<PAGE>
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to _____________
Commission file number 0-18606
DISCOVERY TECHNOLOGIES, INC.
----------------------------
(Name of small business issuer in its charter)
Kansas 36-352602
- ------------------------------ ---------------------
State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
24 Tejon Street, Colorado Springs, Colorado 80901
------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (719) 575-0503
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $1.00
-----------------------------
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ ] No [ X ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [ ]
The Issuer's revenues for the twelve months ended December 31, 1995
were $483,604.
As of October 1, 1996, the aggregate market value of the Common Stock
of the Registrant based upon the closing bid prices of the Common Stock, as
quoted on the OTC Bulletin Board, held by non-affiliates of the Registrant was
approximately $929,220.
As of October 1, 1996, 3,746,196 shares of $1.00 par value Common
stock, of the Registrant were outstanding.
<PAGE>
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant hereby incorporates herein by reference the following documents:
PART IV - EXHIBITS
- ------------------
(1) Incorporated by reference from the Company's Current Report on Form 8-K
dated October 15, 1993.
(2) Incorporated by reference from the Company's Registration Statement on
Form S-18; SEC File No. 33-32764D.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended June 30, 1990.
(4) Incorporated by reference from the Company's Registration Statement on
Form S-3; SEC Registration Number 33-75346.
(5) Incorporated by reference from the Company's Annual Report on Form 10-
KSB for the year ended December 31, 1994.
(6) Incorporated by reference from the Company's Current Report on Form 8-
K/A-1 dated May 23, 1996.
(7) Incorporated by reference from the Company's Current Report on From 8-
K/A-1 dated August 27, 1996.
<PAGE>
<PAGE>
PART I
ITEM 1 DESCRIPTION OF BUSINESS
- ---------------------------------
HISTORY
- -------
Discovery Technology, Inc. ("Discovery" or the "Company") was incorporated
in February, 1987 under the laws of the State of Kansas under the name
Videophones, Inc. The Company changed its name to Discovery Systems, Inc. in
1988 and to Discovery Technologies, Inc. in 1990. The Company was formed to
design, manufacture and market video products that transmit pictures over
standard voice-grade telephone lines. Discovery's products evolved from
pictures-by-phone to products which transmitted and stored critical resolution
images. Certain of the technology utilized in the pictures-by-phone product
was also utilized in the Company's Tel-MED and MAT products.
TERMINATION OF OPERATIONS
- -------------------------
Effective June 30, 1993, due to the Company's recurring operating losses,
the Company discontinued all ongoing operations. On that date, the Company
terminated all of its remaining employees and began negotiations to sell all of
its inventory, equipment, technology and application rights. In September,
1993, the Company sold all of the equipment, personal property, assets and
intangible property rights used in connection with the MAT and Tel-MED product
lines to a former employee for a combination of cash, promissory note and a
future royalty interest. In September, 1994, the Company sold all of the
Company's assets used in connection with its FilmFAXTM product line.
ACQUISITION OF INNOVATIVE FINANCIAL STRATEGIES, INC.
- ----------------------------------------------------
On October 15, 1993, the Company consummated the acquisition of 100% of
the outstanding common stock of Innovative Financial Strategies, Inc., a
Delaware corporation operating in California ("Innovative"). This transaction
was effective October 1, 1993. In connection with the acquisition, the Company
issued to the Innovative shareholders, pro rata, 10,000,000 shares of the
Company's Common Stock and 1,000,000 shares of the Company's Preferred Shares.
Each Preferred Share entitled the holder to fifty (50) votes at any meeting of
shareholders, and was automatically convertible into fifty (50) shares of
Common Stock as soon as there were a sufficient number of authorized Common
Stock in the Company available.
Effective November 8, 1993, the Shareholders of the Company approved a
one-for-one hundred (1-for-100) reverse split of Common Stock, and increasing
the par value of the Company's Common Stock to $1.00 per share (the "Reverse
Split"). Giving effect to the Reverse Split, the 1,000,000 Preferred Stock
automatically converted into 500,000 shares of Discovery $1.00 par value Common
Stock.
BUSINESS
- --------
Prior to the termination of Innovative's operations, the Company served as
a holding company for Innovative and had no separate revenue generating
activities beyond those of Innovative. Innovative's prior mission had been to
provide comprehensive financial services and computer software systems to
hospitals with a major focus on increasing profitability through cost reduction
systems and pricing strategies. Utilizing highly qualified consultants, these
cost reduction systems and pricing strategies were designed to help hospitals
establish rates and reduce costs.
The market for Innovative services and products had consisted primarily of
larger hospitals throughout the United States. Innovative had clients in
Hawaii, Washington, California, Illinois, Indiana, Texas, North Carolina, Ohio,
Colorado, and Wisconsin.
Innovative utilized a combined employee and independent sales staff to
market its services and products with the Company's former President investing
a substantial portion of his time to marketing and sales activities including
the direct supervision of the Company's national sales director.
Innovative utilized a highly sophisticated computer software system which
was developed for Innovative. All copyrights and other intellectual property
rights related to the software were acquired by Innovative from the developer
of such software in consideration of a combination of stock, cash and future
payments. The Company did not own or utilize any trademarks or service marks
which it considered to be material to its business or operations.
During 1995, Innovative had approximately 20 employees. Innovative's
principal executive officers were Don McCrea-Hendrick, Chairman of the Board,
and Gary R. Fong, President/CEO.
Effective August 24, 1995, the Company entered into a separation agreement
with Mr. Fong whereby Mr. Fong resigned as President/CEO and a Director of the
Company and the Company and Mr. Fong released each other from all obligations
under Mr. Fong's employment agreement in exchange for Mr. Fong's agreement to
transfer 300,000 shares of the Company's Common Stock to the Company, and to
other mutual consideration. Mr. McCrea-Hendrick was subsequently appointed
President/CEO.
REGULATIONS
- -----------
The Company is a public company which files reports with the Securities
and Exchange Commission pursuant to Section 15(d) of the Securities Exchange
Act of 1934, as amended. The Company's Common Stock is traded on the Over-The-
Counter ("OTC") Bulletin board under the symbol "DSVY".
Additionally, the Company is required to comply with both State and
Federal laws related to the payment of minimum wage and overtime, including the
Fair Labor Standards Act. In the event the Company elects to provide
additional benefits to its employees, including retirement, pension or profit
sharing programs, the Company will be required to comply with the
specifications of the Employee Retirement Income Security Act of 1976
("ERISA"), as amended and, depending on the type of benefit provided, may be
required to operate within the bounds of certain state and federal securities
laws and regulations.
To the best of the Company's knowledge and belief, the Company is
currently in compliance with all Federal, State and Local laws and regulations
pertaining to its business operations. Compliance with the foregoing is not
anticipated to have a material adverse effect on the Company's earnings and/or
competitive position within the respective industries and will not result in
increased capital expenditures. The Company currently is not subject to any
Federal, State or local provisions which have been enacted or adopted
regulating the discharge of materials into the environment or otherwise
relating to the protection of the environment.
PERSONAL
- --------
The Company entered into a separation agreement with Mr. Gary Fong effective
August 24, 1995, whereby Mr. Fong resigned as President/CEO and a Director of
the Company. The Company and Mr. Fong released each other from all obligations
under Mr. Fong's employment agreement in exchange for Mr. Fong's agreement to
transfer 300,000 shares of the Company's Common Stock back to the Company, and
to other mutual consideration. Mr. McCrea-Hendrick was subsequently appointed
President/CEO.
The Company entered into a separation agreement with Mr. McCrea-Hendrick
effective December 31, 1995, whereby Mr. McCrea-Hendrick resigned as
President/CEO of the Company. In May, 1996 Mr. McCrea-Hendrick resigned as a
Director of the Company. As part of the agreements for Mr. McCrea-Hendrick to
purchase Innovative Financial Strategies, Inc. from the Company, in addition to
other mutual consideration, the Company and Mr. McCrea-Hendrick agreed to
release each other from all obligations under McCrea-Hendrick's employment
agreement. Mr. D. William Hill was subsequently appointed Chairman / CEO and
Mr. David W. Hill was appointed President / COO and Director. (See "Subsequent
Events.")
The Company has an employment agreement with Mr. Craig T. Rogers who serves
as CFO, Director and Secretary of the Company. The written agreement with Mr.
Rogers provides for the payment of a base salary of $36,000 per year as well as
the payment of incentive compensation conditioned upon the Company achieving
certain minimum thresholds of after-tax net income. The Employment Agreement
also grants to Mr. Rogers the right to receive salary continuation for a period
of three (3) years in the event the Company terminates the Agreement without
cause prior to its expiration. Mr. Rogers' agreement expires December 31,
1996.
SUBSEQUENT EVENTS
- -----------------
Pursuant to the terms of a Definitive Agreement and Plan of Reorganization
(the "Agreement"), effective March 29, 1996, the Company acquired one hundred
percent (100%) of the issued and outstanding shares of common stock of Rocky
Mountain Taco, Inc., a Colorado corporation ("RMT"), and one hundred percent
(100%) of issued and outstanding shares of The Colorado Taco Corporation, a
Colorado corporation ("CTC"), (RMT and CTC shall collectively be referred to as
"ZuZu(-Registered Mark-) Colorado").
Specifically, pursuant to the terms of the Agreement, the Company
exchanged 2,800,000 shares of its Common Stock for a combined total of
1,159,049 shares of ZuZu(-Registered Mark-) Colorado's issued and outstanding
common stock. Additionally, warrants exercisable to acquire up to 124,000
shares of RMT common stock at an exercise price of $2.50 per share were
exchanged for warrants exercisable to purchase 124,000 shares of the Company's
Common Stock at an exercise price of $1.04 per share, which warrants expire
December 31, 1998. For accounting purposes, the transactions contemplated by
the Agreement (hereinafter the "Reorganization") has been accounted for as a
reverse acquisition whereby Discovery was considered to have been acquired by
ZuZu(-Registered Mark-) Colorado. Additionally, in conjunction with the
Reorganization, the ownership of the Company's wholly owned subsidiary,
Innovate Financial Strategies, Inc., was transferred to Don McCrea-Hendrick, a
former officer and director of the Company, in exchange for Mr. McCrea-
Hendrick's forgiveness of unpaid salary in excess of $175,000, the transfer by
Mr. McCrea-Hendrick of 126,221 shares of Company common stock to the company,
and other consideration.
Rocky Mountain Taco, Inc. was incorporated in Colorado in November, 1993
to develop and operate ZuZu(-Registered Mark-) Handmade Mexican Food
restaurants in the counties of El Paso, Boulder and Larimer in the state of
Colorado. In March, 1994, RMT opened its first restaurant in Colorado Springs,
Colorado. This location was the first ZuZu(-Registered Mark-) restaurant
opened outside Dallas, Texas. In January, 1995, RMT opened its second
restaurant in Colorado Springs, Colorado. RMT opened its third location in
Boulder, Colorado in April, 1995, and its fourth location in Colorado Springs,
Colorado, in January, 1996.
The Colorado Taco Corporation was incorporated in Colorado in September,
1994, to develop and operate ZuZu(-Registered Mark-) Handmade Mexican Food
restaurants in the state of Colorado outside the counties of El Paso, Boulder
and Larimer. CTC opened its first restaurant in Denver, Colorado in October
1994.
Collectively RMT and CTC own 100% of the traditional and non-traditional
rights to the development and operations of the ZuZu(-Registered Mark-)
Handmade Mexican Food concept in Colorado.
ZuZu(-Registered Mark-), Inc., parent company of ZuZu(-Registered Mark-)
Franchising Corp., is the Dallas, Texas, based franchisor for ZuZu(-Registered
Mark-) Handmade Mexican Food. In August, 1995, ZuZu(-Registered Mark-), Inc.
signed a co-branding agreement with Triarc Restaurant Group ("TRG"), formerly
Arby's, Inc., franchisor for Arby's Roast Beef restaurants, Arby's Roast Town
restaurants, the T.J. Cinnamon's and P.T. Noodles concepts. The agreement
provides TRG with the right to co-brand the ZuZu(-Registered Mark-) Handmade
Mexican Food concept with the Triarc Restaurant Group concepts throughout the
United States. The ZuZu(-Registered Mark-) Colorado agreements with ZuZu(-
Registered Mark-), Inc. preclude co-branding of the ZuZu(-Registered Mark-)
concept with Triarc Restaurant Group concepts in Colorado except as allowed by
ZuZu(-Registered Mark-) Colorado.
ZuZu(-Registered Mark-) Handmade Mexican Food restaurants provide fresh,
authentic, wholesome Mexican food in a fast-casual environment at good value.
The targeted customer base is two-income families with children, and the white
collar work force. These demographics have sophisticated pallets, are health
conscious and are value minded. ZuZu(-Registered Mark-)'s mission is to
provide premium fast food to its chosen customer base, at good values and in a
more relaxed environment.
CURRENT BUSINESS
----------------
The Company currently operates as a holding company for the purpose of
developing, owning and operating ZuZu(-Registered Mark-) Handmade Mexican Food
restaurants throughout the state of Colorado. Additionally, the Company plans
to grow in Colorado and in other strategic locations in the western United
States through expansion and strategic acquisition. The Company believes that
with a long-term strategy of acquisitions and conversions of existing
restaurants, and through internal growth, the Company will strengthen its
market position and improve the profitability of the Company's operations.
THE ZUZU(-Registered Mark-) CONCEPT
-----------------------------------
The first ZuZu(-Registered Mark-) Handmade Mexican Food restaurant was
opened by ZuZu(-Registered Mark-), Inc. in Dallas, Texas, in July, 1989.
ZuZu(-Registered Mark-) Handmade Mexican Food features premium fast food in a
casual dining environment. ZuZu(-Registered Mark-) was quickly awarded Best
Chips and Salsa in Dallas, Texas in 1989 and has continued to receive critical
acclaim, including selection as one of the Hot Concepts of the Nineties by
Nations Restaurant News in 1995 and culminating in the Visionary Award for the
most creative menu awarded by The Food Group in 1995 in the quick service
category of food service. Additionally, The Wall Street Journal recently
touted ZuZu(-Registered Mark-) Handmade Mexican Food as one of the Nation's
Best Franchise Buys.
Currently, there are forty-two (42) ZuZu(-Registered Mark-) Handmade
Mexican Food restaurants open and operating in six (6) states. RMT opened the
first Colorado ZuZu(-Registered Mark-) Handmade Mexican Food restaurant and the
first ZuZu(-Registered Mark-) Handmade Mexican Food restaurant outside of
Dallas, Texas, in Colorado Springs, Colorado, in March, 1994. Subsequently,
RMT opened a second location in Colorado Springs, Colorado, in January, 1995,
its third location in Boulder, Colorado, in April, 1995 and its fourth location
in Colorado Springs, Colorado, in January, 1996.
CTC opened the first ZuZu(-Registered Mark-) Handmade Mexican Food
restaurant in the Denver, metro, area in October, 1995.
PROPOSED EXPANSION
------------------
The development agreements between ZuZu(-Registered Mark-) Franchising
Corporation and ZuZu(-Registered Mark-) Colorado require ZuZu(-Registered
Mark-) Colorado to open seven (7) restaurants in 1996. One restaurant was
opened in January 1996 at 1899 S. Nevada Ave., Colorado Springs, Colorado. In
1997 the Company is required to open ten (10) additional sites and in 1998 an
additional fourteen (14) sites. The majority of the new sites will be in the
Denver, metro, area and in southern Colorado as part of the co-branding
development with Circle Restaurant Group. (see Arby's Acquisition - Multi-
Branding). The increased density will expand customer awareness of the ZuZu(-
Registered Mark-) concept and will multiply the advertising budget available in
a given trade area. In addition, the cost of management will be lowered on a
per site basis as corporate management salaries and costs are amortized over
more sites.
Assuming in-line space is utilized (versus a stand-alone building), the
cost associated with constructing and outfitting a single brand ZuZu(-
Registered Mark-) Handmade Mexican Food restaurant is approximately $275,000.
Co-branded units may be developed for $100,000 to $200,000 per site. $5,000 to
$10,000 is required for pre-opening training expense, including staff
recruitment, orientation, and detailed training.
ARBY'S ACQUISITION - MULTI-BRANDING:
-----------------------------------
Triarc Restaurant Group (previously Arby's, Inc.) and ZuZu(-Registered
Mark-), Inc. have entered into a master franchise agreement pursuant to which
TRG obtained the right to operate or grant franchises to operate ZuZu(-
Registered Mark-) restaurants at certain Arby's "multi-brand" locations. To
take advantage of the multi-branding agreement, the Company has entered into a
letter of intent to purchase sixteen (16) Arby's units located in southern
Colorado, one (1) Arby's unit located in Nebraska, and the development rights
to Arby's in southern Colorado. The Company's exclusive rights to the
development of the ZuZu(-Registered Mark-) Handmade Mexican Food concept in
Colorado excludes development of ZuZu(-Registered Mark-)/Arby's co-branded
units in the state except through collaboration with the Company.
PRODUCTS AND SERVICES
---------------------
Menu
----
ZuZu(-Registered Mark-) offers fresh, wholesome, authentic Mexican
food. ZuZu(-Registered Mark-)'s food is lower in fat and cholesterol than
typical fast food. ZuZu(-Registered Mark-) uses only cholesterol free oils for
food preparation. The beef used in the recipes is hand trimmed by ZuZu(-
Registered Mark-) to eliminate concentrated fat. All meats are open fire
grilled. ZuZu(-Registered Mark-) uses vegetable stocks for preparing rice and
beans, which allows ZuZu(-Registered Mark-) to offer a full range vegetarian
menu. Prior to grilling, all meats are marinated in authentic Mexican spices.
ZuZu(-Registered Mark-) offers unique Mexican menu items such as gorditas and
flautas as well as typical items such as fajitas, enchiladas and burritos. All
food preparation is done by hand and food is only prepared to order so that the
customer may customize their food order as they like -- thus ZuZu(-Registered
Mark-)'s handmade reputation.
Service
-------
ZuZu's(-Registered Mark-) customers order from the counter, serve
themselves drinks, flatware, napkins and salsa from the self service salsa bar.
The customers seat themselves and are served by ZuZu(-Registered Mark-) wait
staff. ZuZu(-Registered Mark-) restaurants deliver a fresh, made-to-order
meal, with a much faster order-delivery response time than traditional, sit-
down restaurants. Typically, a customer receives an order within four (4) to
seven (7) minutes. Tables and dishes are bussed by the ZuZu(-Registered Mark-)
wait staff. The service system employed by ZuZu(-Registered Mark-) has been
coined fast-casual by the restaurant industry and is designed to provide many
key aspects of a standard sit-down service style while providing a tip free
environment.
<PAGE>
Operation and Management
------------------------
Restaurant:
ZuZu(-Registered Mark-) restaurants are generally open from
11:00 a.m. to 9:00 p.m., seven days a week, for lunch and dinner. Each ZuZu(-
Registered Mark-) restaurant employs a general manger, one (1) or two (2)
assistant managers, and approximately ten (10) to fifteen (15) employees, most
of whom work part-time. (See Personnel) Operating systems and training
materials are utilized to ensure consistent performance to ZuZu(-Registered
Mark-) and Company standards.
Customer service and employee training are top priorities of the
Company in order to ensure repeat business and consumer loyalty. To this end,
a four to six week training program is utilized to train restaurant general
managers on all phases of the operation. A two to three week training program
is utilized for shift managers and kitchen managers, depending on prior
restaurant experience. A full set of manuals is provided to each restaurant
describing all aspects of the restaurant management including recipes, point of
sales system, employee management, customer service, and forecasting. Each
manager is responsible for weekly sales, labor cost and food cost forecasting
and variance reporting. The manuals are provided as part of the franchising
agreement and are augmented by the Company to address issues uniquely related
to Colorado and the area of the individual restaurant, such as training
specific to Colorado or municipality liquor laws. Refresher training is
provided on an ongoing basis.
Financial and Management Control:
Financial and management control is maintained through the use
of data processing and centralized accounting and management information
systems which are provided by the Company. Restaurant mangers forward sales
reports, vendor invoices, payroll data and other operating information to
Company headquarters. Management receives daily, weekly and monthly reports
identifying food, labor and operating expenses and other significant indicators
of restaurant performance. Management believes that such reporting
requirements enhance its ability to control and manage its expanding operations
while maintaining customer sensitivity.
PROVISIONS AND SUPPLIES
-----------------------
Under the Franchise Agreements, each ZuZu(-Registered Mark-) restaurant is
free to obtain products, including food, beverage, ingredients, paper goods,
equipment and signs, from any source that meets the Franchisor's specifications
and approval. As a result, the Company presently purchases its products from a
number of independent food processors and distributors, and does not anticipate
any difficulty in continuing to obtain an adequate quantity of food products of
acceptable quality and at acceptable prices.
MARKETS
-------
The U.S. restaurant industry is highly fragmented, with approximately
390,000 units nationwide. Industry surveys indicate that the 15 largest chains
accounted for approximately thirty-two percent (32%) of all industry sales in
1995. According to data compiled by the National Restaurant Association, total
domestic restaurant industry sales were estimated to be approximately $190
billion in 1995, of which approximately $94 billion was estimated to be in the
quick service restaurant or fast food segment. In recent years the industry
has benefited as spending in restaurants has consistently increased as a
percentage of total food-related spending. According to an industry survey,
the fast food segment (of which ZuZu(-Registered Mark-) restaurants are a part)
has been the fastest growing segment of the restaurant industry over the past
five years, with a compounded annual sales growth rate from 1991 through 1995
of four and one-half percent (4.5%).
ZuZu(-Registered Mark-) customers are drawn primarily from the Baby Boomer
and Generation X family demographics. With this segment of the population
eating approximately sixty percent (60%) of their meals outside the home, the
Company believes its products and presentation provide a high quality, high
value, and much needed alternative to traditional fast food and home meal
replacement providers.
COMPETITION
-----------
The restaurant industry, including the fast food segment, is highly
competitive. The Company competes with a large number of Mexican fast food
restaurants, including Taco Bell, Taco Cabana and Taco Johns, in the areas in
which it operates. Many of these restaurants are owned and operated by
regional and national restaurant chains, many of which have greater financial
resources and experience than does the Company. Additionally, the Company must
compete with more traditional, sit-down restaurants and emerging fast-casual
concepts such as Boston Market.
Management believes that it may have a competitive advantage in terms of
quality of product, menu and price-value compared to traditional Mexican fast
food chains and fast-casual concepts such as Boston Market. However, recent
price discounting by the major Mexican fast food chains may have a detrimental
effect on Company sales.
In addition, management believes the Company has a competitive advantage
in areas of customer service, quality assurance and training. Nevertheless,
the Company may be at a competitive disadvantage with other restaurant chains
with greater name recognition and marketing capability. Furthermore, most of
the Company competitors in the Mexican fast-food business operate more
restaurants, have been established longer and have greater financial resources
and name recognition than ZuZu(-Registered Mark-). There is also active
competition for management personnel, as well as for attractive commercial real
estate sites suitable for restaurants.
FRANCHISE ARRANGEMENTS
----------------------
The Company's franchise arrangement with ZuZu(-Registered Mark-)
Franchising Corporation requires that the Company pay 4.5% of net revenue to
ZuZu(-Registered Mark-) Franchising Corporation and contribute 2% of net
revenue to a national advertising fund and spend at least 2% of net revenue in
local advertising. The agreements are issued individually to each site as the
site is opened. ZuZu(-Registered Mark-) Franchising Corporation provides
ongoing support for the Company through assigned Directors of Franchise
Operations which provide quality control and support which may be unique to a
specific area or site. For such fees the Company receives off site and on site
training for store personnel, updates to operations manuals, point-of-sales
systems, construction standards, consultation on site selection and use of the
ZuZu(-Registered Mark-) brand name and intellectual property such as point-of-
sales software training materials and recipes.
On April 30, 1996, the Company and Franchisor executed and entered into a
consent to reorganization agreement ("Consent") pursuant to which Franchisor
approved the Reorganization, and the Company agreed to pay to Franchisor
$75,000 as prepayment for certain development rights and $45,000 of franchise
fees which had been accrued as of December 31, 1995. Pursuant to the Consent,
the Company has also committed to develop a minimum of thirty (30) additional
ZuZu(-Registered Mark-) restaurant locations before the end of fiscal 1998.
REGULATION
----------
Each of the ZuZu(-Registered Mark-) Handmade Mexican Food restaurants is
subject to the regulations of various health, sanitation, safety and fire
agencies in the jurisdiction in which the restaurant is located. Difficulties
or failures in obtaining the required licenses or approvals could delay or
prevent the opening of a new ZuZu(-Registered Mark-) restaurant. Federal and
state environmental regulations have not had a material effect on the Company's
operations. More stringent and varied requirements of local governmental
bodies with respect to zoning, land use and environmental factors could delay
or prevent development of new restaurants in particular locations.
Additionally, the Company is required to comply with both State and
Federal laws related to the payment of minimum wage and overtime, including the
Fair Labor Standards Act. In the event the Company elects to provide
additional benefits to its employees, including retirement, pension or profit
sharing programs, the Company will be required to comply with the
specifications of the Employee Retirement Income Security Act of 1974
("ERISA"), as amended and, depending on the type of benefit provided, may be
required to operate within the bounds of certain state and federal securities
laws and regulations.
The Company is also subject to the Americans With Disabilities Act (the
"ADA") which requires restaurants and other facilities open to the public to
provide for access and use of facilities by the handicapped. Management
believes that the Company is in compliance with the ADA.
To the best of the Company's knowledge and belief, the Company is
currently in compliance with all Federal, State and Local laws and regulations
pertaining to its business operations. Except as noted above, compliance with
the foregoing is not anticipated to have a material adverse effect on the
Company's earnings and/or competitive position within the respective industries
and will not result in increased capital expenditures.
PERSONNEL
---------
ZuZu(-Registered Mark-) Colorado has 65 employees of which the majority
are hourly, part time employees. The restaurant managers, key chefs, Director
of Operations, CFO, President and CEO are salaried employees. The restaurant
managers and Director of Operations average greater than 7 years of restaurant
experience each.
ITEM 2 PROPERTY
- ------------------
Innovative Financial Strategies, Inc., leased its principal offices at
1299 Fourth St, #400, San Rafael, California. The lease expired November, 30,
1995. The Company currently maintains its offices at 24 Tejon Street, Colorado
Springs, Colorado 80701, in unused office space within one of its Colorado
Springs restaurant locations.
The Company currently leases five (5) restaurant sites, three (3) in
Colorado Springs, one (1) in Denver and one (1) in Boulder. As the Company
continues to grow, additional office space will be needed and the number of
restaurant leases will increase. The following table describes the details
contained in each of the Company's current property leases.
<PAGE>
<TABLE>
<CAPTION>
Start Monthly Term of Renewal Floor Space Opening
Date Address Lease Costs The Lease Term (Sq. Ft.) Date
- ------- --------------------------- ----------- --------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
12/1/93 6916 N. Academy Blvd. $2,800.00 10 years 10 years 2,400 Mar 1994
Colorado Springs, CO 80920
1/1/95 24 S. Tejon(1) $2,420.48 (2) 5 years 2-5 year terms 4,000 Jan 1995
Colorado Springs, CO 80903
12/1/95 1899 S Nevada Ave. (1) $6,477.33 (3) 20 years 10 years 3,470 Jan 1996
Colorado Springs, CO 80906
12/1/94 1447 Pearl St. (1) $5,146.25 5 years 2-5 year terms 2,025 Apr 1995
Boulder, CO 80302
2/1/95 2710 E. Third $4,398.75 5 years 2-5 year terms 2,346 Oct 1995
Denver, CO 80206
- -----------------------------
<FN>
<PAGE>
(1) 24 S. Tejon, 1899 S. Nevada Ave. and 1467 Pearl St. have been issued
Hotel - Restaurant Liquor licenses. These licenses allow full
service beer, wine and spirits. These restaurants are serving beer
and margaritas and do not have full bar service.
(2) 24 S. Tejon lease costs include approximately 3,000 square feet of
developed space and 1,000 feet of office area. In addition the lease
costs includes six (6) off street parking spaces for ZuZu(-Registered
Mark-) customer use.
(3) 1899 S. Nevada Ave. lease costs include approximately 1,000 square
feet of additional space was completed in August 1996. The landlord
will contribute up to $80,000 for completion of the space. The
additional space will expand the seating capacity of the location
from approximately seventy (70) seats to on hundred forty (140)
seats.
</FN>
</TABLE>
ITEM 3 LEGAL PROCEEDINGS
- ---------------------------
The Company's former subsidiary, Innovative, is presently a defendant in
an action pending in the Superior Court of the State of California for Marin
County. The suit was filed on or about May 17, 1994, by THCS Holding, Inc.
("THCS") and QuadraMed Corporation ("QuadraMed") as plaintiffs against
Innovative, Don McCrea-Hendrick, Ron L. Ziuraitis and TRIM Healthcare Systems,
Inc. ("TRIM").
In December, 1993, Innovative purchased from THCS certain secured
promissory notes issued by TRIM. In consideration for the assignment of such
promissory notes, Innovative executed its own promissory note in the amount of
$200,000 in favor of THCS, which note was secured by the personal guarantees of
Messrs. McCrea-Hendrick and Ziuraitis. The note called for five equal monthly
payments of $40,000 each commencing in January, 1994. Innovative has refused
to make payments on the note claiming numerous defenses and counterclaims based
upon misrepresentations in the transaction. THCS has initiated suit against
Innovative and the guarantors to collect amounts due on the note, also
asserting claims for defamation, trade libel, interference with economic
relations, and invasion of privacy (which claim has been dismissed).
Innovative has retained counsel and is vigorously defending the suit and, on
its own behalf, has asserted counterclaims against the plaintiffs. Based upon
their own assessment of the claims pending in the case after consultation with
legal counsel, it is the view of management that the risk of a material adverse
judgment against Innovative is remote.
On or about October 28, 1994, a cross-complaint was filed against THCS and
QuadraMed for Breach of Fiduciary Duty, Tortious Interference, Fraud, Breach of
Contract, Declaratory Relief, and Constructive Trust. A settlement offer was
made by THCS and QuadraMed on or about September 22, 1995, which included
cancellation of the $200,000 note signed by Innovative, but was determined to
be unacceptable as it related to other elements of the cross-complaint. A
motion is before the courts to accept a first amended cross-complaint for
Breach of Fiduciary Duty, Fraudulent Transfer, Tortious Interference with
Contract, Interference with Prospective Economic Advantage, Concealment of
Fact, Intentional Misrepresentation, Negligent Misrepresentation, Breach of
Contract, Conversion, Breach of Contract, Constructive Trust, Alter Ego,
Conspiracy, Declaratory Relief, Injunctive Relief, and Breach of Contact and
includes the addition of cross-complainants and cross-defendants. A counter
settlement offer was submitted to the cross-defendants on December 28, 1995,
which includes cancellation of the $200,000 note signed by Innovative and other
consideration. Based upon their own assessment of the claims pending in the
case after additional consultation with legal counsel, it is the continued view
of management that the risk of a material adverse judgment against the Company
continues to be remote. In conjunction with the Reorganization, Innovative and
Mr. Don McCrea-Hendrick have agreed to indemnify the Company from and against
any damages or liability the Company may incur as a result of the foregoing.
The Company itself is currently not a party to any legal proceedings.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
No items were submitted to the shareholders for a vote during the fourth
quarter of fiscal 1995.
<PAGE>
<PAGE>
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
- --------------------------------------------------------------
PRICE RANGE OF COMMON STOCK
---------------------------
The Company's common stock is traded on the OTC electronic bulletin
board under the symbol "DSVY". The reported high and low bid information as
quoted on the OTC bulletin board for the period January 1, 1994, through
October 21, 1996, is shown below. The high and low bid information as quoted
on the OTC bulletin board represents prices between brokers and dealers and
does not include retail markups, markdowns or commissions to the broker-dealer.
<TABLE>
<CAPTION>
BID
Quarter Ended High Low
------------- ------ -----
<S> <C> <C>
1994
First Quarter 3 1
Second Quarter 1 3/4 1
Third Quarter 1 3/4 1
Fourth Quarter 2 1/4 1
1995
First Quarter 1 3/4 1
Second Quarter 1 1/4 3/4
Third Quarter 1 5/8
Fourth Quarter 3/4 3/8
1996
First Quarter 1 3/8 13/16
Second Quarter 1 1/2 15/16
Third Quarter 1 1/4 5/8
Fourth Quarter
(through October 21, 1996) 5/8 5/8
</TABLE>
The number of record holders of the Company's common stock as of
October 1, 1996, was approximately 611.
DIVIDENDS
---------
The Company has never paid cash dividends on its common stock, and does
not anticipate the payment of such dividends in the foreseeable future.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS
- ----------------------------------------------
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this report.
LIQUIDITY AND CAPITAL RESOURCES AT DECEMBER 31, 1995
- ----------------------------------------------------
The Company's balance sheet reflects total assets of $287,031. Current
assets represent $41,458, or 14.5% of total assets. Accounts receivables of
$37,959 make up the majority of current assets.
The Company made certain loans to Gary R. Fong, a former officer of the
Company, which totaled $65,000 at December 31, 1994, plus accrued interest.
The company entered into a separation agreement with this officer effective
August 24, 1995, which provided for the principal balance at the time of
$35,000 and accrued interest payable to the Company be forgiven in exchange for
300,000 shares of common stock to be transferred to the Company. The agreement
also provided for mutual releases and the resignation of Gary R. Fong as
President/CEO and a board member of the Company. Subsequent to the resignation
of Gary R. Fong, the board appointed Don McCrea-Hendrick as President/CEO.
Certain promissory notes and related security interest totaling over
$700,000 purchased by the company in December, 1993, continue to be reported at
the Company's purchase price of $200,000. These notes are due from TRIM
Healthcare Systems, Inc. (hereinafter "TRIM"), a Delaware corporation 49% of
which is owned by Don McCrea-Hendrick. The notes are secured by the assets of
TRIM; however this security interest is subordinate to an obligation to a
Silicon Valley Bank note in the approximate amount of $150,000 as of March 18,
1996. The Company acquired the notes in exchange for its own interest free
note which calls for repayment in five equal monthly installments which were to
commence in January, 1994. No payments have been made, and the amount due is
the subject of pending legal proceedings. (See "LEGAL PROCEEDINGS".)
