FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Fiscal Year Ended December 31, 1998
Commission File Number: 0-24058
WESTERN COUNTRY CLUBS, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1131343
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1601 N.W. Expressway, Suite 1610
Oklahoma City, Oklahoma 73118
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (405) 848-0996
Securities to be registered under Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for at least the
past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B 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-KSB or any amendment to
this Form 10-KSB. [ ]
Revenues of registrant for year ended December 31, 1998: $5,278,924
Aggregate market value of voting stock held by
non-affiliates as of April 9, 1999 $2,731,721
Shares of Common Stock, $.01 par value, outstanding
as of April 9, 1999: 3,789,721
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement in connection with the Annual Meeting
of Shareholders to be filed with the Commission pursuant to Regulation 14A, is
incorporated by reference into Part III of this report.
<PAGE>
WESTERN COUNTRY CLUBS, INC.
1998 Form 10-KSB Annual Report
Table of Contents
Item
Part I
Special Note Regarding Forward Looking Statements
1. Description of Business
2. Description of Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
Part II
5. Market for Common Equity and Related Stockholder Matters
6. Management's Discussion and Analysis
7. Financial Statements and Supplementary Data
8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Part III
9. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act
10. Executive Compensation
11. Security Ownership of Certain Beneficial Owners and Management
12. Certain Relationships and Related Transactions
13. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I
Special Note Regarding Forward-Looking Statements
Certain statements in this Form 10-KSB under "Item 1. Description of
Business", "Item 3. Legal Proceedings", "Item 6. Management's Discussion and
Analysis" and elsewhere constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other facts which may cause the actual results, performance or
achievements of Western Country Clubs, Inc. (the "Company") and its subsidiaries
and affiliated partnerships 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: general economic
and business conditions; competition; success of operating initiatives;
development and operating costs; advertising and promotional efforts; adverse
publicity; customer appeal and loyalty; availability, locations and terms of
sites for nightclub development; the development of the "Atomic Burrito"
concept; changes in business strategy or development plans; quality of
management; availability, terms and development of capital; business abilities
and judgment of personnel; availability of qualified personnel; food, labor and
employee benefit costs; changes in, or the failure to comply with government
regulations; regional weather conditions; construction schedules; and other
factors referenced in the Form 10-KSB. The use in this Form 10-KSB of such words
as "believes", "anticipates", "expects", "intends" and similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. The success of the Company is dependent on the
efforts of the Company and its management and personnel and the manner in which
they operate and develop stores.
Item 1. Description of Business
General
Western Country Clubs, Inc. (the "Company") was organized under the laws of
the State of Colorado in December 1989, but had no operations until April 1993.
The Company completed its initial public offering in May 1994, from which it
received net proceeds of approximately $1.9 million from the sale of 460,000
shares of Common Stock. In late 1996, a change of control took place, which
resulted in the replacement of senior management and changes in the Company's
operating and growth strategies. The Company's prior strategies focused heavily
on cost reduction as the preferred means of improving profitability. Such
strategies resulted in lean Club-level management and loss of experienced
personnel, low levels of physical facility maintenance and reinvestment, and
reduced levels of advertising, promotion and entertainment expense. Current
management has replaced much of the Club-level management with more experienced
personnel, instituted management training procedures, implemented a cost
management system which includes daily unit-level accounting and reporting,
improved the sound, light and video systems, increased radio buys within the
local markets, and implemented new advertising and in-store promotions. These
changes reflect current management's belief that long-term strategies involving
greater investment in personnel and physical facilities will produce a superior
financial performance. See Item 6."Management's Discussion and Analysis."
During 1998, after months of searching for a viable restaurant concept to
acquire or merge with, the Company developed its own restaurant concept "Atomic
Burrito", a "Fresh-Mex" restaurant featuring a Mexican menu emphasizing fresh
ingredients and made-to-order burritos. Utilizing senior management's extensive
background in the Mexican segment of the restaurant industry, the Company formed
a wholly-owned subsidiary corporation, "Atomic Burrito, Inc.", and developed a
prototype for the concept, including menus, recipes, design, layout, equipment
specifications and other items such as signage, logos, and an operations manual
of operating procedures. The Company then entered into two License Agreements
with an experienced food service operator who opened two "Atomic Burrito"
restaurants in Stillwater, Oklahoma and in Norman, Oklahoma during the fall of
1998. The Company later entered into another License Agreement with a different
operator for the development of an "Atomic Burrito" restaurant in Longview,
Washington. In December of 1998, the Company entered into a joint venture
agreement with a publicly owned company, New York Bagel Enterprises, Inc. ("New
York Bagel") for the joint development of additional "Atomic Burrito"
restaurants. Subject to available financing, the Company intends to develop the
"Atomic Burrito" concept through both company-owned and joint venture
restaurants, as well as through additional licensed restaurants. See additional
discussion in Item I, "Atomic Burrito Restaurants".
The Company
The Company currently operates two "country-western" theme nightclubs
located in St. Louis, Missouri (the "St. Louis Club") and Wichita, Kansas, (the
"Wichita Club"). Each Club combines live entertainment, dancing, bar and food in
a country-western atmosphere. The Wichita Club has operated as In Cahoots since
its inception in 1994, and the St. Louis Club was changed to an In Cahoots in
1996, having previously operated as A Little Bit of Texas. The Company acquired
its interest in the Wichita Club, an 80% general partnership interest, in
December 1996 from a corporation affiliated with James E. Blacketer and Joe R.
Love, Directors of the Company. During 1997, the Company sold a nightclub
located in Tucson, Arizona (the "Tucson Club"). Additionally, the Company also
operated a nightclub in Indianapolis, Indiana (the "Indy Club") until December,
1997 when the club was closed in anticipation of its sale in early 1998. See
Item 6. "Management's Discussion and Analysis."
The Company is taking a cautious approach toward expansion of its nightclub
business. The Company has closed and sold two of its clubs in 1997 and 1998, and
sold its partnership interest in another club in 1997. With the Company's
current focus on development of its "Atomic Burrito" restaurant concept, it is
anticipated that most of the Company's resources in the future will be utilized
for the development and expansion of the "Atomic Burrito" restaurant concept,
rather than for the development of additional nightclubs.
The St. Louis Club
The St. Louis Club is located on the I-70 corridor between St. Louis,
Missouri and Kansas City, Kansas. The Club occupies roughly one-half of a
building which previously housed a Sam's Club wholesale warehouse operation and
is in excess of 56,000 square feet making it the largest nightclub in Missouri.
This mammoth nightclub operates under the name In Cahoots and features a design
with the look and feel of an authentic rustic western town. The Club, with a
capacity of almost 3,000, houses a huge dance floor, performance stage, a
billiards and video arcade area and several retail stores including Sundance
Silver & Hide, which sells wardrobe items, including hats and boots, and the
Homestead Store which sells Indian artifacts, clothing and jewelry. Sundance
Silver & Hide occupies approximately 800 square feet of the Club, for which it
pays $1,200 per month pursuant to an oral agreement with the Company. The
Homestead Store occupies approximately 600 square feet of the Club, for which it
pays $300 plus 10% of sales per month pursuant to an oral agreement with the
Company. The Club also features a walk-up restaurant selling various food items
in addition to its extensive drink offerings. The St. Louis Club featured
numerous nationally known entertainers during the past year, including such
performers as Tracy Lawrence, Lone Star, Chris LeDoux and Blackhawk.
The St. Louis Club opened for business as a non-alcoholic club on April 22,
1994. It began marketing alcoholic beverages on May 19, 1994 upon receipt of a
liquor license from the Supervisor of Liquor Control of the State of Missouri.
The customer's average expenditure, exclusive of food and souvenirs, is
approximately $11.00.
The Wichita Club
The Wichita Club opened in February 1994, and has been voted the top
country-western club in Wichita since opening. It consists of approximately
30,000 square feet and has parking for 900 cars. The Wichita Club is designed to
appeal to rodeo cowboys as well as the casual country western music lover. It
blends high tech, state-of-the-art, and "good old country boy" entertainment.
The high tech presentation includes giant 20 foot video screens, double CD
players, a roll up lighted American flag, neon lighting and the capability to
include a live band's sound throughout the house speaker system. A comfortable
ambiance is achieved through rustic wooden floors, old west photographs, antique
back bars, and a huge, hand-painted mural of past and present Country and
Western entertainers. The showcase of the Club is the circular, race track style
dance floor, complete with a bar in the center allowing for more dancing room.
The Company acquired its interest in the Wichita Club on December 16, 1996,
when it acquired Entertainment Wichita, Inc. ("EWI"), the general partner and
80% owner of In Cahoots, Limited Partnership, a Kansas limited partnership. In
exchange for the 80% interest, the Company issued 400,000 shares of its Common
Stock and assumed $150,000 in debt through a merger transaction. EWI was owned
45.5% by Shane Investments, L.C. ("Shane Investments"), a corporation which is
solely owned and controlled by Joe Robert Love, Jr., the adult son of Joe R.
Love, a Director of the Company. Shane Investments received 250,500 shares of
the Company's Common Stock upon completion of the transaction in December 1996.
Entertainment
The Company seeks to book nationally known entertainers as well as
regionally-known entertainers and/or bands which do not yet have national
recognition. National name entertainers such as Willie Nelson, Jerry Lee Lewis,
Tracy Byrd and Blackhawk have performed at one or more of the Company's clubs
during 1998. The Company currently has Toby Keith and Chris Ledoux booked for
engagements in 1999. The Company utilizes these performers to enhance its
customer traffic and revenues in what would otherwise be less busy time periods
in the nightclub business. Typically, the Company charges admission fees which
approximate the fee payable to the performers and realizes the benefit from the
increased sales which are generated due to the large numbers of customers in
attendance.
Atomic Burrito Restaurants
During late 1997 and the first half of 1998, the Company conducted an
extensive search for a viable restaurant concept to acquire and/or merge with.
Management's belief was that expansion of a restaurant concept had many
advantages to the Company compared to expansion of its nightclub business. Under
the guidance and direction of Company President and Chief Executive Officer,
James E. Blacketer, and Vice-President of Operations, Dominic W. Grimmett, the
Company decided to develop its own restaurant concept during the summer of 1998.
Blacketer and Grimmett had extensive backgrounds in the Mexican segment of the
restaurant industry and they developed a "Fresh-Mex" burrito concept, which
features fresh ingredients and made-to-order burritos. The menu contains a
variety of Mexican items with the burrito being the featured entre, and with a
focus on lunch and dinner business. While the concept emphasizes a family
atmosphere, alcoholic beverages will be an option depending on the particular
location.
The Company formed a wholly-owned subsidiary, "Atomic Burrito, Inc.", an
Oklahoma corporation, in the summer of 1998, for development of its new
restaurant concept. Because of its limited financial resources, the Company
opted to develop its prototype restaurants through a "license agreement" whereby
an experienced restaurant operator would own and operate the restaurant, using
the "Atomic Burrito" name, menu, recipes, logo, layout and design, and utilizing
the "Atomic Burrito" operations manual developed by the Company. In return, the
licensee would pay the Company's subsidiary (licensor) an initial license fee
and an ongoing royalty fee.
The prototype restaurants, as developed by the Company, are planned to be
located in leased premises of approximately 3,000 square feet. Remodeling,
construction and equipment costs are estimated at $250,000 to $300,000, though
it may be possible to convert an existing restaurant location for less. The
restaurants are expected to be open from 11:00 a.m. until 10:00 p.m., and will
serve a variety of Mexican menu items, centered around the burrito. The food
will be prepared on a serving line, made-to-order as the customer progresses
along the line. Some units may offer alcoholic beverages in addition to soft
drinks.
The first two "Atomic Burrito" restaurants were opened in Stillwater and
Norman, Oklahoma in the fall of 1998 under license agreements. Subsequent to
fiscal year end 1998, the Company entered into an additional license agreement
of an "Atomic Burrito" restaurant to be opened in Longview, Washington. In
addition, in October of 1998, the Company entered into a joint venture
agreement with New York Bagel Enterprises, Inc. ("New York Bagel"), for the
joint development of up to eight "Atomic Burrito" restaurants. Under the
agreement, New York Bagel is to contribute the leased premises, the lease,
leasehold improvements and equipment in certain existing New York Bagel
restaurants and the Company is to contribute up to $150,000 per restaurant to
pay for conversion costs and additional equipment. According to the agreement,
the Company would own a 60% interest in the restaurant and New York Bagel would
own a 40% interest in the restaurant. The agreement also provides for the
development of additional "Atomic Burrito" restaurants over an 18-month period.
The first joint venture restaurant under the agreement opened in March 1999 in
Tulsa, Oklahoma, with a second restaurant scheduled to open in April 1999 in
Wichita, Kansas. After the end of fiscal 1998, the Company also entered into a
separate agreement with another operator for the development of an "Atomic
Burrito" restaurant in Houston, Texas with an expected opening in June of 1999.
Expansion Strategy
The Company intends to grow primarily by developing its "Atomic Burrito"
concept, through license agreements, joint venture developments, and through
company-owned restaurants. Additional restaurants may be financed through the
formation of limited partnerships, internal funding, bank financing or private
and/or public equity or debt offerings, or a combination of the foregoing. The
Company may also purchase existing operations, which may be converted into
"Atomic Burrito" restaurants through transactions involving the issuance of the
Company's stock and/or cash. Several locations for future "Atomic Burrito"
restaurants have been identified by management, including locations in
Nashville, Tennessee; Dallas, Austin, San Antonio and Lubbock, Texas; and Kansas
City and St. Louis, Missouri.
Government Regulation
The Company's business is subject to extensive federal, state and local
government regulations, including regulations relating to alcoholic beverage
control, public health and safety, zoning and fire codes. In addition, each
nightclub restaurant and "Atomic Burrito" restaurant must have food service
licenses from local health authorities.
Alcoholic beverage control regulations require each of the nightclubs
and/or restaurants to apply to a state authority, and, in certain locations,
county or municipal authorities for a license or permit to sell alcoholic
beverages on the premises and to provide service for extended hours and on
Sundays.
Alcoholic beverage control regulations relate to numerous aspects of the
daily operation including advertising, wholesale purchasing, inventory control
and handling, storage and dispensing of alcoholic beverages. Licenses to sell
alcoholic beverages must be renewed annually and are subject to suspension or
revocation for cause, including violation by the Company or its employees of any
law or regulation pertaining to alcoholic beverage control, such as those
regulating the minimum age of patrons or employees, advertising, wholesale
purchasing, and inventory control, handling and storage. Each nightclub and/or
restaurant is operated in accordance with stringent procedures designed to
assure compliance with all applicable codes and regulations.
In recent years, certain states have enacted "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment, which wrongfully served alcoholic beverages to
such person. Presently, Missouri, Kansas, and Oklahoma, the states in which the
Company operates, do not have dram-shop statutes. However, should these states
enact such statutes, the Company would be subject to additional exposure in such
cases where judgments for damages exceeded its insurance coverage.
The development and construction of additional nightclubs and/or
restaurants will be subject to compliance with applicable zoning, land use and
environmental regulations. Management believes that federal and state
environmental regulations have not had a material effect on the Company's
operations, but more stringent and varied requirements of local governmental
bodies with respect to zoning, land use and environmental factors could delay
construction of new nightclubs and/or restaurants and add to their cost.
The Company is also subject to the Fair Labor Standards Act, the
Immigration Reform and Control Act of 1986 and various state laws governing such
matters as minimum wages, overtime, tip credits and other working conditions. A
significant number of the Company's hourly personnel are paid at rates relating
to the federal minimum wage and, accordingly, increases in the minimum wage or
decrease in the allowable tip credit will increase the Company's labor cost. The
Company may also incur labor cost increases as a result of certain mandatory
medical and parental leave benefits legislation enacted by the United States
Congress.
The Americans With Disabilities Act prohibits discrimination in employment
and public accommodations, such as restaurants and nightclubs, on the basis of
disability. Under the Act, the Company is required to provide service to, or
make usable accommodations for the employment and service of, disabled persons.
Competition
The nightclub business is highly competitive. Most of the companies, which
own and/or operate nightclubs are substantially larger than the Company, and
have greater resources, operating histories and experience. They include many
national, regional and local chains with more locations and larger advertising
budgets. Nightclub and theme entertainment businesses are also affected by
changing customer tastes, local and national economic conditions affecting
spending habits, population shifts and traffic patterns. Quality of service,
attractiveness of facilities, popularity of entertainment and price are also
important factors.
The restaurant business is even more competitive than the nightclub
business, with restaurants literally on most every corner in most cities and
with new restaurants opening every week. The industry has many large and small
operators, with most having greater financial resources than the Company, and
with many having more experience in restaurant operations. Restaurant customers'
tastes are even more fickle than those of nightclub customers, and most of the
same factors discussed above with regard to nightclubs and their competition are
also applicable to restaurants. The Company, however, believes that its "Atomic
Burrito" concept will be well received and will be able to successfully compete
in the highly competitive restaurant industry, and believes that the experience
of senior management will give the Company more opportunity for success, though
there are no assurances that this will be the case.
Trademarks
The Company uses the trademark In Cahoots in the operation of its business.
This mark is used by others in the operation of businesses throughout the
country, including other nightclub operators. Because of these uses, the Company
believes that it cannot, nor can its competitors, register the mark with the
United States Patent and Trademark office to obtain exclusive, nationwide rights
to the mark. The Company believes, however, that it has enforceable common law
rights to its mark for use in the immediate trade areas in which the Clubs
operate, and it has encountered no claims of trademark infringement. As the
Company expands, it may encounter claims of trademark infringement requiring the
Company to negotiate license agreements with the prior user or to use other
non-infringing trademarks for nightclubs in the affected areas.
The Company has, however, filed trademark applications with the United
States Patent and Trademark Office for the name "Atomic Burrito" and the phrase
"Out of this World!." While the applications are currently pending, and there is
no way to determine in advance the final decision, the Company believes that
there are few, if any, other users of the name and expects to eventually be
granted the trademarks applied for.
Employees and Consultants
As of April 9, 1999, the Company had four full time employees in the
corporate office, including James E. Blacketer, President and Chief Executive
Officer, and Dominic W. Grimmett, Vice-President of Operations. The Company also
had approximately 120 employees in the two nightclubs, and approximately 35
employees in the joint venture "Atomic Burrito" restaurant in Tulsa, Oklahoma.
Year 2000 Compliance
The Company is aware of the potential for industry-wide business
disruption, which could occur due to problems related to the "Year 2000 Issue".
It is the belief of the Company that a prudent plan is in place to address these
issues. The components of the Company's plan include: an assessment of internal
systems for modification and/or replacement; communication with external vendors
to determine their state of readiness to maintain an uninterrupted supply of
goods and services to the Company; an evaluation of the Company's equipment as
to its ability to function properly after the turn of the century; an evaluation
of facility related issues; and the development of a contingency plan.
The Company has developed a comprehensive plan to reduce the probability of
operational difficulties due to Year 2000 related failures. While much work
remains, the Company believes that it is approximately 75% complete with regard
to the identification and remediation of Year 2000 issues.
The process the Company is following to achieve Year 2000 compliance for
internal systems is as set forth herein. All of the Company's financial
accounting is outsourced, so no issues exist for the Company with regard to its
financial accounting at all of its locations, and is in the process of
programming these systems so that they will all roll over to the Year 2000. It
is expected that all restaurant and club operating systems and cash registers
will be compliant by the end of the third quarter of 1999. Testing being
currently conducted have identified no unsolvable issues.
The Company is communicating with its external vendors to gain an
understanding of their state of readiness to maintain an uninterrupted supply of
goods and services to the Company, and their ability to satisfactorily deal with
their own Year 2000 issues. Most all major suppliers and vendors have assured
the Company that there will be no disruption of the delivery of goods and
services at the turn of the century.
The Company is in the process of completing an inventory of currently used
equipment, and will determine the Year 2000 readiness through communication with
the equipment manufacturers and testing where appropriate. At this time the
Company is not aware of any equipment which is affected by the Year 2000 issue
which will not be repaired or replaced prior to year end. The Company remains
aware of the potential for imbedded logic within microchips to cause equipment
failure. The Company believes that its plan of action provides a prudent
approach toward evaluating equipment, though some equipment may prove not
feasible or possible to test.
The Company is in the process of completing an inventory and evaluating
facilities related equipment with the potential for Year 2000 related failures.
The same action as set forth in the preceding paragraph will be used for
evaluating facilities related equipment.
The Company is evaluating the total cost of Year 2000 compliance. At this
time, primarily because the Company outsources so much of its internal
functions, including its financial accounting functions, the Company expects the
total cost of year 2000 compliance to be less than $50,000.
At this time the Company is not aware of any internal systems or external
vendor issues related to the Year 2000 which would prevent or seriously impact
the Company from continuing operations before, during or after the turn of the
century. Although the Company believes it is taking prudent action related to
the identification and resolution of issues related to the Year 2000, there is
no certainty that certain key vendors are compliant, and there are possibly
technical vagaries to logic imbedded within microchips which may prove not
feasible or impossible to test. The Company continues the risks associated with
potential Year 2000 related failures. The Company is working to develop a formal
contingency plan to alleviate the impact of high potential or serious failures.
The Company anticipates having this contingency plan outlined by the end of the
second quarter of 1999.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's results of operations, liquidity or
financial condition. The Year 2000 Project is uncertainty about the Year 2000
problem, and in particular, about the Year 2000 compliance and readiness of its
material external agents. The Company believes that with the implementation of
new business systems and completion of the Project as scheduled, the possibility
of significant interruptions of normal operations should be reduced.
Item 2. Description of Properties
The Company's principal offices are located at 1601 N. W. Expressway, Suite
1610, Oklahoma City, Oklahoma, 73118. The Company's offices occupy approximately
2,460 square feet, for which it pays $3,075 per month pursuant to a lease, which
expires in June 2001.
In August 1993, the Company entered into a lease for nightclub space in St.
Louis, Missouri. The lease, which expires in August 2003, is for a 10 acre
parcel of land housing a 106,744 square foot building and parking facilities.
