U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 29, 1996.
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
Commission file number 0-25926
WOODROAST SYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Minnesota 41-1563961
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
10250 Valley View Road, Suite 145, Eden Prairie, Minnesota 55344
(Address of Principal Executive Offices)
(612) 944-5113
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes __X__ No _____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: At October 25, 1996 there were
4,241,397 shares of common stock, $0.005 par value outstanding.
WOODROAST SYSTEMS, INC.
Form 10-QSB Index
September 29, 1996
PART I: FINANCIAL INFORMATION Page #
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets -
September 29, 1996 and December 31, 1995.....................3
Consolidated Condensed Statements of Operations -
for the thirteen and thirty-nine week periods ended
September 29, 1996 and September 24, 1995....................4
Consolidated Condensed Statements of Cash Flows -
for the thirteen and thirty-nine week periods ended
September 29, 1996 and September 24, 1995....................5
Notes to Consolidated Condensed
Financial Statements.........................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations...................................................8
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.............................................11
Item 6. Exhibits and Reports on Form 8-K..............................11
Signatures................................................................12
<TABLE>
<CAPTION>
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 29, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................................... $ 4,191,027 $ 27,843
Available-for-sale securities .................................................. 0 12,634
Inventories .................................................................... 184,725 125,386
Due from stockholder ........................................................... 73,872 0
Prepaid expenses and other ..................................................... 156,179 95,810
------------ ------------
Total current assets ........................................................ 4,605,803 261,673
Property and equipment, net ...................................................... 4,330,660 4,378,285
Construction in progress ......................................................... 30,306 0
Deposits ......................................................................... 7,900 51,085
Patent and trademarks, being amortized ........................................... 9,338 10,009
------------ ------------
$ 8,984,007 $ 4,701,052
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable - stockholder ..................................................... $ 0 $ 300,000
Current portion of capital leases .............................................. 73,990 58,234
Accounts payable ............................................................... 253,577 877,438
Accrued expenses ............................................................... 284,076 174,210
------------ ------------
Total current liabilities ................................................... 611,643 1,409,882
Long-term debt ................................................................... 1,000,000 1,000,000
Less: unamortized discount ....................................................... (264,411) (346,914)
Obligations under capital leases, net of current portion ......................... 135,993 115,925
------------ ------------
Total liabilities ........................................................... 1,483,225 2,178,893
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.005 par value, 33,333,333 shares
authorized, 4,231,396 and 2,249,967 shares
issued and outstanding ........................................................ 21,157 11,250
Additional paid-in capital ..................................................... 10,017,877 3,962,406
Accumulated deficit ............................................................ (2,538,252) (1,451,497)
------------ ------------
Total stockholders' equity .................................................. 7,500,782 2,522,159
------------ ------------
$ 8,984,007 $ 4,701,052
============ ============
</TABLE>
<TABLE>
<CAPTION>
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------------- ----------------------------
Sept. 29, Sept. 24, Sept. 29, Sept. 24,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ............................. $ 1,343,692 $ 513,475 $ 4,761,245 $ 1,653,503
----------- ----------- ----------- -----------
Costs and expenses:
Food, beverage and retail costs ..... 434,600 165,727 1,598,137 525,756
Restaurant operating expenses ....... 830,533 313,101 2,885,245 969,636
Depreciation and amortization ....... 106,342 32,824 317,149 97,624
General, administrative & development 325,543 161,671 879,079 529,563
----------- ----------- ----------- -----------
Total costs and expenses .......... 1,697,018 673,323 5,679,610 2,122,579
----------- ----------- ----------- -----------
Loss from operations .............. (353,326) (159,848) (918,365) (469,076)
----------- ----------- ----------- -----------
Other income (expense):
Interest income .................... 3,534 14,898 3,599 75,786
Interest expense ................... (62,664) (1,364) (222,472) (12,819)
Other income ....................... 0 6,706 50,483 25,229
Gain on sale of property & equipment 0 0 0 3,900
----------- ----------- ----------- -----------
Total other income (expense) ...... (59,130) 20,240 (168,390) 92,096
----------- ----------- ----------- -----------
Loss before income taxes .............. (412,456) (139,608) (1,086,755) (376,980)
Income taxes ...................... 0 0 0 0
----------- ----------- ----------- -----------
Net loss .............................. $ (412,456) $ (139,608) $(1,086,755) $ (376,980)
=========== =========== =========== ===========
Loss per common share ................. $ (.13) $ (.06) $ (.40) $ (.17)
=========== =========== =========== ===========
Weighted average
common shares outstanding ............ 3,080,626 2,268,000 2,744,581 2,268,000
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------------- ----------------------------
