 10-SB.
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ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 22, 1999, the Petersen Trust loaned SCAC $332,500 pursuant to a
promissory note (the "Petersen Note"). The note bears interest at 10% per annum,
matures March 1, 2001, and provides for monthly principal and interest payments.
As of November 30, 1999, the outstanding principal balance on the Petersen Note
was $222,052.86. Messrs. Blackwell and Guarino have personally guaranteed SCAC's
obligations under the Petersen Note.
Mr. Kevin Blackwell, the Company's President and a Director, loaned one of
the Company's wholly owned subsidiaries the sum of $30,000 during October 1999.
The loan, which has since been repaid in full, accrued no interest and had no
stated maturity. As of November 30, 1999, there were no outstanding loans
between Mr. Kevin Blackwell and the Company or its wholly owned subsidiaries.
Mr. Eugene Blackwell, the father of Mr. Kevin Blackwell, a Director and
President of the Company, loaned one of the Company's subsidiaries the sum of
$20,000 during December 1998. The loan, which has since been repaid in full,
accrued no interest, and had no stated maturity. As of November 30, 1999, there
were no outstanding loans between Mr. Eugene Blackwell and the Company or its
wholly owned subsidiaries.
Mr. Guarino, the Vice President-Chief Financial Officer and a Director of
the Company, made multiple loans to one of the Company's wholly owned
subsidiaries between April 1998 and March 1999. These loans, which have been
repaid by the Company, ranged in principal amounts from $2,000 to $60,000,
accrued no interest, and had no stated maturities. As of November 30, 1999,
there were no outstanding loans between Mr. Guarino and the Company or its
wholly owned subsidiaries.
The Blackwells and Mr. Guarino have periodically personally guaranteed
financial obligations of the Company and its subsidiaries. Items personally
guaranteed include commercial office and storage facility leases for the
Company, commercial real estate leases with 24-Hour Fitness under which Company
franchisees are the tenants, a promissory note to a vendor of the Company, and
various equipment leases. Mr. Kevin Blackwell and Ms. Kathryn Blackwell are also
the tenants of record under the commercial real estate warehouse and storage
lease used by Kona Coast described above. It is the Company's intent to have
Messrs. Blackwell and Guarino's personal guarantees released as soon as
practicable.
Mr. Plato, an independent director of the Company, is a shareholder of a
corporation that is an unsecured creditor in Surf City's Chapter 11 Bankruptcy
and subsequent Plan of Reorganization. Mr. Plato's corporation has an unsecured
claim of approximately $109,000, and is currently receiving payments from the
unsecured creditors distribution account pursuant to the terms of the Plan of
Reorganization. See, BUSINESS OF SUBSIDIARIES: FRULLATI CAFE & BAKERY AND SURF
CITY SQUEEZE - THE SURF CITY SQUEEZE DIVISION - SURF CITY'S PLAN OF
REORGANIZATION.
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On March 15, 1999, the Company pledged one hundred percent (100%) of its
right, title and interest in the stock of SCAC to Mr. Kevin Blackwell
("Blackwell"), the current chief executive officer of the Company, as security
for the Company's obligations to Blackwell and SCAC under a Share Purchase
Agreement of even date between Blackwell and the Company. Events of Default, as
defined in the Share Purchase Agreement, have occurred that would allow
Blackwell to proceed against the shares of SCAC. However, as of November 30,
1999, Blackwell had waived each Event of Default and entered into a cancellation
agreement with the Company to release the pledged SCAC shares.
In the Company's merger with SCAC, the 575,000 shares of the Company's
Series A Preferred were issued to the shareholders of SCAC for 100% of its
outstanding common stock. Additionally, two million shares of the Company's
Common Stock were issued to Apache Peak Capital, L.L.C., an Arizona limited
liability company ("Apache Peak") for 100% of the membership interest in Apache
Peak and other consideration. Apache Peak is controlled by Mr. David Guarino,
the Company's Vice President and Chief Financial Officer. Apache Peak's sole
asset is Mr. Guarino's interest in the Shareholder Voting Trust and Management
Agreement (the "Voting Agreement") dated May 19, 1997, by and between Mr.
Guarino and Mr. Kevin Blackwell, the Company's Chief Executive Officer. The
Company's issuance of the 2,000,000 shares of its Common Stock to Apache Peak
for a 100% membership interest in Apache Peak was effected to cancel the Voting
Agreement between Messrs. Blackwell and Guarino and thus facilitate the merger
between SCAC and the Company. Apache Peak has no other assets or operations, and
it is the intent of the Company to dissolve Apache Peak simultaneously with this
filing.
FUTURE TRANSACTIONS
The Company has adopted a policy that future transactions with affiliated
persons or entities will be on terms no less favorable to the Company than those
that could be obtained from unaffiliated third parties on an arm's length basis,
and that any such transactions must be reviewed and approved by the Company's
independent directors.
ITEM 8. DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $.001 per share, and 2,000,000 shares of Preferred
Stock, par value $.001 per share, of which 575,000 issued and outstanding shares
have been designated as Series A Preferred Stock and 650,000 issued and
outstanding shares have been designated as Series B Preferred Stock. The
material terms of the Company's Common and Preferred Stock are set forth below.
The following descriptions are qualified in their entirety by reference to the
Company's Amended and Restated Articles of Incorporation and Bylaws, all of
which are set forth in the Exhibits to this Form 10-SB.
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COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share standing
in his name on the books of the Company for those matters properly presented to
shareholders for consideration and action. Holders of Common Stock have no
preemptive rights, and share ratably in dividends, if any, when and if declared
by the Board of Directors in its discretion from funds or stock legally
available. Common Stock holders are entitled to share pro-rata in all net assets
of the Company, in the event of dissolution, after all creditors and the rights
of the holders of Series A and Series B Preferred Stock are satisfied. All of
the shares of Common Stock are fully paid and non-assessable.
PREFERRED STOCK
The Company's Amended and Restated Articles of Incorporation authorize
2,000,000 shares of Preferred Stock, which may be issued in series. Of this
amount, 575,000 shares are issued and outstanding and have been designated as
Series A Preferred Stock, par value $10.00 per share, and 650,000 shares are
issued and outstanding and have been designated as Series B Preferred Stock, par
value $10.00 per share.
SERIES A PREFERRED STOCK
The dividend rate for Series A Preferred Stock is ten percent (10%) per
annum of the par value for each share. Dividends on the Series A Preferred Stock
are payable, at the Holder's election, either in cash or Series A Preferred at
the $10.00 par value beginning on June 1, 1999, and quarterly thereafter each
calendar year. Dividends on the Series A Preferred Stock are cumulative from the
date of its issuance. No dividends shall be paid or set apart for payment on any
shares ranking junior to the Series A Preferred Stock unless and until all
accrued and unpaid dividends on the Series A Preferred Stock shall have been
declared and paid or a sum sufficient for payment thereof set apart. For
purposes of this dividend provision, Series A Preferred Stock ranks on a parity
with the Series B Preferred Stock. As of December 1, 1999, the holders of the
Series A Preferred Stock have always elected to receive the ten percent (10%)
annual dividend, which is payable quarterly, in shares of Common Stock in the
Company, and not cash, at the Series A Preferred Stock conversion ratio of 13
1/3 shares of Common Stock for each share of Preferred Series A Stock held.
Until May 20, 1999, the Series A Preferred Stock had a redemption and
security feature that is currently referenced in the Company's Amended and
Restated Articles of Incorporation. This redemption and security feature was
waived by the holder of the Series A Preferred Stock on May 20, 1999, in
consideration for the stock conversion rights described below. In addition,
holders of Series A Preferred Stock were granted piggy-back registration rights
in the event the Company makes a registered offering of its equity securities.
Options to purchase the Company's Common Stock previously granted in exchange
for this waiver are now included as part of the existing grant of stock options
under the Company's 1999 Stock Option Plan, more fully described above.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of Series A Preferred Stock then
outstanding are entitled to be paid out of the assets of the Company available
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for distribution to its shareholders, an amount per share equal to $10.00 per
share, plus an amount equal to unpaid cumulative dividends, without interest,
before any payment shall be made to the holders of any Common Stock or stock of
the Company ranking junior to the Series A or Series B Preferred Stock. For
purposes of liquidation, Series A Preferred Stock ranks on a parity with the
Series B Preferred Stock.
The holders of Series A Preferred Stock have the right, at their option, to
convert their shares into Common Stock at any time after the date of issue, in
the ratio of one share of Series A Preferred Stock to 13 1/3 shares of Common
Stock. A minimum of 1,000 shares of Series A Preferred Stock must be converted,
with no maximum share limitations.
Holders of shares of Series A Preferred Stock have a general right to vote
and are entitled to notice of the meetings of stockholders of the Company, and
to participate in such meetings. Holders, of Series A Preferred Stock are
entitled to 13 1/3 votes for each share of Series A Preferred Stock held.
In addition to their general voting rights, holders of shares of Series A
Preferred Stock have certain special voting rights. If any shares of the Series
A Preferred Stock are outstanding, the Company shall not (i) without the
affirmative vote of at least one-half of the votes entitled to be cast by all
shares of the Series A Preferred Stock at the time outstanding, amend or change
any terms of the Series A Preferred Stock in Article IV of the Amended and
Restated Articles of Incorporation of the Company or other provisions of the
Amended and Restated Articles of Incorporation generally applicable to the
Series A Preferred Stock, so as to affect materially and adversely any such
terms; (ii) without the affirmative vote of at least one-half of the votes
entitled to be cast by shares of the Series A Preferred Stock at the time
outstanding, (a) increase the authorized number of shares of Series A Preferred
Stock in excess of 575,000; (b) authorize shares of any other class of stock
ranking on a parity with shares of Series A Preferred Stock as to dividends or
assets; or (c) change the conversion features of the Series A Preferred Stock.
SERIES B PREFERRED STOCK
The dividend rate for Series B Preferred Stock is ten percent (10%) per
annum of the $10.00 par value each share. Dividends on the Series B Preferred
Stock are be payable at the Holder's election, either in cash or Series B
Preferred Stock at the $10.00 par value beginning on June 1, 1999 and quarterly
thereafter each calendar year. Dividends on the Series B Preferred Stock are
cumulative from the date of its issuance. No dividends may be paid or set apart
for payment on any shares ranking junior to the Series B Preferred Stock unless
and until all accrued and unpaid dividends on the Series B Preferred Stock shall
have been declared and paid or a sum sufficient for payment thereof set apart.
For purposes of this dividend provision, Series B Preferred Stock ranks on a
parity with the Series A Preferred Stock. As of December 1, 1999, the holder of
the Series B Preferred Stock has always elected to receive the ten percent (10%)
annual dividend, which is payable quarterly, in shares of Common Stock in the
Company, and not cash, at the Series B Preferred Stock conversion ratio of 10
shares of Common Stock for each share of Preferred Series B Stock held.
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In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of Series B Preferred Stock then
outstanding shall be entitled to be paid out of the assets of the Company
available for distribution to its shareholders, an amount per share equal to
$10.00 per share, plus an amount equal to the unpaid cumulative dividends,
without interest, before any payment shall be made to the holders of any Common
Stock or stock of the Company ranking junior to the Series B Preferred Stock.
For purposes of liquidation, Series B Preferred Stock ranks on a parity with the
Series A Preferred Stock.
The holders of Series B Preferred Stock shall have the right, at their
option, to convert their shares into Common Stock at any time after the date of
issue, in the ratio of one share of Series B Preferred Stock to 10 shares of
Common. A minimum of 1,000 shares of Series B Preferred Stock must be converted;
there are no maximum limitations.
Holders of shares of Series B Preferred Stock shall have a general right to
vote and are entitled to notice of the meetings of stockholders of the Company,
and to participate in such meetings. Shareholders of Series B Preferred Stock
are entitled to 10 votes for each share of Series B Preferred Stock held. In
addition to these general voting rights, holders of Series B Preferred Stock
have special voting rights. If any shares of the Series B Preferred Stock are
outstanding, the Company may not (i) without the affirmative vote of at least
one-half of the votes entitled to be cast by all shares of the Series B
Preferred Stock at the time outstanding, amend or change any terms of the Series
B Preferred in Article IV of the Amended and Restated Articles of Incorporation
of the Company or other provisions of the Amended and Restated Articles of
Incorporation generally applicable to the Series B Preferred Stock, so as to
affect materially and adversely any such terms; (ii) without the affirmative
vote of at least one-half of the vote entitled to be cast by shares of the
Series B Preferred Stock at the time outstanding, (a) increase the authorized
number of shares of Series B Preferred Stock in excess of 650,000; (b) authorize
shares of any other class of stock ranking on a parity with shares of Series B
Preferred Stock as to dividends or assets; or (c) change the conversion features
of the Series B Preferred Stock.
OTHER PREFERRED STOCK VOTING RIGHTS
Under Florida corporate law, holders of Preferred Stock also have the
statutory right to vote as a class with respect to any amendment to the
Company's Articles of Incorporation that would materially affect the rights of
such class, including increasing or decreasing the aggregate number of
authorized shares of such class; exchanging or reclassifying such class;
changing the designations, rights or privileges of such class; creating a new
class of shares having preferential rights to such class; or canceling or
otherwise affecting rights to dividends or distributions of such class. Voting
by class is also required for a plan of merger if it would result in an
amendment to the Company's Articles of Incorporation that would otherwise
require class voting and on any plan of share exchange if the Preferred Shares
would be converted under the plan, and in certain other circumstances.
The Company has issued no debt securities.
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There are no provisions in the Company's Amended and Restated Articles of
Incorporation or the Bylaws that would delay, defer or prevent a change of
control. However, the issuance of additional shares of or additional series of
Preferred Stock could have the effect of delaying or preventing a change in
control of the Company without further action by the shareholders and could
adversely affect the voting or other rights of the holders of Common Stock.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on the Over the Counter Market of the
NASDAQ Bulletin Board (OTC BB) under the symbol "SPGK." The Company's Common
Stock began trading on the Over the Counter Bulletin Board Market in March of
1999. In general, shares of the Company's Common Stock are highly illiquid due
to the lack of volume and any known market makers.
The high and low bid (sales) prices for each quarter are as follows:
Quarter(1) High Low Close
---------- ---- --- -----
03/31/99 3.75 2.00 2.25
06/30/99 2.25 0.44 0.56
09/30/99 0.63 0.13 0.28
- - ----------
(1) The Company's Common Stock began trading on the Over the Counter Bulletin
Board Market in March 1999. Consequently, the high and low bid (sales)
price, for each quarter during the past two years are only available
beginning with the quarter ending March 31, 1999. There is an established
trading market for the Common Stock being presented in this registration
statement.
HOLDERS
There are approximately 357 holders of the Common Stock of the Company as
of November 10, 1999.
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DIVIDENDS
The Company has neither paid nor declared any cash or stock dividends on
its Common Stock during the past fiscal year and does not anticipate doing so in
the immediate future. There are no restrictions that limit the Company's ability
to pay dividends on its Common Stock other than the availability of Company
revenues and earnings, cash flow, payment of the Series A and Series B Preferred
Stock dividends and the Company's overall financial condition. Except for
dividends required to be paid on the Company's Preferred Stock, it is the
current intention of the Company's Board of Directors to retain earnings to
finance the growth of the Company's business rather than to pay cash dividends.
ITEM 2. LEGAL PROCEEDINGS.
The Company is party to routine litigation incidental to its business
involving primarily litigation with franchisees and landlords. The litigation
discussed below, if resolved adversely to the Company, could materially and
adversely affect the Company's operations and financial condition.
SGI AND RELATED LITIGATION
On March 15, 1999, the Company entered into a Merger Agreement and Plan of
Reorganization ("Merger Agreement") with Sports Group International, Inc., a
Delaware Corporation ("SGI"). According to the terms of the Merger Agreement,
the merger was to close on or before May 30, 1999, if certain conditions were
met. The merger, if completed, would have required the Company to exchange its
shares for shares of SGI held by approximately 300 SGI shareholders. The Merger
Agreement did not require the shares of the surviving corporation to be
registered with the Securities and Exchange Commission or under applicable state
law prior to the consummation of the merger. The merger was subject to certain
conditions, including the truth of all representations and warranties in the
Merger Agreement, and no substantial adverse change in the financial condition
or operations of SGI. On June 25, 1999, the Company's legal counsel sent a
letter to the Board of Directors of SGI notifying SGI that the Merger Agreement
was terminated because SGI had failed to comply with certain conditions of the
Merger Agreement in a timely fashion. Following receipt of the letter, the SGI
Board of Directors notified the Company that SGI contended that the Merger
Agreement between the Company and SGI had been "completed."
On July 29, 1999, the Company filed a Complaint for Declaratory Relief
against SGI in the Superior Court of the State of California, in the County of
San Diego, case no. GIC 733034. The Company has requested entry of an order
declaring that: (1) the Merger Agreement expired under its own terms and
conditions on May 30, 1999, due to SGI's failure to satisfy the condition
precedent to the consummation of the merger; (2) the Company properly terminated
the Merger Agreement; (3) SGI has no interest in or right to shares of the
Company; and (4) the Company has no liability to SGI, its creditors or
shareholders. On September 14, 1999, SGI and certain individual SGI shareholders
filed a cross-complaint against the Company, alleging breach of the Merger
Agreement and seeking declaratory and injunctive relief. SGI also seeks monetary
damages in an unspecified amount. The Company has asserted defenses to all of
SGI's claims and intends to mount a vigorous defense to the cross-complaint. The
Court has denied SGI's request for temporary injunctive relief. The matter is
presently set for trial in March 2000.
-33-
<PAGE>
The SGI litigation described above has also resulted in ancillary
litigation. For the most part, the claims against the Company associated with
this litigation assert that the Company is obligated for certain liabilities of
SGI which the Company would have assumed if the SGI merger had been consummated.
In FISCH, SPIEGLER, GINSBURG, LADNER & ATTERIAN V. SPORTS GROUP
INTERNATIONAL, INC., the plaintiff has asserted a claim for $42,000, plus
pre-judgment interest, attorneys' fees and costs, alleging that the Company
assumed all of SGI's liabilities pursuant to the merger agreement described
above. In JEFF KUDLA V. SPORTS GROUP INTERNATIONAL, INC., the plaintiff asserts
that the Company is liable for $25,000, plus interest, attorneys' fees and costs
relating to alleged bridge loans made to SGI in March 1999. In MAKO CAPITAL,
INC. V. SPORTS GROUP INTERNATIONAL, INC., the plaintiff alleges a breach of
contract arising out of loans made by Mako Capital to SGI in the approximate
amount of $250,000. The Company is still investigating a number of these claims,
but expects to be able to assert defenses to all claims.
In addition, the Company has been notified that Spalding Sports Worldwide,
Inc. ("Spalding") has threatened to assert a claim against the Company in the
amount of $275,000 in connection with royalties allegedly owed to Spalding
pursuant to a license agreement between Spalding and SGI.
The Company has advised Spalding that it is not a party to the license
agreement and that it has not assumed any of SGI's liabilities in connection
with the Merger Agreement discussed above. As of this date, Spalding has not
filed suit against the Company.
FRANNET
On December 31, 1998, FranNet Southern California, Inc., a California
corporation, and Allan S. Craven, an individual, doing business as Franchise
Resource/Franchise Network (hereinafter, "FranNet") filed a complaint against
SCSFC alleging that SCSFC is liable for certain debts of Surf City that were
discharged in bankruptcy. The lawsuit arises out of a contract between FranNet
and Surf City for the acquisition of franchisees. Surf City believes that
FranNet billed and was paid for its work. In 1997, FranNet filed a demand for
arbitration for sums it claims it was due from Surf City's sale of franchises.
Shortly after the arbitration hearing, Surf City filed its Chapter 11 Bankruptcy
Petition. FranNet obtained an order lifting the Bankruptcy Court's stay order
and the arbitrator ruled in favor of FranNet and awarded FranNet Southern
California $67,159.15 and Franchise Resource $28,056.25 in commissions. In
addition, the arbitrator ordered Surf City to pay FranNet's attorneys' fees of
$17,000.00, administrative fees of $1,950.00 and the arbitrator's compensation
of $1,350.00. As a result of Surf City's bankruptcy, FranNet's award was treated
as an unsecured claim and included in Surf City's Plan of Reorganization.
FranNet's attempt to amend the Demand to include SCSFC as a party was denied by
the arbitrator.
FranNet is currently seeking to enforce the arbitration award against SCSFC
in the Orange County Superior Court, under a statute which permits a party who
has a contract with another party to sue a related party who "received all of
the benefits of the underlying contract." FranNet's Motion for Summary Judgment
-34-
<PAGE>
was denied on November 30, 1999, and the matter is currently set for trial in
late January 2000. The Company intends to vigorously contest FranNet's claims.
ROYAL MARKETING INTERNATIONAL, INC.
Royal Marketing International, Inc., a Frullati Cafe and Bakery franchisee,
has sued Frullati Franchise Systems and Frullati, Inc. for a breach of contract,
breach of the implied covenant of good faith and fair dealing, tortuous
interference with contract, violation of the Texas Unfair Trade & Deceptive
Practices Act, fraud in the inducement, common law fraud, misrepresentation,
negligent misrepresentation and rescission, in District Court for Dallas County,
Texas. The franchisee seeks damages of approximately $400,000. The franchisee
alleges that it purchased the right to open two franchises in the Miami, Florida
area, and was responsible for the construction/build-out of the stores. The
franchisee alleges that the cost of construction ran over what was estimated by
Frullati and that the stores did not perform to the franchisee's expectations or
the "estimate" the plaintiff alleges it received from Frullati. Subsequent to
the filing of the complaint, Frullati was able to negotiate reductions in the
cost of construction, bringing the final cost within the initially projected
amount. The Company believes that the franchisee owes Frullati approximately $
135,000 for the cost of construction, past due rent and royalties, and has filed
a cross-complaint against Royal Marketing in the district court action for that
amount. The Company has defenses to all claims and intends to vigorously contest
this matter.
ZIAD S. DALAL
Mr. Dalal ("Dalal") was the sole shareholder of Selman prior to the
Company's purchase of Selman in May 1999. Under the Company's agreement to
purchase the stock of Selman, the Company assumed: (i) a loan between Selman and
United Texas Bank in the amount of $514,791.64 ("United Texas Loan"); (ii) a
loan between Selman and Bank One in the amount of $96,328.04 ("Bank One Loan"),
(iii) a promissory note between Selman and Fru-Cor in the amount of $1,200,000,
and (iv) a promissory note between Selman and Dalal in the amount of $300,000
("Dalal Note").
On the day following the closing of the Company's purchase of Selman's
stock, Dalal's attorney requested that the Company execute a Closing Agreement
which provided that the Company and Selman were to have Dalal removed as a
guarantor on the United Texas loan and the Bank One loan. The Company executed
the Closing Agreement. The Closing Agreement provided that if the Company and
Selman did not obtain a release of Dalal's personal guarantee on these two bank
loans within forty-five days of the closing, that failure would be an event of
default under the Dalal Note, causing the entire $300,000 balance to be
immediately due and payable.
The Company and Selman failed to obtain Dalal's personal guarantee release
on the Bank One Loan and United Texas loan within forty-five (45) days of the
closing, and Dalal subsequently sued Selman and the Company in District Court
for Dallas County for full payment of the Dalal Note, and for interest and
related costs. The Company believes it has defenses to these claims, and is
vigorously contesting them.
-35-
<PAGE>
LANDLORDS CLAIMS UNDER THE PLAN OF REORGANIZATION
The Company is involved in litigation with three of its landlords,
Westfield Corporation, Inc., The Macerich Company and Donahue Schriber (the
"Landlords"), who among themselves own nine properties in which Surf City
Squeeze franchises are operated.
On June 15, 1999, the Landlords filed a motion in Bankruptcy Court seeking
an order compelling Surf City to pay all amounts alleged to be due the Landlords
under nine leases plus interest, attorneys fees, and costs. The total amount of
these claims exceeded $76,000. Surf City responded to the Landlord's claims
contending that the Landlords were bound by the cure amounts listed in Surf
City's Plan of Reorganization, because the Landlords had failed to object to the
Plan of Reorganization or the Confirmation Order, which listed the pre and
post-petition cure amounts.
On September 9, 1999, the Bankruptcy Court ruled that the Landlords were
bound by the pre- and post-petition cure amounts Surf City set forth in its Plan
of Reorganization, and the Court declined to award the Landlords their
attorneys' fees. Following the Bankruptcy Court's ruling, the Landlords claim
that the amount they are owed under the Judge's ruling is approximately $41,000.
Surf City believes the actual amount owing is approximately $37,000. The correct
amount due the Landlords will be paid by Surf City upon the issuance of the
court's final ruling expected in January 1999.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The Company has had no disagreements with its accountants nor has the
Company changed its accountants.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
During the past year, the Company has issued the following securities,
which were not registered and are restricted. The shares were issued in reliance
upon the exemption from registration under the Securities Act of 1933, provided
by the private placement exemption and comparable provisions of state law.
-36-
<PAGE>
Date Name No. of Shares Consideration
- - ---- ---- ------------- -------------
04/01/99 Scott Levine 75,000 Legal Fees(1)
04/01/99 William Naumann 75,000 Legal Fees(1)
09/15/99 Kenneth Sharkey 75,000 Arbitration Settlement(2)
10/30/99 Coffin Associates 50,000 Public Relations Firm(3)
- - ----------
(1) The Company issued a total of 150,000 shares of unregistered Common Stock
to the shareholders of Naumann & Levine, LLP in satisfaction of outstanding
legal fees totaling approximately $47,000.
(2) The Company issued 75,000 shares of unregistered Common Stock to Kennteth
Sharkey in settlement of an action pending before the American Arbitration
Association entitled Surf City Squeeze Franchising Corp. Inc. et al. V.
Kenneth A. Sharley, et al., Case no 76 114 00299 97.
(3) The Company retained Coffin & Associates ("Coffin") as its public relations
Firm on October 27, 1999. As part of the retainer agreement, Coffin agreed
to purchase from the Company 50,000 shares of its Common Stock at $.16 per
share, the average market price calculated during a two-week period in
October 1999.
There has been no underwriting undertaken by the Company.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Florida Statutes Section 607.0850 provides that a Florida corporation has
the power to indemnify its Directors, Officers, Employees and Agents if he or
she acted in good faith and in an manner he or she reasonably believed to be in,
or not opposed to, the best interests of the corporation. Additionally, in a
criminal action or proceeding, a Florida corporation can indemnify a director,
officer, employee and agent if he had no reasonable cause to believe his conduct
was unlawful. Pursuant to Article X of the Company's Amended and Restated
Articles of Incorporation, the Company is obligated to indemnify its officers
and directors to the fullest extent permitted by law. A copy of the Company's
Amended and Restated Articles of Incorporation and Bylaws are attached as
Exhibits to this registration statement and incorporated herein by reference.
The Company has entered into Indemnification Agreements with each of its
current directors. These agreements provide that the Company will hold harmless
and indemnify each director against any and all expenses, liabilities, and
losses (including investigation expenses, expert witness and attorneys' fees and
expenses, costs of court, judgments, penalties and fines, and amounts paid or to
be paid in settlement) actually incurred by the director, net of any insurance
proceeds, in connection with any suit or proceeding, whether civil, criminal, or
administrative, to which the director is a party or threatened to be made a
party, based upon, or arising from, or by reason of the fact that the director
is or was a director or officer of the Company, or, at the Company's request,
serves or has served as a director, officer, partner, trustee, employee or agent
of another company or affiliate. The Company is obliged to indemnify each
director to the fullest extent not prohibited by Florida law.
-37-
<PAGE>
Each indemnified director is granted the right to receive prior to a final,
non-appealable judgment, advances from the Company for all expenses, including
investigative expenses, court costs, expert witness and attorneys' fees, and
other expenses, incurred in connection with an indemnifiable claim or
proceeding. To obtain these advances, the director must execute and deliver to
the Company a schedule setting forth in reasonable detail the dollar amount
expended and must provide the Company with a written undertaking that the
director acted in good faith and in accordance with the standard of conduct
applicable in order for the Company to indemnify the director, and a written
agreement to repay the Company if it is ultimately determined that the director
has not satisfied the applicable standard of conduct. Indemnification is not
available to a director, if he has engaged in certain prohibited acts. These
include any matters for which indemnification is barred by law, and any
violation of a director's duty of loyalty to the Company. The Indemnification
Agreement is not exclusive, and is in addition to any other rights of
indemnification provided by the Company's Amended and Restated Articles of
Incorporation, Bylaws, or by law. A copy of each of these indemnification
agreements is attached as an Exhibit to this registration statement and
incorporated herein by reference.
The Company also maintains, at is sole cost and expense, a director's and
officer's insurance policy (the "Policy") with coverage up to $5,000,000. Mr.
Blackwell, Ms. Blackwell, Mr. Guarino, Mr. Corliss, and Mr. Plato are all named
insureds, in their respective capacities as officers and directors of the
Company under the POLICY.
In the Share Purchase Agreement between the Company and SCAC, dated March
15, 1999, the Company agreed to indemnify the officers, directors, employees,
and shareholders of SCAC, both past and present, and Mr. Blackwell, Mr. Guarino,
and Ms. Blackwell, from and against any and all costs and expenses including,
but not limited to, lease obligations, personal guarantees, the warrants issued
to Weider, entering into the Share Purchase Agreement with SCAC, the avoidance
of or alleged avoidance of any agreement, and the breach of or alleged breach of
any agreement (including those incurred pursuant to a settlement entered into in
good faith). A copy of the Share Purchase Agreement containing this
Indemnification Provision is attached to this registration statement as an
Exhibit and incorporated herein by reference.
-38-
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
2.1* Order Confirming First Modified Joint Plan of Reorganization Proposed
by the Debtor and the Official Committee of Unsecured Creditors. **
2.2* First Modified Joint Plan of Reorganization Proposed by the Debtor
and the Official Committee of Unsecured Creditors dated May 13, 1997,
as amended July 22, 1997. **
2.3* Amended Disclosure Statement accompanying First Modified Joint Plan of
Reorganization Proposed by the Debtor and the Official Committee of
Unsecured Creditors dated May 13, 1997, as amended July 22, 1997. **
2.4* Share Purchase Agreement between Sports Group International, Inc. and
Surf City Acquisition Corporation II dated March 15, 1999. **
2.5* Membership Interest Purchase Agreement between Sports Group
International, Inc. and Apache Peak Capital, L.L.C., dated
March 12, 1999.**
2.6* Share Purchase Agreement between Sports Group International, Inc.,
Ziad S. Dalal and Selman Systems, Inc. dated May 21, 1999. **
2.7* Stock Purchase Agreement between Selman Systems, Inc., Kenneth L.
Musgrave, Ltd., Tony Condor and Larry Pearce dated May 21, 1999. **
3.1* Amended and Restated Articles of Incorporation of Sports Group
International, Inc.
3.2* Bylaws of Sports Group International, Inc.
4.1* Promissory Note with United Texas Bank.
4.2* Bank One Promissory Note
4.3* Promissory Note between SCAC and the Petersen Trust.
4.4* Consent and Waiver of Terms of Series A Preferred Stock
10.1* Sports Group International, Inc.'s 1999 Stock Option Plan.
10.2* Employment Agreement between Mr. Kevin A. Blackwell and Sports
Group International, Inc. dated October 1, 1999.
10.3* Employment Agreement between Mr. David A. Guarino and Sports Group
International, Inc. dated October 1, 1999.
10.4* Series B Preferred Stock and Warrant Purchase Agreement between
Sports Group International, Inc., Robert E. Petersen and Margaret
Petersen dated May 20, 1999. **
10.5* Warrant to purchase 1,000,000 shares of the Company's Common Stock.
10.6* Master Franchise Agreement between Surf City Squeeze Franchise Corp.
and 1238176 Ontario, Inc. dated July 7, 1998.
10.7* Indemnification Agreement for Kathryn Blackwell
10.8* Indemnification Agreement for Kevin Blackwell.
10.9* Indemnification Agreement for David Guarino.
10.10* Indemnification Agreement for Robert Corliss.
10.11* Indemnification Agreement for Don Plato.
11 Computation of Per Share Earnings - In Financial Statements
21* Subsidiary Information. (See Chart)
27* Financial Data Schedule
- - ----------
* Filed herewith.
** All schedules referenced by this Agreement have been intentionally omitted
with this filing and are available to the Commission upon request.
-39-
<PAGE>
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
December 17, 1999 SPORTS GROUP INTERNATIONAL, INC.
By: /s/ Kevin A. Blackwell
-----------------------------------------
Kevin A. Blackwell, President,
Chief Executive Officer and Director
By: /s/ David A. Guarino
-----------------------------------------
David A. Guarino Vice President -
Principal Financial Officer and Director
-40-
<PAGE>
PART F/S
SPORTS GROUP INTERNATIONAL, INC.
CONTENTS TO F/S SECTION
A. Sports Group International, Inc.
Unaudited Consolidated Financial Statements as of and for the nine
months ended September 30, 1999
B. Surf City Squeeze Acquisition Corporation II
Consolidated Financial Statements as of December 31, 1998 and
Independent Auditors' Report
C. Selman Systems Inc.
Consolidated Financial Statements as of December 27, 1998 and
Independent Auditors' Report
D. Fru-Cor, Inc.
Financial Statements as of December 31, 1998 and Independent Auditors'
Report
E. Selman Systems Inc.
Consolidated Financial Statements as of December 28, 1997
F. Sports Group International, Inc.
Unaudited Pro Forma Financial Condensed Statements for the nine months
ended September 30, 1999 and for the year ended December 31, 1998
41
<PAGE>
SPORTS GROUP INTERNATIONAL INC.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
A-1
<PAGE>
SPORTS GROUP INTERNATIONAL, INC.
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
Page
----
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 1999:
Consolidated Balance Sheet A-3
Consolidated Statement of Operations A-4
Consolidated Statement of Stockholders' Equity A-5
Consolidated Statement of Cash Flows A-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A-8
A-2
<PAGE>
SPORTS GROUP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1999
- - --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 106,686
Trade accounts receivable (net of allowance of $12,464) 254,839
Other receivables 123,691
Inventories 178,441
Prepaid expenses and other assets 85,957
Deferred income taxes 54,631
Notes receivable - current portion 60,086
------------
Total current assets 864,331
PROPERTY AND EQUIPMENT, net 3,490,734
LEASE DEPOSITS 170,609
NOTES RECEIVABLE - less current portion 97,512
GOODWILL, net of accumulated amortization of $106,177 5,950,819
DEFERRED INCOME TAXES 220,782
OTHER ASSETS 17,219
------------
TOTAL ASSETS $ 10,812,006
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 700,850
Accrued liabilities 998,902
Notes payable - current portion 923,172
Acquisition note payable 1,200,000
Accrued dividends payable 102,083
Confirmed bankruptcy liabilities - current portion 616,371
------------
Total current liabilities 4,541,378
NOTES PAYABLE - long-term portion 248,789
LEASE SECURITY DEPOSITS HELD 11,666
CONFIRMED BANKRUPTCY LIABILITIES - long term portion 848,553
DEFERRED FRANCHISE FEE INCOME 308,894
------------
Total liabilities 5,959,280
------------
STOCKHOLDERS' EQUITY:
Series A preferred stock, $10.00 par value, 575,000 shares
designated, 575,000 issued 5,750,000
Series B preferred stock, $10.00 par value, 650,000 shares
designated, 650,000 issued 6,500,000
Common stock, $.001 par value, 100,000,000 shares authorized,
7,763,854 issued and outstanding 7,764
Paid in capital 3,769,476
Accumulated deficit (11,174,514)
------------
Total stockholders' equity 4,852,726
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,812,006
============
The accompanying notes are an integral part of these
consolidated financial statements.
A-3
<PAGE>
SPORTS GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
- - --------------------------------------------------------------------------------
REVENUES:
Net product and store sales $ 5,230,162
Franchise fees 392,485
Royalties 922,753
Rental income 280,800
-----------
Total revenues 6,826,200
-----------
EXPENSES:
Cost of product sales 1,695,292
Store operating costs 588,693
Personnel expenses 1,606,168
Rent 1,267,810
Depreciation and amortization 282,949
Franchising expense 25,339
General and administrative expenses 1,216,881
-----------
Total expenses 6,683,132
-----------
OPERATING INCOME (LOSS) 143,068
-----------
OTHER (INCOME) AND EXPENSES
Interest expense 129,863
Interest income (11,946)
Other income (5,838)
-----------
Total other expense 112,079
-----------
INCOME BEFORE INCOME TAXES 30,989
INCOME TAX PROVISION 18,661
-----------
NET INCOME $ 12,328
===========
NET (LOSS) PER SHARE:
Basic $ (0.10)
===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,389,267
===========
The accompanying notes are an integral part of these
consolidated financial statements.
A-4
<PAGE>
SPORTS GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED A PREFERRED B PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------- ------- ---------- ------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE
JANUARY 1, 1998 4,104,968 $ 4,105 $ -- $ -- $ 8,822,997 $(10,655,032) $(1,827,930)
Exercise of warrants
in subsidiary 1,750 1,750
Reverse split 1:2 (2,052,484) (2,052) 2,052
Common stock issued
for cash 2,247,516 2,248 207,752 210,000
Securities issued in
connection with the
reverse merger 2,000,000 2,000 575,000 5,750,000 (5,752,000)
Preferred B issued
for cash 650,000 6,500,000 6,500,000
Common stock issued
as payment for legal
fees and settlment 225,000 225 58,437 58,662
Common stock for
preferred dividends 1,238,854 1,239 428,488 (429,727)
Accrued preferred
dividend (102,083) (102,083)
Net income 12,328 12,328
---------- ------- ------- ---------- ------- ---------- ----------- ------------ -----------
BALANCE
SEPTEMBER 30, 1999 7,763,854 $ 7,764 575,000 $5,750,000 650,000 $6,500,000 $ 3,769,476 $(11,174,514) $ 4,852,726
========== ======= ======= ========== ======= ========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
A-5
<PAGE>
SPORTS GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
- - --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,328
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 282,949
Deferred income taxes 96,325
Changes in assets and liabilities (net of business
acquisitions):
Trade and other accounts receivable (80,075)
Inventories 37,738
Refundable lease deposits (20,022)
Prepaids and other current assets (25,650)
Other assets 22,614
Accounts payable (112,966)
Accrued liabilities (4,876)
Deferred franchise fee income 29,456
-----------
Net cash provided by operating activities 237,821
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (8,825)
Collections on notes receivable 92,797
Purchase of business (net of cash acquired) (6,500,000)
-----------
Net cash (used in) investing activities (6,416,028)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on notes payable 322,500
Principal repayments on notes payable (358,879)
Payments on confirmed bankruptcy liabilities (409,945)
Proceeds from the sale of preferred stock 6,500,000
Proceeds from sale of common stock 211,750
-----------
Net cash (used in) financing activities 6,265,426
-----------
INCREASE IN CASH 87,219
CASH, BEGINNING OF YEAR 19,467
-----------
CASH, END OF YEAR $ 106,686
===========
The accompanying notes are an integral part of these
consolidated financial statements.
A-6
<PAGE>
SPORTS GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED), (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
- - --------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 105,140
===========
Income taxes paid $ 12,200
===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of business with notes payable $ 1,200,000
===========
Common stock for legal fees and settlement $ 58,662
===========
Preferred stock issued for business acquisition $ 5,750,000
===========
Common stock issued for business acquisition $ 2,000
===========
Common stock issued as preferred stock dividends $ 429,727
===========
The accompanying notes are an integral part of these
consolidated financial statements.
A-7
<PAGE>
SPORTS GROUP INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999
- - --------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
Sports Group International, Inc. (the "Company") was formed in 1997 under
its former name, Secretarial Services of Orlando, Inc. The Company merged
with Surf City Acquisition Corporation II ("SCAC") in March 1999 by the
issuance of 2,000,000 shares of common stock and 575,000 shares of Series A
Preferred Stock. Prior to its merger with SCAC, the Company had no
significant operations. SCAC was formed as a holding company to acquire and
recapitalize Surf City Squeeze, Inc., an entity operating in a Chapter 11
bankruptcy, and other affiliated entities. Under the confirmed bankruptcy
plan, SCAC acquired all of the outstanding interests in: Surf City Squeeze,
Inc. ("Surf City"), Surf City Franchise Corporation ("SCSFC") and Kona
Coast Provisions, Inc. ("Kona") and Malibu Smoothie Franchising Corporation
("Malibu Smoothie"). SCAC, through its operating subsidiaries, operates and
franchises juice bars in the United States and Canada. The stores are
generally located in shopping malls and health clubs and operate under the
name of "Surf City Squeeze".
On May 21, 1999, the Company issued 650,000 shares of its Series B
Convertible Preferred Stock for $6,500,000. The proceeds were used to
acquire all of the issued and outstanding stock of Selman Systems, Inc.
("Selman"), an operator and franchisor of a chain of cafes and bakeries
under the name of Frullati Cafe and Bakery ("Frullati").
On July 7, 1999, the Company, through Selman, purchased all of the
outstanding stock of Fru-Cor, Inc., an owner of eight Frullati locations.
The purchase was effected through the issuance of a promissory note for
$1,200,000.
The accompanying financial statements represent the consolidated financial
position and results of operations of the Company and includes the accounts
and results of operations of the Company and its wholly owned subsidiaries
for the nine months ended September 30, 1999. The consolidated results of
operations and cash flows for the nine months ended September 30, 1999
include that of Frullati and Frucor from the respective acquisition dates
through September 30, 1999.
As a result of the merger transaction with SCAC, the former SCAC
stockholders held approximately 69% of the Company's voting stock. For
financial accounting purposes, the acquisition was a reverse merger and was
treated as a recapitalization with SCAC as the acquirer.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH includes all short-term highly liquid investments that are readily
convertible to known amounts of cash and have original maturities of three
months or less.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries, SCAC, Surf
A-8
<PAGE>
City, SCSFC, Kona, Malibu Smoothie, Frullati and Frucor. All significant
intercompany accounts and transactions are eliminated.
INVENTORIES consist primarily of food products, drink mixes, supplements
and supplies. Inventories are recorded at the lower of cost or market on a
first-in, first-out basis.
PROPERTY AND EQUIPMENT is stated at cost less accumulated depreciation.
Depreciation is recorded on a straight-line basis over a period of the
shorter of the applicable lease term or the estimated useful lives of the
assets ranging from 3 to 10 years.
REVENUE RECOGNITION - Initial franchise fees are deferred until
substantially all services and conditions relating to the sale of the
franchise have been performed or satisfied. The Company will finance the
initial franchise fee by taking a note receivable from the franchisee. The
notes receivable are typically payable by the franchisee over five years.
Due to uncertainties relative to the success of these stores and
franchisees, revenue on the financed initial franchise fees is recognized
on an installment basis until 30% of the principal balance of the note is
collected. At that time, the remaining deferred balance is recognized as
revenue.
Fees from Area Development Agreements ("ADA") are recognized as revenue on
a pro rata basis based on the number of stores opened to-date to total
stores to be developed as stipulated in the ADA. If the total number of
stores stipulated in the ADA are not opened at the expiration of the ADA,
the balance of such fees is recognized.
Kona sells mixes and supplements to franchisees. Revenue on such sales is
recognized when the product is shipped. Sales from the Company owned stores
are recognized at the point of sale.
The Company also receives sublease rental income. The Company is the
primary lessee on certain franchised stores. Rental income is recognized
ratably over the term of the subleases.
INCOME TAXES - The Company provides for income taxes based on the
provisions of Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES, which, among other things, requires that
recognition of deferred income taxes be measured by the provisions of
enacted tax laws in effect at the date of financial statements.
FINANCIAL INSTRUMENTS - Financial instruments consist primarily of cash,
accounts receivable, notes receivable, and obligations under accounts
payable, accrued expenses, notes payable and confirmed bankruptcy
obligations. The carrying amounts of cash, accounts receivable, accounts
payable and accrued expenses approximate fair value because of the short
maturity of those instruments. The carrying value of the Company's notes
receivable approximate fair value because they contain market interest
rates and allowances are provided for any estimated uncollectible amounts.
The carrying value of notes payable and confirmed bankruptcy obligations
approximate fair value because they contain market value interest rates and
have specified repayment terms. The Company has applied certain assumptions
in estimating these fair values. The use of different assumptions or
methodologies may have a material effect on the estimates of fair values.
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 disclosure of contingent assets and liabilities at the date
A-9
<PAGE>
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
ADVERTISING EXPENSES are expensed as incurred. Advertising expense was
$36,275 for the nine months ended September 30, 1999.
GOODWILL is recorded for the difference between the purchase price of the
acquired business and the fair value of the identifiable net assets.
Goodwill is amortized on a straight-line basis over 20 years. Amortization
expense for the nine months ended September 30, 1999 was $106,177.
IMPAIRMENT OF LONG-LIVED ASSETS are assessed by the Company for impairment
whenever there is an indication that the carrying amount of the asset may
not be recoverable. Recoverability of these assets is determined by
comparing the forecasted undiscounted cash flows generated by those assets
to the assets' net carrying value. The amount of impairment loss, if any,
is measured as the difference between the net book value of the assets and
the estimated fair value of the related assets. Assets held for sale are
recorded at fair value less selling costs.
3. BANKRUPTCY PETITION AND REORGANIZATION
On January 13, 1997, Surf City filed a voluntary petition for relief (under
Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of Arizona. The bankruptcy plan was
confirmed by the Court on November 18, 1997 to become effective within 45
days of confirmation (the "Plan").
Surf City's largest single creditor was also a significant shareholder of
Surf City at the time of the bankruptcy. Immediately prior to filing the
bankruptcy petition, Surf City reached an agreement with the creditor for
discharge and settlement of $3,500,000 in debt. As part of that agreement,
the creditor also agreed to provide $800,000 in cash to the Company as
settlement of various claims made against the creditor by the Company. The
Company used the funds as its investment in Surf City and the related
operating subsidiaries. The controlling ownership of Surf City and the
other operating subsidiaries did not change as a result of this
transaction. Due to the controlling ownership of operating companies
effectively remaining with the same shareholders after the acquisition, the
purchase is recorded at the existing bases of the net assets of the
operating companies. There are no adjustments to reflect the differences
between the fair values and book values of the net assets at the time of
the transaction.
Debts that were subject to compromise under the Plan include priority
claims for sales taxes, secured claims from equipment vendors, contractors,
landlords and franchisees, and certain administrative and unsecured claims.
The majority of unsecured claims in the Plan are those commitments of Surf
City for future rents due under real property operating leases. Surf City
rejected certain material operating leases under the Plan. All allowed
claims under the Plan are recorded at the present value of those debts
based on the confirmed repayment terms and discount rates of 8% to 10%.
The allowed General Unsecured Claims under the Plan includes a contingency
for payments based on future cash flow of Surf City and its subsidiaries.
The terms of the repayment of the General Unsecured Claims require minimum
quarterly payments of $43,750 over a seven year period to an Unsecured
Creditors Pool resulting in a minimum of $1,225,000 payable over that seven
year period. In addition, amounts determined as 25% of the first $50,000 of
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<PAGE>
quarterly Net Cash Flow, as defined in the Plan, and 40% of the quarterly
Net Cash Flow in excess of $50,000 are required to be paid to the Unsecured
Creditors Pool on a quarterly basis. The Company has recorded the General
Unsecured Claims liability at the present value of the 28 quarterly
payments of $43,750. The Plan lists the total General Unsecured Claims to
be $5,000,000 to $6,000,000, but states that much of that estimate arises
from the rejection of unexpired operating leases. The Company believed that
it could not reasonably estimate the amount of those claims at the time of
the Plan confirmation because the damages arising from rejected leases are
likely to be reduced as the locations under those leases are re-leased to
new tenants. The Company also believes that it cannot reasonably estimate
the amount of contingency payments because of uncertainties in Surf City's
likelihood to generate net cash flow and the inability to estimate the
timing of any such Net Cash Flow if it does occur. Surf City has not yet
made any contingent payments to the Unsecured Creditors Pool.
The scheduled repayments of remaining bankruptcy liabilities at September
30, 1999 is as follows:
September 30 1999 through December 31, 2000 $ 625,496
Years ended December 31: 2001 199,548
2002 218,337
2003 224,422
2004 197,120
----------
$1,464,924
==========
4. NOTES RECEIVABLE
Notes receivable principally result from the financing of the initial
franchise fees required from franchisees and the sale of corporate owned
stores. The notes are generally guaranteed by the franchisee or purchaser
and are collateralized by the related juice bar business, and related
equipment and leasehold improvements. The notes are generally due in
monthly installments of principal and interest with interest at 10% per
annum.
The Company periodically reviews the collectibility of its notes
receivable. Due to matters related to the Surf City bankruptcy, certain
notes were written off or allowances for credit losses were established.
The Company recognizes interest income on notes it has determined to be
impaired only when payments are received.
At September 30, 1999, the Company determined that there were no impaired
notes receivable. The allowance for credit losses on impaired notes
decreased by $55,526 for the nine months ended September 30, 1999. The
allowance for credit losses on notes receivable was $48,510 at September
30, 1999.
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<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 1999:
Leasehold improvements $ 2,073,691
Store fixtures, equipment and furnishings 1,341,588
Office furnishings and equipment 135,617
Construction-in-progress 129,439
-----------
Total 3,680,335
Less accumulated depreciation (189,601)
Property and equipment, net $ 3,490,734
===========
6. NOTES PAYABLE
Notes payable at September 30, 1999 are comprised of the following:
Notes payable to officer and affiliate, no specified
repayment terms, unsecured, no stated rate of interest. $ 40,000
Note payable to stockholder, original balance of $322,500,
interest at 10% per annum, principal and interest
installments of $14,882 due monthly through 2001.
Personally guaranteed by other stockholders. 247,793
Notes payable to franchisees in settlement of legal claims.
Repayment terms require monthly installments of principal
and interest at 10% per annum of $7,500 through 2002.
Collateralized by royalties and franchise fees of designated
store locations. Original principal balance of notes was
$335,000. 169,830
Note payable to equipment vendor. Payment terms require
monthly installments $7,000 through July 2000. The stated
balance of promissory note is $215,129. A balloon payment of
$71,129 is due July 15, 2000. The promissory note has no
stated interest. The present value of the note was determined
using a discount rate of 10%. Collateralized by certain
royalties and 412,500 shares of the Company's common held by
the Company's president. Personally guaranteed by the
Company's president. 127,507
Bank notes payable, interest at 10.5% per annum, principal
and interest payment due in monthly installments of $12,700
through 2003, collateralized by equipment, intangibles and
Selman common stock and personally guaranteed by the prior
owner of Selman. 586,831
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<PAGE>
Acquisition note payable related to the acquisition of
Fru-Cor. Interest at 9%, monthly interest only payments,
note is due and payable in full, plus accrued interest
on May 21, 2000. Collateralized by the stock of Selman. 1,200,000
-----------
Totals 2,391,961
Less current portion (2,123,172)
-----------
Long-term portion $ 248,789
===========
Principal payments due as follows:
September 30 1999 through December 31, 2000 $ 625,496
Years ended December 31: 2001 199,548
2002 218,337
2003 224,422
197,120
----------
$2,391,961
==========
The bank note payable was called due to the transfer of controlling
ownership of Selman. The Company assumed the note and is attempting to
refinance the debt through another bank. The full outstanding balance of
the note at September 30, 1999 has been classified as current.
The fair value of the related party notes payable could not be estimated
due to the related nature of the notes and the unspecified repayment terms.
There were no interest payments on the officer notes in the nine months
ended September 30, 1999. Significant royalty income generated by the
Company is pledged as collateral on certain of the above notes.
7. BUSINESS COMBINATIONS
On March 15, 1999, the Company exchanged 575,000 shares of Series A
Convertible Preferred Stock ("Series A Preferred") and 2,000,000 shares of
common stock for all of the common stock for of Surf City Acquisition
Corporation II ("SCAC") and its wholly owned subsidiaries. The preferred
stock has voting rights and is convertible at a ratio of 13 1/3 per share
resulting in the shareholders of SCAC obtaining control of the voting
interest in the Company at the time of the transaction. Additionally,
SCAC's management and board of directors became the new management of the
Company. The Company had no material assets or operations at the time of
the transaction. For financial accounting purposes, the acquisition was a
reverse merger and was treated as a recapitalization with SCAC as the
acquirer.
On May 21, 1999, the Company issued 650,000 shares of its Series B
Convertible Preferred Stock for $6,500,000. The proceeds were used to
acquire all of the issued and outstanding stock of Selman Systems, Inc.
("Selman"), an operator and franchisor of a chain of cafes and bakeries
under the name of Frullati Cafe and Bakery ("Frullati"). The acquisition
was recorded under the purchase method of accounting. The aggregate
purchase price has been allocated to the assets acquired and liabilities
assumed based on their respective fair values at the date of acquisition.
The excess consideration paid over the fair market value of the net assets
acquired of $4,874,364 is recorded as goodwill. The operating results of
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<PAGE>
Selman are included in the accompanying consolidated financial statements
for the period May 21, 1999 through September 30, 1999.
On July 7, 1999, the Company, through Selman, purchased all of the
outstanding stock of Fru-Cor, Inc., an owner of eight Frullati locations.
The purchase was effected through the issuance of a promissory note for
$1,200,000 plus assumption of other debt. The note is due on May 20, 2000.
The acquisition was recorded under the purchase method of accounting. The
aggregate purchase price has been allocated to the assets acquired and
liabilities assumed based on their respective fair values at the date of
acquisition. The excess consideration paid over the fair market value of
the net assets acquired of $1,197,414 is recorded as goodwill. The
operating results of Fru-Cor are included in the accompanying consolidated
financial statements for the period July 7, 1999 through September 30,
1999.
The following summarizes unaudited pro forma consolidated financial
information assuming that the acquisitions of Selman and Fru-Cor occurred
on January 1, 1999:
Net sales $12,718,243
Net income $ 16,575
Basic loss per share $ (0.10)
The pro forma financial information is presented for informational purposes
only and may not necessarily reflect the results had Selman and Fru-Cor
actually been acquired on January 1, 1999, nor is this information
indicative of the future consolidated results.
8. INCOME TAXES
The Company recognizes deferred income taxes for the differences between
financial accounting and tax bases of assets and liabilities. Income taxes
for the nine months ended September 30, 1999 consisted of the following:
Current tax (benefit) provision $(77,664)
Deferred tax (benefit) provision 96,325
--------
Total income tax provision $ 18,661
========
Net deferred tax assets of $3,575,146 less a valuation allowance of
$3,025,377, relate to net operating loss carryforwards and differences in
book and tax bases of property and equipment and notes receivable. The net
deferred income tax asset at September 30, 1999 is comprised of:
A-14
<PAGE>
Allowance for losses on notes and accounts receivable $ 26,961
Differences in liabilities related to deferred
revenue and rent 40,394
Net operating loss carryforwards 3,507,822
-----------
Deferred income tax asset 3,575,177
Less: valuation allowance (3,025,377)
-----------
Total deferred income tax asset 549,800
Deferred income tax liability related to book/tax
differences in bases of property and equipment
and goodwill (274,387)
-----------
Net deferred income tax asset $ 275,413
===========
Federal net operating loss carryforwards of $8,524,000 expire from 2010
through 2018. State net operating loss carryforwards of $8,524,000 expire
from 2000 through 2003. Due to the change in control of the Company
discussed in Note 7, future utilization of the net operating losses may be
restricted.
The differences between the statutory and effective tax rates is as
follows:
Federal statutory rates $ 4,543 15%
State income taxes 2,423 8%
Valuation allowance for operating loss
carryforwards 13,590 45%
Other (1,895) (6)%
-------- ---
Effective rate $ 83,503 62%
======== ===
Income taxes for the year ended December 31, 1998 reflect a reversal of
certain temporary differences that reduced the net deferred income tax
asset as well as an increase in the valuation allowance for uncertainties
relative to the future utilization of net operating loss carryforwards.
9. LEASES
Surf City, SCSFC and Selman are the primary lessees on most of their
franchised stores under long-term operating leases. The leases generally
have initial terms of five to seven years and usually provide for renewal
options ranging from five to seven additional years. These operating leases
expire at various dates through 2007. Most of the leases contain escalation
clauses and common area maintenance charges. The franchised locations are
subleased to the franchisees. There were approximately 117 leases under
these terms at September 30, 1999. The Company records rent expense and
sublease rental income only on locations at a certain health club chain
because the Company is directly responsible for payment to the landlord and
collection from the franchisee. On other store locations, the franchisees
have direct responsibility for payment to the lessor. Rent expense under
the leases in which the Company is directly responsible, including
corporate owned stores, was $1,130,970 for the nine months ended September
30, 1999. Sublease rental income under these leases was $280,800 for the
nine months ended September 30, 1999.
The Company also leases its offices and warehouses under long-term
operating leases expiring through 2001. Rent expense under these leases was
$136,839 for the nine months ended September 30, 1999.
A-15
<PAGE>
Future minimum annual lease payments and sublease rentals under operating
lease agreements for years ended December 31 are:
Sublease Warehouse
Store Leases Rental and Office
------------ ------------ ----------
1999 $ 5,826,288 $ 4,412,292 $113,640
2000 5,831,866 4,544,674 72,542
2001 5,882,254 4,573,759 29,604
2002 6,056,428 4,798,112 --
2003 4,940,233 3,674,150 --
Thereafter 11,088,479 9,148,580 --
----------- ------------ --------
$ 39,625,548 $ 31,151,567 $215,786
============ ============ ========
10. STOCKHOLDERS' EQUITY
The Company issued 575,000 shares of its Series A Convertible Preferred
Stock in connection the SCAC merger. The Series A Preferred Stock has a $10
par and liquidation value. The Series A Preferred also has a 10% per annum
cumulative dividend payable quarterly. The dividend can be paid in cash or
common stock of the Company at the option of the holder. Series A Preferred
stock is convertible to the Company's common stock at the option of the
holder at a rate of 13 1/3 shares of common for each share of Series A
Preferred. The holders of Series A Preferred stock are entitled to vote in
the same matters as the common shareholders at a ratio of 13 1/3 votes per
share of Series A Preferred held.
The Company issued 650,000 shares of its Series B Convertible Preferred
Stock for $6,500,000. The Series B Preferred Stock has a $10 par and
liquidation value. The Series B Preferred also has a 10% per annum
cumulative dividend payable quarterly. The dividend can be paid in cash or
common stock of the Company at the option of the holder. For purposes of
liquidation and dividends, Series B ranks on parity with Series A. Series B
Preferred stock is convertible to the Company's common stock at the option
of the holder at a rate of 10 shares of common for each share of Series B
Preferred. The holders of Series B Preferred stock are entitled to vote in
the same matters as the common shareholders at a ratio of 10 votes per
share of Series B Preferred held.
During the nine months ended September 30, 1999, the Company issued
1,238,854 shares of its common stock as payment of preferred dividends
through August 31, 1999. The number of common shares issued was based on
the trading value of the common stock, less a 50% discount for the
restricted nature of the shares issued, and the amount of the dividend
determined on the stated rate of 10%. Additionally, the Company accrued
preferred dividends payable through September 30, 1999.
The Company issued 225,000 shares of its common stock in settlement of
amounts due under a legal settlement and related attorneys fees. The value
of the shares was determined based on the trading value of the Company's
common stock less a 50% discount for the restricted nature of the shares
issued.
Prior to the merger with SCAC, the Company's board of directors approved a
reverse stock split of one common share for every two common shares issued
and outstanding.
A-16
<PAGE>
Also prior to the merger with SCAC, the Company issued 4,247,516 shares of
its common stock in a private offering for $210,000.
11. COMMITMENTS AND CONTINGENCIES
As discussed in Note 6, certain of the Company's notes payable are
collateralized by revenue generated from franchise fees and royalties.
As discussed in Note 3, there are contingent amounts payable to an
Unsecured Creditors Pool subject to quarterly cash flows through 2004.
Surf City is involved in litigation with three landlords. The landlords
sought claims of $76,000 plus expenses. In September, 1999, the Bankruptcy
Court ruled that the landlords were bound by the Plan. However, the
landlords amended their claim to $41,000 and the Company believes that it
may owe approximately $37,000. The $37,000 was accrued by the Company at
December 31, 1998 but payment of such is pending final decision from the
Court.
A party has filed a complaint against SCSFC alleging that SCSFC is liable
for certain debts of Surf City discharged in bankruptcy. The Company
believes that all amounts billed by this party were paid. In 1997, an
arbitrator ruled that Surf City owed the party approximately $126,000,
including attorneys' fees. The award was considered an unsecured claim in
the bankruptcy. The party has attempted to include SCSFC as a creditor
under the claim but the attempts have been denied by the arbitrator and a
motion for summary judgement filed by the party in Orange County Superior
Court to enforce the award has also been denied. The matter is set for
trial in early 2000. The Company intends to defend its position. However,
management and the Company's counsel believe it is not yet possible to
determine the likelihood or extent of any unfavorable outcome.
The Company may be subject to other claims as a result of its merger with
SCAC and Frullati (see Note 9).
The Company has been named in a lawsuit by a third party alleging that it
breached its merger agreement with the third party. The Company has
responded that the third party failed to meet certain conditions required
under the merger agreement and that it had notified the third party that
the merger was properly terminated. The third party seeks unspecified
damages. The Company believes that it has adequate defenses but that the
case has not proceeded to a point where the outcome can be estimated. There
are claims made against this third party by others that, based on the
outcome of this case, may have an effect on the Company.
A franchisee of Frullati has sued for breach of contract and related causes
of action is seeking approximately $400,000 in damages. The claim stems
from alleged cost overruns in the construction of two Frullati stores that
the franchisee believes payment for such are the responsibility of Selman
or its subsidiaries. Frullati has filed a counter claim against the
franchisee. Management and the Company's counsel believe it is not yet
possible to determine the likelihood or extent of any unfavorable outcome.
A-17
<PAGE>
12. NET INCOME PER SHARE
Net loss per share is calculated using the weighted average number of
shares of common stock outstanding during the year. Paid and accrued
preferred dividends are subtracted from the net income to determine the
amount available to common shareholders. Convertible preferred stock was
not considered in the calculation for diluted earnings per share for the
nine months ended September 30, 1999 because the effect of their inclusion
would be antidilutive.
Income (Loss) Shares Per share
------------- ------ ---------
Net Income (Loss) $ 12,328
Preferred stock dividends (531,810)
BASIC EARNINGS PER SHARE
Loss available to common
stockholders $(519,482) 5,389,267 $(0.10)
Effect of dilutive securities N/A
DILUTED EARNINGS PER SHARE N/A
Preferred stock convertible to 14,166,667 shares of common stock was
outstanding at September 30, 1999. These securities were excluded from the
computation of diluted earnings per share because the effect of their
inclusion would be anti-dilutive.
13. RELATED PARTY TRANSACTIONS
The Company's officers and stockholders have personally guaranteed certain
of the Company's operating leases. The Company's president is named as the
lessee on the lease of one of the Company's warehouse leases.
As discussed in Note 5, the Company has debt due to related parties and
certain debt includes a personal guarantee and pledge of common stock owned
by the Company's president.
In February 1999, the holder of the Series B Preferred Stock loaned SCAC
$325,000 under a promissory note. The Company paid interest on this note of
$14,584 during the nine months ended September 30, 1999.
From time to time, the Company borrows funds from certain of its officers.
At September 30, 1999, the Company had $40,000 due to its officers or their
affiliates.
14. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at banks in Arizona, Texas and
Louisiana. Accounts are insured by the Federal Deposit Insurance
Corporation up to $100,000. At September 30, 1999, the Company had no
uninsured bank balances.
A-18
<PAGE>
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily notes receivable and trade
accounts receivable. The trade accounts receivable are due primarily from
franchisees in numerous geographical locations in the United States. The
Company has not historically experienced material losses due to
uncollectible trade accounts receivable.
The Company's notes receivable are generally due from franchisees and are
guaranteed by the franchisee and collateralized by leasehold improvements
and rights under the franchise agreement. The Company has experienced
credit losses under notes receivable and has generally foreclosed on the
related stores and attempted to re-franchise those locations. The notes
receivable balance at September 30, 1999 is comprised of numerous debtors.
One of which represents approximately 20% and another 13% of the total
balance at September 30, 1999. No other single note or debtor comprises
greater than 10% of the total balance at September 30, 1999.
15. EMPLOYEE BENEFIT PLAN
Selman maintains a 401(k) savings plan for its employees. Employees are
eligible to participate in the plan upon reaching age 21 and completion of
six months of service. Selman matches 25% of the first 6% of the employee's
salary contributed to the plan. Selman made matching contributions to the
plan of $2,882 for the nine months ended September 30, 1999.
* * * * * *
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<PAGE>
SURF CITY ACQUISITION CORPORATION II
CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1998
AND INDEPENDENT AUDITORS' REPORT
B-1
<PAGE>
SURF CITY ACQUISITION CORPORATION II
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
PAGE
----
INDEPENDENT AUDITORS' REPORT B-3
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998:
Consolidated Balance Sheet B-4
Consolidated Statements of Operations B-5
Consolidated Statements of Stockholders' (Deficit) B-6
Consolidated Statements of Cash Flows B-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS B-9
B-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Surf City Acquisition Corporation II:
Scottsdale, Arizona
We have audited the accompanying consolidated balance sheet of Surf City
Acquisition Corporation II (the "Company"), as of December 31, 1998, and the
related statements of operations, stockholders' (deficit) and cash flows for
each of the two years in the period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Surf
City Acquisition Corporation II at December 31, 1998, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KING, WEBER & ASSOCIATES, P.C.
Tempe, Arizona
November 18, 1999
B-3
<PAGE>
SURF CITY ACQUISITION CORPORATION II
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
- - --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 19,467
Trade accounts receivable 137,889
Other receivables 15,217
Inventories 59,138
Prepaid expenses and other assets 5,157
Notes receivabl, net - current portion 115,473
------------
Total current assets 352,341
PROPERTY AND EQUIPMENT, net 12,556
LEASE DEPOSITS 150,587
NOTES RECEIVABLE, net - less current portion 134,922
DEFERRED INCOME TAXES 492,665
OTHER ASSETS 12,134
------------
TOTAL ASSETS $ 1,155,205
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 231,396
Accrued liabilities 143,531
Notes payable - current portion 332,877
Confirmed bankruptcy liabilities - current portion 843,572
------------
Total current liabilities 1,551,376
NOTE PAYABLE - long-term portion 260,358
LEASE SECURITY DEPOSITS HELD 11,666
CONFIRMED BANKRUPTCY LIABILITIES - long term portion 1,055,997
DEFERRED FRANCHISE FEE INCOME 103,738
------------
Total liabilities 2,983,135
------------
STOCKHOLDERS' (DEFICIT):
Serial preferred stock, $10.00 par value, 1,000,000
shares authorized, none issued
Common stock, $.01 par value, 10,000,000 shares
authorized, 825,000 issued and outstanding 8,250
Paid in capital 8,818,852
Accumulated deficit (10,655,032)
------------
Total stockholders' (deficit) (1,827,930)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 1,155,205
============
The accompanying notes are an integral part of these
consolidated financial statements.
B-4
<PAGE>
SURF CITY ACQUISITION CORPORATION II
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- - --------------------------------------------------------------------------------
1998 1997
----------- -----------
Debtor-in-
Possession
REVENUES:
Net product sales $ 1,049,997 $ 1,706,117
Franchise fees 483,088 321,165
Royalties 722,130 656,174
Rental income 404,233 591,963
Other 8,241 40,278
----------- -----------
Total revenues 2,667,689 3,315,697
----------- -----------
EXPENSES:
Cost of product sales 437,525 511,542
Store operating costs 164,303 372,832
Personnel expenses 720,670 1,199,023
Rent 655,017 928,596
Franchising expense 21,429 59,675
General and administrative expenses 494,913 662,008
----------- -----------
Total expenses 2,493,857 3,733,676
----------- -----------
OPERATING INCOME (LOSS) 173,832 (417,979)
----------- -----------
OTHER (INCOME) AND EXPENSES
Interest expense 176,806 75,851
Interest income (23,045) --
Other income (108,345) (20,520)
----------- -----------
Total other expense 45,416 55,331
----------- -----------
INCOME (LOSS) BEFORE REORGANIZATION ITEMS
AND INCOME TAXES 128,416 (473,310)
REORGANIZATION ITEMS -- 1,180,585
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 128,416 (1,653,895)
INCOME TAX PROVISION/(BENEFIT) 83,503 (27,691)
----------- -----------
NET INCOME (LOSS) $ 44,913 $(1,626,204)
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
B-5
<PAGE>
SURF CITY ACQUISITION CORPORATION II
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE
JANUARY 1, 1997 3,972,200 $ 39,722 $ 7,987,380 $ (9,073,741) $ (1,046,639)
Bankruptcy reorganization (3,972,200) (39,722) 39,722 0
Recapitalization 8,250,000 8,250 791,750 800,000
Net loss (1,626,204) (1,626,204)
------------ ------------ ------------ ------------ ------------
BALANCE
DECEMBER 31, 1997 8,250,000 8,250 8,818,852 (10,699,945) (1,872,843)
Net income 44,913 44,913
------------ ------------ ------------ ------------ ------------
BALANCE
DECEMBER 31, 1998 8,250,000 $ 8,250 $ 8,818,852 $(10,655,032) $ (1,827,930)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
B-6
<PAGE>
SURF CITY ACQUISITION CORPORATION II
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- - --------------------------------------------------------------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 44,913 $(1,626,204)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 9,932 53,952
(Gain) loss on disposal of property
and equipment (97,718) --
Deferred income taxes 83,502 (27,691)
Impairment expense on property and equipment 297,685
Net settlement expense paid by issuance
of note payable 10,419 --
Allowance for doubtful collection on
notes receivable (8,084) 34,989
Changes in assets and liabilities:
Trade and other accounts receivable (21,216) 64,910
Inventories (4,309) 131,574
Refundable lease deposits 64,785 39,562
Prepaids and other current assets 11,122 (21,709)
Accounts payable (100,645) 1,493,910
Accrued liabilities 52,368 879
Deferred franchise fee income (279,432) (169,379)
Deposits (3,248) 11,666
----------- -----------
Net cash (used in) provided by
operating activities (237,611) 284,144
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment -- (387,569)
Collections on notes receivable 348,688 327,207
Proceeds from sale of property and equipment 472,000 40,000
----------- -----------
Net cash provided by (used in)
investing activities 820,688 (20,362)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on notes payable 129,000 --
Principal repayments on notes payable (298,872) (116,720)
Payments on confirmed bankruptcy liabilities (574,231) (993,001)
Proceeds from sale of common stock -- 800,000
----------- -----------
Net cash (used in) financing activities (744,103) (309,721)
----------- -----------
DECREASE IN CASH (161,026) (45,939)
CASH, BEGINNING OF YEAR 180,493 226,432
----------- -----------
CASH, END OF YEAR $ 19,467 $ 180,493
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
B-7
<PAGE>
SURF CITY ACQUISITION CORPORATION II
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- - --------------------------------------------------------------------------------
1998 1997
---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 84,564 $ 69,716
========== ==========
Income taxes paid $ -0- $ -0-
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Sale of property and equipment under notes receivable $ 65,000
==========
Debt for legal settlement $ 10,419
==========
Notes receivable for franchise fees $ 122,386 $ 230,163
========== ==========
Accrued interest added to bankruptcy liabilities $ 36,224
==========
Bankruptcy administrative fees added to long-term
bankruptcy liabilities $1,336,646
==========
The accompanying notes are an integral part of these
consolidated financial statements.
B-8
<PAGE>
SURF CITY ACQUISITION CORPORATION II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- - --------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
Surf City Acquisition Corporation II (the "Company") was formed in 1997 as
a holding company to acquire and recapitalize Surf City Squeeze, Inc., an
entity operating in a Chapter 11 bankruptcy, and other affiliated entities.
Under the confirmed bankruptcy plan, the Company acquired all of the
outstanding interests in: Surf City Squeeze, Inc. ("Surf City"), Surf City
Franchise Corporation ("SCSFC") and Kona Coast Provisions, Inc. ("Kona").
The Company later formed another wholly owned subsidiary in 1998, Malibu
Smoothie Franchising Corporation ("Malibu Smoothie"). The Company, through
its operating subsidiaries, operates and franchises juice bars in the
United States and Canada. The stores are generally located in shopping
malls and health clubs and operate under the name of "Surf City Squeeze".
The accompanying financial statements represent the consolidated financial
position and results of operations of the Company and includes the accounts
and results of operations of the Company and its wholly owned subsidiaries
for the years ended December 31, 1998 and 1997.
The statements of operations and cash flows for the year ended December 31,
1997 reflect the operations of the "debtor-in-possession". Because the
parent company, Surf City Acquisition Corporation II, was formed to acquire
the bankrupt entity, and because the controlling ownership of the operating
companies did not change as a result of the reorganization, the financial
statements are presented as if the parent company had owned and managed the
operating companies for the full year ended 1997. Due to the controlling
ownership of those operating companies effectively remaining with the same
shareholders after the acquisition, the purchase is recorded at the
existing bases of the net assets of the operating companies. There are no
adjustments to reflect the differences between the fair values and book
values of the net assets at the time of the transaction.
Surf City filed its voluntary Chapter 11 bankruptcy petition on January 13,
1997. The bankruptcy plan of reoganization was confirmed on November 18,
1997 to be effective within 45 days after the confirmation date. The only
significant debt discharged was $3,500,000 due to a significant
shareholder. The discharge of that debt had been agreed upon by the
creditor and Surf City prior to the bankruptcy filing. The effect of the
debt forgiveness was therefore recorded prior to 1997. Due to the short
period of time after the 1996 year end to the filing of the bankruptcy
petition, all prepetition liabilities were recorded at the expected amount
of the allowed claims effective December 31, 1996. All allowed claims have
been recorded at the present value of such debts under the payment plans as
outlined by the confirmed bankruptcy plan.
B-9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH includes all short-term highly liquid investments that are readily
convertible to known amounts of cash and have original maturities of three
months or less.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries, Surf City,
SCSFC, Kona and Malibu Smoothie. All significant intercompany accounts and
transactions are eliminated.
INVENTORIES consist primarily of food products, drink mixes, supplements
and supplies. Inventories are recorded at the lower of cost or market on a
first-in, first-out basis.
PROPERTY AND EQUIPMENT is stated at cost less accumulated depreciation.
Depreciation is recorded on a straight-line basis over a period of the
shorter of the applicable lease term or the estimated useful lives of the
assets ranging from 3 to 10 years.
REVENUE RECOGNITION - Initial franchise fees are deferred until
substantially all services and conditions relating to the sale of the
franchise have been performed or satisfied. The Company will finance the
initial franchise fee by taking a note receivable from the franchisee. The
notes receivable are typically payable by the franchisee over five
years.Due to uncertainties relative to the success of these stores and
franchisees, revenue on the financed initial franchise fees is recognized
on an installment basis until 30% of the principal balance of the note is
collected. At that time, the remaining deferred balance is recognized as
revenue.
Fees from Area Development Agreements ("ADA") are recognized as revenue on
a pro rata basis based on the number of stores opened to-date to total
stores to be developed as stipulated in the ADA. If the total number of
stores stipulated in the ADA are not opened at the expiration of the ADA,
the balance of such fees is recognized.
Kona sells mixes and supplements to franchisees. Revenue on such sales is
recognized when the product is shipped. Sales from the Company owned stores
are recognized at the point of sale.
The Company also receives sublease rental income. The Company is the
primary lessee on certain franchised stores. Rental income is recognized
ratably over the term of the subleases.
INCOME TAXES - The Company provides for income taxes based on the
provisions of Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES, which, among other things, requires that
recognition of deferred income taxes be measured by the provisions of
enacted tax laws in effect at the date of financial statements.
FINANCIAL INSTRUMENTS - Financial instruments consist primarily of cash,
accounts receivable, notes receivable, and obligations under accounts
payable, accrued expenses, notes payable and confirmed bankruptcy
obligations. The carrying amounts of cash, accounts receivable, accounts
payable and accrued expenses approximate fair value because of the short
maturity of those instruments. The carrying value of the Company's notes
receivable approximate fair value because they contain market interest
B-10
<PAGE>
rates and allowances are provided for any estimated uncollectible amounts.
The carrying value of notes payable and confirmed bankruptcy obligations
approximate fair value because they contain market value interest rates and
have specified repayment terms. The Company has applied certain assumptions
in estimating these fair values. The use of different assumptions or
methodologies may have a material effect on the estimates of fair values.
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 disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
ADVERTISING EXPENSES are expensed as incurred. Advertising expense was not
significant for the years ended December 31, 1998 and 1997 respectively.
3. BANKRUPTCY PETITION AND REORGANIZATION
On January 13, 1997, Surf City filed a voluntary petition for relief (under
Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of Arizona. The bankruptcy plan was
confirmed by the Court on November 18, 1997 to become effective within 45
days of confirmation (the "Plan").
Surf City's largest single creditor was also a significant shareholder of
Surf City at the time of the bankruptcy. Immediately prior to filing the
bankruptcy petition, Surf City reached an agreement with the creditor for
discharge and settlement of $3,500,000 in debt. As part of that agreement,
the creditor also agreed to provide $800,000 in cash to the Company as
settlement of various claims made against the creditor by the Company. The
Company used the funds as its investment in Surf City and the related
operating subsidiaries. The controlling ownership of Surf City and the
other operating subsidiaries did not change as a result of this
transaction.
Debts that were subject to compromise under the Plan include priority
claims for sales taxes, secured claims from equipment vendors, contractors,
landlords and franchisees, and certain administrative and unsecured claims.
The majority of unsecured claims in the Plan are those commitments of Surf
City for future rents due under real property operating leases. Surf City
rejected certain material operating leases under the Plan. All allowed
claims under the Plan are recorded at the present value of those debts
based on the confirmed repayment terms and discount rates of 8% to 10%.
The allowed General Unsecured Claims under the Plan includes a contingency
for payments based on future cash flow of Surf City and its subsidiaries.
The terms of the repayment of the General Unsecured Claims require minimum
quarterly payments of $43,750 over a seven year period to an Unsecured
Creditors Pool resulting in a minimum of $1,225,000 payable over that seven
year period. In addition, amounts determined as 25% of the first $50,000 of
quarterly Net Cash Flow, as defined in the Plan, and 40% of the quarterly
Net Cash Flow in excess of $50,000 are required to be paid to the Unsecured
Creditors Pool on a quarterly basis. The Company has recorded the General
Unsecured Claims liability at the present value of the 28 quarterly
payments of $43,750. The Plan lists the total General Unsecured Claims to
be $5,000,000 to $6,000,000, but states that much of that estimate includes
B-11
<PAGE>
commitments for future rents on unexpired operating leases which were
rejected by Surf City. The Company believed that it could not reasonably
estimate the amount of those claims at the time of the Plan confirmation
because the damages arising from rejected leases are likely to be reduced
as the locations under those leases are re-leased to new tenants. The
Company also believes that it cannot reasonably estimate the amount of
contingency payments because of uncertainties in Surf City's likelihood to
generate net cash flow and the inability to estimate the timing of any such
Net Cash Flow if it does occur. Surf City has not yet made any contingent
payments to the Unsecured Creditors Pool.
The scheduled repayments of remaining bankruptcy liabilities at December
31, 1998 is as follows:
1999 $ 843,572
2000 216,570
2001 199,548
2002 218,337
2003 224,422
2004 197,120
----------
$1,899,569
==========
The effect of transactions and adjustments related to reorganization
related activities in the statement of operations for the year ended
December 31, 1997 are:
Provision for closed locations and impairment
losses on locations held for sale $ 297,685
Professional fees and other expenses 933,669
Interest income (50,769)
----------
Total reorganization items $1,180,585
==========
Certain store locations were selected for sale. The net book value of the
assets of those locations were written down to a fair value estimated based
on the expected selling price of the stores.
4. NOTES RECEIVABLE
Notes receivable principally result from the financing of the initial
franchise fees required from franchisees and the sale of corporate owned
stores. The notes are generally guaranteed by the franchisee or purchaser
and are collateralized by the related juice bar business, and related
equipment and leasehold improvements. The notes are generally due in
monthly installments of principal and interest with interest at 10% per
annum.
The Company periodically reviews the collectibility of its notes
receivable. Due to matters related to the Surf City bankruptcy, certain
notes were written off or allowances for credit losses were established.
The Company recognizes interest income on notes it has determined to be
impaired only when payments are received.
B-12
<PAGE>
At December 31, 1998, the investment in impaired notes receivable was
$122,550 and the related allowance on that investment was $93,991. The
allowance for credit losses on these impaired notes decreased by $8,084 to
$104,036 and increased by $34,989 to $112,120 for the years ended and at
December 31, 1998 and 1997 respectively. The average balance of impaired
notes receivable was $149,771 and $82,315 for the years ended December 31,
1998 and 1997 respectively. Interest income earned on impaired notes
receivable was $3,375 and $3,263 for the years ended December 31, 1998 and
1997 respectively.
5. NOTES PAYABLE
Notes payable at December 31, 1998 are comprised of the following:
Notes payable to officer and affiliate, no specified
repayment terms, unsecured, no stated rate of interest. $159,166
Notes payable to franchisees in settlement of legal claims.
Repayment terms require $7,500 monthly installments of
principal and interest at 10% per annum through 2002.
Collateralized by royalties and franchise fees of designated
store locations. Original principal balance of notes was
$335,000. 222,379
Note payable to equipment vendor. Payment terms require
monthly installments $7,000 through July 2000. The stated
balance of promissory note is $215,129. A balloon payment
of $71,129 is due July 15, 2000. The promissory note has no
stated interest. The present value of the note was determined
using a discount rate of 10%. Collateralized by certain
royalties and 412,500 shares of the Company's common stock
held by the Company's president. Personally guaranteed by
the Company's president. 169,331
Other miscellaneous notes payable arising from various
settlements. Payment terms vary requiring minimum monthly
installments of principal and interest at 10% per annum of
$10,812 plus royalties earned from two store locations
through 1999. 42,359
--------
Totals 593,235
Less current portion (332,877)
--------
Long-term portion $260,358
========
One note payable, with a principal balance of $13,282 at December 31, 1998
was settled for a single payment $10,000 in 1999.
B-13
<PAGE>
Principal payments due in years ended December 31:
1999 $ 332,877
2000 187,321
2001 66,243
2002 6,794
----------
Total $ 593,235
==========
The fair value of the related party notes payable could not be estimated
due to the related nature of the notes and the unspecified repayment terms.
There were no interest payments on the related party notes in the years
ended December 31, 1998 and 1997. Significant royalty income generated by
the Company is pledged as collateral on certain of the above notes.
6. INCOME TAXES
The Company recognizes deferred income taxes for the differences between
financial accounting and tax bases of assets and liabilities. Income taxes
for the years ended December 31, consisted of the following:
1998 1997
--------- ---------
Current tax (benefit) provision $(102,453) $(737,364)
Deferred tax (benefit) provision 185,956 709,673
--------- ---------
Total income tax (benefit) provision $ 83,503 $ (27,691)
========= =========
Deferred tax assets of $3,439,913 less a valuation allowance of $2,947,248,
relate to net operating loss carryforwards and differences in book and tax
bases of property and equipment and notes receivable. The valuation
allowance was increased by $31,094 and $666,633 for the years ended
December 31, 1998 and 1997 respectively. The net deferred income tax asset
at December 31, 1998 is comprised of:
Allowance for losses on notes receivable $ 35,375
Write-down of property and equipment on closed locations 38,948
Net operating loss carryforwards 3,365,590
----------
Total deferred income tax asset 3,439,913
Less: valuation allowance (2,947,248)
Net deferred income tax asset $ 492,665
==========
Federal net operating loss carryforwards of $8,323,000 expire from 2010
through 2018. State net operating loss carryforwards of $8,323,000 expire
from 2000 through 2003.
B-14
<PAGE>
The differences between the statutory and effective tax rates is as
follows:
1998 1997
--------------------- ----------------------
Federal statutory rates $ 33,333 26% $(562,324) (34)%
State income taxes 10,723 8% (132,312) (8)%
Valuation allowance
for operating loss
carryforwards 31,094 24% 666,633 40%
Other 8,353 7% 312 --%
--------- --------- --------- ---------
Effective rate $ 83,503 65% $ (27,691) (2)%
========= ========= ========= =========
Income taxes for the year ended December 31, 1998 reflect a reversal of
certain temporary differences that reduced the net deferred income tax
asset as well as an increase in the valuation allowance for uncertainties
relative to the future utilization of net operating loss carryforwards.
7. LEASES
The Company is the primary lessee on most of its franchised stores under
long-term operating leases. The leases generally have initial terms of five
to seven years and usually provide for renewal options ranging from five to
seven additional years. These operating leases expire at various dates
through 2006. Most of the leases contain escalation clauses and common area
maintenance charges. The Company sublease the store locations to
franchisees. There were approximately 70 leases under these terms at
December 31, 1998. The Company records rent expense and sublease rental
income only on locations at a certain health club chain because the Company
is directly responsible for payment to the landlord and collection from the
franchisee. On other store locations, the franchisees have direct
responsibility for payment to the lessor. Rent expense under the leases in
which the Company is directly responsible, including corporate owned
stores, was $557,008 and $863,076 for the years ended December 31, 1998 and
1997 respectively. Sublease rental income under these leases was $404,233
and $591,963 for the years ended December 31, 1998 and 1997 respectively.
The Company also leases its offices and warehouses under long-term
operating leases expiring through 2001. Rent expense under these leases was
$98,008 and $65,518 for the years ended December 31, 1998 and 1997
respectively.
Future minimum annual lease payments and sublease rentals under operating
lease agreements for years ended December 31 are:
Sublease Warehouse
Store Leases Rental and Office
----------- ----------- -----------
1999 $ 2,482,031 $ 2,523,144 $ 113,640
2000 2,557,935 2,579,895 72,542
2001 2,579,834 2,587,724 29,604
2002 2,809,675 2,813,175 --
2003 1,749,432 1,749,432 --
Thereafter 2,451,884 2,451,884 --
----------- ----------- -----------
$14,630,791 $14,705,254 $ 215,786
=========== =========== ===========
B-15
<PAGE>
8. STOCKHOLDERS' DEFICIT
The Company issued 825,000 shares of its common stock for $800,000 in the
year ended December 31, 1997.
As part of a settlement with a former creditor, the Company issued warrants
to purchase 175,000 shares of its common stock in the year ended December
31, 1997. The exercise price of the warrants is $0.01 per share. Subsequent
to December 31, 1998, the warrants were exercised.
9. SUBSEQUENT EVENTS
On March 15, 1999, the Company exchanged all of its common stock for
575,000 shares of Series A Convertible Preferred Stock ("Series A
Preferred") of Sports Group International, Inc. ("SPGK") resulting in the
Company and its subsidiaries becoming wholly owned subsidiaries of SPGK.
The Series A Preferred has voting rights and is convertible at a ratio that
effectively results in the controlling interest of SPGK belonging to the
shareholders of the Company at the time of the transaction. Additionally,
the Company's management and board of directors became the new management
of SPGK. SPGK had no material assets or operations at the time of the
transaction.
On February 22, 1999, SPGK borrowed $332,500 under a promissory note from a
significant shareholder. The promissory note is personally guaranteed by
the shareholders and officers of the Company.
On May 21, 1999, SPGK issued 650,000 shares of its Series B Convertible
Preferred Stock for $6,500,000. The proceeds were used to acquire all of
the issued and outstanding stock of Selman Systems, Inc. ("Selman"), an
operator and franchisor of a chain of cafes and bakeries under the name of
Frullati Cafe and Bakery ("Frullati").
On July 7, 1999, SPGK, through Selman, purchased all of the outstanding
stock of Fru-Cor, Inc., an owner of eight Frullati locations. The purchase
was effected through the issuance of a promissory note for $1,200,000. The
note is due on May 20, 2000.
10. COMMITMENTS AND CONTINGENCIES
As discussed in Note 5, certain of the Company's notes payable are
collateralized by revenue generated from franchise fees and royalties.
As discussed in Note 3, there are contingent amounts payable to an
Unsecured Creditors Pool subject to quarterly cash flows through 2004.
B-16
<PAGE>
Surf City is involved in litigation with three landlords. The landlords
sought claims of $76,000 plus expenses. In September, 1999, the Bankruptcy
Court ruled that the landlords were bound by the Plan. However, the
landlords amended their claim to $41,000 and the Company believes that it
may owe approximately $37,000. The $37,000 was accrued by the Company at
December 31, 1998 but payment of such is pending final decision from the
Court.
A party has filed a complaint against SCSFC alleging that SCSFC is liable
for certain debts of Surf City discharged in bankruptcy. The Company
believes that all amounts billed by this party were paid. In 1997, an
arbitrator ruled that SURF CITY owed the party approximately $126,000,
including attorneys' fees. The award was considered an unsecured claim in
the bankruptcy. The party has attempted to include SCSFC as a creditor
under the claim but the attempts have been denied by the arbitrator and a
motion for summary judgement filed by the party in Orange County Superior
Court to enforce the award has also been denied. The matter is set for
trial in early 2000. The Company intends to defend its position. However,
management and the Company's counsel believe it is not yet possible to
determine the likelihood or extent of any unfavorable outcome.
The Company may be subject to other claims as a result of its merger with
SPGK and Frullati (see Note 9).
SPGK has been named in a lawsuit by a third party alleging that SPGK
breached its merger agreement with the third party. SPGK has responded that
the third party failed to meet certain conditions required under the merger
agreement and that it had notified the third party that the merger was
properly terminated. The third party seeks unspecified damages. SPGK
believes that it has adequate defenses but that the case has not proceeded
to a point where the outcome can be estimated. There are claims made
against this third party by others that, based on the outcome of this case,
may have an effect on SPGK.
A franchisee of Frullati has sued for breach of contract and related causes
of action is seeking approximately $400,000 in damages. The claim stems
from alleged cost overruns in the construction of two Frullati stores that
the franchisee believes payment for such are the responsibility of Selman
or its subsidiaries. Frullati has filed a counter claim against the
franchisee. Management and the Company's counsel believe it is not yet
possible to determine the likelihood or extent of any unfavorable outcome.
11. RELATED PARTY TRANSACTIONS
The Company's officers and stockholders have personally guaranteed certain
of the Company's operating leases. The Company's president is named as the
lessee on the lease of one of the Company's warehouse leases.
As discussed in Note 5, the Company has debt due to related parties and
certain debt includes a personal guarantee and pledge of common stock owned
by the Company's president.
B-17
<PAGE>
12. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily notes receivable and trade
accounts receivable. The trade accounts receivable are due primarily from
franchisees in numerous geographical locations in the United States. The
Company has not historically experienced material losses due to
uncollectible trade accounts receivable.
The Company's notes receivable are generally due from franchisees and are
guaranteed by the franchisee and collateralized by leasehold improvements
and rights under the franchise agreement. The Company has experienced
credit losses under notes receivable and has generally foreclosed on the
related stores and attempted to re-franchise those locations. The notes
receivable balance at December 31, 1998 is comprised of numerous debtors.
One of which represents approximately 15% of the total balance at December
31,1998. No other single note or debtor comprises greater than 10% of the
total balance at December 31, 1998.
* * * * * *
B-18
<PAGE>
SELMAN SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 27, 1998
C-1
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
PAGE
----
Report of Independent Accountants C-3
Consolidated Financial Statements
Consolidated Balance Sheet C-4
Consolidated Statement of Income and Retained Earnings C-5
Consolidated Statement of Cash Flows C-6
Notes to Consolidated Financial Statements C-7
C-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of
Selman Systems, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Selman
Systems, Inc. and its subsidiaries at December 27, 1998, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
June 11, 1999
C-3
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 27, 1998
- - --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 179,635
Certificate of deposit 64,492
Accounts and notes receivable
(net of allowance of $46,635) 210,322
Income tax refund receivable 23,390
Inventories 125,603
Prepaid expenses and other current assets 85,094
Deferred income tax asset 51,771
----------
Total current assets 740,307
Property and equipment, net 3,084,220
Long-term receivables 23,011
Other assets 15,745
----------
Total assets $3,863,283
----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 790,650
Accrued liabilities 303,198
Deferred revenue 93,400
Current portion of long-term debt 147,565
Due to related parties 132,606
----------
Total current liabilities 1,467,419
Deferred rent 34,333
Long-term debt 457,234
Deferred income tax payable 250,361
----------
Total liabilities 2,209,347
Commitments and contingencies (Note 4)
Stockholder's equity:
Common stock, at $1.00 par value, 1,000 shares
authorized; 1,000 shares issued and outstanding 1,000
Additional paid-in capital 100,000
Retained earnings 1,552,936
----------
Total stockholder's equity 1,653,936
----------
Total liabilities and stockholder's equity $3,863,283
==========
The accompanying notes are an integral part of these
consolidated financial statements.
C-4
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 27, 1998
- - --------------------------------------------------------------------------------
Revenues:
Store sales $ 12,148,375
Franchise royalties 952,779
Initial franchise and development fees 320,537
Other income 95,506
------------
Total revenues 13,517,197
Operating expenses:
Compensation 4,032,835
Cost of sales 3,664,796
Selling, general and administration 2,878,973
Occupancy 2,425,680
Depreciation and amortization 558,725
------------
Total operating expenses 13,561,009
------------
Operating loss (43,812)
Other income:
Gain on sale of property and other assets 213,314
Interest and other income 26,511
Interest expense (75,187)
------------
Total other income 164,638
------------
Income before income taxes 120,826
Provision for income taxes 98,067
------------
Net income 22,759
Retained earnings at beginning of year 1,530,177
------------
Retained earnings at end of year $ 1,552,936
============
The accompanying notes are an integral part of these
consolidated financial statements.
C-5
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 27, 1998
- - --------------------------------------------------------------------------------
Operating activities:
Net income $ 22,759
Noncash items in net income:
Depreciation and amortization 558,725
Gain on sale of property and other assets (213,314)
Change in deferred rent 10,423
Deferred income taxes (12,617)
Cash from (used for) changes in operating working capital:
Accounts and notes receivable 238,246
Inventories 3,657
Prepaid expenses and other assets (91,846)
Accounts payable and accrued liabilities (120,397)
Deferred revenue 73,400
---------
Net cash provided by operating activities 469,036
---------
Investing activities:
Purchases of property and equipment (904,636)
Proceeds from sales of property and equipment 547,022
---------
Net cash used in investing activities (357,614)
---------
Financing activities:
Net repayments of bank line of credit (85,210)
Proceeds from notes payable to bank 61,794
Repayments of notes payable to bank (26,929)
Proceeds from notes payable to related parties 20,000
Repayments of notes payable to related parties (168,545)
---------
Net cash used in financing activities (198,890)
---------
Net decrease in cash (87,468)
Cash and cash equivalents, beginning of year 267,103
---------
Cash and cash equivalents, end of year $ 179,635
=========
Supplemental cash flow disclosures:
Cash paid for income taxes $ 131,847
=========
Cash paid for interest $ 74,418
=========
Noncash transactions:
Receipt of note for equipment $ 45,000
=========
The accompanying notes are an integral part of these
consolidated financial statements.
C-6
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Selman
Systems, Inc. and its wholly-owned subsidiaries, Frullati Enterprises,
Inc., Frullati Franchise Systems, Inc., Frullati, Inc., and Frullati
Systems, Inc. (collectively, the "Company"). All material intercompany
balances and transactions have been eliminated.
The Company operates restaurants under the name of "Frullati Cafe," which
serve fruit smoothie drinks, along with sandwich and salad items. The
Company currently operates 30 stores in 11 states (Arkansas, Florida,
Indiana, Kentucky, Louisiana, Minnesota, Missouri, North Carolina, Ohio,
Texas and Virginia). Additionally, the Company franchises its operations,
with 55 franchise locations in operation at year-end.
FISCAL PERIOD
The fiscal period of the Company is based on a 52- and 53-week calendar,
which ends on the Sunday closest to December 31.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingencies at the date of the financial statement and the
reported amounts of revenues and expenses for the period. Actual results
could subsequently differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all cash on hand and in banks, and highly liquid
investments with original maturities of three months or less, to be cash
and cash equivalents.
CERTIFICATE OF DEPOSIT
The certificate of deposit is a time deposit at a bank which is due on June
12, 1999, and bears interest at 4.3% per annum.
REVENUE RECOGNITION
Franchise royalties are recognized as earned.
Initial franchise and development fees are recognized upon fulfillment of
all significant obligations to the franchisee.
Revenues from store sales are recognized at the point of sale.
C-7
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
INVENTORIES
Inventory consists primarily of food and service items and is stated at the
lower of cost or market. Inventory costs are determined using the average
cost method, the use of which approximates the first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and is depreciated on a
straight-line basis, over the estimated useful life of the respective
asset. Leasehold improvements are depreciated over the estimated useful
life or the term of the related lease, whichever is shorter. Major
additions and betterments are capitalized and depreciated over the
remaining estimated useful life of the related asset. Maintenance, repairs,
and minor improvements are charged to expense as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses long-lived assets (primarily property and equipment)
for impairment whenever there is an indication that the carrying amount of
the asset may not be recoverable. Recoverability of these assets is
determined by comparing the forecasted undiscounted cash flows generated by
those assets to the assets' net carrying value. The amount of impairment
loss, if any, is measured as the difference between the net book value of
the assets and the estimated fair value of the related assets. Assets held
for sale are recorded at fair value less selling costs.
During the year ended December 27, 1998, the Company determined that it
would dispose of four of its company-owned stores. The Company expects to
sell these stores during 1999. The assets were written down to fair value
less selling costs based on the estimated selling prices of the individual
stores. An impairment loss of $145,031 has been recorded to the
accompanying income statement and is included in depreciation expense.
Additionally, the net loss resulting from the operations of these stores in
the amount of $136,220 is included in the accompanying income statement.
DEFERRED RENT
Deferred rent represents the difference between rent paid on a cash basis
and rent amortized equally over the lease period for financial statement
purposes.
INCOME TAXES
Income taxes are recorded based on the liability method of accounting.
Deferred income taxes are recorded to reflect the tax benefit and
consequences of future years' differences between the tax bases of assets
and liabilities and their financial reporting basis. The Company records a
valuation allowance to reduce deferred tax assets if it is more likely than
not that some portion or all of the deferred tax assets will not be
realized.
C-8
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 27, 1998, the Company's carrying value of financial instruments
approximates fair value due to the short maturities of these instruments or
variable or market rates of interest. During 1998, no financial instruments
were held or issued for trading purposes.
ADVERTISING EXPENSES
Advertising costs are expensed as incurred. Advertising expense for 1998
was $282,993.
START-UP COSTS
In April 1998, the AICPA issued Statement of Position 98-5, REPORTING ON
THE COSTS OF START-UP ACTIVITIES ("SOP 98-5"). SOP 98-5 becomes effective
for all fiscal years beginning after December 15, 1998. The Company's
current policy falls within the guidelines of SOP 98-5.
2. FRANCHISE OPERATIONS
The Company charges a nonrefundable initial franchise fee of $20,000 for
the right to establish a single cafe. An existing franchisee may purchase
the right to establish additional cafes for a reduced fee of $17,500 which
includes a $5,000 nonrefundable deposit per location. The Company provides
one on-site evaluation of the proposed site and initial training to the
cafe's operating principal or general manager at no additional charge. As
of December 27, 1998, the Company had substantially performed all of the
significant commitments and obligations related to all new franchises, with
the exception of five. As a result, the accompanying balance sheet reflects
deferred revenue of $93,400 at December 27, 1998. The Company fulfilled its
commitments and recognized this revenue in the first quarter of 1999.
Under the terms of the franchise agreements, the Company has no obligation
to refund any part of either the initial franchise fee or any development
fee if the franchise agreement is terminated at any time by either the
Company or the franchisee.
The Company experienced the following changes in the ownership of
franchises for the year ended December 27, 1998:
Number of franchised cafes in operation at December 28, 1997 49
Number of new franchises sold during year 7
Number of franchises closed during year (1)
------
Number of franchised cafes in operation at December 27, 1998 55
======
C-9
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Useful December 31,
Life 1998
------ -----------
Leasehold improvements 10 $ 2,164,413
Store fixtures, equipment and furniture 10 1,727,277
Assets held for sale 213,039
Truck and autos 5 17,412
Construction-in-progress 84,735
-----------
Total 4,206,876
Less accumulated depreciation (1,122,656)
-----------
Property and equipment, net $ 3,084,220
===========
Depreciation expense for the year ended December 27, 1998 was $557,650.
4. LEASE COMMITMENTS
The Company leases certain of its store facilities pursuant to
noncancelable operating leases that expire at various times through 2007.
The Company also leases store facilities which are operated by and
subleased to franchisees. Future minimum lease payments under the operating
leases are as follows:
FISCAL YEARS ENDING DECEMBER:
1999 $ 3,241,140
2000 3,205,814
2001 3,194,803
2002 3,136,728
2003 3,077,776
Thereafter 8,077,938
-----------
Total $23,934,199
===========
The total future minimum lease payments exclude expense reimbursements to
lessors, as well as contingent rentals which are based upon sales volume.
Lease agreements frequently require the Company to pay utilities, taxes,
insurance and maintenance related to the property. Rent expense in 1998
(net of sublease payments by franchisees) was approximately $2,418,739, of
which approximately $400,796 was contingent rent.
Deferred rent of $34,333 has been recorded to account for rent expenses on
a straight-line basis over the lease term, where lease payments are not
made on such basis.
C-10
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
Future minimum lease payments receivable under subleases to franchisees are
as follows (which are included in the minimum lease obligations listed
above):
FISCAL YEARS ENDING DECEMBER:
1999 $ 2,184,339
2000 2,208,852
2001 2,212,167
2002 2,157,199
2003 2,149,095
Thereafter 5,463,828
-----------
$16,375,480
===========
5. DEBT
December 27,
DESCRIPTION OF DEBT 1998
----------
Note payable to bank; interest at 10.5%; due
in monthly installments through September 2003;
collateralized by equipment, common stock,
intangibles and other $ 553,573
Note payable to creditor, interest at 6.99%;
due August 1999. 51,226
Revolving line of credit, variable interest rates
(10.5% at December 27, 1998); due February 1999,
collateralized by certificate of deposit. --
----------
604,799
Less: current portion 147,565
----------
$ 457,234
==========
Total long-term maturities in 2000, 2001, 2002 and 2003 are $106,427,
$117,572, $129,883 and $103,352, respectively.
C-11
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. INCOME TAXES
December 27,
1998
----------
Deferred tax assets:
Current:
Deferred revenue $ 34,530
Reserves for bad debt 17,241
----------
Total current deferred tax assets 51,771
Noncurrent:
Deferred rent 12,693
Net operating loss carryforwards (state) 64,538
----------
Total deferred tax assets 129,002
Less: valuation allowance (64,538)
----------
Net deferred tax assets 64,464
----------
Deferred tax liabilities:
Noncurrent:
Book-tax basis differences in fixed assets (18,086)
Deferred gain on sale of assets (244,968)
----------
Total deferred tax liabilities (263,054)
----------
Net deferred tax liabilities $ (198,590)
==========
Net operating loss carryforwards in the amount of $64,538 are attributable
to Frullati Enterprises, Inc. and Frullati Systems, Inc., both of which
have recorded cumulative taxable losses through December 27, 1998. For
state tax purposes, the net operating losses generated by various legal
entities cannot offset taxable income from income generating entities for
the current year. Certain states do not allow consolidated or combined
filings for state income tax purposes. A valuation allowance has been
provided related to these state net operating loss carryforwards as the
Company believes that it is more likely than not that these tax benefits
will not be realized.
The components of income tax expense for the year ended December 27, 1998
are as follows:
Current:
Federal $ 37,577
State 73,107
---------
110,684
---------
Deferred (12,617)
---------
$ 98,067
=========
C-12
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
The Company's income tax expense for the year ended December 27, 1998
differed from the statutory federal rate of 34% as follows:
Statutory rate applied to earnings before income taxes $ 41,081
Increase in income taxes resulting from:
State income taxes 46,334
Non-deductible meal and entertainment expense 8,792
Other 1,860
---------
Income tax expense $ 98,067
---------
7. RETIREMENT PLAN
During 1998, the Company began offering its employees the option of
participating in a 401(k) savings plan (the "Plan"). Employees are eligible
to participate in the Plan upon reaching the age of 21 and upon completion
of six months of service. The Company currently matches 25% of the first 6%
of an employee's contribution to the Plan. During the year ended December
27, 1998, matching contributions to the Plan were $5,254. Also during the
year ended December 27, 1998, the Company paid $3,307 of expenses on behalf
of the Plan.
8. RELATED PARTY TRANSACTIONS
Included in due to related parties is an amount owed to an affiliated
entity, Continental Realty, Inc. ("CRI"), as compensation for management
services provided to the Company through June 15, 1998, the termination
date of the agreement. CRI is owned by the Company's stockholder. The
remaining unpaid balance at December 27, 1998 is $131,186.
9. SUBSEQUENT EVENTS
On April 9, 1999, the Company and its parent and affiliates were acquired
by Fru-Cor, Inc. In connection with this acquisition, amounts due to
related parties were paid in full.
Subsequently on May 20, 1999, the Company and its parent and affiliates
were acquired by Sports Group International, Inc.
C-13
<PAGE>
FRU-COR, INC.
FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1998
AND INDEPENDENT AUDITORS' REPORT
D-1
<PAGE>
FRU-COR, INC.
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
PAGE
----
INDEPENDENT AUDITORS' REPORT D-3
FINANCIAL STATEMENTS AS OF DECEMBER 27, 1998:
Balance Sheet D-4
Statement of Operations D-5
Statement of Stockholders' Equity D-6
Statement of Cash Flows D-7
NOTES TO FINANCIAL STATEMENTS D-8
D-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Fru-Cor, Inc.:
Scottsdale, Arizona
We have audited the accompanying consolidated balance sheet of Fru-Cor, Inc.
(the "Company"), as of December 27, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the period
July 1, 1998, date of inception, through December 27, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Fru-Cor, Inc. at December 27, 1998, and the consolidated results of its
operations and its cash flows for the period July 1, 1998, date of inception,
through December 27, 1998, in conformity with generally accepted accounting
principles.
/s/ KING, WEBER & ASSOCIATES, P.C.
Tempe, Arizona
December 6, 1999
D-3
<PAGE>
FRU-COR, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 27, 1998
- - --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 248,406
Inventories 25,301
Prepaid expenses and other assets 3,923
-----------
Total current assets 277,630
PROPERTY AND EQUIPMENT, net 688,743
DEFERRED INCOME TAXES 14,698
DEFERRED DEVELOPMENT AND FRANCHISE FEES 164,120
GOODWILL 52,834
-----------
TOTAL ASSETS $ 1,198,025
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 93,480
Accrued liabilities 63,524
Payable to franchisor 21,240
-----------
Total current liabilities 178,244
-----------
DEFERRED RENT 20,590
-----------
Total liabilities 198,834
-----------
STOCKHOLDERS' EQUITY:
Common stock, no par value, 1,200,000 shares
authorized, 1,200,000 issued and outstanding 1,200,000
Accumulated deficit (200,809)
-----------
Total stockholders' equity 999,191
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,198,025
===========
The accompanying notes are an integral part of these
consolidated financial statements.
D-4
<PAGE>
FRU-COR, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD JULY 1, 1998, (DATE OF INCEPTION) THROUGH
DECEMBER 27, 1998
- - --------------------------------------------------------------------------------
REVENUES:
Net product sales $ 761,976
---------
EXPENSES:
Cost of product sales 231,697
Store operating costs 61,466
Personnel expenses 327,373
Rent 191,470
Depreciation 35,628
Royalties and franchising expense 60,288
General and administrative expenses 71,553
---------
Total expenses 979,475
---------
OPERATING LOSS (217,499)
---------
OTHER (INCOME) AND EXPENSES
Interest expense 209
Interest income (426)
Other income (1,775)
---------
Total other expense (1,992)
---------
LOSS BEFORE INCOME TAXES (215,507)
INCOME TAX BENEFIT 14,698
---------
NET (LOSS) $(200,809)
=========
The accompanying notes are an integral part of these
consolidated financial statements.
D-5
<PAGE>
FRU-COR, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JULY 1, 1998, (DATE OF INCEPTION) THROUGH
DECEMBER 27, 1998
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
-------------------------- Accumulated
Shares Amount Deficit Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE
JULY 1, 1998 -- $ -- $ -- $ --
Common stock issued for cash 1,200,000 1,200,000 1,200,000
Net loss (200,809) (200,809)
----------- ----------- ----------- -----------
BALANCE
DECEMBER 27, 1998 1,200,000 $ 1,200,000 $ (200,809) $ 999,191
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
D-6
<PAGE>
FRU-COR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD JULY 1, 1998, (DATE OF INCEPTION) THROUGH DECEMBER 27, 1998
- - --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (200,809)
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
Depreciation and amortization 36,752
Deferred income taxes (14,698)
Changes in assets and liabilities:
Inventories (25,301)
Prepaids and other current assets (3,923)
Deferred development fees (164,120)
Accounts payable 93,480
Accrued liabilities 63,524
Payable to franchisor 21,240
Deferred rent 20,590
-----------
Net cash (used in) operating activities (173,265)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (585,204)
Proceeds from sale of property and equipment (193,125)
-----------
Net cash (used in) investing activities (778,329)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 1,200,000
-----------
Net cash provided by financing activities 1,200,000
-----------
DECREASE IN CASH 248,406
CASH, BEGINNING OF PERIOD --
-----------
CASH, END OF PERIOD $ 248,406
===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 209
===========
Income taxes paid $ -0-
===========
The accompanying notes are an integral part of these
consolidated financial statements.
D-7
<PAGE>
FRU-COR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD JULY 1, 1998, (DATE OF INCEPTION) THROUGH DECEMBER 27, 1998
- - --------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
Fru-Cor, Inc. (the "Company") was formed in 1998 to acquire and operate, as a
franchisee, cafes and bakeries under the name of Frullati Cafe and Bakery
("Frullati"). At December 27, 1998, the Company owned and operated seven
Frullati stores in Texas, Lousiana and Mississippi. The stores are generally
located in shopping malls. In the period ended December 27, 1998, the Company
acquired all of the outstanding voting stock of Texas Class, Inc. ("TCI"), the
owner and operator of a single Frullati location an Abilene, Texas. The
accompanying financial statements represent the consolidated financial position
and results of operations of the Company and includes the accounts and results
of operations of the Company for the period July 1, 1998 (date of inception)
through December 27, 1998 and its wholly owned subsidiary, TCI for the period
August 4, 1998 (date of acquisition) through December 27, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH includes all short-term highly liquid investments that are readily
convertible to known amounts of cash and have original maturities of three
months or less.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, TSI. All
significant intercompany accounts and transactions are eliminated.
INVENTORIES consist primarily of food products, drink mixes, supplements
and supplies. Inventories are recorded at the lower of cost or market on a
first-in, first-out basis.
PROPERTY AND EQUIPMENT is stated at cost less accumulated depreciation.
Depreciation is recorded on a straight-line basis over a period of the
shorter of the applicable lease term or the estimated useful lives of the
assets ranging from 3 to 10 years. Maintenance, repairs and minor
improvements are expensed as incurred.
REVENUE RECOGNITION - Sales from the Company owned stores are recognized at
the point of sale.
INCOME TAXES - The Company provides for income taxes based on the
provisions of Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES, which, among other things, requires that
recognition of deferred income taxes be measured by the provisions of
enacted tax laws in effect at the date of financial statements.
ADVERTISING EXPENSES are expensed as incurred. Advertising expense was
$3,447 for the period ended December 27, 1998.
D-8
<PAGE>
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 disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
FINANCIAL INSTRUMENTS - At December 27, 1998, the Company's carrying value
of financial instruments approximates fair value due to the short term
maturities of those instruments. The Company held no financial instruments
for trading purposes at December 27, 1997.
DEFERRED DEVELOPMENT AND FRANCHISE FEES are payments made to the franchisor
which are amortized over the initial term of the related agreements of
typically ten years.
GOODWILL is recorded for the difference between the purchase price of the
acquired business and the fair value of the identifiable net assets.
Goodwill is amortized on a straight-line basis over 20 years.
3. STOCKHOLDERS' EQUITY
The Company issued 1,200,000 shares of its common stock for $1,200,000 as
its initial capitalization.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 27, 1998:
Leasehold improvements $ 199,663
Store fixtures, equipment and furnishings 519,120
Construction-in-progress 5,588
-----------
Total 724,371
Less accumulated depreciation (35,628)
-----------
Property and equipment, net $ 688,743
===========
5. BUSINESS COMBINATION
On August 4, 1998, the Company acquired all of the outstanding common stock
of Texas Class, Inc. ("TSI"). TSI is the franchisee, owner and operator of
one Frullati store in Abilene, Texas. The Company paid cash of $193,125 to
the shareholders of TSI. The acquisition was recorded under the purchase
method of accounting. The aggregate purchase price has been allocated to
the assets acquired and liabilities assumed based on their respective fair
values at the date of acquisition. The excess consideration paid over the
fair market value of the net assets acquired is recorded as goodwill. The
operating results of TSI are included in the accompanying consolidated
financial statements for the period August 4, 1998 through December 27,
1998. Due the short intervening period between the date of commencement of
the Company's operations and the acquisition of TSI the consolidated
operation results of the Company would not have been materially different
had the acquisition of TSI occurred on July 1, 1998.
D-9
<PAGE>
6. INCOME TAXES
The Company recognizes deferred income taxes for the differences between
financial accounting and tax bases of assets and liabilities. Income taxes
for the period July 1, 1998 (date of inception) through December 28, 1998
consisted of the following:
Current tax (benefit) provision $ (50,763)
Deferred tax (benefit) provision 36,065
---------
Total income tax (benefit) $ (14,698)
=========
Deferred tax assets of $65,862 less a valuation allowance of $50,763,
relate primarily to net operating loss carryforwards and differences in
book and tax bases of property and equipment and deferred rent. The net
deferred income tax asset at December 31, 1998 is comprised of:
Difference in tax and book bases of property and equipment $ 8,098
Difference in tax and book bases of goodwill (401)
Deferred rent 7,001
Net operating loss carryforwards 50,763
----------
Total deferred income tax asset 65,461
Less: valuation allowance (50,763)
----------
Net deferred income tax asset $ 14,698
==========
Federal net operating loss carryforwards of $173,000 expire through 2018.
Due to the change in control of the Company discussed in Note 8, future
utilization of the net operating losses may be restricted.
The differences between the statutory and effective tax rates is as
follows:
Federal statutory rates $(64,652) (30)%
Valuation allowance for operating loss carryforwards 50,763 23%
Other (809) --%
-------- -----
Effective rate $(14,698) (7)%
======== =====
7. LEASES
The Company leases its stores under long-term operating leases. The leases
generally have initial terms of five to seven years and usually provide for
renewal options ranging from five to seven additional years. These
operating leases expire at various dates through January 31, 2009. Most of
the leases contain escalation clauses and common area maintenance charges.
The Company records rent expense on a straight-line basis over the original
term of the lease. Rent expense under these operating leases was $191,470.
for the period July 1, 1998 (date of inception) through December 28, 1998.
D-10
<PAGE>
Future minimum annual lease payments and sublease rentals under operating
lease agreements for years ended December 31 are:
1999 $ 332,230
2000 339,480
2001 340,480
2002 350,313
2003 352,480
Thereafter 1,134,622
----------
$2,852,605
==========
8. SUBSEQUENT EVENTS
Subsequent to December 27, 1998, the Company enter into and agreement to
acquire all of the issued and outstanding stock of Selman Systems, Inc.
("Selman"), an operator and franchisor of a chain of cafes and bakeries
under the name of Frullati Cafe and Bakery ("Frullati"). That transaction
was later rescinded when Selman agreed to be acquired by Sports Group
International, Inc. ("SPGK"). On July 7, 1999, all of the outstanding
common stock of the Company was acquired by Selman through the issuance by
Selman of $1,200,000 note payable. The Company became a wholly owned
subsidiary of Selman, which is a wholly owned subsidiary of SPGK.
9. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at banks in Texas and Louisiana.
Accounts are insured by the Federal Deposit Insurance Corporation up to
$100,000. At December 27, 1998, the Company's uninsured bank balances total
$14,287.
* * * * * *
D-11
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Financial Statements
Fifty-Two Weeks Ended December 28, 1997, and
Supplemental Schedules
E-1
<PAGE>
SELMAN SYSTEMS, INC.
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
PAGE
----
FINANCIAL STATEMENTS AS OF DECEMBER 27, 1997:
Consolidated Balance Sheet E-3
Consolidated Statement of Operations E-4
Consolidated Statement of Stockholders' Equity E-5
Consolidated Statement of Cash Flows E-6
NOTES TO FINANCIAL STATEMENTS E-7
E-2
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 28, 1997
- - --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 267,103
Certificate of deposit 64,492
Accounts and notes receivable (Net of
allowance for bad debts of $35,000) 433,246
Inventories 129,261
Deferred income tax asset 12,765
----------
Total current assets 906,867
PROPERTY AND EQUIPMENT - Net 3,115,942
OTHER ASSETS 13,069
----------
TOTAL $4,035,878
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $1,468,455
Note payable to bank 574,265
Notes payable to shareholder 94,098
Deferred revenue 20,000
----------
Total current liabilities 2,156,818
DEFERRED RENT EXPENSE 23,910
DEFERRED INCOME TAX LIABILITIES 223,972
----------
Total liabilities 2,404,700
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, at stated value, 1,000 shares authorized; 1,000
1,000 shares issued and outstanding
Additional paid-in capital 100,000
Retained earnings 1,530,178
----------
Total shareholder's equity 1,631,178
----------
TOTAL $4,035,878
==========
See notes to consolidated financial statements.
E-3
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FIFTY-TWO WEEKS ENDED DECEMBER 28, 1997
- - --------------------------------------------------------------------------------
REVENUES:
Store sales $10,602,472
Franchise royalties 814,621
Initial franchise and development fees 334,543
-----------
Total revenues 11,751,636
COST OF SALES 6,007,347
-----------
GROSS PROFIT 5,744,289
OPERATING EXPENSES:
Selling and administrative expenses 5,223,950
Management fee to affiliate 175,010
-----------
Total operating expenses 5,398,960
-----------
OPERATING INCOME 345,329
OTHER INCOME:
Gain on sale of property and other assets 45,039
Other income 24,774
-----------
Total other income 69,813
-----------
INCOME BEFORE PROVISION FOR INCOME TAXES 415,142
PROVISION FOR INCOME TAXES 169,421
-----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 245,721
CUMULATIVE EFFECT ON PRIOR YEARS (TO DECEMBER 29, 1996) OF
CHANGING TO A DIFFERENT DEPRECIATION METHOD (Note 2) 78,774
-----------
NET INCOME $ 324,495
===========
See notes to consolidated financial statements.
