United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission File Number 0-25164
LUCOR, INC.
Florida 65-0195259
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
790 Pershing Road
Raleigh, North Carolina 27608
(Address of Principal Executive Offices) (Zip Code)
919-828-9511
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.02 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to
this Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 15, 1998, was $5,302,411
As of March 15, 1998, there were 2,145,733 shares of the Registrant's Class A
Common Stock, $.02 par value, outstanding and 702,155 shares of the
Registrant's Class B Common Stock, $.02 par value, outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement (the "Proxy Statement") for the
Annual meeting of Stockholders to be held in May 1998 are incorporated by
reference in Parts II and III.
<PAGE>
Lucor, Inc.
Index to Form 10-K
For the Year Ended December 31, 1997
PART I Page
Item 1 - Business . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2 - Properties . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 3 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 5
Item 4 - Submission of Matters to a Vote of Security-Holders . . . . . 5
PART II
Item 5 - Market for the Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . 6
Item 6 - Selected Financial Data . . . . . . . . . . . . . . . . . . . 6
Item 7 - Management's Discussion and Analysis
Financial Condition and Results of Operation . . . . . . . 8
Item 8 - Financial Statements and Supplementary Data . . . . . . . . . 15
Item 9 - Changes in and Disagreements with Accountants
or Accounting and Financial Disclosure . . . . . . . . . 40
PART III
Item 10 - Directors and Executive Officers of the Registrant . . . . . . 41
Item 11 - Executive Compensation . . . . . . . . . . . . . . . . . . . . 41
Item 12 - Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . 41
Item 13 - Certain Relationships and Related Transactions . . . . . . . . 41
PART IV
Item 14 - Exhibits, Financial Statement Schedules
and Reports on Form 8-K . . . . . . . . . . . . . . . . 42
<PAGE> 1
PART I
Item 1 - Business
General
Lucor, Inc. (the "Registrant" or the "Company") is the largest franchisee
of Jiffy Lube International, Inc. ("JLI") in the United States. These
franchises consist of automotive fast oil change, fluid maintenance,
lubrication, and general preventative maintenance service centers under the
name "Jiffy Lube." As of December 31, 1997, the Company operated one hundred
service centers in six states, including twenty five service centers in the
Raleigh-Durham, North Carolina DMA (Geographic Designated Market Area defined
for television markets), twenty one service centers in the Cincinnati, Ohio
DMA (which includes northern Kentucky), nineteen service centers in the
Pittsburgh, Pennsylvania DMA, fifteen service centers in the Dayton, Ohio
area, five service centers in the Toledo, Ohio area, eight service centers in
the Nashville, Tennessee area, and seven service centers in the Lansing,
Michigan area. The operations of the service centers in each of these markets
are conducted through subsidiaries of the Company, each of which has entered
into area development (except Lansing) and franchise agreements with JLI.
Unless the context otherwise requires, references herein to the Company or the
Registrant refer to Lucor, Inc. and its subsidiaries.
During 1997, the Company opened a total of six service centers. This
represents a reduction in the growth rate that the Company had experienced
over the prior two years. This reduction in growth was a deliberate action
taken by management to allow for the most recently opened stores to mature and
generate cash flows to be used to fuel future growth. During 1997, the
Company developed one new Sears unit bringing the total number of Sears units
to sixteen. Management has been disappointed in the revenue generated at the
Sears units. Management believes that it is too early to draw any firm
conclusions regarding their future profitability, however, of the sixteen
units, only three of the units (all in the Raleigh-Durham, NC region) have
been profitable. Further discussion of the Sears units is contained later in
this Form 10-K.
Quick Lube Industry
In the past, the traditional provider of oil change and lubrication
services has been the corner gas station. The decline in the number of full-
service gasoline stations has reduced the number of convenient places
available to customers for performing basic mechanical and fluid maintenance
work on their automobiles. The Company believes that this trend combined with
convenience and service are significant factors in the continuing success of
quick lube centers in the marketplace.
According to National Oil & Lube News, March 1998 edition, there are
approximately 5,948 fast lube chain service centers in operation as of March
1, 1998, representing an increase in the number of fast lube operations by
7.5% over 1997. Jiffy Lube is the largest fast lube operation chain, almost
double the number of service centers run by the next largest chain.
On December 31, 1997, 1,516 Jiffy Lube service centers were open in the
United States. Franchisees of JLI operated 935 of the service centers and JLI
owned and operated the remaining 581 locations. (Source: Pennzoil Company,
1997 10-K.) Of the total JLI franchised service centers, the Company operated
one hundred locations, making it the largest franchisee.
<PAGE> 2
Services
The products and services offered by the Company are designed to provide
customers with a convenient way to perform preventative maintenance on their
vehicles, typically in minutes and without an appointment. The Company's
proprietary service mark "Signature Service" includes changing engine oil and
filter, lubricating the chassis, checking for proper tire inflation, washing
the windows, vacuuming the interior of the car, checking and replenishing
fluids in the transmission, differential, windshield washer, battery and power
steering, and examining the air filter, lights, and windshield wiper blades
while performing a manufacturers recommended service review. A quality
inspection is then completed and a Signature Service card is signed by a
lubrication technician confirming that the service was properly performed. The
pricing of a Signature Service ranges from $24.99 to $27.99, depending on the
geographic area.
The Company also offers several other products and services including fuel
injection system cleaning, automotive additives, manual transmission,
differential and transfer case fluid replacement, radiator coolant
replacement, tire rotation, air filter replacement, breather element
replacement, positive crankcase ventilator valve (PCV valves) replacement,
wiper blade replacement, headlight and light bulb replacement, tire rotation,
complete transmission fluid replacement, preventative maintenance packages,
and auto safety and emissions inspection services. The Company does not
perform any repairs on vehicles, only preventative maintenance.
In combination with JLI, the Company's "fleet" business is arranged with
large, national and local consumers of lubrication services who may obtain
such services at the Company's service centers. These services are billed by
the Company to the fleet customers through JLI for national fleet customers
and by the Company for local fleet customers. The Company solicits most fleet
business from local fleet customers in each of its markets.
Service Centers
A typical service center consists of approximately 2200 square feet with
three service bays, a customer lounge, storage area, a full basement and rest
rooms. The operating staff at each service center consists of a manager, an
assistant manager and usually eight additional employees.
In general, the Company's service centers are well lit, clean, and
provide customers an attractive surrounding and comfortable professional
waiting area while their vehicle is serviced.
Marketing
The Company uses newsprint, public relations, direct marketing, radio and
television advertising to market its products and services. In addition to the
Company's marketing programs, JLI conducts national marketing programs for
Jiffy Lube service centers, principally through television advertising.
Pennzoil conducts a national advertising program for Pennzoil motor oil and
other Pennzoil lubrication products. The Company does not pay any fee to
either JLI or Pennzoil for their advertising programs. In addition to direct
advertising, the Company emphasizes the development of goodwill in the
communities in which it operates through involvement in community promotions.
Some of the Company's community campaigns include Coats for Kids, Teaching
Excellence, Jump Start on Reading, Children's Hospital Free Care Fund, Boy
Scouts, Scouting for Food.
<PAGE> 3
Area Development Agreements and Franchise Agreements
The Company operates Jiffy Lube service centers under individual
franchise agreements that are part of broader exclusive development agreements
with JLI, the franchisor. The exclusive development agreements require the
Company to identify sites for and develop a specific number of service centers
in specific territories and the separate franchise agreements each provide the
Company the right to operate a specific service center for a period of 20
years, with two, 10-year renewal options.
Each development agreement grants the Company exclusive rights to develop
and operate a specific number of service centers within a defined geographic
area, provided that a certain number of service centers are opened over
scheduled intervals.
Cincinnati. The Company has satisfied its obligations to develop service
centers under its Area Development Agreement for the Cincinnati market area,
and currently has a right of first refusal to develop any additional service
centers which JLI may propose to develop or offer to others in this market.
This right extends to December 31, 2000 in the Cincinnati market area
Raleigh-Durham. The Company has satisfied its obligations to develop
service centers under its Area Development Agreement for the Raleigh-Durham
market area, and currently has a right of first refusal to develop any
additional service centers which JLI may propose to develop or offer to others
in this market. This right extends to December 31, 2006 in the Company's
Raleigh-Durham market.
Pittsburgh. The Company has satisfied its obligations to develop service
centers under its Area Development Agreement for the Pittsburgh market area,
and currently has a right of first refusal to develop any additional service
centers which JLI may propose to develop or offer to others in this market.
This right extends to June 30, 2019.
Other Areas. On August 1, 1995, Cincinnati Lubes, Inc. amended its Area
Development Agreement to include Toledo, Dayton, Nashville and Cincinnati
areas and agreed to operate a specific number of centers within the defined
geographical areas until July 31, 2004. The Company has satisfied its
development obligation under the revised agreement. The Company has a first
right of refusal to develop service centers until July 31, 2019.
Lansing. On May 1, 1996, the Company purchased substantially all of the
assets of Quick Lube, Inc. which included six Jiffy Lube service centers in
the Lansing, Michigan area. The Company has not entered into an Area
Development Agreement regarding Lansing nor is the Company contemplating
entering into an agreement at this time.
The franchise agreements convey the right to use the franchisor's trade
names, trademarks, and service marks with respect to specific service centers.
The franchisor also provides general construction specifications for the
design, color schemes and signage for a service center, training, operating
manuals and marketing assistance. Each franchise agreement requires the
franchisee to purchase products and supplies approved by the franchisor. The
initial franchise fee payable by the Company upon entering into a franchise
agreement for a service center varies based on the market area where the
Company develops the center and the time of development of the center. For
service centers which the Company may develop in 1998, the initial franchise
fee ranges from $12,500 to $35,000. The franchise agreements generally
require a monthly royalty fee of 5% of sales. The royalty fee is reduced to 4%
of sales when the fee for a given month is paid in full by the 15th of the
following month, a practice followed by the Company.
<PAGE> 4
Management Services Agreement
Each of the Company's operating subsidiaries has entered into a
management agreement (amended effective July 1, 1997, see exhibits 10.25, 10.26
and 10.27) with CFA Management, Inc., a Florida corporation (CFA), pursuant
to which CFA, as an independent contractor, operates, manages and maintains
the service centers. CFA is owned by Stephen P. Conway and Jerry B. Conway,
both of whom are executive officers and directors of the Company and each
subsidiary, as well as principal shareholders of the Company. These agreements
continue until the termination of the last franchise agreement between the
Company and JLI. On December 1, 1997, CFA assigned its management contract
with the Company to Navigator Management, Inc. Navigator Management, Inc. is
also owned by Stephen P. Conway and Jerry B. Conway. For its services, CFA
receives an amount equal to a percentage of the annual net sales of each
service center operated by a subsidiary, calculated as follows:
Number of Management Fee
Service Centers Per Service Center
1 - 34 4.50% of the sales of these centers
35 - 70 3.00% of the sales of these centers
71 - 100 2.25% of the sales of these centers
More than 100 1.50% of the sales of these centers
Expansion Plans
The Company added six service centers in 1997, bringing the total number
of service centers that the Company operates to one hundred. The Company
continues to review acquisitions that will fit into its strategic expansion
plans, but will remain focused on improving the sales and profitability of its
service centers. At the end of 1997, there were only two service centers
under construction in areas that the Company currently services. The Company
was also in negotiations to purchase twenty three currently operating Jiffy
Lube service centers.
Competition
The quick oil change and lubrication industry is highly competitive with
respect to the service location, product type, customer service and, to a
lesser degree, price. The Company's service centers compete in their local
markets with the "installed market" consisting of service stations, automobile
dealers, independent operators and franchisees of automotive lubrication
service centers, some of which operate multiple units offering nationally
advertised lubrication products such as Quaker State and Valvoline motor oil.
Some of the Company's competitors are larger and have been in existence for a
longer period than the Company. However, the Company is larger than many
independent operators in its markets and it believes that its size is an
advantage in these markets as it affords the Company the benefits of
marketing, name awareness and service as well as economies of scale for
purchasing and easier access to capital for improvements.
Government Regulation and Environmental Matters
The Company's service centers store new oil and generate and handle large
quantities of used automotive oils and fluids. Accordingly, the Company is
subject to a number of federal, state and local environmental laws governing
the storage and disposal of automotive oils and fluids. Noncompliance with
such laws and regulations, especially those relating to the installation and
maintenance of underground storage tanks (UST's), could result in substantial
cost. As of December 31, 1997, 12 of the Company's service centers had UST's
on the premises. Of those service centers with UST's, only 7 were actively
using the tanks, all at the requirement of local and state regulatory
authorities. Those UST's in use comply with all Environmental Protection
Agency regulations scheduled to become effective December 22, 1998. The
remaining five centers have inactive UST's that are scheduled for removal in
the first half of fiscal 1998. The Company is not aware that any leaks have
occurred at any of its existing UST's.
In addition, the Company's service centers are subject to local zoning
laws and building codes which could adversely impact the Company's ability to
construct new service centers or to construct service centers on a cost-
effective basis.
Employees
As of December 31, 1997, the Company employed 1,096 people, of which
1,044 were engaged in operating the Company's Jiffy Lube Service Centers and
the remainder were in management, development, marketing, finance and
administrative capacities. None of the Company's employees are represented by
unions. The Company considers its employee relations to be good.
Item 2 - Properties
Twenty four of the Company's one hundred service centers are owned, with
the balance of the service centers leased. Most of the leases are for a
twenty year period with generally one to two, ten year options to renew.
Twelve of the company's owned service centers are secured by a mortgage held
by Enterprise Mortgage Acceptance Company, LLC (EMAC). Nineteen of the leased
service centers are secured by a leasehold mortgage held by EMAC. The Company
also owns an 8,000 square foot office building in Raleigh, North Carolina
which is secured by a mortgage to Centura Bank as described in the notes to
the financial statements.
<PAGE> 5
Item 3 - Legal Proceedings
The Company is involved in lawsuits and claims arising in the normal
course of business. Although the outcome of these lawsuits and claims are
uncertain, Management believes that these lawsuits and claims are adequately
covered by insurance or they will not (singly or in the aggregate) have a
material adverse affect on the Company's business, financial condition, or
operations. Those lawsuits and claims against the Company which have not been
resolved and which can be estimated and are probable to occur, have been
accounted for in the Company's financial statements.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
<PAGE> 6
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company has two classes of Common Stock consisting of Class A Common
Stock and Class B Common Stock. The Class A stock is traded on the NASDAQ
SmallCaps market. The Class B Common Stock is closely held and not traded in
any public market.
As of December 31, 1997, there were 455 holders of record of the Class A
Common Stock and three record holders of the Class B Common Stock. No cash
dividends have ever been paid on either class of the Company's Common Stock.
The following table shows high and low sales prices for the Class A
Common Stock of Lucor as reported on the NASDAQ - SmallCaps market.
1997 1996
Market Price Market Price
Quarter Ended High Low High Low
March 31 $ 7.00 $ 6.00 $ 7.75 $ 5.75
June 30 $ 5.50 $ 4.00 $10.00 $ 6.13
September 30 $ 5.25 $ 4.25 $ 8.50 $ 7.50
December 31 $ 4.25 $ 2.75 $ 7.50 $ 4.50
Item 6 - Selected Financial Data
The selected consolidated financial data of the Company set forth on the
following page are qualified by reference to, and should be read in
conjunction with, the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this 10-K Report. The income statement data for
each of the years in the five year period ended December 31 and the Balance
Sheet data as of December 31, 1993, 1994, 1995, 1996, and 1997 are derived
from audited Consolidated Financial Statements.
<PAGE> 7
<TABLE>
LUCOR, INC.
Five-Year Summary of Selected Financial Data
1997 1996 1995 1994 1993
____ ____ ____ ____ ____
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net sales $42,678,313 $37,772,799 $28,153,521 $20,566,519 $16,265,623
Cost of sales 9,979,363 8,951,465 6,748,266 4,947,670 3,987,441
___________ ___________ ___________ ___________ ___________
Gross profit 32,698,950 28,821,334 21,405,255 15,618,849 12,278,182
___________ ___________ ___________ ___________ ___________
Costs and expenses:
Direct 16,494,374 14,059,886 10,020,278 6,749,017 5,304,942
Operating 8,923,880 7,786,260 6,053,513 4,640,848 3,872,453
Depreciation, amortization 2,056,059 2,001,300 848,301 442,116 425,842
Selling, general, admin. 5,928,152 5,455,291 3,183,110 1,951,464 1,654,891
___________ ___________ ___________ ___________ __________
33,402,465 29,302,737 20,105,202 13,988,997 11,428,018
Income (loss) from operations (703,515) (481,403) 1,300,053 1,629,852 850,164
Interest expense (1,480,679) (1,176,149) (450,471) (205,552) (169,890)
Income(loss) before provision
for income taxes and extra-
ordinary item (2,122,038) (1,464,994) 921,679 1,804,405 976,488
Income (loss) before extra-
ordinary item (1,581,443) (1,201,988) 540,243 1,087,995 598,918
Extraordinary loss(net of tax) (258,625) - - - -
Net income (loss) $(1,581,443)$(1,201,988)$ 540,243 $ 1,087,995 $ 598,918
============ ========== =========== =========== ===========
Preferred dividend accrued (140,000) (133,287) (35,000) - -
Income (loss) before extra-
ordinary item available
to common shareholders $(1,721,443)$(1,335,275)$ 505,243 $ 1,087,995 $ 598,918
============ ========== =========== =========== ===========
Basic income (loss) before
extraordinary item per
common share $(0.49) $(0.54) $0.26 $0.62 $0.34
Diluted income (loss) before
extraordinary item per
common share $(0.49) $(0.54) $0.26 $0.62 $0.33
Cash dividends declared
per share -0- -0- -0- -0- -0-
Weighted average common shares
outstanding - Basic 2,842,367 2,451,683 1,944,618 1,757,985 1,758,163
Weighted average common shares
outstanding - Dilutive 2,842,367 2,451,683 1,960,382 1,757,985 1,818,282
December 31,
1997 1996 1995 1994 1993
Balance Sheet Data:
Cash and other short-term
assets $ 6,614,374 $ 5,213,281 $ 4,143,399 $ 2,967,892 $ 2,139,445
Property and equipment, net 21,839,319 22,506,488 14,246,603 3,140,443 1,878,662
Other assets, net 4,766,587 4,907,840 3,288,044 1,140,210 703,357
___________ ___________ ___________ ___________ ___________
Total assets $33,220,280 $32,627,609 $21,678,046 $ 7,248,545 $ 4,721,464
=========== =========== =========== =========== ===========
Short-term obligations/debt 4,757,756 5,335,200 3,266,336 2,273,300 1,284,503
Long-term liabilities 18,855,114 16,304,431 12,198,958 1,256,886 1,691,494
Preferred stock, redeemable 2,000,000 2,000,000 2,000,000
Shareholder's equity 7,607,410 8,987,978 4,212,752 3,718,359 1,745,467
</TABLE>
<PAGE> 8
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operation
Introduction
The Company is engaged through its subsidiaries in the automotive fast
oil change, fluid maintenance lubrication, and general preventative
maintenance service business at one hundred service centers located in six
states. Twenty five service centers are located in the Raleigh-Durham area of
North Carolina, twenty one in the Cincinnati Ohio area (which includes
northern Kentucky), nineteen in the Pittsburgh, Pennsylvania area, fifteen in
the Dayton, Ohio area, five in the Toledo, Ohio area, eight in the Nashville,
Tennessee area, and seven in the Lansing, Michigan area. Starting in early
1995, the Company embarked on a plan of expansion, involving acquisition of
facilities in new markets as well as construction of new sites in current
markets.