Sept. 29, Sept. 24, Sept. 29, Sept. 24,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................... $ (412,456) $ (139,608) $(1,086,755 $ (376,980)
Adjustments to reconcile net loss to
cash flows from operating activities -
Depreciation and amortization .............. 106,342 42,496 317,149 93,956
Amortization of long-term debt discount .... 27,501 0 82,503 0
Changes in operating assets and liabilities (79,587) 129,091 (577,025) 254,595
----------- ---------- ----------- -----------
Cash flows from operating activities .... (358,200) 31,979 (1,264,128) (28,429)
----------- ---------- ----------- -----------
Cash flows from investing activities:
Proceeds of available-for-sale securities .. 704 0 12,649 1,498,321
Purchases of property and equipment ........ (148,258) (28,050) (187,143) (109,664)
Construction in progress ................... (30,306) (1,272,035) (30,306) (1,883,895)
Advances to stockholders ................... (39,379) (2,678) (73,872) (105,223)
Deposits (advanced) used ................... (1,000) (13,976) 43,185 (28,588)
Sale of property and equipment ............. 0 0 0 3,900
----------- ---------- ----------- -----------
Cash flows from investing activities .... (218,239) (1,316,739) (235,487) (625,149)
----------- ---------- ----------- -----------
Cash flows from financing activities:
Payments on capital lease obligations ...... (19,459) (2,425) (54,175) (29,875)
Payment on note payable - stockholder ...... 0 0 (300,000) 0
Payments on note payable - bank ............ 0 0 0 (370,452)
Net proceeds from sale of common stock ..... 4,701,596 0 6,016,974 0
----------- ---------- ----------- -----------
Cash flows from financing activities .... 4,682,137 (2,425) 5,662,799 (400,327)
----------- ---------- ----------- -----------
Increase (decrease) cash and cash equivalents 4,105,698 (1,287,185) 4,163,184 (1,053,905)
Cash and cash equivalents, beginning ......... 85,329 1,513,953 27,843 1,280,673
----------- ---------- ----------- -----------
Cash and cash equivalents, ending ............ $ 4,191,027 $ 226,768 $ 4,191,027 $ 226,768
=========== =========== =========== ===========
</TABLE>
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 29, 1996
(UNAUDITED)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. Although management believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
interim consolidated condensed financial statements be read in conjunction with
the Company's most recent audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented have been made. Operating results for the periods
ended September 29, 1996 are not necessarily indicative of the results that may
be expected for the fiscal year ending December 29, 1996.
(2) LONG-TERM DEBT
In November 1995, the Company completed a private placement of $1,000,000 in
principal amount of Secured Promissory Notes (the Notes) (including $700,000 to
Company stockholders) and received net proceeds of $943,252. The Notes are
secured by substantially all Company assets and bear interest at an annual rate
of 15%, payable monthly. In addition, the holders of the Notes received warrants
to purchase an aggregate of 200,016 shares of the Company's common stock at $.01
per share. The warrants are exercisable through May 31, 2000. On the date of
issuance, the Warrants had a total value of $299,333 based on the then market
price of the Company's common stock. The discount created by the issuance costs
and warrants is being amortized over the life of the Notes using the interest
method. The approximate effective annual interest rate of the Notes is 26%. The
Notes generally require repayment of principal over a four year period beginning
January 1997, although certain reductions or accelerations of the repayment
schedule are possible if the annual gross sales of the Rockville unit are less
than $4,000,000 or greater than $7,000,000. Current maturities of the Notes,
assuming the four year amortization beginning January 1997 are $197,162 in
fiscal year 1997, $228,857 in fiscal year 1998, $265,647 in fiscal year 1999,
and $308,334 in fiscal year 2000.
(3) PRIVATE PLACEMENT OF COMMON STOCK
In March and April 1996, the Company sold 625,000 shares of its Common Stock in
a private placement for $2.25 per share, and received net proceeds of
approximately $1,300,000. Holders of such shares have certain piggyback
registration rights. The net proceeds from the private placement of Common Stock
have been and will be used to pay debt and trade payables and to provide working
capital for the general corporate purposes.
(4) EXERCISE OF WARRANTS
In August and September 1996, the holders of 1,153,652 of the Redeemable Class A
Warrants exercised the Warrants at an exercise price of $4.00. A total of 21,048
Warrants were not exercised and the Company redeemed these Warrants at $0.01 per
Warrant. The Company received net proceeds of approximately $4,570,000.
(5) LOSS PER COMMON SHARE
Primary and fully diluted loss per common share are determined by dividing net
loss by the weighted average number of common shares outstanding during each
period. Primary and fully diluted loss per share are the same.
(6) INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", under which deferred income tax assets and
liabilities are recognized for the differences between financial and income tax
reporting basis of assets and liabilities based on currently enacted rates and
laws. The Company has incurred cumulative net operating losses for both
financial reporting and income tax purposes. As of December 31, 1995, the
Company had net operating loss carryforwards of approximately $1,430,000, which,
if not used, will begin to expire in 2010. Future changes in the ownership of
the Company may place limitations on the use of these net operating loss
carryforwards. The Company has recorded a full valuation allowance against the
net deferred tax asset due to the uncertainty of realizing the related benefits.
(7) COMMITMENTS AND CONTINGENCIES
Litigation - The Company is involved in legal actions in the ordinary course of
its business. While no reasonable estimates of potential liability can be
determined, management believes such legal actions will be resolved without a
material effect on the Company's financial position or results of operations.