E-4
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
FIFTY-TWO WEEKS ENDED DECEMBER 28, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Pain-in Retained
Shares Amount Capital Earnings Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 29, 1996 1,000 $ 1,000 $ 100,000 $1,205,683 $1,306,683
Net income 324,495 324,495
---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 28, 1997 1,000 $ 1,000 $ 100,000 $1,530,178 $1,631,178
========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
E-5
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FIFTY-TWO WEEKS ENDED DECEMBER 28,1997
- - --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 324,495
Noncash items in net income:
Cumulative effect on prior years of changing to a
different depreciation method (Note 2) (78,774)
Depreciation and amortization 240,456
Gain on sale of property and other assets (45,039)
Change in deferred rent (12,896)
Deferred income taxes 8,207
Cash from (used for) changes in operating working capital:
Accounts and notes receivable (247,553)
Income tax receivable 64,604
Inventories (29,164)
Prepaid expenses and other assets 4,830
Accounts payable and accrued liabilities 683,441
Deferred revenue (5,000)
-----------
Net cash provided by operating activities 907,607
-----------
INVESTING ACTIVITIES:
Purchases of property and equipment (2,673,205)
Proceeds from sales of property and equipment 1,211,623
Proceeds from liquidation of certificate of deposit 15,508
-----------
Net cash used in investing activities (1,446,074)
-----------
FINANCING ACTIVITIES:
Increase in notes payable to bank 574,265
Increase in notes payable to shareholder 148,823
Decrease in notes payable to shareholder (244,500)
-----------
Net cash provided by financing activities 478,588
-----------
NET INCREASE IN CASH (59,879)
CASH, BEGINNING OF YEAR 326,982
-----------
CASH, END OF YEAR $ 267,103
===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $ 28,488
===========
Cash paid for income taxes $ 122,205
===========
See notes to consolidated financial statements.
E-6
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIFTY-TWO WEEKS ENDED DECEMBER 28, 1997
- - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - The consolidated financial statements include the accounts of
Selman Systems, Inc. and its wholly owned subsidiaries (collectively, "the
Company"). See Note 9 for a listing of all consolidated subsidiaries. All
material intercompany balances and transactions have been eliminated.
The Company operates restaurants under the name of "Frullati Cafe," which
serve fruit smoothie drinks, along with sandwich and salad items. The
Company currently operates 31 stores in 12 states (Arkansas, Florida,
Illinois, Indiana, Kentucky, Louisiana, Minnesota, Missouri, North
Carolina, Ohio, Tennessee and Texas). Additionally, the Company franchises
its operations, with 45 franchise locations in operation at year-end.
FISCAL PERIOD of the Company is based on a 52- and 53-week calendar, which
ends on the Sunday closest to December 31.
PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS requires management to
make estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingencies at the date of the financial
statements and the reported amounts of revenues and expenses for the
period. Differences from those estimates are recorded in the period they
become known.
CERTIFICATE OF DEPOSIT represents a time deposit at a bank which is due on
June 12, 1998, and bears interest at 6.5% per annum.
INVENTORIES are accounted for at the lower of average cost using the FIFO
(first-in, first-out) method, or market.
FRANCHISE ROYALTIES are recognized as earned.
INITIAL FRANCHISE AND DEVELOPMENT FEES are recognized upon fulfillment of
all significant obligations to the franchisee.
STORE OPENING COSTS are expensed as incurred.
DEPRECIATION AND AMORTIZATION of property and equipment (see Note 3) are
recorded using the straight-line method. Leasehold improvements are
amortized over their estimated useful lives or the terms of the related
leases, whichever is shorter.
IMPAIRMENT OF LONG-LIVED ASSETS is recognized as a loss if the future net
cash flows expected to be generated by long-lived assets are less than the
carrying value of the assets. This impairment loss is equal to the amount
by which the carrying value of the asset exceeds the fair value of the
assets.
DEFERRED RENT represents the difference between rent paid on a cash basis
and rent amortized equally over the lease period for financial statement
purposes.
E-7
<PAGE>
DEFERRED INCOME TAXES are provided under the asset and liability method for
temporary differences in the recognition of income and expense for tax and
financial reporting purposes.
2. CHANGE IN ACCOUNTING PRINCIPLE
Depreciation of operating equipment has been computed by the straight-line
method using the mid-month convention in 1997. For newly acquired assets
under the current method, depreciation in the first year is recorded for
each full month of the year the asset is held, in addition to one-half
month for the month in which the asset is acquired. Depreciation of
operating equipment in prior years was computed using the straight-line
method, taking a full year's depreciation in the first year, regardless of
the date acquired. The new method of depreciation was adopted to more
accurately reflect depreciation of such assets and has been applied
retroactively to equipment acquisitions of prior years. The effect of the
change in 1997 was to decrease expenses and increase pretax income by
$25,038. The adjustment of $78,774 (after reduction for income taxes of
$54,290) to retroactively apply the new method, as of the first day of
fiscal year 1997, is included in income of 1997 as the cumulative effect of
an accounting change.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Useful Lives
------------
Leasehold improvements 10 $2,142,446
Store fixtures, equipment and furniture 10 1,542,385
Truck and autos 5 17,412
Construction in progress 32,155
----------
Total 3,734,398
Less accumulated depreciation and amortization 618,456
----------
Property and equipment - net $3,115,942
==========
4. LEASE COMMITMENTS
The Company leases certain of its store facilities pursuant to
noncancelable operating leases that expire at various times through 2007.
The Company also leases store facilities which are operated by and
subleased to franchisees. Future minimum lease payments under the operating
leases are approximately as follows:
Operating
Leases
-----------
Fiscal year ending December:
1998 $ 2,962,238
1999 2,945,589
2000 2,908,596
2001 2,891,379
2002 2,831,680
Thereafter 9,326,482
-----------
Total minimum lease payments $23,865,964
===========
E-8
<PAGE>
The total future minimum lease payments exclude expense reimbursements to
lessors, as well as contingent rentals which are based upon sales volume.
Lease agreements frequently require the Company to pay utilities, taxes,
insurance and maintenance related to the property. Rent expense in 1997 was
approximately $1,611,325, of which approximately $643,062 was contingent
rent.
Deferred rent expense of $23,910 has been recorded to account for rent
expenses on a straight-line basis over the lease term, where lease payments
are not made on such basis.
The Company is a party to store leases for store locations where it is the
original lessee, however such stores have been subleased to franchisees.
Future minimum lease payments receivable under the subleases are as follows
(which are included in the minimum lease obligations listed above.
Sublease
Rentals
-----------
Fiscal year ending December:
1998 $ 1,958,381
1999 1,983,839
2000 2,006,685
2001 2,005,833
2002 1,943,616
Thereafter 6,496,299
-----------
Total minimum lease payments due under subleases $16,394,653
===========
5. NOTE PAYABLE TO BANK
At December 28, 1997, there was a $574,265 demand note payable to bank
bearing interest at 2% above the bank prime rate (8.5% at December 28,
1997). The note is secured by equipment, general intangibles and securities
of the Company and a life insurance policy owned by the shareholder.
Interest is due monthly, with the entire balance due on August 7, 1998.
6. INCOME TAXES
The tax effects of significant items comprising the net deferred tax
liability at December 28, 1997, include deferred rent expense and bases
differences in fixed assets due to re-investment and accelerated tax
depreciation. The effective tax rate differs from the federal statutory
rate due to state income taxes.
Components of the provision for income taxes, which include the tax effect
of the cumulative change in accounting principle, as discussed in Note 2,
are as follows:
Current tax expense:
Federal $188,222
State 27,282
Deferred tax expense:
Federal 6,636
State 1,571
--------
Total $223,711
========
E-9
<PAGE>
7. RELATED PARTY TRANSACTIONS
At December 28, 1997, the Company was indebted to the shareholder for
$94,098, which will be repaid by the Company within the next twelve months
and accrues interest at 7% per year.
The Company has paid $9,011 toward the total $175,010 in management fees
owed to an affiliated entity, Continental Realty, Inc. ("CRI"), as
compensation for management services provided to the Company through June
15, 1997, the termination date of the agreement. The remaining unpaid
$165,999 is included in accounts payable as of December 28, 1997. CRI is
also owned by the Company's shareholder.
8. SUBSEQUENT EVENT
On December 29, 1997, several of the existing corporations were merged with
and into DFW3E.07, including Frullati Town East, Inc., Frullati NHM, Inc.,
Frullati Collin Creek, Inc., Frullati of Four Seasons, Inc., Frullati-MCD,
Inc., Frullati Vista Ridge, Inc., Frullati UT, Inc., Frullati Hulen, Inc.,
Frullati of Orland Square, Inc., Frullati River Oaks, Inc., Frullati
DePaul, Inc., Frullati West Oaks, Inc., Frullati Caf6 DFW 2E, Inc. and
Frullati Cafe DFW 3E.50, Inc. In addition, DFW3E.07 has subsequently
changed its name to Frullati Enterprises, Inc.
9. SELMAN SYSTEMS, INC. AND SUBSIDIARIES
The following are the legal entities whose financial statements are
consolidated herein:
Selman Systems, Inc.
Frullati Systems, Inc.
Frullati Town East, Inc.
Frullati NHM, Inc.
Frullati of Four Seasons, Inc.
Frullati Vista Ridge. Inc.
Frullati Hulen, Inc.
Frullati of Orland Square, Inc.
Frullati River Oaks, Inc.
Frullati Enterprises. Inc.
Frullati DEW 3E.50, Inc.
Frullati DePaul, Inc.
Frullati, Inc.
Frullati UT, Inc.
Frullati Collin Creek, Inc.
Frullati DEW 2E, Inc.
Frullati Franchise Systems, Inc.
Frullati-MCD, Inc.
Frullati West Oaks, Inc.
******
E-10
<PAGE>
SELMAN SYSTEMS, INC. AND SUBSIDIARIES AND
CONTINENTAL REALTY, INC.
SUPPLEMENTAL SCHEDULE - UNAUDITED COMBINING STATEMENT OF INCOME
FIFTY-TWO WEEKS ENDED DECEMBER 28, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Combined
Statement
Selman CRI Eliminations of Income
Systems, Inc. (Unaudited) (Unaudited) (Unaudited)
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Store sales $10,602,472 $ 188,856 $ (188,856) $10,602,472
Franchise royalties 814,621 814,621
Initial franchise and development fees 334,543 334,543
----------- ---------- ---------- -----------
Total revenues 11,751,636 188,856 (188,856) 11,751,636
COST OF SALES 6,007,347 6,007,347
----------- ---------- ---------- -----------
GROSS PROFIT 5,744,289 188,856 (188,856) 5,744,289
OPERATING EXPENSES:
Selling and administrative expenses 5,223,950 188,856 (13,846) 5,398,960
Management fee to affiliate 175,010 (175,010)
----------- ---------- ---------- -----------
OPERATING INCOME 345,329 -- -- 345,329
OTHER INCOME:
Gain on sale of property and other assets 45,039 45,039
Other income 24,774 24,774
----------- ---------- ---------- -----------
Total 69,813 -- -- 69,813
----------- ---------- ---------- -----------
INCOME BEFORE PROVISION FOR INCOME
TAXES 415,142 -- -- 415,142
PROVISION FOR INCOME TAXES 169,421 169,421
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 245,721 -- -- 245,721
CUMULATIVE EFFECT ON PRIOR YEARS
(TO DECEMBER 29, 1996) OF CHANGING TO
A DIFFERENT DEPRECIATION METHOD 78,774 78,774
----------- ---------- ---------- -----------
NET INCOME $ 324,495 $ -- $ -- $ 324,495
=========== ========== ========== ===========
</TABLE>
E-12
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Sports Group International, Inc. (the "Company") was formed in 1997 under its
former name, Secretarial Services of Orlando, Inc. The Company merged with Surf
City Acquisition Corporation II ("SCAC") in March 1999. Prior to its merger with
SCAC, the Company had no significant operations. As a result of the merger
transaction with SCAC, the former SCAC stockholders held approximately 55% of
the Company's voting stock. For financial accounting purposes, the acquisition
was a reverse merger and was treated as a recapitalization with SCAC as the
acquirer.
On May 21, 1999, the Company issued 650,000 shares of its Series B Convertible
Preferred Stock for $6,500,000. The proceeds were used to acquire all of the
issued and outstanding stock of Selman Systems, Inc. ("Selman"), an operator and
franchisor of a chain of cafes and bakeries under the name of Frullati Cafe and
Bakery ("Frullati").
On July 7, 1999, the Company, through Selman, purchased all of the outstanding
stock of Fru-Cor, Inc., an owner of eight Frullati locations. The purchase was
effected through the issuance of a promissory note for $1,200,000.
The accompanying Pro Forma Condensed Consolidated Financial Statements of
Operations for the year ended December 31, 1998 and the nine months ended
September 30, 1999 assume that the acquisition of Selman and Fru-Cor took place
on January 1, 1998. The accompanying pro forma information is presented for
illustrative purposes and is not necessarily indicative of the financial
position or results of operations, which would actually have been reports, had
the acquisition been in effect during the periods presented, or which may be
reports in the future.
The accompanying Pro Form Condensed Consolidated Financial Statements should be
read in conjunction with the historical financial statements and related notes
thereto for the Company, SCAC, Selman, and Fru-Cor.
F-1
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS For the Nine
- - --------------------------------------------------------------------------------
Months Ended September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Historical
----------------------------------------------
Company Frulatti Fru-Cor
------------ ------------ ------------
Nine Months Results from Results from
Ended Dec. 28, 1998 Dec. 28, 1998 Pro Forma Pro Forma
Sept. 30, 1999 to May 16, 1999 to July 10, 1999 Adjustments Combined
-------------- --------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net product sales 5,230,162 4,301,546 1,076,014 -- 10,607,723
Franchise fees 392,485 128,602 -- -- 521,087
Royalties 922,753 408,950 -- (28,909)(1) 1,302,793
Rental income 280,800 -- -- -- 280,800
Other 5,840 -- -- -- 5,840
------------ ------------ ------------ ------------ ------------
Total revenues 6,832,039 4,839,098 1,076,014 (28,909) 12,718,243
------------ ------------ ------------ ------------ ------------
EXPENSES:
Cost of product sales 1,695,292 1,267,782 379,620 -- 3,342,693
Store operating costs 588,693 552,705 83,748 (28,909)(1) 1,196,237
Personnel expenses 1,606,169 1,549,962 417,142 (139,508)(2) 3,433,765
Rent 1,267,810 794,962 223,281 (49,006)(3) 2,237,047
Depreciation 283,092 157,966 56,967 85,959 (4) 583,984
Franchising expense 25,339 -- -- 25,339
General and administrative
expenses 1,216,739 347,900 75,327 (37,000)(5) 1,602,966
------------ ------------ ------------ ------------ ------------
Total expenses 6,683,134 4,671,276 1,236,085 (168,464) 12,422,031
------------ ------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 148,906 167,822 (160,071) 139,555 296,212
------------ ------------ ------------ ------------ ------------
OTHER (INCOME) AND EXPENSES
Interest expense 129,863 27,384 26,035 63,000 (6) 246,282
Interest income (11,946) -- -- -- (11,946)
Other income -- 19,378 -- -- 19,378
------------ ------------ ------------ ------------ ------------
Total other expense 117,916 46,762 26,035 63,000 253,713
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
REORGANIZATION ITEMS
INCOME (LOSS) BEFORE INCOME TAXES 30,989 121,060 (186,106) 76,555 42,498
INCOME TAX PROVISION/(BENEFIT) 18,661 -- -- 7,272 25,933
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 12,328 $ 121,060 $ (186,106) $ 69,283 $ 16,565
============ ============ ============ ============ ============
NET LOSS PER SHARE
Basic (7) $ (0.12)
============
WEIGHTED AVERAGE SHARES OUTSTANDING 7,391,467
============
</TABLE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(1) Eliminate the royalty income and royalty expense of Selman and Fru-Cor,
respectively for the stores owned by Fru-Cor and which Fru-Cor was a
franchisee of Selman.
(2) Elimination of certain payroll and related costs of the former shareholders
of Selman and Fru-Cor.
(3) Elimination of Selman's corporate office rent.
(4) Amortization of acquired intangibles and goodwill and a reduction of
depreciation expense due to purchase accounting adjustments made to certain
assets of Selman and Fru-Cor.
(5) Elimination of legal fees related to acquisition of Selman and Fru-Cor.
(6) Interest expense on the $1.2 million acquisition note related to Fru-Cor.
(7) Includes net loss available for common shareholders affected assuming
preferred stock divdends were payable for full nine months and that the
2,000,000 common shares issued in the SCAC transaction were issued at
January 1, 1999.
F-2
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
- - --------------------------------------------------------------------------------
For the Year Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma
Surf City Frullati Fru-Cor Adjustments Combined
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net product sales $1,049,997 12,148,375 761,976 -- 13,960,348
Franchise fees 483,088 320,537 -- (95,000)(1) 708,625
Royalties 722,130 952,779 -- (46,690)(2) 1,628,219
Rental income 404,233 -- -- -- 404,233
Other 8,241 95,506 -- -- 103,747
---------- ------------ ------------ ------------ -----------
Total revenues 2,667,689 13,517,197 761,976 (141,690) 16,805,172
---------- ------------ ------------ ------------ -----------
EXPENSES:
Cost of product sales 437,525 3,664,796 231,697 -- 4,334,018
Store operating costs 164,303 61,466 -- 225,769
Personnel expenses 720,670 4,032,835 327,373 (272,404)(3) 4,808,474
Rent 655,017 2,425,680 170,880 (65,341)(4) 3,186,236
Depreciation -- 558,725 35,628 208,795 (5) 803,148
Franchising expense 21,429 60,288 (46,690)(2) 35,027
General and administrative 494,913 2,878,973 71,553 -- 3,445,439
---------- ------------ ------------ ------------ -----------
Total expenses 2,493,857 13,561,009 958,885 (175,640) 16,838,111
---------- ------------ ------------ ------------ -----------
OPERATING INCOME (LOSS) 173,832 (43,812) (196,909) 33,950 (32,939)
---------- ------------ ------------ ------------ -----------
OTHER (INCOME) AND EXPENSES
Interest expense 176,806 75,187 209 108,000 (6) 360,202
Interest income (23,045) (26,511) (426) -- (49,982)
Other income (108,345) (213,314) (1,775) 222,135 (1) (101,299)
---------- ------------ ------------ ------------ -----------
Total other expense 45,416 (164,638) (1,992) 330,135 208,921
---------- ------------ ------------ ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES 128,416 120,826 (194,917) (296,185) (241,860)
INCOME TAX PROVISION/(BENEFIT) 83,503 98,067 (7,697) (215,767) (41,894)
---------- ------------ ------------ ------------ -----------
NET INCOME (LOSS) $ 44,913 22,759 $ (187,220) $ (80,417) $ (199,965)
========== ============ ============ ============ ===========
NET LOSS PER SHARE
Basic $ (0.35) (7)
===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,052,284
===========
</TABLE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(1) Eliminate the gain on sale of certain stores from Selman to Fru-Cor and
related franchise fee income.
(2) Eliminate the royalty income and royalty expense of Selman and Fru-Cor,
respectively for the stores owned by Fru-Cor and which Fru-Cor was a
franchisee of Selman.
(3) Elimination of certain payroll and related costs of the former shareholders
of Selman and Fru-Cor.
(4) Elimination of Selman's corporate office rent.
(5) Amortization of acquired intangibles and goodwill and a reduction of
depreciation expense due to purchase accounting adjustments made to certain
assets of Selman and Fru-Cor.
(6) Interest expense on the $1.2 million acquisition note related to Fru-Cor.
(7) Includes net loss available for common shareholders affected assuming
preferred stock divdends were payable for full year and that the 2,000,000
common shares issued in the SCAC transaction were issued at January 1,
1998.
F-3
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ARIZONA
In re: ) In Proceedings Under Chapter 11
SURF CITY SQUEEZE, INC., an ) Case No. 97-00451-PHX-GBN
Arizona corporation, fka )
Sunbelt Ventures, Inc., ) ORDER CONFIRMING FIRST MODIFIED
) JOINT PLAN OF REORGANIZATION
) PROPOSED BY THE DEBTOR AND THE
) OFFICIAL COMMITTEE OF UNSECURED
Debtor. ) CREDITORS
)
) Hearing Date: 11/12/97
) Hearing Time: 9:30 a.m.
This matter came on for hearing before the Court in a Confirmation Hearing
which began on August 27, 1997 and concluded on November 12, 1997. At the
Confirmation Hearing, the Debtor requested confirmation of the plan entitled
"FIRST MODIFIED JOINT PLAN OF REORGANIZATION PROPOSED BY THE DEBTOR AND THE
OFFICIAL COMMITTEE OF UNSECURED CREDITORS" dated July 22, 1997, as modified by
this Confirmation Order (the "Plan"). The Plan was filed by: (i) Surf City
Squeeze, Inc. (fka Sunbelt Ventures, Inc.), which is the Debtor and
Debtor-In-Possession in the above-captioned Chapter 11 case; and (ii) the
Official Committee of Unsecured Creditors (the "Creditors' Committee"). Unless
<PAGE>
otherwise expressly stated in this Confirmation Order, all capitalized defined
terms used herein will have the same meanings as defined in the Plan.
The Court has considered the entire record (including all pleadings and
evidence) presented with respect to confirmation of the Plan. Based on the Plan
and the entire record, the Court hereby finds and concludes as follows:
THE PLAN, SOLICITATION, AND OBJECTIONS
1. By an Order dated July 30, 1997, the Court approved the "AMENDED
DISCLOSURE STATEMENT ACCOMPANYING FIRST MODIFIED JOINT PLAN OF REORGANIZATION
PROPOSED BY THE DEBTOR AND THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS" dated
July 22, 1997 (the "Disclosure Statement"), and fixed the procedures related to
the solicitation of votes on the Plan. Following the Court's entry of the Order
approving the Disclosure Statement, plan solicitation packages (including the
Disclosure Statement) were timely transmitted to the creditors and other
interested parties in accordance with this Court's order and Bankruptcy Rule
3017(d) and other applicable procedural rules.
2. Voting on the Plan is summarized in the "Ballot Report with Respect To
The First Modified Joint Plan Of Reorganization Proposed By The Debtor And The
Official Committee Of Unsecured Creditors Dated May 13. 1997 As Amended July 22.
1997" (the "Ballot Report") filed by the Debtor on August 27, 1997.
3. Objections to the Plan were filed by: (i) Crocker Plaza Company and One
Post Associates LLC (collectively, "Crocker Plaza"); (ii) SZS 33 Associates,
L.P. and Simon Property Group, L.P. (collectively, "Simon Debartolo"); (iii)
-2-
<PAGE>
ERE Yarmouth, General Growth Management, Kravco Company, and New Plan Realty
Trust (collectively, "Yarmouth Group"); (iv) Union Station Venture, Ltd. ("Union
Station"); (v) the Arizona Department of Revenue; (vi) The Network Group; (vii)
Bally Total Fitness Corporation ("Bally"); and (viii) Santa Cruz Squeeze
Corporation ("Santa Cruz"). In addition, the holders of the Pyramid Secured
Claims expressed an opposition to the Plan.
4. In open court on August 27, 1997, the Court ruled that Santa Cruz was
not permitted to participate in the Plan confirmation process, thereby
overruling Santa Cruz's opposition to the Plan.
5. On August 26, 1997, Simon Debartolo withdrew its opposition to the Plan
and changed its ballot vote from rejection of the Plan to acceptance of the
Plan. See "Withdrawal Of Objection To Debtor's First Modified Joint Plan Of
Reorganization And Notice Of Change In Ballot Vote To Accept Or Reject The
Plan".
6. Subject to the Plan amendments set forth in the following paragraph,
Crocker Plaza, Yarmouth Group, Union Station, the Arizona Department of Revenue,
The Network Group, Bally, and the holders of the Pyramid Secured Claims have
withdrawn their opposition to the Plan. To the extent that Crocker Plaza,
Yarmouth Group, the Arizona Department of Revenue, The Network Group, Bally, and
the holders of the Pyramid Secured Claims either rejected the Plan or did not
previously vote to accept or reject the Plan, such parties have withdrawn any
rejection votes and hereby vote to accept the Plan as amended pursuant to the
terms of this Order.
-3-
<PAGE>
PLAN MODIFICATIONS PURSUANT TO THIS CONFIRMATION ORDER
7. The Plan is modified and amended as follows, which modifications and
amendments will be binding on Crocker Plaza, Simon Debartolo, Yarmouth Group,
Union Station, Arizona Department of Revenue, The Network Group, Sally, the
holders of the Pyramid Secured Claims, the Debtor, and all other parties in
interest in the Debtor's Chapter 11 case:
(a) Pursuant to Class 7 of the Plan, Crocker Plaza's
Landlord/Executory Contract Claim will be treated in accordance with the
"AGREED ORDER APPROVING ASSUMPTION OF ONE POST PLAZA LEASE", a copy of
which is attached hereto as Exhibit "A" and incorporated herein by this
reference.
(b) Pursuant to Class 7 of the Plan, the Landlord/Executory Contract
Claims of Simon Debartolo and Yarmouth Group (to the extent they hold
Landlord/Executory Contract Claims) will be treated in accordance with the
"ORDER APPROVING ASSUMPTION AND/OR ASSUMPTION AND ASSIGNMENT OF VARIOUS
LEASES", a copy of which is attached hereto as Exhibit "B" and incorporated
herein by this reference.
(c) Union Station has an allowed Class 1 Administrative Claim for the
prorated amount of rent that accrued from January 13 through January 31,
-4-
<PAGE>
1997 under the Lease Agreement between the Debtor and Union Station for the
lease of non-residential real property located at Union Station, 50
Massachusetts Avenue, N.E., Washington, D.C. Pursuant to Paragraph 4.1 of
the Plan, Union Station's allowed Class 1 Claim in the amount of $4,158.19
will be paid in full on the Effective Date of the Plan.
d) The Arizona Department of Revenue's ("ADR") Administrative Claims,
Priority Claims, and General Unsecured Claims, if any, will be treated in
accordance with Class 1, Class 4, and Class 11 of the Plan. In addition,
the Debtor will file all prepetition tax returns with the ADR no later than
sixty (60) days after the Effective Date of the Plan. Any liabilities
resulting from such prepetition tax returns will be allowed as Priority
Claims and paid pursuant to Class 4 of the Plan. All payments made by the
Debtor to ADR shall be made payable to the Arizona Department of Revenue,
c/o J. Murray Zeigler, Arizona Attorney General's Office, Tax Section, 1275
West Washington Avenue, Phoenix, Arizona 85007. The failure of the Debtor
to comply with the provisions of the Plan concerning liability owed to the
ADR which include, but are not limited to, the failure to make any full and
<PAGE>
timely payment(s) owing to the ADR, shall constitute a default of the Plan
with respect to the ADR. If the Debtor fails to cure any default within ten
(10) days after receipt by the Debtor of written notice of the default from
the ADR or its agents, the entire balance due to the ADR shall be
immediately due and owing. Further, in the event of a default which is not
timely cured, the ADR may enforce the entire amount of its claim and
exercise any and all rights and remedies under applicable non-bankruptcy
law which includes, but is not limited to, state tax collection procedures
and any other such relief as may be deemed appropriate by the Bankruptcy
Court.
(e) Pursuant to Class 1 and Class 7 of the Plan, the Network Group
Claims will be treated in accordance with the "AGREED ORDER AUTHORIZING
ASSUMPTION OF NETWORK GROUP CONTRACT AND RESOLVING NETWORK GROUP CLAIMS", a
copy of which is attached hereto as Exhibit "C" and incorporated herein by
this reference.
(f) Pursuant to Class 9 of the Plan, Bally's Claims will be treated in
accordance with the "AGREED ORDER APPROVING SETTLEMENT BETWEEN DEBTOR AND
-5-
<PAGE>
BALLY TOTAL FITNESS CORPORATION", a copy of which is attached hereto as
Exhibit "D" and incorporated herein by this reference.
(g) The following language will supersede the second sentence of
Paragraph 4.6 of the Plan:
The holders of Secured Claims in Class 5B (Carousel Center Company LP,
Crystal Run Company LP, Pyramid Crossgates Company, and Pyramid Company of
Holyoke) will hold an Allowed Claim in Class SB in the amount of $4,000
each, for a total of 16,000. The holders of the Allowed Secured Claims in
Class 5B will be paid by the Reorganized Debtor in equal monthly
installments of principal and interest over a period of twenty-four (24)
months commencing on the first day of the first month following the
Effective Date, with interest fixed at eight and one-half percent (8 1/2%)
per annum. The holders of Secured Claims in Class SB will retain their
respective existing liens and security interests in the same priority on
their respective collateral as security for their respective Allowed
Secured Claims.
8. The modifications to the Plan set forth in this Order do not materially
or adversely change the treatment of any creditor or party in interest who has
previously cast a ballot to either accept or reject the Plan (other than those
creditors which have agreed to the modifications). Accordingly, the foregoing
modification are appropriate under Section 1127 of the Bankruptcy Code and do
not require any further disclosures of information, solicitation of creditors
and parties in interest, or voting regarding the Plan. In accordance with
Bankruptcy Code Section 1127, the text of the Plan, subject to and hereby
-6-
<PAGE>
incorporating the foregoing modifications, becomes the Plan. The term "Plan"
used in this Order shall include the Plan as modified by this Order.
PLAN SATISFIES CONFIRMATION REQUIREMENTS
9. Confirmation of the Plan is a core proceeding under 28 U.S.C. Section
157(b) (2). Pursuant to 28 U.S.C. Sections 157(b) and 1334, this Court has the
jurisdiction to enter a final order confirming the Plan.
10. The Plan and this Court's hearing thereon were duly and properly
noticed to all creditors and parties in interest in the Debtor's Chapter 11
case. The Court has determined that the Plan (as amended) satisfies the
requirements for confirmation set forth in Bankruptcy Code Section 1129(a) and
(b)
Based on the foregoing findings and conclusions, and the entire record
before the Court; and good cause appearing,
IT IS HEREBY ORDERED as follows:
A. The Plan, a true and correct copy of which is attached hereto as Exhibit
"E", and as modified by this Order, shall be, and hereby is, confirmed pursuant
to Bankruptcy Code Section 1129. The modifications to the Plan set forth above
shall be, and hereby are, approved.
B. All objections to confirmation of the Plan that have not been withdrawn,
waived, or settled (if any) shall be, and hereby are, overruled on the merits.
C. In order to satisfy the requirements of Bankruptcy Code Section 1129 (a)
(9), on or before the Effective Date, the Debtor is directed to pay the
following:
-7-
<PAGE>
(1) $288,408 to Streich Lang, P.A. (the "Streich Firm") representing
the unpaid professional compensation and reimbursement of expenses incurred by
the Streich Firm, which the Streich Firm shall hold in its trust account pending
final application and approval by the Court with respect to the payment of its,
attorneys' fees and costs incurred in connection with this Chapter 11 case. This
payment is in the nature of a deposit and does not preclude opposition to the
Streich Firm's fees and expenses at the time of final application to the Court.
To the extent the ultimate amount of unpaid fees and costs owed to the Streich
Firm exceeds the $288,408 on deposit the Reorganized Debtor will pay such
additional amounts as are approved by the Court as part of the final award of
allowed attorneys' fees and costs to the Streich Firm. To the extent the amounts
held by the Streich Firm exceed the final award of allowed attorneys' fees and
costs, the Streich Firm will reimburse the Reorganized Debtor to the extent of
the overpayment.
(2) $21,200 to Gallagher & Kennedy (the "Gallagher Firm") representing
the unpaid professional compensation and reimbursement of expenses incurred by
the Gallagher Firm, which the Gallagher Firm shall hold in its trust account
pending final application and approval by the Court with respect to the payment
of its attorneys' fees and costs incurred in connection with this Chapter 11
case.
-8-
<PAGE>
This payment is in the nature of a deposit and does not preclude opposition to
the Gallagher Firm's fees and expenses at the time of final application to the
Court. To the extent the ultimate amount of unpaid fees and costs owed to the
Gallagher Firm exceeds the $21,200 on deposit, the Reorganized Debtor will pay
such additional amounts as are approved by the Court as part of the final award
of allowed attorneys' fees and costs to the Gallagher Firm. To the extent the
amounts held by the Gallagher Firm exceed the final award of allowed attorneys'
fees and costs, the Gallagher Firm will reimburse the Reorganized Debtor to the
extent of the overpayment.
(3) $18,400 to Barrington Consulting Group (the "Barrington Group")
representing the unpaid professional compensation and reimbursement of expenses
incurred by the Barrington Group, which the Barrington Group shall hold in its
trust account pending final application and approval by the Court with respect
to the payment of its fees and costs incurred in connection with this Chapter 11
case. This payment is in the nature of a deposit and does not preclude
opposition to the Barrington Group's fees and expenses at the time of final
application to the Court. To the extent the ultimate amount of unpaid fees and
costs owed to the Barrington Group exceeds $18,400 on deposit, the Reorganized
Debtor will pay such additional amounts as are approved by the Court as part of
-9-
<PAGE>
the final award of allowed fees and costs to the Barrington Group. To the extent
the amounts held by the Barrington Group exceed the final award of allowed
attorneys' fees and costs, the Barrington Group will reimburse the Reorganized
Debtor to the extent of the overpayment.
D. The Debtor and all other necessary parties are authorized, empowered,
and directed, without further Order of this Court, to execute and deliver any
instrument, deed of trust, security agreement or other document, and to perform
any act, that is necessary, desirable, or required for the consummation of the
Plan. Pursuant to Bankruptcy Code Section 1141, and except as otherwise provided
in the Plan or this Order, entry of this Order discharges any and all Claims
against the Debtor including, but not limited to, any Claim which arose at any
time before the entry of this Order and any Claim of a kind described in
Bankruptcy Code Section 502 (g), (h), and (i). On and after the Confirmation
Date, and as to every discharged Claim, every holder of a Claim will be
precluded from asserting against the Debtor, and any assets of the Debtor, any
such discharged Claim and any rights, remedies, demands, damages, or liabilities
of any kind arising from or related to any such discharged Claim.
E. Congress has amended the Bankruptcy Code requiring Chapter 11 debtors to
pay Chapter 11 fees to the Office of the U.S. Trustee after confirmation of a
plan of reorganization. The Debtor shall be, and hereby is, directed to continue
paying in cash the U.S. Trustee fees from and after the Confirmation Date as
such fees become due until the Debtor's case is closed.
-10-
<PAGE>
F. Jurisdiction will be, and hereby is, retained by the Court as provided
in the Plan. Notwithstanding such retention of jurisdiction, this Confirmation
Order is intended by the Court to be a final order. Accordingly, the Court
expressly determines that there is no just reason for delay and expressly
directs the entry of this Confirmation Order as a final order.
DATED this 18th day of November, 1997
/s/ George B. Nielsen
-----------------------------------
THE HONORABLE GEORGE B. NIELSEN, JR.
UNITED STATES BANKRUPTCY JUDGE
[APPROVING SIGNATURES
ON FOLLOWING PAGES]
-11-
<PAGE>
APPROVED AS TO FORM AND CONTENT:
STREICH LANG, P.A.
Renaissance One
Two North Central Avenue
Phoenix, Arizona 85004-2391
By /s/ Samantha G. Masters-Brown
---------------------------------
Samantha G. Masters-Brown
Attorneys for Debtor and Debtor-In-Possession
BROBECK, PELEGER & HARRISON, LLP
One Market Plaza, Spear Street Tower
San Francisco, California 94105
By /s/ Ivan M. Sold
---------------------------------
Ivan M. Sold
Attorneys for Crocker Plaza Company and One Post Associates LLC
POLLACK MEYERS & ROSENBLUM
Bell Atlantic Tower, 37th Floor
1717 Arch Street
Philadelphia, Pennsylvania 19103-2793
By /s/ David L. Pollack
---------------------------------
David L. Pollack
Attorneys for ERE Yarmouth, General Growth
Management, Kravco Company, and New Plan Realty Trust
Mark H. Berman, Esq.
SHAW, PITTMAN, POTTS & TROWBRIGDE
2300 N. Street N.W.
Washington, D.C. 20037
and
LEWIS AND ROCA, LLP
40 North Central Avenue
Phoenix, Arizona 85004-4429
By /s/ Bret A. Maidman
---------------------------------
Bret A. Maidman
John J. Dawson, Esq. (#2786)
Samantha G. Masters-Brown, Esq. (#13950)
STREICH LANG, P.A.
Renaissance One
Two North Central Avenue
Phoenix, Arizona 85004-2391
(602) 229-5200
Attorneys for the DEBTOR
Charles R. Sterbach, Esq. (#9315)
GALLAGHER & KENNEDY
2600 North Central Avenue
Phoenix, Arizona 85004-3020
(602) 530-8000
Attorneys for the OFFICIAL UNSECURED
CREDITORS COMMITTEE
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ARIZONA
In re: ) In Proceedings Under Chapter 11
)
SURF CITY SQUEEZE, INC., ) Case No. 97-00451-PHX-GBN
an Arizona corporation, )
fka Sunbelt Ventures, Inc., )
)
Debtor. )
___________________________________)
FIRST MODIFIED JOINT PLAN OF REORGANIZATION PROPOSED
BY THE DEBTOR AND THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS
DATED: May 13, 1997, as amended July 22, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I INTRODUCTION......................................................1
ARTICLE II DEFINITIONS.......................................................2
2.1 Administrative Claim..............................................2
2.2 Administrative Convenience Unsecured Claims.......................3
2.3 Affiliate.........................................................4
2.4 Allowed Claim.....................................................4
2.5 Avoidance Actions.................................................4
2.6 Avoidance Actions Proceeds........................................5
2.7 Ballots...........................................................5
2.8 Bally.............................................................5
2.9 Bally Adversary Proceeding........................................5
2.10 Bally's Claims....................................................5
2.11 Bankruptcy Code...................................................5
2.12 Bankruptcy Court..................................................6
2.13 Bankruptcy Rules..................................................6
2.14 Business Day......................................................6
2.15 Cash..............................................................6
2.16 Chandler..........................................................6
2.17 Chandler Claims...................................................6
2.18 Chandler Stipulation..............................................6
2.19 Chapter 11 Professionals..........................................7
2.20 Cho...............................................................7
2.21 Cho Secured Claim.................................................7
2.22 Claim.............................................................7
2.23 Class.............................................................7
2.24 Confirmation Date.................................................7
2.25 Confirmation Hearing..............................................7
2.26 Confirmation Order................................................8
2.27 Court.............................................................8
2.28 Creditor..........................................................8
2.29 Creditors' Committee..............................................8
2.30 Creditors' Committee Professionals................................8
2.31 Creditors' Representative.........................................8
2.32 Creditors' Representative Agreement...............................8
2.33 Debtor............................................................9
2.34 Debtor's Professionals............................................9
2.35 DIP Financing Claim...............................................9
2.36 DIP Financing Order...............................................9
2.37 Disclosure Statement.............................................10
2.38 Disputed Claim...................................................10
2.39 Dmitrenko........................................................10
2.40 Dmitrenko Secured Claims.........................................10
2.41 Effective Date...................................................10
2.42 Equity Interests.................................................11
-i-
<PAGE>
2.43 Estate...........................................................11
2.44 Executive........................................................11
2.45 Executive Salaries...............................................11
2.46 Executory Contract...............................................11
2.47 Filed............................................................11
2.48 Final Order......................................................12
2.49 General Unsecured Claim..........................................12
2.50 Hofmeister and Manzeri...........................................12
2.51 Hofmeister and Manzeri Secured Claims............................12
2.52 Initial Plan Payment.............................................12
2.53 Initial Plan Payment Date........................................13
2.54 Kim..............................................................13
2.55 Kim Secured Claims...............................................13
2.56 Kona.............................................................13
2.57 Koury and Colen..................................................13
2.58 Koury and Colen Secured Claims...................................13
2.59 Landlord/Executory Contract Claims...............................13
2.60 Net Cash Flow....................................................13
2.61 Person...........................................................14
2.62 Petition Date....................................................14
2.63 Plan.............................................................14
2.64 Priority Tax Claim...............................................14
2.65 Priority Unsecured Claim.........................................14
2.66 Pro Rata Share...................................................14
2.67 Professional Charges.............................................14
2.68 Proponents.......................................................15
2.69 Pyramid..........................................................15
2.70 Pyramid Secured Claims...........................................15
2.71 Pyramid Stipulation..............................................15
2.72 Pyramid Order....................................................15
2.73 Reorganization Case..............................................16
2.74 Reorganized Debtor...............................................16
2.75 SCAC.............................................................16
2.76 SCSFC............................................................16
2.77 Schedules........................................................16
2.78 Secured Claim....................................................17
2.79 Secured Creditor.................................................17
2.80 Southern.........................................................17
2.81 Southern Secured Claim...........................................17
2.82 Southern Stipulation.............................................17
2.83 Southern Order...................................................17
2.84 Subsidiaries.....................................................18
2.85 Surf City Common Stock...........................................18
2.86 Taubman..........................................................18
2.87 Taubman Priority Claims..........................................18
2.88 Taubman Agreed Order.............................................18
2.89 Universal City Store.............................................18
2.90 Unsecured Claims.................................................18
2.91 Unsecured Creditor...............................................19
2.92 Unsecured Creditor Payment Pool..................................19
2.93 Unsecured Creditor Distribution Account..........................20
-ii-
<PAGE>
2.94 Weider...........................................................21
2.95 Weider Stipulation...............................................21
2.96 Weider Unsecured Claim...........................................21
ARTICLE III CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS....................21
3.1 Class 1: Administrative Claims...................................22
3.2 Class 2: Priority Unsecured Claims...............................22
3.3 Class 3: Taubman Priority Claims.................................22
3.4 Class 4: Priority Tax Claims.....................................22
3.5 Class 5: Secured Claims..........................................22
(a) Class 5A: Cho Secured Claims.................................22
(b) Class 5B: Pyramid Secured Claims.............................22
(c) Class 5C: Southern Secured Claims............................22
(d) Class 5D: Koury and Colen Secured Claims.....................22
(e) Class 5E: Dmitrenko Secured Claims..........................23
(f) Class 5F: Hofmeister and Manzeri Secured Claims..............23
(g) Class 5G: Kim Secured Claims.................................23
(h) Class 5H: Other Secured Claims...............................23
3.6 Class 6: Chandler Claims.........................................23
3.7 Class 7: Landlord/Executory Contract Claims......................23
3.8 Class 8: Weider Unsecured Claims.................................23
3.9 Class 9: Bally's Claims..........................................23
3.10 Class 10: Administrative Convenience Unsecured Claims............24
3.11 Class 11: General Unsecured Claims...............................24
3.12 Class 12: Equity Interests.......................................24
ARTICLE IV TREATMENT OF CLASSES OF CLAIMS UNDER THE PLAN....................24
4.1 Treatment of Class 1 (Administrative Claims).....................24
4.2 Treatment of Class 2 (Priority Unsecured Claims).................25
4.3 Treatment of Class 3 (Taubman Priority Claims)...................25
4.4 Treatment of Class 4 (Priority Tax Claims).......................25
4.5 Treatment of Class 5A (Cho Secured Claims).......................26
4.6 Treatment of Class 5B (Pyramid Secured Claims)...................26
4.7 Treatment of Class 5C (Southern Secured Claims)..................27
4.8 Treatment of Class 5D (Koury and Colen Secured Claims)...........27
4.9 Treatment of Class 5E (Dmitrenko Secured Claims).................27
4.10 Treatment of Class 5F (Hofmeister and Manzeri Secured Claims)....28
4.11 Treatment of Class 5G (Kim Secured Claims).......................28
4.12 Treatment of Class 5H (Other Secured Claims).....................28
4.13 Treatment of Class 6 (Chandler Claims)...........................29
4.14 Treatment of Class 7 (Landlord/Executory Contract Claims)........29
4.15 Treatment of Class 8 (Weider Unsecured Claims)...................30
4.16 Treatment of Class 9 (Bally's Claims)............................30
4.17 Treatment of Class 10 (Administrative Convenience
Unsecured Claims)................................................30
-iii-
<PAGE>
4.18 Treatment of Class 11 (General Unsecured Claims).................31
ARTICLE V TREATMENT OF CLASS 12 INTERESTS
(Equity Interests)...............................................31
5.1 No Distributions.................................................31
ARTICLE VI MEANS FOR IMPLEMENTATION OF PLAN.................................32
6.1 Structure Of Reorganized Debtor..................................32
6.2 Establishment of Unsecured Creditor Payment Pool.................32
(a) Execution of Creditors' Representative Agreement.............32
(b) Effect of Creditors' Representative Agreement................33
(c) Dissolution of Creditors' Committee..........................33
(d) Succession of Certain Rights; Limitation on Duties...........34
(e) Funding of Unsecured Creditor Distribution Account...........34
(f) Assignment of Claims.........................................34
(g) Expenses Associated with Unsecured Creditor Payment
Pool and Distribution Account................................35
6.3 Reduction of Executive Salaries..................................35
6.4 Operations of Reorganized Debtor, Kona, and SCSFC................36
ARTICLE VII OBJECTIONS TO CLAIMS.............................................36
7.1 Objections.......................................................36
7.2 Distributions....................................................36
ARTICLE VIII TREATMENT OF EXECUTORY CONTRACTS.................................37
8.1 Assumption of Certain Executory Contracts........................37
8.2 Rejection of Other Executory Contracts...........................37
8.3 Rejection Claims Bar Date and Objections to Claims...............37
8.4 Vesting..........................................................38
ARTICLE IX DISCHARGE........................................................38
ARTICLE X MODIFICATIONS OF THE PLAN........................................39
ARTICLE XI RETENTION OF JURISDICTION........................................39
11.1 In General.......................................................39
11.2 Plan Disputes and Enforcement....................................40
11.3 Further Orders...................................................40
11.4 Other Claims.....................................................40
11.5 Final Decree.....................................................41
11.6 Appeals..........................................................41
11.7 Executory Contracts..............................................41
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ARTICLE XII GENERAL PROVISIONS...............................................41
12.1 Additional Assurances............................................41
12.2 Extension of Payment Dates.......................................41
12.3 Confirmation by Non-Acceptance Method............................42
12.4 Vesting - Closing of Reorganization Case.........................42
12.5 Retention of Claims and Causes of Action.........................42
12.6 Interest on Claims...............................................42
12.7 Exculpation and Limitation of Liability..........................43
12.8 Captions.........................................................44
12.9 Prohibition Against Prepayment Penalties.........................44
12.10 Payment of Statutory Fees........................................44
12.11 Successors and Assigns...........................................44
12.12 Confirmation Order...............................................45
12.13 Revocation.......................................................45
12.14 Reservation of Rights............................................45
12.15 Unclaimed Property...............................................45
12.16 Payment Option...................................................45
12.17 Disclosure Statement.............................................45
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LIST OF PLAN EXHIBITS
Exhibit 1 Executory Contracts to be assumed pursuant to the Plan [Section 8.1)
Exhibit 2 Pyramid Stipulation
Exhibit 3 Pyramid Order
Exhibit 4 Southern Stipulation
Exhibit 5 Southern Order
Exhibit 6 Chandler Stipulation
Exhibit 7 Creditors' Representative Agreement
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ARTICLE I
INTRODUCTION
This plan of reorganization (defined herein as the "Plan", including any
modification(s)) is proposed jointly by: (i) the Debtor which is the
debtor-in-possession in the above-captioned case, SURF CITY SQUEEZE, INC., an
Arizona corporation ("Surf City" or "Debtor"); and (ii) the OFFICIAL COMMITTEE
OF UNSECURED CREDITORS (the "Creditors' Committee") (separately and
collectively, the Debtor and the Creditors' Committee are the "Proponents" of
the Plan). The Debtor filed a voluntary petition under Chapter 11 of the
Bankruptcy Code on January 13, 1997. Since the filing of this case, the Debtor
has remained in possession of its assets and has continued its business
operations as a Debtor-In-Possession pursuant to the provisions of Bankruptcy
Code ss.ss.1107 and 1108. The nature of the Debtor's business is the ownership,
operation, and sale to franchisees of juice bar stands located throughout the
United States. This Plan modifies the reorganization plan previously filed by
the Debtor on May 13, 1997.
ALL CREDITORS AND OTHER PARTIES-IN-INTEREST ARE ENCOURAGED TO CONSULT THE
DISCLOSURE STATEMENT PREPARED BY THE DEBTOR BEFORE VOTING TO ACCEPT OR REJECT
THIS PLAN OF REORGANIZATION. AMONG OTHER INFORMATION, THE DISCLOSURE STATEMENT
CONTAINS DISCUSSIONS OF THE DEBTOR, THE HISTORICAL BACKGROUND OF THE CHAPTER 11
CASES AND THE PRE-PETITION PERIOD, THE PROJECTIONS GERMANE TO THE PLAN AND THE
POST-CONFIRMATION OPERATIONS OF THE REORGANIZED DEBTOR, AND A SUMMARY AND
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ANALYSIS OF THE PLAN. NO SOLICITATION MATERIALS, OTHER THAN THE DISCLOSURE
STATEMENT AND ANY RELATED MATERIALS TRANSMITTED THEREWITH, HAVE BEEN AUTHORIZED
BY THE BANKRUPTCY COURT FOR USE IN SOLICITING ACCEPTANCES OR REJECTIONS OF THIS
PLAN OF REORGANIZATION.
ARTICLE II
DEFINITIONS
For purposes of this Plan, and except as expressly provided otherwise
herein or unless the context otherwise requires, all of the defined terms stated
in Article II (which appear in the Plan as capitalized terms) will have the
meanings stated below in this Article II. For purposes of this Plan and such
defined terms, the singular and plural uses of such defined terms and the
conjunctive and disjunctive uses thereof will be fungible and interchangeable
(unless the context otherwise requires); and the defined terms will be equally
applicable to masculine, feminine, and neuter forms of the terms defined. The
defined terms stated in Article II also are substantive terms of the Plan; and
Article II will be deemed incorporated throughout the rest of the Plan to apply
the substantive provisions included in the defined terms. The words "herein",
"hereof", "hereto", "hereunder", and others of similar import, refer to the Plan
as a whole and not to any particular section, subsection, or clause contained in
the Plan. The rules of construction set forth in Section 102 of the Bankruptcy
Code apply. In computing any period of time prescribed or allowed by the Plan,
the provisions of Bankruptcy Rule 9006(a) apply. Accordingly, the defined terms
are as follows:
2.1 ADMINISTRATIVE CLAIM. The term "Administrative Claim" will refer to and
mean any Claim entitled to priority afforded by Sections 503(b) and 507(a) of
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the Bankruptcy Code arising prior to the Effective Date, including, without
limitation: (a) every cost and expense of administration of the Reorganization
Case, including, without limitation, all actual and necessary post-petition
expenses of maintaining and preserving the Estate; (b) all actual and necessary
post-petition expenses of operating the Debtor's business; (c) all Professional
Charges approved by the Bankruptcy Court pursuant to interim and final
allowances in accordance with Bankruptcy Code ss.ss.330, 331, and 503(b); and
(d) all fees and charges assessed against the Estate under Chapter 123 of Title
28, United States Code; EXCEPT THAT Administrative Claims in Class 1 of the Plan
do not include the Landlord/Executory Contract Claims which are included in
Class 7 of the Plan.
2.2 ADMINISTRATIVE CONVENIENCE UNSECURED CLAIMS. The term "Administrative
Convenience Unsecured Claims" will refer to and mean any Claim against the
Debtor which will be classified and paid under the Plan as the Plan provides for
Class 10 Claims. The Administrative Convenience Claims are: (a) all Unsecured
Claims against the Debtor (other than Administrative Claims or Priority
Unsecured Claims) that are, in the aggregate for each Creditor, $500.00 or less;
and (b) all Unsecured Claims against the Debtor (other than Administrative
Claims or Priority Unsecured Claims) that are, in the aggregate for each
Creditor, greater than $500.00, but which the Creditor voluntarily reduces to
$500.00 in full satisfaction of such Unsecured Claim or group of Unsecured
Claims. The option to reduce an Unsecured Claim(s) to the aggregate sum of
$500.00 and to have such an Unsecured Claim(s) treated as an Administrative
Convenience Unsecured Claim is exercisable only in the manner prescribed in the
Ballot.
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2.3 AFFILIATE. The term "Affiliate" will refer to and mean "affiliate" as
that term is defined in Section 101(2) of the Bankruptcy Code.
2.4 ALLOWED CLAIM. The term "Allowed Claim" will refer to and mean any
Claim against the Debtor: (a) with respect to which a proof of such Claim has
been properly Filed within the time fixed by the Bankruptcy Court; and (b)(i)
with respect to which no objection to the allowance of such Claim, or motion to
estimate for purposes of allowance, has been Filed within any applicable time
period fixed by the Bankruptcy Code, the Bankruptcy Rules, and/or the Bankruptcy
Court, or (ii) with respect to which any objection, or any motion to estimate
for purposes of allowance, has been so Filed, to the extent allowed by a Final
Order. The term Allowed Claim may be used throughout the Plan with each of the
various Creditors' Claims or Classes of those Claims (E.G., "Allowed
Administrative Claims" or "Allowed Class 1 Claims") to signify that such Claims
are, will be, or must be Allowed Claims in order to qualify for certain
treatment under the Plan.
2.5 AVOIDANCE ACTIONS. The term "Avoidance Actions" will refer to and mean
actions brought or continued after the Effective Date by the Creditors'
Representative for the benefit of the Estate of the Debtor pursuant to Section
550(a) of the Bankruptcy Code, to recover transfers avoidable under Section 547
of the Bankruptcy Code or under Section 548 of the Bankruptcy Code, other than
the Bally Adversary Proceeding.
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2.6 AVOIDANCE ACTIONS PROCEEDS. The term "Avoidance Actions Proceeds" will
refer to and mean amounts recovered and collected by the Creditors'
Representative in the Avoidance Actions.
2.7 BALLOTS. The term "Ballots" will refer to and mean the ballots which
will be distributed to the Creditors holding Claims in the Classes for the
purpose of voting to accept or reject the Plan.
2.8 BALLY. The term "Bally" will refer to and mean collectively Bally Total
Fitness Corporation and all Affiliates thereof.
2.9 BALLY ADVERSARY PROCEEDING. The term "Bally Adversary Proceeding" will
refer to and mean the adversary proceeding commenced by the Debtor on June 5,
1997, Adversary No. 97-344, to determine the nature, extent, and priority of any
Claim held by Bally against the Debtor, as well as to recover any payments to
Bally which may be recovered pursuant to Section 550 of the Bankruptcy Code and
to obtain certain other relief with respect to Bally and Bally's Claims.
2.10 BALLY'S CLAIMS. The term "Bally's Claims" will refer to and mean the
Disputed Unsecured Claims and any and all other Claims against the Debtor held
by Bally or any entity included in the definition of Bally.
2.11 BANKRUPTCY CODE. The term "Bankruptcy Code" will refer to and mean
Title 11 of the United States Code, ss.ss.101, ET SEQ., as it is in effect on
the Confirmation Date.
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2.12 BANKRUPTCY COURT. The term "Bankruptcy Court" will refer to and mean
the United States Bankruptcy Court for the District of Arizona, or such other
court which exercises jurisdiction over part or all of the Reorganization Case,
including the United States District Court for the District of Arizona if and to
the extent that the reference of part or all of the Reorganization Case is
withdrawn.
2.13 BANKRUPTCY RULES. The term "Bankruptcy Rules" will refer to and mean
the Federal Rules of Bankruptcy Procedure, promulgated under Title 28 of the
United States Code, ss.2075, and the Local Rules of Bankruptcy Procedure of the
United States Bankruptcy Court for the District of Arizona, as applicable from
time to time during the Reorganization Case.
2.14 BUSINESS DAY. The term "Business Day" will refer to and mean every day
except Saturdays, Sundays, and days on which the Bankruptcy Court is required by
law to be closed.
2.15 CASH. The term "Cash" will refer to and mean cash, cash equivalents,
bank deposits, and negotiable instruments payable on demand and supported by
readily available funds.
2.16 CHANDLER. The term "Chandler" will refer to and mean Chandler Signs,
Inc.
2.17 CHANDLER CLAIMS. The term "Chandler Claims" will refer to and mean any
and all Claims against the Debtor held by Chandler.
2.18 CHANDLER STIPULATION. The term "Chandler Stipulation" will refer to
and mean the "STIPULATION RESOLVING CHANDLER SIGNS' MOTION FOR IMMEDIATE PAYMENT
OF ADMINISTRATIVE EXPENSE" dated July 11, 1997.
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2.19 CHAPTER 11 PROFESSIONALS. The term "Chapter 11 Professionals" will
refer to and mean the Debtor's Professionals and the Creditors' Committee
Professionals, which are or may be employed with the Bankruptcy Court's approval
at the expense of the Estate, pursuant to Bankruptcy Code ss.ss.327(a), 327(e),
or 1103(a).
2.20 CHO. The term "Cho" will refer to and mean collectively Dae Ik Cho,
Kyung Ja Cho, Jessica H. Cho, Victor J. Cho, Sophia Choi, and Louis Jungwook
Choi.
2.21 CHO SECURED CLAIM. The term "Cho Secured Claim" will refer to and mean
any and all Secured Claims against the Debtor held by Cho or any one of them.
2.22 CLAIM. The term "Claim" will refer to and mean "claim" as the term is
defined in Section 101(5) of the Bankruptcy Code.
2.23 CLASS. The term "Class" will refer to and mean each of the
classifications of the Creditors' Claims and the Equity Interests, which are
described in Article III of the Plan. Each subclass of a Class provided in this
Plan will be treated as a separate Class of the Plan for voting purposes.
2.24 CONFIRMATION DATE. The term "Confirmation Date" will refer to and mean
the date on which the Confirmation Order is entered on the docket of the
Bankruptcy Court.
2.25 CONFIRMATION HEARING. The term "Confirmation Hearing" will refer to
and mean the hearing regarding confirmation of the Plan conducted by the
Bankruptcy Court pursuant to Section 1128 of the Bankruptcy Code, as adjourned
or continued from time to time.
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2.26 CONFIRMATION ORDER. The term "Confirmation Order" will refer to and
mean the written order of the Bankruptcy Court which confirms the Plan pursuant
to Section 1129 of the Bankruptcy Code.
2.27 COURT. The term "Court" is completely synonymous and interchangeable
with the term "Bankruptcy Court," which term is defined in a preceding Section
of this Article II.
2.28 CREDITOR. The term "Creditor" will refer to and mean "creditor" as
defined in Section 101(10) of the Bankruptcy Code.
2.29 CREDITORS' COMMITTEE. The term "Creditors' Committee" will refer to
and mean the Official Unsecured Creditors Committee appointed in the
Reorganization Case by the United States Trustee pursuant to Section 1102 of the
Bankruptcy Code, or when appropriate, the Creditors' Representative, as
successor to the Creditors' Committee.
2.30 CREDITORS' COMMITTEE PROFESSIONALS. The term "Creditors' Committee
Professionals" will refer to and mean: (i) the law firm of Gallagher & Kennedy,
P.A., legal counsel to the Creditors' Committee; and (ii) the accounting firm of
The Barrington Consulting Group, Inc.
2.31 CREDITORS' REPRESENTATIVE. The term "Creditors' Representative" will
refer to and mean The Barrington Consulting Group, Inc., or such other or
substitute representative as may be appointed as the representative of the Class
11 Creditors, for the purposes more particularly described in Sections 4.18 and
6.2 hereof.
2.32 CREDITORS' REPRESENTATIVE AGREEMENT. The term "Creditors'
Representative Agreement" will refer to and mean the agreement to be executed on
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the Effective Date by the Creditors' Representative and the Creditors'
Committee, substantially in the form attached hereto as Exhibit "7", which sets
forth the duties of the Creditors' Representative with respect to the Class 11
Creditors, the Unsecured Creditors Payment Pool, and the Unsecured Creditors
Distribution Account.
2.33 DEBTOR. The term "Debtor" will refer to and mean Surf City Squeeze,
Inc., an Arizona corporation, as debtor and debtor-in-possession in the
Reorganization Case.
2.34 DEBTOR'S PROFESSIONALS. The term "Debtor's Professionals" will refer
to and mean: (i) the law firm of Streich Lang, P.A., which is the Debtor's
bankruptcy counsel; (ii) the accounting firm of Ernst & Young LLP; and (iii) any
and all other similar professionals which the Debtor has employed or may employ
to assist in the conduct of the Reorganization Case or to provide professional
services for a specified purpose, all in accordance with Sections 327(a) and
327(e) of the Bankruptcy Code.
2.35 DIP FINANCING CLAIM. The term "DIP Financing Claim" will refer to and
mean the debtor-in-possession financing obtained by the Debtor following the
Petition Date and approved by the Bankruptcy Court by its DIP Financing Order,
in the amount of Eight Hundred Thousand and no/100 Dollars ($800,000.00).
2.36 DIP FINANCING ORDER. The term "DIP Financing Order" will refer to and
mean the "ORDER APPROVING SETTLEMENT AND APPROVING DIP FINANCING" entered by the
Court on May 6, 1997.
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2.37 DISCLOSURE STATEMENT. The term "Disclosure Statement" will refer to
and mean the "AMENDED DISCLOSURE STATEMENT ACCOMPANYING FIRST MODIFIED JOINT
PLAN OF REORGANIZATION PROPOSED BY THE DEBTOR AND THE OFFICIAL COMMITTEE OF
UNSECURED CREDITORS" dated May 13, 1997, as amended July 22, 1997, prepared by
the Debtor, and presented by the Proponents in its present form or as it may be
altered, amended, or modified, and as approved by the Bankruptcy Court.
2.38 DISPUTED CLAIM. The term "Disputed Claim" will refer to and mean every
Claim which is not an Allowed Claim.
2.39 DMITRENKO. The term "Dmitrenko" will refer to and mean Scott
Dmitrenko.
2.40 DMITRENKO SECURED CLAIMS. The term "Dmitrenko Secured Claims" will
refer to and mean any and all Claims against the Debtor held by Dmitrenko
arising out of secured loans by Dmitrenko to the Debtor.
2.41 EFFECTIVE DATE. The term "Effective Date" will refer to and mean,
unless and to the extent that the Debtor elects an earlier date in a writing
filed with the Bankruptcy Court, the date thirty (30) Business Days after the
date on which the Confirmation Order has become a Final Order. Except where
performance earlier than the Effective Date is expressly required by the Plan or
where it is lawful, and expressly permitted by the Plan to perform after the
Effective Date, performance under the Plan will be due on the Effective Date.
The Debtor or the Reorganized Debtor will have the right to render any or all of
the performance under this Plan prior to what otherwise would be the Effective
Date if the Debtor or the Reorganized Debtor deem it appropriate to do so,
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including, but not limited to, the right to render performance under any
circumstances which would moot any appeal, review, or other challenge of any
kind to the Confirmation Order if the Confirmation Order is not stayed pending
such appeal, review, or other challenge.
2.42 EQUITY INTERESTS. The term "Equity Interests" will refer to and mean
the equity interests held by the holders of record as of the Confirmation Date
of all of the then outstanding stock in the Debtor.
2.43 ESTATE. The term "Estate" will refer to and mean the estate created in
the Reorganization Case pursuant to Section 541 of the Bankruptcy Code.
2.44 EXECUTIVE. The term "Executive" will refer to and mean: (i) Kevin A.
Blackwell, the President of the Debtor; and (ii) David A. Guarino, the Chief
Financial Officer of the Debtor, or their respective successors in such
positions.
2.45 EXECUTIVE SALARIES. The term "Executive Salaries" will refer to and
mean all Cash received by the Executives from the Reorganized Debtor, SCSFC, and
Kona in the form of salaries, exclusive of health, dental, life, disability, and
similar benefits.
2.46 EXECUTORY CONTRACT. The term "Executory Contract" will refer to and
mean every unexpired lease or executory contract which is subject to being
assumed or rejected by the Debtor under Section 365 of the Bankruptcy Code.
2.47 FILED. The term "Filed" will refer to and mean filed with the
Bankruptcy Court in the Reorganization Case.
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2.48 FINAL ORDER. The term "Final Order" will refer to and mean an order or
judgment entered on the docket by the Clerk of the Bankruptcy Court or any other
court exercising jurisdiction over the subject matter and the parties: (a) which
has not been reversed, stayed, modified, or amended; (b) as to which no appeal,
certiorari proceeding, reargument or other review has been requested or is
pending; and (c) as to which the term for filing a notice of appeal, a petition
for certiorari, or request for reargument or further review or rehearing shall
have expired.
2.49 GENERAL UNSECURED CLAIM. The term "General Unsecured Claim" will refer
to and mean any Unsecured Claim against the Debtor (including, but not limited
to, every such Claim arising from the rejection of an Executory Contract) which
will be classified and paid under the Plan as the Plan provides for Class 11
Claims, and which Claim is not an Administrative Claim, Priority Unsecured
Claim, Taubman Priority Claim, Priority Tax Claim, Chandler Claim,
Landlord/Executory Contract Claim, Weider Unsecured Claim, Bally Claim, or
Administrative Convenience Unsecured Claim.
2.50 HOFMEISTER AND MANZERI. The term "Hofmeister and Manzeri" will refer
to and mean Gary Hofmeister and Russ Manzeri.
2.51 HOFMEISTER AND MANZERI SECURED CLAIMS. The term "Hofmeister and
Manzeri Secured Claims" will refer to and mean any and all Claims against the
Debtor held by Hofmeister and Manzeri.
2.52 INITIAL PLAN PAYMENT. The term "Initial Plan Payment" will refer to
and mean sums deposited into the Unsecured Creditor Distribution Account on the
Initial Plan Payment Date.
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2.53 INITIAL PLAN PAYMENT DATE. The term "Initial Plan Payment Date" will
refer to and mean the first Business Day which is forty-five (45) days after the
Effective Date.
2.54 KIM. The term "Kim" will refer to and mean Choon Ja Kim.
2.55 KIM SECURED CLAIMS. The term "Kim Secured Claims" will refer to and
mean any and all Claims against the Debtor held by Kim.
2.56 KONA. The term "Kona" will refer to and mean Kona Coast Provisions,
Inc., an Arizona Corporation, a wholly-owned subsidiary of the Debtor.
2.57 KOURY AND COLEN. The term "Koury and Colen" will refer to and mean
Richard Koury and Steven Colen.
2.58 KOURY AND COLEN SECURED CLAIMS. The term "Koury and Colen Secured
Claims" will refer to and mean any and all Claims against the Debtor held by
Koury and Colen, or either of them, including, but not to, any Claim arising out
of the purchase by the Debtor of the equity interests in Kolt Enterprises.
2.59 LANDLORD/EXECUTORY CONTRACT CLAIMS. The term "Landlord/Executory
Contract Claims" will refer to and mean any and all Claims (both pre-petition
and post-petition) of those landlords, licensors, or other parties to an
Executory Contract, whose Executory Contracts are assumed by the Debtor in this
Reorganization Case, other than the Bally Claims.
2.60 NET CASH FLOW. The term "Net Cash Flow" will refer to and mean the net
consolidated cash flow of the Reorganized Debtor and its Subsidiaries based on
generally accepted accounting principles.
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2.61 PERSON. The term "Person" will refer to and mean "person" as that term
is defined in Section 101(41) of the Bankruptcy Code.
2.62 PETITION DATE. The term "Petition Date" will refer to and mean January
13, 1997, the date on which the voluntary Chapter 11 petition commencing the
Reorganization Case was filed.
2.63 PLAN. The term "Plan" will refer to and mean this "FIRST MODIFIED
JOINT PLAN OF REORGANIZATION PROPOSED BY THE DEBTOR AND THE OFFICIAL COMMITTEE
OF UNSECURED CREDITORS" and every modification, amendment, restatement, and
supplement thereof, if any, Filed by the Proponents, from time to time.
2.64 PRIORITY TAX CLAIM. The term "Priority Tax Claim" will refer to and
mean every Claim of the kind entitled to priority under Section 507(a)(8) of the
Bankruptcy Code.
2.65 PRIORITY UNSECURED CLAIM. The term "Priority Unsecured Claim" will
refer to and mean every Unsecured Claim or portion thereof which is not an
Administrative Claim or a Priority Tax Claim, and which is entitled to priority
under Section 507 of the Bankruptcy Code.
2.66 PRO RATA SHARE. The term "Pro Rata Share" will refer to and mean the
proportion of the amount of an Allowed Claim in a particular Class to the
aggregate amount of all Allowed Claims in such Class.
2.67 PROFESSIONAL CHARGES. The term "Professional Charges" will refer to
and mean the allowed interim and final professional fees and expenses charged by
the Chapter 11 Professionals pursuant to Sections 330 and 331 of the Bankruptcy
Code.
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2.68 PROPONENTS. The term "Proponents" will refer to and mean, separately
and collectively, the Debtor and the Creditors' Committee, in each of their
respective capacities as a proponent of the Plan.
2.69 PYRAMID. The term "Pyramid" will refer to and mean collectively The
Pyramid Company of Glen Falls, Pyramid Company of Onandaga, Pyramid Crossgates
Company, PCM Development, Pyramid Company of Holyoke, Pyramid Company of Ithaca,
Pyramid Co. of Watertown, Berkshire Mall Group, the Senpike Mall Company, and
all Affiliates thereof.
2.70 PYRAMID SECURED CLAIMS. The term "Pyramid Secured Claims" will refer
to and mean any and all Secured Claims against the Debtor held by Pyramid or any
one or more of Pyramid.
2.71 PYRAMID STIPULATION. The term "Pyramid Stipulation" will refer to and
mean the "STIPULATION RESOLVING PYRAMID LANDLORDS' MOTION TO TERMINATE THE
AUTOMATIC STAY OF 11 U.S.C. SS.362(A) AND MOTION TO ALLOW AND COMPEL PAYMENT OF
ADMINISTRATIVE CLAIMS PURSUANT TO 11 U.S.C. SS.503(B)(1)(A)" dated June 18,
1997.
2.72 PYRAMID ORDER. The term "Pyramid Stipulation" will refer to and mean
the "ORDER APPROVING STIPULATION RESOLVING PYRAMID LANDLORDS' MOTION TO
TERMINATE THE AUTOMATIC STAY OF 11 U.S.C. SS.362(A) AND MOTION TO ALLOW AND
COMPEL PAYMENT OF ADMINISTRATIVE CLAIMS PURSUANT TO 11 U.S.C. SS.503(B)(1)(A)"
dated June 19, 1997.
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2.73 REORGANIZATION CASE. The term "Reorganization Case" will refer to and
mean the case under Chapter 11 of the Bankruptcy Code which was commenced by the
Debtor's filing of its voluntary Chapter 11 petition on the Petition Date.
2.74 REORGANIZED DEBTOR. The term "Reorganized Debtor" will refer to and
mean the Debtor, as reorganized from and after the Effective Date. Unless
otherwise expressly stated or the context otherwise requires, alternative
references to the Debtor or the Reorganized Debtor, or either of them,
throughout various provisions of the Plan are intended to anticipate whether an
event may occur before or after the Effective Date. Any settlement or agreement
made as part of the Plan before the Effective Date will survive the Effective
Date and will bind both the Reorganized Debtor and every other party to such
settlement or agreement (including, but not limited to, the provisions of the
Plan as confirmed).
2.75 SCAC. The term "SCAC" will refer to and mean Surf City Acquisition
Corporation II, an Arizona corporation, or its Affiliates.
2.76 SCSFC. The term "SCSFC" will refer to and mean Surf City Squeeze
Franchising Corporation, an Arizona Corporation, a wholly owned subsidiary of
the Debtor.
2.77 SCHEDULES. The term "Schedules" will refer to and mean the schedules
of assets and liabilities and the statement of financial affairs Filed by the
Debtor pursuant to Section 521 of the Bankruptcy Code, as such schedules and
statement are amended, modified, restated or supplemented from time to time.
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2.78 SECURED CLAIM. The term "Secured Claim" will refer to and mean every
Claim or portion thereof held by any Person, including, without limitation, an
Affiliate or judgment creditor of the Debtor, to the extent such Claim
constitutes a secured Claim under Sections 506(a) or 1111(b) of the Bankruptcy
Code.
2.79 SECURED CREDITOR. The term "Secured Creditor" will refer to and mean
every Creditor which holds a Secured Claim in the Reorganization Case.
2.80 SOUTHERN. The term "Southern" will refer to and mean Southern Group,
Inc., as agent for Southern Capital Corporation, LLC.
2.81 SOUTHERN SECURED CLAIM. The term "Southern Secured Claim" will refer
to and mean any and all Secured Claims against the Debtor held by Southern.
2.82 SOUTHERN STIPULATION. The term "Southern Stipulation" will refer to
and mean the "STIPULATION RESOLVING THE MOTIONS OF THE SOUTHERN GROUP INC.,
PURSUANT TO SECTIONS 362 AND 365 OF THE UNITED STATES BANKRUPTCY CODE SEEKING
RELIEF FROM THE AUTOMATIC STAY AND COMPELLING THE DEBTOR TO ASSUME OR REJECT
EXECUTORY CONTRACTS" dated June 27, 1997.
2.83 SOUTHERN ORDER. The term "Southern Order" will refer to and mean the
"ORDER APPROVING STIPULATION RESOLVING THE MOTIONS OF THE SOUTHERN GROUP INC.,
PURSUANT TO SECTIONS 362 AND 365 OF THE UNITED STATES BANKRUPTCY CODE SEEKING
RELIEF FROM THE AUTOMATIC STAY AND COMPELLING THE DEBTOR TO ASSUME OR REJECT
EXECUTORY CONTRACTS" dated June 27, 1997.
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2.84 SUBSIDIARIES. The term "Subsidiaries" will refer to and mean
collectively Kona and SCSFC.
2.85 SURF CITY COMMON STOCK. The term "Surf City Common Stock" will refer
to and mean all of the authorized shares of common stock in the Reorganized
Debtor to be issued on the Effective Date to SCAC.
2.86 TAUBMAN. The term "Taubman" will refer to and mean collectively The
Taubman Company and all Affiliates thereof.
2.87 TAUBMAN PRIORITY CLAIMS. The term "Taubman Priority Claims" will refer
to and mean the Unsecured Claims and any and all Claims against the Debtor held
by Taubman or any one or more of the entities included within the definition of
Taubman, including, but not limited to, any Claims arising out of the
transaction which was the subject of the Taubman Agreed Order.
2.88 TAUBMAN AGREED ORDER. The term "Taubman Agreed Order" will refer to
and mean the order entered by the Bankruptcy Court on May 15, 1997 granting the
"JOINT MOTION TO ASSUME, AS MODIFIED, CERTAIN UNEXPIRED REAL PROPERTY LEASES,
AND TO TERMINATE ONE UNEXPIRED REAL PROPERTY LEASE, BETWEEN THE DEBTOR AND THE
TAUBMAN LANDLORDS."
2.89 UNIVERSAL CITY STORE. The term "Universal City Store" will refer to
and mean the Debtor's Surf City Squeeze juice bar stand located at 1000
Universal Center Drive, #134, Universal City, California 91608.
2.90 UNSECURED CLAIMS. The term "Unsecured Claim" will refer to and mean
the Claims (or portions thereof) held by Creditors, which Claims are not Secured
Claims.
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2.91 UNSECURED CREDITOR. The term "Unsecured Creditor" will refer to and
mean every Creditor which holds an Unsecured Claim in the Reorganization Case.
2.92 UNSECURED CREDITOR PAYMENT POOL. The term "Unsecured Creditor Payment
Pool" will refer to and mean the computation of the funds which are available
and provided for distributions on account of the holders of Allowed Claims in
Class 11. The Unsecured Creditor Payment Pool will consist of the Avoidance
Action Proceeds and the following:
(a) On the Initial Plan Payment Date, the Debtor will deposit into the
Unsecured Creditor Distribution Account, all Cash held by the Debtor or the
Reorganized Debtor on the last day of the month in which the Effective Date
occurs which exceeds $100,000.00 after: (i) all other payments owing on or
before the Initial Plan Payment Date under this Plan and in the ordinary
course of business have been made as required; and (ii) a sufficient
reserve has been established for all Professional Charges incurred through
the Initial Plan Payment Date;
(b) Beginning with the calendar year 1998, on the twentieth (20th) day
of each calendar quarter (I.E., January, April, July, and October) and
continuing for seven (7) years thereafter (twenty-eight (28) calendar
quarters) or until all Allowed Claims in Class 11 have been paid in full
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into the Unsecured Creditor Payment Pool (without interest), whichever
occurs earlier, the Reorganized Debtor will deposit into the Unsecured
Creditor Distribution Account, Cash in the sum of the following amounts:
(i) $43,750; (ii) twenty-five percent (25%) of the first $50,000 of Net
Cash Flow for the preceding calendar quarter (or preceding month(s) for the
first payment date after the Effective Date) on a cumulative basis after
taking into account (i) above; and (iii) thereafter, forty percent (40%) of
the Net Cash Flow in excess of $50,000 for the preceding calendar quarter
on a cumulative basis;
(c) Twenty percent (20%) of Net Cash Flow in excess of $50,000 for
each calendar quarter will be reserved for payments under (b)(i) above; and
(d) For purposes of determining the calculation in paragraph (b)
above, the calculation of percentages due to the Unsecured Creditors
Payment Pool will begin on the first day of the first month following the
Effective Date.
2.93 UNSECURED CREDITOR DISTRIBUTION ACCOUNT. The term "Unsecured Creditor
Distribution Account" will refer to and mean a deposit account in the name of
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the Reorganized Debtor: (a) which will be established at a federally insured
bank or other federally insured financial institution which the Bankruptcy Court
approves as a depository institution; (b) on which the Creditors' Representative
will be the authorized signatory; and (c) into which the Reorganized Debtor will
pay or tender the payments due under the Unsecured Creditor Payment Pool to the
holders of Allowed Claims in Class 11.
2.94 WEIDER. The term "Weider" will refer to and mean, collectively, Weider
Health and Fitness, Weider Nutrition Group, Inc., and Surf Ventures, L.L.C.
2.95 WEIDER STIPULATION. The term "Weider Stipulation" will refer to and
mean the agreement among the Debtor, Weider, SCAC, and others reflected in the
term sheet approved by the Bankruptcy Court by the DIP Financing Order.
2.96 WEIDER UNSECURED CLAIMS. The term "Weider Unsecured Claim" will refer
to and mean the Unsecured Claim and any and all other Claims against the Debtor,
held by Weider as more particularly described in the Weider Stipulation as
assigned to SCAC pursuant to the Weider Stipulation.
ARTICLE III
CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS
All Claims and the Equity Interests are classified under the Plan as
hereafter stated in Article III. As of the Confirmation Hearing, any Class of
Claims which does not contain any Creditor's Claim will be deemed deleted
automatically from the Plan; and any Class of Claims which does not contain an
Allowed Claim (or a Claim temporarily or provisionally allowed by the Bankruptcy
Court for voting purposes) will not be entitled to vote on confirmation of the
Plan.
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3.1 CLASS 1: ADMINISTRATIVE CLAIMS. The Class 1 Claims will be all Allowed
Claims which are Administrative Claims.
3.2 CLASS 2: PRIORITY UNSECURED CLAIMS. The Class 2 Claims will be all
Allowed Claims which are Priority Unsecured Claims except those in Class 3 and
Class 4.
3.3 CLASS 3: TAUBMAN PRIORITY CLAIMS. The Class 3 Claims will be all
Allowed Claims which are Taubman Priority Claims.
3.4 CLASS 4: PRIORITY TAX CLAIMS. The Class 4 Claims will be all Allowed
Claims which are Priority Tax Claims.
3.5 CLASS 5: SECURED CLAIMS. The Class 5 Claims will be comprised of the
following subclasses:
(a) CLASS 5A: CHO SECURED CLAIMS. The Class 5A Claims will be all
Allowed Claims which comprise the Cho Secured Claims.
(b) CLASS 5B: PYRAMID SECURED CLAIMS. The Class 5B Claims will be all
Allowed Claims which comprise the Pyramid Secured Claims.
(c) CLASS 5C: SOUTHERN SECURED CLAIMS. The Class 5C Claims will be all
Allowed Claims which comprise the Southern Secured Claims.
(d) CLASS 5D: KOURY AND COLEN SECURED CLAIMS. The Class 5D Claims will
be all Allowed Claims which comprise the Koury and Colen Secured Claims.
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(e) CLASS 5E: DMITRENKO SECURED CLAIMS. The Class 5E Claims will be
all Allowed Claims which comprise the Dmitrenko Secured Claims.
(f) CLASS 5F: HOFMEISTER AND MANZERI SECURED CLAIMS. The Class 5F
Claims will be all Allowed Claims which comprise the Hofmeister and Manzeri
Secured Claims.
(g) CLASS 5G: KIM SECURED CLAIMS. The Class 5F Claims will be all
Allowed Claims which comprise the Kim Secured Claims.
(h) CLASS 5H: OTHER SECURED CLAIMS. The Class 5H Claims will be all
Allowed Claims which are Secured Claims, if any, other than Secured Claims in
Classes 5A through 5G. Each Other Secured Claim, if any, shall be deemed a
separate subclass of Class 5 for all purposes under this Plan.
3.6 CLASS 6: CHANDLER CLAIMS. The Class 6 Claims will be all Allowed Claims
which comprise the Chandler Claims.
3.7 CLASS 7: LANDLORD/EXECUTORY CONTRACT CLAIMS. The Class 7 Claims will be
all Allowed Claims which comprise the Landlord/Executory Contract Claims.
3.8 CLASS 8: WEIDER UNSECURED CLAIMS. The Class 8 Claims will be all Claims
which comprise the Weider Unsecured Claims.
3.9 CLASS 9: BALLY'S CLAIMS. The Class 9 Claims will be all Claims which
comprise the Bally's Claims, except to the extent the Bankruptcy Court may
determine that a portion thereof is required to be treated in a Class other than
Class 10.
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3.10 CLASS 10: ADMINISTRATIVE CONVENIENCE UNSECURED CLAIMS. The Class 10
Claims consist of all Claims which are Administrative Convenience Unsecured
Claims.
3.11 CLASS 11: GENERAL UNSECURED CLAIMS. The Class 11 Claims consist of all
Claims which are General Unsecured Claims.
3.12 CLASS 12: EQUITY INTERESTS. Class 12 shall consist of all Equity
Interests in the Debtor. This Class does not include the Equity Interests to be
acquired by SCAC pursuant to the Plan.
ARTICLE IV
TREATMENT OF CLASSES OF CLAIMS UNDER THE PLAN
4.1 TREATMENT OF CLASS 1 (ADMINISTRATIVE CLAIMS). Every Creditor holding a
Class 1 Administrative Claim will be paid by the Reorganized Debtor: (a) fully
and in Cash on the Effective Date if the Claim is then an Allowed Claim; (b)
fully and in Cash when and if the Claim becomes an Allowed Claim after the
Effective Date; (c) as otherwise agreed in writing by the Creditor holding the
Allowed Claim; or (d) as ordered by the Bankruptcy Court. The Administrative
Claim held by SCAC in connection with the DIP Financing Claim will be fully
satisfied in accordance with the Weider Stipulation as approved by the DIP
Financing Order. On the Effective Date, SCAC will release all of its Claims held
on account of the Weider Stipulation or will contribute all amounts outstanding
under the DIP Financing Claim to the capital of the Reorganized Debtor and will
otherwise comply with the DIP Financing Order and the Weider Stipulation in
connection with its Class 1 Claim and the remaining portion of the Weider
Unsecured Claim. Notwithstanding the first sentence of this Section 4.1, every
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Allowed Class 1 Administrative Claim for a post-petition operating expense
incurred in the ordinary course of Debtor's operations will be paid fully, and
in Cash by the Reorganized Debtor in the ordinary course of business (including
any payment terms applicable to any such expense).
4.2 TREATMENT OF CLASS 2 (PRIORITY UNSECURED CLAIMS). Every Creditor
holding a Class 2 Priority Unsecured Claim will be paid by the Reorganized
Debtor: (a) fully and in Cash on the Effective Date if the Claim is then an
Allowed Claim; (b) fully and in Cash when and if the Claim becomes an Allowed
Claim after the Effective Date; (c) as otherwise agreed in writing by the
Creditor holding the Allowed Claim; or (d) as ordered by the Bankruptcy Court.
The Priority Unsecured Claims which comprise the Class 2 Claims are UNIMPAIRED
pursuant to the Plan.
4.3 TREATMENT OF CLASS 3 (TAUBMAN PRIORITY CLAIMS). Any Allowed Claim which
arises in favor of Taubman will be treated under the Taubman Agreed Order and
will be paid fully and in Cash by the Reorganized Debtor in the ordinary course
of business at the time the Debtor may become obligated thereon pursuant to the
Taubman Agreed Order. The Priority Claims which comprise the Class 3 Claims are
UNIMPAIRED pursuant to the Plan.
4.4 TREATMENT OF CLASS 4 (PRIORITY TAX CLAIMS). Every Creditor holding a
Class 4 Priority Tax Claim, as and when it is an Allowed Claim, will be paid by
the Reorganized Debtor in equal quarterly installments of principal and interest
over a period commencing at the end of the first calendar quarter after the
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Effective Date, and continuing at the end of each calendar quarter thereafter
until the date that is six (6) years after the assessment date with respect to
such Allowed Claim, with interest fixed at 8% per annum unless the Bankruptcy
Court orders the use of a different interest rate. The Priority Claims which
comprise the Class 4 Claims are UNIMPAIRED pursuant to the Plan.
4.5 TREATMENT OF CLASS 5A (CHO SECURED CLAIMS). The holders of the Allowed
Secured Claims in Class 5A will be paid in full and in Cash upon the close of
the sale of the Universal City Store, pursuant to the Debtor's motion to sell
the Universal City Store, which will be filed with the Bankruptcy Court before
the Confirmation Hearing. The Secured Claims which comprise the Class 5A Claims
are UNIMPAIRED pursuant to the Plan.
4.6 TREATMENT OF CLASS 5B (PYRAMID SECURED CLAIMS). The holders of the
Allowed Secured Claims in Class 5B will be determined and treated in accordance
with the Pyramid Stipulation and Pyramid Order, copies of which are attached
hereto as Exhibits "2" and "3", and are incorporated herein by this reference as
though fully set forth herein. The holders of the Allowed Secured Claims in
Class 5B will receive on the later of the Effective Date or the date upon which
such Claim becomes Allowed Secured Claims, one of the following, at the option
of the Reorganized Debtor: (i) Cash in an amount equal to 90% of the Allowed
Secured Claim; or (ii) payment of sums over a period of twenty-four months
having a value as of the Effective Date that is not less than 90% of the value
of the interest of the holder of the Allowed Secured Claim in the property
securing payment of the Allowed Secured Claim, as established by the Bankruptcy
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Court; or (iii) abandonment to such holder of all of the property of the Debtor
upon or in which the holder of the Allowed Secured Class 5B Claim has a valid,
perfected, and enforceable lien or security interest. The Secured Claims which
comprise the Class 5B Claims are IMPAIRED pursuant to the Plan.
4.7 TREATMENT OF CLASS 5C (SOUTHERN SECURED CLAIMS). The holders of the
Allowed Secured Claims in Class 5C will be treated in accordance with the
Southern Stipulation and Southern Order, copies of which are attached hereto as
Exhibits "4" and "5", and are incorporated herein by this reference as though
fully set forth herein. The Secured Claims which comprise the Class 5C Claims
are IMPAIRED pursuant to the Plan.
4.8 TREATMENT OF CLASS 5D (KOURY AND COLEN SECURED CLAIMS). The holders of
the Allowed Secured Claims in Class 5D will receive on the later of the
Effective Date or the date upon which such Claim becomes an Allowed Secured
Claim: (i) Cash in the full amount of the pre-petition amount owing with respect
to the Allowed Secured Claim; and (ii) reinstatement of the underlying principal
obligation or instrument, with the holder of such Allowed Secured Class 5D Claim
retaining its existing lien(s) and security interest(s) in the same priority on
its collateral as security for its Allowed Secured Claim(s). The Secured Claims
which comprise the Classes 5D Claims are UNIMPAIRED pursuant to the Plan.
4.9 TREATMENT OF CLASS 5E (DMITRENKO SECURED CLAIMS). The holders of the
Allowed Secured Claims in Class 5E will receive on the later of the Effective
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Date or the date upon which such Claim becomes an Allowed Secured Claim,
reinstatement of the underlying obligation or instrument, with the holder of
such Allowed Secured Class 5E Claim retaining its existing lien(s) and security
interest(s) in the same priority on its collateral as security for its Allowed
Secured Claim(s), PROVIDED, HOWEVER, THAT the maturity date of the obligation
under the existing underlying instruments will be extended for a period of one
(1) month from the current maturity date to pay any prepetition amounts still
owing. The Secured Claims which comprise the Class 5E Claims are IMPAIRED
pursuant to the Plan.
4.10 TREATMENT OF CLASS 5F (HOFMEISTER AND MANZERI SECURED CLAIMS). The
holders of the Allowed Secured Claims in Class 5F will be paid outside the Plan
by the licensees who operate the stores related to the Hofmeister and Manzeri
Secured Claims and, therefore, will receive no distributions under the Plan. The
Secured Claims which comprise the Class 5F Claims are UNIMPAIRED pursuant to the
Plan.
4.11 TREATMENT OF CLASS 5G (KIM SECURED CLAIMS). The holders of the Allowed
Secured Claims in Classes 5G will receive on the later of the Effective Date or
the date upon which such Claim becomes an Allowed Secured Claim Cash in the full
amount of the Allowed Secured Claim. The Secured Claims which comprise the Class
5G Claims are UNIMPAIRED pursuant to the Plan.
4.12 TREATMENT OF CLASS 5H (OTHER SECURED CLAIMS). The holders of the
Allowed Secured Claims in Classes 5H will receive on the later of the Effective
Date or the date upon which such Claim becomes an Allowed Secured Claim, one of
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the following, at the option of the Reorganized Debtor: (i) Cash in the full
amount of the Allowed Secured Claim; or (ii) reinstatement of the underlying
obligation or instrument or other treatment in accordance with Bankruptcy Code
ss.1124, with the holder of such Allowed Secured Class 5H Claim retaining its
existing lien(s) and security interest(s) in the same priority on its collateral
as security for its Allowed Secured Claim(s); or (iii) abandonment to such
holder of all of the property of the Debtor upon or in which the holder of the
Allowed Secured Claim has a valid, perfected, and enforceable lien or security
interest. The Secured Claims which comprise the Class 5H Claims are UNIMPAIRED
pursuant to the Plan.
4.13 TREATMENT OF CLASS 6 (CHANDLER CLAIMS). The holders of the Allowed
Claims in Class 6 will be treated in accordance with the Chandler Stipulation, a
copy of which is attached hereto as Exhibit "6", and which is incorporated
herein by this reference as though fully set forth herein. The Claims which
comprise the Class 6 Claims are IMPAIRED pursuant to the Plan.
4.14 TREATMENT OF CLASS 7 (LANDLORD/EXECUTORY CONTRACT CLAIMS). The holders
of the Allowed Claims in Class 7 will be paid by the Reorganized Debtor: (a) in
accordance with the "DEBTOR'S MOTION TO ASSUME AND/OR ASSUME AND ASSIGN CERTAIN
UNEXPIRED REAL PROPERTY LEASES AND EXECUTORY CONTRACTS" dated May 13, 1997; (b)
as ordered by the Bankruptcy Court; or (c) as otherwise agreed in writing by the
Creditor holding the Allowed Class 7 Claim. The Claims which comprise the Class
7 Claims are IMPAIRED pursuant to the Plan.
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4.15 TREATMENT OF CLASS 8 (WEIDER UNSECURED CLAIMS). The holder of the
Unsecured Claim in Class 8 will be treated in accordance with the Weider
Stipulation. On the Effective Date, SCAC, which holds the portion of the Weider
Unsecured Claims not previously released pursuant to the Weider Stipulation,
will either release the remaining portion of the Weider Unsecured Claim or
contribute any amount it would receive on the Weider Unsecured Claim to the
capital of the Reorganized Debtor. The Unsecured Claims which comprise the Class
8 Claims are UNIMPAIRED pursuant to the Plan.
4.16 TREATMENT OF CLASS 9 (BALLY'S CLAIMS). To the extent that after
resolution of the Bally Adversary Proceeding, Bally holds an Unsecured Claim,
Bally will receive the same amount on account of its Claim as the holders of
Allowed Claims in Class 7, except to the extent that, prior to the Confirmation
Date, the Debtor and Bally agree in writing to a different treatment thereof and
the Bankruptcy Court approves the different treatment of the Claims either in
the Confirmation Order or a separate order entered on the Confirmation Date. If
the Debtor and Bally have not entered into an agreement providing for such
different treatment prior to the Confirmation Date, then this Class 9 will be
deleted automatically and the Class 9 Claims will be treated in the appropriate
Class hereof as determined by the Bankruptcy Court. The Unsecured Claims which
comprise the Class 9 Claims are IMPAIRED pursuant to the Plan.
4.17 TREATMENT OF CLASS 10 (ADMINISTRATIVE CONVENIENCE UNSECURED CLAIMS).
The holder of every Class 10 Unsecured Claim that is an Allowed Claim shall
receive, in full satisfaction, settlement, release and discharge of, and in
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exchange for, its Allowed Claim(s) a payment from the Reorganized Debtor in the
aggregate amount equal to the lesser of: (a) $500.00; or (b) the amount of such
holder's Allowed Claim(s). Payments to holders of Allowed Class 10 Claims will
be due on the Initial Plan Payment Date. No interest will be paid on Class 10
Claims. The Unsecured Claims which comprise the Class 10 Claims are IMPAIRED
under the Plan.
4.18 TREATMENT OF CLASS 11 (GENERAL UNSECURED CLAIMS). The holder of every
General Unsecured Claim that is an Allowed Claim will receive, in full
satisfaction, settlement, release and discharge of, and in exchange for, its
Allowed Unsecured Claim, Cash payments in the total amount equal to its Pro Rata
Share of the amounts in the Unsecured Creditors Payment Pool. Payments pursuant
to the Unsecured Creditors Payment Pool will be made as provided in the
definition of the Unsecured Creditor Payment Pool under Article II of the Plan
and as described in Article VI of the Plan. No interest will be paid on Class 11
Claims. The General Unsecured Claims which comprise the Class 11 Claims are
IMPAIRED under the Plan.
ARTICLE V
TREATMENT OF CLASS 12 INTERESTS
(EQUITY INTERESTS)
5.1 NO DISTRIBUTIONS. The holders of the Equity Interests will receive no
distributions on account of such Equity Interests under the Plan. In addition,
all Equity Interests in the Debtor prior to the Effective Date will be cancelled
on the Effective Date. On the Effective Date, 100% of the Surf City Common Stock
will be issued to SCAC. The Interests which comprise the Class 12 Interests are
IMPAIRED pursuant to the Plan.
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ARTICLE VI
MEANS FOR IMPLEMENTATION OF PLAN
6.1 STRUCTURE OF REORGANIZED DEBTOR. The Reorganized Debtor will continue
in business. So long as amounts are owed under the Plan to holders of Allowed
Claims in Class 11, the Reorganized Debtor will not declare dividends and will
continue to own all of the issued and outstanding stock in Kona and SCSFC. From
and after the Effective Date, the articles of incorporation and bylaws of the
Reorganized Debtor will be the existing articles of incorporation and bylaws of
the Debtor except to the extent they are modified in accordance with Section
1126 of the Bankruptcy Code. The stock in the Reorganized Debtor will be the
issued and outstanding Surf City Common Stock.
6.2 ESTABLISHMENT OF UNSECURED CREDITOR PAYMENT POOL.
(a) EXECUTION OF CREDITORS' REPRESENTATIVE AGREEMENT. On the Effective
Date, the Creditors' Representative and the Chairman of the Creditors'
Committee will execute the Creditors' Representative Agreement,
substantially in the form attached hereto as Exhibit "7" and incorporated
herein by this reference, subject to modification before confirmation. The
final form of the Creditors' Representative Agreement will be an Exhibit to
the Confirmation Order. The
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Creditors' Representative Agreement provides for the duties of the
Creditors' Representative, including the duties to pursue Avoidance Actions
and distribute funds held in the Unsecured Creditors Distribution Account.
All expenses of the Creditors' Representative, or professionals engaged by
the Creditors' Representative, as well as expenses incurred in connection
with the Avoidance Actions will be charged to and paid from the Unsecured
Creditors Payment Pool. The Debtor and Reorganized Debtor will not be
responsible for payment of any expenses associated with the Creditors'
Representative, its professionals, or any other expenses in connection with
the administration of the Unsecured Creditors Payment Pool.
(b) EFFECT OF CREDITORS' REPRESENTATIVE AGREEMENT. Upon the execution
of the Creditors' Representative Agreement, all of the provisions and
recitals of the Creditors' Representative Agreement will be deemed
incorporated herein as though fully set forth as approved provisions of the
Plan, fully binding upon all persons bound by this Plan.
(c) DISSOLUTION OF CREDITORS' COMMITTEE. Upon execution of the
Creditors' Representative Agreement, the Creditors' Committee will be
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dissolved and discharged, and will have no further rights or
responsibilities in connection with the Debtor, the Estate, or this
Reorganization Case.
(d) SUCCESSION OF CERTAIN RIGHTS; LIMITATION ON DUTIES. The Creditors'
Representative will be the successor-in-interest of the Creditors'
Committee, succeeding to all rights of the Creditors' Committee under this
Plan. The Creditors' Representative's duties are limited to those set forth
in the Creditors' Representative Agreement.
(e) FUNDING OF UNSECURED CREDITOR DISTRIBUTION ACCOUNT. On or before
the Initial Plan Payment Date, the Debtor or Reorganized Debtor will open
the Unsecured Creditor Distribution Account and deposit the Initial Plan
Payment in good and immediately available funds.
(f) ASSIGNMENT OF CLAIMS. On the Effective Date, the Debtor will be
deemed to have assigned to the Creditors' Representative: (i) any and all
rights to bring or continue an Avoidance Action (other than the Bally
Adversary Proceeding); and (ii) any and all claims against the Class 11
Creditors. Upon such assignment, the Creditors' Representative will be
fully authorized and empowered to prosecute, compromise, and enforce such
claims for the benefit of the Unsecured Creditor Payment Pool.
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(g) EXPENSES ASSOCIATED WITH UNSECURED CREDITOR PAYMENT POOL AND
DISTRIBUTION ACCOUNT. The Unsecured Creditor Payment Pool will bear the
administrative costs incurred by the Creditors' Representative or its
professionals after the Effective Date for: (i) the liquidation of Class 11
claims; (ii) the distribution of funds; (iii) the prosecution of Avoidance
Actions; and (iv) any other administrative costs incurred by the Creditors'
Representative after the Effective Date.
6.3 REDUCTION OF EXECUTIVE SALARIES. Beginning with the first (1st) day of
the first (1st) month after the Effective Date and continuing for seven (7)
years thereafter or until all Allowed Claims in Class 11 have been paid in full
into the Unsecured Creditor Payment Pool (without interest), whichever occurs
earlier, the Executive Salaries will be reduced to a base salary of $100,000.00
per each Executive per calendar year, plus a percentage of the profits to be
determined and paid on a quarterly basis as follows: (i) seventy-five percent
(75%) of the first $50,000 of Net Cash Flow for the preceding calendar quarter;
and (ii) thereafter forty percent (40%) of the Net Cash Flow in excess of
$50,000 for the preceding calendar quarter.
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6.4 OPERATIONS OF REORGANIZED DEBTOR, KONA, AND SCSFC. From and after the
Effective Date, so long as amounts are owed under the Plan to holders of Allowed
Claims in Class 11, the Reorganized Debtor will operate, and will cause Kona and
SCSFC to operate, their businesses in the ordinary course of business and not
dispose of assets out of the ordinary course of business or for other than a
full and fair consideration.
ARTICLE VII
OBJECTIONS TO CLAIMS
7.1 OBJECTIONS. The Bankruptcy Court established a date by which any Claims
were to be filed in the Reorganization Case. Any objections to Claims by the
Debtor or Reorganized Debtor or by any other Person properly entitled to do so
under the Bankruptcy Code and Bankruptcy Rules, other than a Claim arising out
of the rejection by the Debtor of an Executory Contract, must be filed with the
Bankruptcy Court and served upon the parties required to be served, no later
than thirty (30) days following the Effective Date. Any objection to a Claim
must be served upon the holder of the Claim to which the objection has been
made, and upon the Debtor (or Reorganized Debtor) as appropriate.
7.2 DISTRIBUTIONS. Except as may otherwise be agreed by the Reorganized
Debtor, no payment or distribution will be made with respect to all or a portion
of any Disputed Claim until such Claim is an Allowed Claim. Payments and
distributions to each holder of a Disputed Claim (to the extent that it
ultimately becomes an Allowed Claim) will be made in accordance with the Plan
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once such Claim becomes an Allowed Claim. In order to permit undelayed pro rata
distributions to the holders of Allowed Claims, the Creditors' Representative
may create appropriate reserves with respect to Disputed Claims.
ARTICLE VIII
TREATMENT OF EXECUTORY CONTRACTS
8.1 ASSUMPTION OF CERTAIN EXECUTORY CONTRACTS. Pursuant to this Plan, any
Executory Contracts of the Debtor listed in Exhibit "1" to this Plan shall be
assumed upon the Effective Date of the Plan or as otherwise agreed in writing by
the parties pursuant to Bankruptcy Code ss.365.
8.2 REJECTION OF OTHER EXECUTORY CONTRACTS. Despite the Debtor's best
efforts to identify all Executory Contracts, some may be inadvertently omitted
from Section 8.1 or not otherwise addressed in this Reorganization Case by
motion or stipulation. Any and all Executory Contracts of the Debtor that are
not expressly assumed pursuant to this Plan or which have not been otherwise
assumed by the Debtor in the Reorganization Case will be deemed rejected as of
the Confirmation Date or as prescribed by the Bankruptcy Code, whichever is
earlier, pursuant to Bankruptcy Code ss.365.
8.3 REJECTION CLAIMS BAR DATE AND OBJECTIONS TO CLAIMS. Every Claim
asserted by a Creditor arising from the rejection of an Executory Contract
pursuant to the Plan must be Filed with the Bankruptcy Court no later than the
first Business Day which is twenty (20) days after the Confirmation Date; or
with respect to any Executory Contract which is the subject of a motion by the
Debtor, the later of either: (i) June 9, 1997; or (ii) twenty (20) days after
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the Bankruptcy Court enters an order on the motion permitting rejection of the
particular Executory Contract. Every such Claim which is timely filed, as and
when it becomes an Allowed Claim, will be treated under Class 11 of the Plan.
Every such Claim which is not timely filed by the deadline stated above will be
forever barred and discharged and the Creditor holding the Claim will not
receive or be entitled to any distribution under the Plan on account of such
Claim. Any objections by the Debtor or Reorganized Debtor, or by any other
Person properly entitled to do so under the Bankruptcy Code and Bankruptcy
Rules, to Claims arising out of the rejection by the Debtor of an Executory
Contract must be filed with the Bankruptcy Court and served no later than thirty
(30) days following the Effective Date, as to any Executory Contract rejected
pursuant to the Plan, or filed with the Bankruptcy Court and served no later
than thirty (30) days following the entry of an order of the Bankruptcy Court
permitting the Debtor to reject the particular Executory Contract. Any objection
to a Claim must be served upon the holder of the Claim to which the objection
has been made, and upon the Debtor or Reorganized Debtor as appropriate.
8.4 VESTING. All Executory Contracts which are assumed will be vested in
the Reorganized Debtor as of the Effective Date.
ARTICLE IX
DISCHARGE
Except as otherwise provided in the Confirmation Order or the Plan, entry
of the Confirmation Order discharges any and all Claims against the Debtor
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including, but not limited to, any Claim which arose at any time before the
entry of the Confirmation Order and any Claim of a kind described in Bankruptcy
Code ss.502(g), (h), or (i). On and after the Confirmation Date, and as to every
discharged Claim, every holder of a Claim will be precluded from asserting
against the Reorganized Debtor, and any assets of the Debtor any such discharged
Claim and any rights, remedies, demands, damages, or liabilities of any kind
arising from or related to any such discharged Claim.
ARTICLE X
MODIFICATIONS OF THE PLAN
The Plan may be modified by the Debtor or the Reorganized Debtor (as
applicable) subject to and in accordance with the provisions and requirements of
Bankruptcy Code ss.1127.
ARTICLE XI
RETENTION OF JURISDICTION
Notwithstanding confirmation of the Plan, the Bankruptcy Court will retain
jurisdiction for the following purposes:
11.1 IN GENERAL. The Bankruptcy Court will retain jurisdiction to determine
the allowance and payment of any Claim(s) upon any objection(s) thereto (or
other appropriate proceedings) by the Debtor, the Reorganized Debtor, or any
other party in interest entitled to proceed in that manner. As part of such
retained jurisdiction, the Bankruptcy Court will continue to determine the
allowance of Administrative Claims and any request(s) for payment(s) thereof,
including Administrative Claims for Professional Charges. Additionally, the
Bankruptcy Court will retain jurisdiction to determine the allowance, legality
and payment of all Claims asserted by taxing authorities, pursuant to Bankruptcy
Code ss.505 or otherwise.
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<PAGE>
11.2 PLAN DISPUTES AND ENFORCEMENT. The Bankruptcy Court will retain
jurisdiction to determine any dispute(s) which may arise regarding the
interpretation of any provision(s) of the Plan. The Bankruptcy Court also will
retain jurisdiction to enforce any provisions of the Plan and any and all
documents relating to the Plan.
11.3 FURTHER ORDERS. The Bankruptcy Court will retain jurisdiction to
facilitate the performance of the Plan by entering any further necessary or
appropriate order(s) regarding enforcement of the Plan and any provision(s)
thereof. In addition, the Bankruptcy Court will retain jurisdiction to
facilitate or implement the discharge of any Claim, or any portion thereof,
pursuant to the Plan.
11.4 OTHER CLAIMS. The Bankruptcy Court will retain jurisdiction to
adjudicate any cause(s) of action or other proceeding(s), including all
Avoidance Actions, presently pending or otherwise referenced here or elsewhere
in the Plan, including, but not limited to, the adjudication of any and all
"core proceedings" under 28 U.S.C. ss.157(b) which may be pertinent to the
Reorganization Case, and which the Debtor or Reorganized Debtor may deem
appropriate to initiate and prosecute before the Court in aid of the
reorganization of the Debtor. This provision will not restrict the rights of the
Debtor or Reorganized Debtor to proceed in any other court of competent
jurisdiction; and it will not be construed to require the Debtor or Reorganized
Debtor to proceed in any other such court if the Bankruptcy Court also has
proper jurisdiction.
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<PAGE>
11.5 FINAL DECREE. The Bankruptcy Court will retain jurisdiction to enter
an appropriate final decree in the Reorganization Case.
11.6 APPEALS. In the event of an appeal of the Confirmation Order or any
other kind of review or challenge to the Confirmation Order, and provided that
no stay of the effectiveness of the Confirmation Order has been entered, the
Bankruptcy Court will retain jurisdiction to implement and enforce the
Confirmation Order and the Plan according to their terms, including, but not
limited to, jurisdiction to enter such orders regarding the Plan or the
performance thereof as may be necessary or appropriate to effectuate the
reorganization of the Debtor.
11.7 EXECUTORY CONTRACTS. The Bankruptcy Court will retain jurisdiction to
determine any and all matters regarding Executory Contracts, including, but not
limited to, assumptions or rejections thereof, and any and all Claims arising
from such Executory Contracts, including, but not limited to, rejection damages
Claims.
ARTICLE XII
GENERAL PROVISIONS
12.1 ADDITIONAL ASSURANCES. The Debtor, Reorganized Debtor, the Creditors'
Committee, and the Creditors holding Claims herein will execute such other and
further documents as are necessary to implement any of the provisions of the
Plan.
12.2 EXTENSION OF PAYMENT DATES. If any payment date falls due on any day
which is not a Business Day, then such payment date will be extended to the next
Business Day.
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<PAGE>
12.3 CONFIRMATION BY NON-ACCEPTANCE METHOD. The Proponents hereby requests,
if necessary, confirmation of the Plan pursuant to Bankruptcy Code ss.1129(b),
with respect to any impaired Class of Claims which does not vote to accept the
Plan.
12.4 VESTING - CLOSING OF REORGANIZATION CASE. As of the Effective Date,
the Reorganized Debtor will be vested with all property of the Debtor's Estate
free and clear of all Claims, liens, security interests, assignments,
encumbrances, charges, and other interests of Creditors except as otherwise
expressly provided in this Plan. Except to the extent otherwise ordered by the
Bankruptcy Court, the Reorganization Case will be deemed to be closed at the
later of the time that the Reorganized Debtor makes the payments due on the
Initial Plan Payment Date or all objections to Claims have been resolved by the
Bankruptcy Court. Except where the Bankruptcy Court has retained jurisdiction
regarding any specified aspect(s) of the Reorganized Debtor's activities after
the Effective Date, the Reorganized Debtor may operate its business free and
clear of any restrictions imposed by the Bankruptcy Code and in all respects as
if there was no pending case under any chapter or provision of the Bankruptcy
Code.
12.5 RETENTION OF CLAIMS AND CAUSES OF ACTION. Pursuant to Bankruptcy Code
ss.1123(b)(3), and except as otherwise provided in this Plan, the Reorganized
Debtor will retain and may enforce any and all claims and causes of action of
the Debtor.
12.6 INTEREST ON CLAIMS. Unless otherwise specifically provided for in the
Plan or the Confirmation Order, post-petition interest shall not accrue or be
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<PAGE>
paid on Claims, and no holder of a Claim shall be entitled to interest accruing
on or after the Petition Date on any Claim. Without limiting the foregoing,
interest will not accrue or be paid upon any Disputed Claim in respect of the
period from the Petition Date to the date a final distribution is made thereon
if such Disputed Claim thereafter becomes an Allowed Claim.
12.7 EXCULPATION AND LIMITATION OF LIABILITY. Neither the Debtor, the
Reorganized Debtor, the Creditors' Committee, nor any of their respective
present or former members, officers, directors, employees, advisors, attorneys,
or agents shall have or incur any liability to any holder of a Claim or an
Equity Interest, or any other party-in-interest, or any of their respective
agents, employees, representatives, financial advisors, attorneys, or
affiliates, or any of their successors or assigns, for any act or omission in
connection with, relating to, or arising out of, the Reorganization Case, the
pursuit of confirmation of the Plan, the consummation of the Plan, or the
administration of the Plan or the property to be distributed under the Plan,
except for their wilful misconduct, and in all respects shall be entitled to
reasonably rely upon the advice of counsel with respect to their duties and
responsibilities under the Plan. Notwithstanding any other provisions of this
Plan, no holder of a Claim or Equity Interest, no other party-in-interest, none
of their respective agents, employees, representatives, financial advisors,
attorneys, or affiliates, and no successors or assigns of the foregoing, shall
have any right of action against the Debtor, the Reorganized Debtor, or any
statutory committee, or any of their respective present or former members,
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<PAGE>
officers, directors, employees, advisors, attorneys, or agents, for any act or
omission in connection with, relating to, or arising out of, the Reorganization
Case, the pursuit of confirmation of the Plan, the consummation of the Plan, or
the administration of the Plan or the property to be distributed under the Plan,
except for their wilful misconduct.
12.8 CAPTIONS. Section captions used in the Plan are for convenience only,
and will not affect the construction of the Plan.
12.9 PROHIBITION AGAINST PREPAYMENT PENALTIES. If the Reorganized Debtor
chooses, in its sole and absolute discretion, to prepay any obligation on which
deferred payments are provided under the Plan, the Reorganized Debtor will not
be liable or subject to the assessment of any prepayment penalty thereon unless
otherwise ordered by the Bankruptcy Court. The Reorganized Debtor will not be
obligated to pay any such prepayment of any deferred obligation.
12.10 PAYMENT OF STATUTORY FEES. All fees payable pursuant to Section 1930
of Title 28 of the United States Code, as determined by the Bankruptcy Court at
or in conjunction with the Confirmation Hearing, due at or prior to such time,
will be paid on or before the Effective Date.
12.11 SUCCESSORS AND ASSIGNS. The rights and obligations of any Creditor or
the holders of the Equity Interests referred to in the Plan will be binding
upon, and will inure to the benefit of, the successors, assigns, heirs,
devisees, executors, and personal representatives of such Creditor or such
holder of an Equity Interest.
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<PAGE>
12.12 CONFIRMATION ORDER. The Plan shall have no force or effect unless the
Bankruptcy Court enters the Confirmation Order.
12.13 REVOCATION. If the Plan is revoked or withdrawn prior to
confirmation, then the Plan shall be deemed null and void, and, in such event,
nothing contained herein shall be deemed to constitute a waiver or release of
any Claims by or against the Debtor or any other Person or to prejudice in any
manner the rights of the Debtor or any Person.
12.14 RESERVATION OF RIGHTS. Neither the filing of the Plan, nor any
statement or provision contained herein, nor the taking of any action by the
Debtor with respect to the Plan shall be or shall be deemed to be an admission
or waiver of any rights prior to the Effective Date, except as specifically set
forth in the Plan with respect to the period prior to the Effective Date.
12.15 UNCLAIMED PROPERTY. Except as otherwise provided in this Plan, any
property held for distribution in accordance with the Plan by the Reorganized
Debtor which is unclaimed or undistributed on the second anniversary of the due
date shall revest in the Reorganized Debtor and be distributed to the
Reorganized Debtor.
12.16 PAYMENT OPTION. At the option of the Reorganized Debtor, except as
otherwise required or provided in the Plan or by any applicable agreement, any
Cash payment to be made pursuant to the Plan may be made by check on a United
States bank mailed by first class mail or by wire transfer.
12.17 DISCLOSURE STATEMENT. Creditors, the holders of the Equity Interests,
and other interested parties are referred to the Disclosure Statement, which
accompanies the Plan in conjunction with the solicitation of acceptances of the
Plan.
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<PAGE>
RESPECTFULLY SUBMITTED this 22nd day of July, 1997.
SURF CITY SQUEEZE, INC., an Arizona
corporation, fka Sunbelt Ventures, Inc.
By /s/ Kevin A. Blackwell
-------------------------------------
Kevin A. Blackwell
Its Duly Authorized
Representative
and
THE OFFICIAL COMMITTEE OF UNSECURED
CREDITORS
By /s/ Joseph Brotherton
-------------------------------------
Joseph Brotherton
Its Chairman and Duly Authorized
Representative
PREPARED AND SUBMITTED BY:
STREICH LANG, P.A.
Renaissance One
Two North Central Avenue
Phoenix, Arizona 85004-2391
By /s/ John J. Dawson
----------------------------------
John J. Dawson
Samantha Masters-Brown
Attorneys for DEBTOR
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<PAGE>
GALLAGHER & KENNEDY
2600 North Central Avenue
Phoenix, Arizona 85004-3020
By /s/ Charles R. Sterbach
----------------------------------
Charles R. Sterbach
Attorneys for the OFFICIAL UNSECURED
CREDITORS COMMITTEE
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John J. Dawson, Esq. (#2786)
Samantha G. Masters-Brown, Esq. (#13950)
STREICH LANG, P.A.