In July 1995 Citicorp Leasing, Inc. agreed to lend $18.0 million to the
Company to refinance existing debt, fund the acquisition of new service center
sites, and to provide capital for the acquisition of additional service
centers in the Raleigh-Durham, Cincinnati, and Pittsburgh areas (See Lucor,
Inc. 10-K for the year ended December 31, 1995). During 1995, the Company
acquired fifteen centers by purchase and developed nine other centers, ending
the year with sixty operating locations. During 1996, the Company acquired
substantially all the assets of Quick Lube, Inc., which included six service
centers in the Lansing, Michigan area. In addition, site development continued
in its existing markets, adding four centers in Cincinnati, six in Dayton,
three in Nashville, six in North Carolina, and nine in Pittsburgh. At the end
of 1996, Company had ninety four centers operating. During 1997, the Company
added six service centers. One center was acquired in Lansing, Michigan, a
Sears center in Cincinnati, Ohio, one service center in Dayton, Ohio, one
service center in Nashville, Tennessee, and one service center in Pittsburgh,
Pennsylvania.
On December 31, 1997, the Company refinanced its existing debt with
Citicorp Leasing, Inc. through EMAC resulting in a new debt of $17,949,000. The
Company refinanced its debt to position itself for further expansion.
The revenue and profits generated by the service centers located in Sears
Auto Centers were disappointing in 1997. In March 1995, Jiffy Lube
International (JLI) and the Sears Merchandise Group (Sears) agreed to open
fast-oil change units in Sears Auto Centers. The Company agreed to open
sixteen such centers in the DMA's the Company currently services. The table
below shows the financial impact of the Sears operations:
<PAGE> 9
All Sears Non-Sears
Service Centers Service Centers Service Centers
Net sales $ 42,678,313 $ 3,221,710 $ 39,456,603
Cost of sales 9,979,363 790,024 9,189,339
_____________ _____________ ______________
Gross profit 32,698,950 2,431,686 30,267,264
_____________ _____________ ______________
Direct expenses 16,494,374 2,070,546 14,423,828
Operating 8,923,880 616,186 8,307,694
Depreciation and amortization 2,056,059 374,563 1,681,496
Selling, general and
administrative 5,928,152 470,008 5,458,144
_____________ _____________ ______________
Total costs and expenses 33,402,465 3,531,303 29,871,162
_____________ _____________ ______________
Income from operations $ (703,515) $ (1,099,617) $ 396,102
============== ============= ==============
Management is considering a number of options for the Sears units. Of
the sixteen units in operation, only the three units in North Carolina are
profitable. It typically takes approximately twenty four months for a store
to reach its mature level of stabilized, consistent sales. The majority of the
Sears units are in the eleventh to fifteenth month of operation (the North
Carolina stores have been open the longest). Management has been disappointed
in the revenue being generated by the Sears units. The Company had forecast a
stronger traffic flow from the existing Sears customer base. Many of the
Company's customers at the Sears locations are existing customers from the
Company's nearby free-standing units. Sears and JLI have joined with the
Company to provide additional marketing funds to boost the traffic flow into
these facilities for a six month period. At the end of this period, the
Company will re-evaluate the performance of the Sears units with the following
strategies in mind:
1. Closing Sears units in some markets and monitoring the results.
2. Renegotiating the lease and licensing agreement.
3. Closing all non profitable units and taking a charge against earnings.
4. Keeping the units open but taking a partial charge against earnings.
The Company continues to closely monitor the revenue and profit of the
Sears units, but feels that the enterprise is too immature to warrant reducing
the carrying value of the assets. Although the Sears units have sustained
substantial losses in 1997, both revenue and profits are trending upward. We
have reviewed FASB Statement No. 121 - Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed and feel that
the carrying amounts are recoverable based on the current trends. Management
continues to project that all units will eventually become profitable and show
a return on the investment made. Management believes that the next twelve to
twenty four months are critical for these operations.
<PAGE> 10
Results of Operations
The Company's primary indicator of business activity is revenue
generated. Costs are measured as a percentage of net sales. Cost of sales and
direct costs (which includes labor at the retail level and other volume-
related operating costs) can be expected to vary approximately in line with
sales volumes. Operating costs include store occupancy costs, insurance,
royalties paid to the franchisor, management fees and other lesser categories
of expenses. Store occupancy costs can be expected to vary, either with
periodic, contractual rent increases at leased locations or as a function of
sales for those leases which have a sales based rent schedule. Real estate
taxes are subject to periodic adjustments. Royalty fees paid to the
franchisor are 4% of sales and management fees are paid at rates described
above (see Management Services Agreement). The Company's service centers are
open 7 days per week and average 360 days of operation per year.
1997 Compared to 1996
Net sales increased by 13% from 1996 to 1997 due to the increase in base
business over the previous year as well as the impact of new service centers
which were opened during 1997 as indicated on the following table:
Same stores 10% $ 41,444,735 $ 37,772,799
New Stores 1,233,578 0
____________ ____________
Total new sales change 13% $ 42,678,313 $ 37,772,799
============ ============
The Company's average daily sales per service center declined when
comparing 1997 with 1996. A large impact on the decrease of the average daily
sales per store were the Sears units, which were opened only an average of
three months in 1996. Taking out the Sears operations, average daily sales
per service center increased in 1997 compared to 1996.
Cost of sales, which represents the direct cost of material sold to the
customer (oil, filters, lubricants, wiper blades, additives, etc.) decreased
as a percent of sales from 23.7% to 23.4%. This decrease in cost of sales
reflects the results of purchase cost reduction programs put in place in 1997.
Direct operating costs increased by $2,434,488 or 17% in 1997 as
compared to 1996. These costs consist primarily of direct labor and
associated labor benefits costs and supplies expended at each location to run
the operation. As a percent of sales these costs increased from 37.2% in 1996
to 38.6% in 1997. The majority of the increased percentage cost of sales
relates to increased labor costs as a percent of sales. Due to the fixed
labor requirement to operate a service center, these costs will increase, as
a percent of sales, as the number of cars per day decreases. The Company
operates in areas that are experiencing low unemployment rates which continues
to make it difficult to obtain the necessary labor to run its service centers.
The Company has been able to resist any significant upward pressures on wage
rates. We are uncertain what affect this may have, if any, on future labor
rates, but do not expect any significant upward pressure in 1998.
Operating costs increased by $1,137,620 or 14.6% in 1997 as compared to
1996. The increase in operating costs above the increase in sales, results from
fixed occupancy costs that are higher, as a percent of sales, for new service
centers. Operating costs consist primarily of facility related costs such
as rents, real estate and personal property taxes plus royalties paid to JLI
as part of the franchise agreement and management fees paid to CFA and by
assignment on December 1, 1997 to Navigator Management, Inc.
<PAGE> 11
Depreciation and amortization costs increased by $54,759.
Selling, general, and administrative (SGA) costs increased by $472,861
or 9% in 1997 as compared to 1996. As a percent of sales, SGA costs decreased
by .6%. All of the increase in SGA related to increased marketing efforts for
1997. The Company increased its marketing efforts in order to attract
additional business into its service centers. Other general and administrative
expenses decreased slightly from the previous year.
Interest expense increased by $304,530 reflecting a full year's interest
expense on loans outstanding which were increased over 1996.
Other income decreased by $130,402 in 1997 compared to 1996. Other
income in 1996 included a gain of $47,000 on the sale of the former Corporate
headquarters. Interest income was also lower in 1997 than in 1996 reflecting
a lower average cash balance on hand.
The extraordinary loss of $258,625 (net of tax) was recorded in 1997 to
reflect the write off of unamortized expenses capitalized as part of the cost
of obtaining the Citicorp debt in 1995. On December 31, 1997 this debt was
refinanced using new debt obtained from EMAC (See discussion elsewhere in this
Form 10-K).
Income tax benefit represented 25.5% of net income. The benefit is lower
than the statutory rate mainly due to minimum state income taxes that are due,
plus non deductible reduction of management fees.
Dividends on Series A redeemable preferred stock were $140,000 in 1997.
1996 Compared to 1995
Net sales increased 34% from 1995 to 1996 due to the increase in base
business sales as well as the impact of the new service centers which were
opened during the year as indicated in the following table:
Increase 1996 1995
Same stores 15% $ 32,416,340 $ 28,153,521
New store 5,356,459 0
____________ ____________
Total net sales in 1996 34% $ 37,772,799 $ 28,153,521
============ ============
The Company had average daily sales of thirty nine cars per day, per
service center, compared to forty seven cars per day in the previous year.
The more than 50% increase in the number of service centers opened during the
year contributed to this decline, as new locations typically require
approximately two years to become stabilized at normal sales levels. In
addition, the fifteen Sears location sites, ten of which were opened in the
last quarter of the year, had car counts significantly below those of non-
Sears locations. Management anticipates that the Sears sites will ultimately
prove to be profitable locations, but no assurances can be given that this
will occur. Net revenue per car increased from $35.68 to $36.42 or 2%. Many
factors contributed to the change in the net revenue per car. Part of the
increase reflects an increase in ancillary sales per customer. As discussed
above, the Company has introduced and has aggressively marketed new ancillary
sales. As additional services are purchased beyond the basic "Signature
Service", the net revenue per car is increased. North Carolina performs
inspections on vehicles which increases the net revenue per vehicle. In North
Carolina for 1996, the net revenue per car increased from $39.04 to $40.26 or
3%. Due to the large number of stores opening in the Company's other regions,
the effect of the higher net revenue per car generated by the North Carolina
region was diluted when computing total net revenue per car for the entire
Company.
<PAGE> 12
The increase in net revenue also occurred despite the loss of over
$900,000 in inspection revenue in the Cincinnati area as this service was
centralized by the state of Ohio in January 1996. Net revenue per car
increased in the Cincinnati area from $35.05 to $35.53 or 1% even with the
loss of the inspection revenue. Had Cincinnati not had inspection revenue in
1995, the net revenue per car would have been $31.62.
Cost of sales, which represents the direct cost of materials sold to the
customer (oil, filters, lubricants, etc.) increased in proportion to sales and
remained relatively unchanged as a percentage of sales.
Direct operating costs increased by 40% or $4,039,608 in 1996 as compared
to 1995. These costs consist primarily of direct labor and supplies costs
expended at each location for customer service. Approximately 74% of this
increase ($3,004,719) was in direct labor costs. Increased sales volume
accounted for 79% of the increase in total direct operating costs, while the
balance was due to higher unit costs ($10.39 in 1996 versus $9.77 in 1995).
The Company has experienced low unemployment labor markets for entry level
employees in its various markets. These low unemployment rates has made it
difficult to obtain the necessary labor to run the service centers, however,
the Company has been able to resist any significant upward pressure on wage
rates. The Company is uncertain to what extent the low unemployment rates
will have on its labor rates.
Operating costs increased by 29% or $1,732,747 in 1996 as compared to
1995, which is less than the increase in sales of 34%. Operating costs consist
primarily of facility related costs such as rents, real estate and personal
property taxes plus royalties paid to JLI as part of the franchise agreement
and management fees paid to CFA Management, Inc.
Depreciation and amortization costs increased by $1,152,999 reflecting
the large increases in properties purchased and built during 1995 and 1996.
The Company changed its method of depreciation for equipment, signs and point
of sales systems from the double declining balance method to the straight line
method for assets purchased in 1996. In addition, the Company changed the
life over which equipment is depreciated from five years to ten years and the
amortization of pre-opening expenses from two years to six months. Management
made these changes to reflect more closely the life of the assets and their
depreciating value over the periods. The change in the method and lives of
depreciating equipment increased net income by $463,389 while the shortened
life in the amortization of pre-opening costs reduced net income by $358,262,
for a net affect of $105,127. This change in accounting has no impact on the
Company's income tax provision, which utilizes the shortest periods allowed by
the Internal Revenue Service code, minimizing in current years the Company's
tax burden.
<PAGE> 13
Selling, general, and administrative expenses increased by 71% or
$2,272,181. Of this increase, $1,002,157 was the result of increases in
marketing efforts. The Company increased its marketing expenses in
conjunction with the new markets that were opened in 1995 and 1996 plus the
new stores opened. Regional and corporate costs associated with the expansion
of the Company increased by $1,270,024. These costs increased reflecting a
full year's expense for regions acquired in 1995, the acquisition of the
Lansing region, and current year service center additions.
Interest expenses increased by $725,678 reflecting the Company's
continued expansion program and additional Citicorp financing (See discussion
below).
Other income includes approximately $47,000 profit earned on the sale of
the Company's office condo in Raleigh when the Corporate headquarters were
moved to the Pershing Road facility.
Income tax (benefit) expense represented (18%) of the before tax loss in
1996, versus 41% of the before tax income in 1995. State income taxes,
approximating 6% of before tax results, cannot generally be carried back to
prior years. Federal income losses, however, may be carried back to offset
previously reported income. The Company has recorded a receivable of
$556,364, representing income taxes paid in prior years and now recoverable.
A deferred tax provision of $293,357 was made mainly representing future taxes
that may be paid when the accelerated depreciation used for tax purposes is
reduced below the book depreciation.
Dividends on Series A redeemable preferred stock was $133,287, up $98,287
from 1995. This increase reflects a full years dividend as compared to one
quarter charged in 1995.
Liquidity and Capital Resources
As of December 31, 1997, the Company had cash and short term assets of
$6,614,374 and short term obligations (including the current portion of long
term debt) of $4,757,756 for net working capital of $ 1,856,618. Cash
provided by operations amounted to $777,239. Net cash used in investing
activities was $957,872. These funds were mainly spent on the addition of
service centers.
On December 31, 1997, the Company refinanced its loan with Citicorp
Leasing, Inc. by obtaining a series of loans totaling $17,949,000 from EMAC.
These new loans carry a fixed interest rate of 8.76% and are payable as
interest only for the first three months. Loans with underlying collateral of
fee simple properties are amortized in equal installments over twenty five
years, all other loans are amortized over fifteen years. The total amount
amortized over twenty five years is $10,871,000, the remaining $7,078,000 is
amortized over fifteen years. The Company refinanced its loans with Citicorp
due to a willingness of EMAC to finance future expansion plans, and has
obtained such additional financing from EMAC since December 31, 1997.
Additional funds were obtained from Jay C. Howell and Pennzoil Products Company
totaling $650,000.
As of December 31, 1996, the Company had cash and short term assets of
$5,213,281 and short term obligations (including the current portion of long
term debt) of $5,335,200 for net working capital deficiency of $121,919. Cash
provided by operations amounted to $1,177,138. $11,106,005 was invested in
purchases of property, plant and equipment in furtherance of the Company's
expansion program. In addition, $1,548,191 was invested in the purchase of
new centers in Lansing, Michigan. $1,049,627 was disbursed for license fees,
deposits and costs associated with the opening of new service centers. New
debt in the amount of $4,719,981 was added, primarily from Citicorp to finance
the expansion. Additionally, Class A Stock was issued in 1996 for $5,345,938;
Pennzoil purchased $5,000,000 in Class A Stock with the remaining issue done
through a private placement with two of its Directors. Debt totaling $315,203
was repaid according to terms of the agreement.
<PAGE> 14
CFA Management, Inc. (CFA) elected to reduce its management fees to the
Company by $338,000 and $500,000 for 1997 and 1996, respectively. CFA made
this reduction as a demonstration of CFA's confidence in the future of the
Company during its historic expansion period. The Company originally treated
these decreases in fees as a reduction in operating expense. However, following
discussions with the Securities and Exchange Commission (SEC), the Company
decided to account for the reduction of management fees as a capital
contribution. A restatement of the third quarter 1997 was made to reflect the
treatment as a capital contribution. See note 18 to the financial statements
for the affects of the restatement.
Based on the Company's current level of operations and anticipated growth
in net sales and earnings as a result of its business strategy, the Company
expects that cash flows from operations and funds from currently available
facilities will be sufficient to enable the Company to meet its anticipated
cash requirements for the next 12 months, including for debt service. In
addition, the Company believes that it will be able to obtain additional
financing through its new lender to facilitate expansion plans over the next
three to five years. If the Company is unable to satisfy its cash
requirements, the Company could be required to adopt one or more alternatives,
such as reducing or delaying capital expenditures and expansion plans,
restructuring indebtedness, or selling assets. The Company contemplates the
sale of additional equity instruments over the next twelve months. There can
be no assurance that there will be a market for the Company's equity
instruments at a price that the Company deems sufficient. The sale of
additional equity could result in additional dilution to the Company's
stockholders.
Forward Looking Statements
Certain statements in this Form 10-K "Management's Discussion and Analysis
of Financial Condition and Results of Operations" constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward looking statements. Such factors include, among others, the
following: competition, success of operating initiative, advertising and
promotional efforts, adverse publicity, acceptance of new product offerings,
availability, locations and terms of sites for store development, changes in
business strategy or development plan, availability and terms of capital,
labor and employee benefit costs, changes in government regulation, regional
weather conditions, and other factors specifically referred to in this 10-K.
Impact of New Accounting Standards
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," which was adopted by the Company on December 31, 1997.
As a result, the Company changed the method previously used to compute
earnings per share and has restated all prior periods.
Year 2000
The Company is in the process of reviewing its computer systems to
determine any potential year 2000 compliance issues. Many of the Company's
current systems are already compliant. The total future cost associated with
potential year 2000 compliance issues has not been determined, but is not
expected to have a material adverse effect on the financial position of the
Company.
<PAGE> 15
Item 8 - Consolidated Financial Statements and Supplementary Data
Page
Consolidated Financial Statements:
Independent Auditors' Report 16
Consolidated Balance Sheets as of December 31, 1997 and 1996 17
Consolidated Statements of Income (Loss) for the years ended
December 31, 1997, 1996 and 1995 18
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995 19
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 20
Notes to Consolidated Financial Statements 22
Financial Statement Schedule:
All schedules have been omitted because they are not applicable or are not
required or the information required to be set forth therein is included in
the Consolidated Financial Statements or Notes thereto.