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company was organized in 1987 to develop Shelly's Original Woodroast
Restaurants. The Company has operated a restaurant in St. Louis Park, Minnesota,
since 1989, and a restaurant in Rockville, Maryland, since November 1995. The
Company plans to pursue development of the Shelly's Back Room "Civilized Cigar
Parlor" concept which is designed to capitalize on the popular cigar smoking
trend in an upscale atmosphere featuring the restaurant's "Northwoods" lodge
theme. The Company has signed a lease for its first stand alone Back Room in
Washington D.C. The successful operation of the Rockville restaurant and future
expansion by the Company will depend on various factors, including market
acceptance of the Shelly's Woodroast and Shelly's Back Room concepts and general
economic conditions. The Company also faces all of the risks, expenses and
difficulties frequently encountered in connection with the operation and
development of a new and expanding business. Furthermore, to the extent that the
Company's expansion strategy is successful, the Company must manage the
transition to multiple site operations, higher volume operations, the control of
overhead expenses and the addition of necessary personnel. The Company had
losses of $412,456 and $1,086,755 for the thirteen and thirty-nine week periods
ended September 29, 1996, respectively, and expects losses to continue for the
near future.
The Company uses a 52/53 week fiscal year ending on the last Sunday of December.
Fiscal year 1996 will be a 52 week year, while fiscal year 1995 was a 53 week
year.
RESULTS OF OPERATIONS FOR THE THIRTEEN WEEKS AND THIRTY-NINE WEEKS ENDED
SEPTEMBER 29, 1996 AND SEPTEMBER 24, 1995
The Company's restaurant operation located in St. Louis Park, Minnesota, had net
sales for the thirteen weeks ended September 29, 1996 and September 24, 1995 of
$553,226 and $513,475, respectively, or a 7.7% increase of $39,751. Net sales
from the St. Louis Park operation for the thirty-nine weeks ended September 29,
1996 and September 24, 1995 were $1,784,624 and $1,653,503, respectively, or a
7.9% increase of $131,121. The restaurant located in Rockville, Maryland, that
opened for business on November 20, 1995, had net sales for the thirteen weeks
and thirty-nine weeks ended September 29, 1996 of $790,466 and $2,976,621,
respectively.
The food, beverage and other direct costs related to the operation of the St.
Louis Park, Minnesota, restaurant for the thirteen weeks ended September 29,
1996 and September 24, 1995 were $522,752 and $511,652, respectively, or a 2.2%
increase of $11,100. The food, beverage and other direct costs from the St.
Louis Park operation for the thirty-nine weeks ended September 29, 1996 and
September 24, 1995 were $1,671,239 and $1,593,016, respectively, or a 4.9%
increase of $78,223. The food, beverage and other direct costs related to the
operation of the Rockville, Maryland, restaurant for the thirteen weeks and
thirty-nine weeks ended September 29, 1996 were $848,723 and $3,129,291,
respectively. A significant portion of the loss from this period was due to the
opening of the Rockville restaurant. In addition to expected costs, including
staff training and promotion, additional unanticipated costs were incurred for
expansion of the restaurant's kitchen and training of additional management to
meet unforeseen peak demand. These and other cost control issues have been
addressed by management, and a program to increase sales has been undertaken.
However, no assurance can be given that these efforts will achieve desired
results by year end, if at all.
The Company's executive and administrative office located in Eden Prairie,
Minnesota, had general, administrative and development costs and expenses for
the thirteen weeks ended September 29, 1996 and September 24, 1995 of $325,543
and $161,671, respectively, or a 101.4% increase of $163,872. The general,
administrative and development costs and expenses for the thirty-nine weeks
ended September 29, 1996 and September 24, 1995 were $879,079 and $529,563,
respectively, or a 66.0% increase of $349,516. These increased expenses are
attributable primarily to the Company's ongoing restaurant development efforts.
Other expenses were $59,130 and $168,390, net, for the thirteen weeks and
thirty-nine weeks ended September 29, 1996, respectively, compared to other
income of $20,240 and $88,196, net, for the thirteen weeks and thirty-nine weeks
ended September 24, 1995, respectively. These increased expenses are
attributable primarily to increased interest costs.
An employment agreement has been signed, with an effective start date of
November 1, 1996, for the new President and Chief Operating Officer. Fourth
quarter earnings will reflect the salary and relocation expenses associated with
this addition to the management staff of the Company. Additionally, the Company
is seeking other senior management personnel as well as support staff, which
will also have an associated impact on future earnings. The Company will benefit
directly due to the expertise of these senior staff additions for its
anticipated expansion.
LIQUIDITY AND CAPITAL RESOURCES
During the past two fiscal years, the Company's capital requirements have been
met principally through the public and private sale of debt and equity
securities. In June 1994, the Company completed an Initial Public Offering of
750,000 units consisting of 750,000 shares of Common Stock, and 750,000
Redeemable Class A Warrants at an offering price of $5.50 per unit and received
net proceeds of approximately $3,360,000 after deducting approximately $765,000
in offering costs and underwriting discounts. Such net proceeds had been fully
utilized by December 31, 1995, for the development and opening of the Rockville
restaurant, and for the reduction of debt and trade payables. The Company had
working capital of $4,044,160 at September 29, 1996, compared to a working
capital deficit of $1,148,209 at December 31, 1995. Cash and cash equivalents
were $4,191,027 at September 29, 1996, representing an increase of $4,150,550
from $40,477 at December 31, 1995. These increases are attributable to proceeds
from the redemption of the Company's Class A Warrants in September 1996, which
is described below.