The rental for the first five years is $22,238 per month, escalating to $26,686
per month for the second five years. The Company has the right to extend the
lease for two additional five year periods at increased rental rates. The lease
is guaranteed by International Entertainment Consultants, Inc., a company
affiliated with Mr. Troy Lowrie. The Company subleases approximately 50,000 feet
of this facility for which it receives $14,000 per month under a two year
sublease which expires in August, 1999.
The Wichita Club is leased from Boots, Inc., a 20% limited partner in the
In Cahoots Limited Partnership but otherwise unaffiliated with the Company. The
lease is for a ten-year term, expiring in the year 2003, with an option to
extend the term for two, five-year periods, and requires monthly payments of the
greater of $12,500 or 6% of gross sales.
On January 1, 1999, the Company entered into a lease agreement for a
building in Tulsa, Oklahoma, for the joint development of an "Atomic Burrito"
restaurant with New York Bagel. The lease is for five years with three, five
year options, with the rental payments being $4,600 per month during the initial
term of the lease, and with increases for the three option periods.
The Company carries general liability insurance for the St. Louis Club in
the amount of $2,000,000 and $850,000 in property liability coverage. In Cahoots
Limited Partnership, owner of the Wichita Club, carries $2,000,000 general
liability insurance and building and property insurance coverage in the amount
of $1,200,000 and $450,000, respectively. The joint venture for the Tulsa
"Atomic Burrito" restaurant carries general liability insurance of $1,000,000
and building and property insurance coverage in the amounts of $400,000 and
$300,000, respectively.
The Company maintains $1,000,000 in liquor liability insurance coverage at
each of its nightclubs, including coverage for assault and battery and other
risks associated with the nightclub business.
Item 3. Legal Proceedings
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" for additional factors
relating to such statements.
The Company is involved in various legal actions associated with the normal
conduct of its business operations. No such actions involve known material gain
or loss contingencies not reflected in the consolidated financial statements of
the Company.
Item 4. Submission of Matters to a Vote of Security Holders
During the recently completed fiscal year, the Company did not submit any
matter to a vote of its shareholders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
On April 9, 1999, there were approximately 88 shareholders of record of the
Company's Common Stock. Based upon information received from brokers and others
in fiduciary capacity, the Company estimates that the total number of
shareholders of the Company's Common Stock exceeds 500 as of that date. The
Company's Common Stock was approved for listing on the NASDAQ SmallCap MarketSM,
effective May 18, 1994, under the symbol "WCCI." Prior to listing on NASDAQ, the
Company's Common Stock briefly traded in the pink sheets.
The following table sets forth, for the periods indicated, the range of
high and low closing bid quotations for the Company's Common Stock, as reported
by NASDAQ:
<TABLE>
<CAPTION>
1998 Fiscal Year High Bid ($) Low Bid ($)
----------------- ------------ -----------
<S> <C> <C>
First Quarter 1.125 .625
Second Quarter 1.125 .5625
Third Quarter .9375 .50
Fourth Quarter 1.375 .5625
1997 Fiscal Year
-----------------
First Quarter 2.25 1.375
Second Quarter 1.125 1.00
Third Quarter 1.125 .625
Fourth Quarter 1.0625 .50
</TABLE>
On December 31, 1998, the last reported bid and asked prices for the
Common Stock were $.6875 and $1.00, respectively.
Revised NASDAQ Listing Requirements
Effective February 23, 1998, the NASDAQ SmallCap Market implemented revised
listing requirements for companies wishing to continue their listing on the
exchange. These revised requirements included provisions that listed companies
maintain net tangible assets of at least $2 million, public float of at least
500,000 shares with a market value of at least $1 million, and a minimum bid
price for the Company's stock of $1 per share. While the Company has maintained
compliance during 1998 with all other requirements, it was notified by NASDAQ in
late 1998 that the Company was not in compliance with the minimum bid price
requirement of $1.00 per share. The Company then requested a hearing before the
NASDAQ Listing Qualifications Panel and a hearing was held on February 4, 1999.
On February 18, 1999, the Panel notified the Company that it had until April 15,
1999 to comply with the minimum bid price requirement or be delisted from the
NASDAQ SmallCap Market. As of March 31, 1999, the Company had been in compliance
with the minimum bid price requirement for twenty consecutive days and fully
expects to be allowed continued listing of its common stock.
Dividends
The Company has never declared a cash dividend with respect to its Common
Stock and intends to retain future earnings to support the Company's growth.
There are no contractual restrictions on the Company's present or future ability
to pay dividends. Future dividend policy is subject to the discretion of the
Board of Directors and is dependent upon a number of factors, including future
earnings, capital requirements and the financial condition of the Company. The
Company declared dividends on its preferred stock totaling $56,350 during the
year ended December 31, 1998.
Item 6. Management's Discussion and Analysis
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" for additional factors
relating to such statements.
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Report.
General
The Company commenced operations in April 1993 with a country-western
nightclub in Indianapolis, Indiana (the "Indy Club"). In April 1994, the Company
opened a nightclub in a suburb of St. Louis, Missouri (the "St. Louis Club").
The Company financed these clubs through limited partnerships in which it was
the general partner. In May 1994, the Company completed its initial public
offering of securities receiving net proceeds of approximately $1.9 million. In
November 1994, the Company purchased a nightclub in Tucson, Arizona (the "Tucson
Club"). At this time, the Company also increased its ownership interest in the
Indy Club to 80% and acquired 100% of the St. Louis Club.
In June 1995, the Company participated as a 50% limited partner in a
partnership formed to acquire a nightclub in Atlanta, Georgia (the "Atlanta
Club"). The Company contributed $500 in partnership capital and loaned an
additional $638,822 to the partnership. Due to continuing losses, the Company
wrote off its interest in the Atlanta Club effective December 31, 1995. On
January 9, 1998, the Company sold its interest in the Atlanta Club for $220,000.
Details of the sale are described more fully below.
In September 1996, Troy H. Lowrie, then President and largest shareholder
of the Company, entered into a Stock Purchase Agreement whereby (i) Red River
Concepts, Inc., a Delaware corporation ("Red River"), or its designees would
acquire in three installments 1,300,000 shares of Mr. Lowrie's Common Stock;
(ii) new management assumed control of the operations of the Company; and (iii)
James E. Blacketer and Joe R. Love, directors of Red River, were appointed to
the Company's Board of Directors. The change of control occurred in October
1996.
Subsequently, on December 16, 1996, new management acquired a nightclub in
Wichita, Kansas (the "Wichita Club") for 400,000 shares of the Company's Common
Stock and assumption of $150,000 in debt. The Wichita Club was owned in part by
entities affiliated with James E. Blacketer and Joe R. Love, directors of the
Company. See Item 12, "Certain Relationships And Related Transactions."
New management also undertook steps to improve the financial performance of
the Tucson Club, which was hampered by high acquisition, leasehold and operating
costs and declining revenues. During October 1996, the Club was remodeled into
two entertainment venues in order to attract new customers and revenues, cost
cutting measures were instituted, and new unit-level management was installed.
Despite these measures, based on the Club's continuing decline in performance,
high overhead and occupancy costs, the Tucson Club's assets were deemed to be
impaired and were written off as of December 31, 1996. The Company sold the
Tucson Club's assets in May 1997 and completed an agreement to settle the
leasehold obligations in August 1997. Details of the sale and lease settlement
are described more fully below.
In February 1997, the Company filed a registration statement for a public
offering of up to 460,000 shares of preferred stock and up to 1,150,000 warrants
to purchase the Company's Common Stock (the "Public Offering"). The Company
cleared all regulatory requirements concerning the Public Offering but the
Company's underwriter was not successful in placing the preferred shares.
Therefore, costs associated with the Public Offering, which had previously been
capitalized were written off at December 31, 1997.
During the fourth quarter of 1997, the Stock Purchase Agreement between
Troy H. Lowrie and Red River Concepts, Inc. was amended whereby Mr. Lowrie
retained 430,000 of the shares which were originally to be sold to Red River.
In June 1998, the Company formed a subsidiary corporation, Atomic Burrito,
Inc., through which to develop a new restaurant concept. Subsequently, Atomic
Burrito, Inc. entered into license agreements for two "Atomic Burrito"
restaurants to be located in Stillwater and Norman, Oklahoma, and entered into a
third license agreement for a restaurant in Longview, Washington. In addition,
in October 1998, the Company entered into a joint venture agreement with New
York Bagel Enterprises, Inc., ("New York Bagel") for the joint development of
"Atomic Burrito" restaurants. The agreement provides for New York Bagel to
contribute certain of its restaurant locations, including leases, leasehold
improvements, and equipment for a 40% interest in the operation, while the
Company would contribute up to $150,000 for the remodel and conversion costs, as
well as for additional equipment. The agreement also provides for the joint
development of a minimum of four and maximum of eight "Atomic Burrito" units
over an 18 month period. The first unit opened in March 1999 in Tulsa, Oklahoma,
while the second unit is scheduled to open in late April 1999.
Liquidity and Capital Resources
Historically, the Company has funded its capital needs through a combination of
cash flows from operations, proceeds from public and private securities
issuances, and loans from commercial banks, principal shareholders or related
persons or entities. During 1998, the Company had no borrowings from any
sources, and raised no capital through issuing any securities or otherwise. The
Company did recognize $1,345,534 from the sale of property and equipment,
primarily from the sale of the Indy Club, and received payment on notes
receivable during the year of $144,570. Net cash used in operating activities by
the Company increased to $108,620 compared with a deficit of $94,785 during
1997. The Company invested $18,004 in capital expenditures during 1998, accrued
$56,350 in dividends on its preferred stock, and repaid notes payable of $66,270
and $108,790. The Company's net cash increased during 1998 by $119,462 from
$85,949 to $205,411, primarily due to improved efficiencies in operations and
increased profitability of the two nightclubs. See "Consolidated Statement of
Cash Flows."
During the first quarter of 1998, two note holders agreed to convert their
notes amounting to $560,000 due from the Company into new issues of preferred
stock. Specifically, Mr. Lowrie will receive 40,000 shares of Series A 10%
Cumulative Convertible Preferred Stock in exchange for the Company's note and
accrued interest of $400,000 owing at December 31, 1997. Ceres, L.L.C., an
Oklahoma limited liability company, will exchange its $160,000 note for 16,000
shares of Series B 12% Cumulative Convertible Preferred Stock.
As of December 31, 1998, the Company had cash of $205,411, which was
generated from operating activities, investing activities and financing
activities, and which was an increase from $85,949 at the end of 1997. For the
year ended December 31, 1998, the Company generated a positive cash flow from
operations of $108,620, a substantial increase from the negative cash flow of
$94,785 for the prior year. This increase in cash flow from operating activities
is not the result of any particular event, but rather reflects a general
strengthening of the Company's overall operations and financial position.
At December 31, 1998, the Company's working capital position (current
assets minus current liabilities) was a positive $126,983 compared with a
negative $833,348 at the end of 1997, or an increase of $960,331. This increase
in working capital position resulted from an increase in cash of $119,462, an
increase in notes receivable of $232,515 (mostly due to the sale of the Indy
Club), a decrease in accounts payable and accrued liabilities of $350,898 and
decreases in the current portion of notes payable of $314,570 and decreases in
the current portion of long-term debt of $182,032. Management believes its
improved working capital position reflects positive changes implemented during
1998 as well as the increased profitability of the Company's business.
Management also expects this positive trend to continue in 1999.
Property and equipment is primarily made up of assets required to open and
operate the St. Louis and Wichita Clubs. Leasehold improvements total
$1,519,862; equipment, furniture and fixtures are $668,315; and land and
improvements are $77,011. These figures have decreased from 1997, reflecting the
sale of the Indy Club in early 1998. Goodwill decreased from $25,970 to $11,130
due to amortization during 1998.
The deferred income tax asset decreased by $49,670 to $367,740 due to the
utilization of this asset by the Company because of its profitable 1998. The
asset resulted from the net operating loss carryforwards from the loss on the
write-off of the Tucson assets in a prior year. Future realization of this asset
is dependent upon the Company generating sufficient future taxable income
against which its loss carryforwards can be offset. The amount of the deferred
tax asset at December 31, 1998 does not include $827,807 reserved as a deferred
income tax valuation allowance, due to the uncertainty of the Company being able
to realize the benefit from such losses in future periods. However, based on the
profitable earnings realized in 1998, and the positive activities of the
Company, management expects to receive benefit from the amount reserved in
future periods.
The Company's current liabilities reflect a reduction of $824,600,
primarily attributable to a $314,570 reduction in the current portion of notes
payable and a $182,032 reduction in the current portion of long-term debt, as
well as reductions in accounts payable of $104,387 and reductions in accrued
liabilities of $246,511. These reductions came about because of the conversion
of $560,000 of Company debt to preferred stock during the first quarter of 1998,
as well as because of the Company's improved profitability during 1998 and the
resulting use of cash to reduce payables and accrued liabilities. Notes payable
reduced by $106,187 to $20,438 and long-term debt reduced by $429,241 to $7,843,
also because of the conversion of debt to preferred stock.
The Company has developed a new restaurant concept, "Atomic Burrito", and
is planning aggressive expansion of this concept during 1999. This expansion
strategy will increase the need for additional financing for the Company during
1999. The Company plans to explore various methods and strategies for obtaining
necessary capital for expansion, including traditional bank financing, capital
raising through formation of limited partnerships, private and/or public equity
or debt offerings, internal funding, or a combination of the foregoing. The
initial fees received from licensees of the "Atomic Burrito" concept will
provide additional operating funds for the Company, as well as the operating
profits from the restaurants developed by the Company. Management believes its
current operations will generate sufficient cash flow to operate the Company,
but believes that additional sources of financing will be necessary to expand
the new restaurant concept. While the success of the new restaurants will
dictate in part the Company's ability to obtain financing for such expansion,
management believes that the "Atomic Burrito" concept will be a viable
investment vehicle for the Company in the future.
Results of Operations - Year Ended December 31, 1998 Compared to the Year Ended
December 31, 1997
The Company's revenues from club operations decreased in 1998 by $1,837,853
or 26% to $5,278,924, reflecting a decline in beverage and food sales of
$1,092,250 or 25% and a decline in admission fees of $720,238 or 34%. These
declines resulted from the close of the Indy Club at the end of 1997, with 1998
figures reflecting an entire year without the Indy Club's revenues. The lower
levels of revenues are not cause of concern because management believes its 1998
results show that the Company can operate profitably with the reduced revenues.
Total costs and expenses in 1998 decreased by $3,387,208 or 40% to
$4,834,083, with corresponding decreases of $1,283,401 or 52% in cost of
products and services to $1,210,405, of $1,022,904 or 24%in general and
administrative expense to $3,238,189, of $196,488,42% in depreciation and
amortization to $270,633 and interest expense of $86,853,55% to $71,968. These
reductions also reflect the closing of the Indy Club in late 1997 and the
comparative impact of three operating clubs in 1997 versus two operating clubs
in 1998. The reduction in total costs and expenses in 1998 also reflects
non-recurring write-offs in 1997 of acquisition goodwill of $75,687, impairment
of long-lived assets of $250,272, write-off of offering costs of $374,653 and
litigation losses of $216,808. These one-time charges in 1997 were significantly
larger than the $62,458 litigation expense in 1998.
For the year ended 1998, the Company made a consolidated profit of
$275,707, compared with a consolidated loss of $987,376 in 1997. The profitable
year was the first for the Company since going public in 1994. While the 1998
results constitute a considerable improvement from 1997 and prior years,
management believes that 1998 earnings were negatively impacted by several
non-recurring transactions and/or write-offs which related to transactions and
events which occurred prior to present management taking over the Company's
operations in late 1996. These items include the write-down of an investment of
$57,400, the write-off of a note receivable of $55,000, a litigation cost of
$62,458, as well as additional provisions for losses on the sale of the Tucson
Club of $36,212 and on the sale of the Indy Club of $25,661. Inasmuch as these
items are all non-cash, non-recurring charges to earnings in 1998, and all
resulted from transactions entered into by prior management, present management
believes that the total of these items in the amount of $236,731 have unduly
impacted the earnings generated by the Company's operations. Management believes
that in the future, without the expense and the drain of these old charges, the
Company's profits will continue to improve. Management believes that the 1998
results are the first step for the Company toward a future of profitability.
Management also believes that the expansion of its new "Atomic Burrito"
restaurant concept will also contribute to continued profitability in 1999 and
in future years.
Item 7. Financial Statements and Supplementary Data
The Company's audited financial statements, together with the report of
auditors, are included in the report after the signature page.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
On January 20, 1999, the Company dismissed the auditing and accounting firm
of Gross, Collins + Cress, P.C., Atlanta, Georgia, who have acted as certifying
accountants for the Company for the years ended December 31, 1996, and 1997 and
engaged the auditing and accounting firm of Gray & Northcutt, Inc., Oklahoma
City, Oklahoma, to act as certifying accountants for the year ended December 31,
1998. The Company is not aware of any disagreements with the prior accountants,
and the decision to change accountants was not based upon any question as to
accounting treatment of any transaction or type of audit opinion that might be
issued. Rather, the Company believed that the change in accounting firms would
be beneficial to the Company's planned expansion over the next several years, as
well as resulting in cost savings and having the added convenience of a firm
based in the same city as the Company.
PART III
Item 9. Directors, Executive Officers Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
Item 10. Executive Compensation
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
Item 11. Security Ownership Of Certain Beneficial Owners And Management
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
Item 12. Certain Relationships And Related Transactions
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
Item 13. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial statements: See index to consolidated financial statements
immediately following the signature page of this report.
2. Financial statement schedules: Financial statement schedules have been
omitted because they are not required or the information is included in
the financial statements and notes thereto.
3. Exhibits: Exhibits required to be filed with this Form 10-KSB are
identified by the numbers indicated, and, except where incorporated by
reference, immediately follow the financial statements.
Number Description
3.1 Articles of Incorporation, dated December 20, 1989 (1)
3.2 Amendment to Articles of Incorporation, dated November 30, 1993 (1)
3.2 Bylaws of Western Country Clubs, Inc. (1)
4.0 Agreement to convert notes to Series A Preferred Stock dated
January 1, 1998 between Troy H. Lowrie and Western Country Clubs,
Inc. (12)
4.1 Agreement to convert note to Series B Preferred Stock dated
February 18, 1998 between Ceres, L.L.C. and Western Country Clubs,
Inc. (12)
9.0 Voting Trust Agreement, dated September 20, 1996, between Red River
Concepts, Inc. and Troy H. Lowrie (7)
10.1 Lease Agreement, dated August 26, 1993, between Wal-Mart Stores,
Inc. and Inc. and Western Country Clubs, Inc. (1)
10.2 License Agreement, dated January 20, 1993, between Western Country
Clubs, Inc. and Western Country Club I, Ltd. (1)
10.3 Option for Limited Partnership Interest, dated September 23, 1993,
between Western Country Clubs, Inc. and Merrill E. Roberts (1)
10.4 Stock Option Agreement, dated December 16, 1993 (1)
10.5 Lease with Option to Purchase, dated December 26, 1993, between and
among Edward L. and Barbara L. Benshoof and Western Country Clubs,
Inc. (1)
10.6 Agreement to Purchase and Sale of Business and Assets, with
exhibits, dated November 1, 1994 (2)
10.7 Bill of Sale, dated November 1, 1994, transferring Arizona Bar
Liquor License No. 06100208 to Western (2)
10.8 Amendment to Covenant Not To Compete, updated, between Western and
Clarance O. Bond, Jack E. McMurrough and Ada L. Bond (9)
10.9 Agreement and Plan of Merger, dated October 10, 1995, between
Western Country Clubs, Inc., Western Newco, Inc., and Cowboys
Concert Hall - Arlington, Inc. (6)
10.10 Lease with Option to Purchase, dated October 14, 1992, between Expo
Bowl, Inc. and Texas of Indy, Inc. (1)
10.11 Guaranty of Lease with Option to Purchase, dated October 14, 1992,
by Troy H. Lowrie (1)
10.12 First Amendment to Lease with Option to Purchase, dated January 20,
1993, between Expo Bowl Inc. and Texas of Indy, Inc. (1)
10.13 Warranty Deed, dated February 28, 1993, in the name of Western
Country Club I, Ltd. (1)
10.14 State of Indiana, Certificate of Trade Mark Registration, dated
August 18, 1993, in the name of Texas of Indy, Inc. for "A Little
Bit of Texas" and Design (1)
10.15 Lease, dated April 2, 1993, between Texas of Indy, Inc. and Great
Western Boot Company (1)
10.16 Operating Agreement dated March 17, 1993, between Texas of Indy,
Inc. and Taco Bell Corp. (1)
10.17 Option Agreement, dated January 20, 1993, between and among Western
Country Club I, Ltd., Troy H. Lowrie and Merrill Roberts (1)
10.18 Amended Limited Partnership Agreement of Western Country Club I,
Ltd. (1)
10.19 Consulting Agreement dated January 20, 1993, between Western
Country Club I, Ltd. and Texas of Indy, Inc. (1)
10.20 Security Agreement, dated March 18, 1993, between Western Country
Club I, Ltd. and Texas of Indy, Inc. (1)
10.21 Option to Purchase Assets, dated January 20, 1993, between Western
Country Club I, Ltd. and Texas of Indy, Inc. (1)
10.22 Promissory Note, dated January 31, 1994, from Western Country
Club I, Ltd. to Expo Bowl, Inc. in the amount of $150,000 (1)
10.23 Guaranty, dated January 31, 1994, of Promissory Note to Expo Bowl,
Inc. by Troy H. Lowrie (1)
10.24 Promissory Note, dated January 31, 1994, from Western Country
Club I, Ltd. to Dulaney National Bank (1)
10.25 Articles of Incorporation of WCWW Acquisition Corporation, dated
January 20, 1995 (4)
10.26 Interim Permit, dated February 9, 1995, from the Arizona Department
of Liquor Licenses and Control for the Wild Wild West nightclub (5)
10.27 Stock Purchase Agreement, dated September 21, 1996, between and
among Troy H. Lowrie, Western Country Clubs, Inc. and Red River
Concepts, Inc. (7)
10.28 Lease Agreement, dated July 30, 1993, by and between Boots, Inc.
and In Cahoots Limited Partnership (9)
10.29 Agreement and Plan of Merger, dated December 16, 1996, by and
between Western Country Clubs, Inc., Entertainment Wichita, Inc.,
and WCCI Acquisition Corp. (8)
10.30 Contract of sale dated December 26, 1997, and note dated January 9,
1998, between Western Country Clubs, Inc. and Backstage
Entertainment. (11)
10.31 Contract of sale dated November 25, 1997, along with addendum
numbers 1 through 3 thereto, and note dated February 19, 1998,
between Western Country Clubs, Inc. and A Little Bit of Texas, Ltd.