<PAGE> 16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Lucor, Inc. and Subsidiaries
Raleigh, North Carolina
We have audited the accompanying consolidated balance sheets of Lucor, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income (loss), stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 Lucor,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Raleigh, North Carolina
March 13, 1998
<PAGE> 17
<TABLE>
LUCOR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<CAPTION>
Assets 1997 1996
_______ ______________ __________
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 13) $ 1,548,418 $ 2,052,417
Accounts receivable, trade, net of allowance for doubtful
accounts of $41,500 and $34,245 at December 31, 1997 and
1996, respectively 293,364 233,553
Accounts receivable, other 1,974,445 257,601
Income tax receivable 466,523 556,364
Inventories 2,138,180 1,832,658
Prepaid expenses 193,444 280,688
_____________ ____________
Total current assets 6,614,374 5,213,281
_____________ ____________
Property and equipment, net of accumulated
depreciation (notes 3 and 6) 21,839,319 22,506,488
Other assets:
Goodwill, net of accumulated amortization of $292,431 and
$188,561 at December 31, 1997 and 1996, respectively 2,643,435 2,709,796
License, application, area development, loan acquisition,
non-compete agreements and organization costs, net of
accumulated amortization of $811,982 and $756,171 at
December 31, 1997 and 1996, respectively 2,036,096 1,833,807
Security deposits and pre-opening costs, net of accumulated
amortization of $1,024,570 and $581,942 at December 31, 1997
and 1996, repectively 87,056 364,237
_____________ ____________
4,766,587 4,907,840
_____________ ____________
$ 33,220,280 $ 32,627,609
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt (note 6) $ 305,578 $ 969,893
Current portion of capital lease (note 8) 25,478 22,664
Accounts payable 2,949,018 2,967,822
Accrued expenses:
Payroll 701,279 695,949
Property taxes 319,298 316,133
Other 422,105 327,739
Preferred dividend 35,000 35,000
_____________ ___________
Total current liabilities 4,757,756 5,335,200
_____________ ___________
Long-term debt, net of current portion (note 6) 18,642,480 15,831,727
Capital lease, net of current portion (note 8) 23,634 49,110
Deferred taxes (note 4) 189,000 423,594
_____________ ___________
Total long-term liabilities 18,855,114 16,304,431
_____________ ___________
Series A redeemable preferred stock (note 10) 2,000,000 2,000,000
_____________ ___________
Stockholders' equity (notes 9, 10, 11 and 12):
Preferred stock, $.02 par value, ($.10
liquidation preference), authorized 5,000,000
shares, issued and outstanding, none - -
Common stock, Class "A", $.02 par value,
5,000,000 shares authorized, 2,145,733 and 2,099,733
shares issued and outstanding at December 31, 1997
and 1996, respectively 42,914 41,994
Common stock, Class "B", $.02 par value,
2,500,000 shares authorized, 702,155 shares issued
and outstanding at December 31, 1997 and 1996 14,043 14,043
Additional paid-in capital 9,599,642 9,001,062
Treasury stock at cost (760 shares at December 31, 1997
and 1996) (3,437) (3,437)
Accumulated deficit (2,045,752) (65,684)
_____________ ___________
Total stockholders' equity 7,607,410 8,987,978
_____________ ___________
Commitments and contingencies (notes 7 and 8)
$ 33,220,280 $ 32,627,609
============= ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 18
<TABLE>
LUCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net sales $ 42,678,313 $ 37,772,799 $ 28,153,521
Cost of sales (note 5) 9,979,363 8,951,465 6,748,266
______________ ______________ ______________
Gross profit 32,698,950 28,821,334 21,405,255
______________ ______________ ______________
Costs and expenses:
Direct 16,494,374 14,059,886 10,020,278
Operating (note 5) 8,923,880 7,786,260 6,053,513
Depreciation and amortization 2,056,059 2,001,300 848,301
Selling, general and administrative 5,928,152 5,455,291 3,183,110
______________ ______________ ______________
33,402,465 29,302,737 20,105,202
______________ ______________ ______________
Income (loss) from operations (703,515) (481,403) 1,300,053
______________ ______________ ______________
Interest expense (1,480,679) (1,176,149) (450,471)
Other income 62,156 192,558 72,097
______________ ______________ ______________
(1,418,523) (983,591) (378,374)
______________ ______________ ______________
Income (loss) before provision for
income taxes and extraordinary item (2,122,038) (1,464,994) 921,679
Income tax benefit (expense) (note 4) 540,595 263,006 (381,436)
______________ ______________ ______________
Income (loss) before extraordinary item (1,581,443) (1,201,988) 540,243
Extraordinary item - loss on extinguishment
of debt, net of income tax benefit of $133,000 (note 6) (258,625) - -
______________ ______________ ______________
Net income (loss) $ (1,840,068) $ (1,201,988) $ 540,243
============== ============== ==============
Income (loss) before extraordinary item $ (1,581,443) $ (1,201,988) $ 540,243
Preferred dividend (140,000) (133,287) (35,000)
______________ ______________ ______________
Income (loss) before extraordinary item
available to common shareholders $ (1,721,443) $ (1,335,275) $ 505,243
============== ============== ==============
Basic income (loss) per common share:
Income (loss) before extraordinary item available to
common shareholders $ (.61) $ (.54) $ .26
Extraordinary item (.09) - -
______________ ______________ ______________
Net income (loss) per common share available to
common shareholders $ (.70) $ (.54) $ .26
============== ============== ==============
Diluted income (loss) per common share:
Income (loss) before extraordinary item available to
common shareholders $ (.61) $ (.54) $ .26
Extraordinary item (.09) - -
______________ ______________ ______________
Net income (loss) per common share available to common
shareholders $ (.70) $ (.54) $ .26
============== ============== ==============
Weighted average common shares outstanding:
Basic 2,842,367 2,451,683 1,944,618
Options (incremental shares) - - 15,764
______________ ______________ ______________
Dilutive 2,842,367 2,451,683 1,960,382
============== ============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 19
<TABLE>
LUCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
Preferred Stock Common Stock
_____________________ ___________________________________ Additional
Number umber of shares paid-in
of shares Par value Class "A" Class "B" Par value capital
__________ _________ ___________ __________ __________ ____________
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 - $ - 1,242,136 702,155 38,885 2,915,126
Stock issued for employee bonuses
and directors' fees (note 12) - - 1,120 - 22 9,218
Stock issuance costs - - - - - (20,090)
Net income - - - - - -
Preferred dividend - - - - - -
________ _______ __________ ________ _________ ___________
Balance at December 31, 1995 - - 1,243,256 702,155 38,907 2,904,254
Stock issued for directors' fees (note 12) - - 1,000 - 20 7,480
Exercise of stock options (note 12) - - 2,000 - 40 10,460
Sale of stock to directors (note 9) - - 55,000 - 1,100 342,650
Sale of stock to Pennzoil (note 9) - - 759,477 - 15,190 4,986,998
Repurchase of shares - - - - - -
Purchase of Lansing units (note 7) - - 39,000 - 780 249,220
Capital contribution - - - - - 500,000
Net (loss) - - - - - -
Preferred dividend - - - - - -
________ _______ __________ ________ _________ ___________
Balance at December 31, 1996 - - 2,099,733 702,155 56,037 9,001,062
Stock issued for directors' fees (note 12) - - 1,000 - 20 2,730
Sale of stock to directors (note 9) - - 45,000 - 900 257,850
Capital COntribution - - - - - 338,000
Net (loss) - - - - - -
Preferred dividend - - - - - -
________ _______ __________ ________ _________ ___________
Balance at December 31, 1997 - $ - 2,145,733 702,155 56,957 9,599,642
======== ======= ========== ======== ========= ===========
</TABLE>
<TABLE>
Treasury Stock
_______________ Retained
Number earnings
of shares Cost (deficit)
_________ ______ ___________
<S> <C> <C> <C>
Balance at December 31, 1994 - - 764,348
Stock issued for employee bonuses
and directors' fees (note 12) - - -
Stock issuance costs - - -
Net income - - 540,243
Preferred dividend - - (35,000)
_________ _______ ____________
Balance at December 31, 1995 - - 1,269,591
Stock issued for directors' fees (note 12) - - -
Exercise of stock options (note 12) - - -
Sale of stock to directors (note 9) - - -
Sale of stock to Pennzoil (note 9) - - -
Repurchase of shares 760 (3,437) -
Purchase of Lansing units (note 7) - - -
Capital contribution - - -
Net (loss) - - (1,201,988)
Preferred dividend - - (133,287)
_________ _______ ____________
Balance at December 31, 1996 760 (3,437) (65,684)
Stock issued for directors' fees (note 12) - - -
Sale of stock to directors (note 9) - - -
Capital Contribution - - -
Net (loss) - - (1,840,068)
Preferred dividend - - (140,000)
_________ _______ ____________
Balance at December 31, 1997 760 (3,437) (2,045,752)
========= ======= ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 20
<TABLE>
LUCOR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
_____________ _____________ ____________
<S> <C> <C> <C>
Cash flows from operations:
Net income (loss) $ (1,840,068) $ (1,201,988) $ 540,243
Adjustments to reconcile net income to
net cash provided by operating activities:
(Gain) loss on sale of property and equipment (1,200) (47,942) (178)
Depreciation of property and equipment 1,272,583 1,149,028 671,553
Amortization of intangible assets and pre-operating costs 783,476 852,272 176,748
Write-off of loan origination costs 391,625 - -
Stock issued as employee bonuses and
directors' fees 2,750 7,500 9,240
Management fee recorded as contributed capital 338,000 500,000 -
Changes in assets and liabilities:
Increase in accounts receivable, trade (59,811) (103,013) (25,213)
Decrease (increase) in accounts receivable, other 168,858 (156,639) (40,279)
Increase in inventories (305,522) (623,924) (57,548)
Decrease (increase) prepaid expenses 87,244 (70,585) (143,386)
Decrease (increase) in income tax receivable 89,841 (325,356) (231,008)
Increase in accounts payable and accrued
expenses 84,057 1,404,428 1,445,769
Decrease in income tax payable - - (386,048)
Decrease (increase) in deferred tax liability (234,594) 293,357 130,237
_____________ _____________ ____________
Net cash (used in) provided by operating activities 777,239 1,677,138 2,090,130
_____________ _____________ ____________
Cash flows from investing activities:
Purchase of property and equipment (3,410,957) (11,106,005) (10,081,718)
Acquisition of additional service centers and related
equipment (45,000) (1,548,191) (1,887,210)
Acquisition of area development agreement
and other intangible assets (140,817) (333,556) (386,774)
Decrease (increase) in security deposits 22,405 (19,649) (106)
Pre-opening costs (197,737) (696,422) (158,424)
Proceeds from sale of property and equipment 2,504,437 173,950 1,577
Decrease (increase) in construction in progress 309,797 1,939,702 (1,397,395)
_____________ _____________ ____________
Net cash used in investing activities (957,872) (11,590,171) (13,910,050)
_____________ _____________ ____________
Cash flows from financing activities:
Proceeds from the exercise of stock options - 10,500 -
Repurchase of common stock - (3,437) -
Proceeds from issuance of common stock 258,750 5,345,938 -
Proceeds from issuance of Series A redeemable
preferred stock - - 2,000,000
Loan origination costs (680,190) - (538,571)
Dividend paid (140,000) (133,287) -
Stock issuance costs - - (20,090)
Repayments of capital lease (22,662) (3,526) -
Proceeds from borrowings 16,713,298 4,719,981 15,870,591
Repayments of debt (16,452,562) (315,203) (5,160,441)
_____________ _____________ ____________
Net cash (used in) provided by financing activities (323,366) 9,620,966 12,151,489
_____________ _____________ ____________
Increase (decrease) in cash and cash equivalents (503,999) (292,067) 331,569
Cash and cash equivalents at beginning of period 2,052,417 2,344,484 2,012,915
_____________ _____________ ____________
Cash and cash equivalents at end of period $ 1,548,418 $ 2,052,417 $ 2,344,484
============= ============= =============
<PAGE> 21
Supplementary disclosures:
Interest paid, net of amounts capitalized $ 1,480,679 $ 1,052,041 $ 441,804
============= ============= =============
Income tax paid $ 41,031 $ 23,425 $ 868,256
============= ============= =============
Acquisition of units:
Inventory acquired $ - $ 82,432 $ 297,644
Fair value of other assets acquired,
principally property and equipment 7,490 293,318 475,232
Value of stock issued - (250,000) -
Goodwill 37,510 1,422,441 1,114,334
_____________ _____________ ____________
Cash paid $ 45,000 $ 1,548,191 $ 1,887,210
============= ============= =============
Supplementary schedule of non-cash financing
and investing activities:
Unreleased proceeds from borrowings, included
in accounts receivable, other $ 1,885,702 $ - $ -
============= ============= =============
Capital lease $ - $ 75,300 $ -
============= ============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 22
LUCOR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Nature of Business
Lucor, Inc. (the "Company") is the largest franchisee of Jiffy Lube
International, Inc. ("JLI") in the United States. These franchises consist
of automotive fast oil change, fluid maintenance, lubrication, and general
preventative maintenance service centers under the name "Jiffy Lube". As of
December 31, 1997, the Company operated one hundred service centers in six
states, including twenty-five service centers in the Raleigh-Durham, North
Carolina DMA (Geographic Designated Market Area defined in the Arbitron
Ratings Guide for television markets), twenty-one service centers in the
Cincinnati, Ohio DMA (which includes northern Kentucky), nineteen service
centers in the Pittsburgh, Pennsylvania DMA, fifteen service centers in the
Dayton, Ohio area, five service centers in the Toledo, Ohio area, eight
service centers in the Nashville, Tennessee area, and seven service centers
in the Lansing, Michigan area. The operations of the service centers in each
of these markets are conducted through subsidiaries of the Company, each of
which has entered into area development (except for Lansing) and franchise
agreements with JLI. These franchise agreements generally require a monthly
royalty fee of 5% of sales. The royalty fee is reduced to 4% of sales when the
fee for a given month is paid in full by the fifteenth of the following month,
a practice followed by the Company. The Company purchases, leases as well as
constructs these service centers. The Company operated 94 and 60 service
centers at December 31, 1996 and 1995, respectively.
(2) Summary of Significant Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and all of its wholly-owned subsidiaries. Intercompany
transactions and balances have been eliminated upon consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
Inventories
Inventories of oil, lubricants and other automobile supplies are stated at
the lower of cost (first-in, first-out) or market.
<PAGE> 23
Property and Equipment
Property and equipment are recorded at cost. The Company changed its method
of depreciation for equipment, signs, furniture and fixtures and point of
sales systems from the double declining balance method to the straight-line
method for assets purchased since 1996. In addition, during 1996 the Company
changed the life over which equipment purchased since 1996 is depreciated from
five years to a ten year depreciable life during 1996. Management made these
changes to reflect more closely the life of the assets and their depreciating
value over the periods. The change in the method and lives of depreciating
equipment increased net income by $463,389 in 1996. Costs of construction of
certain long-lived assets include capitalized interest which is amortized over
the estimated useful lives of the related assets. The Company capitalized
interest of $124,108 and $133,191 in 1996 and 1995, respectively, as an
additional cost of buildings. No interest was capitalized in 1997.
Goodwill
The Company evaluates, when circumstances warrant, the recoverability of its
goodwill on the basis of undiscounted cash flow projections and through the
use of various other measures, which include, among other things, a review of
its image, market share and business plans.
Amortization
Amortization of other assets is being computed using the straight-line method
over the following lives:
Years
Goodwill 15, 20 and 40
Franchise rights 20
License fees 10, 15 and 20
Organization costs 5
Area development agreement 4.5, 10 and 13
Acquisition/Application fees 20
Loan acquisition costs 8, 15 and 25
Non-compete agreements 5 and 10
Pre-opening costs 0.5
Legal costs 7 and 8
Useful lives of pre-opening costs incurred subsequent to January 1, 1996 were
shortened from two years to six months, resulting in additional amortization
expense during the year ended December 31, 1996 of $358,262.
<PAGE> 24
Income Taxes
The Company accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events
other than enactments of changes in the tax laws or rates.
Advertising
The Company expenses the cost of advertising as incurred.
Loan Acquisition Costs
The costs related to the issuance of debt are capitalized and amortized over the
lives of the related debt.
Basic and Diluted Income (Loss) Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"), which establishes new standards for computing and presenting basic and
diluted earnings per share. As required by SFAS No. 128, the Company adopted
the provisions of the new standard with retroactive effect beginning in 1997.
Accordingly, all net income (loss) per common share amounts for all prior
periods have been restated to comply with SFAS No. 128.
The basic income (loss) per common share has been computed based upon the
weighted average of shares of common stock outstanding. Diluted income
(loss) per common share has been computed based upon the weighted average of
shares of common stock outstanding and shares that would have been
outstanding assuming the issuance of common stock for all dilutive potential
common stock outstanding. The Company's outstanding stock options and
warrants represent the only dilutive potential common stock outstanding. The
amounts of income (loss) used in the calculations of diluted and basic income
(loss) per common share were the same for all the years presented. Diluted
net loss per common share is equal to the basic net loss per common share for
the years ended December 31, 1997 and 1996, as common equivalent shares from
stock options and stock warrants would have an antidilutive effect.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
<PAGE> 25
Reclassifications
Certain accounts included in the 1996 financial statements have been
reclassed to conform to the 1997 presentation. These reclassifications have
no effect on net income (loss) or stockholders' equity as previously
reported.
(3) Property and Equipment
Major classifications of property and equipment together with their estimated
useful lives are summarized below:
<TABLE>
Lives
1997 1996 (years)
______________ ____________ ______________________
<S> <C> <C> <C>
Land $ 3,829,760 4,379,053 N/A
Buildings 11,289,116 11,017,083 31.5
Point of sale systems 364,930 289,488 5
Equipment 6,124,165 5,666,207 5 and 10
Furniture and fixtures 378,699 337,058 7
Signs 594,626 505,995 7
Transportation equipment 322,471 336,329 5
Leasehold improvements 2,937,620 2,400,505 31.5 or remaining life
of lease
Software 75,300 75,300 Life of lease
Construction in progress,
including related land 395,062 704,859 N/A
_______________ ____________
26,311,749 25,711,877
Accumulated depreciation (4,472,430) (3,205,389)
_______________ ____________
$ 21,839,319 22,506,488
=============== ============
</TABLE>
(4) Income Taxes
Total income tax expense for the year ended December 31, 1997 was allocated
as follows:
Income from continuing operations $ (540,595)
Extraordinary item (133,000)
___________
$ (673,595)
===========
<PAGE> 26
The components of income tax expense (benefit) attributable to income from
operations for the years ended December 31, 1997, 1996 and 1995 consisted of
the following:
1997 1996 1995
___________ ___________ __________
Current:
Federal $ (439,000) $ (556,364) $ 181,694
State - - 69,506
___________ ___________ __________
(439,000) (556,364) 251,200
___________ ___________ __________
Deferred:
Federal (183,507) 230,466 110,041
State 81,912 62,892 20,195
___________ ___________ __________
(101,595) 293,358 130,236
___________ ___________ __________
Total $ (540,595) $ (263,006) $ 381,436
=========== =========== ==========
The components of deferred tax assets and deferred tax liabilities as of
December 31, 1997 and 1996 are as follows:
1997 1996
_______________ ____________
Deferred tax assets:
Allowance for doubtful receivable $ 16,000 13,594
State net economic loss carryforwards 389,000 169,658
Federal net operating loss carryforward 966,000 -
Tax credit carryforward 62,000 239,685
_______________ ____________
Total gross deferred tax assets 1,433,000 422,937
Less valuation allowance (307,000) (121,925)
_______________ ____________
Net deferred tax assets 1,126,000 301,012
_______________ ____________
Deferred tax liabilities:
Depreciation (1,315,000) (724,606)
_______________ ____________
Total gross deferred tax liabilities (1,315,000) (724,606)
_______________ ____________
Net deferred tax liability $ (189,000) (423,594)
=============== ============
It is management's opinion that it is more likely than not that the net
deferred tax assets will be realized. This conclusion is based on the fact
that the tax credit carryforwards are available indefinitely, there is a
fifteen year carryforward period for the federal net operating loss
carryforward and for a portion of the state net economic loss carryforward
and the reversal of the gross deferred tax liabilities. A valuation
allowance has been recorded relating to state loss carryforwards that expire
in three to five years. The valuation allowance for deferred tax assets as
of January 1, 1997 was $121,925. The net change in valuation allowance for
the years ended December 31, 1997 was an increase of $185,075.
At December 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of $2,840,000 which are available to offset
future federal taxable income, if any, through 2012. In addition, the
Company has alternative minimum tax credit carryforwards of $62,000 which are
available to reduce future federal regular income taxes, if any, over an
indefinite period.