In November 1995, the Company completed a private placement of Units consisting
of $1,000,000 in principal amount of 15% Secured Promissory Notes (the Notes)
and warrants (the Warrants) to purchase an aggregate 200,016 shares of Common
Stock. The Notes are secured by a senior interest in substantially all assets
owned by the Company and its subsidiary. Property leased by the Company and its
subsidiary, including real estate and certain equipment, is not included in the
security interest. The Warrants have an exercise price of $.01 per share and are
exercisable at any time throughout May 31, 2000. Holders of Warrants or Warrant
shares have certain piggyback registration rights through May 31, 2002.
The Notes bear interest at 15%, payable monthly following the opening of the
Rockville restaurant. The effective annual interest rate, after considering the
value of the Warrants, is approximately 26%. The repayment schedule of the Notes
is dependent on the gross revenues of the Rockville restaurant during its first
year of operations: (A) If the gross revenues of the Rockville restaurant during
the first operating year are $4 million or greater, equal monthly installments
of principal and interest, amortized over a four year period, are payable
beginning in the second month following the end of the first operating year and
ending 47 months thereafter, when any unpaid principal and interest is payable
in full. (B) If the gross revenues of the Rockville restaurant during the first
operating year are less than $4 million, then only interest is payable through
July 1, 1998; thereafter, equal monthly installments of principal and interest,
amortized over an eight year period, are payable beginning August 1, 1998 and
continuing thereafter until July 1, 2006, when any unpaid principal and interest
is payable in full. (C) In addition, if the gross revenues of the Rockville
restaurant exceed $7 million for any operating year, the Company is obligated to
make a prepayment on the Notes of $25,000 for every $100,000 of the original
principal amount of the Note (but not to exceed the then-outstanding principal
balance), payable within two months after the end of such operating year. The
private placement of Units resulted in net proceeds of approximately $940,000
which were used to fund construction expenses and other costs related to the
opening of the Rockville restaurant.
The proceeds from the private placement included $200,000 in cash received in
October 1995 pursuant to a bridge loan financing by Lyle Berman, pursuant to
which the Company and its subsidiary granted to Mr. Berman a security interest
in the assets of the Company's restaurant in St. Louis Park, Minnesota. This
bridge financing was included in the private placement of Notes and Warrants in
November 1995 described above, and the bridge loan agreements were canceled at
that time. In December 1995, Mr. Berman made an additional $300,000 loan to the
Company, which was due and paid in April 1996. The Note carried interest at 15%.
In March and April 1996, the Company sold 625,000 shares of its Common Stock in
a private placement for $2.25 per share, and received net proceeds of
approximately $1,300,000. Holders of such shares have certain piggyback
registration rights. The net proceeds from the private placement of Common Stock
had been fully utilized by September 29, 1996.
In September 1996, the Company completed the redemption of the Redeemable Class
A Warrants. The registered holders of the Warrants had the option to redeem or
exercise. Holders who opted for redemption, received from the Company $0.01 for
each Class A Warrant submitted. The Company redeemed 21,048 Warrants. Holders
who elected to exercise, exchanged one Class A Warrant and $4.00 for one share
of the Company's Common Stock. Holders exercised 1,153,652 Warrants and the
Company received net proceeds of approximately $4,570,000. The net proceeds from
the redemption have been and will be used to pay debt and trade payables and to
provide working capital for the general corporate purposes.
The Company will require additional financing to implement its plans to expand
its Back Room concept. There is no assurance that additional financing will be
available, or if available, will be on terms acceptable to the Company. The
Company believes that it can repay its existing indebtedness from cash flow from
operations or will be able to obtain new financing when such indebtedness is
due. However, there can be no assurance that cash flow from operations will be
sufficient or that new financing will be available.
Foward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. This Form 10-QSB and other materials filed or to
be filed by the Company with the Securities and Exchange Commisssion, as well as
other written materials or oral statements that the Company may make or publish
from time to time, contain forward-looking statements relating to such matters
as plans for future expansion, other business development activities,
anticipated financial performance, business prospects, and similiar matters.
Such forward-looking statements by their nature involve substantial risks and
uncertainties, and actual results may differ materially from anticipated results
or other expectations expressed in the forward-looking statements. These risks
and uncertainties include, but are not limited to, those relating to the
operation and development of a new and expanding business, dependence on current
management and need for additional management personnel, and the risks and
uncertainties described in "Management's Discussion and Anyalysis of Financial
Condition and Results of Operations" in this Form 10-QSB.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently involved in legal proceedings arising in the
ordinary course of its business. The Company does not believe any such
legal proceedings will have a material adverse impact on the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-B
10.1 Employment agreement dated September 5, 1996, between
Woodroast Systems, Inc., and Ralph J. Guarino.
(b) Reports on Form 8-K
No reports on Form 8-K Current Report were filed during the
quarterly period ended September 29, 1996.
Exhibit 27 - Financial Data Schedule - which is only submitted
electronically to the Securities and Exchange Commission for
EDGAR information purposes.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Woodroast Systems, Inc.