(11)
10.32 Agreement and Covenant Not to Execute dated February 18, 1998,
between In Cahoots Limited Partnership, Western Country Clubs, Inc.
and Jana Oelkers. (11)
10.33 Form of License Agreement for Atomic Burrito, Inc. restaurants
10.34 Joint Venture Agreement between Western Country Clubs, Inc. and New
York Bagel Enterprises, Inc. dated October 27, 1998
11 Calculation of Earnings Per Share
21 Subsidiaries of the Registrant
27 Financial Data Schedule
------------------
(1) Incorporated by reference from the like numbered exhibits filed
with the Registrant's Registration Statement on Form SB-2, No.
33-72942.
(2) Incorporated by reference from Western's Current Report on Form
8-K, dated November 1, 1994, attached as Exhibits 10.1 and 10.2
thereto.
(3) Incorporated by reference from Western's Annual Report on Form
10-KSB, dated February 27, 1995, attached as Exhibit 21 thereto.
(4) Incorporated by reference from Western's Annual Report on Form
10-KSB, dated February 27, 1995, attached as Exhibit 28.16 thereto.
(5) Incorporated by reference from Western's Annual Report on Form
10-KSB, dated February 27, 1995, attached as Exhibit 28.17 thereto.
(6) Incorporated by reference from Western's Current Report on Form
8-K, dated October 19, 1995, attached as Exhibit 10.1 thereto.
(7) Incorporated by reference from Western's Current Report on Form
8-K, dated October 10, 1996, attached as Exhibit 9 thereto.
(8) Incorporated by reference from Western's Current Report on Form
8-K, dated October 10, 1996, attached as Exhibit 2 thereto.
(9) Incorporated by reference from the like numbered exhibits filed
with the Registrant's Registration Statement on Form SB-2, dated
February 11, 1997, No. 333-21547.
(10) Incorporated by reference from Western's Current Report on Form
8-K, dated February 6, 1998, attached as Exhibits 10.0, 10.1 and
10.2 thereto.
(11) Incorporated by reference from the like numbered exhibits filed
with Western's Current Report on Form 8-K, dated February 6, 1998.
(b) During the last quarter of the period covered by this report, the
Company filed no Reports on Form 8-K.
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.
April 14, 1999
Western Country Clubs, Inc.
By: /s/ James E. Blacketer
-----------------------------
James E. Blacketer, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ James E. Blacketer President, Principal
Executive Officer, Principal
Financial Officer and Director April 14, 1999
/s/ Joe R. Love Director April 14, 1999
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<PAGE>
TABLE OF CONTENTS
Page No.
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENTS......................................... 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets..................................... 3
Consolidated Statements of Income............................... 5
Consolidated Statement of Stockholder's Equity...................6
Consolidated Statements of Cash Flows........................... 7
Notes to Consolidated Financial Statements...................... 9
<PAGE>
GRAY & NORTHCUTT, INC.
2601 NW EXPRESSWAY, STE. 800E
OKLAHOMA CITY, OK 73112
Independent Auditors' Report
To the Board of Directors
Western Country Clubs, Inc.
We have audited the accompanying consolidated balance sheet of WESTERN COUNTRY
CLUBS, INC. as of December 31, 1998, and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Western Country Clubs, Inc. for the year
ended December 31, 1997, were audited by other auditors whose report thereon,
dated January 29, 1998, expressed an unqualified opinion.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audits 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Western Country Clubs, Inc., as
of December 31, 1998, and the results of its operations and its cash flows for
the year ended in conformity with generally accepted accounting principles.
/s/ Gray & Northcutt, Inc.
February 26, 1999
(except for Note 16, as to which
the date is April 14, 1999)
<PAGE>
HLB Gross Collins, P.C.
Certified Public Accountants and Consultants
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Western Country Clubs, Inc.
We have audited the accompanying consolidated balance sheet of Western Country
Clubs, Inc. as of December 31, 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Western Country
Clubs, Inc. as of December 31, 1997, the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ HLB GROSS COLLINS, P.C.
Atlanta, Georgia
January 29, 1998
2625 Cumberland Parkway, Suite 400, Atlanta,Georgia 30339, USA
Telephone: + 1 770 433 1711, Fax: + 1 770 432 3473.
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
Page 1 of 2
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
1998 1997
------------------- -------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 205,411 $ 85,949
Accounts receivable 67,803 40,713
Notes receivable - related parties (Note 3) 143,340 23,000
Current portion of note due from affiliate (Note 3) 120,000 -
Current portion of notes and loans receivable (Note 3) 124,696 132,522
Inventories 56,514 54,897
Prepaid expenses 105,546 31,323
Deferred income taxes 102,000 309,677
------------------- -------------------
Total current assets 925,310 678,081
------------------- -------------------
PROPERTY AND EQUIPMENT: (Note 1)
Land and improvements 77,011 298,286
Building and building improvements - 1,361,335
Leasehold improvements 1,519,862 1,510,529
Equipment 388,477 677,942
Furniture and fixtures 279,838 333,330
------------------- -------------------
2,265,188 4,181,422
Accumulated depreciation and reserve for impairment (1,128,236) (1,749,344)
------------------- -------------------
1,136,952 2,432,078
------------------- -------------------
OTHER ASSETS:
Note from affiliate, net of current portion shown above (Note 3) 480,000 -
Notes and loans receivable, net of current
portion shown above (Note 3) 103,542 111,498
Deferred income taxes (Note 10) 265,740 107,733
Goodwill, net of accumulated amortization of $69,069
and $48,229 in 1998 and 1997, respectively 11,130 25,970
Deposits and other 41,139 67,980
Investment 57,400 114,800
------------------- -------------------
958,951 427,981
------------------- -------------------
$ 3,021,213 $ 3,538,140
=================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
Page 2 of 2
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
------------------- -------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 262,084 $ 366,471
Accrued liabilities 283,439 529,950
Dividends payable 22,900 -
Current portion of notes payable -
related parties (Note 6) 55,300 369,870
Current portion of long-term debt (Note 6) 174,604 356,636
------------------- -------------------
Total current liabilities 798,327 1,622,927
------------------- -------------------
NOTES PAYABLE - related parties, net of current
portion shown above (Note 6) 20,438 126,625
------------------- -------------------
LONG-TERM DEBT (Note 6) 7,843 437,084
------------------- -------------------
MINORITY INTERESTS (Note 1) 176,389 147,645
------------------- -------------------
COMMITMENTS AND CONTINGENCIES
- -
STOCKHOLDERS' EQUITY: (Note 8)
10%convertible preferred stock, $10 par value, 500,000 shares
authorized, 40,000 shares issued and outstanding
at December 31, 1998 and no shares outstanding 400,000 -
12% convertible preferred stock, $10 par value, 100,000 shares
authorized, 16,000 issued and outstanding
at December 31, 1998 and no shares outstanding 145,000 -
Common stock, $.01 par value, 25,000,000 shares authorized;
3,734,721 shares issued and outstanding at December 31, 1998
and 3,634,721 shares issued and outstanding at December 31, 1997 37,347 36,347
Additional paid-in capital 4,363,739 4,314,739
Accumulated deficit (2,927,870) (3,147,227)
------------------- -------------------
Total stockholders' equity 2,018,216 1,203,859
------------------- -------------------
$ 3,021,213 $ 3,538,140
=================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
REVENUES:
Beverage and food sales $ 3,364,637 $ 4,456,887
Admission fees 1,390,427 2,110,665
Gain on sale of assets 284,861 210,645
Sublease income 168,000 168,000
Interest income 32,819 856
Other income 38,180 169,724
------------------- -------------------
5,278,924 7,116,777
------------------- -------------------
COSTS AND EXPENSES:
Cost of products and services 1,210,405 2,493,806
General and administrative expense 3,238,189 4,261,093
Depreciation and amortization 270,633 467,121
Interest expense 71,968 158,821
Write-down of investments 57,400 -
Impairment of long-lived assets - 250,272
Write-off of acquisition goodwill - 75,687
Litigation loss (Note 8) 62,458 216,808
Offering costs - 374,653
------------------- -------------------
4,911,053 8,298,261
------------------- -------------------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTERESTS 367,871 (1,181,484)
INCOME TAX (EXPENSE) BENEFIT (Note 9) (49,670) 83,789
------------------- -------------------
INCOME (LOSS) BEFORE MINORITY INTERESTS 318,201 (1,097,695)
MINORITY INTERESTS IN (INCOME) LOSS OF
CONSOLIDATED SUBSIDIARIES (42,494) 110,319
------------------- -------------------
NET INCOME (LOSS) 275,707 (987,376)
PREFERRED STOCK DIVIDENDS (56,350) -
------------------- -------------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 219,357 $ (987,376)
=================== ===================
BASIC EARNINGS PER SHARE $ 0.07 $ (0.27)
=================== ===================
DILUTED EARNINGS PER SHARE $ 0.05 $ -
=================== ===================
AVERAGE COMMON AND COMMON EQUIVALENT:
BASIC SHARES 3,775,522 3,619,162
=================== ===================
DILUTED SHARES 5,427,522 -
=================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
10% Convertible 12% Convertible
Preferred Stock Preferred Stock Common Stock
-------------------------------------------------------------
Number Value Number Value Number $0.01 Additional Total
of of of of of par Paid-In Accumulated Stockholders'
Shares Shares Shares Shares Shares Value Capital Deficit Equity
----------------------------------------------------------------------------------------------------
Balance,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996 - $ - - $ - 3,519,921 $35,199 $4,201,087 $(2,159,851) $ 2,076,435
Common stock
issued for
investment - - - - 114,800 1,148 113,652 - 114,800
Net loss for the
year ended
December 31, 1997 - - - - - - - (987,376) (987,376)
----------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 - - - - 3,634,721 36,347 4,314,739 (3,147,227) 1,203,859
Preferred stock issued
for note payable 40,000 400,000 - - - - - - 400,000
Preferred stock issued
for note payable - - 16,000 160,000 - - - - 160,000
Common stock issued
in settlement
of litigation - - - - 100,000 1,000 49,000 - 50,000
Redemption of
preferred stock - - (1,500) (15,000) - - - - (15,000)
Cash dividends:
Preferred -
$1 per share - - - - - - - (40,000) (40,000)
$1.20 per share - - - - - - - (16,350) (16,350)
Net income for the
year ended
December 31, 1998 - - - - - - - 275,707 275,707
----------------------------------------------------------------------------------------------------
Balance,
December 31, 1998 40,000 $400,000 14,500 $145,000 3,734,721 $37,347 $4,363,739 $(2,927,870) $ 2,018,216
====================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Page 1 of 2
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ 275,707 $ (987,376)
Adjustments to reconcile net loss to net cash
provided by operating activities -
Depreciation and amortization 267,297 467,121
Write-off of note receivable 55,000 17,978
Write-down of investment 57,400 -
Write-off of acquisition goodwill - 75,687
Loss from impairment of assets - 250,272
Gain on sale of assets (284,861) (210,645)
Minority interests in earnings of subsidiaries 42,494 (110,319)
Settlement of litigation 50,000
Deferred tax provisions 49,670 (83,789)
Changes in assets (increase) decrease -
Decrease in accounts receivable (27,090) 4,023
Decrease in inventories (1,617) 24,733
Decrease in prepaid expenses (74,223) 37,566
Decrease in refundable income taxes - 7,269
Decrease in capitalized offering costs - 142,857
Decrease in deposits and other assets 26,841 8,290
Changes in liabilities increase (decrease) -
Increase in accounts payable (104,387) 40,649
Increase in accrued expenses (246,511) 220,899
Increase in dividends payable 22,900 -
-------------- -------------
Net cash provided by (used in) operating activities 108,620 (94,785)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted certificate of deposit - 200,000
Sale of property and equipment 255,109 100,000
Notes and loans receivable (304,129) (3,000)
Repayments of notes receivable 144,570 13,002
Acquisition of property and equipment (18,004) (13,571)
-------------- -------------
Net cash provided by (used in) investing activities 77,546 296,431
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partnership distributions to minority interests (13,750) (7,750)
Payments of dividends (56,350) -
Borrowings under notes payable - 190,000
Repayments of notes payable (66,270) (605,687)
Borrowings under notes payable, related parties 178,456 278,276
Repayments of notes payable, related parties (108,790) (161,160)
-------------- -------------
Net cash provided by (used in) financing activities (66,704) (306,321)
-------------- -------------
NET INCREASE (DECREASE) IN CASH 119,462 (104,675)
CASH, BEGINNING OF YEAR 85,949 190,624
-------------- -------------
CASH, END OF YEAR $ 205,411 $ 85,949
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS+A24
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Page 2 of 2
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 71,638 $ 179,174
============== =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
On February 6, 1997, the Company exchanged 114,800 share of its common
stock for 57,400 shares and 57,400 purchase warrants of the stock
of Cowboys Concert Hall-Arlington, Inc.
The Company sold the Tucson club in May 1997 for $325,000. Assets and
liabilities exchanged were as follows:
Working capital and other than cash $ (56,722)
Fixed assets, intangibles, and other assets 381,722
-------------
Net assets exchanged 325,000
Less note receivable 225,000
-------------
Cash proceeds on sale of club $ 100,000
=============
</TABLE>
The Company issued a note payable in May 1997 in the amount of $93,407 for
unpaid rent expenses of the Tucson club. In September, upon finalization of
the agreement to sell the Tucson club, this note was reissued in the amount
of $133,000, and a second note was issued in the amount of $4,800. The note
receivable was reduced to $195,000.
On January 1, 1998, two notes payable from a major stockholder totaling
$378,276 with accrued interest of $21,725 were converted to 40,000 shares of
the Company's Series A 10% cumulative convertible preferred stock (Note 8).
On February 18, 1998, a note payable of $160,000 was converted to 16,000
shares of the Company's Series B 12% cumulative convertible preferred stock
(Note 8).
On February 19, 1998, the Company issued 100,000 shares of common stock in
settlement of an obligation of $50,000.
During 1998, the Indianapolis club was sold to an affiliated partnership for
a $600,000 note receivable. Also, the the affiliated partnership assumed two
notes payable totaling $490,425.
The accompanying notes are an integral part of these financial statements.
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
(1) DESCRIPTION OF BUSINESS
Western Country Clubs, Inc. (the "Company") was incorporated in
Colorado on December 19, 1989, and commenced operations in 1993. The
Company's operations have consisted primarily of owning and operating
"country-western" theme nightclubs. The Company's subsidiaries and
divisions are as follows:
Western Country Club 1, Ltd. ("Indy") is a limited
partnership formed on January 19, 1993. Western 1, Ltd. owned and
operated a nightclub in Indianapolis, Indiana. The operations of
the nightclub began on April 14, 1993. This club was sold to an
affiliated partnership on February 16, 1998. See Notes 9 and 16
for further details.
The St. Louis division of the company was acquired on
October 7, 1994. This division operates a nightclub in St. Louis,
Missouri.
Entertainment Wichita, Inc. ("EWI"), a wholly owned
subsidiary, owns an 80% interest in In Cahoots, Ltd. ("In
Cahoots"). In Cahoots is a limited partnership that owns and
operated a nightclub in Wichita, Kansas (Notes 6).
Atomic Burrito, Inc. ("Atomic"), a wholly-owned subsidiary
formed in 1998 to develop a "Fresh-Mex" restaurant featuring a
Mexican menu emphasizing fresh ingredients and made-to-order
burritos (Note 11).
In addition to these subsidiaries and divisions, the Company
held a 50% interest in a nightclub in Atlanta, Georgia until
December 1997 (Note 7).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
followed by the Company:
Cash and cash equivalents - The company considers all
highly liquid investments with original maturities of three
months or less to be cash equivalents.
Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts or
revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Consolidation - The consolidated financial statements
include the accounts of the Company, two limited
partnerships over which the Company has financial control,
and two wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated
in consolidation.
Investments - Investments in companies in which the
Company has less than a 20% interest are carried at cost
reduced by any permanent impairment in value. At December
31, 1998 and 1997, the Company held 57,400 shares of stock
in Cowboy's Concert Hall Arlington, Inc. in which it had an
original cost basis of $114,800. During 1998, the value of
this investment was determined to be impaired and its
carrying value was reduced to $57,400. See Note 8 for
further details.
Inventories - Inventories consist of liquor, wine,
beer, and boutique items. Inventories are stated at the
lower of cost (first-in, first-out) or market.
Depreciation and amortization - Property and equipment
are stated at cost. Depreciation is provided using the
straight-line method over the assets' estimated useful lives
as follows: land improvements, 10-15 years; building and
improvements, 10-30 years; leasehold improvements, 7-10
years; equipment, 7-10 years; furniture and fixtures, 7-10
years.
Intangibles - Organization costs, liquor license costs,
and goodwill are amortized over five years. The covenant not
to compete is amortized over 15 years..
Measurement of impairment - At each balance sheet date,
the Company reviews the amount of recorded goodwill,
covenant not to compete and related nightclub assets
(separately by club) for impairment. Whenever events or
changes in circumstances indicate that the carrying amount
of the expected cash flows from these assets is less than
the carrying amount of these assets, the Company will
recognize an impairment loss in such period in the amount by
which the carrying amount of the assets exceeds the fair
value of the assets.
Repairs and maintenance - Normal costs incurred to
repair and maintain fixed assets are charged to operations
as incurred. Repairs and betterments which extend the life
of an asset are capitalized and subsequently depreciated on
a straight-line basis over the remaining useful life of the
asset. When assets are sold or retired, the cost and
accumulated depreciation are removed from the accounts and
any resulting gain or loss is included in operations.
Income taxes - Income taxes are provided based on
earnings reported in the financial statements. The company
follows Statement of Financial Accounting Standards No. 109
whereby deferred income taxes are provided on temporary
differences between reported earnings and taxable
income.(See Note 10 for further details.)
Concentration of credit risk - Financial instruments
which potentially subject the Company to concentrations of
credit risk are primarily cash and temporary cash
investments. The Company places its cash investments in
highly rated financial institutions. At times, the Company
may have bank deposits in excess of Federal Deposit
Insurance Commission (FDIC) limits. At December 31, 1998,
the Comany had uninsured deposits totaling $11,916.
(3) NOTES AND LOANS RECEIVABLE
The Company had the following notes and loans receivable at
December 31, 1998:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
8% note receivable due from an
individual, payable in monthly
installments of $7,500, including
interest, due April 1999 $ 111,363 $ 189,020
8% note receivable due from a
corporation, payable in monthly
installments of $5,000, including
interest, due 153,086 -
Non-interest bearing note receivable,
due from an individual, payable on
demand - 55,000
--------- ---------
264,449 244,020
Less current portion 124,696 132,522
Less allowance for doubtful accounts 36,211 -
--------- ---------
Noncurrent portion $ 103,542 $ 111,498
========= =========
Note receivable due from related party:
8% note receivable due from an
affiliated partnership (See Notes
7 and 16 for further details.) $ 600,000 $ -
Less current portion 120,000 -
--------- ---------
Noncurrent portion $ 480,000 $ -
========= =========
</TABLE>
In addition, the Company had a note receivable due from an
officer of the company, bearing interest at 6%, totaling $143,340. The
note receivable is due December 1999. Management anticipates that this
not will be repaid from bonuses earned by this officer in connection
with the opening of new "Atomic Burrito" restaurants.
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, short-term notes receivable,
commercial paper and notes payable approximate fair value because of
the short-term maturity of these instruments.
The fair value of long-term debt, including current portion, is
estimated based on quoted market prices for the same or similar issues
or on the current rates offered to the Company for debt of the same
maturities.
(5) IMPAIRMENT OF LONG-LIVED ASSETS
In December 1997, the Company sold its Indianapolis club to a
stockholder and former officer and director of the Company. A reserve
of $250,272 was recorded for impairment of the long-lived assets
including land and improvements, building and building improvements,
furniture and fixtures, and equipment for the year ended December 31,
1997. In addition, at December 31, 1997, the Company wrote off $75,687
of goodwill, net of accumulated amortization, related to the
acquisition of the Indianapolis Club.
(6) NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable - related parties consist of the following:
1998 1997
------ ------
<S> <C> <C>
10% note payable to a major stockholder
and former officer, payable in
graduated monthly installments,
including interest (Note 17) $ - $ 278,276
12% note payable to a major stockholder
and former officer, due on demand
(Notes 9 and 17). - 100,000
1% over prime note payable to a former
limited partner, payable in monthly
installments of $6,250 plus interest,
secured by the ownership interest of a
stockholder and the guarantee of a
financial corporation (Note 9) 75,738 118,219
-------- -------
Total notes payable - related parties 75,738 496,495
Less current portion 55,300 369,870
-------- ---------
Noncurrent portion $ 20,438 $ 126,625
======== =========
</TABLE>
<TABLE>
<CAPTION>
Maturities of notes payable - related parties are as follows:
Year ending December 31, Amount
------------------------ ---------
<S> <C> <C>
1999 $ 20,438
=========
</TABLE>
<TABLE>
<CAPTION>
Long-term debt consists of the following at December 31, 1998 and 1997:
1998 1997
--------- ---------
<S> <C> <C>
12% note payable to a bank, due on
demand, secured by mortgage of Indy
(Notes 8 & 16) $ - $ 160,000
10% note payable to a limited
partnership, due in monthly installments
of $7,500 through June 1999. 38,900 120,538
3% over prime note payable to a financial
institution, due in monthly installments
of $8,437, through February 2004, secured
by real estate (Notes 8 & 16) - 445,662
10% note payable to an individual,
due in monthly installments of $5,000,
plus interest, through May 1999 52,500 -
10% note payable to an individual,
due in monthly installments of $3,187,
through January 1999, secured by second
mortgage on real estate and the personal
guarantee of the Company's former
president (Note 16) - 44,764
Non-interest bearing note payable to a
Corporation, due in monthly installments
of $1,000, through July 1999, secured
by equipment 8,000 20,000
18% note payable to a financial
institution, due in monthly installments
of $3,744, through March 2000, secured
by Wichita-furniture, fixtures,
inventory and accounts receivable 47,047 -
Non-interest bearing note payable to an
individual, due in monthly installments of
$3,000 through December 1999, secured by
Wichita-furniture, fixtures and
equipment 36,000 -
20.5% capital lease, due in monthly
installments of $256, through November
1998, secured by equipment - 2,756
-------- ---------
Total long-term debt 182,447 793,720
Less current portion 174,604 356,636
-------- ---------
Noncurrent portion $ 7,843 $ 437,084
======== =========
</TABLE>
<TABLE>
<CAPTION>
Maturities of long-term debt are as follows:
Year ending December 31, Amount
------------------------ ---------
<S> <C> <C>
1999 $ 7,843
=========
</TABLE>
(7) RELATED PARTY TRANSACTIONS
On July 3, 1993 In Cahoots signed a ten-year lease. The lessor is
a 20% limited partner of In Cahoots. Rent expense under this lease for
the years ended December 31, 1998 and 1997, was $150,000 for each year
respectively (Note 15).