The Company reported total liabilities of $764,132 or 266.2% of assets.
Current liabilities represent $758,390 or 99.3% of total liabilities. A large
portion of the current liabilities, $200,000, is the subject of the above
referenced litigation in which the Company is claiming numerous set-offs.
The Company's balance sheet illustrates the working capital shortage
suffered by the Company. Current liabilities exceed current assets by
($716,932), and the current ratio is only .05. Both of these measures reflect
historical operating losses and increased investment in operations financed by
short-term debt.
As described in the Independent Auditors Report, the Company's recurring
losses from operations, and working capital and stockholders equity
deficiencies raise substantial doubts about the Company's ability to continue
as a going concern.
Consequently, the Company entered into a definitive agreement to be
acquired under a reverse merger by ZuZu Corporation which consists of Rocky
Mountain Taco, Inc. and Colorado Taco Corporation. The merger was effective
March 29, 1996. The definitive agreement provided for shareholders of ZuZu
Corporation to receive pro-rata 2,800,000 shares of the Company's restricted
stock. In addition, the definitive agreement provided for the Company's wholly
owned subsidiary, Innovative Financial Strategies, Inc. to be sold to Don
McCrea-Hendrick who has reduced the number of the Company's Common Stock shares
he owns by 123,666 in exchange for 85,333 options at $3.00 per share, forgave
$175,000 in past due salary and signed a mutual release with the Company to
terminate all obligations under Mr. McCrea-Hendrick's employment agreement.
Innovative will also be required to assume and pay under reasonable commercial
terms all outstanding Discovery liabilities.
Other than the foregoing, the Company knows of no trends, demands,
commitments, or uncertainties that will result in or are reasonably likely to
result in the Company's liquidity increasing or decreasing in any material way,
and the Company knows of no material trends, demands, commitments, events or
uncertainties that will result in or that are reasonably likely to result in a
change in the mix or cost of such resources.
RESULTS OF OPERATIONS: DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994
- -----------------------------------------------------------------------
Innovative generated revenues of $483,604 during the year ending
December 31, 1995. This was a decrease of $451,791 or 48.3% over revenues in
the previous year. Total operating expenses decreased from $1,538,424 or
164.5% of revenues in 1994 to $1,009,230 or 208.7% in 1995. Losses from
operations decreased from ($603,029) in 1994 to ($525,626) in 1995. Losses
from other activities totaled ($29,556). Net losses were ($556,782) or 115.1%
of revenue in 1995 compared to a Net Loss of ($529,535) for 1994. Net loss per
common share increased from a loss of (.54) in 1994 to (.60) per 1995. Company
cashflow constraints required a reduction in overall Company operations
resulting in a reduction in sales staff and related marketing effort.
TERMINATION OF OPERATIONS OF INNOVATIVE FINANCIAL STRATEGIES, INC.
- ------------------------------------------------------------------
Due to Innovative's recurring operating losses and lack of working
capital, Innovative ceased operations effective December 30, 1995.
ITEM 7 FINANCIAL STATEMENTS
- ------------------------------
The following financial statement and schedules are filed as a separate section
of this Report and are attached hereto:
1) Independent Auditor's Report;
2) Consolidated Balance Sheet - December 31, 1995
3) Consolidated Statements of Operations - for the years ended December 31,
1995, and 1994;
4) Consolidated Statements of Stockholders' Equity (Deficit) - for the years
ended December 31, 1995 and 1994.
5) Consolidated Statements of Cash Flows - for the years ended December 31,
1995, and 1994; and
6) Notes to Consolidated Financial Statements
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- -----------------------------------------------------------------------------
(a) The Board of Directors of the Company decided to change the Company's
independent accountant effective May 23, 1996. The independent accountant who
was previously engaged as the principal accountant to audit the Company's
financial statements was Hein + Associates LLP. The report of Hein +
Associates LLP dated December 14, 1995 on the Company's 1994 financial
statements contained a going concern qualification. Hein + Associates filed a
disagreement related to the proposed merger date of the Company and ZuZu-
Colorado. After reviewing the SEC rules and regulations the Company agreed
with the judgment of Hein + Associates LLP and adjusted the merger date. Other
than the foregoing, there has not been any disagreements between the Company
and Hein + Associates on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
(b) The Company retained the accounting firm of Grant Thornton LLP to
serve as the Company's principal accountant to audit ZuZu Colorado's financial
statements from inception through December 1995. This engagement was effective
May 23, 1996. The Company had planned to use Grant Thornton LLP as the
Company's principal independent accountant. Grant Thornton had not been
consulted by the Company either with respect to the application of accounting
principles to a specified transaction or the type of audit opinion that might
be rendered on the Company's financial statements or on any matter which was
the subject of any prior disagreement between the Company and its previous
certifying accountant. Because the proposed merger date between ZuZu-Colorado
and the Company was moved from 1995 to 1996 the Company was required to
complete an audit including its wholly-owned subsidiary, Innovative, for fiscal
year ended December 31, 1995. For convenience, the Company re-engaged Hein +
Associates LLP as the Company's principal independent accountant August 30,
1996.
<PAGE>
<PAGE>
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
- --------------------------------------------------------
The executive officers and members of the Board of Directors of the Company and
their respective ages, positions with the Company, principal occupations during
the past five (5) years, directorships and certain other affiliations and
information are as
<TABLE>
<CAPTION>
Name (1) Age Position (2)
--------------- --- -------------------------------
<S> <C> <C>
D. William Hill 50 Chairman, CEO, since January,
1996
David W. Hill 30 President, COO, Treasurer and
Director, since January, 1996
Craig T. Rogers 34 Treasurer, CFO, and Director,
since July, 1993
- -------------------------
<FN>
(1) D. William Hill, the Company's CEO and Chairman of the Board, is the
father of David W. Hill, who currently serves as the Company's President,
COO, Treasurer and a member of the Board of Directors. Except as set
forth above, no family relationship exists between or among any of the
directors or officers of the Company.
</FN>
</TABLE>
The foregoing persons will serve in their respective capacities as
officers of the Registrant until the next regular annual meeting of the
Company's Board of Directors, and until their successors are elected and
qualified.
D. WILLIAM HILL
---------------
Mr. Hill currently serves as Chairman of the Board of Directors and CEO of
the Company. From July 1994 until December 31, 1995 Mr. Hill was Chairman and
Director of Rocky Mountain Taco, Inc. and Colorado Taco Corporation. Prior to
this, he spent 21 years in the semiconductor industry. From October 1990 until
July 1994 he served as Chief Operating Officer and Executive Vice President of
Simtek Corp., and was involved in Simtek's initial and secondary public stock
offerings. Mr. Hill was employed by United Technologies as Wafer Fab Manager
from June 1989 through October 1990. He was employed by Advanced Micro Devices
from July 1987 until June 1989 as Engineering Manager and held various
positions at Texas Instruments from June 1973 until July 1987. Mr. Hill
received a Bachelor of Science Degree in Mathematics from Texas A&M, West Texas
in 1973.
DAVID W. HILL
-------------
Mr. Hill currently serves as President, Treasurer, and Director of the
Company. From March 1993 until December 31, 1995, Mr. Hill was President,
Treasurer and Director of Rocky Mountain Taco, Inc. and Colorado Taco
Corporation. During this tenure, Mr. Hill built the first ZuZu(-Registered
Mark-) Handmade Mexican Food restaurant outside of Dallas, Texas and secured
the development rights for the state of Colorado. Additionally, Mr. Hill
orchestrated the development, construction, and introduction of four additional
ZuZu(-Registered Mark-) Handmade Mexican Food restaurants in the state of
Colorado. Mr. Hill has been instrumental in the evolution of the ZuZu(-
Registered Mark-) concept by developing a number of unique product offerings
and promotions. From August 1992 to January 1994, Mr. Hill was a partner in a
financial services company offering mortgage consulting, property assessment,
investment strategies, and mortgage financing services. From August 1989 to
August 1992, Mr. Hill served as a corporate officer of NationsBank
coordinating the nationwide consolidation of banking institutions as well as
developing, tracking and coordinating retail home mortgage lending practices.
Mr. Hill received an MBA in August 1989 from Baylor University's Hankamer
School of Business (attended on full academic scholarship) and a BS in
Economics from Texas Tech University in 1987. From 1982 to 1989, Mr. Hill
developed a significant background in the food services industry serving as a
head-waiter, chef, and restaurant manager. Mr. Hill will appear at the
upcoming Nation's Restaurant News MUFSO (Multi-Unit Food Service Operators)
convention to speak on "Managing Growth".
CRAIG T. ROGERS
---------------
Mr. Rogers has been a Director and officer of the Company since July,
1993. Mr. Rogers had been Chief Executive Officer, President and Director of
Intelligent Financial Corporation from June 30, 1991 until its merger with Cell
Robotics on February 23, 1995. Mr. Rogers was Chief Operating Officer of
Rockies Fund, Inc., a Colorado business development company, from July, 1993 to
October 1, 1996. Mr. Rogers also serves as Chief Financial Officer,
Secretary/Treasurer, and Director of Cell Robotics International, Inc., a
developer and manufacturer of scientific and medical laser products. From
April 1988 to June 1991, he served as Chief Financial Officer for DMA Computer
Solutions, a general partnership operating four Connecting Point franchise
stores. He served as President of DMA Financial Corporation from inception
until its merger into Intelligent Financial Corp. in September, 1991.
Previously, Mr. Rogers was Assistant Vice-President of Century Bank and he was
a Commercial Loan Officer with Colorado National Bank - Exchange in Colorado
Springs, Colorado. Mr. Rogers received a Bachelor of Arts Degree in
Business/Economics from Colorado College in 1984. He was a Boettcher Scholar,
graduated summa cum laude, Phi Beta Kappa and co-valedictorian.
EMPLOYMENT CONTRACTS
- --------------------
A written employment agreement with Mr. Rogers provides for the payment of
a base salary of $36,000 per year as well as the payment of incentive
compensation conditioned upon the Company achieving certain minimum thresholds
of after-tax net income. The Employment Agreement also grants to Mr. Rogers
the right to receive salary continuation for a period of three (3) years in the
event the Company terminates the Agreement without cause prior to its
expiration. The agreement expires December 31, 1996.
No employment contracts exist between the Company and Messrs. Hill.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------
Under the Securities Laws of the United States, the Company's Directors,
its Executive (and certain other) Officers, and any persons holding more than
ten percent (10%) of the Company's Common Stock are required to report their
ownership of the Company's Common Stock and any changes in that ownership to
the Securities and Exchange Commission and the NASDAQ stock market. Specific
due dates for these reports have been established and the Company is required
to disclose in this report any failure to file by these dates during the
preceding fiscal year. All of these filing requirements were satisfied by its
Officers and Directors and ten percent (10%) holders, except the following: D.
William Hill and David W. Hill each failed to file with the Commission, on a
timely basis, an Initial Statement of Beneficial Ownership of Securities on
Form 3. Additionally, Craig Rogers failed to file on a timely basis, one
report relating to one transaction involving the Common Stock of the Company
and also failed to file on a timely basis an Annual Statement of Beneficial
Ownership of Securities on Form 5. In making these statements, the Company has
relied on the representation of its Directors and Officers or copies of the
reports that they have filed with the Commission.
ITEM 10 EXECUTIVE COMPENSATION
- --------------------------------
The following table sets forth information relating to the compensation
paid during the preceding fiscal year to persons who served as executive
officers of the Company.
<TABLE>
TABLE 1
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
----------------------------------
Annual Compensation(1) Awards Payouts
-------------------------- --------------------- -------
Other All
Annual Restricted Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation Award(s) Options/ Payouts sation
Position Year ($) ($) ($)(2) ($) SARs ($) ($)
- -------------------- ------- -------- ----- --------- ---------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Don McCrea-Hendrick 1995 $100,000
Chairman 1994 $ 70,833 __ __ __ __ __
1993 $ 33,333
Gary R. Fong 1995 $ 66,666 __ __ __ __ __
President 1994 $100,000
1993 $ 33,000
- ------------------------------
</TABLE>
STOCK OPTIONS
- -------------
On November 8, 1993, the Board of Directors and shareholders of the
Company adopted the Discovery Stock Option Plan (the "Plan"). The Plan allows
the Company to grant incentive stock options, nonqualified stock options and/or
stock purchase rights to officers, employees, former employees and consultants
of the Company and its subsidiaries. Options that qualify as "Incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986
and options that do not qualify as such "Incentive stock options"
("nonstatutory stock options") may be granted under the Plan. The Plan is
administered by the Board of Directors or a committee appointed by the Board,
which determines the employees, officers, and directors who are to receive
options, the type of option to be granted, and the number of shares subject to
each option. Options may not be granted under the Plan after October 31, 1999.
Incentive stock options may not be granted with a purchase price less than the
fair market value of the common stock on the dates the options are granted (or,
for persons who own more than 10% of the Company's outstanding voting stock,
with a purchase price less than 110% of such fair market value). The aggregate
fair market value (determined as of the time the option is granted ) of shares
of common stock with respect to which incentive stock options become
exercisable for the first time by the optionee under the Plan during any
calendar year may not exceed $100,000. Options may not be transferred, other
than by will or the laws of descent and distribution, and during the lifetime
of an optionee, may be exercised only by the optionee.
As of December 31, 1995, no ISOs and no NQSOs, were outstanding and
unexercised under the Plan.
The following table sets forth certain information concerning the granting
of incentive stock options during the last completed fiscal year to each of the
named executive officers:
<TABLE>
TABLE 2
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
----------------------------------------------------
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees or Base
Name Granted (#) in Fiscal Year Price Expiration Date
- ---------------- ------------ -------------- -------- ---------------
<S> <C> <C> <C> <C>
Don Mccrea-Hendrick 85,333 31.4% $3.00 December 1999 (1)
Gary R. Fong -0- -0- -0- NA
- ------------------------------
</TABLE>
(1) In conjunction with the ZuZu(-Registered Mark-) Colorado Reorganization
all of the outstanding options of the Company, including those granted to
Mr. McCrea-Hendrick, were replaced with common stock purchase warrants of
the Company. The Warrants granted to Mr. McCrea-Hendrick are exercisable
to acquire up to 85,333 shares of Company Common Stock at an exercise
price of $3.00 per share, expiring in December, 1999.
SUBSEQUENT EVENTS
- -----------------
As provided for under the Definitive Agreement with ZuZu Colorado, all of
the outstanding options of the Company, including the foregoing incentive
options issued to Executives of the Company, were canceled and replaced with
the following warrants:
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended Owned at
December 31, 1995 December 30, 1995
---------------------------------------------- ----------------------
Granted Exercised
Name or --------------------- -------------------
Description No. of Exercise No. of Net No. of Exercise
of Group Shares Price Shares Value Shares Price
- ------------------- ------- -------- ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Don McCrea-Hendrick 95,833 $3.00 (1) None -- 95,833 $3.00
Craig T. Rogers 5,000 $3.00 None -- 5,000 $3.00
Craig T. Rogers 90,000 $1.00 None -- 90,000 $1.00
Kelly Mitchell 5,000 $1.51 None -- 5,000 $1.51
Marc Lilly 5,000 $1.51 None -- 5,000 $1.50
Marc Lilly 30,000 $1.00 None -- 30,000 $1.00
Ron T. Ziuraitis 10,000 $1.00 None -- 10,000 $1.00
Ron T. Ziuraitis 1,250 $1.00 None -- 1,250 $1.00
Ron L. Ziuraitis 30,000 $1.00 None -- 30,000 $1.00
Ron L. Ziuraitis 3,750 $1.00 None -- 3,750 $1.00
All Executive Officers
as a Group 275,833 $1.90 None -- 275,833 $1.90
- ---------------------------
<FN>
(1) 85,833 Warrants issued to Don McCrea-Hendrick were issued as part of his
agreement to transfer 126,221 shares of Common Stock to the Company as
part of the Reorganization.
</FN>
</TABLE>
ITEM 11 SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
- ---------------------------------------------------------------------
The following table sets forth, as of October 1, 1996, and as adjusted for
the conversion of Option Stock, the stock ownership of (i) each person known by
the Company to be the beneficial owner of five (5%) percent or more of the
Company's Common Stock, (ii) all Directors individually, (iii) all Officers,
individually, and (iv) all Directors and Officers as a group. Each person has
sole voting and investment power with respect to the shares shown, except as
noted.
<TABLE>
<CAPTION>
Name & Address Shares Beneficially Owned
of Beneficial Owner Number Percent (1)
- ------------------- -------- -----------
Officers, Directors and
Principal Shareholders
- -----------------------
<S> <C> <C>
Don McCrea-Hendrick (2) 334,987 8.7%
75 Capilano Dr.
Novato, CA 94949
Craig T. Rogers (3) 133,131 3.5%
4465 Northpark Drive
Colorado Springs, CO 80907
D. William Hill 678,849 18.1%
24 Tejon Street
Colorado Springs, CO 80901
<PAGE>
David W. Hill 487,064 13.0%
24 Tejon Street
Colorado Springs, CO 80901
Fred M. Seed Annuity Trust (4) 646,596 16.9%
One Citizens Plaza
Providence, RI 02903
Deborah Salzman (5) 257,650 6.9%
538 Garden Of The Gods Road
Colorado Springs, CO 80907
All current Directors and
Officers as a group (3 persons) 1,291,044 33.6%
- ------------------------------
<FN>
(1) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them as of October 1, 1996, or within 60
days of such date, are treated as outstanding when determining the percent
of the class owned by such individual and when determining the percent
owned by the group.
(2) Includes Common Stock Purchase Warrants exercisable to acquire up to
95,833 shares of Common Stock at an exercise price of $3.00 per share.
(3) Includes 5,804 shares owned by Mr. Rogers personally; and 24,327 shares
owned of record by R.O.I., Inc., a Colorado corporation of which Mr.
Rogers is an officer, director and fifty percent shareholder. Also
includes Common Stock Purchase Warrants exercisable to acquire up to
90,000 shares of Common Stock at an exercise price of $1.00 per share, and
Common Stock Purchase Warrants exercisable to acquire up to 5,000
additional shares of Common Stock at an exercise price of $3.00 per share.
Includes Common Stock Purchase Warrants exercisable to acquire up to 8,000
shares of Common Stock at an exercise price of $1.04 per share owned of
record by R.O.I., Inc. Mr. Rogers disclaims beneficial ownership of fifty
percent (50%) of the shares and warrants owned by R.O.I., Inc. for
purposes of Section 16 of the Securities Exchange Act of 1934, as amended.
(4) Includes Common Stock Purchase Warrants exercisable to acquire up to
80,000 shares of Common Stock at an exercise price of $1.04 per share.
(5) Includes 48,316 shares jointly owned with her husband, Harry Salzman.
</FN>
</TABLE>
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
EMPLOYMENT CONTRACTS
- --------------------
The Company entered into written employment agreements with Gary R. Fong,
Don McCrea-Hendrick and Craig Rogers, all of whom were or are executive
officers of the Company. Effective August 24, 1995, the Company entered into a
separation agreement with Mr. Fong whereby Mr. Fong resigned as President/CEO
and a director of the Company and the Company and Mr. Fong released each other
from all obligations under Mr. Fong's employment agreement in exchange for
transferring 300,000 shares of Common Stock owned by Mr. Fong to the Company in
addition to other mutual consideration.
The written employment agreement with Mr. McCrea-Hendrick provides for the
payment of a base salary of $100,000 per year as well as the payment of
incentive compensation conditioned upon the Company achieving certain minimum
thresholds of after-tax net income. The Employment Agreement also grants to
Mr. McCrea-Hendrick the right to receive salary continuation for a period of
three (3) years in the event the Company terminates the Agreement without cause
prior to expiration. In conjunction with the Reorganization, the Company and
Mr. McCrea-Hendrick each agreed to release the other from all obligations
existing under Mr. McCrea-Hendrick's employment agreement, including the
forgiveness by Mr. McCrea-Hendrick of unpaid salary excess of $175,000.
A written employment agreement with Mr. Rogers provides for the payment of
a base salary of $36,000 per year as well as the payment of incentive
compensation conditioned upon the Company achieving certain minimum thresholds
of after-tax net income. The Employment Agreement also grants to Mr. Rogers
the right to receive salary continuation for a period of three (3) years in the
event the Company terminates the Agreement without cause prior to expiration.
LOANS
- -----
From the time of its formation through December 31, 1995, Innovative had
borrowed money from certain stockholders, officers and employees. As of
December 31, 1995, the balance of such loans was $97,362. The interest rates
on such loans range from 15.0% to 17.0%. Except as set forth below, there are
no specific repayment terms.
TRANSACTIONS WITH TRIM HEALTHCARE SYSTEMS, INC.
- -----------------------------------------------
TRIM Healthcare Systems, Inc. ("TRIM") was originally founded and
organized by Don McCrea-Hendrick (the Company's former Chairman of the Board
and President), and Ronald Ziuraitis (currently a minority stockholder of the
Company) in 1985.
In June, 1991 Messrs. McCrea-Hendrick and Ziuraitis sold a majority of the
interest in TRIM to several investor groups and received a combination of cash
and promissory notes. The investor group that purchased controlling interest
in TRIM advanced approximately $716,000 in funds to TRIM secured by promissory
notes which were senior to the notes held by Messrs. McCrea-Hendrick and
Ziuraitis and junior to the security interest of the Silicon Valley Bank.
In December, 1993, the investor group had defaulted on its obligations to
Messrs. McCrea-Hendrick and Ziuraitis and to the Silicon Valley Bank.
Subsequent to the default, the investor group sold their 98% interest in TRIM
to Messrs. McCrea-Hendrick and Ziuraitis at which time it was necessary for
TRIM to file a voluntary petition under the provisions of Chapter 11 of the
United States Bankruptcy Code because of TRIM's $906,000 obligation to Silicon
Valley Bank. As part of the sale, Innovative purchased from the investors their
$716,000 in secured notes by issuing to the investor group a note for $200,000,
which was also personally guaranteed by Messrs. McCrea-Hendrick and Ziuraitis.
The note called for five equal monthly payments of $40,000 each commencing in
January, 1994. Innovative has refused to make payments on the note claiming
numerous defenses and counterclaims based upon misrepresentations in the
transaction. THCS has initiated suit against Innovative and the guarantors to
collect amounts due on the note, also asserting claims for defamation, trade
libel, interference with economic relations, and invasion of privacy (which
claim has been dismissed). Innovative has retained counsel and is vigorously
defending the suit and, on its own behalf, has asserted counterclaims against
the plaintiffs. (See "Legal Proceedings")
In March, 1994, the Company entered into a letter of intent to acquire
Messrs. McCrea-Hendrick and Ziuraitis' 98% interest in TRIM. Subsequently
because of the operational problems encountered by Innovative, the parties
mutually agreed to not pursue the acquisition.
DISPOSITION OF INNOVATIVE AND ACQUISITION OF ZuZu(-Registered Mark-) COLORADO
- -----------------------------------------------------------------------------
Effective March 29, 1996, the Company entered into and consummated an
agreement and plan of reorganization (the "Reorganization"), with Rocky
Mountain Taco, Inc. (RMT) and CTC (The Colorado Taco Corporation) pursuant to
which the Company acquired 100% of the issued and outstanding shares of common
stock, and all other equity securities of RMT and CTC. Pursuant to the terms
of the Reorganization, the Company exchanged 2,800,000 shares of its Common
Stock for a combined total of 1,159,049 shares of ZuZu(-Registered Mark-)
Colorado's issued and outstanding common stock. Additionally, warrants
exercisable to acquire up to 124,000 shares of RMT common stock at an exercise
price of $2.50 per share were exchanged for warrants exercisable to purchase
124,000 shares of the Company's Common Stock at an exercise price of $1.04 per
share, which warrants now expire on December 31, 1998.
As part of the Reorganization, the Company transferred 100% of the
outstanding Common Stock of Innovative to the Company's then Chairman and
principal shareholder, Don McCrea-Hendrick. As consideration for transfer, Mr.
McCrea-Hendrick returned to the Company 126,221 shares of the Company's Common
Stock. In addition, Mr. McCrea-Hendrick forgave $175,000 in past due salary
obligations and signed a mutual release with the Company terminating all rights
and obligations under an employment agreement previously executed by Mr.
McCrea-Hendrick and the Company. Innovative and Mr. McCrea-Hendrick also
assumed and agreed to pay all of the outstanding liabilities and obligations of
the Company which were incurred and/or accrued prior to January 1, 1996, save
and except for $52,000 of liabilities which were retained by the Company. As
further consideration, the Company granted Mr. McCrea-Hendrick options
exercisable to acquire up to 85,833 shares of the Company's common stock at an
exercise price of $3.00 per share.
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
FINANCIAL STATEMENTS
--------------------
The following financial statements are filed herewith as part of this
report:
1. Independent Auditor's Report;
2. Consolidated Balance Sheet, December 31, 1995;
4. Consolidated Statements of Operations for the years ended
December 31, 1995, and 1994;
4. Consolidated Statement of Stockholders Equity (Deficit) for the years
ended December 31, 1995, and 1994;
5. Consolidated Statements of Cash Flows for the years ended
December 31, 1995, and 1994; and
6. Notes to Consolidated Financial Statements.
EXHIBITS
--------
Exhibit
No. Title
------ -----
(1) 2.0 Definitive Agreement and Plan of Reorganization between
Innovative Financial Strategies, Inc. and Discovery
Technologies, Inc. dated September 14, 1993
(5) 2.1 Definitive Agreement and Plan of Reorganization between the
Company and ZuZu(-Registered Mark-) Colorado
(2) 3.1 Articles of Incorporation
(3) 3.2 Certificate and Articles of Amendment
(2) 3.3 Bylaws
(4) 4.1 Specimen Certificate of Common Stock
(4) 4.2 Specimen Class A Common Stock Purchase Warrant
(4) 4.3 Specimen Subscription Agreement - A Warrant
(4) 4.4 Specimen Class B Common Stock Purchase Warrant
(4) 4.5 Specimen Subscription Agreement - B Warrant
(1) 10.1 Employment Agreement of Don McCrea-Hendrick
(1) 10.2 Employment Agreement of Gary R. Fong
(1) 10.3 Employment Agreement of Craig T. Rogers
(5) 10.4 Separation Agreement - Gary Fong
(5) 10.5 Agreement Between Don McCrea-Hendrick and Discovery
Technologies, Inc. for the Ownership Transfer of Innovative
Financial Strategies, Inc.
* 10.6 Sample ZuZu(-Registered Mark-) Franchise Agreement
(6) 16.0 Letter of Hein + Associates LLP filed pursuant to Item 304(a)(3)
of Regulation S-B regarding change in certifying accountant.
(7) 16.1 Letter of Grant Thornton LLP filed pursuant to Item 304(a)(3) of
Regulation S-B regarding change in certifying accountant.
- --------------------------
* Filed herewith
(1) Incorporated by reference from the Company's Current Report on Form 8-K
dated October 15, 1993.
(2) Incorporated by reference from the Company's Registration Statement on
Form S-18; SEC File No. 33-32764D.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended June 30, 1990.
(4) Incorporated by reference from the Company's Registration Statement on
Form S-3; SEC Registration Number 33-75346.
(5) Incorporated by reference from the Company's Current Report on Form 8-K
dated October 14, 1996.
(6) Incorporated by reference from the Company's Current Report on Form 8-K
dated May 23, 1996.
(7) Incorporated by reference from the Company's Current Report on From 8-K
dated August 27, 1996.
CURRENT REPORTS ON FORM 8-K
---------------------------
The Registrant filed no Current Reports on Form 8-K during the fourth
quarter of the year ended
December 31, 1995.
<PAGE>
<PAGE>
DISCOVERY TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1995 AND 1994
AND INDEPENDENT AUDITOR'S REPORT
<PAGE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report F-2
Consolidated Balance Sheet - December 31, 1995 F-3
Consolidated Statements of Operations - For the Years
Ended December 31, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity (Deficit) -
For Years Ended December 31, 1995 and 1994 F-5
Consolidated Statements of Cash Flows - For the Years
Ended December 31, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-8
<PAGE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Discovery Technologies, Inc.
San Rafael, California
We have audited the accompanying consolidated balance sheet of Discovery
Technologies, Inc. and subsidiary as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years ended December 31, 1995 and 1994. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Discovery
Technologies, Inc. and subsidiary as of December 31, 1995, and the results of
their operations and their cash flows for the years ended December 31, 1995 and
1994, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Discovery Technologies, Inc. and subsidiary will continue as a going
concern. As discussed in Note 3 to the financial statements, the Company's
recurring losses from operations, and working capital and stockholders equity
deficiencies raise substantial doubt about the entity's ability to continue as
a going concern. Management's plans in regard to these matters are described
in Note 3. The financial statements do not include any adjustments relating to
the recoverability and classification of reported asset amounts or the amounts
and classification of liabilities that might result from the outcome of this
uncertainty.
Hein + Associates llp
Certified Public Accountants
Orange, California
October 2, 1996
<PAGE>
<PAGE>
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1995
------------
<S> <C>
ASSETS
------
Current Assets:
Cash $ 316
Accounts receivable 37,959
Unbilled receivables 3,183
------------
Total current assets 41,458
Property and Equipment, net 40,106
Notes Receivable 200,000
Other Assets 5,467
------------
Total Assets $ 287,031
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities:
Current portion of notes payable and
long-term debt $ 211,924
Loans from officers and affiliates 97,362
Accounts payable 211,282
Accrued liabilities 237,822
------------
Total current liabilities 758,390
Long-Term Debt, net of current portion 5,742
------------
Total liabilities 764,132
------------
Commitments and Contingencies (Notes 3 and 9)
Stockholders' Equity (Deficit):
Preferred stock, $.01 par value, 1,000,000
shares authorized, issuable in
series, none issued -
Common stock, $1.00 par value,
40,000,000 shares authorized,
774,221 shares issued and outstanding 774,221
Contributed capital 170,140
Accumulated deficit (1,421,462)
------------
Total stockholders' equity (deficit) (477,101)
------------
Total Liabilities and Stockholders' Equity (Deficit) $ 287,031
==========
See accompanying notes to these consolidated financial statements.
/TABLE
<PAGE>
<PAGE>
DISCOVERY TECHNOLOGIES, IC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Years Ended
December 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Net Revenue $ 483,604 $ 935,395
Selling, General and Administrative
Expenses 1,009,230 1,538,424
Loss From Operations (525,626) (603,029)
----------- -----------
Other Income (Expense):
Interest expense (34,107) (29,834)
Interest income 5,283 6,928
Gain on sale of fixed asset (732) -
----------- -----------
Total other income (expense) (29,556) (22,906)
----------- -----------
Loss Before Income Taxes (555,182) (625,935)
Provision (Benefit) for Income Taxes 1,600 (96,400)
----------- -----------
Net Loss $ (556,782) $ (529,535)
========== ==========
Net Loss Per Common Share $ (0.60) $ (0.54)
=========== ===========
Weighted Average Common Shares 934,879 986,298
======= =======
See accompanying notes to these consolidated financial statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>
DISCOVERY TECHNOLOGIES. INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<CAPTION>
Officer/
Stock- Total
Preferred Common holders' Stock
Stock Common Stock Stock Contrib- Accumu- Notes holders'
------------- --------------------- Purchase uted lated Receiv- Equity
Shares Amount Shares Amount Warrants Capital Deficit ables (Deficit)
------ ---- ---------- ---------- --------- ---------------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------
BALANCE,
JANUARY 1, 1994 - $ - 881,917 $881,917 $ 99,500 $(482,828)$ (335,145) $(19,194) $ 144,250
- ---------------
Conversion of
Class A common
stock purchase
warrants - - 57,804 57,804 - 42,196 - - 100,000
Conversion of
Class B common
stock purchase
warrants - - 99,500 99,500 (99,500) 99,500 - - 99,500
Collections
of notes
receivable - - - - - - - 19,194 19,194
Officer note
receivable
forgiven for
return of
common stock - - - - - - - (35,000) (35,000)
Net loss - - - - - - (529,535) - (529,535)
- ----------------- ---- ---- ---------- ---------- -------- ---------------------- -------- ----------
BALANCE,
DECEMBER 31, 1994
- ----------------- - - 1,039,221 1,039,221 - (341,132) (864,680) (35,000) (201,591)
Officer return of
common stock for
forgiveness of
debt - - (300,000) (300,000) - 300,000 - 35,000 35,000
Forgiveness of
stockholder debt - - - - - 151,557 - - 151,557
Common stock
issued for
accrued employee
liabilities - - 35,000 35,000 - 59,715 - - 94,715
Net loss - - - - - - (556,782) - (556,782)
- ----------------- ---- ----- ---------- ---------- -------- ---------------------- -------- ----------
BALANCE,
DECEMBER 31, 1995 - $ - 774,221 $ 774,221 $ - $ 170,140 $(1,421,462) $ - $(477,101)
- -----------------
See accompanying notes to these consolidated financial statements.
/TABLE
<PAGE>
<PAGE>
DISCOVERY TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For The Years Ended
December 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (556,782) $ (529,535)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 32,422 34,007
Allowance for doubtful accounts (10,000) -
Gain on sale of property and equipment 732 -
Deferred income taxes - (98,000)
Changes in operating assets and
liabilities:
(Increase) decrease in:
Accounts receivables 44,435 (505)
Unbilled receivables 232,966 177,019
Inventory 22,500 37,500
Prepaid expenses 18,201 113,616
Other assets 29,161 (23,762)
Increase (decrease) in:
Accounts payable 48,993 (14,322)
Accrued liabilities 274,236 173,413
---------- -----------
Net cash provided by (used in)
operating activities 136,864 (130,569)
---------- -----------
Cash Flows from Investing Activities:
Collections on notes receivable - 29,194
---------- -----------
Net cash provided by investing activities - 29,194
---------- -----------
Cash Flows from Financing Activities:
Loans from officers and affiliates 156,169 117,118
Payments to officers and affiliates (238,696) (159,330)
Payments on long-term debt (55,074) (130,177)
Issuance of common stock - 199,500
---------- -----------
Net cash provided by (used in)
financing activities (137,601) 27,111
---------- -----------
Increase (decrease) in Cash (737) (74,264)
Cash, beginning of period 1,053 75,317
---------- ---------
Cash, end of period $ 316 $ 1,053
========= ========
Supplemental Cash Flow Information:
Interest paid $ 12,177 $ 9,846
========= ========
Taxes paid $ - $ -
========= ========
Noncash investing and financing activities:
Accrued liabilities paid and forgiven
in exchange for common stock $ 246,272 $ -
========= ========
Officer return of common stock $ 300,000 $ -
========= ========
Cancellation of officer note receivable $ 35,000 $ -
========= ========
Forgiveness of debt related to officer
return of stock $ 11,633 $ -
========= ========
Purchase of property and equipment
with debt $ 3,816 $ -
======== ========
See accompanying notes to these consolidated financial statements.
