SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Fee Required)
For the fiscal year ended December 31, 1996.
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required)
For the transition period from __________ to _________
Commission File Number: 0-25334
THE GREAT AMERICAN BACKRUB STORE, INC.
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(Name of small business issuer in its charter)
NEW YORK 13-3729043
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
425 MADISON AVENUE SUITE 605 NEW YORK, NEW YORK 10017
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (212) 750-7046
Securities registered under Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.001 par value Nasdaq SmallCap Market
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. Yes /X/. No / /.
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not 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. / /
State issuer's revenues for its most recent fiscal year: $3,045,937
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of February 12, 1997. (See definition of
affiliate in Rule 12b-2 of the Exchange Act) $11,368,432
NOTE: If determining whether a person is an affiliate with involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on a basis of reasonable
assumptions, if the assumptions are stated.
The number of shares of Common Stock of the issuer outstanding as of February
28, 1997 is 2,416,841.
Transition Small Business Disclosure Format (check one): Yes / / No /X/
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
The Company is a development stage company engaged in the creation of a
national chain of stores under the name "The Great American BackRub Store,"
which offer reasonably-priced back rubs to customers while they are seated and
fully clothed in a clean, open, non-threatening environment. The Company's
stores will also offer back rub services off-site, to corporate offices,
convention centers and tourist attractions. The Company currently owns and
operates 11 retail stores in New York City, one in The Westchester mall in White
Plains, New York, and one at the Woodfield Mall in the Chicago metropolitan
area. In addition, the Company recently entered into franchise agreements for
two locations, one at the Roosevelt Field Mall on Long Island, New York and the
other at the Cherry Creek Mall in Denver, Colorado, and granted an option for a
third franchise in the Los Angeles, California metropolitan area.
The Company's growth strategy is to be implemented primarily by
Terrance Murray, the Company's Chief Executive Officer, who previously served as
the executive vice president, operations of Supercuts, Inc. Supercuts, Inc. is a
hair care chain with in excess of 1,000 company-owned and franchised stores in
43 states and Puerto Rico. The Company believes that the substantial national
retail and franchise experience of Mr. Murray are an asset to the Company.
INDUSTRY BACKGROUND
With the increasing awareness that health is a key factor in
determining worker productivity, a number of businesses have emerged to help
promote physical and mental well-being. This health consciousness movement has
led to the rapid expansion of businesses such as health clubs, spas, diet
centers/alternative education schools, health and fitness magazines and health
equipment manufacturers.
Back pain and stress have become increasingly serious health concerns
in modern society. The effects of poor posture, long hours at desks/keyboards,
and increased stress and work related pressures have all resulted in a society
that suffers from chronic backaches and muscular tension. The July 14, 1994
issue of THE NEW ENGLAND JOURNAL OF MEDICINE reported that backaches rank second
only to respiratory infections as the leading cause of work absences and are the
number one basis for worker's compensation claims and that over 80 percent of
the American adult population suffers from back pain on an occasional basis.
In recent years, preventive health care has taken on new meaning, both
for the consumer and many employers. The December 25, 1994 issue of THE NEW YORK
TIMES reported that a small but growing number of corporations are including
massage in their employee health programs.
Although the number is increasing, only a small percentage of Americans
utilize massage on a regular basis. Management believes that this is so because
of the consumer's perception that the typical back rub is high priced, not
convenient to schedule or travel to, and requires the customer to be undressed.
The Company believes that The Great American BackRub Store is sensitive to and
addresses all of these concerns. The pricing structure ($8.95, $16.95, $28.95,
$38.95 and $49.95, respectively for 5, 10, 20, 30, and 45 minute back rubs) is
perceived by customers to be very reasonable. Stores are located in convenient
locations and no appointments are required. The customer remains fully clothed
during the entire back rub sequence and, because of the openness of the entire
location, is confident of the "safeness" of the experience.
Results from the Company's computerized point-of-sale (POS) system
indicate that repeat customers account for an average of 60% of the Company's
daily customers. A majority (60%) of the customers are women, with the typical
customer being between the ages of 25 and 50.
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CONCEPT
By design, The Great American BackRub Store is a specialty interactive
retailer offering a wide range of massage and stress reduction products. In
addition to experiencing the hands-on interaction of the back rub, customers are
able to view the entire process from both the street and inside the store. Once
inside, customers are encouraged to sample and test the products on display. The
Company therefore believes that the combination of the boutique retailer concept
with back rub services makes The Great American BackRub Store a unique shopping
experience.
