SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 29, 1996
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from
___________ to _____________
Commission File No. 0-25926
WOODROAST SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
Minnesota 41-1563961
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
10250 Valley View Road, Suite 145
Eden Prairie, Minnesota 55344
(Address of Principal Executive Offices) (Zip Code)
(612) 944-5113
(Issuer's telephone number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities to be registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.005 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 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___
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer had total revenues of $6,272,724 for its fiscal year ended December
29, 1996.
As of March 25, 1997, assuming as market value the price of $2.25 per share
(the last sales price of the Company's Common Stock on the Nasdaq SmallCap
Market), the aggregate market value of shares held by non-affiliates was
$6,947,771. For purposes of this computation, affiliates of the Registrant are
deemed only to be the Registrant's executive officers and directors.
As of March 25, 1997, the Company had outstanding 4,242,397 shares of Common
Stock, $.005 par value.
Documents Incorporated by Reference: Portions of the Company's Proxy Statement
for its Annual Meeting of Shareholders to be conducted on May 20, 1997 (the
"1997 Proxy Statement") are incorporated by reference into Part III of this Form
10-KSB, to the extent described in Part III. The 1997 Proxy Statement will be
filed within 120 days after the end of the fiscal year ended December 29, 1996.
<TABLE>
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TABLE OF CONTENTS
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PART I PAGE NO.
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ITEM 1. DESCRIPTION OF BUSINESS.................................................. 1
ITEM 2. DESCRIPTION OF PROPERTY.................................................. 6
ITEM 3. LEGAL PROCEEDINGS........................................................ 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS....................................................... 7
PART II
ITEM 5. MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS........................................ 7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION................................................... 8
ITEM 7. FINANCIAL STATEMENTS..................................................... 11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................................. 11
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT...................................... 11
ITEM 10. EXECUTIVE COMPENSATION................................................... 11
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT....................................... 11
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................................................... 11
ITEM 13. EXHIBITS AND REPORTS ON
FORM 8-K............................................................... 11
SIGNATURES............................................................................................. 12
FINANCIAL STATEMENTS................................................................................... F-1
</TABLE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. The
actual results of the Company could differ materially from the Company's
historical results of operations and those discussed in the forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, lack of profitability, inability to open
additional units, competition in the restaurant industry, unexpected increases
in labor and food costs, and changes in government regulation of the sectors in
which the Company operates.
GENERAL
Woodroast Systems, Inc. (the "Company") owns and operates Shelly's
Woodroast restaurants in St. Louis Park, Minnesota, a suburb of Minneapolis (the
"St. Louis Park Restaurant"), and Rockville, Maryland, a suburb of Washington,
D.C. (the "Rockville Restaurant") (together with the St. Louis Park
Restaurant, the "Restaurants"). The Company has been operating the St. Louis
Park Restaurant since 1989, and the Rockville Restaurant since November 1995.
The Shelly's Woodroast restaurant concept is an integrated concept, involving a
distinctive cooking style, menu offerings, beverage selections and facility
design. The inspiration of the concept is the fresh, relaxed atmosphere of the
northwoods, from the great fieldstone and timber lodges to the aroma of meat,
fish and fowl roasting over a hardwood fire.
THE SHELLY'S WOODROAST CONCEPT
The Company believes that the Shelly's Woodroast concept has several
characteristics that define and distinguish it from its competitors,
particularly full-service, chain-affiliated restaurants:
* The marks "Woodroast," "The Original Shelly's Woodroast" and "Original
Woodroast Cooking," and the patented Woodroast oven, proprietary spice
blends and marinades.
* Unique food offerings patterned after the hearty fare of the
northwoods, which include, in addition to Woodroast entrees, a
selection of fresh sausages prepared under contract using proprietary
recipes, herb roasted potatoes, salmon, freshwater fish and homemade
stew, all served in large portions, creating a high perception of
value.
* A selection of distinctive draft beers from American micro-breweries,
highlighted by three of the Company's own Birch Bay beers brewed from
proprietary recipes exclusively for Shelly's Woodroast. The beer
selection changes seasonably.
* The northwoods lodge design of the facility itself with its fieldstone
fireplace, exposed whole timber beams, rough-cut red pine siding.
ORIGINAL WOODROAST COOKING
Original Woodroast Cooking is a proprietary style of cooking with
origins in America's northwoods country -- where Canada meets the United States.
As the name suggests, it is a cooking method in which meats, fish and fowl are
slowly roasted in wood burning ovens. Invented by the Company's founder, the
patented ovens release the flavorful, aromatic components of a carefully
selected combination of hardwoods and fruitwoods, surrounding each dish with
mellow even heat.
Original Woodroast Cooking involves more than simply slow roasting.
Each offering is also marinated in a proprietary blend of herb and spices for 48
hours or longer before the cooking begins. During the cooking process, the food
is continually basted with the marinade and spice combinations by computer
controlled mechanisms in the patented Woodroast ovens, keeping it moist while
imparting subtle, distinctive flavor throughout. Several of the spice blends and
sauces are described below:
SEVEN HERB BLEND -- An aromatic combination of delicate herbs,
including real lavender flowers. This special seasoning has been custom blended
to especially complement the variety of fowl entrees on the menu.
FIVE PEPPER BLEND -- A complex blend of five different peppercorns,
designed to create a subtle yet full flavor. In addition to its use in the
preparation of several meat dishes, it is placed on the table as a condiment.
SHELLY'S FIRE SPICE -- A combination of six different spices also
placed on the table as a condiment to add additional flavor with a bite to meat
dishes, salads and potatoes as the guest desires.
WOODROAST SAUCE -- The most difficult of the proprietary sauces to
develop, Woodroast sauce contains 14 different fresh ingredients. Woodroast
sauce is served on the side for meat and fowl entrees, topped with freshly diced
vegetables.
MUSTARD SAUCE -- A homemade blend of mustard seeds, with herbs and
spices and a hint of natural sweetness.
Ultimately, the unique blend of these specially formulated marinades
and spice blends, together with wood burning, slow roasting and a commitment to
natural goodness produce the Woodroast style of cooking.
MENU
The meat, fish and fowl, which are the centerpiece of the menu, are
simple and moderately priced. It is the preparation which makes them unique.
Featured dinner items include roast duck and game hen, turkey drumsticks,
salmon, trout and walleye, beef brisket, spare ribs and roast pork. Pricing is
generally moderate, between $9 and $18, and portions are large. Several side
dishes are included with the entrees, such as herb roasted potatoes, marinated
vegetable salad and homemade popovers.
An unusual feature of the Shelly's Woodroast menu are the fresh
sausages made from the personal recipes of Sheldon F. Jacobs, the Company's
principal shareholder. Available as appetizers or as entrees, three varieties
are regularly offered: Fire Sausage -- blended from pork, chilies, onions and
spices; Hunter Sausage -- a combination of veal and pork with mustard seeds and
garlic; and Duck and Turkey Sausage -- a combination of duck and turkey breast
with mild seasonings. Other varieties are prepared as seasonal specials.
For lunches and lighter dinners, a variety of sandwich versions of the
entree selections are offered, as well as Campfire Stew, Corn Cob Chowder, Lodge
Soup (a hearty vegetable beef) and sandwiches. The Company also offers four
specialty salads, including Shelly's Summer Salad (green beans, new potatoes,
red onions, pickled red peppers and black olives in a tuna vinaigrette) and
Shelly's Winter Salad (roast pork and chicken, orange slices, red peppers and
romaine lettuce in a chutney vinaigrette), both served year-round.
FACILITIES
The design of the Restaurants is reminiscent of the great
turn-of-the-century hunting lodges of the northwoods. The St. Louis Park
Restaurant's main dining room features a 20-foot high ceiling with handcrafted
log-scissor trusses resting atop a one-ton log beam. A birch log bar completes
the northern lodge atmosphere. Other natural elements at the restaurant include
exposed beam ceilings in the bar, leather covered booths, barstools covered with
holstein hide with the hair remaining and a massive fieldstone fireplace. The
Rockville Restaurant's main dining room -- The Great Hall -- features a 20-foot
ceiling and Norman trusses of Minnesota red pine. In The Green Room, a second
dining room adjoining The Great Hall, yellow pine parallel-cord log trusses form
an extraordinary pattern of beams bound together with hand-wrought iron, copper
and brass. The fireplace in The Great Hall includes an impressive double-log
mantle and fieldstone set in a classic random pattern. The Green Room fireplace
is laid in a traditional rough coursed pattern. Like its Minnesota counterpart,
the bar in the Rockville Restaurant features furniture made of natural elements
(tables supported by rough-hewn birch logs) and display cases replete with
antique fishing lures, decoys and other items which bring to mind a sense of the
northwoods.
One important variation from the traditional appearance of a northwoods
lodge is the lack of hunting trophies mounted on the walls. Rather, the attitude
toward northwoods wildlife exhibited in the concept is one of respect and
appreciation for its abundance and vigor. Consequently, it is that sense of
vitality which is portrayed through the use of photographs throughout the
restaurant.
The execution of the northwoods concept is far more extensive than
typically present even in a "theme" restaurant. The cost to develop the St.
Louis Park Restaurant in 1989, which has 138 seats, was approximately
$1,750,000. The cost to develop the Rockville Restaurant, which was opened in
November 1995 and has approximately 258 indoor dining seats, was approximately
$3,500,000. The seating area in any new restaurants is likely to be similar to
the Rockville Restaurant.
Unique to the Rockville Restaurant is a "civilized cigar parlor" called
Shelly's Back Room. Nestled in a private corner adjoining the bar, this special
room was designed as a retreat for cigar smokers who may want to follow a lunch
or dinner in the restaurant with cigars from their personal humidors. Shelly's
Back Room boasts exquisitely hand-crafted, floor-to-ceiling humidors, one which
is designed for communal use and another which houses 72 private lockers for use
by special patrons. Coupling a state-of-the-art air purification system with
relaxed club seating and the rich woods used throughout the room, Shelly's Back
Room is a popular haven for the restaurant's cigar-smoking guests.
NEW SHELLY'S BACK ROOM IN WASHINGTON, D.C.
The Shelly's Back Room concept, the pioneering prototype of which is
attached to the Shelly's Woodroast restaurant in Rockville, Maryland, represents
a significant evolution in the development of "cigar bars" and "cigar rooms",
reflecting the expertise of its creator. Unlike many existing facilities,
Shelly's Back Room is open to the public -- no exclusive memberships and high
fees. The only requirements for admittance are a love of good cigars, good food,
good drink and good company.
Key elements of the Shelly's Back Room concept were perfected by Mr.
Jacobs himself, from his knowledge not only of cigars and cigar smoking, but
also of high quality food and beverages. The Back Room offers casual comfortable
seating, a full-service bar, food service and a state-of-the-art air
purification system which circulates 100% fresh air -- no filtering and
recycling -- to ensure maximum guest comfort. An important signature item of
Shelly's Back Room is the development, like the proprietary Birch Bay Beer of
Shelly's Woodroast restaurants, of an exclusive premium cigar already created
with the oversight of Shelly himself and available exclusively in Back Rooms.
However, availability of such cigars is subject to change in the future as in
the case of any product imported from a foreign country.
A smaller but important element of the Back Room concept is the retail
humidor and counter offering a canny selection of some of the world's finest
cigars for purchase. Cigar aficionados know that obtaining favorite premium
brands can occasionally present problems during this extended period of
explosive demand growth. Mr. Jacobs will use his personal knowledge and
connections to ensure that the Back Room humidors offer the most complete and
current selections available, featuring, of course, the private Back Room label
which Mr. Jacobs has developed. In addition to cigars, the Back Rooms will offer
a selection of premium logo merchandise including ashtrays, lighters, selected
clothing items, pocket knives, cutters and glassware.
As previously mentioned, the specialized air purification system will
be a critical component of the Back Room concept. Designed in recognition that
no filtration and recycling system can adequately handle the unique and
intensive needs of a dedicated cigar smoking emporium, the Shelly's Back Room
system will utilize 100% fresh air.
Shelly's Back Room has been designed with the intention of being
efficiently reproduced on a national basis. Target sites will be high
walking-traffic storefront units with convenient parking in major cities and
upscale suburban strip malls and shopping centers, comparable, for example, to
sites targeted by retailers like Starbucks Coffee.
A full, independent Back Room facility is designed to require
approximately 2,500 to 3,500 square feet of space. However, in situations
comparable to Rockville, Maryland, where a Back Room is physically attached to a
Shelly's Woodroast restaurant, the kitchen can be eliminated and the retail
component combined with the restaurant, reducing space needs to as little as
800 square feet. This is also true in special applications such as casinos,
hotels or resorts, which would have their own food service operations.
Similarly, and perhaps most beneficially for potential broad-scale
roll-out of the concept, satellite Back Room operations could be clustered in
markets with a Shelly's Woodroast restaurant, which would act as a central
commissary, again reducing the space needs and equipment costs of individual
Back Room units.
The market position of the Back Room concept can best be described as
accessibly upscale. The very nature of the product offering dictates a refined
sophisticated ambiance with commensurate service and pricing. However, the broad
appeal of cigars and the relative affordability of premium brands compared to
other forms of luxury consumption, encourages a rational market position capable
of appealing to a variety of clientele. Such a position is also far more
conducive to more rapid and widespread duplication as the concept grows in
popularity and exposure. Indeed, the Back Room concept is not dissimilar to a
coffeehouse concept such as Starbucks, offering a convenient location for the
enjoyment of premium versions of popular consumables in a relaxed setting. Of
course, the difference in the average ticket for even a premium coffee beverage
and dessert versus a premium cigar and cognac can be substantial.
EXPANSION PLANS
The Company is in the process of developing new Back Room locations and
is visiting and evaluating potential sites in Chicago, New York, Boston and
Minneapolis. However, there are presently no binding agreements to develop new
restaurants or Back Rooms. The Company has finalized the lease and begun
construction on its first Shelly's Back Room to be located in Washington, D.C.,
and hopes to finalize an additional lease by April 1997. The Company will
consider opening additional Shelly's Woodroast restaurants depending upon
several factors, including the success of the Shelly's Back Room concept, the
costs of developing and opening new facilities, and the Company's ability to
obtain additional financing.
The Company has entered into a license agreement with Grand Casinos,
Inc. to open a Shelly's Back Room in Grand's Tunica, Mississippi Casino. In
addition, the Company is in the final stages of negotiating a license agreement
with Host Marriott to locate Back Rooms in airport facilities. However, no
assurance can be given that any license agreement will be successfully
concluded.
ADVERTISING
The Company's target market are people between the ages of 30 and 60,
typically living in high density suburban locations, who have expendable
household income. The Company advertises its restaurant locations through radio
advertisements and direct mailings. Approximately 4% of the Company's sales is
spent on such advertising. As the Company opens restaurants in new markets, the
amount spent on advertising as a percentage of sales may be increased as the
Company seeks to establish itself in these new markets.
RESTAURANT OPERATIONS
STAFFING
At March 21, 1997, the Company had 195 employees, including 67 at the
St. Louis Park Restaurant, 120 at the Rockville Restaurant, and nine at the
Company's executive offices. The staff of the St. Louis Park Restaurant consists
of a general manager, service manager, bar manager, kitchen manager and
assistant kitchen manager, and approximately 60 hourly employees, 40 of whom are
employed part-time. The staff of the Rockville Restaurant consists of a general
manager, service manager, bar manager, kitchen manager and assistant kitchen
manager, and approximately 110 hourly employees, 60 of whom are employed
part-time. The Company believes that its relationship with its employees is
good.
EMPLOYEE TRAINING AND SUPERVISION
The Company believes strongly in the concept of teamwork and the
importance of a well trained and motivated staff. Each Restaurant is closely
supervised by its general manager, who is directly responsible for the
restaurant's success. Each staff member is given a Staff Member Guideline
Manual, which provides background information on the Company and outlines basic
policies and procedures applicable to all personnel. Each staff member is also
given either a Service Manual or Kitchen Manual as appropriate. These manuals
provide job descriptions for each position in the restaurant and detailed
guidelines and background information for the execution of the duties associated
with employment in either the preparation or service of food and beverages.
Employees are tested on an occasional basis to measure their knowledge of the
products served and the policies of the Company.
New employees receive a training manual and training packet, which
outlines the training agenda for their employment and provides basic background
information on the names and prices of food and beverage items, as well as other
terminology which they need to know. New employees are trained by designated
staff members with considerable experience and proven performance.
RESTAURANT REPORTING
The Company prepares a monthly balance sheet and income statement,
which provides overall performance information for each of the Restaurants. The
Company also utilizes a point-of-sale system which allows daily and weekly
reports to be generated regarding cash control, sales and theoretical food
costs. On a monthly basis, the Company counts its food and beverage inventories.
Sales and guest counts are forecasted in advance for each week of the
month. Actual sales and guest counts are then compared to forecasted levels.
Sales and guest counts are also compared to the annual budget and the prior
year's performance. Labor hours are tracked weekly by day and position. Actual
hours are compared to budgeted levels to identify variance.
COMPETITION
The restaurant business is highly competitive and is affected by
changes in taste and eating habits of the public, local and national economic
conditions affecting spending habits, and population and traffic patterns. The
principal competitive factors in the restaurant industry are believed to be the
quality and price of the food. Restaurant location, name recognition, efficiency
of service, advertising, and attractiveness of facilities are also important.