/TABLE
<PAGE>
DISCOVERY TECHNOLOGIES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND:
----------
Discovery Technologies, Inc. (DTI) was incorporated in February 1987 under
the laws of the State of Kansas. Effective June 30, 1993, DTI
discontinued all ongoing operations and began negotiations to sell all of
its remaining assets.
Effective October 1, 1993, DTI merged with Innovative Financial
Strategies, Inc. (IFS). Collectively, DTI and IFS are referred to as the
Company. IFS was incorporated under the laws of the State of California
in January 1992 and is engaged in the business of providing revenue
enhancement consulting services to hospitals and other health care
clientele in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Principles of Consolidation -
---------------------------
The consolidated financial statements include the accounts of the
Company and its subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Revenue -
-------
Revenue from enhancement consulting services is recognized upon
completion of a project, the acceptance by the client, and the
commencement of a plan of implementation by the client. Revenue for
claims review services is recorded upon completion of the review, net of
an allowance for unrecoverable claims.
Capitalized Expenses -
--------------------
Costs incurred to complete revenue enhancement contracts are
capitalized as prepaid expenses and are expensed when an implementation
plan is accepted by the client and implementation has commenced, or when
the Company determines that the plan will not be implemented.
Unbilled Receivables -
--------------------
Unbilled receivables represent revenue recognized for services
completed but not yet billable, based on the terms of the contract. These
amounts are generally billable in twelve monthly installments commencing
upon implementation of a revenue enhancement system or immediately upon
collection by the client of amounts identified through claims review
services.
Property and Equipment -
----------------------
Property and equipment is stated at cost. Depreciation and
amortization is computed using the straight-line method over the estimated
useful lives of the related assets, which range from three to five years.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation and amortization are removed from the accounts,
and any resulting gain or loss is recognized in income for the period.
The cost of maintenance and repairs is charged to income as incurred
whereas significant renewals and betterments are capitalized.
<PAGE>
Income Taxes -
------------
The Company accounts for income taxes under the liability method,
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the differences between
financial statements and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
Commission Advances -
-------------------
The Company periodically makes advances to commissioned sales
representatives which are recorded in prepaid expenses. The advances are
charged to expense when they are earned.
Cash Equivalents -
----------------
For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.
Loss Per Share -
--------------
Loss per common share is based on the weighted average common shares
outstanding. Common stock equivalents (i.e., common stock options and
purchase warrants) are antidilutive, and therefore, have not been utilized
in the computation.
Merger Expenses -
---------------
All costs related to the merger between DTI and IFS consisting
principally of legal and accounting expenses have been included in
selling, general and administrative expenses.
Use of Estimates -
----------------
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principals requires the
Company's management to make estimates and assumptions that affect the
amounts report in these financial statements and accompanying notes.
Actual results could differ from those amounts.
Impact of Recently Issued Accounting Standards -
----------------------------------------------
In March 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Impairment of Long-Lived Assets." This
new standard is effective for years beginning after December 15, 1995 and
would change the Company's method of determining impairment of long-lived
assets. Although the Company has not performed a detailed analysis of the
impact of this new standard on the Company's financial statements, the
Company does not believe that adoption of the new standard will have a
material effect on the financial statements.
In October 1995, the Financial Accounting Standards Board issued a
new statement titled "Accounting for Stock-Based Compensation" (FAS 123).
The new statement is effective for fiscal years beginning after December
15, 1995. FAS 123 encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options, and
other equity instruments to employees based on fair value. Companies that
do not adopt the fair value accounting rules must disclose the impact of
adopting the new method in the notes to the financial statements.
Transactions in equity instruments with non-employees for goods or
services must be accounted for on the fair value method. The Company
currently does not intend to adopt the fair value accounting prescribed by
FAS 123, and will be subject only to continue its analysis of FAS 123 and
may elect to adopt its provisions in the future.
Concentrations of Credit Risk -
-----------------------------
Credit Risk represents the accounting loss that would be recognized
at the reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off balance
sheet) that arise from financial instruments exist for groups of customers
or groups of counterparties when they have similar ecomonmic
characteristics that would cause their ability to meet contractual
obligations to be similarly effected by changes in economic or other
conditions described below. In accordance with FASB Statement No. 105,
Disclosure of Information about Financial Instruments with Off-Balance-
Sheet Risk and Financial Instruments with Concentrations of Credit Risk,
the credit risk amounts shown do not take into account the value of any
collateral or security.
Fair Value of Financial Instruments -
-----------------------------------
The estimated fair values for financial instruments under SFAS No.
107, Disclosures about Fair Value of Financial Instruments, are determined
at discrete points in time based on relevant market information. These
estimates invlove uncertainties and cannot be determined with precision.
The estimated fair values of the Company's financial instruments, which
includes all cash, accounts receivables, accounts payable, long-term debt,
and other debt, approximates the carrying value in the consolidated
financial statements at December 31, 1995.
3. UNCERTAINITY AS TO GOING CONCERN:
--------------------------------
As shown in the accompanying financial statements, the Company has
suffered recurring losses from operation and at December 31, 1995 had a
deficit in both working capital and stockholders equity.
Management is addressing the issue and has taken action to eliminate all
excess general and administrative expenses. Additionally, management has
increased its sales and marketing staff and has placed emphasis on fixed
fee and retainer required contracts.
On November 15, 1995, the Company approved the sale of IFS. Under the
terms of the agreement, IFS would assume 100% of the liabilities of DTI
including liabilities for any employment agreements. The purchaser, a
current shareholder of the Company, would reduce his number of shares in
DTI by 123,666 shares to be held in escrow as treasury stock with a
repurchase option at $3.00 per share expiring December 1999.
Additionally, the purchaser would release DTI from all obligations,
including $175,000 of unpaid salary and all current employment agreements.
In conjunction with the above sale of IFS, the Company entered into a
letter of intent to purchase ZuZu Colorado ("ZuZu"), an operator of fast
food Mexican restaurants in Colorado, for 2,800,000 shares of the
Company's common stock (See Note 12).
4. PROPERTY AND EQUIPMENT:
----------------------
Property and equipment consist of the following at December 31, 1995:
<PAGE>
<TABLE>
<S> <C>
Office furniture and equipment $ 77,327
Computer software 51,140
---------
128,467
Less accumulated depreciation
and amortization (88,361)
---------
Property and equipment, net $ 40,106
</TABLE>
5. NOTES RECEIVABLE:
----------------
On December 29, 1993, IFS purchased from THCS Holding, Inc. a series of
secured promissory notes, subordinate to only the debt owing to Silicon
Valley Bank made by Trim Healthcare Systems, Inc. (TRIM). The notes were
originally owed to various venture capital firms, who subsequently
collectively assigned the notes to THCS Holding, Inc.
The notes range in principal amount from $6,120 to $59,900, bear interest
at 10% per annum, and had original due dates ranging from June 30, 1993 to
December 14, 1993. All principal and accrued interest was payable on the
due dates. As of December 29, 1993, the outstanding principal balance of
notes was $716,301, and the accrued interest was approximately $91,000.
IFS purchased the notes, including the accrued interest by issuing its
own, unsecured promissory note payable in the amount of $200,000 (See
Note 6). Accordingly, the notes receivable and related accrued interest
have been recorded in the accompanying consolidated balance at their
aggregate cost to IFS of $200,000.
On January 21, 1994, TRIM filed for bankruptcy under the provisions of
Chapter 11 of the Bankruptcy Act.
6. NOTES PAYABLE AND LONG-TERM DEBT:
--------------------------------
Notes payable and long-term debt consist of the following at December 31,
1995:
<TABLE>
<S> <C> <C>
Unsecured notes payable, due in aggregate monthly
installments of $914, including interest at
rates ranging from 8% to 10.9%, with maturities
ranging from January 1996 through November 1998. $ 17,666
Unsecured non-interest bearing note payable, due in
five equal installments of $40,000, due on the
fifteenth calendar day of each subsequent month
commencing on January 15, 1994 (See Note 5). 200,000
---------
217,666
Less current portion (211,924)
----------
Total long-term debt $ 5,742
==========
</TABLE>
The unsecured, non-interest bearing $200,000 note described above was
personally guaranteed by two individuals, one of whom was an officer,
director and majority stockholder of the Company, the other of whom is a
minority stockholder of the Company. Under the terms of the note, the
monthly principal payments can be reduced by amounts owed to IFS by the
noteholder pursuant to another agreement between the parties. IFS has not
made any of the monthly payments due pursuant to the terms of the notes
due to a lack of available funds and because IFS believes that certain
offsets allowable by the terms of the agreements between the parties exist
which will reduce the amount of the principal payment due.
On March 14, 1994, IFS received a notice of default which under the terms
of the note, accelerated all past and future monthly installments. The
default notice demanded payment of $200,000 by April 15, 1994. Subsequent
to March 14, 1994, a lawsuit was filed against IFS demanding payment.
Subsequently, IFS filed a cross complaint and during September 1995
received a settlement offer to the benefit of IFS and other individuals
involved in the cross complaint, including the extinguishment of the
$200,000 note described above. IFS and other cross complainants refused
the offer and have increased their suit against the noteholder to
$10,000,000.
Scheduled maturities of notes payable and long-term debt subsequent to
December 31, 1995 are as follows:
<TABLE>
<S> <C> <C>
1996 $ 211,924
1997 3,837
1998 1,905
---------
$ 217,666
</TABLE>
7. STOCKHOLDERS' EQUITY:
--------------------
On February 23, 1994, the Company received total gross proceeds of
approximately $199,500, resulting from the exercise of Class A and Class B
warrants.
In April 1994, the Board of Directors authorized the issuance of 50,000
Class C common stock purchase warrants in consideration of services to the
Company. Each warrant is exercisable into one share of common stock at a
price of $1.50 per share. The exercise price of the warrants exceeded the
fair market value of the stock at the date of grant. During 1995 the
exercise date of the warrants was extended to June 30, 1997.
In December 1994, the Company granted stock purchase warrants for 250,000
shares with exercise prices ranging from $1.25 to $2.50 per share. The
warrants were granted to an investment banking firm in exchange for
services in connection with the Company's S-8 filing. The exercise price
of the warrants exceeded the fair market value of the stock at the date of
grant. All warrants were immediately exercisable and expired from
January 27, 1995 through December 31, 1995. All warrants granted were
subsequently extended to expire from January 26, 1996 through June 30,
1997. Additionally, the exercise price of the warrants were subsequently
reduced to $1.00 per share.
In November and December 1995, the Company granted stock purchase warrants
for 90,000 shares with an exercise price of $1.00 per share in
consideration of services to the Company. Each warrant is exercisable
into one share of common stock expiring December 31, 1999. The exercise
price of the warrants exceeded the fair market value of the stock at the
date of grant.
As part of the definative agreement between the Company and ZuZu, the
outstanding options of the Company were replaced with warrants of 185,833
with exercise prices ranging from $1.00 to $3.00.
The following table summarizes all stock purchase warrants through
December 31, 1995:
<TABLE>
<CAPTION>
Balance Balance
Beginning At End Exercise
Of Year Granted Exercised Canceled Of Year Price
---------- ------- --------- -------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1994 - 300,000 - - 300,000 $ 1.25 - $ 2.50
======= ======= ======= ======= ======= ===============
December 31, 1995 300,000 275,833 - - 575,833 $ 1.00 - $ 3.00
======= ======= ======= ======= ======= ===============
</TABLE>
At December 31, 1995, 575,833 warrants were exercisable.
Stock Options -
-------------
On November 8, 1993, the Board of Directors and stockholders of the
Company adopted the Discovery Stock Option Plan (the Plan). The Plan
allows the Company to grant incentive stock options, nonqualified stock
options and/or stock purchase rights to officers, employees, former
employees and consultants of the Company and the subsidiaries. Options
that qualify as "incentive stock options" within the meaning of Section
422A of the Internal Revenue Code of 1986 and options that do not qualify
as such "incentive stock options" ("nonstatutory stock options") may be
granted under the Plan. The Plan is administered by the Board of
Directors or a committee appointed by the Board, which determines the
employees, officers, and directors who are to receive options, the type of
option to be granted, and the number of shares subject to each option.
Options may not be granted under the Plan after October 31, 1999.
Incentive stock options may not be granted or, for persons who own more
than 10% of the Company's outstanding voting stock, options may not be
granted with a purchase price less than 110% of such fair market value.
The aggregate fair market value, determined as of the time the option is
granted, of shares of common stock with respect to which incentive stock
options become exercisable for the first time by the optionee under the
Plan during any calendar year may not exceed $100,000. Options may not be
transferred other than by will or the laws of descent and distribution and
may be exercised only by the optionee during the lifetime of an optionee.
In April 1994, the Company granted to certain officers of the
Company, options for the purchase of 50,000 shares of the Company's common
stock, at an exercise price of $3.00 per share, which exceeded the fair
market value of the stock at the date of grant. All options granted
initially expired in June 1995 and were subsequently extended to June 30,
1997. Additionally, subsequent to year end, 20,000 of such options were
canceled, and the remaining 30,000 options were reduced by half, and
reissued with no change in the exercise price.
In January, November, and December 1995, the Company granted
additional options for 190,000 shares with exercise prices ranging from
$1.00 to $1.51 per share, expiring in December 1999.
In conjunction with the sale of IFS and the merger with ZuZu as
described in Note 12, the Company granted options to its current chairman
and CEO to purchase 85,833 shares at an exercise price of $3.00 per share
expiring in December 1999 in exchange for such officer agreeing to return
123,666 of his shares in the Company.
Finally, as part of the definitive merger agreement between the
Company and ZuZu, the outstanding options of the Company were replaced
with warrants allowing, with the exception of 155,833 warrants, the
warrant holder to purchase one half of the number of shares originally
covered by options, but at the same exercise price and with the same
expiration date.
At December 31, 1995, there were no options.
The following table summarizes all stock option activity through
December 31, 1995:
<TABLE>
<CAPTION>
Balance Balance
Beginning At End Exercise
Of Year Granted Exercised Canceled Of Year Price
---------- ------- --------- --------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1994 - 50,000 - - 50,000 $ 3.00
====== ====== ======= ========= ====== ======
December 31, 1995 50,000 271,666 - (321,666) - -
====== ======= ======= ========= ====== ======
</TABLE>
In August 1995 the CEO of the Company resigned. In connection with his
separation agreement, he returned 300,000 shares of common stock to the
Company in exchange for the cancellation of all amounts then owing between
himself and the Company.
In October 1995 the Company agreed to issue 35,000 shares of stock, 5,000
shares for the forgiveness of Company debts totaling $30,904 to an
employee, and 30,000 to two employees for them agreeing to remain with the
Company until September 1, 1996. Such 30,000 shares are being held in
escrow until September 1, 1996 at which time they will be released to the
respective recipient if still employed by the Company.
8. INCOME TAXES:
------------
Income tax expense (benefit) for the years ended December 31, 1995 and
1994 are comprised of the following:
<TABLE>
<CAPTION>
Current Deferred Total
------- ---------- ----------
<S> <C> <C> <C>
Year ended December 31, 1995 $ 1,600 $ - $ 1,600
Year ended December 31, 1994 $ 1,600 $ (98,000) $ (96,400)
</TABLE>
The actual income tax expense (benefit) differs from the "expected" tax
expense (benefit), computed by applying the U.S. Federal corporate income
tax rate of 34% for each period, as follows:
<PAGE>
<TABLE>
<CAPTION>
For The Years Ended
December 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Computed "expected" tax expense (benefit) $ (370,000) $ (212,800)
State income taxes, net of federal
income tax benefit 1,600 1,600
Limitation on use of NOL 370,000 114,800
----------- -----------
Actual income tax expense $ 1,600 $ (96,400)
</TABLE>
The components of the net deferred tax asset (liability) recognized are as
follows:
<TABLE>
<CAPTION>
For The Years Ended
December 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Current deferred tax asset (liabilities):
Cash method adjustments $ 121,000 $ 27,000
----------- -----------
121,000 27,000
Valuation allowance (121,000) (27,000)
----------- -----------
Net current deferred tax asset (liability) $ - $ -
=========== ===========
Long-term deferred tax assets (liabilities):
Net operating loss carryforward $ 249,000 $ 87,800
----------- -----------
249,000 87,800
Valuation allowance (249,000) (87,800)
----------- -----------
Net long-term deferred tax asset $ - $ -
=========== ===========
</TABLE>
The long-term deferred tax asset includes the future benefit of the DTI's
pre-acquisition net operating losses of $180,000, which has been fully
reserved through a valuation allowance. The benefit of $180,000 of the
net operating loss carryforward to offset future taxable income is subject
to limitation of use as a result of certain consolidation return filing
regulation and additional limitation relating to a 50% change in ownership
which occurred during 1993. Any portion of the valuation allowance for
this net operating loss carryforward recognized as a tax benefit in the
future will first reduce current income tax expense.
As of December 31, 1995, the Company has available net operating loss
carryforwards for income tax purposes of $965,000 which expire in the
years 2003 through 2005.
<PAGE>
9. COMMITMENTS:
-----------
Leases -
------
The Company has no operating lease commitments at December 31, 1995.
Rent expense for years ended December 31, 1995 and 1994 was approximately
$44,000 and $40,000 respectively.
Employment Contracts -
--------------------
The Company has employment contracts with various officers with
remaining terms up to one years. Such agreements provide for minimum
salary levels and incentive bonuses, as well as severance payments upon
termination or the non-extension of employment. The aggregate commitment
for future salaries at December 31, 1995, is approximately $36,000.
10. RELATED PARTY TRANSACTIONS:
--------------------------
During the period from inception to December 31, 1995, the Company
borrowed money from certain stockholders, company officers and employees,
and at December 31, 1995 the outstanding balance was $97,362. The
borrowings bear interest at rates ranging from 8% to 13%, and have no
specific repayment terms. Interest expense on such borrowings for the
years ended December 31, 1995 and 1994 was approximately $12,600 and
$16,500, respectively.
11. CONCENTRATION OF CREDIT RISK:
----------------------------
Financial instruments that potentially subject the Company to credit risk
consists primarily of accounts and unbilled receivables. The Company's
customers include hospitals and other health care clientele primarily
located in California. Accounts and unbilled receivables amounted to
approximately $41,142 at December 31, 1995.
12. SUBSEQUENT EVENTS:
-----------------
Effective March 29, 1996, the Company entered into and consummated an
agreement and plan of reorganization (the "Reorganization"), with Rocky
Mountain Taco, Inc. (RMT) and CTC (The Colorado Taco corporation) pursuant
to which the Company acquired 100% of the issued and outstanding shares of
common stock, and all other equity securities of RMT and CTC (ZuZu(-
Registered Mark-) Colorado). Pursuant to the terms of the Reorganization,
the Company exchanged 2,800,000 shares of its Common Stock for a combined
total of 1,159,049 shares of ZuZu(-Registered Mark-) Colorado's issued and
outstanding common stock. Additionally, warrants exercisable to acquire
up to 124,000 shares of RMT common stock at an exercise price of $2.50 per
share were exchanged for warrants exercisable to purchase 124,000 shares
of the Company's Common Stock at an exercise price of $1.04 per share,
which warrants now expire on
December 31, 1998. For accounting purposes, the Reorganization will be
accounted for as a reverse acquisition whereby Discovery is considered to
have been acquired by ZuZu(-Registered Mark-) Colorado.
As part of the Reorganization, the Company transferred 100% of the
outstanding Common Stock of IFS to the Company's then Chairman and
principal shareholder, Don McCrea-Hendrick. As consideration for
transfer, Mr. McCrea-Hendrick returned to the Company 123,666 shares of
the Company's Common Stock. In addition, Mr. McCrea-Hendrick forgave
$175,000 in past due salary obligations and signed a mutual release with
the Company terminating all rights and obligations under an employment
agreement previously executed by Mr. McCrea-Hendrick and the Company.
Innovative and Mr. McCrea-Hendrick also assumed and agreed to pay all of
the outstanding liabilities and obligations of the Company which were
incurred and/or accrued prior to January 1, 1996, save and except for
$52,000 of liabilities which were retained by the Company. As further
consideration, the Company granted Mr. McCrea-Hendrick options exercisable
to acquire up to 85,833 shares of the Company's common stock at an
exercise price of $3.00 per share.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
DISCOVERY TECHNOLOGIES, INC.
Date: October 29, 1996 /s/ D. William Hill
---------------------- ---------------------------------
D. William Hill, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ D. William Hill Chairman 10/29/96
- ------------------------- (Chief Executive Officer) ----------
D. William Hill
/s/ David W. Hill President, Director 10/29/96
- ------------------------- (Chief Operating Officer) ----------
David W. Hill
/s/ Craig T. Rogers Chief Financial Officer, 10/29/96
- ------------------------- Chief Accounting Officer & ----------
Craig T. Rogers Director
<PAGE>
ZUZU HANDMADE MEXICAN FOOD(-Registered Mark-)
FRANCHISE AGREEMENT
FA092694
<PAGE>
<PAGE>
ZUZU HANDMADE MEXICAN FOOD(-Registered Mark-)
FRANCHISE AGREEMENT
TABLE OF CONTENTS
-----------------
Page
----
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
I. GRANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
II. TERM AND RENEWAL. . . . . . . . . . . . . . . . . . . . . . . 4
III. DUTIES OF FRANCHISOR. . . . . . . . . . . . . . . . . . . . . 5
IV. FRANCHISE AND ROYALTY FEES. . . . . . . . . . . . . . . . . . 7
V. ADVERTISING AND RELATED FEES. . . . . . . . . . . . . . . . . 9
VI. FRANCHISEE ORGANIZATION . . . . . . . . . . . . . . . . . . . 13
VII. SITE SELECTION, PLANS AND CONSTRUCTION. . . . . . . . . . . . 14
VIII. RESTAURANT OPERATIONS . . . . . . . . . . . . . . . . . . . . 17
IX. TRAINING. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
X. PROPRIETARY MARKS . . . . . . . . . . . . . . . . . . . . . . 26
XI. CONFIDENTIAL FRANCHISE OPERATING PROCEDURES MANUALS . . . . . 29
XII. CONFIDENTIAL INFORMATION. . . . . . . . . . . . . . . . . . . 29
XIII. ACCOUNTING AND RECORDS. . . . . . . . . . . . . . . . . . . . 31
XIV. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 32
XV. TRANSFER OF INTEREST. . . . . . . . . . . . . . . . . . . . . 34
XVI. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . 39
XVII. OBLIGATIONS UPON TERMINATION OR EXPIRATION. . . . . . . . . . 42
XVIII. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . 45
XIX. TAXES, PERMITS AND INDEBTEDNESS . . . . . . . . . . . . . . . 48
XX. INDEPENDENT CONTRACTOR AND INDEMNIFICATION. . . . . . . . . . 48
XXI. APPROVALS, WAIVERS AND REMEDIES . . . . . . . . . . . . . . . 51
XXII. FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . . . . . 52
XXIII. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
XXIV. ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . 53
XXV. SEVERABILITY AND CONSTRUCTION . . . . . . . . . . . . . . . . 54
XXVI. APPLICABLE LAW AND MEDIATION. . . . . . . . . . . . . . . . . 55
XXVII. ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . 57
ATTACHMENT A - APPROVED LOCATION, ASSIGNED AREA, AREA OF PRIMARY
RESPONSIBILITY AND OPENING DATE
ATTACHMENT B - STATEMENT OF OWNERSHIP INTERESTS
ATTACHMENT C - LEASE RIDER
ATTACHMENT D - CONFIDENTIALITY AND NON-COMPETE AGREEMENT
ATTACHMENT E - SOFTWARE LICENSE AGREEMENT
ATTACHMENT F - CHRONOLOGICAL TABLE OF SELECTED EVENTS
<PAGE>
<PAGE>
ZUZU HANDMADE MEXICAN FOOD(-Registered Mark-)
FRANCHISE AGREEMENT
THIS FRANCHISE AGREEMENT (the "Agreement") is made and entered into
this _________ day of _____________, 19___, by and between ZuZu Franchising
Corporation, a Delaware corporation ("Franchisor") and ____________________
("Franchisee").
WITNESSETH:
WHEREAS, Franchisor has acquired the right to develop and as a result
of the expenditure of time, skill, effort and money has developed, a unique and
distinctive system relating to the establishment and operation of quick-service
restaurants under the mark ZuZu Handmade Mexican Food(-Registered Mark-) which
specialize in the sale of freshly-prepared, authentic, Handmade Mexican Food
and other products (the "System");
WHEREAS, the distinguishing characteristics of the System include,
without limitation, distinctive exterior and interior design, decor, color
scheme and furnishings; special recipes and menu items; uniform standards,
specifications and procedures for operations; quality and uniformity of
products and services offered; procedures for inventory and management control;
training and consultation; and advertising and promotional programs; all of
which may be changed, improved and further developed by Franchisor from time to
time;
WHEREAS, ZuZu has determined to continue development of the System
through the granting of franchises using certain trade names, service marks,
trademarks, symbols, logos, emblems and indicia of origin, including but not
limited to the mark ZuZu Handmade Mexican Food(-Registered Mark-) and such
other trade names, service marks and trademarks as Franchisor may develop in
the future to identify for the public the source of services and products
marketed under these marks and under the System and representing the System's
high standards of quality, appearance and service (collectively, the
"Proprietary Marks");
WHEREAS, Franchisee understands and acknowledges the importance of
Franchisor's high standards of quality, cleanliness, appearance and customer
service and the necessity of operating the business franchised hereunder in
conformity with Franchisor's standards and specifications; and
WHEREAS, Franchisee desires to use the System in connection with the
operation of a restaurant under the name ZuZu Handmade Mexican Food(-Registered
Mark-) at the location specified hereunder as well as to receive the training
and other consultation provided by Franchisor in connection therewith;
NOW, THEREFORE, the parties, in consideration of the mutual
undertakings and commitments set forth herein, the receipt and sufficiency of
which are hereby acknowledged, agree as follows:
I. GRANT
-----
A. Franchisor hereby grants to Franchisee, upon the terms and
conditions in this Agreement, the right and franchise and Franchisee undertakes
the obligation, to operate a ZuZu Handmade Mexican Food(-Registered Mark-)
restaurant (the "Restaurant" or "franchised business") and to use solely in
connection therewith the Proprietary Marks and the System, as such may be
changed, improved and further developed by Franchisor from time to time, only
at the approved location as described in Attachment A.
B. The specific street address of the Restaurant location approved
by Franchisor shall be set forth in Attachment A. Franchisee shall not
relocate the franchised business without the express prior written consent of
Franchisor. This Agreement does not grant to Franchisee the right or franchise
to operate the Restaurant or to offer or sell any products or services
described under this Agreement at or from any other location.
C. Upon execution of this Agreement, Franchisee will be assigned an
area that will include the approved location of the Restaurant (the "Assigned
Area"), which will be described in Attachment A. Subject to Franchisee's full
compliance with this Agreement and except as otherwise provided in Section I.D.
below, neither Franchisor nor ZuZu, Inc. will establish or operate a ZuZu
Handmade Mexican Food(-Registered Mark-) restaurant or authorize any other
person or entity to establish or operate a ZuZu Handmade Mexican Food(-
Registered Mark-) restaurant within the Assigned Area.
Notwithstanding anything to the contrary contained herein,
Franchisor, any ZuZu franchisee and any other authorized person or entity may,
at any time, advertise and promote the System and fulfill customer orders
(including, but not limited to providing catering and delivery services) in the
Assigned Area. Franchisor may also offer and sell (and may authorize others to
offer and sell) products and services which may be similar to those offered by
the Restaurant, under the Proprietary Marks in the Assigned Area, if offered
and sold other than through a ZuZu Handmade Mexican Food(-Registered Mark-)
restaurant (e.g., product and catalogue sales, prepackaged food items,
memorabilia, recipes) and Franchisor may offer and sell (and may authorize
others to offer and sell) products and services which may be similar to those
offered by the Restaurant, under other names and marks in the Assigned Area.
D. In addition to the foregoing, Franchisor may also establish and
operate (and may authorize others to establish and operate) in a Reserved Area
(as defined below) a ZuZu Handmade Mexican Food(-Registered Mark-) restaurant
or other permanent, temporary or seasonal food service facility providing
substantially all (or an approved representative sample) of the services and
products offered at a ZuZu Handmade Mexican Food(-Registered Mark-) restaurant
and intended for immediate consumption and using the Proprietary Marks and
System. If, however, after the date on which this Agreement is executed,
Franchisor elects to grant such a franchise or license, or to operate such
restaurant or facility itself, and the restaurant or facility is to be located
in a Reserved Area and falls within the Assigned Area, Franchisee shall have
the first option, subject to the remaining terms and conditions of this
section, to be granted a franchise or license to operate such restaurant or
facility (the "Option Facility"). Franchisor shall provide Franchisee with
written notice of Franchisor's intention to grant a franchise or license for
such facility, which shall state the location of the Option Facility and the
terms and conditions under which Franchisor is willing to grant such franchise
or license. Franchisee shall have thirty (30) days following its receipt of
Franchisor's notice to exercise its option by delivering to Franchisor a
properly completed and executed application, provided by Franchisor, including
all exhibits and other related documents. The exercise of the option in this
section by Franchisee shall be subject to the following conditions: (i)
Franchisee shall have complied in all material respects with all of the
provisions of, and shall not then be in default under, this Agreement, any
lease or sublease under which Franchisee operates the Restaurant and any other
agreement between Franchisee and Franchisor or its subsidiaries or affiliates;
(ii) Franchisee shall meet Franchisor's then-current conditions and
requirements for operators of multiple franchises, which may, at Franchisor's
option, include limits on the number of ZuZu Handmade Mexican Food(-Registered
Mark-) restaurants or other facilities using the Proprietary Marks in which any
person or entity may have a direct or indirect interest and may include
standards regarding financial resources and management ability; and (iii)
within fourteen (14) days of Franchisee's receipt of the necessary documents,
Franchisee shall execute and deliver to Franchisor, Franchisor's then-current
form of agreement for the operation of the Option Facility and shall pay the
full amount of all fees which are then required to be paid by Franchisee in
accordance with the agreement's terms.
Franchisee's failure to deliver any notice, document or payment to
Franchisor within the time required shall constitute an election by Franchisee
not to exercise its option to be granted the franchise or license for any
Option Facility. If Franchisee does not exercise this option within the time
required, Franchisor may operate or offer any other person or entity a
franchise or license to operate the Option Facility in the Reserved Area and on
terms materially different from the terms of this Agreement and from the terms
set forth on Franchisor's notice of intention to grant a franchise or license
for the Option Facility.
Notwithstanding the above, the option granted to Franchisee is subject
to the approval of the owner, operator and/or other holder of concession rights
to the area in which the Option Facility is to be located. If for any reason
such person or entity determines not to negotiate with or allow Franchisee to
operate the Option Facility, Franchisee's option will immediately terminate,
and Franchisor may establish and operate (or authorize others to establish and
operate) the Option Facility.
As used herein, the term "Reserved Area" shall mean any of the
following areas or locations which fall within the Assigned Area: any enclosed
area of retail sales establishments in excess of 250,000 square feet, food
courts, airports, hospitals, cafeterias, commissaries, hotels and stadiums,
arenas, ballparks, entertainment and special events, festivals, fairs and other
mass gatherings.
Upon the expiration or earlier termination of this Agreement,
Franchisor may, in its sole discretion, establish or operate a ZuZu Handmade
Mexican Food(-Registered Mark-) restaurant or authorize any other person or
entity to establish or operate such a restaurant within the Assigned Area or
conduct any other activity, except as may be prohibited by any other agreement
between Franchisor and Franchisee.
E. After Franchisee's selection of an approved location for the
Restaurant, Franchisee shall also be assigned an Area of Primary Responsibility
(the "Area of Primary Responsibility") by Franchisor, which shall be set forth
in Attachment A. Franchisee shall use its best efforts to advertise and
promote the franchised business in its Area of Primary Responsibility in
accordance with Section V. Franchisee's Area of Primary Responsibility shall
not be exclusive to Franchisee for any purpose except to the extent it includes
the Assigned Area.
II. TERM AND RENEWAL
----------------
A. Except as otherwise provided herein, the initial term of this
Agreement shall expire ten (10) years from the date the Restaurant is opened
for business to the general public (the "Opening Date"); provided, however,
that if the Restaurant premises are leased, the initial term of this Agreement
shall expire at the earlier of ten (10) years from the Opening Date or upon the
expiration or termination of the initial term or renewal term of the lease for
the Restaurant premises.