/s/ SHELDON F. JACOBS
----------------------------------------
(Registrant) by Sheldon F. Jacobs
Chairman of Board,
Chief Executive Officer and
Chief Financial Officer
(Principal Financial and Accounting
Officer, Principal Executive Officer)
Date: November 1, 1996
EMPLOYMENT AGREEMENT
BY AND BETWEEN
WOODROAST SYSTEMS, INC., A MINNESOTA CORPORATION
AND
RALPH J. GUARINO
DATED EFFECTIVE SEPTEMBER 5, 1996
EMPLOYMENT AGREEMENT
BY AND BETWEEN
WOODROAST SYSTEMS, INC., A MINNESOTA CORPORATION
AND
RALPH J. GUARINO
DATED EFFECTIVE SEPTEMBER 5, 1996
TABLE OF CONTENTS
RECITALS ....................................................................1
AGREEMENTS...................................................................1
1. Employment and Duties...............................................1
2. Compensation. .....................................................2
(a) Base Salary. .............................................2
(b) Incentive Bonus Plan.......................................2
(c) Executive Perquisites, Benefits and Other Compensation.....2
3. Non-Competition Agreement...........................................3
4. Term; Termination; Rights on Termination............................5
(a) Death......................................................5
(b) Disability.................................................5
(c) Good Cause.................................................5
(d) Without Cause..............................................5
(e) Termination by Employee for Good Reason....................6
(f) Termination by Employee Without Cause......................6
5. Return of Company Property..........................................6
6. Inventions..........................................................7
7. Trade Secrets.......................................................7
8. Indemnification.....................................................7
9. No Prior Agreements.................................................8
10. Assignment; Binding Effect..........................................8
11. Complete Agreement..................................................8
12. Notice..............................................................8
13. Severability; Headings..............................................9
14. Arbitration.........................................................9
15. Governing Law.......................................................9
SIGNATURES...................................................................9
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") by and between Woodroast
Systems, Inc., a Minnesota corporation (the "Company"), and Ralph J. Guarino
("Employee") is hereby entered into and effective as of September 5, 1996. This
Agreement hereby supersedes any other employment agreements or understandings;
written or oral, between the Company and Employee.
RECITALS:
The following statements are true and correct:
As of the date of this Agreement, the Company is engaged primarily in
the business of owning and operating restaurants and cigar parlors.
Employee is employed hereunder by the Company in a confidential
relationship wherein Employee, in the course of his employment with the Company,
has and will continue to become familiar with and aware of information as to the
Company's customers, specific manner of doing business, including the processes,
techniques and trade secrets utilized by the Company, and future plans with
respect thereto, all of which has been and will be established and maintained at
great expense to the Company; this information is a trade secret and constitutes
the valuable goodwill of the Company.
Therefore, in consideration of the mutual promises, terms covenants and
conditions set forth herein and the performance of each, it is hereby agreed as
follows:
AGREEMENTS:
1. EMPLOYMENT AND DUTIES.
(a) The Company hereby employs Employee as President and Chief
Operating Officer effective November 1, 1996. As such, Employee shall
have responsibilities, duties and authority reasonably accorded to and
expected of a President and Chief Operating Officer and will report
directly to the Chief Executive Officer of the Company. Employee hereby
accepts this employment upon the terms and conditions herein contained
and, subject to paragraph 1(b), agrees to devote his working time,
attention and efforts to promote and further the business of the
Company.
(b) Employee shall not, during the term of his employment
hereunder, be engaged in any other business activity pursued for gain,
profit or other pecuniary advantage; provided however, the foregoing
limitation shall not be construed as prohibiting Employee from making
personal investments in such form or manner as will not require his
services in the operation or affairs of the companies or enterprises in
which such investments are made nor violate the terms of paragraph 3
hereof.
2. COMPENSATION. For all services rendered by Employee, the Company
shall compensate Employee as follows:
(a) BASE SALARY. The base salary payable to Employee shall be
One Hundred Seventy-Five Thousand Dollars ($175,000) per year, payable
on a regular basis in accordance with the Company's standard payroll
procedures but not less than twice monthly. On at least an annual
basis, the Board of Directors of the Company (the "Board") will review
Employee's performance and may make increases to such base salary if,
in its discretion, any such increase is warranted. Such recommended
increase would, in all likelihood, require approval by the Board or a
duly constituted committee thereof.
(b) INCENTIVE BONUS PLAN. For 1997 and subsequent years.
Employee shall be eligible for a bonus opportunity of up to 20% of his
base salary to be awarded at the discretion of the Chief Executive
Officer and based upon such criteria as may from time to time be
determined by the Chief Executive Officer.
(c) EXECUTIVE PERQUISITES, BENEFITS AND OTHER COMPENSATION.
Employee shall be entitled to receive additional benefits and
compensation from the Company in such form and to such extent as
specified below:
(i) Payment of premiums for coverage for Employee and
his spouse and children under health, hospitalization,
disability, life and other employee benefit plans that the
Company may have in effect from time to time, with benefits
provided to Employee under this clause (i) to be not less
favorable than the benefits provided to other Company
executives including the Chief Executive Officer.
(ii) Reimbursement for all business travel and other
out-of-pocket expenses reasonably incurred by Employee in the
performance of his services pursuant to this Agreement. All
reimbursable expenses shall be appropriately documented in
reasonable detail by Employee upon submission of any request
for reimbursement, and in a format and manner consistent with
the Company's expense reporting policy.
(iii) Two (2) weeks paid vacation for each year
during the period of employment (pro rated for any year in
which Employee is employed for less than the full year) until
October 31, 1999 and three (3) weeks paid vacation for each
year during the period of employment (pro rated for any year
in which Employee is employed for less than the full year)
after November 1, 1999. Earned and unused paid vacation for
each year shall not carry forward to subsequent years.