Shelly's Woodroast restaurants compete on a general basis with a large variety
of national and regional restaurant operations, as well as locally owned
restaurants, diners, and other establishments that offer moderately priced food
to the public.
PATENTS AND TRADEMARKS
The Company holds the rights to U.S. Patent Number 4,924,071, which
covers the Woodroast oven invented by Mr. Jacobs. In addition, the Company owns
U.S. registrations of the marks "Woodroast", "Original Woodroast Cooking", "The
Original Shelly's Woodroast" and "Birch Bay Brewing Company." The mark "Original
Woodroast Cooking" has also been registered in the United Kingdom and France,
and the mark "Birch Bay Brewing Company" has been registered in Canada. The
Company has aggressively defended its trademarks against infringement by
competitors on a national basis. Birch Bay Brewing Company is a mark used by the
Company for certain of its own beverages and is not a separate legal entity.
REGULATION
Restaurants are subject to licensing and regulation by state and local
health, sanitation, safety, fire, and other authorities and are also subject to
state and local licensing and regulation of the sale of alcoholic beverages,
food, cigarettes, games, and the like. Difficulties or failure in obtaining
required licenses and approvals will result in delays in, or cancellation of,
the opening of restaurants. The food and liquor licenses are also subject to
suspension or non-renewal if the granting authority determines that the conduct
of the holder does not meet the standards for initial grant or renewal.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name and age of the Company's
executive officers together with all positions and offices held with the Company
by such executive officers. Officers are appointed to serve until the meeting of
the Board of Directors following the next Annual Meeting of Shareholders and
until their successors have been elected and have qualified.
NAME AGE POSITIONS WITH COMPANY
---- --- ----------------------
Sheldon F. Jacobs.................. 52 Chairman of the Board
and Chief Executive Officer
Ralph J. Guarino................... 50 President, Chief Operating
Officer and Chief Financial
Officer
Alex Gionta........................ 45 Vice President of Operations
SHELDON F. JACOBS has been Chairman of the Board and Chief Executive
Officer of the Company since its inception in 1987 and was also its President
and Chief Financial Officer until 1996. From 1980 to 1987, Mr. Jacobs worked
toward the development of the Shelly's Woodroast concept, from engineering and
patenting the design of the Woodroast ovens, to introducing the Original
Woodroast Cooking to existing restaurants and testing consumer response. In
1974, Mr. Jacobs was a co-founder of J.Y.J. Corporation, a liquidation company
that was eventually merged into C.O.M.B. Company. He served as its president
from 1974 to 1980. In 1980 Mr. Jacobs sold his interest in J.Y.J. Corporation.
RALPH J. GUARINO joined the Company in November 1996 as its President,
Chief Operating Officer and Chief Financial Officer. Mr. Guarino brings over 25
years of restaurant operations experience to the Company. From July 1992 until
that time Mr. Guarino served as Senior Vice President, Chief Operating Officer
and member of the Board of Directors for The Italian Oven, Inc., a 100-unit
chain of full-service, moderately-priced Italian family restaurants based in
Latrobe, Pennsylvania. He became President in February 1993. During his
four-year tenure at that company, he oversaw The Italian Oven, Inc.'s initial
public offering of common stock, the opening of 18 additional company-owned
units and 71 franchised units, as well as the sale of over 250 franchises. The
Italian Oven, Inc. filed a voluntary petition for reorganization under Chapter
11 of the United States Bankruptcy Code on October 21, 1996. He served as Senior
Vice President, Chief Financial Officer and member of the Board of Directors for
Boston Chicken, Inc., a restaurant and prepared food chain based in Boston,
Massachusetts, from 1990 until 1992.
ALEX GIONTA joined the Company as Vice President of Operations on
January 2, 1997. He has over 25 years of line restaurant management experience,
including franchisee support, site selection, marketing, profit and loss
management, as well as recruitment and training. He previously was the market
manager for KFC National Management Company. Before his tenure with KFC, Mr.
Gionta was Vice President of Operations with The Italian Oven, Inc. The
Italian Oven, Inc. filed a voluntary petition for reorganization under Chapter
11 of the United States Bankruptcy Code on October 21, 1996. Prior to
joining The Italian Oven, Inc., he managed franchisee operations for KFC, where
he was responsible for 25 franchisees and 120 restaurants.
ITEM 2. DESCRIPTION OF PROPERTY
The St. Louis Park Restaurant is located on Interstate 394, a major
thoroughfare connecting downtown Minneapolis with its western suburbs. The St.
Louis Park Restaurant is a 6,500 square foot facility which seats approximately
138 people, plus a bar that seats 26 people. The Company constructed the
building and improvements on the land which is subject to a 15-year ground lease
expiring in 2004. The Company has the option to extend such lease for two
additional five year periods. Annual base rent pursuant to the lease is $66,000
for fiscal years ended December 1995 through 1998 and approximately $75,000 per
annum for the last five years of the lease. The Company also pays real estate
taxes and operating expenses. At the end of the lease term, the building and
improvements will remain with the land. Mr. Jacobs has personally guaranteed the
landlord's indebtedness related to the land subject to this ground lease.
The Rockville Restaurant, which opened in November 1995, is located in
the Congressional Plaza along Rockville Pike (Highway 355), a main artery
linking the Washington area's northwestern suburbs and the District of Columbia.
The Rockville Restaurant has approximately 9,400 square feet and approximately
258 indoor dining seats, as well as bar seating, and 50 outdoor seats. In
November 1994, the Company signed a 10-year lease for the property on which the
Rockville Restaurant is located. The Company has the option to extend such lease
for two additional five year periods. The lease provides for annual base rent of
$300,000 for the first five years of the lease, and $315,000 for the remaining
five years of the lease. The Company also pays real estate taxes, operating
expenses and a percentage rent equal to 5% of annual gross sales in excess of
$6,500,000. At the end of the lease term, the building and improvements will
remain with the land.
The Company signed a 10-year lease for a stand-alone Shelly's Back Room
to be located at 1331 F Street, N.W. in Washington, D.C. The lease became
effective on August 1, 1996. This unit is expected to open in June 1997. It will
have approximately 3,100 square feet and seating for approximately 72 people.
The lease provides for annual base rent of $62,000 for the first year of the
lease, with the base rent to increase by two per cent per year for the second,
third, fourth and fifth years of the lease. Effective during the sixth year of
the lease, the base rent will be increased by $7,750, and will increase by two
per cent annually over the remaining years of the term. The Company also pays a
pro rata share of real estate taxes and operating expenses.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since June 1994, the Common Stock of the Company has been traded in the
over-the-counter market and quoted on the Nasdaq SmallCap Market under the
symbol "WRSI". The following table sets forth the high and low bid prices of the
Company's Common Stock for the periods indicated. The Nasdaq bid quotations
represent inter-dealer prices, without retail mark-ups, mark-downs or
commissions, and may not necessarily represent actual transactions:
1995 HIGH LOW
---- ------ ----
First Quarter......................... $1.13 $ .75
Second Quarter........................ .88 .50
Third Quarter......................... 1.13 .83
Fourth Quarter........................ 5.71 .92
1996
First Quarter......................... $6.50 $ 3.02
Second Quarter........................ 9.50 3.88
Third Quarter......................... 8.50 4.00
Fourth Quarter........................ 6.38 2.88
- ------------------
All prices set forth above have been adjusted to reflect a
one-for-three reverse split of the Company's common stock effected on
May 25, 1995, and a three-for-one split of the Company's common stock
effected as a stock dividend on January 18, 1996.
As of March 25, 1997, there were approximately 60 shareholders of
record of the Company's common stock, and approximately 1,300 other beneficial
owners whose shares are held in street name at brokerage houses.
The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to pay cash dividends on its Common Stock in the
foreseeable future. The Company presently expects to retain its earnings to
finance the development and expansion of its business. The payment by the
Company of dividends, if any, on its Common Stock in the future is subject to
the discretion of the Board of Directors and will depend on the Company's
earnings, financial condition, capital requirements and other relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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. As a result of the Company's recruitment of senior management staff, its
focus on building the larger superstore restaurants has changed. Therefore, the
Company plans to pursue development of the Shelly's Back Room "Civilized Cigar
Parlor and Tavern" concept, which is designed to capitalize on the popular cigar
smoking trend in an upscale atmosphere featuring exceptional food and drink.
This concept is not a departure from the main core of the Company's business,
which is to provide customers with a quality food and beverage experience in a
relaxed atmosphere. This shift of focus allows the Company to pursue other
avenues to generate revenue, primarily because of the simpler structure to
operate a Back Room and lower capital investment, which would allow franchising
of this concept. The Company has signed a lease for its first stand-alone Back
Room in Washington, D.C. with an anticipated opening in June 1997. The
successful operation of the Rockville restaurant and future expansion of
Shelly's Back Room by the Company will depend on various factors, including
market acceptance of the Shelly's Woodroast and the 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, development and franchising 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 (both
Company-owned and franchisee operations), higher volume operations, the control
of overhead expenses and the addition of necessary personnel. The Company had
losses of $1,702,566 and $1,167,433 for the fiscal years ended December 29, 1996
and December 31, 1995, 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 is a 52-week year, while fiscal year 1995 was a
53-week year.
RESULTS OF OPERATIONS
The following table sets forth, for fiscal years 1996 and 1995, the
percentage relationship to net sales of the items in the Company's consolidated
statements of operations, and the percentage increase in such items from the
previous year. It is management's intention to provide such information on a per
store basis as future stores are developed and reach a level of maturity where
comparability is meaningful.
<TABLE>
<CAPTION>
Fiscal Years Percentage Fiscal Years Percentage Percentage
Dollars Relationship Dollars Relationship of Change
1996 1996 1995 1995 from Prior
Year
<S> <C> <C> <C> <C> <C>
Net Sales $ 6,272,724 100.0% $ 2,914,862 100.0% 115.2%
----------- ----- ----------- ----- -----
Costs and expenses:
Food and beverage costs 2,103,563 33.5 966,663 33.2 117.6
Restaurant operating expenses 3,801,839 60.6 2,127,278 73.0 78.7
Depreciation and amortization 425,660 6.8 182,696 6.3 133.3
----------- ----- ----------- ----- -----
Total costs and expenses 6,331,062 100.9 3,276,637 112.5 93.2
----------- ----- ----------- ----- -----
Restaurant operating income (loss) (58,338) (0.9) (361,775) (12.5) (83.9)
Other income (expenses) (1,644,228) (26.2) (805,658) (27.6) (104.1)
----------- ----- ----------- ----- -----
Net loss ($1,702,566) (27.1%) ($1,167,433) (40.1%) (45.8%)
=========== ===== =========== ===== =====
</TABLE>
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
NET SALES -- Net sales increased by $3,357,862 or 115.2% to $6,272,724 for the
fiscal year 1996 from $2,914,862 for the fiscal year 1995. Sales at the
Rockville restaurant for the first full year of operations, which opened in
November 1995, were $3,833,711. Sales at the St. Louis Park restaurant increased
by approximately 4.4%, to $2,439,013. The St. Louis Park restaurant had a menu
price increase in September 1996 and continues to have guest counts at or near
seating capacity on a daily basis.
COSTS AND EXPENSES -- The cost of restaurant sales, consisting of food, beverage
and other direct costs and expenses related to the operation of restaurants,
were $6,331,062 (100.9% of net sales) for the fiscal year 1996 compared to
$3,276,637 (112.5% of net sales) for fiscal year 1995. Food and beverage costs
were $2,103,563 (33.5% of net sales) for the fiscal year 1996 as compared to
$966,663 (33.2% of net sales) for fiscal year 1995, which remain within the
normal operating percentage of net sales. The increase of 117.6% is due to one
complete year of operation from the Rockville restaurant in 1996. Restaurant
operating expenses were $3,801,839 (60.6% of net sales) for the fiscal year 1996
compared to $2,127,278 (73.0% of net sales) for fiscal year 1995. This reduction
in the percentage relationship of net sales represents the economies of scale of
fixed costs on a higher revenue stream. A significant portion of the increase in
depreciation expense is attributable to the Rockville restaurant. The overall
restuarant operating loss for the fiscal year 1996 was $58,338 as compared to
$361,775 for the fiscal year 1995. This reduction in losses has been favorably
impacted by the addition of the Rockville restaurant. The Company continues to
address ongoing cost and expense issues at the Rockville location, but in
addition to the expected costs, some unexpected issues were encountered,
including additional unanticipated costs incurred for the physical expansion of
the restaurant's kitchen, training of additional management to meet unforeseen
peak demand, and refinement of the air purification system used in the Back Room
in the Rockville restaurant. 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.
OTHER INCOME (EXPENSES) -- The Company's executive and administrative office
located in Eden Prairie, Minnesota had other expenses, consisting of general and
administrative expenses, interest expense, interest income, other income,
development expenses and the disposal of assets, which were $1,644,288 (26.2% of
net sales) for the fiscal year 1996 compared to $805,658 (27.6% of net sales)
for the fiscal year 1995. This is an increase of $838,570 or 104.1%. This
increase is attributable primarily to these two areas: increased interest and
depreciation costs, and the Company's ongoing building of a corporate-management
team and facility to lead the Company into its new focus of the Back Room
concept. The Company expects to continue to incur operating losses during 1997.
As employment agreement has been signed, with an effective start date of
November 1, 1996, for the President and Chief Operating Officer. Fourth quarter
earnings reflect salary and some relocation expenses associated with this
addition to the management staff of the Company. An employment agreement has
been signed, with an effective date of January 2, 1997, for the position of Vice
President of Operations. 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.
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 approximately $765,000 in
offering costs and underwriting discounts. Such net proceeds had been fully
utilized by December 31, 1995 for development and opening of the Rockville
Restaurant and for the reduction of debt and trade payables.
The Company had working capital of $2,996,568 at December 29, 1996,
compared to a working capital deficit of $1,148,209 at December 31, 1995.
Cash, cash equivalents and available-for-sale securities were $3,672,413 at
December 29, 1996, representing an increase of $3,631,936 from $40,477 at
December 31, 1995. These increases are primarily attributable to exercise of
1,155,512 Class A Warrants during 1996, from which the Company received net
proceeds of approximately $4,570,000.
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 of 200,016
shares of Common Stock. 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 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 $.00333 per share and are exercisable at any
time through May 31, 2000. A total of 170,008 of the Warrants were exercised in
1996. Holders of Warrants or Warrant shares have certain piggyback registration
rights through May 31, 2002.
The Notes bear interest of 15%, payable monthly following the opening
of the Rockville Restaurant. The effective annual interest rate, after
considering the value of the Warrants, is approximately 20%. The repayment
schedule of the Notes was dependent on the gross revenues of the Rockville
Restaurant during its first year of operations. The Notes require repayment of
principal over an eight-year period beginning in August 1998. Current maturities
of the Notes are $27,916 in fiscal year 1998, $74,518 in fiscal year 1999,
$86,497 in fiscal year 2000, $100,401 in fiscal year 2001 and $710,668
thereafter.
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 April 15, 1996. The Note accrued
interest of 15%, payable at maturity. The Note was repaid in March 1996.
In March 1996, the Company sold 625,000 shares of its Common Stock in a
private placement at a purchase price of $2.25 per share, and received net
proceeds of approximately $1,315,000. Holders of such shares have certain
piggyback registration rights. The net proceeds from the private placement of
Common Stock have been used to pay debt and trade payables and to provide
working capital for general corporate purposes.
The Company will require additional financing to implement its
expansion plans. 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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are included herein following
the signatures, beginning at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information required under this Item with respect to directors is
contained in the Section "Election of Directors" in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 20, 1997
("1997 Proxy Statement"), a definitive copy of which will be filed with the
Commission within 120 days of the close of the past fiscal year, and is
incorporated herein by reference.
Information concerning executive officers is set forth in the Section
entitled "Executive Officers of the Company" in Part I of this Form 10-KSB
pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation S-B.
ITEM 10. EXECUTIVE COMPENSATION
Information required under this item is contained in the section
entitled "Executive Compensation" in the 1997 Proxy Statement and is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in the section
entitled "Security Ownership of Principal Shareholders and Management," in the
Company's 1997 Proxy Statement and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item is contained in the section
entitled "Certain Transactions" in the Company's 1996 Proxy Statement and is
incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See "Exhibit Index" on the page following the
Financial Statements.
(b) Reports on Form 8-K. None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WOODROAST SYSTEMS, INC.
("Registrant")
Dated: March 28, 1997 By /s/ Sheldon F. Jacobs
----------------------
Sheldon F. Jacobs
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed on March 28, 1997 by the following persons on
behalf of the Registrant, in the capacities indicated.