<PAGE> 27
The reasons for the difference between actual income tax (benefit) expense
attributable to (loss) income from operations for the years ended December 31,
1997, 1996 and 1995 and the amount computed by applying the statutory federal
income tax rate to (loss) income before income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
_____________________ _____________________ ____________________
% of % of % of
pretax pretax pretax
Amount earnings Amount earnings Amount earnings
___________ ________ ___________ _________ _________ ________
<S> <C> <C> <C> <C> <C> <C>
Income tax (benefit) expense
at statutory rate $ (721,493) (34.0%) $ (498,098) (34.0%) $ 313,371 34.0%
State income taxes,
net of federal income
tax benefit 54,062 3.0 41,509 2.8 59,203 6.4
Nondeductible management
fees 114,920 5.4 170,000 11.6 - -
Other, net 11,916 0.6 23,583 1.6 8,862 1.0
___________ ________ ___________ _________ _________ ________
Income tax (benefit)
expense $ (540,595) (25.5%) $ (263,006) (18.0%) $ 381,436 41.4%
=========== ======== =========== ========= ========== ========
</TABLE>
(5) Related Party Transactions
The Company, through its subsidiaries, entered into management agreements (as
amended July 1, 1997) with CFA Management, Inc. ("CFA") which is owned by
certain stockholders of the Company, to operate, manage and maintain the
subsidiaries' service centers. The management agreements for the entities
expire on various dates through 2002. These agreements may be extended. For
its services, CFA Management, Inc. receives a percentage of annual gross
sales calculated on the basis of all service centers as follows:
Number of Management fee
service centers per service center
_______________ __________________
1 - 34 4.50%
35 - 70 3.00%
71 - 100 2.25%
More than 100 1.50%
Management fees paid in 1997, 1996 and 1995 were $1,231,377, $804,815 and
$1,189,800, respectively.
During 1997 and 1996, CFA agreed to reduce its management fees by $338,000
and $500,000, respectively. The Company accounted for the reduction of
management fees as capital contributions.
<PAGE> 28
Included in accounts payable at December 31, 1997 and 1996 was an amount due
to CFA of $181,931 and $115,000, respectively.
On December 1, 1997, CFA assigned its management agreement with the Company
to Navigator Management, Inc, which is owned by certain stockholders of the
Company. No management fees have been paid to Navigator Management, Inc. in
1997. Included in accounts payable at December 31, 1997 was an amount due to
Navigator Management, Inc. of $125,284.
In 1997, the Company began purchasing gasoline and engine additive products,
wiper blades, windshield glass treatment and other automotive products from O.H.
Distributors, Inc., which is owned by stockholders of the Company. Purchases
of these products amounted to $1,243,792 in 1997. Included in accounts
payable at December 31, 1997 was an amount due to O.H. Distributors, Inc. of
$284,916.
In 1996 and 1995, the Company purchased gasoline additive products from Oil
Handlers, Inc. which is also owned by stockholders of the Company. Purchases
of these products amounted to $250,964 and $210,536 in 1996 and 1995,
respectively. Included in accounts payable at December 31, 1996 was an
amount due to Oil Handlers, Inc. of $41,726.
The Company purchased oil, oil filters and other inventory items from
Pennzoil Products Company (PPC) in the amount of $5,850,747 and $3,957,925
during the years ended December 31, 1997 and 1996 respectively. In addition
to these purchases, the Company paid rent in the amount of $146,902 and
$92,556, and dividends on preferred stock of $140,000 and $133,287 to PPC
during the years ended December 31, 1997 and 1996, respectively. Included in
accounts payable at December 31, 1997 and 1996 was an amount due of
$1,180,945 and $829,879, respectively.
The Company enters into transactions with Jiffy Lube International ("JLI"), a
subsidiary of PPC. These transactions include payments for royalties,
operating expenses, and license and franchise fees. In addition, JLI enters
into transactions to credit the Company for national fleet accounts, rebates
for grand openings, and charges for Sears credit cards. The net amount of these
transactions in 1997 and 1996 were payments of $165,476 and $549,359 to JLI.
In addition to these payments, the Company paid rent in the amount of $1,660,954
and $2,160,160 to JLI during the years ended December 31, 1997 and 1996,
respectively. At December 31, 1997 and 1996, amounts receivable from JLI
included $6,957 and $134,363, respectively.
(6) Long-Term Debt
<TABLE>
Long-term debt consists of:
December 31,
1997 1996
______________ _____________
<S> <C> <C>
Notes payable, Enterprise Mortgage Acceptance Corporation,
in monthly installments of $161,066, including interest
at 8.76%, secured by real property of the Company (a) $ 17,949,000 -
Note payable, Jay C. Howell, in one balloon payment at
maturity date of February 1999, with monthly installments
of interest at 12% beginning March 1, 1997, secured by
a Leasehold Mortgage and Security Agreement 400,000 -
Note payable, Centura Bank, in monthly installments of
principal of $2,267, plus interest of prime plus .5% (9.0%
at December 31, 1997), secured by real property of the Company 349,058 376,262
Note payable, Pennzoil Products Company, in one balloon
payment at maturity date of July 1999, with monthly installments
of interest at 10% beginning August 10, 1997 250,000 -
Note payable, Citicorp Leasing, Inc., repaid in 1997 - 13,158,608
Note payable, Citicorp Leasing, Inc., repaid in 1997 - 3,266,750
______________ _____________
18,948,058 16,801,620
Less current portion (305,578) (969,893)
______________ _____________
$ 18,642,480 15,831,727
============== =============
</TABLE>
The following are the maturities at December 31, 1997 of long-term debt for
each of the next five years and in the aggregate.
December 31,
1998 $ 305,578
1999 1,077,881
2000 731,871
2001 477,097
2002 520,610
Thereafter 15,835,021
_____________
$ 18,948,058
=============
During 1997, the Company repaid two notes payable to Citicorp Leasing, Inc.
with original maturity dates in 2004 and 2008. Consequently, the Company
recognized an extraordinary loss of $258,625, net of related income tax
benefit of $133,000, which represented the unamortized debt issuance costs.
<PAGE> 30
(a) During 1997, the Company entered into 14 Loan and Security Agreements
with Enterprise Mortgage Acceptance Corporation ("EMAC").
The principal amount of $7,078,000 related to 9 of these loans is to be
repaid in 177 consecutive installments commencing on April 1, 1998.
Interest only payments of $51,669 are to be made for three months,
commencing January 1, 1998.
The principal amount of $10,871,000 related to 5 of these loans is to be
repaid in 297 consecutive installments commencing on April 1, 1998.
Interest only payments of $79,358 are to be made for three months,
commencing January 1, 1998.
At December 31, 1997, the Company had received approximately $16,063,000
of the total proceeds. The remaining $1,886,000 was received in January 1998
and is included in accounts receivable, other at December 31, 1997.
These loans contain restrictive covenants pertaining to fixed charge
coverage ratios. These restrictive covenants become effective June 30,
1998.
(7) License and Area Development Agreements
The Company operates Jiffy Lube service centers under individual franchise
agreements that are part of broader exclusive development agreements with
JLI, the franchisor. The exclusive development agreements require the
Company to identify sites for and develop a specific number of service
centers in specific territories and the separate franchise agreements each
provide the Company the right to operate a specific service center for a
period of 20 years, with two, 10-year renewal options.
Each development agreement grants the Company exclusive rights to develop and
operate a specific number of service centers within a defined geographic
area, provided that a certain number of service centers are opened over
scheduled intervals.
Raleigh-Durham
The Company has satisfied its obligations to develop service centers under
its Area Development Agreement for the Raleigh-Durham market area, and
currently has a right of first refusal to develop any additional service
centers which JLI may propose to develop or offer to others in this market.
This right extends to December 31, 2006 in the Raleigh-Durham market.
Pittsburgh
Under its area development agreement for the Pittsburgh area, the Company has
satisfied its obligations to develop eight service centers by June 30, 2000.
The Company has the right to develop service centers in its Pittsburgh
territory through June 30, 2004. After that date, the franchisor may develop
or franchise others to develop service centers in the Company's territory but
only after providing the Company with the first right of refusal to develop
any such centers, which right extends through June 30, 2019.
<PAGE> 31
Cincinnati and Other Areas
The Company has satisfied its obligations to develop service centers under
its Area Development Agreement for the Cincinnati market area, and currently
has a right of first refusal to develop any additional service centers which
JLI may propose to develop or offer to others in this market. This right
extends to December 31, 2000 in the Cincinnati market area.
On August 1, 1995, the Company amended its Area Development Agreement for the
Cincinnati market area to include Toledo, Dayton and Nashville areas and
operate a specific number of centers within the defined geographical areas
until July 31, 2004. The Company has satisfied its development obligation.
The Company has a first right of refusal to develop service centers until
July 31, 2019.
Lansing
On May 1, 1996, the Company purchased substantially all of the assets of
Quick Lube, Inc. which included six service centers in the Lansing, Michigan
area. The Company has not entered into an Area Development agreement
regarding Lansing.
The franchise agreements convey the right to use the franchisor's trade
names, trademarks, and service marks with respect to specific service
centers. The franchisor also provides general construction specifications
for the design, color schemes and signage for a service center, training,
operating manuals and marketing assistance. Each franchise agreement
requires the franchisee to purchase products and supplies approved by the
franchisor. The initial franchise fee payable by the Company upon entering
into a franchise agreement for a service center varies based on the market
area where the Company develops the center and the time of development of the
center. For service centers which the Company may develop in 1977, the
initial franchise fee ranges from $12,500 to $35,000.
(8) Commitments and Contingencies
During 1996, the Company leased software costing $75,300 under a capital
lease agreement which expires in 1999.
The Company has entered into operating leases for the buildings and
improvements used in the service centers. Substantially all of the leases
are net leases. Several of the leases stipulate rent increases based on
various formulas for cost of living, percentage of sales, and cost of money
increases.
<PAGE> 32
Future minimum lease payments under noncancellable operating leases and the
present value of future minimum capital lease payments at December 31, 1997
are:
<TABLE>
<CAPTION>
Operating Operating
leases leases
with with
non-related related Capital
parties parties leases
______________ _____________ __________
<S> <C> <C> <C>
1998 $ 2,327,905 1,743,734 29,909
1999 2,353,516 1,769,309 24,924
2000 2,345,128 1,739,892 -
2001 2,368,048 1,566,877 -
2002 2,396,222 1,536,114 -
Thereafter 29,725,410 16,704,783 -
_____________ __________ _________
Total minimum lease payments $ 41,516,229 25,060,709 54,833
============= ==========
Less amounts representing interest (at 11.76%) 5,721
_________
Present value of future minimum lease payments 49,112
Less current portion of obligations under
capital leases 25,478
_________
Capital lease obligations, less current portion $ 23,634
=========
</TABLE>
Rent expense, including contingent rentals, for the years ended December 31,
1997, 1996 and 1995 was $4,306,265, $3,278,019 and $2,458,570, respectively.
As of December 31, 1997 and 1996, the Company had capital expenditure
purchase commitments outstanding of approximately $177,858 and $860,000,
respectively.
(9) Common Stock
The Company currently has two classes of common stock authorized.
Class A common stock has one vote per share, but may be voted only in
connection with: (i) the election of directors; (ii) the sale, lease,
exchange, or other disposition of all, or substantially all, of the Company's
assets; and (iii) the removal of CFA Management, Inc. or a successor
management company under a Management Agreement with a subsidiary. Class B
shareholders have the right to elect a majority of the Directors of the
Company. All shares of Class B common stock have equal voting rights and
have one vote per share in all matters to be voted upon by the shareholders.
Class B shareholders have preemptive rights. Upon the sale for cash of
shares of any class of common stock of the Company, each Class B shareholder
has the right to purchase that number of shares offered at the offering
price, so that Class B shareholders are entitled to maintain their overall
pro rata holdings of common stock. Holders of Class A common stock and
preferred stock have no preemptive rights.
<PAGE> 33
In December 1994, the Company, in a public stock offering, issued 100,000
units, at $5.25 per unit, comprised of one share of common stock and one
warrant to purchase one share of common stock at an exercise price of $9.00
per share by tendering cash. Proceeds from the offering, net of commissions
and related costs of $102,333, were $421,041. The warrants are exercisable
within 3 years of issuance. The Company may redeem the warrants at a price
of $.02 per warrant with 60 days notification prior to either expiration or
exercise of the warrants. 100,000 shares of common stock are reserved for
issuance upon the exercise of the warrants. There were 99,500 warrants in
relation to these shares outstanding at December 31, 1996. At December 31,
1997, all of the outstanding warrants had expired.
On June 3 1996, the Company sold 759,477 of Class A common stock shares at
fair market value to PPC. PPC owned 35% and 36% of the Class A common stock
at December 31, 1997 and 1996, respectively.
In May 1996, the Company sold 55,000 shares of Class A common stock to the
directors of the Company at the fair market value of $6.25.
On February 2, 1997, the Company sold 45,000 shares of Class A common stock
to the directors of the Company at the fair market value of $5.75.
(10) Series A Redeemable Preferred Stock
During 1995 the Company entered into a stock purchase agreement with PPC,
whereby the Company established 20,000 shares of Series A Redeemable
Preferred Stock which were issued to PPC at a price of $100 each together
with warrants to purchase 30,000 shares of Class A common stock at a price of
$15 per share.
The Company has the right and option at any time to redeem all, but not part,
of the Series A Redeemable Preferred Stock by paying in full $100
("Redemption Price") per share plus any accrued and unpaid dividends. At any
time from and after the seventh anniversary of the date of issuance of the
Series A redeemable Preferred Stock PPC shall have the right to cause the
Company to redeem all, but not part of the Series A Redeemable Preferred
Stock by paying the Redemption Price.
The holders of Series A Redeemable Preferred Stock shall be entitled to
receive cumulative dividends accruing from the date of issuance at the rate
of $7 per share per annum, payable semiannually on March 31, and September
30, of each year. If, at any time, the Company fails to make a semiannual
dividend payment on any payment date for any period for which the applicable
coverage ratio exceeded 1.25 to 1 and the Company is permitted under the
terms of its Credit Facilities to pay dividends, the dividend rate shall
increase by $0.50 per share per annum. The increased dividend rate shall
remain in effect until the earlier of the date all accrued dividends are paid
in full or until all outstanding shares of Series A Redeemable preferred
stock are redeemed at the Redemption Price. The Company paid dividends of
$140,000 during the year ended December 31, 1997.
<PAGE> 34
The holders of the Series A Redeemable preferred stock shall have no voting
rights. In the event of any liquidation, dissolution or winding up of the
Company, holders of each share of the Series A Redeemable preferred stock
have be entitled to an amount per share equal to the original price of the
Series A Redeemable preferred stock plus accumulated dividends up through and
including the payment date before any payment shall be made to the holders of
any stock ranking on liquidation junior to the Series A Redeemable preferred
stock, including the common stock.
(11) Preferred Stock
The Company also has non-redeemable preferred stock with a par value of
$0.02. As of December 31, 1997 and 1996, 5,000,000 shares are authorized,
but no shares had been issued or were outstanding.
(12) Stock Plans
1991 Nonqualified Stock Plan
The Company has adopted a non-qualified stock plan (as amended) (1991 plan)
with 150,000 shares of Class "A" common stock reserved for the grant of stock
or options to key employees, officers and directors of the Company. Option
prices may be less than the fair market value of the common stock on the date
the options are granted. As of December 31, 1993, options for 62,500 shares
were granted. During the year ended December 31, 1994, the vesting of the
options granted in 1992 were accelerated and the options were exercised. In
addition, in 1994, an additional 6,940 shares were granted for bonuses. As of
December 31, 1995, an additional 120 shares were granted for bonuses. During
the year ended December 31, 1996, the vesting for these options was accelerated.
The options expired on June 14, 1997. All shares granted are subject to
significant restrictions as to disposition by the optionee.
Changes in the shares authorized, granted and available under the 1991 plan
are as follows:
Weighted
Average
Exercise
Authorized Granted Price
__________ ________ ____________
Balance December 31, 1994 43,060 42,940 $ 5.25
Granted - 120 8.25
Exercised (120) (120) 8.25
Cancelled - (260) 5.25
_________ _________ ___________
Balance December 31, 1995 42,940 42,680 5.25
Exercised (2,000) (2,000) 5.25
_________ _________ ___________
Balance December 31, 1996 40,940 40,680 5.25
Cancelled - (40,680) 5.25
_________ _________ ___________
Balance December 31, 1997 40,940 - $ -
========= ========= ===========
Proceeds received from the exercise of stock options are credited to the
Company's capital accounts.
<PAGE> 35
Omnibus Stock Plan
On December 27, 1994, the Company adopted a stock award and incentive plan
(the "Plan") which permits the issuance of options, stock appreciation rights
(SARs), limited SARs, restricted stock, and other stock-based awards to
directors and employees of the Company. The Plan reserves 600,000 shares of
Class "A" common stock for grants and provides that the term of each award,
typically ten years, be determined by the committee of the board of directors
(the "Committee") charged with administering the Plan. These shares are
subject to certain transfer restrictions as determined by the committee.
Under the terms of the plan, options granted may be either nonqualified or
incentive stock options and the exercise price, determined by the committee,
may not be less than the fair market value of a share on the date of grant.
SARs and limited SARs granted in tandem with an option shall be exercisable
only to the extent the underlying option is exercisable and the grant price
shall be equal to a percent, as determined by the committee, of the amount by
which the fair market value per share of stock exceeds the exercise price of
the SAR. All stock options issued have 5 year vesting periods, and are
exercisable in 20% increments each year.
Stock option activity under the Omnibus Stock Plan during the periods
indicated is as follows:
Weighted
Average
Number Exercise
of Shares Price
__________ _________
Balance at December 31, 1994 - $ -
Granted 100,000 6.50
__________ _________
Balance at December 31, 1995 100,000 6.50
Granted 50,000 7.63
__________ _________
Balance at December 31, 1996 150,000 6.85
Granted 326,500 5.92
Cancelled (33,750) 7.21
__________ _________
Balance at December 31, 1997 442,750 $ 6.14
========== =========
At December 31, 1997, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $5.00-$8.00 and 7.5
years, respectively.
At December 31, 1997 and 1996, there were 600,000 shares authorized, and
157,250 and 450,000 shares available under the Omnibus Stock Plan. Of these
outstanding options, 38,500 and 30,500 were exercisable at December 31, 1997
and 1996, and the weighted average exercise price was $6.61 and $6.71.
<PAGE> 36
Directors' Stock Award Plan
On April 4, 1995, the Company adopted a stock award plan for the outside
directors ("Directors' Plan"). The Directors' Plan reserves 15,000 shares of
Class "A" common stock for issuance under awards to be granted under the
Directors' Plan. The Company granted awards of 1,000, 1,000 and 1,120 shares
during the years ended December 31, 1997, 1996 and 1995, respectively. All
options were exercised at the time of grant.
At December 31, 1997, there were 15,000 shares authorized, 3,120 granted and
exercised and 11,880 available under the Directors' Plan.