Renaissance One
Two North Central Avenue
Phoenix, Arizona 85004-2391
(602) 229-5200
Attorneys for the DEBTOR
Charles R. Sterbach, Esq. (#9315)
GALLAGHER & KENNEDY
2600 North Central Avenue
Phoenix, Arizona 85004-3020
(602) 530-8000
Attorneys for the OFFICIAL UNSECURED
CREDITORS COMMITTEE
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ARIZONA
In re: ) In Proceedings Under Chapter 11
)
SURF CITY SQUEEZE, INC., ) Case No. 97-00451-PHX-GBN
an Arizona corporation, )
fka Sunbelt Ventures, Inc., )
)
Debtor. )
___________________________________)
AMENDED DISCLOSURE STATEMENT ACCOMPANYING FIRST MODIFIED
JOINT PLAN OF REORGANIZATION PROPOSED BY THE DEBTOR
AND THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS
DATED: May 13, l997, as amended July 22, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
----
I. INTRODUCTION.............................................................1
II. INFORMATION REGARDING THE PLAN AND DISCLOSURE STATEMENT..................2
III. REPRESENTATIONS..........................................................3
IV. VOTING PROCEDURES AND REQUIREMENTS.......................................4
A. Who Is Entitled To Vote...............................................4
1. Allowed Claims....................................................4
2. Impaired Claims...................................................5
B. Voting Procedures.....................................................5
1. Submission of Ballots.............................................5
2. Incomplete Ballots................................................6
3. Withdrawal of Ballots.............................................6
4. Questions and lost or damaged Ballots.............................6
C. Summary Of Voting Requirements........................................6
V. OVERVIEW OF THE PLAN.....................................................7
A. General Structure Of The Plan.........................................7
B. Estimated Distributions To Creditors And Holders Of
Equity Interests......................................................8
VI. DESCRIPTION OF THE DEBTOR...............................................10
A. Corporate Structure Of The Debtor....................................10
B. Debtor's Business Operations.........................................11
C. Affiliates And Subsidiaries Of The Debtor............................12
D. Officers And Directors Of Debtor.....................................13
1. Board of Directors of Debtor.....................................13
2. Officers of Debtor...............................................14
E. Retention Of Directors And Management................................14
F. The Debtor's Pre-Bankruptcy Financial Results........................14
G. The Debtor's Post-Petition Financial Results.........................15
H. Competition..........................................................15
VII. EVENTS LEADING UP TO THE FILING OF THE REORGANIZATION CASES.............16
A. Rapid Expansion And Shift To Corporate Owned And Operated Stores.....16
B. Weider's Failure To Fund The Line Of Credit..........................17
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VIII. SIGNIFICANT EVENTS DURING THE REORGANIZATION CASE.......................18
A. Operation Of Business................................................18
B. First Day Motions....................................................19
1. Authority to continue use of pre-petition bank accounts..........19
2. Payment of employee wages, salaries, and other benefits..........19
C. Appointment Of Creditors' Committee..................................20
D. Employment Of Professionals..........................................20
1. The Debtor's Professionals.......................................20
2. Professionals for the Creditors' Committee.......................21
E. The Weider Settlement................................................21
F. Litigation Involving Executory Contracts And
Unexpired Leases.....................................................22
1. Petition Date rejection of leases................................22
2. Assumption/rejection of the Taubman leases.......................23
3. Resolution of Chandler Claims....................................24
4. Resolution of Pyramid Landlords' Claims..........................24
5. Resolution of Southern Group Inc's Claims........................25
6. Extension of time to assume or reject............................26
7. Post-Petition Assumptions/Assignments of
Executory Contracts and Unexpired Lease..........................26
8. Rejections of Executory Contracts And Unexpired Leases...........27
G. Litigation Involving Agreements With Bally Total
Fitness Corporation..................................................27
H. Bar Date For Claims..................................................28
I. Universal City Store.................................................30
J. Biltmore Lease.......................................................30
IX. DESCRIPTION OF THE PLAN.................................................30
A. Classification And Treatment Of Claims And Equity
Interests Under The Plan.............................................30
1. Class 1: Administrative Claims..................................31
2. Class 2: Priority Unsecured Claims..............................32
3. Class 3: Taubman Priority Claims................................33
4. Class 4: Priority Tax Claims....................................34
5. Class 5A: Cho Secured Claims.....................................34
6. Class 5B: Pyramid Secured Claims.................................35
7. Class 5C: Southern Secured Claims................................36
8. Class 5D: Koury and Colen Secured Claims.........................36
9. Class 5E: Dmitrenko Secured Claim................................37
10. Class 5F: Hofmeister and Manzeri Secured Claims..................38
11. Class 5G: Kim Secured Claims.....................................38
12. Class 5H: Other Secured Claims...................................39
13. Class 6: Chandler Claims........................................39
14. Class 7: Landlord/Executory Contract Claims.....................40
15. Class 8: Weider Unsecured Claim.................................41
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<PAGE>
16. Class 9: Bally's Claims.........................................41
17. Class 10: Administrative Convenience Unsecured Claims............42
18. Class 11: General Unsecured Claims...............................42
19. Class 12: Equity Interests.......................................45
B. Means For Implementation Of Plan.....................................45
1. Structure of Reorganized Debtor..................................45
2. Funding of the Plan..............................................46
3. Establishment of Unsecured Creditor Payment Pool.................47
4. Assignment of Claims.............................................48
5. Reduction of Executive Salaries..................................48
6. Objections to Claims.............................................48
7. Assumption and Rejection of Executory Contracts..................49
8. Time of performance under the Plan (Effective Date)..............50
X. POST-CONFIRMATION DATE OPERATIONS AND PROJECTIONS.......................51
XI. CERTAIN INCOME TAX CONSEQUENCES.........................................52
A. Scope And Limitations................................................52
B. Tax Consequences To Creditors........................................53
1. General..........................................................53
2. Receipt of Interest..............................................54
3. Character of Gain or Loss........................................55
C. Importance Of Obtaining Professional Tax Assistance..................56
XII. CONFIRMATION OF THE PLAN................................................57
A. Confirmation Hearing.................................................57
B. Objections To Confirmation Of The Plan...............................57
C. Requirements For Confirmation Of The Plan............................57
1. Best interests of creditors and liquidation analysis.............58
2. Feasibility......................................................59
3. Accepting Impaired Class.........................................60
D. Confirmation Over Dissenting Class (Cram Down).......................60
XIII. ALTERNATIVES TO THE PLAN................................................61
XIV. RECOMMENDATION AND CONCLUSION...........................................63
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<PAGE>
SCHEDULES TO DISCLOSURE STATEMENT
Schedule "A" Plan of Reorganization
Schedule "B" FYE 1993 - FYE 1995 Financial Statements
Schedule "C" 1/13/97-5/31/97 Balance Sheet and Income Statement
Schedule "D" Weider Term Sheet
Schedule "E" Projected Operating Results
Schedule "F-1" Liquidation Analysis
Schedule "F-2" Alternative Liquidation Analysis
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<PAGE>
I. INTRODUCTION.
SURF CITY SQUEEZE, INC., the Debtor and Debtor-In-Possession in the
above-captioned case (the "Debtor") and the OFFICIAL COMMITTEE OF UNSECURED
CREDITORS (the "Creditors' Committee") (the Debtor and the Creditors' Committee
are hereinafter severally and collectively called the "Proponents") have
prepared this Disclosure Statement in connection with the solicitation of
acceptances of the "FIRST MODIFIED JOINT PLAN OF REORGANIZATION PROPOSED BY THE
DEBTOR AND THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS" dated May 13, l997 and
amended July 22, 1997 (the "Plan"). A copy of the Plan is attached as Schedule
"A" to this Disclosure Statement. The Plan modifies the "PLAN OF REORGANIZATION
PROPOSED BY DEBTOR" which was filed by the Debtor on May 13, 1997 (the "Initial
Plan"). This Disclosure Statement modifies and replaces the "DISCLOSURE
STATEMENT ACCOMPANYING PLAN OF REORGANIZATION PROPOSED BY DEBTOR" which was
filed by the Debtor on May 13, 1997 (the "Initial Disclosure Statement").
The various schedules attached to this Disclosure Statement are
incorporated into and are a part of this Disclosure Statement. Capitalized terms
used herein will have the same meanings as are ascribed to such terms in the
Plan. Terms defined in this Disclosure Statement which are also defined in the
Plan are solely for convenience; and the Proponents do not intend to change the
definitions of those terms from the Plan. If there is any inconsistency between
the Plan and this Disclosure Statement, the Plan is, and will be, controlling.
<PAGE>
II. INFORMATION REGARDING THE PLAN AND DISCLOSURE STATEMENT.
The objective of a Chapter 11 case is the confirmation (I.E., approval
by the Bankruptcy Court) of a plan of reorganization. A plan describes in detail
(and in language appropriate for a legal contract) the means for satisfying the
claims against and interests in a debtor. After a plan has been filed with the
Bankruptcy Court, the holders of such claims and interests are permitted to vote
to accept or reject the plan. Before a debtor or other plan proponent can
solicit acceptances of a plan, Bankruptcy Code ss.1125 requires the debtor or
other plan proponent to prepare a disclosure statement containing adequate
information of a kind, and in sufficient detail, to enable those parties
entitled to vote on the plan to make an informed judgment about the plan and
whether they should accept or reject the plan.
The purpose of this Disclosure Statement is to provide sufficient
information about the Debtor and the Plan to enable you to make an informed
decision in exercising your right to accept or reject the Plan. Therefore, this
Disclosure Statement provides relevant information about the Debtor, its
property and liabilities, and the Plan. This Disclosure Statement will be used
to solicit acceptances of the Plan only after the Bankruptcy Court has entered
an order approving this Disclosure Statement. Bankruptcy Court approval of this
Disclosure Statement means that the Bankruptcy Court has found that this
Disclosure Statement provides adequate information in accordance with Bankruptcy
Code ss.1125. Approval by the Bankruptcy Court is not an opinion or ruling on
any other merits of this Disclosure Statement, and it does not mean that the
Plan itself has been or will be approved by the Bankruptcy Court.
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<PAGE>
After this Disclosure Statement has been approved by the Bankruptcy
Court and there has been voting on the Plan, there will be a hearing on the Plan
to determine whether it should be confirmed. At the hearing, the Bankruptcy
Court will consider whether the Plan satisfies the various requirements of the
Bankruptcy Code. The Bankruptcy Court also will receive and consider a ballot
report which will present a tally of the votes accepting or rejecting the Plan
cast by those entitled to vote. Once confirmed, the Plan is treated essentially
as a new contract and is binding on all Creditors and other parties in interest
in the Debtor's Reorganization Case.
THIS DISCLOSURE STATEMENT IS NOT THE PLAN. FOR THE CONVENIENCE OF
CREDITORS AND HOLDERS OF EQUITY INTERESTS IN THE DEBTOR, THE PLAN IS
SUMMARIZED IN THIS DISCLOSURE STATEMENT. ALL SUMMARIES ARE QUALIFIED
IN THEIR ENTIRETY BY THE PLAN ITSELF. IN THE EVENT OF ANY
INCONSISTENCY BETWEEN THIS DISCLOSURE STATEMENT AND THE PLAN, THE PLAN
WILL CONTROL.
III. REPRESENTATIONS.
The information in this Disclosure Statement has not been subject to a
certified audit. Rather, the Debtor has prepared this Disclosure Statement from
information compiled from records maintained in the ordinary course of the
Debtor's business and from information received by the Debtor from third
parties. Every effort has been made to be as accurate as possible in the
preparation of this Disclosure Statement.
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<PAGE>
Other than as stated in this Disclosure Statement, the Proponents have
not authorized any representations or assurances concerning the Debtor and its
operations or the values of its assets. Therefore, in deciding whether to accept
or reject the Plan, you should not rely on any information relating to the
Debtor or the Plan other than that contained in this Disclosure Statement or in
the Plan itself.
IV. VOTING PROCEDURES AND REQUIREMENTS.
A. WHO IS ENTITLED TO VOTE.
If you are the holder of an Allowed Claim that is "impaired" under the
Plan, it is important that you vote on the Plan. The solicitation of votes on
the Plan is sought only from those holders of Allowed Claims which are impaired
by the Plan. As explained more fully below, to be entitled to vote, your Claim
must be both "allowed" and "impaired".
1. ALLOWED CLAIMS.
You have an Allowed Claim if: (i) you timely Filed a proof of claim
and no objection has been Filed to your Claim within the time period set for the
filing of such objections; or (ii) you timely Filed a proof of claim and an
objection was Filed to your Claim upon which the Bankruptcy Court has ruled and
allowed your Claim. Under the Plan, the deadline for filing objections to Claims
is thirty (30) days after the Effective Date. If your Claim is not an Allowed
Claim, it is a Disputed Claim; and you will not be entitled to vote on the Plan
unless the Bankruptcy Court temporarily or provisionally allows your Claim for
voting purposes pursuant to Bankruptcy Rule 3018. If you are uncertain regarding
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<PAGE>
the status of your Claim, you should check the Bankruptcy Court record
carefully, and you should seek appropriate legal advice if you have any dispute
with the Debtor. The Proponents and their professional advisors cannot advise
you about such matters.
2. IMPAIRED CLAIMS.
Claims are "impaired" when the full amounts of the Allowed Claims will
not be paid under the Plan, or when the holders' legal, equitable, or
contractual rights are otherwise altered by the Plan. Holders of Claims which
are not "impaired" under the Plan are deemed to have accepted the Plan pursuant
to Bankruptcy Code ss.1126(f), and their acceptances of the Plan need not be
solicited.
B. VOTING PROCEDURES.
1. SUBMISSION OF BALLOTS.
All Creditors and holders of Equity Interests will be sent a Ballot,
together with instructions for voting, with a copy of this Disclosure Statement
as approved by the Bankruptcy Court and a copy of the Plan. You should read the
Ballot carefully and follow the instructions contained therein. Please use only
the Ballot that was sent with this Disclosure Statement. You should complete
your Ballot and return it to:
STREICH LANG, P.A.
Renaissance One
Two North Central
Phoenix, Arizona 85004-2391
Telephone Number: (602) 229-5498
Telefax Number: (602) 229-5690
Attn: Lori Winkelman
TO BE COUNTED, YOUR BALLOT MUST BE RECEIVED AT THE ADDRESS LISTED
ABOVE BY ________________________
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<PAGE>
2. INCOMPLETE BALLOTS.
Unless otherwise ordered by the Bankruptcy Court, Ballots which are
signed, dated, and timely received, but on which a vote to accept or reject the
Plan has not been indicated, will not be counted as a vote on the Plan.
3. WITHDRAWAL OF BALLOTS.
A Ballot may not be withdrawn or changed after it is cast unless the
Bankruptcy Court permits you to do so after notice and a hearing to determine
whether sufficient cause exists to permit the change.
4. QUESTIONS AND LOST OR DAMAGED BALLOTS.
If you have any questions concerning voting procedures, if your Ballot
is damaged or lost, or if you believe you should have received a Ballot but did
not receive one, you may contact:
STREICH LANG, P.A.
One Renaissance
Two North Central Avenue
Phoenix, Arizona 85004-2391
Telephone Number: (602) 229-5498
Telefax Number: (602) 229-5690
Attn: Lori Winkelman
C. SUMMARY OF VOTING REQUIREMENTS.
In order for the Plan to be confirmed, the Plan must be accepted by at
least one (1) impaired Class of Claims. For a Class of Claims to vote to accept
the Plan, votes representing at least two-thirds (2/3) in amount and a majority
in number of the Claims voted in that Class must be cast for acceptance of the
Plan. For a Class of Equity Interests to vote to accept the Plan, votes
representing at least two-thirds (2/3) of the outstanding Equity Interests in
each Class which are voted must be cast for acceptance of the Plan. The
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<PAGE>
Proponents are soliciting votes from holders of Allowed Claims in the following
Classes which are "impaired" under the Plan, PROVIDED, HOWEVER, THAT the
Proponents will have the right to supplement this Disclosure Statement as to any
other impaired Classes, if any.
CLASS DESCRIPTION
----- -----------
Class 5B Pyramid Secured Claims
Class 5C Southern Secured Claims
Class 5E Dmitrenko Secured Claims
Class 6 Chandler Claims
Class 7 Landlord/Executory Contract Claims
Class 9 Bally's Claims
Class 10 Administrative Convenience Unsecured Claims
Class 11 General Unsecured Claims
The treatment of each Class under the Plan is described in the Plan and is
summarized in Article IX of this Disclosure Statement.
A VOTE FOR ACCEPTANCE OF THE PLAN BY THOSE HOLDERS OF A CLAIM OR
EQUITY INTEREST WHO ARE ENTITLED TO VOTE IS MOST IMPORTANT. THE
PROPONENTS ASSERT THAT THE TREATMENT OF CREDITORS UNDER THE PLAN IS
THE BEST ALTERNATIVE FOR CREDITORS AND THE PROPONENTS RECOMMEND THAT
THE HOLDERS OF ALLOWED CLAIMS AND EQUITY INTERESTS VOTE IN FAVOR OF
THE PLAN.
V. OVERVIEW OF THE PLAN.
A. GENERAL STRUCTURE OF THE PLAN.
From the onset of the Reorganization Case, the Debtor has been intent
on proceeding expeditiously with a reorganization of its financial affairs. The
Plan provides for a restructure of the Claims against the Debtor, which will
allow the Debtor's business to continue successfully. The Plan is structured to
provide a fair and equitable recovery to all parties in this Reorganization Case
given the value of the Debtor's assets and the magnitude of its liabilities.
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<PAGE>
The Plan is made possible by the support of the Debtor's Affiliates,
which operate the franchising and supply operations relied upon by the Debtor.
Moreover, a substantial portion of the funding for the Plan will come from Surf
City Acquisition Corporation II ("SCAC"), which will acquire the equity
interests of the Reorganized Debtor through a new equity contribution and other
financing (SEE Article IX, Section B.1 below for a detailed discussion).
B. ESTIMATED DISTRIBUTIONS TO CREDITORS AND HOLDERS OF EQUITY INTERESTS.
SUMMARY OF PROJECTED RECOVERIES
FOR ALLOWED (OR PROVISIONALLY ALLOWED) CLAIMS AND EQUITY INTERESTS
<TABLE>
<CAPTION>
Approximate
Total
Estimated
Allowed (Or
Provisionally
Class/Nature Allowed) Estimated Dates of Estimated
of Claim Treatment Claims Distributions Distributions
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 Unimpaired $425,000 Effective Date, or as $425,000
Administrative otherwise agreed, or as
Claims otherwise ordered by the
Court
Class 2 Priority Unimpaired $35 Effective Date, or as $35
Unsecured Claims otherwise agreed
Class 3 Taubman Unimpaired None Ordinary course of None
Priority Claims business
Class 4 Priority Unimpaired $272,000 Over six years with $272,000, plus
Tax Claims interest interest
Class 5A Cho Unimpaired $190,500 Paid upon sale of $190,500
Secured Claims Universal City Store
(estimated to be prior to
confirmation)
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Approximate
Total
Estimated
Allowed (Or
Provisionally
Class/Nature Allowed) Estimated Dates of Estimated
of Claim Treatment Claims Distributions Distributions
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class 5B Pyramid Impaired $16,000 Paid under terms stated in At the Debtor's
Secured Claims Plan option, $14,400 or
abandonment of
collateral
Class 5C Southern Impaired $22,200 Paid under terms stated in $22,200
Secured Claims Southern Stipulation
Class 5D Koury Unimpaired $25,900 $4,685 paid on the $25,900
and Colen Secured Effective Date; and
Claims remainder of principal paid
under terms of underlying
instrument
Class 5E Dmitrenko Impaired $27,500 Paid under terms of $27,500
Secured Claims underlying instrument with
maturity date extended by
one month
Class 5F Unimpaired $105,200 Paid outside of Plan $105,200
Hofmeister and
Manzeri Secured
Claims
Class 5G Kim Unimpaired $968.22 Effective Date $968.22
Secured Claims
Class 5H Other Unimpaired $0 Effective Date At the Debtor's
Secured Claims option, Cash in the
amount of any such
Claims,
reinstatement of
underlying
obligation, or
abandonment of
collateral
Class 6 Chandler Impaired $203,039.72 Paid under terms stated in $203,039.72
Claims Chandler Stipulation
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
Approximate
Total
Estimated
Allowed (Or
Provisionally
Class/Nature Allowed) Estimated Dates of Estimated
of Claim Treatment Claims Distributions Distributions
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class 7 Landlord/ Impaired $230,000 Paid over 18 months $230,000
Executory Contract following the Initial Plan
Claims Payment Date; or as
otherwise agreed
Class 8 Weider Unimpaired $1,500,000 Released on the Effective $0.00
Unsecured Claim Date
Class 9 Bally's Impaired $98,000 Treated in accordance with $98,000
Claims Class 7, above
Class 10 Impaired $103,500 45 days after Effective $25,600
Administrative Date
Convenience
Unsecured Claims
Class 11 General Impaired $5,000,000- Paid over 7 years $1,225,000 plus a
Unsecured Claims 6,000,000 (quarterly distributions) percentage of Net
Cash Flow up to
100%
Class 12 Equity Impaired None
Interests
</TABLE>
VI. DESCRIPTION OF THE DEBTOR.
A. CORPORATE STRUCTURE OF THE DEBTOR.
The Debtor was created in 1989 as an Arizona corporation, formerly
known as Sunbelt Ventures, Inc. As of the Petition Date, the Debtor was (and
continues to be) a valid corporation in good standing. The Debtor's primary
place of business is located in Scottsdale, Arizona.
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<PAGE>
The Debtor is a privately held corporation, with one (1) Class of
common stock. From its inception, Kevin A. Blackwell has been the majority
shareholder and President of the Debtor. As of the Petition Date, the common
stock in the Debtor was held as follows: forty-three percent (43%) by Kevin A.
Blackwell and Kathryn Blackwell, jointly; forty percent (40%) by Surf Ventures,
L.L.C.; fifteen percent (15%) by Apache Peak Capital, L.L.C. ("Apache Peak");
and two percent (2%) by Robert Corliss. The common stock of the Debtor presently
is held as follows: seventy percent (70%) by Kevin A. Blackwell and Kathryn
Blackwell, jointly; twenty-five percent (25%) by Apache Peak Capital, L.L.C.
("Apache Peak"); and five percent (5%) by Robert Corliss
B. DEBTOR'S BUSINESS OPERATIONS.
The Debtor's primary business is the ownership, operation, and sale to
franchisees/licensees of juice bar stands located throughout the United States.
The juice bar stands provide smoothies and other nutritionally fortified food
and drink products to consumers. Historically, the Debtor has operated its
business as a franchise/license system. Specifically, in 1989, the Debtor began
building and operating juice bars. In 1991, the Debtor started licensing the
juice bars to independent operators. The Debtor continued to license its juice
bar stands from 1991 through 1994. As the Debtor matured into an industry
leader, it began to require a greater degree of system wide control and
uniformity than the licensing arrangements could provide. Therefore, in early
1995, the Debtor began franchising its juice bar stands. Thereafter, during the
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<PAGE>
third quarter of 1995, the Debtor, in conjunction with new investors (Apache
Peak and Weider), began opening and operating corporate juice bars, which
activity continued until October 1996. Beginning in November of 1996 to the
present, the Debtor determined that it was more efficient and profitable to
operate as a franchise/license system and began converting its corporate stores
to franchises.
In this regard, the Debtor oversees the general administration of its
two (2) subsidiaries which are instrumental in the franchise/license system:
Surf City Squeeze Franchising Corporation ("SCSFC") and Kona Coast Provisions,
Inc. ("Kona"). In addition, the Debtor currently operates five (5)
corporate-owned juice bar stands.
C. AFFILIATES AND SUBSIDIARIES OF THE DEBTOR.
The Debtor owns two (2) subsidiary companies, which are not in Chapter
11: SCSFC and Kona(1).
SCSFC is an Arizona corporation which was formed during the last
quarter of 1994 for the purpose of franchising the Surf City Squeeze juice bar
stands. Accordingly, SCSFC is in the business of administering and developing
- - ----------
(1) The Debtor also owns partnership interests in: Surf City Joint Venture and
Centerpoint Joint Venture. The Debtor intends to sell its interest in the
Centerpoint Joint Venture for fair and adequate consideration, which the
Debtor estimates will be a promissory note in the approximate amount of
$146,000.00 payable over five (5) years, to the Debtor's partner in the
Centerpoint Joint Venture, CSI, Inc. The note from CSI, Inc. will be
secured by the Surf City stores owned by Centerpoint Joint Venture. The
Debtor anticipates that the sale of its interest in the Centerpoint Joint
Venture will occur by confirmation of the Plan, and the funds from the sale
will be used to fund the Plan. Surf City Joint Venture does not have any
assets of any significant value and has minimal activity.
-12-
<PAGE>
programs for the operation of Surf City Squeeze juice bar stands; selling
licenses to franchisees to use the system, marks, and goodwill of Surf City
Squeeze in operating juice bar stand franchises; and monitoring the operation of
franchised locations nationwide to ensure compliance with the terms and
conditions of the franchise agreements.
KONA is an Arizona corporation which was formed in April of 1994 to
serve as the product supplier for the Surf City Squeeze stores. Accordingly, it
is in the business of supplying various proprietary and private label products
to the Surf City Squeeze stores for smoothies and other nutritionally-fortified
drinks. Kona initially was an independent company owned by Kevin Blackwell and
Kathryn Blackwell. It later was acquired by the Debtor as a wholly-owned
subsidiary in December, 1995.
D. OFFICERS AND DIRECTORS OF DEBTOR.
1. BOARD OF DIRECTORS OF DEBTOR.
The following individuals currently serve as members of the Board of
Directors of the Debtor:
KEVIN A. BLACKWELL serves as the Chairman of the Board of Directors
and as the President of the Debtor. He attended Eastern Washington University
with an emphasis in math and business law. Kevin Blackwell has over fifteen (15)
years of experience in the juice bar industry. He founded the Debtor and took
the blended fresh fruit smoothie concept into the regional mall arena and health
club facilities. Kevin Blackwell devotes full time to the Debtor.
-13-
<PAGE>
KATHRYN BLACKWELL serves as a member of the Board of Directors and as
the Secretary/Treasurer of the Debtor. Kathryn Blackwell is the wife of Kevin
Blackwell. She completed four (4) years of study at San Jose State University in
1988. Her studies were concentrated in the field of business management and
international business. Kathryn Blackwell devotes full time to the Debtor.
2. OFFICERS OF DEBTOR.
In addition to Kevin Blackwell (President) and Kathryn Blackwell
(Secretary/Treasurer), the following individual currently serves as the Chief
Financial Officer of the Debtor:
DAVID A. GUARINO serves as the Chief Financial Officer of the Debtor.
He graduated from the University of Denver in 1982 with a Masters and
undergraduate degree in accounting. He previously served as Senior Vice
President - Principal Financial Officer of TLC Beatrice International Holdings,
Inc., a $1.8 billion (revenues) international food company.
E. RETENTION OF DIRECTORS AND MANAGEMENT.
Pursuant to the Plan, on the Effective Date, the existing Board of
Directors of the Debtor will continue as the Board of Directors for the
Reorganized Debtor EXCEPT THAT David Guarino will replace Kathryn Blackwell on
or before the Effective Date. In addition, the Plan contemplates that the
current management of the Debtor, and other Debtor employees, will continue in
their positions with the Reorganized Debtor.
-14-
<PAGE>
F. THE DEBTOR'S PRE-BANKRUPTCY FINANCIAL RESULTS.
The income, expenses, and financial results with respect to the Debtor
and its subsidiaries from the creation of the Debtor through the fiscal year
ended December 31, 1995 are summarized in the audited Consolidated Financial
Statements, copies of which are attached to this Disclosure Statement as
Schedule "B".
G. THE DEBTOR'S POST-PETITION FINANCIAL RESULTS.
A Balance Sheet for the Debtor as of March 31, 1997, and an Income
Statement for the Debtor for the period from January 13, 1997 through May 31,
1997, which were prepared by the Debtor's management (with assistance from Ernst
& Young), are attached to this Disclosure Statement as Schedule "C". The Debtor
also has Filed monthly operating reports with the Bankruptcy Court which are
available for review by interested parties.
H. COMPETITION.
The 1990's have emerged as a decade of maturation for the fitness
movement, marked by increasing consumer interest in a balanced regimen of diet
and exercise. A simultaneous counter-trend has been the acceleration of the fast
food craze. The Debtor and its subsidiaries are well positioned to capitalize on
both of these trends as they offer an appealing and nutritious alternative to
fast food.
The industry, however, has been penetrated by several small companies
building organizations in the juice bar market. However, the Debtor believes
that none of the companies that could be considered to be a competitor of the
Debtor has the size, the momentum, or the name recognition to compete with the
Debtor. The Debtor continually studies the state of the juice bar market.
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<PAGE>
VII. EVENTS LEADING UP TO THE FILING OF THE REORGANIZATION CASES.
No single factor alone caused the filing of the Reorganization Case.
Instead, a combination of factors led to the need for the Debtor to seek Chapter
11 relief. Outlined below are the primary factors and events that required the
Debtor to seek a reorganization of its financial affairs.
A. RAPID EXPANSION AND SHIFT TO CORPORATE OWNED AND OPERATED STORES.
From 1991 through mid-1995, the Debtor successfully operated as a
license/franchise system. In mid-1995, with a $1 million infusion made by Apache
Peak, the Debtor ventured into owning and operating juice bar stores at the
corporate level. Thereafter, in August 1995, Weider infused an additional $1.25
million into the Debtor to fund the expansion of corporate juice bar stands.
With the large amount of capital then available, the strategy was to engineer a
rapid expansion, thereby giving the Debtor a leading position in the
increasingly popular retail juice and smoothie bar market. The goal was to focus
primarily on building corporate stores in prime locations; this was based upon
the philosophy that the revenues generated by running these stores internally
would fund the desired expansion. The combination of available capital and the
new strategy of rapid expansion led to negotiations with mall developers, health
clubs, and various other venues nationwide to open juice bars in a large number
of locations across the country. Through these negotiations, the Debtor secured
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<PAGE>
leases and licenses for numerous sites, and with rent commencement dates quickly
approaching, the pressure was on the Debtor to implement the company's explosive
growth. As such, between August and December of 1995, the Debtor opened almost
thirty (30) new locations. With the growing number of company-owned stores came
the need to implement an operations team to manage the stores. The orchestration
of a successful management team over such a short period of time was a challenge
for the Debtor. Initially, the number of corporate locations was manageable, and
the stores produced competitive numbers. However, the revenues generated by the
stores were not sufficient to fund the aggressive expansion.
The Debtor sought additional investment in order to continue the
construction of new locations as scheduled. As a result, Weider infused an
additional $5.5 million into the Debtor to fund the expansion from December of
1995 through June of 1996. During this six (6) month period, the Debtor opened
approximately thirty (30) new corporate locations in several different states.
As a result of the rapid expansion, it became increasingly difficult for the
Debtor's small management team to manage properly the large number of stores,
leading to insufficient management and supervision. Consequently, store sales
suffered.
B. WEIDER'S FAILURE TO FUND THE LINE OF CREDIT.
The Debtor contends that on or around October 1996, Weider committed
to provide a line of credit in favor of the Debtor in the amount of $6.5 million
for the continued expansion and operation of corporate-owned stores. This
capital was necessary to the Debtor to: (i) provide funding for the continued
-17-
<PAGE>
construction of new stores in the numerous locations for which the Debtor had
signed lease agreements; and (ii) provide funding for the increasing travel and
related expenses associated with properly managing such a large number of stores
in a wide range of locations. Prior to October, 1996, Weider funded $3.5
million, which the Debtor used for such expansion. Thereafter, Weider declined
to fund the remaining $3 million.
As a result, the Debtor could not continue to open new stores where it
had already signed lease or license agreements. In addition, the Debtor did not
have the funds to pay a work force for the operation and management of the
corporate locations. Consequently, management of the locations declined, along
with the sales of the locations. The Debtor attempted to rectify the situation
by closing locations that were not meeting expectations and by making extreme
cutbacks in personnel. Unfortunately, these efforts were not sufficient to cure
the company's financial situation. Debt continued to accumulate with the
Debtor's general trade creditors and on lease and license agreements where
stores had not been opened or were closed, ultimately leading to the Debtor's
filing of this Reorganization Case.
VIII. SIGNIFICANT EVENTS DURING THE REORGANIZATION CASE.
A. OPERATION OF BUSINESS.
The Debtor Filed its voluntary Chapter 11 petition on January 13,
1997, thereby commencing the Debtor's Reorganization Case. The Debtor is
continuing to manage its business affairs as debtor-in-possession pursuant to
Bankruptcy Code ss.ss.1107 and 1108.
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<PAGE>
B. FIRST DAY MOTIONS.
At the onset of this Reorganization Case, the Debtor presented to the
Court various motions designed to assist the Debtor in making a smooth
transition into Chapter 11. The discussion below provides a general overview of
these "first day motions".
1. AUTHORITY TO CONTINUE USE OF PRE- PETITION BANK ACCOUNTS.
On January 15, 1997, the Debtor Filed with the Court its "EMERGENCY
MOTION FOR ORDER AUTHORIZING CONTINUED USE OF PREPETITION BANK ACCOUNTS" (the
"Accounts Motion"). Pursuant to the Accounts Motion, the Debtor requested that
the Court authorize and approve the Debtor's maintenance of existing bank
accounts and the continued use of its existing cash management system. Pursuant
to its Order dated January 23, 1997, the Bankruptcy Court granted the Accounts
Motion in its entirety.
2. PAYMENT OF EMPLOYEE WAGES, SALARIES, AND OTHER BENEFITS.
On January 15, 1997, the Debtor Filed with the Court its "EMERGENCY
MOTION FOR ORDER AUTHORIZING PAYMENT OF PREPETITION WAGES, SALARIES, AND OTHER
EMPLOYEE BENEFITS" (the "Wage Motion"). In the Wage Motion, the Debtor requested
that the Court enter an Order authorizing the Debtor to pay the prepetition
wages, salaries, and other benefits of its employees. Pursuant to its Order
dated January 23, 1997, the Bankruptcy Court approved the Wage Motion.
Accordingly, the Debtor has paid these pre-petition obligations in the ordinary
course of business.
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<PAGE>
C. APPOINTMENT OF CREDITORS' COMMITTEE.
On February 10, 1997, the Office of the United States Trustee
appointed the Creditors' Committee to represent the interests of Unsecured
Creditors in the Debtor's Reorganization Case pursuant to Bankruptcy Code
ss.1102(a)(1). The members of the Creditors' Committee are: (i) Builders
National, Inc.; (ii) C.S.R. Corporation; (iii) Chandler Signs Incorporated; (iv)
JMI Sales Corp.; and (v)Taylor Freezer Sales of Arizona. The Creditors'
Committee has been actively involved in this Reorganization Case. Pursuant to
the provisions of the Bankruptcy Code, the Creditors' Committee is charged with
the duty to represent the interests of Unsecured Creditors in the Debtor's
Reorganization Case.
D. EMPLOYMENT OF PROFESSIONALS.
The Debtor and the Creditors' Committee have retained various
professionals to provide advice and assistance in these Reorganization Cases.
1. THE DEBTOR'S PROFESSIONALS.
The Bankruptcy Court has approved the Debtor's employment of the
following professionals: (i) Streich Lang, P.A. (the "Streich Firm") -- general
bankruptcy and restructuring counsel; (ii) Ernst & Young, LLP ("Ernst & Young")
- - -- accountants and financial consultants; and (iii) Titus, Brueckner & Berry --
general corporate counsel(2).
- - ----------
(2) The Court has approved the employment of Titus, Brueckner & Berry subject
to the refiling of their application clarifying their representation of
various parties.
-20-
<PAGE>
2. PROFESSIONALS FOR THE CREDITORS' COMMITTEE.
The Bankruptcy Court has approved the Creditors' Committee's
employment of the following professionals in the Debtor's Reorganization Case:
(i) Gallagher & Kennedy (the "Gallagher Firm") -- general counsel for the
Creditors' Committee; (ii) The Barrington Group ("Barrington") -- accountants
and financial advisors to the Creditors' Committee.
E. THE WEIDER SETTLEMENT.
The Debtor, its principals, and the Creditors' Committee participated
in extensive settlement discussions with the Debtor's largest creditor, Weider,
which resulted in a settlement that provided for the release of almost $9
million of alleged claims against the Debtor while providing the Debtor with an
additional $800,000.00 funding, which will not have to be repaid except under
certain specified conditions. The terms of the settlement are set forth in a
"TERM SHEET STATING THE ESSENTIAL SUBSTANTIVE PROVISIONS OF THE PARTIES'
AGREEMENT - WEIDER SETTLEMENT AND THE RELATED MATTERS" dated April 2, 1997 (the
"Term Sheet"). A copy of the Term Sheet is attached to this Disclosure Statement
as Schedule "D". On April 4, 1997, the Debtor presented the settlement to the
Bankruptcy Court for its approval pursuant to its "MOTION FOR ORDER APPROVING
SETTLEMENT AND APPROVING DIP FINANCING" (the "Settlement Motion"). The
settlement was approved by the Court, over the objection of one creditor
(Bally), on May 6, 1997. The parties entered into the settlement to avoid the
costs and uncertainty surrounding litigation over the damages and reimbursement
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<PAGE>
claims, and other claims or issues that may have existed or arisen in connection
with the disputes between the parties to the settlement. This settlement has
permitted the Debtor to resolve a situation which might have significantly
delayed confirmation of a Plan, while also providing the Debtor with significant
debtor-in-possession financing which will assist the Debtor in its operations as
it proceeds with the proposal and confirmation of its Plan.
F. LITIGATION INVOLVING EXECUTORY CONTRACTS AND UNEXPIRED LEASES.
The following litigation has taken place with respect to executory
contracts and unexpired leases to which the Debtor is a party:
1. PETITION DATE REJECTION OF LEASES.
At the beginning of this Reorganization Case, the Debtor was a party
to approximately two hundred (200) leases and license agreement. On the Petition
Date, the Debtor rejected the majority of non-residential real property leases
(ninety-six (96)) which were burdensome to the estate. The Court approved the
rejection of the ninety-six (96) leases pursuant to an Order of the Court dated
February 10, 1997. In conjunction with the rejection of the ninety- six (96)
leases, the Court ordered that the Debtor was required to pay post-petition
administrative expense rent with respect to seventeen (17) of the leases for the
period from the Petition Date to the date the Order was entered rejecting the
leases, February 10, 1997. The administrative expenses related to those leases
totals approximately $46,575.00.
-22-
<PAGE>
2. ASSUMPTION/REJECTION OF THE TAUBMAN LEASES.
The Debtor and one of its major landlords, Taubman, entered into an
agreement which provided for the assumption of eighteen (18) non-residential
real property leases and the rejection of one (1) non-residential real property
leases. In conjunction with the assumption of the Taubman leases, Taubman
agreed: (i) to waive all pre-petition arrearages on the leases being assumed
(approximately $326,442.60); (ii) to waive all post-petition administrative
expense rents for the month of January on the leases being assumed
(approximately $66,717.74); (iii) to return to the Debtor $45,000; and (iv) to
change certain lease commencement dates. On March 5, 1997, the Debtor and
Taubman presented the assumptions/rejection of the Taubman leases to the
Bankruptcy Court for approval pursuant to their "JOINT MOTION TO ASSUME, AS
MODIFIED, CERTAIN UNEXPIRED REAL PROPERTY LEASES, AND TO REJECT ONE UNEXPIRED
REAL PROPERTY LEASE, BETWEEN THE DEBTOR AND THE TAUBMAN LANDLORDS" (the "Taubman
Motion"). In response to an objection that was Filed by the Creditors' Committee
to the Taubman Motion, Taubman agreed to hold the franchisees/licensees
responsible for all obligations under the leases first and prior to holding the
Debtor responsible for any such obligations. As such, the Taubman leases were
assigned to the franchisees/licensees. In response, the Creditors' Committee
withdrew its objection, and the Court approved the Taubman Motion on May 6,
1997. The Debtor believes that the Taubman agreement establishes the basis for a
successful reorganization and limitation on residual liability on the estate.
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<PAGE>
3. RESOLUTION OF CHANDLER CLAIMS.
The Debtor and one of its creditors, Chandler Signs, Inc.
("Chandler"), with which it is a party to an executory contract providing for
signage, entered into an agreement which provided for the rejection of various
leases for signage, while providing for the parties to enter into a purchase
agreement for such signage upon confirmation of the Plan. In conjunction with
the rejection of the Chandler leases and the purchase of the signage, Chandler
agreed to waive all of its pre-petition, post-petition, and rejection damage
claims upon confirmation of the Plan and execution of the purchase agreement. On
July 15, 1997, the Debtor and Chandler presented the their agreement to the
Bankruptcy Court for approval pursuant to a "STIPULATION RESOLVING CHANDLER
SIGNS' MOTION FOR IMMEDIATE PAYMENT OF ADMINISTRATIVE EXPENSE" (the "Chandler
Stipulation"). No objections have been received to date to the Chandler
Stipulation.
4. RESOLUTION OF PYRAMID LANDLORDS' CLAIMS.
The Debtor and a number of its landlords commonly referred to as the
Pyramid Landlords resolved pending disputes between them regarding the Pyramid
Landlords' Claims (secured and unsecured) and the Pyramid Landlords' request for
stay relief with respect to their Secured Claims. In essence, the Debtor and the
Pyramid Landlords agreed as follows: (i) the Pyramid Landlords were granted stay
relief with respect to the Debtor's equipment located at five (5) of the
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locations in which the Pyramid Landlords' claimed to be secured; (ii) the
Pyramid Landlords waived all claims (pre-petition, post-petition, and
administrative claims) with respect to those five (5) locations; (iii) the
Debtor and the Pyramid Landlords agreed that the Pyramid Landlords would hold
Secured Claims with respect to the remaining four (4) Pyramid Landlords in the
total amount of $16,000.00 ($4,000.00 per location); and (iv) the Pyramid
Landlords Unsecured Claims would be limited to calculation under Section
502(b)(6) of the Bankruptcy Code, and would not be accelerated as previously
claimed by the Pyramid Landlords. The agreement of the Debtor and the Pyramid
Landlords was presented to the Bankruptcy Court for approval on June 19, 1997,
pursuant to the "STIPULATION RESOLVING PYRAMID LANDLORDS' MOTION TO TERMINATE
THE AUTOMATIC STAY OF 11 U.S.C. SS.362(A) AND MOTION TO ALLOW AND COMPEL PAYMENT
OF ADMINISTRATIVE CLAIMS PURSUANT TO 11 U.S.C. SS.503(B)(1)(A)" (the "PyramiD
Stipulation"). The Pyramid Stipulation was approved by Bankruptcy Court order on
June 20, 1997.
5. RESOLUTION OF SOUTHERN GROUP INC'S CLAIMS.
The Debtor and one of its creditors, Southern, from which the Debtor
leased and purchased various equipment, entered into an agreement resolving
various disputes regarding the leases and alleged administrative claims. The
Court entered an order on July 1, 1997 which approved the agreement between the
parties which was set forth in the "STIPULATION RESOLVING MOTIONS OF SOUTHERN
GROUP, INC. FILED PURSUANT TO SECTIONS 362 AND 365 OF THE UNITED STATES
BANKRUPTCY CODE" (the "Southern Stipulation"). Pursuant to the Southern
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<PAGE>
Stipulation: (i) the leases with Southern were rejected; (ii) Southern will have
an administrative claim of $5,000.00; and (iii) Southern's Unsecured Claim will
be limited to $18,000.00.
6. EXTENSION OF TIME TO ASSUME OR REJECT.
In an effort to allow the Debtor and its professionals sufficient time
to analyze its numerous remaining leases and related executory contracts in
connection with its reorganization Plan, the Debtor Filed a motion requesting
the Court to extend the deadline to assume or reject unexpired non-residential
real property leases. Specifically, on March 7, 1997, the Debtor Filed a "MOTION
FOR ORDER EXTENDING DEADLINE FOR DEBTOR-IN-POSSESSION TO ASSUME OR REJECT
UNEXPIRED NON-RESIDENTIAL REAL PROPERTY LEASES" (the "Motion to Extend"),
requesting that the Court extend the deadline of the Debtor to assume or reject
non-residential real property leases under Bankruptcy Code ss.365(d) for sixty
(60) days, to coincide with the filing of the Debtor's Plan. Over the objection
of Bally, the Court granted the Debtor's Motion to Extend pursuant to an Order
dated May 9, 1997, extending the deadline to assume or reject non-residential
real property leases to May 13, 1997.
7. POST-PETITION ASSUMPTIONS/ASSIGNMENTS OF EXECUTORY CONTRACTS AND
UNEXPIRED LEASE.
On May 13, 1997, the Debtor filed its "MOTION TO ASSUME AND/OR ASSUME
AND ASSIGN CERTAIN UNEXPIRED REAL PROPERTY LEASES AND EXECUTORY CONTRACTS" (the
"Assumption Motion"), which requests the Court to consider the assumption and/or
assumption and assignment of numerous leases. On May 19, 1997, the Court entered
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<PAGE>
an order directing that the hearing on the Assumption Motion will be held at the
same time as the Confirmation Hearing on the Plan. The Debtor is in the process
of working with various landlords regarding the assumption and/or assumption and
assignment of various leases.
8. REJECTIONS OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES.
The Debtor has filed numerous motions with the Court rejecting certain
unexpired non-residential real property leases. These motions apply to
properties in which the Debtor believes it is in the best interest of the
Debtor's estate for the leases to be rejected. Each motion to reject has been
approved by order of the Bankruptcy Court.
G. LITIGATION INVOLVING AGREEMENTS WITH BALLY TOTAL FITNESS CORPORATION.
Bally operates health clubs. The Debtor, its franchisees, and its
licensees operate juice and health food concessions in certain of the Bally
clubs. In this regard, the Debtor is a party to twenty-two (22) separate
agreements with Bally that affect forty-six (46) Bally locations. Bally claims
that the Debtor's agreements with Bally affect seventy-nine (79) locations.
In the course of this Reorganization Case, Bally has taken the
following steps: (i) objected to the Debtor's Motion to Extend; (ii) requested
that the Court compel assumption or rejection of the Debtor's agreements with
Bally, which comprise approximately one-third (1/3) of the Debtor's opened and
operating juice bar stands; (iii) requested that the Court cut-off an exclusive
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<PAGE>
right of the Debtor to open juice bar stands in Bally locations; and (iv)
objected to the Weider Settlement. The Court overruled Bally's objections to the
Motion to Extend and the Weider Settlement. Bally's request for assumption or
rejection of the Bally agreements has been mooted. On May 13, 1997, the Debtor
Filed a motion to assume the Bally agreements. There are a number of disputes
pending between the Debtor and Bally regarding the Debtor's agreements with
Bally. An evidentiary hearing with respect to some of these disputes and issues
has been set by the Court for August 27, 1997.
In addition, the Debtor has commenced an adversary proceeding to
determine the nature, extent, and priority of any Claim held by Bally as well as
to recover any payments to Bally which may be recovered pursuant to Section 550
of the Bankruptcy Code and to obtain certain other relief with respect to Bally
and Bally's Claims.
Presently, however, the Debtor and Bally are attempting to settle all
disputes between the parties. In this regard, the parties are in the process of
exchanging drafts of settlement documents and have agreed to stay discovery for
one (1) week in an effort to resolve this matter. The Debtor anticipates that
the Debtor and Bally will be presenting a stipulated order resolving the
disputes between the parties to the Court for its approval prior to the
Confirmation Hearing. Although the Debtor believes that a settlement will be
reached with Bally, the Debtor cannot make any assurances that a settlement will
in fact be reached between the parties.
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H. BAR DATE FOR CLAIMS.
On May 9, 1997, the Debtor Filed a motion requesting that the
Bankruptcy Court enter an Order fixing the time within which all parties may
file proofs of Claim or interest in this Reorganization Case. On May 15, 1997,
the Court entered an Order setting a bar date for filing ALL proofs of Claim or
interest (regardless of whether the Claim or interest is listed by the Debtor as
undisputed, disputed, contingent, fixed, or liquidated) as the date twenty (20)
days from the entry of the Order setting the bar date. In this regard, the Court
set the following deadlines by which all proofs of Claim must be filed:
(a) With respect to Claims not concerning executory contracts or
unexpired leases, all proofs of Claim must have been filed by June 9,
1997.
(b) With respect to Claims arising from the rejection of an
executory contract or unexpired lease, all proofs of Claim must have
been or be filed by the later of either: (i) June 9, 1997; (ii) twenty
(20) days after the Bankruptcy Court enters an order permitting
rejection of the particular executory contract or unexpired lease; or
(iii) twenty (20) days from the date a plan of reorganization is
confirmed in this Reorganization Case. FAILURE OF HOLDERS OF CLAIMS OR
INTERESTS TO TIMELY FILE A PROOF OF CLAIM WILL RESULT IN DISALLOWANCE
OF THEIR CLAIMS.
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I. UNIVERSAL CITY STORE.
Prior to the Confirmation Hearing, the Debtor expects to file a motion
to sell the Universal City Store. In this regard, the Debtor has received an
offer to sell the Universal City Store for $400,000. The Debtor intends to use
the proceeds of the sale to pay arrearages owing under the lease with respect to
the Universal City Store and indebtedness owing to the Secured Creditor with
respect to the Universal City Store, with the remainder of the proceeds to be
used for the Debtor's reorganization. The Debtor anticipates that the sale of
the Universal City Store will close prior to the Confirmation Hearing.
J. BILTMORE LEASE.
The Debtor presently is involved in negotiations with the landlord and
a potential buyer for the assignment of the Debtor's lease with respect to the
Biltmore location.
IX. DESCRIPTION OF THE PLAN.
The following description of the Plan is for informational purposes
only and does not purport to change or supersede any of the specific contractual
language of the Plan. THE PLAN IS CONTROLLING IN THE EVENT OF ANY INCONSISTENCY
BETWEEN THE CONTENTS OF THE PLAN AND THE CONTENTS OF THIS DISCLOSURE STATEMENT.
A. CLASSIFICATION AND TREATMENT OF CLAIMS AND EQUITY INTERESTS UNDER THE
PLAN.
The Plan divides Claims against, and Equity Interests in, the Debtor
into twelve (12) separate Classes which the Debtor believes are in compliance
with the Bankruptcy Code.
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1. CLASS 1: ADMINISTRATIVE CLAIMS.
Class 1 of the Plan consists of all Claims which are Administrative
Claims. The Administrative Claims include the Claims allowed under Bankruptcy
Code ss.503(b) and referred to in Bankruptcy Code ss.507(a)(1) arising prior to
the Effective Date, such as: (a) every cost or expense of administration of the
Reorganization Case, including, without limitation, all actual and necessary
post-petition expenses of maintaining and preserving the Estate; (b) all actual
and necessary post-petition expenses of operating the Debtor's business; (c) all
Professional Charges of the Chapter 11 Professionals approved by the Bankruptcy
Court pursuant to interim and final allowances in accordance with Bankruptcy
Code ss.ss.330, 331, and 503(b); and (d) all fees and charges assessed against
the Estate under Chapter 123 of Title 28, United States Code; EXCEPT THAT this
Class does not include the Landlord/Executory Contract Claims which are included
in Class 7 of the Plan.
Under the Plan, every Creditor holding a Class 1 Administrative Claim
will be paid by the Reorganized Debtor: (a) fully and in Cash on the Effective
Date if the Claim is then an Allowed Claim; (b) fully and in Cash when and if
the Claim becomes an Allowed Claim after the Effective Date; (c) as otherwise
agreed in writing by the Creditor holding the Allowed Claim; or (d) as ordered
by the Bankruptcy Court. Every Allowed Class 1 Administrative Claim for a
post-petition operating expense incurred in the ordinary course of the Debtor's
operations will be paid fully and in Cash by the Reorganized Debtor in the
ordinary course of business (including any payment terms applicable to any such
expense). Class 1 Claims are UNIMPAIRED pursuant to the Plan.
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The Debtor estimates that the aggregate amount of Allowed Claims in
Class 1 will be approximately $425,000, consisting primarily of the following:
(i) Professional Charges, which the Proponents estimate total $320,000 as of
July 20, 1997(3); (ii) approximately $75,000 in Administrative Claims arising
out of use and occupancy of rejected leases; (iii) a $5,000 Administrative Claim
owing to Southern pursuant to the Southern Stipulation; and (iv) approximately
$25,000 for other miscellaneous Administrative Claims. The Debtor is paying its
post-petition business expenses as they come due in the ordinary course of
business(4).
2. CLASS 2: PRIORITY UNSECURED CLAIMS.
Class 2 of the Plan consists of all Claims which are Priority
Unsecured Claims. The Priority Unsecured Claims include every Unsecured Claim or
portion thereof which is entitled to priority under the applicable provisions of
Bankruptcy Code ss.507 and which is not an Administrative Claim (Classified in
Class 1) or a Priority Tax Claim (Classified in Class 4).
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(3) The Streich Firm holds a retainer in the amount of $50,000.00.
(4) The Debtor has deposited $202,000 into an escrow account with respect to
the Administrative Claims of Bally (I.E., post-petition fees under the
Debtor's agreements with Bally) pending resolution of the disputes between
the Debtor and Bally. SEE Section VIII.G, above, for a general description
of the pending disputes between the Debtor and Bally. If a settlement is
reached with Bally prior to confirmation, which the Debtor anticipates will
occur (but cannot make any assurances that such a settlement will in fact
occur), then the funds in escrow will be paid to Bally for its
Administrative Claims.
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Under the Plan, every Creditor holding a Class 2 Priority Unsecured
Claim will be paid by the Reorganized Debtor: (a) fully and in Cash on the
Effective Date if the Claim is then an Allowed Claim; (b) fully and in Cash when
and if the Claim becomes an Allowed Claim after the Effective Date; (c) as
otherwise agreed in writing by the Creditor holding the Allowed Claim; or (d) as
ordered by the Bankruptcy Court. Class 2 Claims are UNIMPAIRED pursuant to the
Plan.
The Debtor estimates that the aggregate amount of Allowed Claims in
Class 2 will be approximately $35.00, consisting of security deposits placed
with the Debtor by individuals for use of tanning beds at locations that have
now been closed.
With the Bankruptcy Court's approval, the Debtor has already paid in
the ordinary course of its business a number of Priority Unsecured Claims,
including pre-petition claims of employees and related employee benefits.
3. CLASS 3: TAUBMAN PRIORITY CLAIMS.
Class 3 of the Plan consists of all Claims against the Debtor held by
Taubman or any one or more of the Taubman Affiliates, including, but not limited
to, any Claims arising out of the transaction which was the subject of the
Taubman Agreed Order.
Under the Plan, every Creditor holding a Class 3 Taubman Priority
Claim will be paid by the Reorganized Debtor in accordance with the Taubman
Agreed Order and will be paid fully and in Cash by the Reorganized Debtor in the
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ordinary course of business at the time the Debtor may become obligated thereon
pursuant to the Taubman Agreed Order. Class 3 Claims are UNIMPAIRED pursuant to
the Plan.
The Debtor does not believe that there will be any Allowed Class 3
Claims.
4. CLASS 4: PRIORITY TAX CLAIMS.
Class 4 of the Plan consists of all Claims entitled to priority under
Bankruptcy Code ss.507(a)(8). Under the Plan, every Creditor holding a Class 4
Priority Tax Claim, as and when it is an Allowed Claim, will be paid by the
Reorganized Debtor in equal quarterly installments of principal and interest
over a period commencing at the end of the first (1st) calendar quarter after
the Effective Date, and continuing at the end of each calendar quarter
thereafter until the date that is six (6) years after the assessment date with
respect to such Claim, with interest fixed at 8% per annum. Class 4 Claims are
UNIMPAIRED pursuant to the Plan.
In the schedules of liabilities which Debtor Filed in its
Reorganization Case, the Debtor lists priority tax claims totaling $272,000. A
large portion of these Claims are disputed by the Debtor.
5. CLASS 5A: CHO SECURED CLAIMS.
Class 5A of the Plan consists of the Secured Claims held by Cho. Cho
claims lien interests in the Debtor's Universal City Store. Under the Plan,
holders of the Secured Claims in Class 5A will receive upon the sale of the
Universal City Store (which will be sold pursuant to motion of the Court), Cash
in the full amount of the Allowed Cho Secured Claim. Class 5A Claims are
UNIMPAIRED pursuant to the Plan.
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The Debtor estimates that the Allowed Claims in Class 5A will be
approximately $190,500.
6. CLASS 5B: PYRAMID SECURED CLAIMS.
Class 5B of the Plan consists of the Secured Claims held by Pyramid, a
landlord of the Debtor. Pyramid claims lien interests in certain of the Debtor's
equipment at four (4) locations which were previously leased by the Debtor from
Pyramid. Under the Plan, holders of the Secured Claims in Class 5B will receive
on the Effective Date or the date upon which such Claim becomes an Allowed
Secured Claim, one of the following, at the option of the Debtor: (i) Cash in an
amount equal to ninety percent (90%) of such Allowed Secured Claim; (ii) payment
of sums over a period of twenty-four (24) months having a value as of the
Effective Date that is not less than ninety percent (90%) of the value of the
interest of the holder of the Allowed Secured Claim in the property securing
payment of the Allowed Secured Claim, as established by the Bankruptcy Court; or
(iii) abandonment to such holder of all of the property of the Debtor upon or in
which the holder of the Allowed Secured Class 5B Claim has a valid, perfected,
and enforceable lien or security interest. Class 5B Claims are IMPAIRED pursuant
to the Plan.
The Debtor and Pyramid have agreed that the value of the equipment at
the Pyramid locations is $4,000.00 per location. Thus, the amount of Claims in
Class 5B total $16,000.
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7. CLASS 5C: SOUTHERN SECURED CLAIMS.
Class 5C of the Plan consists of the Secured Claims held by Southern.
Southern sold certain equipment to the Debtor and asserts that it holds security
for its Claims in the equipment it sold to the Debtor. Southern and the Debtor
have agreed pursuant to the Southern Stipulation that Southern holds a Secured
Claim in the amount of $22,200. Southern will be paid in accordance with the
Southern Stipulation and the Southern Order, which essentially provide that
Southern will be paid in accordance with the existing loan and security
documents, PROVIDED, HOWEVER, THAT the maturity dates of the obligations
thereunder will be extended for a period of one (1) month from the current
maturity dates to pay the prepetition amounts still owing under the underlying
loan and security documents. In addition, Southern will retain its liens on its
collateral to the full extent of its Secured Claims. Class 5C Claims are
IMPAIRED pursuant to the Plan.
8. CLASS 5D: KOURY AND COLEN SECURED CLAIMS.
Class 5D of the Plan consists of the Secured Claims held by Koury and
Colen. Koury and Colen sold their ownership interests in Kolt Enterprises and
the Kolt Enterprises stores to the Debtor. Koury and Colen claim lien interests
in their respective Kolt Enterprises stock and the purchased stores. Under the
Plan, holders of the Secured Claims in Class 5D will receive on the Effective
Date or the date upon which such Claim becomes an Allowed Secured Claim, one of
the following, at the option of the Debtor: (i) Cash in the full amount of the
pre-petition amount owing with respect to the Allowed Secured Claim; and (ii)
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reinstatement of the underlying principal obligation or instrument, with the
holder of such Claim retaining his existing liens and security interests in the
same priority on its collateral as security for its Class 5D Claim. Class 5D
Claims are UNIMPAIRED pursuant to the Plan.
The Debtor estimates that the total pre-petition amounts owing Koury
and Colen total $4,685, while the total remaining principal balance due to Koury
and Colen totals approximately $25,900. The value of the alleged Koury and Colen
collateral has not been determined.
9. CLASS 5E: DMITRENKO SECURED CLAIM.
Class 5E of the Plan consists of the Secured Claim held by Dmitrenko.
Dmitrenko loaned the Debtor funds pursuant to a note, and as security for the
note, Dmitrenko claims lien interests in the royalty payments to SCSFC related
to the Northshore and Century City stores. Under the Plan, the holder of the
Secured Claim in Class 5E will receive on the Effective Date or the date upon
which such Claim becomes an Allowed Secured Claim reinstatement of the
underlying obligation or instrument, EXCEPT THAT the maturity date of the
obligation under the existing underlying instruments will be extended for a
period of one (1) month from the current maturity date to pay any prepetition
amounts still owing. In addition, the holder of such Claim will retain his
existing liens and security interests in the same priority on its collateral as
security for its Class 5E Claim. Class 5E Claims are IMPAIRED pursuant to the
Plan.
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The Debtor estimates that the total pre-petition amount owing
Dmitrenko totals $1,500.00, while the total remaining balance due to Dmitrenko
totals approximately $26,000.00.
10. CLASS 5F: HOFMEISTER AND MANZERI SECURED CLAIMS.
Class 5F of the Plan consists of the Secured Claims held by Hofmeister
and Manzeri. These Creditors either sold stores to the Debtor or loaned the
Debtor funds. They assert they hold security for their respective Claims in the
personal property located at certain of the Debtor's stores which are operated
by licensees of the Debtor. There are no pre-petition amounts owing to these
Creditors. These obligations are paid directly by the licensees who operate the
stores. However, the Debtor still remains liable for these obligations.
Hofmeister and Manzeri will be paid outside the Plan and thus will receive no
distributions under the Plan. Class 5F Claims are UNIMPAIRED under the Plan.
The Debtor estimates that the aggregate amount of Allowed Claims in
Class 5F will be approximately $105,200.00.
11. CLASS 5G: KIM SECURED CLAIMS.
Class 5G of the Plan consists of the Secured Claims held by Kim. Kim
asserts that he holds security for his Claims against the Debtor for the sale of
his store to the Debtor in the personal property located at the respective store
which he sold. Under the Plan, the holder of the Secured Claim in Class 5G will
receive the full amount of the Allowed Secured Claim on the later of the
Effective Date or the date upon which such Claim becomes an Allowed Secured
Claim. Class 5G Claims are UNIMPAIRED under the Plan.
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The Debtor estimates that the Claims in Class 5G total approximately
$968.00.
12. CLASS 5H: OTHER SECURED CLAIMS.
Class 5H of the Plan consists of all Secured Claims, if any, other
than Secured Claims in Classes 5A through 5G. Under the Plan, the holder of each
Allowed Secured Claim in Class 5H (or any subclass thereof) will receive on the
later of the Effective Date or the date upon which such Claim becomes an Allowed
Secured Claim, one of the following, at the option of the Reorganized Debtor:
(i) Cash in the full amount of such Allowed Secured Claim; (ii) reinstatement of
the underlying obligation or instrument or other treatment in accordance with
Bankruptcy Code ss.1124, with the holder of such Claim retaining his existing
liens and security interests in the same priority on its collateral as security
for its Class 5H Claim; or (iii) abandonment to such Creditor of all of the
property of the Debtor upon which the holder of the Allowed Secured Claim has a
valid, perfected, and enforceable lien or security interest. Class 5H Claims are
UNIMPAIRED under the Plan.
The Debtor is not aware of any Other Secured Claim which will be
Classified in Class 5H.
13. CLASS 6: CHANDLER CLAIMS.
The Class 6 Claims consist of the Claims held by Chandler. The Debtor
and Chandler have entered into the Chandler Stipulation and, pursuant to the
Chandler Stipulation, at confirmation of the Plan, Chandler will waive all of
its pre-petition, post-petition, and rejection damage claim and the Debtor will
enter into a purchase agreement with Chandler for certain signage. Pursuant to
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the purchase agreement, the Debtor will pay Chandler a total purchase price
(including both principal and interest) of $203,039.72 for certain signage in
fifty-two (52) monthly installments of $3,904.61. The holder of the Class 6
Claims will be paid in accordance with the Chandler Stipulation. Class 6 Claims
are IMPAIRED under the Plan.
As of the Effective Date, the Debtor estimates that the Chandler
Claims will total approximately $203,039.
14. CLASS 7: LANDLORD/EXECUTORY CONTRACT CLAIMS.
The Class 7 Claims are comprised of the Landlord/Executory Contract
Claims, which relate to Executory Contracts which the Debtor has assumed or will
assume in this Reorganization Case, other than the Bally Claims. Under the Plan,
the holders of Allowed Claims in Class 7 will be paid either: (i) in accordance
with the "DEBTOR'S MOTION TO ASSUME AND/OR ASSUME AND ASSIGN CERTAIN UNEXPIRED
REAL PROPERTY LEASES AND EXECUTORY CONTRACTS" dated May 13, 1997, which provides
for payment in full and in Cash of all Landlord/Executory Contract Claims in
equal monthly installments for a period of eighteen (18) months, commencing the
first month after the Initial Plan Payment Date; (ii) as ordered by the
Bankruptcy Court; or (iii) as otherwise agreed in writing by the Creditor
holding the Allowed Class 7 Claim. Class 7 Claims are IMPAIRED under the Plan.
The Debtor estimates that the Claims which comprise Class 7 Claims
will total approximately $230,000.
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15. CLASS 8: WEIDER UNSECURED CLAIM.
The Class 8 Claim is comprised of the Unsecured Claim of Weider as
assigned to SCAC pursuant to the Weider Stipulation in the amount of
$1,500,000.00. Under the Plan, the Weider Unsecured Claim will be paid in
accordance with the Weider Stipulation. Under the Weider Stipulation, upon
approval of the Plan (which provides that SCAC will own one hundred percent
(100%) of the voting common stock of Reorganized Debtor), SCAC will release or
contribute to the capital of Reorganized Debtor, the Weider Unsecured Claim.
The Weider Unsecured Claim is UNIMPAIRED pursuant to the Plan.
16. CLASS 9: BALLY'S CLAIMS.
The Class 9 Claims consist of all Claims asserted by Bally or its
Affiliates against the Debtor. To the extent that Bally holds a Class 9 Claim
after resolution of the Bally Adversary Proceeding, Bally will receive the same
amount on account of its Claim as the holders of Allowed Claims in Class 7,
unless otherwise agreed in writing by Bally and the Debtor and approved by the
Bankruptcy Court. If prior to the Confirmation Date, the Debtor and Bally have
not entered into an agreement providing for such different treatment, then Class
9 will be deleted automatically from the Plan and the Bally's Claims will be
treated in the appropriate Class(es) of the Plan as determined by the Bankruptcy
Court.
The Bally's Claims are IMPAIRED pursuant to the Plan.
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17. CLASS 10: ADMINISTRATIVE CONVENIENCE UNSECURED CLAIMS.
The Class 10 Claims consist of all Unsecured Claims against the Debtor
that are, in the aggregate for each Creditor, $500 or less, or that are in the
aggregate greater than $500, but are voluntarily reduced by the Creditor holding
that Unsecured Claim(s) to $500. The option to reduce an Unsecured Claim(s) to
the aggregate sum of $500 and have such an Unsecured Claim(s) treated as a Class
10 Claim must be made in the manner prescribed in the Ballot.
Under the Plan, the holder of every Class 10 Unsecured Claim that is
an Allowed Claim will receive a payment from the Reorganized Debtor in the
aggregate amount equal to the lesser of: (a) $500; or (b) the amount of such
holder's Allowed Claim(s). Payments to holders of Allowed Class 10 Claims will
be due on the first Business Day forty-five (45) days after the Effective Date.
No interest will be paid on Class 10 Claims. The Class 10 Claims are IMPAIRED
pursuant to the Plan.
The Debtor estimates that there are twenty (20) Claims which are $500
or less. These Claims total approximately $5,600. The Debtor estimates an
additional forty (40) Claims in excess of $500 may elect to participate in Class
10. Total payments with respect to Class 10 Claims are accordingly estimated to
total approximately $25,600.
18. CLASS 11: GENERAL UNSECURED CLAIMS.
Class 11 of the Plan consists of every Unsecured Claim against the
Debtor, which is not a Class 1 Administrative Claim, a Class 2 Priority
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Unsecured Claim, a Class 3 Taubman Priority Claim, a Class 4 Priority Tax Claim,
a Class 6 Chandler Claim, a Class 7 Landlord/Executory Contract Claim, a Class 8
Weider Unsecured Claim, a Class 9 Bally's Claim, or a Class 10 Administrative
Convenience Unsecured Claim. Under the Plan, the holder of each General
Unsecured Claim that is an Allowed Claim will receive its Pro Rata Share of the
amounts in the Unsecured Creditors Payment Pool. The Unsecured Creditors Payment
Pool will consist of the Avoidance Action Proceeds and the following:
(a) All Cash held by the Debtor or the Reorganized Debtor on the last
day of the month in which the Effective Date occurs which exceeds $100,000.00
after: (i) all other payments owing on or before the Initial Plan Payment Date
have been made; and (ii) a sufficient reserve has been established for all
Professional Charges incurred through the Initial Plan Payment Date. The Debtor
estimates that this amount will be very minimal, if any.
(b) Quarterly distributions of the following: (i) $43,750; (ii)
twenty-five percent (25%) of the first $50,000 of Net Cash Flow for the each
calendar quarter on a cumulative basis after taking into account (i) above; and
(iii) thereafter, forty percent (40%) of the Net Cash Flow in excess of $50,000
for the preceding calendar quarter on a cumulative basis. For purposes of
determining the calculation in this paragraph, the calculation of percentages
due to the Unsecured Creditors Payment Pool will begin on the first day of the
first month following the Effective Date and will continue for seven (7) years
thereafter (twenty-eight (28) calendar quarters) or until all Allowed Claims in
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Class 11 have been paid in full into the Unsecured Creditor Payment Pool
(without interest), whichever occurs earlier. Twenty percent (20%) of Net Cash
Flow in excess of $50,000 for each calendar quarter referenced above will be
reserved for payments under (b)(i) above.
All payments into the Unsecured Creditor Payment Pool will be
deposited by the Debtor or the Reorganized Debtor into the Unsecured Creditor
Distribution Account. No interest will be paid on Class 11 Claims.
The payments to the holders of Class 11 Claims from the Unsecured
Creditor Distribution Account will be made by the Creditors' Representative
pursuant to the Plan and the Creditors' Representative Agreement. The Creditors'
Representative Agreement will provide for the duties of the Creditors'
Representative. Included in those duties will be the duty to pursue the
Avoidance Actions and distribute funds held in the Unsecured Creditor
Distribution Account. All expenses of the Creditors' Representative, as well as
expenses incurred in connection with the Avoidance Actions, will be charged to
the Unsecured Creditors Payment Pool.
The General Unsecured Claims which comprise the Class 11 Claims are
IMPAIRED pursuant to the Plan.
Based on the Claims listed in the schedules of liabilities Filed by
the Debtor, the proofs of claim Filed by Creditors holding Claims in this Class,
as well as the Debtor's current estimate of Unsecured Claims arising from the
rejection of unexpired leases, the Debtor estimates that the Class 11 Claims
total approximately $5,000,000 to $6,000,000. The Debtor believes that this
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amount will be reduced because the Unsecured Claims arising from rejection
damages will continue to decline as locations previously leased by the Debtor
are re-leased to new tenants.
19. CLASS 12: EQUITY INTERESTS.
Class 12 of the Plan consists of the Equity Interests held by the
holders of the Debtor Common Stock. The Debtor Common Stock is the issued and
outstanding shares of common stock in Debtor.
Under the Plan, the holders of the Equity Interests will receive no
distributions on account of their Equity Interests. In addition, the holders of
the Equity Interests will not receive any property under the Plan on account of
their Equity Interests.
On the Effective Date, all Equity Interests in the Debtor will be
canceled and new Equity Interests will be issued to SCAC. In return SCAC will
release or contribute to the capital of Reorganized Debtor, the $1,500,000.00
Weider Unsecured Claim and the $800,000.00 DIP Financing Claim, as approved by
the Court on May 6, 1997.
The Class 12 Equity Interests are IMPAIRED pursuant to the Plan.
B. MEANS FOR IMPLEMENTATION OF PLAN.
1. STRUCTURE OF REORGANIZED DEBTOR.
The Reorganized Debtor will be a continuation of the Debtor, an
Arizona corporation, as reorganized pursuant to the Plan. From and after the
Effective Date, the articles of incorporation and bylaws of the Reorganized
Debtor will be the existing articles of incorporation and bylaws of the Debtor.
The stock in the Reorganized Debtor will be held by SCAC.
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On the Effective Date, SCAC will be comprised of the following: (i)
Kevin Blackwell will hold fifty percent (50%) of the stock of SCAC; and (ii)
David Guarino will hold fifty percent (50%) of the stock of SCAC. On the
Effective Date, the officers of the Reorganized Debtor will remain the same, and
the Board of Directors of the Reorganized Debtor will remain the same EXCEPT
THAT David Guarino will replace Kathryn Blackwell on the Board of Directors on
or before the Effective Date.
2. FUNDING OF THE PLAN.
Payments under the Plan which are due from the Reorganized Debtor on
the Effective Date will be funded from the Cash held by the Reorganized Debtor
on the Effective Date prior to the distribution or reservation of any amounts
under the Plan. The funds necessary to ensure continuing performance under the
Plan after the Effective Date will come from revenues of the Reorganized
Debtor's operations and its Affiliates' operations. Accordingly, so long as
amounts are owed under the Plan to the holders of Allowed Claims in Class 11,
the Reorganized Debtor will not declare dividends and will continue to own all
of the issued and outstanding stock in Kona and SCSFC. In addition, if required,
the Reorganized Debtor may also seek additional financing or additional equity
contributions from SCAC or its other Affiliates.
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3. ESTABLISHMENT OF UNSECURED CREDITOR PAYMENT POOL.
On the Effective Date, the Creditors' Representative and the Chairman
of the Creditors' Committee will execute the Creditors' Representative
Agreement, substantially in the form attached to the Plan as Exhibit "7",
subject to modification before confirmation. The Creditors' Representative
Agreement provides for the duties of the Creditors' Representative, including
the duties to pursue Avoidance Actions and distribute funds held in the
Unsecured Creditors Distribution Account. All expenses of the Creditors'
Representative, or professionals engaged by the Creditors' Representative, as
well as expenses incurred in connection with the Avoidance Actions will be
charged to and paid from the Unsecured Creditors Payment Pool. The Debtor and
Reorganized Debtor will not be responsible for payment of any expenses
associated with the Creditors' Representative, its professionals, or any other
expenses in connection with the administration of the Unsecured Creditors
Payment Pool.
Accordingly, upon execution of the Creditors' Representative
Agreement, the Creditors' Committee will be dissolved and discharged, and will
have no further rights or responsibilities in connection with the Debtor, the
Estate, or this Reorganization Case, EXCEPT THAT the designee of the Creditors'
Committee (as identified in the Creditors' Representative Agreement) will
oversee the performance of the Creditors' Representative with respect to the
Creditors' Representative Agreement. The Creditors' Representative will be the
successor-in-interest of the Creditors' Committee, succeeding to all rights of
the Creditors' Committee under this Plan.
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4. ASSIGNMENT OF CLAIMS.
On the Effective Date, the Debtor will be deemed to have assigned to
the Creditors' Representative: (i) any and all rights to bring or continue an
Avoidance Action (other than the Bally Adversary Proceeding); and (ii) any and
all claims against the Class 11 Creditors. Upon such assignment, the Creditors'
Representative will be fully authorized and empowered to prosecute, compromise,
and enforce such claims for the benefit of the Unsecured Creditor Payment Pool.
5. REDUCTION OF EXECUTIVE SALARIES.
Beginning with the first day of the first month following the
Effective Date and continuing for seven (7) years thereafter or until all
Allowed Claims in Class 11 have been paid in full into the Unsecured Creditor
Payment Pool (without interest), whichever occurs earlier, the Executive
Salaries will be reduced to a base salary of $100,000.00 per each Executive per
calendar year, plus a percentage of the profits to be determined and paid on a
quarterly basis as follows: (i) seventy-five percent (75%) of the first $50,000
of the Net Cash Flow for the preceding calendar quarter; and (ii) thereafter
forty percent (40%) of the Net Cash Flow in excess of $50,000 for the preceding
calendar quarter.
6. OBJECTIONS TO CLAIMS.
Any objections to Claims by the Debtor or Reorganized Debtor or by any
other Person properly entitled to do so under the Bankruptcy Code and Bankruptcy
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Rules, other than a Claim arising out of the rejection by the Debtor of an
Executory Contract, must be Filed with the Bankruptcy Court and served no later
than thirty (30) days following the Effective Date. Any objection to a Claim
must be served upon the holder of the Claim to which the objection has been
made, and upon the Debtor or Reorganized Debtor as appropriate.
7. ASSUMPTION AND REJECTION OF EXECUTORY CONTRACTS.
Under the Plan, the Executory Contracts of the Debtor listed in
Exhibit "1" to the Plan will be assumed upon the Effective Date or as otherwise
agreed in writing by the parties. All Executory Contracts of the Debtor that are
not expressly assumed under the Plan or which have not been otherwise assumed by
the Debtor in the Reorganization Case will be deemed rejected as of the
Confirmation Date or as prescribed by the Bankruptcy Code, whichever is earlier.
Every Claim asserted by a Creditor arising from the rejection of an Executory
Contract pursuant to the Plan must be Filed with the Bankruptcy Court no later
than the first Business Day which is twenty (20) days after the Confirmation
Date; or with respect to any Executory Contract which is the subject of a motion
by the Debtor, the later of either: (i) June 9, 1997; or (ii) twenty (20) days
after the Bankruptcy Court enters an order on the motion permitting rejection of
the particular Executory Contract. Every such Claim which is timely Filed, as
and when it becomes an Allowed Claim, will be treated under the appropriate
Class of the Plan. Every such Claim which is not timely Filed by the deadline
stated above will be barred and discharged and the Creditor holding the Claim
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will not receive or be entitled to any distribution under the Plan on account of
such Claim. All Executory Contracts which are assumed will be vested in the
Reorganized Debtor as of the Effective Date.
Any objections to Claims by the Debtor or Reorganized Debtor or by any
other Person properly entitled to do so under the Bankruptcy Code and Bankruptcy
Rules, arising out of the rejection by the Debtor of an Executory Contract, must
be Filed with the Bankruptcy Court and served no later than thirty (30) days
following the Effective Date as to any Executory Contract rejected pursuant to
the Plan, or Filed with the Bankruptcy Court and served no later than thirty
(30) days following the entry of an order of the Bankruptcy Court permitting the
Debtor to reject the particular Executory Contract. Any objection to a Claim
must be served upon the holder of the Claim to which the objection has been
made, and upon the Debtor or Reorganized Debtor as appropriate.
8. TIME OF PERFORMANCE UNDER THE PLAN (EFFECTIVE DATE).
The "Effective Date" of the Plan determines when the performance of
many of the obligations under the Plan are due. Unless and to the extent that
any such condition is waived by the Debtor, the Effective Date is the date
thirty (30) Business Days after the date on which the Confirmation Order has
become a Final Order. Except where performance earlier than the Effective Date
is expressly required by the Plan or where it is lawful and expressly permitted
by the Plan to perform after the Effective Date, performance under the Plan will
be due on the Effective Date. The Debtor or Reorganized Debtor will have the
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right to render any or all of the performance under the Plan prior to what
otherwise would be the Effective Date if the Debtor or Reorganized Debtor deem
it appropriate to do so, including, but not limited to, the right to render
performance under any circumstances which would moot any appeal, review, or
other challenge of any kind to the Confirmation Order if the Confirmation Order
is not stayed pending such appeal, review, or other challenge.
X. POST-CONFIRMATION DATE OPERATIONS AND PROJECTIONS.
As discussed in Section IX.B, above, a significant amount of the
funding for the Plan is expected to come from the ongoing operations of the
Reorganized Debtor following the Confirmation Date. Projections for the
operation of the Reorganized Debtor over the next seven (7) years have been
prepared by Debtor's management with the assistance of Ernst & Young and the
Barrington Consulting Group, Inc.
These projections (the "Projections") are attached to this Disclosure
Statement as Schedule "E". While presented with numerical specificity, the
Projections are based upon a variety of assumptions (as stated in the
Projections) and are subject to significant business, economic, and competitive
uncertainties and contingencies, many of which are beyond the control of the
Debtor. Consequently, the inclusion of the Projections herein should not be
regarded as a representation by the Debtor, Ernst & Young, Barrington Consulting
Group, Inc., or any other professionals of the Debtor or the Creditors'
Committee's, or any person involved in the preparation thereof that the
Projections will be realized. Actual results may vary materially from those
presented in the Projections.
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XI. CERTAIN INCOME TAX CONSEQUENCES.
A. SCOPE AND LIMITATIONS.
It is not practicable to present a detailed explanation of all of the
possible federal income tax ramifications of the Plan and the following is only
a summary discussion of certain of the significant consequences which may affect
Creditors and others. This summary is based upon laws, regulations, rulings, and
decisions now in effect and upon proposed regulations, all of which are subject
to change (possibly with retroactive effect) by legislation, administrative
action, or judicial decision.
Under present law, there is uncertainty surrounding many of the tax
consequences discussed below. Further, this summary does not discuss all aspects
of federal taxation which may be relevant to a particular Creditor; and the
federal income tax consequences to any particular Creditor may be affected by
special considerations not discussed below. For example, certain types of
Creditors (including non-resident aliens, foreign corporations, broker-dealers,
financial institutions, life insurance companies, and tax-exempt organizations)
may be subject to special rules not discussed below. In addition to the federal
income tax consequences discussed below, the transactions contemplated herein
may have significant state and local tax consequences which are not discussed
herein. Neither a ruling from the Internal Revenue Service (the "IRS") nor an
opinion of counsel has been requested with respect to the federal income tax
consequences of the Plan.
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ACCORDINGLY, ALL HOLDERS OF CLAIMS ARE URGED TO CONSULT THEIR TAX
ADVISORS WITH SPECIFIC REFERENCE TO THE FEDERAL, STATE, AND LOCAL TAX
CONSEQUENCES OF THE PLAN WITH RESPECT TO THEIR CLAIM(S). NEITHER THE DEBTOR NOR
ITS COUNSEL MAKE ANY REPRESENTATIONS REGARDING THE PARTICULAR TAX CONSEQUENCES
OF CONFIRMATION AND CONSUMMATION OF THE PLAN AS TO ANY CREDITOR, NOR IS THE
DEBTOR OR ITS COUNSEL RENDERING ANY FORM OF LEGAL OPINION AS TO SUCH TAX
CONSEQUENCES.
B. TAX CONSEQUENCES TO CREDITORS.
The federal income tax consequences to Creditors arising from the Plan
will vary depending upon, among other things, the type of consideration received
by the Creditor in exchange for its Claim, whether the Creditor reports income
using the cash or accrual method, whether the Creditor has taken a "bad debt"
deduction with respect to its Claim, whether the Creditor receives consideration
in more than one (1) tax year of the Creditor, whether the Creditor is a
resident of the United States, and whether all of the consideration received by
the Creditor is deemed to be received by that Creditor in an integrated
transaction.
1. GENERAL.
Although not free from doubt, the exchange by a Creditor of a Claim
(other than any Claim for interest) for cash or property (including a new
obligation with terms and conditions that are materially different from the
obligation from which a Creditor's Claim arose) will be a taxable exchange for
federal income tax purposes under which the Creditor will recognize gain or
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loss. Generally, a Creditor will be entitled to a bad debt deduction or a charge
against its bad debt reserve to the extent that the adjusted tax basis of its
Claim (other than a Claim for interest) exceeds the "amount realized," which is
the sum of the amount of cash received, the issue prices of any new debt
obligations received (although unclear, such amount for a cash basis taxpayer
might equal fair market value), and the fair market value of any other property
received (excluding the amount of any such consideration received in respect of
Claims for interest). If the sum of such items is greater than the adjusted tax
basis of its Claim, the Creditor will recognize taxable gain. This may occur,
for example, where a Claim represents income not yet reported on the cash method
of tax accounting or where all or a portion of the Claim has been deducted as a
bad debt. Creditors which receive what may be considered new debt obligations
should consult their own tax advisors with respect to the effect of these rules
on them.
The tax basis of property received by Creditors in exchange for their
Claims (other than any Claim for interest) generally will be the amount of such
property that is included in the Creditor's amount realized on the exchange. The
holding period for such property will begin on the day after the date of
exchange.
2. RECEIPT OF INTEREST.
The Bankruptcy Tax Act reversed prior law by providing that income
attributable to accrued and unpaid interest will be treated as ordinary income,
regardless of whether the Creditor's existing Claims are capital assets in its
hands.
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A Creditor which, under its tax accounting method, was not previously
required to include in income accrued and unpaid interest attributable to its
existing Claims and which exchanges its interest Claims (for cash, other
property, a new debt obligation, or a combination thereof) pursuant to the Plan,
will be treated as receiving ordinary interest income to the extent of any
consideration so received allocable to such interest, regardless of whether that
Creditor realizes an overall gain or loss as a result of the exchange of its
existing Claims. The IRS recently issued regulations which provide that each
payment under a loan is generally treated as a payment of interest to the extent
of accrued and unpaid interest. It is unclear whether or to what extent these
rules can be altered in the context of consideration received under a plan of
reorganization approved by the Bankruptcy Court. Accordingly, the extent to
which consideration distributable under the Plan should be allocable to accrued
and unpaid interest is uncertain. Creditors should consult their own tax
advisors to determine the amount of consideration received under the Plan that
is allocable to interest.
3. CHARACTER OF GAIN OR LOSS.
The character of gain or loss recognized by a holder of a Claim as
capital or ordinary gain or loss and, in the case of capital gain or loss, as
short term or long term, will depend on a number of factors, including: (i) the
nature and origin of the Claim; (ii) the tax status of the holder of the Claim;
(iii) whether the holder is a financial institution; (iv) whether the Claim is a
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capital asset in the hands of the holder; (v) whether the Claim has been held
for more than one (1) year; (vi) the extent to which the holder previously
claimed a loss, bad debt deduction, or charge to a reserve for bad debts with
respect to the Claim; and (vii) whether, in the case of a Claim arising from
certain indebtedness issued after July 18, 1984, with a term of more than one
(1) year, for which no election was made to include market discount in income,
the difference between (a) the holder's tax basis in the indebtedness
immediately after it was acquired and the amount of the indebtedness, and (b)
the stated redemption price of the indebtedness at maturity (or, in the case of
a debt obligation issued with original issue discount, its revised issue price),
provided such difference exceeds the statutory "DE MINIMIS" amount.
C. IMPORTANCE OF OBTAINING PROFESSIONAL TAX ASSISTANCE.
THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE PLAN
ARE COMPLEX AND, IN MANY AREAS, UNCERTAIN. THE FOREGOING IS INTENDED TO BE A
SUMMARY ONLY AND, AS SUCH, DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF A CLAIM OR EQUITY
INTEREST IN LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. THE
FOREGOING SHOULD NOT BE CONSIDERED TAX ADVICE, AND IT IS NOT A SUBSTITUTE FOR
CAREFUL TAX PLANNING WITH A TAX PROFESSIONAL. ACCORDINGLY, EACH HOLDER OF A
CLAIM OR OTHER AFFECTED PARTY IS STRONGLY URGED TO CONSULT WITH ITS OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO SUCH INDIVIDUAL OR ENTITY.
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XII. CONFIRMATION OF THE PLAN.
A. CONFIRMATION HEARING.
Pursuant to Bankruptcy Code ss.1128(a), the Bankruptcy Court will hold
a hearing regarding confirmation of the Plan at the United States Bankruptcy
Court, 2929 North Central, 10th Floor, Courtroom 4, Phoenix, Arizona, commencing
on ________ AT ______ O'CLOCK A.M.
B. OBJECTIONS TO CONFIRMATION OF THE PLAN.
Bankruptcy Code ss.1128(b) provides that any party in interest may
object to confirmation of a plan. Any objection(s) to confirmation of the Plan
must be in writing; must state with specificity the grounds for any such
objections; and must be Filed with the Bankruptcy Court and served upon the
following parties so as to be received on or before ___________.
Counsel for Debtor: STREICH LANG, P.A.
One Renaissance
Two North Central Avenue
Phoenix, Arizona 85004-2391
Telefax Number: 602-229-5690
Attention: Samantha Masters-Brown, Esq.
Counsel for
Creditors' Committee: GALLAGHER & KENNEDY
2600 North Central Avenue
Phoenix, Arizona 85004-3020
Telefax Number: 602-257-9459
Attention: Charles R. Sterbach, Esq.
C. REQUIREMENTS FOR CONFIRMATION OF THE PLAN.
For a Plan to be confirmed, the Plan must satisfy the requirements
stated in Bankruptcy Code ss.1129. In this regard, the Plan must satisfy, among
other things, the following requirements:
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1. BEST INTERESTS OF CREDITORS AND LIQUIDATION ANALYSIS.
Pursuant to Bankruptcy Code ss.1129(a)(7), for the Plan to be
confirmed, it must provide that Creditors will receive at least as much under
the Plan as they would receive in a liquidation of the Debtor under Chapter 7 of
the Bankruptcy Code. The Debtor and the Creditors' Committee believe that the
distributions to Creditors under the Plan will substantially exceed the
recoveries which Creditors would receive in a Chapter 7 liquidation of the
Debtor and its Estate. Under Chapter 7, the Debtor would cease to be a going
concern business and would be liquidated. The holders of Allowed Secured Clams
would receive the value of their collateral. There would be substantial
administrative and priority claims that would be senior to Unsecured Claims.
Unsecured Creditors would receive a substantially lower recovery on their
Allowed Claims in a liquidation of the Debtor than they will receive under the
Plan.
Ernst & Young, based on input from the Debtor's management, has
prepared a liquidation analysis of the Debtor as of May 12, 1997 (the
"Liquidation Analysis"). A copy of the Liquidation Analysis is attached to this
Disclosure Statement as Schedule "F-1". The Liquidation Analysis is based upon a
variety of assumptions (as stated in the Liquidation Analysis). Pursuant to the
Liquidation Analysis, the Debtor projects that, in a liquidation, Unsecured
Creditors would receive less than one percent (1%) of the amount of their
Allowed Claims.
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The Barrington Consulting Group, Inc., based upon information obtained
from the Debtor's management and the Creditors' Committee, has prepared an
alternative liquidation analysis of the Debtor as of June 30, 1997 (the
"Alternative Liquidation Analysis"). A copy of the Alternative Liquidation
Analysis is attached to this Disclosure Statement as Schedule "F-2". The
Alternative Liquidation Analysis is based on an alternative set of assumptions
as compared to the Debtor's Liquidation Analysis. Pursuant to the Alternative
Liquidation Analysis, the Creditors' Committee projects that, in a liquidation,
Unsecured Creditors would receive at least $761,612 in the aggregate.
Under the Plan, the Debtor projects that Unsecured Creditors will
receive recoveries totaling at least twenty to twenty- four percent (20-24%) of
their Allowed Claims resulting from the fixed payments under the Plan (I.E.,
$1,225,000 over seven (7) years), and potentially up to one-hundred percent
(100%) of their Allowed Claims (less administration expenses of the Creditors'
Representative) resulting from the payments of a percentage of profits. In
summary, Unsecured Creditors and all other Creditors will receive distributions
pursuant to the Plan that meet or far exceed that which Creditors would receive
in a Chapter 7 liquidation of the Debtor's Estate.
2. FEASIBILITY.
Bankruptcy Code ss.1129(a)(11) includes what is commonly described as
the "feasibility" standard. When the feasibility standard applies, it requires
that confirmation of a plan will not be followed by liquidation or the need for
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further financial reorganization unless the plan provides for that alternative.
For the reasons discussed above, the Debtor and the Creditors' Committee believe
that the Plan satisfies the feasibility requirements of Bankruptcy Code
ss.1129(a)(11). The projections included as Schedule "E" to this Disclosure
Statement confirm that the Debtor should have sufficient cash flow to satisfy
the obligations under the Plan.
3. ACCEPTING IMPAIRED CLASS.
For the Plan to be confirmed, the Plan must be accepted by at least
one impaired Class of Claims. For an impaired Class of Claims to accept the
Plan, votes representing at least two-thirds (2/3) in amount and a majority in
number of the Allowed Claims voted in that Class must be cast for acceptance of
the Plan (not including the votes of insiders of the Debtor). Similarly, for an
impaired Class of Equity Interests to accept the Plan, votes representing at
least two-thirds (2/3) in amount of the outstanding Equity Interests voted in
that Class must be cast for acceptance of the Plan.
D. CONFIRMATION OVER DISSENTING CLASS (CRAM DOWN).
If there is less than unanimous acceptance for the Plan by impaired
Classes of Claims or Equity Interests, the Bankruptcy Court nevertheless may
confirm the Plan at the Proponents' request. Bankruptcy Code ss.1129(b) provides
that if all other requirements of Bankruptcy Code ss.1129(a) are satisfied and
if the Bankruptcy Court finds that: (i) the Plan does not discriminate unfairly;
and (ii) the Plan is fair and equitable with respect to the rejecting Class(es)
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of Claims or Equity Interests impaired under the Plan, the Bankruptcy Court may
confirm the Plan despite the rejection of the Plan by a dissenting impaired
Class (or Classes) of Claims.
The Proponents have requested, if necessary, confirmation of the Plan
pursuant to Bankruptcy Code ss.1129(b) with respect to any impaired Class of
Claims which does not vote to accept the Plan. The Proponents believe that the
Plan as proposed meets the cramdown requirements of Bankruptcy Code ss.1129(b).
The Proponents believe that the Plan satisfies all of the statutory
requirements for confirmation, that the Proponents have complied or will have
complied with all the statutory requirements for confirmation of the Plan, and
that the Plan is proposed in good faith. At the hearing on confirmation of the
Plan, the Bankruptcy Court will determine whether the Plan satisfies the
statutory requirements for confirmation of the Plan.
XIII. ALTERNATIVES TO THE PLAN.
The Debtor and the Creditors' Committee believe that the Plan provides
the holders of Claims the best and most complete form of recovery available. As
a result, the Debtor and the Creditors' Committee believes that the Plan serves
the best interests of all Creditors and parties in interest in this case. In the
course of its Reorganization Case, the Debtor has considered alternatives to the
Plan, including liquidation under Chapter 7 of the Bankruptcy Code.
If the Reorganization Case is converted to Chapter 7, a trustee would
be appointed to liquidate the assets of the Debtor. It is impossible to predict
precisely how the proceeds of liquidation of the Debtor would be distributed
under Chapter 7 to the holders of Claims in this case. The Debtor and the
Creditors' Committee have prepared Liquidation Analyses. SEE Article XII,
Section C.1 and Schedules "F-1" and "F-2" to this Disclosure Statement. As
reflected in the Liquidation Analyses, the Debtor and the Creditors' Committee
believe that a liquidation would result in a substantially lower recovery for
holders of Unsecured Claims in this case than they will receive under the Plan.
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XIV. RECOMMENDATION AND CONCLUSION.
The Plan provides the best possible recovery for Creditors.
Accordingly, the Debtor and the Creditors' Committee recommend that all
Creditors and holders of Equity Interests which are entitled to vote on the Plan
should vote to accept the Plan.
DATED this 22nd day of July, 1997.
SURF CITY SQUEEZE, INC., an Arizona
corporation, fka Sunbelt Ventures, Inc.
By /s/ Kevin A. Blackwell
-------------------------------------
Kevin A. Blackwell
Its Duly Authorized Representative
and
THE OFFICIAL COMMITTEE OF UNSECURED
CREDITORS
By /s/ Joseph Brotherton
-------------------------------------
Joseph Brotherton
Its Chairman and Duly Authorized
Representative
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PREPARED AND SUBMITTED BY:
STREICH LANG, P.A.
Renaissance One
Two North Central Avenue
Phoenix, Arizona 85004-2391
By /s/ John J. Dawson
-----------------------------------
John J. Dawson
Samantha Masters-Brown
Attorneys for DEBTOR
GALLAGHER & KENNEDY
2600 North Central Avenue
Phoenix, Arizona 85004-3020
By /s/ Charles R. Sterbach
-----------------------------------
Charles R. Sterbach
Attorneys for the OFFICIAL UNSECURED
CREDITORS COMMITTEE
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THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITES ACT OF 1933 (THE "1933 ACT"), NOR REGISTERED UNDER ANY STATE
SECURITIES LAW, AND ARE "RESTRICTED SECURITIES" AS THAT TERM IS DEFINED IN RULE
144 UNDER THE 1933 ACT. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE 1933 ACT, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE 1933
ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE
COMPANY.
SHARE PURCHASE AGREEMENT
This SHARE PURCHASE AGREEMENT (the "Agreement"), is made this 15th day of
March, 1999, by and between SPORTS GROUP INTERNATIONAL, INC. ("SPGK"), a Florida
corporation, and SURF CITY ACQUISITION CORPORATION II ("SCAC"), an Arizona
corporation.
RECITALS
1. SPGK is a corporation duly organized and existing under the laws of the
State of Florida with an authorized capital stock consisting of 50,000,000
shares of voting common stock, $0.001 par value ("SPGK Common Stock"), of which
6,300,000 shares are issued and outstanding prior to its merger with Sports
Group International ("SGI") and 13,747,246 shares are issued and outstanding
following its merger with SGI. Said shares take into account the share exchange
between SPGK and SGI and all shares issued for debt reduction by SGI.
2. Prior to the date of this Agreement, Investors Communication Group, Inc.
("ICC") entered into an agreement with Louise Cunningham ("LC") herein ICC
purchased 95% of the outstanding common stock of Secretarial Services of
Orlando, Inc., a Florida corporation ("Secretarial"). All contingencies and
conditions of the ICC-LC agreement have been completed and satisfied. The
undersigned, on behalf of SPGK hereby represents and warrants that the ICC-LC
Agreement has been completed and that the undersigned has the right and power to
enter into this Agreement. Prior to the date of this Agreement, Secretarial
formally changed its name to Sports Group International, Inc., a Florida
corporation, with a symbol on the NASD of "SPGK" ("SPGK"). SPGK is a party to an
Amended Merger Agreement and Plan of Reorganization, dated March 15, 1999 ("Plan
of Merger") with Sports Group International, Inc., a Delaware corporation
("SGI). (A true and correct copy of the ICC-LC Agreement and the Plan of Merger
are attached collectively hereto as Exhibit "A."). THIS SHARE PURCHASE AGREEMENT
IS BEING ENTERED INTO AND EXECUTED FOLLOWING THE CLOSING OF THE COMPLETED
PURCHASE BY ICC OF LC'S SHARES AS REPRESENTED IN EXHIBIT "A", THE NAME CHANGE OF
SECRETARIAL TO SPORTS GROUP INTERNATIONAL, INC., A FLORIDA CORPORATION, THE
SYMBOL ON NASD OF SPGK, AND THE PLAN OF MERGER BETWEEN SPGK AND SGI, AND IN
RELIANCE OF THE CLOSING OF THE PLAN OF MERGER. WITHOUT ALL OF THE AFOREMENTIONED
TRANSACTIONS BEING COMPLETE, SCAC WOULD NOT ENTER INTO THIS AGREEMENT.
3. SCAC is a corporation duly organized and existing under the laws of the
State of Arizona with authorized capital stock consisting of 10,000,000 shares
of voting common stock, $.01 par value, of which 850,000 shares are issued and
outstanding ("SCAC Common Stock") and 1,000,000 authorized Serial Preferred
Stock with a par value of $10.00 per share of which 0 shares are issued and
outstanding ("SCAC Preferred Stock"). SCAC is the owner of 100% of the
outstanding common shares of Surf City Squeeze, Inc., which owns all of the
shares of its subsidiaries. (Surf City Squeeze, Inc. and its subsidiaries are
collectively referred to herein as "Surf City").
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4. SPGK will issue and deliver 525,000 shares of SPGK Series A Redeemable
Convertible Secured Preferred Stock in consideration for the issuance and
delivery of 825,000 shares of SCAC Common Stock which represents 100% of the
total of the issued and outstanding shares of SCAC Common Stock ("the
"Transaction"). In addition, SPGK will issue but not deliver an additional
50,000 shares of SPGK Series A Redeemable Convertible Secured Preferred Stock to
cover those shares necessary to provide shares of stock in the event that the
Weider Warrants are exercised. (See Article 2.2(e)).
5. In Exhibit "E" to this Agreement, SGI Proforma Balance Sheet for the 1st
Quarter for the period ending March 31, 1999, there is a balance of
$1,007,012.00 identified as "Other Assets (2)." It is understood and being
relied upon by the parties to this Agreement that Investors Communication
Corporation, Inc. and Jeffrey Black (hereinafter collectively referred to herein
as "Black") are the debtors of said asset for $1,000,000.00 payable to SPGK
(hereinafter "Note") on said Proforma and that said Note shall be paid from the
proceeds of Black's free trading 504 shares.
6. SPGK and SCAC desire to make certain representations, warranties,
covenants and agreements in connection with the Transaction, and also desire to
prescribe various conditions precedent to the Transaction.
NOW, THEREFORE, in consideration of the recitals which are a part of this
Agreement, and of the mutual agreements, SPGK and covenants herein contained,
including the recitals above which are part of this Agreement, the parties
hereto hereby agree as follows:
ARTICLE 1
1. CONSIDERATION OF SECURITIES AND PLAN OF TRANSACTION
1.1 CONSIDERATION. Subject to all of the terms and conditions of this
Agreement, SPGK agrees to issue and deliver to Kevin A. Blackwell 525,000 shares
of SPGK Preferred stock in consideration for the issuance and delivery to SPGK
by Kevin A. Blackwell that number of shares of SCAC Common Stock which, at the
Closing Date, will represent 100% of the total of the issued and outstanding
shares of SCAC Common Stock.
1.1.1 Valid and binding obligations of SPGK and SCAC existing on the
Closing Date shall become and remain the valid and binding obligations of
the surviving corporation.
1.1.2 SPGK agrees to assume any and all obligations of SCAC, Kevin
Blackwell, Kathryn Blackwell and David Guarino (Collectively "SCAC"),
whether incurred prior to this Agreement or after this Agreement. In
addition, SPGK agrees to assume any and all obligations of the officers,
directors, shareholders and employees of SCAC incurred on behalf of SCAC or
for the benefit of SCAC. In addition, SPGK expressly agrees to assume any
and all obligations owing, owed or to be owed pursuant to any and all
Personal Guarantees enforced or enforceable against Kevin A. Blackwell,
Kathryn Blackwell, and any other (past or present) officer, director and/or
shareholder of Surf City Squeeze, Inc., Kona Coast Provisions, Surf City
Squeeze Franchise Corporation or Malibu Smoothie Franchise Corporation.
This agreement to assume Personal Guarantees includes any and all Personal
Guarantees signed by Kevin A. Blackwell ("KAB") and Kathryn Blackwell after
this Agreement is executed.
1.2 FRACTIONAL SHARES. Fractional common shares shall not be issued; and
fractional shares shall be rounded up to the nearest whole share.
1.3 SPGK SHARES EXEMPT FROM REGISTRATION. The parties hereto intend that
the SPGK shares to be issued to the Shareholders at the Closing shall be exempt
from the registration requirements of the Securities act of 1933, as amended
(the "Act"), pursuant to Section 4(2) of the Act and the rules and regulations
promulgated thereunder.
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1.4 ADDITIONAL CONSIDERATION. As additional consideration for the
Transaction.
(a) SPGK shall provide to SCAC working capital in the amount of
$1,000,000.00. Said sum shall be due and payable as follows:
(i) $250,000.00 on or before April 1, 1999;
(ii) $250,000.00 on or before April 30, 1999;
(iii) $250,000.00 on or before June 30, 1999; and
(iv) $250,000.00 on or before September 30, 1999.
(b) During the period of three (3) years from the Date of Closing, the
SPGK Board of Directors shall consist only of five (5) members, three (3)
of whom shall be selected by KAB.
1.5 USE AND DISPOSITION OF PREFERRED STOCK. At Closing, SPGK will deliver
to KAB, 525,000 shares of Series A Redeemable Convertible Secured Preferred
Stock. 50,000 shares of said stock shall be held by KAB for issuance to Weider
in the event that Weider exercises its Warrants as described in Article 2.2(e)
of this Agreement and Attached hereto as Exhibit "B" and incorporated herein by
this reference.
1.5.1 In addition to the 525,000 shares of Series A Redeemable
Convertible Secured Preferred Stock issued to KAB, SPGK shall issue and
hold an additional 50,000 shares of said Stock for use and issuance in the
event that Weider exercises its Warrants as described in Article 2.2(e) of
this Agreement.
1.5.2 If Weider exercises its Warrants prior to expiration, KAB and
SPGK will each transfer and/or issue to Weider a total of 100,000 Series A
Redeemable Convertible Secured Preferred Stock to Weider. Said transfer
shall be divided as follows: KAB shall transfer to Weider 50,000 shares of
Series A Stock and SPGK will transfer 50,000 shares of Series A Stock. If
Weider fails to exercise its Warrants prior to expiration and said Warrants
expire, the Series A Redeemable Convertible Secured Preferred Stock held
for Weider by KAB shall become unrestricted Preferred shares for the sole
use of KAB. The Preferred shares held by SPGK shall expire upon the
expiration of the Weider Warrants.
1.6 REDEMPTION FEATURE. At the option of the Holder, shares of KAB's Series
A Stock may be redeemed, in whole or in part, at any time and from time to time
after the date of issuance of the Shares of Series A Stock to be redeemed, upon
the terms and conditions set forth as follows:
1.6.1 The redemption price per share shall be Ten Dollars ($10.00) per
share, plus an amount equal to unpaid cumulative dividends accrued to date
of redemption (whether or not declared), which shall be accrued at the
dividend rate of 10% per annum and payable quarterly, pro rata to the date
of redemption.
1.6.2 Redemption Schedule. 1/5 of outstanding Series A Stock may be
redeemed 1 year from the date of issuance. An additional 1/5 of outstanding
Series A Stock may be redeemed 2 years from the date of issuance. All
outstanding Series A Stock may be redeemed 3 years from the date of
issuance.
1.6.3 Waiver of Redemption Feature. At the absolute and sole
discretion of the Holder of the Series A Stock, the Redemption Feature, or
any part thereof can be waived. In the event that said waiver is made, the
holder of said Series A Stock, Issued and Outstanding at the time of the
waiver, shall be entitled to purchase ten (1) share of SPGK Common Stock
for every five (5) shares of Series A Stock held by the Holders, for $1.00
each.
1.7 SECURITY FEATURE. The Holder of the Series A Stock shall be secured by
100% of the Outstanding Shares of the SCACII Common Stock pursuant to the terms
of the Pledge Agreement dated March 12, 1999.
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1.7.1 Default. Any of the following events shall be deemed a "default"
for the purposes of this Article:
(a) If the SCAC Holder presents Series A Stock to the Company for
redemption and the Company cannot redeem said shares;
(b) SPGK loses its Exclusive License to market the Spalding name
as permitted in the Spalding License
Agreement (the Spalding License along with all amendments and
renewals are attached hereto as Exhibit "C" and incorporated herein by
this reference);
(c) Filing by SPGK of a voluntary petition in bankruptcy or
seeking reorganization, adjustment, readjustments of debts, or any
other relief under the Bankruptcy Code, as amended, or any insolvency
act or law, state or federal, now or hereafter existing;
(d) Filing of an involuntary petition against SPGK in bankruptcy
or seeking reorganization, arrangement, readjustment of debts, or any
other relief under the Bankruptcy Code, as amended, or. under any
other insolvency act or law, state or federal, now or hereafter
existing, and the continuance thereof for sixty (60) days undismissed,
unbonded, or undischarged;
(e) Failure of SPGK to provide funding to SCAC on the following
schedule:
1. $250,000.00 to be received on or before April 1, 1999;
2. $250,000.00 to be received on or before April 30, 1999;
3. $250,000.00 to be received on or before June 30, 1999; and
4. $250,000.00 to be received on or before September 30, 1999.
Said funding shall be secured without encumbering any of the assets of
SCAC or its subsidiaries.
1.7.2 Remedies upon the Occurrence of an Event of Default. Upon the
occurrence of an Event of Default as defined in Article 1.7.1 of this
Agreement, KAB may at his option exercise any rights identified in the
Pledge Agreement attached hereto and incorporated herein by this reference
as Exhibit "D".
ARTICLE 2
2. REPRESENTATIONS AND WARRANTIES
2.1 SPGK REPRESENTATIONS AND WARRANTIES. Except as disclosed in the
Disclosure Schedule dated as of the date of this Agreement and delivered to SCAC
concurrently herewith (by specific reference to the section hereof pursuant to
which the disclosure is being made), SPGK represents and warrants, as follows:
(a) ORGANIZATION. It is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation and has full power and authority to conduct its business as
it is now being conducted, and to own and lease its properties and assets;
and it is duly qualified to do business as a foreign corporation in good
standing in every jurisdiction in which the conduct of its business or
ownership or leasing of its properties requires such qualification or, if
any jurisdiction is not so qualified, such failure to qualify will not have
any material adverse effect on its "business, prospects, assets, income or
financial conditions" (hereinafter "Financial Condition").
(b) AUTHORITY. It has full power and authority to enter into this
Agreement and to carry out the transactions contemplated herein. The
execution and delivery of this agreement and the consummation of the
transactions contemplated herein have been duly and validly authorized and
approved by its Board of Directors, and no other corporate proceedings on
its part are necessary to authorize this Agreement or the consummation of
the transactions contemplated herein. This Agreement has been duly and
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validly executed and delivered by it and constitutes a valid and binding
agreement of it, enforceable against it in accordance with the terms
hereof.
(c) CONFLICTS/APPROVALS. Neither the execution and delivery of this
Agreement nor compliance by it with the terms thereof by SPGK will (1)
violate or conflict with or result in a breach or default of any of the
terms or conditions of the Articles of Incorporation or Bylaws of SPGK; (2)
violate any applicable law, statute, rule, regulation or order promulgated
by any governmental authority; or (3) conflict with or result in a material
breach, acceleration or material default or under any of the terms,
conditions of (A) any judgment, order, decree, or ruling to which it is a
party, or any injunction to which it is subject, or any court or
governmental authority, domestic or foreign, or (B) any agreement, contract
or commitment to which it s a party; or (4) require the consent or approval
of, or declaration, filing or registration with, any non-governmental third
party or, to the best of its knowledge, any governmental authority, or
stock exchange in the United States.
(d) AFFILIATES. Except as set forth in Item 2.1(d) of the Disclosure
Schedule, no person owns of record or, to its best knowledge, owns
beneficially five percent (5%) or more of any class of its issued and
outstanding voting securities. In Schedule 2.1 attached hereto, SPGK lists
its stock ownership. SPGK has no controlled subsidiaries.
(e) LITIGATION. Except as set forth in Item 2.1(e) of the Disclosure
Schedule, (1) there is no action, suit, proceeding, claim or investigation,
pending or, to its knowledge, threatened, by or against or otherwise
affecting it which might have a material adverse effect on its Financial
Condition; and it knows of no basis or grounds for any such action, suit,
proceeding, claim or investigation; and (2) there is no outstanding order,
writ, injunction or decree of any court, government or governmental agency,
or any arbitration award against it which might have a material adverse
effect on its Financial Condition.
(f) TAXES. All tax returns and reports required by law to be filed by
it have been duly filed or are in the process of being filed, and, except
as set forth in Item 2.1(f) of the Disclosure Schedule, all taxes,
assessments, fees and other governmental charges (collectively "Taxes")
upon it or upon any of its respective properties, assets, interest or
income which are due and payable have been paid or adequate reserve
therefor have been provided for on its books and financial statements.
(g) TITLE. To the best of its knowledge and belief, except as set
forth in Item 2.1(g) of the Disclosure Schedule, it has good and marketable
title to all of the properties and assets, real and personal, which it
purports to own, free and clear of all liens, claims, charges, encumbrances
and restrictions of whatsoever nature ("Encumbrances").
(h) SECURITIES COMPLIANCE. To the best of its knowledge and belief
during the five (5) year period prior to the execution of this Agreement,
no Director of Officer of it has been involved in any of the events set
forth in Rule 401(f) of Regulation S-K of the Securities Act of 1933, as
amended ("Act"). It has never been subject to any claim or proceeding
brought by any shareholder of it under either state or federal securities
laws. In addition, the stock of SPGK is freely trading as a priced
quotation listed on the Over the Counter Bulletin Board of the NASD and is
not subject to any investigation or inquiry by the NASD, SEC or any other
governmental agencies.
(i) LOANS. It has not received any notices of default, other than
those already disclosed, regarding any of their loans or other credit
facilities.
(j) CONDUCT OF BUSINESS. Since December 1, 1998, except as set forth
in Item 2.1(j) of the Disclosure statement, it has not:
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1. Directly or indirectly redeemed, purchased or otherwise
acquired or re-capitalized or reclassified any of its capital stock or
liquidated in whole or in part;
2. Merged or consolidated with any other companies.
3. Mortgaged, pledged or otherwise encumbered any of its assets;
4. Altered or amended its certificate of incorporation or bylaws;
5. Entered into, materially amended or terminated any material
contract, agreement, franchise, permit or license; and
6. Except in the normal course of business made any material
increase in compensation payable or to become payable by it to its
directors, officers or employees, or any increase in benefits or
benefit plan costs, or any increase in any bonus, insurance, pension,
compensation or other benefit plan covering any directors or officers.
(k) CAPITAL. Its authorized capital stock consists of 100,000,000
common voting shares, par value $0.001, of which 13,747,246shares are
issued and outstanding. All of such issued and outstanding shares are
validly issued, fully paid and non-assessable.
(l) FINANCIALS. Attached hereto as Exhibit "E" are true and correct
copies of (1) the audited financial statement for the period ending
December 31, 1997; (2) the unaudited financial statements for the period
ending December 31, 1998; and (3) the unaudited Proforma Balance Sheet for
the First Quarter of 1999, dated March 31, 1999. There has not been any
material adverse change in the Financial Condition, results of operations
or business of SPGK since February 28, 1999, and no event or condition has
occurred or exists which will result in a material adverse change other
than changes resulting from general economic conditions.
(m) ISSUANCE OF SPGK SHARES. All approvals, permits, consents, orders
and authorizations have been obtained and the necessary documents have been
filed under all applicable laws of the United States to qualify the
issuance, exchange and distribution of the SPGK Shares to be issued to the
Shareholders pursuant to this Agreement.
2.2 SCAC REPRESENTATIONS AND WARRANTIES. Except as disclosed in the
Disclosure Schedule dated as of the date of this Agreement and delivered to SPGK
concurrently herewith (by specific reference to the section hereof pursuant to
which the disclosure is being made), SCAC represents and warrants to SPGK as
follows:
(a) ORGANIZATION. It is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation and has full power and authority to conduct its business as
it is now being conducted.
(b) AUTHORITY. It has full power and authority to enter into this
Agreement and to carry out the transactions contemplated herein. The
execution and delivery of this agreement and the consummation of the
transactions contemplated herein have been duly and validly authorized and
no other corporate proceedings on its part are necessary to authorize this
Agreement or the consummation of the transactions contemplated herein. This
Agreement has been duly and validly executed and delivered by it and
constitutes a valid and binding agreement of it, enforceable against it in
accordance with the terms hereof.
(c) CONFLICTS/APPROVALS. Neither the execution and delivery of this
Agreement nor compliance by it with the terms thereof by SPGK will (1)
violate or conflict with or result in a breach or default of any of the
terms or conditions of the Articles of Incorporation or Bylaws of SPGK; (2)
violate any applicable law, statute, rule, regulation or order promulgated
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by any governmental authority; or (3) conflict with or result in a material
breach, acceleration or material default or under any of the terms,
conditions of (A) any judgment, order, decree, or ruling to which it is a
party, or any injunction to which it is subject, or any court or
governmental authority, domestic or foreign, or (B) any agreement, contract
or commitment to which it is a party; or (4) require the consent or
approval of, or declaration, filing or registration with, any
non-governmental third party or, to the best of its knowledge, any
governmental authority, or stock exchange in the United States.
(d) CAPITAL. Its authorized capital stock consists of 10,000,000
common shares, $.01 par value, of which 825,000 shares are issued and
outstanding. All of such issued and outstanding common voting shares are
validly issued, fully paid, and non-assessable. In addition, Its authorized
Serial Preferred Stock, $10 par value, of which 0 shares are issued and
outstanding.
(e) WEIDER WARRANTS. SCAC has issued Warrants to Weider Health &
Fitness, a Nevada Corporation ("Weider"), which permits Weider to purchase
175,000 shares of SCAC. Pursuant to the terms of the Warrant Agreement (a
true and correct copy is attached hereto as Exhibit "B" and incorporated
herein by this reference), SPGK expressly assumes and acknowledges said
Warrants and agrees to deliver the Holder of said Warrants such shares of
stock, securities or assets as, in accordance with the provisions contained
within said Warrant Agreement. SPGK further agrees to defend, indemnify and
hold harmless, the shareholders, officers, directors and employees of SCAC
and Surf City for and from any action by Weider relating to the Warrants
identified in Exhibit "B" of this Agreement.
ARTICLE 3
3. CONDITIONS PRECEDENT TO SPGK'S PERFORMANCE.
3.1 ACCURACY OF REPRESENTATIONS. Except as otherwise permitted by this
Agreement, all representations and warranties by SCAC in this Agreement, or in
any written Statement that shall be delivered to SPGK by SCAC under this
Agreement, shall be true and accurate in all material respects and as of the
Closing Date as though made at that time.
3.2 PERFORMANCE. SCAC shall have performed, satisfied and complied with all
covenants, agreements and conditions required by this Agreement to be performed
or complied with on or before the Closing Date. If SCAC has not performed, SPGK
may give SCAC written notice, prior to Closing, including particulars known to
it, and the Closing shall be delayed and SPGK shall have ten (10) days to
perform or comply. SPGK's signature on this Agreement shall be deemed to be
SPGK's acceptance of performance by SCAC and satisfaction with said performance
and condition of SCAC.
3.3 ABSENCE OF LITIGATION. No action, suit or proceeding before any court
or any governmental body or authority pertaining to the transaction contemplated
by this Agreement or to its consummation shall have been instituted or
threatened against SCAC or Surf City on or before the Closing Date other than as
listed on Exhibit "F".
3.4 CORPORATE PROCEEDINGS. All corporate and other necessary proceedings
contemplated herein, and all documents necessary thereto, shall be reasonably
satisfactory in form and substance to the parties hereto and to their counsel.
(a) STATUTORY REGULATIONS. All statutory requirements for the valid
consummation of the transactions contemplated by this Agreement shall have
been fulfilled, all authorizations, consents and approvals of all
non-governmental; third parties, and all governmental authorities required
to be obtained in order to permit consummation of the transactions
contemplated by this agreement, and to permit the business currently
carried on by it to continue unimpaired immediately following the Closing
Date, shall have been obtained.
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(b) SHAREHOLDER APPROVAL. The transactions contemplated by this
Agreement shall have been approved in the manner required by law by the
holders of the issued and outstanding shares of SCAC Common Stock, entitled
to vote thereon, and all other corporate action required by law with
respect to the Transaction shall have been taken.
3.5 OFFICER'S CERTIFICATE. SCAC shall have delivered to SPGK a certificate,
dated the Closing Date and signed by its President, certifying that the
conditions specified in this Agreement have been fulfilled and accepted. In the
alternative, the signature of an Officer to this Agreement shall constitute
certification that the conditions specified in this Agreement have been
fulfilled.
ARTICLE 4
4. CONDITIONS PRECEDENT TO SCAC PERFORMANCE
4.1 CONDITIONS. SCAC's obligations hereunder shall be subject to the
satisfaction, at or before the Closing Date, of all the conditions set forth in
this Agreement and, upon finalization and execution of all documentation, SCAC
shall have a period of fifteen (15) days to have said Transaction and
documentation reviewed and approved by securities counsel. Failure to obtain
such approval will not void this Agreement. SCAC may waive any or all of these
conditions, in whole or in part, without prior notice, so long as such waiver is
in writing and provided, however, that no such waiver of a condition shall
constitute a waiver by SCAC of any other condition or any of SCAC's rights or
remedies, at law or in equity, if SPGK shall be in default of any of its
representations, warranties, or covenants under this Agreement.
4.2 ACCURACY OF REPRESENTATION. Except as otherwise permitted by this
Agreement, all representations and warranties by SPGK in this Agreement, or in
any written Statement that shall be delivered to SCAC by SPGK under this
Agreement, shall be true and accurate in all material respects and, as of the
Closing Date, as though made at that time.
4.3 PERFORMANCE. SPGK shall have performed, satisfied, and complied with
all covenants, agreements, and conditions required by this Agreement to be
performed or complied with by it on or before the Closing Date. If SPGK has not
performed, SCAC may terminate this Agreement at its sole discretion any time
after thirty (30) days from signature.
4.4 ABSENCE OF LITIGATION. No action, suit or proceeding before any court
or any governmental body or authority pertaining to the transaction contemplated
by this Agreement or to its consummation shall have been instituted or
threatened against SPGK on or before the Closing Date.
4.5 CORPORATE PROCEEDINGS. All corporate and other necessary proceedings
contemplated herein and all documents necessary thereto shall be reasonably
satisfactory in form and substance to the parties hereto and to their counsel.
(c) STATUTORY REGULATIONS. All statutory requirements for the valid
consummation of the transactions contemplated by this Agreement shall have
been fulfilled, all authorizations, consents and approvals of all
non-governmental; third parties, and all governmental authorities required
to be obtained in order to permit consummation of the transactions
contemplated by this Agreement and to permit the business currently carried
on by it to continue unimpaired immediately following the Closing Date
shall have been obtained.