Each person whose signature appears below constitutes and appoints
SHELDON F. JACOBS and BYRON L. FRANK as his true and lawful attorneys-in-fact
and agents, each acting alone, with the full power of substitution and
re-substitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10-KSB
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, each acting alone, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Signature Title
- --------- -----
/s/ Sheldon F. Jacobs Chairman of the Board and
- ---------------------- Chief Executive Officer
Sheldon F. Jacobs (principal executive officer)
/s/ Ralph J. Guarino President, Chief Operating Officer
- --------------------- and Chief Financial Officer
Ralph J. Guarino (principal financial and
accounting officer)
/s/ Byron L. Frank Director
- -------------------
Byron L. Frank
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Woodroast Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Woodroast
Systems, Inc. and Subsidiary as of December 29, 1996 and December 31, 1995 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. The consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Woodroast Systems,
Inc. and Subsidiary as of December 29, 1996 and December 31, 1995 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
LUND KOEHLER COX & COMPANY, PLLP
Minneapolis, Minnesota
February 13, 1997
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 31,
1996 1995
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,673,663 $ 27,843
Available-for-sale securities 1,998,750 12,634
Inventories 181,971 125,386
Prepaid expenses and other current assets 89,183 95,810
------------ -----------
Total current assets 3,943,567 261,673
------------ -----------
PROPERTY AND EQUIPMENT, NET 4,537,418 4,378,285
------------ -----------
OTHER ASSETS:
Deposits 138,884 51,085
Patent and trademarks, net 9,834 10,009
------------ -----------
Total other assets 148,718 61,094
------------ -----------
$ 8,629,703 $ 4,701,052
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable - stockholder $ 0 $ 300,000
Current portion of obligations under capital leases 77,936 58,234
Accounts payable 640,752 877,438
Accrued expenses 228,311 174,210
------------ -----------
Total current liabilities 946,999 1,409,882
LONG-TERM DEBT 1,000,000 1,000,000
LESS: UNAMORTIZED DISCOUNT (299,514) (346,914)
OBLIGATIONS UNDER CAPITAL LEASES, NET OF CURRENT PORTION 107,813 115,925
------------ -----------
Total liabilities 1,755,298 2,178,893
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.005 par value, 33,333,333 shares authorized,
4,242,397 and 2,249,967 shares issued and outstanding 21,212 11,250
Additional paid-in capital 10,033,229 3,962,406
Unrealized loss on securities available-for-sale (16,250) 0
Unearned compensation (9,723) 0
Accumulated deficit (3,154,063) (1,451,497)
------------ -----------
Total stockholders' equity 6,874,405 2,522,159
------------ -----------
$ 8,629,703 $ 4,701,052
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED
-------------------------------
DECEMBER 29, DECEMBER 31,
1996 1995
-------------------------------
NET SALES $ 6,272,724 $2,914,862
----------- ----------
COSTS AND EXPENSES:
Food and beverage costs 2,103,563 966,663
Restaurant operating expenses 3,801,839 2,127,278
Depreciation and amortization 425,660 182,696
General, administrative and development 1,472,025 862,793
----------- ----------
Total costs and expenses 7,803,087 4,139,430
----------- ----------
LOSS FROM OPERATIONS (1,530,363) (1,224,568)
----------- ----------
OTHER INCOME (EXPENSE):
Interest income 59,745 76,373
Interest expense (241,337) (49,584)
Loss on disposal of property and equipment (41,094) (960)
Other income 50,483 31,306
----------- ----------
Total other income (expense) (172,203) 57,135
----------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,702,566) (1,167,433)
PROVISION FOR INCOME TAXES 0 0
----------- ----------
NET LOSS $(1,702,566) $(1,167,433)
=========== ===========
NET LOSS PER COMMON SHARE $ (0.55) $ (0.51)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,121,267 2,268,877
=========== ===========
See accompanying notes to consolidated financial statements.
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized loss
Common stock Additional on securities
----------------------- paid-in available-
Shares Amount capital for-sale
---------- -------- --------------- ----------------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 25, 1994 2,250,000 $11,250 $ 3,663,177 $ 0
Issuance of warrants to purchase
200,016 shares of common stock -- -- 299,333 --
Fractional shares repurchased
due to stock splits (33) -- (104) --
Net loss -- -- -- --
---------- ------- ------------ --------
BALANCE - DECEMBER 31, 1995 2,249,967 11,250 3,962,406 0
Private placement of common
stock at $2.25 per share, net of
issuance costs 625,000 3,125 1,312,253 --
Exercise of redeemable Class A
warrants at $4.00 per share, net
of issuance costs 1,155,152 5,776 4,567,151 --
Redemption of unexercised
Class A warrants -- -- (214) --
Issuance of warrants for
services provided -- -- 48,405 --
Exercise of warrants 202,278 1,011 120,568 --
Exercise of options 10,000 50 8,075 --
Options granted -- -- 14,585 --
Stock option compensation earned -- -- -- --
Change in unrealized loss on
securities available-for-sale -- -- -- (16,250)
Net loss -- -- -- --
---------- ------- ------------ --------
BALANCE - DECEMBER 29, 1996 4,242,397 $21,212 $ 10,033,229 $(16,250)
========== ======= ============ ========
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
Unearned Accumulated
Compensation deficit Total
------------ ------------ -----------
<S> <C> <C> <C>
BALANCE - DECEMBER 25, 1994 $ 0 $ (284,064) $ 3,390,363
Issuance of warrants to purchase
200,016 shares of common stock -- -- 299,333
Fractional shares repurchased
due to stock splits -- -- (104)
Net loss -- (1,167,433) (1,167,433)
-------- ----------- -----------
BALANCE - DECEMBER 31, 1995 0 (1,451,497) 2,522,159
Private placement of common
stock at $2.25 per share, net of
issuance costs -- -- 1,315,378
Exercise of redeemable Class A
warrants at $4.00 per share, net
of issuance costs -- -- 4,572,927
Redemption of unexercised
Class A warrants -- -- (214)
Issuance of warrants for
services provided -- -- 48,405
Exercise of warrants -- -- 121,579
Exercise of options -- -- 8,125
Options granted (14,585) -- 0
Stock option compensation earned 4,862 -- 4,862
Change in unrealized loss on
securities available-for-sale -- -- (16,250)
Net loss -- (1,702,566) (1,702,566)
-------- ----------- -----------
BALANCE - DECEMBER 29, 1996 $ (9,723) $(3,154,063) $ 6,874,405
======== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------
DECEMBER 29, DECEMBER 31,
1996 1995
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,702,566) $(1,167,433)
Adjustments to reconcile net loss to
cash flows from operating activities:
Depreciation and amortization 425,660 182,696
Loss on disposal of property and equipment 41,094 960
Amortization of long-term debt discount 47,400 9,167
Changes in operating assets and liabilities:
Inventories (56,585) (95,811)
Prepaid expenses and other current assets 11,489 (47,656)
Accounts payable (236,686) 519,994
Accrued expenses 54,101 94,509
----------- -----------
Cash flows from operating activities (1,416,093) (503,574)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (2,015,000) 0
Proceeds from sale of available-for-sale securities 12,634 1,485,687
Purchases of property and equipment (486,593) (3,065,035)
Proceeds from sale of property and equipment 0 3,900
Purchases of patents and trademarks (714) 0
Deposits used (advanced) (87,799) 19,137
----------- -----------
Cash flows from investing activities (2,577,472) (1,556,311)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement of common stock, net of issuance costs 1,315,378 0
Proceeds from exercise of Class A warrants, net of issuance costs 4,572,713 0
Proceeds from exercise of warrants 121,579 0
Proceeds from exercise of options 8,125 0
Proceeds from long-term debt, net of issuance costs 0 943,252
Payments on obligations under capital leases (78,410) (62,447)
Proceeds (payments) of note payable - stockholder (300,000) 300,000
Net increase (decrease) in note payable - bank 0 (370,452)
Repayment of advances from stockholders 0 (3,194)
Repurchase of fractional shares due to stock splits 0 (104)
----------- -----------
Cash flows from financing activities 5,639,385 807,055
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,645,820 (1,252,830)
CASH AND CASH EQUIVALENTS, BEGINNING 27,843 1,280,673
----------- -----------
CASH AND CASH EQUIVALENTS, ENDING $ 1,673,663 $ 27,843
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
WOODROAST SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996 AND DECEMBER 31, 1995
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Woodroast Systems, Inc. (the Company) currently owns and
operates two Shelly's Woodroast restaurants. The first unit (the St. Louis Park
unit) is in St. Louis Park, Minnesota, a suburb of Minneapolis, and opened in
1989. The second unit (the Rockville unit) is in Rockville, Maryland, a suburb
of Washington, D.C., and opened in November 1995. The Company is presently
developing a Shelly's Back Room cigar parlor unit in Washington, D.C.
FISCAL YEAR - The Company uses a 52/53 week fiscal year ending on the last
Sunday of December. Fiscal year 1996 was a 52 week year and 1995 was a 53 week
year.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Woodroast Systems, Inc. and its wholly owned subsidiary Shelly's
Woodroast Two, Inc. All significant intercompany transactions and balances have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - The Company includes as cash equivalents money
market deposits and all other investments with original maturities of three
months or less when purchased which are readily convertible into known amounts
of cash.
INVENTORIES - Inventories consist principally of food, beverages and logo
merchandise and are recorded at the lower of cost (first-in, first-out) or
market value.
PRE-OPENING COSTS - Direct costs of hiring and training the initial workforce
and other direct costs associated with opening a new restaurant are capitalized
and amortized over a twelve-month period commencing with the restaurant opening
if the recoverability of such costs can be reasonably assured. Expenses incurred
prior to opening the Rockville unit were charged to operations when incurred due
to the developmental nature of this unit. Accordingly, no unamortized
pre-opening costs existed at December 29, 1996 or December 31, 1995.
DEPRECIATION - Property and equipment are stated at cost. Depreciation is
computed using the straight-line method over three to seven years. Leasehold
improvements are depreciated using the straight-line method over the shorter of
their estimated useful lives or the lease term including option periods.
Maintenance, repairs and minor renewals are expensed when incurred.
PATENT AND TRADEMARKS - Patent and trademarks are stated at cost. Amortization
is computed using the straight-line method over seven to twenty years. Costs
associated with the maintenance and defense of the patent and trademarks are
expensed when incurred. Accumulated amortization was $8,457 and $7,568 at
December 29, 1996 and December 31, 1995.
LOSS PER SHARE OF COMMON STOCK - Loss per common share is based on the weighted
average number of common shares outstanding for each period, after an adjustment
for the stock splits discussed in Note 8. Common stock equivalents are not
included in the per share calculations because the effect would be
anti-dilutive, except that, in accordance with requirements of the Securities
and Exchange Commission, common stock and common stock equivalents issued within
one year of the Company's initial public offering with an issue price of less
than the initial public offering price have been included using the treasury
stock method to determine the dilutive effects of such issuances.
MANAGEMENT'S USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(2) AVAILABLE-FOR-SALE SECURITIES
The Company classifies all investments which are not cash equivalents as
available-for-sale securities with all gross unrealized gains or losses included
as a separate component of stockholders' equity. There were unrealized losses of
$16,250 and $0 at December 29, 1996 and December 31, 1995.
Available-for-sale securities at December 29, 1996 and December 31, 1995 consist
of United States Government debt securities, are reported at fair value and are
due within one year of the financial statement date. The market value of the
portfolio was $1,998,750 and $12,634 at December 29, 1996 and December 31, 1995.
(3) INVENTORIES
Inventories consisted of the following at:
December 29, 1996 December 31, 1995
-------------------- --------------------
Food $ 95,745 $ 46,141
Beverage 36,733 42,426
Logo merchandise 49,493 36,819
-------------------- --------------------
Total $ 181,971 $ 125,386
==================== ====================
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
<TABLE>
<CAPTION>
December 29, 1996 December 31, 1995
---------------------- -------------------
<S> <C> <C>
Leasehold improvements $ 3,869,467 $ 3,446,251
Restaurant equipment 801,116 870,384
Restaurant furniture and fixtures 509,206 515,440
Office equipment and furniture 266,868 82,191
---------------------- -------------------
Total 5,446,657 4,914,266
Less: accumulated depreciation 1,102,911 734,345
---------------------- -------------------
Total 4,343,746 4,179,921
Equipment and furniture under
capital lease, net 193,672 198,364
---------------------- -------------------
Total $ 4,537,418 $ 4,378,285
====================== ===================
</TABLE>
Approximately $64,000 of leasehold improvements relating to the cigar parlor
unit in development were not in service at December 29, 1996.
(5) NOTE PAYABLE - STOCKHOLDER
At December 31, 1995, the Company had a $300,000 note payable to a stockholder
that was unsecured and accrued interest at 15%. The note was paid in March 1996.
(6) 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 15%, payable
quarterly. In addition, the holders of the Notes received warrants to purchase
an aggregate of 200,016 shares of the Company's common stock at $.0033 per
share, of which 170,008 were exercised in 1996. The remaining 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 20%. The Notes require repayment
of principal over an eight-year period beginning August 1998. Current maturities
of the Notes are $27,916 in fiscal year 1998, $74,518 in fiscal year 1999,
$86,497 in fiscal year 2000, $100,401 in fiscal year 2001 and $710,668
thereafter.
(7) OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain items under agreements that expire through 2000.
Interest is provided for at annual rates ranging from approximately 11% to 26%.
These obligations are secured by the items under lease. Future minimum lease
payments required under the capital leases together with the present value of
the future minimum lease payments are as follows for the fiscal years ending:
<TABLE>
<CAPTION>
Amount
---------------------
<S> <C> <C>
1997 $ 114,823
1998 71,545
1999 27,451
2000 10,523
---------------------
Total 224,342
Less: amount representing interest 38,593
---------------------
Present value of future minimum lease payments 185,749
Less: current portion 77,936
---------------------
Obligations under capital leases, net of current portion $ 107,813
=====================
</TABLE>
(8) STOCKHOLDERS' EQUITY
STOCK SPLITS - In May 1995, the Company declared a 1-for-3 reverse stock split
and in January 1996, the Company declared a 3-for-1 stock split. The stock
splits have been retroactively reflected in the accompanying consolidated
financial statements.
PRIVATE PLACEMENT OF COMMON STOCK - During 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 $1,315,000.
(9) STOCK WARRANTS
EXERCISE OF REDEEMABLE CLASS A WARRANTS - During 1996, the holders of 1,155,152
of redeemable Class A warrants exercised the warrants at an exercise price of
$4.00. A total of 20,048 warrants were not exercised and the Company redeemed
these warrants for $0.01 per warrant. The Company received net proceeds of
approximately $4,570,000.
UNDERWRITER'S WARRANT - In connection with its initial public offering in June
1994, the Company issued a warrant to the underwriter to purchase 60,000 shares
of common stock at $6.60 per share. The warrant is exercisable for five years.
(10) STOCK OPTIONS
STOCK OPTION PLAN - The Company has a Stock Option Plan (the "Plan"), pursuant
to which options and other awards to acquire an aggregate of 750,000 shares of
the Company's common stock may be granted. Stock options, stock appreciation
rights, restricted stock, other stock and cash awards may be granted under the
Plan. The Plan is administered by a stock option committee which has the
discretion to determine the number and purchase price of the shares subject to
stock options, which may be below the fair market value of the common stock on
the date thereof, the term of each option, and time or times during its term
when the option becomes exercisable. At December 29, 1996, 417,000 options had
been granted at exercise prices of $0.81 to $5.50 per share, none of which had
been exercised.
DIRECTORS' STOCK OPTIONS - At December 29, 1996, 90,002 options had been granted
to two of the Company's directors at exercise prices of $.81 to $5.00 per share.
The Company applies APB Opinion 25 "Accounting for Stock Issued to Employees"
and related Interpretations in accounting for its stock options. Accordingly, no
compensation cost has been recognized for its stock options. Had compensation
cost for the Company's stock options been determined based on the fair value at
the grant dates consistent with the method of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock Based Compensation" (Statement 123), the
Company's net loss would have been increased to the proforma amounts indicated
below:
1996 1995
------------------------ ----------------------
Net loss:
As reported $ 1,702,566 $ 1,167,433
Pro forma $ 2,122,061 $ 1,175,882
Earnings per share:
As reported $ (0.55) $ (0.51)
Pro forma $ (0.68) $ (0.52)
Because the Statement 123 method of accounting has not been applied to options
granted by the Company prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
Information regarding the Company's stock options is summarized below:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------- ----------------------------------------
Weighted Weighted
Shares Average Shares Average
Exercise Price Exercise Price
---------------- --------------------- ---------------- ----------------------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of year 54,002 $ 0.81 35,000 $ 2.24
Granted 473,500 4.87 29,002 0.69
Canceled (20,500) 0.94 (10,000) 5.50
Exercised (10,000) 0.81 0 0.00
---------------- ----------------
Options outstanding,
end of year 497,002 $ 4.67 54,002 $ 0.81
================ ===================== ================ ======================
Options exercisable,
end of year 81,334 $ 3.61 31,002 $ 0.81
================ ===================== ================ ======================
Weighted average fair
value of options granted $ 4.21 $ 0.61
===================== ======================
</TABLE>
Options outstanding at December 29, 1996 have an exercise price ranging between
$0.75 and $5.50 and a weighted average remaining contractual life of 8.57 years.
In determining the compensation cost of the options granted during 1996 and
1995, as specified by Statement 123, the fair value of each option grant has
been estimated on the date of grant using the Black-Scholes option pricing model
and the weighted average assumptions used in these calculations are summarized
below:
1996 1995
----------- ----------
Risk free interest rate 7% 7%
Expected life of options granted 10 years 10 years
Expected volatility of options granted 85.3% 84.6%
(11) 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 29, 1996, the
Company had net operating loss carryforwards of approximately $3,132,000, 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.