On October 1, 1996, EWI assumed $150,000 of debt when it acquired
control of In Cahoots. The remaining balance of $75,738 at December
31, 1998 is due to a former limited partner of the Company (Notes 6
and 8).
Effective January 9, 1998, the Company sold its interest in a
limited partnership for $10,000 in cash and a $210,000 note. The sale
resulted in a gain of $192,869, net of the tax effect of $27,131 (Note
6).
On February 6, 1998, the Indy Partnership sold its Indianapolis
club to an affiliated partnership in exchange for a $600,000 note
receivable and the assumption of $490,426 of long term debt and
$60,078 of accrued interest and taxes. The note receivable bore
interest at the rate of 8% per annum and was due on February 6, 1999.
This note was collateralized by 732,191 shares of the Company's common
stock for which the issuer of the note had the right to assign the
shares to the partnership in lieu of payment of the note. Furthermore,
the Indy Partnership remains contingently liable on the $490,426 in
long term debt assumed by the purchaser. This sale resulted in a gain
of $64,861. See Note 16 for details regarding subsequent events
associated with this note receivable.
(8) STOCKHOLDERS' EQUITY
Stock options - On December 16, 1993 the Company granted an
option to purchase 250,000 shares of the Company's $.01 par value
common stock at $2.50 per share to an employee of the Company. The
option expires on December 1, 1998. During 1995, 20,000 options were
exercised resulting in proceeds to the Company of $50,000.
The underwriter was issued warrants as compensation to purchase
40,000 shares of common stock. The warrants are exercisable at $6.30
per share commencing April 25, 1995 until April 25, 1999. The Company
has granted the holders of the warrants certain customary registration
rights. As of December 31, 1998, none of these warrants have been
exercised.
Warrants granted - Effective July 1, 1994, the Company granted
warrants to purchase 60,000 shares of the Company's common stock
exercisable at $6.00 per share until June 30, 1999, in exchange for
consulting services to be performed over a one-year period. In
addition, stock appreciation rights were granted whereby the
consultant could purchase shares of common stock for $.01 per share
representing the increase in value of the 60,000 shares divided by the
then market price of the stock. Compensation will be recorded as the
price of the Company's stock exceeds the warrant exercise price.
Stock compensation plan - In 1996, the company established a
stock option compensation plan for employees and consultants. The
aggregate number of common shares as to which options and awards may
be granted shall not exceed 250,000 and the options and awards must be
granted within five years. At the time of grant, the Company will
determine the exercise price and the vesting period, which shall not
exceed five years.
During 1996, the Company issued: (1) 10,000 shares of the
Company's common stock to the Company's president for services
rendered and recorded compensation of $35,000; (2) 15,000 shares of
the Company's common stock to a consultant as a reduction of accounts
payable of $46,666; (3) 10,000 shares of the Company's common stock to
a consultant for services valued at $35,000; and (4) 45,000 shares of
the Company's common stock and 145,000 options to purchase the
Company's common stock at $3.50 per share for three years in exchange
for the cancellation of 240,000 options to purchase the Company's
common stock at $2.50 per share. Each of the above issuances of common
stock was valued at $3.50 per share less the previously recorded
compensation where warrants were returned.
During 1997, the company exchanged 114,800 shares of its common
stock for 57,400 shares and 57,400 purchase warrants of the stock of
Cowboys Concert Hall Arlington, Inc. ("Cowboys"). The individual
shareholders of the Cowboys' stock had participated in a private
placement conducted by Cowboys in Fall 1995 to raise funds for Cowboys
to pay its expense in connection with a proposed merger between
Cowboys and the Company which did not occur.(See Note 2 for further
details).
During 1998, the Company converted its notes payable to a former
officer of the Company and a shareholder and the related accrued
interest in the amount of $400,000 into 40,000 shares of Series A
Convertible Preferred Stock. The Series A Preferred Stock provides for
a par value of $10 per share; a 10% cumulative annual dividend,
payable quarterly; conversion into the Company's common stock at the
rate of $1 per share; and redemption by the Company at the rate of up
to 10,000 shares annually on each anniversary date for four years.
During 1998, the Company agreed to convert the Company's note
payable to a limited partnership in the amount of $160,000 into 16,000
shares of Series B Cumulative Convertible Preferred Stock. The Series
B Preferred provides for a par value of $10 per share; a 12%
cumulative annual dividend, payable quarterly; conversion into the
Company's common stock at the rate of $1 per share; and redemption of
the preferred stock funded in the amount of $5,000 monthly.
During 1998, the Company settled a lawsuit for $92,808 in cash, a
note payable of $74,000 and 100,000 shares of the Company's
stock valued at $50,000.(See Notes 6 & 14 for further details).
14).
(9) INCOME TAXES
<TABLE>
<CAPTION>
As of December 31, 1998 and 1997, the Company's deferred tax
assets were as follows:
1998 1997
---- ----
<S> <C> <C>
Tax over book basis of fixed and
intangible assets $ 209,635 $ 280,736
Impairment of long-lived assets - 92,601
Leases with scheduled rent increases 48,391 42,787
Net operating loss carryforwards 935,972 835,704
Charitable contribution carryforwards 1,549 1,656
---------- ----------
1,195,547 1,253,484
Valuation allowance (827,807) (836,074)
---------- ----------
Net deferred tax asset 367,740 417,410
Current asset (102,000) (309,677)
---------- ----------
Long-term asset $ 265,740 $ 107,733
========== ==========
</TABLE>
Realization of the deferred tax asset is dependent upon the
Company generating sufficient future taxable income against which its
loss carryforward and other positive timing differences can be offset.
Management has determined that it is not more likely than not that the
Company will be able to realize all the tax benefits from the net
operating loss carryforward and other positive timing differences and
has therefore reduced the deferred tax asset by a valuation allowance.
<TABLE>
<CAPTION>
Deferred income taxes resulting from temporary differences in the
recognition of income and expense from tax and financial reporting
purposes are as follows:
1998 1997
---- ----
<S> <C> <C>
Differences between book and
tax depreciation $ (71,101) $ 65,387
Impairment of long-lived assets (92,601) (591,428)
Leases with scheduled rent increases 5,604 (10,134)
Net operating loss carryforwards 100,268 786,138
Charitable contribution carryforwards (107) 1,656
--------- ---------
(57,937) 251,619
Change in valuation allowance 8,267 (167,830)
--------- ---------
Net deferred tax (expense) benefit $ (49,670) $ 83,789
========= =========
</TABLE>
<TABLE>
<CAPTION>
Components of the provision for income taxes attributable to
continuing operations are as follows:
1998 1997
---- ----
<S> <C> <C>
Current income tax benefit $ - $ -
Deferred income tax (expense) benefit (49,670) 83,789
-------- --------
$(49,670) $ 83,789
======== ========
</TABLE>
<TABLE>
<CAPTION>
The difference between the Company's effective income tax rate
and the United States statutory rate is reconciled below for the years
ended December 31, 1998 and 1997:
1998 1997
---- ----
<S> <C> <C>
United States statutory rate (34.0)% (34.0)%
State income taxes, net of federal
income tax benefit (cost) (3.0) (3.0)
Increase (decrease) in valuation
Allowance 44.5 14.2
Other (.1) 15.7
----- ------
7.4% (7.1)%
===== ======
</TABLE>
At December 31, 1998, the Company has a net operating loss
carryforward of approximately $2,855,519, which commences expiring in
2012.
(10) EARNINGS PER SHARE
Basic earnings per share amounts are computed based on the
weighted average number of shares outstanding plus the shares that
would be outstanding assuming the conversion of the Series A and B
Preferred Stocks, which are considered to be common stock equivalents.
Net income has been adjusted for dividends on convertible preferred
stock. The number of shares used in computing basic earning per share
were 4,266,022 and 3,619,162 in 1998 and 1997 respectively.
Diluted earnings per share for 1998 was computed taking into
effect the stock options and warrants outstanding during 1998. Options
and warrants were not taken into consideration in computing diluted
earnings per share in 1997 because their effects were antidilutive.
As of December 31, 1998, the Company had the following options
and warrants outstanding:
Stock Options
55,000 shares exercisable at $2.00 per share through June 30, 1999
75,000 shares exercisable at $0.75 per share through March 30, 2002
420,000 shares exercisable at $0.75 per share through December 11, 2002
127,000 shares exercisable at $0.75 per share through December 30, 2003
Warrants
40,000 shares exercisable at $6.60 per share through April 25, 1999
60,000 shares exercisable at $6.00 per share through June 30, 1999
75,000 shares exercisable at $0.75 per share through February 16, 2001
240,000 shares exercisable at $0.75 per share through February 18, 2001
100,000 shares exercisable at $1.00 per share through February 18, 2001
440,000 shares exercisable at $0.75 per share through June 30,2003
20,000 shares exercisable at $0.75 per share through November 15, 2003
In total the Company had options and warrants outstanding
totaling 677,000 shares and 975,000 shares respectively. Thus the
Company used 5,472,522 shares in computing its diluted earnings per
share for 1998.
(11) ATOMIC BURRITO, INC.
On June 19, 1998 the Company formed Atomic Burrito, Inc. ("Atomic
Burrito") as a wholly owned subsidiary. Atomic Burrito will be used to
develop its new restaurant concept which features a Mexican menu
emphasizing fresh ingredients and made-to-order burritos.
During 1998, Atomic Burrito entered into license agreements for
two restaurants to be located in Stillwater and Norman Oklahoma. These
licensing agreements call for licensing fees of $10,000 per restaurant
and royalty fees of 2% of the licensee's gross receipts from the
restaurant. Although these restaurants were opened in 1998, no fees
were accrued or monies received during 1998.
Subsequent to year end, the Company entered into a third
licensing agreement for a restaurant to be located in Longview,
Washington. This licensing agreement called for a $15,000 licensing
fee and 3% of the licensee's gross receipts from the restaurant.
On October 27, 1998, the company entered into a joint venture
agreement with New York Bagel Enterprises, Inc.("New York Bagel") to
form a limited liability company to convert, own finance and operate
restaurant facilities. New York Bagel is to contribute its leases and
leasehold improvements on each facility to be developed and the
Company is to contribute funds sufficient to cover the conversion
costs of the facility along with sufficient funds to cover pre-opening
expenses, limited to $150,000 per restaurant, with any required
funding in excess of $150,000 to be split 60 % to the Company and 40%
to New York Bagel. During 1998, no restaurants were opened under this
joint venture agreement.
(12) LEASE COMMITMENTS
On July 30, 1993, In Cahoots entered into a building lease for
club operations in Wichita, Kansas, with a 20% limited partner. The
lease term is ten years commencing October 15, 1993. In addition to
minimum rental payments of $12,500, In Cahoots is obligated to pay to
the landlord, as additional rent, a percentage of gross sales after
deductions for alcohol and sales taxes. The lease agreement contains
two five-year renewal options at the primary lease term rental rate
(Note 9).
In December 1993, the Company entered into a building lease for
club operations in St. Louis, Missouri. The lease term is ten years
with two five-year renewal options. Minimum rent per month is $22,238
for years one through five and $26,686 per month for years six through
ten. The lease requires a $25,000 security deposit, and is guaranteed
by an affiliated company.
On March 15, 1997, the Company entered into a 51.5-month lease
agreement for an office building to serve as the corporate
headquarters in Oklahoma City, Oklahoma. From March 15, 1997 to August
31, 1998, the base rent will be $36,900 per year. From September 1,
1998 to January 31, 2000, the rent increases to $39,360 per year. From
February 1, 2000 to June 30, 2001, the base rent will be $41,820.
Rent expense for the years ended December 31, 1998 and 1997
amounted to $513,315 and $614,522, respectively. Rent expense for 1998
is net of $13,500 for rental income received.
<TABLE>
<CAPTION>
Minimum future rental payments under non-cancelable operating
leases having remaining terms in excess of one year as of December 31,
1998 for each of the next five years and in the aggregate are:
Years ending December 31, Amount
------------------------- ------
<S> <C>
1999 $ 531,192
2000 533,447
2001 533,682
2002 502,287
2003 491,832
Thereafter 5,400
----------
$2,597,840
==========
</TABLE>
(13) Litigation
The Company is involved in various other claims and legal proceedings
of a nature considered normal to its business, principally personal
injury claims resulting from incidents occurring on the premises of
the Company's nightclubs. While it is not feasible to predict or
determine the financial outcome of these proceedings, management does
not believe that they will result in a materially adverse effect on
the Company's financial position, results of operations or liquidity.
(14) OFFERING COSTS
In September 1997, the Company terminated its agreement with an
underwriter to offer preferred stock to the public due to
nonperformance by the underwriter. The Company's costs associated with
the offering of $374,653 have been charged to operations.
(15) RECLASSIFICATIONS
Certain amounts on the 1997 financial statements have been
reclassified in order to be consistent with the 1998 presentation.
(16) SUBSEQUENT EVENTS
The $600,000 note receivable received in connection with the sale of
the Indianapolis Club due on February 6, 1999, from an affiliated
partnership was not paid when due. This note receivable was due to
Western Country Club 1, Ltd., an 80% owned partnership. The note was
collateralized by 732,191 shares of the Company's common stock for
which the borrower had the right to assign the stock back to the
partnership in lieu of payment of this debt. On April 14, 1999, a
three party agreement was reached with the borrower, whereby an
unrelated third party agreed to purchase 585,753 shares of the
borrowers stock for $480,000 payable in the form of a $480,000 6% per
annum note due in two years. The remaining 146,438 shares of stock
held as collateral on the original note are to be assigned to the Indy
Partnership. The Indy Partnership agreed to accept the $480,000 note
from the unrelated third party in full settlement of the remaining
$480,000 balance due on the note. Management of the Indy Partnership
intends to liquidate the Partnership by distributing 146,438 shares of
common stock of Western Country Clubs, Inc. to the unrelated partners
and assigning the $480,000 note from the unrelated third party to
Western Country Clubs, Inc.
For reporting purposes, $480,000 of this note receivable was reflected
as long-term as of December 31, 1998.
On February 24, 1999, the Company implemented a Bonus Compensation
Plan. This plan calls for the Company to pay a bonus of $10,000 per
store for all Atomic Burrito stores, excluding licensed operations,
opened by the Company to Mr. James Blacketer, the Company's president.
In addition, Mr. Blacketer is to receive a bonus of $15,000 for each
ten Atomic Burrito units opened by the Company, whether owned by the
Company in full or in part, or licensed by the Company. Once the
Company has fifty units opened, Mr. Blacketer shall receive a bonus of
$50,000: and if pre-tax earnings exceed $1,000,000, then Mr. Blacketer
shall receive a bonus of $75,000.
This bonus plan is effective for 1999 and 2000 provided that Mr.
Blacketer remain as president and CEO of the COmpany during that time.
All payments to be paid under this bonus plan will first be applied to
any amounts owed by Mr. Blacketer to the Company. At December 31,
1998, Mr. Blacketer owed the Company $143,340.
Exhibit 10.33
LICENSE AGREEMENT
This License Agreement (the "Agreement") is made this _____ day of
____________, 1999, by and between ATOMIC BURRITO, INC., a Oklahoma corporation
(hereinafter referred to as ("Licensor"), with a principal place of business at
1601 N.W. Expressway, Suite 1910, Oklahoma City, OK 73118 and
________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_________________
INTRODUCTION:
A. Licensor has developed a restaurant format which features the sale
of high quality burritos, beverages, and related Mexican food items of a
distinctive variety, and has expended considerable time, skill, effort and money
in the creation and development of a restaurant concept using the United States
registered trade and service marks (applied for, registration pending) "Atomic
Burrito" and "Out of this World!" and operating under the trade name "Atomic
Burrito" (The Atomic Burrito restaurant type developed by Licensor and described
herein as the "Restaurant").
B. Licensor and Licensee have previously entered into a Master License
Agreement, A copy of which is attached hereto and make a part hereof. In the
event of any conflict between this Agreement and the Master License Agreement,
then the terms and provisions of this Agreement shall control.
C. Licensor employs or may employ certain other distinctive and
identifying marks, trade names, trademarks, service marks, copyrights, logos,
emblems, sign designs and advertising or promotional slogans.
D. All of the foregoing trademarks or service marks, and such other
trademarks or service marks as may be issued by the United States Patent and
Trademark office and as may be designated or adopted in the future by Licensor
for use in connection with the Restaurant, shall hereinafter by collectively
referred to as the "Proprietary Marks."
E. Licensor employs, and continues to develop and implement, certain
distinguishing and identifying restaurant layout and design features, including
building design, decor, accessories and fixtures and other identifying trade
dress in the interior and exterior of its Restaurants, which features as now and
hereafter designated or adopted by Licensor are collectively referred to herein
as the "Trade Dress."
<PAGE>
F. Licensor employs, and continues to develop and implement,
identifying combinations of specified equipment and equipment layout; recipes;
food preparation methods and food products; operating standards and food and
beverage and equipment specifications; operational, management and
record-keeping procedures; advertising and marketing techniques; trade secrets
and confidential information; all of which in combination with its Proprietary
Marks and Trade Dress, and as hereafter may be designated or adopted by Licensor
for a Restaurant, is sometimes collectively referred to in this Agreement as the
"System."
G. Licensor, by reason of its maintenance of its high standards of
quality for food and beverages sold at its Restaurants operated by Licensor
and/or by other Licensees, and by reason of its maintenance of high standards of
service rendered by such Restaurants, has created goodwill and a demand for
restaurants operated using the System, and for the foods served therein.
H. Licensee recognizes the benefits that may be derived from being
identified with and licensed by Licensor and from being able to utilize the
System and the Proprietary Marks which Licensor owns.
I. Licensee acknowledges that the above-described System should provide
a firm foundation for restaurant operations featuring high standards of
merchandising and quality food products.
J. Licensee desires, upon the terms and conditions herein set forth, to
enter into the business of operating A Restaurant in the location herein
described using the System, in accordance with the standards of food and service
adopted and promulgated by Licensor.
K. Licensor is ready and willing to grant a license to Licensee for the
use of the System in the operation of a restaurant upon the terms and conditions
set forth below.
Licensor and Licensee, in consideration of the mutual agreements
contained and for other good and valuable consideration, acknowledged by each of
them to be satisfactory and adequate, do hereby agree as follows:
1. GRANT OF LICENSE
1.1 Grant of Right. Upon the terms and conditions set forth in this
Agreement, Licensor hereby grants to Licensee the right (often referred to
herein as the "License") to be non-exclusive except as hereinafter provided, to
use the System, including the Proprietary Marks, in the operation of a
restaurant at ________________________________________________; such Restaurant
is often referred to herein as the "Licensed Restaurant."
1.2 Initial Term. The License is for a term of twenty (20) years
commencing on the date hereof (the "Initial Term"), subject, however, to earlier
termination as provided for herein.
1.3 Scope of License. The License permits Licensee to represent itself
to the public as a licensee of Licensor, and may only be enjoyed or used by
Licensee as provided in this Agreement in connection with the advertising,
marketing, promotion and sale of such food products and services as are
designated from time to time by Licensor to Licensee.
1.4 Limited Exclusivity. The License granted to Licensee is exclusive
only as to the specific location designated herein and may be subject to other
limitations set forth in this Agreement.
1.5 Future Franchise. Licensee and Licensor agree that if Licensor
should ever decide to franchise Restaurants, Licensor will provide Licensor's
then current franchise disclosure materials, if any, to Licensee. Within thirty
(30) days after receipt of such materials Licensee will give Licensor written
notice ("Licensee's Notice") of whether Licensee desires to become a franchisee.
If Licensee elects to become a franchisee, then Licensor and Licensee will
execute Licensor's standard franchise documents at which time this Agreement
shall terminate. If Licensee fails to give Licensor written notice of its
election to become a franchisee as set forth in this Section, then Licensee will
be deemed to have elected not to become a franchisee and this Agreement will
remain in effect. If Licensee elects to become a franchisee, no initial
franchise fees shall be payable by Licensee to Licensor.
2. OPERATION AND MANAGEMENT
2.1 Operation. Throughout the Term of this Agreement, Licensee shall
continuously operate the Licensed Restaurant (except if prevented by fire, Act
of God or other casualty or cause beyond the control of the Licensee), or shall
secure Licensor's prior approval, which shall not be unreasonably withheld, for
any interruption of operations lasting for more than five (5) days. Licensee
shall use its best efforts, skills and diligence in the conduct of the Licensed
Restaurant, and shall regulate Licensee's employees so that they will be
courteous and helpful to the public.
2.2 Hours of Operation. Unless otherwise authorized or directed by
Licensor in writing, which authorization will not be unreasonably withheld, the
Licensed Restaurant shall be open for business a minimum of 11:00 a.m. to 10:00
p.m., seven (7) days a week, three hundred sixty-two (362) days per year.
Licensee may only close the Licensed Restaurant on Easter Sunday, Thanksgiving
Day and Christmas Day and on other days which Licensor may from time to time
allow in writing, which authorization will not be unreasonably withheld.