B. Franchisee may, at its option, renew the franchise granted
hereunder for one (1) additional term of ten (10) years, such term to begin
upon the expiration of the initial term, subject to the following conditions,
<PAGE>
any or all of which (as determined by Franchisor) must be satisfied prior to
such renewal:
1. Franchisee shall give Franchisor written notice of
Franchisee's election to renew not less than seven (7) months nor more than
twelve (12) months prior to the end of the initial term;
2. Franchisee shall repair or replace, at Franchisee's cost and
expense, equipment (including computer hardware and software not licensed to
Franchisee pursuant to the software license agreement required to be executed
under Section VIII.K.), signs, interior and exterior decor items, fixtures,
furnishings, supplies and other products and materials required for the
operation of the Restaurant as Franchisor may reasonably require and shall
obtain, at Franchisee's cost and expense, any new or additional equipment,
fixtures, supplies and other products and materials which may be reasonably
required by Franchisor for Franchisee to offer and sell new menu items from the
Restaurant or to provide the Restaurant's services by alternative means such as
through carry-out or delivery arrangements and shall otherwise modernize the
Restaurant premises, equipment (including computer hardware and software),
signs, interior and exterior decor items, fixtures, furnishings, supplies and
other products and materials required for the operation of the Restaurant, as
reasonably required by Franchisor to reflect the then-current standards and
image of the System as contained in the Manuals (as defined in Section III.H.)
or otherwise provided in writing by Franchisor;
3. Franchisee shall not be in default of any provision of this
Agreement or any other agreement between Franchisee and Franchisor or its
subsidiaries or affiliates; and Franchisee shall have substantially and timely
complied with all the terms and conditions of this Agreement and such other
agreements during their terms;
4. Franchisee shall have satisfied all monetary obligations
owed by Franchisee to Franchisor and its subsidiaries and affiliates under this
Agreement and any other agreement between Franchisee and Franchisor or its
subsidiaries or affiliates and shall have timely met those obligations
throughout the terms thereof;
5. Franchisee shall present evidence satisfactory to Franchisor
that Franchisee has the right to remain in possession of the approved location
for the duration of the renewal term of this Agreement;
6. Franchisee shall execute Franchisor's then-current form of
franchise agreement for the renewal term, which agreement shall supersede this
Agreement and any prior franchise agreement relating to the Restaurant in all
respects, and the terms of which may differ from the terms of this Agreement
and may include, without limitation, a higher royalty fee and advertising
contribution or expenditure requirement; provided, however, that Franchisee
shall pay, in lieu of an initial franchise fee, a renewal fee which shall not
exceed two thousand dollars ($2,000);
7. Franchisee shall execute a general release, in a form
prescribed by Franchisor, of any and all claims of Franchisee, of whatever
nature or kind, against Franchisor and its subsidiaries and affiliates and
their respective officers, directors, shareholders, partners, employees,
servants, representatives, independent contractors and agents, in their
corporate and individual capacities, including without limitation, claims
arising under this Agreement and any other agreement between Franchisee and
Franchisor or its subsidiaries or affiliates and under any federal, state and
local laws, rules and ordinances; and
8. Franchisee shall comply with Franchisor's then-current
qualification and training requirements.
III. DUTIES OF FRANCHISOR
--------------------
Franchisor shall provide the following services to Franchisee:
A. Franchisor shall provide the following services regarding site
selection:
1. Franchisor's written site selection guidelines and such site
selection counseling and consultation as Franchisor may deem advisable; and
2. Such on-site evaluation as Franchisor may deem necessary on
its own initiative or in response to Franchisee's reasonable request for site
approval; provided, however, that Franchisor shall not provide on-site
evaluation for any proposed site prior to the receipt of all required
information and materials concerning such site prepared pursuant to
Section VII. Franchisor will provide at no additional charge to Franchisee one
(1) on-site evaluation for the Restaurant (or for Franchisee's first Restaurant
under a multi-unit arrangement or development agreement between Franchisee and
Franchisor). Thereafter, if additional on-site evaluation is deemed
appropriate by Franchisor or upon Franchisee's reasonable request, Franchisee
shall pay a reasonable fee for each such evaluation and shall reimburse
Franchisor for all reasonable expenses incurred by Franchisor in connection
with such on-site evaluation, including, without limitation, the cost of
travel, lodging, meals and wages.
B. Franchisor shall provide Franchisee, on loan, a set of
prototypical architectural and design plans and specifications for a ZuZu
Handmade Mexican Food(-Registered Mark-) restaurant. Franchisee shall
independently and at Franchisee's expense, have such architectural and design
plans and specifications adapted for construction of the Restaurant in
accordance with Section VII.E.
C. Franchisor shall provide an initial training program for certain
personnel of Franchisee in accordance with Section IX. and shall make available
such other training programs and seminars as it deems appropriate. All
training provided by Franchisor shall be in accordance with Section IX.
D. Franchisor shall provide Franchisee consultation and advice
concerning equipment and opening inventory selection and purchasing in
connection with the opening of the Restaurant.
E. Franchisor shall provide to Franchisee such on-site opening
supervision and consultation and thereafter such additional advisory
consultation to Franchisee in the operation of the franchised business during
the term of this Agreement as set forth in Section IX.
F. Franchisor shall establish and administer an advertising fund in
accordance with Section V.B. Franchisor may terminate the advertising fund at
any time in accordance with Section V.B.4. and provide for the advertisement
and promotion of the Restaurant and the System by such other methods as set
forth in Section V. If Franchisor establishes an advertising cooperative,
Franchisor shall administer such cooperative in accordance with Section V.E.
G. Franchisor shall, from time to time, make available to Franchisee
certain advertising and promotional materials and information developed by
Franchisor for use by Franchisee in marketing and conducting local advertising
for the Restaurant at a reasonable cost to Franchisee. Franchisor shall have
the right to review and approve or disapprove all advertising and promotional
materials that Franchisee proposes to use, pursuant to Section V.
H. Franchisor shall provide Franchisee, on loan, one (1) set of the
Confidential Franchise Standard Operating Procedures Manual and such other
manuals, written materials and software programs as Franchisor shall have
developed for use in the franchised business (as the same may be revised by
Franchisor from time to time, the "Manuals"), as more fully described in
Section XI. Any computer software provided to Franchisee shall be licensed
from Franchisor pursuant to Section VIII.K. Franchisor shall also make
available to Franchisee from time to time any upgrades, enhancements or
replacements to the software that are developed by or on behalf of Franchisor,
at such cost as Franchisor makes such upgrades, enhancements and replacements
available to other franchisees operating under the System.
I. Franchisor may create, from time to time, training films and
other instructional video and audio materials. Upon request, Franchisor shall
make available to Franchisee, from time to time, on loan or for purchase,
subject to the approval of Franchisor and at such cost as Franchisor makes such
films and materials available to other franchisees operating under the System,
copies of such films and materials.
J. Franchisor shall, from time to time, conduct meetings, seminars
and other related activities regarding the System for franchisees generally.
Except as approved by Franchisor, any costs incurred by Franchisee or
Restaurant personnel in attending such events shall be the responsibility of
Franchisee. Any video or audio tapes relating to such meetings and seminars
will be made available to Franchisee, on loan, at such cost as Franchisor makes
such materials available to other franchisees operating under the System.
K. Franchisor shall provide to Franchisee, from time to time as
Franchisor deems appropriate, advice and written materials concerning
techniques of managing and operating the franchised business, including new
developments and improvements in restaurant equipment, food products, packaging
and preparation.
L. Subject to the availability of appropriate personnel of
Franchisor, Franchisor shall provide Franchisee ongoing operational review from
time to time as Franchisor deems necessary.
M. Franchisor shall provide Franchisee, upon execution of this
Agreement and thereafter from time to time as Franchisor deems appropriate
during the term of this Agreement, with a list of the approved suppliers and
required product specifications of Franchisor as described in Section VIII.
N. Franchisor shall make available at a reasonable cost and, at its
option, will require Franchisee to purchase from Franchisor for resale to
Franchisee's customers certain promotional merchandise identifying the System
such as T-shirts, sweatshirts, caps and watches, in amounts sufficient to meet
Franchisee's customer demand.
O. Franchisor shall seek to maintain the high standards of quality,
appearance and service of the System, and accordingly shall conduct, as it
deems advisable, inspections of the Restaurant and evaluations of the products
sold and services rendered therein, as more fully described in Section VIII.
IV. FRANCHISE AND ROYALTY FEES
--------------------------
A. As partial consideration for the rights granted hereunder
Franchisee shall pay Franchisor:
1. An initial franchise fee of ____________________ dollars
($_________) upon the execution of this Agreement. Such initial franchise fee
shall be nonrefundable, except as otherwise provided in Sections VII.C. and
IX.A. If the parties have entered into a development agreement, the initial
franchise fee will be payable according to its terms.
2. A nonrefundable royalty fee of four and 50/100 percent
(4.5%) of the Gross Sales (as defined in Section IV.C. below) of the Restaurant
for each two calendar week period ("Sales Period") during the term of this
Agreement.
B. 1. Franchisee shall, during the term of this Agreement, submit
(a) a statement setting forth (i) the Restaurant's Gross Sales for each Sales
Period, (ii) the amount of the royalty fee as required by Section IV.A.2. and
(iii) the advertising fee required under Section V.B. (the "Statement of Gross
Sales and Fees") and (b) the payment for such royalty and advertising fees, on
or before the second Monday following each Sales Period, provided that such day
is a business day. The advertising fee shall be paid to ZuZu Franchising
Advertising Fund or other designee of Franchisor and shall be paid separately
from the royalty fee. A business day for the purpose of this Agreement means
any day other than Saturday, Sunday or the following national holidays: New
Year's Day, Martin Luther King Day, Presidents' Day, Memorial Day, Independence
Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas. If
the date on which such payments would otherwise be due is not a business day,
then payment shall be due on the next business day. Franchisee shall not be
entitled to withhold any payments due to Franchisor on grounds of alleged non-
performance by Franchisor under this Agreement.
2. Any payment not actually received by Franchisor on or before
the due date and any payment made by a check that is returned by the bank upon
which it is drawn for insufficient funds or for any other reason shall be
deemed overdue. All payments required under this Section IV. shall be made by
personal delivery or regular mail to Franchisor at its corporate offices in
Dallas, Texas or to such other location as Franchisor may direct, or by
personal check, electronic transfer, certified check, automatic account debit
or in such other manner as Franchisor may determine.
3. If any payment or fee due under this Agreement is not paid
by Franchisee when the payment or fee is due, Franchisee shall pay Franchisor,
in addition to the overdue amount, interest on such amount from the date it was
due until paid at the rate of eighteen percent (18%) per annum, or the maximum
rate permitted by law, whichever is less. Any failure to comply with this
Section IV. shall be a material event of default under Section XVI.
Entitlement to such interest shall be in addition to any other remedies
Franchisor may have in law or in equity, arising under this Agreement or
otherwise.
C. Gross Sales shall include all revenue from the sale of services
and products by in-store dining, carry-out, delivery and otherwise, including,
but not limited to, the sale of food and beverages and the sale of merchandise
(e.g., T-shirts, sweatshirts, caps, watches, etc.) and all other income of
whatever nature or kind relating to the franchised business, whether for cash
or credit and regardless of collection in the case of credit, together with
Franchisee's share of any revenues from vending or other coin-operated machines
located in the Restaurant or on the Restaurant premises, and from any other
activity conducted in the Restaurant or on the Restaurant premises; provided
that Gross Sales shall not include any sales tax or other taxes collected from
customers by Franchisee and paid to the appropriate taxing authority, the
retail value of employee meals (up to seven hundred fifty dollars ($750) for
any applicable Sales Period) and the value of meals purchased with promotional
coupons approved by Franchisor. Franchisor may, from time to time, in writing,
permit certain other items to be excluded from Gross Sales. Any such
permission may be revoked or withdrawn at any time in writing by Franchisor in
its discretion.
V. ADVERTISING AND RELATED FEES
----------------------------
Recognizing the value of advertising and the importance of the
standardization of advertising programs to the furtherance of the goodwill and
public image of the System, the parties agree as follows:
A. Franchisor may from time to time in addition to the Fund referred
to below develop and administer advertising and sales promotion programs
designed to promote and enhance the collective success of all restaurants
operating under the System. Specifically, Franchisor may from time to time
establish and administer a promotional gift certificate acceptance program.
Franchisee shall not be obligated to purchase any gift certificates from
Franchisor pursuant to such program; however, Franchisee shall honor any such
gift certificate presented at the Restaurant for the purchase of food and
beverage items. Franchisor will redeem at face value any gift certificate from
Franchisee presented in accordance with the terms and conditions set forth in
writing by Franchisor. Franchisee shall have the right to participate actively
in all advertising and sales promotion programs, but only in complete
accordance with the terms and conditions established by Franchisor for each
program. In all aspects of these programs, including without limitation, the
type, quantity, timing, placement and choice of media, market areas and
advertising agencies, the standards and specifications established by
Franchisor shall be final and binding upon Franchisee.
B. Franchisor shall establish and administer an advertising fund for
the purpose of advertising the System on a local, regional or national basis
(the "Fund"). Franchisee agrees to contribute to the Fund an amount equal to
two percent (2%) of the Gross Sales of the Restaurant (subject to any Local
Advertising amount allocated to the Fund under Section V.C.), such fee to be
paid as set forth in Section IV.B. During the term of this Agreement
Franchisor may, in its sole discretion, review and modify the amount of the
continuing advertising fee up to a maximum limit of four percent (4%) of Gross
Sales for each Sales Period (subject to any Local Advertising amount allocated
to the Fund under Section V.C.). In reviewing and modifying the advertising
fee, Franchisor may consider the level of advertising expenditures by
competitors of the System, media costs, available marketing resources,
population changes, changes in market conditions, the degree of market
penetration of the System and such other factors as Franchisor deems relevant
to the operation of the Fund. Franchisee shall be provided with thirty (30)
days prior written notice of any such change in the advertising fee.
Franchisee agrees that the Fund shall be maintained and
administered by Franchisor or its designee as follows:
1. Franchisor shall direct all advertising programs and shall
have sole discretion to approve or disapprove the creative concepts, materials
and media used in such programs and the placement and allocation thereof.
Franchisee agrees and acknowledges that the Fund is intended to maximize
general public recognition and acceptance of the Proprietary Marks and enhance
the collective success of all restaurants operating under the System.
Franchisor or ZuZu, Inc. (the corporate parent of Franchisor) shall, with
respect to ZuZu Handmade Mexican Food(-Registered Mark-) restaurants operated
by ZuZu, Inc. ("company-operated restaurants"), contribute to the Fund
generally on the same basis as Franchisee. In administering the Fund,
Franchisor and its designees undertake no obligation to make expenditures for
Franchisee which are equivalent or proportionate to Franchisee's contribution
or to ensure that any particular franchisee benefits directly or pro rata from
the placement of advertising.
2. Franchisee agrees that the Fund may be used to satisfy any
and all costs of maintaining, administering, directing and preparing
advertising (including, without limitation, the cost of preparing and
conducting television, radio, magazine and newspaper advertising campaigns;
direct mail and outdoor billboard advertising; public relations activities;
employing advertising agencies to assist therein; costs of Franchisor's
personnel and other departmental costs for advertising that is internally
administered or prepared by Franchisor; costs of providing other advertising
materials to the restaurants operated under the System; and costs of
maintaining a national "1-800" customer and/or franchisee service telephone
number). All sums paid by Franchisee to the Fund shall be maintained in a
separate account by Franchisor and shall not be used to defray any of
Franchisor's general operating expenses, except for such reasonable
administrative costs and overhead, if any, as Franchisor may incur in
activities reasonably related to the administration or direction of the Fund
and advertising programs for franchisees and the System. The Fund and its
earnings shall not otherwise inure to the benefit of Franchisor. The Fund is
operated solely as a conduit for collecting and expending the advertising fees
as outlined above.
3. A statement of the operations of the Fund shall be prepared
annually by Franchisor and shall be made available to Franchisee upon request.
4. Although the Fund is intended to be of perpetual duration,
Franchisor may terminate the Fund. The Fund shall not be terminated, however,
until all monies in the Fund have been expended for advertising or promotional
purposes or returned to contributing franchised or company-operated
restaurants, without interest, on the basis of their respective contributions.
C. In addition to the contribution to the Fund set forth in Section
V.B. above, Franchisee shall spend, during each calendar quarter throughout the
term of this Agreement, two percent (2%) of the Gross Sales of the Restaurant
on advertising for the Restaurant in its Area of Primary Responsibility ("Local
Advertising"). Franchisee shall submit to Franchisor an advertising
expenditure report accurately reflecting such expenditures in accordance with
Section XVIII.B.3. During each calendar quarter, Franchisee shall have the
discretion to expend such funds when Franchisee reasonably deems appropriate,
so long as Franchisee's expenditure schedule is acceptable to Franchisor in its
reasonable discretion. In addition to the restrictions set forth in
Section V.G. below, costs and expenditures incurred by Franchisee in connection
with any of the following shall not be included in Franchisee's expenditures on
Local Advertising for purposes of this Section V.C.:
1. Incentive programs for employees or agents of Franchisee,
including the cost of honoring any coupons distributed in connection with such
programs;
2. Research expenditures;
3. Food or coupon costs incurred in any promotion;
4. Salaries and expenses of any employees of Franchisee,
including salaries or expenses for attendance at advertising meetings or
activities;
5. Charitable, political or other contributions or donations;
6. Press parties or other expenses of publicity;
7. In-store materials consisting of fixtures or equipment;
8. Seminar and educational costs and expenses of employees of
Franchisee; and
9. Specialty merchandise items such as T-shirts, sweatshirts,
caps and watches, unless such items are part of a market-wide advertising
program and then only to the extent that the cost of such items is not
recovered by the promotion.
Notwithstanding the above, Franchisor may at any time require
Franchisee to contribute to the Fund, in accordance with Section V.B., all or
part of any amounts that otherwise would be required to be expended on Local
Advertising under this Section V.C. Such amounts will be applied by Franchisor
toward the fulfillment of Franchisee's Local Advertising expenditure
requirement in this Section V.C.
D. Franchisee shall also pay its pro rata share of the cost of a
Yellow Pages trademark listing to be placed by Franchisor or its designee on
behalf of all franchised and company-operated restaurants in the Restaurant's
local market area. This area will usually include Franchisee's Area of Primary
Responsibility. If Franchisee operates the only ZuZu Handmade Mexican Food(-
Registered Mark-) restaurant in the local market area, Franchisee shall be
responsible for full payment of the Yellow Pages advertising, unless Franchisor
determines, in its sole discretion, that placement of a Yellow Pages trademark
listing for such local market area is not economically justified.
E. Franchisee agrees that Franchisor shall have the right, in its
sole discretion, to designate any geographic area in which two (2) or more ZuZu
Handmade Mexican Food restaurants are located as a region for purposes of
establishing an advertising cooperative ("Cooperative"). The members of the
Cooperative for any area shall consist of all ZuZu Handmade Mexican Food
restaurants (whether operated by a franchisee, Franchisor or ZuZu, Inc.). Each
Cooperative shall be organized and governed in a form and manner, and shall
commence operation on a date, determined in advance by Franchisor in its sole
discretion. Each Cooperative shall be organized for the exclusive purposes of
administering advertising programs and developing, subject to Franchisor's
approval pursuant to Section V.G., promotional materials for use by the members
in Local Advertising. If at the time of the execution of this Agreement a
Cooperative has been established for a geographic area that encompasses the
Restaurant, or if any Cooperative is established during the term of this
Agreement, Franchisee shall execute such documents as are required by
Franchisor immediately upon the request of Franchisor and shall become a member
of the Cooperative pursuant to the terms of these documents. Franchisee shall
participate in the Cooperative as follows:
1. Franchisee shall contribute to the Cooperative such amounts
as is required by the documents governing the Cooperative; provided, however,
Franchisee will not be required to contribute more than two percent (2%) of
Franchisee's Gross Sales during each Sales Period to the Cooperative unless,
subject to Franchisor's approval, the members of the Cooperative agree to the
payment of a larger fee. The payment of any such Cooperative fee may be
applied by Franchisee toward the fulfillment of its Local Advertising
requirement set forth in Section V.C. Likewise, Franchisor may at any time
require Franchisee to contribute to the Fund, in accordance with Section V.B.,
all or part of any amounts that otherwise would be required to be contributed
to the Cooperative.
2. Franchisee shall submit to the Cooperative and to Franchisor
such statements and reports as may be required by Franchisor or by the
Cooperative. All contributions to the Cooperative shall be maintained and
administered in accordance with the documents governing the Cooperative. The
Cooperative shall be operated solely as a conduit for the collection and
expenditure of the Cooperative fees for the purposes outlined above.
3. No advertising or promotional plans or materials may be used
by the Cooperative or furnished to its members without the prior approval of
Franchisor. All such plans and materials shall be submitted to Franchisor in
accordance with the procedure set forth in Section V.G.
F. Franchisee shall plan and carry out a grand opening promotion
relating to the opening of the Restaurant in accordance with the Manuals. Any
advertising and promotional items used by Franchisee in connection with such
grand opening must be approved by Franchisor in accordance with Section V.F.
Franchisee shall spend a minimum of eight thousand two hundred dollars ($8,200)
in connection with such grand opening promotion. Any such amount paid by
Franchisee for the grand opening promotion shall not be credited toward any
other obligation of Franchisee as described in this Section V.
G. Franchisee may, without offset or deduction to the amounts
payable to the Fund, Cooperative or on Local Advertising, create or produce its
own advertising or promotional campaign. However, all advertising and
promotion by Franchisee in any medium shall be conducted in a dignified manner
and shall conform to the standards and requirements of Franchisor as set forth
in the Manuals or otherwise in writing. Franchisee shall obtain Franchisor's
approval of all advertising and promotional plans and materials prior to use if
such plans and materials have not been prepared by Franchisor or previously
approved by Franchisor during the six (6) months prior to their proposed use.
Franchisee shall submit such unapproved plans and materials to Franchisor and
Franchisor shall approve or disapprove such plans and materials within fifteen
(15) days of Franchisor's receipt thereof. Franchisee shall not use such
unapproved plans or materials until they have been approved by Franchisor and
shall promptly discontinue use of any advertising or promotional plans or
materials, whether or not previously approved, upon notice from Franchisor.
<PAGE>
H. Franchisee shall have the right to sell its products and
merchandise and offer services at any prices Franchisee may determine and shall
in no way be bound by any price which may be recommended or suggested by
Franchisor.
VI. FRANCHISEE ORGANIZATION
-----------------------
A. If Franchisee is a corporation or a partnership, Franchisee
represents, warrants and covenants that:
1. Franchisee is duly organized and validly existing under the
state law of its formation;
2. Franchisee is duly qualified and is authorized to do
business in each jurisdiction in which its business activities or the nature of
the properties owned by it require such qualification;
3. Franchisee's corporate charter or written partnership
agreement shall at all times provide that the activities of Franchisee include
the development and operation of ZuZu Handmade Mexican Food(-Registered Mark-)
restaurants;
4. The execution of this Agreement and the performance of the
transactions contemplated hereby are within Franchisee's corporate power if
Franchisee is a corporation, or if Franchisee is a partnership, are permitted
under Franchisee's written partnership agreement and have been duly authorized
by Franchisee;
5. If Franchisee is a corporation, copies of Franchisee's
articles of incorporation, bylaws, other governing documents, any amendments to
the foregoing, resolutions of the Board of Directors authorizing entry into and
performance of this Agreement and any certificates or other documents as may be
reasonably required by Franchisor shall be furnished to Franchisor prior to the
execution of this Agreement; or, if Franchisee is a partnership, copies of the
written partnership agreement, other governing documents and any amendments to
the foregoing, shall be furnished to Franchisor prior to the execution of this
Agreement, including evidence of consent or approval of the entry into and
performance of this Agreement by the requisite number or percentage of
partners, if such approval or consent is required by Franchisee's written
partnership agreement;
6. If Franchisee is a corporation or partnership, the ownership
interests in Franchisee are accurately and completely described in
Attachment B. Further, if Franchisee is a corporation, Franchisee shall
maintain at all times a current list of all owners of record and all beneficial
owners of any class of voting securities in Franchisee or, if Franchisee is a
partnership, Franchisee shall maintain at all times a current list of all
owners of an interest in the partnership. Franchisee shall make its list of
owners available to Franchisor upon request;
7. Except as may otherwise be agreed upon in writing by
Franchisor and Franchisee, if any officer or director of Franchisee ceases to
serve as such or any individual is elected as an officer or director of
Franchisee after the execution of this Agreement, Franchisee shall notify
Franchisor within five (5) days after any such change and any newly elected
officer or director shall execute this Agreement as one of Franchisee's
Principals (as defined in Section XXV.F.) and shall be individually bound by
all obligations of Franchisee's Principals hereunder;
8. If Franchisee is a corporation, Franchisee shall maintain
stop-transfer instructions against the transfer on its records of any of its
equity securities and each stock certificate of the corporation shall have
conspicuously endorsed upon it a statement in a form satisfactory to Franchisor
that it is held subject to all restrictions imposed upon assignments by this
Agreement; provided, however, that the requirements of this Section VI.8. shall
not apply to the transfer of equity securities of a publicly-held corporation
(as defined in Section XV.B.1.). If Franchisee is a partnership, its written
partnership agreement shall provide that ownership of an interest in the
partnership is held subject to all restrictions imposed upon assignments by
this Agreement; and
9. Franchisee and, at Franchisor's request, each of
Franchisee's Principals, have provided Franchisor with the most recent
financial statements of Franchisee and such Principals. Such financial
statements present fairly the financial position of Franchisee and each of
Franchisee's Principals, as applicable, at the dates indicated therein and with
respect to Franchisee, the results of its operations and its cash flow for the
years then ended. Franchisee agrees that it shall maintain at all times,
during the term of this Agreement, sufficient working capital to fulfill its
obligations under this Agreement. Each of the financial statements mentioned
above has been prepared in conformity with generally accepted accounting
principles applicable to the respective periods involved and, except as
expressly described in the applicable notes, applied on a consistent basis. No
material liabilities, adverse claims, commitments or obligations of any nature
exist as of the date of this Agreement, whether accrued, unliquidated,
absolute, contingent or otherwise, which are not reflected as liabilities on
the financial statements of Franchisee or such Principals.
B. Franchisee and Franchisee's Principals, as applicable,
acknowledge and agree that the representations, warranties and covenants set
forth above in Sections VI.A.1. through VI.A.9. are continuing obligations of
Franchisee and its Principals and that any failure to comply with such
representations, warranties and covenants shall constitute a material event of
default under Section XVI. Franchisee will cooperate with Franchisor in any
efforts made by Franchisor to verify compliance with such representations,
warranties and covenants.
VII. SITE SELECTION, PLANS AND CONSTRUCTION
--------------------------------------
A. Franchisee assumes all cost, liability, expense and
responsibility for locating, obtaining and developing a site for the Restaurant
and for constructing and equipping the Restaurant at such site. Franchisee
shall not make any binding commitment to a prospective vendor or lessor of real
estate with respect to a site for the Restaurant unless the site is approved as
set forth below. Franchisee acknowledges that Franchisor's approval of a
prospective site and the rendering of consultation in the selection of a site
does not constitute a representation, promise, warranty or guarantee by
Franchisor that the Restaurant operated at that site will be profitable or
otherwise successful.
B. 1. Prior to acquiring by lease or purchase a site for the
Restaurant, Franchisee shall locate a site for the Restaurant that satisfies
the site selection guidelines provided to Franchisee by Franchisor pursuant to
Section III.A. and shall submit to Franchisor in the form specified by
Franchisor a description of the site, including evidence satisfactory to
Franchisor demonstrating that the site satisfies Franchisor's site selection
guidelines, together with such other information and materials as Franchisor
may reasonably require, including but not limited to a letter of intent or
other evidence satisfactory to Franchisor which confirms Franchisee's favorable
prospects for obtaining the site. Recognizing that time is of the essence,
Franchisee agrees that it will submit such information and materials for the
proposed site to Franchisor for its approval no later than thirty (30) days
after the execution of this Agreement. Franchisor shall have fifteen (15) days
after receipt of this information and materials to approve or disapprove, in
its sole discretion, the proposed site as the location for the Restaurant. No
site may be used for the location of the Restaurant unless it is first approved
in writing by Franchisor. Franchisee acknowledges that Franchisor may have
entered into agreements with real estate brokerage firms under which such firms
have agreed to represent Franchisor and ZuZu system franchisees in the location
of sites for Restaurants. If Franchisee chooses to locate a Restaurant at a
site procured by such a firm, Franchisee may be required to pay such firm's
<PAGE>
fees and commissions. Payment by Franchisee may be a condition of Franchisor's
approval of such a site.
2. Failure by Franchisee to acquire the site for the Restaurant
within the time stated in Section VII.C. below and in the manner required in
Section VII.B.1. above shall constitute a material event of default under this
Agreement.
3. After a location for the Restaurant is approved by
Franchisor and acquired by Franchisee pursuant to this Agreement the location
shall be described in Attachment A.
C. Within sixty (60) days after execution of the Franchise
Agreement, Franchisee shall acquire by purchase or lease, at Franchisee's
expense, a location for the Restaurant at a site approved by Franchisor as set
forth below. If Franchisee fails to acquire an approved site within such time
period, unless the time period is extended by Franchisor, either party may,
during the thirty (30) day period following the expiration of the sixty (60)-
day time period described above in this Section VII.C., terminate this
Agreement effective immediately upon notice to the other party. In such event,
Franchisor shall return to Franchisee the initial franchise fee actually paid
to Franchisor, without interest, less thirty percent (30%) of the initial
franchise fee required under Section IV.A.1. and less any and all expenses
incurred by Franchisor in providing Franchisee with any services under this
Agreement as of the effective date of termination, which amount shall be paid
by Franchisor within thirty (30) days after the effective date of termination.
Refund of any portion of the initial franchise fee by Franchisor pursuant to
this Section VII.C. shall occur solely as a result of the failure by Franchisee
to acquire an approved site for the Restaurant in accordance with this section
and shall not occur as a result of any other failure to act or action taken by
Franchisee or any other reason. Franchisor shall not be obligated to return
any fees paid by Franchisee if this Agreement is terminated by Franchisor
pursuant to any other term of this Agreement or by Franchisee for any reason
other than those reasons expressly set forth in this section or in Section
IX.A.
D. Franchisee shall be responsible for obtaining all zoning
classifications and clearances which may be required by state or local laws,
ordinances or regulations or which may be necessary as a result of any
restrictive covenants relating to the Restaurant premises. Prior to beginning
the construction of the Restaurant, Franchisee shall (i) obtain all permits,
licenses and certifications required for the lawful construction or remodeling
and operation of the Restaurant and (ii) certify in writing to Franchisor that
the insurance coverage specified in Section XIV. is in full force and effect
and that all required approvals, clearances, permits and certifications have
been obtained. Upon request, Franchisee shall provide to Franchisor additional
copies of Franchisee's insurance policies or certificates of insurance and
copies of all such approvals, clearances, permits and certifications.
E. Franchisee must independently obtain any architectural,
engineering and design services it deems necessary for the construction of the
Restaurant at its own expense. Franchisee shall adapt the prototypical
architectural and design plans and specifications for construction of the
Restaurant provided to Franchisee by Franchisor in accordance with Section
III.B. as necessary for the construction of the Restaurant and shall submit
such adapted plans to Franchisor for review. If Franchisor determines, in its
sole discretion, that any such plans are not consistent with the best interests
of the System, Franchisor may prohibit the implementation of such plans, and in
this event will notify Franchisee of any objection(s) within fifteen (15) days
of receiving such plans. If Franchisor fails to notify Franchisee of an
objection to the plans within this time period, Franchisee may use such plans.
If Franchisor objects to any such plans, it shall provide Franchisee with a
reasonably detailed list of changes necessary to make the plans acceptable.
Franchisor shall, upon a resubmission of the plans with such changes, notify
Franchisee within fifteen (15) days of receiving the resubmitted plans whether
<PAGE>
the plans are acceptable. If Franchisor fails to notify Franchisee of any
objection within such time period, Franchisee may use the resubmitted plans.
F. If Franchisee will purchase the premises for the Restaurant,
Franchisee must submit a copy of the proposed contract of sale to Franchisor
prior to its execution for its written approval and shall furnish to Franchisor
a copy of the executed contract of sale within ten (10) days after execution.
If Franchisee will occupy the premises of the Restaurant under a lease,
Franchisee will submit the lease to Franchisor for written approval prior to
its execution and shall furnish to Franchisor a copy of the executed lease
within ten (10) days after execution. Franchisee shall not assign or renew the
lease without the prior written consent of Franchisor. If Franchisee will
occupy the premises under a sublease from Franchisor, Franchisee shall execute
a sublease in a form acceptable to Franchisor prior to occupying such premises.
No lease for the Restaurant premises shall be approved by Franchisor unless a
rider to the lease, prepared by Franchisor and executed by Franchisor,
Franchisee and the lessor, in substantially the form attached as Attachment C,
is attached to the lease and incorporated therein. If the landlord for an
approved site refuses to sign the lease rider as drafted, and Franchisor
refuses to revise the lease rider to meet the landlord's objections, so long as
Franchisee has diligently and timely attempted to obtain the lease rider, upon
Franchisee's request, Franchisor will extend the time by which Franchisee must
acquire an approved site for thirty (30) days. Franchisee shall reimburse
Franchisor for any costs and expenses incurred by Franchisor (including but not
limited to reasonable legal fees and Franchisor's then-current per diem rate or
flat rate for personnel time) in connection with the review of purchase, lease
or sublease agreements described in this Section VII.F. In addition, if
Franchisor has incurred a broker's or similar fee in connection with the site
chosen by Franchisee, Franchisee shall reimburse Franchisor for such fee.
Franchisor may, from time to time, in its sole discretion,
guarantee certain leases if Franchisor determines that assuming the risk
involved in such a guarantee will not be detrimental to Franchisor. If
Franchisor guarantees Franchisee's lease, Franchisee shall be required to pay
to Franchisor a fee for such guarantee, and reimburse Franchisor for any costs
and expenses incurred by Franchisor (including reasonable legal fees and
Franchisor's then-current per diem rate or flat rate for personnel time) in
connection with the review and negotiation of the lease and guarantee.
G. Franchisee shall diligently pursue construction or remodeling (as
applicable) of the Restaurant. During the time of construction or remodeling,
Franchisee shall provide Franchisor with such periodic reports regarding the
progress of the construction or remodeling as may be reasonably requested by
Franchisor. In addition, Franchisor shall make such on-site inspections as it
may deem reasonably necessary to evaluate such progress. Franchisee shall
notify Franchisor of the scheduled date for completion of construction or
remodeling no later than fourteen (14) days prior to such date. Within a
reasonable time after the date of completion of construction or remodeling
Franchisor shall, at its option, conduct an inspection of the completed
Restaurant. Franchisee acknowledges and agrees that Franchisee will not open
the Restaurant for business without the written authorization of Franchisor
and that authorization to open shall be conditioned upon Franchisee's strict
compliance with this Agreement.