(d) SHAREHOLDER APPROVAL. The transactions contemplated by this
Agreement has been approved in the manner required by law by the holders of
the issued and outstanding shares of SPGK Common Stock, entitled to vote
thereon, and all other corporate action required by law with respect to the
Transaction has been taken.
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4.6 OFFICER'S CERTIFICATE. SPGK shall deliver to SCAC a certificate, dated
the Closing Date and signed by its President, certifying that the conditions
specified this Agreement have been fulfilled and accepted. In the alternative,
the signature of an Officer to this Agreement shall constitute certification
that the conditions specified in this Agreement have been fulfilled and
accepted.
ARTICLE 5
5. CLOSING.
5.1 CLOSING. The Closing (the "Closing Date") shall take place at such
location and time on March 15, 1999, or on such date and at such time as the
parties may mutually agree upon.
5.2 SPGK DELIVERIES TO SCAC. At Closing, SPGK shall deliver to SCAC and KAB
the following instruments and documents:
(a) Certificates representing 525,000 shares of SPGK Series A
Redeemable Convertible Preferred Stock, par value $10.00 with cumulative
dividends of 10% per annum on the outstanding shares;
(b) Certified resolutions of SPGK's Board of Directors, in a form
satisfactory to counsel for SCAC, authorizing the execution and performance
of this Agreement and all actions to be taken by SPGK under this Agreement;
(c) A Certificate executed by the President or Vice President and the
Secretary of SPGK certifying that all of SPGK's representations and
warranties under this Agreement are true as of the Closing, as though each
of those representations and warranties had been made on the date of
Closing or alternatively, the signature of an officer and/or director of
SPGK to this agreement shall be deemed said certification of said officer
and/or director of SPGK and thus bind the company; and
(d) SPGK shall deliver the opinion of its counsel, dated the Closing
Date, in form and in substance satisfactory to counsel for SCAC to the
effect that or in the absence of an opinion from counsel for SPGK, the
undersigned, on behalf of SPGK, represents and warrants that:
(1) SPGK is a corporation duly organized, validly existing and in
good standing under the laws of the State of Florida, duly qualified
to do business and in good standing in each State where its business
requires qualification.
(2) SPGK's authorized capital stock is as set forth in Section 2
hereof and as listed in Schedule 2.1 attached hereto.
(3) The execution and consummation of this Agreement have been
duly authorized and approved by SPGK's Board of Directors. To the best
of counsel's knowledge and belief, after reasonable inquiry, the
making and performance of this Agreement by SPGK will not violate SPGK
of any laws, rules, regulations, decrees, orders or judgments known to
such counsel of SPGK's Certificate of Incorporation or Bylaws and will
not result in the breach or violation of, or constitute a default
under, any contractual agreement of SPGK.
(4) Counsel or the undersigned has no knowledge of any
litigation, proceeding or investigation of the type described in
Section 2.1(e) hereof.
(5) The SPGK shares pursuant to this Agreement are duly and
validly authorized and issued and are fully paid and non-assessable.
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(6) All applicable approvals, permits, consents, orders and
authorizations have been obtained, and the necessary documents have
been filed under all applicable laws of the United States and, except
for filing of requisite notices or other documentation with any
applicable governmental authority or stock exchange in the United
States, no other regulatory action is required in connection with the
issuance and delivery of SPGK Common Stock. SPGK is listed, quoted and
trading on the Over the Counter Bulletin Board of the NASD as of the
date of this Agreement.
5.3 SCAC'S DELIVERIES TO SPGK. At Closing, SCAC shall deliver to SPGK the
following instruments and documents:
(a) Certificates representing 825,000 shares of Common Stock of SCAC,
par value $0.01, representing therein no less than 100% of the issued and
outstanding capital stock of SCAC.
(b) Certified resolutions of SCAC's Board of Directors, in a form
satisfactory to counsel for SPGK, authorizing the execution and performance
of this Agreement and all actions to be taken by SCAC under this Agreement;
and
(c) A Certificate executed by the President or Vice President and the
Secretary of SPGK certifying that all of SCAC `s representations and
warranties under this Agreement are true as of the Closing, as though each
of those representations and warranties had been made on the date of
Closing.
ARTICLE 6
6. DISPUTE RESOLUTION.
6.1 GOOD FAITH NEGOTIATION FOLLOWED BY MEDIATION. The parties will attempt
in good faith to resolve through negotiation any dispute, claim or controversy
arising out of or relating to this agreement. Either party may initiate
negotiations by providing written notice in letter form to the other party,
setting forth the subject of the dispute and the relief requested. The recipient
of such notice will respond in writing within five days with a statement of its
position on and recommended solution to the dispute. If the dispute is not
resolved by this exchange of correspondence, then representatives of each party
with full settlement authority will meet at a mutually agreeable time and place
within twenty days of the date of the initial notice in order to exchange
relevant information and perspectives, and to attempt to resolve the dispute. If
the dispute is not resolved by these negotiations, the matter will be submitted
to JO AO MO S/ENDISPUTE, or its successor, or another mediation firm or retired
judge mutually agreed upon by the parties for mediation.
6.2 MEDIATION. Except as provided herein, no civil action with respect to
any dispute, claim or controversy arising out of or relating to this agreement,
may be commenced until the matter has been submitted to JO AO MO S/ENDISPUTE, or
its successor, or another mediation firm or retired judge mutually agreed upon
by the for mediation. Either party may commence mediation by providing to JO AO
MO S/ENDISPUTE and the other party a written request for mediation, setting
forth the subject of the dispute and the relief requested. The parties will
cooperate with JO AO MO S/ENDISPUTE and with one another in selecting a mediator
from JO AO MO S/ENDISPUTE panel of neutrals, and in scheduling the mediation
proceedings. If the parties are unable to mutually agree upon a panel of
neutrals from JO AO MO S/ENDISPUTE, the parties shall mutually agree upon a
retired judge or other mediator to assist the parties in the mediation process.
The parties covenant that they will participate in the mediation in good faith,
and that they will share equally in its costs. All offers, promises, conduct and
statements, whether oral or written, made in the course of the mediation by any
of the parties, their agents, employees, experts and attorneys, and by the
mediator and any JO AO MO S/ENDISPUTE employees, are confidential, privileged
and inadmissible for any purpose, including impeachment, in any litigation or
other proceeding involving the parties, provided that evidence that is otherwise
admissible or discoverable shall not be rendered inadmissible or
non-discoverable as a result of its use in the mediation. Either party may seek
equitable relief prior to the mediation to preserve the status quo pending the
completion of that process. Except for such an action to obtain equitable
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relief, neither party may commence a civil action with respect to the matters
submitted to mediation until after the completion of the initial mediation
session, or 45 days after the date of filing the written request for mediation,
whichever occurs first. Mediation may continue after the commencement of a civil
action, if the parties so desire. The provisions of this Clause may be enforced
by any Court of competent jurisdiction, and the party seeking enforcement shall
be entitled to an award of all costs, fees and expenses, including attorneys
fees, to be paid by the party against whom enforcement is ordered.
6.3 COURT PROCEEDINGS.
(a) If a dispute is mediated unsuccessfully, or a dispute arises that is
not subject to the mediation provision of this Agreement, either party may avail
itself of the right to seek relief from a court of competent jurisdiction in or
about San Diego County, in San Diego, California, and only in that location.
(b) All disputes which involve adjudication in a court shall be governed by
the provisions of section 6 of this Agreement. If, in an action commenced in a
court pursuant to section 6 of this Agreement, a party seeks temporary or
preliminary injunctive relief, the court hearing the matter shall proceed to
adjudicate the issues before it with respect to such relief and shall not delay
the entry of any order with respect to such relief; provided, however, that
except for matters fully determined in connection with proceedings for temporary
or preliminary relief, the dispute resolution procedures set forth herein shall
be used. If in an action commenced in court pursuant to section 6, the opposing
party shall raise a legally sufficient claim by way of defense, cross-claim or
counterclaim which is otherwise subject to the dispute resolution provisions of
this Article 6, the court hearing the matter shall proceed to adjudicate the
issues before it; provided, however, that the court may elect to use the dispute
resolution procedures set forth herein with respect to any such defense,
counterclaim or cross-claim to the maximum extent feasible, so long as the use
of all such dispute resolution procedures may be completed within 60 days from
the date the matter is referred to the mediator for that purpose.
6.4 VENUE; WAIVER OF JURY; LIMITATION OF DAMAGES. The parties hereby agree
as follows:
(a) ANY AND ALL COURT PROCEEDINGS ARISING FROM MATTERS RELATED TO THIS
AGREEMENT SHALL BE BROUGHT IN, AND ONLY IN, A COURT OF COMPETENT JURISDICTION IN
SAN DIEGO COUNTY, SAN DIEGO, CALIFORNIA. IN EITHER CASE, THE PARTIES HEREBY
CONSENT TO THE EXERCISE OF SUBJECT MATTER AND PERSONAL JURISDICTION BY SUCH
COURTS.
(b) THE PARTIES AGREE THAT ALL DISPUTES ADMITTED TO THE COURT PURSUANT TO
THIS AGREEMENT SHALL BE TRIED TO THE COURT SITTING WITHOUT A JURY,
NOTWITHSTANDING ANY STATE OR FEDERAL CONSTITUTIONAL OR STATUTORY RIGHTS OR
PROVISIONS.
(c) NO PUNITIVE OR EXEMPLARY DAMAGES SHALL BE AWARDED AGAINST EITHER PARTY,
OR ANY AFFILIATES OF EITHER OF THEM, IN ANY PROCEEDING ARISING UNDER THIS
AGREEMENT, AND ALL CLAIMS TO SUCH DAMAGES ARE HEREBY WAIVED.
ARTICLE 7
7. MISCELLANEOUS
7.1 CAPTIONS AND HEADINGS. The Article and paragraph headings throughout
this Agreement are for convenience and reference only and shall in no way be
deemed to define, limit, or add to the meaning of this Agreement.
7.2 MODIFICATIONS. This Agreement may be waived, changed, modified or
discharged in written form only, signed by the party seeking the waiver, change,
modification or discharge and by the party against whom enforcement of any
waiver, change, modification or discharge is sought.
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7.3 NON-WAIVER. Except as otherwise expressly provided herein, no waiver of
any covenant or condition of this Agreement shall be deemed to have been made,
unless expressly in writing and signed by the party against whom such waiver is
charged; and (i) the failure of any party to insist in any one or more cases
upon the performance of any of the covenants or conditions of this Agreement or
to exercise any option herein contained shall not be construed as a waiver or
relinquishment for the future of any such covenant or condition; (ii) the
acceptance of performance of anything required by this Agreement to be performed
with knowledge of the breach or failure of a covenant or condition of this
Agreement hereof shall not be deemed a waiver of such breach or failure; and
(iii) no waiver by any party of one breach by another party shall be construed
as a waiver with respect to any other subsequent breach.
7.4 TIME OF THE ESSENCE. Time is of the essence in this Agreement and of
each and every provision hereof.
7.5 ENTIRE AGREEMENT; MODIFICATION. This Agreement contains all of the
terms and conditions and representations agreed upon by the parties hereto with
reference to the subject matter hereof. No other agreements or representations,
oral or otherwise shall be deemed to exist or to bind any of the parties hereto
and all prior agreements and understandings are superseded hereby. No officer or
employee or agent of SCAC has any authority to make any representation or
promise not contained in this Agreement. SPGK agrees that it has executed this
Agreement without reliance upon any such unauthorized representation or promise
and in fact has received no representation or promise not contained within this
agreement. This Agreement cannot be modified or changed except by written
instrument signed by all of the parties hereto.
7.6 COUNTERPARTS. This Agreement may be executed simultaneously in one or
more counterparts and/or by facsimile signatures, each of which shall be deemed
an original but which together shall constitute one and the same instrument and
have the same force and effect as if executed in one complete document.
7.7 NOTICES. All notices, requests, demands, and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given
on the date of service, if served personally, on the party to whom notice is to
be given or on the third day after mailing, if mailed, to the party to whom
notice is to be given by first class, registered or certified mail, postage
prepaid, and properly addressed as follows or at an alternative address or
person as the Party may from time to time furnish to the other party:
To SPGK: Mr. Jeffrey Black c/o Investors Communications Group
43725 Monterey Avenue, Suite A
Palm Desert, CA 92260
Phone: 888-723-3742
with a copy to: Don Davis, Esq.
Davis & Associates
P.O. Box 2009
Marina Del Rey, CA 90295
Phone: (310) 378-8968
Facsimile: (310) 301-3370
To SCAC or KAB: Mr. Kevin Blackwell
7730 East Greenway Road, Suite 203
Phoenix, AZ 85260
Phone: (602) 443-0200
Facsimile: (602) 443-1972
with a copy to: Scott Levine, Esq.
401 West "A" Street, Suite 1805
San Diego, CA 92101
Phone: (619) 687-0100
Facsimile: (619) 687-0101
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7.8 BINDING EFFECT. This Agreement is and shall inure to and be binding
upon the heirs, executors, personal representatives, successors and assigns of
the parties to this Agreement.
7.9 MUTUAL COOPERATION. The parties hereto shall cooperate with each other
to achieve the purpose of this Agreement, and shall execute such other and
further documents and take such other and further actions as may be reasonable
and necessary or convenient to effect the Transaction described herein.
7.10 BROKERS. Each of the parties hereto shall indemnify and hold the other
harmless against any and all claims, losses, liabilities or expenses which may
be asserted against it as a result of its dealings, arrangements or agreements
with any broker, finder or person claiming to have a right to compensation for
bringing the parties into agreement.
7.11 ANNOUNCEMENTS. SPGK and SCAC will consult and cooperate with each
other as to the timing and content of any announcements of the transactions
contemplated hereby to the general public or to employees, customers or
suppliers. No party is permitted to announce this transaction until the all
parties have signed this Agreement. This shall not prevent the parties from
providing necessary persons with information about the Agreement.
7.12 EXPENSES. In the event the Transaction contemplated hereby is
consummated, SPGK will pay all legal, accounting and any other out-of-pocket
expenses reasonably incurred in connection with the Transaction.
7.13 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations,
warranties, covenants and agreements of the parties set forth in this Agreement,
or in any instrument, certificate, opinion or other writing providing for it,
shall survive for a period of twenty-four (24) months after Closing,
irrespective of any investigation made by or on behalf of any party.
7.14 EXHIBITS. As of the execution hereof, the parties hereto have provided
each other with the Exhibits and a Disclosure Schedule provided for herein
above, including any items referenced therein or required to be attached
thereto. Any material changes to the Exhibits and Disclosure Schedule shall be
immediately disclosed to the other party. All such Exhibits or Schedules are
incorporated herein and made a part of this Agreement.
7.15 AUTHORITY. Each party to this Agreement acknowledges that: (1) this
Agreement and its reduction to final form is the result of extensive good faith
negotiations between the parties through their respective counsel; (2) said
counsel have carefully reviewed and examined this agreement for execution by
said parties, or any of them; and (3) any statute or rule of construction that
ambiguities are to be resolved against the drafting party should not be employed
in the interpretation of this Agreement.
7.16 COOPERATION. Each party hereby agrees, certifies and covenants that
they will assist each other in completing and preparing any documents to
effectuate the Agreement. Each party agrees, certifies and covenants that they
will immediately execute and revise any corrected documents or forms as
necessary and upon request in order to obtain the benefits agreed to pursuant to
the terms of this Agreement. The Parties further agree to immediately initial
any corrections on any documents containing typographical errors or omissions
upon the request of the other Party.
7.17 INDEMNITY. SPGK hereby agrees to protect, defend and indemnify SCAC,
its direct or indirect parents, their subsidiaries, affiliates and designees and
their officers (past and present), board of directors (past and present),
employees (past and present), shareholders (past and present), Kevin Blackwell,
David Guarino, Kathryn Blackwell (Kevin Blackwell, David Guarino, and Kathryn
Blackwell are hereinafter and hereinabove referred to herein collectively with
respect to this Indemnity provision along with SCAC) and hold them harmless from
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and against any and all costs and expenses actually incurred by them or for
which they are liable or alleged to be liable, including attorney's fees, court
costs, expert witness fees/costs, losses, liabilities, damages, claims and
demands of every kind or nature, including, but not limited to lease
obligations, personal guarantees, the Weider Warrants, entering into this
Agreement, the avoidance of or alleged avoidance any agreement, the breach of or
alleged breach of any agreement, and including those incurred pursuant to a
settlement entered into in good faith. SCAC, and its direct or indirect parents,
their subsidiaries, affiliates and designees and their officers (past and
present), board of directors (past and present), employees (past and present),
shareholders (past and present), at their sole discretion, may hire legal
counsel of their sole choice to defend any actions brought against SCAC, its
direct or indirect parents, their subsidiaries, affiliates and designees and
officers (past and present), board of directors (past and present), employees
(past and present), shareholders (past and present) which arise out of SPGK's
obligations herein. SPGK hereby agrees to pay any and all attorneys' fees,
expert costs, and any other fees and costs incurred by SCAC, its direct or
indirect parents, their subsidiaries, affiliates and designees and their
officers (past and present), board of directors (past and present), employees
(past and present), shareholders (past and present) to said selected counsel
upon the request of SCAC, its direct or indirect parents, their subsidiaries,
affiliates and designees and their officers (past and present), board of
directors (past and present), employees (past and present). SPGK will, if
requested by SCAC, its direct or indirect parents, their subsidiaries,
affiliates and designees and their officers (past and present), board of
directors (past and present), employees (past and present), defend any suits at
the sole cost and expense of SPGK. SPGK hereby agrees to defend said suits with
the use of attorneys requested by SCAC, its direct or indirect parents, their
subsidiaries, affiliates and designees and their officers (past and present),
board of directors (past and present), employees (past and present). For
purposes of this provision, requests shall be made pursuant to the Notice
paragraph herein. For purposes of this provision, said request shall be deemed
accepted unless written notice of said non-acceptance is received by SCAC at the
address listed herein, or later changed, within 10 days of receipt of said
notice. The parties may rely upon this acceptance in their action or non-action.
7.18 SEVERABILITY. Nothing contained in this Agreement shall be construed
as requiring the commission of any act contrary to law. Whenever there is any
conflict between any provisions of this Agreement and any present or future
statute, law, ordinance, regulation or judicial decision, contrary to which the
parties have no legal right under this Agreement, the latter shall prevail, but
in such event the provision of this Agreement thus affected shall be curtailed
and limited only to the extent necessary to bring it within the requirements of
the law. In the event that any part, article, section, sentence or clause of
this Agreement shall be held to be indefinite, invalid or otherwise
unenforceable, the indefinite, invalid or unenforceable provision shall be
deemed deleted, and the remaining parts thereof shall continue in full force and
effect.
7.19 NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to
benefit any other person or entity except the named parties hereto and no other
person or entity shall be entitled to any rights hereunder by virtue of
so-called "third party beneficiary rights" or otherwise.
AGREED TO AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN.
Dated: March 15, 1999 SPORTS GROUP INTERNATIONAL, INC.
By: /s/ Jeffrey Black
------------------------------------
Jeffrey Black, its President and
Chairman of the Board
/s/ Jeffrey Black
------------------------------------
Jeffrey Black, an Individual and on
behalf of Investors Communication
Corporation, Inc.
Dated: March 15, 1999 SURF CITY ACQUISITION CORPORATION II
By: /s/ Kevin Blackwell
------------------------------------
Kevin Blackwell, President
/s/ Kevin A. Blackwell
Dated: March 15, 1999 ------------------------------------
Kevin A. Blackwell, an Individual
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MEMBERSHIP INTEREST PURCHASE AGREEMENT
This MEMBERSHIP INTEREST PURCHASE AGREEMENT (the "Agreement"), is made this
12th day of March, 1999, ("the effective date") by and between SPORTS GROUP
INTERNATIONAL, INC. ("SPGK"), a Florida corporation, and APACHE PEAK CAPITAL,
LLC ("APACHE"), an Arizona Limited Liability Company.
RECITALS
1. SPGK is a corporation duly organized and existing under the laws of the
State of Florida with an authorized capital stock consisting of 100,000,000
shares of voting common stock, $0.001 par value ("SPGK Common Stock"), of which
4,300,000 shares are issued and outstanding.
2. APACHE is a Limited Liability Company duly organized and existing under
the laws of the State of Arizona with two members.
3. SPGK will issue and deliver $700,000.00 in cash or kind to the members
of APACHE on the effective date of this Agreement In lieu of paying cash to the
members, SPGK may at the members' sole discretion, transfer 2,100,000 shares of
unrestricted, fully tradable, shares of common stock of SPGK to said members.
Said shares of common stock are to be "504 Stock' valued at $.35 per share
without any trading restrictions upon the members of APACHE. Said shares of SPGK
504 Common Stock is in consideration for the delivery of 100% of APACHE to SPGK
(the "Transaction").
4. SPGK and APACHE desire to make certain representations, warranties,
covenants and agreements in connection with the Transaction, and also desire to
prescribe various conditions precedent to the Transaction.
NOW, THEREFORE. in consideration of the recitals which are a part of this
Agreement, and of the mutual agreements, SPGK and covenants herein contained,
including the recitals above which are part of this Agreement, the parties
hereto hereby agree as follows:
ARTICLE 1
1. CONSIDERATION OF SECURITIES AND PLAN OF TRANSACTION
1.1 CONSIDERATION. Subject to all of the terms and conditions of this
Agreement, SPGK agrees to issue and deliver to the members of APACHE 2,100,000
shares of SPGK 504 Common Stock to the members of APACHE in exchange for said
members' interest in APACHE.
1.1.1 Valid and binding obligations of SPGK and APACHE existing on the
Closing Date shall become and remain the valid and binding obligations of
SPGK.
1.1.2 SPGK agrees to assume any and all obligations of APACHE whether
incurred prior to this Agreement or after this Agreement In addition, SPGK
agrees to assume any and all obligations of the officers, directors,
members and employees of APACHE incurred on behalf of APACHE or for the
benefit of APACHE.
1.2 SPGK SHARES REGISTERED. The parties hereto intend that the SPGK shares
to be issued to the Members St the Closing shall be fully registered under the
registration requirements of the Securities act of 1933. as amended (the "Act"),
and the rules and regulations promulgated thereunder.
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<PAGE>
ARTICLE 2
2. REPRESENTATIONS AND WARRANTIES
2.1 SPGK REPRESENTATIONS AND WARRANTIES. Except as disclosed in the
Disclosure Schedule dated as of the date of this Agreement and delivered to
APACHE concurrently herewith (by specific reference to the section hereof
pursuant to which the disclosure is being made)1 SPGK represents and warrants,
as follows:
(a) ORGANIZATION. It is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation and has full power and authority to conduct its business as
it is now being conducted, and to own and lease Its properties and assets;
and it is duly qualified to do business as a foreign corporation in good
standing in every jurisdiction in which the conduct of its business or
ownership or leasing of its properties requires such qualification or, if
any jurisdiction is not so qualified, such failure to qualify will not have
any material adverse effect on its "business, prospects, assets, income or
financial conditions" (hereinafter "Financial Condition').
(b) AUTHORITY. It has full power and authority to enter into this
Agreement and to carry out the transactions contemplated herein. The
execution and delivery of this agreement and the consummation of the
transactions contemplated herein have been duly and validly authorized and
approved by its Board of Directors, and no other corporate proceedings on
its part are necessary to authorize this Agreement or the consummation of
the transactions contemplated herein. This Agreement has been duly and
validly executed and delivered by it and constitutes a valid and binding
agreement of it, enforceable against it in accordance with the terms
hereof.
(c) CONFLICTS/APPROVALS. Neither the execution and delivery of this
Agreement nor compliance by it with the terms thereof by SPGK will (1)
violate or conflict with or result in a breach or default of any of the
terms or conditions of the Articles of Incorporation or Bylaws of SPGK: (2)
violate any applicable law, statute, rule, regulation or order promulgated
by any governmental authority; or (3) conflict with or result in a material
breach, acceleration or material default or under any of the terms,
conditions of (A) any judgment, order, decree, or ruling to which it is a
party, or any injunction to which it is subject, or any court or
governmental authority, domestic or foreign, or (B) any agreement contract
or commitment to which It s a party; or (4) require the consent or approval
of, or declaration, filing or registration with, any non-governmental third
party or, to the best of its knowledge, any governmental authority, or
stock exchange in the United States.
(d) AFFILIATES. Except as set forth in Item 2.1(d) of the Disclosure
Schedule, no person owns of record or, to its best knowledge, owns
beneficially five percent (5%) or more of any class of its issued and
outstanding voting securities. In Schedule 2.1 attached hereto, SPGK lists
its stock ownership SPGK has no controlled subsidiaries.
(e) LITIGATION. Except as set forth in Item 2.1(e) of the Disclosure
Schedule, (1) there is no action, suit proceeding, claim or investigation,
pending or, to its knowledge, threatened, by or against or otherwise
affecting It which might have a material adverse effect on its Financial
Condition; and it knows of no basis or grounds for any such action, suit
proceeding, claim or investigation; and (2) there is no outstanding order,
writ injunction or decree of any court, government or governmental agency,
or any arbitration award against It which might have a material adverse
effect on its Financial Condition.
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<PAGE>
(f) Taxes. All tax returns and reports required by law to be filed by
it have been duly filed or are in the process of being filed, and, except
as set forth in Item 2.1 (1) of the Disclosure Schedule, all taxes,
assessments, fees and other governmental charges (collectively Taxes) upon
it or upon any of its respective properties, assets, interest or income
which are due and payable have been paid or adequate reserve therefor have,
been provided for on its books and financial statements.
(g) TITLE. To the best of its knowledge and belief, except as set
forth in Item 2.1(g) of the Disclosure Schedule, it has good and marketable
title to all of the properties and assets, real and personal, which it
purports to own, free and clear of all liens, claims, charges, encumbrances
and restrictions of whatsoever nature ("Encumbrances).
(h) SECURITIES COMPLIANCE. To the best of its knowledge and belief
during the five (5) year period prior to the execution of this Agreement no
Director of Officer of it has been involved in any of the events set forth
in Rule 401(f) of Regulation S-K of the Securities Act of 1933, as amended
("Act"). It has never been subject to any claim or proceeding brought by
any shareholder of it under either state or federal securities laws. In
addition, the stock of SPGK is freely trading as a priced quotation listed
on the Over the Counter Bulletin Board of the NASD and is not subject to
any investigation or inquiry by the NASD, SEC or any other governmental
agencies.
(i) LOANS. It has not received any notices of default, other than
those already disclosed, regarding any of their loans or other credit
facilities.
(j) CONDUCT OF BUSINESS. Since December 111998, except as set forth in
Item 2.1 (j) of the Disclosure statement it has not
1. Directly or indirectly redeemed, purchased or otherwise
acquired or re-capitalized or reclassified any of its capital stock or
liquidated in whole or in part;
2. Merged or consolidated with any other companies.
3. Mortgaged, pledged or otherwise encumbered any of its assets;
4. Altered or amended its certificate of incorporation or bylaws;
5. Entered into, materially amended or terminated any material
contract agreement, franchise, permit or license; and
6. Except in the normal course of business made any material
increase in compensation payable or to become payable by it to its
directors, officers or employees, or any increase in benefits or
benefit plan costs, or any increase in any bonus, insurance. pension,
compensation or other benefit plan covering any directors or officers:
(k) CAPITAL. Its authorized capital stock consists of 100,000,000
common voting shares, par value $0.001, of which 4,300,000 shares are
issued and outstanding (pro-effective date). All of such issued and
outstanding shares are validly issued, fully paid and non-assessable.
(l) FINANCIALS. Attached hereto as Exhibit SE" are true and correct
copies of (1) the audited financial statement for the period ending
December 31. 1997; (2) the unaudited financial statements for the period
ending December 31, 1998; and (3) the unaudited Proforma Balance Sheet for
the First Quarter of 1999, dated March 31, 1999. There has not been any
material adverse change in the Financial Condition, results of operations
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<PAGE>
or business of SPGK since February 28, 1999, and no event or condition has
occurred or exists which will result in a material adverse change other
than changes resulting from general economic conditions.
(m) ISSUANCE OF SPGK SHARES. All approvals, permits, consents, orders
and authorizations have been obtained and the necessary documents have been
filed under all applicable laws of the United States to qualify the
issuance, exchange and distribution of the SPGK shares under Rule 504 to be
issued to the Members pursuant to this Agreement Said shares being Issued
to the Members herein are "free-trading" and without restriction under the
rules of the SEC.
2.2 APACHE REPRESENTATIONS AND WARRANTIES. Except as disclosed in the
Disclosure Schedule dated as of the date of this Agreement and delivered to SPGK
concurrently herewith (by specific reference to the section hereof pursuant to
which the disclosure is being made). APACHE represents and warrants to SPGK as
follows:
(a) ORGANIZATION. It is a Limited Liability Company duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its organization and has full power and authority to conduct its business
as it is now being conducted.
(b) AUTHORITY. It has full power and authority enter into this
Agreement and to carry out the transactions contemplated herein. The
execution and delivery of this agreement and the consummation of the
transaction contemplated herein have been duly and validly authorized and
no other proceedings on its part are necessary to authorize this Agreement
or the consummation of the transactions contemplated herein. This Agreement
has been duly and validly executed and delivered by it and constitutes a
valid and binding agreement of it enforceable against it in accordance with
the terms hereof.
(c) CONFLICTS/APPROVALS. Neither the execution and delivery of this
Agreement nor compliance by it with the terms thereof by SPGK will (1)
violate or conflict with or result in a breach or default of any of the
terms or conditions of the Articles of Organization of APACHE; (2) violate
any applicable law, statute, rule, regulation or order promulgated by any
governmental authority; or (3) conflict with or result in a material
breach, acceleration or material default or under any of the terms,
conditions of (A) any judgment, order, decree, or ruling to which it is a
party, or any injunction to which it is subject, or any court or
governmental authority, domestic or foreign, or (B) any agreement contract
or commitment to which it is a party; or (4) require the consent or
approval of or declaration, filing or registration with, any
non-governmental third party or, to the best of its knowledge, any
governmental authority, or stock exchange in the United States.
ARTICLE 3
3. CONDITIONS PRECEDENT TO SPGK'S PERFORMANCE.
3.1 ACCURACY OF REPRESENTATIONS. Except as otherwise permitted by this
Agreement, all representations and warranties by APACHE in this Agreement, or in
any written Statement that shall be delivered to SPGK by APACHE under this
Agreement, shall be true and accurate in all material respects and as of the
Closing Date as though made at that time.
3.2 PERFORMANCE. APACHE shall have performed, satisfied and complied with
all covenants, agreements and conditions required by this Agreement to be
performed or complied with on or before the Closing Date. If APACHE has not
performed, SPGK may give APACHE written notice, prior to Closing, including
particulars known to it, and the Closing shall be delayed and SPGK shall have
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ten (10) days to perform or comply SPGK's signature on this Agreement shall be
deemed to be SPGK's acceptance of performance by APACHE and satisfaction with
said performance and condition of APACHE.
3.3 ABSENCE OF LITIGATION. No action, suit or proceeding before any court
or any governmental body or authority pertaining to the transaction contemplated
by this Agreement or to its consummation shall have been instituted or
threatened against APACHE on or before the Closing Date.
3.4 CORPORATE/ORGANIZATIONAL PROCEEDINGS. All necessary proceedings
contemplated herein, and all documents necessary thereto, shall be reasonably
satisfactory In form and substance to the parties hereto and to their counsel.
(a) STATUTORY REGULATIONS. All statutory requirements for the valid
consummation of the transactions contemplated by this Agreement shall have
been fulfilled, all authorizations, consents and approvals of all
non-governmental; third parties, and all governmental authorities required
to be obtained in order to permit consummation of the transactions
contemplated by this agreement and to permit the business currently carried
on by it to continue unimpaired immediately following the Closing Date,
shall have been obtained.
(b) MEMBER APPROVAL. The transactions contemplated by this Agreement
shall have been approved in the manner required by law by the Members of
APACHE, and all other organizational action required by law with respect to
the Transaction shall have been taken.
3.5 OFFICER'S CERTIFICATE. APACHE shall have delivered to SPGK a
certificate, dated the Closing Date and signed by its Members, certifying that
the conditions specified in this Agreement have been fulfilled and accepted. In
the alternative, the signature of a Member to this Agreement shall constitute
certification that the conditions specified in this Agreement have been
fulfilled.
ARTICLE 4
4. CONDITIONS PRECEDENT TO APACHE PERFORMANCE
4.1 CONDITIONS. APACHE's obligations hereunder shall be subject to the
satisfaction, at or before the Closing Date, of all the conditions set forth in
This Agreement and, upon finalization and execution of all documentation, APACHE
shall have a period of fifteen (15) days to have said Transaction and
documentation reviewed and approved by securities counsel. Failure to obtain
such approval will not void this Agreement. APACHE may waive any or all of these
conditions, in whole or in part, without prior notice, so long as such waiver is
in writing and provided, however, that no such waiver of a condition shall
constitute a waiver by APACHE of any other condition or any of APACHE's rights
or remedies, at law or in equity, if SPGK shall be in default of any of its
representations, warranties, or covenants under this Agreement
4.2 ACCURACY OF REPRESENTATION. Except as otherwise permitted by this
Agreement all representations and warranties by SPGK in this Agreement, or in
any written Statement that shall be delivered to APACHE by SPGK under this
Agreement shall be true and accurate in all material respects and, as of the
Closing Date, as though made at that time.
4.3 PERFORMANCE. SPGK shall have performed. satisfied, and complied with
all covenants. agreements. and conditions required by this Agreement to be
performed or complied with by it on or before the Closing Date. It SPGK has not
performed, APACHE may terminate this Agreement at its sole discretion any time
after thirty (30) days from signature.
4.4 ABSENCE OF LITIGATION. No action, suit or proceeding before any court
or any governmental body or authority pertaining to the transaction contemplated
by this Agreement or to its consummation shall have been instituted or
threatened against SPGK on or before the Closing Date.
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4.5 CORPORATE PROCEEDINGS. All corporate and other necessary proceedings
contemplated herein and all documents necessary thereto shall be reasonably
satisfactory in form and substance to the parties hereto and to their counsel.
(c) STATUTORY REGULATIONS. All statutory requirements for the valid
consummation of the transactions contemplated by this Agreement shall have
been fulfilled, all authorizations, consents and approvals of all
non-governmental; third parties, and all governmental authorities required
to be obtained in order to permit consummation of the transactions
contemplated by this Agreement and to permit the business currently carried
on by it to continue unimpaired immediately following the Closing Date
shall have been obtained.
(d) SHAREHOLDER APPROVAL. The transactions contemplated by this
Agreement has been approved in the manner required by law by the holders of
the issued and outstanding shares of SPGK Common Stock, entitled to vote
thereon, and all other corporate action required by law with respect to the
Transaction has been taken.
4.6 OFFICER'S CERTIFICATE. SPGK shall deliver to APACHE a certificate,
dated the Closing Date and signed by its President, certifying that the
conditions specified this Agreement have been fulfilled and accepted. In the
alternative, the signature of an Officer to this Agreement shall constitute
certification that the conditions specified in this Agreement have been
fulfilled and accepted.
ARTICLE S
5. CLOSING.
5.1 CLOSING. The Closing (the "Closing Date") shall take place at such
location and time on March 12,1909, or on such date and at such time as the
parties may mutually agree upon.
5.2 SPGK DELIVERIES TO APACHE. At Closing, SPGK shall deliver to APACHE the
following instruments and documents:
(a) Certificates representing 2,100,000 shares of SPGK 504 Common
Stock registered in the Member's names as designated at Lonsdale
Securities, Inc.;
(b) Certified resolutions of SPGK's Board of Directors, in a form
satisfactory to counsel for APACHE, authorizing the execution and
performance of this Agreement and all actions to be taken by SPGK under
this Agreement;
(c) A Certificate executed by the President or Vice President and the
Secretary of SPGK certifying that all of SPGK's representations and
warranties under this Agreement are true as of the Closing, as though each
of those representations and warranties had. been made on the date of
Closing or alternatively, the signature of an officer and/or director of
SPGK to this agreement shall be deemed said certification of said officer
and/or director of SPGK and thus bind the company; and
(d) SPGK shall deliver the opinion of its counsel, dated the Closing
Date, in form and in substance satisfactory to counsel for APACHE to the
effect that or in the absence of an opinion from counsel for SPGK. the
undersigned, on behalf of SPGK, represents and warrants that
(1) SPGK is a corporation duly organized, validly existing and in
good standing under the laws of the State of Florida, duly qualified
to do business and in good standing in each State where its business
requires qualification.
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(2) SPGK's authorized capital stock Is as set forth in Section 2
hereof and as listed in Schedule 2.1 attached hereto.
(3) The execution and consummation of this Agreement have been
duly authorized and approved by SPGK's Board of Directors. To the best
of counsel's knowledge and belief, after reasonable inquiry, the
making and performance of this Agreement by SPGK will not violate SPGK
of any laws, rules, regulations, decrees, orders or-judgments known to
such counsel of SPGK's Certificate of Incorporation or Bylaws and will
not result in the breach or violation of or constitute a default
under, any contractual agreement of SPGK.
(4) Counsel or the undersigned has no knowledge of any
litigation, proceeding or investigation of the type described in
Section 2.1(e) hereof.
(5) The SPGK shares pursuant to this Agreement are duly and.
validly authorized and issued and are fully paid and non-assessable.
(6) All applicable approvals, permits, consents, orders and
authorizations have been obtained, and the necessary 0ocuments have
been filed under all applicable laws of the United States and, except
for filing of requisite notices or other documentation with any
applicable governmental authority or stock exchange in the United
States, no other regulatory action is required in connection with the
issuance and delivery of SPGK Common Stock. SPGK is listed, quoted and
trading on the Over the Counter Bulletin Board of the NASD as of the
date of this Agreement
5.3 APACHE'S DELIVERIES TO SPGK. At Closing, APACHE shall deliver to SPGK
its Members' interests in the Company. Said Members agree to file and/or sign
any documents necessary to effectuate the transfer of APACHE to SPGK.
ARTICLE 6
6. DISPUTE RESOLUTION.
6.1 GOOD FAITH NEGOTIATION FOLLOWED BY MEDIATION. The parties will attempt
in good faith to resolve through negotiation any dispute, claim or controversy
arising out of or relating to this agreement. Either party may initiate
negotiations by providing written notice in letter form to the other party,
setting forth the subject of the dispute and the relief requested. The recipient
of such notice will respond in writing within five days with a statement of its
position on and recommended solution to the dispute. If the dispute is not
resolved by this exchange of correspondence, then representatives of each party
with full settlement authority will meet at a mutually agreeable time and place
within twenty days of the date of the initial notice in order to exchange
relevant information and perspectives, and to attempt to resolve the dispute. If
the dispute is not resolved by these negotiations, the matter will be submitted
to J-A-M-S/ENDISPUTE, or its successor, or another mediation firm or retired
judge mutually agreed upon by the parties for mediation.
6.2 MEDIATION. Except as provided herein, no civil action with respect to
any dispute, claim or controversy arising out of or relating to this agreement,
may be commenced until the matter has been submitted to J-A-M-S/ENDISPUTE, or
its successor, or another mediation firm or retired judge mutually agreed upon
by the for mediation. Either party may commence mediation by providing to
J-A-M-S/ENDISPUTE and the other party a written request for mediation, setting
forth the subject of the dispute and the relief requested. The parties will
cooperate with J-A-M-S-/ENDISPUTE and with one another in selecting a mediator
from J-A-M-S/ENDISPUTE panel of neutrals, and in scheduling the mediation
proceedings. If the parties are unable to mutually agree upon a panel of
neutrals from J-A-M-S/ENDISPUTE, the parties shall mutually agree upon a retired
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judge or other mediator to assist the parties in the mediation process. -The
parties covenant that they will participate in the mediation in good faith, and
that they will share equally in its costs. All offers, promises, conduct and
statements, whether oral or written, made in the course of the mediation by any
of the parties, their agents, employees, experts and attorneys, and by the
mediator and any J-A-M-S/ENDISPUTE employees, are confidential, privileged and
inadmissible for any purpose, including impeachment in any litigation or other
proceeding involving the parties, provided that evidence that is otherwise
admissible or discoverable shall not be rendered inadmissible or
non-discoverable as a result of its use in the mediation. Either party may seek
equitable relief prior to the mediation to preserve the status quo pending the
completion of that process. Except for such an action to obtain equitable
relief, neither party may commence a civil action with respect to the matters
submitted to mediation until after the completion of the initial mediation
session, or 45 days after the date of filing the written request for mediation,
whichever occurs first Mediation may continue after the commencement of a civil
action, If the parties so desire. The provisions of this Clause may be enforced
by any Court of competent jurisdiction, and the party seeking enforcement shall
be entitled to an award of all costs, fees and expenses, including attorneys
fees, to be paid by the party against whom enforcement is ordered.
6.3 COURT PROCEEDINGS.
(a) If a dispute is mediated unsuccessfully, or a dispute arises that is
not subject to the mediation provision of this Agreement, either party may avail
itself of the right to seek relief from a court of competent jurisdiction in or
about San Diego County, in San Diego, California, and only in that location.
(b) All disputes which involve adjudication in a court shall be governed by
the provisions of section 6 of this-Agreement. If, in an action commenced in a
court pursuant to section 6-of this Agreement a party seeks temporary or
preliminary injunctive relief, the court hearing the matter shall proceed to
adjudicate the issues before it with respect to such relief and shall not delay
the entry of any order with respect to such relief; provided, however, that
except for matters fully determined in connection with proceedings for temporary
or preliminary relief, the dispute resolution procedures set forth herein shall
be used. If in an action commenced in court pursuant to section 6, the opposing
party shall raise a legally sufficient claim by way of defense, cross-claim or
counterclaim which is otherwise subject to the dispute resolution provisions of
this Article 6, the court hearing the matter shall proceed to adjudicate the
issues before it, provided, however, that the court may elect to use the dispute
resolution procedures set forth herein with respect to-any such defense,
counterclaim or cross-claim to the maximum extent feasible, so - long as the use
of all such dispute resolution procedures may be completed within 60 days from
the date the matter is referred to the mediator for that purpose.
6.4 VENUE: WAIVER OF JURY: LIMITATION OF DAMAGES. The parties hereby agree
as follows:
(a) ANY AND ALL COURT PROCEEDINGS ARISING FROM MATTERS RELATED TO THIS
AGREEMENT SHALL BE BROUGHT IN, AND ONLY IN, A COURT OF COMPETENT JURISDICTION IN
SAN DIEGO COUNTY, SAN DIEGO, CALIFORNIA. IN EITHER CASE, THE PARTIES HEREBY
CONSENT TO THE EXERCISE OF SUBJECT MATTER AND PERSONAL JURISDICTION BY SUCH
COURTS
(b) THE PARTIES AGREE THAT ALL DISPUTES ADMITTED TO THE COURT PURSUANT TO
THIS AGREEMENT SHALL BE TRIED TO THE COURT SITTING WITHOUT A JURY,
NOTWITHSTANDING ANY STATE OR FEDERAL CONSTITUTIONAL OR STATUTORY RIGHTS OR
PROVISIONS.
(c) NO PUNITIVE OR EXEMPLARY DAMAGES SHALL BE AWARDED-AGAINST EITHER PARTY,
OR ANY AFFILIATES OF EITHER OF THEM, IN ANY PROCEEDING ARISING UNDER THIS
AGREEMENT, AND ALL CLAIMS TO SUCH DAMAGES ARE HEREBY WAIVED.
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7. MISCELLANEOUS
7.1 CAPTIONS AND HEADINGS. The Article and paragraph headings throughout
this Agreement are for convenience and reference only and shall in no way be
deemed to define, limit, or add to the meaning of this Agreement
7.2 MODIFICATIONS. This Agreement may be waived, changed, modified or
discharged in written form only, signed by the party seeking the waiver, change,
modification or discharge and by the party against whom enforcement of any
waiver, change, modification or discharge is sought.
7.3 NON-WAIVER. Except as otherwise expressly provided herein, no waiver of
any covenant or condition of this Agreement shall be deemed to have been made,
unless expressly in writing and signed by the party against whom such waiver is
charged; and (i) the failure of any party to insist in any one or more cases
upon the performance of any of the covenants or conditions of this Agreement or
to exercise any option herein contained shall not be construed as a waiver or
relinquishment for the future of any such covenant or condition; (ii) the
acceptance of performance of anything required by this Agreement to be performed
with knowledge of the breach or failure of a covenant or condition of this
Agreement hereof shall not be deemed a waiver of such breach or failure; and
(iii) no waiver by any party of one breach by another party shall be construed
as a waiver with respect to any other subsequent breach.
7.4 TIME OF THE ESSENCE. Time is of the essence in this Agreement and of
each and every provision hereof.
7.5 ENTIRE AGREEMENT; MODIFICATION. This Agreement contains all of the
terms and conditi6ns and representations agreed upon by the parties hereto with
reference to the subject matter hereof. No other agreements or representations,
oral or otherwise shall be deemed to exist or to bind any of the parties hereto
and all prior agreements and understandings are superseded hereby. No officer or
employee or agent of APACHE has any authority to make any representation or
promise not contained in this Agreement. SPGK agrees that it has executed this
Agreement without reliance upon any such unauthorized representation or promise
and in fact has received no representation or promise not contained within this
agreement. This Agreement cannot be modified or changed except by written
instrument signed by all of the parties hereto.
7.6 COUNTERPARTS. This Agreement may be executed simultaneously in one or
more counterparts and/or by facsimile signatures, each of which shall be deemed
an original but which together shall constitute one and the same instrument and
have the same force and effect as if executed in one complete document
7.7 Notices. All notices, requests, demands, and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given
on the date of service, if served personally, on the party to whom, notice is to
be given or on the third day after mailing. if mailed, to the party to whom
notice is to be given by first class, registered or certified mail, postage
prepaid, and properly addressed as follows or at an alternative address or
person as the Party may from time to time furnish to the other party:
To SPGK: Mr. Jeffrey Black c/o Investors Communications Group
43726 Monterey Avenue, Suite A
Palm Desert, CA 92260
Phone: 888-723-3742
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with a copy to: Don Davis, Esq.
Davis & Associates
P0. Box 2009
Marina Del Rey, CA 90295
Phone: (310) 378-8968
Facsimile: (310) 301-3370
To APACHE: Mark J. Thoeny
9120 North 114th Street
Scottsdale, AZ 85259
Facsimile: (602) 391-ISSI
with a copy to: Scott Levine, Esq.
401 West "A" Street, Suite 1805
San Diego, CA 92101
Phone: (619) 607-0100
Facsimile: (819) 687-0101
7.8 BINDING EFFECT. This Agreement is and shall inure to and be binding
upon The heirs. executors, personal representatives, successors and assigns of
the parties to this Agreement
7.9 MUTUAL COOPERATION. The parties hereto shall cooperate with each other
to achieve the purpose of this Agreement, and shall execute such other and
further documents and take such other and further actions as may be reasonable
and necessary or convenient to effect the Transaction described herein.
7.10 BROKERS. Each of the parties hereto shall indemnify and hold the other
harmless against any and all claims, losses, liabilities or expenses which may
be asserted against it as a result of its dealings, arrangements or agreements
with any broker, finder or person claiming to have a right to compensation for
bringing the parties into agreement.
7.11 ANNOUNCEMENTS. SPGK and APACHE will consult and cooperate with each
other as to the timing and content of any announcements of the transactions
contemplated hereby to the general public or to employees, customers or
suppliers. No party is permitted to announce this transaction until the all
parties have signed this Agreement. This shall not prevent the parties from
providing necessary persons with information about the Agreement.
7.12 EXPENSES. In the event the Transaction contemplated hereby is
consummated, SPGK will pay all legal, accounting and any other out-of-pocket
expenses reasonably incurred in connection with the Transaction.
7.13 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations,
warranties, covenants and agreements of the parties set forth in this Agreement,
or in any instrument, certificate. opinion or other writing providing for it,
shall survive for a period of twenty-four (24) months after Closing,
irrespective of any investigation made by or on behalf of any party.
7.14 EXHIBITS. As of the execution hereof, the parties hereto have provided
each other with the Exhibits and a Disclosure Schedule provided for herein
above, including any items referenced therein or required to be attached
thereto. Any material changes to the Exhibits and Disclosure Schedule shall be
Immediately disclosed to the other party. All such Exhibits or Schedules are
incorporated herein and made a part of this Agreement
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7.15 AUTHORITY. Each party to this Agreement acknowledges that (1) this
Agreement and its reduction to final form is the result of extensive good faith
negotiations between the parties through their respective counsel; (2) said
counsel have carefully reviewed and examined this agreement for execution by
said parties, or any of them; and (3) any statute or rule of construction that
ambiguities are to be resolved against the drafting party should not be employed
in the interpretation of this Agreement
7.16 COOPERATION. Each party hereby agrees, certifies and covenants that
they will assist each other in completing and preparing any documents to
effectuate the Agreement Each party agrees, certifies and covenants that they
will immediately execute and revise any corrected documents or forms as
necessary and upon request in order to obtain the benefits agreed to pursuant to
the terms of this Agreement The Parties further agree to immediately initial any
corrections on any documents containing typographical errors or omissions upon
the request of the other Party.
7.17 INDEMNITY. SPGK hereby agrees to protect defend and indemnify
APACHE, its direct or indirect affiliates and designees and their Members (past
and present, employees (past and present), and hold them harmless from and
against any and all costs and expenses actually incurred by them or for which
they are liable or alleged to be liable, including attorney's fees, court costs,
expert witness fees/costs, losses, liabilities, damages, claims and demands of
every kind or nature, including, but not limited to entering into this
Agreement, the avoidance of or alleged avoidance any agreement, the breach of or
alleged breach of any agreement, and including those Incurred pursuant to a
settlement entered into in good faith. APACHE, and its direct or indirect
affiliates and designees and Their Members (past and present), employees (past
and present), at Their sole discretion, may hire legal counsel of their sole
choice to defend any actions brought against APACHE, its direct or indirect
affiliates and designees Members (past and present), employees (past and
present), which arise out of SPGK's obligations herein. SPGK hereby agrees to
pay any and all attorneys' fees, expert costs, and any other fees and costs
incurred by APACHE, its direct or indirect affiliates and designees and their
Members (past and present), employees (past and -present), to said selected
counsel upon the request of APACHE. SPGK will, if requested by APACHE, its
direct or indirect affiliates and designees and their Members (past and
present), employees (past and present), defend any suits at the sole cost and
expense of SPGK. SPGK hereby agrees to defend said suits with the use of
attorneys requested by APACHE, its direct or affiliates and designees and their
Members (past and present), employees (past and present). For purposes of this
provision, requests shall be made pursuant to the Notice paragraph herein. For
purposes of this provision, said request shall be deemed accepted Cm less
written notice of said non-acceptance is received by APACHE at the address
listed herein, or later changed, within 10 days of receipt of said notice. The
parties may rely upon this acceptance in their action or non-action.
7.18 SEVERABILITY. Nothing contained in this Agreement shall be construed
as requiring the commission of any act contrary to law. Whenever there is any
conflict between any provisions of this Agreement and any present or future
statute, law, ordinance, regulation or judicial decision, contrary to which the
parties have no legal right under this Agreement, the latter shall prevail, but
in such event the provision of this Agreement thus affected shall be curtailed
and limited only to the extent necessary to bring it within the requirements of
the law, In the event that any part, article, section, sentence or clause of
this Agreement shall be held to be indefinite, invalid or otherwise
unenforceable, the indefinite, invalid or unenforceable provision shall be
deemed deleted, and the remaining parts thereof shall continue in full force and
effect.
7.19 NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to
benefit any other person or entity except the named parties hereto and no other
person or entity shall be entitled to any rights hereunder by virtue of
so-called "third party beneficiary rights" or otherwise.
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AGREED TO AND ACCEPTED as of the date first above written.
Dated: March 12,1999 SPORTS GROUP INTERNATIONAL, INC.
By: /s/ Jeffrey Black
------------------------------------
Jeffrey Black, its President and
Chairman of the Board
Dated: March 12, 1999 APACHE PEAK CAPITAL, L.L.C.
By: /s/ David A. Guarino
------------------------------------
David A. Guarino, Member
Dated: March 12, 1999 By: /s/ Mark J. Thoeny
------------------------------------
Mark J. Thoeny, Member
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SHARE PURCHASE AGREEMENT
This SHARE PURCHASE AGREEMENT (the "Agreement"), is made this 21st day of
May, 1999, by and between SPORTS GROUP INTERNATIONAL, INC. ("SPGK"), a Florida
corporation, Ziad S. Dalal ("Dalal") and SELMAN SYSTEMS, INC., a Texas
corporation ("Selman Systems").
RECITALS
1. Selman Systems is a corporation duly organized and existing under the
laws of the State of Texas with authorized capital stock consisting of 1,000,000
shares of voting common stock, $.01 par value, of which 10,000 shares are issued
and outstanding ("Selman Common Stock") and 100,000 authorized shares of
Preferred Stock with a par value of $.01 per share, of which 10,000 have been
designated as "Series A Preferred Stock, of which 0 shares are issued and
outstanding ("Selman Preferred Stock"). (Selman Common Stock and Selman
Preferred Stock are collectively referred to herein as "Selman Stock").
2. Selman Systems owns 100% of the stock of Frullati, Inc., a Texas
corporation, Frullati Systems, Inc., a Texas corporation, Frullati Franchise
Systems, Inc., a Texas corporation, and Frullati Enterprises, Inc., a Texas
corporation. Frullati, Inc., Frullati Systems, Inc., Frullati Franchise Systems,
Inc., and Frullati Enterprises, Inc., are hereinafter collectively referred to
herein as the "Subsidiaries."
3. Selman Systems and the Subsidiaries are the operators, owners and
franchisors of the juice bar commonly known as and doing business as "Frullati."
4. SPGK will pay $6,500,000.00 in exchange for 100% of the outstanding
Selman Stock, including the stock of any and all Subsidiaries.
5. Ziad S. Dalal ("Dalal") is the sole owner of all of the shares of Selman
Stock.
6. Dalal desires to make certain representations, warranties, covenants and
agreements in connection with the transaction, and SPGK desires to prescribe
various conditions precedent to the transaction. Selman Systems, Dalal, and all
Subsidiaries and related companies are hereinafter collectively referred to
herein as "Selman."
NOW, THEREFORE, in consideration of the recitals which are a part of this
Agreement, and of the mutual agreements set forth herein and the covenants
herein contained, including the recitals above which are part of this Agreement,
the parties hereto hereby agree as follows:
ARTICLE 1
1. CONSIDERATION AND PLAN OF TRANSACTION
1.1 CONSIDERATION. Subject to all of the terms and conditions of this
Agreement, SPGK agrees on the Closing Date (as defined below) to pay to Dalal
$6,500,000.00 by wire transfer to an account to be designated by Dalal in
exchange for 100% of the Selman Stock and 100% of the stock of any and all
Subsidiaries and related businesses of Selman Systems. After the completion of
the purchase, Selman Systems will become a wholly-owned subsidiary of SPGK.
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ARTICLE 2
2. REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS AND WARRANTIES OF MR. DALAL.
Dalal represents and warrants to SPGK that the statements contained in this
Section 2.1 are correct and complete as of the date of this Agreement, except as
set forth in the Disclosure Schedule delivered by Dalal to SPGK on the date
hereof and attached hereto as Exhibit "A" (the "Disclosure Schedule"). Nothing
in the Disclosure Schedule shall be deemed adequate to disclose an exception to
a representation or warranty made herein, however, unless the Disclosure
Schedule identifies the exception with reasonable particularity and describes
the relevant facts in reasonable detail. Without limiting the generality of the
foregoing, the mere listing (or inclusion of a copy) of a document or other item
shall not be deemed adequate to disclose an exception to a representation or
warranty made herein (unless the representation or warranty has to do with the
existence of the document or other item itself). The Disclosure Schedule will be
arranged in paragraphs corresponding to the lettered and numbered paragraphs
contained in this Section 2.1.
a) AUTHORIZATION OF TRANSACTION. Dalal has full power and authority to
execute and deliver this Agreement and to perform his obligations
hereunder. This Agreement constitutes the valid and legally binding
obligation of Dalal, enforceable in accordance with its terms and
conditions. Dalal need not give any notice to, make any filing with, or
obtain any authorization, consent or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement.
b) BROKERS' FEES. Dalal has no liability or obligation to pay any fees
or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement, and Dalal has no liability or
obligation to pay any fees or commissions to any broker, finder or agent
for which SPGK could become liable or obligated.
c) SHARES. Dalal holds of record and owns beneficially 10,000 shares
of Selman Common Stock, free and clear of any restrictions on transfer
(other than any restrictions under the Securities Act of 1933, as amended
(the "Securities Act") and state securities laws), taxes, security
interests, options, warrants, purchase rights, contracts, commitments,
equities, claims and demands, constituting 100% of the issued capital stock
of Selman Systems. Dalal is not a party to any option, warrant, purchase
right or other contract or commitment that could require Dalal to sell,
transfer or otherwise dispose of any capital stock of Selman Systems or any
of its Subsidiaries, or any of the assets of either Selman Systems or any
of its Subsidiaries (other than this Agreement). Dalal is not a party to
any voting trust, proxy or other agreement or understanding with respect to
the voting of any capital stock of any of Selman Systems or any of its
Subsidiaries.
2.2 SELMAN REPRESENTATIONS AND WARRANTIES. Dalal represents and warrants to
SPGK that the statements contained in this Section 2.2 are correct and complete
as of the date of this Agreement, except as set forth in the Disclosure
Schedule.
(a) ORGANIZATION. Each of Selman Systems and its Subsidiaries, is a
corporation duly organized, validly existing and in good standing under the
laws of the State of its jurisdiction of incorporation, with full corporate
power and authority to conduct its business as it presently is being
conducted and to own and lease its properties and assets. Each of Selman
Systems and its Subsidiaries, is qualified to do business as a foreign
corporation in each of the jurisdictions in which it does business.
(b) OPTIONS & WARRANTS. There are no options and/or warrants issued
and/or outstanding. Further, there are no options and/or warrants to be
issued to any party under any contract or agreement.
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(c) AUTHORITY. Selman Systems has full power and authority to enter
into this Agreement and to carry out the transactions contemplated herein.
The execution and delivery of this agreement and the consummation of the
transactions contemplated herein have been duly and validly authorized and
approved by the Board of Directors of Selman Systems and all shareholders
of record of Selman Systems as of the date of this Agreement, and no other
corporate proceedings on the part of Selman Systems are necessary to
authorize this Agreement or the consummation of the transactions
contemplated herein. This Agreement has been duly and validly executed and
delivered by Selman Systems and constitutes a valid and binding agreement
of Selman Systems, enforceable against Selman Systems in accordance with
the terms hereof.
(d) CONFLICTS/APPROVALS. Neither the execution and delivery of this
Agreement nor compliance by Selman Systems with the terms thereof by Selman
Systems will (1) violate or conflict with or result in a breach or default
of any of the terms or conditions of the Articles of Incorporation or
Bylaws of Selman Systems; or (2) violate any applicable law, statute, rule,
regulation or order promulgated by any governmental authority; or (3)
conflict with or result in a material breach, acceleration or material
default or under any of the terms, conditions of (A) any judgment, order,
decree, or ruling to which Selman Systems is a party, or any injunction to
which Selman Systems is subject, or any court or governmental authority,
domestic or foreign, or (B) any agreement, contract or commitment to which
Selman Systems is a party; or (4) require the consent or approval of, or
declaration, filing or registration with, any non-governmental third party
or, to the best knowledge of Dalal and Selman Systems, any governmental
authority, or stock exchange in the United States; or (5) cause any Lease
(listed in Exhibits "D" and/or "F") to become breached, in default,
accelerated, or terminated for any reason.
(e) LITIGATION. Except as set forth in Section 2.2(e) of the
Disclosure Schedule, there is no litigation, proceeding, or investigation
pending or, to the knowledge of each of Dalal, Selman Systems and its
Subsidiaries, threatened against Dalal, Selman Systems and/or its
Subsidiaries, or any of their principal owners, officers, employees, or
affiliates that may result in a material adverse change in the business
operations, or financial condition of Selman Systems and its Subsidiaries
(taken as a whole). In addition, Selman Systems has no actual knowledge of
any facts or circumstances that could lead to any such litigation,
investigation, or arbitration against Selman Systems or its Subsidiaries
(including without limitation litigation or arbitration that might be
brought by past or present employees of Selman Systems or its
Subsidiaries).
(f) TAXES. Selman Systems and its Subsidiaries and each other member
of the Selman Affiliated Group (as defined below) has each timely filed all
Tax Returns (as defined below) required to be filed by it. All such Tax
Returns are true, correct and complete in all material respects. Selman
Systems and its Subsidiaries and each other member of the Selman Affiliated
Group has each made timely payment of all Taxes (as defined below) required
to be paid by it. There are no liens on the stock of Selman Systems and its
Subsidiaries or on any of the assets of Selman Systems and its Subsidiaries
that arose in connection with any failure (or alleged failure) to pay any
Tax. Each of Selman Systems and its Subsidiaries has complied in all
material respects with all applicable laws, rules and regulations relating
to the withholding and payment of Taxes and has, within the time and manner
prescribed by law, paid over to the proper governmental authorities all
amounts so withheld. Except as set forth in Section 2.2(f) of the
Disclosure Schedule, to the knowledge of Dalal and Selman Systems, no
governmental authority is now asserting or threatening to assert any claim
for assessment or collection of any Taxes against Selman Systems or its
Subsidiaries or any other member of the Selman Affiliated Group. Dalal is
not a "foreign person" as defined in Code Section 1445(f)(3). As a result
of the acquisition of the Selman Stock and any of the stock of its
Subsidiaries pursuant to this Agreement, SPGK and Dalal will be eligible to
make an election pursuant to Section 338(h)(10) of the Code.
(i) "SELMAN AFFILIATED GROUP" shall mean the affiliated group of
corporations (as defined in Section 1504(a) of the Code) of which
Selman was the parent for tax periods ending on or before the Closing
Date.
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(ii) "TAX" OR "TAXES" shall mean any and all taxes, charges,
fees, levies or other assessments in the nature of taxes, including,
without limitation, income, gross receipts, excise, real and personal
property, sales, use, VAT, withholding, social security, occupation,
service, service use, license, net worth, payroll, franchise, transfer
and recording taxes, fees and charges whether domestic or foreign and
whether computed on a separate, consolidated, unitary, combined or any
other basis; and each such term shall also include any interest,
fines, penalties or additional amounts attributable to, or imposed
upon, or with respect to any such taxes, charges, fees, levies or
other assessments.
(iii) "TAX RETURNS" shall mean all reports, estimates,
declarations of estimated tax, information statements and returns
relating to or required to be filed in connection with, any Taxes,
including information returns or reports with respect to backup
withholding and other payments to third parties.
(g) TITLE. To the best of its knowledge and belief, except as set
forth in Item 2.2(g) of the Disclosure Schedule, Selman has good and
marketable title to all of the properties and assets, real and personal,
which it purports to own, free and clear of all liens, claims, charges,
encumbrances and restrictions of whatsoever nature ("Encumbrances").
(h) SECURITIES COMPLIANCE. To the best knowledge of Dalal and Selman
Systems, during the five (5) year period prior to the execution of this
Agreement, no Director or Officer of Selman Systems or its Subsidiaries has
been involved in any of the events set forth in Rule 401(f) of Regulation
S-K of the Securities Act. Selman Systems has never been subject to any
claim or proceeding brought by any shareholder of it under either state or
federal securities laws.
(i) LOANS. Selman has not received any notices of default, other than
those already disclosed, regarding any of their loans or other credit
facilities. A complete list of all loans along with their terms and payment
status and balance are included on the list attached hereto as Exhibit "B"
and incorporated herein by this reference. The entering into this Agreement
shall not cause any listed loan agreement to be breached, accelerated,
terminated or in default.
(j) CONDUCT OF BUSINESS. Since December 27, 1998, except as set forth
in Item 2.2(j) of the Disclosure Schedule, Selman has not:
1. Directly or indirectly redeemed, purchased or otherwise
acquired or re-capitalized or reclassified any of its capital stock or
liquidated in whole or in part;
2. Merged or consolidated with any other companies.
3. Mortgaged, pledged or otherwise encumbered any of its assets;
4. Altered or amended its certificate of incorporation or bylaws;
5. Entered into, materially amended or terminated any material
contract, agreement, franchise, area development agreement, permit or
license; and
6. Except in the normal course of business made any material
increase in compensation payable or to become payable by Selman to its
directors, officers or employees, or any increase in benefits or
benefit plan costs, or any increase in any bonus, insurance, pension,
compensation or other benefit plan covering any directors or officers.
(k) CAPITALIZATION. Selman Systems authorized capital stock consists
of 1,000,000 shares of voting common stock, .01 par value per share, of
which 10,000 shares are issued and outstanding and 100,000 shares of
Preferred Stock with a par value of $.01 per share, of which 10,000 shares
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have been designated as Series A Preferred Stock, of which 0 shares are
issued and outstanding. The stock of the Subsidiaries, all of which is
owned by Selman Systems is identified in Item 2.2(k) of the Disclosure
Schedule. All issued and outstanding shares of Selman Common Stock have
been duly authorized and validly issued, and are fully paid and
nonassessable, and are free of any preemptive rights. Dalal owns all of the
outstanding shares of Selman Systems and Selman Systems owns all of the
outstanding shares of its Subsidiaries. There are no options, warrants, or
rights outstanding of any kind to purchase or acquire shares of capital
stock of Selman or its Subsidiaries. Dalal has full voting power over the
Selman Stock, subject to no proxy, shareholders' agreement, voting trust or
other agreement relating to the voting of such stock. Other than this
Agreement and other than as described in Section 2.2(k) of the Disclosure
Schedule, there is no agreement between Dalal and any other person with
respect to the sale, transfer, disposition or encumbrance of the Selman
Stock or otherwise relating to the Selman Stock.
(l) SUBSIDIARIES. Neither Selman Systems nor any of its Subsidiaries
has any direct or indirect stock or other equity or ownership interest
(whether controlling or not) in any corporation, association, partnership,
joint venture or other entity, except for Selman Systems' ownership of its
Subsidiaries.
(m) FINANCIALS. Attached hereto as Exhibit "C" are true and correct
copies of: (1) the audited financial statement for the year ending December
28, 1997; (2) the audited financial statements for the year ending December
27, 1998; (3) the unaudited financial statements for the sixteen (16) week
period beginning December 28, 1998 and ending April 18, 1998; (4) the
unaudited balance sheet as of April 18, 1999 ("the Interim Balance Sheet");
and (5) the 1999 Plan Projections dated April 4, 1999. There has not been
any material adverse change in the Financial Condition, results of
operations or business of Selman since April 5, 1999, and no event or
condition has occurred or exists which will result in a material adverse
change other than changes resulting from general economic conditions.
Further, there has been no material adverse change which would effect the
achievability of the 1999 Plan Projections dated April 4, 1999 provided
that no representation is made as to whether such projections will be
achieved.
(n) ABSENCE OF UNDISCLOSED LIABILITIES. Except to the extent reflected
or reserved against in the Interim Balance Sheet, neither Selman Systems
nor any of its Subsidiaries had on such dates any liabilities or
obligations (secured, unsecured, contingent or otherwise) of a nature
customarily reflected in a corporate balance sheet prepared in accordance
with generally accepted accounting principles. There is no existing
indebtedness owed by Selman Systems or its Subsidiaries, except as listed
on the Interim Balance Sheet or the Disclosure Schedule..
(o) COMPANY LEASES. Attached hereto as Exhibit "D" is a complete list
of all leases entered into for the operation of company stores owned and
operated by Selman. Said list contains a complete listing of all lease
locations, the opening date of the store (the commencement date if other
than the opening date of the store), the term, if less than 10 years, and
whether there is an option to renew. None of the leases listed are in
default. Other than monthly rent due and payable, including base rent, CAM
charges, and percentage rent (hereinafter referred to as "Total Rent")
after the date of this Agreement, there is no rent or other charges or fees
due to the owners or lessors of the premises on Exhibit "D."
(p) FRANCHISE AND DEVELOPMENT AGREEMENTS. Attached hereto as Exhibit
"E" is a complete list of all Franchise and Area Development Agreements (in
the United States and Worldwide) in operation or existence as of the date
of this Agreement. Said list contains a complete listing of each Franchisee
by store number, the name of the Franchisee, the legal name used by the
Franchisee to conduct business, the beginning date of the franchise
granted, any payments due and owing as of the date of this Agreement, any
other fees due and owing as of the date of this agreement and/or following
the date of this Agreement - with explanation (including the royalty
percentage or formula used for each Franchise). None of the Franchise
Agreements is in default by Selman as of the date of this Agreement. For
Development Agreements (DA), said list shall include the date of the DA,
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the ending date of the DA, the number of Franchises granted by the DA, the
number of Franchises operating under the DA, the franchise fee due for
future franchises opened under the DA and the royalties for said franchises
opened under the DA. The sale of the Selman Stock does not cause a default
or termination of the Franchise or Development Agreements listed on Exhibit
"E."
(q) FRANCHISEE SUBLEASES. Attached hereto as Exhibit "F" is a complete
list of all subleases entered into with Franchisees. Said list contains a
complete listing of all lease locations, the rent amount (if less than the
Total Rent charged in the underlying lease), the beginning date of the
lease and the ending date of the lease. Except as noted on Exhibit "F",
Selman is not aware of any leases listed on Exhibit "F" being in default.
Other than monthly rent due and payable after the date of this Agreement,
there is no rent or other charges or fees due to Selman or the owners or
lessors of the premises on Exhibit "F." In addition, Selman is not aware of
any underlying leases being in default.
(r) EMPLOYMENT RELATED AGREEMENTS. Except as set forth in Item 2.2(r)
of the Disclosure Schedule, there are no collective bargaining agreements,
employment agreements or consulting agreements between Selman Systems
and/or any of its Subsidiaries and any other party. Any such agreements so
disclosed, shall include a complete summary of the material terms of the
agreements and any agreements so summarized shall be provided to counsel
for SPGK prior to the Closing for review.
(s) TRADEMARKS. Attached hereto as Exhibit "J" is a list of all
Trademarks owned by Selman Systems. Except as set forth in Item 2.2(s) of
the Disclosure Schedule, Selman is not aware of any claim to said
Trademark(s) so listed nor aware of any infringement on or upon said
Trademark(s).
(t) EMPLOYEE COMPENSATION. Except as set forth in Item 2.2(t) of the
Disclosure Schedule, there are no bonuses due or agreed to, no retirement
plans or options to be covered by a retirement plan or plans, no profit
sharing agreements, no incentive compensation agreements, no pension or
other employee benefit plans or agreements between Selman Systems and/or
any of its Subsidiaries and any other party or person. None of Selman
Systems or any of its Subsidiaries has entered into any severance or
similar arrangement in respect of any present or former personnel that will
result in any obligation (absolute or contingent) of SPGK or Selman Systems
and any of its Subsidiaries to make any payment to any present or former
personnel following termination of employment.
(u) CONSENT DECREES/SETTLEMENT AGREEMENTS. Except as set forth in Item
2.2(u) of the Disclosure Schedule, there are no consent decrees, judgments,
other decrees or orders, settlement agreements and/or other agreements to
which Selman Systems or any of its Subsidiaries or related companies is a
party or is bound, requiring or prohibiting any future activities.
(v) OFFERING CIRCULAR & REGISTRATION OF FRANCHISOR. Attached hereto as
Exhibit "K" and incorporated herein by this reference is a complete list of
the states in which Selman is registered to offer franchises. Said list
contains the date of said registration, the date said registration is set
to expire. Selman shall provide to SPGK, prior to closing, a copy of all
Offering Circulars currently in effect along with all exhibits to said
Offering Circular and current franchise agreement forms and exhibits. At
Closing, said complete documents shall be provided by Selman to SPGK by
electronic media via e-mail, on disk and/or Zip Disk.
(w) EMPLOYEE & EMPLOYMENT BENEFIT MATTERS. No employees of Selman
Systems or any of its Subsidiaries have any right to accrued vacation (or
payment in lieu of all or part thereof) in excess of 20 business days,
except as listed in Section 2.2(w) of the Disclosure Schedule. Other than
the plans described on Section 2.2(w) of the Disclosure Schedule, there are
no employee benefit plans in place including, but not limited to, pension,
stock bonus, 401(k), employee stock ownership, money purchase, stock
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option, cafeteria, medical expense reimbursement or phantom stock plans,
under which Selman Systems or any of its Subsidiaries is subject to
liability.
(x) PROPRIETARY RIGHTS. For purposes of this Section 2.2(x),
"Proprietary Rights" means (a) all trademarks, service marks, trade dress,
logos, trade names and corporate names, and all applications, registrations
and renewals in connection therewith, (b) all copyrightable works, all
copyrights and all applications, registrations and renewals in connection
therewith, (c) all trade secrets and confidential business information
(including customer and supplier lists, pricing and cost information and
business and marketing plans and proposals), (d) all computer software, (e)
all other proprietary rights and (f) all copies and tangible embodiments
thereof (in whatever form or medium). Section 2.2(x) of the Disclosure
Statement lists all of Selman System's and its Subsidiaries' domestic or
foreign federal, state and foreign registrations of trademarks and of other
marks, trade names or other trade rights, and all pending applications for
any such registrations and all of Selman Systems' and its Subsidiaries'
copyrights and all pending applications therefor. Neither Selman Systems
nor any of its Subsidiaries has any patents or pending patent applications.
Selman System and its Subsidiaries own and has the sole right to use each
of the Proprietary Rights. None of the Proprietary Rights is involved in
any pending or threatened litigation. Neither Selman Systems nor its
Subsidiaries has received any notice of invalidity or infringement of any
rights of others with respect to such Proprietary Rights. All of the
Proprietary Rights are valid and enforceable rights of Selman Systems or
its Subsidiaries. The execution, delivery and performance of this Agreement
and the consummation of the transaction contemplated hereby will not affect
the validity or enforceability of the Proprietary Rights and will not cause
Selman Systems or its Subsidiaries to lose its rights to use any of its
Proprietary Rights, including the name "Frullati."
(y) INSURANCE. Exhibit "K" of the Disclosure Schedule includes a list
of all insurance policies carried by or for the benefit of Selman Systems
and its Subsidiaries. Such insurance policies are valid, outstanding and
enforceable and will remain in force and effect through the Closing Date.
(z) FULL DISCLOSURE. None of the representations and warranties made
by Selman Systems and its Subsidiaries contain any untrue statement of a
material fact or omit any material fact, the omission of which would be
misleading. No notice given pursuant to Section 2.2 will contain any untrue
statement or omit to state a fact necessary to make the statements therein
or in this Agreement, in light of the circumstances in which they were
made, not misleading.
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ARTICLE 3
POST CLOSING COVENANTS; PREPARATION OF TAX RETURNS.
3.1. POST-CLOSING COVENANTS. The parties agree as follows with respect to
the period following the Closing:
a) GENERAL. In case at any time after the Closing any further action
is necessary or desirable to carry out the purposes of this Agreement, each
of the parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other party
reasonably may request, all at the sole cost and expense of the requesting
party (unless the requesting party is entitled to indemnification therefor
under Section 7.16). Dalal acknowledges and agrees that from and after the
Closing, SPGK will be entitled to possession of all documents, books,
records (including Tax records), agreements and financial data of any sort
relating to Selman and any of its Subsidiaries. Dalal shall furnish to SPGK
all information regarding the operations and liabilities of Selman Systems
and any of its Subsidiaries that SPGK may reasonably request.
b) LITIGATION SUPPORT. In the event and for so long as any party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim or demand in connection
with (i) any transaction contemplated under this Agreement or (ii) any
fact, situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act or transaction that
accrued or existed on or prior to the Closing Date involving Selman Systems
or any of its Subsidiaries, each of the other parties will cooperate with
him, her or it (and his, her or its counsel) in the contest or defense,
make available their personnel and provide such testimony and access to
their books and records as shall be necessary in connection with the
contest or defense, all at the sole cost and expense of the contesting or
defending party (unless the contesting or defending party is entitled to
indemnification therefor under Section 7.16).
c) TRANSITION. Dalal will not take any action that is designed or
intended to have the effect of discouraging any lessor, licensor, customer,
supplier or other business associate of Selman from maintaining the same
business relationships with Selman after the Closing as it maintained with
Selman prior to the Closing. Dalal will refer all customer inquiries
relating to the businesses of Selman Systems and its Subsidiaries to SPGK
from and after the Closing.
d) CONFIDENTIALITY. Dalal will treat and hold as confidential all of
the information concerning the businesses and affairs of Selman that is not
already generally available to the public ("Confidential Information"),
refrain from using any of the Confidential Information except in connection
with this Agreement and deliver promptly to SPGK or destroy, at the request
and option of SPGK, all tangible embodiments (and all copies) of the
Confidential Information which are in his or her possession. In the event
that Dalal is requested or required (by oral question or request for
information or documents in any legal proceeding, interrogatory, subpoena,
civil investigative demand or similar process) to disclose any Confidential
Information, Dalal will notify SPGK promptly of the request or requirement
so that SPGK may seek an appropriate protective order or waive compliance
with the provisions of this Section 3.1(d). If, in the absence of a
protective order or the receipt of a waiver hereunder, Dalal is, on the
advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, Dalal may disclose the
Confidential Information to the tribunal; provided, however, that Dalal
shall use his reasonable best efforts to obtain, at the reasonable request
and expense of SPGK, an order or other assurance that confidential
treatment will be accorded to such portion of the Confidential Information
required to be disclosed as SPGK shall designate. The foregoing provisions
shall not apply to any Confidential Information which is generally
available to the public immediately prior to the time of disclosure.
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ARTICLE 4
4. CONDITIONS TO SPGK PERFORMANCE
4.1 CONDITIONS. SPGK's obligations hereunder shall be subject to the
satisfaction, at or before the Closing Date, of all the conditions set forth in
this Agreement. Failure to obtain such approval will not void this Agreement.
SPGK may waive any or all of these conditions, in whole or in part, without
prior notice, so long as such waiver is in writing and provided, however, that
no such waiver of a condition shall constitute a waiver by SPGK of any other
condition or any of SPGK's rights or remedies, at law or in equity, if Dalal
shall be in default of any of his representations, warranties, or covenants
under this Agreement.
4.2 ACCURACY OF REPRESENTATION. Except as otherwise permitted by this
Agreement, all representations and warranties by Dalal in this Agreement, or in
any written statement that shall be delivered to SPGK by Selman or Dalal under
this Agreement, shall be true and accurate in all material respects as of the
Closing Date, as though made at that time.
4.3 PERFORMANCE. Selman shall have performed, satisfied, and complied with
all covenants, agreements, and conditions required by this Agreement to be
performed or complied with by it on or before the Closing Date. If Selman has
not performed, SPGK may terminate this Agreement at its sole discretion any time
before seven (7) days from the date of the last signature on this Agreement.
4.4 ABSENCE OF LITIGATION. No action, suit or proceeding before any court
or any governmental body or authority pertaining to the transaction contemplated
by this Agreement or to its consummation shall have been instituted or
threatened against Selman on or before the Closing Date except as described on
Exhibit "I" attached hereto and incorporated herein by this reference.
4.5 CORPORATE PROCEEDINGS. All corporate and other necessary proceedings
contemplated herein and all documents necessary thereto shall be reasonably
satisfactory in form and substance to the parties hereto and to their counsel.
(a) STATUTORY REGULATIONS. All statutory requirements for the valid
consummation of the transactions contemplated by this Agreement shall have
been fulfilled, all authorizations, consents and approvals of all
non-governmental third parties, and all governmental authorities required
to be obtained in order to permit consummation of the transactions
contemplated by this Agreement and to permit the business currently carried
on by it to continue unimpaired immediately following the Closing Date
shall have been obtained.
(b) SHAREHOLDER APPROVAL. The transactions contemplated by this
Agreement have been approved in the manner required by law by the holders
of the issued and outstanding shares of Selman Stock, entitled to vote
thereon, and all other corporate action required by law with respect to the
Transaction has been taken.
4.6 OFFICER'S CERTIFICATE. Selman shall deliver to SPGK a certificate,
dated the Closing Date and signed by its President, certifying that the
conditions specified in this Agreement have been fulfilled and accepted. In the
alternative, the signature of an Officer to this Agreement shall constitute
certification that the conditions specified in this Agreement have been
fulfilled and accepted.
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ARTICLE 5
5. CLOSING.
5.1 CLOSING. The closing (the "Closing") shall take place at such location
and time on May 20, 1999, or on such date and at such time as the parties may
mutually agree upon (the "Closing Date").
5.2 SELMAN DELIVERIES TO SPGK. At Closing, Selman shall deliver to SPGK the
following instruments and documents:
(a) Certificates representing 10,000 shares of Selman, Common Stock,
which shares represent 100% of the outstanding common stock of Selman which
represents 100% of all outstanding Selman Stock.
(b) Certified resolutions of the Board of Directors of Selman Systems,
in a form satisfactory to counsel for SPGK authorizing the execution and
performance of this Agreement and all actions to be taken by Selman Systems
under this Agreement.
(c) Intentionally Deleted.
(d) Selman shall deliver the opinion of its counsel, dated the Closing
Date, in form and in substance satisfactory to counsel for SPGK to the
effect that:
(1) Selman Systems is a corporation duly organized, validly
existing and in good standing under the laws of the State of Texas.
(2) The authorized capital stock of Selman Systems is as set
forth in Section 2.2(k).
(3) The execution and consummation of this Agreement have been
duly authorized and approved by the Board of Directors of Selman
Systems. To the best of counsel's knowledge and belief, after
reasonable inquiry, the making and performance of this Agreement by
Selman Systems will not cause Selman Systems to violate any laws,
rules, regulations, decrees, orders or judgments, Articles of
Incorporation, or bylaws known to such counsel.
(4) Counsel has no knowledge of any litigation, proceeding or
investigation of the type described in Section 2.2(e) hereof.
(5) The Selman Stock being transferred pursuant to this Agreement
are duly and validly authorized and issued and are fully paid and
non-assessable.
(6) To the knowledge of counsel, all applicable approvals,
permits, consents, orders and authorizations have been obtained, and
the necessary documents have been filed under all applicable laws of
the United States and, except for filing of requisite notices or other
documentation with any applicable governmental authority or stock
exchange in the United States, no other regulatory action is required
in connection with the issuance and delivery of the Selman Stock.
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ARTICLE 6
6. DISPUTE RESOLUTION.
6.1 COURT PROCEEDINGS.
(a) If a dispute arises, either party may avail itself of the right to
seek relief from a court of competent jurisdiction in or about San Diego
County, in San Diego, California, and only in that location.
(b) All disputes which involve adjudication in a court shall be
governed by the provisions of section 6 of this Agreement. If, in an action
commenced in a court pursuant to section 6 of this Agreement, a party seeks
temporary or preliminary injunctive relief, the court hearing the matter
shall proceed to adjudicate the issues before it with respect to such
relief and shall not delay the entry of any order with respect to such
relief; provided, however, that except for matters fully determined in
connection with proceedings for temporary or preliminary relief, the
dispute resolution procedures set forth herein shall be used.
6.2 VENUE; WAIVER OF JURY; LIMITATION OF DAMAGES. The parties hereby agree
as follows:
(a) ANY AND ALL COURT PROCEEDINGS ARISING FROM MATTERS RELATED TO THIS
AGREEMENT SHALL BE BROUGHT IN, AND ONLY IN, A COURT OF COMPETENT
JURISDICTION IN SAN DIEGO COUNTY, SAN DIEGO, CALIFORNIA. IN EITHER CASE,
THE PARTIES HEREBY CONSENT TO THE EXERCISE OF SUBJECT MATTER AND PERSONAL
JURISDICTION BY SUCH COURTS.
(b) THE PARTIES AGREE THAT ALL DISPUTES ADMITTED TO THE COURT PURSUANT
TO THIS AGREEMENT SHALL BE TRIED TO THE COURT SITTING WITHOUT A JURY,
NOTWITHSTANDING ANY STATE OR FEDERAL CONSTITUTIONAL OR STATUTORY RIGHTS OR
PROVISIONS.
(c) NO PUNITIVE OR EXEMPLARY DAMAGES SHALL BE AWARDED AGAINST EITHER
PARTY, OR ANY AFFILIATES OF EITHER OF THEM, IN ANY PROCEEDING ARISING UNDER
THIS AGREEMENT, AND ALL CLAIMS TO SUCH DAMAGES ARE HEREBY WAIVED.
ARTICLE 7
7. MISCELLANEOUS
7.1 CAPTIONS AND HEADINGS. The article and paragraph headings throughout
this Agreement are for convenience and reference only and shall in no way be
deemed to define, limit, or add to the meaning of this Agreement.
7.2 MODIFICATIONS. This Agreement may be waived, changed, modified or
discharged in written form only, signed by the party seeking the waiver, change,
modification or discharge and by the party against whom enforcement of any
waiver, change, modification or discharge is sought.
7.3 NON-WAIVER. Except as otherwise expressly provided herein, no waiver of
any covenant or condition of this Agreement shall be deemed to have been made,
unless expressly in writing and signed by the party against whom such waiver is
charged; and (i) the failure of any party to insist in any one or more cases
upon the performance of any of the covenants or conditions of this Agreement or
to exercise any option herein contained shall not be construed as a waiver or
relinquishment for the future of any such covenant or condition; (ii) the
acceptance of performance of anything required by this Agreement to be performed
with knowledge of the breach or failure of a covenant or condition of this
Agreement hereof shall not be deemed a waiver of such breach or failure; and
(iii) no waiver by any party of one breach by another party shall be construed
as a waiver with respect to any other subsequent breach.
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7.4 TIME OF THE ESSENCE. Time is of the essence in this Agreement and of
each and every provision hereof.
7.5 ENTIRE AGREEMENT; MODIFICATION. This Agreement contains all of the
terms and conditions and representations agreed upon by the parties hereto with
reference to the subject matter hereof. No other agreements or representations,
oral or otherwise shall be deemed to exist or to bind any of the parties hereto
and all prior agreements and understandings are superseded hereby. No officer or
employee or agent of SPGK has any authority to make any representation or
promise not contained in this Agreement. Selman agrees that it has executed this
Agreement without reliance upon any such unauthorized representation or promise
and in fact has received no representation or promise not contained within this
agreement. This Agreement cannot be modified or changed except by written
instrument signed by all of the parties hereto.
7.6 COUNTERPARTS. This Agreement may be executed simultaneously in one or
more counterparts and/or by facsimile signatures, each of which shall be deemed
an original but which together shall constitute one and the same instrument and
have the same force and effect as if executed in one complete document.
7.7 NOTICES. All notices, requests, demands, and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given
on the date of service, if served personally, on the party to whom notice is to
be given or on the third day after mailing, if mailed, to the party to whom
notice is to be given by first class, registered or certified mail, postage
prepaid, and properly addressed as follows:
To SPGK: Mr. Kevin Blackwell
7730 East Greenway Road, Suite 203
Phoenix, AZ 85260
Phone: (602) 443-0200
Facsimile: (602) 443-1972
with a copy to: Scott Levine, Esq.
401 West "A" Street, Suite 1805
San Diego, CA 92101
Phone: (619) 687-0100
Facsimile: (619) 687-0101
To Selman: Ziad S. Dalal
P.O. Box 802624
Dallas, Texas 75380
with a copy to: Kevin L. Twining, Esq.
Locke, Liddell & Sapp, LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201
Phone: (214) 740-8688
Facsimile: (214) 740-8800
7.8 BINDING EFFECT. This Agreement is and shall inure to and be binding
upon the heirs, executors, personal representatives, successors and assigns of
the parties to this Agreement.
7.9 MUTUAL COOPERATION. Each party hereby agrees, certifies and covenants
that they will assist each other in completing and preparing any documents to
effectuate the Agreement. Each party agrees, certifies and covenants that they
will immediately execute and revise any corrected documents or forms as
necessary and upon request in order to obtain the benefits agreed to pursuant to
the terms of this Agreement. The Parties further agree to immediately initial
any corrections on any documents containing typographical errors or omissions
upon the request of the other Party.
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7.10 BROKERS. Each of the parties hereto shall indemnify and hold the other
harmless against any and all claims, losses, liabilities or expenses which may
be asserted against it as a result of its dealings, arrangements or agreements
with any broker, finder or person claiming to have a right to compensation for
bringing the parties into agreement.
7.11 ANNOUNCEMENTS. SPGK and Selman will consult and cooperate with each
other as to the timing and content of any announcements of the transactions
contemplated hereby to the general public or to employees, customers or
suppliers. No party is permitted to announce this transaction until all parties
have signed this Agreement. This shall not prevent the parties from providing
necessary persons with information about the Agreement.
7.12 EXPENSES. SPGK shall bear and pay all legal, accounting and any other
out-of-pocket expenses reasonably incurred in connection with the transaction,
including all reasonable legal fees and expenses of Selman and Dalal.
7.13 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Subject to Section 7.16,
the representations, warranties, covenants and agreements of the parties set
forth in this Agreement, or in any instrument, certificate, opinion or other
writing providing for it, shall survive for a period of twelve (12) months after
Closing, irrespective of any investigation made by or on behalf of any party.
7.14 EXHIBITS. As of the execution hereof, the parties hereto have provided
each other with the Exhibits and a Disclosure Schedule provided for herein
above, including any items referenced therein or required to be attached
thereto. Any material changes to the Exhibits and Disclosure Schedule shall be
immediately disclosed to the other party. All such Exhibits or Schedules are
incorporated herein and made a part of this Agreement.
7.15 AUTHORITY. The parties to this Agreement acknowledges that: (1) this
Agreement and its reduction to final form is the result of extensive good faith
negotiations between the parties through their respective counsel; (2) said
counsel have carefully reviewed and examined this agreement for execution by
said parties, or any of them; and (3) any statute or rule of construction that
ambiguities are to be resolved against the drafting party should not be employed
in the interpretation of this Agreement.
7.16 INDEMNITY. Dalal hereby agrees to protect, defend and indemnify SPGK,
its direct or indirect parents, their subsidiaries, affiliates and designees and
their officers (past and present), board of directors (past and present),
employees (past and present), shareholders (past and present) and hold them
harmless from and against any and all costs and expenses actually incurred by
them or for which they are liable, including attorney's fees, court costs,
expert witness fees/costs, losses, liabilities, damages, claims and demands of
every kind or nature, including those incurred pursuant to a settlement entered
into in good faith with respect to any inaccuracy or breach of the
representations warranties and covenants contained within this Agreement and/or
within the Exhibits to this Agreement.
a) Upon the filing by anyone of any type of claim, cause of action or
lawsuit against an indemnified party for any type of damages arising out of
incidents for which the indemnified party is to be indemnified by Dalal
pursuant to this Section 7.16, the indemnified party shall, within 30 days
of the indemnified party's becoming aware thereof, notify Dalal of such
claim, cause of action or lawsuit. If Dalal does not settle or compromise
such claim, cause of action, or lawsuit at its own cost, to the extent
Dalal is required to indemnify the indemnified party pursuant to this
Section 7.16, then Dalal shall undertake the legal defense of such claim,
cause of action or lawsuit at his own cost through counsel of recognized
capacity or otherwise not reasonably disapproved by the indemnified party
until final disposition, including all appeals. The indemnified party may,
at its sole cost and expense, participate in the legal defense of any such
claim, cause of action or lawsuit by Dalal to defend against such claim,
cause of action or lawsuit. Any final judgment rendered against an
indemnified party for any cause for which the indemnified party is to be
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indemnified against pursuant to this Section 7.16 shall be conclusive
against the indemnified party as to liability and amount upon the
expiration of the time for all appeals. The provisions of this Section 7.16
shall not apply to any claim or demand arising from the intentional act or
acts or fraud of the indemnified party.
b) The provisions of Section 7.16(a) shall only apply if Dalal, within
30 days after the mailing of a request for indemnity to Dalal is responded
to by Dalal with an agreement in writing to defend and indemnify the
requesting party or parties without a Reservation of Rights. In the event
Dalal fails to agree to defend and indemnify the requesting party or
parties within 30 days of the date of the request, Dalal will not be
relieved of his obligations under this agreement or this Section 7.16, and
the provisions of Section 7.16(c) shall apply.
c) SPGK, and its direct or indirect parents, their subsidiaries,
affiliates and designees and their officers (past and present), board of
directors (past and present), employees (past and present), shareholders
(past and present), at their sole discretion, may hire legal counsel to
defend any actions brought against SPGK, its direct or indirect parents,
their subsidiaries, affiliates and designees and officers (past and
present), board of directors (past and present), employees (past and
present), shareholders (past and present) which arise out of Dalal's
obligations herein. Dalal hereby agrees to pay any and all attorneys' fees,
expert costs, and any other fees and costs incurred by SPGK, its direct or
indirect parents, their subsidiaries, affiliates and designees and their
officers (past and present), board of directors (past and present),
employees (past and present), shareholders (past and present) to said
selected counsel upon the request of SPGK, its direct or indirect parents,
their subsidiaries, affiliates and designees and their officers (past and
present), board of directors (past and present), employees (past and
present). Dalal will, if requested by SPGK, its direct or indirect parents,
their subsidiaries, affiliates and designees and their officers (past and
present), board of directors (past and present), employees (past and
present), defend any suits at the sole cost and expense of Dalal. Dalal
hereby agrees to defend said suits with the use of attorneys requested by
SPGK, its direct or indirect parents, their subsidiaries, affiliates and
designees and their officers (past and present), board of directors (past
and present), employees (past and present).
For purposes of this Section 7.16, requests shall be made pursuant to
the Notice paragraph herein.
7.17 SEVERABILITY. Nothing contained in this Agreement shall be construed
as requiring the commission of any act contrary to law. Whenever there is any
conflict between any provisions of this Agreement and any present or future
statute, law, ordinance, regulation or judicial decision, contrary to which the
parties have no legal right under this Agreement, the latter shall prevail, but
in such event the provision of this Agreement thus affected shall be curtailed
and limited only to the extent necessary to bring it within the requirements of
the law. In the event that any part, article, section, sentence or clause of
this Agreement shall be held to be indefinite, invalid or otherwise
unenforceable, the indefinite, invalid or unenforceable provision shall be
deemed deleted, and the remaining parts thereof shall continue in full force and
effect.
7.18 NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to
benefit any other person or entity except the named parties hereto and no other
person or entity shall be entitled to any rights hereunder by virtue of
so-called "third party beneficiary rights" or otherwise.
7.19 ATTORNEYS' FEES. In the event that any party to this Agreement shall
institute any action or proceeding against the other relating to the terms of
this Agreement or any default thereunder, the prevailing party shall be entitled
to recover from the other party, the prevailing party's actual attorneys' fees,
costs and expert costs and expenses incurred in connection with such action or
proceeding, including, without limitation, any post-judgment fees, costs or
expenses incurred on any appeal or in collection of any judgment.
14 of 15
<PAGE>
7.20 AUTHORITY TO EXECUTE AGREEMENT. Each individual executing this
Agreement on behalf of a corporation and/or partnership represents that he or
she is duly authorized to execute and deliver this Agreement on behalf of the
corporation and/or partnership.
AGREED TO AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN.
Dated: May 21, 1999 SPORTS GROUP INTERNATIONAL, INC.
By: /s/ Kevin Blackwell
------------------------------------
Kevin Blackwell, its President
By: /s/ Kathryn Blackwell
------------------------------------
Kathryn Blackwell, its Vice
President & Secretary
Dated: May 21, 1999 SELMAN SYSTEMS, INC.
By: /s/ Ziad S. Dalal
------------------------------------
Ziad S. Dalal, President
Dated: May 20, 1999 /s/ Ziad S. Dalal
----------------------------------------
Ziad S. Dalal, an Individual and sole
shareholder of Selman Systems, Inc.
I, CONSENT TO THE TRANSACTION DESCRIBED
HEREIN.
Dated: May 20, 1999 /s/ Deborah Dalal
----------------------------------------
Deborah Dalal, Spouse of Ziad S. Dalal
15 of 15
STOCK PURCHASE AGREEMENT
BETWEEN
SELMAN SYSTEMS, NC.
AND
KENNETH L. MUSGRAVE, LTD., TONY CONDER
AND LARRY PEARCE
Dated May 21, 1999
<PAGE>
TABLE OF CONTENTS
ARTICLE 1
SALE AND PURCHASE OF THE STOCK................................................ 1
Section 1.1 Sale And Purchase; Purchase Price........................ 1
Section 1.2 Date And Place Of Closing
Section 1.3 Seller's Performance..................................... 2
Section 1.4 Buyer's Performance...................................... 2
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF SELLER...................................... 2
Section 2.1 Ownership Of Shares; Binding Effect...................... 2
Section 2-2 Organization Of Fru-Cor.................................. 2
Section 2.3 Capital Stock............................................ 2
Section 2.4 Subsidiaries............................................. 3
Section 2.5 Financial Statements..................................... 3
Section 2.6 Employee Benefit Plans................................... 3
Section 2.7 Absence Of Certain Changes............................... 3
Section 2.8 Title And Related Matters................................ 5
Section 2.9 Contracts................................................ 5
Section 240 Litigation And Proceedings; Compliance With Laws......... 5
<PAGE>
Section 2.11 No Conflict With Other Instruments..................... 6
Section 2.12 Governmental Authorizations............................ 6
Section 2.13 Patents, Trademarks And Copyrights..................... 6
Section 2.14 Insurance.............................................. 6
Section 2.15 Brokers................................................ 6
Section 2.16 Employees.............................................. 6
Section 2.1 Banks And Powers Of Attorney............................ 7
Section 2.18 Transactions With Affiliates........................... 7
Section 2.19 Misrepresentations..................................... 7
Section 2.20 Tax Matters............................................ 7
Section 2.21 Inventories............................................ 7
Section 2.22 No Similar Business.................................... 7
Section 2.23 Ownership Of Assets.................................... 8
Section 2.24 Use Of Marks........................................... 8
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF BUYER....................................... 8
Section 3.1 Power and Authority..................................... 8
Section 3.2 Brokers................................................. 8
Section 3.3 Waiver Of Consumer Rights............................... 8
<PAGE>
ARTICLE 4
INDEMNIFICATION 8
Section 4.1 Indemnification Of Buyer................................. 8
Section 4.2 Limitations ............................................. 9
Section 4.3 Indemnity Periods........................................ 9
Section 4.4 Notice By Buyer And Other Matters........................ 9
Section 4.5 Indemnification Of Seller................................10
Section 4.6 Notice By Seller And Other Matters.......................10
ARTICLE 5
CONDITIONS TO CLOSING.........................................................10
Section 5.1 Conditions To Obligations Of Seller......................10
Section 5.2 Conditions To Obligations Of Buyer.......................10
ARTICLE 6
MISCELLANEOUS.................................................................11
Section 6.1 Survival Of All Representations,
Warranties And Covenants...........................................11
Section 6.2 Investigation............................................11
Section 6.3 Schedules And Exhibits, Financial
Statements, Lists, Etc. ...........................................11
Section 6.4 Specific Enforcement.....................................11
Section 6.5 Expenses.................................................11
<PAGE>
Section 6.6 Amendments...............................................11
Section 6.7 Nonassignability.........................................11
Section 6.8 Rights Of Third Parties..................................11
Section 6.9 Headings, Etc............................................12
Section 6.10 Severability............................................12
Section 6.11 Counterparts............................................12
Section 6.12 Governing Law; Venue....................................12
Section 6.13 Entire Agreement........................................12
Section 6.14 Press Release...........................................12
Section 6.15 Notices.................................................12
EXHIBIT
1.1 Escrow Agreement
SCHEDULES
2.5 - Financial Statement Deviations
2.7(a) - Material Adverse Changes
2.7(b) - Certain Changes
2.8 - Liens and Security Interests, Etc.
2.9 - Material Contracts
2.10 - Proceedings
2.14 - Insurance Policies
2.16 - Employee Matters
2.17 - Bank Accounts
2.20 - Tax Return Audits and Extensions
4.5 - Matters Indemnified by Buyer
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement"), dated May 21, 1999, is
made and entered into between SELMAN SYSTEMS, INC., a Texas corporation
("Buyer"), and KENNETH L. MUSGRAVE, LTD., a Texas limited partnership, by and
through Musgrave Abilene, L.L.C., its General Partner, TONY CONDER and LARRY
PEARCE (`Sellers").
WITNESSETH:
WHEREAS, Sellers own all of the outstanding shares of capital stock and all
outstanding warrants to purchase the capital stock (the "Stock") of Fru-Cor,
Inc., a Texas corporation ("FruCor"); and
WHEREAS, Buyer desires to purchase the Stock from Sellers, and Sellers
desire to sell the Stock to Buyer, pursuant to the terms of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and other agreements herein contained,
the parties hereby agree as follows:
ARTICLE 1
SALE AND PURCHASE OF THE STOCK
SECTION 1.1 SALE AND PURCHASE; PURCHASE PRICE. Sellers have agreed to sell
and deliver to Buyer, and Buyer has agreed to purchase from Sellers, the Stock,
free and clear of all liens, encumbrances, charges, security interests,
equities, options and claims whatsoever. The purchase price for the Stock shall
be Three Million One Hundred Seventy Thousand Dollars ($3,170,000.00). The
purchase price will be as follows: One Million Nine Hundred Seventy Thousand
Dollars ($1,970,000.00) to be paid in cash at Closing, and One Million Two
Hundred Thousand Dollars ($1,200,000.00) to be paid by a promissory note (the
"Note") delivered at Closing. The Note shall bear interest at 9% per annum and
shall be due May 21, 2000. The cash and Note shall be delivered by the Buyer to
Chase Bank of Texas, N.A. (the "Escrow Agent") to be held by the Escrow Agent
pursuant to the terms of the agreement attached hereto as Exhibit 1.1 (the
"Escrow Agreement"). The Note shall be secured by a Pledge Agreement (in the
form and substance satisfactory to Sellers) from Buyer pledging the Stock as
security for the Note. In addition, the Note shall be secured by a Pledge
Agreement (in the form and substance satisfactory to Sellers) from Sports Group
International, Inc. pledging the stock of Selman Systems, Inc. as security for
the Note. The Pledge Agreements, together with the documents necessary to
perfect the security interest granted therein shall be delivered to the Escrow
Agent to be held pursuant to the terms of the Escrow Agreement.
SECTION 1.2 DATE AND PLACE OF CLOSING. The Closing shall be held at the
offices of Escrow Agent or at such other place as mutually agreed upon by the
parties, at 10:00 o'clock a.m., Dallas, Texas, time July 7. 1999 or at such
other time as the parties may mutually agree (the "Closing Date").
<PAGE>
SECTION 1.3 SELLERS' PERFORMANCE. Sellers' performance shall be in
accordance with the Escrow Agreement
SECTION 1.4 BUYER'S PERFORMANCE. Buyer's performance shall be in accordance
with the Escrow Agreement.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF
SELLERS
Sellers hereby represent and warrant to Buyer as follows:
SECTION 2.1 OWNERSHIP OF SHARES: BINDING EFFECT. Kenneth L. Musgrave, Ltd.
owns 1,116,000 shares of stock of Fru-Cor and such shares are owned of record
and beneficially. Larry Pearce owns 84,000 shares of stock of Fru-Cor and such
shares are owned of record and beneficially. Tony Conder and Larry Pearce own
stock warrants entitling them to purchase sufficient shares of stock of Fm-Cot
so that after the purchase of such shares Tony Conder will own 22% of the issued
and outstanding stock of Fru-Cor and Larry Pearce will own 15% of the issued and
outstanding stock of Fru-Cor. The stock warrants owned by Tony Conder and Larry
Pearce are owned of record and beneficially. The stock and the warrants are
being sold to Buyer free and clear of all liens, claims, charges, encumbrances,
security interests, equities, rights, options, and claims whatsoever. Sellers
have the power and authority to enter into this Agreement and to carry out their
obligations hereunder. This Agreement has been duly and validly executed by the
Sellers, and is enforceable against Sellers in accordance with its terms.
SECTION 2.2 ORGANIZATION OF FRU-COR. Fru-Cor is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas. Fru-Cor has the corporate power, and is duly authorized and licensed
under all applicable laws to carry on its business as it is now being conducted.
Fru-Cor is qualified to do business in every jurisdiction in which the character
and location of the properties and assets owned or leased by it or the nature of
the business transacted by it requires qualification. Fur-Cor has delivered to
Buyer complete and correct copies of its Articles of Incorporation, Bylaws as in
effect on the date hereof, and all minutes of meetings of the board of directors
and shareholders of Fru-Cor.
SECTION 2.3 CAPITAL STOCK. The authorized capital stock of Fur-Cor consists
of 1,200,000 shares of common stock, no par value, of which 1,200,000 shares are
issued and outstanding. In addition, Fru-Cor has issued warrants to purchase
shares of its common stock to Tony Conder and Larry Pearce which entitle Tony
Conder to purchase sufficient shares so that he will own 22% of the issued and
outstanding shares of Fru-Cor and which entitle Larry Pearce to purchase
sufficient shares so that he will own 15% of the issued. and outstanding shares
of Fru-Cor All of the outstanding shares of common stock of Fru-Cor were duly
authorized and are validly issued and outstanding, hilly paid and
non-assessable. Other than the warrants held by Tony Conder and Larry Pearce,
Fru-Cor does not have any outstanding subscriptions, options, warrants, rights,
convertible securities, calls, commitments, or agreements to issue shares of
capital stock or other securities.
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STOCK PURCHASE AGREEMENT PAGE 2
<PAGE>
SECTION 2.4 SUBSIDIARIES. The only subsidiary of Fru-Cor is Texas Class,
Inc., a Texas corporation. All references herein to Fru-Cor shall include this
subsidiary. All of the issued and outstanding capital stock of Texas Class, Inc.
is owned by Fru-Cor, and such shares are owned of record and beneficially. Texas
Class, Inc. is a corporation duly organized, validly existing and in good
standing under the laws of the State of Texas. Texas Class, Inc. has the
corporate power, and is duly authorized and licensed under all applicable laws
to carry on its business as it is now being conducted. Texas Class, Inc. is
qualified to do business in every jurisdiction in which the character and
location of the properties and assets owned or leased by it or the nature of the
business transacted by it requires qualification. Fru-Cor will deliver to Buyer
complete and correct copies of Texas Class, Inc. Articles of Incorporation,
Bylaws as in effect on the date hereof and all minutes of meetings of the board
of directors and stockholders of Texas Class, Inc.
SECTION 2.5 FINANCIAL STATEMENTS. Fru-Cor has delivered to Buyer copies of
Fru-Cor's unaudited financial statements dated April 18, 1999. Except as set
forth in SCHEDULE 2.5. all of such financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis throughout the periods covered by such statements, are true and correct in
all material respects, and fairly present the financial position of Fur-Cor as
of the indicated dates; as of April 18, 1999, there were no material
liabilities, contingent or otherwise, of Fru-Cor that were not reflected in such
financial statements as at said date.
SECTION 2.6 EMPLOYEE BENEFIT PLANS. Except as set forth on Schedule 2.6,
Fru-Cor does not have any employee benefit plan, contract or arrangement
concerning current employees or former employees of Fru-Cor, including, but not
limited to, "employee benefit plans" within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Fru-Cor
is not (a) currently contributing, and has never contributed in the past, to any
multi-employer plan as defined in Section 3(37) of ERISA, and (b) has not
incurred any withdrawal liability with respect to any such multi-employer p]an
SECTION 2.7 ABSENCE OF CERTAIN CHANGES. (a) Except as set forth in SCHEDULE
2.7(a) since April 18, 1999 (i) there has not been any material adverse change
in the business, operations, properties, assets or condition (financial or
otherwise) of Fru-Cor, or any damage, destruction or loss (whether or not
covered by insurance), materially and adversely affecting the business,
operations, properties, assets or condition (financial or otherwise) of Fru-Cor
and (ii) Fru-Cor has operated its business only in the usual, regular and
ordinary manner, consistent with past practice, and, to the extent consistent
with such operations, has used its reasonable efforts to preserve intact the
present business organization, keep available the services of its present
employees and preserve present relationships with suppliers and others having
business dealings with Fru-Cor.
(b) Since April 18, 1999, Fru-Cor has not:
(i) amended its Articles of Incorporation or Bylaws;
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STOCK PURCHASE AGREEMENT PAGE 3
<PAGE>
(ii) issued, delivered or agreed to issue or deliver any stock, bonds or
other corporate securities (whether authorized and unissued or held in treasury)
or granted or agreed to grant any options, warrants or other rights providing
for the issuance thereof;
(iii) except as set forth in Schedule 2.7(b), made or entered into, or
agreed to make or enter into, any contract, agreement, lease, license,
franchise, mortgage, deed of trust or other instrument, other than such
agreements made or entered into in the ordinary course of business consistent
with past practice;
(iv) except as set forth in Schedule 2.7(b) borrowed, or agreed to borrow,
any funds or incurred, or become subject to, any obligation or liability
(absolute or contingent), except liabilities incurred in the ordinary course of
business consistent with past practice;
(v) except as set forth in Schedule 2.7(b), paid any material obligation or
liability (absolute or contingent), other than current liabilities reflected in
or shown on the balance sheet dated April 18, 1999 described in Section 2.5
above, and current liabilities incurred since that date in the ordinary course
of business in amounts consistent with past practice;
(vi) purchased or redeemed, or agreed to purchase or redeem, any capital
stock, or declared or made, or agreed to declare or make, any payment of
dividends or distributions of any property or assets of any kind whatsoever to
Sellers.
(vii) except in the ordinary course of business consistent with past
practice or as set forth in Schedule 2.7(b), sold or transferred, or agreed to
sell or transfer, any of its assets, property or rights or canceled, or agreed
to cancel, any debts or claims;
(viii) except in the ordinary course of business consistent with past
practice, waived any rights of Fru-Cor;
(ix) except in the ordinary course of business consistent with past
practice, made or permitted any amendment or termination of any contract,
agreement or license to which it is a party;
(x) except as set forth in Schedule 2.16, made any accrual or other
arrangement for, or payment of, bonuses or special compensation of any kind or
made any severance or termination payment to any present or former officer,
director or employee;
(xi) except as set forth in Schedule 2.16, increased the rate of
compensation payable, or to become payable, by Fru-Cor to any of' its officers,
directors or employees or made any payment in respect of any profit sharing,
stock option, bonus, deferred compensation, insurance, pension, retirement or
other employee benefit plan;
(xii) taken any action to become subject to any law, rule or regulation
that materially and adversely affects the business, operations, properties,
assets or condition (financial or otherwise) of Fru-Cor;
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STOCK PURCHASE AGREEMENT PAGE 4
<PAGE>
(xiii) granted or permitted, or agreed to grant or permit, any of its
property or assets to become subject to any mortgage, lien, pledge, security
interest, charge or encumbrance;
(xiv) granted, or agreed to grant, any subscription, option, warrant,
right, convertible security, call, commitment or agreement to issue shares of
capital stock of Fru-Cor; or
(xv) entered into any other transaction other than in the ordinary course
of business consistent with past practice.
SECTION 2.8 TITLE AND RELATED MATTERS. Except as set forth on Schedule 2.8,
Fru-Cor has good and marketable title to all the properties and assets and
interests in properties and assets, real and personal, reflected in the balance
sheet dated April 18, 1999, described in Section 2.5 above, or acquired after
the date of such balance sheet (except properties and assets and interests in
properties and assets sold or otherwise disposed of in the ordinary course of
business, consistent with past practice, after the date of such balance sheet),
free and clear of all mortgages, liens, pledges, security interests, charges or
encumbrances. The structures and equipment of Fru-Cor that are necessary to the
operations of the business of Fru-Cor are in good operating condition and repair
and comply with the requirements of all applicable zoning laws and ordinances.
SECTION 2.9 CONTRACTS. (a) Set forth on Schedule 2.9 is a true and complete
list as of the date hereof of all material contacts, agreements, leases,
franchises, licenses and other commitments to which Fru-Cor is a party or by
which any of its properties or assets are bound, and Fru-Cor has delivered true
and complete copies of such agreements to Buyer. To the best of its knowledge,
Fru-Cor is in good standing and not in default under the terms and provisions of
any outstanding contract, agreement, lease, franchise, license or other
commitment that is material to the business, operations, properties or assets or
the condition (financial or otherwise) of Fru-Cor, and no event of default or
other event exists that with notice or lapse of time, or both, would constitute
a default under any such contract, agreement, lease, franchise, license or other
commitment with respect to which Fru-Cor has not taken adequate steps to prevent
from occurring.
(b) Fru-Cor is not a party to any contract, agreement, lease, franchise,
other commitment or instrument, or subject to any charter or other corporate
restriction or any judgment, order, writ, injunction, decree, award, rule or
regulation that materially and adversely affects, or in the future may (insofar
as can now be foreseen) materially and adversely affect, the business,
operations, properties, assets or condition (financial or otherwise) of Fru-Cor
(taken as a whole).
(c) Except as provided or disclosed in this Agreement, Fru-Cor is not a
party to any oral or written (i) contract for the employment of any officer,
employee or agent, (ii) profit sharing, bonus, deferred compensation, stock
option, severance pay, pension or retirement plan, agreement or arrangement,
(iii) agreement, contract or indenture relating to the borrowing of money, (iv)
guaranty of any obligation for the borrowing of money or otherwise, excluding
- - --------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT PAGE 5
<PAGE>
endorsements made for collection, (v) consulting or other similar contract, (vi)
collective bargaining agreement, (vii) agreement with any present or former
officer, director or employee of Fru-Cor, or (viii) contract, agreement or other
commitment involving a payment or expenditure by Fru-Cor of more than $10,000 in
the aggregate for all items listed in clauses (i) through (vii) above.
SECTION 2.10 LITIGATION AND PROCEEDINGS; COMPLIANCE WITH LAWS. (a) Except
as disclosed on Schedule 2.10, there are no actions, suits, investigations or
proceedings pending to which Fru-Cor is a party, or, to the knowledge of Fru-Cor
or Sellers> threatened against or affecting Fru-Cor and its properties and
assets, at law or in equity, or before or by any governmental agency or
instrumentality, or before any arbitrator of any kind, that may result in any
material adverse change in the business, operations, properties or assets or in
the condition (financial or otherwise) of Fru-Cor (taken as a whole); and
Sellers do not have any knowledge of any default on the part of Fru-Cor with
respect to any judgment, order, writ, injunction> decree or award of any court,
arbitrator or governmental agency or instrumentality. A description of each
lawsuit, investigation and administrative proceeding in which Fru-Cor is a party
or in which Fru-Cor has any involvement is set forth on Schedule 2.10 attached
hereto.
(b) Except as set forth in Schedule 2.10(b) Fru-Cor has complied in all
material respects with all applicable statutes, rules and regulations, including
those imposing taxes, of any applicable jurisdiction and of all states,
municipalities, political subdivisions and agencies with respect to the
ownership of its properties and assets and the conduct of its business.
SECTION 2.11 NO CONFLICT WITH OTHER INSTRUMENTS. Neither the execution and
delivery of this Agreement nor, except as set forth on Schedule 2.9, the
consummation of the transactions contemplated by this Agreement and by the
related documents dated as of the date hereof will result in the breach of any
term or provision of, or constitute a default under, any indenture, mortgage,
deed of trust or other contract, agreement, lease, franchise or instrument to
which Fru-Cor is a party, and will not conflict with any provision of the
Articles of Incorporation or Bylaws of Fru-Cor.
SECTION 2.12 GOVERNMENTAL AUTHORIZATIONS. Except as set forth in Schedule
2.10(b), Fru-Cor has all licenses, franchises, permits and other governmental
authorizations that are legally required to enable it to conduct its business as
conducted on the date hereof
SECTION 2.13 PATENTS, TRADEMARKS AND COPYRIGHTS. Fru-Cor is not a defendant
in any litigation asserting infringement of any patent, copyright, trademark or
trade name of any other person. firm or corporation, and as of the date of this
Agreement, no written notification of any such infringement has been received.
SECTION 2.14 INSURANCE. A list of Fru-Cor's insurance policies is set forth
on Schedule 2.14. All of the insurance policies listed on Schedule 2.14 are
valid and enforceable policies issued by insurers of recognized responsibility.
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STOCK PURCHASE AGREEMENT PAGE 6
<PAGE>
SECTION 2.15 BROKERS. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried on by Sellers directly with
Buyer and without the intervention of any other person, either as a result of
any act of Sellers or otherwise, in such manner as to give rise to any valid
claim against Buyer, Fru-Cor or Sellers for a finders fee, brokerage commission
or like payment.
SECTION 2.16 EMPLOYEES. All employees of Fru-Cor are commensurate with
industry standards in the form and substance of job responsibilities and duties.
All records are kept and maintained by Selman and are controlled and maintained
by Selman's controller Jeff Moran.
SECTION 2.17 BANKS AND POWERS OF ATTORNEY. A correct and complete list
setting forth the name of each bank, the type of accounts and account numbers in
which Fru-Cor has an account or safe deposit box, the names of the persons
authorized to draw thereon or to have access thereto, and the name of each
person holding a power of attorney with respect thereto are set forth on
Schedule 2.17.
SECTION 2.18 TRANSACTIONS WITH AFFILIATES. Except as set forth on Schedule
2.16, no officer or director or employee of Fru-Cor presently has any
transaction, loan or other business arrangement or relationship with Fru-Cor.
Except for Sellers' ownership of the Stock, no officer or director or employee
of Fru-Cor has any outstanding investment in, or commitment or option to make
any such investment, loan or advance to Fru-Cor.
SECTION 2.19 MISREPRESENTATIONS. Neither this Agreement nor any Schedule or
Exhibit hereto, nor any financial statement, list, certificate, or other written
material furnished to Buyer by or on behalf of Fru-Cor or Sellers, contains or
will contain any untrue statement of a material fact or omits or will omit to
state a material fact necessary in order to make the statements contained herein
and therein not misleading.
SECTION 2.20 TAX MATTERS. Each tax return with respect to all federal,
state or local Income, gross receipts, severance, property, ad valorem,
production, sales, use, license, excise, franchise, employment, withholding for
similar taxes, together with any interest, additions or penalties with respect
thereto and any interest in respect of such additions or penalties (hereinafter
referred to as "Tax" or "Taxes"), that is required to be filed by or with
respect to FruCor has been duly filed or the time for the filing of such return
has been properly extended to a date after the date of this Agreement. All such
extensions are described on Schedule 2.20. All Taxes shown to be due on the
filed tax returns referred to in the foregoing sentence have been paid in full.