The Company has two fixed option plans which reserve shares of common stock
for issuance to executives, key employees and directors. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123"). Accordingly, no compensation cost has been recognized for the stock
option plans. Had compensation cost for the Corporation's two stock option
plans been determined based on the fair value at the grant date for awards in
1997, 1996 and 1995 consistent with the provisions of SFAS No. 123, the
Corporation's net earnings and earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
As Reported Pro Forma
___________________________________ ____________________________________
1997 1996 1995 1997 1996 1995
____ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before
extraordinary item
available to common
shareholders $ (1,721,443) (1,335,275) 505,243 (1,790,685) (1,423,435) 483,899
Extraordinary item, net of
income tax benefit (258,625) - - (258,625) - -
_____________ ___________ ________ ___________ ___________ _________
Net income (loss) available to
common shareholders $ (1,980,068) (1,335,275) 505,243 (2,049,310) (1,423,435) 483,899
============= =========== ======== =========== =========== =========
Basic income (loss) per common share:
Income (loss) before
extraordinary item available
to common shareholders $ (.61) (.54) .26 (.63) (.58) .25
Extraordinary item (.09) - - (.09) - -
_____________ ___________ ________ ___________ ___________ _________
Net income (loss) per common
share available to common
shareholders $ (.70) (.54) .26 (.72) (.58) .25
============= =========== ======== =========== =========== =========
Diluted income (loss) per common share:
Income (loss) before
extraordinary item available
to common shareholders $ (.61) (.54) .26 (.63) (.58) .25
Extraordinary item (.09) - - (.09) - -
_____________ ___________ ________ ___________ ___________ _________
Net income (loss) per common
share available to common
shareholders $ (.70) (.54) .26 (.72) (.58) .25
============= =========== ======== =========== =========== =========
</TABLE>
<PAGE> 37
The pro forma effect on net income for 1997, 1996 and 1995 is not
representative of the pro forma effect on net income in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
1997 1996 1995
_________ _________ _________
Expected dividend yield 0% 0% 0%
Expected stock price volatility 39.0% 30.1% 30.1%
Risk-free interest rate 5.69% 6.21% 6.21%
Expected life of options 5 years 5 years 5 years
The weighted average fair value of options granted during 1997, 1996 and 1995
is $.53, $2.84 and $3.34, respectively, per share.
(13) Concentration of Credit Risk
The Company maintains cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. At December 31, 1997, cash balances in excess of the insurance
limits totalled $699,732. In addition, the Company had a cash balance of
$243,106 in a money market fund at December 31, 1997 which was not insured.
(14) Profit Sharing Plan
During 1994, effective for years beginning after January 1, 1995, the Company
adopted a profit sharing plan pursuant to Section 401(k) of the Internal
Revenue Code ("Code") whereby participants may contribute a percentage of
compensation, but not in excess of the maximum allowed under the Code. The
plan provides for a discretionary matching contribution by the Company.
Employees are eligible for the plan after being employed full time for six
consecutive months. For the years ended December 31, 1997 1996 and 1995, the
Company contributed $48,538, $46,387 and $37,988, respectively, to the plan.
(15) Fair Value of Financial Instruments
The Company's financial instruments are cash and cash equivalents, notes
payable and long-term debt, and various receivables and payables. The
carrying values of these on-balance sheet financial instruments approximate
fair value.
<PAGE> 38
(16) Subsequent Event
In January 1998, the Company issued a letter of intent to purchase the assets
of Tidewater Lubes Ventures, Inc. and Lube Ventures East, Inc., which
include twenty-three service centers in eastern North Carolina and Virginia.
The Company anticipates financing the acquisition by obtaining additional
funding during 1998.
In February 1998, the Company entered into a Loan and Security Agreement with
Enterprise Mortgage Acceptance Corporation in the amount of $1,787,000.
<PAGE> 39
(18) Unaudited Quarterly Results
Unaudited quarterly financial information for 1997 and 1996 is set forth in the
table below:
<TABLE>
<CAPTION>
March June September December
___________________ __________________ _________________ _________________
1997 1996 1997 1996 1997 1996 1997 1996
____ ____ ____ ____ ____ ____ ____ ____
All dollar amounts in thousands except per common share data
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 10,018 7,897 10,778 9,414 11,005 10,055 10,877 10,407
Gross profit 7,708 6,011 8,246 7,183 8,440 7,702 8,305 7,925
Preferred dividend (35) (35) (35) (35) (35) (28) (35) (35)
Loss before extraordinary
item available to
common shareholders* (395) (207) (205) (211) (572)** (219) (549) (698)
Extraordinary item, net
of income tax benefit - - - - - - (259) -
Basic loss per common
share* (0.14) (0.11) (0.07) (0.08) (0.20)** (0.08) (0.20) (0.27)
Extraordinary item - - - - - - (0.09) -
*Loss before extraordinary item available to common shareholders and basic loss per common share as
previously reported for the quarters ended June 30, 1996 and September 30, 1996 were ($158) and
($0.062) and ($160) and ($0.057), respectively. The loss reflected above includes additional expense
of ($0.021) and ($0.021) per common share for the quarters ended June 30, 1996 and September 30, 1996,
respectively. This additional expense is a result of excess interest expense capitalized during the
second and the third quarter.
** The loss before extraordinary item available to common shareholders and the basic loss per common
share as previously reported for the quarter ended September 30, 1997 were ($234) and $(0.08),
respectively. The amounts reflected above include additional expense of $338 and $(0.12) per common
share for the quarter ended September 30, 1997. This additional expense is a result of an adjustment
to the management fee incurred during the third quarter.
</TABLE>
<PAGE> 41
Item 9 - Changes in and Disagreements with Accountants or Accounting and
Financial Disclosure
None
PART III
Item 10 - Directors and Executive Officers of the Registrant
Reference is made to the information set forth in the section entitled
"Election of Directors" in the Proxy Statement, which information is
incorporated herein by reference.
Reference is made to the information set forth in the section entitled
"Directors and Executive Officers" in the Proxy Statement, which information
is incorporated herein by reference.
Item 11 - Executive Compensation
Reference is made to the information set forth in the section entitled
"Executive Compensation" in the Proxy Statement, which information is
incorporated herein by reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information set forth in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, which information is incorporated herein by reference.
Item 13 - Certain Relationships and Related Transactions
Reference is made to the information set forth in the sections entitled
"Election of Directors" and "Certain Transactions" in the Proxy Statement,
which information is incorporated herein by reference
<PAGE> 42
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
Financial statements and financial statement schedule - see Index to
Consolidated Financial Statements at Item 8 of this report.
(a)(3) Exhibits: Unless otherwise indicated, the following exhibits are
incorporated herein by reference from the Registrant's Registration Statement
on Form S-1, File No. 33-71630, and made a part hereof by such reference.
Exhibit
Number Exhibit Description
3.1 Articles of Incorporation
3.2 By-Laws of the Registrant
3.3 Amendment to Articles of Incorporation
3.4 Amendment to Articles of Incorporation dated June 27, 1994
4.1 Form of Warrant Agreement
4.2 Form of Common Stock Certificate
4.3 Form of Warrant Certificate
10.1 Area Development Agreement - Carolina Lubes
10.2 Right of First Refusal - Carolina Lubes
10.3 Area Development Agreement and Amendment - Cincinnati Lubes
10.4 Standard form of Franchise Agreement with standard form of
Amendment to License Agreement
10.5 Standard License Agreement
10.6 Amendment to Standard License Agreement
10.7 Amended and Restated Management Agreement of August 1988
with Amendments of September 1993 with Carolina Lubes,
Cincinnati Lubes and CFA Management.
10.8 Deed, Note & Loan Agreement, Milbrook - Carolina Lubes
10.12 Area Development Agreement, Jiffy Lube - Pittsburgh Lubes
10.13 Management Agreement between Pittsburgh Lubes, Inc. and CFA
Management, Inc.
10.14 Lucor, Inc. Omnibus Stock Plan
10.15 Carolina Lubes First Right of Refusal Agreement with Jiffy
Lube International, Inc. dated December 12, 1994
10.16 Commercial Note - Centura Bank, Pershing Road
10.17 Assignment and Assumption Agreement - P.B. Lubes and
Carolina Lubes
10.18 Lucor, Inc. Amended and Restated 1991 Non-Qualified Stock
Plan
10.20 Standard Lease of Inspection Equipment - Carolina Lubes
10.21 Citicorp Leasing Credit Facility form of preferred stock
with designation of rights, and form of Sales Agreement (1)
10.23 Franchise Agreement, Jiffy Lube - Pittsburgh Lubes
Inc. and CFA Management dated January 1, 1997
10.24 * Form of Loan Agreements with Enterprise Mortgage Acceptance
Company, LLC
10.25 * Amendment to the Management Agreement between Carolina
Lubes, Inc. and CFA Management, Inc.
10.26 * Amendment to the Management Agreement between Cincinnati
Lubes, Inc. and CFA Management, Inc.
10.27 * Amendment to the Management Agreement between Pittsburgh
Lubes, Inc. and CFA Management, Inc.
21 * Subsidiaries of the Company
27 * Financial Data Schedule
* Filed herewith.
(1) Incorporated by reference to Form 8-K, File No. 0-25164, dated August 18,
1995
<PAGE> 43
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LUCOR, INC.
By /s/ Stephen P. Conway
_____________________________________
Stephen P. Conway, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities indicated on the 3rd day of April, 1998.
/s/ Stephen P. Conway
__________________________ Chairman, Chief Executive Officer and Director
Stephen P. Conway (Principal Executive Officer)
/s/ Jerry B. Conway
__________________________ President, Chief Operating Officer and Director
Jerry B. Conway
/s/ Kendall A. Carr
__________________________ Vice President - Finance
Kendall A. Carr (Principal Financial Officer
/s/ Martin Kauffman
___________________________ Controller
Martin Kauffman (Principal Accounting Officer)
/s/ D. Fredrico Fazio
__________________________ Director
D. Fredrico Fazio
/s/ Anthony J. Beisler, III
__________________________ Director
Anthony J. Beisler, III
Enterprise Identification Numbers: See Annexed Schedule of Properties
LOAN AGREEMENT
THIS LOAN AGREEMENT, dated as of December 31, 1997 (this "Agreement"), is
entered into by and between the Borrower(s) designated on the Addendum
(hereinafter defined) (whether one, or if more than one then collectively,
"Borrower") and ENTERPRISE MORTGAGE ACCEPTANCE COMPANY, LLC, a Delaware
limited liability company ("EMAC", or "Originator", and together with its
successors and assigns, "Lender").
RECITALS
A. Borrower is the owner and operator of the Enterprise (hereinafter
defined).
B. Borrower has concurrently herewith executed other Loan Documents
(hereinafter defined) in connection with a loan (the "Loan") in the Loan
Amount (hereinafter defined) from Lender to Borrower which is subject to
the conditions set forth herein and in the other Loan Documents.
C. Borrower is fully aware that Lender is relying on this Agreement in
making the Loan and the representations and warranties made herein are
material factors in making the Loan.
AGREEMENTS
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
Borrower and Lender agree as follows:
SECTION I. DEFINITIONS:
For purposes of this Agreement the following terms will be defined as follows:
"Actual Loss of Business Income" shall mean all losses incurred due to
the necessary suspension of operations during any period of Restoration,
including, but not limited to loss of net income and the cost of maintaining
operations, including payroll and Debt Service.
"Addendum" shall mean the Addendum to Loan Agreement annexed to this
Agreement.
Affiliate Borrower shall mean Cincinnati Lubes, Inc., a Florida
corporation.
"Application Date" shall mean the date identified as such in the
Addendum.
"Assignee" shall have the meaning given to such term in Section
X(e)(ii).
"Borrower Adjusted Free Cash Flow" shall mean, for any period, the Net
Income (loss) for Borrower and Affiliate Borrower, on a consolidated basis,
determined in accordance with GAAP, plus, to the extent previously deducted in
calculating Net Income (loss): (i) income taxes; (ii) Debt Service payments;
(iii) all non-cash charges including depreciation and amortization; (iv) the
amount of expenses paid under the CFA Management Agreement, or for salaries of
officers or general partners, charitable donations, travel and entertainment
and other items deemed to be owner compensation; and (v) non-recurring
expenses, including those non-recurring expenses required by the Franchisor or
Licensor, if any.
"Borrower FCCR shall mean, for any period, (i) Borrower Adjusted Free
Cash Flow plus base occupancy rents divided by (ii) aggregate Debt Service
payments of Borrower and Affiliate Borrower, on a consolidated basis plus base
occupancy rents.
"Business Day" shall mean any day on which banks are not authorized or
required to close in New York, New York.
ACFA Management Agreement shall mean the Amended and Restated Management
Agreement between Borrower and CFA Management, Inc., dated August, 1988, as
amended.
"Collateral" shall have the meaning given to that term in the Security
Agreement, and if the Loan is secured by a Mortgage, then such term also
refers to the property described as "Collateral" and/or "Property" in the
Mortgage.
"Commitment Date" shall mean the date identified as such in the
Addendum.
"Commitment Letter" shall mean that certain commitment letter from EMAC
to Borrower dated the Commitment Date, with respect to the Loan.
"Debt Service" shall mean, for any period, an amount equal to the sum of
all payments of interest and current maturities of principal required to be
made by the specified party during such period with respect to its
indebtedness.
"Default" shall mean any event or circumstance not yet constituting an
Event of Default but which, with the giving of any notice or the lapse of any
period of time or both, would become an Event of Default.
"Demand Rate" shall have the meaning given to that term in the Note.
"Enterprise" shall mean each business concern identified as such in the
Addendum.
"Enterprise Identification Number" shall mean the number designated as
such on the Addendum.
"Entity" shall mean a corporation, a limited partnership, a general
partnership, a limited liability company, an association, a trust, or any
other entity or organization, including a government or political subdivision
or an agency or instrumentality thereof.
"Environmental Indemnitor(s)" shall mean the Person(s) designated as
such on the Addendum.
"Environmental Indemnity" shall mean the Environmental Indemnity
executed by the Environmental Indemnitor(s) for the benefit of Lender
concurrently herewith.
"Environmental Laws" shall mean all present and future requirements of
law relating to the protection of human health and safety or the environment,
including, without limitation, all requirements of law pertaining to
reporting, licensing, permitting, investigation, and remediation of emissions,
discharges, releases, or threatened releases of hazardous materials, chemical
substances, pollutants, contaminants, or hazardous or toxic substances,
materials or wastes whether solid, liquid, or gaseous in nature, into the air,
surface water, groundwater, or land, or relating to the presence, generation,
discharge, release, removal, manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of chemical substances,
pollutants, emissions, asbestos contaminants, or hazardous, radioactive or
toxic substances, materials, or wastes, whether solid, liquid, or gaseous in
nature; and all requirements of law pertaining to the protection of the health
and safety of employees or the public, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act (42
U.S.C. ' 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C.
App. ' 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C.'
6901 et seq.) the Clean Water Act (33 U.S.C. ' 1251 et seq.),the Clean Air Act
(42 U.S.C. ' 7401 et seq.), the Toxic Substance Control Act (15 U.S.C. ' 2601
et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. '
136 et seq.), and the Occupational Safety and Health Act (29 U.S.C. ' 651 et
seq.), all as now or hereafter amended, and the regulations promulgated
pursuant thereto, and judicial interpretations thereof, as well as common law
rights of action under theories of nuisance, trespass and strict liability.
"Equipment" shall mean all estate, right, title and interest of the
Borrower in, to, under or derived from all machinery, equipment, fixtures and
accessions thereof and renewals and replacements thereof, and substitutions
therefor and other tangible property of every kind and nature whatsoever owned
by the Borrower, or in which the Borrower has or shall have an interest, now
or hereafter located at each Enterprise, or appurtenant thereto, or usable
exclusively in connection with the present or future operation and occupancy
of each Enterprise.
"Equity Securities" of any Person shall mean (a) all common stock,
preferred stock, participations, shares, partnership interests, membership
interests or other equity interests in and of such Person (regardless of how
designated and whether or not voting or non-voting), (b) all warrants, options
and other rights to acquire any of the foregoing and (c) any securities
convertible into any of the foregoing.
"Event of Default" shall have the meaning given to that term in the
Note.
"Financial Statements" shall mean, with respect to any accounting period
for any Person, statements of income and of sources and uses of and changes in
cash flow of such person for such period, and balance sheets of such Person as
of the end of such period, setting forth in each case in comparative form
figures for the corresponding period in the preceding fiscal year if such
period is less than a full fiscal year or, if such period is a full fiscal
year, corresponding figures from the preceding fiscal year end, all prepared
in reasonable detail and in accordance with GAAP.
"Franchise Agreement" shall have the meaning given to that term in the
Addendum.
"Franchisor" shall have the meaning given to that term in the Addendum.
"GAAP" shall mean generally accepted accounting principles and practices
as in effect in the United States of America from time to time, consistently
applied. All references to GAAP shall mean either GAAP or, if a Franchisor or
Licensor is indicated in the Addendum, an accounting methodology in a format
and according to procedures acceptable to such Franchisor or Licensor, which
in any case shall be consistently applied.
"Guarantor" shall mean any Person designated as such on the Addendum.
"Guaranty" shall mean that certain guaranty(s) given by Guarantor(s) to
Lender in connection with the Loan.
"Improvements shall mean all right, title and interest of the Borrower
in, to, under or derived from all buildings, structures, facilities and other
improvements of every kind and description now or hereafter located on the
Real Property, including, without limitation, all parking areas, roads,
driveways, walks, fences, walls, drainage facilities and other site
improvements, all water, sanitary and storm sewer, drainage, electricity,
steam, gas, telephone and other utility equipment and facilities, all
plumbing, lighting, heating, ventilating, air-conditioning, refrigerating,
incinerating, compacting, fire, protection and sprinkler, surveillance and
security, public address and communications equipment and systems, all
awnings, floor coverings, partitions, elevators, escalators, motors,
machinery, pipes, fittings and other items of Equipment and personal property
of every kind and description now or hereafter located on the Real Property,
as defined herein, or attached to the improvements which by the nature of
their location thereon or attachment thereto are real property under
applicable law; and including all materials intended for the construction,
reconstruction, repair, replacement, alteration, addition or improvement of or
to such buildings, Equipment, fixtures, structures and improvements, all of
which materials shall be deemed to be part of the Real Property immediately
upon delivery thereof on the Real Property and to be part of the improvements
immediately upon their incorporation therein.
"Indemnitees" shall have the meaning given to such term in Section X(c).
"Landlord Estoppel" shall mean, if any, each certain Landlord Estoppel
Certificate and Agreement Regarding Lease executed by the landlord under each
Lease for Lender's benefit.
"Lease" shall mean, if any, each Lease identified in the Addendum.
"License Agreement" shall have the meaning given to that term in the
Addendum.
"Licensor" shall have the meaning given to that term in the Addendum.
"Loan" shall have the meaning given to such term in the Recitals of this
Agreement.
"Loan Amount" shall mean the amount in U.S. Dollars designated as such
in the Addendum.
"Loan Application" shall mean that certain EMAC Loan Application
completed by Borrower, dated the Application Date, in order to obtain the
Loan.
"Loan Documents" shall mean and include this Agreement, the Note, the
Mortgage, the Security Agreement, the Environmental Indemnity (if any), the
Guaranty (if any), and all other documents, instruments and agreements
delivered to Lender in connection with the Loan.
"Loss" shall have the meaning given to such term in Section VI.
"Loss Proceeds" shall have the meaning given to such term in Section
VI(a).
"Maturity Date" shall have the meaning given to such term in the Note.
"Mortgage" shall mean, if any, the document identified as such in the
Addendum.
"Mortgagor" shall mean the Person identified as such in the Addendum.
"Net Income" shall mean the net income determined in accordance with
GAAP.
"Note" shall mean that certain Promissory Note in the form annexed
hereto as Exhibit B from Borrower to Lender dated as of the date hereof in the
Loan Amount. The terms of the Note shall be deemed incorporated herein by
reference.
"Owner(s)" shall have the meaning given to such term in Section II(t).
A Parent means Lucor, Inc., a Florida corporation.
"Permitted Lien" shall have the meaning given to such term in the
Addendum.
"Person" shall mean an individual or an Entity.
"Property" shall mean the Real Property, the Improvements, the Equipment
and rights appurtenant thereto.
"Real Property" shall have the meaning given to such term in the
Mortgage, if any, or, if there is no Mortgage, shall mean all of Borrower's
present and future estate, right, title and interest, together with right of
entry, in and to that certain real property at which each Enterprise is
located.