December 29, 1996 December 31, 1995
-------------------- --------------------
Net operating loss carryforwards $ 1,268,000 $ 580,000
Valuation allowance (1,268,000) (580,000)
-------------------- --------------------
Net deferred taxes $ 0 $ 0
==================== ====================
(12) SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
December 29, December 31,
1996 1995
----------------- ---------------
Cash paid for interest $195,540 $ 30,704
Cash paid for income taxes $ 900 $ 600
Non-cash transactions:
Assets acquired with capital leases $ 90,000 $139,219
Issuance of private warrants for
construction services provided $ 48,405 $0
Options granted $ 9,723 $0
Change in unrealized loss on
securities available-for-sale $ 16,250 $0
(13) RETIREMENT SAVINGS PLAN
In January 1997, the Company implemented a pre-tax salary reduction/profit
sharing plan under the provisions of Section 401(k) of the Internal Revenue Code
which covers employees meeting certain eligibility requirements. Profit sharing
contributions by the Company are completely discretionary.
(14) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases the land the St. Louis Park and Rockville
units occupy under leases that expire in 2004 and 2005. Each lease has an option
to extend for two additional five year periods. Both leases require payment of
base rent (which escalates over the term of the lease) and all real estate taxes
and operating expenses. The Rockville unit lease requires payment of a
percentage rent equal to 5% of annual gross sales in excess of $6.5 million.
The Company leases its corporate office space under a lease which expires in
1999. Base rent is $2,482 per month increasing to $2,820 during 1997. The
Company also is required to pay its pro-rata share of real estate taxes and
operating expenses.
During 1996, the Company signed a ten-year lease for its planned Shelly's Back
Room in Washington, D.C. which became effective February 1997. The lease
requires payment of base rent and a pro rata share of real estate taxes and
operating expenses.
In addition to the leases described above, the Company leases various equipment
on operating leases that expire through 2000. Future minimum rental payments
(excluding percentage rents) are as follows for the fiscal years ending:
Amount
------------------
1997 $ 462,526
1998 479,381
1999 469,876
2000 455,437
2001 457,001
Thereafter 1,652,699
-------------------
Total $ 3,976,920
===================
Total rent expense was $462,245 and $133,341 for the fiscal years 1996 and 1995.
The Company accounts for rent expense on a straight-line basis over the terms of
the leases.
EMPLOYMENT AGREEMENTS - The Company has employment agreements with three of its
officers. The agreements require minimum annual compensation of $70,000 to
$175,000 and have terms of three to five years. The agreements include benefits,
other compensation and executive perquisites in addition to non-compete
provisions.
PURCHASE CONTRACT - On September 7, 1994, the Company entered into a contract to
purchase twenty-five Woodroast ovens for $263,907. Through December 29, 1996,
the Company had paid $86,085 under the contract. The balance of $177,822 is due
in 1997.
CONCENTRATION OF CREDIT RISK - The Company maintains cash accounts with various
financial institutions. The balances at times may exceed federally insured
limits.
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE NO.
------- ----------- --------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of Woodroast
Systems, Inc., as amended May 24, 1995, incorporated by
reference from Exhibit 3.2 to the Company's annual report on
Form 10-KSB for the fiscal year ended December 31, 1995 filed
with the Securities and Exchange Commission on March 31, 1996
(the "1995 10-KSB")
3.2 Amended and Restated Bylaws of Woodroast Systems, Inc.,
incorporated by reference from Exhibit 3.2 to the Company's
Registration Statement on Form SB-2 (File No. 33-75152C) filed
with the Securities and Exchange Commission on February 27,
1994 (the "1994 SB-2")
4 Form of Warrant Agreement by and between the Company and
Norwest Bank Minnesota, N.A., incorporated by reference from
Exhibit 4 to the 1994 SB-2
10.1 Employment Agreement between the Company and Sheldon F. Jacobs
dated as of February 4, 1994, incorporated by reference from
Exhibit 10.1 to the 1994 SB-2
10.2 Employment Agreement between the Company and Ralph J. Guarino
dated as of September 5, 1996, incorporated by reference from
Exhibit 10.1 to the 1995 10-KSB
10.3 Employment Agreement between the Company and Alex Gionta dated
as of November 18, 1996........................................
10.4 Lease Agreement by and between Northstar Pizza Properties, Inc.
and Shelly's Two dated January 19, 1989, incorporated by
reference from Exhibit 10.4 to the 1994 SB-2
10.5 Agreement of Lease by and between 1331 F Street, Inc. and the
Company dated July 22, 1996....................................
10.6 Company's 1994 Stock Plan, incorporated by reference from
Exhibit 10.4 to the 1994 SB-2
10.7 Amendment dated May 29, 1996 to the Company's 1994 Stock
Plan...........................................................
10.8 Form of Non-qualified Stock Option Agreement, incorporated by
reference from Exhibit 10.6 to the 1994 SB-2
10.9 Form of Restructured Stock Option Agreement, incorporated by
reference from Exhibit 10.7 to the 1994 SB-2
10.10 Registration Rights Agreement by and among the Company, Sheldon
F. Jacobs, John B. Goodman and Daniel T. Lindsay, incorporated
by reference from Exhibit 10.12 to the 1994 SB-2
10.11 Form of Escrow Agreement by and among the Company, National
City Bank of Minneapolis and Sheldon F. Jacobs, incorporated by
reference from Exhibit 10.13 to the 1994 SB-2
10.12 Second Amendment to and Restatement of Agreement, by and among
the Company, Sheldon F. Jacobs, John B. Goodman and Daniel T.
Lindsay dated January 27, 1994, incorporated by reference from
Exhibit 10.14 to the 1994 SB-2
10.13 Shareholders Agreement by and among the Company, Sheldon F.
Jacobs, John B. Goodman and Daniel T. Lindsay dated January 27,
1994, incorporated by reference from Exhibit 10.15 to the 1994
SB-2
10.14 Shareholder Agreement by and between Shelly's Two and Sheldon
F. Jacobs dated January 27, 1994, incorporated by reference
from Exhibit 10.16 to the 1994 SB-2
10.15 Escrow Agreement by and among First Trust National Association,
Sheldon F. Jacobs, John B. Goodman, Daniel T. Lindsay, Shelly's
Two, Woodroast Acquisition Corp. and the Company dated as of
January 27, 1994, incorporated by reference from Exhibit 10.17
to the 1994 SB-2
10.16 Agreement and Plan of Merger by and among Shelly's Two, the
Company, Woodroast Acquisition Corp. and Sheldon F. Jacobs
dated May 4, 1994, incorporated by reference from Exhibit 10.18
to the 1994 SB-2
10.17 Lease by and between Congressional Plaza Associates, Federal
Realty, Investment Trust and Woodroast Systems, Inc.,
incorporated by reference from Exhibit 10.17 to the 1995 10-KSB
10.18 Form of Promissory Note dated November 7, 1995, incorporated by
reference from Exhibit 10.18 to the 1995 10-KSB
21.1 Subsidiary of Woodroast Systems, Inc., incorporated by
reference from Exhibit 21.1 to the 1995 10-KSB
23.1 Consent of Lund Koehler Cox & Company, PLLP....................
24 Power of Attorney (set forth on the signature page)
27 Financial Data Schedule........................................
</TABLE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
BY AND BETWEEN
WOODROAST SYSTEMS, INC., A MINNESOTA CORPORATION
AND
ALEX GIONTA
DATED EFFECTIVE: NOVEMBER 18, 1996
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C> <C> <C>
RECITALS .........................................................................................................1
AGREEMENTS........................................................................................................1
1. Employment and Duties...........................................................................1
2. Compensation. .................................................................................2
(a) Base Salary. .........................................................................2
(b) 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
</TABLE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") by and between Woodroast
Systems, Inc., a Minnesota corporation (the "Company"), and Alex Gionta
("Employee") is hereby entered into and effective as of November 18, 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
Vice-President/Operations effective January 15, 1997. As such, Employee
shall have responsibilities, duties and authority reasonably accorded
to and expected of a Vice-President and will report directly to the
President and Chief Operating 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 Twenty-Five Thousand Dollars ($125,000) 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 President and Chief Executive Officer of the Company will
review Employee's performance and may make increases to such base
salary if, in his discretion, any such increase is warranted. Such
recommended increase would, in all likelihood, require approval by the
Board of Directors of the Company (the "Board") or a duly constituted
committee thereof.
(b) 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
December 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 January 1, 2000. 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 fifty thousand (50,000) shares of the
Common Stock of the Company at the price of Five and 375/1000s
Dollars ($5.375) per share (the "Option Price"). The Options
shall become exercisable as to twenty percent (20%) of the
underlying shares of Common Stock on January 15, 1998 and as
to the remainder, twenty percent (20%) of the underlying
shares of Common Stock on each of the first four anniversaries
of January 15, 1999 (January 15, 2000, January 15, 2001, and
January 15, 2002). 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 (with spouse) between Employee's current
residence and Minneapolis, Minnesota; and (C) rent for
temporary lodging not to exceed One Thousand Eight Hundred
Dollars ($1,800) per month for a period not to exceed six (6)
months. 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 January 15, 1997 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 nine (9) months.
(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 a period of nine (9) months.
(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 a period of nine (9) months.
(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:
Alex Gionta
2243 Woodmont Drive
Export, PA 15632
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: November 18, 1996 /s/ Alex Gionta
----------------
Alex Gionta
"Employee"
/s/ Jane Gionta
- -----------------
Witness
WOODROAST SYSTEMS, INC.
Dated: November 20, 1996 By /s/ Ralph J. Guarino
---------------------
Ralph J. Guarino
Its President and Chief Operating Officer
/s/ Elizabeth A. Orris "Company"
- -----------------------
Witness
EXHIBIT 10.5
AGREEMENT OF LEASE
COMMERCIAL LEASE SUMMARY
1331 F Street, N.W.
Washington, D.C. 20004
LANDLORD: TENANT:
1331 F STREET, INC. WOODROAST SYSTEMS, INC.
ADDRESS FOR NOTICES: ADDRESS FOR NOTICES:
CB Commercial Real Estate Group
1001 Pennsylvania Avenue, N.W.
Suite 210 S
Washington, D.C. 20004
Attn: Brendan Owen
COPY OF NOTICES TO:
Ronald S. Shapiro, Esq. James W. Dierking, Esq.
Shapiro, Lifschitz and Winthrop & Weinstine
Schram, P.C. 3000 Dain Bosworth Plaza
1101 Pennsylvania Avenue, N.W. 60 South Sixth Street
Suite 1050 Minneapolis, Minnesota 55402
Washington, D.C. 20004
COMMENCEMENT DATE: August 1, 1996.
INITIAL TERM: 10 years.
RENEWAL OPTION: none.
PREMISES: 3,100 rentable square feet on third floor.
BASIC RENT: $20.00 per square foot, plus 2% per year, with an
additional increase of $2.50 per square foot at
the beginning of year 6, plus Tenant's Share of
Taxes and Expenses.
USE OF PREMISES: Retail sale of tobacco and related products,
and the operation of a sit-down restaurant
and cigar bar with sale and on-premises
consumption of alcoholic beverages.
TABLE OF CONTENTS
1. DEFINITIONS
1.1. Definitions.
2. DELIVERY OF POSSESSION; BUILD-OUT
2.1. Possession of Premises.
2.2. Acceptance of Premises.
2.3. Tenant's Build-out.
2.3.1. Tenant's Allowance.
2.3.2. Construction Plans.
2.3.3. Construction Contract.
2.3.4. Permits.
2.3.5. Delay.
3. RENT
3.1. Payment of Rent.
3.2. Basic Rent and Annual Adjustments.
3.3. Intentionally Omitted.
3.4. Additional Rent.
3.4.1. Tenant's Escalation.
3.4.2. Real Estate Taxes Defined.
3.4.3. Operating Expenses Defined.
3.4.4. Additional Rent Defined.
3.4.5. Payment of Additional Rent.
3.4.6. Payment of Estimated Additional Rent.
3.4.7. Landlord's Contesting Real Estate Taxes.
3.5. Interest Rate on Delinquencies.
3.6. Intentionally Omitted.
4. USE AND OPERATION OF BUILDING AND PREMISES.
4.1. Use.
4.2. Building Rules and Regulations.
4.3. Utilities.
4.4. Quiet Enjoyment.
5. TRANSFER OF LANDLORD'S AND TENANT'S INTERESTS.
5.1. Assignment and Sublet.
5.2. Corporate Transfer.
5.3. Recapture of Premises.
5.4. Mortgage by Landlord.
5.5. Subordination.
5.6. Attornment.
5.7. Estoppel Certificate.
5.8. Sale by Landlord.
5.9. Landlord's Lien.
5.10. Assumption or Assignment of Lease
in the Event of Bankruptcy.
6. UPKEEP AND ALTERATION OF PREMISES.
6.1. Upkeep of Premises.
6.2. Maintenance by Landlord.
6.3. Alterations by Tenant.
6.4. Alterations by Landlord.
6.5. Mechanics' and Other Liens.
7. INSURANCE AND INDEMNITY.
7.1. Insurance by Landlord.
7.2. Insurance by Tenant.
7.2.1. Tenant's Liability Insurance.
7.2.2. Tenant's Property Insurance.
7.2.3. Co-naming of Landlord.
7.3. Insurance Rating.
7.4. Indemnity.
7.5. Landlord's Liability.
7.6. Waiver of Subrogation.
8. DAMAGE AND DESTRUCTION.
8.1. Damage Caused by Tenant.
8.2. Damage Not Caused by Tenant.
8.3. Delay Beyond Landlord's Control.
9. CONDEMNATION.
9.1. Condemnation.
10. SURRENDER OF PREMISES.
10.1. Surrender at Expiration.
10.2. Removal of Property.
11. HOLDING OVER.
11.1. Holding Over.
12. DEFAULT.
12.1. Defaults by Tenant.
12.1.1. Failure to Pay Rent.
12.1.2. Failure to Perform.
12.1.3. Failure to Conduct Business.
12.1.4. Trusteeship; Assignment; Attachment.
12.1.5. Bankruptcy.
12.2. Remedies of Landlord.
12.2.1. Cure.
12.2.2. Repossession; Acceleration; Money Damages.
12.2.3. Reletting.
12.2.4. Waiver by Tenant of Notice to Quit.
12.2.5. Waiver of Protective Order by Tenant.
12.2.6. Suit.
12.2.7. Interest on Unpaid Rent.
12.2.8. Survival.
12.3. Default by Landlord.
12.4. Limitation of Landlord's Liability.
12.5. Non-waiver of Defaults.
13. MISCELLANEOUS PROVISIONS.
13.1. Waiver.
13.2. Attorneys' Fees.
13.3. Designated Parties.
13.4. Successors.
13.5. Relationship of Parties.
13.6. Severability.
13.7. Gender.
13.8. Brokerage.
13.9. Corporate Authority.
13.10. Common Areas.
13.11. Notices.
13.12. Captions and Summary.
13.13. Survival.
13.14. Process.
13.15. Force Majeure.
13.16. Governing Law.
13.17. Counterparts.
13.18. Submission of Lease.
13.19. Entire Agreement.
13.20. Parking.
13.21. Waiver of Jury Trial.
EXHIBITS:
Exhibit A - Floor Plan
Exhibit B - Lease Commencement Certificate
Exhibit C - Rules and Regulations
LEASE
THIS AGREEMENT OF LEASE, made and entered into this 22nd day of July,
1996, by and between 1331 F STREET, INC., a District of Columbia corporation,
hereinafter referred to as "Landlord" and WOODROAST SYSTEMS, INC., a Minnesota
corporation, hereinafter referred to as "Tenant";
W I T N E S E T H:
In consideration of the rent hereinafter reserved and of the covenants
hereinafter contained, Landlord hereby leases space to Tenant in the building
located at 1331 F Street, N.W., Washington, D.C. 20004.
1. DEFINITIONS
1.1. Definitions. Landlord and Tenant hereby agree that the
following definitions shall apply for all purposes of this Lease (as well as of
all Exhibits which are attached hereto and made a part of this Lease):
(A) "Additional Rent" shall mean all sums of money due
and owing by Tenant to Landlord in respect of this
Lease, other than Basic Rent. Additional Rent
includes, but is not limited to, Tenant's Share of
Taxes and Expenses.
(B) "Agent" shall mean CB Commercial Real Estate Group,
Inc., 1001 Pennsylvania Avenue, N.W., Suite 210 S,
Washington, D.C. 20004, or any successor thereto
designated by Landlord.
(C) "Basic Rent" shall mean the annual rental rate set
forth in Section 3.2 hereof.
(D) "Building" shall mean collectively the real
property and improvements located at 1331 F
Street, N.W., Washington, D.C. 20004.
(E) "Commencement Date" shall be August 1, 1996.
(F) "Notices" shall be addressed as follows:
LANDLORD: TENANT:
--------- -------
CB Commercial Real Estate Group Woodroast Systems, Inc.
1001 Pennsylvania Avenue, N.W.
Suite 210 S
Washington, D.C. 20004
Attn: Brendan Owen
COPY OF NOTICES TO:
Ronald S. Shapiro, Esq. James W. Dierking, Esq.
Shapiro, Lifschitz and Winthrop & Weinstine
Schram, P.C. 3000 Dain Bosworth Plaza
1101 Pennsylvania Avenue, N.W. 60 South Sixth Street
Suite 1050 Minneapolis, Minnesota 55402
Washington, D.C. 20004
(G) "Operating Expenses" shall have the meaning given in
Section 3.4.3 below.