No waivers of statutes of limitation have been given or requested by or with
respect to any Taxes of Fru-Cor.
SECTION 2.21 INVENTORIES. The inventories reflected in the financial
statements of FruCor dated April 18, 1999, and the inventories acquired since
then consist of items of a quality and quantity that are usable or salable in
the ordinary course of business of Fru1Cor, and inventories of below standard
quality or not useable in the business of Fru-Cor have been written down in
value in accordance with good business practices to estimated net realizable
market values. All items included in such inventories are the property of
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STOCK PURCHASE AGREEMENT PAGE 7
<PAGE>
Fru-Cor, except for usage or sales made in the ordinary course of business
Except as set forth on SCHEDULE 2.8, no items included in the inventories have
been pledged as collateral or are held by Fru-Cor on consignment
SECTION 2.22 NO SIMILAR BUSINESS Sellers do not own any interest in any
business located in the United States of America, the Dominion or Canada or the
Republic of Mexico that is engaged in the same or substantially similar business
as that conducted by Fru-Cor, including any food service business that offers
fruit smoothies as a primary menu item Upon transfer of the Stock to Buyer,
Sellers will have conveyed any and all ownership interest they have in any
business that is engaged in the same or substantially similar business as that
conducted by Fru-Cor, including any food service business that offers fruit
smoothies as a primary menu item located in the United States of America, the
Dominion or Canada or the Republic of Mexico.
SECTION 2.23 OWNERSHIP OF ASSETS. None of the personal property located at
any of the Frullati Stores operated by Fru-Cor is the personal property of
Sellers.
SECTION 2.24 USE OF MARKS. Sellers hereby covenant and agree that they will
not, directly or indirectly, without the written consent of Buyer, ever use in
connection with any business located anywhere in the world any of the trademarks
or any other indicia of origin that are owned or utilized by Fru-Cor as of the
date of this Agreement, including, without limitation, the marks "Frullati" and
"Frullati Cafe"
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Fru-Cor and Sellers as follows:
SECTION 3.1 POWER AND AUTHORITY Buyer has the power and authority to enter
into this Agreement and to carry out his obligations hereunder. This Agreement
has been duly and validly executed and delivered by Buyer, and is enforceable
against Buyer in accordance with its terms.
SECTION 3.2 Brokers. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried on by Buyer directly with
Fru-Cor and Sellers and without the intervention of any other person, either as
a result of any act of Buyer or otherwise, in such manner as to give rise to any
valid claim against Buyer, Fru-Cor or Sellers for a finders fee, brokerage
commission or like payment.
SECTION 3.4 WAIVER OF CONSUMER RIGHTS. BUYER HEREBY WAIVES THE PROVISIONS
OF THE TEXAS DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT, SECTION 17.41
ET SEQ., BUSINESS & COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND
PROTECTIONS. ALTER CONSULTATION WITH AN ATTORNEY OF BUYER'S OWN SELECTION, BUYER
VOLUNTARILY CONSENTS TO THIS WAIVER. BUYER (A) IS NOT IN A SIGNIFICANTLY
DISPARATE BARGAINING POSITION WITH SELLERS AND (B) IS REPRESENTED BY LEGAL
COUNSEL.
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STOCK PURCHASE AGREEMENT PAGE 8
<PAGE>
ARTICLE 4
INDEMNIFICATION
SECTION 4.1 INDEMNIFICATION OF BUYER. Sellers hereby indemnify Buyer
against and agrees to hold it harmless from any and all damage, loss, liability
and expense (including, without limitation, expenses of investigation and
attorneys' fees and expenses) incurred or suffered by Buyer arising out of
(a) any inaccuracy or breach of any covenant, agreement, representation or
warranty made or to be performed by Sellers pursuant to this Agreement or any
inaccuracy contained in any Schedule hereto or in any list or document furnished
to Buyer pursuant to the terms hereof;
(b) Any liabilities or obligations of Fru-Cor incurred other than in the
ordinary course of business and not disclosed in the financial statements of
Fru-Cor of which copies are delivered to Buyer or on the Schedules hereto; and
(c) any federal or state income or other Taxes assessed against Fru-Cor for
any taxable year (or portion thereof) during the period beginning with the
incorporation of Fru-Cor to and including the date of this Agreement.
SECTION 4.2 LIMITATIONS. The parties agree that the right to indemnity set
forth in this Article 4 and the remedy of rescission are the sole remedies for
any inaccuracy or breach of the representations and warranties contained in
Article 2. In no event shall the amount paid by Sellers to Buyer pursuant to
Sections 4.1(a) exceed $3,170,000.00. Sellers waive any and all rights of
subrogation against Fru-Cor that they may have with respect to those damages,
losses, liabilities and expenses, if any, giving rise to indemnity under this
Article 4.
SECTION 4.3 INDEMNITY PERIODS. Buyers rights to indemnity pursuant to this
Article 4 shall expire with respect to matters of which Sellers shall not have
received notice within one year after the date of this Agreement, except that
(a) Buyer's rights to indemnity based upon a breach of or inaccuracy in the
representations and warranties made in the first sentences of Sections 2.1 and
2.8 shall continue indefinitely, and (b) Buyers rights to indemnity based upon a
breach of or inaccuracy of the representations and warranties made in Section
2.20 or upon Subsection 4.1(c) shall survive until the expiration of the
applicable periods (including any extension periods) of the respective statutes
of limitation applicable to the payment of Taxes to which such representations
and warranties relate.
SECTION 4.4 NOTICE BY BUYER AND OTHER MATTERS. Buyer agrees to give notice,
within ten business days, to Sellers of the assertion of any claim, or the
commencement of any suit, action or proceeding in respect of which indemnity may
be sought from Sellers pursuant to Section 4.1. Buyer also agrees to give
Sellers such information with respect to matters for which notice is so given as
they may reasonably request. Sellers may, at their own expense, participate in
and, upon notice to Buyer that the claim is one for which they bear
responsibility under this Agreement, assume the defense of any such suit, action
or proceeding for which notice is so given; provided that counsel is reasonably
satisfactory to Buyer, and Sellers shall thereafter consult with Buyer upon
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STOCK PURCHASE AGREEMENT PAGE 9
<PAGE>
their reasonable request for such consultation from time to time with respect to
such suit, action or proceeding. Sellers shall not be liable under this Article
4 for any settlement effected without their consent of any claim, litigation or
proceeding in respect of which indemnity may be sought hereunder. No
investigation by or on behalf of Buyer at or prior to the date of this Agreement
shall relieve Sellers of any liability under this Article 4 unless prior to the
date hereof Buyer had actual knowledge of such liability pursuant to written
evidence received by Buyer prior to the date hereof
SECTION 4.5 INDEMNIFICATION OF SELLER, Buyer hereby indemnifies Sellers
against and agrees to hold them harmless from any and all damage, loss,
liability and expense (including, without limitation, attorneys' fees and
expenses) incurred or suffered by them arising out of the liabilities,
obligations or actions taken on behalf of Fru-Cor described on Schedule 4.5, but
only up to the amounts set forth thereon, if any.
SECTION 4.6 NOTICE BY SELLERS AND OTHER MATTERS. Sellers agree to give
notice, within ten business days, to Buyer of the assertion of any claim, or the
commencement of any suit, action or proceeding in respect of which indemnity may
be sought by Sellers hereunder, and will give Buyer such information with
respect thereto as it may reasonably request. Buyer may, at its own expense,
participate in and, upon notice to Sellers that the claim is one for which it
bears responsibility under this Agreement, assume the defense of any such suit,
action or proceeding; provided that counsel is reasonably satisfactory to
Sellers, and Buyer shall thereafter consult with Seller upon its reasonable
request for such consultation from time to time with respect to such suit,
action or proceeding. Buyer shall not be liable under this Article 4 for any
settlement effected without its consent of any claim, litigation or proceeding
in respect of which indemnity may be sought hereunder.
ARTICLE 5
CONDITIONS TO CLOSING
SECTION 5.1 CONDITIONS TO OBLIGATIONS OF SELLER. The obligations of Sellers
under this Agreement are subject to satisfaction, or the written waiver thereof,
of the following conditions: (a) all of the representations and warranties of
Buyer contained in this Agreement shall be true and correct in all material
respects on and as of the Closing Date, except to the extent that changes shall
have been approved in writing by Seller, and (b) at the Closing Date, there
shall not be pending or threatened any litigation in any court or proceeding
before any governmental agency in which it is sought to restrain or prohibit or
obtain damages in respect of the consummation of the purchase and sale of the
Stock.
SECTION 5.2 CONDITIONS TO OBLIGATIONS OF BUYER. The obligations of Buyer
under this Agreement are subject to satisfaction, or the written waiver thereof,
of the following conditions: (a) all of the representations and warranties of
Sellers contained in this Agreement shall be true and correct in all material
respects on and as of the Closing Date, except to the extent tat changes shall
have been approved in writing by Buyer. (b) Sellers shall not have taken any
actions set forth in Section 2.7 between the date of this Agreement and the
Closing Date without the written approval of Sellers, (c) at the Closing Date,
there shall not be pending or threatened any litigation in any court or
proceeding before any governmental agency in which it is sought to restrain or
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STOCK PURCHASE AGREEMENT PAGE 10
<PAGE>
prohibit or obtain damages in respect of the consummation of the purchase and
sale of the Stock, and (d) on the Closing Date, Sellers shall deliver the
written resignations of each officer and each member of the Board of Directors
of Fru-Cor.
ARTICLE 6
MISCELLANEOUS
SECTION 6.1 SURVIVAL OF ALL REPRESENTATIONS. WARRANTIES AND COVENANTS.
Subject to the limitations to Buyer's rights to indemnity set forth in Section
4.3, the representations, warranties and covenants of Sellers and Buyer shall
terminate upon the sale of the Stock by Sellers to Buyer.
SECTION 6.2 INVESTIGATION. Subject to the last sentence of Section 4.4, the
respective representations and warranties of Sellers and Buyer contained herein
or in any Schedule, Exhibit or document referred to in this Agreement shall not
be deemed waived or otherwise affected by any investigation made by any party
hereto.
SECTION 6.3 SCHEDULES AND EXHIBITS. FINANCIAL STATEMENTS. LISTS, ETC. All
Schedules and Exhibits referred to in this Agreement and attached hereto, all
financial statements referred to in Section 2.5, and all other documents
referred to in this Agreement are incorporated by reference in this Agreement
for all purposes.
SECTION 6.4 SPECIFIC ENFORCEMENT. Each of the parties hereto acknowledges
and agrees that the other parties hereto would be irreparably damaged if any of
the provisions of this Agreement are not performed in accordance with their
respective terms or are otherwise breached. It is accordingly agreed that,
subject to the restrictions on remedies set forth in Section 4.2, any of the
parties hereto shall be entitled to an injunction or injunctions to prevent
breaches of such provisions and to specifically enforce such provisions, in
addition to any other remedy to which such party may be entitled, at law or in
equity.
SECTION 6.5 EXPENSES. Except as otherwise expressly provided herein, the
parties to this Agreement shall pay their respective costs and expenses,
including legal and accounting fees and fees and expenses, incurred in
connection with the performance of and compliance with the covenants and
agreements contained in this Agreement and related agreements dated as of the
date hereof.
SECTION 6.6 AMENDMENTS. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by Buyer and Sellers.
SECTION 6.7 NONASSIGNABILITY. The rights and obligations under this
Agreement shall not be assignable by either party hereto except upon or with the
prior written consent of the other PARTY.
SECTION 6.8 RIGHTS OF THIRD PARTIES. Nothing in this Agreement shall be
construed to give any person or entity, other than the parties hereto, any legal
or equitable right, remedy or claim under this Agreement.
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STOCK PURCHASE AGREEMENT PAGE 11
<PAGE>
SECTION 6.9 HEADINGS, ETC. The headings of the various sections of this
Agreement, and the Table of Contents, have been inserted for convenience of
reference only and shall not be deemed to be a part of this Agreement. Unless
the context otherwise requires, references herein to Articles, Sections and
Subsections are references to Articles, Sections and Subsections, respectively,
of this Agreement.
SECTION 6.10 SEVERABILITY. If any provision of this Agreement shall be
deemed invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not be affected or impaired
thereby.
SECTION 6.11 COUNTERPARTS. This Agreement may be executed by any one or
more of the parties hereto in any number of counterparts, each of which shall be
deemed to be an original, but all such counterparts together shall constitute
one and the same instrument.
SECTION 6.12 GOVERNING LAW: VENUE. This Agreement shall be governed by and
construed and interpreted in accordance with the laws of the State of Texas,
without giving effect to the principles of choice of laws of such state. Any
action or dispute among the parties involving this Agreement and transactions
contemplated hereby shall be asserted and maintained in any court of competent
subject matter jurisdiction located in Abilene, Texas.
SECTION 6.13 ENTIRE AGREEMENT. This Agreement contains the entire agreement
among the parties hereto with respect to the transactions contemplated herein
and supersedes all previous written or oral agreements, negotiations,
commitments and writings.
SECTION 6.14 PRESS RELEASE. Neither party shall make any press release or
public statement with respect to this Agreement without the prior written
consent of the other party.
SECTION 6.15 NOTICES. All notices and other communications hereunder shall
be in writing and deemed to have been given if mailed, first class, registered
or certified mail, return receipt requested, postage prepaid, to the following
respective addresses:
To Buyer: Selman Systems, Inc.
5720 LBJ #370
Dallas, Texas 75240
To Sellers: Kenneth L. Musgrave, Ltd.
P.O. Box 1743
Abilene, Texas 79604
Tony Conder
1925 Green Ridge Court
Abilene, Texas 79602
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STOCK PURCHASE AGREEMENT PAGE 12
<PAGE>
Larry Pearce
#7 South Bethany Bend Court
The Woodlands, Texas 77382
Any party to this Agreement may change the name of the person to whom all
communications and notices may be sent on such party's behalf by written notice
of such change to the other party.
IN WITNESS WHEREOF, Sellers and Buyer have each signed this Agreement all
as of the date first above written.
KENNETH L. MUSGRAVE, LTD., a Texas
limited partnership
By and through its General Partner
Musgrave Abilene, L.L.C., General Partner
By: /s/ Tony Conder
-------------------------------------------------
Tony Conder, Manager and Executive Vice President
By: /s/ Tony Conder
-------------------------------------------------
Tony Conder
SELMAN SYSTEMS,
By: /s/ Ziad S. Dalal
-------------------------------------------------
Ziad S. Dalal, President
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
SPORTS GROUP INTERNATIONAL, INC.
Pursuant to the provisions of Sections 607.1006 and 607.1007 of the
Florida Statutes, Sports Group International, Inc., a Florida corporation (the
"Corporation"), hereby files the following Amended and Restated Articles of
Incorporation. The initial Articles of Incorporation of the Company were filed
on September 30, 1997.
FIRST: The name of the Corporation is Sports Group International, Inc.
SECOND: The following constitute the Amended and Restated Articles of
Incorporation of the Corporation:
ARTICLE I. CORPORATE NAME
The name of the Corporation shall be Sports Group International, Inc.
ARTICLE II. PURPOSE
The Corporation shall be organized for any and all purposes authorized
under the laws of the State of Florida.
ARTICLE III. PERIOD OF EXISTENCE
The period during which the Corporation shall continue is perpetual.
ARTICLE IV. SHARES
The total number of shares of stock which the Company shall have authority
to issue shall be one hundred two million (102,000,000), divided as follows: (i)
one hundred million (100,000,000) shares of Common Stock with a par value of
$.001 per share, and (ii) two million (2,000,000) shares of Preferred Stock with
a par value of $.001 per share, of which 575,000 are hereby designated Series A
Preferred Stock ("Series A Preferred Stock") and 650,000 are hereby designated
as Series B Preferred Stock.
Shares of Preferred Stock may be issued from time to time in one or more
series, each of such series to have such terms as stated in the resolution or
resolutions providing for the establishment of such series adopted by the Board
of Directors of the Company as hereinafter provided. Except with respect to the
Series A Preferred Stock and Series B Preferred Stock which are described below,
authority is hereby expressly granted to the Board of Directors of the Company
<PAGE>
to issue, from time to time, shares of Preferred Stock in one or more series,
and, in connection with the establishment of any such series by resolution or
resolutions, to determine and fix such voting powers, full or limited, or no
voting powers, and such other powers, designations, preferences and relative,
participating, optional, and other special rights, and the qualifications,
limitations, and restrictions thereof, if any including, without limitation,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be stated in such resolution or resolutions, all to the
fullest extent permitted by the Florida General Company Act. Without limiting
the generality of the foregoing, the resolution or resolutions providing for the
establishment of any series of Preferred Stock may, to the extent permitted by
law, provide that such series shall be superior to, rank equally with or be
junior to the Preferred Stock of any other series. Except as otherwise expressly
provided in the resolution or resolutions providing for the establishment of any
shares of any series of Preferred Stock, no vote of the holders of shares of
Preferred Stock or Common Stock shall be a prerequisite to the issuance of any
shares of any series of the Preferred Stock unauthorized by and complying with
the conditions of this Amended and Restated Certificate of the Company. The
right, preferences, privileges and restrictions of the Series A Preferred Stock
and Series B Preferred Stock shall be as follows:
A. SERIES A PREFERRED STOCK.
1. DESIGNATION AND INITIAL NUMBER. The Class of shares of Preferred Stock
hereby classified shall be designated as "Series A Redeemable Convertible
Secured Preferred Stock". The initial number of authorized shares of the Series
A Preferred Stock shall be 575,000.
2. DIVIDENDS. The dividend rate for the Series A Preferred Stock shall be
ten percent (10%) per annum of the face value of $10.00 per share, and no more.
Dividends on the Series A Stock shall be payable at the Holder's election either
in cash or Series A Preferred Stock at face value beginning on June 1, 1999 and
quarterly thereafter each calendar year. Dividends on shares of Series A
Preferred Stock shall commence and accrue and shall cumulative from the date in
which the Series A Preferred Stock is issued. No dividends shall be paid or set
apart for payment on any shares ranking junior to the Series A Preferred Stock
unless and until all accrued and unpaid dividends on the Series A Preferred
Stock shall have been declared and paid or a sum sufficient for payment thereof
set apart.
3. LIQUIDATION OR DISSOLUTION. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of Series A Preferred Stock then outstanding shall be entitled to be
paid out of the assets of the Corporation available for distribution to its
stockholders, an amount per share equal to Ten Dollars ($10.00) per share (plus
an amount equal to unpaid cumulative dividends) without Interest and no more,
before any payment shall be made to the holders of any common stock or stock of
the Company ranking junior to Series A Stock.
4. SINKING FUND. The shares of Series A Preferred Stock may, at the
discretion of the Board of Directors, be subject to the operation of a purchase,
retirement or sinking fund.
2
<PAGE>
5. CONVERSION PRIVILEGE. The holders of shares of Series A Preferred
Stock shall have the right at their option to convert their shares into common
stock at any time after the date of issue, on and subject to the following terms
and conditions:
5.1 One share of Series A Stock may be converted into 13 1/3 shares
of Common Stock at any time. A minimum of 1000 shares of Series A Preferred
Stock must be converted with no maximum.
5.2 No fraction of shares of stock of any class of the Company at any
time authorized shall be Issuable upon any conversion of the Series A Preferred
Stock. In lieu of any such fraction of a share, the person entitled to an
interest in respect to such fraction shall be entitled to an additional share to
round up the fraction to the next whole share.
5.3 Any conversion of Series A Preferred Stock shall be made by the
surrender to the Company, at the office of any Transfer Agent for the Series A
Preferred Stock and at such other office or offices as the Board of Directors
may designate, of the certificate or certificates representing the share or
shares of Series A Preferred Stock to be converted, duly endorsed or assigned
(unless such endorsement or assignment be waived by the Company), together with
a written request for conversion. All shares which may be issued upon conversion
of shares of the Series A Preferred Stock shall upon issue be fully paid and
non-assessable by the Company and free from all taxes, liens, charges and
security Interests with respect to the issue thereof. The Company shall not
however, be required to pay any tax which may be payable in respect to any
transfer involved in the issue and delivery of shares of Common Stock upon
conversion in a name other than that of the holder of the shares of the Series A
Preferred Stock converted, and the Company shall not be required to issue or
deliver any such share unless and until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of any such tax or
shall have established to the satisfaction of the Company that such tax has been
paid.
5.4 All shares of Series A Preferred Stock which shall have been
surrendered for conversion as herein provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the rights, if
any, to receive notices and to vote, shall forthwith cease except only the right
to the holders hereof to receive Common Stock in exchange therefor. No payment
or adjustment shall be made upon any Conversion on account of any dividends
accrued on the shares of the Series A Preferred Stock surrendered for conversion
or on account of any dividends on the Common Stock issued upon such conversion.
6. ADJUSTMENTS TO CONVERSION RATIO. The ratio for the conversion of
Series A Preferred Stock into Common Stock (the "Conversion Ratio") shall be
subject to adjustment from time to time as follows:
6.1 In the event the Company should at any time or from time to time
after the issuance of the Series A Preferred Stock fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common Stock
or the determination of holders of Common Stock entitled to receive a dividend
3
<PAGE>
or other distribution payable in additional shares of Common Stock without
payment of any consideration by such holder for the additional shares of Common
Stock, then, as of such record date (or the date of such dividend, distribution,
split or subdivision, if no record date is fixed), the Conversion Ratio shall be
appropriately adjusted so that the number of shares of Common Stock issuable on
conversion of each share of the Series A Preferred Stock shall be increased in
proportion to such increase of outstanding shares.
6.2 If the number of shares of Common Stock outstanding at any time
after the issuance of the Series A Preferred Stock is decreased by a combination
of the outstanding shares of Common Stock, then, following the record date of
such combination, the Conversion Ratio shall be appropriately adjusted so that
the number of shares of Common Stock issuable on conversion of each share of
such Series A Preferred Stock shall be decreased in proportion to such decrease
in outstanding shares.
6.3 OTHER DISTRIBUTIONS. In the event the Company shall declare a
distribution payable in securities of other persons, evidences of indebtedness
issued by the Company or other persons, or assets (excluding cash dividends),
then, in each such case for the purpose of this subsection 6.3, the holder of
Series A Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Company into which their shares of Series A Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Company entitled to receive such distribution.
6.4 RECAPITALIZATION. If, at any time or from time to time there
shall be a recapitalization of the Common Stock (other then a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 6), provisions shall be made so that the holders of Series A
Preferred Stock shall thereafter be entitled to receive upon conversion of their
Preferred Stock the number of shares of stock or other securities or property of
the Company or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 6 with respect to the rights of the holders of Series A Preferred
Stock after the recapitalization to the end that the provisions of this Section
6 (including adjustment of the Series A Preferred Stock Conversion Price then in
effect and the number of shares purchasable upon conversion of Series A
Preferred Stock) shall be applicable after the event as nearly equivalent as may
be practicable.
6.5 NO IMPAIRMENT. The Company will not by amendment of its
Certificate of the Company or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section 6 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series A Preferred Stock against impairment.
4
<PAGE>
6.6 NO FRACTIONAL SHARES AND CERTIFICATES AS TO ADJUSTMENTS.
(i) No fractional shares shall be issued upon conversion of the
Series A Preferred Stock and the number of shares of Common Stock to be issued
shall be rounded up to the nearest whole share.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Ratio pursuant to this Section 6, the Company, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Series A Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Company shall, upon the written request at any time of any holder of Series A
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (A) such adjustment and readjustment, (B) the
Conversion Ratio at the time in effect and (C) the number of shares of Common
Stock and the amount if any, of other property which at the time would be
received upon the conversion of a share of Series A Preferred Stock.
(iii) If any adjustment in the number of shares of Common Stock
into which each share of Series A Preferred Stock may be converted required
pursuant to this Section 6 would result in an increase or decrease of less than
1% in the number of shares of Common Stock into which each share of Series A
Preferred Stock is then convertible, the amount of any such adjustment shall be
carried forward and adjustment with respect thereto shall be made at the time of
and together with any subsequent adjustment which, together with such amount and
any other amount or amounts so carried forward, shall aggregate at least 1% of
the number of shares of Common Stock into which each share of Series A Preferred
Stock is then convertible. All calculations under this paragraph (iii) shall be
made to the nearest one-hundredth of a share.
6.7 NOTICES OF RECORD DATE. In the event of any taking by the Company
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, the Company shall mail to each
holder of Series A Preferred Stock, at least 20 days prior to the date specified
therein, notice for specifying the date on which any such record is to be taken
for the purpose of such dividend or distribution.
6.8 RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of Series A Preferred Stock such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series A Preferred Stock; and, if at any time a number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
5
<PAGE>
the conversion of all then outstanding shares of Series A Preferred Stock, in
addition to such other remedies as shall be available to the holder of such
Series A Preferred Stock, the Company will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes.
6.9 NOTICES. Any notice required by the provisions of this Section 6
to be given to the holders of shares of Series A Preferred Stock shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at his address appearing on the books of the Company.
6.10 MERGER, CONSOLIDATION. If at any time there is a merger or
consolidation of the Company with or into another Company or other entity or
person, or any other corporate reorganization; in which the Company shall not be
the continuing or surviving entity of such merger, consolidation or
reorganization, or the sale of all or substantially all of the Company's
properties and. assets to any other person, then, as a part of such
reorganization, merger, consolidation or sale, provision shall be made so that
the holders of the Series A Preferred Stock shall be entitled to receive (on a
per share basis), prior to any distribution to holders of Common Stock, the
number of shares of stock or other securities or property to be issued to the
Company or its stockholders resulting from such reorganization, merger,
consolidation or sale in an amount per share equal to the applicable Liquidation
Price for the Series A Preferred Stock plus a further amount equal to any
dividends declared but unpaid on such shares.
7. VOTING RIGHTS. Holders of shares of Series A Preferred Stock shall
have a general right to vote and shall be entitled to notice of the meetings of
the stockholders of the Company, and to participate in such meetings. At general
meetings of the stockholders, Holders of Series A Preferred Stock shall be
entitled to thirteen and one-third (13 1/3) votes for each share of Series A
Preferred Stock. Holders of shares of Series A Preferred Stock shall be
permitted to special voting rights set forth in the following sub-paragraph 7.1
below.
7.1 So long as any shares of the Series A Preferred Stock are
outstanding, the Company shall not (a) without the affirmative vote of at least
one-half of the votes entitled to be cast by all shares of the Series A
Preferred Stock at the time outstanding amend or change any terms of the Series
A Preferred Stock in Article IV of the Articles of Incorporation of the Company
or other provisions of the Articles of Incorporation generally applicable to the
Series A Preferred Stock, so as to affect materially and adversely any such
terms; (b) without the affirmative vote of at least one- half of the vote
entitled to be cast by shares of the Series A Preferred Stock at the time
outstanding, (i) increase the authorized number of shares of Series A Preferred
Stock in excess of 575,000; (ii) authorize shares of any other class of stock
ranking on a parity with shares of Series A Preferred Stock as to dividends or
assets; (iii) change the terms of the redemption feature of the Series A
Preferred Stock, including the waiver of said feature; or (iv) change the
conversion features of the Series A Preferred Stock.
8. GENERAL PROVISIONS. In addition to the above provisions with respect
to the Series A Preferred Stock, such Series A Preferred Stock shall be subject
to and be entitled to the benefits of, the provisions set forth in the Company's
Articles of Incorporation with respect to Preferred Stock generally.
6
<PAGE>
B. SERIES B PREFERRED STOCK.
1. DESIGNATION AND INITIAL NUMBER. The Class of shares of Preferred Stock
hereby classified shall be designated as "Series B Preferred Stock." The initial
number of authorized shares of the Series B Preferred Stock shall be 650,000.
2. DIVIDENDS. The dividend rate for the Series B Preferred Stock shall be
ten percent (10%) per annum of the face value of $10.00 per share, and no more.
Dividends on the Series B Preferred Stock shall be payable at the Holder's
election either in cash or Series B Preferred Stock at face value beginning on
June 1, 1999 and quarterly thereafter each calendar year. Dividends on shares of
Series B Preferred Stock shall commence and accrue and shall be cumulative from
the date in which the Series B Preferred Stock is issued. No dividends shall be
paid or set apart for payment on any shares ranking junior to the Series B
Preferred Stock unless and until all accrued and unpaid dividends on the Series
B Preferred Stock shall have been declared and paid or a sum sufficient for
payment thereof set apart. For purposes of this provision, the Series B
Preferred Stock shall rank equal to the Series A Preferred Stock.
3. LIQUIDATION OR DISSOLUTION. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of Series B Preferred Stock then outstanding shall be entitled to be
paid out of the assets of the Corporation available for distribution to its
stockholders, an amount per share equal to Ten Dollars ($10.00) per share (plus
an amount equal to unpaid cumulative dividends) without interest and no more,
before any payment shall be made to the holders of any common stock or stock of
the Company ranking junior to Series B Stock. For purposes of this provision,
the Series B Preferred Stock shall rank equal to the Series A Stock.
4. SINKING FUND. The shares of Series B Preferred Stock may, at the
discretion of the Board of Directors, be subject to the operation of a purchase,
retirement or sinking fund.
5. CONVERSION PRIVILEGE. The holders of shares of Series B Preferred
Stock shall have the right at their option to convert their shares into common
stock at any time after the date of issue, on and subject to the following terms
and conditions:
5.1 One share of Series B Preferred Stock may be converted into 10
shares of Common Stock at any time. A minimum of 1000 shares of Series B
Preferred Stock must be converted with no maximum.
5.2 No fraction of shares of stock of any class of the Company at any
time authorized shall be issuable upon any conversion of the Series B Stock. In
lieu of any such fraction of a share, the person entitled to an interest in
respect to such fraction shall be entitled to an additional share to round up
the fraction to the next whole share.
5.3 Any conversion of Series B Preferred Stock shall be made by the
surrender to the Company, at the office of any Transfer Agent for the Series B
Preferred Stock and at such other office or offices as the Board of Directors
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may designate, of the certificate or certificates representing the share or
shares of Series B Preferred Stock to be converted, duly endorsed or assigned
(unless such endorsement or assignment be waived by the Company, together with a
written request for conversion). All shares which may be issued upon conversion
of shares of the Series B Preferred Stock shall upon issue be fully paid and
non-assessable by the Company and free from all taxes, liens, charges and
security interests with respect to the issue thereof. The Company shall not
however, be required to pay any tax which may be payable in respect to any
transfer involved in the issue and delivery of shares of Common Stock upon
conversion in a name other than that of the holder of the shares of the Series B
Preferred Stock converted, and the Company shall not be required to issue or
deliver any such share unless and until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of any such tax or
shall have established to the satisfaction of the Company that such tax has been
paid.
5.4 All shares of Series B Preferred Stock which shall have been
surrendered for conversion as herein provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the rights, if
any, to receive notices and to vote, shall forthwith cease except only the right
to the holders thereof to receive Common Stock in exchange therefor. No payment
or adjustment shall be made upon any conversion on account of any dividends
accrued on the shares of the Series B Preferred Stock surrendered for conversion
or on account of any dividends on the Common Stock issued upon such conversion.
6. ADJUSTMENTS TO CONVERSION RATIO. The ratio for the conversion of
Series B Preferred Stock into Common Stock (the "Conversion Ratio") shall be
subject to adjustment from time to time as follows:
6.1 In the event the Company should at any time or from time to time
after the issuance of the Series B Preferred Stock fix a record date for the
effectuation of a split or subdivision of tho outstanding shares of Common Stock
or the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock without
payment of any consideration by such holder for the additional shares of Common
Stock, then, as of such record date (or the date of such dividend, distribution,
split or subdivision, if no record date is fixed), the Conversion Ratio shall be
appropriately adjusted so that the number of shares of Common Stock issuable on
conversion of each share of the Series B Preferred Stock shall be increased in
proportion to such increase of outstanding shares.
6.2 If the number of shares of Common Stock outstanding at any time
after the issuance of the Series B Preferred Stock is decreased by a combination
of the outstanding shares of Common Stock, then, following the record date of
such combination, the Conversion Ratio shall be appropriately adjusted so that
the number of shares of Common Stock issuable on conversion of each share of
such Series B Preferred Stock shall be decreased in proportion to such decrease
in outstanding shares.
6.3 OTHER DISTRIBUTIONS. In the event the Company shall declare a
distribution payable in securities of other persons, evidences of indebtedness
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issued by the Company or other persons, or assets (excluding cash dividends),
then, in each such case for the purpose of this subsection 6.3, the holder of
Series B Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Company into which their shares of Series B Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Company entitled to receive such distribution.
6.4 RECAPITALIZATION. If, at any time or from time to time there
shall be a recapitalization of the Common Stock (other then a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 6), provisions shall be made so that the holders of Series B
Preferred Stock shall thereafter be entitled to receive upon conversion of their
Preferred Stock the number of shares of stock or other securities or property of
the Company or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 6 with respect to the rights of the holders of Series B Preferred
Stock after the recapitalization to the end that the provisions of this Section
6 (including adjustment of the Series B Preferred Stock Conversion Price then in
effect and the number of shares purchasable upon conversion of Series B
Preferred Stock) shall be applicable after the event as nearly equivalent as may
be practicable.
6.5 NO IMPAIRMENT. The Company will not by amendment of its
Certificate of the Company or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Section 6 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series B Preferred Stock against impairment
6.6 NO FRACTIONAL SHARES AND CERTIFICATES AS TO ADJUSTMENTS.
(i) No fractional shares shall be issued upon conversion of the
Series B Preferred Stock and the number of shares of Common Stock to be issued
shall be rounded up to the nearest whole share.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Ratio pursuant to this Section 6, the Company, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Series B Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Company shall, upon the written request at any time of any holder of Series B
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (A) such adjustment and readjustment (B) the
Conversion Ratio at the time in effect, and (C) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of a share of Series B Preferred Stock.
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(iii) If any adjustment in the number of shares of Common Stock
into which each share of Series B Preferred Stock may be converted required
pursuant to this Section 6 would result in an increase or decrease of less than
1% in the number of shares of Common Stock into which each share of Series B
Preferred Stock is then convertible, the amount of any such adjustment shall be
carried forward and adjustment with respect thereto shall be made at the time of
and together with any subsequent adjustment which, together with such amount and
any other amount or amounts so carried forward, shall aggregate at least 1% of
the number of shares of Common Stock into which each share of Series B Preferred
Stock is then convertible. All calculations under this paragraph (iii) shall be
made to the nearest one-hundredth of a share.
6.7 NOTICES OF RECORD DATE. In the event of any taking by the Company
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, the Company shall mail to each
holder of Series B Preferred Stock, at least 20 days prior to the date specified
therein, notice for specifying the date on which any such record is to be taken
for the purpose of such dividend or distribution.
6.8 RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of Series B Preferred Stock such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series B Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series B Preferred Stock, in
addition to such other remedies as shall be available to the holder of such
Series B Preferred Stock, the Company will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes.
6.9 NOTICES. Any notice required by the provisions of this Section 6
to be given to the holders of shares of Series B Preferred Stock shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at his address appearing on the books of the Company.
6.10. MERGER, CONSOLIDATION. If at any time there is a merger or
consolidation of the Company with or into another Company or other entity or
person, or any other corporate reorganization, in which the Company shall not be
the continuing or surviving entity of such merger, consolidation or
reorganization, or the sale of all or substantially all of the Company's
properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation or sale, provision shall be made so that
the holders of the Series B Preferred Stock shall be entitled to receive (on a
per share basis), prior to any distribution to holders of Common Stock, the
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number of shares of stock or other securities or property to be issued to the
Company or its stockholders resulting from such reorganization, merger,
consolidation or sale in an amount per share equal to the applicable Liquidation
Price for the Series B Preferred Stock plus a further amount equal to any
dividends declared but unpaid on such shares.
7. VOTING RIGHTS. Holders of shares of Series B Preferred Stock shall
have a general right to vote and shall be entitled to notice of the meetings of
the stockholders of the Company, and to participate in such meetings. At general
meetings of the stockholders, Holders of Series B Preferred Stock shall be
entitled to ten (10) votes for each share of Series B Stock. Holders of shares
of Series B Preferred Stock shall be permitted to special voting rights set
forth in the following sub- paragraph 7.1 below.
7.1 So long as any shares of the Series B Preferred Stock are
outstanding, the Company shall not (a) without the affirmative vote of at least
one-half of the votes entitled to be cast by all shares of the Series B
Preferred Stock at the time outstanding amend or change any terms of the Series
B Preferred Stock in Article IV of the Articles of Incorporation of the Company
or other provisions of the Articles of Incorporation generally applicable to the
Series B Stock, so as to affect materially and adversely any such terms, (b)
without the affirmative vote of at least one-half of the vote entitled to be
cast by shares of the Series B Preferred Stock at the time outstanding, (i)
increase the authorized number of shares of Series B Preferred Stock in excess
of 650,000; (ii) authorize shares of any other class of stock ranking on a
parity with shares of Series B Preferred Stock as to dividends or assets; or
(iii) change the conversion features of the Series B Preferred Stock.
8. General Provisions. In addition to the above provisions with respect
to the Series B Stock, such Series B Preferred Stock shall be subject to and be
entitled to the benefits of, the provisions set forth in the Company's Articles
of Incorporation with respect to the Preferred Stock generally.
ARTICLE V. PLACE OF BUSINESS
The initial address of the principal place of business of this corporation
in the State of Florida shall be 200 E. Robinson Street, Suite 450, Orlando,
Florida 32801. The Board of Directors may at any time and from time to time move
the principal place of this Corporation.
ARTICLE VI. DIRECTORS AND OFFICERS
The number of directors of the Corporation shall be fixed by the bylaws, or
if the bylaws fail to fix such a number, then by resolution adopted from time to
time by the board of directors, provided that the number of directors shall not
be less than one.
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ARTICLE VII. DENIAL OF PREEMPTIVE RIGHTS
No shareholder shall have any right to acquire shares or other securities
of the Corporation except to the extent such right may be granted by an
amendment to these Articles of Incorporation or by a resolution of the Board of
Directors.
ARTICLE VIII. AMENDMENT OF BYLAWS
Anything in these Articles of Incorporation, the Bylaws, or the Florida
Corporation Act notwithstanding, bylaws shall not be adopted, modified, amended
or repealed by the shareholders of the Corporation except upon the affirmative
vote of a simple majority vote of the holders of all the issued and outstanding
shares of the Corporation entitled to vote thereon.
ARTICLE IX. SHAREHOLDERS
9.1 INSPECTION OF BOOKS. The Board of Directors shall make reasonable
rules to determine at what times and places and under what conditions the books
of the Corporation shall be open to inspection by shareholders or a duly
appointed representative of a shareholder.
9.2 CONTROL SHARE ACQUISITION. The provisions relating to any control
share acquisition as contained in Florida Statutes now, or hereinafter amended,
and any successor provision shall not apply to the Corporation.
9.3 QUORUM. The holders of shares entitled to one-third of the votes at a
meeting of shareholders shall constitute a quorum.
ARTICLE X.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
To the fullest extent permitted by law, no director or officer of the
Corporation shall be personally liable to the Corporation or its shareholders
for damages for breach of any duty owed to the Corporation or its shareholders.
In addition, the Corporation shall have the power, in its Bylaws or in any
resolution of its stockholders or directors, to undertake to indemnify the
officers and directors of this Corporation against any continency or peril as
may be determined to be in the best interests of this Corporation, and in
conjunction therewith, to procure, at this Corporation's expense, policies of
insurance.
ARTICLE XI. SUBSCRIBER
ARTICLE DELETED.
ARTICLE XII. CONTRACTS
No contract or other transaction between this corporation and any person,
firm or corporation shall be affected by the fact that any officer or director
of this Corporation is such other party or is, or at some time in the future
becomes, an officer, director or partner of such other contracting party, or has
now or hereafter a direct or indirect interest in such contract.
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ARTICLE XIII. RESIDENT AGENT
The name and address of the resident agent of this Corporation is:
CT Corporation System
1200 S. Pine Island Road
Plantation, Florida 33324
THIRD: The date of the adoption of these Amended and Restated Articles of
Incorporation of the Corporation is December 7, 1999.
FOURTH: Amended and Restated Articles of Incorporation [CHECK ONE]
[ ] The Amended and Restated Articles of Incorporation was approved by the
shareholders. The number of votes cast for the Amended and Restated
Articles of Incorporation was sufficient for approval.
[ ] The Amended and Restated Articles of Incorporation was approved by the
shareholders through voting group.
[X] The Amended and Restated Articles of Incorporation was adopted by the
board of directors without shareholder action and shareholder action
was not required.(1,2)
- - ----------
(1) The Corporation filed Articles of Amendment to its Articles of
Incorporation on March 29, 1999 with the Florida Secretary of State to
change its authorized capital and revise its number of directors. These
Articles of Amendment were adopted by the Corporation's Board of Directors
WITHOUT shareholder action. Since changing the Corporation's authorized
capital in its Articles of Incorporation requires a shareholder vote
approving such action under Florida law, the Articles of Amendment filed by
the Corporation on March 29, 1999 with the Florida Secretary of State are
invalid, and of no force and effect. Thus, the Articles of Amendment filed
March 29, 1999 by the Corporation are ignored for purposes of these Amended
and Restated Articles of Incorporation of the Corporation.
(2) The Corporation filed Articles of Amendment to its Articles of
Incorporation on May 11, 1999 with the Florida Secretary of State. The
second amendment in these Articles of Amendment amended the Fifth Article
of the Corporation's Articles of Incorporation to read as follows: "The
number of directors of the Corporation shall be fixed by the bylaws, or if
the bylaws fail to fix such a number, then by resolution adopted from time
to time by the board of directors, provided that the number of directors
shall not be less than one." This amendment was intended to amend the Sixth
Article of the Corporation's Articles of Incorporation, not the Fifth
Article. These Amended and Restated Articles of Incorporation have
corrected this previous error in the numbering of the Articles of Amendment
filed May 11, 1999.
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[ ] The Amended and Restated Articles of Incorporation was adopted by the
incorporators without shareholder action and shareholder action was
not required.
Executed this 7th day of December, 1999.
Signature: /s/ Kevin Blackwell
----------------------------------------
Kevin Blackwell, President and Director
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CERTIFICATE DESIGNATING PLACE OF BUSINESS OR
DOMICILE FOR SERVICE OF PROCESS WITHIN THIS STATE
NAMING THE AGENT UPON WHOM PROCESS MAY BE SERVED
Having been named to accept service of process for Sports Group
International, Inc., a Florida corporation, at the place designated in these
Restated Articles of Incorporation, the undersigned is familiar with and accepts
the obligations of that position pursuant to F.S. 607.0501(3).
DATED: December 9, 1999.
CT CORPORATION SYSTEMS
By: /s/ Vickie M. Prince
------------------------------------
Its: Authorized Person
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BY-LAWS
OF
SECRETARIAL SERVICES OF ORLANDO, INC.
ARTICLE I. MEETING OF SHAREHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders of this
corporation shall be held on the 30th day of June of each year or at such other
time and place designated by the Board of Directors of the corporation. Business
transacted at the annual meeting shall include the election of directors of the
corporation. If the designated day shall fall on a Sunday or legal holiday, then
the meeting shall be held on the first business day thereafter.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders shalll be
held when directed by the President or the Board of Directors, or when requested
in writing by the holders of not less than 10% of all the shares entitled to
vote at the meeting. A meeting requested by shareholders shall be called for a
date not less than 3 nor more than 30 days after the request is made, unless the
shareholders requesting the meeting designate a later date. The call for the
meeting shall be issued by the Secretary, unless the President, Board of
Directors, or shareholders requesting the meeting shall designate another person
to do so.
SECTION 3. PLACE. Meetings of shareholders shall be held at the principal
place of business of the corporation or at such other place as may be designated
by the Board of Directors.
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SECTION 4. NOTICE. Written notice stating the place, day and hour of the
meeting and in the case of a special meeting, the purpose or purposes for which
the meeting is called, shall be delivered not less than 3 nor more than 30 days
before the meeting, either personally or by first class mail, or by the
direction of the President, the Secretary or the officer or persons calling the
meeting to each shareholder of record entitled to vote at such meeting. If,
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail addressed to the shareholder at his address as it appears on the
stock transfer books of the corporation, with postage thereon prepaid.
SECTION 5. NOTICE OF ADJOURNED MEETING. When a meeting is adjourned to
another time or place, it shall no be necessary to give any notice of the
adjourned meeting if the time and place to which the meeting is adjourned are
announced at the meeting at which the adjournment is taken, and at the adjourned
meeting any business may be transacted that might have been trasacted on the
original date of the meeting. If, however, after the adjournment the Board of
Directors fixes a new record date for the adjourned meeting, a notice of
adjourned meeting shall be given as provided in this Article to each shareholder
record on a new record date entitled to vote at such meeting.
SECTION 6. SHAREHOLDER QUORUM AND VOTING. A majority of the shares entitled
to vote, represented in person or by proxy, shall constitute a quorum at a
meeting of shareholders. If a quorum is present, the affirmative vote of a
majority of the shares represented at the meeting and entitled to vote on the
subject matter shall be the act of the shareholders unless otherwise provided by
law.
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SECTION 7. VOTING OF SHARES. Each outstanding share shall be entitled to
one vote on each matter submitted to a vote at a meeting of shareholders.
SECTION 8. PROXIES. A shareholder may vote either in person or by proxy
executed in writing by the shareholder or his duly authorized attorney-in-fact.
No proxy shall be valid after the duration of 11 months from the date thereof
unless otherwise provided in the proxy.
SECTION 9. ACTION BY SHAREHOLDERS WITHOUT A MEETING. Any action required by
law or authorized by these by-laws or the Articles of Incorporation of this
corporation or taken or to be taken at any annual or special meeting of
shareholders, or any action which may be taken at any annual or special meeting
of shareholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
ARTICLE II. DIRECTORS
SECTION 1. FUNCTION. All corporate powers shall be exercised by or under
the authority of, and the business and affairs of the corporation shall be
managed under the direction of, the Board of Directors.
SECTION 2. QUALIFICATION. Directors need not be residents of this state or
shareholders of this corporation.
SECTION 3. COMPENSATION. The Board of Directors shall have authority to fix
the compensation of directors.
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SECTION 4. PRESUMPTION OF ASSENT. A director of the corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless he
votes against such action or abstains from voting in respect thereto because of
an asserted conflict of interest.
SECTION 5. NUMBER. This corporation shall have a minimum of 1 director but
no more than 7.
SECTION 6. ELECTION AND TERM. Each person named in the Articles of
Incorporation as a member of the initial Board of Directors shall hold office
until the next shareholder meeting or until his earlier resignation, removal
from office or death. If no shareholder meeting takes place, each director shall
continue to serve until such meeting takes place. At each shareholder the
shareholders shall elect directors to hold office until the next succeeding
shareholder meeting. Each director shall hold office for a term for which he is
elected and until his successor shall have been elected and qualified or until
his earlier resignation, removal from office or death.
SECTION 7. VACANCIES. Any vacancy occuring in the Board of Directors,
including any vacancy created by reason of an increase in the number of
Directors, may be filled by the affirmative vote of a majority of the remaining
directors though less than a quorum of the Board of Directors. A director
elected to fill a vacancy shall hold office only until the next election of
directors by the shareholders.
SECTION 8. REMOVAL OF DIRECTORS. At a meeting of shareholders called
expressly for that purpose, any director of the entire Board of Directors may be
removed, with or without cause, by a vote of the holders of a majority of the
shares then entitled to vote at an election of directors.
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SECTION 9. QUORUM AND VOTING. A majority of the number of directors fixed
by these by-laws shall constitute a quorum for the transaction of business. The
act of a majority of the directors present at a meeting at which is quorum is
present shall be the act of the Board of Directors.
SECTION 10. EXECUTIVE AND OTHER COMMITTEES. The Board of Directors, by
resolution adopted by a majority of the full Board of Directors, may be
designated from amongs its members an executive committee and one or more each
of which, to the extent provided in such resolution shall have and may exercise
all the authority of the Board of Directors, except as is provided by law.
SECTION 11. PLACE OF MEETING. Regular and special meetings of the Board of
Directors shall be held at the principal place of business of the corporation or
as otherwise determined by the Directors.
SECTION 12. TIME, NOTICE AND CALL OF MEETINGS. Regular meetings of the
Board of Directors shall be held without notice on the first Monday of the
calendar month two (2) months following the end of the corporation's fiscal, or
if the said first Monday is a legal holiday, then on the next business day.
Written notice of the time and place of special meetings of the Board of
Directors shall be given to each director by either personal delivery, telegram,
cablegram at least three (3) days before the meeting or by notice mailed to the
director at least 3 days before the meeting.
Notice of a meeting of the Board of Directors need not be given to any
director who signs a waiver of notice either before or after the meeting.
Attendance of a director at a meeting shall constitute a waiver of notice of
such meeting and waiver of any and all objections to the place of the meeting,
the time of the meeting, or the manner in which it bad been called or convened,
except when a director states, at the beginning of the meeting, any objection to
the transaction of business because the meeting is not lawfully called or
convened.
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Neither the business to be transacted at, nor the purpose, of any regular
or special meeting of the Board of Directors need be specified in the notice of
waiver of notice of such meeting. A majority of the directors present, whether
or not a quorum exists, may adjourn any meeting of the Board of Directors to
another time and place. Notice of any such adjourned meeting shall be given to
the directors who were not present at the time of the adjournment, and unless
the time and place of adjourned meeting are announced at the time of the
adjournment, to the other directors. Meetings of the Board of Directors may be
called by the chairman of the board, by the president of the corporation or by
any two directors.
Members of the Board of Directors may participate in a meeting of such
board by means of a conference telephone of similar communications equipment by
means of which all persons participating in the meeting can hear each other at
the same time. Participation by such means constitutes presence in person at a
meeting.
SECTION 13. ACTION WITHOUT A MEETING. Any action, required to be taken at a
meeting of the Board of Directors, or any action which may be taken at a meeting
of the Board of Directors or a committee thereof, may be taken without a meeting
if a consent in writing, setting forth the action so to be taken, is signed by
such number of the directors, or such number of the members of the committee, as
the case may be, as would constitute the requisite majority thereof for the
taking of such actions, is filed in the minutes of the proceedings of the board
or of the committee. Such actions shall then be deemed taken with the same force
and effect as though taken at a meeting of such board or committee whereas all
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members were present and voting throughout and those who signed such action
shall have voted in the affirmative and all others shall have voted in the
negative. For informational purposes, a copy of such signed actions shall be
mailed to all members of the board or committee who did not sign said action,
provided however, that the failure to mail said notices shall in no way
prejudice the actions of the board or committee.
ARTICLE III. OFFICERS
SECTION 1. OFFICERS. The officers of this corporation shall consist of a
president, a secretary and a treasurer, each of whom shall be elected by the
Board of Directors. Such other officers and assistant officers and agents as may
be deemed necessary may be elected or appointed by the Board of Directors from
time to time. Any two or more offices may be held by the same person.
SECTION 2. DUTIES. The officers of this corporation shall have the
following duties:
The President shall be the chief executive officer of the corporation,
shall have general and active management of the business and affairs of the
corporation subject to the directions of the Board of Directors, and shall
preside at all meetings of the shareholders and Board of Directors.
The Secretary shall have custody of, and maintain, all of the
corporate records except the financial records, shall record the minutes of all
meetings of the shareholders and Board of Directors, send all notices of all
meetings and perform such other duties as may be prescribed by the Board of
Directors or the President.
The Treasurer shall have custody of all corporate funds and financial
records, shall keep full and accurate accounts of receipts and disbursements and
render accounts thereof at the annual meeting of shareholders and whenever else
required by the Board of Directors or the President, and shall perform such
other duties as may be prescribed by the Board of Directors or the President.
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SECTION 3. REMOVAL OF OFFICERS. An officer or agent elected or appointed by
the Board of Directors may be removed by the board whenever in its judgment the
best of interests of the corporation will be served thereby. Any vacancy in any
office may be filed by the Board of Directors.
ARTICLE IV. STOCK CERTIFICATES
SECTION 1. ISSUANCE. Every holder of shares in this corporation shall be
entitled to have a certificate representing all shares to which he is entitled.
No certificate shall be issued for any share until such share is fully paid.
SECTION 2. FORM. Certificates representing shares in this corporation shall
be signed by the President or Vice President and the Secretary or an Assistant
Secretary and may be sealed with the seal of this corporation or facsimile
thereof.
SECTION 3. TRANSFER OF STOCK. The corporation shall register a stock
certificate presented to it for transfer if the certificate is properly endorsed
by the holder of record or by his duly authorized attorney.
SECTION 4. LOST, STOLEN OR DESTROYED CERTIFICATES. If the shareholder shall
claim to have lost or destroyed a certificate of shares issued by the
corporation, a new certificate shall be issued upon the making of an affidavit
of that fact by the person claiming the certificate of stock to be lost, stolen
or destroyed, and, at the discretion of the Board of Directors, upon the deposit
of a bond or other indemnity in such amount and with such sureties, if any, as
the board may reasonably require.
8
<PAGE>
ARTICLE V. BOOKS AND RECORDS
SECTION 1. BOOKS AND RECORDS. This corporation shall keep correct and
complete books and records of account and shall keep minutes of the proceedings
of its shareholders, Board of Directors and committee of directors.
This corporation shall keep at its registered office, or principal place of
business a record of its shareholders, giving the names and addresses of all
shareholders and the number of shares held by each.
Any books, records and minutes may be in written form or in any other form
capable of being converted into written form with a reasonable time.
SECTION 3. SHAREHOLDERS' INSPECTION RIGHTS. Any person who shall have been
a holder of record of shares of voting certificates therefor at least six months
immediately preceding his demand or shall be the holder of record of, or the
holder of record of voting trust certificates for, at least five percent of the
outstanding shares of the corporation, upon written demand stating the purpose
thereof, shall have the right to examine, in person or by agent or attorney, at
any reasonable time or times, for any proper purpose its relevant books and
records of accounts, minutes and records of shareholders and to make extracts
therefrom.
SECTION 3. FINANCIAL INFORMATION. Not later than four months after the
close of each fiscal year, this corporation shall prepare a balance sheet
showing reasonable detail the financial condition of the corporation as of the
close of its fiscal year, and a profit and loss statement showing the results of
the operations of the corporation during the fiscal year.
Upon the written request of any shareholder or holder of voting trust
certificates for shares of the corporation, the corporation shall mail to each
shareholder or holder of voting trust certificates a copy of the most recent
9
<PAGE>
such balance sheet and profit and loss statement. The balance sheets and profit
and loss statements shall be filed in the registered office of the corporation
in this state, shall be kept for at least five years, and shall be subject to
inspection during business hours by any shareholder or holder of voting trust
certificates, in person or by agent.
ARTICLE VI. DIVIDENDS
The Board of Directors of this corporation may, from time to time, declare
and the corporation may pay dividends on its shares in cash, property or its own
shares, except when the corporation is insolvent or when the payment thereof
would render the corporation insolvent subject to the provisions of the Florida
Statutes.
ARTICLE VII. CORPORATE SEAL
The Board of Directors shall provided a corporate seal which shall be in
circular form.
ARTICLE VIII. AMENDMENT
These by-laws may be altered, amended or repeated, and new by-laws may be
adopted by the majority vote of the directors of the corporation.
10
PROMISSORY NOTE
(Business Purpose)
To Evidence a Renewal of a Loan from
UNITED TEXAS BANK
1. DATE AND PARTIES. The date of this Promissory Note (Note) is September 16,
1998. This Note evidences a loan which includes all extensions, renewals,
modifications and substitutions (Loan). The parties to this Note and Loan
are:
BORROWER:
SELMAN SYSTEMS, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TEXAS 75240
Tax I.D. # 75-2461618
FRULLATI CAFE DFW 2E, INC.
a TEXAS corporation.
5720 LBJ FREEWAY, SUITE 370
DALLAS, TX 75240
Tax I.D. # 75-2662773
FRULLATI CAFE DFW 3E50, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TX 75240
Tax I.D. # 73-266776
FRULLATI CAFE DFW 3E07, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TX 75240
Tax I.D. # 75-2662775
BANK:
UNITED TEXAS BANK
a TEXAS banking corporation
12222 MERIT DRIVE, SUITE 100
P.O. Box 515529
DALLAS, TEXAS 75251-6529
Tax I.D. # 75-2008275
2. BACKGROUND. Borrower executed a promissory note payable to the order of
Bank dated August 7, 1997, (Note) evidencing a loan (Loan) which Note is
further described as Note number 31380 in the principal amount of
$576,000.00. Borrower has requested that this Note be renewed.
3. PROMISE TO PAY. For value received, Borrower promises to pay to Bank's
order at its office at the above address, or such other place as Bank may
designate, the sum of $576,000.00 (Principal) plus Interest from September
16,1998, on the unpaid principal balance at the rate of 10% per annum
(Contact Rate) until this Note matures or the obligation is accelerated.
Alter maturity or acceleration, the unpaid principal balance shall bear
interest at the Maximum Lawful Interest (with is hereafter defined) until
this Note is paid in full Also, it Borrower falls to pay a scheduled
installment payment when due the unpaid installment balance shall bear
interest at the Maximum Lawful Interest until paid in full. The Loan and
this Note are limited to the maximum lawful amount of interest (Maximum
Lawful Interest) permitted under federal and state laws. The Maximum Lawful
Interest shall equal the quarterly ceiling rate as computed from time to
time by the Texas Consumer Credit Commissioner, the then maximum
nonusurious interest rate in Texas applicable to this Loan, or the maximum
interest rate punted under federal law, whichever is greatest
Notwithstanding the rate of interest "expressly" stated above, borrower
agrees that it Borrower pays any fees or expenses In connection with this
Loan to Bank, either now or in the future, and if such lees or expenses are
deemed to be interest under the law, the maximum nonusurious Interest rate
for this loan shall equal the Maximum Lawful Interest if the Interest
accrued and collected exceeds the Maximum Lawful Interest as of the time of
collection, such excess chat be applied to reduce the principal amount
outstanding, unless otherwise required by law. If or when no principal
amount is outstanding, any excess Interest shall be refunded to Borrower
according to the actuarial method. Unless otherwise required by law, all
fees and charges, accrued, assessed or collected shall be amortized and
prorated over the full term of the Loan for purposes of determining the
Maximum Lawful Interest. Interest shall be computed on the basis of a
360-day year and the actual number of days elapsed.
All unpaid principal and accrued Interest are due and payable upon demand.
Until demand In made, principal and accrued Interest are due and payable in
60 equal monthly payments of $12,278.41 on the 16th day of each month,
beginning October 16, 1998, or the day following if the payment day is a
holiday or is a non-business day for Bank. Unless paid prior to maturity or
demand is made, all other unpaid principal, accrued Interest, costs and
expenses are due and payable on September 16, 2003. which is the date of
maturity. These payment amounts are based upon timely payment of each
installment. All amounts shall be paid in legal U.S. currency. Any payment
made with a check will constitute payment only when collected.
4. EFFECT OF PREPAYMENT. Borrow may prepay this Lean in full, subject to any
prepayment penalty or minimum charge as agreed to below. However, no
partial prepayment shall excuse or defer Borrower's subsequent payments or
entitle Borrow to a release of any collateral. Interest will cease to
accrue on the amounts prepaid on the day actually credited by Bank.
<PAGE>
5. RIGHT TO PREPAY. Borrower may prepay this Note in full or in part at any
lime without penalty.
6. RETURNED CHECK CHARGE. To the extent not prohibited by law, Borrower agrees
to pay Bank $25.00 for each check presented for payment and dishonored
because of insufficient funds or no account If unpaid, such charge will be
added to the unpaid Principal, but no interest will accrue on such charge
during the term of this Note.
7. EVENTS OF DEFAULT. Borrower shall be in default upon the occurrence of any
of the following events, circumstances or conditions (Events of Default):
A. Failure by any party obligated on this Note or any other obligations
Borrower has with Bank to make payment when due; or
B. A default or breach by Borrower or any co-signer, endorser, surety,
or guarantor under any of the terms of this Note, any construction
loan agreement or other loan agreement, any security agreement
mortgage, deed to secure debt, deed of trust, trust deed, or any other
document or instrument evidencing, guarantying, securing or otherwise
relating to this Note or any other obligations Borrower has with Bank;
or
C. The making or furnishing of any verbal' or written representation,
statement or warranty to Bank which is or becomes false or incorrect
in any material respect by or on behalf of Borrower, or any one of
them, or any co-signer, endorser, surety or guarantor of this Note or
any other obligations Borrower has with Bank; or
D. Failure to obtain or maintain the insurance coverages required by
Bank, or insurance as is customary and proper for any collateral (as
herein defined); or
E. The death, dissolution or insolvency of, the appointment of a receiver
by or on behalf of, the assignment for the benefit of creditors by or
on behalf of, the voluntary or involuntary termination of existence
by, or the commencement of any proceeding under any present or future
federal or state insolvency, bankruptcy, reorganization, composition
or debtor relief law by or against Borrower, or any one of them, or
any co-signer, endorser, surety or guarantor of this Note or any other
obligations Borrower has with Bank; or
F. Failure to pay or provide proof of payment of any tax, assessment,
rent, insurance premium, escrow or escrow deficiency on or before its
due date; or
G. A material adverse change in Borrowers business, including ownership,
management, and financial conditions, which in Bank's opinion, impairs
any collateral or repayment of the Obligations; or
H. A transfer of a substantial part of Borrowers money or property.
8. REMEDIES ON DEFAULT. On or after the occurrence of an Event of Default, at
the option of Bank, all or any part of the Principal and accrued interest
on this Note, the Loan and, all other obligations which Borrower owes Bank
shall become immediately due and payable without notice or demand. Bank may
exercise all rights and remedies not inconsistent with Borrowers rights
under applicable law, equity, this Note, any mortgage, deed of trust or
similar instrument and any other security, loan, guaranty or surety
agreements pertaining to this Note and all other obligations of Borrower to
Bank. Bank is entitled to all rights and remedies provided at law or equity
whether or not expressly stated in this Note. By choosing any remedy, Bank
does not waive its right to an immediate use of any other remedy if the
event of default continues or occurs again.
9. SET-OFF. Borrower agrees that Bank may exercise Bank's right of set-off to
pay any or all of the outstanding Principal and accrued interest, costs and
expenses, attorneys' fees, and advances due and owing on this Note against
any obligation Bank may have, now or hereafter, to pay money, securities or
other property to Borrower. This includes, without limitation:
A. any deposit account balance, securities account balance or certificate
of deposit balance Borrower has with Bank whether general, special,
time, savings or checking;
B. any money owing to Borrower on an item presented to Bank or in Bank's
possession for collection or exchange; and
C. any repurchase agreement or any other non-deposit obligation or
credit in Borrowers favor.
If any such money, securities or other property is also owned by some other
person who has not agreed to pay this Note (such as another depositor on a
joint account) Bank's right of set-off will extend to the amount which
could be withdrawn or paid directly to Borrower on Borrowers request,
endorsement or instruction alone. In addition, where Borrower may obtain
payment from Bank only with the endorsement or consent of someone who has
not agreed to pay this Note, Bank's right of set-off will extend to
Borrowers interest in the obligation. Bank's right of set-off will not
apply to an account or other obligation if it clearly appears that
Borrowers rights in the obligation are solely as a fiduciary for another,
or to an account, which by its nature and applicable law (for example an
IRA or other tax-deferred retirement account), must be exempt from the
claims of creditors. Borrower hereby appoints Bank as Borrowers
attorney-in-fact and authorizes Bank to redeem or obtain payment on any
certificate of deposit in which Borrower has an interest in order to
exercise Bank's right of set-off. Such authorization applies to any
certificate of deposit even if not matured. Borrower further authorizes
Bank to withhold any early withdrawal penalty without liability in the
event such penalty is applicable as a result of Bank's set-off against a
certificate of deposit prior to its maturity.
Bank's right of set-off may be exercised:
A. without prior demand or notice;
B. without regard to the existence or value of any Collateral securing
this Note; and
C. without regard to the number or creditworthiness of any other persons
who have agreed to pay this Note.
Bank will not be liable for dishonor .of a check or other request for
payment where there are insufficient funds in the account (or other
obligation) to pay such request because of Bank's exercise of Bank's right
of set-off. Borrower agrees to indemnify and hold Bank harmless from any
person's claims and the costs and expenses, including without limitation,
attorneys' fees, incurred as a result of such claims or arising as the
result of Bank's exercise of Bank's right of set-off.
10. COLLECTION EXPENSES. On or after an Event of Default, and to the extent not
prohibited by law, Borrower agrees to pay upon demand all court costs;
attorneys' fees assessed by a court; lawful fees for filing, recording, or
releasing in any public office any security for a loan; the reasonable
costs actually expended for repossessing, storing, preparing for sale, or
selling any security; or fees for noting a lien on or transferring a
certificate of title to any motor vehicle offered as security for the loan,
if applicable. Any such payments or advances made or expenses incurred by
Bank are secured by the Collateral Borrower has granted Bank.
11. ATTORNEYS' FEES. In the event of default and to the extent not prohibited
by law, Borrower agrees to pay reasonable attorneys' fees assessed by a
court, including without limitation any court costs. Any such fees and
expenses shall be added to the principal amount of this Note and shall
accrue interest at the same rate as this Note and shall be secured by the
Collateral.
12. YEAR 2000 COMPLIANCE. As of the date of this Note, Borrower has assessed
the risk of Year 2000 noncompliance and has formulated, approved, and
implemented a comprehensive business plan (Year 2000 Plan) to meet "Year
2000 requirements." "Year 2000 requirements" include analyzing,
programming, and testing all of Borrowers information technology systems to
accurately process date and time data, including, but not limited to,
calculating, comparing, and sequencing functions. `Year 2000 requirements"
apply to all systems or processes that directly or indirectly affect
<PAGE>
Borrower's business, such as accounting and processing procedures, as well
as basic electronic devices that are necessary to facility management, such
as security systems, elevators, and telephones. Borrower's Year 2000 Plan
includes an allocation of resources toward meeting Year 2000 requirements,
an inventory of all affected systems, processes to assess and prepare for
the Interaction of Borrowers systems with external systems, periodic
testing and evaluation of progress under Borrower's Year 2000 Plan, and
contingency arrangements for Year 2000 failure, either by Borrower or
Borrowers partners, affiliates, vendors, or customers.
Borrower will take all measures necessary to fulfill the requirements of
Borrowers Year 2000 Plan and meet all Year 2000 requirements as specified
above. Borrower agrees to make Borrowers Year 2000 Plan available to Bank,
if requested, and will keep Bank informed of progress made under Borrower's
Year 2000 Plan. Borrower will immediately notify Bank of any actual or
anticipated delays in meeting dates designated in Borrower's Year 2000 Plan
or failure to accomplish any objectives of Borrower's Year 2000 Plan.
Borrower will allow Bank, or a third party Bank designate, reasonable
access to Borrower's information technology systems for the purpose of
determining progress made under Borrower's Year 2000 Plan. Borrower agrees
that Bank has no responsibility for managing, advising, or executing any of
Borrower's efforts to comply with Year 2000 requirements or Borrower's Year
2000 Plan.
13. NO DUTY BY BANK. Bank is under no duty to preserve or protect any
Collateral until Bank is in actual, or constructive, possession of the
Collateral. For purposes of this paragraph, Bank shall only be considered
to be in "actual" possession of the Collateral when Bank has physical,
immediate and exclusive control over the Collateral and has affirmatively
accepted such control. Bank shall only be considered to be in
"constructive" possession of the Collateral when Bank has both the power
and the intent to exercise control over the Collateral.
14. WAIVER AND CONSENT BY BORROWER AND OTHER SIGNERS. Regarding this Note, to
the extent not prohibited by law, Borrower and any other signers:
A. waive notice of dishonor, notice of intent to accelerate and notice of
acceleration.
B. consent to any renewals and extensions for payment on this Note,
regardless of the number of such renewals or extensions.
C. consent to Bank's release of any borrower, endorser, guarantor,
surety, accommodation maker or any other co-signer.
D. consent to the release, substitution or impairment of any collateral.
E. consent that Borrower, or any Borrower herein, is authorized to modify
the terms of this Note or any instrument securing, guarantying or
relating to this Note.
F. consent to Bank's right of set-off as well as any right of set-off of
any bank participating in the Loan.
G. consent to any and all sales, repurchases and participations of this
Note to any person In any amounts and waive notice of such sales,
repurchases or participations of this Note.
15. SECURITY. This Note is secured by the following type(s) (or items) of
property (Collateral):
EQUIPMENT
GENERAL INTANGIBLES
SECURITIES
LIFE INSURANCE POLICIES
which includes (but is not limited to) the following described property:
LIFE INSURANCE POLICY NO. 61335088, ISSUED BY THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA, ON THE LIFE OF ZIAD S. DALAL, IN
THE FACE AMOUNT OF $750,000.00 AND 4,900 S/S SELMAN SYSTEMS,
INC., CERTIFICATE NO.5, IN THE NAME OF ZIAD S. DALAL
The term "Collateral" further includes, but is not limited to, the
following property, whether now owned or hereafter acquired, and whether or
not held by a bailee for the benefit of the Owner or owners, all:
accessions, accessories, additions, fittings, increases, insurance benefits
and proceeds, parts, products, profits, renewals, rents, replacements,
special tools and substitutions, together with all books and records
pertaining to the Collateral and access to the equipment containing such
books and records including computer stored information and all software
relating thereto, plus all cash and non-cash proceeds and all proceeds of
proceeds arising from the type(s) (items) of property listed above.
16. PAYMENTS APPLIED. All payments, including but not limited to regular
payments or prepayments, received by Bank shall be applied first to accrued
interest and the balance, if any, to Principal except as otherwise required
by law.
17. LOAN PURPOSE. Borrower represents and warrants that the purpose of this
Loan is TO RENEW NOTE #31880 ORIGINALLY USED TO FINANCE INTERIM
CONSTRUCTION OF FOUR NEW FRULLATI LOCATIONS AT DFW AIRPORT.
18. JOINT AND SEVERAL. Borrower, and any one of them, or any other signers
shall be jointly and severally liable under this Note.
19. FINANCIAL STATEMENTS. Until this Note is paid in full, Borrower shall
furnish Bank upon Bank's request and in the event of no request, at least
annually a current financial statement which is certified by Borrower and
Borrower's accountant to be true, complete and accurate.
20. GENERAL PROVISIONS.
A. TIME IS OF THE ESSENCE. Time is of the essence in Borrower's
performance of all duties and obligations imposed by this Note.
B. NO WAIVER BY BANK. Bank's course of dealing, or Bank's forbearance
from, or delay in, the exercise of any of Bank's rights, remedies,
privileges or right to insist upon Borrower's strict performance of
any provisions contained in this Note, or other loan documents, shall
not be construed as a waiver by Bank, unless any such waiver is in
writing and is signed by Bank.
C. AMENDMENT. The provisions contained in this Note may not be amended,
except through a written amendment which is signed by Borrower and
Bank.
D. INTEGRATION CLAUSE. This written Note and all documents executed
concurrently herewith, represent the entire understanding between the
parties as to the Obligations and may not be contradicted by evidence
of prior, contemporaneOus, or subsequent oral agreements of the
parties.
E. FURTHER ASSURANCES. Borrower agrees, upon request of Bank and within
the time Bank specifies, to provide any information, and to execute,
acknowledge, deliver and record or file such further instruments or
documents as may be required by Bank to secure this Note or confirm
any lien.
F. GOVERNING LAW. This Note shall be governed by the laws of the State of
TEXAS, provided that such laws are not otherwise preempted by federal
laws and regulations.
G. FORUM AND VENUE. In the event of litigation pertaining to this Note,
the exclusive forum, venue and place of jurisdiction shall be in the
State of TEXAS, unless otherwise designated in writing by Bank or
otherwise required by law.
H. SUCCESSORS. This Note shall inure to the benefit of and bind the
heirs, personal representatives, successors and assigns of the
parties: provided however, that Borrower may not assign, transfer or
delegate any of the rights or obligations under this Note.
I. NUMBER AND GENDER. Whenever used, the singular shall include the
plural, the plural the singular, and the use of any gender shall be
applicable to all genders.
<PAGE>
J. DEFINITIONS. The terms used in this Note, if not defined herein, shall
have their meanings as defined in the other documents executed
contemporaneously, or In conjunction, with this Note.
K. PARAGRAPH HEADINGS. The headings at the beginning of any paragraph, or
any subparagraph, in this Note are for convenience only and shall not
be dispositive in interpreting or construing this Note.
L. IF HELD UNENFORCEABLE. If any provision of this Note shall be held
unenforceable or void, then such provision to the extent not otherwise
limited by law shall be severable from the remaining provisions and
shall in no way affect the enforceability of the remaining provisions
nor the validity of this Note.
M. CHANGE IN APPLICATION. Borrower will notify Bank in writing prior to
any change in Borrowers name, address, or other application
information.
N. NOTICE. All notices under this Note must be in writing. Any notice
given by Bank to Borrower hereunder will be effective upon personal
delivery or 24 hours after mailing by first class United States mail,
postage prepaid, addressed to Borrower at the address indicated below
Borrower's name on page one of this Note. Any notice given by Borrower
to Bank hereunder will be effective upon receipt by Bank at the
address indicated below Bank's name on page one of this Note. Such
addresses may be changed by written notice to the other party.
0. HOLDER. The term "Bank" shall include any transferee and assignee of
Bank or other holder of this Note.
P. BORROWER DEFINED. The term "Borrower" includes each and every person
signing this Note as a Borrower and any co-signers.
21. ADDITIONAL TERMS. 1. THERE IS NO PRE-PAYMENT PENALTY ON THE INDEBTEDNESS.
WHEN THIS INDEBTEDNESS IS PAID IN FULL ALL LIENS RELATING TO THIS
INDEBTEDNESS WILL BE RELEASED, PROVIDED THAT THE COLLATERAL SECURING THIS
INDEBTEDNESS IS NOT CROSS PLEDGED TO ANY OTHER INDEBTEDNESS AT THIS BANK 2.
IF DEFAULT ON THIS INDEBTEDNESS OCCURS, BORROWERS WILL BE PROVIDED WITH
WRITTEN NOTICE FROM THE BANK AND WILL HAVE FIFTEEN (15) DAYS TO CURE SUCH
DEFAULT PRIOR TO ANY ATTEMPTS BY THE BANK TO FORECLOSE ON ANY COLLATERAL A.
UPON MATURITY AND PAYMENT IN FULL OF THIS INDEBTEDNESS BY BORROWERS, BANK
SHALL FILE, AT BORROWERS EXPENSE, ALL RELEASES OF LIENS AND ANY OTHER
DOCUMENTS REQUIRED TO RELEASE THE COLLATERAL AND ZIAD S. DALAL'S GUARANTY,
WITHIN THIRTY (30) DAYS AFTER MATURITY AND PAYMENT IN FULL OF INDEBTEDNESS.
22. RECEIPT OF COPY. By signing below, Borrower acknowledges that Borrower has
read and received a copy of this Note.
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
THE PARTIES' SIGNATURES BELOW INDICATE AGREEMENT WITH THE STATEMENTS
CONTAINED WITHIN THIS BOX.
BORROWER:
SELMAN SYSTEMS, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
-----------------------------
ZIAD S. DALAL, PRESIDENT
(*Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
FRULLATI CAFE DFW 2E, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
-----------------------------
ZIAD S. DALAL, PRESIDENT
(*Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
FRULLATI CAFE DFW 3E50, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
-----------------------------
ZIAD S. DALAL, PRESIDENT
(*Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
FRULLATI CAFE DFW 3E07, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
-----------------------------
ZIAD S. DALAL, PRESIDENT
(*Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
<PAGE>
BANK:
UNITED TEXAS BANK
a TEXAS banking corporation
[Corporate Seal*]
By: /s/ Thomas S. Mello
----------------------------------
THOMAS S. MELLO, PRESIDENT AND CEO
("Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
THIS IS THE LAST PAGE OF A 5 PAGE DOCUMENT. EXHIBITS AND/OR ADDENDA MAY FOLLOW.
<PAGE>
LOAN AGREEMENT
FOR A LOAN FROM
UNITED TEXAS BANK
1. DATE AND PARTIES. The date of this Loan Agreement (Agreement) is August
6,1996, and the parties are the following:
BORROWER:
SELMAN SYSTEMS, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TEXAS 75240
Tax I.D. # 75-2461 618
FRULLATI CAFE DFW 2E, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TX 75240
FRULLATI CAFE DFW SESO, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TX 75240
FRULLATI CAFE DFW 3E07, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TX 75240
BANK:
UNITED TEXAS BANK
a TEXAS banking corporation
12222 MERIT DR., SUITE 100
P.O. Box 515529
DALLAS, TEXAS 75251-5529
Tax I.D. # 75-2008275
2. BACKGROUND. Borrower has applied for a draw loan (Loan) in the principal
amount of $576,000.00. The Loan shall be evidenced by a promissory note,
No. 31880, (Note) dated August 6,1996, and executed by Borrower payable to
the order of Bank and all extensions, renewals, modifications, or
substitutions thereof. There may be other documents (Related Documents)
that secure, guaranty or otherwise relate to the Loan, any collateral
securing the Loan (Collateral), or this Agreement To induce Bank to make
the Loan and as part of the consideration for Bank making the Loan,
Borrower and Bank agree to the following terms, representations, warranties
and covenants, which shall prevail so long as any part of the Loan or any
other obligation of Borrower to Bank remains outstanding or Bank is
obligated to make any advances on the Loan.
3. ADVANCES ON LOAN. The Loan is to be made in one or more advances to
Borrower on or before August 6,1997. At no time shall the outstanding
principal balance of the Loan exceed $576,000.00. Borrower authorizes Bank
to honor any written request for an advance on the Loan from Borrower or
from any one of the following persons: ZIAD S. DALAL Bank may, in its sole
discretion and without liability of any kind, honor any oral request made
by Borrower for an advance on the Loan. Such request constitutes a warranty
by Borrower that the request is in compliance with this Agreement, the Note
and all Related Documents. The written request shall be made on documents
normally required by Bank and shall be accompanied by all documents
normally required by Bank for the particular type of Loan made to Borrower.
Bank's records shall be conclusive evidence as to the amount of advances,
unpaid principal balances and the accrued interest on the Loan. A check or
other charge presented against this account in excess of the balance may be
treated by Bank, at its option, as a request for an advance under this
Agreement Any payment by Bank of any such check or other charge may, at its
option, constitute an advance on the Loan to Borrower. Bank shall have no
duty to make any advances except as expressly stated in the Note.
4. COLLECTION EXPENSES. Borrower shall, upon demand, reimburse Bank for all
fees and expenses paid or Incurred by Bank for the preparation and
recordation of all documentation, the closing, and the enforcement of the
Note, this Agreement or the Related Documents, whether or not a suit is
filed. These fees and expenses include, but are not limited to,
accountants~ fees and other professional fees. All such fees and expenses
shall be additional liabilities of Borrower to Bank as advances under the
Loan and shall be secured by the Collateral securing the Loan.
5. ATTORNEYS' FEES. In the event of default and to the extent not prohibited
by law, Borrower agrees to pay reasonable attorneys fees, including without
limitation any court costs and fees incurred in the collection of, or
foreclosure of, the Ben and any other security interest securing the Note.
Any such fees and expenses shall be added to the principal amount of the
Note and shall accrue interest at the same rate as the Note and shall be
secured by the Collateral.
6. AFFIRMATIVE COVENANTS. Borrower agrees:
A. PERFORMANCE OF LOAN OBLIGATIONS. To make full and timely payment of
all principal and interest obligations, and to comply with the terms
and covenants contained in this Agreement and in the Related
Documents.
B. PRESERVE EXISTENCE. To preserve Borrower's present existence until
such time as Bank consents in writing to any change. Bank's consent to
any such change will not be unreasonably withheld provided Bank can
protect Bank's security interest and provided further Borrower can
provide Bank with sufficient security to assure repayment of the Loan.
C. MAINTENANCE OF PROPERTY. To maintain, preserve and keep Borrower's
properties in good repair, working order and condition, and from time
to time to make all needful and proper repairs, renewals,
replacements, additions, betterments and improvements thereto so that
the efficiency of the properties is fully preserved and maintained at
all times.
D. INSURANCE. To keep and maintain the Collateral insured in full with
companies acceptable to Bank, naming Bank and Borrower on the policy
In accordance with their respective interests, with the loss payable
to Bank. Insurance of the types and in amounts customarily carried by
entities In businesses similar to Borrower's shall be maintained for
the full insurable value, including without limitation, fire, public
liability, property damage, business interruption, rent loss
Insurance, and worker's compensation Insurance. Certified copies of
all such insurance policies or certificates of insurance shall be
delivered upon demand to Bank.
E. LOSS OR DEPRECIATION OF COLLATERAL To immediately notify Bank of any
material casualty, loss or depreciation to the Collateral or to any
other property of Borrower which affects Borrower's business.
<PAGE>
F. LIFE INSURANCE. To maintain all life insurance policies assigned to
Bank as Collateral.
G. INSPECTION. To permit Bank, or its agents, to enter upon any of
Borrower's premises and any location where the Collateral is located
at all reasonable times for the following purposes, without
limitation: (1) to inspect, audit, check, review and obtain copies
from Borrower's books, records, journals, orders, receipts, and any
correspondence and other business related data; (2) to make
verifications concerning the Collateral, proceeds of the Collateral
and proceeds of proceeds and their use and disposition; and (3) to
discuss the affairs, finances and business of Borrower with any person
or entity who claims to be a creditor of Borrower.
H. BOOKS AND RECORDS. To maintain accurate and complete books and records
regarding its operations and to permit Bank, or its agents, to examine
and copy all or any part of them.
I. FINANCIAL STATEMENTS. To promptly provide Bank with all financial
statements which Bank may request concerning the Borrower and all
Guarantors, initially and from time to time, within 30 days of the
request(s), or if no request is made, at least every 12 months from
the date of this Agreement, including business and personal financial
statements; such statements shall be reasonably current, accurate,
complete, in a form acceptable to Bank and shall be based on generally
accepted accounting principles (GAAP) then in effect
J. FURNISH DOCUMENTS. To promptly furnish Bank such other documents,
instruments, and information as Bank may reasonably request
K. TAXES AND LIENS. To file all federal, state and other tax and similar
returns and to pay all taxes or liens assessed against Borrower or
Borrowers properties, whether. due now or hereafter, including but not
limited to sales taxes, use taxes, personal property taxes,
documentary stamp taxes, recordation taxes, franchise taxes, income
taxes, withholding taxes, FICA taxes and unemployment taxes when due,
and to promptly furnish Bank with written evidence of such payments.
L. LICENSES, PERMITS, BONDS AND OTHER RIGHTS. To acquire and maintain in
full force and effect all licenses, permits, bonds and other documents
or certificates reasonably necessary or required to engage in and to
carry on its business or venture as contemplated by Borrower and Bank.
M. NOTICE TO BANK BY BORROWER. To promptly notify Bank of the occurrence
of any Event of Default under the terms of this Agreement and of the
occurrence of any default against Borrower by third parties which
materially affects Borrower's business.
N. CERTIFICATION OF NO DEFAULT. To furnish Bank a written certification
upon Bank's request, or in event of no request at least quarterly,
that there exists no Event of Default under the terms of this
Agreement or under the Related Documents, and that there exists no
other action, condition or event which with the giving of notice or
lapse of time or both would constitute an Event of Default If such a
condition does exist, the certificate must accurately and fully
disclose the extent and nature of such condition and state what action
is being taken to correct it.
0. ADDITIONAL AFFIRMATIVE COVENANT. ADVANCES ON LOAN WILL BE LIMITED TO
80% OF EQUIPMENT COST BASED. ON INVOICES AND 80% OF IMPROVEMENT COST
BASED ON INVOICES.
7. NEGATIVE COVENANTS. Without Bank's prior written consent, which shall not
be unreasonably withheld, Borrower agrees:
A. NO CHANGE IN STRUCTURE. Not to change the structure or ownership of
Borrowers entity or business venture, which includes a change in the
management, shareholders, directors, or officers of any corporate
borrower and to notify Bank in writing of any change in name or
management of Borrower.
B. NOT TO FORM. Not to form, organize or participate In the organization
of any other corporation, partnership or other entity, or in the
creation of any other business entity or merge, consolidate with or
info any other corporation, partnership or other entity.
C. PAY NO DIVIDENDS. Not to pay or declare any dividends (including but
not limited to any cash dividend or stock dividend) or similar
distribution.
D. NO CHANGE IN CAPITAL STRUCTURE OR STOCK Not to release, redeem,
retire, purchase or otherwise acquire, directly or Indirectly, any of
its capital stock or other equity security or partnership Interest, or
make any change in Borrower's capital structure except to the extent
required by the terms of any agreements signed prior to this
Agreement.
E. DEALINGS WITH INSIDERS. Not to purchase, acquire or lease any property
or services from, or sell, provide or lease any property or service
to, or otherwise deal with, any insIders. The term "Insiders" includes
but is not limited to any officer, employee, stockholder, director,
partner, or any immediate family member thereof, or any business
entity who owns a controlling interest in Borrower.
F. LOANS TO INSIDERS. Not to lend or advance or permit to be outstanding
any loans or advances to any of its "Insiders" which term is defined
above.
G. INCUR NO OTHER LIABILITIES. Not to incur, assume or otherwise permit
any liability to exist for money borrowed, except from Bank, or incur,
assume or otherwise permit any other debts or obligations outside of
the ordinary course of business, or loan money to, or guaranty or
otherwise become In any way liable for the debt or obligations of any
other person or entity.
H. USE OF LOAN PROCEEDS. Not to permit the loan proceeds to be used to
purchase, carry, reduce, or retire any loan incurred to purchase or
carry any margin stock.
I. DISPOSE OF NO ASSETS. Not to sell or dispose of or make any other
distribution of any of Borrower's assets, properties or business other
than as permitted in the Related Documents.
J. NO OTHER LIENS OR ENCUMBRANCES. Not to permit or suffer any lien or
encumbrance upon any of Borrower's properties, except to Bank, and
except for any valid purchase money security Interests, or any other
liens specifically agreed to by Bank in writing.
8. REPRESENTATIONS. Borrower represents, guaranties and warrants to Bank that
A. AUTHORITY TO DO BUSINESS. Borrower is authorized to do business in
this state and in each state where it may be doing business and has
full power and authority to execute and deliver the Note and enter
into this Agreement and the Related Documents.
B. CORPORATE STATUS. Borrower is duly incorporated and validly existing
and in good standing in the jurisdiction of Borrower's incorporation
and where Borrower conducts Borrower's business.
C. AUTHORITY TO ENTER AGREEMENTS. This Agreement the Note, and the
Related Documents will constitute legal, valid, and binding agreements
and are enforceable against Borrower and all other parties thereto.
D. TITLE AND POSSESSION. Borrower has good and marketable title to its
assets, and enjoys peaceful and undisturbed possession under all
leases under which Borrower now operates.
E. LABOR LAWS. Borrower is complying with all applicable federal or state
labor laws, including but not limited to the Federal Fair Labor
Standards Act
F. TAX LAWS. Borrower has complied with all federal, state and local tax
laws, licensing laws and permit laws.
G. OTHER LAWS. Borrower is not in violation of other federal laws or
state laws, including but not limited to, ERISA (Employee Retirement
Income Security Act) or RICO (Racketeer Influenced and Corrupt
Organizations).
H. COMPLIANCE. Borrower is in compliance with all laws, orders,
judgments, decrees and regulations (Laws) of all federal, foreign,
state and local governmental authorities relating to the business
operations and the assets of Borrower, the violation of which would
have an adverse effect on the value of or Bank's interest in any of
the Collateral or would have a materially adverse effect on Borrower's
financial condition business or conduct of its business.
I. ADVERSE AGREEMENTS. Borrower is not a party to, nor is Borrower bound
by, any agreement that materially or adversely affects Borrower's
business, properties, assets or operations.
J. OTHER CLAIMS. There are no outstanding claims or rights that would
conflict with the execution, delivery or performance by Borrower of
<PAGE>
the terms of the Note, this Agreement or the Related Documents or that
would cause a lien to be placed on the Collateral given for this Loan,
including proceeds of the Collateral and proceeds of proceeds, except
those, if any, disclosed to and agreed to by Bank in writing prior to
the execution of this Agreement
K. ACCURATE STATEMENTS. All financial statements, books, records,
documents, and instruments submitted by Borrower to Bank in connection
with the Loan are accurate and complete, and there has been no
material adverse change in the financial condition of Borrower as
shown by such statements, books, records, documents or instruments.
L. SOLVENCY. Borrower is solvent, able to pay its debts as they mature,
and has sufficient capital to carry on its business and all businesses
in which Borrower is or will be engaged. Borrower's total assets, at a
present, fair market value, are greater than the amount of Borrower's
total obligations. Borrower will not be rendered insolvent by the
execution of the Note, this Agreement or Related Documents or by any
other transactions.
M. LITIGATION. There are no proceedings pending or threatened before any
court or administrative agency which will or could have a materially
adverse affect upon the financial condition or operations of Borrower.
N. SURVIVAL OF WARRANTIES. All representations, warranties, statements,
guaranties and covenants contained in the Note, this Agreement or any
Related Documents shall survive the execution of such documents.
9. EVENTS OF DEFAULT. Borrower shall be in default upon the occurrence of any
of the following events, circumstances or conditions (Events of Default):
A. Failure by any party obligated on the Loan to make payment when due;
or
B. A default or breach by Borrower or any co-signer, endorser, surety, or
guarantor under any of the terms of this Agreement, the Note, any
construction loan agreement or other loan agreement, any security
agreement mortgage, deed to secure debt, deed of trust, trust deed, or
any other document or instrument evidencing, guarantying, securing or
otherwise relating to the Loan; or
C. The making or furnishing of any verbal or written representation,
statement or warranty to Bank which is or becomes false or incorrect
in any material respect by or on behalf of Borrower, owner, or any one
of them, or any co-signer, endorser, surety or guarantor of the Loan;
or
D. Failure to obtain or maintain the insurance coverages required by
Bank, or insurance as is customary and proper for the Collateral (as
herein defined); or
E. The death, dissolution or insolvency of, the appointment of a receiver
by or on behalf of, the assignment for the benefit of creditors by or
on behalf of, the voluntary or involuntary termination of existence
by, or the commencement of any proceeding under any present or future
federal or state insolvency, bankruptcy, reorganization, composition
or debtor relief law by or against Borrower, owner, or any one of
them, or any co-signer, endorser, surety or guarantor of the Loan; or
F. A good faith belief by Bank at any time that Bank is Insecure with
respect to Borrower, or any co-signer, endorser, surety or guarantor,
that the prospect of any payment is impaired or that the Collateral
(as herein defined) is impaired; or
G. Failure to pay or provide proof of payment of any tax, assessment rent
insurance premium, escrow or escrow deficiency on or before its due
date; or
H. A material adverse change in Borrower's business, including ownership,
management, and financial conditions, which in Bank's opinion, impairs
the Collateral or repayment of the Obligations; or
I. A transfer of a substantial part of Borrower's money or property.
10. REMEDIES ON DEFAULT. Upon the occurrence of any Event of Default Bank, at
its option, may declare the Loan immediately due and payable as well as
Invoke any or all other remedies provided in the Note, any Related Document
or by law. Bank is entitled to all rights and remedies provided at law or
equity whether or not expressly stated in this Agreement By choosing any
remedy, Bank does not waive its right to an immediate use of any other
remedy if the event of default continues or occurs again.
11. NOTICE. All notices, requests, and demands under this Agreement shall be
given by regular United States mail, postage prepaid, or personal delivery,
at the address set forth above or such other address as the parties may
designate in writing.
12. GENERAL PROVISIONS.
A. TIME IS OF THE ESSENCE. TIme is of the essence In Borrower's
performance of all duties and obligations imposed by this Agreement
B. NO WAIVER BY BANK Bank's course of dealing, or Bank's forbearance
from, or delay In, the exercise of any of Bank's rights, remedies,
privileges or right to insist upon Borrower's strict performance of
any provisions contained In this Agreement, or other loan documents,
shall not be construed as a waiver by Bank, unless any such waiver is
in writing and is signed by Bank.
C. AMENDMENT. The provisions contained in this Agreement may not be
amended, except through a written amendment which is signed by
Borrower and Bank.
D. INTEGRATION CLAUSE. This written Agreement and all documents executed
concurrently herewith, represent the entire understanding between the
parties as to the Obligations and may not be contradicted by evidence
of prior, contemporaneous, or subsequent oral agreements of the
parties.
E. FURTHER ASSURANCES. Borrower agrees, upon request of Bank and within
the time Bank specifies, to provide any information, and to execute,
acknowledge, deliver and record or file such further instruments or
documents as may be required by Bank to secure the Note or confirm any
lien.
F. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of TEXAS, provided that such laws are not otherwise preempted by
federal laws and regulations.
G. FORUM AND VENUE. In the event of litigation pertaining to this
Agreement, the exclusive forum, venue and place of jurisdiction shall
be in the State of TEXAS, unless otherwise designated in writing by
Bank or otherwise required by law.
H. SUCCESSORS. This Agreement shall inure to the benefit of and bind the
heirs, personal representatives, successors and assigns of the
parties; provided however, that Borrower may not assign, transfer or
delegate any of the rights or obligations under this Agreement
I. NUMBER AND GENDER. Whenever used, the singular shall include the
plural, the plural the singular, and the use of any gender shall be
applicable to all genders.
J. DEFINITIONS. The terms used in this Agreement, if not defined herein,
shall have their meanings as defined in the other documents executed
contemporaneously, or in conjunction, with this Agreement
K. PARAGRAPH HEADINGS. The headings at the beginning of any paragraph, or
any subparagraph, in this Agreement are for convenience only and shall
not be dispositive in interpreting or construing this Agreement.
<PAGE>
L. IF HELD UNENFORCEABLE. If any provision of this Agreement shall be
held unenforceable or void, then such provision to the extent not
otherwise limited by law shall be severable from the remaining
provisions and shall in no way affect the enforceability of the
remaining provisions nor the validity of this Agreement.
M. CHANGE IN APPLICATION. Borrower will notify Bank in writing prior to
any change in Borrower's name, address, or other application
information.
N. NOTICE. All notices under this Agreement must be in writing. Any
notice given by Bank to Borrower hereunder will be effective upon
personal delivery or 24 hours after mailing by first class United
States mail, postage prepaid, addressed to Borrower at the address
indicated below Borrower's name on page one of this Agreement. Any
notice given by Borrower to Bank hereunder will be effective upon
receipt by Bank at the address indicated below Bank's name on page one
of this Agreement. Such addresses may be changed by written notice to
the other party.
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
THE PARTIES' SIGNATURES BELOW INDICATE AGREEMENT WITH THE STATEMENTS
CONTAINED WITHIN THIS BOX.
BORROWER:
SELMAN SYSTEMS, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
-----------------------------
ZIAD S. DALAL, PRESIDENT
(*Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
FRULLATI CAFE DFW 2E, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
-----------------------------
ZIAD S. DALAL, PRESIDENT
(*Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
FRULLATI CAFE DFW 3E50, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
-----------------------------
ZIAD S. DALAL, PRESIDENT
(*Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
FRULLATI CAFE DFW 3E07, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
-----------------------------
ZIAD S. DALAL, PRESIDENT
(*Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
BANK:
UNITED TEXAS BANK
a TEXAS banking corporation
[Corporate Seal*]
By: /s/ Casey R. Hozer
----------------------------------
CASEY HOZER, SENIOR VICE PRESIDENT
("Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
THIS IS THE LAST PAGE OF A 4 PAGE DOCUMENT. EXHIBITS AND/OR ADDENDA MAY FOLLOW.
<PAGE>
SECURITY AGREEMENT
AS SECURITY FOR A LOAN
FROM UNITED TEXAS BANK
1. DATE AND PARTIES. The date of this Security Agreement (Agreement) is August
6, 1998, and the parties (along with the correct mailing addresses) are the
following:
OWNER:
FRULLATI, COLLIN CREEK, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TEXAS 75240
Tax I.D. # 75-2283211
FRULLATI HULEN, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TEXAS 75240
Tax I.D. # 75-2544236
FRULLATI - MCD, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TEXAS 75240
Tax I.D. # 75-2342299
FRULLATI NHM, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TEXAS 75240
Tax I.D. # 75-2441283
FRULLATI TOWN EAST, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TEXAS 75240
Tax I.D. # 75-2420848
SELMAN SYSTEMS, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TEXAS 75240
Tax I.D. # 75-2461 618
FRULLATI CAFE DFW 2E, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TX 75240
FRULLATI CAFE DFW SESO, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TX 75240
FRULLATI CAFE DFW 3E07, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TX 75240
(REFER TO THE ADDENDUM WHICH IS ATTACHED AND INCORPORATED HEREIN
FOR ADDITIONAL PARTIES AND THEIR RESPECTiVE SIGNATURES).
BANK:
UNITED TEXAS BANK
a TEXAS banking corporation
12222 MERIT DR., SUITE 100
P.O. Box 515529
DALLAS, TEXAS 75251-5529
Tax I.D. # 75-2008275
2. OBLIGATIONS DEFINED. The term "Obligations" is defined as and includes the
following:
A. A promissory note, No. 31880, (Note) dated August 6,1996, and executed
by SELMAN SYSTEMS, INC., FRULLATI CAFE DFW 2E, INC., FRULLATI CAFE
DFW 3E50, INC. and FRULLATI CAFE DFW 3E07, INC. (Borrower) payable to
the order of Bank, which evidences a loan (Loan) to Borrower in the
amount of $576,000.00, plus interest and all extensions, renewals,
modifications or substitutions thereof.
B. All future advances by Bank to Borrower, to Owner, to any one of them
or to any one of them and others (and all other obligations referred
to in the subparagraph(s) below, whether or not this Agreement is
specifically referred to in the evidence of indebtedness with regard
to such future and additional indebtedness).
C. All additional sums advanced, and expenses incurred, by Bank for the
purpose of insuring, preserving or otherwise protecting the Collateral
(as herein defined) and its value, and any other sums advanced, and
expenses incurred by Bank pursuant to this Agreement plus interest at
the same rate provided for in the Note computed on a simple interest
method.
<PAGE>
D. All other obligations, now existing or hereafter arising, by Borrower
owing to Bank to the extent the taking of the Collateral (as herein
defined) as security therefor is not prohibited by law, including but
not limited to liabilities for overdrafts, all advances made by Bank
on Borrower's, and/or Owner's, behalf as authorized by this Agreement
and liabilities as guarantor, endorser or surety, of Borrower to Bank,
due or to become due, direct or indirect, absolute or contingent,
primary or secondary, liquidated or unliquidated, or joint, several,
or joint and several.
E. Borrower's performance of the terms in the Note or Loan, Owner's
performance of any terms in this Agreement, and Borrowers and Owner's
performance of any terms in any deed of trust, any trust deed, any
trust indenture, any mortgage, any deed to secure debt, any other
security agreement, any assignment, any construction loan agreement,
any loan agreement, any assignment of beneficial interest any guaranty
agreement or any other agreement which secures, guaranties or
otherwise relates to the Note or Loan.
However, this security interest will not secure another debt if Bank fails
to make any disclosure of the existence of this security interest required
by law for such other debt
3. COLLATERAL To secure the Obligations and to induce Bank to make the Loan to
Borrower and for other valuable consideration, the receipt and sufficiency
of which is acknowledged by Owner, Owner hereby grants, conveys and
transfers to Bank a continuing security interest to secure the Obligations
in the following type(s) (or items) of property (Collateral), together with
any property of a like type or nature, all whether now owned or hereafter
acquired:
EQUIPMENT
GENERAL INTANGIBLES
The term "Collateral" further includes, but is not limited to, the
following property, whether now owned or hereafter acquired, and whether or
not held by a bailee for the benefit of the Owner or owners, all:
accessions, accessories, additions, fittings, increases, insurance benefits
and proceeds, parts, products, profits, renewals, rents, replacements,
special tools and substitutions, together with all books and records
pertaining to the Collateral and access to the equipment containing such
books and records including computer stored information and all software
relating thereto, plus all cash and non-cash proceeds and all proceeds of
proceeds arising from the type(s) (items) of property listed above.
Pertaining to the general intangibles portion of the Collateral, the term
"Collateral" shall include, but not be limited to, instruments and chattel
paper, all goodwill, tax refunds, trademarks, trade names, patents,
copyrights, and all proceeds thereof and proceeds of proceeds thereof.
Pertaining to the equipment portion of the Collateral, the term
"Collateral" shall include, but not be limited to, wherever located, all
furniture, accessions, non-titled vehicles that are not held for resale,
trailers, tools, machinery, equipment, supplies, all proceeds thereof and
proceeds of proceeds thereof
4. LOCATION OF THE COLLATERAL. The location of the Collateral is given for the
purpose of aiding in the identity of the Owner and, only to the extent
necessary, aiding in the identification of the Collateral. It does not In
any way limit the scope of the security interest granted to Bank. Owner
shall notify Bank in writing prior to any change in location of any of the
Collateral. Except as otherwise provided in this Agreement, the Collateral
will be located at: 811 N. CENTRAL EXPRESSWAY, PLANO, TEXAS 75075; 1508 W.
MOCKINGBIRD, DALLAS, TEXAS 75235; 4800 5. HULEN STREET, SPACE 2114, FT.
WORTH, TEXAS 76132; 3864 IRVING MALL, SPACE #183, IRVING, TEXAS 75062; 7777
FOREST LANE, BLDG. A #068, DALLAS, TEXAS 75230; 7624 GRAPEVINE HWY., NORTH
RICHLAND HILLS, TEXAS 76180; 3042 TOWN EAST MALL, MESQUITE, TEXAS 75150;
5323 HARRY HINES #C1-212, DALLAS, TEXAS 75235; 2401 S. STEMMONS,
LEWISVILLE, TEXAS 75067; AND 3200 EAST AIRFIELD DRIVE, DFW AIRPORT, TEXAS
75261. Except as otherwise provided herein, the Collateral shall not be
removed without the prior written consent of Bank, except as required in
the ordinary course of business.
Owner has more than one place of business and Owner's chief executive
office is located at 5720 LBJ FREEWAY, SUITE 370, DALLAS, TEXAS 75240.
5. USE OF THE COLLATERAL Owner represents and warrants that the Collateral
will be used solely (or primarily) for business purposes.
6. OTHER CLAIMS. Except for the security Interest granted in this Agreement
Owner represents, warrants and covenants that Owner is the exclusive owner
of the Collateral which now is and will continue to be free from any liens,
encumbrances, security interests, restrictions, set-offs, adverse claims
and assessments, except as disclosed in writing to Bank, prior to any
advance on the Loan; and
A. Owner has the right and authority to make this Agreement.
B. Owner will defend the Collateral against all claims of all persons
claiming any interest in it.
C. the execution and delivery of this Agreement will not violate any
agreement governing Owner or to which Owner is a party.
D. this Agreement relating to the Collateral is enforceable In accordance
with its terms, is genuine and complies with laws concerning form,
content and manner of preparation and execution, and all persons
obligated on this Agreement have authority and capacity to contract
and are bound as they appear to be.
7. TRANSFER OF COLLATERAL. Owner will not sell, offer to sell, lease, or
otherwise transfer or encumber the Collateral or any interest in the
Collateral without the prior written consent of Bank which Owner agrees may
be reasonably withheld without regard to the creditworthiness of any buyer
or transferee. Owner agrees further that Owner will not sell, offer to
sell, lease, or otherwise encumber the Collateral or any interest in the
Collateral, to insiders, principals, competitors, and dealers in the same
line of goods or business, without prior written consent of the Bank. Owner
will not permit the Collateral to be the subject of any court order
affecting Owner's rights to the Collateral in any action by any person
other than Bank.
8. TAXES. Owner will pay when due all taxes and assessments which may be
levied or assessed against Owner or against the Collateral, including but
not limited to sales taxes, use taxes, personal property taxes, documentary
stamp taxes, franchise taxes, income taxes, withholding taxes, FICA taxes
and unemployment taxes. Owner covenants that Owner will provide timely
proof of payment of such taxes and assessments, at least quarterly and also
upon Bank's request.
9. INSURANCE. Owner will keep the insurable portion of the Collateral at all
times insured against risk of loss or damage by fire (including so-called
extended coverage), theft, flood and all other casualties, all in such
amounts, under such forms of policies, upon such terms, for such periods,
and written by such companies as Bank may approve. Owner shall range for
Bank to be named and endorsed as lender loss payee on any such policy.
Losses in all cases shall be payable to Bank, as Lender, and Owner as their
interests may appear on this policy. Bank may collect the proceeds (or
rebates of unearned premiums) on any insurance policy insuring the
Collateral. Bank will apply such proceeds toward what is owed on the
Obligations. In the event of any loss, Bank may require additional security
or assurance of payment of the secured obligation as a condition of
permitting any insurance benefits to be used for repair or replacement of
the Collateral. Owner shall maintain the insurance required hereunder until
the Obligations are paid in full. All such policies of insurance shall
provide for at least 30 days prior written notice of amendment or
cancellation to Bank and shall contain a standard breach of warranty
endorsement in favor of Bank. Owner shall furnish Bank with certificates of
such insurance or other evidence satisfactory to Bank as to compliance with
<PAGE>
the provisions of this section. Owner hereby authorizes Bank to act, at
Bank's option, as attorney-in-fact for Owner in acquiring, making,
adjusting, or seWing claims under or cancelling such insurance and
endorsing Owner's name on any drafts, checks or other instruments drawn by
insurers of the Collateral.
10. CONDITION OF THE COLLATERAL Owner represents, warrants and covenants that
the Collateral is in good condition. Owner agrees that Owner will
immediately notify Bank of any loss or damage. Owner will not cause or
permit waste or destruction of the Collateral. Owner hereby authorizes Bank
to examine the Collateral wherever located at any time during ordinary
business hours, upon reasonable notice or at any other reasonable time.
Pertaining to the tangible property portions of the Collateral, Owner, at
Owner's expense, will keep it in good condition and replace and repair, in
a timely manner, all parts of the Collateral as may be worn out or damaged
without allowing any lien to be created upon the Collateral.
11. BANK'S DUlY TO ACT. Bank's duty, with reference to the Collateral and any
books and records pertaining to the Collateral, shall be solely to use
reasonable care in the custody and preservation of the Collateral and such
books and records in Bank's possession, which shall not include any steps
necessary to preserve rights against prior parties nor the duty to send
notices, perform services or take any action in connection with the
management of the Collateral nor the duty to protect, preserve or maintain
any security interest given to others by Owner or other parties. Bank shall
be under no duty to exercise or to withhold the exercise of any of the
rights, remedies, powers, privileges and options expressly or impliedly
granted to Bank in this Agreement, and Bank shall not be responsible or
liable for any failure to exercise such rights, nor for its delay in so
doing.
12. POSSESSION. Until default, Owner may have possession of any Collateral not
delivered or to be delivered to Bank and use it in any lawful manner riot
inconsistent with this Agreement or any policy of insurance. Upon default
Bank shall have immediate right to possession of such Collateral.
13. VIOLATIONS OF LAW. Owner shall not use the Collateral in violation of any
municipal, state or federal law or regulation nor in violation of any order
of any governmental regulatory agency.
14. CORPORATE WARRANTIES AND REPRESENTATIONS. If Owner is a corporation, Owner
makes to Bank the following warranties and representations which shall be
continuing so long as the Obligations remain outstanding:
A. Owner is a corporation which is duly organized and validly existing in
Owner's state of incorporation as represented in the DATE AND PARTIES
paragraph above; Owner is in good standing under the laws of all
states in which Owner transacts business; Owner has the corporate
power and authority to own the Collateral and to carry on its business
as now being conducted; Owner is qualified to do business in every
jurisdiction In which the nature of its business or its property makes
such qualification necessary; and Owner is in compliance with all
laws, regulations, ordinances and orders of public authorities
applicable to it.
B. The execution, delivery and performance of this Agreement by Owner and
the borrowing evidenced by the Note: (1) are within the corporate
powers of Owner (2) have been duly authorized by all requisite
corporate action; (3) have received all necessary governmental
approval; (4) will not violate any provision of law, any order of any
court or other agency of government or Owner's Articles of
Incorporation or Bylaws; and (5) will not violate any provision of any
indenture, agreement or other instrument to which Owner is a party or
to which Owner is or any of Owner's property is subject, including but
not limited to any provision prohibiting the creation or imposition of
any lien, charge or encumbrance of any nature whatsoever upon any of
Owner's property or assets. The Note and this Agreement when executed
and delivered by Owner will constitute the legal, valid and binding
obligations of Owner, and of the other obligors named therein, if any,
in accordance with their respective terms.
C. All other information, reports, papers and data given to Bank with
respect to Owner or to others obligated under the terms of this
Agreement are accurate and correct in all material respects and
complete insofar as completeness may be necessary to give Bank a true
and accurate knowledge of the subject matter.
D. Owner has not changed its name within the last six years, unless
otherwise disclosed in writing; other than the trade names or
fictitious names actually disclosed to Bank prior to execution of this
Agreement, Owner uses no other names; and until the Obligations shall
have been paid in full, Owner hereby covenants and agrees to preserve
and keep in full force and effect its existing name, corporate
existence, rights, franchises and trade names, and to continue the
operation of its business in the ordinary course.
15. CHANGE OF NAME OR ADDRESS. Owner shall notify Bank in writing prior to any
change in Owner's name or, if an organization, any change in identity or
structure. Owner also will notify Bank in writing prior to any change in
Owner's address.
16. EVENTS OF DEFAULT. Owner shall be in default upon the occurrence of any of
the following events, circumstances or conditions (Events of Default):
A. Failure by any party obligated on the Obligations to make payment when
due; or
B. A default or breach by Borrower, Owner or any co-signer, endorser,
surety, or guarantor under any of the terms of this Agreement, the
Note, any construction loan agreement or other loan agreement, any
security agreement, mortgage, deed to secure debt, deed of trust,
trust deed, or any other document or instrument evidencing,
guarantying, securing or otherwise relating to the Obligations; or
C. The making or furnishing of any verbal or written representation,
statement or warranty to Bank which is or becomes false or Incorrect
in any material respect by or on behalf of Owner, Borrower, or any one
of them, or any co-signer, endorser, surety or guarantor of the
Obligations; or
D. Failure to obtain or maintain the insurance coverages required by
Bank, or insurance as is customary and proper for the Collateral (as
herein defined); or
E. The death, dissolution or insolvency of, the appointment of a receiver
by or on behalf of, the assignment for the benefit of creditors by or
on behalf of, the voluntary or involuntary termination of existence
by, or the commencement of any proceeding under any present or future
federal or state Insolvency, bankruptcy, reorganization, composition
or debtor relief law by or against Owner, Borrower, or any one of
them, or any co-signer, endorser, surety or guarantor of the
Obligations; or
F. A good faith belief by Bank at any time that Bank is insecure with
respect to Borrower, or any co-signer, endorser, surety or guarantor,
that the prospect of any payment is impaired or that the Collateral
(as herein defined) is impaired; or
G. Failure to pay or provide proof of payment of any tax, assessment
rent, insurance premium, escrow or escrow deficiency on or before its
due date; or
H. A material adverse change in Owner's business, including ownership,
management, and financial conditions, which in Bank's opinion, impairs
the Collateral or repayment of the Obligations; or
I. A transfer of a substantial part of Owner's money or property.
17. REMEDIES ON DEFAULT. At the option of Bank, all or any part of the
principal and accrued Interest on the Note and the Obligations shall become
immediately due and payable without notice or demand, upon the occurrence
of an Event of Default or at any time thereafter. In addition, upon the
occurrence of any Event of Default, Bank shall be entitled to all of the
remedies provided by law, the Note and any related loan documents. Bank is
entitled to all rights and remedies provided at law or equity whether or
not expressly stated in this' Agreement By choosing any remedy, Bank does
not waive its right to an immediate use of any other remedy if the event of
default continues or occurs again. Bank shall have all the remedies of a
secured party under:
<PAGE>
A. Article 9 of the TEXAS Uniform Commercial Code;
B. all other TEXAS laws;
C. this Agreement;
D. any instrument evidencing the Obligations;
E. any other applicable security, loan, guaranty or surety agreements
pertaining to the Obligations; and
F. the common law, including Bank's right of set-off.
Bank may require Owner to assemble all or any portion of the Collateral and
make it available to Bank at a place to be designated by Bank which is
reasonably convenient to both parties. Bank shall have the right to enter
and/or remain upon the premises of Owner, or any other place where any of
the Collateral is located and kept, but in doing so Bank may not breach the
peace or unlawfully enter onto Owner's premises, without any obligation to
pay rent to Owner or others, and
A. remove Collateral therefrom to the premises chosen by Bank or any
agent of Bank for such time as Bank may desire in order to maintain,
sell the Collateral and/or liquidate the Collateral; or
B. use such premises together with materials, supplies, books, and
records of Owner to maintain possession and/or the condition of the
Collateral and to prepare the Collateral for selling, liquidating, or
collecting and to conduct the selling, liquidating or collecting.
Except where the law permits the sale or disposition of Collateral without
notice, any notice of sale, disposition or other intended action by Bank,
sent at least ten days prior to such action to the last known address of
Owner as shown on Bank's records, shall constitute reasonable notice. The
following reasonable expenses relating to default and collection shall be
secured by this Agreement and added to the Obligations:
A. expenses for taking, holding, preparing for sale, or selling the
Collateral, or similar expenses;
B. advances made for the above purposes and advances relating to the
Collateral made on Owner's behalf as permitted herein; and
C. reasonable attorneys' fees, including without limitation any court
costs and fees incurred In the collection of, or foreclosure of, the
lien.
18. RESTRICTIONS ON SALE OR DISPOSITION. Owner acknowledges that a state or
federal law or regulation may restrict Bank's sale or disposition of
certain portions of the Collateral. As a result, such restriction may cause
the Collateral to have less value than it otherwise would have had. In all
cases, however, any such sale or disposition will be held in accordance
with applicable TEXAS and federal laws and regulations.
19. PROTECTION OF COLLATERAL Bank is hereby appointed as the attorney-in-fact
for Owner to do anything, at Bank's option, Bank deems o reasonably
necessary to perfect its security interest in the Collateral and to protect
the Collateral and to continue Bank's security interest in the Collateral,
including, but not limited to, the following:
A. pay and discharge taxes, liens, security interests or other
encumbrances at any time levied or placed on the Collateral;
B. pay any rents or other charges under any lease affecting the
Collateral;
C. place and pay for insurance on the Collateral;
D. order and pay for the repair, maintenance and preservation of the
Collateral; or
E. to sign, when permitted by law, and file any financing statements on
behalf of Owner and to pay for filing and recording fees at Owner's
expense, pertaining to the Collateral.
Bank is under no duty to preserve or protect any Collateral until Bank is
in actual, or constructive, possession of the Collateral. For purposes of
this paragraph, Bank shall only be deemed to be in "actual" possession of
the Collateral when Bank has physical, immediate and exclusive control over
the Collateral and has affirmatively accepted such control. Further, Bank
shall only be deemed to be in "constructive" possession of the Collateral
when Bank has both the power and the intent to exercise control over the
Collateral. Owner shall reimburse Bank on demand, but no later than 10 days
after notice from Bank, for any payment made or expense incurred by Bank
pursuant to this Agreement The amounts for such payments and expenses shall
be added to the Obligations and shall earn interest at the same rate as the
principal balance owed on the Note from the date payment is made (or the
expense is incurred) until paid.
20. FINANCIAL STATEMENTS. Until the Obligations are paid in full, Owner shall
furnish Bank upon Bank's request and in the event of no request, at least
annually, a current financial statement of Owner, which Is certified by
Owner and Owner's accountant to be true and accurate.
21. DURATION OF SECURITY INTEREST. This Agreement shall continue in full force
and effect and the security interest granted herein and all
representations, warranties, covenants and agreements of Owner and all of
the terms, conditions and provisions relating thereto shall continue to be
fully operative until Owner and/or Borrower shall have paid or caused to be
paid, or otherwise discharged, all of Borrower's obligations pursuant to
the terms of the Note and the Note no longer secures any indebtedness
Borrower may have to Bank.
22. RELEASES BY BANK Owner agrees that Bank may, without notice and without
releasing any of the obligations of any of the remaining parties:
A. release any security interest for the Obligations; or
B. release any of the Collateral; or
C. release any pasty to the Obligations, any guaranty or this Agreement
23. GENERAL WAIVER BY OWNER. Owner hereby waives and releases Bank from all
claims for loss or damage caused by any act or omission of Bank, its
officers, directors, employees or agents, except for willful misconduct
24. TERM. This Agreement shall remain in effect until terminated in writing.
25. GENERAL PROVISIONS.
A. TIME IS OF THE ESSENCE. Time is of the essence in Owner's performance
of all duties and obligations Imposed by this Agreement.
B. NO WAIVER BY BANK Bank's course of dealing, or Bank's forbearance
from, or delay in, the exercise of any of Bank's rights, remedies,
privileges or right to insist upon Owner's strict performance of any
provisions contained in this Agreement, or other loan documents, shall
not be construed as a waiver by Bank, unless any such waiver is in
writing and is signed by Bank.
C. AMENDMENT. The provisions contained in this Agreement may not be
amended, except through a written amendment which is signed by Owner
and Bank.
D. INTEGRATION CLAUSE. This written Agreement and all documents executed
concurrently herewith, represent the entire understanding between the
parties as to the Obligations and may not be contradicted by evidence
of prior, contemporaneous, or subsequent oral agreements of the
parties.
E. FURTHER ASSURANCES. Owner agrees, upon request of Bank and within the
time Bank specifies, to provide any information, and to execute,
acknowledge, deliver and record or file such further instruments or
documents as may be required by Bank to secure the Note or confirm any
lien.
F. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of TEXAS, provided that such laws are not otherwise preempted by
federal laws and regulations.
<PAGE>
G. FORUM AND VENUE. In the event of litigation pertaining to this
Agreement, the exclusive forum, venue and place of jurisdiction shall
be in the State of TEXAS, unless otherwise designated in writing by
Bank or otherwise required by law.
H. SUCCESSORS. This Agreement shall inure to the benefit of and bind the
heirs, personal representatives, successors and assigns of the
parties; provided however, that Owner may not assign, transfer or
delegate any of the rights or obligations under this Agreement
I. NUMBER AND GENDER. Whenever used, the singular shall include the
plural, the plural the singular and, the use of any gender shall be
applicable to all genders.