The Company's concept is to provide a clean, open, non-threatening
environment where people can enjoy the benefits of a back rub as a daily or
weekly stress relaxation technique without having to undress and without
incurring the time and expense of a conventional massage. Integral to the
Company's strategy is the sale of massage and stress reduction products in each
of its stores, including oils, bath salts, back supports and electronic and
mechanical stress reduction devices.
The focus of the Company's service business is a 5, 10, 20, 30 or 45
minute back rub that consists of an 18-step massage sequence of the back, neck,
shoulders, arms and hands conducted on the Company's specially designed back rub
chair. These areas represent eighty percent of the areas normally worked on
during a full body massage, without the space-consuming tables or necessity that
the customer undress. In the 20, 30 and 45 minute sequences, additional time is
spent on particular areas where either the customer or the therapist detects
stress or tension. The percentage of customers purchasing the 20, 30 and 45
minute sequences has increased to almost 50% of services. In addition, the
Company offers scalp massages and has designed a foot rub sequence which
involves the customer wearing a disposable sock during a reflexology treatment.
STORE DESIGN, OPERATIONS AND CONTROLS
The typical Great American BackRub Store location consists of
approximately 600 to 1,200 square feet, including 300 to 600 square feet of
retail space. Customers are seated on a specially-designed chair which provides
cushioned support for the chest, arms and head. The Company's stores are
designed to permit people both inside and outside the store to view the back rub
process and at the same time maintain the privacy of the back rub customer.
Each of the Company's stores will typically be staffed with a manager,
an assistant manager, and between eight and twelve part-time therapists,
depending upon the size of the store.
The Company's stores, as well as intended franchisee-operated stores,
will be located in leased facilities with high pedestrian traffic, including
metropolitan areas, shopping malls, popular tourist attractions and specialty
locations such as airports, casinos and convention centers. Stores will
generally be open seven days a week from early morning to late evening.
The back rub services are provided by licensed or certified massage
therapists who, as employees, earn between $10.00 and $16.00 per hour. All
therapists are required to wear the Company's standard uniform: Company shirt,
white pants and white athletic shoes. See "Employees; Employee Training."
Management has installed certain store-level internal controls which
minimize incidents of employee theft and maximize the flow of pertinent data
from the store to the Company's accounting department. When a customer enters a
store, the receptionist greets the customer, answers any questions the customer
may have, and then prepares a pre-numbered "ticket" on which the customer's name
and requested service(s) are printed. The next available therapist then takes
the ticket from the receptionist, leads the customer to the back rub area and
performs one of three back rub sequences. At the end of the back rub sequence,
the therapist verifies the ticket, escorts the customer to the receptionist and
returns the ticket. The receptionist collects the payment due and issues a
receipt to the customer. At no time does the therapist collect any payments from
the customer. At the end of the day, all pre-numbered tickets must be accounted
for, and cash deposits must balance with reports generated by the store's POS
system.
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The POS system currently being used by management is that used in over
800 Supercuts stores. In addition to normal cash register functions, the system
generates a sophisticated array of reports and cross checks which provide
management with immediate access to sales data, labor scheduling, inventory
changes, cash shortages and employee productivity. The information is
automatically downloaded every night to the Company's office in New York and is
available for management's review and use the following day.
INTENDED EXPANSION
Although no assurance can be given, the Company plans to open a minimum
of 40 Company-owned and/or franchised stores during the next two years.
Management believes an important element of "marketing" is the selection of
prime locations with heavy traffic patterns. During the initial expansion of
both Company and franchised stores, sites will be generally limited to high
traffic locations such as malls, popular tourist attractions, and busy specialty
locations (e.g. airports, casinos and convention centers).
Management estimates that its current average cost to open a
Company-owned store location is approximately $100,000, including pre-opening
costs, leasehold improvements, fixtures, equipment and store inventory. The
Company, in its franchise offering circular, estimates that the initial
investment required by a franchisee, including the initial franchise fee, is
approximately $70,000 to $135,000, depending upon a number of variables,
including leasehold related costs and improvements, inventory, equipment,
training fees and staffing.
The Company supplements its retail operations with corporate or other
off-site service and intends to actively increase this portion of its business.
This service involves having one or more therapists taking portable massage
chairs to a place of business, convention center or tourist attraction. Since
the only operating costs associated with this service are labor and
transportation, the profit margins on such corporate and other offsite work are
significant.