2.3 Uniforms. All employees shall wear uniforms of such design and
color as Licensor and Licensee agree upon from time to time.
2.4 Menu and Service. Licensee shall serve all menu items which
Licensor may deem appropriate to take maximum advantage of the potential market
and achieve standardization among the Restaurants. Licensee shall not serve any
item which is not otherwise authorized and approved by Licensor in writing.
Licensee shall adhere to all specifications prescribed by the Licensor as to
ingredients, methods of preparation and service, weight and dimensions of
products served, and standards of cleanliness, health and sanitation. All food,
drink and other items will be served and sold in packaging that meets Licensor's
specifications. Licensee's development of new products is encouraged for the
benefit of both Licensee and Licensor.
<PAGE>
2.5 Promotional Material. Notwithstanding the above, Licensee shall
exhibit, promote the sale of, sell and distribute Licensor's products, including
novelties, coupons, promotional literature, materials and souvenirs in the
manner and to the extent requested by Licensor from time to time in the Licensed
Restaurant operated by Licensee.
2.6 Pricing. Licensee and Licensor shall agree on the prices to be
charged to customers for all products and services (both regular menu items and
promotional materials) offered by the Licensed Restaurant.
2.7 Signs. Licensee shall display the Proprietary Marks only in the
manner and at such locations as Licensor has authorized. Licensee agrees to
maintain and display signs reflecting the current image of the Restaurant in
conformity with specifications issued by Licensor from time to time and shall
not place additional posters or signs on the premises without the prior written
consent of the Licensor. Licensee shall discontinue the use of such signs as
they are declared obsolete by Licensor within a reasonable time specified by
Licensor.
2.8 Equipment. Licensee shall only use equipment in the Licensed
Restaurant which Licensor has approved as meeting its specifications and
performance standards. As equipment becomes obsolete or inoperable, Licensee
shall replace such items with the types and kinds of equipment as are then being
installed in new Restaurant at the time of replacement. If Licensor determines
that additional or substitute equipment is needed because of a change in menu
items or methods of preparation and service, Licensee will install the new
equipment within the reasonable time specified by Licensor.
2.9 Vending Machines, Etc. Licensee shall not install telephone booths,
newspaper racks, gum or candy machines, rides, or other vending machines on the
premises of the Licensed Restaurant without the prior approval of Licensor.
2.10 Licensor's Right to Enter. If licensee fails to substantially
perform any of its obligations under this Section 2 after being given seven (7)
days' prior notice and opportunity to cure, any persons authorized by Licensor
may enter the Licensed Restaurant at any time during regular business hours and
perform any act deemed necessary by Licensor to remedy such failure without
liability to Licensor.
3. RIGHT OF ENTRY AND INSPECTION
To insure compliance with this Agreement, Licensor or its designated
representative shall have the right to enter the Licensed Restaurant to conduct
such activities as it or they deem necessary to ascertain compliance with this
Agreement. The inspections may be conducted without prior notice at any time
when Licensee or one of its employees is at the Licensed Restaurant. The
inspections will be performed in a manner which minimizes interference with the
operation of the Licensed Restaurant.
4. STANDARDS OF OPERATION
Licensor shall determine standards of quality for all goods and menu items
used or sold by the Licensed Restaurant, standards of service in connection with
their sale, standards of quality and utility for all furnishings and fixtures of
the Licensed Restaurant, and standards of repair and maintenance of the Licensed
Restaurant. These standards may, in some cases include recommended manufacturers
of certain foods or beverages. Licensee shall strictly conform to such standards
and operate such Licensed Restaurant so as to sustain and maintain the goodwill
and reputation of the Restaurant, the System and the Proprietary Marks. Such
standards shall be substantially the same as those standards employed by
Licensor in the operation of any Restaurants. Licensor may own and/or operate,
and at any other Atomic Burrito Restaurant any which may be owned and operated
by any other Licensee.
5. LICENSE FEE
As consideration for the license granted hereby, Licensee agrees to pay
Licensor the sum of Fifteen Thousand Dollars ($15,000.00) shall be payable upon
execution of this Agreement. This payment is non-refundable and covers the
services provided Licensee by Licensor as set forth in Section 5.1 herein.
5.1 Services Provided for License Fee. In addition to providing Licensee
a non-exclusive right to use the trade mark "Atomic Burrito", the trade phrase
"Out of this World!", any of the Proprietary marks, trade dress, and use of the
System, Licensor agrees to provide the following additional services to Licensee
in return for Licensee's payment of the License Fee:
A. Upon the execution of this Agreement, or within sixty (60) days
thereafter, Licensee shall be provided such training and procedure manuals for
all restaurant job descriptions as Licensor may have developed, if any, for
operation of an "Atomic Burrito" restaurant;
B. Upon execution of this Agreement, or within sixty (60) days of the
opening of Licensee's restaurant, Licensee shall be provided recipes for all
Atomic Burrito food items;
C. Training at existing Atomic Burrito restaurants, if any, for
employees of Licensee at the sole expense of Licensee, with the number of people
to be trained to be agreed upon jointly by Licensor and Licensee;
D. An opening training team to assist in opening the new Atomic
Burrito restaurant owned by Licensee. This team will be present during the week
prior to the opening and the week after the opening. All expenses regarding the
opening team provided by Licensor will be borne by Licensor;
E. Consulting on design and construction of Licensee's Atomic Burrito
restaurant; and
F. Inclusion of Licensee in any "Atomic Burrito Buying Group" for
group volume pricing for products and services, if possible.
6. ROYALTY FEES
6.1 Royalties. In addition to the License Fee set forth in Section 5
above, Licensee agrees to pay Licensor a royalty fee equal to three percent (3%)
of Licensee's gross receipts at the Licensed Restaurant covered by this
Agreement, said payments to be paid on the fifteenth (15th) of each month as set
forth herein below.
6.2 "Gross Receipts". The term as used in this Agreement, includes the
aggregate amount of all sales of food, beverage, articles, and any other
merchandise, whether for cash, on credit or otherwise, made and rendered in,
about or in connection with the Licensed Restaurant, unless specifically
exempted by Licensor in writing. The sale of Restaurant related products away
from the Licensed Restaurant shall be included within the definition of Gross
Receipts. Gross Receipts excludes (i) any federal, state, county or city tax,
excise tax, or similar taxes based on sales which Licensee collects from
customers; (ii) employee discounts; (iii) room rentals and service charges; and
(iv) cash register over-rings. Gross Receipts also excludes cash received as
payment in credit transactions where the extension of credit itself has already
been included in the amount upon which royalty is computed.
6.3 Monthly Payment. Once royalty payments commence as set forth above,
Licensee shall pay royalties monthly to Licensor based upon the Gross Receipts
for the preceding calendar month. Payments ("Royalty Payments") shall be
calculated by multiplying the Gross Receipts of the Licensed Restaurant during
the preceding calendar month by the applicable royalty percentage of three
percent (3%). All Royalty Payments are to be made at Licensor's corporate
offices as shown in this Agreement or at such place as Licensor may designate
from time to time. All Royalty Payments must be either (a) by check dated and
postmarked on or before the fifteenth (15th) day of the month or (b) by wire
transfer received by Licensor on or before the fifteenth (15th) day of the
month. In the event a Royalty Payment by check is postmarked, or if by wire
transfer is received, after the fifteenth (15th) day of any month, Licensee
shall pay Licensor a Fifty Dollar ($50.00) late fee in addition to the overdue
Royalty Payment. In the event a Royalty Payment by check is postmarked, or if by
wire transfer is received, after the fifteenth (15th) day of the second month
from the date due, Licensee shall pay Licensor an additional Fifty Dollar
($50.00) late fee and the overdue Royalty Payment plus interest on the Royalty
Payment from the date such payment was originally due (i.e., the fifteenth
(15th)) as provided in Section 6.7.
<PAGE>
6.4 Annual Statement of Accounts. Within seventy-five (75) days after
the end of each calendar year during the Term of this Agreement, Licensee shall
prepare and deliver to Licensor a statement of accounts and financial
statements, including a statements of income, balance sheet and statement of
cash flows, certified to be true and correct by the President or Chief Financial
Officer of Licensee, showing all monthly Gross Receipts and the corresponding
monthly Royalty Payments made during such calendar year and the annual Gross
Receipts. In the event that the total of the Royalty Payments for any calendar
year is less than the actual royalty owed by Licensee for such calendar year
computed on the total amount of Gross Receipts for and during such calendar
year, then Licensee shall pay to Licensor the amount of the deficiency. However,
in the event that the total of the Royalty Payments for any calendar year is
greater than the actual royalty owed by Licensee for such calendar year,
Licensor shall either pay to Licensee within thirty (30) days after receipt of
the statements required by this Section the amount of such excess or, at
Licensor's option apply such excess to any amount then due or to become due from
Licensee to Licensor under this Agreement.
If Licensee fails to submit to Licensor the statements required by this
Section within thirty (30) days of receiving notice that they are overdue,
Licensor may have an audit conducted of the Licensed Restaurant's financial
records and accounts for the applicable period by Certified Public Accountant
selected by Licensor, at Licensor's sole expense. The fees and expenses of such
Certified Public Accountant incurred by Licensor shall be paid by Licensee to
Licensor within thirty (30) days of Licensee's receipt of a statement therefor,
in the event that such audit discloses an underpayment by Licensee of four
percent (4%) or more of the amount due.
6.5 Use of Payments. Licensor shall be entitled to deposit each monthly
Royalty Payment in its general funds account or to such other accounts as it
elects and may make use of such payments freely and without conditions for any
and all purposes and no obligation or debt of Licensor to Licensee, or
constructive trust or other legal encumbrance, shall be deemed to exist or be
imposed on or with respect to any funds paid to Licensor as royalties.
6.6 Services Provided for Royalty Payments. In consideration for the
royalty payments to be made by the Licensee to the Licensor, as set forth in
Section 6.1 above, the Licensor agrees to provide the Licensee with ongoing
operations support and consulting in order to assist Licensee in operating the
Licensed Restaurant. Such ongoing consulting services to be provided to Licensee
shall include a semi-annual operations review and report detailing operational
issues identified by Licensor and such other issues as Licensee may request. In
addition, Licensor shall provide Licensee with "trouble-shooting" services in
order to help Licensee identify and/or deal with problems which may arise in
connection with Licensee's operation of the Licensed Restaurant. Such
"trouble-shooting" services, to the extent they involve store visits in excess
of the semi-annual operations reviews shall be made at the request of licensee
and at licensees sole expenses.
6.7 Interest. Interest will be charged on the amount of any unpaid
royalty, hereunder from the date such fee was due and payable at the rate of
twelve percent (12%) per annum or the maximum rate permitted by law, whichever
is lower.
7. ACCOUNTING AND RECORDS OF OPERATIONS
7.1 Maintenance of Records. During the Term of this Agreement, Licensee
shall maintain and preserve, for at least three (3) years from the dates of
their preparation, full, complete and accurate books, records and accounts as
reasonably required by Licensor.
<PAGE>
7.2 Tax Returns. At the time of filing any and all federal income tax
and state sales or income tax returns applicable to the Licensed Restaurants
with the appropriate taxing authority, Licensee shall submit a copy of same to
Licensor, certified by Licensee to be authorized copies of those filed with the
I.R.S. and with the applicable State Tax Commission.
7.3 Other Financial Information. Licensee shall submit to Licensor
current financial statements and such other forms, income tax returns, reports,
records, information and data as Licensor may reasonably designate, in the
format and at the times and places reasonably required by Licensor, either upon
request or as specified from time to time.
7.4 Inspection and Audit. Licensor or its designated independent
accountants shall have the right at all reasonable times to examine and copy at
Licensor's expense, all financial records and accounts relating to the Licensed
Restaurants. Licensor shall have the right, at any time, to cause an audit to be
conducted of the licensed Restaurant's financial records and accounts by an
independent Certified Public Accountant. If such audit should reveal that
Royalty Payments due Licensor have been understated by Licensee, in any report
to Licensor, then within thirty (30) days of License's receipt of the results of
such audit, Licensee shall pay Licensor the amount by which such Royalty
Payment(s) were understated plus interest from the date each such payment should
have been made. In addition, if the amounts due were under-reported by four
percent (4%) or more, then Licensor shall send to Licensee a copy of the invoice
for the cost of such audit, which Licensee agrees to pay within thirty (30) days
of receipt thereof.
8. ADVERTISING
8.1 Advertising Program. Licensor, at its option, may establish a
Public Relations and Advertising Program ("Advertising Program") at such time as
there are, in Licensor's sole judgement, a sufficient number of Restaurants in
operation. The Advertising Program shall be funded with contributions from each
licensee and Licensor operated Restaurant. All contributions to the Advertising
program shall be used solely and exclusively for national, regional or local
advertising, development of sales and advertising tools, and Public relations
for the System and related matters for the mutual benefits of Licensor and all
Licensees.
8.2 Advertising Fee. Licensee shall contribute to the Advertising
Program an amount to be determined by Licensor, not to exceed one percent (1%)
of Licensee's Gross Receipts during the preceding month. Licensee shall begin
making contributions to the Advertising Program if and when it is established by
Licensor. Licensor shall determine the amount Licensee owes for advertising
expenses from time to time in accordance with this Section, and Licensee shall
pay such amount within thirty (30) days of Licensee receipt of payment request.
8.3 Use of Photographs. Licensor shall have the right to photograph
both the interior and exterior of the Licensed Restaurant, and the various foods
served therein, and to use any such photographs in its publicity or advertising,
and Licensee shall cooperate in securing such photographs and the consent of the
persons pictured.
9. USE OF PROPRIETARY MARKS BY LICENSEE
9.1 Trademarks, Trade Names, Service Marks and Trade Secrets. Licensee
acknowledges that ownership of all rights, title and interest in and to the
System, Proprietary Marks, Trade Dress, and the Design, decor and image of the
Licensed Restaurant are and shall remain vested solely in Licensor and Licensee
disclaims any right or interest therein or the goodwill derived therefrom. In
addition, Licensee agrees as follows:
A. Licensee shall use only the Proprietary Marks and such
other Proprietary marks as are required and approved by Licensor for Licensee's
use, and shall use them only in the manner authorized, required and permitted
under this Agreement or otherwise by Licensor in writing.
B. Licensee shall use the Proprietary Marks and Trade Dress
only in connection with the operation of the Licensed Restaurant.
C. Licensee shall post a notice at the location of the
Licensed Restaurant, in the form and manner required by Licensor, indicating
that Licensee is a "Licensed Operator" of the Licensed Restaurant and that the
Proprietary Marks are used by the Licensee under license from Licensor.
D. Licensee shall not use any Proprietary Marks to secure or
incur any obligation or indebtedness.
E. Licensee shall not use the Proprietary Marks, or any part
thereof, as part of its corporate or other legal business name, without the
express written consent or Licensor.
F. Licensee shall comply with Licensor's instructions in
filing and maintaining requisite trade name or assumed name registrations, and
shall execute any documents deemed necessary by Licensor or its counsel to
obtain protection for the Proprietary Marks or to Maintain their continued
validity and enforceability.
G. If Licensee has reason to believe that an unauthorized
third party is using or infringing upon any Proprietary Mark, or using a trade
dress which is confusingly similar to Licensor's Trade Dress, Licensee shall
immediately notify Licensor and cooperate with Licensor in defending or settling
any litigation arising therefrom. Licensor will have sole discretion to take
such action, if any, it deems reasonably necessary or proper in the
circumstances.
9.2 Change in Proprietary Mark and Trade Dress. If it becomes advisable
at any time in the sole discretion of Licensor to modify or discontinue use of
any Proprietary Mark or Trade Dress, or to use one or more additional or
substitute names or marks, Licensee is obligated to do so and the sole
obligation of Licensor in any such event will be to reimburse Licensee for its
tangible costs resulting from such modifications or discontinuance of any
Proprietary Mark (such as changing signs) of complying with this obligation. Any
exceptions to this requirement must be in writing.
<PAGE>
9.3 No Contest of Licensor's Interest. Licensee shall not contest,
directly or indirectly, Licensor's ownership, title right or interest in, or the
validity of the System or any component thereof, and agrees not to contest
Licensor's sole right to register, use or license others to use such System or
any component thereof.
9.4 Actions on Termination or Expiration. Upon the termination or
expiration of this Agreement, Licensee shall execute such documents and perform
such acts as Licensor may deem reasonably necessary or desirable to evidence (i)
Licensee's disassociation from Licensor, (ii) the fact that Licensee has ceased
using the Proprietary Marks and Trade Dress and has no further interest or right
therein whatsoever, and (iii) the fact that the obligations in Section 15.4
shall be fulfilled.
10. CONFIDENTIALITY
10.1 Confidential Information. Licensee shall not, during the Term of
this Agreement or any time thereafter, communicate to, divulge to, or use for
the benefit of any other person, persons, partnership, association, corporation
or other entity any "Confidential Information" including, without limitation,
the following:
A. Any information or know-how concerning the methods of
operation of the Licensor's restaurant business which may be communicated to
Licensee or of which Licensee may learn by virtue of Licensee's operation of the
Licensed Restaurants or relationship with Licensor under this Agreement.
B. Any information or know-how including, without limitation,
drawings, materials, equipment, specifications, techniques, recipes, customer
lists and supplier lists and other data, which Licensor designates as, or which
Licensee reasonably knows is, confidential; provided that information or
know-how which Licensee can demonstrate came to its attention prior to
disclosure thereof by Licensor, or which, after disclosure to Licensee by
Licensor, becomes a part of the Public domain through publication or
communications by others shall not be deemed to be Confidential Information.
Notwithstanding the foregoing, Licensee may disclose such Confidential
Information to its accountants and attorneys if and to the extent such
disclosure is necessary to enable such accountants and attorneys to perform
their services for and on behalf of Licensee.
10.2 Irreparable Harm. Licensee acknowledge that any failure by
Licensee or its owners, agents, employees, or affiliates, as the case may be, to
comply with the requirements of Sections 10 of this Agreement will cause
Licensor irreparable injury, and Licensee agrees to pay Licensor all costs and
reasonable attorneys' fee incurred by Licensor in obtaining specific performance
of, or any injunction or restraining order against violation of, the
requirements of such sections. Licensee shall divulge such Confidential
information only to such persons as necessary in order to operate the Licensed
Restaurant. Licensee shall obtain from such of its employees or class of
employees as Licensor may designate, as a condition of employment, executed
copies of a "Confidential Information Disclosure Agreement," in a form to be
prescribed by Licensor, requiring a similar observance and protection of the
confidentiality of such information on their part and naming Licensor as a third
party beneficiary.
<PAGE>
11. INSURANCE
Licensee will procure and maintain in full force and effect throughout
the Term of this Agreement, an insurance policy protecting Licensee, Licensor
and its affiliates, and their respective officers, directors, partners and
employees against any loss, liability, personal injury, property damage or
expense whatsoever arising or occurring upon in connection with the operation of
the Licensed Restaurant. Licensor shall be an additional named insured on those
coverages specified in subsections (A) and (C) below. All policies required
herein shall be written by a responsible insurance company or companies
satisfactory to Licensor with an A.M. Best Company financial rating of not less
than "A-" and shall provide at least the following minimum amounts of coverage
under the following categories:
A. Comprehensive general liability insurance for property
damage and personal injury, including death, and including products liability,
with limits of One Million Dollars ($1,000,000.00) per occurrence and Two
Million Dollars ($2,000,000.00) annual aggregate;
B. Property damage insurance in the amount of at least full
replacement value insuring the Licensed Restaurant, and its equipment,
inventory, furnishings and fixtures, and any additions thereto, in accordance
with standard fire and extended coverage insurance then in effect for similar
businesses; and
C. If alcoholic beverages are ever served at the Licensed
Restaurant, liability insurance policy with minimum limits of at least One
Million Dollars ($1,000,000.00) with endorsements insuring against liability
imposed by statutes commonly known as "Dram Shop Acts," or by other laws, upon
retailers of alcoholic substances, if such coverage cannot be obtained under the
policy or policies in (A) above.
As a condition to Licensor's approval to permit Licensee to open the
Licensed Restaurant for business, certificates of insurance showing compliance
with all of the foregoing requirements shall be furnished directly by the
insurance agent of Licensee to Licensor for approval. Said certificates shall
state that the policy or policies will not be canceled or altered without at
least thirty (30) days prior notice to Licensor. Similar certificates shall be
submitted to Licensor on each policy renewal date thereafter and, upon request,
Licensee shall submit to Licensor copies of all or any policy or amendments
thereto. Maintenance of such insurance and the performance by Licensee of its
obligations under this paragraph shall not relieve Licensee of liability under
the indemnity provisions set forth in this Agreement.
12. RENEWAL OF LICENSE
<PAGE>
12.1 Right to Renew. Unless the License has been terminated prior to
the expiration of its Initial Term, or Licensor has given Licensee notice of its
intention not to renew the License as permitted under this Section, the License
may be renewed at the option of Licensee for two (2) additional periods of five
(5) years each beyond the initial Term (the "Renewal Terms"; the Initial Term
and the Renewal Terms are collectively referred to herein as the "Term" of this
Agreement), provided that at the end of the Initial Term and the first Renewal
Term, Licensee shall have complied with the conditions set forth in Section 12.3
(hereafter the "Conditions of Renewal"). If renewed, the first Renewal Term will
commence on the day immediately following the last day of the Initial Term and
if further renewed, the second Renewal Term will commence on the day immediately
following the last day of the first Renewal Term.
12.2 Notice of Renewal/Non-Renewal. Licensor shall give notice to
Licensee, not less than one hundred eighty (180) days prior to the scheduled
expiration of the Initial Term or the first Renewal Term, as the case may be, of
either (a) its intention not to renew (or further renew) the License and of at
least one "adequate reason", as hereafter defined, for such refusal to renew, or
(b) its acknowledgment that Licensee is entitled to renew (or further renew)
this License at Licensee's option subject to Licensee's compliance with the
Conditions of Renewal in Section 12.3. Upon the expiration of the Initial Term
or the first Renewal Term, if this Agreement is not renewed (or further
renewed), and upon the expiration of the first Renewal Term or the second
Renewal Term, if this Agreement is renewed, Licensee shall comply with the
obligations in Section 15.4.