H. Franchisee acknowledges that time is of the essence. Subject to
Franchisee's compliance with the conditions stated below, Franchisee shall open
the Restaurant and commence business within one hundred twenty (120) days after
the execution of this Agreement, unless Franchisee obtains an extension of such
time period from Franchisor in writing or unless otherwise provided in a
development agreement between Franchisor and Franchisee. Prior to opening,
Franchisee shall complete all exterior and interior preparations for the
Restaurant, including installation of equipment, fixtures, furnishings and
signs, pursuant to the plans and specifications approved by Franchisor, and
shall comply with all other pre-opening obligations of Franchisee, including
but not limited to, those obligations described in Sections IV.A.1., VI.A.1.
through VI.A.9., VII., VIII.A., IX.A. and XII.B. to Franchisor's satisfaction.
If Franchisee fails to comply with any of such obligations, Franchisor shall
have the right to prohibit Franchisee from commencing business. Franchisee's
failure to open the Restaurant and commence business in accordance with the
foregoing shall be deemed a material event of default under this Agreement.
VIII. RESTAURANT OPERATIONS
---------------------
A. Upon execution of this Agreement, Franchisee shall designate an
individual to serve as the "Operating Principal" of the Restaurant. The
Operating Principal shall, during the period that he serves as such, meet the
following qualifications:
1. a. If Franchisee is an individual, Franchisee shall
perform all obligations of the Operating Principal.
b. If Franchisee is a corporation, the Operating Principal
shall, at all times during which he serves as Operating Principal, (i) directly
or indirectly beneficially own at least fifty-one percent (51%) of the shares
of each class of Franchisee's issued and outstanding capital stock and (ii) be
entitled, under its governing documents and under any agreements among the
shareholders, to cast a sufficient number of votes to require such corporation
to take or omit to take any action which such corporation is required to take
or omit to take under this Agreement.
c. If Franchisee is a partnership, the Operating Principal
shall, at all times during which he serves as Operating Principal, (i) own at
least a twenty-five percent (25%) interest in the operating profits and
operating losses of the partnership as well as at least a twenty-five percent
(25%) ownership interest in the partnership (and at least a fifty-one percent
(51%) interest in the shares of each class of capital stock of any corporate
general partner) and (ii) be entitled under its partnership agreement or
applicable law to act on behalf of the partnership without the approval or
consent of any other partner or be able to cast a sufficient number of votes to
require the partnership to take or omit to take any action which the
partnership is required to take or omit to take under this Agreement.
d. Except as may otherwise be provided in this Agreement,
the Operating Principal's interest in Franchisee shall be and shall remain free
of any pledge, mortgage, hypothecation, lien, charge, encumbrance, voting
agreement, proxy, security interest or purchase right or options.
2. In certain instances Franchisor may, based on the size and
financial strength of Franchisee and/or the territory and number of Restaurants
to be operated, modify or waive the above ownership requirements.
3. If Franchisee operates only one (1) Restaurant, the Operating
Principal shall devote full time and best efforts to the supervision and
management of this Restaurant. In this case, the Operating Principal may also
be the store manager and chef or kitchen manager, if agreed to by Franchisor.
If Franchisee operates two (2) or more Restaurants, Franchisee shall appoint at
least one (1) store manager per Restaurant (as determined by Franchisor) to
carry out the day-to-day management and supervision of each such restaurant.
Any such manager(s) shall be appointed in a timely manner in order to satisfy
each manager's initial training obligations set forth in Section IX., shall
meet Franchisor's educational, managerial and business standards and shall be
approved in writing by Franchisor. In addition, any manager must devote full
time and best efforts to the daily management and supervision of the
Restaurant. The Operating Principal shall execute this Agreement as one of
Franchisee's Principals and shall be individually, jointly and severally bound
by all obligations of Franchisee, the Operating Principal and Franchisee's
Principals hereunder.
4. The Operating Principal and any manager shall meet any other
of Franchisor's standards and criteria for such positions, as set forth in the
Manuals or otherwise in writing by Franchisor.
5. The Operating Principal and any manager shall satisfy the
training requirements set forth in Section IX. If, during the term of this
Agreement, the Operating Principal or any manager is not able to continue to
serve in such capacity or no longer qualifies to act as such in accordance with
this Section VIII., Franchisee shall promptly notify Franchisor and designate a
replacement within thirty (30) days after the Operating Principal or manager
ceases to serve, such replacement being subject to the same qualifications
listed above. Franchisee shall provide for interim management of the
Restaurant until such replacement is so designated, such interim management to
be conducted in accordance with this Agreement. Any failure to comply with the
requirements of this Section VIII.A.5. shall be deemed a material event of
default under this Agreement.
B. Franchisee shall retain such additional managers, chefs and other
persons as Franchisor, in its reasonable discretion, deems necessary for the
operation and management of the Restaurant. All such personnel shall satisfy
Franchisor's educational and business criteria as provided to Franchisee in the
Manuals or otherwise and shall be individuals acceptable to Franchisor. Such
individuals shall satisfy the applicable training requirements in Section IX.
C. Franchisee understands that compliance by all franchisees and
developers operating under the System with Franchisor's training and
operational requirements is an essential and material element of the System and
that Franchisor and franchisees operating under the System consequently expend
substantial time, effort and expense in training management personnel for their
respective Restaurants. Accordingly, Franchisee agrees that if during the term
of this Agreement, Franchisee shall employ in a managerial position any
individual who is at the time or was at any time during the prior six (6)
months employed in a managerial position by Franchisor or any of its
subsidiaries or affiliates, including but not limited to individuals employed
by Franchisor or ZuZu, Inc. to work in company-operated restaurants, or by any
other franchisee or developer operating under the System, such former employer
shall be entitled to be compensated for the reasonable costs and expenses, of
whatever nature or kind, incurred by such employer in connection with the
training of such employee. The parties agree that such expenditures may be
uncertain and difficult to ascertain and therefore agree that the compensation
specified herein reasonably represents such expenditures and is not a penalty.
An amount equal to the annual compensation of such employee at the time of the
termination of the individual's employment with such former employer shall be
paid by Franchisee prior to such individual assuming such managerial position.
In seeking any individual to serve in a managerial position with respect to the
development or operation of the Restaurant, Franchisee shall not discriminate
in any manner against any individual to whom the provisions of this Section
VIII.C. apply, on the basis of the compensation required to be paid by
Franchisee hereunder if Franchisee designates or employs such individual. The
parties expressly acknowledge and agree that no current or former employee of
Franchisor, its subsidiaries and affiliates, or of any franchisee or developer
under the System shall be a third party beneficiary of this Agreement or any
provision hereof, except for the covenant of Franchisee in the preceding
sentence. Franchisor expressly disclaims any representations and warranties
regarding the performance of any employee or former employee of Franchisor or
its subsidiaries and affiliates, or any franchisee or developer operating under
the System, who is employed by Franchisee in any capacity and Franchisor shall
not be liable for any losses, of whatever nature or kind, incurred by
Franchisee in connection therewith.
D. Franchisee shall use the Restaurant premises solely for the
operation of the franchised business, shall maintain business hours as provided
for in the Manuals or as Franchisor may specify from time to time in writing
and shall refrain from using or permitting the use of the premises for any
other purpose or activity at any time without obtaining the prior written
consent of Franchisor.
E. Franchisor reserves the right to implement a food delivery
service program in which Franchisor will designate a nonaffiliated third party
to provide delivery services to customers of Franchisee. If Franchisor
implements such a program, Franchisee is required to participate and to pay to
Franchisor or its designee the costs and fees associated with such program.
These costs and fees will generally be the same (per Restaurant) as that
charged to other ZuZu franchisees participating in the same program.
Franchisor will provide Franchisee thirty (30) days notice prior to
implementing such a program. In lieu of participation in such program, if
required by Franchisor, Franchisee agrees to offer and provide delivery service
to its customers, in accordance with the terms and conditions set forth in the
Manuals. Franchisee agrees to execute an amendment to this Agreement
concerning such delivery service, if required by Franchisor. The Manuals and
such amendment will set forth any limits on Franchisee's delivery service (such
as delivery time periods, area, identification of delivery vehicles and
authorized drivers). If Franchisee is required to participate in such a
program or offer such services, company-operated restaurants in Franchisee's
local market area shall also participate in such program or offer such
services.
F. Franchisee agrees to maintain competent, conscientious and
trained personnel to operate the Restaurant in accordance with this Agreement
and the Manuals and to take such steps as are necessary to ensure that its
employees preserve good customer relations, comply with such dress code as
Franchisor may prescribe in the Manuals or otherwise and observe reasonable
standards of grooming and cleanliness.
G. Franchisee shall meet and maintain the highest health and safety
standards and ratings applicable to the operation of the Restaurant.
Franchisee shall furnish to Franchisor, within three (3) days after receipt
thereof, a copy of any inspection report, warning, citation, certificate,
rating and any other document, of whatever nature or kind, issued by any
federal, state, local or other administrative agency, instrumentality or other
organization with respect to the health or safety conditions of the Restaurant.
H. To ensure that the highest degree of quality and service is
maintained, Franchisee shall operate the Restaurant in strict conformity with
such methods, standards and specifications as Franchisor may from time to time
prescribe in the Manuals or otherwise in writing. Franchisee further agrees:
1. To offer for sale and sell at the Restaurant all menu items
and other designated products and services required by Franchisor and to
provide such products and services in the manner and style prescribed by
Franchisor, including but not limited to dining-in, carry-out and delivery
services;
2. To sell and offer for sale only the menu items, products and
services that have been expressly approved for sale in writing by Franchisor;
to refrain from deviating from Franchisor's standards and specifications
without Franchisor's prior written consent; and to discontinue selling and
offering for sale any menu items, products or services which Franchisor may, in
its discretion, disapprove in writing at any time;
3. To maintain in sufficient supply and to use and sell at all
times only such food and beverage items, ingredients, products, materials,
supplies and paper goods that conform to Franchisor's standards and
specifications; to prepare all menu items in accordance with Franchisor's
recipes and procedures for preparation contained in the Manuals or other
written directives, including but not limited to the prescribed measurements of
ingredients; and to refrain from deviating from Franchisor's standards and
specifications by the use or offer of non-conforming items or differing amounts
of any items, without Franchisor's prior written consent;
4. To permit Franchisor and its representatives and agents, at
any reasonable time, to remove samples of food or non-food items from
Franchisee's inventory or from the Restaurant, without payment therefor, in
amounts reasonably necessary for testing by Franchisor or an independent
laboratory to determine whether such samples meet Franchisor's then-current
standards and specifications. In addition to any other remedies it may have
under this Agreement, Franchisor may require Franchisee to bear the cost of
such testing if the supplier of the item has not previously been approved by
Franchisor or if the sample fails to conform with Franchisor's specifications;
and
5. To purchase or lease and install, at Franchisee's expense,
all fixtures, furnishings, kitchen and dining room equipment, computer hardware
and software, decor items and signs required by Franchisor, all of which must
conform to Franchisor's standards and specifications as Franchisor may
reasonably direct from time to time in the Manuals or otherwise in writing and
to refrain from installing or permitting to be installed on or about the
Restaurant premises, without Franchisor's prior written consent, any fixtures,
furnishings, kitchen and dining room equipment, computer hardware and software,
decor items, signs, games, vending machines or other items not previously
approved by Franchisor. If any of the property described above is leased by
Franchisee from a third party, such lease must be approved by Franchisor, in
writing, prior to execution. Franchisor's approval shall be conditioned upon
such lease containing a provision which permits any interest of Franchisee in
the lease to be assigned to Franchisor upon the termination or expiration of
this Agreement and which prohibits the lessor from imposing an assignment or
related fee upon Franchisor in connection with such assignment.
I. Except for those items which Franchisee is required to obtain
from Franchisor or its designee, Franchisee shall obtain all food and beverage
items, ingredients, supplies, equipment, computer hardware and software,
materials and other products used or offered for sale at or from the Restaurant
solely from suppliers (including manufacturers, distributors and other sources)
who demonstrate, to the continuing reasonable satisfaction of Franchisor, the
ability to meet Franchisor's then-current standards and specifications for such
items, who possess adequate quality controls and capacity to supply
Franchisee's needs promptly and reliably and who have been approved in writing
by Franchisor prior to any purchases by Franchisee and have not thereafter been
disapproved. Franchisor or any affiliate or subsidiary may be an approved
supplier of certain items and products. If Franchisee desires to purchase,
lease or use any products from an unapproved supplier Franchisee shall submit
to Franchisor a written request for such approval or may request the supplier
to do so. Franchisee shall not purchase or lease from any supplier until such
supplier has been approved in writing by Franchisor. Franchisor shall have the
right to require that its representatives and agents be permitted to inspect
the supplier's facilities and that samples from the supplier be delivered
either to Franchisor or to an independent laboratory designated by Franchisor
for testing. A charge not to exceed the reasonable cost of the inspection and
the actual cost of the test shall be paid by Franchisee or the supplier.
Franchisor reserves the right, at its option, to re-inspect from time to time
the facilities and products of any such approved supplier and to revoke its
approval upon the supplier's failure to continue to meet any of Franchisor's
then-current criteria. Nothing above shall require Franchisor to approve any
particular supplier.
J. Franchisee acknowledges and agrees that Franchisor may develop
for use in the System certain products which are prepared from highly
confidential secret recipes and which are trade secrets of Franchisor. Because
of the importance of quality and uniformity of production and the significance
of such products in the System, it is to the mutual benefit of the parties that
Franchisor closely control the production and distribution of such products.
Accordingly, Franchisee agrees that if such products become a part of the
System, Franchisee shall use only Franchisor's secret recipe products and shall
purchase solely from Franchisor or from a source designated by Franchisor all
of Franchisee's requirements for such products.
K. Franchisee shall enter into a software license agreement with
Franchisor in substantially the form attached as Attachment E for the license
of certain computer software for the operation of the Restaurant.
L. Franchisor will make available at a reasonable cost and, at its
option will require Franchisee and other franchisees in Franchisee's local
market area to purchase from Franchisor for resale to Franchisee's customers
certain promotional merchandise identifying the System such as T-shirts,
sweatshirts, caps and watches, in amounts necessary to meet Franchisee's
customer demand.
M. Franchisee shall require all advertising and promotional
materials, signs, decorations, paper goods (including menus and all forms and
stationery used in the franchised business) and other items which may be
designated by Franchisor to bear the Proprietary Marks in the form, color,
location and manner prescribed by Franchisor.
N. Franchisee shall, at Franchisee's sole cost and expense, maintain
the Restaurant in the highest degree of sanitation, repair and condition and in
conformity with the standards, specifications and requirements of the System,
as may be designated by Franchisor from time to time. Franchisee specifically
agrees to repair or replace, at Franchisee's cost and expense, equipment
(including computer hardware and software, except as may be provided in the
software license agreement executed pursuant to Section VIII.K.), signs,
interior and exterior decor items, fixtures, furnishings, supplies and other
products and materials required for the operation of the Restaurant as
necessary or desirable and to obtain, at Franchisee's cost and expense, any new
or additional equipment, fixtures, supplies and other products and materials
which may be reasonably required by Franchisor for Franchisee to offer and sell
new menu items from the Restaurant or to provide the Restaurant's services by
alternative means, such as through carry-out or delivery arrangements. Except
as may be expressly provided in the Manuals, no alterations or improvements or
changes of any kind in design, equipment, signs, interior or exterior decor
items, fixtures or furnishings shall be made in or about the Restaurant or its
premises without the prior written approval of Franchisor.
O. To assure the continued success of the Restaurant, Franchisee
shall, upon the request of Franchisor, modernize the Restaurant premises,
equipment (including computer hardware and software), signs, interior and
exterior decor items, fixtures, furnishings, supplies and other products and
materials required for the operation of the Restaurant, to Franchisor's then-
current standards and specifications; provided, however, that Franchisee shall
not be required to modernize the Restaurant more than once during the initial
term of this Agreement. Franchisee's obligations under this Section VIII.O.
are in addition to, and shall not relieve Franchisee from, any of its other
obligations under this Agreement, including those contained in the Manuals.
P. Franchisee hereby grants Franchisor and its representatives and
agents the right to enter upon the Restaurant premises at any time for the
purpose of conducting inspections of the Restaurant and its operation and
Franchisee shall cooperate with Franchisor's representatives and agents by
rendering such assistance as they may reasonably request and, upon notice from
Franchisor or its representatives and agents and without limiting Franchisor's
other rights under this Agreement, Franchisee shall take such steps as may be
necessary to correct immediately any deficiencies detected during any such
inspection. Should Franchisee fail to correct such deficiencies within a
reasonable time as determined by Franchisor, Franchisor shall have the right
(without, however, any obligation), to correct such deficiencies and to charge
Franchisee a reasonable fee for Franchisor's expenses in so acting, payable by
Franchisee immediately upon demand.
Q. Upon the execution of this Agreement or at any time thereafter,
Franchisee shall, at the option of Franchisor, execute such forms and documents
as Franchisor deems necessary to appoint Franchisor its true and lawful agent
and attorney-in-fact with full power and authority for the sole purpose of
assigning to Franchisor all rights to the telephone numbers of the Restaurant
and any related and other business listings upon the termination or expiration
of this Agreement as required under Section XVII.F.
R. Upon execution of this Agreement or at any time thereafter,
Franchisee shall, at the option of Franchisor, execute such forms and documents
as Franchisor deems necessary to appoint Franchisor its true and lawful agent
and attorney-in-fact with full power and authority for the sole purpose of
obtaining any and all returns and reports filed by Franchisee with any state
and federal tax authority.
S. Franchisee shall comply with all other requirements set forth in
this Agreement.
IX. TRAINING
--------
Franchisee agrees that it is necessary to the continued operation of
the System and the Restaurant that Franchisee, the Operating Principal, any
managers and chefs of the Restaurant and other Restaurant personnel receive the
training as specified in the Manuals or as Franchisor may otherwise require and
accordingly agrees as follows:
A. 1. Not later than seven (7) days prior to the Opening Date, the
Operating Principal, one (1) store manager, one (1) chef or kitchen manager and
one (1) tortilla maker shall attend and complete, to Franchisor's satisfaction,
Franchisor's initial training program. Training shall be conducted at
Franchisor's corporate training center and at a company-operated restaurant or
such other location designated by Franchisor. Franchisor shall determine, in
its sole discretion, whether the Operating Principal and each manager, chef and
tortilla maker have satisfactorily completed initial training. If the training
program is not satisfactorily completed by the Operating Principal, any
manager, chef or tortilla maker, or if Franchisor, in its reasonable business
judgment based upon the performance of such person(s), determines that the
training program cannot be satisfactorily completed by all such person(s),
Franchisee shall immediately designate a replacement to complete such initial
training.
2. Without limiting Franchisor's right to terminate this
Agreement pursuant to Section XVI.C., if the initial training program is not
satisfactorily completed by any replacement Operating Principal or manager (or
the initial Operating Principal or manager if no replacement is designated) or
if Franchisor determines that the training program cannot be satisfactorily
completed by such person(s), as set forth above, Franchisor may, in its sole
discretion, terminate this Agreement effective immediately upon notice to
Franchisee. In the event of such termination, Franchisor will return to
Franchisee the initial franchise fee actually paid by Franchisee to Franchisor,
less thirty percent (30%) of the initial franchise fee required under Section
IV.A.1. and less any expenses incurred by Franchisor in providing Franchisee
with any services under this Agreement as of the effective date of termination.
3. Franchisor shall provide instructors and training materials
for the initial training program at no additional charge to Franchisee. Any
successor or replacement Operating Principal, store manager and chef/kitchen
manager shall, and any additional Restaurant personnel may be required by
Franchisor to attend and complete, to Franchisor's satisfaction, Franchisor's
initial training program. Franchisor reserves the right to impose a training
fee for any such additional initial training programs. Franchisee shall be
responsible for any and all expenses incurred by Franchisee or the Operating
Principal, any managers and chefs and other Restaurant personnel in connection
with any initial training program including, without limitation, costs of
travel, lodging, meals and wages.
B. Franchisee, the Operating Principal and any managers and chefs
may attend such additional or remedial training programs and seminars as
Franchisor may offer from time to time. At Franchisor's discretion such
training (including on-site remedial training) shall be mandatory for such
individuals and any other Restaurant personnel required by Franchisor. For all
such training, Franchisor will provide the instructors and training materials;
however, Franchisor reserves the right to impose a reasonable fee for such
training, including costs of travel, lodging, meals and wages for Franchisor's
representatives. Franchisee shall be responsible for any and all expenses
incurred by Franchisee, the Operating Principal, Franchisee's managers and
chefs and other Restaurant personnel in connection with such additional
training including, without limitation, costs of travel, lodging, meals and
wages.
C. In connection with the opening of the Restaurant, Franchisor
shall make available to Franchisee one (1) trained representative of Franchisor
to provide on-site training, supervision and consultation for a period of time
not to exceed five (5) days occurring before and after the Opening Date of the
Restaurant. Franchisor's representative will be provided at no expense to
Franchisee; provided, however, with respect to any replacement Restaurant
established by Franchisee pursuant to any development agreement between
Franchisor and Franchisee or in accordance with this Agreement as a result of a
Force Majeure event (as defined in Section XXII.), Franchisor may charge a
reasonable fee for such opening services, including costs of travel, lodging,
meals and wages for such representative. Except as otherwise provided,
Franchisee shall be responsible for training all Restaurant personnel other
than the Operating Principal, store manager, chef or kitchen manager and
tortilla maker in accordance with the specifications and standards regarding
such training described in the Manuals or otherwise in writing by Franchisor.
D. 1. Franchisee may train its Operating Principal, managers,
chefs and other personnel designated by Franchisor in the Manuals or otherwise
in writing if (i) Franchisor so requests or permits, (ii) Franchisor has first
certified Franchisee's Training Unit Manager (defined below), (iii) Franchisee
has been operating a Restaurant for at least eighteen (18) months and has at
least one (1) Restaurant open and operating, (iv) the training program,
including the facility at which the training program is conducted and the
Training Unit Manager, have been and remain certified by Franchisor, and (iv)
Franchisee satisfies any other criteria for certified training set forth by
Franchisor in the Manuals or otherwise in writing.
2. Upon Franchisor's written request, or upon Franchisee's
written request and Franchisor's written consent, Franchisee must designate a
person acceptable to Franchisor to act as Franchisee's training unit manager
("Training Unit Manager") who, in order to be certified to fulfull the duties
of the Training Unit Manager, must complete Franchisor's management training
program to Franchisor's satisfaction. Franchisee also must require its
Training Unit Manager to attend recertification training as Franchisor
determines. Franchisor may hold the recertification classes in one or more
locations and for the period which Franchisor determines. Franchisee shall pay
all of the expenses of the Training Unit Manager and any other personnel of
Franchisee designated by Franchisor for the management training program and
recertification classes.
3. Franchisor may restrict the type of trainee that the
Training Unit Manager trains and the duties of the Training Unit Manager and
may require the Training Unit Manager to attend additional training to be
certified to train certian of Franchisee's personnel. Franchisor may, in its
sole discretion, require any of Franchisee's personnel at Franchisee's expense
to attend the initial, remedial or additional training programs which
Franchisor conducts at its corporate training center or at any other location.
4. The Training Unit Manager may use only training materials
provided by Franchisor for training Franchisee's personnel, unless Franchisee
first has submitted the materials to Franchisor for its review and Franchisor
has approved the materials in writing. Franchisor has the right to withhold
approval on any training materials for which Franchisee has requested approval
and to deny the use of any training materials Franchisor previously has
approved. Any training materials which Franchisee or its personnel develop
will be the sole property of Franchisor, and Franchisor may use the materials
and permit other franchisees to use the materials without any payment to
Franchisee.
5. The Training Unit Manager may train Franchisee's personnel
only at a training facility that Franchisor has certified for training.
Franchisor will grant the approval if the facility meets Franchisor's
specifications for training facilities as Franchisor, in its sole discretion,
prescribes in the Manuals or otherwise in writing, and Franchisor provides its
written consent to Franchisee.
6. If the proposed Training Unit Manager does not complete
Franchisor's management training program to Franchisor's satisfaction or if the
Training Unit Manager ceases to be an employee of Franchisee, Franchisee must
promptly designate a proposed replacement Training Unit Manager who is
acceptable to Franchisor and who must, before taking on his responsibilities,
attend and complete Franchisor's management training program to Franchisor's
satisfaction and be certified by Franchisor. Franchisee shall pay all expenses
for the replacement Training Unit Manager and other replacement personnel of
Franchisee designated by Franchisor.
E. In addition to the above, Franchisor may require Franchisee to
allow Franchisor to use Franchisee's restaurant facilities for an in-store
franchisee training center. In such event, Franchisor will use its best
efforts to minimize any interruption to Franchisee's normal business
operations. Franchisor shall pay Franchisee its then-current fee for such
services, which shall not be less than $250.00 per franchisee that is trained
at Franchisee's Restaurant.
DO PROPRIETARY MARKS
-----------------
A. Franchisor hereby licenses Franchisee to use the Proprietary
Marks during the term of this Agreement in accordance with the System and the
related standards and specifications, as prescribed by the Franchisor from time
to time, which underlie the goodwill associated with and symbolized by the
Proprietary Marks.
B. With respect to Franchisee's licensed use of the Proprietary
Marks pursuant to this Agreement, Franchisee agrees that:
1. Franchisee shall use only the Proprietary Marks designated
by Franchisor and shall use them only in the manner authorized and permitted by
Franchisor. Any unauthorized use of the Proprietary Marks shall constitute an
infringement of Franchisor's rights and a material event of default under
Section XVI. of this Agreement;
2. Franchisee shall use the Proprietary Marks only for the
operation of the Restaurant and only at its authorized location or in
advertising related to the Restaurant and only during the term of this
Agreement. Franchisee expressly agrees to cease use of the Proprietary Marks
after the termination or expiration of this Agreement and shall take
appropriate action to remove the Proprietary Marks from the Restaurant premises
and to cancel any advertising relating to Franchisee's use of the Proprietary
Marks, including Yellow Pages listings;
3. Unless otherwise authorized or required by Franchisor,
Franchisee shall operate and advertise the franchised business only under the
name ZuZu Handmade Mexican Food(-Registered Mark-) without prefix or suffix;
4. During the term of this Agreement, Franchisee shall identify
itself as the owner of the franchised business (a) in conjunction with any use
of the Proprietary Marks, including, but not limited to, uses on invoices,
order forms, receipts and contracts and (b) in a notice of such content and
form and at such conspicuous locations on the Restaurant premises as Franchisor
may designate in writing;
5. Franchisee shall not use the Proprietary Marks to incur any
obligation or indebtedness on behalf of Franchisor;
6. Franchisee shall not use the Proprietary Marks as part of
its corporate or other legal name;
7. Franchisee shall comply with Franchisor's instructions in
filing and maintaining any requisite trade name or fictitious name
registrations and shall execute any documents deemed necessary by Franchisor or
its counsel to obtain protection for the Proprietary Marks or to maintain their
continued validity and enforceability; and
8. Franchisee shall immediately notify Franchisor of any
infringement or challenge to its use of any of the Proprietary Marks or claim
by any person of any rights in any of the Proprietary Marks. Franchisee and
Franchisee's Principals agree that they will not communicate with any person
other than Franchisor and Franchisor's counsel in connection with any such
infringement, challenge or claim. Franchisor shall have sole discretion to
take such action as it deems appropriate and the right to exclusively control
any litigation, or Patent and Trademark Office or other proceeding, arising out
of any infringement, challenge or claim or otherwise relating to any of the
Proprietary Marks. Franchisee agrees to execute any and all instruments and
documents, render such assistance and do such acts and things as may, in the
opinion of Franchisor's counsel, be necessary or advisable to protect and
maintain Franchisor's interests in any such litigation or Patent and Trademark
Office or other proceeding, or to otherwise protect and maintain Franchisor's
interest in the Proprietary Marks. Franchisor will indemnify Franchisee
against and reimburse Franchisee for all damages for which Franchisee is held
liable in any proceeding arising out of Franchisee's use of any of the
Proprietary Marks, provided that the conduct of Franchisee and Franchisee's
Principals with respect to such proceeding and use of the Proprietary Marks is
in compliance with the terms of this Agreement.
C. Franchisee expressly understands and acknowledges that:
1. ZuZu, Inc. is the owner of all right, title and interest in
and to the Proprietary Marks and the goodwill associated with and symbolized by
them;
2. Franchisor has the right to use and grant licenses to use
the Proprietary Marks to franchisees in connection with the operation of
businesses under the System;
3. The Proprietary Marks are valid and serve to identify ZuZu,
Inc. and Franchisor as the source of origin of goods and services provided
under them;
4. Franchisee shall not directly or indirectly contest the
validity of ZuZu, Inc.'s or Franchisor's ownership or interest in or validity
of the Proprietary Marks;
5. Franchisee's use of the Proprietary Marks under this
Agreement does not give Franchisee any ownership or other interest in or to the
Proprietary Marks, except the license granted by this Agreement;
6. Any and all goodwill arising from Franchisee's use of the
Proprietary Marks in its franchised business under this Agreement shall inure
solely and exclusively to Franchisor's benefit, and upon the expiration or
termination of this Agreement and the license herein granted, no monetary
amount shall be assigned as attributable to any goodwill associated with
Franchisee's use of the System or the Proprietary Marks;
7. The right and license of the Proprietary Marks granted
hereunder to Franchisee is nonexclusive and Franchisor and ZuZu, Inc. thus have
and retain the following rights, among others, subject only to the limitations
of Section I.:
a. To grant other licenses for use of the Proprietary
Marks, in addition to those licenses already granted to existing franchisees;
<PAGE>
b. To develop and establish other systems using the
Proprietary Marks or other names or marks and to grant licenses or franchises
thereto without providing any rights to Franchisee; and
c. To engage, directly or indirectly, through its
employees, representatives, licensees, assigns, agents and others, at
wholesale, retail or otherwise, in (1) the production, distribution, license
and sale of products and services and (2) the use in connection with such
production, distribution and sale, of the Proprietary Marks and any and all
trademarks, trade names, service marks, logos, insignia, slogans, emblems,
symbols, designs and other identifying characteristics as may be developed or
used from time to time by Franchisor; and
8. Franchisor reserves the right to add or substitute different
trade names, service marks, trademarks, symbols, logos, emblems and indicia of
origin for the Proprietary Marks for use in identifying the System and the
businesses operating thereunder if Franchisor's currently owned Proprietary
Marks no longer can be used, or if Franchisor, in its sole discretion,
determines that the addition or substitution of different trade names, service
marks, trademarks, symbols, logos, emblems and indicia of origin will be
beneficial to the System. In such event, Franchisor may require Franchisee to
discontinue or modify Franchisee's use of any of the Proprietary Marks or to
use one or more additional or substitute trade names, service marks,
trademarks, symbols, logos, emblems and indicia of origin. Franchisor shall
reimburse Franchisee for its direct out-of-pocket expenses incurred in such
change up to a maximum amount of two thousand dollars ($2,000).
XI. CONFIDENTIAL FRANCHISE OPERATING PROCEDURES MANUALS
---------------------------------------------------
A. Franchisee shall receive one (1) set of the Manuals on loan from
Franchisor and shall retain such set of the Manuals, or any replacement, for so
long as this Agreement remains in effect. One (1) set of the Manuals shall be
provided at no expense to Franchisee, however, Franchisor will charge
Franchisee a replacement fee of five thousand dollars ($5,000) for any
replacement Manual provided to Franchisee.
B. To protect the reputation and goodwill of Franchisor and to
maintain high standards of operation under Franchisor's Proprietary Marks,
Franchisee shall conduct its business in accordance with the Manuals, other
written directives which Franchisor may issue to Franchisee from time to time
whether or not such directives are included in the Manuals, and any other
manuals and materials created or approved for use in the operation of the
franchised business.
C. Franchisee and Franchisee's Principals shall at all times treat
the Manuals, any written directives of Franchisor, and any other manuals and
materials, and the information contained therein, as confidential and shall
maintain such information as secret and confidential in accordance with
Section XII. Franchisee and Franchisee's Principals shall not at any time
copy, duplicate, record or otherwise reproduce these materials, in whole or in
part, or otherwise make the same available to any unauthorized person.
D. The Manuals, written directives, other manuals and materials and
any other confidential communications provided or approved by Franchisor shall
at all times remain the sole property of Franchisor, shall at all times be kept
in a secure place on the Restaurant premises and shall be returned to
Franchisor immediately upon request or upon termination or expiration of this
Agreement.
E. The Manuals, any written directives and any other manuals and
materials issued by Franchisor and any modifications to such materials shall
supplement this Agreement.
<PAGE>
F. Franchisor may from time to time revise the contents of the
Manuals and the contents of any other manuals and materials created or approved
for use in the operation of the franchised business. Franchisee expressly
agrees to comply with each new or changed standard.
G. Franchisee shall at all times ensure that the Manuals are kept
current and up to date. In the event of any dispute as to the contents of the
Manuals, the terms of the master copy of the Manuals maintained by Franchisor
at Franchisor's corporate office shall control.
XII. CONFIDENTIAL INFORMATION
------------------------
A. Franchisee and each of Franchisee's Principals shall not, during
the term of this Agreement and thereafter, communicate or divulge to, or use
for the benefit of, any other person(s), partnership, association or
corporation any confidential information, knowledge or know-how concerning the
methods of operation of the franchised business which may be communicated to
Franchisee or any of Franchisee's Principals or of which they may be apprised
by virtue of Franchisee's operation of the franchised business under this
Agreement. Franchisee and each of Franchisee's Principals shall divulge such
confidential information only to Franchisee's Principals and manager(s) of the
Restaurant and such other Restaurant personnel as must have access to it to
operate the franchised business. Any and all information, knowledge, know-how
and techniques used in or related to the System which Franchisor communicates
to Franchisee or Franchisee's Principals including, but not limited to, the
Manuals, recipes, plans and specifications, marketing information and
strategies and site evaluation and selection guidelines and techniques shall be
deemed confidential for purposes of this Agreement. Neither Franchisee nor
Franchisee's Principals shall at any time, without Franchisor's prior written
consent, copy, duplicate, record or otherwise reproduce such materials or
information, in whole or in part, nor otherwise make the same available to any
unauthorized person. The covenant in this Section XII.A. shall survive the
expiration, termination or transfer of this Agreement or any interest herein
and shall be perpetually binding upon Franchisee and each of Franchisee's
Principals.