J. DEFINITIONS. The terms used in this Agreement, if not defined herein,
shall have their meanings as defined in the other documents executed
contemporaneously, or in conjunction, with this Agreement
K. PARAGRAPH HEADINGS. The headings at the beginning of any paragraph, or
any subparagraph, in this Agreement are for convenience only and shall
not be dispositive in interpreting or construing this Agreement
L. IF HELD UNENFORCEABLE. If any provision of this Agreement shall be
held unenforceable or void, then such provision to the extent not
otherwise limited by law shall be severable from the remaining
provisions and shall in no way affect the enforceability of the
remaining provisions nor the validity of this Agreement.
M. AUTHORITY TO MAKE AND USE COPIES. Owner authorizes Bank to make
copies, photocopies, reproductions and other facsimiles (Copies) of
this Agreement and any Financing Statement related to the Collateral
for the purpose of filings or any other purpose, as if such Copies
were the original.
N. FILING AS FINANCING STATEMENT. Owner agrees and acknowledges that this
Agreement also suffices as a financing statement and as such, may be
filed of record as a financing statement for purposes of Article 9 of
the TEXAS Uniform Commercial Code. A carbon, photographic or other
reproduction of this Agreement is sufficient as a financing statement
26. SIGNATURES. By Owner's signature below, Owner agrees and acknowledges that
Owner is signing in all represented capacities (whether Owner, Borrower or
both) as they appear in the paragraph titled "DATE AND PARTIES" of this
Agreement.
27. RECEIPT OF COPY. By signing this Agreement, Owner acknowledges that Owner
has read this Agreement and a copy of this Agreement was delivered to and
received by Owner.
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
THE PARTIES' SIGNATURES BELOW INDICATE AGREEMENT WITH THE STATEMENTS
CONTAINED WITHIN THIS BOX.
OWNER:
FRULLATI, COLLIN CREEK, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
------------------------------
ZIAD S. DALAL, PRESIDENT
("Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
FRULLATI HULEN, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
--------------------------------
ZIAD S. DALAL, PRESIDENT
("Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
FRULLATI - MCD, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
--------------------------------
ZIAD S. DALAL, PRESIDENT
("Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
FRULLATI NHM, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
--------------------------------
ZIAD S. DALAL, PRESIDENT
("Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
<PAGE>
FRULLATI TOWN EAST, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
--------------------------------
ZIAD S. DALAL, PRESIDENT
("Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
SELMAN SYSTEMS, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
--------------------------------
ZIAD S. DALAL, PRESIDENT
("Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
FRULLATI CAFE DFW 2E,, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
--------------------------------
ZIAD S. DALAL, PRESIDENT
("Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
FRULLATI CAFE DFW 3E50, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
--------------------------------
ZIAD S. DALAL, PRESIDENT
("Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
FRULLATI CAFE DFW 3E07, INC.
a TEXAS corporation
[Corporate Seal*]
By: /s/ Ziad S. Dalal
--------------------------------
ZIAD S. DALAL, PRESIDENT
("Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
(REFER TO THE ADDENDUM WHICH IS ATTACHED AND INCORPORATED HEREIN FOR
ADDITIONAL PARTIES AND THEIR RESPECTIVE SIGNATURES).
BANK:
UNITED TEXAS BANK
a TEXAS banking corporation
[Corporate Seal*]
By: /s/ Casey R. Hozer
----------------------------------
CASEY HOZER, SENIOR VICE PRESIDENT
("Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
THIS IS THE LAST PAGE OF A 6 PAGE DOCUMENT. EXHIBITS AND/OR ADDENDA MAY FOLLOW.
<PAGE>
ADDENDUM
This ADDENDUM is attached to and made a part of a certain Security Agreement
(Agreement) dated August 6, 1996, and this ADDENDUM contains the names,
addresses, signatures and notaries, it applicable, of the additional parties to
such Agreement:
OWNER:
FRULLATI VISTA RIDGE, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TEXAS 75240
Tax I.D. #75-2467800
FRULLATI UT, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TEXAS 75240
Tax I.D. #75-2507864
FRULLATI SYSTEMS, INC.
a TEXAS corporation
5720 LBJ FREEWAY, SUITE 370
DALLAS, TEXAS 75240
Tax I.D. #75-2605356
FRULLATI VISTA RIDGE, INC.
a TEXAS corporation
By: /s/ Ziad S. Dalal
------------------------------
ZIAD S. DALAL, PRESIDENT
FRULLATI UT, INC.
a TEXAS corporation
By: /s/ Ziad S. Dalal
------------------------------
ZIAD S. DALAL, PRESIDENT
FRULLATI SYSTEMS, INC.
a TEXAS corporation
By: /s/ Ziad S. Dalal
------------------------------
ZIAD S. DALAL, PRESIDENT
<PAGE>
GUARANTY AGREEMENT FOR A SPECIFIC LOAN
AS SECURITY FOR A LOAN FROM
UNITED TEXAS BANK
1. DATE AND PARTIES. The date of this Guaranty Agreement (Agreement) is August
6, 1996, and the parties are the following:
GUARANTOR:
ZIAD S. DALAL
5156 MEADOW CREST DRIVE
DALLAS, TX 75229
Social Security # ###-##-####
BANK:
UNITED TEXAS BANK
a TEXAS banking corporation
12222 MERIT DR., SUITE 100
P.O. Box 515529
DALLAS, TEXAS 75251-5529
Tax I.D. # 75-2008275
2. AGREEMENT TO GUARANTY. Guarantor requests that Bank make the Loan (as
herein defined) to SELMAN SYSTEMS, INC., FRULLATI CAFE DFW 2E, INC.,
FRULLATI CAFE DFW 3E50, INC. and FRULLATI CAFE DFW 3E07, INC. (Borrower).
In consideration of Bank making any such loan(s), Guarantor jointly and
severally, absolutely and unconditionally promises to pay and guaranties
prompt payment of the Obligations (as hereafter defined) to Bank, when due,
up to $576,000.00 of the principal amount. The term "Obligations" shall
mean the indebtedness of Borrower to Bank as evidenced by Borrower's
promissory note, No. 31880, (Note) dated August 6, 1996, and executed by
Borrower payable to the order of Bank, which evidences a loan (Loan) to
Borrower in the sum of $576,000.00, and all extensions, renewals,
modifications, or substitutions thereof. Guarantor further absolutely and
unconditionally promises to pay and guaranties prompt payment, when due, of
all accrued interest and all reasonable attorneys' fees, and all other
expenses incurred by Bank in collecting the Obligations and in enforcing
this Agreement and all other agreements with respect to the Borrower.
3. EXTENSIONS. Guarantor consents to all renewals, extensions, modifications
and substitutions of the Obligations which may be made by Bank upon such
terms and conditions as Bank may see fit from time to time without further
notice to Guarantor and without limitation as to the number of renewals,
extensions, modifications or substitutions.
4. PRIMARY LIABILITY. Guarantor is primarily liable under this Agreement,
regardless of whether or not Bank pursues any. of its remedies against
Borrower, against any other maker, surety, guarantor or endorser of the
Obligations or against any collateral securing the Obligations.
5. NO OTHER CONDITIONS. The liability of the Guarantor is not conditioned on
the signing of this Agreement by any other person and further is not
subject to any condition not expressly set forth herein.
6. EVENTS OF DEFAULT. Guarantor shall be in default upon the occurrence of any
of the following events, circumstances or conditions (Events of Default):
A. Failure by any party obligated on the Obligations to make payment when
due; or
B. A default or breach by Borrower or any co-signer, endorser, surety, or
guarantor under any of the terms of this Agreement, the Note, any
construction loan agreement or other loan agreement any security
agreement, mortgage, deed to secure debt, deed of trust trust deed, or
any other document or instrument evidencing, guarantying, securing or
otherwise relating to the Obligations; or
C. The making or furnishing of any verbal or written representation,
statement or warranty to Bank which is or becomes false or incorrect
in any material respect by or on behalf of Guarantor, Borrower, or any
one of them, or any co-signer, endorser, surety or guarantor of the
Obligations; or
D. Failure to obtain or maintain the insurance coverages required by
Bank, or Insurance as is customary and proper for the Collateral (as
herein defined); or
E. The death, dissolution or insolvency of, the appointment of a receiver
by or on behalf of, the assignment for the benefit of creditors by or
on behalf of the voluntary or involuntary termination of existence by,
or the commencement of any proceeding under any present or future
federal or state insolvency, bankruptcy, reorganization, composition
or debtor relief law by or against Guarantor, Borrower, or any one of
them, or any co-signer, endorser, surety or guarantor of the
Obligations; or
F. A good faith belief by Bank at any time that Bank is insecure with
respect to Borrower, Guarantor, or any co-signer, endorser, surety or
guarantor, that the prospect of any payment is impaired or that the
Collateral (as herein defined) is impaired; or
G. Failure to pay or provide proof of payment of any tax, assessment,
rent, insurance premium, escrow or escrow deficiency on or before its
due date; or
H. A material adverse change in Guarantor's business, including
ownership, management, and financial conditions, which in Bank's
opinion, impairs the Collateral or repayment of the Obligations; or
I. A transfer of a substantial part of Guarantor's money or property.
7. REMEDIES ON DEFAULT. At the option of Bank, all or any part of the
Obligations under this Agreement, together with any other obligations of
Guarantor relating to this Loan, shall become immediately due and payable
without notice or demand, upon the occurrence of an Event of Default or at
any time thereafter. In addition, upon the occurrence of any Event of
Default, Bank, at its option, may immediately invoke any or all other
remedies provided in this Guaranty, the Note, or any other instrument
evidencing the Obligations, and any documents securing or otherwise
relating to the Obligations. Bank is entitled to all rights and remedies
provided at law or equity whether or not expressly stated in this Agreement
By choosing any remedy, Bank does not wave its right to an immediate use of
any other remedy if the event of default continues or occurs again.
8. WAIVER AND CONSENT BY GUARANTOR AND OTHER SIGNERS. Regarding the Note and
Obligations, to the extent not prohibited by law, Guarantor and any other
signers:
A. consent to the valuation of any collateral in connection with any
proceedings under the U.S. Bankruptcy Code concerning Borrower or
Guarantor, regardless of any such valuation or actual amounts received
by Bank arising from sale of such collateral.
B. consent to any waiver granted Borrower, and agree that any delay or
lack of diligence in the enforcement of the Obligations, or any
<PAGE>
failure to file a claim or otherwise protect any of the Obligations,
in no way affects or impairs Guarantor's liability.
C. waive reliance on any anti-deficiency statutes, through subrogation or
otherwise, and such statutes in no way affect or impair Guarantor's
liability. In addition, Guarantor waives any rights of subrogation,
contribution or reimbursement and any other right Guarantor may have
to enforce any remedy which Bank now has or in the future may have
against Borrower or another guarantor or as to any collateral or
security interest Back may now or in the future hold for the
indebtedness. Any Guarantor who is an "insider", as contemplated by
the U.S. Bankruptcy Code, 11 U.S.C. 101, makes these waivers
permanently. (An insider includes, among others, a director, officer,
partner, or other person in control of Borrower, a person or an entity
that is a co-partner with Borrower, an entity in which Borrower is a
general partner, director, officer or other person in control or a
close relative of any of these other persons.) Any Guarantor who is
not an insider makes these waivers until all of Borrower's Obligations
to Bank, including Obligations that are not covered by this
Guaranty, are fully repaid.
D. waive notice of dishonor, notice of intent to accelerate and notice of
acceleration.
E. consent to any renewals and extensions for payment on the Note and
Obligations, regardless of the number of such renewals or extensions.
F. consent to Bank's release of any borrower, endorser, guarantor,
surety, accommodation maker or any other co-signer.
G. consent to the release, substitution or impairment of any collateral.
H. consent that Borrower or Guarantor Is authorized to modify the terms
of the Note or any instrument securing, guarantying or relating to the
Note.
I. consent to Bank's right of set-off as well as any right of set-off of
any bank participating in the Loan.
J. consent to any and all sales, repurchases and participations of the
Note to any person in any amounts and waive notice of such sales
repurchases or participations of the Note.
9. RELEASE OF COLLATERAL Guarantor agrees that any collateral which secures
all or part of the Obligations (Collateral) may be assigned, exchanged,
released in whole or in part or substituted without notice to Guarantor and
without defeating, discharging or diminishing the liability of the
Guarantor. Guarantor's obligation is absolute and Bank's failure to perfect
any security interest or any act or omission by Bank which impairs the
Collateral shall not relieve Guarantor of Guarantor's liability under this
Agreement
10. NO DUTY BY BANK Bank is under no duty to preserve or protect any Collateral
until Bank is in actual or constructive possession of the Collateral. For
purposes of this paragraph, Bank shall only be deemed to be in "actual"
possession of the Collateral when Bank has physical, immediate and
exclusive control over the Collateral and has accepted such control in
writing. Further, Bank shall only be deemed to be in "constructive"
possession of the Collateral when Bank has both the power and the intent to
exercise control over the Collateral.
11. BANKRUPTCY. If a bankruptcy petition should at any time be filed by or
against the Borrower, the maturity of the Obligations, so far as
Guarantor's liability is concerned, shall be accelerated and the
Obligations shall be immediately payable by Guarantor.
Guarantor acknowledges and agrees that this Agreement, and the Obligations
secured hereby, shall remain in full force and effect at all times,
notwithstanding any action or undertakings by, or against, Bank or against
any collateral, in connection with any obligation in any proceeding in the
U.S. Bankruptcy Courts, including without limitation, valuation of
collateral, election of remedies or imposition of secured or unsecured
claim status upon claims by Bank, pursuant to the U.S. Bankruptcy Code, as
amended.
In the event that any payment of principal or interest received and paid by
any other guarantor, borrower, surety, endorser or co-maker is deemed, by
final order of a court of competent jurisdiction, to have been a voidable
preference under the bankruptcy or insolvency laws of the United States or
otherwise, then Guarantor's obligation shall remain as an obligation to
Bank and shall not be considered as having been extinguished.
12. BANKS RIGHT OF SET-OFF. Guarantor agrees that Bank may exercise Bank's
right of set-off against any obligation Bank may have, now or hereafter, to
pay money, securities or other property to Guarantor in order to pay any or
all of the outstanding Obligations. This includes, without limitation:
A. any deposit account balance, securities account balance or certificate
of deposit balance Guarantor has with Bank whether general, special,
time, savings or checking;
B. any money owing to Guarantor on an item presented to Bank or in Bank's
possession for collection or exchange; and
C. any repurchase agreement or any other non-deposit obligation or credit
in Guarantor's favor.
If any such money, securities or other property is also owned by some other
person who has not agreed to pay the Obligations (such as another depositor
on a joint account) Bank's right of set-off will extend to the amount which
could be withdrawn or paid directly to Guarantor on Guarantor's request,
endorsement or instruction alone. In addition, where Guarantor may obtain
payment from Bank only with the endorsement or consent of someone who has
not agreed to pay the Obligations, Bank's right of set-off will extend to
Guarantor's interest in the obligation. Bank's right of set-off will not
apply to an account or other obligation if it clearly appears that
Guarantor's rights in the obligation are solely as a fiduciary for another,
or to an account, which by its nature and applicable law (for example an
IRA or other tax-deferred retirement account), must be exempt from the
claims of creditors. Guarantor hereby appoints Bank as Guarantor's
attorney-in-fact and authorizes Bank to redeem or obtain payment on any
certificate of deposit in which Guarantor has an interest in order to
exercise Bank's right of set-off. Such authorization applies to any
certificate of deposit even if not matured. Guarantor further authorizes
Bank to withhold any early withdrawal penalty without liability in the
event such penalty is applicable as a result of Bank's set-off against a
certificate of deposit prior to its maturity.
Bank's right of set-off may be exercised:
A. without prior demand or notice;
B. without regard to the existence or value of any Collateral securing
the Obligations; and
C. without regard to the number or creditworthiness of any other persons
who have agreed to pay the Obligations.
Bank will not be liable for dishonor of a check or other request for
payment where there are insufficient funds In the account (or other
obligation) to pay such request because of Bank's exercise of Bank's right
of set-off. Guarantor agrees to indemnity and hold Bank harmless from any
person 5 claims and the costs and expenses, including without limitation,
attorneys' fees, incurred as a result of such claims or arising as the
result of Bank's exercise of Bank's right of set-off.
13. WARRANTY AND RELIANCE BY GUARANTOR. Guarantor represents and warrants that
this Agreement was entered into at the request of Borrower, and that
Guarantor is satisfied regarding Borrower's financial condition and
existing indebtedness, authority to borrow and the use and intended use of
all loan proceeds. Guarantor further represents and warrants that Guarantor
has not relied on any representations or omissions of Bank or any
information provided by Bank respecting Borrower, Borrower's financial
condition and existing indebtedness, Borrower's authority to borrow or
Borrower's use and intended use of all loan proceeds.
14. RELIANCE BY BANK. Guarantor acknowledges that Bank is relying on this
Agreement in making the Obligations to Borrower, and Guarantor has signed
this Agreement to induce Bank to make the Obligations. Guarantor further
acknowledges and agrees that the requirement for Guarantor's signature is
<PAGE>
necessary for the Obligations to be considered creditworthy and that the
signatures of all co-signers, if any, are necessary since Bank would not
have otherwise made the Loan.
15. FINANCIAL STATEMENTS. Until the Obligations are paid in full, Guarantor
shall furnish Bank upon Bank's request and in the event of no request, at
least annually a current financial statement which is certified by
Guarantor and Guarantor's accountant to be true, complete and accurate.
16. JOINT AND SEVERAL Guarantor or any one of them, and all other borrowers,
endorsers, makers, co-signers, and sureties shall be jointly and severally
liable under this Agreement and other related agreements.
17. GENERAL PROVISIONS.
A. TIME IS OF THE ESSENCE. Time is of the essence in Guarantor's
performance of all duties and obligations imposed by this Agreement
B. NO WAIVER BY BANK Bank's course of dealing, or Bank's forbearance
from, or delay in, the exercise of any of Bank's rights, remedies,
privileges or right to insist upon Guarantor's strict performance of
any provisions contained in this Agreement, or other loan documents,
shall not be construed as a waiver by Bank, unless any such waiver is
in writing and is signed by Bank.
C. AMENDMENT. The provisions contained in this Agreement may not be
amended, except through a written amendment which is signed by
Guarantor and Bank.
D. INTEGRATION CLAUSE. This written Agreement and all documents executed
concurrently herewith, represent the entire understanding between the
parties as to the Obligations and may not be contradicted by evidence
of prior, contemporaneous, or subsequent oral agreements of the
parties.
E. FURTHER ASSURANCES. Guarantor agrees, upon request of Bank and within
the time Bank specifies, to provide any information, and to execute,
acknowledge, deliver and record or file such further instruments or
documents as may be required by Bank to secure the Note or confirm any
lien.
F. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of TEXAS, provided that such laws are not otherwise preempted by
federal laws and regulations.
G. FORUM AND VENUE. In the event of litigation pertaining to this
Agreement, the exclusive forum, venue and place of jurisdiction shall
be in the State of TEXAS, unless otherwise designated in writing by
Bank or otherwise required by law.
H. SUCCESSORS AND LIABILITY OF GUARANTOR. This Agreement shall inure to
the benefit of and bind the heirs, personal representatives,
successors, assigns of the parties and subsequent holders of the
Obligations; provided however, that Guarantor may not assign, transfer
or delegate any of its rights or obligations under this Agreement If
any Guarantor dies, the estate of the deceased Guarantor only owes the
amount of the Obligations outstanding at the death of this Guarantor.
As to all Obligations after such death, this Agreement shall remain in
full force and effect as a guaranty by the surviving Guarantor(s), but
not as a guaranty by the deceased Guarantor's estate.
I. NUMBER AND GENDER. Whenever used, the singular shall include the
plural, the plural the singular, and the use of any gender shall be
applicable to all genders.
J. DEFINITIONS. The terms used in this Agreement, if not defined herein,
shall have their meanings as defined in the other documents executed
contemporaneously, or in conjunction, with this Agreement.
K. PARAGRAPH HEADINGS. The headings at the beginning of any paragraph, or
any subparagraph, in this Agreement are for convenience only and shall
not be dispositive in interpreting or construing this Agreement.
L. IF HELD UNENFORCEABLE. If any provision of this Agreement shall be
held unenforceable or void, then such provision to the extent not
otherwise limited by law shall be severable from the remaining
provisions and shall in no way affect the enforceability of the
remaining provisions nor the validity of this Agreement This Agreement
is valid despite the genuineness, validity or enforceability of any of
the loan documents.
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
THE PARTIES' SIGNATURES BELOW INDICATE AGREEMENT WITH THE STATEMENTS
CONTAINED WITHIN THIS BOX.
GUARANTOR:
/s/ Ziad S. Dalal
-----------------------------------
ZIAD S. DALAL
Individually
BANK:
UNITED TEXAS BANK
a TEXAS banking corporation
[Corporate Seal*]
By: /s/ Casey R. Hozer
----------------------------------
CASEY HOZER, SENIOR VICE PRESIDENT
("Corporate seal may be affixed, but failure to
affix shall not affect validity or reliance.)
<PAGE>
STATE OF TEXAS
ss:
COUNTY OF DALLAS
This instrument was acknowledged before me on August 27, 1996 by ZIAD S. DALAL.
My commission expires: /s/ Shawna Sue Yeats
10/31/96 ------------------------------
NOTARY PUBLIC
[SEAL]
SHAWNA S. YEATS
MY COMMISSION EXPIRES
October 31, 1996
STATE OF TEXAS
ss:
COUNTY OF DALLAS
This instrument was acknowledged before me on August 27, 1996 by CASEY HOZER,
SENIOR VICE PRESIDENT, of UNITED TEXAS BANK, a TEXAS banking corporation, on
behalf of said banking corporation.
My commission expires: /s/ Shawna Sue Yeats
10/31/96 ------------------------------
NOTARY PUBLIC
[SEAL]
SHAWNA S. YEATS
MY COMMISSION EXPIRES
October 31, 1996
[BANK ONE LOGO]
PROMISSORY NOTE
Borrower: SELMAN SYSTEMS, INC. Lender: Bank One, Texas, N.A.
5720 LBJ FREEWAY SUITE 370 Dallas Downtown
DALLAS, TX 75240 Banking Center - Dallas.
1717 Main Street
Dallas, TX 75201
================================================================================
Principal Amount: $100,000.00 Date of Note: March 15, 1999
PROMISE TO PAY. For value received, SELMAN SYSTEMS, INC. ("Borrower") promises
to pay to Bank One, Texas, N.A. ("Lender"), or order, in lawful money of the
United States of America, the principal amount of One Hundred Thousand & 00/100
Dollars (*100.000.00) (Total Principal Amount") or so much as may be
outstanding, together with interest on the unpaid outstanding principal balance
from the date advanced until paid in full.
PAYMENT. Borrower will pay this loan in accordance with the following payment
schedule:
Payments of accrued interest are due and payable monthly on the 25th day of
each month until the Final Availability Date. Upon notice from Lender to
Borrower, Lender may refuse to advance any additional amounts under this
Note. The term "Final Availability Date" as used herein means the date of
such notice, which shall be affective when deposited in the United States
mail, first class postage prepaid, addressed to Borrower at Borrower's last
known address. After the Final Availability Date, monthly payments shall be
due in the aggregate amount of (A) equal payments of principal In the
amount of one-thirty sixth (1/36) of the unpaid principal balance as of the
Final Availability Date, plus (B) accrued interest, and shall be paid on
the 26th day of each month until all amounts owing under this Note are paid
In full. Notwithstanding language in the following paragraph to the
contrary, and unless otherwise agreed to, in writing, or by applicable law,
payments and other credits will be allocated to principal, interest, late
charges, collection costs and other charges by Lender at its discretion.
Interest on this Note is computed on a 365/385 simple interest basis; that is,
by applying the ratio of the annual interest rate over the number of days in a
year (366 during leap years), multiplied by the outstanding principal balance,
multiplied by the actual number of days the principal balance is outstanding.
Borrower will pay Lender at the address designated by Lender from time to time
in writing. If any payment of principal of or interest on this Note shall become
due on a day which is not a Business Day, such payment shall be made on the next
succeeding Business Day. As used herein, the term "BUSINESS DAY" shah mean any
day other than a Saturday, Sunday or any other day on which national banking
associations are authorized to be closed. Unless otherwise agreed to, in
writing, or otherwise required by applicable law, payments will be applied first
to accrued, unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs, late charges and other charges, provided, however, upon
delinquency or other default, Lender reserves the right to apply payments among
principal, interest, late charges, collection costs and other charges at its
discretion. Notwithstanding any other provision of this Note, Lender will not
charge interest on any undisbursed loan proceeds. No scheduled payment, whether
of principal or interest or both, will be due unless sufficient loan funds have
been disbursed by the scheduled payment date to justify the payment. The books
and records of Lender shall be prima facie evidence of all outstanding principal
of and accrued but unpaid interest on this Note. If this Note is governed by or
is executed in connection with a loan agreement, this Note is subject to the
terms and provisions thereof.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to fluctuation
based upon the Prime Rate of interest in effect from time to time (the "index")
(which rate may not be the lowest, best or most favorable rate of interest which
Lender may charge on loans to its customers). "Prime Rate" shall mean the rate
announced from time to time by Lender as its prime rate. Each change in the rate
to be charged on this Note will become effective without notice on the first day
of each month following the month in which the index changes. Except as
otherwise provided herein, the unpaid principal balance of this Note will accrue
interest at a rate per annum which will from time to time be equal to the sum of
the index, plus 2.000%. NOTICE: Under no circumstances will the interest rate on
this Note be more than the maximum rate allowed by applicable law, if at any
time any interest rate to be charged hereunder that is based on the Index is
greater than the maximum rate allowed by applicable law, thereby causing the
interest rate on this Note to be limited to the maximum rate allowed by
applicable law, any subsequent reduction in the Index will not reduce the rate
of interest on this Note below the maximum rate allowed by applicable law until
the total amount of interest accrued on this Note equals the amount of interest
that would have accrued on this Note if the interest rate based on the index had
at all times been in effect. For purposes of this Note, the "maximum rate
allowed by applicable law" means the greater of (a) the maximum rate of interest
permitted under federal or other law applicable to the indebtedness evidenced by
this Note, or (b) the "Weekly Rate Ceiling" as referred to in Section 303.20 1
of the Texas Finance Code, as supplemented by the Texas Credit Title.
PREPAYMENT. Borrower may pay without premium or fee all or a portion of the
principal amount owed hereunder earlier than it is due. All prepayments shall be
applied to the indebtedness owing hereunder in such order and manner as Lender
may from time to time determine in its sole discretion.
LATE CHARGES. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $25.00. whichever Is greater.
POST MATURITY RATE. The Post Maturity Rate on this Note is the lesser of the
maximum rate allowed by applicable law or 5.000 percentage points over the
Index. Borrower will pay interest on all sums due after final maturity, whether
by acceleration or otherwise, at that rate, with the exception of any amounts
added to the principal balance of this Note based on Lender's payment of
insurance premiums, which will continue to accrue interest at the pre-maturity
rate.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment of principal or interest when due under this
Note or any other indebtedness owing now or hereafter by Borrower to Lender; (b)
failure of Borrower or any other party to comply with or perform any term,
obligation, covenant or condition contained in this Note or in any other
promissory note, credit agreement, loan agreement, guaranty, security agreement,
mortgage, deed of trust or any other instrument, agreement or document, whether
now or hereafter existing, executed in connection with this Note (the Note and
all such other instruments, agreements, and documents shall be collectively
known herein as the "RELATED DOCUMENTS"); (c) Any representation or statement
made or furnished to Lender herein, in any of the Related Documents or in
connection with any of the foregoing is false or misleading in any material
respect; (d) Borrower or any other party liable for payment of this Note,
whether as maker, endorser, guarantor, surety or otherwise, becomes insolvent or
bankrupt, has a receiver or trustee appointed for any part of its property,
makes an assignment for the benefit of its creditors, or any proceeding is
commenced either by any such party or against it under any bankruptcy or
insolvency laws; (e) the occurrence of any event of default specified in any of
the other Related Documents or in any other agreement now or hereafter arising
between Borrower and Lender; (f) the occurrence of any event which permits the
acceleration of the maturity of any indebtedness owing now or hereafter by
Borrower to any third party; or (g) the liquidation, termination, dissolution,
death or legal incapacity of Borrower or any other party liable for the payment
of this Note, whether as maker, endorser, guarantor, surety, or otherwise.
LENDER'S RIGHTS. Upon default, Lender may at its option, without further notice
or demand (i) declare the entire indebtedness, including the unpaid principal
balance on this Note, all accrued unpaid interest, and all other amounts, costs
and expenses for which Borrower is responsible under this Note or any other
Related Document, immediately due, (ii) refuse to advance any additional amounts
under this Note, (ill) foreclose all liens securing payment hereof, (iv) pursue
any other rights, remedies and recourses available to the Lender, including
without limitation, any such rights, remedies or recourses under the Related
Documents, at law or in equity, or (iv) pursue any combination of the foregoing.
The rights, remedies and recourses of Lender, as provided in this Note and in
the other Related Documents, shall be cumulative and concurrent and may be
pursued separately, successively or together as often as occasion therefore
shall arise, at the sole discretion of Lender. The acceptance by Lender of any
payment under this Note which is less than the payment in full of all amounts
due and payable at the time of such payment shall not (i) constitute a waiver of
or impair, reduce, release or extinguish any right, remedy or recourse of
Lender, or nullify any prior exercise of any such right, remedy or recourse, or
(ii) impair, reduce, release or extinguish the obligations of any party liable
under any of the Related Documents as originally provided herein or therein.
Lender may hire an attorney to help collect this Note if Borrower does not pay,
and Borrower will pay Lender's reasonable attorneys' fees and all other costs of
collection. To the extent interest is not paid on or before the fifth `v after
it becomes due and payable, Lender may, at its option, add such accrued but
unpaid interest to the principal balance of this Note. This Note has been
delivered to Lender and accepted by Lender in the State of Texas. Subject to the
provisions on arbitration, this Note shall be governed by and construed in
accordance with the laws of the State of Texas without regard to any conflict of
laws or provisions thereof.
PURPOSE. Borrower agrees that no advances under this Note shall be used for
personal, family, or household purposes and that all advances hereunder shall be
used solely for business, commercial, agricultural or other similar purposes.
JURY WAIVER. THE BORROWER AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY
VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE
A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT
OR OTHERWISE) BETWEEN OR AMONG THE BORROWER AND LENDER ARISING OUT OP OR IN ANY
WAY RELATED TO THIS NOTE, ANY OTHER RELATED DOCUMENT, OR ANY RELATIONSHIP
BETWEEN LENDER AND BORROWER. THIS PROVISION IS A MATERIAL INDUCEMENT TO LENDER
TO PROVIDE THE FINANCING EVIDENCED BY THIS NOTE.
<PAGE>
03-15-1999 PROMISSORY NOTE
Loan No (Continued)
================================================================================
DISHONORED CHECK CHARGE. Borrower will pay a processing fee of *25.00 If any
check given by Borrower to Lender as a payment on this loan is dishonored.
RIGHT OF SETOFF. Unless a lien would be prohibited by law or would render a
nontaxable account taxable, Borrower grants to Lender a contractual security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or any other account), including without
limitation all accounts held jointly with someone else and all accounts Borrower
may open in the future. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
UNE OF CREDIT. This Note evidences a revolving line of credit. Borrower may
request advances and make payments hereunder from time to time, provided that it
is understood and agreed that the aggregate principal amount outstanding from
time to time hereunder shall not at any time exceed the Total Principal Amount.
The unpaid principal balance of this Note shall Increase and decrease with each
new advance or payment hereunder, as the case may be. Subject to the terms
hereof, Borrower may borrow, repay and reborrow hereunder. Any request for
advances under this Note must be in writing, unless Lender, in its sole
discretion, accepts telephonic or other oral advance requests. Borrower agrees
to indemnify and hold Lender harmless from any loss or liability incurred in
connection with Lender honoring any telephonic or other oral advance request.
All communications, instructions, or directions by telephone or otherwise to
Lender are to be directed to Lender's offIce shown above. THIS REVOLVING LINE OF
CREDIT SHALL NOT BE SUBJECT TO CHAPTER 346 OF THE TEXAS FINANCE CODE.
ARBITRATION. Lender and Borrower agree that upon the written demand of either
party, whether made before or after the institution of any legal proceedings,
but prior to the rendering of any judgment In that proceeding, all disputes,
claims and controversies between them, whether individual, joint, or class in
nature, arising from this Note, any Related Document or otherwise, including
without limitation contract disputes and tort claims, shall be resolved by
binding arbitration pursuant to the Commercial Rules of the American Arbitration
Association ("AAA"). Any. arbitration proceeding held pursuant to this
arbitration provision shall be conducted in the city nearest the Borrower's
address having an AAA regional office, or at any other place selected by mutual
agreement of the parties. No act to take or dispose of any collateral shall
constitute a waiver of this arbitration agreement or be prohibited by this
arbitration agreement. This arbitration provision shall not limit the right of
elthei party during any dispute, claim or controversy to seek, use, and employ
ancillary, or preliminary rights and/or remedies, judicial or otherwise, the
purposes of realizing upon, preserving, protecting, foreclosing upon or
proceeding under forcible entry and detainer for possession of, en real or
personal property, and any such action shall not be deemed an election of
remedies. Such remedies include, without limitation, injunctive relief or a
temporary restraining order, invoking a power of sale under any deed of trust or
mortgage, obtaining a writ of attacnmenr or imposition of a receivership, or
exercising any rights relating to personal property, including exercising the
right of set-off, or taking or diap of such property with or without judicial
process pursuant to the Uniform Commercial Code. Any disputes, claims, or
controversies concernitip the lawfulness or reasonableness of an act, or
exercise of any right or remedy, concerning any collateral, including any claim
to rescind, reform or otherwise modify any agreement relating to the collateral,
shall also be arbitrated; provided, however that no arbitrator shall have the
right the power to enjoin or restrain any act of either party. Judgment upon any
award rendered by any arbitrator may be entered in any court havirN
jurisdiction. The statute of limitations, estoppel, waiver, aches and similar
doctrines which would otherwise be applicable in an action brought, by a party
shall be applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of any action for these
purposes. The Federal Arbitration Act (Title 9 of the United States Code) shall
apply to the construction,. interpretation, and enforcement of this arbitration
provision.
STOP PAYMENT CHARGE. A stop payment charge of $25.00 will be assessed and
charged directly to the Account for each check written against the Account upon
which a stop payment order is issued.
METHOD OF ADVANCEMENT. The principal amount of this Note may be advanced by
means including but not limited to, Visa check(s), telephone transfer/access,
and may be repaid and readvanced In full or part until the Final Availability
Date. Borrower assumes I~ for, and agrees to pay for, purchases and cash
advances made by Borrower or anyone authorized by Borrower, through use of any
Visa CAN issued at Borrower's request or any other means, and agrees to pay, at
such place as Lender designates, all extensions of credit and charges accordance
with statement billings and the interest, fees and other charges as same may be
modified from time to time by Lender. Borrower Is> bound and liable for
repayment of the entire Note, regardless of who received the benefit of the
transaction(s) or to whom any advance of credit was made. Borrower may be liable
for any loss, theft, or unauthorized use of any Visa card issued at Borrower's
request.
ACCOUNT. The term "Account" as used herein means the line of credit established
pursuant to this Note.
ANNUAL FEE. A non-refundable Annual Fee of $25.00 may be charged to your Account
at the following time: The Annual Fee is payable advance for each year, and may
be charged to the Account annually. No refund of any part of the Annual Fee will
be made in the event of cancellation of the Account for any reason.
OVERLIMIT FEE. We may charge you a fee in the event your Account balance exceeds
your Total Principal Amount on the last day of any period. The amount of this
charge is $25.00.
ADDITIONAL EXPENSES. Expenses paid by Lender in processing and/or filing any
security documents executed In conjunction with this may be charged directly to
the undersigned's depository account ten (10) days after Lender notifies the
undersigned of said amount.
MODIFICATION. The fees and time frames set forth above may be modified from time
to time by Lender without prior written notice to undersigned.
RENEWAL AND EXTENSION. This Note is given in replacement, renewal and/or
extension of, but not extinguishing the indebtedness eviderna. by, that
promissory note dated December 17, 1 994 executed by Borrower in the original
principal amount of $100,000.00, and Is fl novation thereof. All interest
evidenced by the note being replaced, renewed, and/or extended by this
instrument shall continue to be dug payable until paid.
ADDITIONAL DEFAULTS. Borrower will be in Default if the following happens: (h)
Borrower fails to furnish Lender within thirty (30) days an written request by
Lender, current financial statements, including income tax returns, in form
satisfactory to Lender, or to permit inspection any of Borrower's books and
records.
ADDITIONAL PROVISION REGARDING LATE CHARGES. In the "Late Charge" provision set
forth above, the following language is hereby added after the word "greater":
"up to the maximum amount of Two Hundred Fifty Dollars ($250.00) per late
charge".
GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will
not affect the rest of the Note. In particular, this section means (among other
things) that Borrower does not agree or intend to pay, and Lender does not agree
or intend to contract for, charge, collect take, reserve or receive
(collectively referred to herein as "charge or collect"), any amount in the
nature of interest or In the nature of a fee this loan, which would in any way
or event (including demand, prepayment, or acceleration) cause Lender to charge
or collect more for this loan than the maximum Lender would be permitted to
charge or collect by federal law or the law of the State of Texas (as
applicable). Any such excess Interest or unauthorized fee shall, instead of
anything stated to the contrary, be applied first to reduce the principal
balance of this loan and when the principal has been paid in full, be refunded
to Borrower. The right to accelerate maturity of sums due under this Note does
not include the right to accelerate any interest which has not otherwise accrued
on the date of such acceleration, and Lender does not intend to or collect any
unearned interest in the event of acceleration. All sums paid or agreed to be
paid to Lender for the use, forbearance or detention of sums due hereunder
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full term of the loan evidenced by this Note
until payment in full so that the rate or amount of interest on account of the
loan evidenced hereby as not exceed the applicable usury ceiling. Lender may
delay or forgo enforcing any of its rights or remedies under this Note without
losing them. Borrower and any other person who signs, guarantees or endorses
this Note, to the extent allowed by law, severally waive presentment, DEMAND for
payment, protest, notice of protest, notice of dishonor, notice of intent to
accelerate the maturity of this Note, notice of accelerate the maturity of this
Note, diligence in enforcement and indulgences of every kind. Upon any change in
the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this Note, or
release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral without the consent of or
notice to anyone. All such parties also agree that Lender may modify this Note
without the consent of or notice to anyone other than the party with whom the
modification is made. Borrower agrees to provide to Lender such further
financial information with respect to Borrower Lender may reasonably request
from time to time, including, without limitation, financial statements in form
and detail satisfactory to Lender.
<PAGE>
03-15-1999 PROMISSORY NOTE Page 3
Loan No (Continued)
================================================================================
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE. INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
SELMAN SYSTEMS. INC.
BY: /s/ ZIAD DALAL
-------------------------------
ZIAD DALAL, PRESIDENT
<PAGE>
NOTICE OF FINAL AGREEMENT
Borrower: SELMAN SYSTEMS, INC. Lender: Bank One, Texas, N.A.
5720 LBJ FREEWAY SUITE 370 Dallas Downtown
DALLAS, TX 75240 Banking Center - Dallas.
1717 Main Street
Dallas, TX 75201
================================================================================
THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUEN1UORAIA AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
As used in this Notice, the following terms have the following meanings:
LOAN. The term "Loan" means a loan, an extension of credit or other financial
accommodations, or the renewal, modification or extension of any of the
foregoing, by Bank One, Texas, N.A. to Borrower for $100,000.00.
PARTIES. The term "Parties" means Bank One, Texas, N.A. and any and all entities
or individuals who are obligated to repay all or any part of the Loan or have
pledged property as security for the Loan, Including without limitation those
parties signing below. oWritten Loan Agreement. The term
"WRITTEN LOAN AGREEMENT" means any agreements, instruments or documents relating
to the Loan that have been executed or may hereafter be executed by any of the
Parties.
This Notice of Final Agreement is given by Bank One, Texas. N.A. pursuant to
Section 26.02 of the Texas Business and Commerce Code. Each Party who signs
below, other than Bank One, Texas, NA.. acknowledges, represents, and warrants
to Bank One, Texas, N.A. that it has received, read and understood this Notice
of Final Agreement. This Notice is dated March 15, 1999.
BORROWER:
SELMAN SYSTEMS, INC.
By: /s/ ZIAD DALAL
-------------------------------
ZIAD DALAL. PRESIDENT
GUARANTOR:
/s/ ZIAD DALAL
- - -------------------------------
ZIAD DALAL
LENDER:
Bank One, Texas, N.A.
BY:
-------------------------------
Authorized Officer
PROMISSORY NOTE
$322,500.00 DATED: March 1, 1999
PRINCIPAL AND INTEREST. For value received, SURF CITY ACQUISITION CORPORATION
II, an Arizona corporation (hereinafter "Maker"), promises to pay to Robert E.
Petersen & Margret M. Petersen, Trustees of the R.E. & M. Petersen Living Trust
dated 1/17/83 (hereinafter "Holder"), or to its order, at its principal office
located at 6420 Wilshire Boulevard, 20th Floor, Los Angeles, California 90048,
or such other place as Holder may from time to time designate, in lawful money
of the United States of America, the principal amount of THREE HUNDRED
TWENTY-TWO THOUSAND FIVE HUNDRED AND NO/100 DOLLARS ($322,500.00) together with
interest from the date of the first advance until paid in full, at ten percent
(10%) per annum. Notwithstanding any other term or condition hereof, in the
event the Holder shall advance to Maker amounts in excess of the face amount
hereof, any and all such advances shall be subject to and constitute
indebtedness under and subject to the terms and conditions of this Agreement.
Interest shall be calculated on the basis of a 360-day year by using the
applicable rate divided by 360 and multiplying the result by the actual number
of days elapsed.
PAYMENTS. MAKER shall pay principal and interest as follows:
(1) Commencing on the first day of April, 1999, and continuing on the same
day of each month thereafter, Maker shall make consecutive monthly installments
of $14,881.74.
(2) Any installment not made within ten (10) days of the date it is due
shall, in addition to interest applicable thereto, to the extent permitted by
applicable law be subject to a late charge equal to five percent (5%) of the
amount of the delinquent installment. All payments received shall be applied
first to any late charges, to accrued interest, and the balance, if any, to the
reduction of principal. Any payments due hereunder shall be made in lawful money
of the United States of America.
DEFAULT. This Note shall be in default if: (a) Maker fails to pay any amount
when due as herein set forth or (b) Maker or either Kevin A. Blackwell or David
A Guarino becomes insolvent or voluntarily or involuntarily becomes subject to
any proceeding under the Bankruptcy Code.
REMEDIES. In the event of any default, Holder may, at its option, declare the
entire unpaid principal balance, together with accrued interest and other
charges, to be immediately due and payable. Holder's remedies shall be
cumulative with any and all other remedies available to it at law or-in equity.
Maker waives any right to presentment, notice, dishonor, notice of dishonor, or
demand. Holder may delay enforcing any of its rights under this Note without
losing or waiving them. Holder's wavier of any default shall not constitute a
wavier of any subsequent default.
COLLECTION COSTS. In the event of a default under the terms of this Note, Maker
agrees to pay all collection costs, including but not limited to attorneys' fees
and court costs, incurred by Holder, whether before, during or subsequent to any
bankruptcy proceedings, litigation, or appeal.
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<PAGE>
INTEREST LIMITATION. Notwithstanding any provision herein to the contrary, the
maximum interest which may be charged, taken or collected under this Note shall
not exceed the maximum rate which is held to be applicable to this Note by a
Court of Competent Jurisdiction.
ENTIRE AGREEMENT. This Note is the final expression of the agreement and
understanding of Maker and Holder with respect to the general subject matter
hereof and supersedes any previous understanding, negotiations or discussions,
whether written or oral. This Note may only be modified in writing and may not
be contradicted by evidence of any alleged oral agreement.
This Note shall be construed in accordance with the laws of the State of
Arizona. Time is of the essence hereof.
SURF CITY ACQUISITION
CORPORATION II, an Arizona corporation
By /s/ Kevin A. Blackwell
----------------------------------
Kevin A. Blackwell, President
/s/ Kevin A. Blackwell
- - -------------------------------------
Kevin A. Blackwell
/s/ David A. Guarino
- - -------------------------------------
David A. Guarino
2
<PAGE>
GUARANTY
THIS GUARANTY (the "Guaranty"), dated as of March 1, 1999, is made by each
of Kevin A. Blackwell and David A. Guarino (each a "Guarantor" and collectively
the "Guarantors") in favor of Robert E. Petersen and Margaret M. Petersen,
Trustees of the R.E.&M. Petersen Living Trust dated 1/17/83 (the "Trustees").
Surf City Squeeze Acquisition Corporation, Inc., an Arizona corporation
(the "Borrower"), and the Trustees are parties to a Promissory Note dated as of
March 1, 1999 (as amended, modified, renewed or extended from time to time, the
"Promissory Note"). It is a condition precedent to [the borrowings under the
Promissory Note] that each Guarantor guarantees the indebtedness and other
obligations of the Borrower to the Trustees as set forth herein. Each Guarantor
is a principal shareholder of the Borrower and wishes to provide assurance to
guarantee that the Borrower will perform its obligations to the Trustees
evidenced by the Promissory Note.
Accordingly, to induce the Trustees to make the loan evidenced by the
Promissory Note, and in consideration thereof, each Guarantor hereby agrees as
follows:
(1) GUARANTY. Each Guarantor unconditionally and jointly and severally
guarantees to the Trustees timely and complete payment when due (whether at
stated maturity, by required prepayments, declaration, acceleration, demand or
otherwise) and performance of the indebtedness, liabilities and other
obligations of the Borrower to the Trustees under the Promissory Note. The
foregoing indebtedness, liabilities and other obligations of the Borrower, and
all other indebtedness, liabilities and obligations to be paid or performed by
each Guarantor in connection with this Guaranty, shall hereinafter be
collectively referred to as the "Guaranteed Obligations."
(2) LIABILITY OF EACH GUARANTOR. The liability of each Guarantor under this
Guaranty shall be irrevocable, absolute, independent and unconditional, and
shall not be affected by any circumstance which might constitute a discharge of
a surety or guarantor other than the payment and performance in full of all
Guaranteed Obligations.
(3) GUARANTORS' WAIVERS. Each Guarantor waives and agrees not to assert:
A) any right to require the Trustees to marshal assets in favor of
the Borrower, each Guarantor, any other guarantor or any other
person, to proceed against the Borrower, any other guarantor or
any other person, or to pursue any other right, remedy, power or
privilege of the Trustees whatsoever;
B) the defense of the statute of limitations in any motion hereunder
or for the collection or performance of the Guaranteed
Obligations;
C) any rights to set-offs and counterclaims;
D) without limiting the generality of the foregoing, to the fullest
extent permitted by law, any defense or benefits that may be
derived from or afforded by applicable law limiting the liability
of or exonerating guarantors or sureties; or which may conflict
<PAGE>
with the terms of this Guaranty, including any and all benefits
that otherwise might be available to each Guarantor under
California Civil Code Sections 1432, 2809, 2810, 2819, 2839,
2845, 2848, 2849, 2850, 2899 and 3433.
(4) ADDITIONAL WAIVERS. Each Guarantor waives any and all notice of the
acceptance of this Guaranty, and any and all notice of the creation, renewal,
modification, extension or accrual of the Guaranteed Obligations, or the
reliance by the Trustees upon this Guaranty, or the exercise of any right, power
or privilege hereunder. Each Guarantor waives promptness, diligence,
presentment, protest, demand for payment, notice of default, dishonor or
nonpayment and all other notices to or upon the Borrower or each Guarantor with
respect to the Guaranteed Obligations.
(5) SUBROGATION. Until the Guaranteed Obligations shall be satisfied in
full, each Guarantor shall not have, and shall not directly or indirectly
exercise, (i) any rights that it may acquire by way of subrogation under this
Guaranty, by any payment hereunder or otherwise, or (ii) any rights of
contribution, indemnification, reimbursement or similar suretyship claims
arising out of this Guaranty.
(6) CONTINUING GUARANTY. This Guaranty is a continuing guaranty and shall
continue in effect and be binding upon each Guarantor until termination of the
Promissory Note and performance in full of the Guaranteed Obligations.
(7) COSTS AND EXPENSES. Each Guarantor agrees to pay on demand all
collection costs and expenses of the Trustees, including but not limited to
attorneys' fees and court costs, whether before, during or subsequent to any
bankruptcy proceedings, litigation or appeal, in connection with the enforcement
or attempted enforcement, or preservation of any rights under, this Guaranty.
(8) BINDING EFFECT. This Guaranty shall be binding upon each Guarantor and
each Guarantor's successors and assigns, to inure to the benefit of and be
enforceable by the Trustees and its successors, transferees and assigns.
(9) ASSIGNMENT. Each Guarantor shall not have the right to assign or
transfer its rights and obligations hereunder without the prior written consent
of the Trustees.
(10) GOVERNING LAW. THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA, UNITED STATES.
-2-
<PAGE>
IN WITNESS WHEREOF, each Guarantor has executed this Guaranty, as of the
date first above written.
By: /s/ Kevin A. Blackwell
------------------------------------
Kevin A. Blackwell
By: /s/ David A. Guarino
------------------------------------
David A. Guarino
-3-
CONSENT AND WAIVER OF TERMS OF SERIES A PREFERRED STOCK
The undersigned, constituting a majority of the shareholders of Series A
Preferred Stock of Sports Group International, Inc., a Florida corporation ("the
Company"), hereby consent to and agree to the waiver and modification of the
terms of the Series A Preferred Stock as follows:
1. CONSENT TO ISSUE SERIES B STOCK. Kevin Blackwell shall and does
consent to the issuance of the Series B Stock.
2. WAIVER OF REDEMPTION FEATURE OF SERIES A STOCK. Kevin Blackwell
shall and does consent to the waiver of the Redemption feature of the
Series A Stock as defined in Article I, Section 3 of the Articles of
Amendment to Articles of Incorporation of Sports Group International, Inc.,
filed on May 11,1999. In exchange for the waiver of the Redemption Feature,
Blackwell shall receive an Option to Purchase 105.000 shares of common
stock for $1.00 each.
3. WAIVER OF PART OF THE SECURITY FEATURE OF SERIES A STOCK. Kevin
Blackwell shall and does consent to the waiver of the Security Features of
the Series A Stock defined in Article I, Section 4tf the Articles of
Amendment to Articles of Incorporation of Sports Group International, Inc.,
filed on May 11, 1999.
4. MODIFICATION OF CONVERSION PRICE FOR SERIES A STOCK. In
consideration of the waiver and consent contained herein, each share of
Series A Stock shall be convertible into 13 1/3 shares of Common Stock at
the election of the Holder of the Series A Stock.
6. REGISTRATION RLOHTS, In consideration of the waiver and consent
contained herein, the Series A Stock shall be entitled to the following
Registration Rights:
5.1 DEFINITIONS. For purposes of this Section 5:
(a) REGISTRATION. The terms "register," "registered," and
"registration" refer to a registration effected by preparing
and filing a registration statement in compliance with the
1933 Act, and the declaration or ordering of effectiveness
of such registration statement.
(b) REGISTRABLE SECURITIES. The term "Registrable
Securities" means: (1) all the shares of Common Stock of the
Company issued or issuable upon the conversion of any shares
of Series A and/or Series B Preferred Stock issued and
shares of Common Stock issued or issuable upon exercise of
the Warrant and (2) any shares of Common Stock of the
Company issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to,
or in exchange for or in replacement of, the Series A and/or
B Preferred Stock or all such shares of Common Stock
described in clause (1) of this subsection (b), as such
shares may be adjusted for any stock dividends, splits,
reverse splits, combinations and recapitalizations occurring
after the closing; excluding in all cases, however, any
Registrable Securities sold to the public or sold pursuant
to Rule 144.
1
<PAGE>
(c) REGISTRABLE SECURITIES THEN OUTSTANDING. The number of
shares of "Registrable Securities then outstanding" shall
mean the number of shams of Common Stock which are
Registrable Securities and (1) are then Issued and
outstanding or (2) are then issuable pursuant to the
exercise or conversion of then outstanding end then
exercisable options, warrants or convertible securities.
(d) HOLDER. For purposes of this Section 7, the term
"Holder" means any person owning of record Registrable
Securities that have not been sold to the public pursuant to
Rule 144 or any assignee of record of such Registrable
Securities.
(e) SEC. The term `SEC" or "Commission" means the U.S.
Securities and Exchange Commission.
5.2 PIGGYBACK REGISTRATIONS The Company shall notify all Holders
of Registrable Securities in writing at least thirty (30) days prior
to filing any registration statement under the 1933 Act for purposes
of effecting a public offering of securities of the Company (but
excluding registration statements relating to any employee benefit
plan or a corporate reorganization) and will afford each such Holder
an opportunity to include in such registration statement all or any
part of the Registrable Securities then held by such Holder. Each
Holder desiring to include in any such registration statement all or
any part of the Registrable Securities held by such Holder shall,
within twenty (20) days after receipt of the above-described notice
from the Company, so notify the Company in writing, and in such notice
shall inform the Company of the number of Registrable Securities such
Holder wishes to include in such registration statement, If a Holder
decides not to include all of its Registrable Securities in any
registration statement thereafter filed by the Company, such Holder
shall nevertheless continue to have the right to include any
Registrable Securities In any subsequent registration statement or
registration statements as may be filed by the Company with respect to
offerings of its securities, all upon the terms and conditions set
forth herein.
(a) UNDERWRITING. If a registration statement under which
the Company gives notice under this Section 5.2 is for an
underwritten offering, then the Company shall so advise the
Holders of Registrable Securities. In such event, the right of
any such Holder's Registrable Securities to be included in a
registration pursuant to this Section 5.2 shall be conditioned
upon such Holders participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein, All Holders proposing
to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in
customary form with the managing underwriter or underwriter(s)
selected for such underwriting. Notwithstanding any other
provision of this Agreement, If the managing underwriter
determine(s) in good faith that marketing factors require a
limitation of the number of shares to be underwritten, then the
managing underwriter(s) may exclude shares (including Registrable
Securities) from the registration and the underwriting, and the
number of shares that may be included in the registration and the
2
<PAGE>
underwriting shall be allocated, first to the Company, and
second, to each of the Holders requesting inclusion of their
Registrable Securities in such registration statement and each
other stockholder exercising piggyback registration rights on a
pro rata basis. If any Holder disapproves of the terms of any
such underwriting, such Holder may elect to withdraw therefrom by
written notice to the Company and the underwriter, delivered at
least ten (10) business days prior to the effective date of the
registration statement. Any Registrable Securities excluded or
withdrawn from such underwriting shall be excluded and withdrawn
from the registration. For any Holder which is a partnership or
corporation, the partners, retired partners and stockholders of
such Holder, or the estates and family members of any such
partners and retired partners and any trusts for the benefit of
any of the foregoing persons Shall be deemed to be a single
"Holder," and any pro rata reduction with respect to such "Holder
shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals
included In such "Holder." as defined in this sentence.
(b) EXPENSES. The Company shall bear and pay all expenses
Incurred in connection with any registration or qualification of
Registrable Securities pursuant to this Section 5.2 for each
Holder, including all registration and qualification fees,
printers and accounting fees relating thereto, and legal fees of
counsel to the Company, but excluding underwriting discounts and
commissions relating to the Registrable Securities and the legal
fees of counsel to the Holders.
5.3 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities under this Agreement, the
Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use Its best
efforts to cause such registration statement to become effective,
and, upon the request of the Holders of a majority of the
Registrable Securities registered thereunder, keep such
registration statement effective for up to ninety (90) days.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus
used in connection with such registration statement as may be
necessary to comply with the provisions of the 1933 Act with
respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity
with the requirements of the 1933 Act, and such other documents
as they may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by them that are
included in such registration.
3
<PAGE>
(d) If the Company has delivered preliminary or final
prospectuses to the Holders and after having done so the
prospectus is amended to comply with the requirements of the 1933
Act the Company shall promptly notify the Holders and, if
requested, the Holders shall immediately cease making offers of
Registrable Shares and return all prospectuses to the Company The
Company shall promptly provide the Holders with revised
prospectuses and, following receipt of the revised prospectuses,
the Holders shall be free to resume making offers of the
Registrable Shares.
(e) Use its best efforts to register and qualify the
securities covered by such registration statement under such
other securities or Blue Sky laws of such jurisdictions as shall
be reasonably requested by the Holders, keep such registration or
qualification in effect for so long as such registration
statement remains in effect, and take any other action which may
be reasonably necessary or advisable to consummate the
disposition in such jurisdictions of such securities; PROVIDED
that the Company shall not be required In connection therewith or
as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or
jurisdictions.
(f) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement,
in usual and customary form, with the managing underwriter(s) of
such offering. Each Holder participating in such underwriting
shall also enter Into and perform its obligations under such an
agreement.
(g) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus
relating thereto is required to be delivered under the 1933 Act
of the happening of any event as a result of which the prospectus
included In such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the
circumstances then existing and, upon the occurrence of any such
event, prepare a supplement or post-effective amendment to the
registration statement or related prospectus or any document
incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of
the securities being sold thereunder, such prospectus will not
include any untrue statement of a material fact or omit to state
any material fact necessary to make the facts Therein not
misleading.
(h) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus
relating thereto is required to be delivered under the 1933 Act
of the issuance by the SEC of (i) any stop order suspending the
effectiveness of a registration statement or the initiation of
any proceedings for that purpose and (ii) the receipt by the
Company of any notification with respect to the suspension of the
qualification of any of such Registrable Securities for sale in
4
<PAGE>
any jurisdiction or the initiation or threatening of any
proceeding for such purpose, and the Company shall make every
reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of such a registration statement or
the lifting of any suspension of the qualification of any of the
Registrable Securities for sale in any jurisdiction, at the
earliest possible time.
(i) Cause all Registrable Securities covered by such
registration statement to be listed on each securities exchange,
if any, on which securities of such class are then listed.
(j) Use its reasonable efforts to take any other steps
necessary to effect the registration contemplated by Section 5.2.
5.4 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section
5 that the selling Holders shall furnish to the Company such
information regarding themselves, the Registrable Securities held by
them, and the intended method of disposition of such securities as
shall be required to timely effect the registration of their
Registrable Securities.
5.5 DELAY OF REGISTRATION. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any
such registration as the result of any controversy that might arise
with respect to the interpretation or implementation of this Section
5.
5.6 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under this Section 5:
(a) BY THE COMPANY, To the extent permitted by law, the
Company will indemnify and hold harmless each Holder, the
partners, officers and directors of each Holder, any underwriter
(as defined in the 1933 Act) for such Holder and each person, if
any, who controls such Holder or underwriter within the meaning
of the 1933 Act or the 1934 Act, against any losses, claims.
damages, or liabilities (joint or several) to which they may
become subject under the 1933 Act, the 1934 Act or other federal
or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or
violations (collectively a "Violation"):
(i) any untrue statement or alleged untrue statement of
a material fact contained In any registration statement
under which Registrable Securities are registered, including
any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto;
(ii) the omission or alleged omission to state therein
a material fact required to be stated therein, or necessary
to make the statements therein not misleading; or
5
<PAGE>
(iii) any violation or alleged violation by the Company
of the 1933 Act, the 1934 Act, any federal or state
securities law or any rule or regulation promulgated under
the 1933 Act, the 1934 Act or any federal or state
securities law In connection with the offering covered by
such registration statement; and the Company will reimburse
each such Holder, partner, officer or director, underwriter
or controlling person for any legal or other expenses
reasonably incurred by them, as incurred, in connection with
investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity
agreement contained in this subsection 5.6(a) shall not
apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected
without the consent of the Company (which consent shall not
be unreasonably withheld), nor shall the Company be liable
in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based
upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for
use in connection with such registration by such Holder,
partner, officer, director, underwriter or controlling
person of such Holder.
(b) BY SELLING HOLDERS. To the extent permitted by law, each
selling Holder will indemnify and hold harmless the Company, each
of its directors, each of its officers who have signed the
registration statement, each person, if any, who controls the
Company within the meaning of the 1933 Act, any underwriter and
any other Holder selling securities under such registration
statement or any of such other Holders partners, directors or
officers or any person who controls such Holder within the
meaning of the 1933 Act or the 1934 Act, against any losses,
claims, damages or liabilities (joint or several) to which the
Company or any such director, officer, controlling person,
underwriter or other such Holder, partner or director, officer or
controlling person of such other Holder may become subject under
the 1933 Act, the 1934 Act or other federal or state law, insofar
as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation) in
each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written
information furnished by such Holder expressly for use in
connection with such registration; and each such Holder will
reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer, controlling person,
underwriter or other Holder, partner, officer, director or
controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity
agreement contained in this subsection 5.6(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the
consent of the Holder, which consent shall not be unreasonably
withheld; and provided further, That the total amounts payable in
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<PAGE>
Indemnity by a Holder under this Section 5.6(b) in respect of any
Violation shall not exceed the net proceeds received by such
Holder in the registered offering out of which such Violation
arises.
(c) NOTICE. Promptly after receipt by an indemnified party
under this Section 5.6 of notice of the commencement of any
action (Including any governmental action), such indemnified
party will, if a claim in respect thereof Is to be made against
any Indemnifying party under this Section 5.6, deliver to the
indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate
in, and, to the extent the indemnifying party so desires, jointly
with any other Indemnifying party similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the
parties; provided, however, that an indemnified party shall have
the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if representation of such
Indemnified party by the counsel retained by the indemnifying
party would be inappropriate due to actual or potential conflict
of interests between such indemnified party and any other party
represented by such counsel In such proceeding The failure to
deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action, if
prejudicial to its ability to defend such action, shall relieve
such indemnifying party of any liability to the indemnified party
under this Section 5.6, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any
liability that It may have to any indemnified party otherwise
than under this Section 5.6.
(d) CONTRIBUTION, In order to provide for just and equitable
contribution to joint liability under the 1933 Act in any case in
which either (i) any Holder exercising rights under this
Agreement, or any controlling person of any such Holder, makes a
claim for indemnification pursuant to this Section 5.6 but It is
judicially determined (by the entry of a final judgment or decree
by a court of competent jurisdiction and the expiration of time
to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding
the fact that this Section 5.6 provides for Indemnification in
such case, or (ii) contribution under the 1933 Act may be
required on the part of any such selling Holder or any such
controlling person in circumstances for which indemnification is
provided under this Section 5.6; then, and in each such case, the
Company and such Holder will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that such
Holder is responsible for the portion represented by the
percentage that the public offering price of its Registrable
Securities offered by and sold under the registration statement
bears to the public offering price of all securities offered by
and sold under such registration statement, and the Company and
other selling Holders are responsible for the remaining portion;
provided, however, that, in any such case, (A) no such Holder
wilt be required to contribute any amount in excess of the public
offering price of all such Registrable Securities offered end
8
<PAGE>
sold by such Holder pursuant to such registration statement; and
(B) no person or entity guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) will be
entitled to contribution from any person or entity who was not
guilty of such fraudulent misrepresentation.
(e) Survival. The obligations of the Company and Holders
under this Section 5.6 shall survive the completion of any
offering of Registrable Securities in a registration statement,
and otherwise.
5.7 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that
it shall not to the extent requested by the Company or an underwriter
of securities of the Company, sell or otherwise transfer or dispose of
any Registrable Securities or other shares of stock of the Company
then owned by such Holder (other than to donees, partners or
affiliates of the Holder who agree to be similarly bound) for up to
one hundred and eighty (180) days following the effective date of a
registration statement of the Company filed under the 1933 Act;
provided, however, that:
(a) such agreement shall be applicable only to the first
such registration statement of the Company which covers
securities to be sold on its behalf to the public in an
underwritten offering but not to Registrable Securities sold
pursuant to such registration statement; and
(b) all executive officers, directors and stockholders then
holding Common Stock of the Company enter into similar
agreements.
in order to enforce the foregoing covenant, the Company shall have the
right to place restrictive legends on the certificates representing
the shares subject to this Section and to Impose stop transfer
instructions with respect to the Registrable Securities and such other
shares of stock of each Holder (and the shares or securities of every
other person subject to the foregoing restriction) until the end of
such period.
5.8 RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the Commission which may
at any time permit the sale of the Registrable Securities to the
public without registration, after such time as a public market exists
for the Common Stock of the Company, the Company agrees to:
(a) Make and keep public information available, as those
terms are understood and defined in Rule 144, at all times after
the effective date of the first registration under the 1933 Act
filed by the Company for an offering of its securities to the
general public;
(b) Use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the
Company under the 1933 Act and the 1934 Act (at any time after It
has become subject to such reporting requirements); and
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<PAGE>
(c) So long as a Holder owns any Registrable Securities, to
furnish to the Holder forthwith upon request a written statement
by the Company as to Its compliance with the reporting
requirements of said Rule 144 (at any time after ninety (90) days
after the effective date of the first registration statement
filed by the Company for an offering of its securities to the
general public), and of the 1933 Act and the 1934 Act (at any
time after it has become subject to the reporting requirements of
the 1934 Act), a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents of
the Company as a Holder may reasonably request in availing itself
of any rule or regulation of the Commission allowing a Holder to
sell any such securities without registration (at any time after
the Company has become subject to the reporting requirements of
the 1934 Act).
5.9 TERMINATION OF THE COMPANY'S OBLIGATIONS. The Company shall
have no obligations pursuant to this Section 5 with respect to: (i)
any request or requests for registration made by any Holder on a date
more than five (5) years after the closing date of the Initial Public
Offering; (ii) any request or requests for registration made by any
Holder after an acquisition of the Company by a publicly traded,
reporting company, pursuant to which such Holder receives registered
securities listed for trading; or (iii) any Registrable Securities
proposed to be sold by a Holder In a registration pursuant to this
Section 5 if, in the opinion of counsel to the Company, all such
Registrable Securities proposed to be sold by a Holder may be sold In
a three-month period without registration under the 1933 Act pursuant
to Rule 144.
Said modifications and waivers are hereby agreed to and consented to by the
undersigned, holder of a majority of the shares of Series A Preferred Stock of
the Company. Said modifications and consent are being provided in reliance upon
the execution and performance of the Series B Preferred Stock and Warrant
Purchase Agreement between Sports Group International, Inc., a Florida
Corporation and Robert E. Petersen & Margret M. Petersen, Trustees of the R.E. &
M. Petersen Living Trust dated 1/17/83 attached hereto as Exhibit "A". Without
said agreement, this consent Is of no force and effect and shall be void.
Further, the consent to the above-described modifications are being obtained as
required pursuant to the terms of the Series B Preferred Stock and Warrant
Purchase Agreement dated May 20, 1999.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
The Parties agree to sign and file any and all documents necessary to
effectuate the terms of this Agreement, including, but not limited to Consents
to the Amendment of the Articles of Incorporation to be filed with the Secretary
of State of Florida.
This consent may be executed in counterparts and by facsimile signatures.
Date: May 20, 1999 By: /s/ Kevin Blackwell
------------------------------------
Kevin Blackwell
As the sole Holders of the Series B Stock, we hereby Consent to the
above-described changes to the terms and conditions of the Series A Stock.
Date: May 20, 1999 THE R.E. PETERSEN LlVING TRUST DATED
1/17/83
By: /s/ Robert E. Petersen
------------------------------------
Robert E. Petersen, Trustee
/s/ Margret M. Petersen
------------------------------------
Margret M. Petersen, Trustee
10
SPORTS GROUP INTERNATIONAL, INC.
1999 STOCK OPTION PLAN
AS OF SEPTEMBER 2, 1999
<PAGE>
SPORTS GROUP INTERNATIONAL
1999 STOCK OPTION PLAN
1. PURPOSE
The Board of Directors of SPORTS GROUP INTERNATIONAL, INC., a Florida
corporation (the "Company"), wishes to adopt the 1999 Stock Option Plan
effective as of September 2, 1999 (the "1999 Stock Option Plan" or the "Plan").
The Plan will provide certain key employees of the Company (as defined below)
with an opportunity to purchase voting common stock of the Company as an
incentive to continue as employees of the Company and to work for the growth,
development, and financial success of the Company.
2. DEFINITIONS
The following terms shall have the meanings set forth below, unless
context otherwise requires.
"Board of Directors" or "Board" means the Board of Directors of the
Company.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Committee" means the Compensation Committee of the Board of
Directors, which shall be appointed in accordance with the procedures described
in Section 5.
"Company" means Sports Group International, Inc., a Florida
corporation, and any subsidiary that is treated as a "subsidiary" under section
425 of the Code.
"Effective Date" means September 2, 1999.
"ISO" means an incentive stock option granted a Participant under this
Plan and which qualifies as an incentive stock option under section 422 of the
Code.
"Independent Director" means a director of the Company who is not an
officer, employee, or holder of 10% or more of any class of the Company's common
or preferred stock.
"NSO" means any option granted under this Plan that is not an ISO.
"Participant" means any employee, Independent Director, or consultant
of the Company who has been selected by the Committee to participate in the
Plan.
"Plan" means the Company's 1999 Stock Option Plan, effective as of
September 2, 1999.
<PAGE>
"Stock" means the common stock of Company, par value $0.001 per share.
"Stock Option" means any ISO or NSO granted to a Participant under
this Plan, which is evidenced by a writing executed by the Participant and by an
authorized member of the Committee.
"Stock Grant" means the grant of a Stock Option.
3. STOCK GRANTS
The Committee may make Stock Grants to a Participant (including,
without limitation, "ISO"s or "NSO"s) under this Plan, in any combination. At
the time a Stock Grant is awarded under this Plan, the Committee shall designate
whether such grant is an ISO or NSO Stock Grant. Any Stock Grant made by the
Committee hereunder shall be administered pursuant to, and in accordance with,
this Plan, and shall be subject to all restrictions set forth herein.
4. ELIGIBILITY
The Committee, subject to the following limitations, shall from time
to time designate from among the Company's employees those persons who will be
Participants in the Plan. Only full- time employees of the Company at the time a
Stock Option is granted, who, in the sole judgment of the Committee, (i) are
qualified by position, training, ability, and responsibility to contribute sub
stantially to the progress of the Company; (ii) have a material, positive effect
on the results of the operations of the Company; or (iii) are key employees or
critical line employees shall be eligible to participate in the Plan.
Notwithstanding the foregoing, Independent Directors of the Company and any
consultant to the Company who has been designated by the Board as performing a
critical function for the Company are eligible to be Participants in the Plan.
Only employees of the Company shall be eligible to receive ISOs.
5. ADMINISTRATION
(a) ADMINISTRATIVE COMMITTEE. This Plan shall be administered by the
Compensation Committee ("Committee"). The Committee shall be appointed by the
Board of Directors. At such time as the Company has at least two independent
directors, a majority of the Committee shall be appointed from independent
members of the Board of Directors. Members of the Committee shall serve at the
pleasure of the Board, and the Board may, from time to time, remove members
from, or add members to, the Committee. Vacancies on the Committee, however
caused, shall be filled by the Board. No member of the Committee shall
participate in or take any action with respect to any Stock Grant made with
respect to such member, except as otherwise provided herein. The Committee shall
select one of its members as Chairman and shall hold meetings at such times and
places as it may determine. A majority of the Committee at a meeting at which a
quorum is present, or acts reduced to or approved in writing by a majority of
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the members of the Committee, shall be valid acts of the Committee. The
Committee shall have the sole, final, and conclusive authority to interpret this
Plan, to determine the rights and obligations of Participants under the Plan,
and to determine matters relating to the employment of a Participant, including,
without limitation, the time at which a Participant terminates employment. No
member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to this Plan or any option granted
hereunder.
(b) ADMINISTRATION OF PLAN. The Committee may adopt rules and
procedures for administration of the Plan, to the extent such rules and
procedures are not inconsistent herewith, which shall be of general application
to all Participants and the Stock Options granted pursuant to the Plan. Subject
to the provisions of this Plan, the Committee shall have the sole, final, and
conclusive authority to determine:
(1) Those employees who will become Participants and the terms
and conditions of their eligibility;
(2) The Participants to whom Stock Grants are to be made and the
nature and amount of such Stock Grants;
(3) All terms and conditions of each Stock Grant, including,
without limitation:
(i) The number of shares of Stock (as hereinafter defined)
for which a Stock Grant is made;
(ii) The price to be paid for Stock upon exercise of a Stock
Grant;
(iii) The terms and conditions of the exercise;
(iv) The terms of payment of the exercise price of a grant;
(v) Any conditions to which the grant or its exercise may
be subject;
(vi) Any restrictions or limitations placed on Stock issued
pursuant to the exercise of a Stock Grant; and
(vii) Any vesting schedule applicable to any Stock Grant.
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<PAGE>
6. SHARES OF STOCK SUBJECT TO PLAN
(a) SHARES RESERVED FOR OPTION GRANTS. There shall be reserved for the
Stock Grants pursuant to this Plan (including Stock Grants made under Section 8)
2,000,000 shares of the presently authorized but unissued Stock. ISOs or NSOs,
or any combination thereof, may be granted pursuant to this Plan from such
shares, up to such total limitation; provided, however, that in no event shall
the aggregate number of shares of Stock subject to all Stock Grants made under
this Plan exceed 2,000,000 shares of Stock, except as described in paragraph (b)
below.
(b) ADJUSTMENT TO SHARES. The aggregate number of shares of Stock
which may be issued under paragraph (a) of this Section 6 pursuant to Stock
Grants made under this Plan shall be automatically adjusted, without further
action by the Board or the shareholders of the Company, to reflect changes in
the capitalization of the Company, such as stock dividends, stock splits,
reverse stock splits, subdivisions, reorganizations or reclassification, or any
similar recapitalization that affects or modifies the number of shares of Stock
issued and outstanding at any time.
(c) NUMBER OF STOCK GRANTS; PARTIAL EXERCISE. More than one Stock
Grant may be made to the same Participant, and Stock Grants may be subject to
partial exercise. If any Stock Grant made under this Plan expires or is
terminated without being exercised, or after being partially exercised, the
shares of Stock allocated to the unexercised portion of a Stock Grant shall
revert to the pool of shares reserved in paragraph (a) of this Section for
grants made hereunder and shall again be available for Stock Grants made under
this Plan.
(d) ISOS. The aggregate fair market value of Stock subject to an ISO
granted under this Plan (determined without regard to this paragraph)
exercisable for the first time by any Participant during any calendar year
(under all plans of the Company) shall not exceed $100,000. The preceding
sentence shall be applied by taking ISO Options into account in the order in
which they were granted hereunder. If any ISO is granted that exceeds the
limitations of this paragraph at the first time it is exercisable, it shall not
be invalid, but shall constitute and be treated as an NSO to the extent of such
excess. For purposes of this Plan, the fair market value of the Stock subject to
any ISO shall be determined by the Committee without regard to any restriction
other than a restriction which, by its terms, will never lapse.
7. TERMS AND CONDITIONS OF GRANTS
(a) GRANT AGREEMENT. Each Stock Grant made under this Plan shall be
evidenced by a written agreement ("Stock Grant Agreement") and shall be executed
by the Company and the Participant. The Stock Grant Agreement shall contain any
terms and conditions required by this Plan and such other terms and conditions
as the Committee, in its sole discretion, may require that are not inconsistent
with the Plan.
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<PAGE>
(b) NUMBER OF SHARES AND NOTICE OF OPTION. Each Stock Grant shall
state the number of shares of Stock subject to the grant and shall state whether
the action is for an ISO or NSO.
(c) OPTION OR PURCHASE PRICE. Each Stock Option shall state the
exercise price of the option, which, in the case of an ISO, shall not be less
than 100% of the fair market value of the optioned Stock on the date the Stock
Option is granted. In the case of a Participant who, at the time the ISO is
granted, owns shares of Stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company (or any parent or
subsidiary), the exercise price of such ISO shall be not less than 110% of the
fair market value of Stock on the date the option is granted, and, in no event
shall such option be exercisable after the expiration of five years from the
date such option is granted. The exercise price for any share of stock subject
to an NSO Stock Grant shall not be less than 85% of the fair market value of a
share of the Stock as of the date of grant. The fair market value of a share of
the Company's Stock shall equal the closing price for such stock on the day
preceding the date of grant, as reported by the National Association of
Securities Dealers Automated Quotation System (NASDAQ) (National Market) or THE
WALL STREET JOURNAL. If for any reason the Company's stock is not publicly
traded on a national securities market or not listed on NASDAQ, the Committee
shall evaluate all factors which the Committee believes are relevant in
determining the fair market value of a share of Stock and, the Committee, in
good faith and exercising its business judgment, shall establish the fair market
value of the Stock as of the date an option is granted.
(d) LIMITATION ON PERIOD IN WHICH TO GRANT OR EXERCISE OPTIONS. No ISO
or NSO shall be granted under this Plan more than 10 years after the earlier of
(i) the date the Plan is adopted by the Board or (ii) the date the Plan is
approved by the shareholders of the Company. Any Stock Grant other than an ISO
made under the Plan may be exercised at any time permitted by the Stock Option
Agreement and may be granted any time prior to the termination of the Plan.
(e) TRANSFERABILITY. No Stock Grant made under this Plan shall be
transferable by the Participant other than by will or by the laws of descent and
distribution. During a Participant's lifetime, a Stock Grant made hereunder
shall be exercisable only by the Participant and only if at all times during the
period of time beginning on the date the Stock Grant is made and ending on the
day three months (or one year, in the case of an employee who retires on account
of becoming "permanently and totally disabled" within the meaning of that term
under section 22(e)(3) of the Code) before the date of exercise of such Stock
Grant, such Participant was an employee of the Company (or a corporation or a
parent corporation or subsidiary corporation of a corporation assuming an option
in a transaction to which section 424(a) of the Code applies).
(f) PAYMENT FOR STOCK. The exercise price for any shares of Stock
acquired through the whole or partial exercise of any Stock Grant shall be paid
in cash or immediately available funds, or in Stock with a current market value
equal to all or a part of the exercise price, or both.
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<PAGE>
(g) COMPLIANCE WITH APPLICABLE LAWS AND Regulations. Stock Grants made
under this Plan shall contain such provisions with respect to compliance with
applicable federal and state law as the Committee, with the advice of the
Company's counsel, may deem appropriate, including, without limitation, any
provision necessary to comply with state or federal securities laws.
(h) DISPOSITION OF ISO STOCK. No Stock issued in connection with a
Participant's exercise of an ISO may be disposed of by the Participant within
two years from the date the option is granted nor within one year after the date
such Stock is issued to the Participant and be eligible for treatment as an ISO;
provided, however, unless otherwise provided in the Stock Grant Agreement, these
holding periods shall not apply if the Stock Option is exercised after the death
of a Participant by the estate of such Participant, or by a person who acquired
the right to exercise such option by bequest or inheritance or by reason of the
death of a deceased Participant.
(i) TERM OF ISO. In no event shall an ISO granted under this Plan be
exercised after the expiration of 10 years from the date such option is granted.
(j) INSOLVENT PARTICIPANTS. No disposition of Stock, as described in
Section 422(c)(3) of the Code, acquired pursuant to the exercise of an ISO shall
constitute a disposition of Stock in violation of paragraph (h) of this Section.
(k) NON-INCENTIVE STOCK OPTION GRANTS. Any provision of this Plan to
the contrary notwithstanding, the Company may, in its sole discretion, grant any
Participant an NSO which, if provided in the granting agreement, may be
exercised after the termination of the Participant's employment with the
Company.
8. STOCK GRANTS TO INDEPENDENT DIRECTORS
There is hereby reserved for Stock Grants made to Independent
Directors of the Company 100,000 shares of Stock. The Stock available
exclusively for grants to Independent Directors shall reduce the number of
shares of Stock available for issuance under Stock Options granted to employees
and consultants under other provisions of this Plan. Only Independent Directors
of the Company shall be eligible for Stock Grants under this Section 8 of the
Plan.
(a) Any Independent Director who is appointed or elected to the Board
after the Effective date shall automatically receive an NSO for 10,000 shares of
the Company's Stock. The Stock Option shall be subject to forfeiture if the
Director voluntarily resigns within one year after the date of his election as a
Director. Except as otherwise provided in any written agreement between the
Company and the Director, any Stock Option granted an Independent Director shall
expire on the earlier of (i) ten years after the date of grant; (ii) one year
after the Independent Director terminates his service as a Director of the
Company; or (iii) the Expiration Date stated in the Stock Option Agreement.
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(b) Each Stock Grant made under this Section 8 shall be evidenced by a
written Stock Option Agreement that shall be executed by the Company and the
Independent Director. The Stock Option Agreement shall contain all terms and
conditions required by the Board, which the Board may in its discretion require,
including, without limitation, restrictions on the transferability of any Stock
issued pursuant to this Section 8.
(c) The exercise price of any Stock Option granted to an Independent
Director under this Section shall be 85% of the fair market value of a share of
the Company's Stock as of the date of grant. The fair market value of the
Company's Stock shall be determined in the same manner as provided in Section
7(c).
(d) No Stock Option granted under this Section shall be transferrable
by the Participant, other than by will or the laws of descent and distribution.
During a Participant's lifetime, a Stock Option granted hereunder shall be
exercisable only by the Participant and only if, at all times during the period,
beginning on the date the Stock Option was granted and ending three years (or
one year in the case of a Director who is permanently disabled within the
meaning of Section 22(e)(3) the Internal Revenue Code) before the date of the
exercise of such Stock Option, such Participant was a Director with the Company.
(e) The exercise price of any Stock Option granted hereunder shall be
paid in cash or immediately available funds or in Stock with a current market
value equal to all or part of the exercise price, or both. Any Stock Option
granted to an Independent Director shall not be exercisable for at least six
months following the date such Stock Option was granted or awarded.
(f) In addition to granting Stock Options to Independent Directors, as
provided herein, a majority of the Board of Directors (exclusive of any
Directors who are Participants in the Plan pursuant to this Section) may elect
to pay the Director's fees of any Independent Director by the issuance of Common
Stock for services rendered; provided that such Stock shall be valued at its
fair market value prior to the date such Director's fee is due and payable. The
fair market value of any Stock issued to an Independent Director under this
Section shall be determined in the same manner as set forth in Section 7(c)of
this Plan.
(g) The right to grant Options under this Section 8 shall expire upon
the date this Plan expires.
(h) A Participant, as a condition to the exercise of any Stock Option,
shall execute and deliver to the Company an investment letter in such form as
the Board of Directors, with the advice of legal counsel, may from time to time
determine to be appropriate.
(i) Any funds received pursuant to the exercise option under this
Section 8 shall be used for general corporate purposes.
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(j) Any options granted under this Section 8 shall be subject to all
other terms and conditions of all other terms and conditions of this Plan which
are not inconsistent with this Section.
9. MERGERS OR CONSOLIDATIONS
If the Company at any time dissolves or undergoes a reorganization,
including, without limitation, a merger or consolidation with any other
corporation, in any manner or form whatsoever, and the Company is not the
surviving corporation and the surviving corporation does not agree to assume the
options granted pursuant to this Plan, or to substitute options in place
thereof, the Stock Grants made under this Plan may be terminated and canceled by
a resolution of the Board of Directors, subject to the procedures set forth in
this Section. Prior to any termination of this Plan or the Stock Grants made
hereunder, each Participant holding an outstanding Stock Grant not yet exercised
shall be notified of such termination and cancellation, and shall be provided a
period of not less than 15 days in which to exercise such Stock Grant prior to
its termination. A Participant's rights under the preceding sentence shall apply
without regard to whether such rights are specifically stated in any Stock
Option Agreement. In connection with any such termination of Stock Grants, the
Committee may, in its sole discretion, prescribe such terms and conditions as
the Committee deems appropriate and authorize the exercise of such Stock Grants
with respect to all shares covered. Any Stock Grant not exercised in accordance
with such prescribed terms and conditions shall terminate as of the date
specified by the Committee, and simultaneously, the Plan itself shall be
terminated, without further action by shareholders of the Company.
10. TERMINATION OF EMPLOYMENT
Except as provided in Section 7(k), any Stock Grant made pursuant to
this Plan shall immediately terminate upon a Participant's termination of
employment with the Company, unless such termination of employment occurs by
reason of the death or retirement (including early retirement) of the
Participant or on account of the permanent and total disability of the
Participant (as such term is defined in Section 22(e)(3) of the Code and the
regulations therein). Upon retire ment, a Participant (or the administrator or
conservator of the Participant's estate) may, subject to Section 7(i) of the
Plan, exercise any Stock Option granted in full within three months of
retirement or, in the event the Participant retired or terminated employment on
account of "permanent and total disability" (as that term is defined in Section
22(e)(3) of the Code), within one year of retirement. Should a Participant die
while in the employment of the Company or within three months after retirement,
the Participant's personal representative of his or her estate or other person
who acquired the right to exercise such option by bequest or inheritance or by
reason of the death of the deceased optionee may, subject to Section 7(i) of the
Plan or any contrary provision of the Stock Grant Agreement, exercise the option
in full within two years from the date of the optionee's death.
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11. EXPIRATION DATE OF PLAN
If not earlier terminated, this Plan shall terminate on September 1,
2009. In no event shall any Stock Option be granted under this Plan after
September 1, 2009. In no event shall any ISO be granted under this Plan after
September 1, 2009.
12. ADJUSTMENT TO SHARES SUBJECT TO STOCK OPTION
In the event the issued and outstanding Stock of the Company is
increased or decreased by reason of any stock split, reverse stock split,
subdivision, stock dividend, reorganization, or reclassification, the Stock
subject to any unexercised Stock Grant shall be automatically adjusted, without
further action on the part of any person, to reflect the effect of such event,
as if the shares of Stock subject to such Stock Grant were then issued and
outstanding.
13. CORPORATE ACTION
The grant of an option pursuant to this Plan shall not affect in any
way the right or power of the Company to make adjustments, reclassifications,
reorganizations, or changes of any kind to its capital or business structure or
to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of
its business or assets.
14. RIGHTS AS A SHAREHOLDER
A Participant shall have no rights as a shareholder of the Company
with respect to any shares of Stock subject to a Stock Grant made hereunder
until the date of the issuance of a stock certificate to the Participant for
such shares. Except as provided in Sections 6(b) and 12, no adjustment shall be
made for dividends (ordinary or extraordinary, whether in cash, securities, or
other property) or distributions or other rights for which the record date
precedes the date a stock certificate is issued to a Participant upon exercise
of a Stock Grant, except as otherwise provided in this Plan.
15. INVESTMENT PURPOSE
The Stock Grant and the Stock which is subject to any Stock Grant
issued under this Plan have not been registered with the Securities and Exchange
Commission. Each Stock Grant made under this Plan is subject to the condition
that the purchase of Stock hereunder by a Participant is for investment purposes
only, and not with a view to the subsequent resale or distribution of such
Stock, unless such Stock is registered under the Securities Act of 1933, as
amended, or an exemption from registration is available.
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16. INVESTMENT LETTER
Any Participant exercising a Stock Grant shall, as a condition to such
exercise, execute and deliver to the Company an investment letter in any form
the Committee may require.
17. AMENDMENT OF THE PLAN
The Board may terminate, suspend, discontinue, modify or amend this
Plan in any respect whatsoever, except that, without approval of the
shareholders of the Company, no such revision or amendment shall change the
number of shares of stock of the Company subject to the Plan, change the
designation of the class of employees eligible to receive options, decrease the
price at which options may be granted or remove the administration of the Plan
from the Committee. The preceding sentence notwithstanding, the Company may not
terminate this Plan with respect to any issued and outstanding Stock Grant
unless it gives the Participant notice of termination and not less than 15 days
in which to exercise such Stock Grant, if such Stock Grant is then exercisable.
To the extent this Plan has authorized the Committee to grant ISOs, this Plan
shall be interpreted and construed so as to qualify as an incentive stock option
plan under Section 422 of the Code and the regulations thereunder.
18. APPLICATION OF FUNDS
The proceeds received by the Company from the sale of shares of Stock
pursuant to the exercise of options shall be used for general corporate
purposes.
19. OBLIGATION TO EXERCISE GRANT
A Stock Grant shall impose no obligation upon the grantee to exercise
such grant.
20. APPROVAL OF SHAREHOLDERS; TERMINATION OF PLAN
This Plan shall be effective as of the Effective Date, subject to the
approval of the shareholders of the Company who hold a majority of the issued
and outstanding shares of all classes of stock of the Company, which approval
must occur within the period beginning 12 months before and ending 12 months
after the date the Plan is adopted by the Board of Directors. The Committee may
cause Stock Grants to be made under the Plan, subject to the Plan being approved
by the Company's shareholders within the period described above. If for any
reason the Company's shareholders should fail to approve this Plan within the
time stated, all Stock Grants made hereunder shall be void.
-10-
<PAGE>
IN WITNESS WHEREOF, the foregoing Plan was approved by the Board of
Directors on September 2, 1999, and by a majority of the shareholders of the
Company on October 12, 1999 and is executed by the undersigned officers of the
Company, being duly authorized to do so.
SPORTS GROUP INTERNATIONAL, INC.,
a Florida corporation
By /s/ Kevin Blackwell
-------------------------------------
Kevin Blackwell, President & CEO
By /s/ Kathryn Blackwell
-------------------------------------
Kathryn Blackwell, Secretary
-11-
<PAGE>
CERTIFICATION OF SPORTS GROUP INTERNATIONAL, INC.
IN WITNESS WHEREOF, this Plan was adopted by the Board of Directors of
Sports Group International, Inc., a Florida corporation ("Sports Group"), on
September 2, 1999, subject to the condition that it be approved by the
shareholders of Sports Group on or before September 1, 2000, and was executed by
the Chairman of the Board of Sports Group and its Secretary as of September 2,
1999. The Plan was approved by a majority of the shareholders of Sports Group on
October 12, 1999.
DATED as of this 13 day of October, 1999.
SPORTS GROUP INTERNATIONAL, INC.,
a Florida corporation
By /s/ Kathryn Blackwell
-------------------------------------
Kathryn Blackwell
Its Secretary
-12-
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
the 1st day of October 1999 by and between KEVIN A. BLACKWELL, an individual
("Employee") and Sports Group International, Inc., a Florida corporation ("SPGK"
or the "Company"). This Agreement terminates the Employment Agreement between
the Employee and Surf City Acquisition Corp II dated May 16, 1997.
R E C I T A L S
A. The Company desires to be assured of the continued services of
Employee in order to take advantage of his experience, knowledge and abilities,
and the Company is willing to employ Employee, and Employee desires to be so
employed, on the terms and conditions set forth in this Agreement.
B. Employee is currently employed under an the terms of the First
Modified Joint Plan of Reorganization Proposed by the Debtor and the Official
Committee of Unsecured Creditors in the United States Bankruptcy Court for the
District of Arizona on November 18, 1997 (the "Plan of Reorganization") with
Surf City Squeeze, Inc. ("SCS"). It is the intent to supplement the terms of the
employment under the Plan of Reorganization.
Accordingly, in consideration of the mutual promises, covenants and
agreements set forth herein, the parties hereby agree as follows:
1. EMPLOYMENT.
The Company hereby employs Employee, and Employee hereby accepts such
employment on the terms and conditions set forth below, to perform during the
term of this Agreement such duties as are described in Section 4 of this
Agreement as well as such other services as are described herein.
2. TERM OF EMPLOYMENT.
Unless sooner terminated pursuant to Section 5 herein, the term of
employment under this Agreement shall be for three (3) years commencing on
October 1, 1999 and ending as of September 30, 2002. After the initial term,
this Agreement shall continue for an indefinite term until terminated pursuant
to Section 5.
3. COMPENSATION.
During the continuance of Employee's employment hereunder, and as the
total compensation for the services which he renders hereunder, Employee shall
be entitled to the following:
a. BASE SALARY. Employee shall be entitled to receive an annual base
salary of $150,000.00 less income tax and other applicable withholdings, payable
in semi-monthly installments, and subject to annual review and upward adjustment
consistent with the Company's policies. Under the Employee's current terms of
employment with SCS, Employee receives an annual base salary of $100,000.00. The
base salary received from the Company shall be reduced by said amount so long as
Employee receives said base salary from SCS.
1 of 6
<PAGE>
b. EXPENSE REIMBURSEMENT. Employee shall be entitled to receive
reimbursement of any and all reasonable and documented expenses incurred by
Employee from time to time in the performance of his duties hereunder,
consistent with the Company's policies as set by the Company's Board of
Directors. Such reasonable expenses shall be reimbursed to Employee upon receipt
by the Company of an itemized list of such expenses, signed by Employee.
c. EMPLOYEE BENEFITS. Subject to applicable eligibility
requirements, Employee shall be entitled to participate in all employee benefit
plans and programs maintained by the Company for employees in general, including
without limitation, participation in any savings plan, retirement plan, group
health plan, medical reimbursement plan, and life and disability insurance plan.
Said benefits, to the extent permissible by law, shall also extend to Employee's
spouse and minor children.
d. AUTO ALLOWANCE. Employee shall be entitled to receive an auto
allowance as set by the Company's Board of Directors, payable on a monthly
basis, or such other amount, if any, as may be payable to employees of the
Company in comparable positions pursuant to the policies and plans of the
Company.
e. VACATIONS. Employee shall be entitled to take vacations at such
time or times and for such duration as may be approved by the Board of Directors
or the executive officers of the Company.
4. DUTIES. Employee shall serve as President of the Company and shall,
unless otherwise not reelected by the Company's shareholders, serve on its Board
of Directors. Employee shall devote as much of his principal occupational time,
ability and attention as necessary to perform his duties. Employee shall
diligently and conscientiously utilize his best efforts to, further the
Company's business, it being understood that Employee shall not be deemed to be
in breach of his duties hereunder if, and to the extent that, he engages in
personal investments and business so long as such activity or activities do/does
not interfere with his duties to be performed under this Agreement. Employee
shall provide such managerial and executive duties and acts, commensurate with
his position, skills and experience, as may be reasonably required by the
Company's board of Directors in connection with any aspect of the Company's
business. It is expressly understood and agreed that Employee has begun
development of a rolled-sandwich concept. It is expressly understood and agreed
that Employee may devote whatever time is necessary to further those concepts so
long as such time does not interfere with Employee's duties for the Company. It
is further understood and agreed that Employee is under no obligation to share
the profits of said concepts or other concepts, whether said concepts are
brought to the attention of the Company or not. It is expressly understood and
agreed that said outside ventures or concepts shall be the sole property of
Employee and not that of the Company.
5. TERMINATION.
a. EVENTS OF TERMINATION. Employment under this Agreement shall
terminate upon the happening of any of the following events
("Event of Termination"):
i. The mutual agreement between the Company and Employee or
after eighteen (18) months by either party;
ii. The death of Employee;
iii. At the option of the Company's Board of Directors consistent
with subparagraph (c), if Employee has become so physically
or mentally disabled as to be incapable of substantially
performing his duties hereunder for a period of 90
consecutive days in the case of a mental disability and 180
consecutive days in the case of physical disability;
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<PAGE>
iv. At the option of the Company's Board of Directors, in the
event of a material breach by Employee of this Agreement or
"for cause." As used in this Agreement, the term "for cause"
shall mean any of the following: any act of fraud,
misappropriation or similar conduct by Employee against the
Company; repeated intoxication by alcohol or drugs during
the performance of Employee's duties; failure, neglect or
refusal of Employee to perform any material obligation under
this Agreement (all duties described in Section 4 above are
deemed to be material); conviction of Employee of a felony;
conviction of Employee of a misdemeanor involving a breach
of trust; any undisclosed conflict of interest (except as
permitted by this Agreement); Employee's breach of its
confidentiality obligations set forth in Section 6(b)
herein; Employee's failure to or to comply with his
fiduciary duties to the Company (except as permitted by this
Agreement). Notwithstanding the foregoing, the following
shall not constitute "for cause": The disagreement by the
Company's Board of Directors with any action taken by
Employee in the exercise of Employee's reasonable and good
faith business judgment, unless such action violates any
directive of the Board of Directors of the Company (not in
conflict with the terms of this Agreement) made known to
Employee prior to such action;
v. the expiration of the term of employment under this
Agreement as set forth in Section 2 herein.
b. DUTIES UPON TERMINATION. Upon termination of employment under
this Agreement pursuant to Section 5(a) above, neither the
Company nor Employee shall have any remaining duties or
obligations under this Agreement except that:
i. The Company shall pay to Employee or his Estate such
compensation as is due pursuant to Section 3 above, prorated
to the date of termination;
ii. The Company shall pay to Employee or his Estate such other
compensation as may be due pursuant to Section 3 above in
the event termination is made under Sections 5(a)(i), (ii),
(iii) or (v) for a period of two (2) years in consideration
of Employee's strict adherence to the restrictive covenants
set forth in Section (6) herein;
iii. The Company shall provide conversion rights for the benefit
of Employee, his spouse and/or dependents, as applicable,
for medical, dental and other benefits as and to the extent
possible under the Company's then-existing insurance and
benefits plans or policies, but in no event shall said
medical and dental benefits cease less than two (2) year
following termination or upon Employee finding employment
with said benefits provided to Employee and Employee's
family; and
iv. Upon termination, Employee shall continue to be bound by the
provisions of Sections 6 of this Agreement.
3 of 6
<PAGE>
c. DETERMINATION OF DISABILITY. The determination of disability
shall be made by a member of the medical profession in good
standing selected or approved by the Company; provided, however,
that in the event the Employee disagrees with a determination of
disability, he shall be entitled to present a contrary
determination by a member of the medical profession in good
standing selected by him, and the two doctors so selected shall
attempt to reach agreement as to the determination of disability.
In the event the two doctors fail to agree, the determination
regarding disability shall be made by a third member of the
medical profession in good standing jointly appointed by such
doctors or, if they fail to agree upon such appointment, such
third professional shall be selected in accordance with the rules
of the American Arbitration Association then in effect. A
determination regarding disability made by the third professional
so appointed shall be final and binding upon the Company and
Employee.
d. NOTICE AND CURE. In the event of a termination "for cause"
pursuant to subsection (a)(iv), Employee shall be provided with
written notice of the terminable event specifically describing
the same and shall have a period of thirty (30) days to correct
such event; provided, however, that such event is subject to
correction. Thus, for example, fraud, misappropriation or similar
conduct, repeated intoxication, or a conviction, shall not be
subject to correction. All other events shall be deemed curable.
6. NON-DISCLOSURE AND RESTRICTIVE COVENANTS. Employee recognizes that the
business of the Company is a specialized business, that Employee holds a
position of trust and importance with the Company, and that as a result of
Employee's employment by the Company, Employee will gain access to information
of a confidential and proprietary nature relating to the Company's business.
Accordingly, the Company and Employee agree as follows:
a. RETURN OF MATERIALS. Employee acknowledges and agrees that all
materials (including but not limited to tools, books, papers, documents,
drawings, writings, records, customer lists, price lists, job cost estimates,
software, recipes, and software documentation) which are furnished to Employee
by the Company, or which Employee prepares or otherwise acquires in the course
of his employment ("collectively, the "Proprietary Materials"), are the
exclusive property of the Company, and Employee shall promptly surrender to the
Company, upon termination of Employee's employment, all such materials and all
copies of such materials.
b. CONFIDENTIALITY. Employee agrees to maintain the confidentiality
of the Proprietary Materials and their contents and not to disclose the same to,
or discuss the same with, any person except his immediate family, legal counsel
and accounting advisors or as required by law, provided that Employee shall
inform each such person of the confidential nature of the Proprietary Materials
and each such person shall be directed by Employee to treat the Proprietary
Materials confidentially and shall agree to abide by the provisions of this
Section 6(b)
7. MISCELLANEOUS.
a. SEVERABLE PROVISIONS. The provisions of this Agreement are
severable and if any one or more provisions may be determined to be illegal or
otherwise unenforceable, in whole or in part, the remaining provisions, and any
partially unenforceable provisions to the extent enforceable, shall nevertheless
be binding and enforceable.
4 of 6
<PAGE>
b. BINDING AGREEMENT. This Agreement shall inure to the benefit of
and shall be binding upon the parties hereto and their respective successors and
assigns. Notwithstanding the foregoing, neither this Agreement nor any rights
hereunder shall be assigned, pledged, hypothecated or otherwise transferred by
Employee without the prior written consent of the Company, except by operation
of law.
c. GOVERNING LAW. This Agreement is intended to be, and shall be,
governed in all respects by the laws of the State of Arizona.
d. SURVIVAL OF COVENANTS. Subject to the provision of Section 5(b)
herein, the covenants, promises and agreements set forth in Section 6 shall
survive the termination of this Agreement.
e. CAPTIONS. The section captions are inserted only as a matter of
convenience and reference and in no way define, limit or describe the scope of
this Agreement or the intent of any provisions hereof.
f. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
of the parties pertaining to the subject matter hereof, and the parties hereto
have made no agreements, representations or warranties relating to the subject
matter of this Agreement that are not set forth herein. No supplement,
modification, waiver or termination of this Agreement shall be valid unless made
in writing and signed by the parties to be bound thereby.
g. NOTICE. Any notice or demand required or permitted to be given
hereunder shall be in writing and shall be deemed effective upon the personal
delivery thereof or, if faxed upon the receipt of the fax and facsimile
confirmation, or if by mail, forty-eight (48) hours after having been deposited
in the United States mail, postage, pre-paid, and addressed to the party to whom
it is directed at the address set forth below:
If to Employee: Kevin A. Blackwell
6002 East Kelton Lane
Scottsdale, AZ 85254
If to the Company: Attention Vice President
7730 E. Greenway Rd, Suite 203
Scottsdale, AZ 85260
Either party may change the address to which such notices are to be
addressed by giving the other party notice in the manner set forth herein.
h. INSURANCE. SPGK agrees to provide Directors and Officers
Liability Insurance in amounts deemed acceptable to Employee. If SPGK fails to
provide said Insurance, Employee may obtain said Insurance at the sole and
complete expense of SPGK.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first set forth herein.
Employee:
/s/ Kevin A. Blackwell
- - -----------------------------
Kevin A. Blackwell
Sports Group International, Inc.:
By: /s/ David A. Guarino
-------------------------
Its: Vice President - Chief Financial Officer
------------------------
6 of 6
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the
1st day of October 1999 by and between DAVID A. GUARINO, an individual
("Employee") and Sports Group International, Inc., a Florida corporation ("SPGK"
or the "Company"). This Agreement terminates the Employment Agreement between
the Employee and Surf City Acquisition Corp II dated May 16, 1997.
R E C I T A L S
A. The Company desires to be assured of the continued services of
Employee in order to take advantage of his experience, knowledge and abilities,
and the Company is willing to employ Employee, and Employee desires to be so
employed, on the terms and conditions set forth in this Agreement.
B. Employee is currently employed under an the terms of the First
Modified Joint Plan of Reorganization Proposed by the Debtor and the Official
Committee of Unsecured Creditors in the United States Bankruptcy Court for the
District of Arizona on November 18, 1997 (the "Plan of Reorganization") with
Surf City Squeeze, Inc. ("SCS"). It is the intent to supplement the terms of the
employment under the Plan of Reorganization.
Accordingly, in consideration of the mutual promises, covenants and
agreements set forth herein, the parties hereby agree as follows:
1. EMPLOYMENT.
The Company hereby employs Employee, and Employee hereby accepts such
employment on the terms and conditions set forth below, to perform during the
term of this Agreement such duties as are described in Section 4 of this
Agreement as well as such other services as are described herein.
2. TERM OF EMPLOYMENT.
Unless sooner terminated pursuant to Section 5 herein, the term of
employment under this Agreement shall be for three (3) years commencing on
October 1, 1999 and ending as of September 30, 2002. After the initial term,
this Agreement shall continue for an indefinite term until terminated pursuant
to Section 5.
3. COMPENSATION.
During the continuance of Employee's employment hereunder, and as the
total compensation for the services which he renders hereunder, Employee shall
be entitled to the following:
a. BASE SALARY. Employee shall be entitled to receive an annual base
salary of $150,000.00 less income tax and other applicable withholdings, payable
in semi-monthly installments, and subject to annual review and upward adjustment
consistent with the Company's policies. Under the Employee's current terms of
employment with SCS, Employee receives an annual base salary of $100,000.00. The
base salary received from the Company shall be reduced by said amount so long as
Employee receives said base salary from SCS.
1 of 6
<PAGE>
b. EXPENSE REIMBURSEMENT. Employee shall be entitled to receive
reimbursement of any and all reasonable and documented expenses incurred by
Employee from time to time in the performance of his duties hereunder,
consistent with the Company's policies as set by the Company's Board of
Directors. Such reasonable expenses shall be reimbursed to Employee upon receipt
by the Company of an itemized list of such expenses, signed by Employee.
c. EMPLOYEE BENEFITS. Subject to applicable eligibility
requirements, Employee shall be entitled to participate in all employee benefit
plans and programs maintained by the Company for employees in general, including
without limitation, participation in any savings plan, retirement plan, group
health plan, medical reimbursement plan, and life and disability insurance plan.
Said benefits, to the extent permissible by law, shall also extend to Employee's
spouse and minor children.
d. AUTO ALLOWANCE. Employee shall be entitled to receive an auto
allowance as set by the Company's Board of Directors, payable on a monthly
basis, or such other amount, if any, as may be payable to employees of the
Company in comparable positions pursuant to the policies and plans of the
Company.
e. VACATIONS. Employee shall be entitled to take vacations at such
time or times and for such duration as may be approved by the Board of Directors
or the executive officers of the Company.
4. DUTIES. Employee shall serve as Vice President of the Company and shall,
unless otherwise not reelected by the Company's shareholders, serve on its Board
of Directors. Employee shall devote as much of his principal occupational time,
ability and attention as necessary to perform his duties. Employee shall
diligently and conscientiously utilize his best efforts to, further the
Company's business, it being understood that Employee shall not be deemed to be
in breach of his duties hereunder if, and to the extent that, he engages in
personal investments and business so long as such activity or activities do/does
not interfere with his duties to be performed under this Agreement. Employee
shall provide such managerial and executive duties and acts, commensurate with
his position, skills and experience, as may be reasonably required by the
Company's board of Directors in connection with any aspect of the Company's
business. It is expressly understood and agreed that Employee has begun
development of a rolled-sandwich concept. It is expressly understood and agreed
that Employee may devote whatever time is necessary to further those concepts so
long as such time does not interfere with Employee's duties for the Company. It
is further understood and agreed that Employee is under no obligation to share
the profits of said concepts or other concepts, whether said concepts are
brought to the attention of the Company or not. It is expressly understood and
agreed that said outside ventures or concepts shall be the sole property of
Employee and not that of the Company.
5. TERMINATION.
a. EVENTS OF TERMINATION. Employment under this Agreement shall terminate
upon the happening of any of the following events ("Event of
Termination"):
i. The mutual agreement between the Company and Employee or after
eighteen (18) months by either party;
ii. The death of Employee;
iii. At the option of the Company's Board of Directors consistent with
subparagraph (c), if Employee has become so physically or
mentally disabled as to be incapable of substantially performing
his duties hereunder for a period of 90 consecutive days in the
case of a mental disability and 180 consecutive days in the case
of physical disability;
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<PAGE>
iv. At the option of the Company's Board of Directors, in the event
of a material breach by Employee of this Agreement or "for
cause." As used in this Agreement, the term "for cause" shall
mean any of the following: any act of fraud, misappropriation or
similar conduct by Employee against the Company; repeated
intoxication by alcohol or drugs during the performance of
Employee's duties; failure, neglect or refusal of Employee to
perform any material obligation under this Agreement (all duties
described in Section 4 above are deemed to be material);
conviction of Employee of a felony; conviction of Employee of a
misdemeanor involving a breach of trust; any undisclosed conflict
of interest (except as permitted by this Agreement); Employee's
breach of its confidentiality obligations set forth in Section
6(b) herein; Employee's failure to or to comply with his
fiduciary duties to the Company (except as permitted by this
Agreement). Notwithstanding the foregoing, the following shall
not constitute "for cause": The disagreement by the Company's
Board of Directors with any action taken by Employee in the
exercise of Employee's reasonable and good faith business
judgment, unless such action violates any directive of the Board
of Directors of the Company (not in conflict with the terms of
this Agreement) made known to Employee prior to such action;
v. the expiration of the term of employment under this Agreement as
set forth in Section 2 herein.
b. DUTIES UPON TERMINATION. Upon termination of employment under this
Agreement pursuant to Section 5(a) above, neither the Company nor
Employee shall have any remaining duties or obligations under this
Agreement except that:
i. The Company shall pay to Employee or his Estate such compensation
as is due pursuant to Section 3 above, prorated to the date of
termination;
ii. The Company shall pay to Employee or his Estate such other
compensation as may be due pursuant to Section 3 above in the
event termination is made under Sections 5(a)(i), (ii), (iii) or
(v) for a period of two (2) years in consideration of Employee's
strict adherence to the restrictive covenants set forth in
Section (6) herein;
iii. The Company shall provide conversion rights for the benefit of
Employee, his spouse and/or dependents, as applicable, for
medical, dental and other benefits as and to the extent possible
under the Company's then-existing insurance and benefits plans or
policies, but in no event shall said medical and dental benefits
cease less than two (2) year following termination or upon
Employee finding employment with said benefits provided to
Employee and Employee's family; and
iv. Upon termination, Employee shall continue to be bound by the
provisions of Sections 6 of this Agreement.
3 of 6
<PAGE>
c. DETERMINATION OF DISABILITY. The determination of disability shall be
made by a member of the medical profession in good standing selected
or approved by the Company; provided, however, that in the event the
Employee disagrees with a determination of disability, he shall be
entitled to present a contrary determination by a member of the
medical profession in good standing selected by him, and the two
doctors so selected shall attempt to reach agreement as to the
determination of disability. In the event the two doctors fail to
agree, the determination regarding disability shall be made by a third
member of the medical profession in good standing jointly appointed by
such doctors or, if they fail to agree upon such appointment, such
third professional shall be selected in accordance with the rules of
the American Arbitration Association then in effect. A determination
regarding disability made by the third professional so appointed shall
be final and binding upon the Company and Employee.
d. NOTICE AND CURE. In the event of a termination "for cause" pursuant to
subsection (a)(iv), Employee shall be provided with written notice of
the terminable event specifically describing the same and shall have a
period of thirty (30) days to correct such event; provided, however,
that such event is subject to correction. Thus, for example, fraud,
misappropriation or similar conduct, repeated intoxication, or a
conviction, shall not be subject to correction. All other events shall
be deemed curable.
6. NON-DISCLOSURE AND RESTRICTIVE COVENANTS. Employee recognizes that the
business of the Company is a specialized business, that Employee holds a
position of trust and importance with the Company, and that as a result of
Employee's employment by the Company, Employee will gain access to information
of a confidential and proprietary nature relating to the Company's business.
Accordingly, the Company and Employee agree as follows:
a. RETURN OF MATERIALS. Employee acknowledges and agrees that all
materials (including but not limited to tools, books, papers, documents,
drawings, writings, records, customer lists, price lists, job cost estimates,
software, recipes, and software documentation) which are furnished to Employee
by the Company, or which Employee prepares or otherwise acquires in the course
of his employment (collectively, the "Proprietary Materials"), are the exclusive
property of the Company, and Employee shall promptly surrender to the Company,
upon termination of Employee's employment, all such materials and all copies of
such materials.
b. CONFIDENTIALITY. Employee agrees to maintain the confidentiality
of the Proprietary Materials and their contents and not to disclose the same to,
or discuss the same with, any person except his immediate family, legal counsel
and accounting advisors or as required by law, provided that Employee shall
inform each such person of the confidential nature of the Proprietary Materials
and each such person shall be directed by Employee to treat the Proprietary
Materials confidentially and shall agree to abide by the provisions of this
Section 6(b).
4 of 6
<PAGE>
7. MISCELLANEOUS.
a. SEVERABLE PROVISIONS. The provisions of this Agreement are
severable and if any one or more provisions may be determined to be illegal or
otherwise unenforceable, in whole or in part, the remaining provisions, and any
partially unenforceable provisions to the extent enforceable, shall nevertheless
be binding and enforceable.
b. BINDING AGREEMENT. This Agreement shall inure to the benefit of
and shall be binding upon the parties hereto and their respective successors and
assigns. Notwithstanding the foregoing, neither this Agreement nor any rights
hereunder shall be assigned, pledged, hypothecated or otherwise transferred by
Employee without the prior written consent of the Company, except by operation
of law.
c. GOVERNING LAW. This Agreement is intended to be, and shall be,
governed in all respects by the laws of the State of Arizona.
d. SURVIVAL OF COVENANTS. Subject to the provision of Section 5(b)
herein, the covenants, promises and agreements set forth in Section 6 shall
survive the termination of this Agreement.
e. CAPTIONS. The section captions are inserted only as a matter of
convenience and reference and in no way define, limit or describe the scope of
this Agreement or the intent of any provisions hereof.
f. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
of the parties pertaining to the subject matter hereof, and the parties hereto
have made no agreements, representations or warranties relating to the subject
matter of this Agreement that are not set forth herein. No supplement,
modification, waiver or termination of this Agreement shall be valid unless made
in writing and signed by the parties to be bound thereby.
g. NOTICE. Any notice or demand required or permitted to be given
hereunder shall be in writing and shall be deemed effective upon the personal
delivery thereof or, if faxed upon the receipt of the fax and facsimile
confirmation, or if by mail, forty-eight (48) hours after having been deposited
in the United States mail, postage, pre-paid, and addressed to the party to whom
it is directed at the address set forth below:
If to Employee: David A. Guarino
19039 N. 90th Lane
Peoria, AZ 85382
If to the Company: Attention President
7730 E. Greenway Rd, Suite 203
Scottsdale, AZ 85260
Either party may change the address to which such notices are to be
addressed by giving the other party notice in the manner set forth herein.
5 of 6
<PAGE>
h. INSURANCE. SPGK agrees to provide Directors and Officers
Liability Insurance in amounts deemed acceptable to Employee. If SPGK fails to
provide said Insurance, Employee may obtain said Insurance at the sole and
complete expense of SPGK.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first set forth herein.
Employee:
/s/ David A. Guarino
- - ----------------------------------
David A. Guarino
Sports Group International, Inc.:
By: /s/ Kevin A. Blackwell
----------------------------------
Its: Chief Executive Officer & President
---------------------------------
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SERIES B PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
This SERIES B PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT (this
"AGREEMENT") is made and entered into as of May 20, 1999 by and between Sports
Group International, Inc., a Florida corporation (the "COMPANY"), and Robert E.
Petersen & Margaret M. Petersen, Trustees of the R.E. & M. Petersen Living Trust
Dated 1/17/83 (the "INVESTOR").
W I T N E S S E T H:
WHEREAS, the Company desires to sell to the Investor, and the Investor
desires to purchase from the Company, shares of the Company's Series B Preferred
Stock and a Warrant to purchase shares of the Company's common stock on the
terms and conditions set forth in this Agreement;
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. AGREEMENT TO PURCHASE AND SELL STOCK. The Company agrees to sell to the
Investor at the Closing, and the Investor agrees to purchase from the Company at
the Closing, (i) 650,000 shares of Series B Preferred Stock ("PURCHASED SHARES")
at a price of $10.00 per share and (ii) a warrant to purchase 1,000,000 shares
of the Company's common stock (the "WARRANT SHARES") in substantially the form
of EXHIBIT A attached hereto (the "WARRANT"). The shares of Company Common Stock
issuable upon the conversion of the Purchased Shares will be hereinafter
referred to as the "CONVERSION SHARES."
2. CLOSING. The purchase and sale of the Purchased Shares and the Warrant
will take place at the offices of Naumann & Levine, LLP, 401 West "A" Street,
Suite 1850, San Diego, CA 92101, at 10:00 a.m. Pacific Time, on May 20, 1999, or
at such other time and place on which the Company and the Investor mutually
agree (which time and place are referred to in this Agreement as the "CLOSING").
The Closing shall be concurrent with the closing of the contemplated acquisition
by the Company of all of the outstanding stock of Selman Systems, Inc., a Texas
Corporation (hereinafter "Selman"). At the Closing, the Company will deliver to
the Investor a certificate representing the Purchased Shares and the Warrant,
against delivery to the Company by wire transfer of same day funds in the amount
of $6,500,000.00.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as disclosed in
the Disclosure Schedule dated as of the date of this Agreement and delivered to
the Investor concurrently herewith (by specific reference to the section hereof
pursuant to which the disclosure is being made), the Company hereby represents
and warrants to the Investor that the statements in the following paragraphs of
this Section 3 are true and correct:
3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company and
each of its subsidiaries is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation and has all
requisite corporate power and authority to carry on its business as now
conducted and as proposed to be conducted and to enter into and perform this
Agreement and to carry out the transactions contemplated by this Agreement. The
Company has furnished to counsel to the Investor true and complete copies of its
Amended and Restated Articles of Incorporation (the "Restated Articles") and
Bylaws, each as amended to date and presently in effect. The Company is duly
qualified, licensed or domesticated as a foreign corporation in good standing in
each jurisdiction where the nature of its activities or of its owned or leased
properties makes such qualification, licensing or domestication necessary.
3.2 SUBSIDIARIES. Surf City Acquisition Corporation II, an Arizona
corporation ("Surf City"), is a wholly owned subsidiary of the Company, and the
Company owns all of the outstanding capital stock of Surf City free from any
liens or encumbrances other than the pledge in favor of Kevin Blackwell
contemplated by the Restated Articles. The Company has entered into an agreement
to purchase all of the outstanding capital stock of Selman for six million, five
hundred thousand dollars ($6,500,000) in cash. Such agreement has been duly
executed and delivered by Ziad S. Dalal (hereinafter "Dalal"), and constitutes a
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valid and legally binding obligation of Dalal, enforceable in accordance with
its terms, except as may be limited by (i) applicable bankruptcy, insolvency,
reorganization or other laws of general application relating to or affecting the
enforcement of creditors' rights generally and (ii) the effect of rules of law
governing the availability of equitable remedies. Upon the closing of the Selman
transaction, Selman will become a wholly-owned subsidiary of the Company, and
the Company will own all of the outstanding capital stock of Selman free from
any liens or encumbrances, except as otherwise disclosed on the Balance Sheet
attached to the Selman Purchase Agreement. Except for Surf City and Selman, the
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, association, or other business entity. The Company
entered into a merger agreement with Sports Group International, Inc., a
Delaware corporation on March 15, 1999. The Investor understands and
acknowledges that the merger contemplated by the merger agreement has not been
consummated. Following its execution, it was determined that it could not be
effectuated as contemplated and thus the merger agreement will be terminated.