(H) "Premises" shall mean the retail space on the first
floor of the Building, as outlined on Exhibit A
attached hereto and made a part hereof. For all
purposes of this Lease, the parties agree that the
Premises contains 3,100 square feet of rentable
space, in accordance with the Landlord's standard
method of measurement.
(I) "Real Estate Taxes" shall have the meaning given in
Section 3.4.2 below.
(J) "Tenant's Share of Taxes and Expenses" means Tenant's
pro-rata share (based on the ratio of rentable square
feet within the Premises to rentable square feet
within the Building) of Real Estate Taxes and
Operating Expenses, as more particularly described in
Section 3.4.1 below.
(K) "Term" shall mean the period beginning on the
Commencement Date and ending on July 31, 2006.
2. DELIVERY OF POSSESSION; BUILD-OUT.
2.1. Possession of Premises; Delayed Delivery. The Premises shall be
delivered to Tenant by Landlord vacant but otherwise in its current "as-is"
condition.
2.2. Acceptance of Premises. Tenant's occupation of all or any portion
of the Premises shall be conclusive that the Premises are in satisfactory
condition and acceptable to Tenant subject to latent defects and to deficiencies
listed by Tenant on the Lease Commencement Certificate in the form of Exhibit B
attached hereto and made a part hereof. The Lease Commencement Certificate shall
be executed and delivered by Tenant to Landlord within ten (10) days after
possession of the Premises is delivered to Tenant.
2.3. Tenant's Build-out.
2.3.1. Tenant's Obligation. Tenant acknowledges that all
build-out and tenant improvements shall be performed, constructed and installed
at Tenant's sole cost and expense. Tenant further acknowledges that Landlord has
the right to approve all construction documents, contractors, and
subcontractors.
2.3.2. Construction Plans. Promptly following the execution of
this Lease, Tenant shall cause to be prepared a complete set of construction
drawings for the Premises, including all mechanical, electrical and plumbing
working drawings ("Construction Plans"), which plans shall conform to all
requirements of applicable law, including, but not limited to, the District of
Columbia Building Code and the Americans with Disabilities Act. Tenant shall
deliver a complete set of Construction Plans to Landlord for approval no later
than _________________, 1996. Landlord shall have ten (10) business days from
the date it receives the Construction Plans to approve them or to indicate such
changes as Landlord reasonably requires. If Landlord does not expressly approve
the drawings or indicate any changes that Landlord requires by the end of the
tenth business day, the Construction Plans will be deemed approved. If changes
to the Construction Plans are required, Tenant will deliver the modified
Construction Plans to Landlord as soon as they are available, and Landlord shall
have five (5) business days to confirm that the required changes have been made
and to approve the Construction Plans as modified. If Landlord does not
expressly approve or disapprove of the changes by the end of the fifth business
day, the drawings as modified shall be deemed approved. If Landlord requires
changes to the modified Construction Plans and submits those changes within said
five business day period, Tenant's architect will make such changes at Tenant's
expense.
2.3.3. Construction Contract. Promptly following the date
Landlord approves (or is deemed to have approved) the Construction Plans in
accordance with Section 2.3.2, Tenant shall submit the Construction Plans to one
or more contractors selected by Tenant and reasonably approved by Landlord, and
Tenant shall enter into a contract for the construction of the leasehold
improvements as soon as possible. Tenant shall promptly commence and diligently
pursue the completion of the work described in the Construction Plans, and shall
cause all such work to be completed in a good and workmanlike manner, in a
lien-free condition, and in compliance with all applicable laws and regulations.
Tenant agrees to reimburse Landlord (or pay third-party invoices) for reasonable
out-of-pocket expenses incurred by Landlord in connection with the review of
Tenant's Construction Plans and the coordination and supervision of Tenant's
build-out, up to a maximum of $2,500.00.
2.3.4. Permits. Promptly following the date Landlord approves
(or is deemed to have approved) the Construction Plans in accordance with
Section 2.3.2, Tenant shall apply for a construction permit from the District of
Columbia and shall diligently pursue the issuance of said permit, at Tenant's
sole cost and expense. Tenant shall obtain, at its sole cost and expense, all
occupancy and building permits necessary for Tenant to lawfully occupy the
Premises and to conduct its business therein as of the Commencement Date.
2.3.5. Delay. Landlord shall not be liable, and Tenant shall
not be entitled to a rent abatement, for any delay in the completion of Tenant's
leasehold improvements from any cause whatsoever, other than the interference by
Landlord or Landlord's agents with the completion of construction or the
installation of leasehold improvements.
3. RENT
3.1. Payment of Rent. All monies payable by Tenant to Landlord under
this Lease shall be deemed to be rent and shall be payable and recoverable as
rent in the manner herein provided and Landlord shall have all rights against
Tenant for default in any such payment. Rent shall be paid in lawful money of
the United States or by check drawn against lawful money of the United States
and payable to Agent, in advance on the first (1st) day of each calendar month
during the entire Term of this Lease, beginning on the Commencement Date,
without demand, deduction, setoff or counterclaim, at Agent's offices as set
forth above, directly to the Landlord, or to such other person or entity or to
such other address as Landlord may designate in writing. Upon execution of this
Lease, Tenant shall pay an amount equal to (i) one month's Basic Rent, plus (ii)
Tenant's Share of Taxes and Expenses for one month (computed, for purposes of
this sentence, at the rate of $11.50 per square foot per year), less (iii)
one-twelfth of the credit in lieu of moving and build-out expenses described in
Section 3.2(A). Such payment shall be credited to the third month of the Term
(i.e., the first month for which rent is due and payable, after giving effect to
the credit described in Section 3.2(A) below). Tenant's obligation to pay all
rent due under this Lease shall survive the expiration or earlier termination of
this Lease. Should this Lease commence on a day other than the first day of the
month or terminate on a day other than the last day of the month, the rent for
such partial month shall be prorated based on a 365-day year.
3.2. Basic Rent.
(A) Tenant agrees to pay to Landlord Basic Rent in the amount of
Twenty Dollars ($20.00) per rentable square foot per year for
the period August 1, 1996 through July 31, 1997. In lieu of a
cash allowance for Tenant's build-out, Landlord hereby grants
Tenant a credit in an amount equal to two months' Base Rent
and two months of Tenant's Share of Taxes and Expenses, which
shall be applied to the first two months of the Term.
(B) On August 1 of 1997, 1998, 1999, and 2000, the Basic Rent for
the ensuing twelve (12) month period shall be increased by two
percent (2%) over the Basic Rent in effect immediately prior
to such escalation.
(C) On August 1, 2001, the Basic Rent shall be increased by $2.50
per square foot.
(D) On August 1 of 2002, 2003, 2004, and 2005, the Basic Rent
shall be increased by two percent (2%) over the Basic Rent in
effect immediately prior to such escalation.
3.3. Real Estate Taxes and Operating Expenses.
3.3.1. Tenant's Share Defined. Throughout the Term of this
Lease, Tenant shall pay Landlord, as Additional Rent, for each calendar year an
amount equal to the product of (A) the number of rentable square feet in the
Premises and (B) the amount (per rentable square foot in the Building) of "Real
Estate Taxes" (hereinafter defined) and "Operating Expenses" (hereinafter
defined) incurred by the Landlord in connection with the ownership and operation
of the Building, without abatement, reduction or setoff. The amount of Real
Estate Taxes and Operating Expenses per rentable square foot shall be determined
by dividing the sum of Real Estate Taxes and Operating Expenses by the total
number of rentable square feet within the Building. Tenant's liability for
payment of the Additional Rent provided in this Section 3.3.1 shall survive the
termination of this Lease, through passage of time or otherwise.
3.3.2. Operating Expenses Defined. The term "Operating
Expenses" shall mean any and all expenses incurred by Landlord in connection
with the operation, maintenance and repair of the Building during the Term of
this Lease. By way of example but without limitation, Operating Expenses shall
include any and all of the following charges not otherwise paid directly by
Building tenants: electricity, natural gas, water and sewer services for the
Common Areas; rubbish collection services; janitorial service attributable to
the Common Areas; elevator maintenance and repair; casualty, loss of rent,
liability and all other Building insurance; cleaning of windows and exterior
curtain walls; snow removal service charges; Building management fees and costs;
telephone; reasonable legal expenses incurred by Landlord with respect to a
review and/or appeal of the Building's real estate tax assessment and with
respect to other Building operation matters; accounting fees; and capital
improvements that decrease Operating Expenses or are made to comply with
government requirements enacted after the Commencement Date, amortized ratably
over the life of the improvement with interest at the prime commercial rate in
effect from time to time at Riggs National Bank of Washington, D.C., or any
successor thereto on the unamortized amount; including any such additional
services not provided to the Building at the Commencement Date but thereafter
provided by Landlord in the prudent management of the Building. "Operating
Expenses" shall not include any of the following: expenses for capital
improvements or expenditures (as defined for Federal income tax purposes) made
to the Building (other than the capital improvements identified above); expenses
or allowances for painting, redecorating or other work which Landlord performs
for or grants to any tenant (including Tenant) in the Building; interest,
amortization or other payments of loans to Landlord whether secured or unsecured
(other than relating to included capital improvements identified above);
depreciation of the Building; ground rent; leasing commissions; advertising for
vacant space; salaries for Landlord's executive personnel; any income, excess
profits, or franchise taxes or other such taxes imposed on or measured by the
income of Landlord from the operation of the Building; legal fees (except for
legal fees expressly identified above); costs of enforcement of leases; any cost
representing an amount paid for services or materials to a related person, firm
or entity to the extent such amount exceeds the amount that would be paid for
such services or materials at the then-existing market rates to an unrelated
person, firm or corporation; or any expenses for which Landlord has received
reimbursement. For any years in which the Building is less than ninety-five
percent (95%) occupied during the entire period, the Operating Expenses for such
year shall be adjusted as if the Building were ninety-five percent (95%)
occupied.
3.3.3. Real Estate Taxes Defined. The term "Real Estate Taxes"
shall mean all taxes, rates and assessments, general and special, levied or
imposed with respect to the Building, including but not limited to those levied
or imposed for school, public betterment, or general or local improvements. If
the system of real estate taxation shall be altered or varied and any new tax or
levy shall be levied or imposed on, or collected from, the Building and/or
Landlord in substitution for the real estate based taxes presently levied or
imposed on immovables in the District of Columbia, then any such new tax or levy
shall be included within the term "Real Estate Taxes."
3.3.4. Additional Rent Defined. Any sums of money due and
payable by Tenant to Landlord under this Lease, other than Basic Rent, shall be
deemed "Additional Rent" and shall be payable in accordance with Section 3.3.5
hereof.
3.3.5. Payment of Additional Rent. Any Additional Rent due
Landlord by Tenant under the provisions of this Section 3.3 shall be paid within
ten (10) days after submission of a written statement by Landlord to Tenant
showing the computation of the amount of such Additional Rent owed by Tenant,
together with reasonable documentation supporting such computation. Landlord's
failure to submit or delay in submitting to Tenant such written statement shall
in no way limit, abate or affect Tenant's liability for Additional Rent under
the provisions of this Section 3.3. Landlord shall make available records in
reasonable detail supporting items of Operating Expenses and the Real Estate
Taxes reflected on the written statement submitted by Landlord for a period of
one hundred twenty (120) days after submission thereof, for examination during
normal business hours upon reasonable notice by Tenant and its representatives;
provided, however, that any such examination shall be made at Tenant's sole cost
and expense and no such examination shall delay Tenant's payment of such
Additional Rent or Basic Rent; provided, further, that if Tenant's examination
discloses an error in Landlord's favor of more than three percent (3%), Landlord
shall reimburse Tenant for the reasonable cost of Tenant's audit.
3.3.6. Payment of Estimated Additional Rent. Landlord may
estimate in advance the Additional Rent due for the upcoming calendar year as a
result of increases in the Real Estate Taxes and Operating Expenses and provide
notice of said estimate to Tenant. Tenant will pay one-twelfth (1/12th) of said
estimated sum during each month of said calendar year beginning on the first day
of the first month of the upcoming calendar year. Within ninety (90) days of the
close of said calendar year, Landlord shall submit a written statement to Tenant
showing the computation of the actual amount of Additional Rent owed by Tenant
for said calendar year. Any Additional Rent owed by Tenant shall be due within
ten (10) days after receipt of Landlord's notice and any overpayment received
from Tenant shall be credited to the next payment(s) of Basic Rent or Additional
Rent due and owing. Landlord's failure to submit or delay in submitting to
Tenant such written statement shall in no way limit, abate or affect Tenant's
liability for Additional Rent under the provisions of this Section 3.3.4.
Landlord shall make available records in reasonable detail supporting items of
Operating Expenses and Real Estate Taxes reflected on the written statement
submitted by Landlord for a period of one hundred twenty (120) days after
submission thereof, for examination during normal business hours upon reasonable
notice by Tenant and its representatives; provided, however, that any such
examination shall be made at Tenant's sole cost and expense and no such
examination shall delay any payment by Tenant of Basic Rent or Additional Rent;
provided, further, that if Tenant's examination discloses an error in Landlord's
favor of more than three percent (3%), Landlord shall reimburse Tenant for the
reasonable cost of Tenant's audit.
3.3.7. Landlord's Contesting Real Estate Taxes. Landlord shall
be under no obligation to contest, object to either the validity or the amount
of the Real Estate Taxes or of any or all increases in Real Estate Taxes that
may occur or be assessed during the Term of this Lease. In the event that
Landlord shall elect to contest either the validity or the amount of the Real
Estate Taxes, Landlord shall do so at its sole discretion and the expenses
incurred with respect to such contest shall be deemed to be a Operating Expense.
If as a result of such contest Landlord shall receive a refund of Real Estate
Taxes, then for all purposes of this Lease the amount of Real Estate Taxes for
the applicable calendar year shall be deemed to be the amount of Real Estate
Taxes originally assessed less the amount of the refund obtained by Landlord and
any equitable adjustments to prior payments of Additional Rent necessitated by
such refund shall be promptly made. Tenant shall have no right to contest the
amount of Real Estate Taxes.
3.4. Interest Rate on Delinquencies. If Tenant shall fail to pay any
Basic Rent, Additional Rent or other charges when due or within five (5) days
thereafter, such unpaid amounts shall bear interest at the rate of 12% per annum
or the highest lawful rate under applicable law (whichever is lower) from the
due date until paid. Tenant shall at the time the late payment is made pay such
interest plus a penalty equal to 5% of the amount of any delinquent payment.
4. USE AND OPERATION OF BUILDING AND PREMISES.
4.1. Use. The Premises shall be used exclusively for the retail sale of
tobacco and related products, and the operation of a sit-down restaurant and
cigar bar with sale and on-premises consumption of alcoholic beverages. Tenant
agrees that no odors, smoke, fumes or noises shall be allowed to emanate from
the Premises in a manner that annoys or interferes with the conduct of business
by other tenants, occupants or invitees in the Building, and that any such
condition shall be promptly remedied at Tenant's sole cost and expense. Tenant
shall, at Tenant's expense, comply with all laws, rules, regulations,
requirements, and ordinances enacted or imposed by any governmental unit having
jurisdiction over the Building, the Premises, the Landlord or the Tenant. Tenant
shall pay all franchise taxes, business taxes or other similar taxes which may
be levied or imposed upon Tenant's property and the business carried on within
the Premises and also all other taxes which are or may be payable by Tenant as
tenant and occupant thereof. If by law, regulations or otherwise, business taxes
or other similar taxes are made payable by landlords or proprietors, or if the
mode of collecting such taxes be so altered as to make Landlord liable therefor
instead of Tenant, Tenant shall, within ten (10) days after demand by Landlord,
advance to Landlord the amount of such taxes as may be due.
4.2. Building Rules and Regulations. Tenant shall obey all Building
rules and regulations imposed by Landlord and set forth in Exhibit C attached
hereto and made a part hereof. Landlord shall have the right to make changes or
additions to such rules and regulations provided such changes or additions do
not unreasonably affect Tenant's use of the Premises. Landlord shall not be
liable for failure of any tenant to obey such rules and regulations. Failure by
Landlord to enforce any current or subsequent rules or regulations against any
tenant of the Building (including Tenant) shall not constitute a waiver of such
rules and regulations.
4.3. Utilities. Landlord and Tenant acknowledge that the cost of all
electricity that serves only the Premises (including electricity to operate the
fans and compressors for the HVAC system for the Premises) will be separately
metered and will not be included within the definition of "Operating Expenses."
Tenant will pay all electric bills attributable to the Premises directly to the
public utility. The cost of providing electricity and other utilities to the
Common Areas will be included in the definition of "Operating Expenses," and
Tenant will pay its pro-rata share thereof in accordance with 3.3.1. Landlord
shall at all times have free access to all mechanical installations of the
Building and Premises including, but not limited to, air conditioning equipment
and rents, fans, ventilating and machine rooms and electrical closets. Tenant
shall not install any special equipment or machinery of any kind or nature which
will or may necessitate any changes, replacements or additions to, or require
the use of, the water system, plumbing system, heating system, air conditioning
system, or the electrical system of the Building without the prior written
consent of Landlord, which consent may be denied or conditioned in Landlord's
sole discretion.