B. At Franchisor's request, Franchisee shall require any Restaurant
personnel of Franchisee and any holder of a beneficial interest of less than
one percent (1%) in any class of securities of Franchisee and any corporation
directly or indirectly controlling Franchisee, if Franchisee is a corporation
(or of any corporate general partner and any corporation directly or indirectly
controlling a general partner of Franchisee, or from any limited partner, if
Franchisee is a partnership), having access to any confidential information of
Franchisor to execute covenants that they will maintain the confidentiality of
the information they receive in connection with their relationship with
Franchisee. Such covenants shall be substantially in the form contained in
Attachment D.
C. If Franchisee or Franchisee's Principals develop any new concept,
process or improvement in the operation or promotion of the Restaurant,
Franchisee agrees to promptly notify Franchisor and provide Franchisor with all
necessary related information, without compensation. Franchisee and
Franchisee's Principals acknowledge that any such concept, process or
improvement shall become the property of Franchisor and Franchisor may use or
disclose such information to other franchisees or developers as it determines
to be appropriate.
D. Franchisee and Franchisee's Principals acknowledge that any
failure to comply with this Section XII. shall constitute a material event of
default under Section XVI. and will cause Franchisor irreparable injury for
which no adequate remedy at law may be available, and Franchisee and
Franchisee's Principals accordingly consent to the issuance of an injunction(s)
prohibiting any conduct by Franchisee or any of Franchisee's Principals in
violation of this section. Franchisee and Franchisee's Principals agree to pay
all expenses (including court costs and reasonable legal fees) incurred by
Franchisor in enforcing this section (including obtaining specific performance,
injunctive relief or any other equitable or other remedy available to
Franchisor for any violation of this section).
XIII. ACCOUNTING AND RECORDS
----------------------
A. Franchisee shall maintain during the term of this Agreement and
shall preserve for at least three (3) years from the dates of their preparation
full, complete and accurate books, records and accounts including but not
limited to sales slips, coupons, purchase orders, purchase invoices, payroll
records, check stubs, bank statements, sales tax records and returns, cash
receipts and disbursements, journals and ledgers in accordance with generally
accepted accounting principles and in the form and manner prescribed by
Franchisor from time to time in the Manuals or in other written directives.
B. Franchisee shall conduct all financial reporting concerning the
Restaurant in accordance with the accounting methods, principles and practices
prescribed by Franchisor for the accounting periods prescribed by Franchisor in
the Manuals or otherwise in writing. During the term of this Agreement,
Franchisee shall, at its expense, complete and submit to Franchisor on a
continuous basis each of the following reports at the time set forth below and
in the form prescribed by Franchisor in the Manuals or in other written
directives:
1. A Statement of Gross Sales and Fees in accordance with
Section IV.B. on or before the second Monday following each Sales Period;
2. An advertising expenditure report consisting of invoices or
other documents which accurately reflect Franchisee's expenditures for Local
Advertising for the preceding calendar quarter within ten (10) days following
the end of such calendar quarter;
3. A monthly balance sheet and a monthly and fiscal year-to-
date profit and loss statement for the franchised business and copies of all
state sales tax returns and employee payroll tax returns for the franchised
business, within thirty (30) days after the end of each month of Franchisee's
fiscal year;
4. A balance sheet, income statement and statement of changes
in financial position for the franchised business, prepared in accordance with
generally accepted accounting principles, dated as of the end of Franchisee's
fiscal year, and copies of Form W-2 printouts for each employee, within sixty
(60) days after the end of Franchisee's fiscal year; and
5. Such other forms, reports, graphs, information and data as
Franchisor may reasonably request, in the form and at the times specified in
the Manuals or other written directives.
C. Any unaudited financial statement(s) allowed or required by
Franchisor shall be signed by Franchisee or by Franchisee's President attesting
that it is true, complete and correct.
D. Franchisor or its designees shall have the right at all
reasonable times to examine and copy, at Franchisor's expense, the books,
records and tax returns of Franchisee. Franchisor shall also have the right,
at any time, to have an independent audit made of the books of Franchisee. If
any audit reveals that Franchisee has understated Gross Sales in any report or
statement, then Franchisee shall immediately pay Franchisor the additional
amount of fees owing as a result of such understatement, together with interest
as provided in Section IV.B. If an audit reveals that Gross Sales have been
understated in any report or statement by two percent (2%) or more, Franchisee
shall additionally pay and reimburse Franchisor for all costs of the audit,
including, without limitation, travel, lodging, meals and wage expenses and
reasonable accounting and legal fees. These remedies shall be in addition to
any other remedies Franchisor may have at law or in equity. If, however, any
inspection reveals that Franchisee has overstated Gross Sales and that
Franchisee has therefore overpaid any fees, the amount of the overpayment,
without interest, shall be credited toward Franchisee's future fees or payment
on future invoices. If Franchisee is at any time required to furnish any
lender, lessor, government agency or other person audited financial statements
with respect to the franchised business, Franchisee shall concurrently furnish
Franchisor a copy of such audited financial statements.
E. Franchisee hereby authorizes (and agrees to execute any other
documents deemed necessary to effect such authorization) all banks, financial
institutions, businesses, suppliers, manufacturers, contractors, vendors and
other persons or entities with which Franchisee does business to disclose to
Franchisor any requested financial information in their possession relating to
Franchisee or the Restaurant. Franchisee authorizes Franchisor to disclose
data from Franchisee's reports, if Franchisor determines, in its sole
discretion, that such disclosure is necessary or advisable, which disclosure
may include disclosure to prospective or existing franchisees or other third
parties.
F. Notwithstanding any forms and documents which may have been
executed by Franchisee under Section VIII.R., Franchisee hereby appoints
Franchisor its true and lawful attorney-in-fact with full power and authority,
for the sole purpose of obtaining any and all returns and reports filed by
Franchisee with any state and/or federal tax authority. This power of attorney
shall survive the expiration or termination of this Agreement.
G. On Franchisor's request, Franchisee agrees to provide Franchisor
with (i) information regarding start-up costs for the Restaurant and costs
relating to the Restaurant's initial operations (a minimum of three months),
(ii) Franchisee's home address and telephone number and (iii) any other
information reasonably deemed necessary by Franchisor to comply with applicable
federal or state disclosure requirements.
XIV. INSURANCE
---------
A. Franchisee shall obtain within thirty (30) days after the
execution of this Agreement and shall maintain in full force and effect at all
times during the term of this Agreement at Franchisee's expense, an insurance
policy or policies protecting Franchisee and Franchisor and its subsidiaries,
affiliates, successors and assigns and their respective officers, directors,
shareholders, partners, employees, servants, independent contractors,
representatives and agents, against any demand or claim with respect to
personal injury, death or property damage or any loss, liability or expense
arising out of or occurring upon or in connection with the condition,
operation, use or occupancy of the franchised business.
B. Such policy or policies shall be written by a responsible carrier
or carriers acceptable to Franchisor (e.g., with a Best's Insurance Guide
rating of "A" or better) and shall include, at a minimum (except as additional
coverage may reasonably be specified by Franchisor from time to time), in
accordance with standards and specifications set forth in the Manuals or
otherwise in writing, the following:
1. Bodily injury and property damage insurance, with a minimum
aggregate coverage of $1,000,000 and a minimum per occurrence coverage of
$500,000, and all risk replacement cost insurance covering contents, awnings,
signs and glass.
2. Products liability insurance with a minimum aggregate
coverage of $1,000,000.
3. If Franchisee sells any alcoholic beverage from the
Restaurant, liquor liability insurance with a minimum per occurrence coverage
of $1,000,000.
4. An umbrella policy providing coverage with limits of not
less than $1,000,000.
5. Medical payment, crime (inside/outside) and employee
dishonesty insurance with minimum per occurrence coverage of $5,000, $5,000 and
$15,000, respectively.
6. Business interruption insurance to cover Franchisee's loss
of revenues and ongoing expenses and to cover any amounts due and owing to
Franchisor under the Franchise Agreement or any other agreement between
Franchisee and Franchisor or its subsidiaries or affiliates, in an amount not
less than $30,000 per month for a minimum of three (3) months.
7. Worker's compensation insurance in amounts provided by
applicable law or, if permissible under applicable law, any legally appropriate
alternative providing substantially similar compensation for injured workers
satisfactory to Franchisor, provided that Franchisee (i) maintains an excess
indemnity or "umbrella" policy covering employer's liability and/or a
medical/disability policy covering medical expenses for on the job accidents,
which policy or policies shall contain such coverage amounts as Franchisee and
Franchisor shall mutually agree upon and (ii) conducts and maintains a risk
management and safety program for its employees as the Franchisee and
Franchisor shall mutually agree is appropriate. Such policies shall also
include a waiver of subrogation in favor of Franchisor and its directors,
officers, shareholders, partners, employees, servants, representatives and
agents.
8. Automobile liability coverage, including coverage of owned,
non-owned and hired vehicles with coverage in amounts not less than $1,000,000
aggregate and $500,000 per occurrence.
9. Any insurance which may be required by statute or rule of
the state or locality in which the franchised business will be operated.
C. Franchisee may, with the prior written consent of Franchisor,
elect to have reasonable deductibles in connection with the coverage required
under Sections XIV.B.1. and XIV.B.7.
D. In connection with any construction, renovation, refurbishment or
remodeling of the Restaurant, Franchisee or its approved contractor shall
maintain Builder's All Risks insurance and performance and completion bonds in
forms and amounts, and written by a carrier or carriers, reasonably
satisfactory to Franchisor.
E. Franchisee's obligation to obtain and maintain the above policy
or policies in the amounts specified by Franchisor shall not be limited in any
way by any insurance which may be maintained by Franchisor, nor shall
Franchisee's performance of that obligation relieve it of liability under the
indemnity provisions set forth in Section XX.D.
F. All public liability, property damage, motor vehicle liability
and business interruption policies shall contain a provision that Franchisee's
insurance coverage shall be primary to any coverage maintained by Franchisor
and Franchisor shall be entitled to recover under Franchisee's policies for any
loss occasioned to Franchisor, its subsidiaries, affiliates, successors and
assigns, and their respective officers, directors, shareholders, partners,
employees, servants, representatives, independent contractors and agents, for
whatever reason.
G. Within thirty (30) days after the execution of this Agreement
and, thereafter, at least sixty (60) days prior to the expiration of any such
policy, Franchisee shall deliver to Franchisor certificates of insurance and,
if requested by Franchisor, copies of the applicable insurance policies
evidencing the proper coverage with limits not less than those required
hereunder. All insurance policies and certificates required under this
Agreement, except for workers' compensation, shall name Franchisor, its
subsidiaries, affiliates, successors and assigns and their respective partners,
officers, directors, shareholders, representatives, agents, independent
contractors and employees as additional insureds and shall expressly provide
that any interest of same therein shall not be affected by any breach by
Franchisee of any policy provisions. In addition, all insurance policies and
certificates shall expressly provide that no less than thirty (30) days' prior
written notice shall be given to Franchisor in the event of a material
alteration to or cancellation of the policies.
H. Should Franchisee, for any reason, fail to obtain or maintain the
insurance required by this Agreement, as such requirements may be revised from
time to time by Franchisor in the Manuals or otherwise in writing, Franchisor
shall have the right (without, however, any obligation) immediately to obtain
such insurance and to charge same to Franchisee, which charges, together with a
reasonable fee for Franchisor's expenses, shall be payable by Franchisee
immediately upon notice. These remedies shall be in addition to any other
remedies at law or in equity that Franchisor may have.
XV. TRANSFER OF INTEREST
--------------------
A. Transfer by Franchisor:
----------------------
Franchisor shall have the right to transfer or assign this
Agreement and all or any part of its rights or obligations hereunder to any
person or legal entity without Franchisee's consent. Specifically, and without
limitation to the foregoing, Franchisee expressly affirms and agrees that
Franchisor may sell its assets, the Proprietary Marks or the System to a third
party; may merge, acquire other corporations or be acquired by another
corporation; may undertake a refinancing, recapitalization, leveraged buyout or
other economic or financial restructuring; and, with regard to any or all of
the above sales, assignments and dispositions, Franchisee expressly and
specifically waives any claims, demands or damages arising from or related to
the loss of the Proprietary Marks or the System against Franchisor under this
Agreement. Nothing contained in this Agreement shall require Franchisor to
remain in the business of operating or licensing the operation of ZuZu Handmade
Mexican Food(-Registered Mark-) restaurants or other restaurants or to offer
any services or products, whether or not bearing the Proprietary Marks, to
Franchisee, if Franchisor exercises its rights hereunder to assign its rights
in this Agreement.
B. Transfer by Franchisee:
----------------------
1. Franchisee and Franchisee's Principals understand and
acknowledge that the rights and duties set forth in this Agreement are personal
to Franchisee and that Franchisor has granted this franchise in reliance on the
business skill, financial capacity and personal character of Franchisee and
Franchisee's Principals. Accordingly, neither Franchisee nor any successor or
assign to any part of Franchisee's interest in this Agreement or the franchised
business, nor any individual, partnership, corporation or other entity which
directly or indirectly has or owns any interest in this Agreement, in the
franchised business or in Franchisee shall sell, assign, transfer, convey, give
away, pledge, mortgage or otherwise encumber any direct or indirect interest in
this Agreement, in the franchised business or in Franchisee without the prior
written consent of Franchisor; provided, however, that Franchisor's prior
written consent shall not be required for a transfer of less than a one percent
(1%) interest in a publicly-held corporation. For purposes of this Agreement,
a publicly-held corporation is a corporation whose securities are registered
under Section 12 of the Securities Exchange Act of 1934, as amended, or a
corporation subject to the requirements of Section 15(d) of the Securities
Exchange Act, as amended. Any purported assignment or transfer, by operation
of law or otherwise, not having the written consent of Franchisor required by
this Section XV. shall be null and void and shall constitute a material event
of default under this Agreement, for which Franchisor may then terminate this
Agreement without opportunity to cure pursuant to Section XVI.
2. Franchisor shall not unreasonably withhold its consent to a
transfer of any interest in Franchisee, in the franchised business or in this
Agreement; however, Franchisor may, in its sole discretion, require any or all
of the following as conditions of its approval to any such transfer:
a. All of Franchisee's accrued monetary and other
outstanding obligations to Franchisor and its subsidiaries and affiliates
arising under this Agreement or any other agreement between Franchisee and
Franchisor or its subsidiaries or affiliates shall have been satisfied in a
timely manner and Franchisee shall have satisfied all trade accounts and other
debts, of whatever nature or kind, in a timely manner;
b. Franchisee is not in default of any provision of this
Agreement or any other agreement between Franchisee and Franchisor or its
subsidiaries or affiliates;
c. The transferor and its principals, as applicable, shall
have executed a general release, in a form prescribed by Franchisor, of any and
all claims against Franchisor and its subsidiaries and affiliates and their
respective officers, directors, shareholders, partners, employees, servants,
representatives and agents, in their corporate and individual capacities,
including, without limitation, claims arising under this Agreement and any
other agreement between Franchisee and Franchisor or its subsidiaries or
affiliates and federal, state and local laws, rules and ordinances;
d. The transferee shall enter into a written agreement, in
a form prescribed by Franchisor, assuming full, unconditional, joint and
several liability for and agreeing to perform from the date of the transfer,
all obligations, covenants and agreements of Franchisee contained in this
Agreement; and if transferee is a corporation or partnership, transferee's
shareholders, partners or other investors, as applicable, shall also execute
such agreement as principals of the transferee, including a guaranty of
Franchisee's obligations contained in this Agreement;
e. The transferee shall demonstrate to Franchisor's
satisfaction that the transferee meets the criteria which Franchisor considers
when reviewing a prospective franchisee's application for a franchise including
Franchisor's educational, managerial and business standards, transferee's good
moral character, business reputation and credit rating, the transferee's
aptitude and ability to conduct the franchised business (as may be evidenced by
prior related business experience or otherwise), the transferee's financial
resources and capital and the geographic proximity of other Restaurants
operated by the transferee and territories with respect to which transferee is
obligated to develop Restaurants pursuant to any development agreement between
Franchisor and the transferee, in relation to the Restaurant;
f. The transferee shall execute for a term ending on the
expiration date of this Agreement and with such renewal term as may be provided
by this Agreement, the form of franchise agreement then being offered to new
System franchisees and other ancillary agreements as Franchisor may require for
the franchised business, which agreements shall supersede this Agreement and
its ancillary documents in all respects and the terms of which agreements may
differ from the terms of this Agreement and may include, without limitation, a
higher royalty fee and advertising fee and expenditure requirement; provided,
however, that the transferee shall not be required to pay any initial franchise
fee and if the transferee is a corporation or partnership, transferee's
shareholders, partners or other investors, as applicable, shall also execute
such agreements as principals of the transferee, including a guaranty of
Franchisee's obligations contained in such Agreement;
g. The transferee, at its expense, shall renovate,
modernize and otherwise upgrade the Restaurant to conform to the then-current
standards and specifications of System restaurants as reasonably requested by
Franchisor within the time specified by Franchisor;
h. The transferor shall remain liable for all of the
obligations to Franchisor in connection with the franchised business incurred
prior to the effective date of the transfer and shall execute any and all
instruments reasonably requested by Franchisor to evidence such liability;
i. At the transferee's expense, the transferee's Operating
Principal, managers, chefs and Restaurant personnel designated by Franchisor
shall complete the initial training program and any other training programs
then required, upon such terms and conditions (including payment of a
reasonable fee) as Franchisor may reasonably require;
j. Franchisee shall pay a transfer fee of two thousand
five hundred dollars ($2,500) or such greater amount as is necessary to
reimburse Franchisor for its reasonable costs and expenses associated with
reviewing the application for transfer, including, without limitation, legal
and accounting fees;
k. If transferee is a corporation or a partnership,
transferee shall make and will be bound by any or all of the representations,
warranties and covenants in Section VI.A. as Franchisor requests. Transferee
shall provide to Franchisor evidence satisfactory to Franchisor that the terms
of Section VI.A. have been satisfied and are true and correct on the date of
transfer.
3. Franchisee hereby acknowledges and agrees that each
condition which must be met by the transferee is reasonable and necessary to
ensure the transferee's full performance of the obligations hereunder.
C. Transfer for Convenience of Ownership:
-------------------------------------
If the proposed transfer is to a corporation formed solely for
the convenience of ownership, Franchisor's consent may be conditioned upon any
of the requirements in Section XV.B.2., except that the requirements in
Sections XV.B.2.c., e., f., g., i. and j. shall not apply. Franchisee shall be
the owner of all the voting stock or interest of the corporation and if
Franchisee is more than one individual, each individual shall have the same
proportionate ownership interest in the corporation as he had in Franchisee
prior to the transfer.
D. Right of First Refusal:
----------------------
1. Any party holding any interest (including any interest
acquired pursuant to Section XV.E.) in Franchisee, in the franchised business
or in this Agreement who desires to accept any bona fide offer from a third
party to purchase such interest shall promptly notify Franchisor in writing of
each such offer and shall provide such information and documents relating to
the offer as Franchisor may require. Franchisor shall have the right and
option, exercisable within sixty (60) days after receipt of such written
notification, information and documents, to send written notice to the
transferor that Franchisor intends to purchase the transferor's interest on the
same terms and conditions offered by the third party. If Franchisor elects to
purchase the transferor's interest, the closing on such purchase must occur
within thirty (30) days from the date of notice to the transferor of the
election to purchase by Franchisor, or such other date as may be agreed upon.
Any material change in the terms of any offer prior to closing shall constitute
a new offer subject to the same rights of first refusal by Franchisor as in the
case of an initial offer. Failure of Franchisor to exercise the option
afforded by this Section XV.D. shall not constitute a waiver of any other
provision of this Agreement, including all provisions relating to a proposed
transfer.
2. If the offer from the third party provides for payment of
consideration other than cash or involves certain intangible benefits,
Franchisor may elect to purchase the interest proposed to be sold for the
reasonable equivalent in cash. If the parties cannot agree within a reasonable
time on such amount, an independent appraiser shall be designated by Franchisor
to determine such amount and the appraiser's determination shall be final and
binding.
<PAGE>
3. If Franchisor elects to exercise the option described in
this Section XV.D., it shall have the right to set off the cost of the
appraisal described in Section XV.D.2. above, if any, against any payment made
hereunder.
4. Failure to comply with the provisions of this Section XV.D.
prior to the transfer of any interest in Franchisee, in the franchised business
or in this Agreement shall constitute a material event of default under Section
XVI.
E. Transfer Upon Death or Permanent Disability:
-------------------------------------------
1. Upon the death of any person with an interest in this
Agreement, the franchised business or in Franchisee (the "Deceased"), the
executor, administrator or other personal representative of the Deceased shall
transfer such interest to a third party approved by Franchisor within twelve
(12) months after the death. If no personal representative is designated or
appointed or no probate proceedings are instituted with respect to the estate
of the Deceased, then the distributee of such interest must be approved by
Franchisor. If the distributee is not approved by Franchisor, then the
distributee shall transfer such interest to a third party approved by
Franchisor within twelve (12) months after the death of the Deceased.
2. Upon the permanent disability of any person with an interest
in this Agreement, the franchised business or in Franchisee, Franchisor may, in
its sole discretion, require such interest to be transferred to a third party
approved by Franchisor within six (6) months after notice to Franchisee.
"Permanent disability" shall mean any physical, emotional or mental injury,
illness or incapacity which would prevent a person from performing the
obligations set forth in this Agreement for at least ninety (90) consecutive
days and from which condition recovery within ninety (90) days from the date of
determination of disability is unlikely. Permanent disability shall be
determined upon examination of the person by a licensed practicing physician
selected by Franchisor; or if the person refuses to submit to an examination,
then such person shall be automatically deemed permanently disabled as of the
date of such refusal for the purpose of this Section XV.E. The costs of any
examination required by this Section XV.E. shall be paid by Franchisor.
3. In the event of the death or permanent disability of any
person with a twenty-five percent (25%) or more interest in this Agreement, the
franchised business or in Franchisee, or any person with an interest less than
twenty-five percent (25%) if Franchisor determines, in its sole discretion,
that such person had substantial control or supervision over the management of
the Restaurant, Franchisor at its option may elect to operate the Restaurant
during the interim twelve (12) months following such death or the interim six
(6) months following such permanent disability, as applicable, until the
interest of such person is transferred in accordance with this Section XV. or
until the applicable interim period expires, whichever comes first. As
compensation for managing the Restaurant, Franchisor will charge a management
fee of two percent (2%) of the Gross Sales of the Restaurant for each Sales
Period, which will be in addition to the royalty fee, advertising fees and any
other fees or payments due and owing to Franchisor and, if Franchisor provides
one of its employees as manager, Franchisee shall pay Franchisor the manager's
then-current salary for the time of such interim management. In addition,
Franchisee will remain responsible for payment of employee salaries, taxes,
rent, utilities, supplies and all other costs and expenses associated with the
operation of the Restaurant. Franchisor shall exercise its best efforts in
managing the Restaurant, but shall not be liable for any losses incurred by the
Restaurant during the time of such management and thereafter. If Franchisor
elects to operate the Restaurant pursuant to this Section XV.E.3., Franchisee
shall indemnify Franchisor for losses and expenses incurred by Franchisor as a
result of such operation to the same extent as provided in Section XX.D.
4. Upon the death or claim of permanent disability of any
person with an interest in this Agreement, the franchised business or
Franchisee, Franchisee or its representative must promptly notify Franchisor of
such death or claim of permanent disability. Any transfer upon death or
permanent disability shall be subject to the same terms and conditions as
described in this Section XV. for any inter vivos transfer. If an interest is
not transferred upon death or permanent disability as required in this Section
XV.E., Franchisor may terminate this Agreement pursuant to Section XVI.
F. Non-Waiver of Claims:
--------------------
Franchisor's consent to a transfer of any interest in Franchisee,
the franchised business or this Agreement shall not constitute a waiver of any
claims it may have against the transferring party, nor shall it be deemed a
waiver of Franchisor's right to demand exact compliance with this Agreement by
the transferee.
G. Offerings by Franchisee:
-----------------------
Securities of or partnership interests in Franchisee may be
offered to the public, by private offering or otherwise, only with the prior
written consent of Franchisor (whether or not Franchisor's consent is required
under Section XV.B.), which consent shall not be unreasonably withheld. All
materials required for such offering by federal or state law shall be submitted
to Franchisor for a limited review as discussed below prior to their being
filed with any government agency; and any materials to be used in any exempt
offering shall be submitted to Franchisor for such review prior to their use.
No offering by Franchisee shall imply (by use of the Proprietary Marks or
otherwise) that Franchisor is participating in an underwriting, issuance or
offering of Franchisee's or Franchisor's securities or the securities of any
subsidiary or affiliate of Franchisor; and Franchisor's review of any offering
materials shall be limited solely to the subject of the relationship between
Franchisee and Franchisor and its subsidiaries and affiliates. Franchisor may,
at its option, require Franchisee's offering materials to contain a written
statement prescribed by Franchisor concerning the limitations described in the
preceding sentence. Franchisee and the other participants in the offering must
fully indemnify Franchisor in connection with the offering. For each proposed
offering, Franchisee shall pay to Franchisor a nonrefundable fee of five
thousand dollars ($5,000), or such other amount as is necessary to reimburse
Franchisor for its reasonable costs and expenses associated with reviewing the
proposed offering materials, including, without limitation, legal and
accounting fees. Franchisee shall give Franchisor written notice at least
thirty (30) days prior to any offering or other transaction covered by this
Section XV.G.
XVI. TERMINATION
-----------
A. Franchisee shall be deemed to be materially in default under this
Agreement and all rights granted herein shall automatically terminate without
notice to Franchisee (1) if Franchisee becomes insolvent or makes a general
assignment for the benefit of creditors or files a voluntary petition under any
section or chapter of federal bankruptcy laws or under any similar law or
statute of the United States or any state, or admits in writing its inability
to pay its debts when due; or (2) if Franchisee is adjudicated bankrupt or
insolvent in proceedings filed against Franchisee under any section or chapter
of federal bankruptcy law or any similar law or statute of the United States or
any state, without further possibility of appeal or review; or (3) if a bill in
equity or other proceeding for the appointment of a receiver of Franchisee or
other custodian for Franchisee's business or assets is filed and consented to
by Franchisee, or if a receiver or other custodian (permanent or temporary) of
Franchisee's assets or property, or any part thereof, is appointed by any court
of competent jurisdiction; or (4) if proceedings for a composition with
creditors under any state or federal law are instituted by or against
Franchisee; or (5) if a final judgment against Franchisee remains unsatisfied
or of record for thirty (30) days or longer (unless supersedeas bond is filed);
or (6) if Franchisee is dissolved; or (7) if execution is levied against
Franchisee's business or property; or (8) if suit to foreclose any lien or
mortgage against the premises or equipment of the franchised business is
instituted and not dismissed within thirty (30) days; or (9) if the real or
personal property of the franchised business is sold after levy by any sheriff,
marshal or constable.
B. Franchisee shall be deemed to be materially in default and
Franchisor may, at its option, terminate this Agreement and all rights granted
hereunder, without affording Franchisee any opportunity to cure the default
except as provided below, effective immediately upon written notice to
Franchisee, upon the occurrence of any of the following events of default:
1. If Franchisee operates the Restaurant or sells any products
or services authorized by Franchisor for sale at the Restaurant at a location
which has not been approved by Franchisor;
2. If Franchisee fails to acquire an approved location for the
Restaurant within the time and in the manner specified in Section VII.;
3. If Franchisee fails to construct or remodel the Restaurant
in accordance with the plans and specifications provided to Franchisee under
Section III.B., as such plans and specifications may be adapted with
Franchisor's approval in accordance with Section VII.E.;
4. If Franchisor's initial training program is not
satisfactorily completed by any replacement Operating Principal or manager (or
the initial Operating Principal or manager if no replacement is designated in
accordance with Section IX.A.) or if Franchisor, in its reasonable business
judgment based upon the performance of such person(s), determines that the
training program cannot be satisfactorily completed by such person(s), all as
provided in Section IX.A.;
5. If Franchisee at any time ceases to operate or otherwise
abandons the franchised business, or loses the right to possession of the
premises, or otherwise forfeits the right to transact business in the
jurisdiction where the Restaurant is located; provided, however, that this
provision shall not apply in cases of Force Majeure, as defined in
Section XXII.A., if, through no fault of Franchisee, the premises are damaged
or destroyed by a Force Majeure event and Franchisee within thirty (30) days
after such damage or destruction has occurred applies for Franchisor's approval
to relocate or reconstruct the Restaurant premises (which approval shall not be
unreasonably withheld) and Franchisee diligently pursues relocation or
reconstruction of the Restaurant. Such approval may be conditioned upon the
payment of an agreed minimum fee to Franchisor during the period in which the
Restaurant is not fully in operation;
6. If Franchisee or any of Franchisee's Principals is convicted
of, or shall have entered a plea of nolo contendere to, a felony, a crime
involving moral turpitude or any other crime or offense that Franchisor
believes is reasonably likely to have an adverse effect on the System, the
Proprietary Marks, the goodwill associated therewith or Franchisor's interest
therein;
7. If a threat or danger to public health or safety results
from the construction, maintenance or operation of the Restaurant;
8. If Franchisee fails to designate any successor or
replacement Operating Principal or manager within thirty (30) days after the
Operating Principal or manager ceases to serve as such, all as required under
Section VIII.A.5.;
9. If Franchisee or any of Franchisee's Principals breach or
fail to perform any of the representations, warranties and covenants in
Section VI.;
10. If a transfer or an attempt to transfer any rights or
obligations under this Agreement or any interest in Franchisee or the
franchised business to any third party is made without Franchisor's prior
written consent or without offering Franchisor a right of first refusal with
respect to such transfer, contrary to the terms of Section XV.;
11. If Franchisee or any of Franchisee's Principals fails to
comply with the covenants in Section XII.A. or XVIII.B. or if Franchisee fails
to obtain the execution of the covenants required under Section XII.B. or
XVIII.H. within thirty (30) days following Franchisor's request that Franchisee
obtain the execution of such covenants;
12. If an approved transfer upon death or permanent disability
is not effected within the time period and in the manner prescribed by Section
XV.E.;
13. If Franchisee knowingly maintains false books or records or
submits any false reports to Franchisor;
14. If Franchisee fails to have the Restaurant open and in
operation within one hundred twenty (120) days after the date of execution of
this Agreement, unless Franchisee obtains an extension of this time period from
Franchisor in writing or unless otherwise provided in a development agreement
between Franchisor and Franchisee;
15. If Franchisee misuses or makes any unauthorized use of the
Proprietary Marks or otherwise materially impairs the goodwill associated
therewith or with the System or Franchisor's rights therein and does not cure
such default within twenty-four (24) hours following notice from Franchisor;
16. If Franchisee fails to procure and maintain such insurance
policies as required by Section XIV. and Franchisee fails to cure such default
within seven (7) days following notice from Franchisor;
17. If Franchisee fails, refuses or neglects promptly to pay any
monetary obligation owing to Franchisor or its subsidiaries or affiliates when
due under this Agreement or any other agreement between Franchisee and
Franchisor or its subsidiaries or affiliates, or to submit the financial or
other information required by Franchisor under this Agreement and does not cure
such default within five (5) days following notice from Franchisor;
18. If Franchisee fails to offer for sale and sell such menu
items and other designated products required by Franchisor in accordance with
Franchisor's standards and specifications and Franchisee does not cure such
default within ten (10) days following notice from Franchisor;
19. If Franchisee is in default in the payment of any monetary
obligation due to Franchisor hereunder more than one (1) time during the prior
two (2) Sales Periods, whether or not cured by Franchisee after notice by
Franchisor;
20. If Franchisee fails to comply with any of the requirements
in the software license agreement executed pursuant to Section VIII.K. and does
not cure such default in accordance with the terms of the software license
agreement; and
21. Except as provided in Section XVI.B.19. above, if Franchisee
repeatedly commits a material event of default under this Agreement, whether or
not such defaults have been cured after notice by Franchisor.
C. Except as provided in Section XVI.B., upon any default by
Franchisee which is capable of being cured, Franchisor may terminate this
Agreement only by giving written notice of termination stating the nature of
such default to Franchisee at least thirty (30) days prior to the effective
date of termination; provided, however, that Franchisee may avoid termination
by immediately initiating a remedy to cure such default and curing it to
Franchisor's satisfaction within the thirty (30) day period and by promptly
providing proof thereof to Franchisor. If any such default is not cured within
the specified time, or such longer period as applicable law may require, this
Agreement shall terminate without further notice to Franchisee effective
immediately upon the expiration of the thirty (30) day period or such longer
period as applicable law may require. Defaults which are capable of cure may
include, but are not limited to, the following illustrative events:
1. Except as provided in Section XVI.B., if Franchisee fails to
comply with any of the requirements imposed by this Agreement, as it may from
time to time be amended or reasonably supplemented by the Manuals, or fails to
carry out the terms of this Agreement in good faith;
2. Except as provided in Section XVI.B., if Franchisee fails to
maintain or observe any of the standards or procedures prescribed by Franchisor
in this Agreement, the Manuals or otherwise in writing;
3. Except as provided in Section XVI.B.10., if Franchisee
fails, refuses or neglects to obtain Franchisor's prior written approval or
consent as required by this Agreement; or
4. If Franchisee engages in any business or markets any service
or product under a name or mark which, in Franchisor's opinion, is confusingly
similar to the Proprietary Marks.
XVII. OBLIGATIONS UPON TERMINATION OR EXPIRATION
------------------------------------------
Upon the termination or expiration of this Agreement, all rights
granted hereunder to Franchisee shall terminate and:
A. Franchisee shall immediately cease to operate the Restaurant and
shall not thereafter, directly or indirectly, represent to the public or hold
itself out as a present or former franchisee of Franchisor.