3.3 AUTHORIZATION. All corporate action on the part of the Company,
its officers, directors and shareholders, necessary for the authorization,
execution and delivery of this Agreement, the performance of all obligations of
the Company hereunder and the issuance and delivery of the Purchased Shares, the
Warrant, the Warrant Shares and the Conversion Shares has been taken or will be
taken prior to the Closing, and this Agreement has been duly executed and
delivered by the Company and constitutes a valid and legally binding obligation
of the Company, enforceable in accordance with its terms, except as may be
limited by (i) applicable bankruptcy, insolvency, reorganization or other laws
of general application relating to or affecting the enforcement of creditors'
rights generally and (ii) the effect of rules of law governing the availability
of equitable remedies.
3.4 VALID ISSUANCE OF STOCK.
(a) The Purchased Shares and Warrant Shares have been reserved
for issuance and, when issued, sold and delivered in accordance with the terms
of this Agreement for the consideration provided for herein or upon exercise of
the Warrant in accordance with the terms thereof, will be duly and validly
issued, fully paid and nonassessable and will be free of any liens. The
Conversion Shares have been duly and validly reserved for issuance and, upon
issuance in accordance with the terms of the Restated Articles, will be duly and
validly issued, fully paid and nonassessable and will be free of any liens.
(b) Based in part on the representations made by the Investor in
Section 4 hereof, the Purchased Shares, the Warrant Shares, when issued in
accordance with the terms of the Warrant, and (assuming no change in applicable
law and no unlawful distribution of Purchased Shares by the Investor or other
parties) the Conversion Shares, when issued in accordance with the terms of the
Restated Articles, will be issued in full compliance with the registration and
prospectus delivery requirements of the U.S. Securities Act of 1933, as amended
(the "1933 ACT"), and the registration and qualification requirements of the
securities laws of the State of California (PROVIDED THAT, with respect to the
Conversion Shares and the Warrant Shares, no commission or other remuneration is
paid or given, directly or indirectly, for soliciting the issuance of Conversion
Shares upon the conversion of the Purchased Shares or exercise of the Warrant
Shares, as the case may be, and no additional consideration is paid for the
Conversion Shares other than surrender of the applicable Purchased Shares or
Warrant Shares upon conversion thereof in accordance with the Restated
Articles).
3.5 CAPITALIZATION. Immediately prior to the Closing, the
capitalization of the Company will consist of the following:
(a) PREFERRED STOCK. A total of 2,000,000 authorized shares of
preferred stock, $.001 par value per share (the "PREFERRED STOCK"), consisting
of 575,000 shares designated as Series A Preferred Stock, 525,000 of which have
been validly issued and are outstanding and 50,000 of which have been reserved
for issuance upon exercise of an outstanding warrant (the "SERIES A WARRANT"),
and 650,000 shares designated as Series B Preferred Stock, none of which are
issued and outstanding. The rights, preferences and privileges of the Series A
Preferred Stock and Series B Preferred Stock will be as stated in the Restated
Articles and as provided by law.
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(b) COMMON STOCK. A total of 100,000,000 authorized shares of
common stock, no par value per share (the "COMMON STOCK"), of which 6,300,000
shares are issued and outstanding. Said number of shares assumes the merger
contemplated between the Company and Sports Group International, a Delaware
corporation will not be effectuated and the merger agreement will be terminated.
(c) OPTIONS, WARRANTS, RESERVED SHARES. Except for: (i) the
conversion privileges of the Series A Preferred Stock; (ii) the conversion
privileges of the Series B Preferred Stock; (iii) the Warrant; (iv) the Series A
Warrant; and (v) the Options granted to Kevin Blackwell in his Employment
Agreement with the Company, there are not outstanding any options, warrants,
rights (including conversion or preemptive rights) or agreements for the
purchase or acquisition from the Company of any shares of its capital stock or
any securities convertible into or ultimately exchangeable or exercisable for
any shares of the Company's capital stock. Apart from the exceptions noted in
this Section 3.5(c), no shares of the Company's outstanding capital stock, or
other stock issuable by the Company, are subject to any rights of first refusal
or other rights to purchase such stock (whether in favor of the Company or any
other person or entity) pursuant to any agreement or commitment of the Company.
3.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated by this
Agreement, except for the filing pursuant to Section 25102(f) of the California
Corporate Securities Law of 1968, as amended, and the regulations thereunder,
which filing will be effected by the Company in a timely manner in accordance
with such section.
3.7 INDEBTEDNESS. The Company has no Indebtedness for Borrowed Money
(as hereinafter defined) except as disclosed on the Balance Sheet (as
hereinafter defined).
3.8 FINANCIAL STATEMENTS. Attached at Section 3.8 of the Disclosure
Schedule are (a) the Company's unaudited balance sheet (the "Balance Sheet") as
of December 31, 1998 (the "Balance Sheet Date") and the unaudited statements of
income, changes in financial condition, and shareholders' equity for the year
then ended. These financial statements (i) are in accordance with the books and
records of the Company, (ii) present fairly the financial condition of the
Company at the Balance Sheet Date and other dates therein specified and the
results of its operations for the periods therein specified, and (iii) have been
prepared in accordance with generally accepted accounting principles applied on
a basis consistent with prior accounting periods.
3.9 ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed on Section
3.9 of the Disclosure Schedule, the Company has no material obligation or
liability (whether accrued, absolute, contingent, liquidated or otherwise,
whether due or to become due, whether or not known to the Company) except (a) to
the extent set forth on or reserved against in the Balance Sheet and (b) current
liabilities incurred, and obligations under agreements entered into, in the
usual and ordinary course of business since the Balance Sheet Date that
(individually or in the aggregate) do not materially and adversely affect the
business, properties, finances or prospects of the Company.
3.10 TAX RETURNS AND AUDITS. All required federal, state and local tax
returns of the Company and its subsidiaries have been accurately prepared and
duly and timely filed, or are in the process of being prepared and filed and all
federal, state and local taxes required to be paid with respect to the periods
covered by such returns have been paid. Neither the Company nor any of its
subsidiaries is or has been delinquent in the payment of any tax, assessment or
governmental charge. Neither the Company nor any of its subsidiaries has ever
had any tax deficiency proposed or assessed against it and neither the Company
nor any of its subsidiaries has executed any waiver of any statute of
limitations on the assessment or collection of any tax or governmental charge.
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None of the Company's and none of its subsidiaries' federal income tax returns
nor any state income or franchise tax returns has ever been audited by
governmental authorities. The reserves for taxes, assessments and governmental
charges reflected on the Balance Sheet are and will be sufficient for the
payment of all unpaid taxes and governmental charges payable by the Company with
respect to the period ended on the Balance Sheet Date. Since the Balance Sheet
Date, the Company has made adequate provisions on its books of account for all
taxes, assessments and governmental charges with respect to its business,
properties and operations for such period. The Company and each of its
subsidiaries has withheld or collected from each payment made to each of its
employees, the amount of all taxes (including, but not limited to, federal
income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment
Tax Act taxes) required to be withheld or collected therefrom, and has paid the
same to the proper tax receiving officers or authorized depositaries.
3.11 EMPLOYMENT BENEFIT PLANS-ERISA. Neither the Company nor any of
its subsidiaries maintains or makes contributions to any pension, profit sharing
or other employee retirement benefit plan. Neither the Company nor any of its
subsidiaries has any material liability with respect to any such plan
(including, without limitation, any unfunded past service or other liability or
any accumulated funding deficiency) or any material liability to the Pension
Benefit Guaranty Corporation or under Title IV of the Employee Retirement Income
Security Act of 1974, as amended, with respect to a multi-employer pension
benefit plan, nor would the Company or any of its subsidiaries have any such
liability if any such plan were terminated or if the Company or any of its
subsidiaries withdrew, in whole or in part, from any multi-employer plan.
3.12 INSURANCE COVERAGE. There is in full force and effect one or more
policies of insurance issued by insurers of recognized responsibility, insuring
the Company and its properties and business against such losses and risks, and
in such amounts, as are customary in the case of corporations of established
reputation engaged in the same or similar business and similarly situated. The
Company has not been refused any insurance coverage sought or applied for, and
the Company has no reason to believe that it will be unable to renew its
existing insurance coverage upon terms at least as favorable as those presently
in effect, other than possible increases in premiums that do not result from any
act or omission of the Company.
3.13 LITIGATION. Except as set forth on Section 3.13 of the Disclosure
Schedule, there is no action, suit, proceeding, government inquiry or
investigation pending or currently threatened against the Company or any of its
subsidiaries that questions the validity of this Agreement or the right of the
Company to enter into it, or to consummate the transactions contemplated hereby,
or that might result, either individually or in the aggregate, in any material
adverse changes in the assets, condition, affairs or prospects of the Company,
financially or otherwise, or any change in the current equity ownership of the
Company, nor is the Company aware that there is any basis for the foregoing.
Neither the Company nor any of its subsidiaries is a party or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality. There is no action, suit, proceeding or
investigation by the Company currently pending or which the Company intends to
initiate.
3.14 INTELLECTUAL PROPERTY. To the best of the Company's knowledge,
the business conducted or proposed by the Company and its subsidiaries does not
and will not cause the Company to infringe or violate any of the patents,
trademarks, service marks, trade names, copyrights, licenses, trade secrets or
other intellectual property rights of any other person or entity and the Company
has not received any communications alleging such infringement or violation.
3.15 COMPLIANCE WITH OTHER INSTRUMENTS. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in any violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, a default
under the Restated Articles or the Bylaws or any mortgage, instrument, judgment,
order, writ, decree or contract to which the Company is party or by which it is
bound.
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3.16 AFFILIATE TRANSACTIONS. Except as set forth at Section 3.16 of
the Disclosure Schedule, there are no agreements, understandings or proposed
transactions between the Company and any of its shareholders, officers,
directors, affiliates or any affiliate or associates thereof (as such terms are
defined in the rules and regulations under the Securities Act of 1933, as
amended).
3.17 REGISTRATION RIGHTS. Except as set forth at Section 3.17 of the
Disclosure Schedule, the Company has not granted or agreed to grant any
registration rights, including piggyback rights, to any person or entity.
4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor hereby
represents and warrants to the Company that the statements in the following
paragraphs of this Section 4 are true and correct:
4.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Investor has
all requisite power and authority to enter into and perform this Agreement and
to carry out the transactions contemplated by this Agreement.
4.2 AUTHORIZATION. All action on the part of the Investor necessary
for the authorization, execution and delivery of this Agreement and the
performance of all obligations of the Investor hereunder has been taken or will
be taken prior to the Closing, and this Agreement has been duly executed and
delivered by the Investor and constitutes a valid and legally binding obligation
of the Investor, enforceable in accordance with its terms, except as may be
limited by (i) applicable bankruptcy, insolvency, reorganization or other laws
of general application relating to or affecting the enforcement of creditors'
rights generally and (ii) the effect of rules of law governing the availability
of equitable remedies.
4.3 PURCHASE FOR OWN ACCOUNT. The Purchased Shares and the Warrant to
be purchased by the Investor hereunder will be acquired for investment for the
Investor's own account, not as a nominee or agent, and not with a view to the
public resale or distribution thereof within the meaning of the 1933 Act, and
the Investor has no present intention of selling, granting any participation in,
or otherwise distributing the same. The Investor also represents that it has not
been formed for the specific purpose of acquiring Purchased Shares and the
Warrant.
4.4 ACCREDITED THE INVESTOR STATUS. The Investor is an "accredited
investor" within the meaning of Regulation D promulgated under the 1933 Act.
4.5 RESTRICTED SECURITIES. The Investor understands that the Purchased
Shares or the Investor Stock are characterized as "restricted securities" under
the 1933 Act inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under the 1933 Act and
applicable regulations thereunder such securities may be resold without
registration under the 1933 Act only in certain limited circumstances. In this
connection, the Investor represents that it is familiar with Rule 144 of the
U.S. Securities and Exchange Commission, as presently in effect, and understands
the resale limitations imposed thereby and by the 1933 Act. The Investor
understands that the Company is under no obligation to register any of the
securities sold hereunder except as provided in Section 7 hereof.
4.6 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting
the representations set forth above, the Investor further agrees not to make any
disposition of all or any portion of the Purchased Shares, the Conversion Shares
or the Warrant Shares unless and until:
(a) there is then in effect a registration statement under the
1933 Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
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(b) (i) the Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a statement of
the circumstances surrounding the proposed disposition, and (ii) the Investor
shall have furnished the Company at the Investor's expense of an opinion of
counsel, reasonably satisfactory to the Company that such disposition will not
require registration of such securities under the 1933 Act.
Notwithstanding the provisions of paragraphs (a) and (b) above, no such
registration statement or opinion of counsel shall be required: (i) for any
transfer of any Purchased Shares, Warrant Shares or Conversion Shares in
compliance with SEC Rule 144, or (ii) for any transfer of Purchased Shares,
Warrant Shares or Conversion Shares or the Investor Stock by gift, will or
intestate succession to the spouse or lineal descendants or ancestors of Robert
E. Petersen or Margaret M. Petersen or any trust for any of the foregoing;
PROVIDED that in each of the foregoing cases the transferee agrees in writing to
be subject to the terms of this Section 4 to the same extent as if the
transferee were an original party hereunder.
4.7 LEGENDS. It is understood that the certificates evidencing the
Purchased Shares, the Conversion Shares and the Warrant Shares will bear the
legends set forth below:
(a) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM.
(b) Any legend required by the laws of the State of California,
including any legend required by the California Department of Corporations and
Sections 417 and 418 if the California Corporations Code or any other state
securities laws, including, with respect to the Purchased Shares, a legend
substantially in the form of the following:
THE SHARES EVIDENCED BY THIS CERTIFICATE ARE CONVERTIBLE INTO SHARES OF
COMMON STOCK OF THE COMPANY AT THE OPTION OF THE HOLDER AT ANY TIME PRIOR TO
AUTOMATIC CONVERSION THEREOF. A COPY OF SUCH ARTICLES OF INCORPORATION MAY BE
OBTAINED, WITHOUT CHARGE, AT THE COMPANY'S PRINCIPAL OFFICE.
5. CONDITIONS TO THE INVESTORS' OBLIGATIONS AT CLOSING. The obligations of
the Investor under Section 2 of this Agreement are subject to the fulfillment or
waiver, on or before the Closing, of each of the following conditions:
5.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of the Company contained in Section 3 shall be true and correct on
and as of the Closing with the same effect as though such representations and
warranties had been made on and as of the date of the Closing.
5.2 RESTATED ARTICLES EFFECTIVE. The Restated Articles shall have been
duly adopted by the Company by all necessary corporate action of its Board of
Directors and shareholders and duly filed with and accepted by the Secretary of
the State of Florida.
5.3 CERTIFICATES AND DOCUMENTS. The Company shall have delivered to
counsel to the Investor:
(a) The Restated Articles of Incorporation of the Company, as
amended and in effect prior to the Closing Date, to be certified by the
Secretary of State of Florida;
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(b) Certificates, as of the most recent practicable dates, as to
the corporate good standing of the Company issued by the Secretary of State of
Florida;
(c) Bylaws of the Company, certified by its Secretary or
Assistant Secretary as of the Closing Date; and
(d) Resolutions of the Board of Directors of the Company,
authorizing and approving all matters in connection with this Agreement and the
transactions contemplated hereby and reserving appropriate numbers of shares of
capital stock, certified by the Secretary or Assistant Secretary of the Company
as of the Closing Date.
5.4 SHARES TENDERED. The Company shall have tendered executed
certificates for the Purchased Shares.
5.5 WARRANT. The Company shall have executed and delivered to the
Investor the Warrant.
5.6 SELMAN TRANSACTION. All conditions to the purchase by the Company
of the outstanding shares of capital stock of Selman (other than the payment of
the purchase price) shall have been satisfied and Dalal shall have tendered
certificates endorsed in favor of the Company representing all of the
outstanding capital stock of Selman.
5.7 SECURITIES EXEMPTIONS. The offer and sale of the Purchased Shares
and the Warrant to the Investor pursuant to this Agreement shall be exempt from
the registration requirements of the 1933 Act, the qualifications requirement of
the California Corporate Securities Law of 1968 (the "LAW") and the registration
and/or qualification requirements of all other applicable state securities laws.
5.8 OPINION OF COUNSEL. The Investor shall have received an opinion of
the Company's counsel, dated as of each Closing Date, in form, scope and
substance reasonably satisfactory to the Investor and in substantially the same
form as Exhibit "B" attached hereto.
6. CONDITIONS TO THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of
the Company to the Investor under this Agreement are subject to the fulfillment
or waiver on or before the Closing of each of the following conditions by the
Investor:
6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Investor contained in Section 4 shall be true and correct on the date of
the Closing with the same effect as though such representations and warranties
had been made on and as of the Closing.
6.2 PAYMENT OF CONSIDERATION. The Investor shall have delivered to the
Company by wire transfer the purchase price for the Purchased Shares and the
Warrant in accordance with the provisions of Section 2.
6.3 SECURITIES EXEMPTIONS. The offer and sale of the Purchased Shares
and the Warrant to the Investor and of the Investor Stock to the Company
pursuant to this Agreement shall be exempt from the registration requirements of
the 1933 Act, the qualifications requirements of the Law and the registration
and/or qualification requirements of all other applicable state securities laws.
7. REGISTRATION RIGHTS.
7.1 DEFINITIONS. For purposes of this Section 7:
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(a) REGISTRATION. The terms "register," "registered," and
"registration" refer to a registration effected by preparing and filing a
registration statement in compliance with the 1933 Act, and the declaration or
ordering of effectiveness of such registration statement.
(b) REGISTRABLE SECURITIES. The term "Registrable Securities"
means: (1) all the shares of Common Stock of the Company issued or issuable upon
the conversion of any shares of Series A and/or Series B Preferred Stock issued
and shares of Common Stock issued or issuable upon exercise of the Warrant and
(2) any shares of Common Stock of the Company issued as (or issuable upon the
conversion or exercise of any warrant, right or other security which is issued
as) a dividend or other distribution with respect to, or in exchange for or in
replacement of, the Series A and/or B Preferred Stock or all such shares of
Common Stock described in clause (1) of this subsection (b), as such shares may
be adjusted for any stock dividends, splits, reverse splits, combinations and
recapitalizations occurring after the closing; excluding in all cases, however,
any Registrable Securities sold to the public or sold pursuant to Rule 144.
(c) REGISTRABLE SECURITIES THEN OUTSTANDING. The number of shares
of "Registrable Securities then outstanding" shall mean the number of shares of
Common Stock which are Registrable Securities and (1) are then issued and
outstanding or (2) are then issuable pursuant to the exercise or conversion of
then outstanding and then exercisable options, warrants or convertible
securities.
(d) HOLDER. For purposes of this Section 7, the term "Holder"
means any person owning of record Registrable Securities that have not been sold
to the public pursuant to Rule 144 or any assignee of record of such Registrable
Securities.
(e) SEC. The term "SEC" or "Commission" means the U.S. Securities
and Exchange Commission.
7.2 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of
Registrable Securities in writing at least thirty (30) days prior to filing any
registration statement under the 1933 Act for purposes of effecting a public
offering of securities of the Company (but excluding registration statements
relating to any employee benefit plan or a corporate reorganization) and will
afford each such Holder an opportunity to include in such registration statement
all or any part of the Registrable Securities then held by such Holder. Each
Holder desiring to include in any such registration statement all or any part of
the Registrable Securities held by such Holder shall, within twenty (20) days
after receipt of the above-described notice from the Company, so notify the
Company in writing, and in such notice shall inform the Company of the number of
Registrable Securities such Holder wishes to include in such registration
statement. If a Holder decides not to include all of its Registrable Securities
in any registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.
(a) UNDERWRITING. If a registration statement under which the
Company gives notice under this Section 7.2 is for an underwritten offering,
then the Company shall so advise the Holders of Registrable Securities. In such
event, the right of any such Holder's Registrable Securities to be included in a
registration pursuant to this Section 7.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the managing underwriter or underwriter(s) selected for such underwriting.
Notwithstanding any other provision of this Agreement, if the managing
underwriter determine(s) in good faith that marketing factors require a
limitation of the number of shares to be underwritten, then the managing
underwriter(s) may exclude shares (including Registrable Securities) from the
registration and the underwriting, and the number of shares that may be included
in the registration and the underwriting shall be allocated, first, to the
Company, and second, to each of the Holders requesting inclusion of their
Registrable Securities in such registration statement and each other stockholder
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exercising piggyback registration rights on a pro rata basis. If any Holder
disapproves of the terms of any such underwriting, such Holder may elect to
withdraw therefrom by written notice to the Company and the underwriter,
delivered at least ten (10) business days prior to the effective date of the
registration statement. Any Registrable Securities excluded or withdrawn from
such underwriting shall be excluded and withdrawn from the registration. For any
Holder which is a partnership or corporation, the partners, retired partners and
stockholders of such Holder, or the estates and family members of any such
partners and retired partners and any trusts for the benefit of any of the
foregoing persons shall be deemed to be a single "Holder," and any pro rata
reduction with respect to such "Holder" shall be based upon the aggregate amount
of shares carrying registration rights owned by all entities and individuals
included in such "Holder," as defined in this sentence.
(b) EXPENSES. The Company shall bear and pay all expenses
incurred in connection with any registration or qualification of Registrable
Securities pursuant to this Section 7.2 for each Holder, including all
registration and qualification fees, printers and accounting fees relating
thereto, and legal fees of counsel to the Company, but excluding underwriting
discounts and commissions relating to the Registrable Securities and the legal
fees of counsel to the Holders.
7.3 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities under this Agreement, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for up to ninety (90) days.
(b) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
1933 Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
1933 Act, and such other documents as they may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by them that are
included in such registration.
(d) If the Company has delivered preliminary or final
prospectuses to the Holders and after having done so the prospectus is amended
to comply with the requirements of the 1933 Act, the Company shall promptly
notify the Holders and, if requested, the Holders shall immediately cease making
offers of Registrable Shares and return all prospectuses to the Company. The
Company shall promptly provide the Holders with revised prospectuses and,
following receipt of the revised prospectuses, the Holders shall be free to
resume making offers of the Registrable Shares.
(e) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders, keep
such registration or qualification in effect for so long as such registration
statement remains in effect, and take any other action which may be reasonably
necessary or advisable to consummate the disposition in such jurisdictions of
such securities; PROVIDED that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions.
(f) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
9
<PAGE>
(g) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing and, upon
the occurrence of any such event, prepare a supplement or post-effective
amendment to the registration statement or related prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the securities being sold
thereunder, such prospectus will not include any untrue statement of a material
fact or omit to state any material fact necessary to make the facts therein not
misleading.
(h) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act of the issuance by the SEC of (i)
any stop order suspending the effectiveness of a registration statement or the
initiation of any proceedings for that purpose and (ii) the receipt by the
Company of any notification with respect to the suspension of the qualification
of any of such Registrable Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose, and the Company
shall make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of such a registration statement or the lifting of
any suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction, at the earliest possible time.
(i) Cause all Registrable Securities covered by such registration
statement to be listed on each securities exchange, if any, on which securities
of such class are then listed.
(j) Use its reasonable efforts to take any other steps necessary
to effect the registration contemplated by Section 7.2.
7.4 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 7 that
the selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities as shall be required to timely effect the
registration of their Registrable Securities.
7.5 DELAY OF REGISTRATION. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 7.
7.6 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under this Section 7:
(a) BY THE COMPANY. To the extent permitted by law, the Company
will indemnify and hold harmless each Holder, the partners, officers and
directors of each Holder, any underwriter (as defined in the 1933 Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the 1933 Act or the 1934 Act, against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the 1933 Act, the l934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"):
(i) any untrue statement or alleged untrue statement of a
material fact contained in any registration statement under which Registrable
Securities are registered, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto;
(ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading; or
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(iii) any violation or alleged violation by the Company of
the 1933 Act, the 1934 Act, any federal or state securities law or any rule or
regulation promulgated under the 1933 Act, the 1934 Act or any federal or state
securities law in connection with the offering covered by such registration
statement; and the Company will reimburse each such Holder, partner, officer or
director, underwriter or controlling person for any legal or other expenses
reasonably incurred by them, as incurred, in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement contained in this subsection 7.6(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the Company be liable in
any such case for any such loss, claim, damage, liability or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by such Holder, partner, officer,
director, underwriter or controlling person of such Holder.
(b) BY SELLING HOLDERS. To the extent permitted by law, each
selling Holder will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the registration statement, each
person, if any, who controls the Company within the meaning of the 1933 Act, any
underwriter and any other Holder selling securities under such registration
statement or any of such other Holder's partners, directors or officers or any
person who controls such Holder within the meaning of the 1933 Act or the 1934
Act, against any losses, claims, damages or liabilities (joint or several) to
which the Company or any such director, officer, controlling person, underwriter
or other such Holder, partner or director, officer or controlling person of such
other Holder may become subject under the 1933 Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer, controlling person, underwriter or other
Holder, partner, officer, director or controlling person of such other Holder in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this subsection 7.6(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Holder, which consent shall not be unreasonably
withheld; and provided further, that the total amounts payable in indemnity by a
Holder under this Section 7.6(b) in respect of any Violation shall not exceed
the net proceeds received by such Holder in the registered offering out of which
such Violation arises.
(c) NOTICE. Promptly after receipt by an indemnified party under
this Section 7.6 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 7.6, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential conflict of interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 7.6, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 7.6.
(d) CONTRIBUTION. In order to provide for just and equitable
contribution to joint liability under the 1933 Act in any case in which either
(i) any Holder exercising rights under this Agreement, or any controlling person
of any such Holder, makes a claim for indemnification pursuant to this Section
11
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7.6 but it is judicially determined (by the entry of a final judgment or decree
by a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 7.6 provides
for indemnification in such case, or (ii) contribution under the 1933 Act may be
required on the part of any such selling Holder or any such controlling person
in circumstances for which indemnification is provided under this Section 7.6;
then, and in each such case, the Company and such Holder will contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that such Holder is
responsible for the portion represented by the percentage that the public
offering price of its Registrable Securities offered by and sold under the
registration statement bears to the public offering price of all securities
offered by and sold under such registration statement, and the Company and other
selling Holders are responsible for the remaining portion; provided, however,
that, in any such case, (A) no such Holder will be required to contribute any
amount in excess of the public offering price of all such Registrable Securities
offered and sold by such Holder pursuant to such registration statement; and (B)
no person or entity guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) will be entitled to contribution from any
person or entity who was not guilty of such fraudulent misrepresentation.
(e) SURVIVAL. The obligations of the Company and Holders under
this Section 7.6 shall survive the completion of any offering of Registrable
Securities in a registration statement, and otherwise.
7.7 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that it
shall not, to the extent requested by the Company or an underwriter of
securities of the Company, sell or otherwise transfer or dispose of any
Registrable Securities or other shares of stock of the Company then owned by
such Holder (other than to donees, partners or affiliates of the Holder who
agree to be similarly bound) for up to one hundred and eighty (180) days
following the effective date of a registration statement of the Company filed
under the 1933 Act; provided, however, that:
(a) such agreement shall be applicable only to the first such
registration statement of the Company which covers securities to be sold on its
behalf to the public in an underwritten offering but not to Registrable
Securities sold pursuant to such registration statement; and
(b) all executive officers, directors and stockholders then
holding Common Stock of the Company enter into similar agreements.
In order to enforce the foregoing covenant, the Company shall have the right to
place restrictive legends on the certificates representing the shares subject to
this Section and to impose stop transfer instructions with respect to the
Registrable Securities and such other shares of stock of each Holder (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of such period.
7.8 RULE 144 REPORTING. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Registrable Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144, at all times after the effective date of
the first registration under the 1933 Act filed by the Company for an offering
of its securities to the general public;
(b) Use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the 1933
Act and the 1934 Act (at any time after it has become subject to such reporting
requirements); and
(c) So long as a Holder owns any Registrable Securities, to
furnish to the Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 (at any
time after ninety (90) days after the effective date of the first registration
12
<PAGE>
statement filed by the Company for an offering of its securities to the general
public), and of the 1933 Act and the 1934 Act (at any time after it has become
subject to the reporting requirements of the 1934 Act), a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents of the Company as a Holder may reasonably request in availing itself
of any rule or regulation of the Commission allowing a Holder to sell any such
securities without registration (at any time after the Company has become
subject to the reporting requirements of the 1934 Act).
7.9 TERMINATION OF THE COMPANY'S OBLIGATIONS. The Company shall have
no obligations pursuant to this Section 7 with respect to: (i) any request or
requests for registration made by any Holder on a date more than five (5) years
after the closing date of the Initial Public Offering; (ii) any request or
requests for registration made by any Holder after an acquisition of the Company
by a publicly traded, reporting company, pursuant to which such Holder receives
registered securities listed for trading; or (iii) any Registrable Securities
proposed to be sold by a Holder in a registration pursuant to this Section 7 if,
in the opinion of counsel to the Company, all such Registrable Securities
proposed to be sold by a Holder may be sold in a three-month period without
registration under the 1933 Act pursuant to Rule 144.
8. MISCELLANEOUS.
8.1 SURVIVAL OF WARRANTIES. The representations, warranties and
covenants of the Company and the Investor contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing.
8.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties.
8.3 GOVERNING LAW. This Agreement shall be governed by and construed
under the internal laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California, without reference to principles of conflict of laws or choice of
law.
8.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, and/or by facsimile with original signatures to follow, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
8.5 HEADINGS. The headings and captions used in this Agreement are
used for convenience only and are not to be considered in construing or
interpreting this Agreement. All references in this Agreement to sections,
paragraphs, exhibits and schedules shall, unless otherwise provided, refer to
sections and paragraphs hereof and exhibits and schedules attached hereto, all
of which exhibits and schedules are incorporated herein by this reference.
8.6 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated below for such party, or at such other address as any party or the
Company may designate by giving ten (10) days advance written notice to all
other parties.
To the Company: Mr. Kevin Blackwell
7730 East Greenway Road, Suite 203
Phoenix, AZ 85260
Phone: (602) 443-0200
Facsimile: (602) 443-0579
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<PAGE>
with a copy to: Scott Levine, Esq.
Naumann & Levine, LLP
401 West "A" Street, Suite 1805
San Diego, CA 92101
Phone: (619) 687-0100
Facsimile: (619) 687-0101
To Investor: Robert E. Petersen
6420 Wilshire Boulevard, 20th Floor
Los Angeles, CA 90048
Phone: (323) 782-2148
Facsimile: (323) 782-2734
with a copy to: Robert E. Burwell, Esq.
Latham & Watkins
701 "B" Street, Suite 2100
San Diego, CA 92101
Phone: (619) 236-1234
Facsimile: (619) 696-7419
8.7 NO FINDER'S FEES. Each party represents that it neither is nor
will be obligated for any finder's or broker's fee or commission in connection
with this transaction. The Company agrees to indemnify and hold harmless the
Investor from any liability for any commission or compensation in the nature of
a finder's or broker's fee (and any asserted liability) for which the Company or
any of its officers, employees or representatives is responsible.
8.8 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the Investor. Any amendment or
waiver effected in accordance with this Section shall be binding upon each
holder of any Purchased Shares and/or Conversion Shares and/or Warrant Shares
and/or the Warrant at the time outstanding, each future holder of such
securities, and the Company.
8.9 EXPENSES. The Company and the Investor shall pay their own fees
and expenses incurred in entering into this Agreement. If any action at law or
in equity is necessary to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to reasonable attorneys' fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
8.10 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision(s) shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms.
8.11 ENTIRE AGREEMENT. This Agreement, together with all exhibits and
schedules hereto, constitutes the entire agreement and understanding of the
parties with respect to the subject matter hereof and supersedes any and all
prior negotiations, correspondence, agreements, understandings duties or
obligations between the parties with respect to the subject matter hereof.
8.12 FURTHER ASSURANCES. From and after the date of this Agreement,
upon the request of the Investor or the Company, the Company and the Investor
shall execute and deliver such instruments, documents or other writings as may
be reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
THE COMPANY: THE INVESTOR:
Sports Group International, Inc., R. E. & M. Petersen Living Trust Dated
a Florida corporation 1/17/83
By: /s/ Kevin A. Blackwell By: /s/ Robert M. Peterson
-------------------------------- --------------------------------
Name: Kevin A. Blackwell Name: Robert M. Peterson
------------------------------ ------------------------------
Title: President and CEO Title: Trustee
----------------------------- -----------------------------
[SIGNATURE PAGE TO SERIES B PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT]
15
WARRANT TO PURCHASE COMMON STOCK
SPORTS GROUP INTERNATIONAL, INC. (A FLORIDA CORPORATION)
OTC BB TRADING SYMBOL: SPGK
THIS IS TO CERTIFY THAT, for good and valuable consideration, the receipt
of which is hereby acknowledged, ROBERT E. PETERSEN & MARGRET M. PETERSEN,
TRUSTEES OF THE R. E. & M. PETERSEN LIVING TRUST DATED 1/17/83, or registered
assigns (hereinafter collectively referred to as the "Holder"), is entitled to
purchase, subject to the provisions of this Warrant, one million (1,000,000)
shares of common stock (hereinafter referred to as "Common Stock"), of SPORTS
GROUP INTERNATIONAL, INC. a Florida corporation, (hereinafter referred to as the
"Corporation"), held of record and beneficially by the Corporation as treasury
stock and/or authorized but unissued stock, at any time on or after the date
hereof; PROVIDED, HOWEVER, any such purchase shall be made not later than 5:00
P.M., Pacific Standard Time, on the day eight (8) years from the date hereof
(the "Expiration Date"), at an exercise price of Two Dollar ($2.00) per share.
The shares of Common Stock delivered or deliverable upon such purchase are
hereinafter sometimes referred to as "Warrant Stock" and the exercise price of a
share of Common Stock is hereinafter sometimes referred to as the "Exercise
Price."
1. EXERCISE OF WARRANT.
(a) PROCEDURE. The Holder may exercise this Warrant at any time or
from time to time on any business day prior to or on the Expiration Date,
for the full or any lesser number of shares of Common Stock purchasable
hereunder, by surrendering this Warrant to the Corporation at its principal
office, together with a duly executed Notice of Exercise (in substantially
the form attached hereto as EXHIBIT A), and payment in cash or by check of
the aggregate Exercise Price then in effect for the number of shares for
which this Warrant is being exercised. Promptly after such exercise the
Holder of this Warrant shall be entitled to receive a certificate for the
number of shares of Warrant Stock so purchased. At the time of the
surrender of this Warrant and payment of the applicable Exercise Price, the
shares so purchased shall be and be deemed to be issued to the Holder as
the record owner of such shares as of the close of business on the date on
which this Warrant shall have been exercised as provided herein.
(b) NET ISSUE EXERCISE. Notwithstanding any provisions herein to the
contrary, if the Quoted Price (as defined below) of one share of the
Corporation's Common Stock is greater than the Exercise Price (at the date
of calculation as set forth below), in lieu of exercising this Warrant by
payment with cash, certified or cashier's check, the Holder may elect to
make a cash-free exercise of this Warrant and thereby to receive shares of
Common Stock equal to the value (as determined below) of this Warrant (or
the portion thereof being canceled) by surrender of this Warrant at the
principal office of the Corporation together with the properly endorsed
Notice of Exercise and notice of such election, in which event the
Corporation shall issue to the Holder a number of shares of Common Stock
computed using the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be issued to the
Holder
Y = the gross number of shares of Common Stock purchasable under
this Warrant or, if only a portion of this Warrant is being
exercised, the gross number of shares purchased under this
Warrant being canceled (at the date of such calculation)
A = the Quoted Price (as defined below) of one share of the
Corporation's Common Stock (at the date of such calculation)
B = Exercise Price (as adjusted to the date of such calculation)
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As used herein, the "Quoted Price" of the Common Stock is the last
reported sales price of the Common Stock as reported by the Nasdaq National
Market ("NMS"), or the primary national securities exchange on which the
Common Stock is then quoted; PROVIDED, HOWEVER, that if the Common Stock is
neither traded on the NMS nor on a national securities exchange, the price
referred to above shall be the price reflected on Nasdaq, or if the Common
Stock is not then traded on Nasdaq, the price reflected in the
over-the-counter market as reported by the National Quotation Bureau, Inc.
or any organization performing a similar function; and PROVIDED, FURTHER,
that if the Common Stock is not publicly traded. the Quoted Price of the
Common Stock shall be the fair market value as determined in good faith by
the Board of Directors of the Corporation.
(c) DELIVERY OF CERTIFICATES. Certificates for shares of Common Stock
purchased hereunder shall be delivered to the Holder within a reasonable
time after the date on which this Warrant shall have been exercised as
provided herein.
(d) SHARES. The Corporation covenants that all shares of Common Stock
which may be issued upon the exercise of rights represented by this Warrant
will, upon exercise of the rights represented by this Warrant, be fully
authorized, validly issued, fully paid, and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof.
2. CHARGES, TAXES AND EXPENSES. The issuance of certificate(s) for shares
of Common Stock upon the exercise of this Warrant shall be made without charge
to the Holder for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate(s), all of which taxes and expenses
shall be paid by the Corporation, and such certificate(s) shall be issued in the
name of the Holder of this Warrant.
3. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday or a Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a Saturday,
Sunday or legal holiday.
4. EXCHANGE OR LOSS OF WARRANT. This Warrant is exchangeable, without
expense, at the option of the Holder, upon presentation and surrender hereof to
the Corporation for other Warrants of different denominations entitling the
Holder thereof to purchase in the aggregate the same number of shares of Common
Stock at the same Exercise Price purchasable hereunder. In the event this
Warrant is so presented and surrendered for other Warrants of differing
denominations, the Corporation shall deliver said Warrants within ten (10) days
of presentation and surrender.
5. RIGHTS/OBLIGATIONS OF THE HOLDER. The Holder shall not, by virtue
hereof, be entitled to any rights of a shareholder in the Corporation either at
law or equity, except as otherwise stated herein, and the rights of the Holder
are limited to those expressed in this Warrant. No provisions hereof, in the
absence of affirmative action by the Holder to purchase shares of Common Stock,
and no mere enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of such Holder for the Exercise Price or as a
stockholder of the Corporation, whether such liability is asserted by the
Corporation or by its creditors.
6. ADJUSTMENT AND TERMINATION.
(a) ASSUMPTION UPON A MERGER. If at any time the Corporation proposes
to merge with or into any other corporation, effect a reorganization, or
sell or convey all or substantially all of its assets to any other entity,
then the surviving entity shall be obligated to assume the obligations of
this Warrant, and it shall be exercisable for the number of shares of stock
or other securities or property which the Holder of this Warrant would have
received in the transaction if the Holder had exercised the Warrant prior
to the consummation of the transaction.
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<PAGE>
(b) RECLASSIFICATION, ETC. If the Corporation at any time shall, by
subdivision, combination or reclassification of securities or otherwise,
change any of the securities to which purchase rights under this Warrant
exist into the same or a different number of securities of any class or
classes, the shares of Common Stock or other securities for which this
Warrant is exercisable shall thereafter be convertible into the kind and
number of shares of stock or other securities or property of the
Corporation or otherwise to which the Holder would have been entitled if
immediately prior to such change the Holder had acquired the shares of
common Stock or other securities for which this Warrant is exercisable. If
at any time or from time to time after the date of this Warrant (the
"Original Issue Date") the Corporation shall subdivide (by stock split,
stock dividend or otherwise) its outstanding shares of Common Stock, the
Exercise Price in effect immediately prior to such subdivision shall,
concurrently with the effectiveness of such subdivision. be proportionately
decreased. In the event the outstanding shares of Common Stock shall be
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares of Common Stock, the Exercise Price then in effect shall,
concurrently with the effectiveness of such combination or consolidation,
be proportionately increased. Upon each adjustment of the Exercise Price
pursuant to a subdivision or combination, the Holder thereafter shall be
entitled to purchase, at the Exercise Price resulting from such adjustment,
the number of shares of Common Stock (calculated to the nearest whole
share) obtained by multiplying the Exercise Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant
hereto immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment. No adjustment
on account of cash dividends or interest on the Corporation's Common Stock
or other securities purchasable hereunder will be on the Corporation's
Common Stock or other securities purchasable hereunder will be made to the
Exercise Price under this Warrant.
(c) CERTAIN EVENTS. If any change in the outstanding Common Stock of
the Corporation or any other event occurs as to which the other provisions
of this Section 6 are not strictly applicable or if strictly applicable
would not fairly protect the purchase rights of the Holder of the Warrant
in accordance with such provisions, then the Board of Directors of the
Corporation shall make an adjustment in the number and class of shares
available under the Warrant, the Exercise Price or the application of such
provisions, so as to protect such purchase rights as aforesaid. The
adjustment shall be such as will give the Holder of the Warrant upon
exercise for the same aggregate Exercise Price the total number, class and
kind of shares as he would have owned had the Warrant been exercised prior
to the event and had he continued to hold such shares until after the event
requiring adjustment.
(d) NOTICE OF ADJUSTMENT. Upon any adjustment of the securities
issuable upon exercise of this Warrant, Exercise Price for the shares
and/or any increase or decrease in the number of shares purchasable upon
the exercise of this Warrant, the Corporation shall give written notice
thereof certified by an officer of the Corporation, by notice as provided
herein to the registered Holder of this Warrant at the address of such
Holder as shown on the books of the Corporation.
(e) AUTHORIZED SHARES. The Corporation covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the
issuance of Common Stock upon the exercise of any purchase rights under
this Warrant.
7. NOTICES TO WARRANT HOLDER. So long as this Warrant shall be outstanding
and unexercised, (a) if the Corporation shall pay any dividend or make any
distribution upon the Common Stock, (b) if the Corporation shall offer to the
holders of Common Stock for subscription or purchase by them any shares of stock
of any class or any other rights or (c) if any capital reorganization of the
Corporation, reclassification of the capital stock of the Corporation,
consolidation or merger of the Corporation with or into another corporation,
sale, lease or transfer of all or substantially all of the property and assets
of the Corporation to another corporation or a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation shall be effected,
then, in any such case, the Corporation shall cause to be delivered to the
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Holder, at least thirty (30) days prior to the date specified in (i) or (ii)
below, as the case may be, a notice containing a brief description of the
proposed action and stating the date on which (i) a record is to be taken for
the purpose of such dividend, distribution or rights or (ii) such
reclassification, reorganization, consolidation, merger, conveyance, lease,
dissolution, liquidation or winding up is to take place and the date, if any is
to be fixed, as of which the holders of common Stock of record shall be entitled
to exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation or winding up.
8. TRANSFERABILITY. Subject to compliance with applicable federal and state
securities laws, this Warrant and all rights hereunder are transferable, in
whole or in part, without charge to the Holder hereof (except for transfer
taxes), upon surrender of this Warrant properly endorsed. Each taker and holder
of this Warrant, by taking or holding the same, consents and agrees that this
Warrant, when endorsed in blank, shall be deemed negotiable, and that the Holder
hereof, when this Warrant shall have been so endorsed, may be treated by the
Corporation, at the Corporation's option, and all other persons dealing with
this Warrant as the absolute owner hereof for any purpose and as the person
entitled to exercise the rights represented by this Warrant, or to the transfer
hereof on the books of the Corporation any notice to the contrary
notwithstanding; but until such transfer on such books, the Corporation may
treat the registered owner hereof as the owner for all purposes.
9. NOTICES. Any notices or certificates by the Corporation to the Holder
and by the Holder to the Corporation shall be deemed delivered if in writing and
delivered personally or sent by certified mail, postage prepaid to the Holder,
addressed to it at 6420 Wilshire Boulevard, 20th Floor, Los Angeles, California
90048, Attention: Robert E. Petersen, and, if to the Corporation, addressed to
it at 7733 East Greenway Road, Suite 203, Scottsdale, Arizona 85260, Attention:
President. The Corporation may change its address by written notice to the
Holder, and the Holder may change its address by written notice to the
Corporation.
10. CONFIDENTIALITY. The terms, conditions, rights and parties to this
Warrant shall be kept strictly confidential by the Corporation and the Holder
and by their respective successors and assigns.
11. SEVERABILITY. Should any provision of this Warrant be determined by a
court of competent jurisdiction to be unenforceable or invalid, such provision
shall not affect the right of the Holder hereunder to purchase the Warrant Stock
at the Exercise Price, as such may be adjusted from time to time. To the extent
necessary, any such court is hereby authorized to restructure any such provision
so as to be valid, binding and enforceable to the maximum extent possible,
consistent with the intent of the parties and the restrictions of applicable
law.
12. ISSUE DATE; GOVERNING LAW. The provisions of this Warrant shall be
construed and shall be given effect in all respects as if it had been issued and
delivered by the Corporation on the date hereof. This Warrant shall be binding
upon any successors or assigns of the Corporation. This Warrant shall constitute
a contract under the laws of the State of California and for all purposes shall
be construed in accordance with and governed by the laws of said state.
13. MODIFICATION AND WAIVER. This Warrant and any provisions hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
14. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon any
corporation succeeding the Corporation by merger, consolidation or acquisition
of all or substantially all of the Corporation's assets. All of the obligations
of the Corporation relating to the Common Stock issuable upon the exercise of
this Warrant shall survive the exercise and termination of this Warrant. All of
the covenants and agreements of the Corporation shall inure to the benefit of
the successors and assigns of the Holder hereof.
15. DESCRIPTIVE HEADINGS. The description headings of the several sections
and paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
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16. LOST WARRANTS. The Corporation represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Corporation
of the loss, theft, destruction or mutilation of this Warrant and, in the case
of any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Corporation, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Corporation, at its expense,
will make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.
17. FRACTIONAL SHARES. No fractional shares shall be issued upon exercise
of this Warrant. The Corporation shall, in lieu of issuing any fractional share,
pay the Holder entitled to such fraction a sum in cash equal to such fraction
multiplied by the then effective Exercise Price.
This Warrant has been sold and granted as of this 20th day of May, 1999.
SPORTS GROUP INTERNATIONAL, INC.,
a Florida corporation
By: /s/ Kevin A. Blackwell
------------------------------------
Kevin A. Blackwell, President
By: /s/ Kathryn L. Blackwell
------------------------------------
Kathryn L. Blackwell, Secretary
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EXHIBIT A
NOTICE OF EXERCISE
TO: SPORTS GROUP INTERNATIONAL, INC.
The undersigned, the Holder of the attached Warrant, hereby irrevocably
elects to exercise the purchase right represented by this Warrant as follows:
[ ] The undersigned elects to purchase for cash or check _________ full
shares of Common Stock of Sports Group International, Inc. and
herewith makes payment of $________ for those shares:
[ ] The undersigned elects to effect a net exercise of this Warrant,
exercising this Warrant in full or as to the following gross number of
shares: __________. The undersigned understands that the actual number
of shares issuable will be determined in accordance with the terms of
this Warrant.
The undersigned requests that the certificates for the shares be issued in
the name of, and delivered to, __________________________, whose address is
_______________________________________________.
If the shares of Common Stock purchased by the exercise of this Warrant are
not all of the shares which may be purchased under this Warrant, a new Warrant
for the balance remaining of the shares covered by this Warrant shall be
registered with the Corporation in the name of the undersigned and delivered to
the undersigned at the undersigned's address set forth on the records of the
Corporation.
Date: _______________ ________________________________________
Signature of the Holder
1
MASTER FRANCHISE AGREEMENT
CANADA
THIS MASTER FRANCHISE AGREEMENT (the "Agreement") is made on July 7, 1998
(the "Effective Date"), by and between Surf City Squeeze Franchise Corp. a
corporation organized under the laws of the State of Arizona, in the United
States of America, with its principal office at 7730 East Greenway Road, Suite
203, Scottsdale, Arizona, United States of America (the "Franchiser"), and
1238176 Ontario Inc., a corporation incorporated pursuant to the laws of the
Province of Ontario, in Canada, whose principal or registered office is at 100
Redpath Avenue, Suite 9. Toronto, Ontario, Canada (the "Master Franchisee").
THE FRANCHISE SYSTEM
Franchiser has developed a system and procedure for the operation of retail
stores (the "Stores") offering for sale smoothies, juices, functional drinks,
and other healthy consumables, and the sale and promotion of related products
and services, using Franchisor's Proprietary Meats by independent persons
throughout the United States and other countries, (the "Franchise System").
Franchisor licenses the operation by others of the Franchise System (the
"Franchises") under the name "Surf City Squeeze". As part of the Franchise
System. Franchiser provides certain products and services to its Franchisees
including training, use of Franchisor's name and logo and other services related
to the efficient operation of the Franchised Business (hereinafter defined). In
order to assist Franchisees in the start-up of their Franchised Business,
Franchiser makes available to its Franchisees both initial and continuing
information, advice, supervision, guidance and know-how with respect to
management, operation and promotion of the Franchised Business, as part of' the
Franchise System.
FRANCHISE TO BE "MASTER FRANCHISE"
Master Franchisee has requested, and Franchiser has agreed to grant to
Master Franchisee, the exclusive right to set-up, create, establish and operate
Master Franchisee-owned Stores and to grant franchises for Stores (to
"Franchised Business") to qualified persons ("Subfranchisees") for the canny of
Canada as it is currently defined (the "Protected Area") pursuant to the terms
arid conditions of this Agreement, provided same is done in complete compliance
with the laws, rules and regulations of cognizant local jurisdictions.
PROPRIETARY MARKS
Franchiser is the applicant for registration of the Surf City Squeeze
trademark filed with appropriate authorities in the Protected Area (collectively
the "Proprietary Marks"), Upon receiving approval from the appropriate
Governmental Agencies to Import a Functional Powder as listed in Exhibit B
hereto and each ingredient for said Functional Powder is approved for
importation, Franchiser shall apply for registration of the trademark for said
Functional Powder within die Protected Area. Franchisor shall on the rights to
each trademark registered within die Protected Area for each Functional Powder.
GOODWILL
Franchisor has expended money and effort in developing and improving the
Franchise System and in advertising, promoting, and publicizing the Proprietary
Marks. The United States public has come to associate said Proprietary Marks
exclusively with the Franchise System and the products and services offered,
sold, installed, and rendered by Franchisor.
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MASTER FRANCHISEE'S ACKNOWLEDGMENTS
Master Franchisee has had the opportunity to investigate the Franchise
System sad the competitive market in which it operates and, based on the
conclusions drawn therefrom, desires to establish the Franchised Business in the
Protected Area, use the Franchise System and the Proprietary Marks, have the
right to engage in the business of offering to the public said products and
services, sell subfranchises (the "Subfranchises") and derive benefits from
Franchisor's information, experience, advice, guidance, and know bow.
Master Franchisee acknowledges that each Franchise operation is dependent
upon each of the other franchisee or subfranchises in the Franchise System to
establish and maintain the goodwill necessary for a successful operation of die
Franchise System. Master Franchisee hitter acknowledges that it is essential to
preserve the integrity of the Proprietary Marks and goodwill, that Master
Franchisee and each subfranchisee adhere to the uniform standards, procedures,
and policies hereafter described.
NOW, THEREFORE, on the basis of the foregoing recitals, in consideration of
the mutual promises, covenants, agreements and conditions contained in this
Agreement, and other good and valuable consideration. Franchisor and Master
Franchisee hereby agree as follows:
ARTICLE I. GRANT AND USE OF FRANCHISE
1.01. GRANT OF MUSTER FRANCHISE. Subject to the terms and conditions
contained herein and contingent upon Franchisor's active and diligent pursuit of
timely securing the rights and registration to the trademark and Proprietary
Marks as described above within the Protected Axes, Franchisor hereby gnats to
Master Franchisee, and Master Franchisee hereby accepts from Franchisor, the
exclusive right, franchise, and license:
(a) To set-up, create, establish, own and operate Stores in the Protected
Area, in accordance with the terms and conditions of section 1.03 and the
"Production Schedule" attached hereto as Exhibit A;
(b) To use, in connection wit the operation of said businesses, the
Franchise System and the Proprietary Marks;
(c) To purchase those Approved Products authorized by Franchisor for use in
the Franchised Business from persona or entities approved by Franchisor and sell
such Approved Products in the Protected Areas; and
(d) To grant franchises to Subfranchisees to operate Stores in the
Protected Area, in accordance wit the rams and conditions of section 1.03 and
the Production Schedule" attached to this Agreement as Exhibit A.
1.02. TERM OF FRANCHISE. This Agreement and the rights, franchise, and
license granted hereunder shell commence on the Effective Dare and shall be for
a term of 99 years (the "Term"), unless terminated by Franchisor or Master
Franchisee in accordance with the provisions hereof.
1.03. SUBFRANCHISING.
(a) In connection with the exercise by Master Franchisee of its right to
subfranchise to others, Master Franchisee shall comply in all respects wit all
applicable laws and regulations pertaining to franchising and subfranchising
within the Protected Area, including without limitation laws requiring
disclosure documents for prospective Subfranchisees.
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(b) Master Franchisee shall not grant any right hereunder to a
Subfranchisee except pursuant to an agreement (the "Subfranchise Agreement"),
the form of which must have received the prior written approval of Franchiser,
not to be withheld unreasonably. In no event shall the term of the Subfranchise
Agreement exceed the term of the hose of the premises for which the Subfranchise
Agreement was executed. At Master Franchisee's request, Franchiser will prepare
and deliver to Master Franchisee the form of Subfranchise Agreement acceptable
to Franchiser, which may then be adapted (Master Franchisee shall have the right
to make changes in the form of Subfranchise Agreement. so long as such changes
are not material amendments to the form unless such changes are required by law,
Including language laws applicable in the Province of Quebec). Master Franchisee
shall deliver a copy of each executed Subfranchise Agreement to Franchisor
promptly after its execution.
(c) Master Franchisee shall perform and enforce against each Subfranchisee
the terms of any Subfranchise Agreement it enters into, to the extent permitted
by law and good business practice.
(d) Master Franchisee shall deliver to Franchiser a copy of any
correspondence with any Subfranchisee relating to any breach or default of its
Subfranchise Agreement or any Notice of Termination of any Subfranchisee,
concurrently with its being sent or received by Master Franchisee.
(e) Franchisor, or its designee, shall be an Intended third party
beneficiary of each Subfranchise Agreement. If Master Franchisee is in material
default of its obligations or is terminated, Franchiser, or its designee, shall
have the right to enforce the Subfranchise Agreements directly.
(f) Master Franchisee shall protect, defend and indemnity Franchisor and
hold Franchiser harmless from any and all costs and expenses, including
attorney's fees, liabilities and damages arising out of or relating to the
conduct or misconduct by Master Franchisee of this Agreement or any
Subfranchisee of any Subfranchise Agreement, the operation of any franchised or
subfranchised business, or any goods, merchandise, or products leased or sold,
or services rendered, by Master Franchisee or any Subfranchisee. Master
Franchisee shall protect. defend and indemnify Franchisor and hold Franchisor
harmless from any end all costs and expenses, including attorney's fees,
liabilities and damages arising out of or relating to any third party unless the
third party is a consumer of products sold by the Franchisor that caused death
or seven illness. Notwithstanding the foregoing, the Franchiser shall protect,
defend, and indemnity the Master Franchisee and its Subfranchisees and hold them
harmless from all damages, costs and expenses (including attorney's fees)
arising out of any claim that the products sold by or with the recommendation of
the Franchiser caused death or illness, except where such products are
manufactured by or for the Master Franchisee.
ARTICLE II. LOCATION AND TERRITORY
2.01. BUSINESS ADDRESS. The address of Master Franchisee's principal place
of business is 100 Redpath Avenue, Suite 9, Toronto, Ontario, Canada M4S 237,
which may be changed or amended as provided by Master Franchisee from time to
time in writing to Franchiser.
2.02. PROTECTED AREA. Franchiser (including any Affiliate, Subsidiary, or
Parent) will not establish, or grant others (except the Master Franchisee) the
right to establish, or franchise any location or Store, or otherwise distribute,
directly or indirectly, the products under the Proprietary Marks or under any
other name, propriety mark or Indicia within the Protected Area, and Franchiser
will not allow any other party, except Master Franchisee or Subfranchisees
licensed by Master Franchisee, to operate the Franchised Business within the
Protected Met.
2.03. EXCLUSIVITY OF TERRITORY.
(a) In order to facilitate the successful development of the Franchised
Business within die Protected Area and TO promote Master Franchisee's investment
therein, Franchisor grants to Master Franchisee the exclusive right to operate
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the Franchised Business within the Protected Area. For greater certainty, Master
Franchisee is hereby granted by Franchisor the exclusive right to use, together
with its Subfranchisees, the Franchise System and the Proprietary Marks within
the Protected Area and Franchisor covenants and agrees that during the Term of
this Agreement. it shall not without the prior written consent of Master
Franchisee, either directly or indirectly, individually or in partnership or
jointly or in conjunction with any person, firm, association, syndicate or
corporation, as principal, agent, shareholder or in any manner whatsoever, carry
on or be engaged in or be concerned wit or interested in or advise, lend money
to, guarantee the debts or obligations of or permit its name or any part thereof
or any Proprietary Marks to be used or employed by any business, enterprise or
undertaking operations of a similar business to the Franchised Business in the
Protected Area.
(b) If either party becomes aware of any business within the Protected Area
the products of which mesh well with the products sold through the Franchise
System, and wishes to exploit such products either within or outside the
Franchise System, such party will wake the other party aware of the opportunity
and the parties agree that they will work together to exploit the products as
co-venturers having equal responsibility, obligations and equity in the venture.
Subject to the other provisions of this Agreement, if the other party is not
interested in jointly exploiting the products, then the party becoming aware of
the said business may exploit the products without the participation of the
other party.
ARTICLE III. USE OF FRANCHISE SYSTEM
PROPRIETARY MARKS AND LICENSE
3.01 VALIDITY AND USE OF PROPRIETARY MARKS. Master Franchisee hereby
acknowledges the validity of the Proprietary Marks and further acknowledges that
the Proprietary Marks are the sole property of Franchisor During and after the
Term of this Agreement, Master Franchisee shall not in any way dispute or impugn
the validity of the Proprietary Marks, or the rights of Franchisor In them.
Master Franchisee will use such Proprietary Marks only for so long as the right.
franchise, and license granted herein remains in tree, and only Is connection
with the conduct of the Franchised Business, and in the manner and for the
purposes specified in this Agreement Master Franchisee shall not either during
or after the Term of this Agreement do anything, or aid or assist any other
party to do anything, which would infringe upon, ham,, or contest the rights of
Franchisor in any of its Proprietary Marks or in any other mark or name which
incorporates the words "Surf City Squeeze" or any part thereof. Master
Franchisee will not use any mark or name in connection with the conduct of the
Franchised Business, or on any products, packages, or other materials which
Master Franchisee and/or Subfranchisees obtain from Franchisor or any
manufacturer designated or approved by Franchisor, other than as herein licensed
or as explicitly authorized by Franchisor.
3.02. FUTURE PROPRIETARY MARKS. From time to time, Franchisor may change,
improve or modify any of the Proprietary Marks. Master Franchisee shall accept
use and display, as may be applicable, such modified Proprietary Marks in
accordance with the procedures, policies. rules and regulation prescribed by
Franchisor. Master Franchisee acknowledges and agrees that all rights to any
such modified Proprietary Marks, as well as additional rights that may arise in
the future in connection with the Proprietary Marks or their use by Franchisor,
Master Franchisee, or any Subfranchisee, whether as trade names, trademarks,
service marks, or copyrighted materials, shall be the exclusive property of
Franchisor and shall inure to the benefit of Franchisor, except as otherwise
expressly provided herein. All Proprietary Marks shall be licensed to Master
Franchisee, which is hereby granted the right to sub-license the use of same to
its Subfranchisees, in accordance and subject to sections 7 and section 9 below,
without further costs.
3.03. USE OF FRANCHISE BUSINESS NAME.
(a) Master Franchisee shall operate, advertise, and promote its Franchised
Business under the designation "Surf City Squeeze", its translation. or under
such other name or names as Franchisor and Master Franchisee may Sun time to
time agree upon in writing, and under no other name or designation whatsoever.
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(b) Franchiser shall own all right, title, and interest to the Proprietary
Marks. and to any applications, registrations, and other filings or notices
which may be made with respect thereto in any jurisdiction, except to the extent
any such rights are licensed to Master Franchisee or any Subfranchisee
hereunder. Master Franchisee shall execute any and all necessary papas,
documents, and assurances to effectuate this purpose and shall cooperate fully
with Franchisor in securing all required approvals from the appropriate
governmental authority respecting use of the Proprietary Marks.
(c) If required to do so by any applicable law, Master Franchisee shall
promptly, upon the execution of this Agreement, tile with the appropriate
governmental authorities a notice of Master Franchisee's intent to conduct its
business hereunder under the name "Surf City Squeeze". Promptly upon the
termination of this Agreement according to Section 9, Master Franchisee shall
execute and file such documents as way be necessary to revoke or terminate such
assumed name registration.
3.04. TRADEMARK APPLICATIONS. Franchisor warrants and represents that it
has filed, and shall proceed to promptly and diligently prosecute, applications
with the appropriate trademark registration authorities in the Protected Area,
for the registration of the trademarks SURF CITY SQUEEZE and SURF CITY SQUEEZE &
Design in the English language or other language appropriate for such
registration. Master Franchisee shall execute such documents as are necessary
and shall otherwise cooperate with Franchisor in the registration of such marks.
Franchisor covenants that it shall, at its sole expense, exhaust all available
legal procedures and processes available to it in order to procure the
registration of the trademarks SURF CITY SQUEEZE and SURF CITY SQUEEZE & Design
in the Protected Area. In the event Franchisor is unable to procure the
registration of the trademarks SURF CITY SQUEEZE and SURF CITY SQUEEZE & Design
in the Protected Area, Franchisor agree, at its sole expense, to change the aide
name and Proprietary Marks Surf City Squeeze in the Protected Area to a new
trade name and proprietary mark that is mutually acceptable to Franchisor and
Master Franchisee. Franchisor shall, in addition, at its sole expense, pay for
any changes relating to the exterior sign ban of each Master Franchisee-owned
and Subfranchisee Stores resulting from the change in the trade name and
Proprietary Marks hereinbefore described forthwith. Franchisor shall purchase
all items bearing the Surf City Squeeze trademark from Master Franchisee or
Subfranchisees (i.e. cups and menus) resulting from the change in the trade name
and Proprietary Marks described above. Franchisor shall not be responsible for
any other trade name related changes in the Stores of the Master
Franchisee-Owned or Subfranchisee Stores other than the aforementioned exterior
sign ban and trademark bearing items. With regard to the use of trademarks hi
the Province of Quebec, the parties agree to work with provincial language
officials to obtain the appropriate marks and names for use in that province.
3.05. CONFIDENTIALITY OF FRANCHISE SYSTEM. Master Franchisee hereby
acknowledges that, as between it and Franchisor, Franchisor is the sole owner of
all proprietary rights in and to the Franchise System and all material and
information relating to the Franchise System now or hereafter revealed to Master
Franchisee and/or Subfranchisees under this Agreement. Master Franchisee further
acknowledges that the Franchise System, in its entirety, constitutes trade
secrets of Franchisor and that they are revealed to Master Franchisee in
confidence, solely for the purpose of enabling Master Franchisee and
Subfranchisees to establish and operate the Franchised Business licensed herein
in accordance with the terms of this Agreement Such trade secrets may include,
but are not limited TO. training manuals. operating manuals, policy manuals,
sales promotion aids, business forms, accounting procedures, marketing reports.
informational bulletins, and inventory systems. Master Franchisee hereby agrees
that both during and after the Ten of this Agreement, Master Franchisee will not
reveal any of such trade secrets to any other person or entity, except licensed
Subfranchisees, and will not use any of such trade secrets in connection with
any business or venture in which Master Franchisee has a direct or indirect
interest; whether as a proprietor, partner, joint venture, shareholder, officer,
director, or in any other capacity whatsoever, other than in connection with the
operation of the Franchised Business licensed herein. All agreements to which
Master Franchisee and/or any Subfranchisee are a party which are subordinate to
this Agreement shall be required to incorporate and include therein a
Confidentiality and Non-Compete Agreement substantially in the form of Exhibit C
attached hereto. The confidentiality obligations of Master Franchisee set forth
in this section 3.05 shall not apply to any information which was known to
Master Franchisee prior to its disclosure by Franchisor or any information which
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becomes public knowledge without the fault of Master Franchisee. Any information
provided to Master Franchisee by Franchisor prior to the Effective Date of this
Agreement shall apply to this Section 3.05.
3.06. RIGHTS TO GOODWILL. Master Franchisee acknowledges that all goodwill
which may arise 6am Muter Franchisees use of Franchisor's Proprietary Marks or
the Franchise System is and shall at all times remain the sole and exclusive
property of Franchisor and shall inure to the sole benefit of Franchisor.
Notwithstanding the above, Master Franchisee is entitled to its own Goodwill in
connection with the operation of the Franchised Business as provided in this
Agreement through the Term of this Agreement.
3.07. UNAUTHORIZED USE. If Master Franchisee receives notice, or is
informed, of any claim, suit or demand against Muter Franchisee or any
Subfranchisee on account of any alleged infringement, unfair competition, or
similar matter relating to its use of the Proprietary Marks used by Master
Franchisee in accordance with the terms of this Agreement, Master Franchisee
shall promptly notify Franchisor of any such claim, suit or demand. Thereupon,
Franchisor shall promptly take such action as may be necessary to protect and
defend Master Franchisee against any such claim by any third party. Master
Franchisee shall not settle or compromise any such claim by a third party
without the prior written consent of Franchisor. In its sole discretion,
Franchisor shall have the right to defend, compromise or settle any such claim
at Franchisor's sole cost and expense, using attorneys of its own choosing, and
Master Franchisee agrees to cooperate fully with Franchisor in connection with
the defense of any such claim. Any costs and expenses In connection wit such
defense, compromise or settlement occasioned by acts or omissions of Master
Franchise shall be the sole responsibility of Master Franchisee. All other
related costs and expenses shall be the sole responsibility of Franchisor.
3.03. License. Master Franchisee understands and apses that it will render
services to customers with regard to the retail sale of juice products that may
require a license pursuant to applicable law. If Master Franchisee does business
which may require a license, Master Franchisee shall, before it does such
business, obtain the appropriate license. Master Franchisee shall aid and assist
Subfranchisees in the obtaining of such license if required by law.
3.09. TRADEMARK REPRESENTATION. As of the Effective Date, Franchisor hereby
warrants and represents that it has no knowledge of any uses by third parties of
the Proprietary Marks or trademarks similar thereto in the Protected Area which
would be superior to or otherwise conflict or interfere with Master Franchisee's
right to use the Proprietary Marks pursuant to this Agreement.
3.10. USE OF TRADEMARK IN MASTER FRANCHISOR'S CORPORATE NAME.
Notwithstanding anything to the contrary contained in this Agreement, Franchisor
acknowledges and agrees that Master Franchisee shall have the right but not the
obligation, to use the words "Surf City Squeeze" as components of Master
Franchisee's corporate name.
ARTICLE IV. CONTINUING SERVICES OF FRANCHISOR
In addition to any assistance which Franchisor may have heretofore rendered
to Master Franchisee, Franchisor agrees that it will perform the continuing
services set forth in sections 4.01 through 4.04, for the benefit of Master
Franchisee.
4.01. TRAINING.
(a) Franchisor shall instruct a principal and one additional employee of
Master Franchisee in an Initial franchise training program ("IFT") at
Franchisor's approved training facilities in Scottsdale, Arizona. United States
of America, for a period of on. week at no tuition charge to Master Franchisee
(each additional person from Master Franchisee attending IFT will incur a daily
tuition charge of US$300.00) Master Franchisee shall bear all travel, lodging
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and other expenses of its attendees at IFT. In to event Muter Franchisee enters
into an agreement or agreements with Famous Players Inc., or any successor
thereto, as Subfranchisee for one or multiple locations, a principal and one
additional employee of Famous Players Inc. or any successor thereto shall attend
the IFT at no additional tuition cost (each additional person from Famous
Players Inc. or its successor attending IFT will incur a daily tuition charge of
US$300.00). Famous Players Inc. shall bear all travel, lodging and other
expenses of its attendees at IFT.
(b) Where requested by Master franchisee, Franchisor also will provide an
additional three week follow-up training program to management and supervisory
personnel of Master Franchisee in the Stores in the Protected Area. Master
Franchisee shall bear all expenses of its attendees at follow-up training, but
no tuition or separate fee shall be payable to Franchisor by Muter Franchisees
attendees. Such training shall be provided by the Operations Manager of
Franchisor in English. Franchisor shall be responsible for all travel, lodging,
meals, and other living expenses it or its said personnel may reasonably incur
In such visit. Up to three weeks of follow-up training in total will be given
throughout the Term of this Agreement, as Franchisor deems necessary, at a
location chosen by Franchisor. The additional three week fallow-up training
program must be utilized in not less than one (1) week intervals. This training
will include one week of on-site assistance when the 5rst affiliate-owned Store
opens IN the Protected Area.
(c) Any fining, excepts outlined hi section 4.01(a) and 4,01(b), shall be
paid wholly by Master Franchisee, including but not limited to all travel,
lodging, meals, and other living expenses that Franchisor's and Franchisor's
personnel may reasonably incur.
(d) If Master Franchisee requests that any training or assistance provided
by Franchisor be in French, and if Franchisor agree to do so in French, the
expense of any translation into French shall be borne exclusively by Master
Franchisee. If Master Franchisee elects for the translation, Master Franchisee
shall bear the responsibility to choose the translator, at no risk to
Franchisor. Franchisor has no knowledge of the French language.
(e) Master Franchisee shall have the right at any time to request
Franchisor to provide training or operating assistance in the protected Area.
When so requested, Franchisor shall provide personnel for such purposes, subject
to prior notice and Franchisor's approval, in such number as Franchisor and
Master Franchisee shall agree. All costs of such in Wag shall be solely that of
Master Franchisee, including but not limited to transportation, lodging, food,
and Franchisor-employee per diem payments. If translation to the French language
is required, the translation expense shall be the sole responsibility of Master
Franchisee.
4.02. IMPROVEMENTS TO FRANCHISE SYSTEM. Franchisor agrees to make available
to Master Franchisee all improvements and additions to the Franchise System, to
the same extent and In the same manner as they are made available to Surf City
Squeeze franchisees generally. The Franchisor shall make such improvements or
changes as may be required to maintain any competitive advantage enjoyed by the
Franchised Business, but having due regard to the burden of costs in
Implementing such improvements or changes.
4.03. MANAGEMENT ASSISTANCE. When requested by Master Franchisee,
Franchisor agrees to counsel and assist Master Franchisee on a continuing basis
with respect to the management and operation of its Franchised Business and will
make available to Master Franchisee the benefits of Franchisor's Information,
experience, advice, guidance. and know-how in connection therewith. Franchisor
shall not be required to travel to the Protected Area, but if Franchisor does
travel at Master Franchisee's request, Master Franchisee shall be liable for all
necessary and reasonable costs and expenses of such trip including but not
limited to food, lodging, transportation and Franchisor's employee per diem
payments. Also, Franchisor shall have the right, at its sole expense, to make
one visit to the Protected Area to inspect Master Franchisee's business
locations during each calendar year during the Term hereof, whether or not
Master Franchisee requests any such visit.
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4.04. ADVERTISING. If requested to do so by Master Franchisee. Franchiser
shall from time to time offer to Master Franchisee any camera ready artwork (the
"Camera Ready Artwork') to the extent available previously prepared by
Franchisor, at no additional cost to Master Franchisee, which Franchisor
utilizes for marketing, advertising and promotion of products and services in
the United States and other countries. Following Franchisor providing the
requested Camera Ready Artwork, Master Franchisee may, in its sole discretion,
choose to use or not use same within the Protected Area without Franchisor's
prior consent and if its elects to use same within the Protected Area, Master
Franchisee shall be responsible for all further costs relating to producing and
distributing the advertising,
4.05. INITIAL DOCUMENTATION. Franchiser agrees to supply Master Franchisee
with:
(a) one copy of Franchisor's franchise solicitation brochure and one copy
of each of Franchisor's standard form documents to be used by Master Franchisee
to grant franchises to Subfranchisees to operate Stores in the Protected Areas;
(b) one set of Franchisor's standard plans and specifications for a Store,
including requirements for dimensions, exterior design, interior layout building
materials, equipment furnishings, fix lures, signs and colour schemes;
(c) one copy of Franchisors current Manuals (as hereinafter defined), the
contents of which may not be reproduced or disclosed, except to Subfranchisees
and to employees of Master Franchisee and Subfranchisees on a need-to-know basis
and in circumstances which will protect confidentiality;
(d) one copy of the advertising and promotional plans AND materials
presently used by Franchisor;
(e) one set of all documentation on computer readable diskette; and
(t) one copy of the Franchisor's prospectus on computer readable diskette.
All of the above materials shall remain the property of Franchisor and shall be
treated as confidential by Master Franchisee sad its employees and agents. With
the consent of Franchisor. Master Franchisee may adapt any of these materials to
conform to the laws applicable within the Protected Area.
4.06 CONTINUING ADVICE AND GUIDANCE. Franchisor agrees to provide Master
Franchisee with general advice and guidance regarding all aspects of the System,
including:
(a) Establishing a staff of qualified field represe4tatives to provide
supervisory and consultative services to Subfranchisees in the Protected Area.
4.07 EMPLOYEE HANDBOOK. Concurrently with the commencement of Master
Franchisee's follow-up training program. Franchisor agrees to provide Master
Franchisee with one copy of Franchisor's Employee Handbook.
ARTICLE V. PRODUCTS USED IN FRANCHISE
5.01 SYSTEM PURCHASE AND SALE oF APPROVED PRODUCTS.
(a) Subject to the terms and conditions set fort in the Product Agreement
attached as Exhibit D, Franchisor hereby grants to Master Franchisee the
exclusive tight (except as otherwise provided therein or as restricted by
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applicable law) to sell Approved Products and other products sold under or in
association with the Proprietary Marks within the Protected Area. Master
Franchisee hereby acknowledges that the rights granted in said Product Agreement
shall be subject to and subordinate to this Agreement. If this Agreement is
terminated, ten the Master Franchisee's rights in the Product Agreement shall
also be terminated.
ARTICLE VI. COVENANTS AND OBLIGATIONS OF MASTER FRANCHISEE
OPENING AND OPERATION OF FRANCHISED BUSINESS
6.01. OPENING AND OPERATION OF FRANCHISED BUSINESS.
(a) Master Franchisee shall sell Subfranchises in accordance with the
Production Schedule attached as Exhibit A, subject to Force Majeure. Any failure
of Master Franchisee to do so shall subject Master Franchisee to the terms of
section 9.08 hereof.
6.02. PROMOTION OF SALES. Master Franchisee shall at all times actively
promote the sale of Franchisor's product and services, and such other products
and services which an offered and sold by Master Franchisee in accordance with
this Agreement and Master Franchisee shall use its best efforts to cultivate,
develop, and expand the market and goodwill therefor.
6.03. MANAGERIAL RESPONSIBILITY. Master Franchisee agrees that at all times
during the Term of this Agreement. Master Franchisee and Master Franchisee's
duly authorized general manager agent shall (i) devote their time and effort to
the active management and operation of Master Franchisee's business, (ii)
irrespective of any delegation of authority not inconsistent with clause (i)
above, reserve and exercise ultimate authority and responsibility with respect
to the management and operation of Master Franchisee's business, and (iii)
represent and act on behalf of Master Franchisee in all dealings with
Franchisor.
6.04. INTENTIONALLY DELETED.
6.05. ADVERTISING BY MASTER FRANCHISEE.
(a) Recognizing the value of uniform advertising to the goodwill ad public
image of all "Surf City Squeeze" States and recognizing Franchisor's interest in
the Goodwill of its Proprietary Marks in the Protected Area, Master Franchisee
shall submit to Franchisor copies of all proposed advertising waking direct or
indirect claims pertaining to the nutritional value of the Approved Products
prior to their use by Master Franchisee. Franchisor may disapprove the use of
any such material by Master Franchisee by written notice to Master Franchisee
not later than fourteen business days after its submission to Franchisor. in the
event that in Franchisor's reasonable judgment such material misrepresents the
products or services offered by Master Franchisee or the Subfranchisees or
mischaracterizes or impugns the image of Franchiser and its products and
services. Any failure of Franchisor to disapprove any advertising or promotional
material shall not constitute its warranty or representation that the content
thereof is truthful.
(b) Subject to the provision hereof, all decisions from time to time
regarding whether to utilize national, regional, or local advertising, or some
combination thereof, and regarding selection of the particular advertising,
shall be within the sole discretion and at the sole expense of Master
Franchisee.
6.06. MASTER FRANCHISEE'S LIABILITY AND INSURANCE. Other than for
negligence by Franchisor, Master Franchisee also shall be responsible for all
loss or damage rising out of or relating to the operation of its Franchised
Business or arising out of the acts or omissions of Master Franchise, its
Subfranchisees or any of Master Franchisee's agents, servants, or contractors in
connection with the sale of products or rendering of service by Master
Franchisee or its Subfranchisees and for all claims for damage or injury or
death of any persons directly or indirectly resulting therefrom, and Master
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Franchisee agrees to indemnity and hold Franchisor harmless against and torn any
and All such claims, loss, and damage, including costs and reasonable attorneys
fees. Master Franchisee shall obtain and at all dines during the terms of this
Agreement maintain in force and pay the premiums for such public liability
insurance as is usual and customary IN the Protected Area. When such insurance
is obtained. (i) said policies of insurance shall expressly protect Muter
Franchisee and Franchisor and shall require the insurer to defend Master
Franchisee and Franchisor in any action, and (ii) Master Franchisee shall
furnish to Franchisor a certified copy or certificate with respect to each such
policy, naming Franchisor as an additional insured.
6.07. SUBMISSION OF FINANCIAL DATA. In addition to the reports required of
Master Franchisee pursuant to sections 7.05 and 7.06 below, Master Franchisee
agrees to submit to Franchisor, within 90 days after the end of each fiscal year
of Master Franchisee, complete financial statements, including balance sheets,
profit and loss statements, and statements of source and disposition of finds in
accordance with such accounting principles consistently applied from period to
period, as are generally accepted in the Protected Area.
6.08. PAYMENT OF BILLS. Muter Franchisee will pay when due all bills and
other amounts owed to third patties under any purchasing arrangement in which
Franchisor may or may not be involved, but Franchisor shall not by virtue hereof
become liable to any such third pony.
6.09. COMPLIANCE WITH LAWS. Master Franchisee shall comply wit all
applicable statutes, laws, ordinances, regulations, rules, orders, or
suggestions of any governmental or quasi-governmental entity, body, agency,
commission. board, or official applicable to Master Franchisee's business.
Nothing herein shall prevent Master Franchisee from engaging in a bona fide
contest of the validity or applicability thereof in any manner permitted by law.
6.10. INTENTIONALLY DELETED.
6.11. INTENTIONALLY DELETED.
6.12. FRANCHISOR'S RIGHT TO INSPECT. Franchisor, through its authorized
representatives, shall have the right at all reasonable times upon reasonable
notice (at least three business days), to visit Master Franchisee's business for
the purposes of inspecting the merchandise and equipment on hand, inspecting the
nature and quality of goods sold and services rendered, examining and auditing
Master Franchisers books and records, and observing the manner and method of
operating the Franchised Business. If any of Master Franchisee's books, records,
or inventory are located outside the business premises, Franchisor shall have
similar rights with regard to the same.
6.13. INTENTIONALLY DELETED.
ARTICLE VII. ROYALTIES, PAYMENTS, REPORTS
7.01. INITIAL FRANCHISE FEES.
(a) For purposes of this Agreement the following definitions shall apply:
(i) Commencement of the Franchised Business Ma Store by Master
Franchisee or a Subfranchisee shall be the "Opening". All Stores must he opened
in accordance with the Production Schedule.
(ii) The first day of the month following the date of execution by
Master Franchisee or a Subfranchisee of an agreement to operate the Franchised
Business at a Store shall be the "Effective date of Affiliation".
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(b) For the right of territorial exclusivity to act as Master Franchisee
for the Protected Area, Master Franchisee shall pay Franchisor the sum of
US$100,000.00 (the "Exclusivity Fee"). The Exclusivity Pee is not refundable.
(c) The Exclusivity Fee shall also grant Muter Franchisee the right to open
and operate Master Franchisee-owne4 Stores, which are included in the Production
Schedule. If any store is opened by a Sub franchisee, or if any Store opened by
Master Franchisee is sold to a Subfranchisee, Master Franchisee shall pay via
international wire transfer to Franchisor the higher of (i) one-third of the
franchise fee (stated in Canadian currency) for that Store or (ii) the sum of
CDN$5,000.00, due and payable to Franchisor upon Opening. Provided that
Franchiser acknowledges and agrees that notwithstanding any provision to the
Contrary in this Agreement, In the event Master Franchisee enters into an
agreement or agreements wit Famous Players Inc., or any successor thereto, as
Subfranchisee for one or multiple locations, no franchise fee stall be payable
to Franchiser for or in respect of such agreement or agreements. However, if at
any time throughout the Term of this Agreement, Master Franchisee receives a
franchise fee from Famous Players, Inc., or any successor thereto, as
subfranchisee. as a result of an execution of such an agreement or agreements,
Muter Franchisee shall pay via international wire transfer to Franchisor,
one-third of the franchise fee received by the Master Franchisee, Master
Franchisee shall not provide financial assistance to any Subfranchisee for the
franchise fee throughout the Term of this Agreement.
(d) The United States Dollar equivalent of the royalties payable hereunder
shall be determined with reference to the exchange rate prevailing when due. Any
amount properly owing from Master Franchisee to Franchisor under this Article
VII, If not paid when due, shall bear interest until paid at the rate of 15% per
annum. beginning the day after the date such amount was due.
7.02. ROYALTY.
(a) On a monthly bask, Master Franchisee agrees to pay to Franchisor a
continuing royalty (the "Continuing Royalty") equal to (1)6% of all Gross
Revenues derived from the Franchised Business as Stores owned and operated by
Master Franchisee and (ii) the greeter of (A) 2% of all Cross Revenues derived
turn the Stores owned and operated by Subfranchisees or (B) one third of the
royalty fee paid by Subfranchisee to Master Franchisee for the Gross Revenues
derived torn the Sub-franchised Storm. Wit respect to all Stores owned and
operated by Famous Players, Inc., or any successor thereto, as subfranchisee,
Master Franchisee agrees to pay to Franchiser the Continuing Royalty equal to 2%
of all Gross Revenues derived from said Stores.
(b) All payments of Continuing Royalty wider this Agreement shall be
payable via international wire transfer, in Canadian currency not later than the
20th of the month following the month in which applicable revenues were earned
and shall be less any amounts which Master Franchisee is required to withhold in
accordance wit section 7.08 hereof Since it is anticipated that not all of the
Subfranchisees shall have reported to the Master Franchisee in time for the
preparation of an accurate accounting to the Franchiser, the Master Franchisee
shall, in good faith, estimate the amount of the Continuing Royalty, showing in
its report which Subfranchisee payments are actual and which are estimated. In
the following month, the amounts that have been estimated will be readjusted by
the Master Franchisee so that the Franchiser is properly paid for its Continuing
Royalty no later than the 20th day of the month next following the estimated
month. All costs of such international wire transfer shall be the sole
responsibility of Franchiser. Any amount properly owing from Master Franchisee
to Franchisor for royalties, if not paid when due, shall bear interest until
paid at the rate of 15% per annum beginning the day after the date such amount
was due.
7.03. DEFINITIONS OF "GROSS REVENUES". AS used herein, the term "Owes
Revenues" means the aggregate gross revenue earned and received by Master
Franchisee from the operation of the Stores of Master Franchisee and
Subfranchisees, whether payment is, or is expected to be, for cash, credit or
any other form or source arising out of the operation of said businesses,
including without limitation revenues from the retail sale of products or
merchandise within the Master Franchisee-owned Stores or Subfranchisee-owned
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Stores, including, but nor limited to Approved Products in raw or combined form
sold through the Stores to consumers, less all sales taxes, use taxes, gross
receipts taxes and other similar taxes added to the sale price and collected
from the customer and less any bona fide refunds, rebates, and discounts granted
in the ordinary course of business. Gross Revenues shall exclude the wholesale
sale of the Approved Products to the Master Franchisee owned and subfranchise
owned Stores.
7.04. INTENTIONALLY DELETED.
7.05. MONTHLY REPORTS. Master Franchisee shall submit to Franchiser, with
and at the time each monthly payment of royalty is required pursuant to section
7.02 hereof, a true, correct form provided by Franchisor setting forth the
amount in Canadian currency of all Gross Revenues, broken down as to Master
Franchisee and each Subfranchisee (must include the Gross Revenues of each
Subfranchisee), and each separate Franchised Business operated by Muter
Franchisee and such Subfranchisee. Details of estimated Gross Revenues shall be
clearly contained on such form. Each such report shall be signed and verified as
complete, true and correct by an executive managing officer of Master
Franchisee.
7.06. ANNUAL REPORT. Within 120 days after the close of each fiscal year of
Master Franchisee during the Term of this Agreement, Master Franchisee shall
tarnish a copy of its financial statements, prepared by Master Franchisee's
independent accountant and showing in Canadian currency the total Gross Revenues
and net revenue for said preceding fiscal year, as finally adjusted and
reconciled after the closing and review of Master Franchisees books and records
for such fiscal year. If such statement discloses any underpayment of Continuing
Royalties for such fiscal year, Master Franchisee shall pay to Franchisor, at
the time of submitting such statement, the amount of any such underpayment Any
overpayment shall be paid to Master Franchisee by Franchiser within 60 days of
receipt of financial statements front Master Franchisee.
7.07. MAINTENANCE AND AUDIT OF RECORDS. Master Franchisee shall maintain
books and records in such manner as to clearly and accurately reflect Gross
Revenues on an accrual basis. All such books arid records shall be preserved for
a period of not less than five years after the close of the fiscal year to which
they relate and shall be open at all reasonable times to inspection and
verification by Franchisor or any of its representatives. Franchiser shall have
the right at any time (acting reasonably) to have Master Franchisee's books and
records examined or audited at Franchiser's expense, and Master Franchisee shall
cooperate tally wit the party or parties making such examination or audit on
behalf of Franchisor. Master Franchisee shall promptly pay to Franchisor, or
Franchisor shall credit Master Franchisee's account, as the case may be, any
underpayment or overpayment of royalties disclosed by such examination or audit
If any examination or audit is necessitated by Master Franchisee's failure to
submit required financial statements or to maintain books and records as
required by this Article VII or in the event the Gross Revenues reported by
Master Franchisee for any year or years are more than 5% below the actual Gross
Revenues of Master Franchisee for such period as determined by any such
examination or audit, then Master Franchisee shall immediately pay to Franchiser
the reasonable casts of such examination or audit (including reasonable
compensation for any time necessarily expended by Franchisor's own employees and
reimbursement for expenses necessarily incurred by them), as well as arty
additional amount of royalties shown to be due, plus interest thereon at the
rain of 15 percent per annum. Such payments shall be without prejudice to any
right of Franchisor to terminate this Agreement on account of such defaults by
Master Franchisee, in accordance wit the terms of section 9.02 hereof.
7.08. PAYMENTS. Master Franchisee shall make all payments under this
Agreement in immediately available Canadian currency (except where payment is
specifically stated in United States Dollars ("US$"), in which event payment
shall be made in United States currency) at Franchisor's office listed above or
at such other place and in such other manner as Franchisor may direct; free of
all taxes and charges of any nature other than (i) income taxes levied by the
United States government or any state, municipality or other subdivision thereof
on such payments and (ii) income taxes, or taxes in the nature of income taxes,
or otherwise including withholding taxes, levied on by the Canadian or
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provincial government or other governmental authority in the Protected Area or
any political subdivision thereof by reason of such payments. If income taxes,
or taxes in the nature of income taxes, levied on by such governmental authority
on any such payment are required to be withheld from such payment or otherwise
collected by Master Franchisee and remitted to a taxing authority, Master
Franchisee shall withhold and pay to the competent authority any such taxes or
withholdings. Master Franchisees shall be responsible for all taxes and said
taxes shall not be deducted from any payments made to Franchisor unless the
United States ERR collects delinquent taxes from Master Franchisee. Upon
becoming aware that any such governmental authority proposes to levy or to take
any action which would result IN increasing income taxes, or taxes in the nature
of income taxes, on any such payment, or that such a levy has been made or any
such action has been taken, Master Franchisee shall promptly provide Franchisor
with a written statement of the facts known to Master Franchisee.
7.09. INTENTIONALLY DELETED.
7.10. INTENTIONALLY DELETED.
ARTICLE VIII. TRANSFER OR ASSIGNMENT
8.01. ASSIGNABILITY BY FRANCHISER. This Agreement and all rights hereunder
may be assigned by Franchisor, and if so assigned, shall be binding upon and
inure to the benefit of Franchisor's assigns; provided that, in respect of any
assignment resulting in the subsequent performance by the assignee of the
obligations of Franchisor.
(a) The assignee shall be financially responsible and economically and
technically capable of performing the obligations of Franchisor hereunder; and
(b) The assignee shall expressly assume and agree to perform such
obligations in writing, and delivered to Master Franchisee.
8.02. GENERAL PROHIBITION ON ASSIGNABILITY BY MASTER FRANCHISEE. Except as
set forth in this Article VIII, and subject to all the terms and provisions in
sections 8.02 through 8.05 thereof and of section 8.06, Master Franchisee shall
not assign this Agreement or any rights or interest herein. For all purposes of
this Agreement each of the following shall be deemed to be an assignment of this
Agreement.
(a) Any sale, assignment or transfer by Master Franchisee of or with
respect to Master Franchisee's interest in this Agreement or any rights or
interest herein, except with regard to an authorized Subfranchisee;
(b) Any pledge, encumbrance, or grant of any security interest in this
Agreement by Master Franchisee, except in favour of the Master Franchisee's
banker for operating and tern loans exclusively for the purposes of the
Franchised Business;
(c) Sale at judicial sale or under power of sale, conveyance or retention
of collateral in satisfaction of debt, or other procedure to enforce the terms
of any pledge, encumbrance, or security interest in this Agreement which results
in disposition of Master Franchisee's interest herein;
(d) The passing by operation of law to any other party or parties of Master
Franchisee's interest in this Agreement or any part hereof; and
(e) Any act, transaction or event of a nature described in any of
subsections 8.02(a) through 8.02(d) above, which instead of operating upon this
Agreement as such, operates upon or affects any interest in such corporation,
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partnership, or association and results in any change in control of such
corporation, partnership, or association, whether by means of one or a sequence
of more than one transaction or event.
Any assignment of this Agreement other than in accordance with and subject
to all the terms and provisions of sections 8.03 through 8.06 below shall (I)
constitute a breach of this Agreement, (ii) be subject to the provisions of
section 9.02 below, and (iii) confer no rights or interest whatsoever under this
Agreement upon any other party.
8.03. FRANCHISER'S CONSENT TO ASSIGNMENT If Master Franchisee desires or
proposes to sell, assign, or transfer this Agreement to any pry, or in the event
Master Franchisee sad/or the holder or holders of any interest in Master
Franchisee desire or propose to take any action which would constitute or create
an assignment of this Agreement within the meaning of section 8.02 hereof,
Master Franchisee or the holders of such interest, as the case may he, shall
first notify Franchiser in wilting of such proposed sale, assignment, transfer,
or other action, setting forth in detail the nature of the item or interest to
be sold, assigned, transferred, or otherwise acted upon, the name and address of
the proposed purchaser, assignee, or transferee, or party acquiring any
interest, and the consideration, if any, therefor. Franchisor shall not
unreasonably withhold consent to any such assignment, provided that each of the
following conditions is fulfilled:
(a) It shall be demonstrated to tire Franchiser, in its sole discretion but
acting reasonably, that the proposed purchaser, assignee, transferee, or person
(if an individual) otherwise to acquire an interest is of good moral character.
and possesses the business experience and capability, credit standing, health,
and financial resources necessary to successfully operate Master Franchisee's
business in accordance with the terms of this Agreement. If the proposed
purchaser, assignee; or transferee is a corporation, partnership, or other
business association, the provisions of the preceding sentence shall apply to
the individuals who own or are to own such corporation, partnership, or
association. Master Franchise shall cooperate with Franchisor in making
available such information as Franchisor may require to make the above-described
determinations.
(b) The person or entity who is to be substituted in this section 8.03
shall have been approved by Franchiser, and will be required to successfully
complete the training course then in effect for franchisees of Franchisor;
(c) There shall be no existing material default in any of the obligations
of Master Franchisee under this Agreement, and all anion owed to Franchiser
shall be paid in fill at or prior to the consummation of such transaction;
(d) Such party shall have submitted to Franchisor satisfactory evidence
that it will acquire and will become entitled to all rights in Master Franchisee
belonging to the party or parties whose interests have been acquired, as the
case may be. If the interest of Master Franchisee hereunder is to be acquired,
the party acquiring such interest shall have executed and delivered to
Franchiser a written instrument, in a form reasonably satisfactory to
Franchisor, by which it expressly assumes all obligation of Master Franchisee
hereunder, whether then scorned or thereafter arising and agrees to be bound by
all the terms and provisions of this Agreement to the same extent and in the
same manner as Master Franchisee.
(e) Master Franchisee and each of its stockholders, directors, and officers
shall have executed and delivered to Franchisor a release of any and all claims
and causes of action against Franchisor, its affiliated corporations, and their
respective officers, agents and employees.
(f) Master Franchisee shall pay to Franchisor a non-refundable Assignment
by Master Franchisee Fee of (A) US$30,000.00 If the assignment or sale is
consummated prior to the expiration of six months from the Effective Date or (B)
US$25,000.00 if the assignment or sale is consummated from the seventh month
through the eighteenth month from the Effective Date or (C) US$20,000.00 Is the
assignment or sale is consummated from the nineteenth month through the
thirtieth month from the Effective Date or (D) US$10,000.00 is the assignment or
sale is consummated after 31 months from the Effective Date.
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(g) Notwithstanding subclauses 8.03(a) to (t), inclusive, if the Master
Franchisee assigns this Agreement to a parent, subsidiary or affiliate, then the
provisions of subclauses 8.03(a) to (f), inclusive shall not apply to such
assignment, provided that the assignor remains bound by its covenants contained
in this Agreement and the assignee executes a direct covenant with the
Franchiser agreeing to be bound hereby.
8.04. FRANCHISOR'S CONSENT TO ENCUMBRANCES. IF the holder of any interest
in Master Franchisee desires or proposes to pledge, encumber, or grant any
security interest therein under circumstances which would constitute or create
an assignment of this Agreement within the meaning of section 8.02 hereof, the
holder of such interest as the se may be. shall first notify Franchiser in
writing of such proposed transaction. Franchiser shall not unreasonably withhold
its consent to such transaction, subject, however, to the following conditions:
a) Any consent so granted shall not be deemed a consent to such pledges,
encumbrancer, or secured party exercising any rights or prerogatives
of Master Franchisee under this Agreement, nor to its exercise of any
rights or prerogatives of a holder of an ownership interest in Master
Franchisee;
b) Any consent so panted shall not be deemed a consent to any subsequent
disposition described in section 8.02(c) hereof or so much of section
8.02(e) hereof as refers to section 8.02(c). Any subsequent
disposition shall be deemed an assignment of this Agreement within the
meaning of section 8.02 above and shall be subject to the provisions
of section 8.03 hereof;
c) The pledgee, encumbrancer, or secured party shall have executed and
delivered to Franchiser an instrument in writing agreeing to be bound
by the provisions of this Article VIII and
d) The provisions of section 8.03 shall not apply to such transaction.
8.05. TIME LIMITATION. In the case of any transaction described in section
8.03 above, Franchisor shall not be required to give its consent to such
transaction unless each condition precedent to such consent requiring action by
Master Franchisee or any third party has been fulfilled within 90 days from the
date of the event giving rise to the requirements of such consent, provided
however. If in any case the person who is to be substituted in section 8.03 of
this Agreement has been unable, within said 90 day period, to complete the
required training course solely by reason of such course not having been offered
by Franchisor at an earlier date, and if all other conditions to Franchiser's
consent have been fulfilled with said 90 day period, then Franchiser shall
consent to such transaction conditioned upon successful completion of such
training course by such person at the earliest practicable date.
8.06. EXCLUSION. Nothing contained in this Article VIII shall be deemed to
refer to any event referred to In section 9.05(b) or 9,05(c) below as causing
automatic termination of this Agreement.
8.07 PERMITTED ASSIGNMENTS. Notwithstanding any provision to the contrary
in this Agreement, Franchisor acknowledges and agrees that the following
transfers and/or assignments shall be permitted transfers and/or assignments
hereunder which do not require Franchisor's consent:
(a) Master Franchisee shall be permitted to issue additional shares from
treasury, provided that, following the issue of such additional shares, voting
shares of Master Franchisee sufficient to control Master Franchisee shall
continue to be held, directly or indirectly, by or for the benefit of George
Panos;
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(b) Master Franchisee may engage in the sale of its assets (including its
interest in this Agreement) to a BONA FIDE purchaser or purchasers for the
purpose of forming and constituting a partnership, provided that the partnership
interest of George Panes, in the said partnership shall be greater than 50%;
(c). George Panos way sell his shares in Master Franchisee to a BONA FIDE
purchaser or purchasers St any time and from time to time, provided that,
following the said sale of his shares in Master Franchisee, voting shares of
Master Franchisee sufficient to control Master Franchisee shall continue to be
held by or for the benefit of George Panes;
(d) George Panes may transfer all but not less than all of his shares in
Master Franchisee to a corporation controlled by George Panes at any time on
notice to Franchisor.
"Control" for the purposes of this section 8.07 shall have the same meaning
ascribed thereto in the Business Corporations Act (Ontario).
ARTICLE IX. DEFAULT AND TERMINATION
9.01. TERMINATION BY MASTER FRANCHISEE. Master Franchisee may not terminate
this Agreement except for cause. For purposes of this section 9.01, "cause" is
defined as a material breach of this Agreement by Franchisor, which Franchisor
is unable or refuses to cure.
Contemporaneously with the execution of this Agreement, Franchisor agrees
to execute and deliver, and to cause its affiliate, Kona Coast Provision, to
execute and deliver, the escrow agreement annexed hereto as Exhibit E.
Franchisor shall actively and diligently pursue the timely securing of the
rights and registration to the trademark and Proprietary Marks -- described
above within the Protected Area.
9.02. TERMINATION BY FRANCHISER.
(a) If (i) the Stores have not Opened in accordance with the Production
Schedule or (ii) Master Franchisee has not opened at least the number of Master
Franchisee-owned Stores and Subfranchisee-owned Stores within the time specified
In the Production Schedule, and If such default is not cured within 120 days
after Franchiser bas given 30 days written notice of such default to Master
Franchisee, then Franchisor may terminate all rights of Master Franchisee to
continue to subfranchise Stores and to Open Master Franchisee-owned Stores
pursuant to this Agreement, but the other terms and provisions of this Agreement
shall remain in Sill tree and effect.
(b) If Master Franchisee falls to make any payment of money owed to
Franchiser when due, or fails to submit to Franchiser when due, any report
required by this Agreement and such default is not cured within 20 days after
Franchiser gives 10 days written notice of such default to Master Franchisee,
then Franchisor may terminate this Agreement at any time thereafter by giving
written notice of such termination to Master Franchisee. Notwithstanding the
foregoing, if the Master Franchisee disputes that such payment is due, it may
rots to pay the disputed amount (and only the disputed amount) to the Franchiser
and shall instead pay the Sill disputed amount (if greater than C$25,000) into
court or into the hands of the law firm Smith Lyons, who shall hold same until
such dispute is settled.
(c) If Master Franchisee fails to perform any material obligation imposed
upon Master Franchisee by this Agreement, other than those referred to In
section 9.02(a) or 9.02(b), and if such default is not cured within 120 days
alter Franchiser has given 30 days' written notice of such default to Master
Franchisee, then Franchiser may terminate this Agreement at any time thereafter
by giving written notice of such termination to Master Franchisee, provided
however, that if the default is of such nature that it is not capable of being
cured with reasonable diligence by Master Franchisee within said 120 day period,
then this Agreement shall not be terminated by Franchisor if Master Franchisee
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has commenced, immediately upon receipt of such notice, to exercise reasonable
diligence to cure such default, continues to be diligently engaged in curing
same upon the expiration of said 120 day period, and the curing thereof is
completed as soon thereafter as is reasonably practicable.
(d) Except for termination under Section 9.02(b), Master Franchisee shall
continue to be Master Franchisee with respect to the Master franchisee-owned
Stores and Subfranchisee-owned Stores Opened up TO the dare of termination of
exclusivity or which proceed to Open following the date of termination of
exclusivity pursuant to a valid Subfranchise Agreement entered into between
Master Franchisee and a Subfranchisee on or before the date of termination of
exclusivity; and Master Franchisee shall continue to be Master Franchisee of the
aforesaid Stores until the expiration of the term of the lease for each subject
Store, including any renewals thereof. Upon the termination of the right of the
Master Franchisee to Open new Stores under section 9.02(a), Master Franchisee
shall lose the right to sell additional subfranchises and the right to Open any
new franchises or subfranchises as Master Franchisee. All terminations in
accordance with section 9.02(b) shall be subject to the conditions of 9.06.
(e) Notwithstanding any provision to the contrary in this Agreement,
Franchiser acknowledges and agrees that if the events contemplated in this
section 9.02 occurs, any exclusivity of territory enjoyed by or granted to any
Store to the effect that the subject Master Franchisee-Owned Store or
Subfranchisee-Owned Store shall have the exclusive right to operate the Store
within a one (1) kilometer radius of the Store (the "One Kilometer Territory"),
shall continue in full force and effect and shall be respected by Franchiser.
For greater certainty, sections 2.02 and 2.03 of this Agreement shall be deemed
to apply to the above circumstances, mutatis mutandis, save and except that in
applying sections 2.02 and 2.03 to the above circumstances, the term "One
Kilometer Territory" shall be read in the place and stead of the term "Protected
Met appearing in sections 2.02 and 2.03 hereof Provided that Master Franchisee
acknowledges arid agrees that the continued exclusivity in respect of the One
Kilometer Territory referred to in tins section 9.02(e) shall not apply to any
health clubs or movie theatres located within the One Kilometer Territory.
9.03. NOTICE OF DEFAULT OR TERMINATION. No notice of default or notice of
termination purporting to be given pursuant to this Article IX shall be of any
force or effect unless signed by a corporate executive officer of Franchiser.
Regional directors, district managers, and other agents, if any of Franchiser
having authority with respect to a specific geographic area shall in no event be
deemed corporate executive officers for purposes of this section 9.03.
9.04. NONEXCLUSIVE REMEDY. The right of Franchiser to terminate this
Agreement pursuant to Article DC. whether or not exercised, shall not be
exclusive of any other remedies given to Franchisor by this Agreement or by law
on account AT' any default of Muter Franchisee hereunder.
9.05. AUTOMATIC TERMINATION. This Agreement shall terminate immediately
upon the occurrence of any of the following events without the necessity of
notice of any kind by Franchisor or Master Franchisee:
(a) The adjudication of Master Franchisee a bankrupt, or the Sling of any
petition by or against Master Franchise; under the bankruptcy laws of any
applicable jurisdiction within the Protected Area, unless such petition filed
against Master Franchisee IS dismissed within 90 days, or the making by Master
Franchisee of a general assignment for the benefit of creditors.
(b) The appoiacur of any receives trustee, sequester, or similar officer to
take charge of Master Franchisee's business, or any attachment, execution, levy,
seizure, or appinpriation by legal process of Master FranchIsee's interest in
this Agreement, unless the appointment of such officer is vacated or discharged
or the effect of such legal process Is otherwise released within 90 days; and
(c) The occurrence of any act of a type described in section 9.05(b) above,
which relates to, involves, or affects the interest of any person owning a
controlling interest in Master Franchisee.
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9.06 Obligations Following Termination.
Upon termination of this Agreement, whether by lapse of time, by
termination pursuant to any provision of this Article IX, by mutual consent of
the parties, or in other manner whatsoever, Master Franchisee shall cease to be
an authorized Master Franchisee and shall immediately lose the exclusivity
granted to Master Franchisee in this Agreement.
9.07. GENERAL PROVISIONS REGARDING TERMINATION.
(a) Termination of this Agreement under any circumstances shall not
abrogate, impair, release. or extinguish any debt, obligation, or liability of
either party to the other which may have accrued hereunder, including without
limitation, any such debt, obligation, or liability which was the cause of
termination or arose out of such cause.
(b) If termination occurs under this Agreement, the Confidentiality
Agreement the Escrow Agreement or the Products Agreement for any reason
whatsoever, Master Franchisee acknowledges that all of the aforementioned
agreements shall simultaneously and immediately terminate.
(c) All covenants and agreements of either party hereto which by their
terms or by reasonable implication are to be performed, in whole or in part,
after the termination of this Agreement shall survive such termination.
(d) If this Agreement is signed by Master Franchisee and such assignment is
consented to by Franchiser, all conditions and provisions of this Agreement
shall be deemed to be IN FULL force and effect for the assignor or assigners as
of the date of such consent. Such assignor or assigners shall thereupon be bound
by all other provisions.
9.08. TERMINATION OF EXCLUSIVITY.
(a) The failure of Master Franchisee to follow all of the terms and
conditions of the Production Schedule will result In the immediate termination
of exclusive rights of Master Franchisee to the Protected Area (the "Exclusivity
Termination") and certain other rights and obligations as specified in this
section 9.08, but shall not affect Master Franchisee's duties and obligations
under this Agreement.
(b) Exclusivity Termination shall concurrently result hi the termination of
all rights of Master Franchisee to open any other Store under the production
Schedule or otherwise, without Franchisors specific written consent. However,
Master Franchisee shall retain the rights, duties and obligations respecting any
Store previously opened by Master Franchisee or a Subfranchisee for the
remaining term of the Subfranchise.
(c) If Exclusivity Termination occurs, Franchisor may offer rights master
franchisee to any third party.
(d) For greater certainty, the provisions of this section 9.08 shall be
read in conjunction with, and to the extent of any inconsistency shall be
modified by, the provisions of section 9.02 of this Agreement.
ARTICLE X. MISCELLANEOUS PROVISIONS
10.01. INJUNCTIVE OR EXTRAORDINARY REMEDIES. Franchiser may bring an action
in any court of competent jurisdiction for injunctive or other extraordinary
relief as Franchiser deems necessary or appropriate to compel Master Franchisee
to comply with its obligations hereunder respecting Franchisor's rights to
examine or audit books and records under section 6.12 hereof, or respecting
violations of Master Franchisee's obligations under Article UT hereof, or to
otherwise compel Master Franchisee to take steps reasonably necessary to
preserve Franchisor's reputation, goodwill and proprietary rights. Master
Franchisee acknowledges that Franchisor shall have the immediate right to seek a
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preliminary order or injunction enforcing the foregoing obligations during the
tendency of any other legal proceedings then in process. This covenant shall be
independent, severable and enforceable notwithstanding any other rights or
remedies which Franchisor may have.
10.02. INDEPENDENT CONTRACTORS. This Agreement does not constitute Master
Franchisee as an agent legal representative, joint venturer, partner, employee
or servant of Franchisor for any purpose whatsoever. It is understood between
the parties hereto that Master Franchisee is an independent contractor and,
excepting the specific right to subfranchise in accordance with the terms of
this Agreement, is in no way authorized to make any contract, agreement,
warranty or representation on behalf of Franchisor. or to create any obligation,
express or implied, on behalf of Franchisor. Under no circumstances shall
Franchisor be liable for any act, omission, debt or any other obligation of
Master Franchisee. Master Franchisee shall indemnify and hold Franchisor
harmless against any such claim and the cost of defending against such claims
arising directly or indirectly from or as a result of, or in connection with.
Master Franchisee's operation of its business.
10.03. WARRANTY. Excepts expressly provided herein, Franchiser makes no
warranty of any kind express or implied concerning any matter covered by this
Agreement Without limiting the generality of the foregoing Franchiser makes no
warranty or representation as to the results obtained or obtainable by Master
Franchisee hereunder. Franchiser makes no warranty or representation that the
use by Master Franchisee of the know-how and technical information or processes
covered by this Agreement, or the sale or use of any products, will not infringe
patents owned by others. Nothing In this Agreement shall obligate Franchisor in
respect of any claim by Master Franchisee or any third party (including, without
limitation, any claim alleging damages or injury to any person or damage or
spoilage of any property or any claim for lost profit or for consequential
damages) arising out of the use of any know-how, technical information or
processes or the sale or use of any products to which this Agreement relates or
require Franchisor to defend or indemnify Master Franchisee against or to hold
Master Franchisee harmless from any such claims unless the said claims are
attributable at law to any negligent acts or omissions on the part of
Franchisor.
10.04. REFERENCES TO MASTER FRANCHISEE. Upon any effective assignment of
Master Franchisee's interest in this Agreement, any and all references herein to
"Master Franchisee" shall, unless the context otherwise requires, mean and refer
to such assignee.
10.03. SECTION HEADINGS Section headings are inserted for convenience only
and shall not be construed part of this Agreement nor shall they limit or define
the meaning of any provision herein.
10.06. COST OF ENFORCEMENT OR DEFENSE. In the event that any dispute arises
between the parties hereto relating to the interpretation, enticement or
performance of this Agreement, then the prevailing party in an arbitration or
litigation shall be entitled to recover from the losing party the amount of all
reasonable attorney's fees of such counsel and all other expenses incurred by
the prevailing party in connection therewith, whether incurred prior to or in
preparation for or contemplation of the filing of such action or thereafter.
10.07. REMEDIES CUMULATIVE. All rights and remedies conferred upon
Franchiser by this Agreement and by law shall be cumulative of each other, and
neither the exercise nor the failures to exercise any such right or remedy shall
preclude the exercise of any other such right or remedy.
10.08. NON-WAIVER. No failure by either party to take action on account of
any default by the other party, whether In a single instance or repeatedly,
shall constitute a waiver of any such default or of the performance required by
the party. No express waiver by either party of any provision or performance
hereunder or of any default by the other party shall be construed as a waiver of
any other or future provision, performance, or default.
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10.09. INVALIDITY AND SEVERABILITY. If any provision of this Agreement
shall be held to be invalid, illegal, or unenforceable, for any reason, the
remaining portions of this Agreement shall be unimpaired and any invalid,
illegal or unenforceable provisions shall be replaced by a mutual acceptable
provision, which, being valid, legal and enforceable, comes closest to the
intention of the parties underlying the invalid, illegal or unenforceable
provision.
10.10. Notices. Any notice or demand given or made pursuant to the terms of
this Agreement shall be delivered in the following manner:
(a) If given to Franchisor, it shall be sent by telegram, telefacsimile or
telex (unless Franchisor waives such requirement) and also by reliable
international air courier, next available delivery basis, addressed to the
following address, or to such other address or addresses as Franchiser may from
time to time designate in writing:
Surf City Squeeze Franchise Corp.
7730 S. Greenway Rd., Ste. 203
Scottsdale, AZ 85240
U.S.A.
Telefacsimile: 602-443-1972
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with a copy to:
Titus, Brueckner & Berry PC
7373 N. Scottsdale Road
Suite B-252
Scottsdale, AZ 85253
U.S.A.
(b) If given to Master Franchisee, it shall be sent by telegram,
telefacsimile or telex (unless Master Franchisee waives such requirement) and
also by reliable international air courier, next available delivery basis,
addressed to the following address, or to such other address or addresses as
Master Franchisee may from time to time designate in writing:
1238176 Ontario, Inc.
100 Redpath Ave., Ste. 9
Toronto, Ontario M4S 2J7
CANADA.
Telefacsimile:
with a copy to:
Smith Lyons
40 King St. W. Suite 5800
Toronto, Ontario M5H 3Z7
CANADA:
Attn: Donald B. Johnston
(c) Any such notice or demand shall be deemed to have been given or made
and shall be deemed effective when the same has been received (as evidenced by
customary and usual proof of receipt as is available at such time), provided
that any notice pursuant to section 9.03 above shall be deemed to have been made
or given and shall be deemed effective five business days after being mailed in
accordance with this section 10.10, provided that the same is received by
Franchisor within five business days after expiration of the period for waking
or giving such demand or notice.
10.11. ENTIRE AGREEMENT This Agreement constitutes and contains the entire
agreement and understanding of the parties with respect to the subject matter
hereof. There are no representations, undertakings, terms or conditions between
parties not specifically stated herein. This Agreement supersedes and
extinguishes any prior written agreement between the parties.
10.12. BINDING EFFECT Subject to all the provisions of Article VIII and
section 9.07 (c) above, this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto (including the parties whose signatures follow
those of Franchiser and Master Franchisee) and their respective heirs,
executors, administrators. personal representatives, successors, and assigns.
10.13. CONTROLLING LAW. This Agreement shall be deemed to be an agreement
made and shall be performed. construed and enforced in accordance with, and the
rights of the parties hereto shall be governed by, the laws of the Province of
Ontario. Any action or proceeding contemplated by any of the parties hereto for
the purpose of enforcing this Agreement or any past thereof shall be commenced
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and continued only in the Province of Ontario before the appropriate tribunal
having jurisdiction thereof and each of die parties hereto hereby irrevocably
attorns to such jurisdiction and agrees that service of process with respect to
any such proceedings shall be validly and effectively served upon the relevant
parties hereto.
10.14. COUNTERPARTS. This Agreement may be executed in any number of
identical counterparts, and such counterparts shall be deemed a duplicate
original hereof.
10.15. GOVERNMENT APPROVALS. The enforceability of this Agreement is
subject to such approvals. registrations, and other condition of governmental
authorities in the Protected AREA, as applicable law may require or impose. The
parties shall cooperate with each other and exercise their best efforts to
secure any such required approvals, file any such registrations, or satisfy any
such conditions expeditiously.
10.16. LANGUAGE.
(a) This Agreement may be executed in duplicate originals in the English
language and each original shall fully bind each party who has executed it. Such
counterparts may be signed and transmitted by telecopier or other method of
facsimile transmission, and, when signed before transmission, shall be deemed to
include the original signature.
(b) Franchisor shall have the option to deliver the Operations Manual, say
bulletins, modifications, or supplements thereto, and any notices,
correspondence, or other communications to Master Franchisee in English. If any
translation is necessary. Master Franchisee shall bear the burden and expense of
translating any such document into any language relevant to the Protected Area.
(c) All sales reports, financial statements, budgets, notices,
correspondence and other communications from Master Franchisee to Franchisor
shall be in English. All proposed and executed Subfranchise Agreements, notices
to Subfranchisees, proposed advertising and correspondence and other
communications from Master Franchisee to Subfranchisees shall be in English and.
if applicable, French.
10.11. FORCE MAJEURE. Should Master Franchisee be unable to meet the
Production Schedule solely as a result of Force Majeure, including, but not
limited to, war, dot, strikes, material shortages, fires, floods, earthquakes,
and other acts of God. Her Majesties enemies, or by governmental action or tree
of law, which results in the inability of Master Franchisee or the Sub
franchisees to construct or operate locations in the Protected Area and which
neither Master Franchisee nor Subfranchisees could by the exercise of due
diligence have avoided, the Production Schedule shall be extended by the amount
of time during which such Force Majeure shall exist.
IN WITNESS WHEREOF the parties have executed this Master Franchise
Agreement as of the Effective Date.
FRANCHISOR: MASTER FRANCHISEE:
SURF CITY SQUEEZE FRANCHISE CORP. 1238176 ONTARIO, INC.
By /s/ Kevin A. Blackwell By /s/ George Panos
-------------------------------- --------------------------------
Kevin A. Blackwell, President George Panos, President
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EXHIBIT A
PRODUCTION SCHEDULE
1.) EFFECTIVE DATE - THIRTIETH (30TH) MONTH AFTER EFFECTIVE DATE
Master Franchisee agrees to open five franchises, to be paid according to
Section 7.0 1(c) of the Master Franchise Agreement.
2.) DAY AFTER THIRTIETH (30TH) MONTH AFTER EFFECTIVE DATE - NINETIETH (90TH)
MONTH AFTER THE EFFECTIVE DATE
Master Franchisee agrees to open an additional fifteen (15) locations. The
Franchise Fee is to be determined by Master Franchisee prior to the eighth
anniversary of the Effective Date, with a deemed minimum franchise fee (for the
purposes of Section 7.01(c) of the Master Franchise Agreement) of Fifteen
Thousand Dollars ($15,000.00) per location.
3.) DAY AFTER NINETIETH (90TH) MONTH AFTER EFFECTIVE DATE - ONE HUNDRED
FIFTIETH (150') MONTH AFTER THE EFFECTIVE DATE
Master Franchisee agrees to open an additional twenty five (25) locations.
The Franchise Fee is to be determined by Master Franchisee prior to the eighth
anniversary of the Effective Date, with a deemed minimum franchise fee (for the
purposes of Section 7.01(c) of the Master Franchise Agreement) of Fifteen
Thousand Dollars ($15,000.00) per location.
<PAGE>
EXHIBIT "B"
SURF CITY SQUEEZE APPROVED PRODUCTS
1.) SURF CITY SQUEEZE(TM) SMOOTHIE MIX
2.) FUNCTIONAL POWDERS
Aerobic Squeeze(TM)
Loose Lips Squeeze(TM)
Muscle Squeeze(TM)
Power Energy Squeeze(TM)
Recovery Squeeze(TM)
Rejuvenator Squeeze(TM)
Solstice Squeeze(TM)
Stripper Squeeze(TM)
Thinker Squeeze(TM)
3.) EXTRA POWDERS
Bee Pollen
Brewers Yeast
Garbo Powder
Creatine
Korean Ginseng
Lecithin
Multi Vitamin
Protein
Spirulina
Wheat Germ
Wheat Grass
* Franchisor's approval of the aforementioned list of products is subject to and
contingent upon the extent that said product ingredient are legal within the
Protected Area. Muter Franchisee and Franchisor shall share the financial and
material responsibility for gaining approval from Governmental Agencies for the
products listed above within the Protected Area.