4.4. Quiet Enjoyment. Landlord covenants and agrees with Tenant that,
subject to Tenant's paying the Basic Rent and Additional Rent for the Premises
and faithfully observing and performing each and every term, covenant and
condition which, under the terms of this Lease, Tenant is to observe and
perform, Tenant shall peaceably and quietly enjoy the Premises. Notwithstanding
any provisions of this Section 4.4 or of this Lease to the contrary, Landlord
shall, without limitation, have the following rights:
(A) To transmit utilities, etc., through the Premises in
pipes, wires, ducts, conduits or other forms of transmission at all times at
Landlord's discretion; provided, however, that Landlord shall not exercise this
right in such a way as to interfere unreasonably with Tenant's use of the
Premises.
(B) To enter the Premises, at any time during reasonable
business hours and after reasonable notice to Tenant, either to view the
Premises (including to show the Premises to prospective tenants, purchasers or
lenders), to repair the Premises or the Building, or to introduce, replace,
repair, alter or make new or change existing fixtures, equipment, pipes, wires,
ducts, conduits, or other construction therein or to remove, remedy or cure,
without being held responsible therefor, any alterations in the Premises made by
Tenant without Landlord's consent in violation of Section 6.3; provided,
however, that Landlord shall not exercise this right in such a way as to
interfere unreasonably with Tenant's use of the Premises. If Tenant shall vacate
the Premises during the last three (3) months of the Term of this Lease,
Landlord shall have the unrestricted right to enter the same after Tenant's
moving to commence preparations for the succeeding tenant or for any other
purpose whatsoever, without affecting Tenant's obligation to pay rent for the
full Term of this Lease.
5. TRANSFER OF LANDLORD'S AND TENANT'S INTERESTS.
5.1. Assignment and Sublet. Tenant covenants not to assign this Lease
or to sublet the Premises or any portion thereof without the prior written
consent of Landlord. Tenant acknowledges and agrees that Landlord's consent to
an assignment or subletting may be withheld or conditioned in the sole but
reasonable discretion of the Landlord. In any event, no such assignment or
subletting nor the consent of Landlord thereto shall release, discharge or
affect the liability of Tenant, as provided in this Lease, for the full Term
hereof. The consent of Landlord to any such assignment or subletting shall not
constitute a waiver of this Section 5.1, and shall not be deemed to permit any
further assignment or subletting or use by another. In the event of a permitted
sublease of any portion of the Premises which results in the rent received by
Tenant exceeding the rent payable by Tenant hereunder, Tenant agrees to pay
Landlord one-half (1/2) of the amount by which the rent received by Tenant
exceeds the rent payable by Tenant, in addition to any Basic Rent or Additional
Rent due hereunder. In the event of a permitted assignment, Tenant agrees to pay
Landlord one-half (1/2) of any amounts received by Tenant in consideration of
such assignment, net of any expenses incurred by Tenant in procuring such
assignment.
5.2. Corporate Transfer. Any transfer of this Lease by merger,
consolidation or liquidation, or any change in the ownership of or power to vote
the majority of Tenant's outstanding voting stock, shall constitute an
assignment within the meaning of Section 5.1 hereof and require Landlord's prior
written consent in accordance with Section 5.1.
5.3. Recapture of Premises. Tenant's request for Landlord's consent to
assign this Lease or sublet all or any part of the Premises shall constitute an
offer to Landlord to recapture all or such part of the Premises which Tenant
proposes to assign or sublet, at the then rental rate under the Lease or the
rental Tenant proposes to obtain, whichever is lower. Landlord shall have the
option to accept the offer to recapture, to be exercised within ten (10) days
following receipt. If accepted, Tenant shall execute an assignment of the Lease
or a sublease to Landlord in a form acceptable to Landlord, with Landlord having
the right to sublease to others, including Tenant's proposed sublessee. If
Landlord exercises its option to recapture all or such part of the Premises,
Tenant shall be released from further liability under this Lease for such
portion of the Premises as of the effective date of the assignment or sublease.
Landlord's failure to accept such offer to recapture shall not be construed as
Landlord's consent to the proposed assignment or sublease.
5.4. Mortgage by Landlord. Landlord shall have the right to
transfer, assign, mortgage or convey in whole or in part the Building and any
and all of its rights under its Lease, and nothing herein shall be construed as
a restriction upon Landlord's so doing.
5.5. Subordination. This Lease is and shall be subject and subordinate
in all respects to any and all mortgages, deeds of trust and ground leases now
or hereafter placed on the Building or the land upon which the Building is
situated, and to all renewals, modifications, consolidations, replacements and
extensions thereof. This clause shall be self-operative and no further
instrument of subordination shall be necessary; provided, however, Tenant shall
within ten (10) days' of receipt of notice from Landlord, execute, acknowledge
and deliver to Landlord in recordable form any written statement confirming such
subordination required by Landlord or any mortgagee.
5.6. Attornment. If the interest of Landlord is transferred to any
person or entity by reason of foreclosure or other proceedings for enforcement
of any mortgage, deed of trust or security interest or by delivery of a deed in
lieu of foreclosure or other proceedings, or by reason of sale, assignment or
other transfer of Landlord's interest in the Building, Tenant shall immediately
attorn to such person or entity, and no formality or documentation shall be
necessary for Tenant to be obligated so to attorn. In event of such transfer,
this Lease and Tenant's rights hereunder shall continue undisturbed so long as
Tenant is not in default hereunder. Notwithstanding Section 5.5, Tenant shall,
at Landlord's option and request, execute an agreement providing for superiority
of the Lease. Tenant agrees that the termination of any ground lease shall not
result in termination of this Lease.
5.7. Estoppel Certificate. Tenant agrees, at any time and from time to
time, within ten (10) days of receipt of notice from Landlord, to execute,
acknowledge and deliver to Landlord, a statement in writing certifying (i) that
this Lease is unmodified and in full force and effect or, if there have been
modifications, specifying the same; (ii) that Tenant has accepted possession of
the Premises, and that any improvements required by the terms of this Lease to
be made by Landlord have been completed to the satisfaction of Tenant or, if
not, describing such incomplete improvements; (iii) the date to which rent under
this Lease has been paid in advance of its due date; (iv) the address to which
notices to Tenant should be sent; (v) that Tenant, as of the date of any such
certification, has no known charge, lien or claim of setoff under this Lease, or
otherwise, against rents or other charges due or to become due hereunder or
specifying such claims; (vi) whether or not, to the best of Tenant's knowledge,
Landlord is in default in the performance of any covenant, agreement or
condition contained in this Lease and, if so, specifying each such default of
which Tenant may have knowledge; and (vii) any other statement as Landlord may
reasonably request. Any such statement delivered pursuant to Landlord's request
may be relied upon by any owner of the Building, any prospective purchaser of
the Building, any mortgagee or prospective mortgagee of the Building or of
Landlord's interest therein, or any prospective assignee of any such mortgagee.
Tenant hereby constitutes and appoints Landlord as Tenant's attorney-in-fact
(and Tenant acknowledges that such appointment is a power coupled with an
interest) to execute any such statement for or on behalf of Tenant.
5.8. Sale by Landlord. In the event Landlord transfers its interest in
the Building, Landlord shall thereby be released from any further obligation
hereunder accruing after the date of such transfer, and Tenant agrees to look
solely to the successor in interest of the Landlord for the performance of such
obligations.
5.9. Landlord's Lien. In addition to, and not in derogation of, any
other rights or remedies accorded Landlord hereunder or by law in the District
of Columbia, Landlord shall have a lien for the payment of the Basic Rent and
Additional Rent upon all of the goods, wares, chattels, fixtures, furniture and
other tangible personal property of Tenant which may be in or upon the Premises.
Tenant hereby specifically waives any and all exemptions allowed by law, and
such lien may be enforced on the nonpayment of any sum of Basic Rent or
Additional Rent by the taking and selling of Tenant's property in the same
manner as in the case of a default on chattel mortgages. Such sale shall be made
upon not less than ten (10) days' prior notice served upon Tenant by posting
such notice upon the Premises, and such lien may be enforced in any other lawful
manner at the option of Landlord. This Lease shall, for purposes of this
paragraph, constitute a security agreement and Tenant shall execute any U.C.C.
financing statement requested by Landlord and take such other reasonable actions
as Landlord deems necessary to perfect this lien.
5.10. Assumption or Assignment of Lease in the Event of Bankruptcy. In
the event that a petition in bankruptcy, insolvency, or for reorganization is
filed by or against Tenant pursuant to any federal, state, or local statute
(and, with respect to any such petition filed against it, Tenant fails to secure
a stay or discharge thereof within sixty (60) days after such filing), or that
Tenant makes or consents to a general assignment for the benefit of creditors
then, if Landlord's rights to terminate the Lease or recover damages are stayed
or limited by the provisions of the applicable bankruptcy law, the Trustee or
Debtor in possession in bankruptcy shall not have the right to assume or assign
this Lease unless he cures all defaults, compensates Landlord for damages
resulting from such defaults, and provides "adequate assurance of future
performance" as hereinafter defined. "Adequate assurance of future performance"
is hereby defined to include payment of Basic Rent and Tenant's Share of Taxes
and Expenses for a period of three months as an additional security deposit, and
agreement that Tenant's business shall be conducted in a first-class manner and
that the use of the Premises will remain unchanged.
6. UPKEEP AND ALTERATION OF PREMISES.
6.1. Upkeep of Premises. During the Term of this Lease, Tenant
covenants and agrees to keep the Premises and the fixtures therein in good order
and condition, reasonable wear and tear excepted. If, within ten (10) days
following any occurrence, Tenant fails to commence to repair any damage to, or
replace any damaged elements of, the Premises or Building caused by Tenant, its
agents, employees or invitees, or if Tenant fails to proceed diligently to
complete such repair or such replacement, Landlord may, at its option, cause all
required maintenance, repairs or replacements to be made. Tenant shall promptly
pay Landlord all costs incurred in connection therewith plus interest thereon at
the rate of 12% per annum or the highest lawful rate under applicable law
(whichever is lower) from the due date until paid. Tenant shall promptly notify
Landlord of any defective condition in any plumbing or heating system or any
electrical lines located in, servicing, or passing through the Premises.
6.2. Maintenance by Landlord. Landlord shall maintain all public or
common areas located in the Building in good order and condition, including the
roof and structural elements of the Building.
6.3. Alterations by Tenant. Tenant shall make no changes, additions,
alterations or improvements to the Premises without the prior written consent of
Landlord and subject to all rules, requirements and conditions (including
posting adequate security) imposed by Landlord at the time such consent is
given. If any such alterations or additions are made without such consent,
Landlord may correct or remove them and Tenant shall be liable for any and all
expenses incurred by Landlord in the performance of this work. Notwithstanding
the foregoing, Tenant may make non-structural changes, additions, alterations or
improvements to the Premises without the Landlord's consent, to the extent the
cost of such changes, additions, alterations and improvements does not exceed
$10,000 per calendar year. Tenant shall carry and cause its contractors to carry
such workers' compensation, liability and other insurance as Landlord may
reasonably require. On completion of the work, Tenant shall obtain and deliver
to Landlord waivers of mechanics' and materialmen's liens upon the Building and
Premises for all work, labor and services performed and materials furnished.
Tenant shall schedule any work so as not to interfere with work performed by
Landlord or to conflict with any labor relations or other contract to which
Landlord or its contractors may be a party. During performance of its work,
Tenant shall promptly remove at its expense all waste materials related to such
work.
6.4. Alterations by Landlord. Landlord may make such repairs, changes
or additions to the structure, systems, facilities and equipment in the Premises
which it considers necessary to serve the Premises or the Building. Landlord may
also make changes, alterations or additions to any part of the Building not
forming part of the Premises and change the location of public areas of the
Building. In exercising its rights under this Section 6.4, Landlord shall not
unreasonably interfere with Tenant's business operations in the Premises.
6.5. Mechanics' and Other Liens. If, because of any act or omission of
Tenant or any person claiming by, through, or under Tenant, any mechanic's lien
or other lien shall be filed against the Premises or the Building or against
other property of Landlord (whether or not such lien is valid or enforceable as
such), Tenant shall, at its own expense, cause the same to be discharged of
record within thirty (30) days after the date of filing thereof, and shall also
indemnify Landlord and hold it harmless from any and all claims, losses,
damages, judgments, settlements, costs and expenses, including attorneys' fees,
resulting therefrom or by reason thereof. Landlord may, but shall not be
obligated to, pay the claim upon which such lien is based so as to have such
lien released of record; if Landlord does so, then upon demand Tenant shall pay
to Landlord, as Additional Rent, the amount of such claim, plus all other costs
and expenses incurred in connection therewith, plus interest thereon at the rate
of twelve percent (12%) per annum or the highest lawful rate under applicable
law (whichever is lower) until all such costs, expenses, and interest are paid.
7. INSURANCE AND INDEMNITY.
7.1. Insurance by Landlord. Landlord shall maintain insurance for those
perils and in amounts (a) which would be considered prudent for similar property
situated in the general area of the Building or (b) which is required by any
mortgagee or creditor of Landlord. Cost of all insurance maintained by Landlord
shall be considered as a part of the Operating Expenses for the Building in
accordance with Section 3.4.
7.2. Insurance by Tenant.
7.2.1. Tenant's Liability Insurance. Tenant shall at all times
during the Term hereof and at its sole cost and expense, for the mutual benefit
of Landlord and Tenant, purchase and maintain with an insurance company licensed
to do business in the District of Columbia and satisfactory at all times to
Landlord, comprehensive general liability insurance coverage in an adequate
amount, as determined by Landlord's insurance broker or advisor, but not less
than Two Million Dollars ($2,000,000.00) combined single-limit coverage for
personal injury, death and property damage. The comprehensive general liability
policy shall also include contractual coverage of Tenant's obligations under
Section 7.4 below. In no event shall the limits of such policy be considered as
limiting the liability of Tenant under this Lease.
7.2.2. Tenant's Property Insurance. Tenant shall at its own
expense maintain in full force and effect on all of its inventory, furnishings,
fixtures and equipment in the Premises a policy of fire and extended coverage
insurance with vandalism and malicious mischief endorsements for at least eighty
percent (80%) of their insurable cash value. Landlord will not carry insurance
on Tenant's possessions, or on any leasehold improvements made by Tenant. Tenant
hereby assigns to Landlord its interest in any insurance proceeds covering
leasehold improvements to the extent proportionately that Landlord originally
paid for such improvements. Landlord shall make such proceeds available for
restoration of the Premises pursuant to plans and specifications approved by
Landlord.
7.2.3. Co-naming of Landlord. The insurance policies for the
insurance required in Section 7.2.1 and 7.2.2 above shall name Landlord as an
additional insured and loss payee and shall provide that they may not be
canceled on less than thirty (30) days' prior written notice to Landlord. Tenant
shall furnish to Landlord prior to the Commencement Date certificates of
insurance evidencing all required coverage; receipts evidencing payment for said
insurance shall be delivered to Landlord at least annually by Tenant. Should
Tenant fail to carry such insurance or to furnish Landlord with such
certificates of insurance after a request to do so, Landlord shall have the
right to obtain such insurance and collect the cost thereof from Tenant as
further rent plus interest thereon at the rate of 12% per annum or the highest
lawful rate under applicable law (whichever is lower) from the due date until
paid.
7.3. Insurance Rating. Tenant will not conduct or permit to be
conducted any activity, or place any equipment in or about the Premises, which
will, in any way, increase the premium rate of fire insurance or other insurance
on the Building; and if any increase in the rate of fire insurance or other
insurance is stated by any insurance company or by the applicable insurance
rating bureau to be due to activity or equipment in or about the Premises,
Tenant shall be liable for such increase and shall reimburse Landlord therefor.
7.4. Indemnity. Tenant covenants and agrees that it will protect, save
and keep Landlord harmless and indemnified against any penalty or damage or
charge resulting from any violation by Tenant, its officers, employees, agents,
subtenants, licensees or concessionaires, of any federal, state, District of
Columbia, municipal, or other law or ordinance. Tenant further covenants and
agrees to save and keep Landlord harmless and indemnified from all loss, damage,
liability or expense incurred, suffered, or claimed by any person whomsoever
that occurs, in or about the Premises or arises out of Tenant's use or occupancy
of the Premises and is not caused by the negligence or intentional wrongdoing of
Landlord, its employees, agents, or servants; and to be answerable for all
nuisances caused or suffered by Tenant on the Premises, or caused by Tenant in
the Building, or on the approaches thereto.
7.5. Landlord's Liability. Landlord shall not be liable to Tenant, its
employees, agents, contractors or other invitees ("Invitees") for any damage,
compensation or claim arising from any of the following causes: the disrepair of
the Premises or the Building; the interruption in use thereof; accident or
damage resulting from the use or operation (by Landlord, Tenant, or any other
person) of elevators or heating, cooling, electrical or plumbing equipment; or
the termination of this Lease by reason of the destruction of the Premises, or
from any fire, robbery, theft, mysterious disappearance and/or any other
casualty, or from any leakage in any part of the Premises or the Building, or
from water, rain or snow that may leak into, or flow from, any part of the
Premises or the Building, or from any other cause whatsoever, or for any
personal injury arising from the use, occupancy and condition of the Premises,
unless any of the foregoing is caused by the negligence of Landlord or its
agents, or a willful act or failure to act on the part of the Landlord or its
agents. Tenant shall not be entitled to any abatement or diminution of rent as a
result of any of the foregoing occurrences, nor shall the same release Tenant
from its obligations hereunder or constitute an eviction. Any goods, property or
personal effects of Tenant, or Invitees, stored or placed in or about the
Premises or Building shall be at the risk of such Tenant or Invitees, and
Landlord shall not in any manner be held responsible therefor. Tenant
acknowledges that Landlord will not be obligated to carry insurance on Tenant's
furniture, furnishings, fixtures, equipment and/or improvements in or to the
Premises. It is expressly understood and agreed that Tenant shall look to its
property damage or business interruption insurance policy, and not to Landlord
or its agents or employees, for reimbursement for any damages or losses incurred
as a result of any of the foregoing occurrences.