"Restoration" shall have the meaning given to such term in Section
VI(c).
"Security Agreement" shall mean that certain Security Agreement between
Lender and Borrower dated as of the date hereof executed in connection with
the Loan.
"State" shall mean the state (or Commonwealth) where the Enterprise is
located.
"Trade Name" shall mean the name designated as such in the Addendum.
"Yield Maintenance Fee" shall have the meaning given to that term in the
Note.
SECTION II, BORROWER'S REPRESENTATIONS AND WARRANTIES,
To induce Lender to enter into this Agreement and to make the Loan
hereunder, Borrower represents and warrants to Lender that:
(a) Due Organization and Qualification and Proper Licensing. Each
Entity, if any, comprising Borrower as designated in the Addendum, is (i) duly
organized, validly existing and in good standing under the laws of its state
of incorporation or organization, as applicable; (ii) has the power and
authority to own, lease and operate its properties and carry on its business
as now conducted; and (iii) is duly qualified, licensed to do business and in
good standing in the State and in each other state where the failure to be so
qualified or licensed might have a material adverse effect. Each natural
person, if any, comprising Borrower has the power and legal capacity (i) to
execute and deliver the Loan Documents and take the Loan, (ii) to own, lease
and operate its properties and (iii) carry on its business as now conducted
and is duly qualified and licensed to do business where the failure to be so
qualified or licensed might have a material adverse effect.
(b) Authority and Enforceability. The execution, delivery and
performance by Borrower of each Loan Document to be executed by Borrower and
the consummation of the transactions contemplated thereby are within the power
of Borrower and have been duly authorized by all necessary actions on the part
of Borrower. Each Loan Document executed, or to be executed, by Borrower has
been, or will be, on and after the date hereof, duly executed and delivered by
Borrower and constitutes, or will, on and after the date hereof, constitute, a
legal, valid and binding obligation of Borrower, enforceable against Borrower
in accordance with its terms, except as limited by bankruptcy, insolvency or
other laws of general application relating to or affecting the enforcement of
creditors rights generally and general principles of equity; provided,
however, Borrower notes that waiver of jury trial may not be enforceable in
some states.
(c) Non-Contravention. The execution and delivery by Borrower of the
Loan Documents executed by Borrower and the performance and consummation of
the transactions contemplated thereby do not and will not (i) violate any
requirement of law applicable to Borrower; (ii) violate any provision of, or
result in the breach or the acceleration of, or entitle any other Person to
accelerate (whether after the giving of notice or lapse of time or both), any
contractual obligation of Borrower; (iii) result in the creation or imposition
of any lien upon any property, asset or revenue of Borrower constituting
Collateral (except such liens as may be created in favor of Lender pursuant to
this Agreement or the other Loan Documents); or (iv) to the extent applicable,
violate any provision of Borrower's articles of incorporation, Borrower's
limited partnership agreement, Borrower's partnership agreement or Borrower's
articles of organization.
(d) Approvals. No consent, approval, order or authorization of, or
registration, declaration or filing with, any governmental authority or other
Person (including, without limitation, any ground lessor, prior lien or the
shareholders of any Person) is required in connection with the execution and
delivery of the Loan Documents executed by Borrower and the performance and
consummation of the transactions contemplated thereby.
(e) No Violation or Default. No Event of Default or Default has
occurred and is continuing. Borrower is not in violation of or in default
with respect to any requirement of law or any contractual obligation,
including, but not limited to, any default on any contractual obligation to
any of its affiliates (nor is there any waiver in effect which, if not in
effect, would result in such a violation or default), where, in each case,
such violation or default could have a material adverse effect on Borrower.
Without limiting the generality of the foregoing, Borrower (i) has not
directly or indirectly violated any Environmental Laws; (ii) has no liability
under any Environmental Laws; and (iii) has not received notice or other
communication of an investigation nor is under investigation by any
governmental authority having authority to enforce Environmental Laws.
(f) Litigation. Except as previously disclosed to Lender in writing,
no actions (including, without limitation, derivative actions), suits,
proceedings or investigations are pending or, to the knowledge of Borrower,
threatened against Borrower or the Owners at law or in equity in any court or
before any other governmental authority (i) which could (alone or in the
aggregate) have a material adverse effect on Borrower's or any such Owner's
financial condition or (ii) which in any manner calls into question, either
directly or indirectly, the lawfulness of the execution, delivery or
performance by Borrower of the Loan Documents or the transactions contemplated
thereby.
(g) Financial Statements. The Financial Statements of Borrower
provided by Borrower to Lender in connection with the Loan Application (i) are
consistent with the books and records of Borrower and the Enterprise, which
have been maintained in accordance with good business practice; (ii) have been
prepared in conformity with GAAP; (iii) fairly present the financial condition
of Borrower and the Enterprise at such date; and (iv) do not omit any
information which is necessary to make the Financial Statements not
misleading. Borrower does not have any contingent obligations, liability for
taxes or other outstanding obligations which are material in the aggregate,
except as disclosed in the Financial Statements furnished by Borrower to
Lender prior to the date hereof.
(h) Patent and Other Rights. Borrower owns, and has the full right to
use without the consent of any other Person (or otherwise has been granted by
the Franchisor and/or Licensor the right to use), all patents, licenses,
trademarks, trade names, trade secrets, service marks, copyrights, computer
programs and records and other intellectual property and all rights with
respect thereto which are required to conduct its businesses as now conducted.
(i) Governmental Charges and Assessments. Borrower has filed or
caused to be filed all tax returns which are required to be filed by it.
Borrower has paid, or made provision for the payment of, all taxes, ground
rents, water charges, sewer rates and other governmental charges or
assessments which have become due pursuant to said returns or otherwise,
except such governmental charges, if any, which are being contested in good
faith and as to which adequate reserves (determined in accordance with GAAP)
have been provided and which could not have a material adverse effect on
Borrower or impose any criminal liability on Borrower if unpaid.
(j) Subsidiaries and Affiliates. Attached hereto is a complete list
of all subsidiaries and affiliates of Borrower and, as applicable, the
jurisdiction of organization of each, the classes of Equity Securities of each
and the number of shares and percentages of shares of each such class owned
directly or indirectly by Borrower. Except for such affiliates or
subsidiaries, Borrower has no affiliates or subsidiaries and is not a partner
in any partnership or joint venturer in any joint venture.
(k) Solvency. Borrower is able to pay its debts as they become due
and, after the execution and delivery of the Loan Documents and the
consummation of the transactions contemplated thereby, will be solvent. None
of the transactions contemplated by the Loan Documents will be or have been
made with an actual intent to hinder, delay or defraud any present or future
creditors of Borrower. Borrower acknowledges that Lender may make one or more
loans to one or more of any borrowers related to or affiliated or connected
with Borrower, and if Lender makes any such loan, Borrower acknowledges, in
consideration of Lender's making of the Loan, that Borrower will have received
fair and reasonably equivalent value in good faith for the grant of the lien
or security interest effected by the related Loan Documents.
(l) Catastrophic Events. Borrower is not, nor have any of its
properties been, affected by any fire, explosion, accident, strike, lockout or
other labor dispute, drought, storm, hail, earthquake, embargo, natural
disaster or other casualty that could have a material adverse effect on
Borrower or the Collateral.
(m) Franchise Agreement/License Agreement. If a Franchise Agreement
and/or License Agreement is identified in the Addendum, a true, correct and
complete copy of each such Franchise Agreement and License Agreement has been
provided to Lender, and each such Franchise Agreement and License Agreement
constitutes the legal, valid, binding and enforceable obligation between the
parties thereto authorizing the operation of each Enterprise as an enterprise
under the Trade Name. No party is in default under, and no circumstance
exists which with the passage of time could give rise to a default under, the
Franchise Agreement or License Agreement. There are no amendments,
modifications or supplements to any Franchise Agreement or License Agreement
other than those attached thereto. Borrower has not received any notices
under any Franchise Agreement or License Agreement with respect to Borrower's
compliance, other than notices, copies of which have been furnished to Lender.
The Maturity Date will occur prior to the expiration date of each Franchise
Agreement and License Agreement, if any.
(n) Loan Application. All statements made by Borrower in the Loan
Application and information provided in connection therewith were true when
made or provided to Lender and nothing has occurred since Borrower completed
the Loan Application or provided such information which would cause a material
change in such information or the financial condition or business prospects of
Borrower.
(o) Lease. If a Lease has been identified in the Addendum, a true,
correct and complete copy of each such Lease has been provided to Lender, and
each such Lease constitutes the legal, valid and binding obligation of the
parties thereto. All rent payments due and owing under each Lease have been
paid and no party is in default under any Lease, and no circumstance exists
which with the passage of time or giving of notice could give rise to a
default under any Lease. There are no amendments, modifications or
supplements to any Lease other than those attached thereto. Borrower has not
received any notices under any Lease with respect to Borrower's compliance,
other than notices, copies of which have been furnished to Lender. The
Maturity Date will occur prior to the expiration date of each Lease including
any lessee option to extend such term, provided any such option may be
exercised unconditionally in Borrower's sole discretion.
(p) Mortgage. If the Mortgage constitutes a lien on an interest of
Borrower as tenant under a Lease of the Real Property, but not on the related
fee interest in such Real Property, Borrower represents that:
(i) Such Lease or a memorandum thereof has been duly recorded; and
such Lease or the related Landlord Estoppel permits the interest of the tenant
thereunder to be encumbered by the related Mortgage and does not restrict the
use of the Property and related improvements by such tenant, its successors or
assigns in a manner inconsistent with the current and intended uses thereof;
and
(ii) Such Lease has an original term (or an original term plus
one or more optional renewal terms which under all circumstances may be
exercised unconditionally at Borrower's sole discretion, and will be
exercisable by Lender) which extends beyond the Maturity Date.
(q) Sufficiency of Collateral. The Collateral is sufficient for
Borrower to conduct the Enterprise using the trade names and service marks
licensed to Borrower under the Franchise Agreement and/or License Agreement.
(r) Accuracy of Information Furnished. The information set forth in
the Loan Documents (including, without limitation, all information set forth
in the Addendum) and provided to Lender in connection with the Loan
Application is true, complete and correct. None of the Loan Documents and
none of the other certificates, statements or information furnished to Lender
by or on behalf of Borrower or in connection with the Loan Documents or Loan
Application or the transactions contemplated thereby contains or will contain
any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(s) Defenses. The Loan Documents are not subject to any offset,
defense or counterclaims or right of rescission, abatement or diminution as
against Lender, including the defense of usury, and the operation of any of
the terms of the Loan, or the exercise of any right thereunder, will not
render the Loan Documents unenforceable, in whole or in part, or subject to
any offset, defense or counterclaims or right of rescission, abatement or
diminution including the defense of usury, and to Borrower's knowledge Lender
has not taken any action which would give rise to the assertion of any of the
foregoing and no such right of rescission, set-off, abatement, diminution,
counterclaim or defense, including the defense of usury, has been asserted
with respect thereto.
(t) Equity Securities. All outstanding Equity Securities of Borrower
are duly authorized, validly issued, fully paid and non-assessable. There are
no outstanding subscriptions, options, conversion rights, warrants or other
agreements or commitments of any nature whatsoever (firm or conditional)
obligating Borrower to issue, deliver or sell, or cause to be issued,
delivered or sold, any additional Equity Securities of Borrower, or obligating
Borrower to grant, extend or enter into any such agreement or commitment. All
Equity Securities of Borrower have been offered and sold in compliance with
all federal and state securities laws and other requirements of law. The
Equity Securities of Borrower are owned by the Persons designated in the
Addendum (the "Owner(s)").
(u) Insurance. All insurance premiums due and owing pursuant to
Section V hereof or otherwise due and owing by Borrower have been paid.
(v) Miscellaneous Fees or Charges. Borrower has paid all fees or
charges which are due and owing and affect the Collateral.
(w) No Condemnation or Damages. There is no proceeding pending for
the total or partial condemnation of the Property. The Property is being used
for the operation of the Enterprise and is free and clear of any damage or
defective condition that would materially and adversely affect the value of
the Collateral. The Property is lawfully used and occupied by Borrower under
applicable law.
(x) No Mechanics' Liens. The Property and Collateral are free and
clear of any mechanics' liens and materialmens' liens or liens in the nature
thereof, and no rights are outstanding that under law could give right to such
liens, except as insured against by Lender's title policy.
(y) Licenses and Permits. As of the date hereof, Borrower is in
possession of all licenses, permits and other authorizations necessary and
required by applicable law for the conduct of its business. All such
licenses, permits and authorizations are valid and in full force and effect.
SECTION III. COVENANTS.
Until the termination of this Agreement and the satisfaction in full by
Borrower of all obligations under the Loan Documents, Borrower shall comply,
and shall cause compliance, with the following affirmative covenants unless
Lender shall otherwise consent in writing:
(a) Fixed Charge Coverage Ratio. If the Borrower FCCR for any 12-
month period is less than 1.15, then Borrower shall provide to Lender a
compliance certificate in the form specified in Section III(d) herein within
15 days of the end of each calendar quarter, with an income statement and
balance sheet for the 12-month period ending with such calendar quarter
prepared in accordance with GAAP, until such time as Lender shall require, in
its sole discretion. In no event, however, shall Borrower permit the Borrower
FCCR for any 12-month compliance period ended December 31 or June 30 to be
less than 1.15. Notwithstanding the foregoing, a breach of the requirement
set forth in the immediately preceding sentence shall not constitute an Event
of Default provided that as of the conclusion of the six month period (the
Cure Period) immediately succeeding the relevant twelve month period with
respect to which breach occurred, the Borrower FCCR for the twelve month
period ending at the end of the Cure Period is not less than 1.15.
(b) Additional Indebtedness. Except as provided in Section VII,
Borrower shall not directly or indirectly create, incur, assume or permit to
exist any lien on or with respect to any of its assets or property
constituting Collateral, whether now owned or hereafter acquired except for
Permitted Liens, if any, or with the prior written consent of Lender.
Borrower may, however, without Lender's consent, incur any other indebtedness
not relating to the Collateral provided that, immediately prior to and after
Borrower incurs such additional indebtedness, no Event of Default shall exist
and be continuing and provided further that Borrower's pro forma Borrower FCCR
will not be less than the amount required by Section III(a), as determined
using Borrower Adjusted Free Cash Flow for the 12-month period immediately
preceding such determination and Debt Service payments with respect to
indebtedness equal to pro forma payments expected to be made over the 12-month
period immediately succeeding such determination on all Borrower indebtedness
outstanding which will not be retired upon Borrower incurring such additional
indebtedness and on such additional indebtedness. In no event, however, shall
Borrower incur any additional indebtedness for the payment of a dividend or
other distribution to shareholders.
(c) Asset Dispositions and Acquisitions. Borrower shall not sell,
assign, convey, lease, transfer or otherwise dispose of or permit to be sold,
assigned, conveyed, leased, transferred or otherwise disposed of, any of its
assets or property constituting Collateral hereunder, whether now owned or
hereafter acquired, except for inventory in the ordinary course of the
Enterprise's business provided, however, that Borrower may replace the
Enterprise's Equipment or acquire new Equipment and accessions to the
Enterprise's Equipment in the ordinary course of Borrower's business, provided
such replacement Equipment shall be equal to or greater in value as that which
it replaced; and provided, further, that any such replacement Equipment may
not be acquired subject to a purchase money or other security interest without
the prior written consent thereto of Lender.
(d) Compliance Certificates. Borrower and Affiliate Borrower shall
provide to Lender on or prior to March 31 and September 30 of each year a
compliance certificate executed by an authorized officer of Borrower and
Affiliate Borrower, respectively, for the twelve-month periods concluding on
December 31 and June 30, respectively, in the form attached hereto as Exhibit
A.
(e) Equity Securities. Borrower will not permit any person other than
the Owner(s) to own, either directly or beneficially, outstanding Equity
Securities of Borrower which in the aggregate equal or exceed 50% of the total
outstanding voting or controlling interests of Borrower.
(f) Other Documents. Borrower shall provide copies of such other
instruments, agreements, certificates, opinions, statements, documents and
information relating to the operations or condition (financial or otherwise)
of Borrower, and compliance by Borrower with the terms of this Agreement and
the other Loan Documents, as Lender may from time to time request.
(g) Books and Records. Borrower shall at all times keep proper books
of record and account in which full, true and correct entries will be made of
their dealings and transactions in accordance with GAAP and all requirements
of law.
(h) Inspections. Borrower shall permit any Person designated by
Lender, upon reasonable notice and during normal business hours, to visit and
inspect any of the properties and offices of Borrower, to examine and make
abstracts from the records and books of account of Borrower, and to discuss
the affairs, finances and accounts of Borrower, and to be advised as to the
same by, Borrower's officers, auditors and accountants. Borrower authorizes
said auditors and accountants to so discuss the affairs, finances, business,
operations, properties and accounts of Borrower, all at such times and
intervals as Lender may reasonably request.
(i) Governmental Charges and Other Indebtedness. Borrower shall
promptly pay and discharge when due all taxes, liabilities, impositions and
other governmental charges prior to the date upon which penalties accrue
thereon; provided, Borrower shall have the rights of contest set forth in
Section VII.
(j) Use of Proceeds. Borrower shall use the proceeds of the Loan only
for the purposes indicated in the Commitment Letter, which use is not
primarily a personal, family or household purpose and which use shall not
include the satisfaction, in whole or in part, of any debt owed or owing by
Borrower to itself or its affiliates, except as provided in the Commitment
Letter.
(k) General Business Operations. Borrower shall (i) preserve and
maintain its organizational (corporate, partnership, limited liability
company, as applicable) existence and all of its rights, privileges and
franchises reasonably necessary to the conduct of its business, (ii) conduct
its business activities and maintain the Collateral in substantially the same
manner as it is being conducted and maintained at the date of this Agreement
and in compliance with all applicable requirements of law and contractual
obligations applicable thereto, (iii) keep all property useful and necessary
in its business in good working order and condition, ordinary wear and tear
excepted, (iv) maintain its chief executive office and principal place of
business in the state and county specified in the Addendum, (v) if a Franchise
Agreement and/or License Agreement is identified in the Addendum, be and
remain a franchisee or licensee, as the case may be, in good standing under
such Franchise Agreement and/or License Agreement and shall not amend, modify,
or terminate, or permit termination, material amendment or material
modification of such Franchise Agreement and/or License Agreement or transfer,
assign or waive any of its rights under such Franchise Agreement and/or
License Agreement, (vi) if a Lease is identified in the Addendum, comply with
all provisions of such Lease and exercise any option or other extension right
necessary to cause the Lease term to extend to a date beyond the Maturity
Date, and (vii) shall not amend or modify any material term or provisions of,
or terminate such Lease or transfer, assign or waive any of its rights under
such Lease.
(l) Notices. Borrower shall give prompt written notice to Lender of
(i) any claims, proceedings or disputes (whether or not purportedly on behalf
of Borrower) against, or to Borrower's knowledge, threatened or affecting
Borrower which, if adversely determined, could reasonably be expected to have
a material adverse effect or which involve in the aggregate monetary amounts
or claims in excess of $50,000 not fully covered by insurance without
reservation of right; (ii) any proposal by any public authority to acquire the
Property or Collateral or any portion thereof; and (iii) the occurrence of any
Default or Event of Default hereunder.
(m) Loan Documents. Borrower shall comply with and observe all terms
and conditions of the Loan Documents.