"Adequate Reason" to refuse to renew shall mean any unremedied and
existing default by Licensee under this Agreement or any other agreement between
Licensee and Licensor relating to the Licensed Restaurant, including without
limitation, any course of conduct by Licensee during the Initial Term or the
first Renewal Term which constituted a default and would have entitled Licensor
to then terminate this Agreement after notice and the expiration of any
applicable cure period, even though Licensor's right to terminate this Agreement
was not exercised.
12.3 Conditions of Renewal. Unless each of the following Conditions of
Renewal is satisfied at the end of the Initial Term and the first Renewal Term,
Licensee shall have no right to renew (or further renew) this Agreement:
A. Licensee must have given Licensor notice of its election to
renew not less than sixty (60) or more than one hundred eighty (180) days prior
to the scheduled expiration date of the Initial Term or the first Renewal Term,
as the case may be. If Licensee shall fail to timely submit such notice of its
intention to renew, Licensee shall be deemed to have elected not to renew this
Agreement, and it shall expire at the end of the Initial Term or the first
Renewal Term, as the case may be.
B. At the time Licensee elects to renew and at the time of
renewal, Licensee must not be in default under this Agreement or any other
agreement between Licensee and Licensor relating to the Licensed Restaurant.
C. Licensee must have replaced such equipment, furnishings,
decor and signs which are not in good working order or which are obsolete or
otherwise not in conformity with Licensor's then current standards and decorates
or remodels the building and the site to conform to Licensor's then-current
standards.
D. Licensee must have presented evidence satisfactory to
Licensor that Licensee has the right to remain in possession of the
Licensed Restaurant for each of the Renewal Terms, or Licensee must
have commenced business operations with respect to the Licensed
Restaurant.
E. Licensee must have executed a general release, in a form
prescribed by Licensor, of any and all claims against Licensor and its
affiliates and its or their respective officers, directors, shareholders, agents
and employees, in their corporate and individual capacities, including, without
limitation, claims under federal, state and local laws, rules and ordinances
arising from the negotiation, execution or performance of this Agreement, except
for such claims as are expressly identified and reserved by Licensee in a notice
submitted to Licensor simultaneously with Licensee's notice of its election to
renew or within ten (10) days after the claims arises, if that is later. Such
notice shall specify in detail the nature of such claims and the nature and
amount of any relief or damages demanded, or to be demanded, of Licensor.
F. Licensee must have undertaken and satisfactorily
accomplished any reasonable remedial actions and curative measures recommended
by Licensor during the Initial Term and the first Renewal Term to correct
deficiencies in Licensee's sales marketing and operational procedures.
Licensor may refuse to renew or extend this Agreement, even after
giving Licensee notice of Licensee's right to renew under Section 12.2, if any
one of the above Conditions of Renewal is not met at the expiration of the
Initial Term or the first Renewal Term.
13. TRANSFERABILITY OF INTEREST
13.1 Transfer by Licensor. Licensor shall have the right to transfer
all or any part of its rights or obligations herein to any person or legal
entity. Such transfer shall be effected so as to recognize the pre-existing
rights of Licensee under this Agreement.
13.2 Transfer by Licensee. Licensee shall have the right to transfer
all or any part of its rights or obligations herein to any person or legal
entity only with the express written consent of Licensor, which consent shall
not be unreasonably withheld. Any such transfer shall be effected so as to
recognize the pre-existing rights of Licensee under this Agreement.
13.3 Definition of Transfer. For the purposes of this Agreement, the
term "transfer" shall include, but not be limited to, any sale, conveyance,
assignment, disposition, donation, pledge or act of encumbrance, or any transfer
by devise, inheritance or by operation of law or otherwise, whether voluntarily
or involuntarily, including without limitation, any merger, consolidation,
business combination, transaction, joint venture or partnership whereby any
person or persons acquires directly or indirectly license rights granted by
Licensor herein or in any license agreement of Licensee
13.4 Non-Waiver of Claims. Licensor's consent to a transfer of any
interest in the License granted herein shall not constitute a waiver of
Licensor's right to demand compliance by the transferee with any of the
provisions of this Agreement.
<PAGE>
13.5 Sublicensing. Notwithstanding anything in this Agreement to the
contrary, Licensee may not, act as a sub-licensor with respect to the rights
granted in this Agreement. Licensor will allow or permit Licensee to subdivide
his interests in this License Agreement or allow other persons or entities to
share the economic benefits and/or risks of owning the License, even though this
Agreement or any License granted hereunder is not formally assigned or
transferred and remains with Licensee. An example would be Licensee hereunder
forming a separate limited partnership for a Licensed Restaurant and serving as
the general partner of such limited partnership.
14. DEFAULT
Licensee shall be deemed to be in default of this Agreement and to have
materially breached this Agreement upon the occurrence of any of the following:
A. If (i) Licensee is adjudicated bankrupt or insolvent or
shall make a general assignment for the benefit of creditors, (ii) a petition in
bankruptcy is filed by Licensee, or such a petition is filed against Licensee
and is not successfully opposed by Licensee, (iii) a bill in equity or other
proceeding for the appointment of a receiver of Licensee or other custodian for
Licensee's business or assets is filed and is not successfully opposed by
Licensee, or (iv) Licensee is unable to pay its debts and obligations as they
become due;
B. Licensee abandons the License by failing to operate the
Licensed Restaurant for five (5) consecutive days during which Licensee is
required to operate the Licensed Restaurant under the terms of this Agreement or
any shorter period after which it is not unreasonable under the facts and
circumstances for Licensor to conclude that Licensee does not intend to continue
to operate the Licensed Restaurant, unless such failure to operate is due to
fire, flood, earthquake or similar cause beyond Licensee's control;
C. Licensee makes any material misrepresentations relating to
the acquisition of the license or Licensee engages in conduct which reflects
materially and unfavorably upon the operation and reputation of the Licensed
Restaurant or System;
D. Licensee fails, for a period of ten (10) days after
notification of noncompliance, to comply with any federal, state or local law or
regulation applicable to the operation of the Licensed Restaurant;
E. Licensee, after curing any default for which Licensee was
given notice pursuant to Section 15.3, engages in the same noncompliance whether
or not such noncompliance is corrected after notice;
F. Licensee repeatedly fails to comply with one or more
requirements of the License, whether or not corrected after notice;
G. The Licensed Restaurant is seized, taken over or foreclosed
by a government official in the exercise of his duties, or seized, taken over,
or foreclosed by a creditor, lienholder or lessor, or a final judgement against
Licensee remains unsatisfied for thirty (30) days (unless a supersedeas or other
appeal bond has been filed); or a levy of execution has been made upon the
License or upon any property used in the licensed Restaurant, and it is not
discharged within thirty (30) days of such levy;
H. Licensee is convicted of or pleads nolo contendere to a
felony charge or any other criminal misconduct which is relevant to the
operation of the Licensed Restaurant;
I. Licensee fails to pay any license fees or other amounts due
Licensor or its affiliates within thirty (30) days after receiving written
notice that such fees are overdue;
J. Licensor makes a reasonable determination that continued
operation of the Licensed Restaurant by Licensee will result in imminent danger
to public health or safety;
K. Except as expressly permitted by this Agreement, Licensee
discloses or divulges any portion of the contents of the Confidential
Information;
L. Licensee, directly or indirectly, commences any business
operation, or markets any product or services, under any other name or mark or
employs trade dress which, in Licensor's sole opinion, is confusingly similar to
the Proprietary Marks or Trade Dress described herein;
M. Licensee fails or refuses to submit any report or document
required herein by the date it is due, or to obtain Licensor's prior written
approval or consent as required by this Agreement;
N. Licensee fails to comply with any other material provisions
of this Agreement or other agreements between Licensor and Licensee relating to
the Licensed Restaurant.
15. TERMINATION
15.1 Termination by Licensee. In general, Licensee has no right to
terminate this Agreement, except such rights as it may have under common law by
reason of a material breach of Licensor's obligations hereunder. As a condition
precedent to such right of termination, Licensee shall give Licensor thirty (30)
days notice of the alleged default and opportunity to cure. If Licensor has not
cured any such default within thirty (30) days of receiving notice of such
default, then Licensee shall send a notice of termination to Licensor and this
Agreement and the License granted hereunder will terminate thirty (30) days
after Licensor receives such termination letter. In the event Licensee
terminates this Agreement, all of the obligations upon termination in Section
15.3 and 15.4 shall apply.
Licensee acknowledges that any attempted termination by Licensee other
than for a material breach by Licensor shall be deemed a default by Licensee.
15.2 Termination by Licensor After Notice. Upon the occurrence of any
default described under subsection 14 of this Agreement, Licensor may, at its
option, terminate Licensee's rights under this Agreement if such default shall
not have been remedied to Licensor's satisfaction within thirty (30) days after
written notice thereof has been given Licensee or such reasonably shorter period
as is specified in such notice if such shorter period affords Licensee a
reasonable opportunity to cure the default given the nature thereof; provided
that such termination will not in any event be effective until the end of such
longer period as may be specified in the notice or required by applicable
governmental law or regulation. All of the obligations upon termination in
Section 15.3 and 15.4 shall apply upon such termination.
15.3 Licensor's Obligations Upon Termination or Expiration. Upon the
termination or expiration of Licensee's rights under this Agreement, the
obligations of Licensor to Licensee under this Agreement shall terminate, except
where it is specifically provided herein that any obligation of Licensor will
survive such termination or expiration.
15.4 Licensee's Obligations Upon Termination or Expiration. Upon
termination or expiration of the rights granted hereunder to Licensee (whether
by Licensor or Licensee), Licensee shall comply with each of the following
provisions:
A. Cease Operations. Licensee shall immediately cease
operating the Licensed Restaurant, and shall not thereafter, directly or
indirectly, represent itself to the public or hold itself out as a licensee of
Licensor.
B. Cease Use of System, Etc. Licensee shall immediately and
permanently cease to use, in any manner whatsoever (i) any Confidential
Information, (ii) any methods, procedures and techniques associated with the
System, (iii) Licensor's trade name, the Proprietary Marks, distinctive forms,
slogans, signs, symbols or logos or devices associated with the System, and (iv)
any Trade Dress feature which could reasonably be expected to cause the public
to believe that Licensee is doing business at or with a restaurant which is
owned, operated or licensed by Licensor.
C. Other Businesses. Licensee shall not, in the operation of
any other business, use any reproduction, counterfeit, copy or colorable
imitation of the Proprietary Marks or Trade Dress, either in connection with
such other business or the promotion thereof which infringes upon Licensor's
rights in and to the Proprietary Marks or Trade Dress, and shall not utilize any
designation of origin or description or representation which falsely suggest or
represents an association or connection with Licensor.
D. Changes Upon Termination or Expiration. Licensee shall make
such modifications or alterations to the Licensed Restaurant upon termination or
expiration of its rights under this Agreement as may be necessary to prevent the
operation of any business thereon by itself or others in derogation of this
Section.
E. Payment of Indebtedness. Licensee shall promptly pay all
sums owing to Licensor. In the event of termination for any default of Licensee,
such sums shall include reasonable expenses incurred by Licensor as a result of
the default.
<PAGE>
F. Return of Confidential Information. Licensee shall
immediately turn over to Licensor all copies of Confidential Information and
other materials in Licensee's possession bearing the Proprietary Marks and all
copies thereof (all of which are acknowledged to be Licensor's property) and
shall retain no copy or record of the foregoing, except only Licensee's copy of
this Agreement and of any correspondence between the parties, and any other
documents which Licensee reasonably needs for compliance with any provision of
law. Licensee shall additionally turn over to Licensor a copy of all records,
files, correspondence, receipts and other materials relating to the operation of
the Licensed Restaurant in the Licensee's possession.
G. Telephone Number. Licensee shall assign to Licensor or its
designee all of Licensee's right, title and interest in and to Licensee's
telephone numbers relating to the Licensed Restaurant.
H. Continued Compliance. Licensee shall continue to comply
with all provisions of this Agreement which by their terms are intended to
survive the termination or expiration of Licensee's rights hereunder, including,
without limitation, the confidentiality restrictions contained in Section 10.
16. TAXES, PERMITS AND INDEBTEDNESS
16.1 Payment. Licensee shall promptly pay when due all taxes levied or
assessed, including, without limitation, unemployment and sales taxes, and all
accounts and other indebtedness of every kind incurred by Licensee in conducting
the business of the Licensed Restaurant.
16.2 Dispute as to Tax. In the event of any bona fide dispute as to
liability for taxes assessed or other indebtedness, Licensee may contest the
validity or the amount of the tax or indebtedness in accordance with procedures
of the taxing authority or applicable law; however, in no event shall Licensee
permit a tax sale, or seizure by levy or execution, or similar writ or warrant,
or attachment by a taxing authority or a creditor, to occur against the Licensed
Restaurant, or any material portion of the equipment, supplies or inventory of
the Licensed Restaurant.
16.3 Compliance With Laws. Licensee shall, at Licensee's expense,
comply with all federal, state and local laws, rules and regulations, and shall
timely obtain, and shall keep in force as required throughout the Term of this
Agreement all permits and certificates necessary for the full and proper conduct
of the Licensed Restaurant, including, without limitation, any building and
other required construction permits, assumed name registrations, liquor
licenses, sales tax permits, health and sanitation permits and ratings, and fire
clearance.
16.4 Notice of Action. Licensee shall notify Licensor in writing within
ten (10) days of the commencement of any action, suit or proceeding, and of the
issuance of an order, writ, injunction, award or decree of any court, agency or
other governmental instrumentality, which may adversely affect the operation or
financial condition of the Licensed Restaurant.
17. INDEPENDENT CONTRACTOR AND INDEMNIFICATION
17.1 Independent Contractor. This Agreement does not create a fiduciary
relationship between the parties hereto, and Licensee shall be deemed to be an
independent contractor of Licensor. Nothing in this Agreement is intended to
constitute either party as an agent, legal representative, subsidiary, joint
venturer, partner, employee or servant of the other for any purpose whatsoever.
<PAGE>
17.2 Representation of Status. In all public records, in Licensee's
relationship with other persons, and on stationary, business forms and checks,
Licensee shall indicate Licensee's independent ownership of the Licensed
Restaurant and status as a licensee of Licensor. Licensee shall exhibit on the
premise, in such place as Licensor may designate, a notification that the
Licensed Restaurant is operated by an independent operator and not by Licensor.
17.3 Authority and Indemnity. Nothing in this Agreement authorizes
Licensee to make any contract, agreement, warranty or representation on
Licensor's behalf, or to incur any debt or other obligation in Licensor's name,
and Licensor shall in no event assume liability for, or be deemed liable
hereunder as a result of any such action, or by reason of any act or omission of
Licensee in its conduct of the business of the Licensed Restaurant or any claim
or judgment arising therefrom.
18. APPROVALS AND WAIVERS
18.1 Written Request. Whenever this Agreement requires the prior
approval or consent of Licensor, Licensee shall make a written request to
Licensor therefor, and such approval or consent shall be obtained in writing,
and shall not be unreasonably withheld by Licensor.
18.2 Lack of Warranties and Liabilities. Licensor makes no warranties
or guaranties upon which Licensee may rely, and assumes no liability or
obligation to Licensee, by providing any waiver, approval, consent or suggestion
to Licensee in connection with this Agreement, or by reason of any neglect,
delay or denial of any request therefor.
18.3 No Assumption of Liability. Licensor shall not, by virtue of any
approvals, advice or services provided to Licensee, assume responsibility or
liability to Licensee or to any third parties to which Licensor would not
otherwise be subject.
19. NOTICES
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given on the earlier of actual receipt whether
by personal delivery, messenger, courier, telecopy, telex or similar form of
rapid transmission or ten (10) days after being mailed if mailed by certified
mail, return receipt requested, postage prepaid, to the addresses set forth
below or to such other addresses of which a party has given the other party
written notice.
(a) If to Licensor:
Atomic Burrito, Inc.
1601 N.W. Expressway, Suite 1610
Oklahoma City, OK 73118
(b) If to Licensee:
<PAGE>
20. ENTIRE AGREEMENT
This Agreement and the agreements referenced herein constitute the
complete understanding and agreement between Licensor and Licensee concerning
the subject matter hereof. Except as referenced herein, there are no other oral
or written understandings or agreements between Licensor and Licensee or any
affiliates of either relating to the subject matter of this Agreement, and all
prior and contemporaneous agreements, understandings, conditions, warranties,
negotiations, conversations, and representations of each of the parties and
their representatives concerning the subject matter hereof are hereby superseded
and merged herein. No statement, representation or other act, event or
communication, except as referenced or set forth herein, is binding on Licensor
in connection with the subject matter of this Agreement or the grant of the
License. This Agreement may only be amended by a written document duly executed
by both parties.
21. MISCELLANEOUS
21.1 Rights of Parties. This Agreement is binding upon the parties
hereto and their respective executors, administrators, heirs, and their
permitted assigns and successors in interest. Nothing in this Agreement is
intended or shall be deemed to confer upon any person or legal entity other than
Licensor and Licensee, and such of their respective successors and assigns as
may be permitted hereunder, any rights or remedies under or by reason of this
Agreement.
21.2 Captions. All captions in this Agreement are intended solely for
the convenience of the parties, and none shall be deemed to affect the meaning
or construction of any provisions hereof.
21.3 Gender. All references herein to the masculine, neuter or singular
shall be construed to include the masculine, feminine, neuter or plural, where
applicable.
21.4 Counterparts. This Agreement may be executed in two or more
counterparts, and each copy so executed shall be deemed an original.
21.5 Effect of Termination. Licensee's obligations to Licensor
contained in this Agreement shall not be affected by termination, cancellation
or expiration of this Agreement.
22. ENFORCEMENT
22.1 Governing Law. This Agreement shall be governed by and interpreted
and constructed under the substantive laws of the State of Oklahoma. In the
event of any conflict of law, the laws of Oklahoma shall prevail, without regard
to the application of the conflict of law rules of the State of Oklahoma.
<PAGE>
- 12 -
22.2 Waiver of Jury, Waver of Punitive and Consequential Damages, Time
Limitation for Actions. Both Licensor and Licensee agree that neither shall be
entitled to nor shall either demand a jury trial in the event of litigation
between Licensor and Licensee. Except as specifically provided in this
agreement, neither Licensor nor Licensee is entitled to any compensation or
reimbursement for loss of prospective profits, anticipated sales or
consequential damages occasioned by the breach, cancellation or termination of
this Agreement. Both Licensor and Licensee specifically agree that neither shall
be liable to the other for punitive, exemplary or enhance damages of any nature
for any breach, cancellation or termination of this Agreement or the negotiation
hereof or the relationship and dealings between the parties in any way relating
to this Agreement. Any and all claims and actions arising out of or relating to
this Agreement, the relationship of Licensee and Licensor, Licensor's management
of the system, or Licensee's development and operation of any Licensed
Restaurant, brought by any party hereto against the other, shall be commenced
one (1) year from the occurrence of the facts giving rise to such claim or
action. Licensee agrees that any action against Licensor hereunder shall be
brought on an individual basis and not consolidated on a class-wide or other
basis unless Licensor consents thereto.
22.3 Jurisdiction and Venue. Licensor and Licensee acknowledge that
Licensor is a Oklahoma Corporation, this Agreement was offered from Oklahoma
County, Oklahoma, this Agreement was negotiated, in whole or in part, in
Oklahoma County, Oklahoma, the principal place of business and corporate
headquarters of Licensor are in Oklahoma County, Oklahoma, and that Licensee has
and will continue to develop a substantial and continuing relationship with the
Licensor at its principal offices in Oklahoma County, Oklahoma, where the
Licensor's decision-making authority is vested. Accordingly, Licensee and
Licensor agree that any legal action arising out of or relating to this
agreement shall be instituted and maintained in any state or federal court in
Oklahoma. Licensee irrevocably submits to the jurisdiction of such courts and
waives any objection it may have to either the jurisdiction or venue of such
courts.
22.4 Severability and Substitution of Valid Provisions.
A. Except as expressly provided to the contrary herein, each
section, paragraph, term and provision of this Agreement, and any portion
thereof, shall be considered severable and if, for any reason, any such portion
of this Agreement is held to be invalid, contrary to, or in conflict with any
applicable present or future law or regulation in a final, unappealable ruling
issued by any court, agency or tribunal with competent jurisdiction in a
proceeding to which Licensor is a party, that ruling shall not impair the
operation of, or have any other effect upon, such other portions of this
Agreement as may remain otherwise intelligible which shall continue to be given
full force and effect and bind the parties hereto, although any portion held to
be invalid shall be deemed not to be a part of this Agreement from the date the
time for appeal expires, if Licensee is a party thereto, otherwise upon
Licensee's receipt of a notice of non-enforcement thereof from Licensor.
B. Licensor and Licensee agree that if any provision of this
Agreement may be construed in two ways, one of which would render the provision
illegal or otherwise voidable or enforceable and the other of which would render
the provision valid and enforceable, such provision shall have the meaning which
renders it valid and enforceable. The language of each provision of this
Agreement shall be construed according to its fair meaning and not strictly
against Licensor or Licensee.
22.5 Mediation. It is the intention of the parties to attempt to
resolve all disputes arising under or in connection with this Agreement in a
commercially reasonable manner so as to maintain a commercial relationship, if
possible. In the event of any litigation between Licensor and Licensee, either
party may, at its option, provide notice to the other that it desires attempted
mediation of the dispute between the parties. Such notice shall be in writing
and shall be sufficiently in advance of any trial on the merits to avoid delay.