(iv) The Company shall provide Employee with other
executive perquisites as may be available to or deemed
appropriate for Employee by the Board and participation in all
other Company-wide employee benefits as available from time to
time.
(v) The Company shall grant the Employee options (the
"Options") to acquire one hundred fifty thousand (150,000)
shares of the Common Stock of the Company at the price of Four
and 375/1000s Dollars ($4.375) per share (the "Option Price").
The Options shall become exercisable as to twenty percent
(20%) of the underlying shares of Common Stock on May 1, 1997
and as to the remainder, twenty percent (20%) of the
underlying shares of Common Stock on each of the first four
anniversaries of May 1, 1997 (May 1, 1998, May 1, 1999, May 1,
2000, May 1, 2001). The Options shall expire on the tenth
anniversary of the date of grant.
(vi) The Company shall pay Employee's (A) direct and
out-of-pocket relocation expenses to the Minneapolis/St. Paul,
Minnesota metropolitan area; (B) travel expenses for up to
three (3) round-trips between Employee's current residence and
Minneapolis, Minnesota; and (C) rent for temporary lodging not
to exceed Two Thousand Five Hundred Dollars ($2,500) per month
for a period not to exceed one (1) year. Direct and
out-of-pocket relocation expenses include packing, moving and
unpacking of household goods, furniture and automobiles but do
not include temporary lodging or living costs, duplicate home
carrying costs, residential purchase closing costs or travel
costs except as set forth in clauses (B) and (C) of this
subsection 2(c)(vi). The foregoing shall be paid or reimbursed
by the Company if, when and as incurred.
3. NON-COMPETITION AGREEMENT.
(a) Employee will not, during the period of his employment by
or with the Company, and for a period of one (1) year immediately
following the termination of his employment under this Agreement, for
any reason whatsoever, directly or indirectly, for himself or on behalf
of or in conjunction with any other person, persons, company,
partnership, corporation or business of whatever nature:
(i) engage, as an officer, director, shareholder,
owner, partner, joint venturer, or in a managerial capacity,
whether as an employee, independent contractor, consultant or
advisor, or as a sales representative, in any business selling
any products or services in direct competition with the
Company's Shelly's Back Room(R) cigar parlor restaurant
concept (the "Parlor"), within the United States (the
"Territory");
(ii) call upon any person who is, at that time,
within the Territory, an employee of the Company (including
the subsidiaries thereof) for the purpose or with the intent
of enticing such employee away from or out of the employ of
the Company including the subsidiaries thereof);
(iii) call upon any person or entity which is, at
that time, or which has been, within one (1) year prior to
that time, a tobacco supplier (and excluding a food supplier),
joint venturer, licensee, or operator of the Company
(including the subsidiaries thereof) within the Territory for
the purpose of soliciting or selling products or services in
direct competition with the Parlors within the Territory;
(iv) call upon any prospective acquisition candidate,
on Employee's own behalf or on behalf of any competitor, which
candidate was either called upon by the Company (including the
subsidiaries thereof) or for which the Company made an
acquisition analysis, for the purpose of acquiring such
entity; or
(v) disclose the Company's tobacco suppliers (and
excluding food suppliers), joint venturers, licensees or
operators, whether in existence or proposed, of the Company
(or the Subsidiaries thereof) to any person, firm,
partnership, corporation or business for any reason or purpose
whatsoever.
Notwithstanding the above, the foregoing covenant shall not be
deemed to prohibit Employee from acquiring as an investment not more
than three percent (3%) of the capital stock of a competing business,
whose stock is traded on a national securities exchange or
over-the-counter.
(b) Because of the difficulty of measuring economic losses to
the Company as a result of a breach of the foregoing covenant and
because of the immediate and irreparable damage that could be caused to
the Company for which it would have no other adequate remedy, Employee
agrees that the foregoing covenant may be enforced by the Company in
the event of breach by his by injunctions and restraining orders.
(c) It is agreed by the parties that the foregoing covenants
in this paragraph 3 impose a reasonable restraint on Employee in light
of the activities and business of the Company (including the Company's
subsidiaries) on the date of the execution of this Agreement and the
current plans of the Company (including the Company's subsidiaries).
(d) The covenants in this paragraph 3 are severable and
separate, and the unenforceability of any specific covenant shall not
affect the provision of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the
intention of the parties that such restrictions be enforced to the
fullest extent which the court deems reasonable, and the Agreement
shall thereby be reformed.
(e) All of the covenants in this paragraph 3 shall be
construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of
Employee against the Company, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the
Company of such covenants. It is specifically agreed that the period of
one (1) year stated at the beginning of this paragraph 3 shall be
effective, shall be computed by excluding from such computation any
time during which Employee is in violation of any provision of this
paragraph 3.
4. TERM; TERMINATION; RIGHTS ON TERMINATION. The term of this Agreement
shall begin on November 1, 1996 and continue for five (5) years (the "Initial
Term"), and, unless terminated sooner as herein provided, shall continue
thereafter on a year-to-year basis on the same terms and conditions contained
herein. This Agreement and Employee's employment may be terminated in any one of
the following ways:
(a) DEATH. The death of Employee shall immediately terminate
the Agreement with no severance compensation due to Employee's estate.