(n) Recordation of Documents. Borrower shall cooperate with Lender to
ensure that within ten (10) days after the date hereof, the Mortgage (if any),
financing statements and other recordable documents shall be recorded or filed
in the proper official records of registry.
(o) Mergers and Acquisitions. Borrower shall not consolidate with or
merge into any other Person, except as approved in writing by Lender.
Borrower shall not permit any other Person to merge into it, or acquire all or
substantially all of the assets of any other Person unless, after such merger
or acquisition, Borrower or its successor-in-interest shall continue to meet
all of the requirements and conditions hereunder, including but not limited
to, those set forth in Section III(a) and (b).
(p) Transactions with Affiliates. In addition to any other covenant
in this Agreement that may apply to affiliate transactions, Borrower shall not
enter into any contractual obligation relating to the Enterprise with any
affiliate or subsidiary of Borrower or engage in any other transaction
relating to the Enterprise with any affiliate or subsidiary of Borrower except
upon terms at least as favorable to Borrower as an arms-length transaction on
commercially reasonable terms. For purposes of this subsection, the CFA
Management Agreement shall be deemed to be fair and reasonable.
(q) Accounting Changes. Borrower shall not change (i) its/their
fiscal year (currently as indicated on the Addendum) or (ii) its/their
accounting practices except as required by GAAP.
(r) No Proceedings. Borrower shall not institute, or cause or permit
to be instituted against it, any proceedings for the appointment of a
receiver, trustee, liquidator, or custodian of Borrower or of all or a
substantial part of the property thereof, or a voluntary or involuntary case
or other proceedings seeking liquidation, reorganization or other relief with
respect to the Borrower or the debts thereof under bankruptcy, insolvency or
other similar law.
SECTION IV. ASSUMPTION OF LOAN.
The Loan may be assumed one (1) time during its term, or any extension
thereof, by a new borrower provided that each of the following conditions are
met:
(a) The new borrower and any new guarantor, if any, shall provide to
Lender, at the expense of the new borrower, evidence satisfactory to Lender,
in its sole discretion, that the new borrower and new guarantor, if any, and
the Loan upon assumption shall meet Lender's underwriting standards then in
effect. Such obligation shall include providing to Lender financial
statements, appraisals, credit reports, environmental reports and such other
documentation as Lender shall reasonably request.
(b) The new borrower must purchase all of the Collateral and all of
Borrower's interest in the Property and, if a Franchise Agreement or License
Agreement is identified in the Addendum, be a franchisee or licensee, as
applicable in good standing of the Franchisor and/or Licensor, authorized to
operate the Enterprise.
(c) No Default or Event of Default shall exist under any Loan Document
or occur as a result of any assumption.
(d) The new borrower or Borrower shall pay to Lender a fixed
administrative fee equal to the greater of one percent of the then outstanding
principal balance of the Loan or $3,000.
(e) If the Loan has been sold to a trust, the transfer to a new
borrower shall not cause a change in the asset characteristics of the trust or
violate the trust's underwriting requirements. The determination of such
issues shall be at Lender's sole discretion.
(f) The new borrower shall assume all the obligations of Borrower
under the Loan Documents pursuant to an agreement approved by Lender, and, if
a Guaranty is in effect, Lender may require that a new guarantor shall assume
all the obligations of Guarantor under the Guaranty pursuant to an agreement
approved by Lender.
(g) Borrower shall obtain the prior written consent of Lender to the
assumption, which consent may be denied in Lender's reasonable discretion
based upon Lender's evaluation of the creditworthiness of the proposed new
borrower and/or guarantor or if in Lender's reasonable judgment the assumption
would have unfavorable tax consequences to Lender.
(h) Borrower shall have reimbursed Lender for its attorneys fees and
costs incurred in connection with such assumption.
SECTION V. INSURANCE.
At Borrower's sole cost and expense, Borrower shall:
(a) Keep the Collateral and the Property insured against such risks as
may be required by the Franchisor and/or Licensor, if any, and/or Lender,
including, without limitation, fire, lightning, windstorm, hail, explosion,
riot, riot attending a strike, civil commotion, aircraft, vehicles and smoke,
extended coverage, business interruption, life, peril and special form
insurance upon the Collateral and the Property insuring against loss or damage
by fire with extended coverage and against any other risks or hazards which,
in the opinion of Lender should be insured against, in an amount not less than
100% of the replacement cost thereof with an inflation guard endorsement (or,
otherwise blanket coverage in an amount reasonably satisfactory to Lender),
but in no event less than the minimum amount required to prevent the
imposition of any coinsurance requirement on the insured. If the Real
Property is in an area identified by the Federal Emergency Management Agency
as having special flood hazards (and such flood insurance has been made
available), Borrower shall carry a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration
with an insurance carrier acceptable to Lender, in an amount representing
coverage equal to the least of (i) the full insurable value of the Collateral
and the Property, (ii) the outstanding principal balance of the Loan, or (iii)
the maximum amount of insurance available under the Flood Protection Act of
1973, as amended. Borrower shall also carry comprehensive general public
liability insurance providing coverage not less than $1,000,000 per occurrence
for bodily injury and $500,000 per occurrence for property damage, business
interruption insurance in an amount equal to six (6) months of Actual Loss of
Business Income, and ordinance or law coverage if required by Lender;
(b) Cause all insurance policies required hereunder or insuring the
Collateral, Enterprise or Property (i) to contain a standard lender's loss
payable endorsement or mortgagee's endorsement acceptable to Lender providing
for payment directly to Lender and/or its designees, (ii) to provide for a
minimum of 30 day's written notice to Lender prior to cancellation or
modification or non-renewal, (iii) to provide that payment of the premium by
Lender will otherwise cause the policy to remain in force, (iv) to provide
coverage on all buildings or other structures, by direct mention or allowance
in the policy, (v) to contain loan number, property address and insured names,
and (vi) to be issued by companies authorized to issue such policies in the
state in which the Property is located having at all times prior to the
payment of the Note a General Policy Rating of AA-VIII or better in Best's
Key Rating Guide or AA by Standard and Poor's and no lower by either of Best's
or Standard & Poor's;
(c) Timely pay all premiums, fees and charges required in connection
with all of its insurance policies and otherwise continue to maintain such
policies in full force and effect; and
(d) Promptly deliver the insurance policies, certificates (and
renewals) thereof or other evidence of compliance herewith to Lender.
Borrower hereby (A) pledges and assigns to Lender and agrees to transfer and
deliver to Lender all moneys which may become due and payable with respect to
the Collateral under any policy insuring the Collateral, including return of
unearned premium, (B) directs any such insurance company to make payment
directly to Lender and (C) authorizes Lender, in its sole discretion, to apply
the same as set forth herein. If Borrower fails to insure the Collateral or
to take any other action as required by this Section, Lender may, in addition
to its other rights and remedies and in its sole discretion (and without any
obligation) obtain such insurance or take such other action and Borrower shall
immediately reimburse Lender for all costs and expenses incurred by Lender
thereby.
SECTION VI. CASUALTY AND CONDEMNATION.
In the event of any casualty or condemnation of the Collateral or any
portion thereof or a transfer in lieu of or in anticipation of condemnation (a
"Loss"):
(a) Borrower shall give prompt written notice thereof to Lender. Any
insurance proceeds or awards with respect to such Loss (the "Loss Proceeds")
shall be payable to Lender. Borrower shall proceed promptly and diligently to
prosecute in good faith the settlement or compromise of any and all claims or
proceedings relating to such Loss or Loss Proceeds; provided, however, any
such settlement or compromise shall be subject to Lender's prior written
consent, which consent shall not be unreasonably withheld. Borrower hereby
authorizes and directs any affected insurance company and any affected
governmental body responsible for such condemnation to make payment of the
Loss Proceeds directly to Lender. If Borrower receives any Loss Proceeds,
Borrower shall promptly pay over such Loss Proceeds to Lender. Borrower
hereby covenants that until such Loss Proceeds are so paid over to Lender,
Borrower shall hold such Loss Proceeds in trust for the benefit of Lender and
shall not commingle such Loss Proceeds with any other funds or assets of
Borrower or any other Person.
(b) Borrower hereby irrevocably assigns to Lender all Loss Proceeds to
which Borrower may become entitled by reason of its interest in the Property
if a Loss occurs. All Loss Proceeds shall be paid to Lender and applied
pursuant to this section. Subject to the preceding subsection (a) and to the
last sentence of this subsection (b), Borrower shall take all appropriate
action in connection with each such proceeding, settlement and adjustment and
shall pay all expenses thereof, including, if Lender shall elect to
participate therein, the cost of Lender's participation (including the fees
and disbursements of counsel); provided, however, that any final settlement or
adjustment shall be subject to the prior written consent of Lender unless the
Loss Proceeds are sufficient to prepay the Note in full, together with the
Yield Maintenance Fee specified in the Note and all accrued and unpaid
interest thereon and all other amounts due thereon. Borrower hereby appoints
Lender as its lawful attorney-in-fact, which appointment, coupled with an
interest, is irrevocable for the foregoing purpose and as such is duly
authorized and empowered to receive, receipt for, discharge and satisfy any
such award and judgment on behalf of Borrower, which receipt, discharge and
satisfaction shall be as legally binding and effective as if given directly by
Borrower; provided, however, that nothing herein contained shall deprive
Borrower of the right to contest, pursuant to Section VII, either the
necessity of any condemnation or the value placed on the Property. So long as
an Event of Default shall have occurred and be continuing, Lender may, at its
option and with respect to its interests as set forth herein, commence, appear
in and prosecute, in its own name (or, at Lender's option, in the name of the
Borrower), any such action or proceeding or make any compromise or settlement
in connection with such damage, destruction or taking and obtain directly all
Loss Proceeds.
(c) If the Property suffers a Loss, Borrower shall restore the
Property (or, in the case of a taking, the remaining Property) in such manner
as to restore the Property to the same condition, as nearly as possible, as
existed immediately prior to such casualty or taking (the "Restoration"),
whether or not the Loss Proceeds are sufficient therefor. If the cost of any
Restoration made by Borrower pursuant to this section shall exceed the amount
of the Loss Proceeds, such deficiency shall be paid by Borrower. The Loss
Proceeds shall be held by Lender or its agent and, provided that (i) no Event
of Default has occurred (ii) Lender reasonably determines that (a) such
Restoration is feasible and (b) following the Restoration the ratio which the
unpaid principal balance of the Loan bears to the value of the Collateral (as
determined by Lender) ("LTV") shall not exceed the LTV determined by Lender as
of the date of this Agreement, and (iii) the Franchise Agreement and License
Agreement, if any, have not terminated and shall not terminate as a result of
the Loss and/or Restoration, the Loss Proceeds, shall be disbursed to Borrower
as hereinafter set forth, provided that if the estimated cost of such
Restoration exceeds the amount of the Loss Proceeds, Borrower shall deliver to
Lender or its agent the estimated deficiency before commencing work. Lender
or its agent shall release such Loss Proceeds to Borrower, subject to such
reasonable procedural requirements as Lender or its agent may prescribe, from
time to time. Any portion of the Loss Proceeds which is not applied to the
Restoration shall be applied by Lender on the next loan installment date (as
provided in the Note) toward the prepayment of the entire outstanding
principal amount of the Loan, plus accrued and unpaid interest thereon, and
the Yield Maintenance Fee and all other amounts outstanding under the Loan
Documents, provided Borrower shall remain liable for any deficiency.
SECTION VII. PERMITTED CONTESTS.
After prior notice to Lender, Borrower may contest, by appropriate legal
or other proceedings conducted in good faith and with due diligence, the
amount, validity or application, in whole or in part, of any imposition or
lien therefor, any legal requirement, any insurance requirement or any lien of
any laborer, mechanic, materialman, supplier or vendor, provided that (a) the
Collateral and the Property, or any part thereof or estate or interest
therein, shall not be in any danger of being sold, forfeited or lost by reason
of such proceedings; (b) in the case of (i) liens of laborers, mechanics,
materialmen, suppliers or vendors or (ii) the impositions, or liens therefor,
such proceedings shall suspend the foreclosure of any such lien or any other
collection thereof from the Collateral or the Property; (c) in the case of a
legal requirement, Lender shall not be in any danger of any criminal liability
or, unless Borrower shall have furnished a bond or other security therefor
reasonably satisfactory to Lender, any additional civil liability for failure
to comply therewith, and the Property, or any part thereof or estate or
interest therein, shall not be subject to the imposition of any lien as a
result of such failure which is not properly contested pursuant to this
subsection; (d) in the case of any insurance requirement, no insurance
coverage required to be maintained pursuant to the Mortgage, if any, or this
Agreement shall be canceled or jeopardized; (e) no Default or Event of Default
shall have occurred; and (f) if reasonably required by Lender, Borrower shall
have furnished to Lender a bond or other security reasonably satisfactory to
Lender.
SECTION VIII. PERFORMANCE BY LENDER.
If Borrower shall fail to pay or perform any of its obligations herein
contained or under any other Loan Documents, Lender upon five (5) days prior
written notice to Borrower (except as otherwise expressly permitted by any
Loan Document or in the event of an emergency when no notice need be given)
may, but need not, make (or cause to be made) any such payment or perform (or
cause to be performed) any such obligation of Borrower hereunder or thereunder
(provided Borrower is not contesting such payment or performance as permitted
by Section VII), in any form and manner deemed reasonably expedient by Lender
as agent of Borrower, and any amount so paid or expended (plus reasonable
compensation to Lender for its out-of-pocket and other expenses (including
legal expenses) for each matter for which it acts under this Loan Agreement),
with interest thereon at the Demand Rate, shall be added to the obligations of
Borrower and shall be repaid to Lender upon demand. No such action of Lender
shall be considered as a waiver of any right accruing to it on account of the
occurrence of any Default, any Event of Default, or any default or event of
default under any other Loan Document.
SECTION IX. LENDER DISCUSSIONS WITH FRANCHISOR/LICENSOR.
(a) Communications with Franchisor/Licensor. Borrower shall provide
to Lender or its representatives (i) copies of annual financial reports (and
such other reports as Lender may from time to time request) required under the
Franchise Agreement and/or License Agreement, if any, at the same time it
provides such reports to the Franchisor and/or Licensor, as the case may be,
and (ii) any notices from Franchisor and/or Licensor of an event of default or
other event or condition which could have a material adverse effect on Lender,
promptly following receipt by Borrower, provided that such disclosure would
not create a breach of the Franchise Agreement and/or License Agreement. If
and to the extent that any disclosure required under clauses (i) or (ii) of
the preceding sentence is not made because of the provision in the last clause
of the preceding sentence, notice of such nondisclosure and the nature of
information not disclosed shall be provided to Lender at the time such
disclosure would have been required to be made. Borrower hereby authorizes
Lender to discuss with the Franchisor and/or Licensor, if any, Borrower's
operations relating to car counts and ticket averages and any matters relating
to the Franchise Agreement and/or License Agreement. Borrower further
consents to the release to Lender by the Franchisor and/or Licensor of any
information relating to the foregoing matters, and instructs the Franchisor
and/or Licensor to release any information relating to the foregoing matters
upon the request of Lender.
SECTION X. MISCELLANEOUS.
(a) Notices. Except as otherwise provided herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Lender or Borrower under this Agreement or the other Loan Documents shall be
in writing and sent by facsimile transmission, mailed or delivered to each
party at its facsimile number or address set forth below (or to such other
facsimile number or address for any party as indicated in any notice given by
that party to the other party). All such notices and communications shall be
effective (a) when sent by Federal Express or other overnight service of
recognized standing, on the Business Day following the deposit with such
service; (b) when mailed, first class postage prepaid and addressed as
aforesaid through the United States Postal Service, upon receipt; (c) when
delivered by hand, upon delivery; and (d) when sent by facsimile transmission,
upon confirmation of receipt.
Lender: ENTERPRISE MORTGAGE ACCEPTANCE COMPANY, LLC
One Glendinning Place
Westport, CT 06880
Attention: Charan J. Chanana
Facsimile:(203) 341-6501
Borrower: AS PROVIDED IN THE ADDENDUM
In any case where this Agreement authorizes or requires notices, requests,
demands or other communication by Borrower to Lender, Lender may conclusively
presume that anyone purporting to be a Person designated in any borrowing
resolution, incumbency certificate or in any other such document delivered by
Borrower to Lender, is such a Person.
(b) Expenses. Borrower shall pay on demand, whether or not any Loan
is made hereunder, (a) all reasonable fees and expenses, including reasonable
attorneys' fees and expenses, incurred by Lender in connection with the
preparation, execution and delivery of, and the exercise of its duties under,
this Agreement and the other Loan Documents, and the preparation, execution
and delivery of amendments, consents and waivers hereunder and thereunder, (b)
all recording costs and expenses (including, without limitation, documentary
stamp taxes, intangible recording taxes and the like), and (c) all reasonable
fees and expenses, including reasonable attorneys' fees and expenses, incurred
by Lender in the enforcement or attempted enforcement of any of Borrower's
obligations under the Loan Documents, including, but not limited to expenses
incurred in the investigation of Defaults or reasonably alleged Defaults, or
in preserving any of Lender's rights and remedies (including, without
limitation, all such fees and expenses incurred in connection with any
"workout" or restructuring affecting the Loan Documents or the Borrower's
obligations under the Loan Documents or any bankruptcy or similar proceeding
involving Borrower).
(c) Indemnification. To the fullest extent permitted by law, Borrower
agrees to protect, indemnify, defend and hold harmless Lender, Originator and
their respective shareholders, beneficial owners, members, directors,
partners, officers, employees, agents, attorneys, successors, assigns and any
affiliate thereof ("Indemnitees") from and against any and all liabilities,
losses, damages (whether direct or consequential), obligations, claims,
penalties, causes of action, fines, injunctions, costs or expenses of any kind
or nature (including without limitation, those arising out of, in respect of,
as a consequence of or in connection with any violation or failure to comply
with any Environmental Law) and from any and all suits, claims or demands
(including, without limitation, in respect of or for reasonable attorneys'
fees and other expenses whether incurred within or outside the judicial
process) arising on account of or in connection with or relating to Borrower,
the Property, the Collateral, the Loan or the Loan Documents, whether prior to
or after the date of this Agreement and whether prior to or after Borrower
became the lessee under the Lease, if any, including, without limitation, any
use by Borrower of any proceeds of the Loan, except to the extent such
liability arises from the willful misconduct or gross negligence of the
Indemnitees. Upon receiving knowledge of any suit, claim or demand asserted
by a third party that Lender believes is covered by this indemnity, Lender
shall give Borrower notice of the matter and an opportunity to defend it, at
Borrower's sole cost and expense, with legal counsel satisfactory to Lender.
Any failure or delay of Lender to notify Borrower of any such suit, claim or
demand shall not relieve Borrower of its obligations under this paragraph.
The obligations of Borrower under this paragraph shall survive the payment of
the Loan and the exercise of any rights or remedies by Lender.
(d) Waivers; Amendments. No term, covenant, agreement or condition of
this Agreement or any other Loan Document may be amended or waived unless such
amendment or waiver is in writing and is signed by Borrower and Lender. If
the Loan is sold to a trust, Section IV may not be amended unless Borrower has
provided to Lender an opinion of counsel satisfactory to Lender that such
amendment will not affect the tax treatment of the trust. No failure or delay
by Lender in exercising any right hereunder shall operate as a waiver thereof
or of any other right nor shall any single or partial exercise of any such
right preclude any other further exercise thereof or of any other right.
Unless otherwise specified in such waiver or consent, a waiver or consent
given hereunder shall be effective only in the specific instance and for the
specific purpose for which given.
(e) Successors and Assigns.