B. Franchisee shall immediately and permanently cease to use, in any
manner, any confidential methods, procedures, techniques and trade secrets
associated with the System, the Proprietary Marks and all other distinctive
forms, slogans, signs, symbols and devices associated with the System, as set
forth in the Manuals. In particular, Franchisee shall cease to use, without
limitation, all signs, advertising materials, displays, stationery, forms and
any other articles which display the Proprietary Marks.
C. Franchisee shall take such action as may be necessary to cancel
any assumed name or equivalent registration which contains the mark ZuZu
Handmade Mexican Food(-Registered Mark-) or any part thereof or any other
service mark or trademark of Franchisor and Franchisee shall furnish Franchisor
with evidence satisfactory to Franchisor of compliance with this obligation
within five (5) days after the termination or expiration of this Agreement.
D. Franchisee shall, at Franchisor's option, assign to Franchisor
any interest which Franchisee has in any lease or sublease for the Restaurant
premises or for any equipment used in the operation of the franchised business.
Franchisor may exercise such option at or within thirty (30) days after either
termination or (subject to any existing right to renew) expiration of this
Agreement. The time for closing on the assignment of lease, sublease or
equipment shall be a date no later than ten (10) days after Franchisor's
exercise of the option(s) unless Franchisor is also exercising its option to
purchase property described below in Section XVII.E., in which case the date of
closing shall be on the same date prescribed for the purchase option. Closing
shall take place at Franchisor's corporate offices or at such other location as
the parties may agree. If Franchisor does not elect to exercise its option to
acquire the lease or sublease for the premises of the franchised business,
Franchisee shall make such modifications or alterations to such premises
immediately upon termination or expiration of this Agreement as may be
necessary to distinguish the appearance of such premises from that of other
restaurants operating under the System and shall make such specific additional
changes as Franchisor may reasonably request. If Franchisee fails or refuses
to comply with the requirements of this Section XV.D., Franchisor shall have
the right to enter upon the premises of the franchised business, without being
guilty of trespass or any other crime or tort, to make or cause to be made such
changes as may be required, at the expense of Franchisee, which expense
Franchisee agrees to pay upon demand.
E. 1. Franchisor shall have the option, which it may exercise by
providing written notice to Franchisee within thirty (30) days after
termination or (subject to any right to renew) expiration of this Agreement, to
purchase from Franchisee any or all of the furnishings, equipment (including
computer hardware and software not subject to a software license agreement
between Franchisee and Franchisor), signs, fixtures, supplies or inventory of
Franchisee related to the operation of the franchised business, at Franchisee's
cost or fair market value, whichever is less.
2. Franchisor shall be purchasing Franchisee's assets only and
shall be assuming no liabilities.
3. If the parties cannot agree on a fair market value within
thirty (30) days from the date of Franchisor's notice to exercise its option,
an independent appraiser shall be designated by each party and the two (2)
independent appraisers shall select a third independent appraiser. The
determination of fair market value by the majority of the appraisers shall be
binding. Each party shall bear the costs and expenses of the appraiser
appointed by such party, and the parties shall share equally the costs and
expenses of the third appraiser.
4. At closing, Franchisee shall deliver to Franchisor, in a
form satisfactory to Franchisor, such bills of sale, assignments, releases of
liens and such other documents and instruments which Franchisor deems
reasonably necessary to perfect Franchisor's title and possession in and to the
assets being purchased and to certify that the requirements of all taxing and
other governmental authorities have been satisfied. If at the time of closing
Franchisee has not obtained all of these certificates and other documents,
Franchisor may, in its sole discretion, place the purchase price in escrow
pending the issuance of any required certificates or documents.
5. The time and place for the closing of the purchase and sale
of such assets shall be a date not later than thirty (30) days after the
purchase price is determined by the parties or the appraisers, whichever is
later, at the corporate offices of Franchisor, unless the parties mutually
agree to designate another date or place.
6. At closing, Franchisor shall have the right to set off all
amounts owed by Franchisee to Franchisor and its subsidiaries and affiliates
and the cost incurred in connection with any escrow arrangement (including
reasonable legal fees) against any payment for the assets, and shall pay the
remaining amount in cash.
F. Franchisee, at the option of Franchisor, shall assign to
Franchisor all rights to the telephone numbers of the Restaurant and any
related Yellow Pages or other business listings and execute all forms and
documents required by any telephone company to transfer such service and
numbers to Franchisor. Notwithstanding any forms and documents which may have
been executed by Franchisor under Section VIII.Q., Franchisee hereby appoints
Franchisor its true and lawful agent and attorney-in-fact with full power and
authority, for the sole purpose of taking such action as is necessary to
complete such assignment. This power of attorney shall survive the expiration
or termination of this Agreement. Franchisee shall thereafter use different
telephone numbers at or in connection with any subsequent business conducted by
Franchisee.
G. Franchisee agrees, if it continues to operate or subsequently
begins to operate any other business, not to use any reproduction, counterfeit,
copy or colorable imitation of the Proprietary Marks, either in connection with
such other business or its promotion, which is likely to cause confusion,
mistake or deception or which is likely to dilute Franchisor's rights in and to
the Proprietary Marks, and further agrees not to use any designation of origin
or description or representation which falsely suggests or represents an
association or connection with Franchisor constituting unfair competition.
H. Franchisee shall promptly pay all sums owing to Franchisor and
its subsidiaries and affiliates. In the event of termination for any default
of Franchisee, such sums shall include interest on any past due amounts as
prescribed in this Agreement and all damages, costs and expenses, including
reasonable legal fees, incurred by Franchisor as a result of the default, which
obligation shall give rise to and remain, until paid in full, a lien in favor
of Franchisor against any and all of the personal property, furnishings,
equipment, signs, fixtures and inventory owned by Franchisee and on the
premises of the franchised business at the time of default.
I. Franchisee shall pay to Franchisor all damages, costs and
expenses, including reasonable legal fees, incurred by Franchisor after the
termination or expiration of this Agreement in obtaining injunctive or other
relief for the enforcement of any provisions of this Section XVII.
J. Franchisee shall immediately deliver to Franchisor all manuals,
including the Manuals, records, files, instructions, correspondence, customer
lists and all other materials related to operating the franchised business,
including, without limitation, brochures, agreements, invoices and all other
related materials in Franchisee's possession, and all copies thereof (all of
which are acknowledged to be Franchisor's property) and shall retain no copy or
record of any of the above, except Franchisee's copy of this Agreement and of
any correspondence between the parties and any other documents which Franchisee
reasonably needs for compliance with any applicable law.
K. Franchisee and Franchisee's Principals shall comply with the
restrictions on confidential information contained in Section XII.A. and the
covenants contained in Section XVIII.B. Any other person required to execute
similar covenants pursuant to Sections XII.B. or XVIII. shall also comply with
such covenants.
XVIII. COVENANTS
---------
A. Franchisee covenants that during the term of this Agreement,
except as otherwise provided in this Agreement or approved in writing by
Franchisor, Franchisee and the Operating Principal shall devote full time,
energy and best efforts to the management and operation of the franchised
business.
B. Franchisee and Franchisee's Principals specifically acknowledge
that, pursuant to this Agreement, Franchisee and Franchisee's Principals will
receive valuable specialized training, trade secrets and confidential
information, including, without limitation, information regarding the
operational, sales promotional and marketing methods and techniques of
Franchisor and the System which are beyond the present skills and experience of
Franchisee, Franchisee's Principals and Franchisee's managers and employees.
Franchisee and Franchisee's Principals acknowledge that such training, trade
secrets and confidential information provide a competitive advantage and will
be valuable to them in the development of the franchised business and that
gaining access to such training, trade secrets and confidential information is,
therefore, a primary reason for entering into this Agreement. In consideration
for such training, trade secrets and confidential information, Franchisee and
Franchisee's Principals covenant as follows:
1. With respect to Franchisee, during the term of this
Agreement, or with respect to each of Franchisee's Principals, during the term
of this Agreement for so long as such individual or entity satisfies the
definition of "Franchisee's Principal" in Section XXV.F., except as otherwise
approved in writing by Franchisor, neither Franchisee nor any of Franchisee's
Principals shall, either directly or indirectly, for themselves or through, on
behalf of or in conjunction with any person(s), partnership or corporation:
a. Divert or attempt to divert any business or customer of
the franchised business to any competitor, by direct or indirect inducement or
otherwise, or do or perform, directly or indirectly, any other act injurious or
prejudicial to the goodwill associated with the Proprietary Marks and the
System; or
b. Own, maintain, operate, engage in or have any financial
or beneficial interest in (including interest in corporations, partnerships,
trusts, unincorporated associations or joint ventures), advise, assist or make
loans to, any business which is the same as or similar to the franchised
business including, but not limited to, any food business which offers Mexican-
style food as a primary menu item.
2. With respect to Franchisee, for a continuous uninterrupted
period commencing upon the expiration or termination of, or transfer of all of
Franchisee's interest in, this Agreement, or with respect to each of
Franchisee's Principals, for a continuous uninterrupted period commencing upon
the earlier of: (i) the expiration, termination or transfer of all of
Franchisee's interest in this Agreement or (ii) the time such individual or
entity ceases to satisfy the definition of "Franchisee's Principal" in
Section XXV.F., and for two (2) years thereafter, except as otherwise approved
in writing by Franchisor, neither Franchisee nor any of Franchisee's Principals
shall, either directly or indirectly, for themselves or through, on behalf of
or in conjunction with any person(s), partnership or corporation:
a. divert or attempt to divert any business or customer of
the franchised business to any competitor, by direct or indirect inducement or
otherwise, or do or perform, directly or indirectly, any other act injurious or
prejudicial to the goodwill associated with Franchisor's Proprietary Marks and
the System; or
b. employ or seek to employ any person who is at that time
employed by Franchisor or by any other franchisee or developer of Franchisor,
or otherwise directly or indirectly induce such person to leave that person's
employment, except as may be permitted under any existing development agreement
or franchise agreement between Franchisor and Franchisee; or
c. own, maintain, operate, engage in or have any financial
or beneficial interest in (including interest in corporations, partnerships,
trusts, unincorporated associations or joint ventures), advise, assist or make
loans to, any business which is the same as or similar to the franchised
business including, but not limited to, any food business which offers Mexican-
style food as a primary menu item, which business is, or is intended to be,
located within a five (5)-mile radius of the location approved hereunder or of
any ZuZu Handmade Mexican Food(-Registered Mark-) restaurant in existence or
under construction as of the earlier of: (i) the expiration or termination of,
or the transfer of all of Franchisee's interest in, this Agreement; or (ii) the
time Franchisee's Principal ceases to satisfy the definition of Franchisee's
Principal, as applicable.
C. Section XVIII.B.1.b. and 2.c. shall not apply to ownership of
less than a one percent (1%) beneficial interest in the outstanding equity
securities of any publicly-held corporation.
D. The parties agree that each of the above covenants shall be
construed as independent of any other covenant or provision of this Agreement.
If all or any portion of a covenant in this Section XVIII. is held unreasonable
or unenforceable by a court or agency having valid jurisdiction in an
unappealed final decision to which Franchisor is a party, Franchisee and
Franchisee's Principals expressly agree to be bound by any lesser covenant
subsumed within the terms of such covenant that imposes the maximum duty
permitted by law, as if the resulting covenant were separately stated in and
made a part of this section.
E. Franchisee and Franchisee's Principals understand and acknowledge
that Franchisor shall have the right, in its sole discretion, to reduce the
scope of any covenant set forth in Section XVIII.B., or any portion thereof,
without their consent, effective immediately upon written notice to Franchisee;
and Franchisee and Franchisee's Principals agree that they shall immediately
comply with any covenant as so modified, which shall be fully enforceable
notwithstanding the provisions of Section XXIV.
F. Franchisee and Franchisee's Principals expressly agree that the
existence of any claims they may have against Franchisor, whether or not
arising from this Agreement, shall not constitute a defense to the enforcement
by Franchisor of the covenants in this Section XVIII. Franchisee and
Franchisee's Principals agree to pay all costs and expenses (including
reasonable legal fees) incurred by Franchisor in connection with the
enforcement of this section.
G. Franchisee and Franchisee's Principals acknowledge that a
violation of the terms of this Section XVIII. would result in irreparable
injury to Franchisor for which no adequate remedy at law may be available, and
Franchisee and Franchisee's Principals accordingly consent to the issuance of
an injunction prohibiting any conduct by Franchisee or any of Franchisee's
Principals in violation of the terms of this section.
H. At Franchisor's request, Franchisee shall require and obtain
execution of covenants similar to those set forth in this Section XVIII.
(including covenants applicable upon the termination of a person's employment
with Franchisee) from any Restaurant personnel of Franchisee and any holder of
a beneficial interest of less than one percent (1%) of any class of the
securities of Franchisee and any corporation directly or indirectly controlling
Franchisee, if Franchisee is a corporation (or of any corporate general partner
and any corporation directly or indirectly controlling a general partner of
Franchisee, if Franchisee is a partnership), who has received or will receive
confidential information or training from Franchisor. Such covenants shall be
substantially in the form set forth in Attachment D. Failure by Franchisee to
obtain execution of the covenants required by this Section XVIII.H. shall
constitute a material event of default under Section XVI.
XIX. TAXES, PERMITS AND INDEBTEDNESS
-------------------------------
A. Franchisee shall promptly pay when due all taxes levied or
assessed, including, without limitation, unemployment and sales taxes and all
accounts and other indebtedness of every kind incurred by Franchisee in the
conduct of the franchised business.
B. Franchisee shall pay to Franchisor an amount equal to any sales
tax, gross receipts tax, excise tax or any similar license or tax, directly or
indirectly imposed on Franchisor with respect to any payment to Franchisor
required under this Agreement. The preceding sentence shall not apply to any
franchise tax or income, war profits or excess profits tax (or any tax in lieu
thereof) imposed on Franchisor with respect to the above payments.
C. In the event of any bona fide dispute as to Franchisee's
liability for taxes assessed or other indebtedness, Franchisee may contest the
validity or the amount of the tax or indebtedness in accordance with the
procedures of the taxing authority or applicable law; however, in no event
shall Franchisee permit a tax sale or seizure by levy of execution or similar
writ or warrant or attachment by a creditor, to occur against the premises of
the franchised business or any improvements thereon.
D. Franchisee shall comply with all federal, state and local laws,
rules and regulations and shall timely obtain any and all permits, certificates
or licenses necessary for the full and proper conduct of the franchised
business, including, without limitation, licenses to do business, fictitious
name registrations, sales tax permits, fire clearances, health permits and
certificates of occupancy.
<PAGE>
E. Franchisee shall notify Franchisor in writing within five (5)
days of the commencement of any action, suit or proceeding and of the issuance
of any order, writ, injunction, award or decree of any court, agency or other
governmental instrumentality, which may adversely affect the operation or
financial condition of the franchised business.
XX. INDEPENDENT CONTRACTOR AND INDEMNIFICATION
------------------------------------------
A. The parties acknowledge and agree that this Agreement does not
create a fiduciary relationship between them, that Franchisee shall be an
independent contractor and that nothing in this Agreement is intended to
constitute either party an agent, legal representative, subsidiary, joint
venturer, partner, employee, employer, joint employer or servant of the other
for any purpose.
B. During the term of this Agreement, Franchisee shall hold itself
out to the public as an independent contractor operating the business pursuant
to a franchise from Franchisor. Franchisee agrees to take such action as shall
be necessary to that end, including, without limitation, exhibiting a notice of
that fact in a conspicuous place in the franchised premises, the content and
form of which Franchisor reserves the right to specify in the Manuals or
otherwise in writing.
C. Franchisee and Franchisee's Principals understand and agree that
nothing in this Agreement authorizes Franchisee or Franchisee's Principals to
make any contract, agreement, warranty or representation on Franchisor's
behalf, or to incur any debt or other obligation in Franchisor's name; and that
Franchisor shall in no event assume liability for, or be deemed liable
hereunder as a result of, any such action; nor shall Franchisor be deemed
liable for any act or omission of Franchisee or Franchisee's Principals in the
conduct of the franchised business or for any claim or judgment arising
therefrom.
D. 1. FRANCHISEE AND EACH OF FRANCHISEE'S PRINCIPALS SHALL, AT ALL
TIMES, INDEMNIFY AND HOLD HARMLESS TO THE FULLEST EXTENT PERMITTED BY LAW
FRANCHISOR, ITS SUBSIDIARIES, AFFILIATES, SUCCESSORS AND ASSIGNS AND THEIR
RESPECTIVE DIRECTORS, OFFICERS, SHAREHOLDERS, PARTNERS, SERVANTS, EMPLOYEES,
AGENTS, INDEPENDENT CONTRACTORS AND REPRESENTATIVES FROM ALL "LOSSES AND
EXPENSES" (AS DEFINED IN SECTION XX.D.4. BELOW) INCURRED IN CONNECTION WITH ANY
ACTION, SUIT, PROCEEDING, CLAIM, DEMAND, INVESTIGATION OR INQUIRY (FORMAL OR
INFORMAL), OR ANY SETTLEMENT THEREOF (WHETHER OR NOT A FORMAL PROCEEDING OR
ACTION HAS BEEN INSTITUTED) WHICH ARISES OUT OF OR IS BASED UPON ANY OF THE
FOLLOWING:
a. THE INFRINGEMENT, ALLEGED INFRINGEMENT OR ANY OTHER
VIOLATION OR ALLEGED VIOLATION BY FRANCHISEE OR ANY OF FRANCHISEE'S PRINCIPALS
OF ANY PATENT, MARK OR COPYRIGHT OR OTHER PROPRIETARY RIGHT OWNED OR CONTROLLED
BY THIRD PARTIES (EXCEPT AS SUCH MAY OCCUR WITH RESPECT TO ANY RIGHTS IN THE
PROPRIETARY MARKS OR COPYRIGHTS GRANTED UNDER THIS AGREEMENT);
b. THE VIOLATION, BREACH OR ASSERTED VIOLATION OR BREACH
BY FRANCHISEE OR ANY OF FRANCHISEE'S PRINCIPALS OF ANY FEDERAL, STATE OR LOCAL
LAW, REGULATION, RULING, STANDARD OR DIRECTIVE OR ANY INDUSTRY STANDARD;
c. LIBEL, SLANDER OR ANY OTHER FORM OF DEFAMATION OF
FRANCHISOR OR THE SYSTEM, BY FRANCHISEE OR BY ANY OF FRANCHISEE'S PRINCIPALS;
d. THE VIOLATION OR BREACH BY FRANCHISEE OR BY ANY OF
FRANCHISEE'S PRINCIPALS OF ANY WARRANTY, REPRESENTATION, AGREEMENT OR
OBLIGATION IN THIS AGREEMENT OR IN ANY DEVELOPMENT AGREEMENT OR OTHER AGREEMENT
BETWEEN FRANCHISEE AND FRANCHISOR OR ITS SUBSIDIARIES OR AFFILIATES; AND
e. ACTS, ERRORS OR OMISSIONS OF FRANCHISEE, ANY OF
FRANCHISEE'S SUBSIDIARIES AND AFFILIATES AND ANY OF FRANCHISEE'S PRINCIPALS AND
THE OFFICERS, DIRECTORS, SHAREHOLDERS, PARTNERS, AGENTS, INDEPENDENT
CONTRACTORS, SERVANTS, EMPLOYEES AND REPRESENTATIVES OF FRANCHISEE AND ITS
SUBSIDIARIES AND AFFILIATES IN CONNECTION WITH THE ESTABLISHMENT AND OPERATION
OF THE RESTAURANT, INCLUDING BUT NOT LIMITED TO ACTS, ERRORS OR OMISSIONS OF
ANY OF THE FOREGOING IN THE OPERATION OF ANY DELIVERY MOTOR VEHICLE. THE
PARTIES ACKNOWLEDGE AND AGREE THAT FRANCHISOR CANNOT AND DOES NOT EXERCISE ANY
CONTROL OVER THE MANNER OF OPERATION OF ANY DELIVERY MOTOR VEHICLES USED BY OR
ON BEHALF OF ANY INDEPENDENT DELIVERY SERVICE PROVIDER REQUIRED UNDER THIS
AGREEMENT OR BY OR ON BEHALF OF FRANCHISEE OR ANY EMPLOYEE, AGENT OR
INDEPENDENT CONTRACTOR OF FRANCHISEE (EXCEPT, WITH RESPECT TO DELIVERY SERVICE
PROVIDED BY FRANCHISEE, FRANCHISOR MAY REQUIRE THAT FRANCHISEE'S DRIVERS MEET
CERTAIN MINIMUM STANDARDS AND, THEREFORE, THAT THE SAFE OPERATION OF DELIVERY
SERVICE IS THE INDEPENDENT OPERATOR'S OR FRANCHISEE'S (AS APPLICABLE) SOLE
RESPONSIBILITY.
2. Franchisee and each of Franchisee's Principals agree to give
Franchisor immediate notice of any such action, suit, proceeding, claim,
demand, inquiry or investigation. At the expense and risk of Franchisee and
each of Franchisee's Principals, Franchisor may elect to control (but under no
circumstance is obligated to undertake), and associate counsel of its own
choosing with respect to, the defense and/or settlement of any such action,
suit, proceeding, claim, demand, inquiry or investigation. Such an undertaking
by Franchisor shall, in no manner or form, diminish the obligation of
Franchisee and each of Franchisee's Principals to indemnify Franchisor and to
hold it harmless.
3. In order to protect persons or property, or its reputation
or goodwill, or the reputation or goodwill of others, Franchisor may, at any
time and without notice, as it in its judgment deems appropriate, consent or
agree to settlements or take such other remedial or corrective action as it
deems expedient with respect to any action, suit, proceeding, claim, demand,
inquiry or investigation if, in Franchisor's sole judgment, there are
reasonable grounds to believe that:
a. any of the acts or circumstances in Section XX.D.1.
above have occurred; or
b. any act, error or omission as described in Section
XX.D.1.e. may result directly or indirectly in damage, injury or harm to any
person or any property.
4. a. All losses and expenses incurred under this Section XX.
shall be chargeable to and paid by Franchisee or any of Franchisee's Principals
pursuant to its obligations of indemnity under this section, regardless of any
action, activity or defense undertaken by Franchisor or the subsequent success
or failure of such action, activity or defense.
b. As used in this Section XX., the phrase "losses and
expenses" shall include, without limitation, all losses, compensatory,
exemplary or punitive damages, fines, charges, costs, expenses, lost profits,
legal fees, court costs, settlement amounts, judgments, compensation for
damages to Franchisor's reputation and goodwill, costs of or resulting from
delays, financing, costs of advertising material and media time/space and costs
of changing, substituting or replacing the same, and any and all expenses of
recall, refunds, compensation, public notices and other such amounts incurred
in connection with the matters described.
5. The persons indemnified pursuant to this Section XX. do not
assume any liability for acts, errors or omissions of those with whom
Franchisee, any of Franchisee's Principals or Franchisee's subsidiaries and
affiliates may contract, regardless of the purpose. Franchisee and each of
Franchisee's Principals shall hold harmless and indemnify the persons
indemnified pursuant to this section for all losses and expenses which may
arise out of any acts, errors or omissions of Franchisee, Franchisee's
Principals, Franchisee's subsidiaries and affiliates, the officers, directors,
shareholders, partners, agents, independent contractors, servants, employees
and representatives of Franchisee and its subsidiaries and affiliates, and any
such third parties without limitation and without regard to the cause or causes
thereof or the negligence of Franchisor or any other party or parties arising
in connection therewith, and whether such negligence be sole, joint or
concurrent, or active or passive.
6. Under no circumstances shall the persons indemnified
pursuant to this Section XX. be required to seek recovery from third parties or
otherwise mitigate their losses to maintain a claim against Franchisee or any
of Franchisee's Principals. Franchisee and each of Franchisee's Principals
agree that the failure to pursue such recovery or mitigate loss will in no way
reduce the amounts recoverable from Franchisee or any of Franchisee's
Principals by the persons indemnified pursuant to this section.
7. Franchisee and Franchisee's Principals expressly agree that
the terms of this Section XX.D. shall expressly survive the termination,
expiration or transfer of this Agreement or any interest herein.
XXI. APPROVALS, WAIVERS AND REMEDIES
-------------------------------
A. Whenever this Agreement requires the prior approval or consent of
Franchisor, Franchisee shall make a timely written request to Franchisor and
such approval or consent shall be obtained in writing.
B. Franchisor makes no warranties or guarantees upon which
Franchisee or Franchisee's Principals may rely, and assumes no liability or
obligation to Franchisee, Franchisee's Principals or any third party to which
it would not otherwise be subject, by providing any waiver, approval, consent
or suggestion to Franchisee or Franchisee's Principals in connection with this
Agreement, or for any neglect, delay or denial of any request therefor.
C. No delay, waiver, omission or forbearance by Franchisor to
exercise any right, option, duty or power arising out of any breach or default
by Franchisee or Franchisee's Principals under this Agreement shall constitute
a waiver by Franchisor to enforce any such right, option, duty or power against
Franchisee or Franchisee's Principals, or as to a subsequent breach or default
by Franchisee or Franchisee's Principals. Subsequent acceptance by Franchisor
of any payments due to it hereunder shall not be deemed to be a waiver by
Franchisor of any preceding breach by Franchisee or Franchisee's Principals of
any terms, provisions, covenants or conditions of this Agreement.
D. All rights and remedies of the parties to this Agreement shall be
cumulative and not alternative, in addition to and not exclusive of any other
rights or remedies which are provided for herein or which may be available at
law or in equity in case of any breach, failure or default or threatened
breach, failure or default of any term, provision or condition of this
Agreement or any other agreement between Franchisee and Franchisor or its
subsidiaries or affiliates. The rights and remedies of the parties to this
Agreement shall be continuing and shall not be exhausted by any one or more
uses thereof, and may be exercised at any time or from time to time as often as
may be expedient; and any option or election to enforce any such right or
remedy may be exercised or taken at any time and from time to time. The
expiration or earlier termination of this Agreement shall not discharge or
release Franchisee or any of Franchisee's Principals from any liability or
obligation then accrued, or any liability or obligation continuing beyond, or
arising out of, the expiration or earlier termination of this Agreement.
XXII. FORCE MAJEURE
-------------
A. As used in this Agreement, the term "Force Majeure" shall mean
any act of God, strike, lock-out or other industrial disturbance, war (declared
or undeclared), riot, epidemic, fire or other catastrophe, act of any
government and any other similar cause not within the control of the affected
party.
B. Except as provided in Section XVI.B.1., if the performance of any
obligation by any party under this Agreement is prevented, hindered or delayed
because of Force Majeure, which cannot be overcome by use of normal commercial
measures, the parties shall be relieved of their respective obligations to the
extent the parties are respectively necessarily prevented, hindered or delayed
in such performance during the period of such Force Majeure; provided, that
Franchisee shall continue to be obligated to perform all of its monetary
obligations under this Agreement. The party whose performance is affected by
an event of Force Majeure shall give prompt notice of such Force Majeure event
to the other party by telephone or facsimile (in each case to be confirmed in
writing), setting forth the nature of the event, an estimate as to its duration
and a plan for resuming compliance with this Agreement, which the party shall
promptly undertake and maintain with due diligence. Such affected party shall
be liable for failure to give such timely notice only to the extent of damage
actually caused.
XXIII. NOTICES
-------
Any and all notices required or permitted under this Agreement shall
be in writing and shall be personally delivered or mailed by expedited delivery
service or certified or registered mail, return receipt requested, first-class
postage prepaid, or sent by prepaid facsimile, telegram or telex (provided that
the sender confirms the facsimile, telegram or telex by sending an original
confirmation copy by certified or registered mail or expedited delivery service
within three (3) business days after transmission) to the respective parties at
the following addresses unless and until a different address has been
designated by written notice to the other party:
Notices to Franchisor: ZuZu Franchising Corporation
2651 N. Harwood
Suite 100
Dallas, Texas 75201
Attention: Chief Executive Officer
Facsimile: 214-720-1332
Notices to Franchisee and
Franchisee's Principals: ________________________________
________________________________
________________________________
________________________________
Attention: ______________________
Facsimile: ______________________
Any notice shall be deemed to have been given at the time of personal
delivery or, in the case of facsimile, telegram or telex, upon transmission
(provided confirmation is sent as described above) or, in the case of expedited
delivery service or registered or certified mail, three (3) business days after
the date and time of mailing. Any change in the above addresses shall be made
by giving fifteen (15) days written notice of the change to the other party.
XXIV. ENTIRE AGREEMENT
----------------
This Agreement, the documents referred to herein and the Attachments
hereto constitute the entire, full and complete Agreement between Franchisor
and Franchisee and Franchisee's Principals concerning the subject matter hereof
and shall supersede all prior related agreements between the Franchisor and
Franchisee and Franchisee's Principals, no other representations having induced
Franchisee to execute this Agreement. Except for those permitted to be made
unilaterally by Franchisor hereunder, no amendment, change or variance from
this Agreement shall be binding on either party unless mutually agreed to by
Franchisor and Franchisee and executed by their authorized officers or agents
in writing.
XXV. SEVERABILITY AND CONSTRUCTION
-----------------------------
A. Except as expressly provided to the contrary herein, each
portion, section, part, term and provision of this Agreement shall be
considered severable; and if, for any reason, any section, part, term or
provision is determined to be invalid and contrary to, or in conflict with, any
existing or future law or regulation by a court or agency having valid
jurisdiction, this shall not impair the operation of, or have any other effect
upon, such other portions, sections, parts, terms and provisions of this
Agreement as may remain otherwise intelligible; and the latter shall continue
to be given full force and effect and bind the parties hereto; and the invalid
portions, sections, parts, terms and provisions shall be deemed not to be a
part of this Agreement.
B. Except as expressly provided to the contrary herein, nothing in
this Agreement is intended, nor shall be deemed, to confer upon any person or
entity other than Franchisee, Franchisor, Franchisor's officers, directors and
personnel and such of Franchisee's and Franchisor's respective successors and
assigns as may be contemplated (and, as to Franchisee, authorized) by
Section XV., any rights or remedies under or as a result of this Agreement.
C. Franchisee and Franchisee's Principals expressly agree to be
bound by any promise or covenant imposing the maximum duty permitted by law
which is subsumed within the terms of any provision hereof, as though it were
separately stated in and made a part of this Agreement, that may result from
striking from any of the provisions of this Agreement any portion or portions
which a court may hold to be unreasonable and unenforceable in a final decision
to which Franchisor is a party, or from reducing the scope of any promise or
covenant to the extent required to comply with such a court order.
D. All captions in this Agreement are intended solely for the
convenience of all parties and none shall be deemed to affect the meaning or
construction of any provision of this Agreement.
E. All references to the masculine, neuter or singular shall be
construed to include the masculine, feminine, neuter or plural, where
applicable. Without limiting the obligations individually undertaken by
Franchisee's Principals hereunder, all acknowledgments, promises, covenants,
agreements and obligations herein made or undertaken by Franchisee shall be
deemed jointly and severally undertaken by all of Franchisee's Principals.
F. Unless otherwise agreed to in writing between the parties, the
term "Franchisee's Principal(s)" as used in this Agreement shall include,
collectively or individually, Franchisee's spouse, if Franchisee is an
individual; all officers and directors of, and holders of a beneficial interest
of one percent (1%) or more of any class of securities of, Franchisee and any
corporation directly or indirectly controlling Franchisee, if Franchisee is a
corporation; and the general partners of Franchisee and the officers and
directors of, and holders of a beneficial interest of one percent (1%) or more
of any class of securities of, a corporate general partner and any corporation
which controls, directly or indirectly, any general partner, if Franchisee is a
partnership. The Operating Principal shall be one of Franchisee's Principals.
G. This Agreement may be executed in counterparts, and each copy so
executed shall be deemed an original.
H. This Agreement shall not become effective until signed by an
authorized officer of Franchisor.
I. Each reference in this Agreement to a corporation or partnership
shall be deemed to also refer to a limited liability company and any other
similar entity or organization. Each reference to the organizational
documents, equity owners, directors and officers of a corporation in this
Agreement shall be deemed to refer to the functional equivalents of such
organizational documents, equity owners, directors and officers, as applicable,
in the case of a limited liability company or any other similar entity or
organization.
XXVI. APPLICABLE LAW AND MEDIATION
----------------------------
A. THE PARTIES AGREE TO SUBMIT ANY CLAIM, CONTROVERSY OR DISPUTE
ARISING OUT OF OR RELATING TO THIS AGREEMENT (AND ATTACHMENTS) OR THE
RELATIONSHIP CREATED BY THIS AGREEMENT TO NON-BINDING MEDIATION PRIOR TO FILING
SUCH CLAIM, CONTROVERSY OR DISPUTE IN A COURT. THE MEDIATION SHALL BE
CONDUCTED THROUGH EITHER AN INDIVIDUAL MEDIATOR OR A MEDIATOR APPOINTED BY A
MEDIATION SERVICES ORGANIZATION OR BODY, EXPERIENCED IN THE MEDIATION OF
DISPUTES IN THE FOOD SERVICE BUSINESS, AGREED UPON BY THE PARTIES AND, FAILING
SUCH AGREEMENT WITHIN A REASONABLE PERIOD OF TIME AFTER EITHER PARTY HAS
NOTIFIED THE OTHER OF ITS DESIRE TO SEEK MEDIATION OF ANY CLAIM, CONTROVERSY OR
DISPUTE (NOT TO EXCEED FIFTEEN (15) DAYS), THROUGH THE AMERICAN ARBITRATION
ASSOCIATION IN ACCORDANCE WITH ITS RULES GOVERNING MEDIATION, AT FRANCHISOR'S
CORPORATE HEADQUARTERS IN DALLAS, TEXAS. THE COSTS AND EXPENSES OF MEDIATION,
INCLUDING COMPENSATION AND EXPENSES OF THE MEDIATOR, SHALL BE BORNE BY THE
PARTIES EQUALLY. IF THE PARTIES ARE UNABLE TO RESOLVE THE CLAIM, CONTROVERSY OR
DISPUTE WITHIN NINETY (90) DAYS AFTER THE MEDIATOR HAS BEEN APPOINTED, THEN
EITHER PARTY MAY SUBMIT SUCH CLAIM, CONTROVERSY OR DISPUTE TO A COURT IN
ACCORDANCE WITH SECTION XXVI.B. BELOW. NOTWITHSTANDING THE FOREGOING, THE
PARTIES MAY BRING AN ACTION (1) FOR MONIES OWED, (2) FOR INJUNCTIVE OR OTHER
EXTRAORDINARY RELIEF, OR (3) INVOLVING THE POSSESSION OR DISPOSITION OF, OR
OTHER RELIEF RELATING TO, REAL PROPERTY IN A COURT HAVING JURISDICTION AND IN
ACCORDANCE WITH SECTION XXVI.B. BELOW, WITHOUT SUBMITTING SUCH ACTION TO
MEDIATION.