7.6. Waiver of Subrogation. Landlord and Tenant hereby waive, to the
extent of net proceeds collected under insurance policies, any rights each may
have against the other on account of any loss or damage occasioned to Landlord
or Tenant, as the case may be, its respective property, or the Building.
8. DAMAGE AND DESTRUCTION.
8.1. Damage Caused by Tenant. In the event of damage to the Premises or
the Building by fire or other causes resulting from fault or negligence of
Tenant or Invitees, such damage shall be promptly reported to Landlord and shall
be repaired by and at the expense of Tenant under the direction and supervision
of Landlord. There shall be no abatement of rent during the period of repair.
8.2. Damage Not Caused by Tenant. In the event the Building or the
Premises shall be destroyed or rendered untenantable, either in whole or in
part, by fire or other casualty not resulting from fault or negligence of Tenant
or Invitees, Landlord may, at its option, restore the Building or Premises to as
near their previous condition as is reasonably possible, and in the meantime the
rent shall be abated in the same proportion as the untenantable portion of the
Premises bears to the whole thereof. If Landlord elects to restore the Building
or Premises, Landlord shall commence such restoration within sixty (60) days
after adjustment of all its insurance claims, and thereafter proceed diligently
to complete such restoration. In the event that Landlord, within sixty (60) days
after the occurrence of any such casualty, shall notify Tenant of its election
not to restore, this Lease shall thereupon terminate and Tenant shall vacate the
Premises within thirty (30) days. Such restoration by Landlord shall not include
replacement of furniture, equipment or Tenant's leasehold improvements.
Restoration of the Premises required beyond Landlord's obligation shall be
performed by Tenant at no cost to Landlord. Notwithstanding the foregoing, if
restoration is not completed within 180 days following the casualty, Tenant may,
at its option, terminate this Lease by written notice to Landlord.
8.3. Delay Beyond Landlord's Control. Landlord shall not be subject to
any penalty for delay in commencing or completing repairs caused by adjustment
of insurance claims, governmental requirements or any cause beyond Landlord's
reasonable control.
9. CONDEMNATION.
9.1. Condemnation. If the Building or Premises shall be condemned or
otherwise taken for any public purpose to such an extent as to render either or
both untenantable in whole, or to such a degree that in Tenant's reasonable
business judgment, Tenant cannot reasonably continue its business operations in
the Premises, either Landlord or Tenant shall have the option to terminate this
Lease effective as of the date of such taking. If such taking does not render
the Building or the Premises untenantable, this Lease shall continue in effect
and Landlord shall promptly restore the portion not taken to the extent possible
to the condition existing prior to the taking. If, as a result of such
restoration, the area of the Premises is reduced, Tenant's rent shall be reduced
proportionately. All proceeds from any taking shall be paid to Landlord, except
that Tenant may make a claim for its costs of relocation and for the unamortized
value of leasehold improvements paid for by Tenant, to the extent that such
claim does not reduce sums payable to Landlord. Except as set forth in the
preceding sentence, Tenant waives all claims against such proceeds. A voluntary
sale or conveyance in lieu of, but under the threat of, condemnation shall be
considered a taking for a public purpose.
10. SURRENDER OF PREMISES.
10.1. Surrender at Expiration. Upon expiration or other termination of
this Lease, Tenant shall immediately surrender possession of the Premises to
Landlord in substantially the condition in which Tenant is required to maintain
the Premises except for reasonable wear and tear.
10.2. Removal of Property. All changes and decorations, other than
unattached movable furniture, furnishings or equipment installed in the Premises
at the expense of Tenant, shall become a part of the Premises at the time of
their installation and shall remain upon and be surrendered with the Premises as
a part thereof. Any unattached movable furniture, furnishings or equipment not
removed by the Tenant prior to the expiration or termination of this Lease shall
become, at Landlord's option, the property of the Landlord and shall be
surrendered with the Premises as a part thereof. Upon expiration or other
termination of this Lease, Tenant (i) shall remove only such changes,
decorations, and leasehold improvements as Landlord requests in writing; (ii)
notwithstanding Section 10.2(i), shall remove any and all telephone and computer
cables and any security system; (iii) shall, except for those changes,
decorations, and leasehold improvements not required to be removed, restore the
Premises to the same condition existing upon the Commencement Date, reasonable
wear and tear excepted; and (iv) shall surrender to Agent all keys for the
Premises and shall inform Agent of all combinations on locks, safes, and vaults,
if any, in the Premises.
11. HOLDING OVER.
11.1. Holding Over. If Tenant should fail to vacate the Premises upon
expiration or termination of this Lease, with Landlord's approval Tenant shall
become a month-to-month Tenant, subject to all laws of the District of Columbia
applicable to such tenancy and to the terms and conditions of this Lease, so far
as applicable. The monthly rent to be paid Landlord by Tenant during such
continued occupancy shall be an amount equal to one and one-half (1 1/2) times
the rent (which shall include Basic Rent and Additional Rent) being paid for the
month the Lease expires or is terminated. Notwithstanding the foregoing, if
Tenant remains in occupancy without the consent of Landlord, after expiration or
termination of this Lease, no receipt of money by Landlord from Tenant shall
reinstate or extend this Lease or affect any prior notice given by Landlord to
Tenant. Landlord shall have the right to accept any payments by Tenant as use
and occupancy payments, but not as rent, without being deemed to have consented
to such holdover. Such use and occupancy payments shall be equal to the amount
of rent that would have been collected by Landlord pursuant to this Section 11
had Landlord approved Tenant's holding over as a month-to-month Tenant, and
shall be credited against rent accruing for such period. Moreover, if Tenant
fails to surrender the Premises upon expiration or termination of this Lease,
despite demand to do so by Landlord, Tenant shall indemnify and hold Landlord
harmless from all loss or liability including, without limitation, any loss of
rent or any claim made by any succeeding tenant or prospective tenant founded on
or resulting from such failure to surrender. In the event of holding over,
Landlord may at any time prior to acceptance of rent and without waiving its
right to use and occupancy payments, reenter the Premises by any applicable
legal process or otherwise in accordance with the provisions of this Lease.
12. DEFAULT.
12.1. Defaults by Tenant. The occurrence of any one or
more of the following events shall be a default under and breach
by Tenant of this Lease:
12.1.1. Failure to Pay Rent. Tenant shall fail to pay any
monthly installment of Basic Rent, Additional Rent or any other amounts
otherwise due Landlord from Tenant when the same shall become due and payable.
12.1.2. Failure to Perform. Tenant shall fail to perform or
observe any other term, condition, covenant or obligation required to be
performed or observed by it under this Lease for a period of thirty (30) days
after notice thereof from Landlord; provided, however, that if the term,
condition, covenant or obligation to be performed by Tenant is of such nature
that the same cannot reasonably be performed within such thirty-day period, such
default shall be deemed to have been cured if Tenant commences such performance
within said thirty-day period and thereafter diligently undertakes to complete
the same and completes the required action within a reasonable time.
12.1.3. Failure to Conduct Business. Tenant shall fail to
conduct business in the Premises for a period of seven (7) consecutive days,
unless such failure is due to the untenantability of the Premises.
12.1.4. Trusteeship; Assignment; Attachment. A trustee or
receiver shall be appointed (i) to take possession of substantially all of
Tenant's assets in, on, or about the Premises or (ii) to assume Tenant's
interest in this Lease (and, if such appointment is not voluntary by Tenant, if
Tenant does not regain possession within sixty (60) days after such
appointment); Tenant makes a general assignment for the benefit of creditors; or
substantially all of Tenant's assets in, on, or about the Premises or Tenant's
interest in this Lease are attached or levied under execution (and Tenant does
not discharge the same within sixty (60) days thereafter).
12.1.5. Bankruptcy. A petition in bankruptcy, insolvency, or
for reorganization or arrangement is filed by or against Tenant pursuant to any
federal, state, or local statute (and, with respect to any such petition filed
against it, Tenant fails to secure a stay or discharge thereof within sixty (60)
days after such filing).
12.2. Remedies of Landlord. Upon the occurrence of any event of default
set forth in Section 12.1, Landlord shall have the following rights and
remedies, in addition to those allowed by law, any one or more of which may be
exercised without further notice to or demand upon Tenant:
12.2.1. Cure. Landlord may seek judicial relief, and/or
reenter the Premises to cure any default of Tenant, in which event Tenant shall
reimburse Landlord for any costs and expenses, including reasonable attorneys'
fees, which Landlord may incur with respect to such default; and Landlord shall
not be liable to Tenant for any loss or damage which Tenant may sustain by
reason of any action by Landlord in reentering the Premises, regardless of
whether such loss or damage is caused by Landlord's negligence or otherwise. Any
payments made by Landlord on account of Tenant pursuant to this Section 12.2.1
shall bear interest as specified in Section 3.5.
12.2.2. Repossession; Acceleration; Money Damages. Landlord
may, with or without terminating this Lease, reenter the Premises and dispossess
Tenant or any other occupants of the Premises by force, summary proceedings,
ejectment or otherwise, and may remove their effects, without prejudice to any
other remedy which Landlord may have for possession or arrearages in rent,
whereby neither Tenant nor any person claiming under or through Tenant shall
thereafter be entitled to possession of the Premises, and Tenant shall
immediately thereafter surrender the Premises to Landlord. Notwithstanding a
termination of this Lease, Landlord may to the extent permitted by law declare
all rent which would have been due under this Lease for the balance of the Term
to be immediately due and payable, whereupon Tenant shall be obligated to pay
the same to Landlord, together with all loss or damage which Landlord may
sustain by reason of such termination, offset by the fair rental value thereof,
as adjusted for a reasonable period of vacancy and the cost of reletting and
preparing the Premises.
12.2.3. Reletting. Landlord may, with or without terminating
this Lease, reenter the Premises as provided in Section 12.2.2 and relet all or
any part of the Premises, for any term, for any rent, and on any terms and
conditions, whereupon Tenant shall be obligated to pay to Landlord as liquidated
damages the difference between the rent provided for herein and that provided
for in any lease covering a subsequent reletting of the Premises, for the period
which would otherwise have constituted the balance of the Term of this Lease,
together with all of Landlord's reasonable costs and expenses for preparing the
Premises for reletting, including without limitation all repairs, tenant finish
improvements, and brokers' and attorneys' fees that Landlord, in its sole
discretion, may incur, and all loss or damage which Landlord may sustain by
reason of such reentry and reletting. Landlord may recover such liquidated
damages at the time of such reletting or by successive actions (without
prejudice to further actions) as such damages become determinable. Landlord
shall use reasonable efforts to mitigate its damages by reletting the Premises;
provided, however, that this obligation shall not require Landlord to relet the
Premises on the same terms and conditions as set forth herein. Landlord shall in
no event be liable in any way for failure to relet the Premises, or in the event
that the Premises are relet, for failure to collect the rent under such
reletting, and in no event shall Tenant be entitled to receive the excess, if
any, of such net rent collected over the sums payable by Tenant to Landlord
hereunder.
12.2.4. Waiver by Tenant of Notice to Quit. To the extent
permitted by law, Tenant waives any notice to quit or other provision of
applicable law requiring notice or delay in an action to evict or dispossess
Tenant, and all rights of redemption under any laws in the event Tenant is
evicted or dispossessed for any cause.
12.2.5. Waiver of Protective Order by Tenant. To the extent
permitted by law in the event Landlord brings an action to evict or dispossess
Tenant, Tenant waives any right it may have to seek, obtain or receive a
protective order and agrees to pay any amount due for rent or use and occupancy
directly to Landlord or Landlord's representative, as appropriate.
12.2.6. Suit. Landlord may sue for injunctive relief or to
recover damages for any loss resulting from breach of this Lease.
12.2.7. Interest on Unpaid Rent. Interest on unpaid rent shall
be charged as specified in Section 3.5.
12.2.8. Survival. It is expressly understood and agreed by
Landlord and Tenant that the liabilities and remedies specified in this Section
12.2 shall survive the termination of this Lease.
12.3. Default by Landlord. It shall be a default under and breach of
this Lease by Landlord if Landlord shall fail to perform or observe any term,
condition, covenant or obligation required to be performed or observed by it
under this Lease for a period of thirty (30) days after notice thereof from
Tenant; provided, however, that if the term, condition, covenant or obligation
to be performed by Landlord is of such nature that the same cannot reasonably be
performed within such thirty-day period, such default shall be deemed to have
been cured if Landlord commences such performance within said thirty-day period
and thereafter diligently undertakes to complete the same and completes the
required action within a reasonable time. Upon the occurrence of any such
default, Tenant may sue for injunctive relief or to recover damages for any loss
resulting from the breach, but Tenant shall not be entitled to terminate this
Lease or withhold or abate any rent due hereunder; provided, however, that
Tenant shall be entitled to terminate this Lease if Landlord breaches its
covenant of quiet enjoyment set forth in Section 4.4 hereof, and such breach is
not cured within the time periods set forth in this Section 12.3. Tenant shall
deliver a copy of any written notice of default to any mortgagee of Landlord of
which Tenant has received notice.
12.4. Limitation of Landlord's Liability. If Landlord shall fail to
perform or observe any term, condition, covenant or obligation required to be
performed or observed by it under this Lease as provided in Section 12.3 and if
Tenant shall, as a consequence thereof, recover a money judgment against
Landlord, Tenant agrees that it shall look solely to Landlord's right, title and
interest in and to the Building for the collection of such judgment. Tenant
further agrees that no other assets of Landlord shall be subject to levy,
execution or other process for the satisfaction of Tenant's judgment and that
Landlord shall not be liable for any deficiency.
12.5. Non-waiver of Defaults. The failure or delay by either party
hereto to exercise or enforce at any time any of the rights or remedies or other
provisions of this article shall not be construed to be a waiver thereof, nor
affect the validity of any part of this Lease or the right of either party
thereafter to exercise or enforce each and every such right or remedy or other
provision. No waiver of any default or breach of the Lease shall be deemed to be
a waiver of any other default or breach. The receipt by Landlord of less than
the full rent then due shall not be construed to be other than a payment on
account of rent then due, nor shall any statement on Tenant's check or any
letter accompanying Tenant's check be deemed an accord and satisfaction, and
Landlord may accept such payment without prejudice to Landlord's right (i) to
recover the balance of the rent due or (ii) to pursue any other remedies
provided in this Lease. No act or omission by Landlord or its employees or
agents during the Term of this Lease shall be deemed an acceptance of a
surrender of the Premises, and no agreement to accept such a surrender shall be
valid unless in writing and signed by Landlord.
13. MISCELLANEOUS PROVISIONS.
13.1. Waiver. The failure of Landlord to insist upon strict performance
of any of the covenants and agreements of this Lease, or to exercise any option
herein conferred in any one or more instances, shall not be considered to be a
waiver or relinquishment of such performance by Tenant or right of Landlord, and
all covenants, agreements and options shall remain in full force and effect.
13.2. Attorneys' Fees. All costs and expenses, including attorneys'
fees in a reasonable amount, incurred by Landlord in enforcing the obligations
of Tenant under this Lease shall be paid by Tenant upon demand.
13.3. Designated Parties. Landlord may act in any matter provided for
herein through Agent or any other person who shall from time to time be
designated by Landlord by notice to Tenant. Tenant shall designate in writing a
person to act on its behalf in any matter provided for herein and shall, by
written notice, change such designation in the event such person is no longer
authorized to act on its behalf. In the absence of such designation, the person
or persons executing this Lease for Tenant shall be deemed to be authorized to
act on behalf of Tenant in any matter provided for herein.
13.4. Successors. All covenants, agreements, terms and conditions
contained in this Lease shall apply to, be binding upon, and inure to the
benefit of Landlord and Tenant and their respective heirs, executors,
administrators, successors and assigns. If there is more than one Tenant, the
obligations hereunder imposed upon Tenant shall be joint and several. No rights,
however, shall inure to the benefit of any assignee or sublessee of Tenant
unless Landlord has given its consent to the assignment or sublease in
accordance with Section 5.1.
13.5. Relationship of Parties. Nothing contained in this Lease shall
create any relationship between the Landlord and Tenant other than that of
Landlord and Tenant, and it is acknowledged and agreed that Landlord does not in
any way or for any purpose become a partner of Tenant in the conduct of Tenant's
business, or a joint venturer or member of a joint or common enterprise with
Tenant.
13.6. Severability. If any clause or provision of this Lease is held to
be illegal, invalid or unenforceable under present or future law effective
during the Term of this Lease, the remainder of this Lease shall not be affected
thereby. In lieu of such clause or provision which is held to be illegal,
invalid or unenforceable there shall be added, as a part of this Lease, a clause
or provision as similar in terms as possible which shall be legal, valid and
enforceable.