Each party shall present written briefs, oral arguments, evidence and testimony
at the mediation proceeding which shall be conducted as a mini-trial type
proceeding involving a senior representative of each party having full
settlement authority and a mutually agreed upon mediator, or one selected by the
American Arbitration Association. The mediator shall be a licensed attorney with
experience as a court-appointed mediator. Prior to any mediation, each party
shall have had the opportunity to undertake reasonable discovery. In the event
settlement is not reached during mediation, the mediator shall promptly prepare
a written report detailing his proposed resolution of the matter including
factual findings and legal conclusion. The mediation proceedings shall be
non-binding upon the parties and the decision and/or report of the mediator
shall be confidential and the parties shall enter into a confidentiality
agreement for all aspects of the mediation effort. In the event of mediation,
the parties agree that no written or oral statements or legal positions or any
evidence presented at or in connection with the mediation or any aspect of the
mediation proceedings whatsoever may be used in any legal proceeding. All fees
and expenses of the mediator shall be split between the parties. Any mediation
proceeding shall be conducted in Oklahoma City, Oklahoma. In no event shall
mediation delay or impair the right of specific performance set forth in this
Section. Any party who refuses to be subject to mediation, or who does not
undertake good faith mediation efforts (as determined by the mediator in
writing), shall be responsible for the costs and expenses of the other party,
including attorney's fees, which are in any way connected with the mediation
effort, including reasonable discovery expenses incurred prior thereto. For
purposes of awarding costs and expenses pursuant to the foregoing sentence, a
court of competent jurisdiction may consider the written report of the mediator
which addresses that issue (which shall be separate from the report containing
the mediator's proposed resolution of the matter, factual findings and legal
conclusions). Any court of competent jurisdiction as determined in accordance
with Section 22.3 shall have the power to order the parties to mediation.
22.6 Rights of Parties are Cumulative. The rights of Licensor and
Licensee hereunder are cumulative and no exercise or enforcement by the Licensor
or Licensee of any right or remedy hereunder shall preclude the exercise or
enforcement by Licensor or Licensee of any other rights or remedy hereunder or
which Licensor or Licensee is entitled by law to enforce.
23. ACKNOWLEDGMENTS
23.1 Licensee's Time to Review. Licensee acknowledges that it has
received, read and understood this Agreement and has been accorded ample time
and opportunity to consult with advisors, including legal counsel, of its own
choosing, about the potential benefits and risks of entering into this
Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement of the day and year first above written.
LICENSOR:
Atomic Burrito, Inc.
By: ______________________________
Name: ______________________________
Title: ______________________________
LICENSEE:
By: ________________________________
Name: ________________________________
Title: ________________________________
Exhibit 10.34
JOINT VENTURE AGREEMENT
This Agreement is made as of the 27 day of October, 1998, by and among NEW YORK
BAGEL ENTERPRISES, INC., a Kansas corporation ("NYBE") and WESTERN COUNTRY
CLUBS, INC., a Colorado corporation ("WCCI").
RECITALS:
A. NYBE and WCCI have agreed to form a joint venture for the purpose of
converting various New York Bagel Cafe restaurants into Atomic Burrito
restaurants; and
B. WCCI shall cause its subsidiary, Atomic Burrito, Inc., an Oklahoma
corporation, to negotiate in good faith with NYBE, such that it is contemplated
that NYBE shall be granted a master license to develop Atomic Burrito(R)
restaurants; and
C. The parties are entering into this Agreement to set forth their
mutual understanding and agreements with respect to the terms and conditions of
such joint venture.
NOW, THEREFORE, in consideration of the mutual covenants and promises
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE 1
DEFINITIONS
In addition to the other definitions contained herein, the following
definitions shall apply for purposes of this Agreement:
1.1 Affiliate. "Affiliate," when such term is used with respect to
another Person which is a legal entity, means (a) any Person who directly or
indirectly Controls, is Controlled by or is under common Control with such other
Person, (b) any Person who is a director or officer of a privately-owned
company, member in or trustee of, or who serves in a similar capacity with
respect to, such other Person, or (c) any Person who directly or indirectly is
the beneficial owner of 20% or more of such other Person. When the term
"Affiliate" is used with respect to another Person who is an individual, it
means any corporation, partnership, limited liability Company, trust or other
entity of which such other Person serves as an officer, director, general
partner, manager, trustee or has similar capacity.
1-2 Ancillary Agreement. "Ancillary Agreements" means all of the
agreements executed and delivered by NYBE and/or WCCI, pursuant to this
Agreement or in connection with the transactions contemplated by this Agreement.
1.3 Capital Investment Schedule. "Capital Investment Schedule" means
the schedule attached as Schedule 3.2.
1.4 Closing. "Closing" means the closing of the transactions provided
for in this Agreement, which shall take place on the Closing Date at the offices
of NYBE in Wichita, or such other place as the parties may agree upon.
1.5 Closing Date. "Closing Date" means the date on which a Closing
occurs.
1.6 Control. "Control" as applied to a Person means the direct or
indirect ownership of more than 50% of the voting common stock (in the case of a
corporation) or other voting interests (in the case of legal entity, which is
not a corporation)
1.7 Development Term. "Development Term" means the twelve (12) month
period commencing on December 1, 1998. However, either party may terminate this
Agreement during the Development Term immediately upon written notice if either
party materially fails to perform its duties hereunder. Providing, such
termination shall not affect the obligations of WCCI and NYBE to complete the
conversion of any Facilities then under construction.
1.8 Facility. "Facility" means the leased premises and improvements
thereon constituting New York Bagel Cafe restaurants, identified in Schedule
1.8, which are to be converted into Atomic Burrito restaurants pursuant to or as
contemplated by this Agreement.
1.9 License Agreement. "License Agreement' meets the License Agreement
substantially the form of Exhibit "A," attached hereto.
1.10 NYBE Responsibilities Schedule. "NYBE Responsibilities Schedule"
means the schedule attached as Exhibit 3.4(A).
1.11 Operating Agreement. "Operating Agreement" means an Operating
Agreement in substantially the form of Exhibit "B," attached hereto.
1.12 Percentage Interest. "Percentage Interest" means, as applied to
the Project Entity, the ownership interest of NYBE or WCCI in such Project
Entity.
1.13 Person. "Person" means a natural person, corporation, trust,
partnership, limited liability company, governmental entity (or agency, branch
or department thereof) or any other legal entity.
1.14 Project Entity, "Project Entity" means any limited partnership,
limited liability company or other entity, which, directly or indirectly, owns
the Facilities.
1.15 Territory. "Territory" means the geographic area described on the
attached Schedule 1.15.
1.16 WCCI's Responsibilities Schedule. "WCCI's Responsibilities
Schedule" means the schedule attached as Exhibit 3.4(B).
<PAGE>
ARTICLE 2
PURPOSE OF JOINT VENTURE
The parties are entering into the joint venture contemplated by this
Agreement in order for NYBE and WCCI, through a jointly owned limited liability
company to convert, own, operate and finance, the Facilities in targeted market
areas throughout the Territory. The Facilities that shall be subject to
conversion to Atomic Burrito restaurants pursuant to the terms of this Agreement
set forth in the attached Schedule 1.8.
ARTICLE 3
COVENANTS
3.1 Formation and Capitalization of Project Entity. At the Closing,
NYBE and WCCI shall form the Project Entity contemplated by this Agreement by
entering into the Operating Agreement. It is contemplated by the parties that
the Operating Agreement will contain a provision for incentivising store level
managers by allowing them to participate in the net profits of particular
Facilities,
3.2 Capitalization of Project Entity. During the Development Term, the
parties shall make mandatory capitol contributions to the Project Entity, as
more fully set forth in the Capital Investment Schedule, attached hereto as
Schedule 3.2, unless the parties otherwise agree, neither NYBE nor WCCI shall
have any obligation to make any expenditure, provide capital or loan funds to
the Project Entity, except as may specifically be required by this Agreement,
ally Ancillary Agreements (including the Operating Agreement), by applicable
law, or as otherwise agreed by NYBE and WCCI from time to time.
3.3 Project Entity Financing. In the event it is deemed necessary by
the parties hereto, the parties will use their best efforts to cause the Project
Entity to obtain the necessary financing; and the parties hereto shall jointly
be the guarantors of such financing if guaranty is required.
3.4 Responsibilities of the Parties.
A) NYBE shall be responsible for the duties and activities set forth
on the NYBE Responsibilities Schedule. To the extent that NYBE is
to be reimbursed or compensated for such services, the terms and
conditions of same shall be set forth on the NYBE Responsibilities
Schedule.
B) WCCI shall be responsible for the duties and activities set forth
on the WCCI's Responsibilities Schedule. To the extent that WCCI is
to be reimbursed or compensated for such services, the terms and
conditions of same shall be set forth on the WCCI Responsibilities
Schedule.
<PAGE>
C) All charges associated with the forgoing services provided by NYBE
or WCCI or any Affiliate shall be paid by the Project Entity or as
agreed on by both parties in writing.
3.5 Facility Development. With respect to the Facilities, WCCI shall
begin construction on converting the Facilities pursuant to the
following development schedule:
A) December 1, 1998 Facility located at 310 North Rock Road,
Wichita, Kansas
B) December 15, 1998 Facility located at 5048 South Sheridan,
Tulsa, Oklahoma
C) January 15, 1999 Facility located at 1520 East 15th Street,
Tulsa, Oklahoma
D) March 1, 1999 Facility to be selected at sole discretion
of WCCI, no later than January 1, 1999
E) May 1, 1999 Facility to be selected at sole discretion
of WCCI, no later than January I, 1999
F) July 1, 1999 Facility to be selected at sole discretion
of WCCI, no later than January I, 1999
G) September 15, 1999 Facility to be selected at sole discretion
of WCCI, no later than January 1, 1999
H) December 1, 1999 Facility to be selected at sole discretion
of WCCI, no later than January 1, 1999
In the event WCCI elects not to develop the Facilities identified as (G) and (H)
above, WCCI shall pay to NYBE the sum of Two Thousand Five Hundred Dollars
($2,500.00) per Facility and, shall
*Prior to the commencement of construction on any Facility, WCCI shall
obtain a bid for the costs and expenses associated with the conversion and
opening of that Facility and shall deliver such bid to NYBE. It is understood
and agreed by the parties hereto that WCCI shall pay the first One Hundred Fifty
Thousand Dollars ($150.000.00) of the conversion costs with respect to any
particular Facility, and the Project Entity shall pay the additional costs and
expenses associated with the conversion. In the event WCCI fails to meet the
development schedule, its obligation to corem-byte the first One Hundred Fifty
Thousand Dollars ($150,000) shall increase each month by the amount of rent for
the particular Facility that is behind schedule until such time as construction
**Notwithstanding anything to the contrary contained herein, it is
understood and agreed by the parties hereto that WCCI shall pay seventy percent
(70%) and NYBE shall pay thirty percent (30%), respectively, of the pre-opening
costs and expenses, relating to the construction and opening of this Facility.
Therefore be released from its obligation to convert these Facilities. WCCI
shall have the right to substitute Facilities into the development schedule, or
rearrange the order in which the Facilities are to be developed, provided that
the development schedule timing is not affected.
3.6 Operation of Facilities. The Project Entity shall be solely responsible
for all cost and expenses associated with (i) funding each Facility after the
completion of the construction, these expenses include, without limitation, all
pre-opening marketing activities, pre-opening cost of innovatory and all
post-opening operational expenses; (ii) the assumption of the lease agreement
for a particular Facility from the earlier of the respective dates set forth in
Section 3.5 or the date construction begins for a particular Facility (if
acceptable to the landlord, the Project Entity shall into a new lease agreement
(on terms no less favorable than those experienced by NYBE), at which time NYBE
shall be released from its obligations under the current lease; provided, if
NYBE is to remain or otherwise guaranty any such lease agreement, then WCCI
shall also, jointly and severally, guaranty such lease agreement); and (if)
paying for all insurance and utility expenses with respect to each Facility. In
addition to the foregoing, it is understood by the parties that WCCI shall have
operational control (are the store level), relative to the day-today operation
of the converted Facilities.
3.7 Additional NYBE Restaurants. During the Development Term, NYBE
shall pursue the disposition of NYBE restaurants. In the event NYBE identifies a
disposition plan for say of it its (other than the Facilities), which NYBE
intends on pursuing, NYBE shall notify WCCI of its intent to dispose of that
specific NYBE restaurant; and WCCI shall have fourteen (14) days from the date
of such notice to evaluate such NYBE restaurant, In the event WCCI is interested
in such NYBE restaurant, WCCI shall notify NYBE of its desire to convert such
NYBE restaurant to an Atomic Burrito(R) restaurant and the parties shall either
(i) amend this Agreement and insert such NYBE restaurant into the development
schedule or (ii) WCCI shall, with the consent of NYBE, have the right to convert
such NYBE restaurant outside of this Agreement. If NYBE does not consent to
option (ii), the parties shall enter into a subsequent Joint Venture Agreement
with NYBE having the relative percentage ownership that the offer to purchase
such NYBE restaurant by a third party or the fair marker value of such NYBE
Restaurant's assets, as the case may be, bears to the total cost associated with
the conversion of such NYBE restaurant. Also, NYBE shall have the right to
contribute cash to the subsequent Joint Venture in an amount necessary to bring
its ownership percentage up to forty percent (40%). Provided, however, in the
event, at WCCI elects to one hundred twenty (120) days from the date WCCI
receives notice from NYBE of its rights hereunder.
3.8 Master Licensing Agreement. As partial consideration for this
Agreement, the parties hereby agree that NYBE and Atomic Burrito, Inc., shall
enter into a Master Licensing Agreement pursuant to which NYBE shall have the
right to license or develop up to fifty (50) Atomic Burrito(R) restaurants
within an exclusive territory. It is contemplated by the parties that this
Master Licensing Agreement shall be executed no later than the earlier of (i)
December 1, 1998, or (ii) the date the first Facility's lease is assumed by the
Project Entity.
<PAGE>
3.9 Restrictions on Transferability of Interests, From and after the
Closing Date, neither NYBE nor WCCI shall transfer its ownership interest in the
Project Facility except to the other party; provided, however, that either party
may transfer a portion of its interest to an Affiliate prior to the exercise of
a put or call option pursuant to Section 3.11 so as to preserve the existence of
the Project Entity following such purchase. A transfer means any disposition of
an interest or any interest therein, including, without limitation, any sale,
gift, assignment, pledge or encumbrance, whether such disposition occurs
voluntarily, by operation of law or otherwise.
3.10 Non-competition.
A) During the period in which the Project Entity is a licensee of
WCCI, without the prior written consent of NYBE, WCCI shall not
directly or indirectly own, operate, develop, construct, manage or
participate in the ownership, development, construction, operation
or management of any restaurant engaged in the sale of bagels or
bagel related products located in the Territory.
B) During the period in which the Project Entity is a licensee of
WCCI, without the prior written consent of NYBE, WCCI shall not
directly or indirectly own, operate, develop, construct, manage or
participate in the ownership, development, construction, operation
or management of quick service fresh-Tex Mexican restaurants,
located within the Designated Market Area or Areas identified by
the then current Nielson Well Map, published by the A.C, Nielson
Company, in which the Project Entity is operating an Atomic
Burrito restaurant.
C) The restrictions on WCCI set forth in Section 3,10(A) and (B)
shall also apply to any entities or Persons directly or indirectly
controlled by WCCI.
D) The restrictions set forth in Section 3.10(A) are subject to the
following exceptions:
i) Such restrictions shall not be considered violated by
reason of WCCI owning and/or constructing any
restaurant engaged in the sale of bagels or bagel
related products, located outside the Territory;
ii) Such restrictions shall not be considered violated by
reason of WCCI owning less than a five percent (5%)
interest in a legal entity that owns, develops,
constructs, operates or manages any restaurant
engaged in the sale of bagels or bagel related
products;
E) During the period in which the Project Entity is a licensee of
WCCI, without the prior written consent of WCCI, NYBE shall not
directly or indirectly own, operate, develop, construct, manage
or participate in the ownership, development, construction,
operation or management of quick service fresh-Tex Mexican
restaurants located in the Territory.
F) The restrictions on NYBE set forth in Section 3.10(E) shall also
apply to any entities or Persons directly or indirectly
controlled by NYBE.
G) The restrictions set forth in Section 3.10(E) shall not be
considered violated by reason of NYBE owning less than a five
percent (5%) interest in a legal entity that owns, develops,
constructs, operates or manages any quick service fresh-Tex-
Mexican restaurants;
H) Each party hereby agrees that the restrictions set forth in this
Section 3,10 are founded on valuable consideration and are
reasonable in duration and geographic area in view of the
circumstances under which this Agreement is executed and that
such restrictions are necessary to protect the legitimate
interests of the parties. In the event that any provision of this
Section 3.10 is determined to be invalid by any arbitrator or
court of competent jurisdiction, the provisions of this Section
3.10 shall be deemed to have been amended end the parties agree
to execute any documents and take whatever action is necessary to
evidence such amendment, so as to eliminate or modify any such
invalid provision and to carry out the intent of this Section
3.10 to render the terms of this Section 3.10 enforceable in all
respects as so modified.
I) Each party acknowledges and agrees that irreparable injury may
result to the other party and/or a Project Entity if the other
party breaches any covenant contained in this Section 3.10 and
that the remedy at law for the breach of any such covenant will
be inadequate. Therefore, if any party shall engage in any act in
violation of any of the provisions of this Section 3.10, the
other party shall be entitled, in addition to such other remedies
and damages as may be available to either or both of them at law
or under this Agreement, to injunctive relief to enforce the
provisions of this Section 3.10.
3.11 Confidentiality. The parties will at all times hold and cause
their consultants and advisors to hold in confidence the information contained
in this Agreement. In addition, each party (the "receiving party") will at all
times hold and cause its advisors and representatives to hold in strict
confidence all documents, materials and other information concerning the other
parties (the "disclosing party"), which have been or will be furnished by the
disclosing party to the receiving parties or their employees, advisors and
representatives in connection with the transactions contemplated by this
Agreement and which are designated as confidential. All such information shall
be dialoged by a receiving party only to its employees, advisors and
representatives engaged in the evaluation of such information. If the
transactions contemplated by this Agreement are not consummated, regardless of
the reason therefor, such confidence will be maintained by the receiving party,
except to the extent such information (a) was previously known to the receiving
party prior to disclosure by the disclosing party, (b) is in the public domain
through no fault of the receiving party, (c) is lawfully acquired by the
receiving party from a third party under no obligation of confidence to the
disclosing party, or (d) is required by any law or by any governmental or
judicial body to be disclosed. Such documents and information will not be used
to the detriment of the disclosing party or otherwise in any manner and all
documents, materials and other Written information provided by the disclosing
party to the receiving party, including all copies and extracts thereof, will be
returned to the disclosing party immediately upon its written request
3.12 Further Assurances . Following the Closing, each party shall
execute such further documents and perform such further acts as may be
reasonably necessary to consummate the transactions contemplated by this
Agreement and the Ancillary Agreements in accordance with the terms hereof and
thereof and to more effectively carry out the transactions contemplated hereby
and thereby.
3.13 Liens and Encumbrances. Each of NYBE and WCCI, acquiring an
interest in the Project Entity, agrees to keep its ownership interest in each
such entity free and clear from any and all security interests, liens and
restrictions in favor of third parties.
3.14 Public Statement. NYBE and WCCI shall consult with each other
prior to issuing any press release or making any other public statement
(including, direct communications with third parties) with respect to the
transactions contemplated hereby and will not issue any such release or make any
such statement without the approval of the other parry, except as required
pursuant to any state or federal securities law or by the rules and regulations
of any relevant securities exchange or quotation system upon which a party's
securities are then traded. NYBE and WCCI acknowledge that its breach of the
provisions of this Section 3.14, may result in the assessment of fines,
penalties and/or civil liabilities by the Securities and Exchange Commission,
state securities commissions, and others.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES AND ADDITIONAL COVENANTS OF NYBE
NYBE hereby represents and warrants to WCCI, as of the date of this
Agreement and further covenants that NYBE shall hereafter represent and warrant
to WCCl as of the Closing Date that:
4.1 Organization. NYBE is a corporation validly existing and in good
standing under the laws of the State of Kansas and has full corporate power and
corporate authority to conduct its business as presently conducted and to become
an owner of the Project Entity. NYBE is duly qualified to transact business as a
foreign corporation in the State of domicile of each Facility.
4.2 Authorization: Enforceability. The execution, delivery performance
by NYBE of this Agreement and the Ancillary Agreements are within the corporate
power of NYBE and have been duly authorized by all necessary corporate action by
NYBE. This Agreement and the Ancillary Agreements, when executed and delivered
by NYBE, will be the valid and binding obligations of NYBE, enforceable against
NYBE in accordance with their respective terms.
4.3 No Violation or Conflict. The execution, delivery and performance
by NYBE of this Agreement and of the Ancillary Agreements will not conflict with
or violate any law, judgment, order, or decree, the Articles of Incorporation or
Bylaws of NYBE, or any contract or agreement to which either is a party or by
which it is respectively bound.
4.4 Brokers. NYBE has not incurred any brokers', finders' or any
similar fee in connection with the transactions contemplated by this Agreement
or the Ancillary Agreements.
4.5 Litigation. There is no litigation, arbitration, proceeding,
governmental investigation, citation or action of any kind pending or, to the
knowledge of NYBE, proposed or threatened, against NYBE which could have a
material adverse effect on the transactions contemplated hereby. There is no
action, suit or proceeding against NYBE by any person or entity which questions
the validity, legality or propriety of the transactions contemplated by this
Agreement or the Ancillary Agreements.
4.6 Governmental Approvals. No permission, approval, determination,
consent or waiver by, or any declaration, filing or registration with, any
governmental or regulatory authority is required on the part of NYBE in
connection with its execution and delivery of this Agreement and the Ancillary
Agreements and the consummation by it of the transactions contemplated hereby
and thereby.
4.7 Required Consents. There are no approvals or consents which NYBE is
required to obtain from any third parties to enter into this Agreement or the
Ancillary Agreements which have not been obtained.
4.8 Representations and Warranties True and Correct at Closing. Except
as specifically disclosed by NYBE to WCCI in writing prior to or at the Closing
Date with respect to matters arising after the date of this Agreement the
representations and warranties of NYBE set forth in this Article 4 shall be true
and correct as of the Closing.