(i) Binding Effect. This Agreement and the other Loan Documents
shall be binding upon and inure to the benefit of Borrower, Lender, all
future holders of the Note and their respective successors and permitted
assigns, except that Borrower may not assign or transfer any of its
rights or obligations under any Loan Document except as provided in
Section IV. All references in this Agreement to any Person shall be
deemed to include all successors and assigns of such Person.
(ii) Assignments. Lender may at any time sell, assign, grant
participations in, delegate or otherwise transfer to any other Person
(an "Assignee") all or part of the rights and duties of Lender under
this Agreement and the other Loan Documents. To the extent indicated in
any document, instrument or agreement so selling, assigning, granting
participations in, or otherwise transferring to an Assignee such rights
and/or duties, (i) the Assignee shall acquire all of Lender's rights
(and, other than those duties retained, its duties) under this Agreement
and the other Loan Documents and (ii) the Assignee shall be deemed to be
the "Lender" under this Agreement and the other Loan Documents with the
authority to exercise such rights (and, other than those duties
retained, its duties) in the capacity of Lender.
(iii) Confidentiality. Lender may disclose the Loan Documents and
any other documents or financial or other information relating to
Borrower or any of its subsidiaries or affiliates or to the Enterprise
or the Collateral to any Assignee or potential Assignee, to any servicer
of the Loan, any investor, potential investor in interests in the Loan,
to any governmental authority regulating any of the foregoing or as may
be required by any governmental authority or any other authority having
jurisdiction over Lender and to any advisors of Lender, including,
without limitation, legal counsel; provided, however, Lender shall
instruct such individual to treat this information confidentially. The
terms of this provision shall replace and supersede any prior
understanding between the parties hereto regarding confidentiality and
the matters set forth herein, whether such understanding be verbal or
written.
(f) Setoff. In addition to any rights and remedies of Lender provided
by law, Lender shall have the right, without prior notice to Borrower, any
such notice being expressly waived by Borrower to the extent permitted by
applicable law, upon the occurrence and during the continuance of a Default or
an Event of Default, to set-off and apply against any indebtedness, whether
matured or unmatured, of Borrower to Lender, any amount owing from Lender to
Borrower. The aforesaid right of set-off may be exercised by Lender against
Borrower or against any trustee in bankruptcy, debtor-in-possession, assignee
for the benefit of creditors, receiver or execution, judgment or attachment
creditor of any Borrower or against anyone else claiming through or against
Borrower or such trustee in bankruptcy, debtor-in-possession, assignee for the
benefit of creditors, receiver, or execution, judgment or attachment creditor,
notwithstanding the fact that such right of set-off shall not have been
exercised by Lender prior to the occurrence of a Default or an Event of
Default. Lender agrees promptly to notify Borrower after any such set-off and
application made by Lender, provided that the failure to give such notice
shall not affect the validity of such set-off and application.
(g) No Third Party Rights. Nothing expressed in or to be implied from
this Agreement or any other Loan Document is intended to give, or shall be
construed to give, any Person, other than the Originator, the parties hereto
and thereto and their permitted successors and assigns, any benefit or legal
or equitable right, remedy or claim under or by virtue of this Agreement or
any other Loan Document.
(h) Partial Invalidity. If at any time any provision of this
Agreement is or becomes illegal, invalid or unenforceable in any respect under
the law of any jurisdiction, neither the legality, validity or enforceability
of the remaining provisions of this Agreement nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
(i) Jury Trial. BORROWER, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY AS TO ANY
ISSUE RELATING TO ANY LOAN DOCUMENT IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM
ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT.
(j) Counterparts. This Agreement may be executed in any number of
identical counterparts, any set of which signed by all the parties hereto
shall be deemed to constitute a complete, executed original for all purposes.
(k) Cumulative Rights. The rights, powers and remedies of Lender
hereunder are cumulative and in addition to all rights, powers and remedies
provided under any and all agreements between Borrower and Lender relating
hereto (including, without limitation, the Loan Documents), at law, in equity
or otherwise.
(l) Governing Law. This Loan Agreement shall be governed by and
construed in accordance with the laws of the State.
(m) Liability. If the Borrower consists of more than one Person, the
liability of all of such Persons under this Agreement shall be joint and
several.
(n) Survival. All representations, warranties, covenants and
agreements herein contained on the part of Borrower shall be effective until
the Loan is paid and performed in full, or longer as expressly provided
herein.
(o) Time of Essence. Time is of the essence under this Agreement and
in the performance of every term, covenant and obligation contained herein.
(p) Defeasance: At any time during the period beginning 2 years after
the date hereof, provided no Event of Default is then continuing, the Borrower
is permitted, on any regularly scheduled Payment Date (as defined in the Note)
selected by the Borrower upon at least thirty days notice to Lender (the
Defeasance Date), to defease all of the Loan (a Defeasance) (and release the
existing Collateral) provided that, among other conditions, the Borrower pays
on the Defeasance Date the Defeasance Deposit (as defined below). In
addition, in connection with any such defeasance, the Borrower is required (a)
to grant to Lender a valid perfected first priority security interest in the
Defeasance Deposit and (b) to deliver to Lender, among other things, (i) a
written confirmation from each rating agency which has rated bonds or other
securities issued by an entity which holds the Loan or an interest in the Loan
that such Defeasance will not result in the qualification, downgrade or
withdrawal of the ratings of such bonds or other securities and (ii) such
opinions of counsel, in form and substance satisfactory to Lender, as may be
required by Lender. The (Defeasance Deposit) means any direct noncancellable
obligations of the United States Government, including, without limitation,
treasury bills, notes and bonds in an amount sufficient to provide payments on
or prior to, but as close as possible to, all successive scheduled Payment
Dates upon which interest and/or principal payments are required under the
Loan from and after the Defeasance Date through and including the Maturity
Date and in amounts equal to the payments due on such dates under the Loan and
in the amount of the full outstanding principal balance of the Loan and all
deferred interest thereon on the Maturity Date. Upon the satisfaction of such
conditions, the existing Collateral will be released from the Mortgage and the
Security Agreement and the Defeasance Deposit will serve as the sole
collateral for the repayment of the Loan.
IN WITNESS WHEREOF, Borrower and Lender have caused this Agreement to be
executed, under seal, as of the day and year first above written.
CAROLINA LUBES, INC.
Attest:
By: By:
Name: Name: Stephen P. Conway
Title: Title: President
[CORPORATE SEAL]
ENTERPRISE MORTGAGE ACCEPTANCE COMPANY,
LLC
By:
Name:
Title:
ADDENDUM TO LOAN AGREEMENT
Borrower(s):
CAROLINA LUBES, INC., a corporation organized and existing
under the laws of the State of Florida
Address of
Chief 790 Pershing Road
Executive Raleigh, North Carolina 27608
Office: County of Wake
Enterprise
Address: See attached acehdule of Properties
Enterprise: Each Enterprise which is referred to in this
Agreement is a motor oil change facility operated at
the Enterprise Address under the Trade Name.
Trade Name: Jiffy Lube
Enterprise
Identification
Number: See attached acehdule of Properties
Borrower's
Address for 790 Pershing Road
Notices: Raleigh, North Carolina 27608
Borrower's
Facsimile
Number for
Notices: (919) 828-2433
Federal
Taxpayer
Identification
Number: 59-2596369
Loan Amount: $________________
Commitment
Date: December 3, 1997
Application
Date: December 17, 1997
Franchisor: JIFFY LUBE INTERNATIONAL, INC., a Nevada corporation,
or its successors or assigns under the Franchise
Agreement.
Franchise
Agreement: See attached Schedule of Franchise Agreements
Licensor: Jiffy Lube International, Inc., a Nevada corporation,
or its successors or assigns under the License
Agreement.
License
Agreement: See attached Schedule of Franchise Agreements
Environmental Each Borrower, and the following additional Persons
Indemnitor(s): (if any):
Lucor, Inc.
Lease: See attached Schedule of leases
Mortgage: That certain mortgage or deed of trust, identified in
the Note, dated the date hereof made by Mortgagor to
Lender.
Mortgagor: Borrower
Permitted Liens designated as Permitted Liens in the Mortgage,
Liens: if any, Liens (other than Mortgage liens, judgments,
or other liens which secure monetary obligations) set
forth in the title commitments and/or policies issued
by Chicago Title Insurance Company to lender with
respect to the properties listed on the annexed
Schedule of Properties, and the following: None
Owner(s) of
Borrower
Equity
Securities: Lucor, Inc.
Borrower's
Fiscal Year-
end: December 31 of each year.
Guarantor(s): Lucor, Inc. and the Affiliate Borrower
SIGNATURE OF BORROWER(S):
CAROLINA LUBES, INC.
By:__________________________________
Name: Stephen P. Conway
Title: President
EXHIBIT A
BORROWER
SEMI-ANNUAL COMPLIANCE CERTIFICATE
ENTERPRISE MORTGAGE ACCEPTANCE COMPANY, LLC
Attention:
Re: Loan Agreement, dated ____________ between__________ and
ENTERPRISE MORTGAGE ACCEPTANCE COMPANY, LLC (Loan Agreement),
Enterprise No. _____.
(1) Attached hereto are true and correct copies of (a ) an income statement
and a balance sheet for each of the Enterprise and Borrower for the twelve
months ended [December 31] [June 30]19__ and (b) the calculation of Borrower
Adjusted Free Cash Flow for such 12 months for the Enterprise in the form of
the attached "Calculation of Adjusted Free Cash Flow". (If Borrower's fiscal
year-end does not end on December 31 or June 30, Borrower shall attach to the
compliance certificate true and correct copies of its income statement and
balance sheet for Borrower's most recent fiscal year (unless already
provided). Such financial statements shall be audited(FN-1), reviewed (FN-2)
or certified (FN-3) as required.)
(2) If the loan was personally guaranteed, attached hereto, for the
compliance certificate due March 31, is each guarantor's federal tax return
for the year ended December 31, 19 , and a personal financial
statement as of December 31, 19 .
(3) Borrower owns ____ [INSERT NUMBER OF AND TRADE NAME OF ENTERPRISE] as
of the date hereof. Borrower and its Affiliates (including principals) is
[are] involved in the operation of _____ [INSERT NUMBER OF AND TRADE NAME OF
ENTERPRISE] as of the date hereof.
(4) Borrower hereby certifies that all real estate taxes due and owing in
connection with the Enterprise have been duly and punctually paid as follows:
Date paid:
Amount paid:
Address and phone no.
of office where taxes
were sent:
(5) Borrower hereby certifies to ENTERPRISE MORTGAGE ACCEPTANCE COMPANY, LLC
that (i) all representations and warranties made by Borrower in the above-
referenced Loan Agreement as of the date hereof are true and correct in all
material respects as if made on the date hereof, except as previously
disclosed in writing or as otherwise disclosed in an exhibit attached hereto,
(ii) Borrower has performed all of its covenants and other agreements
required to be performed under the Loan Documents (as defined in the Loan
Agreement) as of the date hereof, (iii) no Event of Default (as defined in the
Loan Agreement) has occurred and Borrower has no reason to believe that an
Event of Default will occur any time in the six-month period following the
date hereof; and (iv) the attached financial statements are true and correct
as of the date thereof.
IN WITNESS WHEREOF, the undersigned has caused this Compliance Certificate to
be executed and delivered for and on behalf of this day of
,19 .
[Borrower]
By:
Name:
Title:
FN-1 Financial statements shall be compiled and audited by an accountant and
certified by Borrower if the aggregate amount of Borrower's and its Affiliates
original principal Loan balance is equal to or greater than $5 million after
taking into consideration any loans that have been prepaid or assumed under the
Loan Documents.
FN-2 Financial statements shall be compiled and reviewed by an accountant and
certified by Borrower if the aggregate amount of Borrower's and its Affiliates
original principal Loan balance is equal to or greater than $2.5 million or
less than $5 million after taking into consideration any loans that have been
prepaid or assumed under the Loan Documents.
FN-3 Financial statements shall be compiled and certified by an accountant and
certified by Borrower if the aggregate amount of Borrower's and its Affiliates
original principal Loan balance is equal to or less than $2.5 million after
taking into consideration any loans that have been prepaid or assumed under the
Loan Documents.
<PAGE>
CALCULATION OF ADJUSTED FREE CASH FLOW (FN-4)
Date of Report:
Borrower:
Enterprise Number:
Period Covered:
1. Enterprise Revenues
2. GAAP Net Income for the Period Covered:
3. Plus: Income Taxes if included in (2) above
4. Plus: Interest Payments on any indebtedness
5. Plus: Non-cash charges to (2) above
a) depreciation and amortization
b) other
6. Plus: Expenses included in (2) above , net of tax effects, if any,
consisting of the management fee (excluding market-rate fees paid
to any on-site manager), automobiles, administrative fees, legal
and accounting services, other professional services, office
supplies, and travel and entertainment and other items deemed to
be owner compensation and non-recurring expenses including those
required by [franchisor].
7. Equals: Adjusted Free Cash Flow for the Period Covered
FN-4 All definitions have the same meaning given in the Loan Agreement.
SECOND AMENDMENT
TO
MANAGEMENT AGREEMENT
THIS SECOND AMENDMENT TO MANAGEMENT AGREEMENT (the "Amendment") is made
and entered into as of July 1, 1997, by and between CFA MANAGEMENT, INC., a
Florida corporation ("Manager"), and CAROLINA LUBES, INC., a Florida
corporation ("Owner").
RECITALS:
A. Manager and Owner are parties to that certain Amended and Restated
Management Agreement, dated August 15, 1988, as amended by that certain
Amendment to Management Agreement dated September 9, 1993 (the "Agreement").
B. Manager and Owner have agreed to modify the standard method of
calculating fees owed to Manager as compensation under the Agreement for the
three (3) month period ending September 30, 1997; and
C. Manager and Owner desire to memorialize such modification on the
terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Owner and Manager agree as
follows:
1. The parties hereby agree that for the three (3) month period ending
September 30, 1997, the calculation of the Management Fee shall be $
52,579.52.
2. All terms and conditions of the Management Agreement not amended by
this Amendment shall remain in full force and effect except to the
extent that they must be modified to effectuate the amendment
contemplated by this instrument. All defined terms shall have the same
meaning as in the Management Agreement unless otherwise defined herein.
3. Nothing contained herein shall imply or suggest similar
modifications to the Agreement will be made in the future.
4. This instrument shall be governed by and construed in accordance
with the laws of the State of Florida.
IN WITNESS WHEREOF, the Manager and Owner have executed this Amendment
as of the day and year set forth above.
Owner: Manager:
CAROLINA LUBES, INC. CFA MANAGEMENT, INC.
/s/ Stephen P. Conway /s/ Jerry B. Conway
By: _________________________ By: _________________________
Stephen P. Conway Jerry B. Conway,
President President
SECOND AMENDMENT
TO
MANAGEMENT AGREEMENT
THIS SECOND AMENDMENT TO MANAGEMENT AGREEMENT (the "Amendment") is made
and entered into as of July 1, 1997, by and between CFA MANAGEMENT, INC., a
Florida corporation ("Manager"), and CINCINNATI LUBES, INC., a Florida
corporation ("Owner").
RECITALS:
A. Manager and Owner are parties to that certain Amended and Restated
Management Agreement, dated August 15, 1988, as amended by that certain
Amendment to Management Agreement dated September 9, 1993 (the "Agreement").
B. Manager and Owner have agreed to modify the standard method of
calculating fees owed to Manager as compensation under the Agreement for the
three (3) month period ending September 30, 1997; and
C. Manager and Owner desire to memorialize such modification on the
terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Owner and Manager agree as
follows:
1. The parties hereby agree that for the three (3) month period ending
September 30, 1997, the calculation of the Management Fee shall be $
5,981.25
2. All terms and conditions of the Management Agreement not amended by
this Amendment shall remain in full force and effect except to the
extent that they must be modified to effectuate the amendment
contemplated by this instrument. All defined terms shall have the same
meaning as in the Management Agreement unless otherwise defined herein.
3. Nothing contained herein shall imply or suggest similar
modifications to the Agreement will be made in the future.
4. This instrument shall be governed by and construed in accordance
with the laws of the State of Florida.
IN WITNESS WHEREOF, the Manager and Owner hereunto set their hands and
seals as of the day and year set forth above.
Owner: Manager:
CINCINNATI LUBES, INC. CFA MANAGEMENT, INC.
/s/ Stephen P. Conway /s/ Jerry B. Conway
By: _________________________ By: _________________________
Stephen P. Conway Jerry B. Conway,
President President
SECOND AMENDMENT
TO
MANAGEMENT AGREEMENT
THIS SECOND AMENDMENT TO MANAGEMENT AGREEMENT (the "Amendment") is made
and entered into as of July 1, 1997, by and between CFA MANAGEMENT, INC., a
Florida corporation ("Manager"), and PITTSBURGH LUBES, INC., a Florida
corporation ("Owner").
RECITALS:
A. Manager and Owner are parties to that certain Amended and Restated
Management Agreement, dated July 1, 1994 (the "Agreement").
B. Manager and Owner have agreed to modify the standard method of
calculating fees owed to Manager as compensation under the Agreement for the
three (3) month period ending September 30, 1997; and
C. Manager and Owner desire to memorialize such modification on the
terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Owner and Manager agree as
follows:
1. The parties hereby agree that for the three (3) month period ending
September 30, 1997, the calculation of the Management Fee shall be $
0.00.
2. All terms and conditions of the Management Agreement not amended by
this Amendment shall remain in full force and effect except to the
extent that they must be modified to effectuate the amendment
contemplated by this instrument. All defined terms shall have the same
meaning as in the Management Agreement unless otherwise defined herein.
3. Nothing contained herein shall imply or suggest similar
modifications to the Agreement will be made in the future.
4. This instrument shall be governed by and construed in accordance
with the laws of the State of Florida.
IN WITNESS WHEREOF, the Manager and Owner hereunto set their hands and
seals as of the day and year set forth above.
Owner: Manager:
PITTSBURGH LUBES, INC. CFA MANAGEMENT, INC.
/s/ Stephen P. Conway /s/ Jerry B. Conway
By: _________________________ By: _________________________
Stephen P. Conway Jerry B. Conway,
President President
Exhibit 21
Lucor, Inc.
Subsidiaries of the Company
Carolina Lubes, Inc.
Cincinnati Lubes, Inc.
Commonwealth Lubes, Inc.
Pittsburgh Lubes, Inc.
PB Lubes, Inc.
Ohio Lubes, Inc.
Tennessee Lubes, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,548,418
<SECURITIES> 0
<RECEIVABLES> 2,309,309
<ALLOWANCES> 41,500
<INVENTORY> 2,138,180
<CURRENT-ASSETS> 6,614,374
<PP&E> 26,311,749
<DEPRECIATION> 4,472,430
<TOTAL-ASSETS> 33,220,280
<CURRENT-LIABILITIES> 4,757,756
<BONDS> 0
0
2,000,000
<COMMON> 56,957
<OTHER-SE> 7,550,453
<TOTAL-LIABILITY-AND-EQUITY> 33,220,280
<SALES> 42,678,313
<TOTAL-REVENUES> 42,678,313
<CGS> 9,979,363
<TOTAL-COSTS> 33,402,465
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,480,679
<INCOME-PRETAX> (2,122,038)
<INCOME-TAX> (540,595)
<INCOME-CONTINUING> (1,581,443)
<DISCONTINUED> 0
<EXTRAORDINARY> (258,625)
<CHANGES> 0
<NET-INCOME> (1,840,068)
<EPS-PRIMARY> (.70)
<EPS-DILUTED> (.70)
</TABLE>