13.7. Gender. Words of any gender used in this Lease shall be held and
construed to include any other gender and words in the singular number shall be
held to include the plural, unless the context otherwise requires.
13.8. Brokerage. Landlord and Tenant hereby acknowledge, represent and
warrant that the only real estate brokers involved in the negotiation and
execution of this Lease are CB Commercial Real Estate Group and Grubb & Ellis,
and that no other broker or person is entitled to any leasing commission or
compensation as a result of the negotiation or execution of this Lease. The
commission of CB Commercial Real Estate Group shall be paid by Landlord, and the
commission of Grubb & Ellis shall be paid by Tenant, at such times and in such
manner as has been agreed to in separate agreements between Landlord and CB
Commercial Real Estate Group, and between Tenant and Grubb & Ellis. Nothing
herein contained shall be construed to prevent either broker from sharing its
leasing commission with a participating broker, by agreement.
13.9. Corporate Authority. If Tenant is a corporation, Tenant warrants
that it has legal authority to operate and is authorized to do business in the
District of Columbia, that it is in good standing in the District of Columbia
and (if different) its state of incorporation. Tenant also warrants that the
person or persons executing this Lease on behalf of Tenant have authority to do
so and fully to obligate Tenant to all terms and provisions of this Lease.
Tenant shall, upon request from the Landlord, furnish Landlord with appropriate
certificates of good standing and with a certified copy of the resolution of the
Board of Directors authorizing this Lease and granting authority to execute it
to the person or persons who have executed it on Tenant's behalf.
13.10. Common Areas. All lobbies, hallways, passageways, stairways,
restrooms and elevators in the Building, driveways, entrances and exits to the
Building, truckways, pedestrian sidewalks and ramps, landscaped areas and other
areas and improvements located in or about the Building are provided for the
general and nonexclusive use in common of Tenant, Landlord, all other tenants of
the Building, and their Invitees. Such common areas shall at all times be
subject to regulation and management by Landlord, and Tenant agrees to abide by
any rules and regulations with respect thereto and to use its best efforts to
cause its Invitees to do the same. Without limitation on Landlord's general
right to promulgate any such rule and regulations, Landlord reserves the right
to change the area, level, location and arrangement of the facilities referred
to herein and to take such other actions as Landlord shall deem necessary or
desirable with a view to the convenient use thereof by all tenants, their
employees, guests and invitees. Landlord also reserves the right at any time,
without the same constituting an actual or constructive eviction and without
incurring any liability to Tenant therefor, to change the arrangement and/or
location of lobbies, hallways, passageways, stairways, restrooms, entrances,
exits and other common areas of the Building.
13.11. Notices. All notices or other communications required or
permitted hereunder shall be deemed to have been given if hand-delivered or if
mailed in any United States Post Office by certified or registered mail, postage
prepaid, addressed to Landlord or Tenant, respectively, at the addresses set
forth in Section 1.1 or to such other addresses as the parties may designate in
writing from time to time. Notices mailed shall be deemed given on the date of
mailing.
13.12. Captions and Summary. The captions for sections of this Lease
and Lease Summary appearing at the front of this Lease are for convenience of
reference only and shall have no effect upon the construction or interpretation
of any part of this Lease.
13.13. Survival. The provisions of this Lease, to the extent
applicable, shall survive the expiration or termination of the Lease.
13.14. Process. Tenant hereby elects domicile at the Premises for the
purpose of receiving service of all notices, summons, or other legal documents
or process, in any suit, actions, or proceeding which Landlord may undertake
under this Lease.
13.15. Force Majeure. In the event that either party shall be delayed
or hindered in or prevented from performance of any act required hereunder by
reasons of strikes, lockouts, labor troubles, inability to procure materials,
failure of electricity, water, gas, oil or other utilities, restrictive
governmental laws or regulations, riots, insurrection, war, act or omission of
the other party, or other reason of like nature not the fault of the party
delayed in performing work or doing acts required under the terms of this Lease,
the performance of such act shall be excused for the period of the delay and the
period for the performance of any such act shall be extended for a period
equivalent to the period of such delay. The provisions of this Section 13.15
shall not operate to excuse Tenant from prompt payment of Basic Rent, Additional
Rent or any other payments required by the terms of this Lease.
13.16. Governing Law. This Lease shall be construed and governed by the
laws of the District of Columbia.
13.17. Counterparts. This Lease may be executed in multiple
counterparts, all of which constitute one and the same Lease.
13.18. Submission of Lease. The submission of this Lease to Tenant by
Landlord or Agent does not constitute a reservation of or option for the
Premises, and this Lease is not binding on Landlord until signed by an
authorized officer of Landlord.
13.19. Entire Agreement. This Lease contains the entire agreement of
the parties and no representations, promises or agreements, oral or otherwise,
between the parties not contained in this Lease shall be of any force and
effect. No change, amendment or modification of this Lease or waiver of a
provision hereof shall be valid unless made in writing and signed by the party
against whom such change, amendment, modification or waiver is sought to be
enforced.
13.20 Parking. Tenant may rent at least one parking space in the
Building for each 1,500 square feet of rentable space within the Premises, at
the rates charged by the parking garage operator, for use by Tenant. All charges
for such parking spaces shall be paid directly by Tenant to the parking garage
operator. Tenant acknowledges that the rates for parking may be changed from
time to time by the parking garage operator, and that the spaces may or may not
be offered on a reserved, unreserved, assigned, unassigned attendant-parked or
self-parked basis, at the option of the parking garage operator.
13.21. WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH AGREES TO AND
DOES HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER IN RESPECT OF ANY
MATTERS ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP
OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES, ANY CLAIM OF
INJURY OR DAMAGE, OR ANY STATUTORY REMEDY.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease under
seal as of the day first hereinabove written.
LANDLORD:
WITNESS: 1331 F STREET, INC.
/s/ Stephanie Larson /s/ Keith Compton
_______________________ By:______________________
TENANT:
WOODROAST SYSTEMS, INC.
/s/ Stephanie Larson /s/ Sheldon Jacobs
________________________ By:______________________
EXHIBIT B
CERTIFICATE OF LEASE COMMENCEMENT
Reference is made to a certain Agreement of Lease for certain
premises in the Building at 1331 F Street, N.W., Washington, D.C. 20006, between
1331 F STREET, INC. ("Landlord"), and WOODROAST SYSTEMS, INC. ("Tenant"), dated
________________, 199_, (the "Lease"), to which this Certificate of Lease
Commencement is attached. Definition of terms are as set forth in the Lease.
Landlord and Tenant hereby declare that (i) the Commencement
Date is ______________, 199_, and the end of the Term of the Lease is
_____________ , 20__, and (ii) as of the date of Tenant's acceptance of the
Premises, Tenant claims no current right to set off any amount against any rent
or other charge otherwise due Landlord under the Lease. Tenant's declaration
does not extend to any defects in the Premises not readily ascertainable. The
Premises have been delivered to Tenant in conformity with the Lease, except as
may be identified with specificity as an attachment hereto. The items listed on
such an attachment, if any, shall not substantially interfere with Tenant's
occupancy or Tenant's ability to complete any improvements to the Premises.
LANDLORD:
WITNESS: 1331 F STREET, INC.
_______________________ By:______________________
TENANT:
WOODROAST SYSTEMS, INC.
_______________________ By:______________________
EXHIBIT C
Rules and Regulations
1331 F Street, N.W., Washington, D.C.
The following rules and regulations have been formulated for the safety and
well-being of all the tenants of the Building. Strict adherence to these rules
and regulations is necessary to guarantee that each and every tenant will enjoy
a safe and peaceable occupancy in the Building. Any violation of these rules and
regulations by Tenant after notice from Landlord, shall be sufficient cause for
termination of this Lease at the option of Landlord.
The Landlord may, upon request by any Tenant, waive the compliance by such
Tenant with any of the foregoing rules and regulations, provided that (a) no
waiver shall be effective unless signed by Landlord or Landlord's authorized
agent, (b) any such waiver shall not relieve such tenant from the obligation to
comply with such rule or regulation in the future unless expressly consented to
by Landlord, and (c) no waiver granted to any Tenant shall relieve any other
Tenant from the obligation of complying with the foregoing rules and regulations
unless such other Tenant has received a similar waiver in writing from Landlord.
1. The sidewalks, entrances, passages, courts, elevators, vestibules,
stairways, corridors or halls or other parts of the Building not occupied by any
Tenant shall not be obstructed or encumbered by any Tenant or used by Tenant for
any purpose other than ingress and egress to and from the Premises. If the
Premises are situated on the ground floor of the Building, Tenant shall, at
Tenant's own expense, keep the sidewalks and curb directly in front of said
Premises clean and free from ice and snow. Landlord shall have the right to
control and operate the public portions of the Building, and the facilities
furnished for the common use of the Tenants, in such manner as Landlord deems
best for the benefit of the Tenants generally. No Tenant shall permit the visit
to the Premises of persons in such numbers or under such conditions as to
interfere with the use and enjoyment by other Tenants of the entrances,
corridors, elevators and other public portions of facilities of the Building.
2. No awnings or other projections shall be attached to the outside
walls of the Building without the prior written consent of the Landlord. No
curtains, blinds, shades, or screens shall be attached to or hung in, or used in
connection with, any window or door of the Premises, without the prior written
consent of the Landlord. Such awnings, projections, curtains, blinds, shades or
screens must be of a quality, type, design and color, and attached in the manner
approved by Landlord.
3. All electrical fixtures hung in offices or spaces along the
perimeter of the Premises must be fluorescent and of a quality, type, design and
bulb color approved by Landlord unless the prior consent of Landlord has been
obtained for other lighting.
4. No show cases or other articles shall be put in front of or affixed
to any part of the exterior of the Building, nor placed in the halls, corridors
or vestibules, nor shall any article obstruct any air-conditioning supply or
exhaust vent without the prior written consent of the Landlord.
5. The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were constructed, and no
sweepings, rubbish, rags, or other substances shall be thrown therein. All
damages resulting from any misuse of the fixtures shall be borne by the Tenant
who, or whose servants, employees, agents, visitors or licensees, shall have
caused the same.
6. There shall be no marking, painting, drilling into or in any way
defacing any part of the Premises or the Building. No boring, cutting or
stringing of wires shall be permitted. Tenant shall not construct, maintain, use
or operate within the Premises or elsewhere within or on the outside of the
Building, any electrical device, wiring or apparatus in connection with a loud
speaker system or other sound system that can be heard outside the Premises.
7. No bicycles, vehicles or animals, birds or pets of any kind except
guide dogs shall be brought into or kept in or about the Premises or the
Building.
8. No space in the Building shall be used for manufacturing, or for the
sale of merchandise, goods or property of any kind at auction.
9. No Tenant shall make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with occupants of this or neighboring
buildings or premises of those having business with them whether by the use of
any musical instrument, radio, talking machines, unmusical noise, whistling,
singing, or in any other way. No Tenant shall throw anything out of the doors or
windows or down the corridors or stairs.
10. Tenant shall not bring or permit to be brought or kept in or on the
Premises any flammable, combustible or explosive fluid, materials, chemical or
substance except standard cleaning fluid, standard equipment and materials
(including magnetic tape) customarily used in conjunction with business machines
and equipment of the type used from time to time by Tenant in reasonable
quantities.
11. No additional locks or bolts of any kind shall be placed upon any
of the doors or windows by any Tenant, nor shall any changes be made in existing
locks or the mechanism thereof, unless Tenant promptly provides Landlord with
keys shall be kept closed during business hours, except as they may be used for
ingress or egress. Each Tenant shall, upon the termination of its tenancy,
restore to Landlord all keys of stores, offices, storage, and toilet rooms
either furnished to, or otherwise procured by, the Tenant, and in the event of
the loss of any keys so furnished, the Tenant shall pay to the Landlord the cost
thereof.
12. All removals, or the carrying in or out of any safes, freight,
furniture, equipment, merchandise, goods or bulky matter of any description must
take place during the hours which the Landlord or its agent may determine from
time to time through delivery entrances, elevators and passageways designated by
Landlord. Tenant shall promptly remove from the public areas in or adjacent to
the Building any of Tenant's property there delivered or deposited. The Landlord
reserves the right to inspect all freight to be brought into the Building and to
exclude from the Building all freight which violates any of these Rules and
Regulations or the Lease of which these Rules and Regulations are a part.
13. Any person employed by any Tenant to do janitor work within the
Premises must obtain Landlord's consent and such person shall, while in the
Building and outside of said Premises, comply with all instructions issued by
the Superintendent of the Building. No Tenant shall engage or pay any employees
on the Premises, except those actually working for such Tenant on said premises.
14. Landlord shall have the right to prohibit any advertising by any
Tenant which, in Landlord's opinion, tends to impair the reputation of the
Building or its desirability as a building for offices, and upon written notice
from Landlord, Tenant shall refrain from or discontinue such advertising.
15. The Landlord reserves the right to exclude from the Building at all
times any person who is not known or does not properly identify himself to the
Building management or watchman on duty. Landlord may, at his option, require
all persons admitted to or leaving the Building between the hours of 6 P.M. and
8 A.M., Monday through Saturday, Sundays and legal holidays to register. Each
Tenant shall be responsible for all persons for whom he authorizes entry into or
exit out of the Building, and shall be liable to the Landlord for all acts of
such persons.
16. The Premises shall not be used for lodging or sleeping or for any
immoral or illegal purposes.
17. No Tenant shall occupy or permit any portion of the Premises to be
used or occupied as an office for a public stenographer or typist, or for the
possession, storage, manufacture, or sale of narcotics or dope in any form, or
as a barber or manicure shop, or as an employment bureau, unless said Tenant's
lease expressly grants permission to do so. No Tenant shall advertise for
laborers giving an address at the Premises.
18. No Tenant shall occupy or permit any portion of the Premises to be
used or occupied for the manufacture or sale of liquor or other alcoholic
beverages or for the commercial possession or storage thereof, except pursuant
to a valid license.
19. Each Tenant, before closing and leaving the Premises at any time,
shall see that all windows are closed and all lights turned off.
20. The requirements of Tenants will be attended to only upon
application at the office of the Building. Employees shall not perform any work
or do anything outside of their regular duties, unless under special instruction
from the management of the Building.
21. Canvassing, soliciting and peddling in the Building is prohibited
and each Tenant shall cooperate to prevent the same.
22. No plumbing or electrical fixtures shall be installed by any Tenant
except pursuant to the Construction Plans or with Landlord's express consent.
23. There shall not be used in any space, or in the public halls of the
Building, either by any Tenant or by jobbers or others, in the delivery or
receipt of merchandise, any hand trucks, except those equipped with rubber tires
and side guards.
24. Access plates to underfloor conduits shall be left exposed. Where
carpet is installed, carpet shall be cut around access plates.
25. Mats, trash or other objects shall not be placed in the public
corridors.
26. The Landlord does not maintain suite finishes which are
nonstandard, such as kitchens, bathrooms, wallpaper, special lights, etc.
However, should the need for repairs arise, the Landlord will arrange for the
work to be done at the Tenant's expense. Each tenant shall, at its expense,
provide artificial light for the employees of Landlord while such employees are
engaged in inspections or while such employees are making repairs or alterations
in and to the Premises.
27. Thin line horizontal venetian blinds either have or shall be
installed by Landlord or Tenant pursuant to the other provisions of this Lease
in the Premises, and such blinds shall be cleaned by Tenant at Tenant's expense
as required to maintain an image consistent with a first-class building. If the
Landlord has installed such blinds in the Premises, such blinds shall remain the
property of the Landlord but may be used by Tenant during the term of this
Lease.
28. Tenant shall not cause or permit any unusual or objectionable odors
to be produced upon or emanate from the Premises, and shall not permit the
Premises to harbor roaches, ants, rodents or other vermin.
29. The exterior windows and doors that reflect or admit light and air
into the Premises or the halls, passageways or other public places in the
Building shall not be covered or obstructed by any Tenant, nor shall any
articles be placed on the windowsills.
Exhibit 10.7
AMENDMENT TO THE
WOODROAST SYSTEMS, INC.
1994 STOCK PLAN
May 29, 1996
RECITALS:
A. The Woodroast Systems, Inc. 1994 Stock Plan (the "Plan") was adopted by
the Board of Directors of Woodroast Systems, Inc. (the "Company") on
February 3, 1994, and was approved by the shareholders of the Company
on February 3, 1994. The Plan is now in full force and effect.
B. The Company desires to amend the Plan to increase the number of shares
of common stock available for issuance pursuant to the Plan.
AMENDMENT:
THEREFORE, the Plan is hereby amended as follows:
1. The first sentence of Section 3 of the Plan is hereby amended to read
as follows:
"SECTION 3. STOCK SUBJECT TO PLAN.
"The total number of shares of Stock reserved and available
for distribution under the Plan shall be 750,000 shares, subject to
increase or decrease in the event of any adjustment required in the
paragraph below...."
2. The foregoing amendment shall be effective as of May 29, 1996, and
shall be subject to approval by the shareholders of the Company at its
next Annual or Special Meeting of shareholders.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K into the Company's
previously filed Registration Statements File No. 333-03682, 333-07423 &
333-10539.
/s/ LUND KOEHLER COX & COMPANY, PLLP
LUND KOEHLER COX & COMPANY, PLLP
Minneapolis, Minnesota
March 28, 1997
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