4.9 Disposition of NYBE Facilities. Except as otherwise contemplated
herein, during the Development Term, NYBE shall not dispose of any New York
Bagel Cafe restaurant without giving WCCI a first option, which option shall be
exercised if at all within ninety (90) days of receipt of written notification
by NYBE, to convert such New York Bagel Cafe restaurant(s) into Atomic
Burrito(R) restaurant(s) pursuant to the terms of a subsequent Join Venture
Agreement, substantially in the form of this Agreement.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES AND ADDITIONAL COVENANTS OF WCCI
WCCI hereby represents and warrants to NYBE, as of the date of this
Agreement, and further covenants that WCCI shall hereinafter represent and
warrant to NYBE as of the Closing Date that:
5.1 Organization. WCCI is a corporation, validly existing and in good
standing under the laws of the State of Colorado and has full power and
authority to conduct its business as presently conducted and to become an owner
of the Project Entity, WCCI is duly qualified to transact business as a foreign
corporation in the State of domicile of each Facility.
5.2 Authorization: Enforceability. The execution, delivery and
performance by WCCI of this Agreement and the Ancillary Agreements are within
the power of WCCI and have been duly authorized by all necessary action by WCCI.
This Agreement and the Ancillary Agreements, when executed and delivered by
WCCI, will be the valid and binding obligations of WCCI, enforceable against it
in accordance with their respective terms.
5.3 No Violation or Conflict. The execution, delivery and performance
by WCCI of this Agreement and the Ancillary Agreements will not conflict with or
violate any judgment, order or decree, the Articles of Incorporation or Bylaws
of WCCI, or any contract or agreement to which WCCI is a party or by which WCCI
is bound
5.4 No Broker. WCCI has not incurred any brokers', finders' or any
similar fee in connection with the transactions contemplated by this Agreement
or the Ancillary Agreements.
5.5 No Litigation. There is no litigation, arbitration, proceeding,
governmental investigation, citation or action of any kind pending or, to the
knowledge of WCCI, proposed or threatened, against WCCI which could have a
material adverse effect on the transactions contemplated hereby. There is no
action, suit or proceeding by any person or governmental agency against WCCI
which questions the legality, validity or propriety of the transactions
contemplated by this Agreement or the Ancillary Agreements.
5.6 Governmental Approvals. No permission, approval, determination,
consent or waiver by, or any declaration, filing or registration with, any
governmental or regulatory authority is required on the part of WCCI in
connection with its execution and delivery of this Agreement and the Ancillary
Agreements and the consummation by it of the transactions contemplated hereby
mad thereby.
5.7 Required Consents. There are no approvals or consents, which WCCI
is required to obtain from third parties to enter into this Agreement or the
Ancillary Agreements, which have not been obtained.
5.8 Representations and Warranties True and Correct at Closing. Except
as specifically disclosed by WCCI to NYBE in writing prior to or at the Initial
Closing Date with respect to matters arising after the date of this Agreement,
the representations and warranties of WCCI set forth in this Article 5 shall be
true and correct as of the Closing.
ARTICLE 6
CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF WCCI
Each and every obligation of WCCI to be performed on the Closing Date
shall be subject to the satisfaction prior to or at Closing of the following
conditions:
6.1 Compliance with Agreement. NYBE shall have performed and complied
with all of its obligations under this Agreement which are to be performed or
complied with by it prior to or at Closing.
6.2 Proceedings and Instruments Satisfactory. All proceedings,
corporate or otherwise, to be taken by NYBE in connection with the transactions
contemplated by this Agreement, and all documents incident thereto, shall be
reasonably satisfactory in form and substance to WCCI, and NYBE shall have made
available to WCCI for examination the originals or true and correct copies of
all documents which WCCI may reasonably request and NYBE can reasonably obtain
in connection with the transactions contemplated by this Agreement.
6-3 No Litigation. No investigation, suit, action or other proceeding
shall be threatened or pending before any court or governmental agency that
seeks restraint, prohibition, damages or other relief in connection with this
Agreement or the consummation of the transactions contemplated hereby.
6.4 Representations and Warranties. The representations and warranties
made by NYBE in this Agreement shall be true and correct as of the Closing Date
with the same force and effect as though such representations and warranties had
been made on the Closing Date.
6.5 Deliveries at Closing. NYBE, as the case may be, shall have
delivered or caused to be delivered to WCCI the documents provided for in this
Agreement, together with such certificates and documents of officers of NYBE and
of public officials as shall be reasonably requested by WCCI's counsel to
establish the existence and status of NYBE and the due authorization by NYBE of
this Agreement, the Ancillary Agreements to which either is a party and the
consummation by NYBE of the transactions contemplated healthy and thereby.
ARTICLE 7
CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF NYBE
Each and every respective obligation of NYBE to be performed on the
Closing Date shall be subject to the satisfaction prior to or at the Closing of
the following conditions:
7.1 Compliance with Agreement. WCCI shall have performed and complied
with all of its obligations under this Agreement which are to be performed or
complied with by it prior to or at such Closing.
7.2 Proceedings and Instruments Satisfactory. All proceedings to be
taken by WCCI in connection with the transactions contemplated by this
Agreement, and all documents incident thereto, shall be reasonably satisfactory
in form and substance to NYBE, and WCCI shall have made available to NYBE for
examination the originals or true and correct copies of all documents which NYBE
may reasonably request and WCCI can reasonably obtain in connection with the
transactions contemplated by this Agreement,
7.3 No Litigation. No investigation, suit, action or other proceeding
shall be threatened or pending before any court or governmental agency that
seeks restraint prohibition, damages or other relief in connection with this
Agreement or the consummation of the transactions contemplated hereby.
7.4 Representations and Warranties. The representations and warranties
made by WCCI in this Agreement shall be true and correct as of the Closing Date
with the stone force and effect as though such representations and warranties
had been made on the Closing Date.
7.5 Deliveries at Closing, WCCI shall have delivered or caused to be
delivered to NYBE the documents provided for in this Agreement, together with
such certificates and documents of officers of WCCI and of public officials as
shall be reasonably requested by either NYBE's counsel to establish the
existence and status of WCCI and the due authorization by WCCI of this
Agreement, the Ancillary Agreements to which it is a party and the consummation
by WCCI of the transactions contemplated hereby or thereby.
ARTICLE 8
CLOSING; DELIVERIES AT CLOSING
8.1 Closing. The Closing shall occur on the date the parties hereto may
mutually agree upon in writing.
8.2 Actions at Closing. At the Closing, NYBE and/or WCCI, as
applicable, shall take or cause to be taken the following actions:
A) Operating Agreement. NYBE and WCCI shall enter into the
Operating Agreement pursuant to which NYBE and WCCI shall form
the Project Entity. In addition, at the Closing NYBE and WCCI
shall remit the capital contributions to the Project Entity
referred to in the Capital Investment Schedule.
B) Other Actions and Deliveries. Each party shall have deliver of
cause to be delivered to the other party such other certificates
and documents as may be reasonably requested by such other
party's counsel to establish the existence and status of the
first party, the due authorization by the first party of this
Agreement and the Ancillary Agreements to which the first party
is a party and the consummation by the first party of the
transactions contemplated hereby and thereby.
ARTICLE 9 INDEMNIFICATION
9.1 WCCI's Indemnity. WCCI hereby agrees to indemnify NYBE for and hold
it harmless from and against any and all losses, damages, costs, expenses,
liabilities, obligations and claims of any kind (including, without limitation,
reasonable attorneys' fees and other reasonable legal costs and expenses) which
they may at any time suffer or incur, or become subject to, as a result of or in
connection with:
A) any breach or inaccuracy of any of the representations and
warranties made by WCCI in this Agreement or in any Ancillary
Agreements;
B) any failure by WCCI to carry out, perform, satisfy or
discharge any of its covenants, agreements, undertakings,
liabilities or obligations under this Agreement or under any
Ancillary Agreements;
C) any payments by NYBE, with respect to any obligations of a
Project Entity which is jointly owned by NYBE and WCCI, which at
the time of payment have been jointly guaranteed by NYBE and
WCCI, to the extent such payments by either or both of them
exceed NYBE's proportionate share of such obligations, based on
its Percentage Interest in such Project Entity; or
D) any suit, action or other proceeding brought by any Person
against NYBE, arising out of, or in any way related to, any of
the matters referred to in Section 9. i(A), 9.1(B) or 9.1(C)
hereof.
9.2 NYBE's Indemnity NYBE hereby agrees to indemnify WCCI for and hold
it harmless from and against any and all losses, damages, costs, exposes,
liabilities, obligations and claims of any kind (including without limitation,
reasonable attorneys' fees and other reasonable legal costs and expenses) which
they may at any time suffer or incur, or become subject to, as a result of or in
connection with:
A) any breach or inaccuracy of any of the representations and
warranties made by NYBE in this Agreement or in any Ancillary
Agreement;
B) any failure by NYBE to carry out. perform, satisfy or
discharge any of its covenants, agreements, undertakings,
liabilities or obligations under this Agreement or under any
Ancillary Agreement;
C) any payments by WCCI with respect to any obligations of the
Project Entity which have been jointly guaranteed by WCCI and
NYBE, to the extent such payments exceed WCCI's proportionate
share of such obligations, based on its Percentage Interest in
the Project Entity; or
D) any suit, action or other proceeding brought by any Person
against WCCI, arising out of, or in any way related to, any of
the matters referred to in Section 9.2(A), 9.2(B) or 9.2(C)
hereof.
9.3 Provisions Regarding Indemnities.
A) The indemnification obligations of WCCI and NYBE under Sections
9.1 and 9.2, respectively, shall survive for the applicable
statute of limitations. Delivery of any written demand for
indemnification by an indemnified party shall t011 the survival
period for the subject of the particular demand and, once notice
is given; the indemnified party may pursue the particular claim
to its conclusion to the extent permitted by applicable law.
B) The indemnified party shall promptly notify the indemnifying
party in writing and in reasonable detail of any claim, demand,
action or proceeding for which indemnification will be sought
under Section 9.1 or Section 9.2 of this Agreement, and if such
claim, demand, action or proceeding is a third party claim,
demand, action or proceeding, the indemnifying party will have
the right at its expense to assume the defense thereof using
counsel reasonably acceptable to the indemnified party. The
indemnified party shall have the right to participate, at its own
expense, with respect to any such third party claim, demand,
action or proceeding. In connection with any such third party
claim, demand, action or proceeding, the parties shall cooperate
with each other and provide each other with access to relevant
books and records in their possession. No such third party claim,
demand, action or proceeding shall be settled without the prior
written consent of the indemnified party, such consent not to be
unreasonably withheld or delayed.
ARTICLE 10 TERMINATION
10.1 Termination. The parties acknowledge that time is of the essence
hereof. This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time hereafter as follows:
A) by mutual written agreement of NYBE and WCCI;
B) by WCCI if any of the conditions set forth in Article 6 of this
Agreement have not been timely fulfilled by NYBE; or
C) by NYBE if any of the conditions set forth in Article 7 of this
Agreement have not been timely fulfilled by WCCI.
In the event of termination by WCCI or NYBE pursuant to Section 10.1(B)
or 10.1(C), respectively, as a result of a breach by the other party of any of
its representations, warranties, agreements or obligations contained herein, the
terminating party shall be entitled to any remedies available to it at law or in
equity.
ARTICLE 11
MISCELLANEOUS
11.1 Entire Agreement: Amendment. This Agreement and the other
agreements and documents executed in connection herewith, constitute the entire
agreement between the parties pertaining to the subject matter of this
Agreement, and supersedes all prior agreements, promises, covenants,
arrangements, communications, representations or warranties, whether oral or
written, by any officer, employee or representative of any party hereto, No
amendment, supplement, modification or waiver of this Agreement shall be binding
unless executed in writing by the party to be bound thereby.
11.2 Fees and Expenses. Whether or not the transactions contemplated by
this Agreement are consummated, and except as expressly provided herein or in
any Ancillary Agreements, each of the parties hereto shall pay the fees and
expenses of its respective counsel, accountants, brokers, consultants,
investment bankers and other experts incident to the negotiation of this
Agreement. However, the Project Entity shall be responsible for the fees and
expenses related to the preparation of this Agreement and the consummation of
the transactions contemplated by this Agreement.
11.3 Applicable Law. All questions concerning the construction,
validity, and interpretation of this Agreement and the performance of the
obligations imposed by this Agreement shall be governed by the internal law, not
the law of conflicts, of the State of Kansas.
11.4 Binding Effect: Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto without the prior written consent of the other party,
whether by operation of law or otherwise.
11.5 Facility Atmosphere. The Project Entity shall take input from
executive management of NYBE, concerning the tenant improvements with respect to
ensuring that the improvements will result in an "adult friendly," yet fun,
friendly and festive atmosphere. NYBE hereby agrees that WCCI shall have the
right to determine if it is appropriate to serve alcohol at any or all of the
Facilities.
I 1.6 Notices. Each notice, request, demand or other communication
("Notice") by either party to the other party pursuant to this Agreement shall
be in writing and shall be personally delivered or sent by U.S, certified mail,
return receipt requested, postage prepaid, or by nationally recognized overnight
commercial courier, charges prepaid, or by facsimile transmission (but each such
Notice sent by facsimile transmission shall be confirmed by sending an original
thereof to the other party by U.S. mail or commercial courier as provided herein
no later than the following business day), addressed to the address of the
receiving party set forth below or to such other address as such party shall
have communicated to the other party in accordance with this Section. Any Notice
hereunder shall be deemed to have been given and received on the date when
personally delivered, on the date of sending when sent by facsimile, on the
third business day following the date of sending when sent by mail or on the
first business day following the date of sending when sent by commercial
courier.
If to WCCI: Western Country Clubs, Inc.
1601 N.W. Expressway, Suite 1610
Oklahoma City, Oklahoma 73118
Facsimile: 405-848-0998
Attn: James E. Blacketer
With a copy to: John Hudson, Esq.
1601 N.W. Expressway, Suite 1910
Oklahoma City, Oklahoma 73118
Facsimile: 405-840-4671
If to NYBE: New York Bagel Enterprises, Inc.
115 East 8th Street
Stillwater, Oklahoma 74076
Facsimile: 405-624-3722
Arm: Robert J. Geresi
With a copy to: Gregory B. Klenda
Klenda, Mitchell, Austerman & Zuercher, L.L.C.
1600 Epic Centex
301 North Main Street
Wichita, Kansas 67202
Facsimile: 316-267-0333
11.7 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but such counterparts
shall together constitute but one and the same Agreement.
11.8 Headings. The Article and Section headings shall be deemed an
original, but such counterparts shall together constitute but one and the same
Agreement.
11.9 Construction. Common nouns shall be deemed to refer to the
masculine, feminine, neuter, singular and plural, as the identity of the person
may in the context require, References to Sections herein include all
subsections which are subsidiary to the Section referred to. No provision of
this Agreement shall be construed in favor of or against any party hereto by
reason of the extent to which any such party or its counsel participated in the
drafting thereof.
11.10 Severability. If any provision, clause or part of this Agreement,
or the application thereof under certain circumstances, is held invalid, the
remainder of this Agreement, or the application of such provision, clause or
part reader other circumstances, shall not be affected thereby unless such
invalidity materially impairs the ability of the parties to consummate the
transactions contemplated by this Agreement.
11.11 Knowledge. Any representation, warranty, Covenant or statement
which is made to the knowledge of any party to this Agreement shall require that
such party make reasonable investigation and inquiry with respect thereto to
ascertain the correctness and validity thereof.
11.12 Survival. All representations and warranties of the parties
contained in this Agreement or made pursuant to this Agreement shall survive the
Closing Date and the consummation of the transactions contemplated by this
Agreement for the applicable statute of limitations. All obligations under this
Agreement which expressly or implicitly by their nature survive the expiration
or termination of this Agreement shall continue in full force and effect
subsequent to and notwithstanding the expiration or termination of this
Agreement and until they are satisfied in full or by their nature expire.
11.13 Waiver of Compliance. Any failure of NYBE or WCCI to comply with
any obligation, covenant, agreement or condition contained herein may be
expressly waived in writing by WCCI or NYBE, respectively, but such waiver or
failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
1 1.14 Third Parties. Except as specifically set forth or referred to
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any Person other than the parties hereto and their
successors or assigns, any rights or remedies under or by reason of this
Agreement.
11. 15 Costs of Litigation. In the event of any litigation arising
among the parties concerning this Agreement the non-prevailing party shall pay
the reasonable attorney's fees and costs incurred by the prevailing party (or
parties) incurred as an incident to such litigation.
11.16 Guaranty. In the event that either WCCI or NYBE causes a
subsidiary to enter into this Agreement WCCI and/or NYSE, as the case may be,
hereby absolutely and unconditionally guarantees the due and punctual payment of
all amounts and the due and punctual performance of all of its obligation owed
under this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed as of the day and year first above written.
NEW YORK BAGEL ENTERPRISES, INC.
By /s/ Robert J. Greresi
-----------------------------------
Robert J. Greresi/Executive Officer
"NYBE'
WESTERN COUNTRY CLUBS, INC.
By /s/ James E. Blacketer
-----------------------------------
James E. Blacketer, Chief Executive Officer
"WCCI"
<PAGE>
EXHIBIT A
LICENSE AGREEMENT
<PAGE>
EXHIBIT B
OPERATING AGREEMENT
<PAGE>
EXHIBIT 1.15
This Agreement covers the Facilities located in:
1. Tulsa, Oklahoma
2. Manhattan and Wichita, Kansas
3- Lubbock, Waco, Austin, Midland, Temple and San Antonio, Texas
4. Springfield, Missouri
5- Nashville, Tennessee
65632
<PAGE>
Schedule 1.18
3801 South General Bruce Drive, Temple, Texas
500 West Wadley, Midland, Texas
9070 Research Boulevard. Suite 303, Austin, Texas
13450 North Research Boulevard, #'243, Austin, Texas
7239 Quaker Avenue, Lubbock, Texas
5188 West Waco Drive, Waco, Texas
999 East Basse Road, Suite 199, San Antonio, Texas
3837 South Campbell, Springfield, Missouri
2456 East Sunshine, Springfield, Missouri
3009 West End Avenue, Nashville, Tennessee
1800 21si Avenue South, Nashville, Tennessee
1219 Bluemont Avenue, Manhattan, Kansas
65632
<PAGE>
CAPITAL INVESTMENT SCHEDULE
As to the Project Facility, the parties shall contribute capital as follows:
NYBE
----
Within ten (10) days prior to the commencement o f construction on any
Facility, NYBE shall contribute to the Project Entity (i) any and all
leases and leasehold improvements with respect to that Facility and
(ii) any and all equipment located at the Facility which WCCI
identifies as useful and desired for the operation of the Atomic
Burrito(R) restaurant at the Facility. All equipment not identified for
contribution by WCCI shall remain the sole property of NYBE and NYBE
shall have the right to remove, at its sole cost and expense, said
equipment at any time.
WCCI
----
WCCI shall be required to contribute funds, on an ongoing basis, to the
Project Entity hi amounts sufficient to cover the conversion costs of
the Facilities. It is contemplated by the parties hereto that the funds
will be in an amount necessary to cover the costs of construction and
pre-opening expenses, including, without limitation, all fixtures,
equipment, signage, required tenant improvements, training expenses,
pre-opening travel expenses and small wares.
65632
<PAGE>
EXHIBIT 3.4(A)
NYBE RESPONSIBILITIES SCHEDULE
Perform all accounting functions for the Project Entity, including, without
limitation, cash management bank account reconciliation and preparation of
monthly internal unaudited financial statements. In consideration for performing
these services, the Project Entity shall be pay a fee of one percent (1%) of Net
Sales to NYBE, up to a maximum of One Thousand Dollars ($l,000.00) per Facility,
per month. WCCI shall have the right to terminate NYBE's right to perform these
accounting functions if NYBE sells all or substantially all of its assets.
65632
<PAGE>
EXHIBIT 3.4(B)
WCCI'S RESPONSIBILITIES SCHEDULE
Design, construct and open the Atomic Burrito restaurants contemplated by this
Agreement
Hire, supervise, manage and oversee the day to day operations of the Atomic
Burrito restaurants developed pursuant to this Agreement.
65632
Exhibit 11
WESTERN COUNTRY CLUBS, INC.
CALCULATION OF EARNINGS PER SHARE
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Weighted
Shares Days Average
Date Outstanding Outstanding Shares
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
Common shares outstanding at
December 31, 1997 12/31/97 3,634,721 365 3,634,721
10% Preferred stock issue
in exchange for debt 40,000 40,000
12% Preferred stock issued
in exchange for debt 14,500 14,500
Common stock issued for
settlement of litigation 02/19/98 100,000 315 83,301
--------- ----------
Shares outstanding at
December 31, 1998 3,789,221 3,775,522
========= ==========
Net earnings (loss) $ 219,357
==========
Basic earnings (loss) per share $ .06
==========
FULLY DILUTED EARNINGS (LOSS) PER SHARE:
Shares outstanding at December 31, 1998 3,775,522
Stock Options 677,000
Stock Warrants 975,000
----------
5,427,522
==========
</TABLE>
Exhibit 21
WESTERN COUNTRY CLUBS, INC.
SUBSIDIARIES OF THE REGISTRANT
DECEMBER 31, 1998
1. Western Country Club 1, Ltd. 80% Owned
2. Entertainment Wichita, Inc. 100% Owned
3. In Cahoots, Ltd. 80% Owned
4. Western Newco, Inc. 100% Owned
5. Atomic Burrito, Inc. 100% Owned
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 205,411
<SECURITIES> 0
<RECEIVABLES> 455,839
<ALLOWANCES> 36,211
<INVENTORY> 56,514
<CURRENT-ASSETS> 925,310
<PP&E> 2,265,188
<DEPRECIATION> 1,128,236
<TOTAL-ASSETS> 3,021,213
<CURRENT-LIABILITIES> 798,327
<BONDS> 0
0
545,000
<COMMON> 37,347
<OTHER-SE> 1,435,869
<TOTAL-LIABILITY-AND-EQUITY> 3,021,213
<SALES> 3,364,637
<TOTAL-REVENUES> 5,278,924
<CGS> 1,210,405
<TOTAL-COSTS> 1,210,405
<OTHER-EXPENSES> 4,911,053
<LOSS-PROVISION> 36,211
<INTEREST-EXPENSE> 71,968
<INCOME-PRETAX> 367,871
<INCOME-TAX> (49,670)
<INCOME-CONTINUING> 275,707
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 219,357
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