<PAGE>
EXHIBIT "C"
CONFIDENTIALITY AND NON-COMPETITION AGREEMENT
THIS AGREEMENT is made this 7th day of July, 1998 by and between Surf City
Squeeze Franchise Corp., hereafter referred to as "Franchisor", an Arizona
corporation, and 1238176 Ontario Inc. (hereafter referred to as "Franchisee").
WITNESSETH:
WHEREAS, Franchisee has contracted with Franchisor according to the terms
of the master franchise agreement (the "Master Franchise Agreement") dated the
date hereof; and
WHEREAS, Franchisee is utilizing Proprietary Marks of Franchisor in a
capacity through which Franchisee will have access to confidential, proprietary
information of Franchisor or of others to which Franchisor has obligations to
maintain information confidential; and
WHEREAS, Franchisee acknowledges that in the performance of his present and
future duties, he will or may have access to confidential proprietary
information developed by Franchisor; and
WHEREAS, Franchisee acknowledges that Franchisor may be substantially and
irreparably harmed by Franchisee's unauthorized use or disclosure of any
confidential or secret information; and
WHEREAS, Franchisee acknowledges that Franchisor must ensure that the
confidential and secret information made available to Franchisee be treated as
confidential and secret, both during and after the period of the Agreement;
NOW, THEREFORE, in consideration of the franchise fees, and other forms of
fees or premiums now and hereafter paid to Franchisor by Franchisee, the mutual
agreements herein contained, and other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, Franchisor and
Franchisee agree as follows:
1. CONFIDENTIAL INFORMATION
a) Franchisee agrees during the term of the Agreement and thereafter not
to reveal to any persons, unless authorized in writing by Franchisor,
any confidential or secret information of Franchisor or of others as
to which Franchisee knows or should know that Franchisor has
confidential information obligations.
b) Franchisee and Franchisor agree that confidential or trade secret
information includes, but is not limited to, information in any form
whatsoever pertaining to: marketing data, including analyses and
projections, strategies, business plans, product plans and competitive
activity data; all financial and profit information not required by
law to be published, purchasing or costs data; sales data including
customer lists, booking reports, current sales information, pricing,
billing and other information; information considered as proprietary
by Franchisor or any other information pertaining to the Franchisor or
made available to Franchisee by the Franchisor and identified or
treated as confidential or secret.
c) Franchisee agrees that he will at all times regard and preserve as
confidential all proprietary, confidential or secret information
pertaining to Franchisor or made available to Franchisee by
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Franchisor, and that Franchisee will not use for his own benefit or
purposes, nor disclose to others, either during the term of the
Agreement or thereafter, any such information unless authorized to do
so in writing by Franchisor.
d) Franchisor and Franchisee agree that confidential and secret
information shall not include information which Franchisor has
voluntarily disclosed to the public or which otherwise enters the
public domain trough lawful means other than through Franchisee or
sources under his control.
Franchisee shall be subject to the terms and conditions of the Master
Franchise Agreement Limited disclosure of confidential information to
subfranchisees of the Franchisee, to the extent required to cry on the
Franchised Business, will not be deemed to be a breach of this Agreement
provided that the subfranchisees execute such similar non-disclosure
provisions as may be required to bind them to the same standard as that
contained in this Agreement.
2. NON-COMPETITION
Master Franchisee covenants and agrees that during the Term of this
Agreement and for a period of three years after termination or expiration of the
Agreement, it shall not, without the prior written consent of Franchisor, either
directly or indirectly, individually or in partnership or jointly or in
conjunction with any person, firm, association, syndicate or corporation, as
principal, agent, shareholder or in any manner whatsoever, cry on or be engaged
in or be concerned with or interested in or advise, lend money to, guarantee the
debts or obligations of or permit its name or any part thereof to be used or
employed by any business, enterprise or undertaking operations of a similar
business to the Franchised Business in the Protected Area.
3. REMEDIES
Franchisee agrees that in the event of any violation or threat of violation
of this Agreement by Franchisee is subject to Article X of the Master Franchise
Agreement dated July 7th, 1998.
4. CONTROLLING LAW
This Agreement shall be deemed to be an agreement made and shall be
performed, construed and enforced in accordance with., and the rights of the
parties hereto shall be governed by, the laws of the Province of Ontario. Any
action or proceeding contemplated by any of the parties hereto for the purpose
of enforcing this Agreement or any part thereof shall be commenced and continued
only in the Province of Ontario before the appropriate tribunal having
jurisdiction thereof and each of the parties hereto hereby irrevocably attorns
to such jurisdiction and agrees that service of process with respect to any such
proceeding shall be validly and effectively served upon the relevant parties
hereto.
5. SEVERABILITY
If any provision of this Agreement shall be held to be invalid, illegal, or
unenforceable, for any reason, the remaining portions of this Agreement shall be
unimpaired, and any invalid, illegal or unenforceable provisions shall be
replaced by a mutual acceptable provision, which, being valid, legal and
enforceable, comes closest to the intention of the parties underlying the
invalid, illegal or unenforceable provision.
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6. GOVERNMENT APPROVALS
In the event that any part, article, section, sentence or clause of this
Agreement shall be held to be indefinite, invalid or otherwise unenforceable the
indefinite, invalid, or unenforceable provision shall be deemed deleted. The
remaining parts thereof shall continue in full force and effect.
7. BINDING EFFECT
This Agreement shall be binding upon the Franchisee, its successors, legal
representatives, heirs and assigns and shall inure to the benefit of the
Franchisor, its successors, legal representatives and assigns.
8. FURTHER ASSURANCES
Franchisee agrees to execute, file, seal, deliver and acknowledge any and
all documents and take or cause to be taken any and all other action necessary
to effect the terms and conditions of this Agreement.
IN WITNESS WHEREOF Franchisee and Franchisor have caused this Agreement to
be duly executed as of the date and year first above written.
WITNESS: FRANCHISEE:
123817 ONTARIO INC.
/s/ Donald Johnston /s/ George Panos
- - -------------------------------- --------------------------------
George Panos, President
WITNESS: FRANCHISOR:
SURF CITY SQUEEZE FRANCHISE CORP.
/s/ Kathryn Blackwell /s/ Kevin A. Blackwell
- - -------------------------------- --------------------------------
Kevin A. Blackwell, President
3
<PAGE>
EXHIBIT "D"
PRODUCT AGREEMENT
THIS AGREEMENT is made as this 7th day of July, 1998.
BETWEEN:
KONA COAST PROVISION
(hereinafter referred to as the "Supplier"),
- and -
1238176 ONTARIO INC.
(hereinafter referred to as the "Distributor")
WHEREAS the Supplier is the owner of certain Recipes. Supplier contracts
with certain manufacturers of certain mixes, consumables, and related products
listed in Schedule "A" to this Agreement (the "Licensed Products") used by Surf
City Squeeze Franchise Corp. in the sale to the public of smoothies, juices,
functional drinks, and other healthy consumables under its proprietary marks and
the name "Surf City Squeeze";
AND WHEREAS contemporaneously with the execution of this Agreement, Surf
City Squeeze Franchise Corp. as franchisor (the "Franchisor") and 1238176
Ontario Inc. as master franchisee shall execute a master franchise agreement
(the "Master Franchise Agreement') whereby the Franchisor shall grant an
exclusive license in the country of Canada to the Distributor to set-up, create,
establish and maintain Distributor-owned stores and subfranchised stores using
the franchise system and the trade name "Surf City Squeeze";
AND WHEREAS the Supplier has agreed that the Distributor shall have the
exclusive right in Canada to sell and distribute the Licensed Products;
NOW THEREFORE in consideration of the mutual covenants and agreements
herein contained and for other good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I. APPOINTMENT AND ACCEPTANCE
1.01 Subject to the terms and conditions hereinafter set out, the Supplier
hereby appoints the Distributor as the exclusive distributor of the Licensed
Products in the country of Canada (the "Protected Area").
1.02 The Distributor hereby accepts the appointment as the exclusive
distributor of the Supplier for the Licensed Products in the Protected Area on
the terms and conditions hereinafter set out.
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ARTICLE II. EXCLUSIVE RIGHTS
2.01 The Distributor is given the exclusive right to distribute the
Licensed Products in the Protected Area and the Supplier, each of its Principle
Shareholders and specifically Kevin Blackwell covenants and agrees-that during
the term of this Agreement, it and he shall not, without the prior written
consent of the Distributor either directly or indirectly, individually or in
partnership or jointly or in conjunction with any person, firm, association,
syndicate or corporation, as principal, agent, shareholder or in any matter
whatsoever, carry on or be engaged in or be concerned with or interested in or
advise, lend money to, guarantee the debts or obligations of or permit its name
or any part thereof, to be used or employed by any business, enterprise or
undertaking to sell or distribute the Licensed Products or any products that
compete with the Licensed Products within the Protected Area to any other
individual, partnership or corporation.
2.02 Distributor covenants and agrees that during the term of this
Agreement, it shall not, without the prior written consent of Supplier either
directly of indirectly, individually or in partnership or jointly or in
conjunction with any person, firm, association, syndicate or corporation, as
principal, agent, shareholder or in any matter whatsoever, carry on or be
engaged in any business, enterprise or undertaking to sell or distribute the
Licensed Products or any products that compete with the Licensed Products
outside the Protected Area to any other individual, partnership or corporation.
2.03 The Supplier agrees that the Distributor is entitled to act as a
distributor for products other than the Licensed Products that are not
competitive with the Licensed Products. Such action shall not in any manner
whatsoever affect the right of the Distributor to act as the exclusive
distributor of the Supplier in the Protected Area as herein set out The
Distributor agrees that the Supplier is entitled to act as a supplier for
products other than the Licensed Products that are not competitive with the
Licensed Products. If Distributor elects to sell the additional products not
specifically listed as the Licensed Products, attached hereto as Schedule A,
within the Protected Area, the Supplier shall be entitled to receive its fifty
(50%) percent of the Net Profit as outlined in Article VI hereunder.
ARTICLE III. NEW AND REVISED PRODUCTS
3.01 The Supplier shall inform the Distributor forthwith in respect of any
new or revised products which are ready for sale.
3.02 In the event that the Supplier produces or acquires any new or revised
product and said product is distributed to the United States Surf City Squeeze
Franchise System, the Supplier agrees that the Distributor shall have the first
right of opportunity to sell same provided that such product is recognized as
legal by the presiding Governmental Agencies for sale and/or distribution within
the Protected Area. Supplier shall authorize the Distributor immediately to sell
the same in accordance with agreements having substantially the same terms as
contained herein. The Supplier shall supply the Distributor with samples of such
new or revised products upon such authorization. Such samples are to be provided
at the Supplier's cost, as provided in this Agreement herein.
ARTICLE IV. NATURE OF RELATIONSHIP
4.01 The relationship between the Supplier and the Distributor with respect
to the sale of the Licensed Products by the Distributor only, shall be that of
independent contractors. The Distributor shall transact all business pursuant to
this Agreement on its own account Both parties acknowledge and agree that they
have no right to enter into contracts or commitments for the other, and that
they shall not represent to third parties that they have the right to enter into
contracts or commitments, of any nature or kind whatsoever in the name of or on
behalf of the other party to this Agreement The Distributor and Supplier further
agree that each party (the "Indemnifier") will indemnify and hold harmless the
other party from and against any and all claims, losses and liabilities
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<PAGE>
including legal costs and disbursements incurred by, o in connection with
negligent or unauthorized acts or omissions of the Indemnifier and those for
whom it is at lay responsible.
4.02 All orders and contracts taken by the Distributor for the sale of
Licensed Products shall be subject solely to the Distributor's own pricing,
policies and procedures, as the Distributor may, in its own discretion
determine. The Supplier acknowledges and agrees that it shall have no rights to
determine or affect the Distributor's pricing, policies and procedures.
Distributor acknowledges his duty to operate the Distributorship by selling the
Licensed Products and any additional products at the highest price the market
will sustain and by minimizing expenses as low as practical in the normal course
of business.
4.03 Distributor acknowledges that it is essential to the maintenance of
the high standards that the public has come to expect of Suppliers Products, and
to the preservation of the integrity of the goodwill, that Distributor adheres
to the uniform standards, procedures, and policies hereafter described.
ARTICLE V. RECIPES
5.01 The Supplier represents, warrants and covenants that it is the owner
of the Recipes (the "Recipes") in connection with the Licensed Products in the
United States. Supplier also represents, warrants and covenants that the Recipes
are not patented. As such, Distributor acknowledges the possibility of
duplication of said Recipes for the Licensed Products.
5.02 Contemporaneously with the execution of this Agreement, the Recipes
shall be lodged with Fort Knox Escrow Services, Inc., 2100 Norcross Parkway,
Suite 150, Norcross, Georgia, 30071, as Escrow Agent Supplier represents that
each Recipe lodged with said Escrow Agent for the Licensed Products and the
ingredients for the Licensed Products are broken down on a percentage basis and
Supplier cannot provide the particular grade of each individual ingredient in
each Licensed Product Should Supplier fail to deliver a Licensed Product to
Distributor for any reason for a period of thirty (30) consecutive days, upon
written notice from Distributor and Supplier, the Escrow Agent shall release to
Distributor the one Licensed Product Recipe which Supplier failed to deliver. If
said failure of delivery of a Licensed Product occurs and Distributor receives
the one Recipe from the Escrow Agent, Supplier remains entitled to receive the
50% net profit distribution, as referenced in Article VI below, for that one
product as well as all other products being sold to Subfranchisees or any other
sales of the Licensed or approved Products. The Distributor shall be a trustee
and fiduciary for the Supplier with respect to the Recipe, which Recipe shall be
deemed to be Confidential Information within the meaning of the Master Franchise
Agreement The Distributor covenants not to disclose the Recipe to any third
party and, if the Supplier again becomes able to supply the Licensed Product
covered by the Recipe, the Distributor shall return the Recipe to the Escrow
Agent and shall destroy any copies thereof that may remain in the Distributor's
possession.
5.03 The parties acknowledge that it is the intention of the Supplier and
the Distributor that the Distributor eventually engage an independent
manufacturer in Canada to manufacture the Licensed Products. If at any time the
manufacturing of any one or more of the Licensed Products in Canada by an
independent Canadian manufacturer retained for such purpose would result in a
higher net profit to be shared equally by Supplier and Distributor hereunder,
then the Distributor may provide written notice to the Supplier that such
Licensed Products will be manufactured in Canada for re-distribution to
sub-franchisees or other approved parties. The Distributor and the Supplier
shall split the costs of all duties and other fees or charges payable in
connection with the shipment to and importation of such products into the
Protected Area unless and until the Licensed Products are manufactured in
Canada. Upon delivery of such notice, the Distributor shall be released from its
obligations to purchase such products from the Supplier under this Agreement,
and the Supplier shall provide the Canadian manufacturer the Recipes of the
Licensed products subject to the execution of a confidentiality agreement by
such Canadian manufacturer and supplier in respect of such Recipes.
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ARTICLE VI. PROFIT SHARING TERMS
6.01 The terms of sale from the Supplier to the Distributor and the terms
of the Profit Sharing Distributions shall be as follows:
1. Quantity: As requested by the Distributor in writing from time to
time.
2. Price FOR the Licensed Product At the Supplier's cost or as otherwise
agreed upon by the parties net of any allowances, bonuses or
commissions. If the Licensed Product is sold by the Distributor for
re-distribution to subfranchisees or other approved parties, the net
profit derived from the sale of Licensed Products in Canada to these
parties, after deductions for cost of the Licensed Products (adjusted
for inventories), import duties and taxes, transportation insurance,
administrative fees and expenses, all determined in accordance with
generally accepted accounting principles, shall be shared equally by
the Supplier and the Distributor (I.E. 50% to each). Distributor
acknowledges his duty to operate the Distributorship by selling the
Licensed Products and any additional products at the highest price the
market will sustain and by minimizing expenses as low as practical in
the normal course of business. Distributor and Supplier will take
profits only quarterly and no salary of any representative of either
party shall be included in the calculation of such profits.
3. Profit Sharing Distributions: Distributions of the net profit shall be
made by Distributor to Supplier on a quarterly basis. Said
distribution of net profit shall be delivered from Distributor to the
office of Supplier not later than the 15's day of the following month
for the preceding quarter which shall be accompanied by copies of each
check written for said quarter as well as all back-up accounting
including, but not limited to, income statements and balance sheets.
Distributor and Supplier agree to purchase the Licensed Products from
the manufacturer extending the lowest price whether in the United
States or Canada. As referenced in Section 4.02, Distributor
acknowledges his duty to operate the Distributorship by selling the
Licensed Products and any additional products at the highest price the
market will sustain and by minimizing expenses as low as practical in
the normal course of business. From time to time, Distributor may
request to verify the invoices from Supplier for the products shipped
to Distributor in the Protected Area.
4. Distributor and Supplier hereby agree to each pay 50% toward the
initial order of Licensed Products (i.e. if the initial order of
Licensed Products is $10,000, Distributor shall pay $5,000 and
Supplier shall pay $5,000). In the event that the bank account for
Distributor and Supplier needs to be replenished, Distributor and
Supplier hereby agree to contribute 50% of the monies required for
said replenishment All expenses of the Business as in accordance with
this Agreement shall be shared equally by Distributor and Supplier.
All operations of the Business shall be run in accordance with this
Agreement.
5. Taxes, Duties and Exchange Rates: Shall be shared by Distributor and
Supplier.
ARTICLE VII. WARRANTIES
7.01 The Supplier warrants to the Distributor that the products will be
free from defects.
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<PAGE>
7.02 The Supplier shall indemnify and hold harmless the Distributor from
and against any and all claims, losses an liabilities including legal costs and
disbursements incurred by or in connection with negligent acts or omissions of
the Supplier or its employees arising in connection with any fault of failure of
the Licensed Products.
7.03 The Distributor warrants to the Supplier that the Subfranchisees and
all other recipients of the Licensed Products shall be entitled to the constant
delivery of the Licensed Products ordered. Failure by Distributor to provide
such constant supply of Licensed Products to Subfranchisees or other approved
vendors ordering the Licensed Products will result in the Termination of this
Agreement according to Article VIII. Termination of this Agreement shall also
terminate any other agreements between the same parties in accordance with their
respective terms as to termination.
ARTICLE VIII. TERM AND TERMINATION
8.01 The term of this Agreement shall be in perpetuity commencing on the
date of execution hereof subject to termination of this Agreement with written
notice to Distributor upon the occurrence of any or all of the following events,
each of which shall be deemed an incurable breach of this Agreement:
(a) If the Distributor fails to make payment of the amounts owing pursuant
to this Product Agreement to the Supplier.
(b) If termination occurs under the Master Franchise Agreement,
Confidentiality Agreement, or the Escrow Agreement for any reason
whatsoever. By virtue of those Agreements, Distributor acknowledges
that the Exclusivity granted within this Agreement shall
simultaneously and immediately terminate. In the event of the
termination of the aforementioned Agreements, Distributor shall lose
the right to distribute the Licensed Products to any further Stores
opened by Franchisor or other third party. Distributor shall retain
the to distribute the Licensed Products to the Stores, whether owned
by Master Franchisee or Subfranchisees, which are open and operating
at the time of termination. In the event of said termination, Supplier
remains entitled to receive the 50% net profit distribution, as
referenced in Article VI above, for the Licensed Products being sold
by Distributor.
(c) If Distributor fails to supply the Licensed Products to Subfranchisees
and other approved vendors as outlined in this Agreement, excluding
the non-delivery by Supplier as per Section 5.02 herein.
ARTICLE IX GENERAL
9.01 Any notice required to be given pursuant to this Agreement shall be
validly given if delivered personally, faxed or mailed by prepaid registered
mail to a party at its address on the first page hereof. Any such notice
delivered personally or faxed shall be deemed to have been received by and given
to the addressee at the time of receipt, and any such notice mailed by prepaid
registered mail shall be deemed to have been received by and given to the
addressee on the seventh business day following the day of mailing. Notice of a
change of address may be given to the other party as set out above.
9.02 The Supplier shall not transfer or assign its rights and obligations
under this Agreement to any other individual, partnership or corporation without
the prior written consent of the Distributor which shall not be unreasonably
withheld. With respect to any transfers or assignments by the Distributor, the
Supplier acknowledges and agrees that the following transfers or assignments
shall be permitted contingent upon the Distributor not being in material default
of any of the Agreements and that said transfer or assignment is effective
simultaneously for the Master Franchise Agreement, Escrow Agreement and
Confidentiality Agreement Said transfers or assignments hereunder, except as
previously mentioned, do not require the Supplier's consent:
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(a) the Distributor shall be permitted to issue additional shares from
treasury, provided that, following the issue of such additional shares, voting
shares of the Distributor sufficient to control the Distributor shall continue
to be held, directly by George Panos;
(b) the Distributor may engage in the sale of its assets (including its
interest in this Agreement) to a bona fide purchaser or purchasers for the
purpose of forming and constituting a partnership, provided that the partnership
interest of George Panos in the said partnership shall be greater than 50%;
(c) George Panos may sell his shares in the Distributor to a bona fide
purchaser or purchasers at any time and from time to time, provided that,
following the said sale of his shares in the Distributor, voting shares of the
Distributor sufficient to control the Distributor shall continue to be held by
George Panos;
(d) George Panos may transfer all but not less than all of his shares in
the Distributor to a corporation controlled by George Panos at any time upon
sufficient notice to the Supplier.
"Control" for the purposes of this section 8.07 shall have the same meaning
ascribed thereto in the Business Corporations Act (Ontario).
9.03 In exercising any discretion or making any decisions hereunder, the
parties shall at all times act reasonably.
9.04 The provisions hereof contain the entire agreement between the
parties. No representations or statements other than those expressly set forth
herein were made or relied upon in entering into this Agreement.
9.05 The parties hereby acknowledge that the rights granted hereof shall be
subject to and subordinate to the Master Franchise Agreement as it now or
hereafter exists. In the event Master Franchisee's interests under the Master
Franchise Agreement are terminated, revoked, barred or the like for any reason,
Distributor's rights hereunder shall be terminated concurrently.
9.06 This Agreement may not be varied, modified or amended except by an
instrument in writing duly executed by the parties hereto.
9.07 Should any provision or provisions of this Agreement be unenforceable,
it or they shall be considered separate and severable from the Agreement, and
the remaining provisions of the Agreement shall remain in full force and be
binding upon the parties hereto as though the unenforceable provision or
provisions had never been included.
9.08 This Agreement shall be subject to and construed in accordance with
the laws of the Province of Ontario, and each of the parties hereto irrevocably
atoms to the jurisdiction of the courts thereof.
9.09 All headings appearing herein have been inserted for convenience of
reference only and shall not in any way affect the construction, interpretation
or meaning of the Agreement.
9.10 This Agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns.
9.11 Time of the essence of this Agreement.
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IN WITNESS WHEREOF the parties hereto have duly executed this Agreement as
of the date first written above.
KONA COAST PROVISION
Per: /s/ Kathryn Blackwell c/s
----------------------------------------
I have authority to bind the Corporation
1238176 ONTARIO INC.
Per: /s/ George Panos c/s
----------------------------------------
I have authority to bind the Corporation
WITNESS FOR KEVIN BLACKWELL:
/s/ Kathryn Blackwell /s/ Kevin Blackwell
- - -------------------------------- --------------------------------
KEVIN BLACKWELL
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SCHEDULE "A"
SURF CITY SQUEEZE APPROVED PRODUCTS
1.) SURF CITY SQUEEZE(TM) SMOOTHIE MIX
2.) FUNCTIONAL POWDERS
Aerobic Squeeze(TM)
Loose Lips Squeeze(TM)
Muscle Squeeze(TM)
Power Energy Squeeze(TM)
Recovery Squeeze(TM)
Rejuvenator Squeeze(TM)
Solstice Squeeze(TM)
Stripper Squeeze(TM)
Thinker Squeeze(TM)
3.) EXTRA POWDERS
Bee Pollen
Brewer's Yeast
Carbo Powder
Creatine
Korean Ginseng
Lecithin
Multi Vitamin
Protein
Spirulina
Wheat Germ
Wheat Grass
<PAGE>
EXHIBIT E
ESCROW AGREEMENT
THIS ESCROW AGREEMENT ("Agreement") is made on July 7th 1998 (the "Effective
Date"), among SURF CITY SQUEEZE FRANCHISING CORP., a corporation organized under
the laws of the State of Arizona, United States of America, with its principal
office at 7730 East Greenway Road, Suite 203, Scottsdale, Arizona, United States
of America ("Franchise"), KONA COAST PROVISION ("KCP"), a corporation organized
under the laws of the State of Arizona, United States of America, wit its
principa! office at do 8350 East Evans, Suite D-l, Scottsdale, Arizona, United
States of America ("Franchisor"), 1238176 ONTARIO INC., whose principal or
registered office is at 100 Redpath Avenue, Suite 9, Toronto, Ontario, Canada
("Master Franchisee"), and Fort Knox Escrow Services, Inc., 2100 Norcross
Parkway, Suite 150, Norcross, Georgia, 30071 ("Fort Knox").
MASTER FRANCHISE AGREEMENT
The Franchisor has developed a system and procedure for the operation of
retail stores ("Stores") offering smoothies, juices, functional drinks, other
healthy consumables, and the sale and promotion of related products
(collectively, the "Products") and services, using Franchisor's proprietary
marks.
Master Franchisee has requested, and Franchisor has agreed to grant to
Master Franchisee, the exclusive right to set-up, create, establish and operate
Master Franchisee-owned Stores and to grant franchises for Stores to qualified
persons for the country of Canada (the "Protected Area") pursuant to the terms
and conditions of a master franchise agreement ("Master Franchise Agreement")
between Franchisor and Master Franchisee, dated the date hereof.
RECIPES FOR PRODUCTS
KCP is an affiliate of Franchisor and an approved supplier and manufacturer
of the Products (as more particularly described in the Product Agreement annexed
as Exhibit "D" to the Master Franchise Agreement) and, as such, is in possession
of the recipes (the "Recipes") required for the manufacture of the Products.
ARTICLE I - APPOINTMENT OF ESCROW AGENT
1.01 Franchisor, KCP and Master Franchisee hereby appoint Fort Knox as their
agent and trustee, and Fort Knox hereby agrees to act exclusively to hold the
Recipes required to be held by him in accordance wit the terms of this Escrow
Agreement. Fort Knox agrees that he will not at any time dispose, encumber or
otherwise deal with the Recipes and all such other documents required to be held
by him other than as provided in this Escrow Agreement.
ARTICLE II - RECIPES TO BE DELIVERED TO ESCROW AGENT
2.01 Franchisor agrees to cause KCP to deliver, and KCP hereby agrees that it
shall deliver, to Fort Knox the Recipes, which Franchisor and KCP hereby
represent and warrant shall be the true, accurate and complete recipes required
for the manufacture of the Products. Franchisor and KCP represents that each
Recipe lodged with Fort Knox for the Licensed Products and the ingredients for
the Licensed Products are broken down on a percentage basis and Franchisor and
KCP cannot provide the particular grade of each individual ingredient in each
Licensed Product.
ARTICLE III - DEFAULT
3.01 Fort Knox shall deliver the Recipe for the Product which the Franchisor or
KCP is unable to supply, or a copy of such Recipe, to Master Franchisee ONLY in
the event that:
(a) Franchisor or KCP notifies Fort Knox to effect such delivery to Master
Franchisee at a specific address, the notification being accompanied
by a cheque payable to Fort Knox in the amount of one hundred
thirty-five dollars ($135.00) (Canadian Funds); or
(b) Fort Knox receives from Master Franchisee:
<PAGE>
-2-
(i) notification that Franchisor or KCP has been continuously
unable, for a period thirty (30) days, to supply a particular
Product in respect of which Fort Knox is holding a Recipe after
an order by the Master Franchisee therefor ("Franchisor or KCP
Default"); and
(ii) evidence reasonably satisfactory to Fort Knox that Franchisor or
KCP Default has in fact occurred and subsists at the time of
receipt of such notification; and
(iii) a written demand that the Recipe for the one Product which
cannot be supplied be released and delivered to Master
Franchisee; and
(iv) a written undertaking from the Master Franchisee that the Recipe
being supplied to the Master Franchisee will be used only as
permitted under the terms of the Master Franchise Agreement
between Franchisor and Master Franchisee; and
(v) specific instructions from the Master Franchisee for this
delivery; and
(vi) a cheque payable to Fort Knox in the amount of one hundred
thirty-five dollars ($135.00).
(c) If the provisions of section 3.01(a) are satisfied, Fort Knox shall,
within five (5) business days after receipt of the notification and
cheque specified in section 3.01(a), deliver the Recipe in accordance
with the applicable instructions.
(d) If the provisions of section 3.01(b) are met, Fort Knox shall, within
five (5) business days after receipt of all the documents specified in
paragraph 3.01(b), send by certified mail to Franchisor or KCP a
photostatic copy of all such documents. Franchisor or KCP shall have
ten (10) days from the date of mailing such documents ("Objection
Period") to notify Fort Knox of its objection ("Objection Notice") to
the release of the Recipe to Master Franchisee and to request that the
issue of Master Franchisee's entitlement to a copy of the Recipe be
submitted to arbitration in accordance with the following provisions:
(i) If Franchiser or KCP shall send an Objection Notice to Fort Knox
during the Objection Period, the matter shall be submitted to,
and settled by arbitration by, a panel of three (3) arbitrators
pursuant to the Arbitrations Act (Ontario). The arbitrators shall
apply Ontario law. At least one (1) arbitrator shall be
reasonably familiar with franchising industry. The decision of
the arbitrators shall be binding and conclusive on all parties
involved, and judgment upon their decision may be entered in a
court of competent jurisdiction. All costs of the arbitration
incurred by Fort Knox, including reasonable legal fees and costs,
shall be paid as directed by the arbitration provided, however,
if the arbitration is settled prior to a decision by the
arbitrators, Franchisor or KCP and Master Franchisee shall each
pay 50% of all such costs.
(ii) Franchiser or KCP may, at any time prior to the commencement of
arbitration proceedings, notify Fort Knox that it has withdrawn
its Objection Notice. Upon receipt of any such notice, Fort Knox
shall reasonably promptly deliver the Deposit Materials to Master
Franchisee in accordance with the instructions specified in
paragraph 3.01(b).
(e) If, at the end of the Objection Period, Fort Knox has not received an
Objection Notice from Franchisor or KCP, then Fort Knox shall
reasonably promptly deliver the Recipe to Master Franchisee in
accordance with the instructions specified in paragraph 3.0 1(b).
3.02 Nothing in this Article III affects the entitlement of KCP to receive the
50% net profit distribution, as referenced in Article VI below, for that one
product as well as all other products being sold to Subfranchisees or any other
sales of the Licensed or approved Products.
<PAGE>
-3-
ARTICLE IV - INDEMNIFICATION OF ESCROW AGENT
4.01 INDEMNITY. Franchisor, KCP and Master Franchisee shall, jointly and
severally, indemnify and hold harmless Fort Knox and each of its directors,
officers, agents, employees and stockholders ("Escrow Agent Indemnitees")
absolutely and forever, from and against any and all claims, actions, damages,
suits, liabilities, obligations, costs, fees, charges, and any other expenses
whatsoever, including reasonable attorneys' fees and costs (collectively
referred to as a "Claim"), that may be asserted against any Escrow Agent
Indemnitee in connection with this Agreement or the performance of Fort Knox or
any Escrow Agent Indeninitee hereunder except where any such Claim arises out of
the fraud, negligence or intentional misconduct of a Escrow Agent Indemnitee or
the breach by Fort Knox of its obligations under this Agreement.
4.02 DISPUTES AND INTERPLEADER.
(a) In the event of any dispute between any of Fort Knox, Franchisor, KCP
and Master Franchisee relating to delivery of the Recipes by Fort Knox
or to any other matter arising out of this Agreement, Fort Knox may
submit the matter to any court of competent jurisdiction in an
interpleader or similar action. Any and all costs incurred by Fort
Knox in connection therewith, including reasonable legal fees and
costs, shall be borne 50% by the Franchisor and KCP and 50% by the
Master Franchisee.
(b) Fort Knox shall perform any act ordered by any court of competent
jurisdiction, without any liability or obligation to any party
hereunder by reason of such act.
ARTICLE V - REPRESENTATIONS AND WARRANTIES
Each of Franchisor and KCP hereby represents and warrants as follows and hereby
acknowledges that Master Franchisee is relying upon such representations and
warranties:
5.01 That Franchisor and KCP are the absolute and beneficial owners of the
Recipes with good and marketable title thereto, free and clear of any mortgages,
liens, charges, security interests, adverse claims, pledges, encumbrances and
demands of any kind, and as such, has the exclusive right and full power to
deliver and transfer the Recipes to Fort Knox free and clear of all mortgages,
liens, charges, security, interests, adverse claims, pledges, encumbrances and
demands whatsoever.
5.02 As of the Effective Dare of this Agreement, no person, firm or corporation
has any agreement, option or right capable of becoming an agreement for the
purchase of the Recipes or any interest(s) therein or right(s) thereto.
5.03 There is not pending any suit, action or other legal proceeding of any sort
by any party (i) claiming to have rights to the Recipes superior to or otherwise
in conflict with Franchisor's rights to the Recipes, (ii) wishing to restrain or
otherwise prevent Franchisor and/or KCP from effectually and legally
transferring the Recipes to Fort Knox free and clear of any and all claims,
interests and encumbrances or any suit, action, (iii) wishing to restrain the
use of the Recipes by Franchisor, KCP and/or any other party, or (iv) the effect
of which would be to cause a lien to attach or to divest tide to the Recipes in
any manner whatsoever.
5.04 The Recipes do not infringe any patents, trade secrets, confidential
information or any other property rights whatsoever owned by any third parties.
5.05 Franchisor and KCP represents, warrants and covenants that the Recipes are
not patented. As such, Master Franchisee acknowledges the possibility of
duplication of said Recipes for the Licensed Products.
5.06 Franchisor and KCP represents that each Recipe lodged with Fort Knox for
the Licensed Products and the ingredients for the Licensed Products are broken
down on a percentage basis and Franchisor and KCP cannot provide the particular
grade of each individual ingredient in each Licensed Product.
<PAGE>
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ARTICLE VI - GENERAL CONTRACT PROVISIONS
6.01 All of the pates hereto hereby acknowledge receipt of a duplicate copy of
this Escrow Agreement.
6.02 The pates hereto shall sign and deliver such further and other papers,
cause such meetings to be held, resolutions passed and by-laws enacted, exercise
their vote and influence, do and perform and cause to be done and performed such
further and of the acts and things as may be necessary or desirable in order to
give effect to this Agreement and every part thereof. Without limiting the
generality of the foregoing, the Master Franchisee shall deliver to the
Franchisor and KCP the personal covenant of George Panos respecting maintenance
of confidentiality of the Recipes.
6.03 This Agreement and the terms hereof shall constitute the entire agreement
between the pates hereto with respect to all of the matters herein and its
execution has not been induced by, nor do any of the pates hereto rely upon or
regard as material any representations or writings whatsoever not incorporated
herein and made part hereof. This Agreement shall not be amended, altered or
qualified except by a memorandum in writing signed by all of the pates hereto
and any amendment, alteration or qualification hereof shall be null and void and
shall not be binding upon any party who has not given his consent as aforesaid.
6.04 The pates hereby acknowledge that the rights granted hereof shall be
subject to and subordinate to the Master Franchise Agreement as it now or
hereafter exists. In the event Master Franchisee's interests under the Master
Franchise Agreement are terminated, revoked, barred or the like for any reason,
Master Franchisee's rights hereunder shall be terminated concurrently.
6.05 Time shall be of the essence of this Agreement and every part hereof.
6.06 No delay or failure of Master Franchisee in exercising any right, power or
privilege hereunder shall affect any such right, power or privilege, nor shall
any single or partial exercise thereof preclude any further exercise thereof, or
the exercise of any other right, power or privilege. The rights of Master
Franchisee under this Agreement are cumulative and not exclusive of any right or
remedy which Master Franchisee would otherwise have.
6.07 This Agreement shall be deemed to be an agreement made and shall be
performed, construed and enforced in accordance with, and the rights of the
pates hereto shall be governed by, the laws of the Province of Ontario. Any
action or proceeding contemplated by any of the pates hereto for the purpose of
enforcing this Agreement or any part thereof shall be commenced and continued
only in the Province of Ontario before the appropriate tribunal having
jurisdiction thereof and each of the pates hereto hereby irrevocably attorns to
such jurisdiction and agrees that service of process with respect to any such
proceedings shall be validly and effectively served upon the relevant parties
hereto.
6.08 All words and personal pronouns relating thereto shall be read and
construed as the number and gender of the party or pates referred to in each
case require, and the verb agreeing therewith shall be construed as agreeing
with the required word and pronoun.
6.09 All headings and tides in this Agreement are for reference only and are not
to be used in the interpretation of the terms hereof.
6.10 This Agreement shall not be assigned by any party hereto without the prior
written consent of the other pates hereto, which consent shall not be
unreasonably withheld. Subject to the foregoing and subject to any assignment
required by operation of law due to the death or incapacity of Fort Knox, as
trustee, if applicable, this Agreement shall enure to the benefit of and be
binding upon the pates hereto their respective heirs, legal personal
representatives, executors, successors and assigns. The pates mutually
acknowledge that this Agreement may only be assigned where other Agreements
among the Franchisor, KCP and the Master Franchisee, or any of them, are also
assigned.
<PAGE>
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IN WITNESS WHEREOF the parties have executed this Master Franchise
Agreement as of the Effective Date.
FRANCITISOR: MASTER FRANCHISEE:
SURF CITY SQUEEZE FRANCHISE CORP. 1238176 ONTARIO INC.
By /s/ Kevin A. Blackwell By /s/ George Panos
------------------------------ ------------------------------
Kevin A. Blackwell, President George Panos, President
KCP: ESCROW AGENT:
KONA COAST PROVISION FORT KNOX ESCROW, INC.:
By /s/ Kevin A. Blackwell By /s/
------------------------------ ------------------------------
INDEMNITY AGREEMENT
This INDEMNITY AGREEMENT dated as of March 15, 1999, is made by and between
Sports Group International, Inc., a Florida corporation (the "Corporation"), and
Kathryn Blackwell (the "Indemnitee").
RECITALS
The Articles of Incorporation and By-Laws of the Corporation provide for
indemnification by the Corporation of its directors to the fullest extent
permitted by law. The Indemnitee has been serving and desires to continue to
serve as a director of the Corporation in part in reliance on such indemnity
provision.
To provide the Indemnitee with additional contractual assurance of
protection against personal liability in connection with certain proceedings
described below, the Corporation desires to enter into this Agreement.
In order to induce the Indemnitee to serve or continue to serve as a
director of the Corporation, and in consideration of the Indemnitee's so
serving, the Corporation desires to indemnify the Indemnitee and to make
arrangements pursuant to which the Indemnitee may be advanced or reimbursed
expenses incurred by Indemnitee in certain proceedings described below,
according to the terms and conditions set forth below.
AGREEMENT
THEREFORE, in consideration of the foregoing recitals and of Indemnitee's
serving or continuing to serve the Corporation as a director, the parties agree
as follows:
1. INDEMNIFICATION.
(a) In accordance with the provisions of subsection (b) of this
Section 1, the Corporation shall hold harmless and indemnify the Indemnitee
against any and all expenses, liabilities and losses (including, without
limitation, investigation expenses and expert witnesses' and attorneys' fees and
expenses, costs of court, judgments, penalties, fines, and amounts paid or to be
paid in settlement) actually incurred by the Indemnitee (net of any related
insurance proceeds or other amounts received by Indemnitee or paid by or on
behalf of the Corporation on the Indemnitee's behalf), in connection with any
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, to which the Indemnitee is a party or is threatened to be made a
party (a "Proceeding") based upon, arising from, relating to, or by reason of
the fact that Indemnitee is, was, shall be, or shall have been a director and/or
officer of the Corporation or is or was serving, shall serve, or shall have
served at the request of the Corporation as a director, officer, partner,
trustee, member, employee, or agent ("Affiliate Indemnitee") of another foreign
<PAGE>
or domestic corporation or non-profit corporation, cooperative, partnership,
joint venture, limited liability company, trust or other incorporated or
unincorporated enterprise (each, a "Company Affiliate").
(b) Without limiting the generality of the foregoing, the Indemnitee
shall be entitled to the rights of indemnification provided in this Section 1
for any expenses actually incurred in any Proceeding initiated by or in the
right of the Corporation, unless indemnification is barred by Florida Statutes
Section 607.0850(7), or any other applicable law.
(c) In providing the foregoing indemnification, the Corporation shall,
with respect to any proceeding, hold harmless and indemnify the Indemnitee to
the fullest extent not prohibited by the law of the State of Florida, as in
effect from time and time, and the Articles of Incorporation. For purposes of
this Agreement, it is intended that the indemnification afforded hereby be
mandatory and the broadest possible under any then existing statutory provision
expressly authorizing the Corporation to indemnify directors or officers whether
in effect on the date of this Agreement or hereafter, provided, however, that
the indemnification provisions of this Agreement shall apply without regard to
whether any provision set forth in the Articles or Bylaws of the Corporation
authorizing or permitting indemnification shall be in force or effect.
2. OTHER INDEMNIFICATION AGREEMENTS. The Corporation may purchase and
maintain insurance or furnish similar protection or make other arrangements,
including, but not limited to, providing a trust fund, letter of credit, or
surety bond ("Indemnification Arrangements") on behalf of the Indemnitee against
any liability asserted against him or her or incurred by or on behalf of him or
her in such capacity as a director or officer of the Corporation or an
Affiliated Indemnitee, or arising out of his or her status as such, whether or
not the Corporation would have the power to indemnify him or her against such
liability under the provisions of this Agreement. The purchase, establishment,
and maintenance of any such Indemnification Arrangement shall not in any way
limit or affect the rights and obligations of the Corporation or of the
Indemnitee under this Agreement except as expressly provided herein, and the
execution and delivery of this Agreement by the Corporation and the Indemnitee
shall not in any way limit or affect the rights and obligations of the
Corporation or the other party or parties thereto under any such Indemnification
Arrangement. All amounts payable by the Corporation pursuant to this Section 2
and Section 1 hereof are herein referred to as "Indemnified Amounts." To the
extent the Corporation is able to maintain its existing directors and officers
liability insurance at a reasonable premium (as determined by the Corporation in
its sole discretion), the Corporation shall use reasonable efforts to cause the
Indemnitee to be covered by such insurance.
3. ADVANCE PAYMENT OF INDEMNIFIED AMOUNTS.
(a) The Indemnitee hereby is granted the right to receive in advance
of a final, nonappealable judgment or other final adjudication of a Proceeding
(a "Final Determination") the amount of any and all expenses, including, without
limitation, investigation expenses, court costs, expert witnesses' and
attorneys' fees and other expenses expended or incurred by the Indemnitee in
connection with any Proceeding or otherwise expensed or incurred by the
Indemnitee (such amounts so expended or incurred being hereinafter referred to
as "Advanced Amounts").
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<PAGE>
(b) In making any written request for Advanced Amounts, the Indemnitee
shall submit to the Corporation a schedule setting forth in reasonable detail
the dollar amount expended or incurred and expected to be expended. Each such
listing shall be supported by the bill, agreement, or other documentation
relating thereto, each of which shall be appended to the schedule as an exhibit.
In addition, before the Indemnitee may receive Advanced Amounts from the
Corporation, the Indemnitee shall provide to the Corporation (i) a written
affirmation of the Indemnitee's good faith belief that the applicable standard
of conduct required for indemnification by the Corporation has been satisfied by
the Indemnitee, and (ii) a written undertaking by or on behalf of the Indemnitee
to repay the Advanced Amount if it shall ultimately be determined that the
Indemnitee has not satisfied any applicable standard of conduct. The written
undertaking required from the Indemnitee shall be an unlimited general
obligation of the Indemnitee, but need not be secured. The Corporation shall pay
to the Indemnitee all Advanced Amounts within twenty (20) days after receipt by
the Corporation of all information and documentation required to be provided by
the Indemnitee pursuant to this paragraph.
4. PROCEDURE FOR PAYMENT OF INDEMNIFIED AMOUNTS.
(a) To obtain indemnification under this Agreement, the Indemnitee
shall submit to the Corporation a written request for payment of the appropriate
Indemnified Amounts, including with such requests such documentation and
information as is reasonably available to the Indemnitee and reasonably
necessary to determine whether and to what extent the Indemnitee is entitled to
indemnification. The Secretary of the Corporation shall, promptly upon receipt
of such a request for indemnification, advise the Board of Directors in writing
that the Indemnitee has requested indemnification.
(b) The Corporation shall pay the Indemnitee the appropriate
Indemnified Amounts unless it is established that the Indemnitee engaged in one
of the Prohibited Acts, and such Prohibited Act was the subject matter of the
Proceeding. For purposes of determining whether the Indemnitee is entitled to
Indemnified Amounts, in order to deny indemnification to the Indemnitee, the
Corporation has the burden of proof in establishing (1) that the Indemnitee
engaged in the Prohibited Act, and (2) that the Prohibited Act was the subject
matter of the Proceeding. In this regard, a termination of any Proceeding by
judgment, order or settlement does not create a presumption that the Indemnitee
did not meet the requisite standard of conduct; provided, however, that the
termination of any criminal proceeding by conviction, or a pleading of nolo
contendere or its equivalent, or an entry of an order of probation prior to
judgment, creates a rebuttable presumption that the Indemnitee engaged in a
Prohibited Act. For purposes of this Agreement, a "Prohibited Act" shall mean
any act, omission or condition (i) described in Florida Statutes Section
607.0850(7) for which the Corporation may not indemnify the Indemnitee or (ii)
any act, omission or condition for which indemnity is not available under any
federal or state law or public policy.
(c) Any determination that the Indemnitee has engaged in a Prohibited
Act shall be made (i) either by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to such Proceeding; or (ii)
by independent legal counsel (who may be the outside counsel regularly employed
by the Corporation); provided that the manner in which (and, if applicable, the
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<PAGE>
counsel by which) the right of indemnification is to be determined shall be
approved in advance in writing by both the highest ranking executive officer of
the Corporation who is not a party to such action (sometimes hereinafter
referred to as "Senior Officer") and by the Indemnitee. In the event that such
parties are unable to agree on the manner in which any such determination is to
be made, such determination shall be made by independent legal counsel retained
by the Corporation especially for such purpose, provided that such counsel be
approved in advance in writing by both the Senior Officer and the Indemnitee
and, provided further, that such counsel shall not be outside counsel regularly
employed by the Corporation. The fees and expenses of counsel in connection with
making the determination contemplated hereunder shall be paid by the
Corporation, and, if requested by such counsel, the Corporation shall give such
counsel an appropriate written agreement with respect to the payment of their
fees and expenses and such other matters as may be reasonably requested by
counsel.
(d) The Corporation will use its best efforts to conclude as soon as
practicable any required determination pursuant to subparagraph (c) above and
promptly will advise the Indemnitee in writing with respect to any determination
that the Indemnitee is or is not entitled to indemnification, including a
description of any reason or basis for which indemnification has been denied.
Payment of any applicable Indemnified Amounts will be made to the Indemnitee
within ten (10) days after any determination of the Indemnitee's entitlement to
indemnification.
(e) Notwithstanding the foregoing, the Indemnitee may, at any time
after sixty (60) days after a claim for Indemnified Amounts has been filed with
the Corporation (or upon receipt of written notice that a claim for Indemnified
Amounts has been rejected, if earlier) and before three (3) years after a claim
for Indemnified Amounts has been filed, petition a court of competent
jurisdiction to determine whether the Indemnitee is entitled to indemnification
under the provisions of this Agreement, and such court shall thereupon have the
exclusive authority to make such determination unless and until such court
dismisses or otherwise terminates such action without having made such
determination. The court shall, as petitioned, make an independent determination
of whether the Indemnitee is entitled to indemnification as provided under this
Agreement, irrespective of any prior determination made by the Board of
Directors or independent counsel. If the court shall determine that the
Indemnitee is entitled to indemnification as to any claim, issue or matter
involved in the Proceeding with respect to which there has been no prior
determination pursuant to this Agreement or with respect to which there has been
a prior determination that the Indemnitee was not entitled to indemnification
hereunder, the Corporation shall pay all expenses (including attorneys' fees and
court costs) actually incurred by the Indemnitee in connection with such
judicial determination.
5. AGREEMENT NOT EXCLUSIVE; SUBROGATION RIGHTS, ETC.
(a) This Agreement shall not be deemed exclusive of and shall not
diminish any other rights the Indemnitee may have to be indemnified or insured
or otherwise protected against any liability, loss, or expense by the
Corporation, any subsidiary of the Corporation, or any other person or entity
under any charter, bylaws, law, agreement, policy of insurance or similar
protection, vote of stockholders or directors, disinterested or not, or
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<PAGE>
otherwise, whether or not now in effect, both as to actions in the Indemnitee's
official capacity, and as to actions in another capacity while holding such
office. The Corporation's obligations to make payments of Indemnified Amounts
hereunder shall be satisfied to the extent that payments with respect to the
same Proceeding (or part thereof) have been made to or for the benefit of the
Indemnitee by reason of the indemnification of the Indemnitee pursuant to any
other arrangement made by the Corporation for the benefit of the Indemnitee.
(b) In the event the Indemnitee shall receive payment from any
insurance carrier or from the plaintiff in any Proceeding against such
Indemnitee in respect of Indemnified Amounts after payments on account of all or
part of such Indemnified Amounts have been made by the Corporation pursuant
hereto, such Indemnitee shall promptly reimburse to the Corporation the amount,
if any, by which the sum of such payment by such insurance carrier or such
plaintiff and payments by the Corporation or pursuant to arrangements made by
the Corporation to Indemnitee exceeds such Indemnified Amounts; provided,
however, that such portions, if any, of such insurance proceeds that are
required to be reimbursed to the insurance carrier under the terms of its
insurance policy, such as deductible or co-insurance payments, shall not be
deemed to be payments to the Indemnitee hereunder. In addition, upon payment of
Indemnified Amounts hereunder, the Corporation shall be subrogated to the rights
of Indemnitee receiving such payments (to the extent thereof) against any
insurance carrier (to the extent permitted under such insurance policies) or
plaintiff in respect to such Indemnified Amounts and the Indemnitee shall
execute and deliver any and all instruments and documents and perform any and
all other acts or deeds which the Corporation deems necessary or advisable to
secure such rights. Such right of subrogation shall be terminated upon receipt
by the Corporation of the amount to be reimbursed by the Indemnitee pursuant to
the first sentence of this paragraph.
6. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Corporation contained herein shall continue during the period Indemnitee is a
director of the Corporation (or is serving at the request of the Corporation as
an Affiliate Indemnitee) and shall continue thereafter so long as Indemnitee
shall be subject to any possible Proceeding by reason of the fact that
Indemnitee was a director, officer or employee of the Corporation or was serving
in any other capacity referred to herein.
7. SUCCESSORS; BINDING AGREEMENT. This Agreement shall be binding on and
shall inure to the benefit of and be enforceable by the Corporation's successors
and assigns and by the Indemnitee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees, and
legatees. The Corporation shall require any successor or assignee
(whether direct or indirect, by purchase, merger, consolidation, or otherwise)
to all or substantially all of the business and/or assets of the Corporation, by
written agreement in form and substance reasonably satisfactory to the
Corporation and to the Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Corporation would
be required to perform if no such succession or assignment had taken place.
8. ENFORCEMENT. The Corporation has entered into this Agreement and
assumed the obligations imposed on the Corporation hereby in order to induce the
Indemnitee to act as a director of the Corporation, and acknowledges that the
-5-
<PAGE>
Indemnitee is relying upon this Agreement in continuing in such capacity. In the
event the Indemnitee is required to bring any action to enforce rights or to
collect monies due under this Agreement and is successful in such action, the
Corporation shall reimburse Indemnitee for all of the Indemnitee's fees and
expenses in bringing and pursuing such action. The Indemnitee shall be entitled
to the advancement of Indemnified Amounts to the full extent contemplated by
Section 3 hereof in connection with such Proceeding.
9. SEPARABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement independent of the others, so that if any provision
hereof shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall not affect the validity or enforceability
of the other provisions hereof, which other provisions shall remain in full
force and effect.
10. MISCELLANEOUS. No provision of this Agreement may be modified, waived,
or discharged unless such modification, waiver, or discharge is agreed to in
writing signed by Indemnitee and either the Chairman of the Board or the
President of the Corporation or another officer of the Corporation specifically
designated by the Board of Directors. No waiver by either party at any time of
any breach by the other party of, or of compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same time or
at any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.
The validity, interpretation, construction, and performance of this Agreement
shall be governed by the laws of the State of Florida, without giving effect to
the principles of conflicts of laws thereof. The Indemnitee may bring an action
seeking resolution of disputes or controversies arising under or in any way
related to this Agreement in the state or federal court jurisdiction in which
Indemnitee resides or in which his or her place of business is located, and in
any related appellate courts, and the Corporation consents to the jurisdiction
of such courts and to such venue.
11. NOTICES. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to Indemnitee: Kathryn Blackwell
7730 East Greenway Road, Suite 203
Scottsdale, Arizona 85260
If to Corporation: Sports Group International, Inc.
7730 East Greenway Road, Suite 203
Scottsdale, Arizona 85260
Attention: Secretary
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<PAGE>
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
12. COUNTERPART. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
13. EFFECTIVENESS. This Agreement shall be effective as of March 15, 1999.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the day and year first above written.
SPORTS GROUP INTERNATIONAL, INC.
By: /s/ Kevin A. Blackwell
------------------------------------
Kevin A. Blackwell
Its Chief Executive Officer
INDEMNITEE:
/s/ Kathryn Blackwell
----------------------------------------
Kathryn Blackwell
-7-
INDEMNITY AGREEMENT
This INDEMNITY AGREEMENT dated as of March 15, 1999, is made by and between
Sports Group International, Inc., a Florida corporation (the "Corporation"), and
Kevin A. Blackwell (the "Indemnitee").
RECITALS
The Articles of Incorporation and By-Laws of the Corporation provide for
indemnification by the Corporation of its directors to the fullest extent
permitted by law. The Indemnitee has been serving and desires to continue to
serve as a director of the Corporation in part in reliance on such indemnity
provision.
To provide the Indemnitee with additional contractual assurance of
protection against personal liability in connection with certain proceedings
described below, the Corporation desires to enter into this Agreement.
In order to induce the Indemnitee to serve or continue to serve as a
director of the Corporation, and in consideration of the Indemnitee's so
serving, the Corporation desires to indemnify the Indemnitee and to make
arrangements pursuant to which the Indemnitee may be advanced or reimbursed
expenses incurred by Indemnitee in certain proceedings described below,
according to the terms and conditions set forth below.
AGREEMENT
THEREFORE, in consideration of the foregoing recitals and of Indemnitee's
serving or continuing to serve the Corporation as a director, the parties agree
as follows:
1. INDEMNIFICATION.
(a) In accordance with the provisions of subsection (b) of this
Section 1, the Corporation shall hold harmless and indemnify the Indemnitee
against any and all expenses, liabilities and losses (including, without
limitation, investigation expenses and expert witnesses' and attorneys' fees and
expenses, costs of court, judgments, penalties, fines, and amounts paid or to be
paid in settlement) actually incurred by the Indemnitee (net of any related
insurance proceeds or other amounts received by Indemnitee or paid by or on
behalf of the Corporation on the Indemnitee's behalf), in connection with any
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, to which the Indemnitee is a party or is threatened to be made a
party (a "Proceeding") based upon, arising from, relating to, or by reason of
the fact that Indemnitee is, was, shall be, or shall have been a director and/or
officer of the Corporation or is or was serving, shall serve, or shall have
served at the request of the Corporation as a director, officer, partner,
trustee, member, employee, or agent ("Affiliate Indemnitee") of another foreign
<PAGE>
or domestic corporation or non-profit corporation, cooperative, partnership,
joint venture, limited liability company, trust or other incorporated or
unincorporated enterprise (each, a "Company Affiliate").
(b) Without limiting the generality of the foregoing, the Indemnitee
shall be entitled to the rights of indemnification provided in this Section 1
for any expenses actually incurred in any Proceeding initiated by or in the
right of the Corporation, unless indemnification is barred by Florida Statutes
Section 607.0850(7), or any other applicable law.
(c) In providing the foregoing indemnification, the Corporation shall,
with respect to any proceeding, hold harmless and indemnify the Indemnitee to
the fullest extent not prohibited by the law of the State of Florida, as in
effect from time and time, and the Articles of Incorporation. For purposes of
this Agreement, it is intended that the indemnification afforded hereby be
mandatory and the broadest possible under any then existing statutory provision
expressly authorizing the Corporation to indemnify directors or officers whether
in effect on the date of this Agreement or hereafter, provided, however, that
the indemnification provisions of this Agreement shall apply without regard to
whether any provision set forth in the Articles or Bylaws of the Corporation
authorizing or permitting indemnification shall be in force or effect.
2. OTHER INDEMNIFICATION AGREEMENTS. The Corporation may purchase and
maintain insurance or furnish similar protection or make other arrangements,
including, but not limited to, providing a trust fund, letter of credit, or
surety bond ("Indemnification Arrangements") on behalf of the Indemnitee against
any liability asserted against him or her or incurred by or on behalf of him or
her in such capacity as a director or officer of the Corporation or an
Affiliated Indemnitee, or arising out of his or her status as such, whether or
not the Corporation would have the power to indemnify him or her against such
liability under the provisions of this Agreement. The purchase, establishment,
and maintenance of any such Indemnification Arrangement shall not in any way
limit or affect the rights and obligations of the Corporation or of the
Indemnitee under this Agreement except as expressly provided herein, and the
execution and delivery of this Agreement by the Corporation and the Indemnitee
shall not in any way limit or affect the rights and obligations of the
Corporation or the other party or parties thereto under any such Indemnification
Arrangement. All amounts payable by the Corporation pursuant to this Section 2
and Section 1 hereof are herein referred to as "Indemnified Amounts." To the
extent the Corporation is able to maintain its existing directors and officers
liability insurance at a reasonable premium (as determined by the Corporation in
its sole discretion), the Corporation shall use reasonable efforts to cause the
Indemnitee to be covered by such insurance.
3. ADVANCE PAYMENT OF INDEMNIFIED AMOUNTS.
(a) The Indemnitee hereby is granted the right to receive in advance
of a final, nonappealable judgment or other final adjudication of a Proceeding
(a "Final Determination") the amount of any and all expenses, including, without
limitation, investigation expenses, court costs, expert witnesses' and
attorneys' fees and other expenses expended or incurred by the Indemnitee in
connection with any Proceeding or otherwise expensed or incurred by the
Indemnitee (such amounts so expended or incurred being hereinafter referred to
as "Advanced Amounts").
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(b) In making any written request for Advanced Amounts, the Indemnitee
shall submit to the Corporation a schedule setting forth in reasonable detail
the dollar amount expended or incurred and expected to be expended. Each such
listing shall be supported by the bill, agreement, or other documentation
relating thereto, each of which shall be appended to the schedule as an exhibit.
In addition, before the Indemnitee may receive Advanced Amounts from the
Corporation, the Indemnitee shall provide to the Corporation (i) a written
affirmation of the Indemnitee's good faith belief that the applicable standard
of conduct required for indemnification by the Corporation has been satisfied by
the Indemnitee, and (ii) a written undertaking by or on behalf of the Indemnitee
to repay the Advanced Amount if it shall ultimately be determined that the
Indemnitee has not satisfied any applicable standard of conduct. The written
undertaking required from the Indemnitee shall be an unlimited general
obligation of the Indemnitee, but need not be secured. The Corporation shall pay
to the Indemnitee all Advanced Amounts within twenty (20) days after receipt by
the Corporation of all information and documentation required to be provided by
the Indemnitee pursuant to this paragraph.
4. PROCEDURE FOR PAYMENT OF INDEMNIFIED AMOUNTS.
(a) To obtain indemnification under this Agreement, the Indemnitee
shall submit to the Corporation a written request for payment of the appropriate
Indemnified Amounts, including with such requests such documentation and
information as is reasonably available to the Indemnitee and reasonably
necessary to determine whether and to what extent the Indemnitee is entitled to
indemnification. The Secretary of the Corporation shall, promptly upon receipt
of such a request for indemnification, advise the Board of Directors in writing
that the Indemnitee has requested indemnification.
(b) The Corporation shall pay the Indemnitee the appropriate
Indemnified Amounts unless it is established that the Indemnitee engaged in one
of the Prohibited Acts, and such Prohibited Act was the subject matter of the
Proceeding. For purposes of determining whether the Indemnitee is entitled to
Indemnified Amounts, in order to deny indemnification to the Indemnitee, the
Corporation has the burden of proof in establishing (1) that the Indemnitee
engaged in the Prohibited Act, and (2) that the Prohibited Act was the subject
matter of the Proceeding. In this regard, a termination of any Proceeding by
judgment, order or settlement does not create a presumption that the Indemnitee
did not meet the requisite standard of conduct; provided, however, that the
termination of any criminal proceeding by conviction, or a pleading of nolo
contendere or its equivalent, or an entry of an order of probation prior to
judgment, creates a rebuttable presumption that the Indemnitee engaged in a
Prohibited Act. For purposes of this Agreement, a "Prohibited Act" shall mean
any act, omission or condition (i) described in Florida Statutes Section
607.0850(7) for which the Corporation may not indemnify the Indemnitee or (ii)
any act, omission or condition for which indemnity is not available under any
federal or state law or public policy.
(c) Any determination that the Indemnitee has engaged in a Prohibited
Act shall be made (i) either by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to such Proceeding; or (ii)
by independent legal counsel (who may be the outside counsel regularly employed
by the Corporation); provided that the manner in which (and, if applicable, the
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counsel by which) the right of indemnification is to be determined shall be
approved in advance in writing by both the highest ranking executive officer of
the Corporation who is not a party to such action (sometimes hereinafter
referred to as "Senior Officer") and by the Indemnitee. In the event that such
parties are unable to agree on the manner in which any such determination is to
be made, such determination shall be made by independent legal counsel retained
by the Corporation especially for such purpose, provided that such counsel be
approved in advance in writing by both the Senior Officer and the Indemnitee
and, provided further, that such counsel shall not be outside counsel regularly
employed by the Corporation. The fees and expenses of counsel in connection with
making the determination contemplated hereunder shall be paid by the
Corporation, and, if requested by such counsel, the Corporation shall give such
counsel an appropriate written agreement with respect to the payment of their
fees and expenses and such other matters as may be reasonably requested by
counsel.
(d) The Corporation will use its best efforts to conclude as soon as
practicable any required determination pursuant to subparagraph (c) above and
promptly will advise the Indemnitee in writing with respect to any determination
that the Indemnitee is or is not entitled to indemnification, including a
description of any reason or basis for which indemnification has been denied.
Payment of any applicable Indemnified Amounts will be made to the Indemnitee
within ten (10) days after any determination of the Indemnitee's entitlement to
indemnification.
(e) Notwithstanding the foregoing, the Indemnitee may, at any time
after sixty (60) days after a claim for Indemnified Amounts has been filed with
the Corporation (or upon receipt of written notice that a claim for Indemnified
Amounts has been rejected, if earlier) and before three (3) years after a claim
for Indemnified Amounts has been filed, petition a court of competent
jurisdiction to determine whether the Indemnitee is entitled to indemnification
under the provisions of this Agreement, and such court shall thereupon have the
exclusive authority to make such determination unless and until such court
dismisses or otherwise terminates such action without having made such
determination. The court shall, as petitioned, make an independent determination
of whether the Indemnitee is entitled to indemnification as provided under this
Agreement, irrespective of any prior determination made by the Board of
Directors or independent counsel. If the court shall determine that the
Indemnitee is entitled to indemnification as to any claim, issue or matter
involved in the Proceeding with respect to which there has been no prior
determination pursuant to this Agreement or with respect to which there has been
a prior determination that the Indemnitee was not entitled to indemnification
hereunder, the Corporation shall pay all expenses (including attorneys' fees and
court costs) actually incurred by the Indemnitee in connection with such
judicial determination.
5. AGREEMENT NOT EXCLUSIVE; SUBROGATION RIGHTS, ETC.
(a) This Agreement shall not be deemed exclusive of and shall not
diminish any other rights the Indemnitee may have to be indemnified or insured
or otherwise protected against any liability, loss, or expense by the
Corporation, any subsidiary of the Corporation, or any other person or entity
under any charter, bylaws, law, agreement, policy of insurance or similar
protection, vote of stockholders or directors, disinterested or not, or
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otherwise, whether or not now in effect, both as to actions in the Indemnitee's
official capacity, and as to actions in another capacity while holding such
office. The Corporation's obligations to make payments of Indemnified Amounts
hereunder shall be satisfied to the extent that payments with respect to the
same Proceeding (or part thereof) have been made to or for the benefit of the
Indemnitee by reason of the indemnification of the Indemnitee pursuant to any
other arrangement made by the Corporation for the benefit of the Indemnitee.
(b) In the event the Indemnitee shall receive payment from any
insurance carrier or from the plaintiff in any Proceeding against such
Indemnitee in respect of Indemnified Amounts after payments on account of all or
part of such Indemnified Amounts have been made by the Corporation pursuant
hereto, such Indemnitee shall promptly reimburse to the Corporation the amount,
if any, by which the sum of such payment by such insurance carrier or such
plaintiff and payments by the Corporation or pursuant to arrangements made by
the Corporation to Indemnitee exceeds such Indemnified Amounts; provided,
however, that such portions, if any, of such insurance proceeds that are
required to be reimbursed to the insurance carrier under the terms of its
insurance policy, such as deductible or co-insurance payments, shall not be
deemed to be payments to the Indemnitee hereunder. In addition, upon payment of
Indemnified Amounts hereunder, the Corporation shall be subrogated to the rights
of Indemnitee receiving such payments (to the extent thereof) against any
insurance carrier (to the extent permitted under such insurance policies) or
plaintiff in respect to such Indemnified Amounts and the Indemnitee shall
execute and deliver any and all instruments and documents and perform any and
all other acts or deeds which the Corporation deems necessary or advisable to
secure such rights. Such right of subrogation shall be terminated upon receipt
by the Corporation of the amount to be reimbursed by the Indemnitee pursuant to
the first sentence of this paragraph.
6. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Corporation contained herein shall continue during the period Indemnitee is a
director of the Corporation (or is serving at the request of the Corporation as
an Affiliate Indemnitee) and shall continue thereafter so long as Indemnitee
shall be subject to any possible Proceeding by reason of the fact that
Indemnitee was a director, officer or employee of the Corporation or was serving
in any other capacity referred to herein.
7. SUCCESSORS; BINDING AGREEMENT. This Agreement shall be binding on and
shall inure to the benefit of and be enforceable by the Corporation's successors
and assigns and by the Indemnitee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees, and
legatees. The Corporation shall require any successor or assignee
(whether direct or indirect, by purchase, merger, consolidation, or otherwise)
to all or substantially all of the business and/or assets of the Corporation, by
written agreement in form and substance reasonably satisfactory to the
Corporation and to the Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Corporation would
be required to perform if no such succession or assignment had taken place.
8. ENFORCEMENT. The Corporation has entered into this Agreement and
assumed the obligations imposed on the Corporation hereby in order to induce the
Indemnitee to act as a director of the Corporation, and acknowledges that the
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Indemnitee is relying upon this Agreement in continuing in such capacity. In the
event the Indemnitee is required to bring any action to enforce rights or to
collect monies due under this Agreement and is successful in such action, the
Corporation shall reimburse Indemnitee for all of the Indemnitee's fees and
expenses in bringing and pursuing such action. The Indemnitee shall be entitled
to the advancement of Indemnified Amounts to the full extent contemplated by
Section 3 hereof in connection with such Proceeding.
9. SEPARABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement independent of the others, so that if any provision
hereof shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall not affect the validity or enforceability
of the other provisions hereof, which other provisions shall remain in full
force and effect.
10. MISCELLANEOUS. No provision of this Agreement may be modified, waived,
or discharged unless such modification, waiver, or discharge is agreed to in
writing signed by Indemnitee and either the Chairman of the Board or the
President of the Corporation or another officer of the Corporation specifically
designated by the Board of Directors. No waiver by either party at any time of
any breach by the other party of, or of compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same time or
at any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.
The validity, interpretation, construction, and performance of this Agreement
shall be governed by the laws of the State of Florida, without giving effect to
the principles of conflicts of laws thereof. The Indemnitee may bring an action
seeking resolution of disputes or controversies arising under or in any way
related to this Agreement in the state or federal court jurisdiction in which
Indemnitee resides or in which his or her place of business is located, and in
any related appellate courts, and the Corporation consents to the jurisdiction
of such courts and to such venue.
11. NOTICES. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to Indemnitee: Kevin A. Blackwell
7730 East Greenway Road, Suite 203
Scottsdale, Arizona 85260
If to Corporation: Sports Group International, Inc.
7730 East Greenway Road, Suite 203
Scottsdale, Arizona 85260
Attention: Secretary
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or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
12. COUNTERPART. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
13. EFFECTIVENESS. This Agreement shall be effective as of March 15, 1999.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the day and year first above written.
SPORTS GROUP INTERNATIONAL, INC.
By: /s/ David Guarino
------------------------------------
David Guarino
Its Vice President, Chief Financial
Officer
INDEMNITEE:
/s/ Kevin A. Blackwell
----------------------------------------
Kevin A. Blackwell
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INDEMNITY AGREEMENT
This INDEMNITY AGREEMENT dated as of October 12, 1999, is made by and
between Sports Group International, Inc., a Florida corporation (the
"Corporation"), and David Guarino (the "Indemnitee").
RECITALS
The Articles of Incorporation and By-Laws of the Corporation provide for
indemnification by the Corporation of its directors to the fullest extent
permitted by law. The Indemnitee has been serving and desires to continue to
serve as a director of the Corporation in part in reliance on such indemnity
provision.
To provide the Indemnitee with additional contractual assurance of
protection against personal liability in connection with certain proceedings
described below, the Corporation desires to enter into this Agreement.
In order to induce the Indemnitee to serve or continue to serve as a
director of the Corporation, and in consideration of the Indemnitee's so
serving, the Corporation desires to indemnify the Indemnitee and to make
arrangements pursuant to which the Indemnitee may be advanced or reimbursed
expenses incurred by Indemnitee in certain proceedings described below,
according to the terms and conditions set forth below.
AGREEMENT
THEREFORE, in consideration of the foregoing recitals and of Indemnitee's
serving or continuing to serve the Corporation as a director, the parties agree
as follows:
1. INDEMNIFICATION.
(a) In accordance with the provisions of subsection (b) of this
Section 1, the Corporation shall hold harmless and indemnify the Indemnitee
against any and all expenses, liabilities and losses (including, without
limitation, investigation expenses and expert witnesses' and attorneys' fees and
expenses, costs of court, judgments, penalties, fines, and amounts paid or to be
paid in settlement) actually incurred by the Indemnitee (net of any related
insurance proceeds or other amounts received by Indemnitee or paid by or on
behalf of the Corporation on the Indemnitee's behalf), in connection with any
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, to which the Indemnitee is a party or is threatened to be made a
party (a "Proceeding") based upon, arising from, relating to, or by reason of
the fact that Indemnitee is, was, shall be, or shall have been a director and/or
officer of the Corporation or is or was serving, shall serve, or shall have
served at the request of the Corporation as a director, officer, partner,
trustee, member, employee, or agent ("Affiliate Indemnitee") of another foreign
<PAGE>
or domestic corporation or non-profit corporation, cooperative, partnership,
joint venture, limited liability company, trust or other incorporated or
unincorporated enterprise (each, a "Company Affiliate").
(b) Without limiting the generality of the foregoing, the Indemnitee
shall be entitled to the rights of indemnification provided in this Section 1
for any expenses actually incurred in any Proceeding initiated by or in the
right of the Corporation, unless indemnification is barred by Florida Statutes
Section 607.0850(7), or any other applicable law.
(c) In providing the foregoing indemnification, the Corporation shall,
with respect to any proceeding, hold harmless and indemnify the Indemnitee to
the fullest extent not prohibited by the law of the State of Florida, as in
effect from time and time, and the Articles of Incorporation. For purposes of
this Agreement, it is intended that the indemnification afforded hereby be
mandatory and the broadest possible under any then existing statutory provision
expressly authorizing the Corporation to indemnify directors or officers whether
in effect on the date of this Agreement or hereafter, provided, however, that
the indemnification provisions of this Agreement shall apply without regard to
whether any provision set forth in the Articles or Bylaws of the Corporation
authorizing or permitting indemnification shall be in force or effect.
2. OTHER INDEMNIFICATION AGREEMENTS. The Corporation may purchase and
maintain insurance or furnish similar protection or make other arrangements,
including, but not limited to, providing a trust fund, letter of credit, or
surety bond ("Indemnification Arrangements") on behalf of the Indemnitee against
any liability asserted against him or her or incurred by or on behalf of him or
her in such capacity as a director or officer of the Corporation or an
Affiliated Indemnitee, or arising out of his or her status as such, whether or
not the Corporation would have the power to indemnify him or her against such
liability under the provisions of this Agreement. The purchase, establishment,
and maintenance of any such Indemnification Arrangement shall not in any way
limit or affect the rights and obligations of the Corporation or of the
Indemnitee under this Agreement except as expressly provided herein, and the
execution and delivery of this Agreement by the Corporation and the Indemnitee
shall not in any way limit or affect the rights and obligations of the
Corporation or the other party or parties thereto under any such Indemnification
Arrangement. All amounts payable by the Corporation pursuant to this Section 2
and Section 1 hereof are herein referred to as "Indemnified Amounts." To the
extent the Corporation is able to maintain its existing directors and officers
liability insurance at a reasonable premium (as determined by the Corporation in
its sole discretion), the Corporation shall use reasonable efforts to cause the
Indemnitee to be covered by such insurance.
3. ADVANCE PAYMENT OF INDEMNIFIED AMOUNTS.
(a) The Indemnitee hereby is granted the right to receive in advance
of a final, nonappealable judgment or other final adjudication of a Proceeding
(a "Final Determination") the amount of any and all expenses, including, without
limitation, investigation expenses, court costs, expert witnesses' and
attorneys' fees and other expenses expended or incurred by the Indemnitee in
connection with any Proceeding or otherwise expensed or incurred by the
Indemnitee (such amounts so expended or incurred being hereinafter referred to
as "Advanced Amounts").
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(b) In making any written request for Advanced Amounts, the Indemnitee
shall submit to the Corporation a schedule setting forth in reasonable detail
the dollar amount expended or incurred and expected to be expended. Each such
listing shall be supported by the bill, agreement, or other documentation
relating thereto, each of which shall be appended to the schedule as an exhibit.
In addition, before the Indemnitee may receive Advanced Amounts from the
Corporation, the Indemnitee shall provide to the Corporation (i) a written
affirmation of the Indemnitee's good faith belief that the applicable standard
of conduct required for indemnification by the Corporation has been satisfied by
the Indemnitee, and (ii) a written undertaking by or on behalf of the Indemnitee
to repay the Advanced Amount if it shall ultimately be determined that the
Indemnitee has not satisfied any applicable standard of conduct. The written
undertaking required from the Indemnitee shall be an unlimited general
obligation of the Indemnitee, but need not be secured. The Corporation shall pay
to the Indemnitee all Advanced Amounts within twenty (20) days after receipt by
the Corporation of all information and documentation required to be provided by
the Indemnitee pursuant to this paragraph.
4. PROCEDURE FOR PAYMENT OF INDEMNIFIED AMOUNTS.
(a) To obtain indemnification under this Agreement, the Indemnitee
shall submit to the Corporation a written request for payment of the appropriate
Indemnified Amounts, including with such requests such documentation and
information as is reasonably available to the Indemnitee and reasonably
necessary to determine whether and to what extent the Indemnitee is entitled to
indemnification. The Secretary of the Corporation shall, promptly upon receipt
of such a request for indemnification, advise the Board of Directors in writing
that the Indemnitee has requested indemnification.
(b) The Corporation shall pay the Indemnitee the appropriate
Indemnified Amounts unless it is established that the Indemnitee engaged in one
of the Prohibited Acts, and such Prohibited Act was the subject matter of the
Proceeding. For purposes of determining whether the Indemnitee is entitled to
Indemnified Amounts, in order to deny indemnification to the Indemnitee, the
Corporation has the burden of proof in establishing (1) that the Indemnitee
engaged in the Prohibited Act, and (2) that the Prohibited Act was the subject
matter of the Proceeding. In this regard, a termination of any Proceeding by
judgment, order or settlement does not create a presumption that the Indemnitee
did not meet the requisite standard of conduct; provided, however, that the
termination of any criminal proceeding by conviction, or a pleading of nolo
contendere or its equivalent, or an entry of an order of probation prior to
judgment, creates a rebuttable presumption that the Indemnitee engaged in a
Prohibited Act. For purposes of this Agreement, a "Prohibited Act" shall mean
any act, omission or condition (i) described in Florida Statutes Section
607.0850(7) for which the Corporation may not indemnify the Indemnitee or (ii)
any act, omission or condition for which indemnity is not available under any
federal or state law or public policy.
(c) Any determination that the Indemnitee has engaged in a Prohibited
Act shall be made (i) either by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to such Proceeding; or (ii)
by independent legal counsel (who may be the outside counsel regularly employed
by the Corporation); provided that the manner in which (and, if applicable, the
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counsel by which) the right of indemnification is to be determined shall be
approved in advance in writing by both the highest ranking executive officer of
the Corporation who is not a party to such action (sometimes hereinafter
referred to as "Senior Officer") and by the Indemnitee. In the event that such
parties are unable to agree on the manner in which any such determination is to
be made, such determination shall be made by independent legal counsel retained
by the Corporation especially for such purpose, provided that such counsel be
approved in advance in writing by both the Senior Officer and the Indemnitee
and, provided further, that such counsel shall not be outside counsel regularly
employed by the Corporation. The fees and expenses of counsel in connection with
making the determination contemplated hereunder shall be paid by the
Corporation, and, if requested by such counsel, the Corporation shall give such
counsel an appropriate written agreement with respect to the payment of their
fees and expenses and such other matters as may be reasonably requested by
counsel.
(d) The Corporation will use its best efforts to conclude as soon as
practicable any required determination pursuant to subparagraph (c) above and
promptly will advise the Indemnitee in writing with respect to any determination
that the Indemnitee is or is not entitled to indemnification, including a
description of any reason or basis for which indemnification has been denied.
Payment of any applicable Indemnified Amounts will be made to the Indemnitee
within ten (10) days after any determination of the Indemnitee's entitlement to
indemnification.
(e) Notwithstanding the foregoing, the Indemnitee may, at any time
after sixty (60) days after a claim for Indemnified Amounts has been filed with
the Corporation (or upon receipt of written notice that a claim for Indemnified
Amounts has been rejected, if earlier) and before three (3) years after a claim
for Indemnified Amounts has been filed, petition a court of competent
jurisdiction to determine whether the Indemnitee is entitled to indemnification
under the provisions of this Agreement, and such court shall thereupon have the
exclusive authority to make such determination unless and until such court
dismisses or otherwise terminates such action without having made such
determination. The court shall, as petitioned, make an independent determination
of whether the Indemnitee is entitled to indemnification as provided under this
Agreement, irrespective of any prior determination made by the Board of
Directors or independent counsel. If the court shall determine that the
Indemnitee is entitled to indemnification as to any claim, issue or matter
involved in the Proceeding with respect to which there has been no prior
determination pursuant to this Agreement or with respect to which there has been
a prior determination that the Indemnitee was not entitled to indemnification
hereunder, the Corporation shall pay all expenses (including attorneys' fees and
court costs) actually incurred by the Indemnitee in connection with such
judicial determination.
5. AGREEMENT NOT EXCLUSIVE; SUBROGATION RIGHTS, ETC.
(a) This Agreement shall not be deemed exclusive of and shall not
diminish any other rights the Indemnitee may have to be indemnified or insured
or otherwise protected against any liability, loss, or expense by the
Corporation, any subsidiary of the Corporation, or any other person or entity
under any charter, bylaws, law, agreement, policy of insurance or similar
protection, vote of stockholders or directors, disinterested or not, or
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otherwise, whether or not now in effect, both as to actions in the Indemnitee's
official capacity, and as to actions in another capacity while holding such
office. The Corporation's obligations to make payments of Indemnified Amounts
hereunder shall be satisfied to the extent that payments with respect to the
same Proceeding (or part thereof) have been made to or for the benefit of the
Indemnitee by reason of the indemnification of the Indemnitee pursuant to any
other arrangement made by the Corporation for the benefit of the Indemnitee.
(b) In the event the Indemnitee shall receive payment from any
insurance carrier or from the plaintiff in any Proceeding against such
Indemnitee in respect of Indemnified Amounts after payments on account of all or
part of such Indemnified Amounts have been made by the Corporation pursuant
hereto, such Indemnitee shall promptly reimburse to the Corporation the amount,
if any, by which the sum of such payment by such insurance carrier or such
plaintiff and payments by the Corporation or pursuant to arrangements made by
the Corporation to Indemnitee exceeds such Indemnified Amounts; provided,
however, that such portions, if any, of such insurance proceeds that are
required to be reimbursed to the insurance carrier under the terms of its
insurance policy, such as deductible or co-insurance payments, shall not be
deemed to be payments to the Indemnitee hereunder. In addition, upon payment of
Indemnified Amounts hereunder, the Corporation shall be subrogated to the rights
of Indemnitee receiving such payments (to the extent thereof) against any
insurance carrier (to the extent permitted under such insurance policies) or
plaintiff in respect to such Indemnified Amounts and the Indemnitee shall
execute and deliver any and all instruments and documents and perform any and
all other acts or deeds which the Corporation deems necessary or advisable to
secure such rights. Such right of subrogation shall be terminated upon receipt
by the Corporation of the amount to be reimbursed by the Indemnitee pursuant to
the first sentence of this paragraph.
6. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Corporation contained herein shall continue during the period Indemnitee is a
director of the Corporation (or is serving at the request of the Corporation as
an Affiliate Indemnitee) and shall continue thereafter so long as Indemnitee
shall be subject to any possible Proceeding by reason of the fact that
Indemnitee was a director, officer or employee of the Corporation or was serving
in any other capacity referred to herein.
7. SUCCESSORS; BINDING AGREEMENT. This Agreement shall be binding on and
shall inure to the benefit of and be enforceable by the Corporation's successors
and assigns and by the Indemnitee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees, and
legatees. The Corporation shall require any successor or assignee (whether
direct or indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Corporation, by written
agreement in form and substance reasonably satisfactory to the Corporation and
to the Indemnitee, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent that the Corporation would be required to
perform if no such succession or assignment had taken place.
8. ENFORCEMENT. The Corporation has entered into this Agreement and
assumed the obligations imposed on the Corporation hereby in order to induce the
Indemnitee to act as a director of the Corporation, and acknowledges that the
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Indemnitee is relying upon this Agreement in continuing in such capacity. In the
event the Indemnitee is required to bring any action to enforce rights or to
collect monies due under this Agreement and is successful in such action, the
Corporation shall reimburse Indemnitee for all of the Indemnitee's fees and
expenses in bringing and pursuing such action. The Indemnitee shall be entitled
to the advancement of Indemnified Amounts to the full extent contemplated by
Section 3 hereof in connection with such Proceeding.
9. SEPARABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement independent of the others, so that if any provision
hereof shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall not affect the validity or enforceability
of the other provisions hereof, which other provisions shall remain in full
force and effect.
10. MISCELLANEOUS. No provision of this Agreement may be modified, waived,
or discharged unless such modification, waiver, or discharge is agreed to in
writing signed by Indemnitee and either the Chairman of the Board or the
President of the Corporation or another officer of the Corporation specifically
designated by the Board of Directors. No waiver by either party at any time of
any breach by the other party of, or of compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same time or
at any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.
The validity, interpretation, construction, and performance of this Agreement
shall be governed by the laws of the State of Florida, without giving effect to
the principles of conflicts of laws thereof. The Indemnitee may bring an action
seeking resolution of disputes or controversies arising under or in any way
related to this Agreement in the state or federal court jurisdiction in which
Indemnitee resides or in which his or her place of business is located, and in
any related appellate courts, and the Corporation consents to the jurisdiction
of such courts and to such venue.
11. NOTICES. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
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<PAGE>
If to Indemnitee: David Guarino
7730 East Greenway Road, Suite 203
Scottsdale, Arizona 85260
If to Corporation: Sports Group International, Inc.
7730 East Greenway Road, Suite 203
Scottsdale, Arizona 85260
Attention: Secretary
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
12. COUNTERPART. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
13. EFFECTIVENESS. This Agreement shall be effective as of October 12,
1999.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the day and year first above written.
SPORTS GROUP INTERNATIONAL, INC.
By: /s/ Kevin A. Blackwell
------------------------------------
Kevin A. Blackwell
Its Chief Executive Officer
INDEMNITEE:
/s/ David Guarino
----------------------------------------
David Guarino
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INDEMNITY AGREEMENT
This INDEMNITY AGREEMENT dated as of October 12, 1999, is made by and
between Sports Group International, Inc., a Florida corporation (the
"Corporation"), and Robert Corliss (the "Indemnitee").
RECITALS
The Articles of Incorporation and By-Laws of the Corporation provide for
indemnification by the Corporation of its directors to the fullest extent
permitted by law. The Indemnitee has been serving and desires to continue to
serve as a director of the Corporation in part in reliance on such indemnity
provision.
To provide the Indemnitee with additional contractual assurance of
protection against personal liability in connection with certain proceedings
described below, the Corporation desires to enter into this Agreement.
In order to induce the Indemnitee to serve or continue to serve as a
director of the Corporation, and in consideration of the Indemnitee's so
serving, the Corporation desires to indemnify the Indemnitee and to make
arrangements pursuant to which the Indemnitee may be advanced or reimbursed
expenses incurred by Indemnitee in certain proceedings described below,
according to the terms and conditions set forth below.
AGREEMENT
THEREFORE, in consideration of the foregoing recitals and of Indemnitee's
serving or continuing to serve the Corporation as a director, the parties agree
as follows:
1. INDEMNIFICATION.
(a) In accordance with the provisions of subsection (b) of this
Section 1, the Corporation shall hold harmless and indemnify the Indemnitee
against any and all expenses, liabilities and losses (including, without
limitation, investigation expenses and expert witnesses' and attorneys' fees and
expenses, costs of court, judgments, penalties, fines, and amounts paid or to be
paid in settlement) actually incurred by the Indemnitee (net of any related
insurance proceeds or other amounts received by Indemnitee or paid by or on
behalf of the Corporation on the Indemnitee's behalf), in connection with any
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, to which the Indemnitee is a party or is threatened to be made a
party (a "Proceeding") based upon, arising from, relating to, or by reason of
the fact that Indemnitee is, was, shall be, or shall have been a director and/or
officer of the Corporation or is or was serving, shall serve, or shall have
served at the request of the Corporation as a director, officer, partner,
trustee, member, employee, or agent ("Affiliate Indemnitee") of another foreign
<PAGE>
or domestic corporation or non-profit corporation, cooperative, partnership,
joint venture, limited liability company, trust or other incorporated or
unincorporated enterprise (each, a "Company Affiliate").
(b) Without limiting the generality of the foregoing, the Indemnitee
shall be entitled to the rights of indemnification provided in this Section 1
for any expenses actually incurred in any Proceeding initiated by or in the
right of the Corporation, unless indemnification is barred by Florida Statutes
Section 607.0850(7), or any other applicable law.
(c) In providing the foregoing indemnification, the Corporation shall,
with respect to any proceeding, hold harmless and indemnify the Indemnitee to
the fullest extent not prohibited by the law of the State of Florida, as in
effect from time and time, and the Articles of Incorporation. For purposes of
this Agreement, it is intended that the indemnification afforded hereby be
mandatory and the broadest possible under any then existing statutory provision
expressly authorizing the Corporation to indemnify directors or officers whether
in effect on the date of this Agreement or hereafter, provided, however, that
the indemnification provisions of this Agreement shall apply without regard to
whether any provision set forth in the Articles or Bylaws of the Corporation
authorizing or permitting indemnification shall be in force or effect.
2. OTHER INDEMNIFICATION AGREEMENTS. The Corporation may purchase and
maintain insurance or furnish similar protection or make other arrangements,
including, but not limited to, providing a trust fund, letter of credit, or
surety bond ("Indemnification Arrangements") on behalf of the Indemnitee against
any liability asserted against him or her or incurred by or on behalf of him or
her in such capacity as a director or officer of the Corporation or an
Affiliated Indemnitee, or arising out of his or her status as such, whether or
not the Corporation would have the power to indemnify him or her against such
liability under the provisions of this Agreement. The purchase, establishment,
and maintenance of any such Indemnification Arrangement shall not in any way
limit or affect the rights and obligations of the Corporation or of the
Indemnitee under this Agreement except as expressly provided herein, and the
execution and delivery of this Agreement by the Corporation and the Indemnitee
shall not in any way limit or affect the rights and obligations of the
Corporation or the other party or parties thereto under any such Indemnification
Arrangement. All amounts payable by the Corporation pursuant to this Section 2
and Section 1 hereof are herein referred to as "Indemnified Amounts." To the
extent the Corporation is able to maintain its existing directors and officers
liability insurance at a reasonable premium (as determined by the Corporation in
its sole discretion), the Corporation shall use reasonable efforts to cause the
Indemnitee to be covered by such insurance.
3. ADVANCE PAYMENT OF INDEMNIFIED AMOUNTS.
(a) The Indemnitee hereby is granted the right to receive in advance
of a final, nonappealable judgment or other final adjudication of a Proceeding
(a "Final Determination") the amount of any and all expenses, including, without
limitation, investigation expenses, court costs, expert witnesses' and
attorneys' fees and other expenses expended or incurred by the Indemnitee in
connection with any Proceeding or otherwise expensed or incurred by the
Indemnitee (such amounts so expended or incurred being hereinafter referred to
as "Advanced Amounts").
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<PAGE>
(b) In making any written request for Advanced Amounts, the Indemnitee
shall submit to the Corporation a schedule setting forth in reasonable detail
the dollar amount expended or incurred and expected to be expended. Each such
listing shall be supported by the bill, agreement, or other documentation
relating thereto, each of which shall be appended to the schedule as an exhibit.
In addition, before the Indemnitee may receive Advanced Amounts from the
Corporation, the Indemnitee shall provide to the Corporation (i) a written
affirmation of the Indemnitee's good faith belief that the applicable standard
of conduct required for indemnification by the Corporation has been satisfied by
the Indemnitee, and (ii) a written undertaking by or on behalf of the Indemnitee
to repay the Advanced Amount if it shall ultimately be determined that the
Indemnitee has not satisfied any applicable standard of conduct. The written
undertaking required from the Indemnitee shall be an unlimited general
obligation of the Indemnitee, but need not be secured. The Corporation shall pay
to the Indemnitee all Advanced Amounts within twenty (20) days after receipt by
the Corporation of all information and documentation required to be provided by
the Indemnitee pursuant to this paragraph.
4. PROCEDURE FOR PAYMENT OF INDEMNIFIED AMOUNTS.
(a) To obtain indemnification under this Agreement, the Indemnitee
shall submit to the Corporation a written request for payment of the appropriate
Indemnified Amounts, including with such requests such documentation and
information as is reasonably available to the Indemnitee and reasonably
necessary to determine whether and to what extent the Indemnitee is entitled to
indemnification. The Secretary of the Corporation shall, promptly upon receipt
of such a request for indemnification, advise the Board of Directors in writing
that the Indemnitee has requested indemnification.
(b) The Corporation shall pay the Indemnitee the appropriate
Indemnified Amounts unless it is established that the Indemnitee engaged in one
of the Prohibited Acts, and such Prohibited Act was the subject matter of the
Proceeding. For purposes of determining whether the Indemnitee is entitled to
Indemnified Amounts, in order to deny indemnification to the Indemnitee, the
Corporation has the burden of proof in establishing (1) that the Indemnitee
engaged in the Prohibited Act, and (2) that the Prohibited Act was the subject
matter of the Proceeding. In this regard, a termination of any Proceeding by
judgment, order or settlement does not create a presumption that the Indemnitee
did not meet the requisite standard of conduct; provided, however, that the
termination of any criminal proceeding by conviction, or a pleading of nolo
contendere or its equivalent, or an entry of an order of probation prior to
judgment, creates a rebuttable presumption that the Indemnitee engaged in a
Prohibited Act. For purposes of this Agreement, a "Prohibited Act" shall mean
any act, omission or condition (i) described in Florida Statutes Section
607.0850(7) for which the Corporation may not indemnify the Indemnitee or (ii)
any act, omission or condition for which indemnity is not available under any
federal or state law or public policy.
(c) Any determination that the Indemnitee has engaged in a Prohibited
Act shall be made (i) either by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to such Proceeding; or (ii)
by independent legal counsel (who may be the outside counsel regularly employed
by the Corporation); provided that the manner in which (and, if applicable, the
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<PAGE>
counsel by which) the right of indemnification is to be determined shall be
approved in advance in writing by both the highest ranking executive officer of
the Corporation who is not a party to such action (sometimes hereinafter
referred to as "Senior Officer") and by the Indemnitee. In the event that such
parties are unable to agree on the manner in which any such determination is to
be made, such determination shall be made by independent legal counsel retained
by the Corporation especially for such purpose, provided that such counsel be
approved in advance in writing by both the Senior Officer and the Indemnitee
and, provided further, that such counsel shall not be outside counsel regularly
employed by the Corporation. The fees and expenses of counsel in connection with
making the determination contemplated hereunder shall be paid by the
Corporation, and, if requested by such counsel, the Corporation shall give such
counsel an appropriate written agreement with respect to the payment of their
fees and expenses and such other matters as may be reasonably requested by
counsel.
(d) The Corporation will use its best efforts to conclude as soon as
practicable any required determination pursuant to subparagraph (c) above and
promptly will advise the Indemnitee in writing with respect to any determination
that the Indemnitee is or is not entitled to indemnification, including a
description of any reason or basis for which indemnification has been denied.
Payment of any applicable Indemnified Amounts will be made to the Indemnitee
within ten (10) days after any determination of the Indemnitee's entitlement to
indemnification.
(e) Notwithstanding the foregoing, the Indemnitee may, at any time
after sixty (60) days after a claim for Indemnified Amounts has been filed with
the Corporation (or upon receipt of written notice that a claim for Indemnified
Amounts has been rejected, if earlier) and before three (3) years after a claim
for Indemnified Amounts has been filed, petition a court of competent
jurisdiction to determine whether the Indemnitee is entitled to indemnification
under the provisions of this Agreement, and such court shall thereupon have the
exclusive authority to make such determination unless and until such court
dismisses or otherwise terminates such action without having made such
determination. The court shall, as petitioned, make an independent determination
of whether the Indemnitee is entitled to indemnification as provided under this
Agreement, irrespective of any prior determination made by the Board of
Directors or independent counsel. If the court shall determine that the
Indemnitee is entitled to indemnification as to any claim, issue or matter
involved in the Proceeding with respect to which there has been no prior
determination pursuant to this Agreement or with respect to which there has been
a prior determination that the Indemnitee was not entitled to indemnification
hereunder, the Corporation shall pay all expenses (including attorneys' fees and
court costs) actually incurred by the Indemnitee in connection with such
judicial determination.
5. AGREEMENT NOT EXCLUSIVE; SUBROGATION RIGHTS, ETC.
(a) This Agreement shall not be deemed exclusive of and shall not
diminish any other rights the Indemnitee may have to be indemnified or insured
or otherwise protected against any liability, loss, or expense by the
Corporation, any subsidiary of the Corporation, or any other person or entity
under any charter, bylaws, law, agreement, policy of insurance or similar
protection, vote of stockholders or directors, disinterested or not, or
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<PAGE>
otherwise, whether or not now in effect, both as to actions in the Indemnitee's
official capacity, and as to actions in another capacity while holding such
office. The Corporation's obligations to make payments of Indemnified Amounts
hereunder shall be satisfied to the extent that payments with respect to the
same Proceeding (or part thereof) have been made to or for the benefit of the
Indemnitee by reason of the indemnification of the Indemnitee pursuant to any
other arrangement made by the Corporation for the benefit of the Indemnitee.
(b) In the event the Indemnitee shall receive payment from any
insurance carrier or from the plaintiff in any Proceeding against such
Indemnitee in respect of Indemnified Amounts after payments on account of all or
part of such Indemnified Amounts have been made by the Corporation pursuant
hereto, such Indemnitee shall promptly reimburse to the Corporation the amount,
if any, by which the sum of such payment by such insurance carrier or such
plaintiff and payments by the Corporation or pursuant to arrangements made by
the Corporation to Indemnitee exceeds such Indemnified Amounts; provided,
however, that such portions, if any, of such insurance proceeds that are
required to be reimbursed to the insurance carrier under the terms of its
insurance policy, such as deductible or co-insurance payments, shall not be
deemed to be payments to the Indemnitee hereunder. In addition, upon payment of
Indemnified Amounts hereunder, the Corporation shall be subrogated to the rights
of Indemnitee receiving such payments (to the extent thereof) against any
insurance carrier (to the extent permitted under such insurance policies) or
plaintiff in respect to such Indemnified Amounts and the Indemnitee shall
execute and deliver any and all instruments and documents and perform any and
all other acts or deeds which the Corporation deems necessary or advisable to
secure such rights. Such right of subrogation shall be terminated upon receipt
by the Corporation of the amount to be reimbursed by the Indemnitee pursuant to
the first sentence of this paragraph.
6. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Corporation contained herein shall continue during the period Indemnitee is a
director of the Corporation (or is serving at the request of the Corporation as
an Affiliate Indemnitee) and shall continue thereafter so long as Indemnitee
shall be subject to any possible Proceeding by reason of the fact that
Indemnitee was a director, officer or employee of the Corporation or was serving
in any other capacity referred to herein.
7. SUCCESSORS; BINDING AGREEMENT. This Agreement shall be binding on and
shall inure to the benefit of and be enforceable by the Corporation's successors
and assigns and by the Indemnitee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees, and
legatees. The Corporation shall require any successor or assignee
(whether direct or indirect, by purchase, merger, consolidation, or otherwise)
to all or substantially all of the business and/or assets of the Corporation, by
written agreement in form and substance reasonably satisfactory to the
Corporation and to the Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Corporation would
be required to perform if no such succession or assignment had taken place.
8. ENFORCEMENT. The Corporation has entered into this Agreement and
assumed the obligations imposed on the Corporation hereby in order to induce the
Indemnitee to act as a director of the Corporation, and acknowledges that the
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<PAGE>
Indemnitee is relying upon this Agreement in continuing in such capacity. In the
event the Indemnitee is required to bring any action to enforce rights or to
collect monies due under this Agreement and is successful in such action, the
Corporation shall reimburse Indemnitee for all of the Indemnitee's fees and
expenses in bringing and pursuing such action. The Indemnitee shall be entitled
to the advancement of Indemnified Amounts to the full extent contemplated by
Section 3 hereof in connection with such Proceeding.
9. SEPARABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement independent of the others, so that if any provision
hereof shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall not affect the validity or enforceability
of the other provisions hereof, which other provisions shall remain in full
force and effect.
10. MISCELLANEOUS. No provision of this Agreement may be modified, waived,
or discharged unless such modification, waiver, or discharge is agreed to in
writing signed by Indemnitee and either the Chairman of the Board or the
President of the Corporation or another officer of the Corporation specifically
designated by the Board of Directors. No waiver by either party at any time of
any breach by the other party of, or of compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same time or
at any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.
The validity, interpretation, construction, and performance of this Agreement
shall be governed by the laws of the State of Florida, without giving effect to
the principles of conflicts of laws thereof. The Indemnitee may bring an action
seeking resolution of disputes or controversies arising under or in any way
related to this Agreement in the state or federal court jurisdiction in which
Indemnitee resides or in which his or her place of business is located, and in
any related appellate courts, and the Corporation consents to the jurisdiction
of such courts and to such venue.
11. NOTICES. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to Indemnitee: Robert Corliss
c/o The Athlete's Foot Group, Inc.
1950 Vaughn Road
Kennesaw, Georgia 30144-7017
If to Corporation: Sports Group International, Inc.
7730 East Greenway Road, Suite 203
Scottsdale, Arizona 85260
Attention: Secretary
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<PAGE>
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
12. COUNTERPART. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
13. EFFECTIVENESS. This Agreement shall be effective as of October 12,
1999.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the day and year first above written.
SPORTS GROUP INTERNATIONAL, INC.
By: /s/ Kevin A. Blackwell
------------------------------------
Kevin A. Blackwell
Its Chief Executive Officer
INDEMNITEE:
/s/ Robert Corliss
----------------------------------------
Robert Corliss
-7-
INDEMNITY AGREEMENT
This INDEMNITY AGREEMENT dated as of October 12, 1999, is made by and
between Sports Group International, Inc., a Florida corporation (the
"Corporation"), and Don Plato (the "Indemnitee").
RECITALS
The Articles of Incorporation and By-Laws of the Corporation provide for
indemnification by the Corporation of its directors to the fullest extent
permitted by law. The Indemnitee has been serving and desires to continue to
serve as a director of the Corporation in part in reliance on such indemnity
provision.
To provide the Indemnitee with additional contractual assurance of
protection against personal liability in connection with certain proceedings
described below, the Corporation desires to enter into this Agreement.
In order to induce the Indemnitee to serve or continue to serve as a
director of the Corporation, and in consideration of the Indemnitee's so
serving, the Corporation desires to indemnify the Indemnitee and to make
arrangements pursuant to which the Indemnitee may be advanced or reimbursed
expenses incurred by Indemnitee in certain proceedings described below,
according to the terms and conditions set forth below.
AGREEMENT
THEREFORE, in consideration of the foregoing recitals and of Indemnitee's
serving or continuing to serve the Corporation as a director, the parties agree
as follows:
1. INDEMNIFICATION.
(a) In accordance with the provisions of subsection (b) of this
Section 1, the Corporation shall hold harmless and indemnify the Indemnitee
against any and all expenses, liabilities and losses (including, without
limitation, investigation expenses and expert witnesses' and attorneys' fees and
expenses, costs of court, judgments, penalties, fines, and amounts paid or to be
paid in settlement) actually incurred by the Indemnitee (net of any related
insurance proceeds or other amounts received by Indemnitee or paid by or on
behalf of the Corporation on the Indemnitee's behalf), in connection with any
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, to which the Indemnitee is a party or is threatened to be made a
party (a "Proceeding") based upon, arising from, relating to, or by reason of
the fact that Indemnitee is, was, shall be, or shall have been a director and/or
officer of the Corporation or is or was serving, shall serve, or shall have
served at the request of the Corporation as a director, officer, partner,
trustee, member, employee, or agent ("Affiliate Indemnitee") of another foreign
<PAGE>
or domestic corporation or non-profit corporation, cooperative, partnership,
joint venture, limited liability company, trust or other incorporated or
unincorporated enterprise (each, a "Company Affiliate").
(b) Without limiting the generality of the foregoing, the Indemnitee
shall be entitled to the rights of indemnification provided in this Section 1
for any expenses actually incurred in any Proceeding initiated by or in the
right of the Corporation, unless indemnification is barred by Florida Statutes
Section 607.0850(7), or any other applicable law.
(c) In providing the foregoing indemnification, the Corporation shall,
with respect to any proceeding, hold harmless and indemnify the Indemnitee to
the fullest extent not prohibited by the law of the State of Florida, as in
effect from time and time, and the Articles of Incorporation. For purposes of
this Agreement, it is intended that the indemnification afforded hereby be
mandatory and the broadest possible under any then existing statutory provision
expressly authorizing the Corporation to indemnify directors or officers whether
in effect on the date of this Agreement or hereafter, provided, however, that
the indemnification provisions of this Agreement shall apply without regard to
whether any provision set forth in the Articles or Bylaws of the Corporation
authorizing or permitting indemnification shall be in force or effect.
2. OTHER INDEMNIFICATION AGREEMENTS. The Corporation may purchase and
maintain insurance or furnish similar protection or make other arrangements,
including, but not limited to, providing a trust fund, letter of credit, or
surety bond ("Indemnification Arrangements") on behalf of the Indemnitee against
any liability asserted against him or her or incurred by or on behalf of him or
her in such capacity as a director or officer of the Corporation or an
Affiliated Indemnitee, or arising out of his or her status as such, whether or
not the Corporation would have the power to indemnify him or her against such
liability under the provisions of this Agreement. The purchase, establishment,
and maintenance of any such Indemnification Arrangement shall not in any way
limit or affect the rights and obligations of the Corporation or of the
Indemnitee under this Agreement except as expressly provided herein, and the
execution and delivery of this Agreement by the Corporation and the Indemnitee
shall not in any way limit or affect the rights and obligations of the
Corporation or the other party or parties thereto under any such Indemnification
Arrangement. All amounts payable by the Corporation pursuant to this Section 2
and Section 1 hereof are herein referred to as "Indemnified Amounts." To the
extent the Corporation is able to maintain its existing directors and officers
liability insurance at a reasonable premium (as determined by the Corporation in
its sole discretion), the Corporation shall use reasonable efforts to cause the
Indemnitee to be covered by such insurance.
3. ADVANCE PAYMENT OF INDEMNIFIED AMOUNTS.
(a) The Indemnitee hereby is granted the right to receive in advance
of a final, nonappealable judgment or other final adjudication of a Proceeding
(a "Final Determination") the amount of any and all expenses, including, without
limitation, investigation expenses, court costs, expert witnesses' and
attorneys' fees and other expenses expended or incurred by the Indemnitee in
connection with any Proceeding or otherwise expensed or incurred by the
Indemnitee (such amounts so expended or incurred being hereinafter referred to
as "Advanced Amounts").
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<PAGE>
(b) In making any written request for Advanced Amounts, the Indemnitee
shall submit to the Corporation a schedule setting forth in reasonable detail
the dollar amount expended or incurred and expected to be expended. Each such
listing shall be supported by the bill, agreement, or other documentation
relating thereto, each of which shall be appended to the schedule as an exhibit.
In addition, before the Indemnitee may receive Advanced Amounts from the
Corporation, the Indemnitee shall provide to the Corporation (i) a written
affirmation of the Indemnitee's good faith belief that the applicable standard
of conduct required for indemnification by the Corporation has been satisfied by
the Indemnitee, and (ii) a written undertaking by or on behalf of the Indemnitee
to repay the Advanced Amount if it shall ultimately be determined that the
Indemnitee has not satisfied any applicable standard of conduct. The written
undertaking required from the Indemnitee shall be an unlimited general
obligation of the Indemnitee, but need not be secured. The Corporation shall pay
to the Indemnitee all Advanced Amounts within twenty (20) days after receipt by
the Corporation of all information and documentation required to be provided by
the Indemnitee pursuant to this paragraph.
4. PROCEDURE FOR PAYMENT OF INDEMNIFIED AMOUNTS.
(a) To obtain indemnification under this Agreement, the Indemnitee
shall submit to the Corporation a written request for payment of the appropriate
Indemnified Amounts, including with such requests such documentation and
information as is reasonably available to the Indemnitee and reasonably
necessary to determine whether and to what extent the Indemnitee is entitled to
indemnification. The Secretary of the Corporation shall, promptly upon receipt
of such a request for indemnification, advise the Board of Directors in writing
that the Indemnitee has requested indemnification.
(b) The Corporation shall pay the Indemnitee the appropriate
Indemnified Amounts unless it is established that the Indemnitee engaged in one
of the Prohibited Acts, and such Prohibited Act was the subject matter of the
Proceeding. For purposes of determining whether the Indemnitee is entitled to
Indemnified Amounts, in order to deny indemnification to the Indemnitee, the
Corporation has the burden of proof in establishing (1) that the Indemnitee
engaged in the Prohibited Act, and (2) that the Prohibited Act was the subject
matter of the Proceeding. In this regard, a termination of any Proceeding by
judgment, order or settlement does not create a presumption that the Indemnitee
did not meet the requisite standard of conduct; provided, however, that the
termination of any criminal proceeding by conviction, or a pleading of nolo
contendere or its equivalent, or an entry of an order of probation prior to
judgment, creates a rebuttable presumption that the Indemnitee engaged in a
Prohibited Act. For purposes of this Agreement, a "Prohibited Act" shall mean
any act, omission or condition (i) described in Florida Statutes Section
607.0850(7) for which the Corporation may not indemnify the Indemnitee or (ii)
any act, omission or condition for which indemnity is not available under any
federal or state law or public policy.
(c) Any determination that the Indemnitee has engaged in a Prohibited
Act shall be made (i) either by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to such Proceeding; or (ii)
by independent legal counsel (who may be the outside counsel regularly employed
by the Corporation); provided that the manner in which (and, if applicable, the
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<PAGE>
counsel by which) the right of indemnification is to be determined shall be
approved in advance in writing by both the highest ranking executive officer of
the Corporation who is not a party to such action (sometimes hereinafter
referred to as "Senior Officer") and by the Indemnitee. In the event that such
parties are unable to agree on the manner in which any such determination is to
be made, such determination shall be made by independent legal counsel retained
by the Corporation especially for such purpose, provided that such counsel be
approved in advance in writing by both the Senior Officer and the Indemnitee
and, provided further, that such counsel shall not be outside counsel regularly
employed by the Corporation. The fees and expenses of counsel in connection with
making the determination contemplated hereunder shall be paid by the
Corporation, and, if requested by such counsel, the Corporation shall give such
counsel an appropriate written agreement with respect to the payment of their
fees and expenses and such other matters as may be reasonably requested by
counsel.
(d) The Corporation will use its best efforts to conclude as soon as
practicable any required determination pursuant to subparagraph (c) above and
promptly will advise the Indemnitee in writing with respect to any determination
that the Indemnitee is or is not entitled to indemnification, including a
description of any reason or basis for which indemnification has been denied.
Payment of any applicable Indemnified Amounts will be made to the Indemnitee
within ten (10) days after any determination of the Indemnitee's entitlement to
indemnification.
(e) Notwithstanding the foregoing, the Indemnitee may, at any time
after sixty (60) days after a claim for Indemnified Amounts has been filed with
the Corporation (or upon receipt of written notice that a claim for Indemnified
Amounts has been rejected, if earlier) and before three (3) years after a claim
for Indemnified Amounts has been filed, petition a court of competent
jurisdiction to determine whether the Indemnitee is entitled to indemnification
under the provisions of this Agreement, and such court shall thereupon have the
exclusive authority to make such determination unless and until such court
dismisses or otherwise terminates such action without having made such
determination. The court shall, as petitioned, make an independent determination
of whether the Indemnitee is entitled to indemnification as provided under this
Agreement, irrespective of any prior determination made by the Board of
Directors or independent counsel. If the court shall determine that the
Indemnitee is entitled to indemnification as to any claim, issue or matter
involved in the Proceeding with respect to which there has been no prior
determination pursuant to this Agreement or with respect to which there has been
a prior determination that the Indemnitee was not entitled to indemnification
hereunder, the Corporation shall pay all expenses (including attorneys' fees and
court costs) actually incurred by the Indemnitee in connection with such
judicial determination.
5. AGREEMENT NOT EXCLUSIVE; SUBROGATION RIGHTS, ETC.
(a) This Agreement shall not be deemed exclusive of and shall not
diminish any other rights the Indemnitee may have to be indemnified or insured
or otherwise protected against any liability, loss, or expense by the
Corporation, any subsidiary of the Corporation, or any other person or entity
under any charter, bylaws, law, agreement, policy of insurance or similar
protection, vote of stockholders or directors, disinterested or not, or
-4-
<PAGE>
otherwise, whether or not now in effect, both as to actions in the Indemnitee's
official capacity, and as to actions in another capacity while holding such
office. The Corporation's obligations to make payments of Indemnified Amounts
hereunder shall be satisfied to the extent that payments with respect to the
same Proceeding (or part thereof) have been made to or for the benefit of the
Indemnitee by reason of the indemnification of the Indemnitee pursuant to any
other arrangement made by the Corporation for the benefit of the Indemnitee.
(b) In the event the Indemnitee shall receive payment from any
insurance carrier or from the plaintiff in any Proceeding against such
Indemnitee in respect of Indemnified Amounts after payments on account of all or
part of such Indemnified Amounts have been made by the Corporation pursuant
hereto, such Indemnitee shall promptly reimburse to the Corporation the amount,
if any, by which the sum of such payment by such insurance carrier or such
plaintiff and payments by the Corporation or pursuant to arrangements made by
the Corporation to Indemnitee exceeds such Indemnified Amounts; provided,
however, that such portions, if any, of such insurance proceeds that are
required to be reimbursed to the insurance carrier under the terms of its
insurance policy, such as deductible or co-insurance payments, shall not be
deemed to be payments to the Indemnitee hereunder. In addition, upon payment of
Indemnified Amounts hereunder, the Corporation shall be subrogated to the rights
of Indemnitee receiving such payments (to the extent thereof) against any
insurance carrier (to the extent permitted under such insurance policies) or
plaintiff in respect to such Indemnified Amounts and the Indemnitee shall
execute and deliver any and all instruments and documents and perform any and
all other acts or deeds which the Corporation deems necessary or advisable to
secure such rights. Such right of subrogation shall be terminated upon receipt
by the Corporation of the amount to be reimbursed by the Indemnitee pursuant to
the first sentence of this paragraph.
6. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Corporation contained herein shall continue during the period Indemnitee is a
director of the Corporation (or is serving at the request of the Corporation as
an Affiliate Indemnitee) and shall continue thereafter so long as Indemnitee
shall be subject to any possible Proceeding by reason of the fact that
Indemnitee was a director, officer or employee of the Corporation or was serving
in any other capacity referred to herein.
7. SUCCESSORS; BINDING AGREEMENT. This Agreement shall be binding on and
shall inure to the benefit of and be enforceable by the Corporation's successors
and assigns and by the Indemnitee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees, and
legatees. The Corporation shall require any successor or assignee (whether
direct or indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Corporation, by written
agreement in form and substance reasonably satisfactory to the Corporation and
to the Indemnitee, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent that the Corporation would be required to
perform if no such succession or assignment had taken place.
8. ENFORCEMENT. The Corporation has entered into this Agreement and
assumed the obligations imposed on the Corporation hereby in order to induce the
Indemnitee to act as a director of the Corporation, and acknowledges that the
-5-
<PAGE>
Indemnitee is relying upon this Agreement in continuing in such capacity. In the
event the Indemnitee is required to bring any action to enforce rights or to
collect monies due under this Agreement and is successful in such action, the
Corporation shall reimburse Indemnitee for all of the Indemnitee's fees and
expenses in bringing and pursuing such action. The Indemnitee shall be entitled
to the advancement of Indemnified Amounts to the full extent contemplated by
Section 3 hereof in connection with such Proceeding.
9. SEPARABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement independent of the others, so that if any provision
hereof shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall not affect the validity or enforceability
of the other provisions hereof, which other provisions shall remain in full
force and effect.
10. MISCELLANEOUS. No provision of this Agreement may be modified, waived,
or discharged unless such modification, waiver, or discharge is agreed to in
writing signed by Indemnitee and either the Chairman of the Board or the
President of the Corporation or another officer of the Corporation specifically
designated by the Board of Directors. No waiver by either party at any time of
any breach by the other party of, or of compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same time or
at any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.
The validity, interpretation, construction, and performance of this Agreement
shall be governed by the laws of the State of Florida, without giving effect to
the principles of conflicts of laws thereof. The Indemnitee may bring an action
seeking resolution of disputes or controversies arising under or in any way
related to this Agreement in the state or federal court jurisdiction in which
Indemnitee resides or in which his or her place of business is located, and in
any related appellate courts, and the Corporation consents to the jurisdiction
of such courts and to such venue.
11. NOTICES. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to Indemnitee: Don Plato
6934 East 5th Avenue
Scottsdale, Arizona 85251
If to Corporation: Sports Group International, Inc.
7730 East Greenway Road, Suite 203
Scottsdale, Arizona 85260
Attention: Secretary
-6-
<PAGE>
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
12. COUNTERPART. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
13. EFFECTIVENESS. This Agreement shall be effective as of October 12,
1999.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the day and year first above written.
SPORTS GROUP INTERNATIONAL, INC.
By: /s/ Kevin A. Blackwell
------------------------------------
Kevin A. Blackwell
Its Chief Executive Officer
INDEMNITEE:
/s/ Don Plato
----------------------------------------
Don Plato
-7-
Sports Group International, Inc.
(A Florida Corporation)
- - --------------------------------------------------------------------------------
Surf City Acquisition Selman Systems, Inc.,
Corporation II (A Texas Corporation)
(An Arizona Corporation) ---------------------
- - ------------------------
Boosters, Inc. Fru-Cor, Inc.
Surf City Squeeze, Inc. (A Texas Corporation) (A Texas Corporation)
(An Arizona Corporation) ---------------------
Frullati Systems, Inc. Texas Class, Inc.
Surf City Franchise (A Texas Corporation) (A Texas Corporation)
Corporation
(An Arizona Corporation) Frullati, Inc.
(A Texas Corporation)
Malibu Smoothie Franchise
Corporation Frullati,
(An Arizona Corporation) Enterprises, Inc.
(A Texas Corporation)
Kona Coast Provision
Corporation Frullati,
(An Arizona Corporation) Franchise
Systems, Inc.
(A Texas Corporation)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
UNAUDITED FINANCIAL STATEMENTS OF SPORTS GROUP INTERNATIONAL, INC. AS OF
SEPTEMBER 30, 1999, INCLUDED IN FORM 10SB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 106,686
<SECURITIES> 0
<RECEIVABLES> 476,042
<ALLOWANCES> (60,974)
<INVENTORY> 178,441
<CURRENT-ASSETS> 864,331
<PP&E> 3,490,734
<DEPRECIATION> (189,601)
<TOTAL-ASSETS> 10,812,006
<CURRENT-LIABILITIES> 4,541,378
<BONDS> 3,836,885
0
12,250,000
<COMMON> 7,764
<OTHER-SE> (7,405,038)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 5,230,162
<TOTAL-REVENUES> 6,826,200
<CGS> 1,695,292
<TOTAL-COSTS> 5,466,251
<OTHER-EXPENSES> 1,216,881
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 129,863
<INCOME-PRETAX> 30,989
<INCOME-TAX> 18,661
<INCOME-CONTINUING> 12,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,328
<EPS-BASIC> (0.10)
<EPS-DILUTED> 0
</TABLE>