B. WITH RESPECT TO ANY CLAIMS, CONTROVERSIES OR DISPUTES WHICH ARE
NOT FINALLY RESOLVED THROUGH MEDIATION, FRANCHISEE HEREBY IRREVOCABLY SUBMITS
ITSELF TO THE NONEXCLUSIVE JURISDICTION OF THE STATE COURTS OF DALLAS COUNTY,
TEXAS AND THE FEDERAL DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS
DIVISION. FRANCHISEE HEREBY IRREVOCABLY AGREES THAT SERVICE OF PROCESS MAY BE
MADE UPON IT IN ANY LEGAL PROCEEDING RELATING TO OR ARISING OUT OF THIS
AGREEMENT OR THE RELATIONSHIP CREATED BY THIS AGREEMENT BY ANY MEANS ALLOWED BY
TEXAS OR FEDERAL LAW. VENUE FOR ANY LEGAL PROCEEDING RELATING TO OR ARISING
OUT OF THIS AGREEMENT SHALL BE DALLAS COUNTY, TEXAS; PROVIDED, HOWEVER, WITH
RESPECT TO ANY ACTION (1) FOR MONIES OWED, (2) FOR INJUNCTIVE OR OTHER
EXTRAORDINARY RELIEF OR (3) INVOLVING POSSESSION OR DISPOSITION OF, OR OTHER
RELIEF RELATING TO, REAL PROPERTY, FRANCHISOR MAY BRING SUCH ACTION IN ANY
STATE OR FEDERAL DISTRICT COURT WHICH HAS JURISDICTION. FRANCHISEE HEREBY
WAIVES ALL QUESTIONS OF PERSONAL JURISDICTION FOR THE PURPOSE OF CARRYING OUT
THIS PROVISION. WITH RESPECT TO ALL CLAIMS, CONTROVERSIES, DISPUTES OR
ACTIONS, THIS AGREEMENT SHALL BE INTERPRETED AND CONSTRUED UNDER TEXAS LAW
(EXCEPT FOR TEXAS CHOICE OF LAW RULES).
C. FRANCHISEE AND FRANCHISOR ACKNOWLEDGE THAT THE PARTIES' AGREEMENT
REGARDING APPLICABLE STATE LAW AND FORUM SET FORTH IN SECTION XXVI.B. ABOVE
PROVIDE EACH OF THE PARTIES WITH THE MUTUAL BENEFIT OF UNIFORM INTERPRETATION
OF THIS AGREEMENT AND ANY DISPUTE ARISING OUT OF THIS AGREEMENT OR THE PARTIES'
RELATIONSHIP CREATED BY THIS AGREEMENT. EACH OF FRANCHISEE AND FRANCHISOR
FURTHER ACKNOWLEDGE THE RECEIPT AND SUFFICIENCY OF MUTUAL CONSIDERATION FOR
SUCH BENEFIT.
D. FRANCHISEE AND FRANCHISOR ACKNOWLEDGE THAT THE EXECUTION OF THIS
AGREEMENT OCCURRED IN DALLAS, TEXAS AND FURTHER ACKNOWLEDGE THAT THE
PERFORMANCE OF CERTAIN OBLIGATIONS OF FRANCHISEE ARISING UNDER THIS AGREEMENT,
INCLUDING BUT NOT LIMITED TO THE PAYMENT OF MONIES DUE HEREUNDER AND THE
SATISFACTION OF CERTAIN TRAINING REQUIREMENTS OF FRANCHISOR, SHALL OCCUR IN
DALLAS, TEXAS.
XXVII. ACKNOWLEDGMENTS
---------------
A. Franchisee acknowledges that it has conducted an independent
investigation of the franchised business and recognizes that the business
venture contemplated by this Agreement involves business risks and that its
success will largely depend upon the ability of Franchisee. Franchisor
expressly disclaims making, and Franchisee acknowledges that it has not
received or relied on, any warranty or guarantee, express or implied, as to the
potential volume, profits or success of the business venture contemplated by
this Agreement.
B. Franchisee acknowledges that it received a copy of the complete
ZuZu Handmade Mexican Food(-Registered Mark-) Franchise Agreement and the
related Attachments and agreements at least five (5) business days prior to the
date on which this Agreement was executed. Franchisee further acknowledges
that it has received the disclosure document required by the Trade Regulation
Rule of the Federal Trade Commission entitled "Disclosure Requirements and
Prohibitions Concerning Franchising and Business Opportunity Ventures" at least
ten (10) business days prior to the date on which this Agreement was executed.
C. Franchisee acknowledges that it has read and understood this
Agreement and the related attachments and agreements and that Franchisor has
provided Franchisee ample time and opportunity to consult with advisors of
Franchisee's own choosing about the potential benefits and risks of entering
into this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement on the day and year first above written.
FRANCHISOR:
ZUZU FRANCHISING CORPORATION,
a Delaware corporation
ATTEST:
_________________________________ By: __________________________________
Witness Name:_________________________________
Title:________________________________
FRANCHISEE:
______________________________________
__________________________________ By: __________________________________
Witness Name:_________________________________
Title:________________________________
__________________________________ By: __________________________________
Witness Name:_________________________________
Title:________________________________
<PAGE>
FRANCHISEE'S PRINCIPALS
-----------------------
Each of the undersigned acknowledges and agrees as follows:
(1) Each has read the terms and conditions of this Franchise
Agreement and acknowledges that the execution of this guaranty and the
undertakings of the Franchisee's Principals in the Franchise Agreement are in
partial consideration for the granting of this franchise, and that Franchisor
would not have granted this franchise without the execution of this guaranty
and such undertakings by each of the undersigned;
(2) Each are included in the term "Franchisee's Principals" as
described in Section XXV.F. of the Franchise Agreement;
(3) Each individually, jointly and severally makes all of the
covenants, representations and agreements of Franchisee's Principals set forth
in the Franchise Agreement and is obligated to perform thereunder; and
(4) Each individually, jointly and severally unconditionally and
irrevocably guarantees to Franchisor and its successors and assigns that all of
Franchisee's obligations under this Agreement will be punctually paid and
performed. Upon default by Franchisee or upon notice from Franchisor, each
will immediately make each payment and perform each obligation required of
Franchisee under this Agreement. Without affecting the obligations of any of
Franchisee's Principals under this guaranty, Franchisor may, without notice to
Franchisee's Principals, waive, renew, extend, modify, amend or release any
indebtedness or obligation of Franchisee, or settle, adjust or compromise any
claims that Franchisor may have against Franchisee. Each of Franchisee's
Principals waives all demands and notices of every kind with respect to the
enforcement of this guaranty, including, without limitation, notice of
presentment, demand for payment or performance by Franchisee, any default by
Franchisee or any guarantor, and any release of any guarantor or other security
for this Agreement or the obligations of Franchisee. Franchisor may pursue its
rights against any of Franchisee's Principals without first exhausting its
remedies against Franchisee and without joining any other guarantor hereto and
no delay on the part of Franchisor in the exercise of any right or remedy shall
operate as a waiver of such right or remedy, and no single or partial exercise
by Franchisor of any right or remedy shall preclude the further exercise of
such right or remedy. Upon receipt by Franchisor of notice of the death of any
of Franchisee's Principals, the estate of the deceased will be bound by the
foregoing guaranty, but only for defaults and obligations under this Agreement
existing at the time of death, and in such event, the obligations of the
remaining Franchisee's Principals shall continue in full force and effect.
Additionally, with respect to the individual designated as Operating
Principal, Operating Principal acknowledges that the undertakings by Operating
Principal under this Agreement are made and given in partial consideration of,
and as a condition to, Franchisor's grant of rights to operate the Restaurant
as described herein; Operating Principal individually, jointly and severally
makes all of the covenants, representations and agreements of Franchisee and
Operating Principal set forth in this Agreement and is obligated to perform
hereunder.
ATTEST: FRANCHISEE'S PRINCIPALS
_________________________________ ___________________________________
Witness * Name:______________________________
_________________________________ ___________________________________
Witness Name:______________________________
<PAGE>
_________________________________ ___________________________________
Witness Name:______________________________
_________________________________ ___________________________________
Witness Name:______________________________
* Denotes individual who is Franchisee's Operating Principal
<PAGE>
ATTACHMENT A
APPROVED LOCATION, ASSIGNED AREA,
AREA OF PRIMARY RESPONSIBILITY
AND OPENING DATE
1. APPROVED LOCATION
Pursuant to Section I.B. of the Franchise Agreement, the Restaurant shall
be located at the following approved location:
__________________________________________________
__________________________________________________
2. ASSIGNED AREA
Pursuant to Section I.C. of the Franchise Agreement, Franchisee's Assigned
Area shall be:
___________________________________________________
___________________________________________________
and shall be further described in the attached map. The Assigned Area shall
include only the area within the interior side of the street boundaries
highlighted on the map and/or described above, if applicable, and shall not
include any area that falls on the exterior of such boundaries.
3. AREA OF PRIMARY RESPONSIBILITY
Pursuant to Section I.E. of the Franchise Agreement, Franchisee's Area of
Primary Responsibility shall be:
___________________________________________________
___________________________________________________
4. OPENING DATE OF RESTAURANT: ________________________________
FRANCHISOR: FRANCHISEE:
ZUZU FRANCHISING CORPORATION ________________________________
By:_____________________________ By:______________________________
Name:___________________________ Name:____________________________
Title:__________________________ Title:___________________________
Date:___________________________ Date:_____________________________
<PAGE>
ATTACHMENT B
STATEMENT OF OWNERSHIP INTERESTS
Owner Percentage Ownership
<PAGE>
ATTACHMENT C
LEASE RIDER
This Lease Rider is made and entered into this ____ day of
___________, 19__ by and between ZuZu Franchising Corporation, a Delaware
corporation ("ZuZu"), __________________ ("Franchisee") and _________________
("Landlord").
WHEREAS, ZuZu and Franchisee are parties to that certain Franchise
Agreement dated ____________, 19__ ("Franchise Agreement");
WHEREAS, Franchisee and Landlord desire to enter into a lease (the
"Lease") pursuant to which Franchisee will occupy the premises located at
_____________________________________ (the "Premises") for a ZuZu Handmade
Mexican Food(-Registered Mark-) restaurant (the "Restaurant") franchised under
the Franchise Agreement; and
WHEREAS, as a condition to entering into the Lease, Franchisee is
required under the Franchise Agreement to execute this Lease Rider along with
the Landlord and ZuZu;
NOW, THEREFORE, in consideration of the mutual undertakings and
commitments set forth herein and in the Franchise Agreement, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. During the term of the Franchise Agreement, the Premises
shall be used only for the operation of the Restaurant.
2. Landlord consents to Franchisee's use of such proprietary
marks and signs, decor items, color schemes and related components of the ZuZu
Handmade Mexican Food(-Registered Mark-) franchise system as ZuZu may prescribe
for the Restaurant.
3. Landlord agrees to furnish ZuZu with copies of any and all
letters and notices sent to Franchisee pertaining to the Lease and the
Premises, at the same time that such letters and notices are sent to
Franchisee.
4. ZuZu shall have the right to enter the Premises to make any
modification or alteration necessary to protect the ZuZu Handmade Mexican
Food(-Registered Mark-) franchise system and proprietary marks or to cure any
default under the Franchise Agreement or any development agreement entered into
between ZuZu and Franchisee or under the Lease, without being guilty of
trespass or any other crime or tort.
5. Franchisee shall be permitted to assign the Lease to ZuZu
or its affiliates or subsidiaries upon the expiration or earlier termination of
the Franchise Agreement and the Landlord hereby consents to such assignment and
agrees not to impose or assess any assignment fee or similar charge or
accelerate rent under the Lease in connection with such assignment.
6. In the event of such assignment, ZuZu or any affiliate or
subsidiary designated by ZuZu will agree to assume from the date of assignment
all obligations of Franchisee remaining under the Lease, and in such event ZuZu
or any affiliate or subsidiary shall assume Franchisee's occupancy rights, and
the right to sublease the Premises, for the remainder of the term of the Lease.
7. Franchisee shall not assign the Lease or renew or extend
the term thereof without the prior written consent of ZuZu.
8. Landlord and Franchisee shall not amend or otherwise modify
the Lease in any manner that could materially affect any of the foregoing
requirements without the prior written consent of ZuZu.
9. The terms of this Lease Rider will supersede any
conflicting terms of the Lease.
IN WITNESS WHEREOF, the parties have executed this Lease Rider as of
the date first above written.
ZUZU FRANCHISING CORPORATION,
a Delaware corporation
By: _______________________________
Name: _____________________________
Title: ____________________________
FRANCHISEE:
__________________________________
By: _______________________________
Name: _____________________________
Title: ____________________________
By: _______________________________
Name: _____________________________
Title: ____________________________
LANDLORD:
___________________________________
By: _______________________________
Name: _____________________________
Title: ____________________________
<PAGE>
ATTACHMENT D
CONFIDENTIALITY AND NON-COMPETE AGREEMENT
This Agreement is made and entered into ________________, 19__,
between ZuZu Franchising Corporation, a Delaware corporation ("Franchisor"),
_____________________ ("Franchisee") and ______________________ ("Employee").
RECITALS
--------
WHEREAS, Franchisor has acquired the right to develop a unique system
(the "System") for the development and operation of restaurants under the name
and mark ZuZu Handmade Mexican Food(-Registered Mark-) ("Restaurants"); and
WHEREAS, the System includes but is not limited to certain trade
names, service marks, trademarks, symbols, logos, emblems and indicia of
origin, including but not limited to the mark ZuZu Handmade Mexican Food(-
Registered Mark-) and such other trade names, service marks and trademarks as
Franchisor may develop in the future to identify for the public the source of
services and products marketed under such marks and under the System and
representing the System's high standards of quality, appearance and service and
distinctive exterior and interior design, decor, color scheme and furnishings;
special recipes and menu items; uniform standards, specifications and
procedures for operations; quality and uniformity of products and services
offered; procedures for inventory and management control; training and
consultation; and advertising and promotional programs; all of which may be
changed, improved and further developed by Franchisor from time to time and are
used by Franchisor in the operation of the System ("Trade Secrets"); and
WHEREAS, the Trade Secrets provide economic advantages to Franchisor
and are not generally known to, and are not readily ascertainable by proper
means by, Franchisor's competitors who could obtain economic value from
knowledge and use of the Trade Secrets; and
WHEREAS, Franchisor has taken and intends to take all reasonable
steps to maintain the confidentiality and secrecy of the Trade Secrets; and
WHEREAS, Franchisor has granted Franchisee a limited right to manage
and participate in the operation of a Restaurant using the System and the Trade
Secrets for the period defined in the franchise agreement made and entered
into ________________, 19__ ("Franchise Agreement") between Franchisor and
Franchisee; and
WHEREAS, Franchisor and Franchisee have agreed in the Franchise
Agreement on the importance to Franchisor and to the Franchisee and other
licensed users of the System of restricting use, access and dissemination of
the Trade Secrets; and
WHEREAS, it will be necessary for certain employees of Franchisee to
have access to and to use some or all of the Trade Secrets in the management
and operation of Franchisee's Restaurants using the System; and
WHEREAS, Franchisee has agreed to obtain from those employees written
agreements protecting the Trade Secrets and the System against unfair
competition; and
WHEREAS, Employee wishes to remain, or wishes to become, an employee
of Franchisee; and
WHEREAS, Employee wishes and needs to receive and use the Trade
Secrets in the course of his employment to effectively perform his services for
Franchisee;
NOW, THEREFORE, in consideration of the mutual covenants and
obligations contained herein, the parties agree as follows:
1. Franchisor and/or Franchisee shall disclose to Employee some or
all of the Trade Secrets relating to the System.
2. Employee shall receive the Trade Secrets in confidence, maintain
them in confidence and use them only in the course of his employment by
Franchisee and only in connection with the management and/or operation by
Franchisee of Restaurants using the System for so long as Franchisee is
licensed by Franchisor to use the System.
3. Employee shall not at any time make copies of any documents or
compilations containing some or all of the Trade Secrets without Franchisor's
express written permission.
4. Employee shall not at any time disclose or permit the disclosure
of the Trade Secrets except to other employees of Franchisee and then only to
the limited extent necessary to train or assist other employees of Franchisee
in the management or operation of a Restaurant using the System.
5. That all information and materials, including without
limitation, drawings, specifications, techniques and compilations of data which
Franchisor shall designate as confidential shall be deemed the Trade Secrets
for the purposes of this Agreement.
6. Employee shall surrender the Confidential Franchise Standard
Operating Procedures Manual and such other manuals and written materials as
Franchisor shall have developed ("Manuals") described in the Franchise
Agreement and any other material containing some or all of the Trade Secrets to
the Franchisee or Franchisor, upon request, or upon termination of employment
by Franchisee, or upon conclusion of the use for which the Manuals or other
information or material may have been furnished to the Employee.
7. Employee shall not, directly or indirectly, do any act or omit
to do any act that would or would likely be injurious or prejudicial to the
goodwill associated with the Trade Secrets and the System.
8. The Manuals are loaned by Franchisor to Franchisee for limited
purposes only and remain the property of Franchisor and may not be reproduced,
in whole or in part, without Franchisor's written consent.
9. To protect the goodwill and unique qualities of the System and
the confidentiality and value of the Trade Secrets, and in consideration for
the disclosure to Employee of the Trade Secrets, Employee further undertakes
and covenants that while he is employed by Franchisee, he will not:
a. Divert or attempt to divert, directly or indirectly, any
business, business opportunity or customer of the Restaurants to any
competitor.
b. Employ or seek to employ any person who is at the time
employed by Franchisor or any franchisee or developer of Franchisor, or
otherwise directly or indirectly induce such person to leave that person's
employment except as may occur in connection with Franchisee's employment of
such person if permitted under the Franchise Agreement.
c. Directly or indirectly, for himself or through, on behalf
of or in conjunction with any person, partnership or corporation, own,
maintain, operate, engage in or have any financial or beneficial interest in
(including interest in corporations, partnerships, trusts, unincorporated
associations or joint ventures), advise, assist or make loans to, any business
which is the same as or similar to the Restaurants including, but not limited
to, any food business which offers Mexican-style food as a primary menu item.
10. In further consideration for the disclosure to Employee of the Trade
Secrets and to protect the uniqueness of the System, Employee agrees that for
two (2) years following the earlier of the expiration, termination or transfer
of all of Franchisee's interest in the Franchise Agreement or the termination
of his employment with Franchisee, the Employee will not, without the prior
written consent of Franchisor:
a. Divert or attempt to divert, directly or indirectly, any
business, business opportunity or customer of the Restaurants to any
competitor.
b. Employ or seek to employ any person who is at the time
employed by Franchisor or any franchisee or developer of Franchisor, or
otherwise directly or indirectly induce such persons to leave that person's
employment.
*c. Directly or indirectly, for himself or through, on behalf
of or in conjunction with any person, partnership or corporation, own,
maintain, operate, engage in or have any financial or beneficial interest in
(including interest in corporations, partnerships, trusts, unincorporated
associations or joint ventures), advise, assist or make loans to, any business
which is the same as or similar to the Restaurants including, but not limited
to, any food business which offers Mexican-style food as a primary menu item
which business is, or is intended to be, located within a five (5)-mile radius
of the location approved in the Franchise Agreement or of any Restaurant in
existence or under construction as of the earlier of: (i) the expiration or
termination of, or the transfer of all of Franchisee's interest in, the
Franchise Agreement; or (ii) the time Employee ceases to be employed by
Franchisee, as applicable.
11. Franchisee undertakes to use its best efforts to ensure that
Employee acts as required by this Agreement.
12. Employee agrees that in the event of a breach of this Agreement,
Franchisor would be irreparably injured and be without an adequate remedy at
law. Therefore, in the event of such a breach, or threatened or attempted
breach of any of the provisions hereof, Franchisor shall be entitled to enforce
this Agreement and shall be entitled, in addition to any other remedies which
are available to it at law or in equity, including the right to terminate the
Franchise Agreement, to a temporary and/or permanent injunction and a decree
for the specific performance of the terms of this Agreement, without the
necessity of showing actual or threatened harm and without being required to
furnish a bond or other security.
* May be deleted if Franchisor does not require the Franchisee to obtain the
execution of this covenant by the Employee. See Section XVIII.H. of the
Franchise Agreement.
<PAGE>
13. Employee agrees to pay all expenses (including court costs and
reasonable legal fees) incurred by Franchisor and the Franchisee in
enforcing this Agreement.
14. Any failure by Franchisor or the Franchisee to object to or take
action with respect to any breach of this Agreement by Employee shall not
operate or be construed as a waiver of or consent to that breach or any
subsequent breach by Employee.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF TEXAS (EXCEPT FOR TEXAS CHOICE OF LAW RULES). THE
PARTIES AGREE THAT ANY ACTION BROUGHT BY ANY PARTY AGAINST ANOTHER IN ANY
COURT, WHETHER FEDERAL OR STATE, SHALL BE BROUGHT IN TEXAS IN THE JUDICIAL
DISTRICT IN WHICH FRANCHISOR HAS ITS PRINCIPAL PLACE OF BUSINESS; PROVIDED,
HOWEVER, WITH RESPECT TO ANY ACTION WHICH INCLUDES INJUNCTIVE RELIEF, EMPLOYER
OR FRANCHISOR MAY BRING SUCH ACTION IN ANY COURT IN ANY STATE WHICH HAS
JURISDICTION. THE PARTIES HEREBY WAIVE ALL QUESTIONS OF PERSONAL JURISDICTION
OR VENUE FOR THE PURPOSE OF CARRYING OUT THIS PROVISION.
16. The parties agree that each of the above covenants shall be construed
as independent of any other covenant or provision of this Agreement. If all or
any portion of a covenant in this Agreement is held unreasonable or
unenforceable by a court or agency having valid jurisdiction in an unappealed
final decision to which Franchisor is a party, Employee expressly agrees to be
bound by any lesser covenant subsumed within the terms of such covenant that
imposes the maximum duty permitted by law, as if the resulting covenant were
separately stated in and made a part of this Agreement.
17. This Agreement contains the entire agreement of the parties regarding
the subject matter hereof. This Agreement may be modified only by a duly
authorized writing executed by all parties.
18. All notices and demands required to be given hereunder shall be in
writing and shall be sent by personal delivery, expedited delivery service,
certified or registered mail, return receipt requested, first-class postage
prepaid or facsimile, telegram or telex (provided that the sender confirms the
facsimile, telegram or telex by sending an original confirmation copy by
certified or registered mail or expedited delivery service within three (3)
business days after transmission), to the respective parties.
If directed to Franchisor, the notice shall be addressed to:
ZuZu Franchising Corporation
2651 N. Harwood
Suite 100
Dallas, Texas 75201
Attention: Chief Executive Officer
Facsimile: 214-720-1332
If directed to the Franchisee, the notice shall be addressed to:
____________________________________
____________________________________
____________________________________
____________________________________
Attention: __________________________
Facsimile: __________________________
If directed to the Employee, the notice shall be addressed to:
____________________________________
____________________________________
____________________________________
____________________________________
Facsimile: ___________________________
Any notices sent by personal delivery shall be deemed given upon receipt.
Any notices given by facsimile, telegram or telex shall be deemed given upon
transmission, provided confirmation is made as provided above. Any notices
sent by expedited delivery service or certified or registered mail shall be
deemed given three (3) business days after the time of mailing. Any change in
the above addresses shall be effected by giving fifteen (15) days written
notice of such change to the other party.
19. The rights and remedies of Franchisor under this Agreement are fully
assignable and transferable and shall inure to the benefit of its successors,
assigns and transferees. The respective obligations of the Franchisee and the
Employee hereunder are personal in nature and may not be assigned by the
Franchisee or Employee, as applicable.
IN WITNESS WHEREOF, the undersigned have entered into this Agreement as
witnessed by their signatures below.
FRANCHISOR:
ZUZU FRANCHISING CORPORATION, a Delaware
corporation
By: ____________________________________
Name: __________________________________
Title: _________________________________
FRANCHISEE:
________________________________________
By: ____________________________________
Name: __________________________________
Title: _________________________________
By: ____________________________________
Name: __________________________________
Title: _________________________________
EMPLOYEE:
By: ____________________________________
Name:___________________________________
<PAGE>
ATTACHMENT E
SOFTWARE LICENSE AGREEMENT
--------------------------
This Software License Agreement ("Software License") is entered into
between ZuZu Franchising Corporation ("ZuZu") and ____________________
("Franchisee") pursuant to a franchise agreement dated ______________, 19__
("Franchise Agreement") under which Franchisee will operate a ZuZu Handmade
Mexican Food(-Registered Mark-) restaurant (the "Restaurant").
1. ZuZu hereby grants to Franchisee a nonexclusive, nonassignable
license to use the computer programs ("Software") listed in the schedule to
this Software License. The schedule may be updated from time to time by ZuZu
to include enhancements, upgrades or replacements ("Enhancements") to the
Software, which ZuZu will make available to Franchisee from time to time at the
cost that ZuZu makes such Enhancements available to other franchisees operating
under the ZuZu Handmade Mexican Food(-Registered Mark-) restaurant system.
2. Franchisee shall use the Software only in the operation of the
Restaurant. Franchisee may not modify, copy or reproduce in any form all or
any part of the Software without the prior written consent of ZuZu, and in such
event solely to the extent required for use of the Software in the operation of
the Restaurant. Franchisee shall not make available the Software or any copy
thereof to any party except as described below in paragraph 4.
3. All copies of the Software, including any produced by Franchisee with
Franchisor's consent, are and shall be the sole and exclusive property of ZuZu
during and after the term of this Software License.
4. Franchisee understands and acknowledges that the Software contains
ZuZu's trade secrets and agrees, during the term of this Software License and
thereafter, not to communicate, divulge or use the Software other than in the
operation of the Restaurant. Franchisee shall divulge and allow access to the
Software only to its employees who must have access to it in connection with
their employment in the Restaurant. At ZuZu's request, Franchisee shall
require and obtain execution of covenants concerning the confidentiality of the
Software from any persons employed by Franchisee who have access to the
Software. These covenants shall be in a form substantially similar to the
confidential covenants contained in Attachment D to this Franchise Agreement.
5. Franchisee agrees to notify ZuZu immediately of the existence of any
unauthorized knowledge, possession or use of the Software or of any part
thereof.
6. The term of this Software License shall be co-extensive with the term
of the Franchise Agreement, including any renewal of the Franchise Agreement.
7. Expiration or termination of the Franchise Agreement for whatever
reason shall automatically terminate this Software License and the right
granted by it to use the Software, without notice to Franchisee. In addition,
ZuZu may terminate this Software License upon the failure by Franchisee to
comply with any of the terms and conditions herein, by giving Franchisee
written notice of termination stating the nature of the breach at least fifteen
(15) days prior to the effective date of termination; provided that Franchisee
may avoid termination by immediately initiating a remedy to cure such default
and curing it to ZuZu's satisfaction within the fifteen (15)-day period and by
promptly providing proof thereof to ZuZu. If any such default is not cured
within that time (or, if appropriate, substantial and continuing action to cure
the default is not initiated within that time), or such longer period as
applicable law may require, this Software License shall terminate without
further notice to Franchisee effective immediately upon expiration of the
fifteen (15)-day period or such longer period as applicable law may require.
8. Upon the expiration or termination of this Software License or upon
the expiration or termination of the Franchise Agreement, whichever shall occur
earlier, Franchisee shall immediately deliver to ZuZu all copies of the
Software then in Franchisee's possession and shall immediately cease to use the
Software.
9. ZuZu will replace without charge any copies of the Software provided
under this Software License which have defects in materials and workmanship
that are not caused by Franchisee's misuse or unauthorized modification of the
Software. This replacement shall be Franchisee's sole and exclusive remedy as
to the Software.
10. EXCEPT FOR THE LIMITED WARRANTY DESCRIBED ABOVE, THERE ARE NO
WARRANTIES GRANTED TO FRANCHISEE OR ANY OTHER PERSON OR ENTITY FOR THE
SOFTWARE, EXPRESSED OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE; ALL SUCH
WARRANTIES ARE EXPRESSLY AND SPECIFICALLY DISCLAIMED.
11. FRANCHISEE IS SOLELY RESPONSIBLE FOR DETERMINING ITS DESIRED RESULTS
FROM THE USE OF THE SOFTWARE, FOR EVALUATING THE SOFTWARE'S CAPABILITIES AND
FOR SUCCESSFULLY OPERATING THE SOFTWARE. IN NO EVENT SHALL ZUZU BE RESPONSIBLE
FOR ANY DIRECT, INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL OR OTHER DAMAGES,
OR FOR LOST DATA OR LOST PROFITS TO FRANCHISEE OR ANY OTHER PERSON OR ENTITY,
WHETHER OR NOT DUE TO ZUZU'S NEGLIGENCE, ARISING OUT OF THE USE OR INABILITY TO
USE THE SOFTWARE, EVEN IF ZUZU HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGE OCCURRING. IN THE EVENT THAT ANY OTHER TERM OF THIS SOFTWARE LICENSE IS
FOUND OR DETERMINED TO BE UNCONSCIONABLE OR UNENFORCEABLE FOR ANY REASON, THE
FOREGOING PROVISION OF WAIVER BY AGREEMENT OF DIRECT, INDIRECT, SPECIAL,
INCIDENTAL, CONSEQUENTIAL OR OTHER DAMAGES OR FOR LOST DATA OR LOST PROFITS
SHALL CONTINUE IN FULL FORCE AND EFFECT.
12. THIS SOFTWARE LICENSE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE
LAWS OF THE STATE OF TEXAS (EXCEPT FOR TEXAS CHOICE OF LAW RULES).
13. If any term herein is declared to be void or unenforceable by a court
of competent jurisdiction, such declaration shall have no effect on the other
terms of this Software License, which will remain in effect and fully
enforceable.
14. Franchisee agrees to pay any sales, use, ad valorem, personal
property and general intangibles tax and any registration fees arising out of
this Software License and the transactions contemplated herein, except for any
taxes imposed upon the gross income of ZuZu.
15. Franchisee may not assign, sublicense or otherwise transfer any of
its rights under this Software License without the prior written consent of
ZuZu.
16. Notice under this Software License shall be provided as indicated in
Section XXIII. of the Franchise Agreement.
17. The terms of this Software License are incorporated into the
Franchise Agreement by reference. This Software License and related provisions
of the Franchise Agreement constitute the entire agreement of the parties with
respect to the subject matter hereof, and supersede all related prior and
contemporaneous agreements between the parties.
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Software License on the _______ day of _________________, 19___.
ZUZU FRANCHISING CORPORATION
By: ____________________________________
Name: __________________________________
Title: _________________________________
FRANCHISEE:
________________________________________
By: ____________________________________
Name: __________________________________
Title: _________________________________
By: ____________________________________
Name: __________________________________
Title: _________________________________
<PAGE>
SCHEDULE TO SOFTWARE LICENSE AGREEMENT
--------------------------------------
Software
--------
Database configuration for micros(-Registered Mark-) P.O.S. platform system.
Spreadsheet templates for operations analysis under Quattro Pro(-Registered
Mark-) platform.
Database Templates under Q&A(-Registered Mark-) platform:
Sales
Mailing List
Employee Files
Bank Account setup, category structure and pre-set reports templates under
Quicken(-Registered Mark-) platform.
<PAGE>
<TABLE>
ATTACHMENT F
CHRONOLOGICAL TABLE OF SELECTED EVENTS
<CAPTION>
ITEM TIME SECTION DATE
---- ---- ------- ----
<S> <C> <C> <C>
Payment of Initial Franchise Fee Execution of Franchise Agreement IV.A. _________
Designation of Operating Execution of Franchise Agreement VIII.A. _________
Principal
Submission of Proposed Site 30 Days Following Execution of VII.B. _________
Franchise Agreement
Approval or Disapproval of 15 Days After Receipt of VII.B. _________
Proposed Site by Franchisor Information
Execution of Lease for 60 Days Following Execution of VII.C. _________
Approved Site Franchise Agreement
Approval or Disapproval of 15 Days After Receipt of Plans VII.E. _________
Proposed Architectural Plans
by Franchisor
Submission of Notice of 14 Days Prior to Scheduled VII.G. _________
Completion of Construction Completion of Construction
Completion of Initial Training 7 Days Prior to Opening Date IX.A. _________
By Operating Principal, Store
Manager, Chef/Kitchen Manager
and Tortilla Maker
Opening of Store 120 Days Following Execution of VII.H. _________
Franchise Agreement
Payment of Royalty Fee and Second Monday Following End IV.B. _________
Advertising Fees of Each Two-Week Period
Expiration of Term 10 Years from Opening Date II.A. _________
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND
ON PAGES 32 AND 33 OF THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 1995
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 316
<SECURITIES> 0
<RECEIVABLES> 41,142
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 41,458
<PP&E> 128,467
<DEPRECIATION> 88,361
<TOTAL-ASSETS> 287,031
<CURRENT-LIABILITIES> 758,390
<BONDS> 0
0
0
<COMMON> 774,221
<OTHER-SE> 170,140
<TOTAL-LIABILITY-AND-EQUITY> 287,031
<SALES> 483,604
<TOTAL-REVENUES> 483,604
<CGS> 1,009,230
<TOTAL-COSTS> 1,009,230
<OTHER-EXPENSES> 29,556
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,107
<INCOME-PRETAX> (555,182)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (556,782)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (556,782)
<EPS-PRIMARY> (.60)
<EPS-DILUTED> (.60)
</TABLE>