(b) DISABILITY. If, as a result of incapacity due to physical
or mental illness or injury, Employee shall have been absent from his
full-time duties hereunder for three (3) consecutive months, then
thirty (30) days after receiving written notice (which notice may occur
before or after the end of such three (3) month period, but which shall
not be effective earlier than the last day of such three (3) month
period), the Company may terminate Employee's employment hereunder
provided Employee is unable to resume his full-time duties at the
conclusion of such notice period. Also, Employee may terminate his
employment hereunder if his health should become impaired to an extent
that makes the continue performance of his duties hereunder hazardous
to his physical or mental health or his life, provided that Employee
shall have furnished the Company with a written statement from a
qualified doctor to such effect and provided, further, that at the
Company's request made within thirty (30) days of the date of such
written statement, Employee shall submit to an examination by a doctor
selected by the Company who is reasonably acceptable to Employee or
Employee's doctor and such doctor shall have concurred in the
conclusion of Employee's doctor. In the event this Agreement is
terminated as a result of Employee's disability, Employee shall receive
from the Company, in a lump-sum payment due within ten (10) days of the
effective date of termination, the base salary at the rate then in
effect for a period of one (1) year.
(c) GOOD CAUSE. The Company may terminate the Agreement ten
(10) days after written notice to Employee for good cause, which shall
be: (i) Employee's material breach of this Agreement (continuing for
ten (10) days after receipt of written notice); (ii) Employee's gross
negligence in the performance or intentional nonperformance (continuing
for ten (10) days after receipt of written notice) of any of Employee's
material duties and responsibilities hereunder; (iii) Employee's
dishonesty, fraud or misconduct with respect to the business or affairs
of the Company which materially and adversely affects the operations or
reputation of the Company; (iv) Employee's conviction of a felony
crime; or chronic alcohol abuse or illegal drug abuse by Employee. In
the event of a termination for good cause, as enumerated above,
Employee shall have no right to any severance compensation.
(d) WITHOUT CAUSE. At any time after the commencement of
employment, the Company may, without cause, terminate this Agreement
and Employee's employment, effective thirty (30) days after written
notice is provided by the Company. Should Employee be terminated by the
Company without cause, Employee shall receive from the Company, in a
lump-sum payment due on the effective date of termination, the base
salary at the rate then in effect for one (1) year.
(e) TERMINATION BY EMPLOYEE FOR GOOD REASON. The Employee may
terminate his employment hereunder for "Good Reason." As used herein,
"Good Reason" shall mean the continuance of any of the following after
10 days' prior written notice by Employee to the Company, specifying
the basis for such Employee's having Good Reason to terminate this
Agreement:
(i) the assignment to Employee of any duties
materially and adversely inconsistent with the Employee's
position as specified in paragraph 1 hereof (or such other
position to which he may be promote), including status,
offices, responsibilities or persons to whom the Employee
reports as contemplated under paragraph 1 of this Agreement,
or any other action by the Company which results in a material
and adverse change in such position, status, offices, titles
or responsibilities;
(ii) Employee's removal from, or failure to be
reappointed or re-elected to, Employee's position under this
Agreement, except as contemplated by paragraphs 4(a), (b), and
(c); or
(iii) any other material breach of this Agreement by
the Company, including the failure to pay Employee on a timely
basis the amounts to which he is entitled under this
Agreement.
In the event of any termination by the Employee for Good
Reason, as determined by a court of competent jurisdiction or pursuant
to the provisions of paragraph 14 below, the Company shall pay to
Employee in a lump-sum payment the base salary at the rate then in
effect for one (1) year.
(f) TERMINATION BY EMPLOYEE WITHOUT CAUSE. If Employee resigns
or otherwise terminates his employment without Good Reason pursuant to
paragraph 4(e), Employee shall receive no severance compensation.
Upon termination of this Agreement for any reason provided in clauses
(a) through (f) above, Employee shall be entitled to receive all compensation
earned and all benefits vested and reimbursements due through the effective date
of termination. Additional compensation subsequent to termination, if any, will
be due and payable to Employee only to the extent and in the manner expressly
provided above. All other rights and obligations of the Company and Employee
under this Agreement shall cease as of the effective date of termination, except
that the Company's obligations under paragraph 8 herein and Employee's
obligations, if any, under paragraphs 3, 5, 6, 7 and 9 herein shall survive such
termination in accordance with their terms.
5. RETURN OF COMPANY PROPERTY. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Employee by or on behalf of the Company shall be and
remain the property of the Company and be subject at all times to its discretion
and control. Likewise, all correspondence, reports, records, charts, advertising
materials and other similar data pertaining to the business, activities or
future plans of the Company which is collected by Employee shall be delivered
promptly to the Company without request by it upon termination of Employee's
employment.
6. INVENTIONS. Employee shall disclose promptly to the Company any and
all significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by Employee,
solely or jointly with another, during the period of employment and which are
directly related to the business or activities of the Company. Employee hereby
assigns and agrees to assign all his interests therein to the Company or its
nominee. Whenever requested to do so by the Company, Employee shall execute any
and all applications, assignments or other instruments that the Company shall
deem necessary or apply for and obtain Letters of Patent of the United States or
any foreign country or to otherwise protect the Company's interest therein. THIS
SECTION 6 DOES NOT APPLY TO AN INVENTION FOR WHICH NO EQUIPMENT, SUPPLIES,
FACILITY OR TRADE SECRET OR CONFIDENTIAL INFORMATION OF THE COMPANY WAS USED AND
WHICH INVEN TION WAS DEVELOPED ENTIRELY ON THE EMPLOYEE'S OWN TIME, AND (i)
WHICH DOES NOT RELATE (A) DIRECTLY TO THE BUSINESS OF THE COMPANY, OR (B) TO THE
COMPANY'S ACTUAL OR DEMONSTRABLY ANTICIPATED RESEARCH OR DEVELOPMENT, OR (ii)
WHICH INVENTION DOES NOT RESULT FROM ANY WORK PERFORMED BY THE EMPLOYEE FOR THE
COMPANY.