To encourage repeat business, the Company has developed a "Frequent
Rub" program which rewards repeat customers with a free back rub after the
purchase of nine back rubs. The Company also actively promotes the sale of gift
certificates by giving a similar discount on the purchase of nine certificates.
As an extension of the gift certificate program, the Company tested a
Valentine's Day card which included a gift certificate. As a result of the
success of this program, the Company has expanded such program to include a line
of gift and holiday certificates.
The Company may also seek to acquire, where feasible, companies whose
business is compatible with that of the Company. The Company does not currently
have any agreements, commitments or arrangements with respect to any proposed
acquisitions, and no assurance can be given that any acquisition opportunity
will be consummated in the future. The Company is also considering the
development or acquisition of a mail order catalog to sell products related to
its retail operations under The Great American BackRub name.
FRANCHISE DEVELOPMENT
The Company anticipates that a significant portion of the Company's
growth will be through franchising. Management has developed a franchising
program which is based largely on management's prior experience with Supercuts,
Inc. The franchise plan calls for the sale of individual unit franchises as
opposed to territorial sales, to control the respective sites and to limit the
impact of a franchisee whose operating standards are not acceptable to
management. Although sold as individual units, the intention is to sell multiple
units within a market area to one franchisee in order to achieve economies of
scale.
Under the terms of the Company's current franchise agreement, the
franchise fee generally is $12,500 per unit. In all cases, the royalty fee is 6%
of gross revenues (both services and products) and 3% of gross revenues (both
services and products) which must be paid to a cooperative advertising fund. The
initial term of the franchise agreement is five years, with options (upon
payment of a fee) to extend the term for an additional five years. The franchise
agreement places strict limitations on the operations of the business and
requires the franchisee to conform to all operations standards established by
the Company. The franchise agreement also requires that all employees of the
franchisee attend and complete a training course conducted or approved by the
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Company. In the event the Company conducts the training class, the franchisee is
required to pay the Company a fee for each employee trained.
The Company's first franchised store (the "Las Vegas Store") opened in
July 1994 in Las Vegas, Nevada. The Company entered into a franchise agreement
(the "Franchise Agreement") with its Las Vegas franchisee (the "Franchisee") on
June 1, 1994. Pursuant to the Franchise Agreement, the Franchisee paid the
Company an initial, non-recurring, non-refundable franchise fee of $10,000. In
addition, the Franchisee paid the Company a monthly royalty fee equal to 8% of
the Franchisee's gross monthly revenues (as such term is defined in the
Franchise Agreement). The Franchisee also paid to the Company an advertising and
sales promotion fee which is equal to the greater of 3% of the Franchisee's
gross monthly revenues or $1,000. On May 30, 1995, the Company and the
Franchisee entered into a franchise termination agreement whereby (i) the
Franchise Agreement and related sublease were terminated, (ii) the Company
purchased certain assets from the Franchisee and (iii) the Company and the
Franchisee provided for the mutual release of any obligations of each to the
other whether arising out of the Franchise Agreement, the sublease or otherwise.
The purchase price for the assets conveyed by the Franchisee to the Company was
$25,000 and 18,185 shares of Common Stock. Simultaneously with the Franchise
Termination Agreement, the Company closed the Las Vegas Store.
The Company entered into two option agreements (the "Bay Area Option
Agreements") with Bay Area Backs I, a California limited partnership (the
"Optionee"), on June 20, 1994 and June 21, 1994, respectively, for the opening
of two franchised stores in the San Francisco area. Pursuant to the Bay Area
Option Agreements, the Optionee paid to the Company $5,000 for each of two
options (the "Bay Area Options") to require the Company to enter into franchise
agreements with the Optionee. On May 30, 1995, the Company and the Optionee
entered into an option termination agreement whereby (i) the Bay Area Option
Agreements were terminated, (ii) the Company purchased certain assets from the
Optionee and (iii) the Company and the Optionee provided for the mutual release
of any obligations of each to the other whether arising out of the Bay Area
Option Agreements or otherwise. The purchase price for the assets conveyed by
the Optionee to the Company and the termination of the Bay Area Options was
$27,300.
Upon termination of the franchise and the options referred to above,
the Company suspended its franchise program and focused on developing its
Company-owned stores. Starting in September 1996, the Company resumed the
marketing of its franchise program. In November 1996, the Company entered into
two franchise agreements, one for a location at Roosevelt Field Mall, Long
Island, New York, and the second for the Cherry Creek Mall, Denver, Colorado.