7. TRADE SECRETS. Employee agrees that he will not, during the term of
this Agreement with the Company, disclose the specific terms of the Company's
relationships or agreements with its significant vendors or customers or any
other significant and material trade secret of the Company, whether in existence
or proposed, to any person, firm, partnership, corporation or business for any
reason or purpose whatsoever, except as is disclosed in the ordinary course of
business, unless compelled by court order.
8. INDEMNIFICATION. In the event Employee is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
against Employee), by reason of the fact that he is or was performing services
under this Agreement or is or was an officer of the Company, then the Company
shall indemnify Employee against all expenses (including attorney's fees),
judgments, fines and amounts paid in settlement, as actually and reasonably
incurred by Employee in connection therewith to the fullest extent authorized by
Minnesota law. In the event that both Employee and the Company are made a party
to the same thirty-party action, complaint, suit or proceeding, the Company
agrees to engage competent legal representation, and Employee agrees to use the
same representation, provided that if counsel selected by the Company shall have
a conflict of interest that prevents such counsel from representing Employee,
Employee may engage separate counsel and the Company shall pay all attorneys'
fees of such separate counsel. Further, while Employee is expected at all times
to use his best efforts to faithfully discharge his duties under this Agreement,
Employee cannot be held liable to the Company for errors or omissions made in
good faith where Employee has not exhibited gross, willful and wanton negligence
and misconduct or performed criminal and fraudulent acts which materially damage
the business of the Company.
9. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to the
Company that the execution of this Agreement by Employee and his employment by
the Company and the performance of his duties hereunder will not violate or be a
breach of any Agreement with a former employer, client or any other person or
entity. Further, Employee agrees to indemnify the Company for any claim,
including, but not limited to, attorneys' fees and expenses of investigation, by
any such third party that such third party may now have or may hereafter come to
have against the Company based upon or arising out of any non-competition
Agreement, invention or secrecy Agreement between Employee and such third party
which was in existence as of the date of this Agreement.
10. ASSIGNMENT; BINDING EFFECT. Employee understands that he has been
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Employee agrees, therefore, he cannot
assign all or any portion of his performance under this Agreement. Subject to
the preceding two (2) sentences, this Agreement shall be binding upon, inure to
the benefit of and be enforceable by the parties hereto and their respective
heirs, legal representatives, successor and assigns.
11. COMPLETE AGREEMENT. This Agreement is a promise of future
employment. Employee has no oral representations, understanding or agreements
with the Company or any of its officers, directors or representatives covering
the same subject matter as this Agreement. This written Agreement is the final,
complete and exclusive statement and expression of the agreement between the
Company and Employee and of all the terms of this Agreement, and it cannot be
varied, contradicted or supplemented by evidence of any prior or contemporaneous
oral or written agreements. This written Agreement may not be later modified
except by a further writing signed by a duly authorized officer of the Company
and Employee, and no term of this Agreement may be waived except by writing
signed by the party waiving the benefit of such term.
12. NOTICE. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To the Company:
Woodroast Systems, Inc.
10250 Valley View Road
Suite 145
Eden Prairie, Minnesota 55344
Attn: Mr. Sheldon F. Jacobs
To the Employee:
Mr. Ralph J. Guarino
204 Horseshoe Trail
Greenburg, Pennsylvania 15601
Notice shall be deemed given and effective three (3) days after the deposit in
the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or when actually received. Either party may
change the address for notice by notifying the other party of such change in
accordance with this paragraph 12.
13. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held in valid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of the
Agreement or of any part hereof.
14. ARBITRATION. Any unresolved dispute or controversy arising under or
in connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three (3) arbitrators in Minneapolis, Minnesota, in
accordance with the rules of the American Arbitration Association then in
effect. The arbitrators shall not have the authority to add to, detract from, or
modify any provisions hereof nor to award punitive damages to any injured party.
The arbitrators shall have the authority to order back-pay, severance
compensation, vesting of options (or cash compensation in lieu of vesting of
options), reimbursement of costs, including those incurred to enforce this
Agreement and interest thereon. A decision by a majority of the arbitration
panel shall be final and binding. Judgment may be entered on the arbitrators'
award in any court having jurisdiction. The direct expense of any arbitration
proceeding shall be borne equally by the Company and Employee.
15. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of Minnesota.
SIGNATURES:
Date: September 25, 1996 /S/ Ralph J. Guarino
-----------------------------------
Ralph J. Guarino
"Employee"
/s/ Elizabeth H. Clark
- -----------------------------------
Witness
WOODROAST SYSTEMS, INC.
Dated: September 25, 1996 By /s/ Sheldon F. Jacobs
------------------------------
Sheldon F. Jacobs
/s/ Janet C. Johnson Its Chief Executive Officer
- ----------------------------------- "Company"
Witness
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