Certain executive officers and directors of the Company have an interest in the
Roosevelt Mall franchisee. See Item 12 (Certain Relationships and Related
Transactions). In addition, in November 1996, the Company entered into an option
agreement (the "Franchise Option Agreement") for a franchise location in the Los
Angeles, California metropolitan area. Under the terms of both franchise
agreements, the franchisee has paid the Company a $12,500 initial,
non-recurring, non-refundable, franchise fee and has agreed to pay a monthly
royalty equal to 6% of the franchise's gross monthly revenues (as such term is
defined in the franchise agreements). Under the terms of the Franchise Option
Agreement, the optionee has paid to the Company a non- refundable fee of $5,000
(to be applied to the $12,500 franchise fee in the event the optionee signs a
franchise agreement within 120 days of the date of the Franchise Option
Agreement) and the Company has given the optionee an exclusive right to open a
Great American BackRub franchise within Los Angeles and Orange Counties,
California for a period of 120 days. In the event that the optionee locates a
site within said counties that is acceptable to both the Company and the
optionee, the Company and the franchisee will enter into a franchise agreement
with terms identical to those described above.
COMPETITION
Management does not know of any other multi-unit retailer in the
business in which the Company operates. Competition currently consists of
numerous independent massage therapists, spas, salons and health clubs providing
full body massage, and a limited number of massage therapists providing seated
massage in non-retail "off-site" environments. As competition may be
anticipated, however, due to the relatively low cost of entry and absence of
substantial barriers into such business, no assurance can be given that the
Company will successfully compete with any such competitors, some of whom may
have substantially greater financial and other resources than the Company.
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REGULATION
The sales of franchises in the United States is subject to certain
requirements established by the FTC. These requirements generally relate to the
disclosure of information regarding the franchisor and the rights, duties and
obligations of the prospective franchisee. These disclosures and explanations
are set forth in a document called a Uniform Franchise Offering Circular (which
is commonly referred to as a "UFOC"). Effective in 1995, the FTC revised the
disclosure requirements for a UFOC to require, among other things, "plain
English language" disclosures. The Company believes it is in compliance with
these changes.
In addition to the requirements of the FTC, certain states require that
franchisors register in the state and submit a modified UFOC for approval before
offering franchises in such state. These state UFOCs must comply with the
applicable state laws, which vary from state to state. The Company is currently
registered in New York, California and Illinois.
Certain states in which the Company intends to operate, including the
States of Illinois and New York, in which the Company currently operates 13
Company-owned stores, require the licensing of massage therapists. The Company
and its massage therapist employees will also be subject to various state and
local laws and ordinances.
The Company believes that it is in compliance with all applicable laws
and regulations and has all required licenses to conduct its business. However,
no assurances can be given that current laws or regulations applicable to the
Company's business will not change. Any such new laws or regulations or the
Company's expansion into new geographic areas could subject the Company to
substantial costs in order to comply with such applicable laws or regulations.
Any failure by the Company to comply with any new or existing laws or
regulations could subject the Company to substantial penalties.
EMPLOYEES; EMPLOYEE TRAINING
As of December 31, 1996, the Company had 132 employees, consisting of
three full-time members of management, two full-time administrative employees,
10 full-time managers, and 60 full-time and 57 part-time in-store employees.
Other than members of management and the stores' managers who are salaried
employees, all full and part-time personnel are hourly employees.
The Company requires each new therapist to participate in the Company's
three to five day training program as a condition to employment. The program
includes extensive training relating to the Company's 5, 10, 20, 30 and 45
minute massage sequences, product knowledge and customer service. All back rub
services are provided by therapists who are either licensed (in states where
such licensing is required) or have completed training at a school certified by
a recognized trade association.
It is estimated by the American Massage Therapists Association that
there are over 120,000 licensed/certified massage therapists in the country. The
Company's experience has shown that most therapists are under-employed and are
seeking part-time employment to supplement their existing private clientele.
This need for part-time employment allows the Company to use flexible scheduling
and minimizes payroll and benefit costs associated with full-time employment.
Currently, the Company requires all of its employee/therapists to
obtain professional liability insurance in the minimum amount of $1,000,000
through one of two professional massage organizations. In some cases the Company
is permitted under the applicable policy to be named as an additional insured.
In addition, the Company has obtained a professional liability policy for an
additional $1,000,000 covering all of its employees.
All of the Company's employees are non-union. The Company considers its
relationship with its employees to be satisfactory.
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TRADEMARK PROTECTION
The mark THE GREAT AMERICAN BACKRUB is the subject of U.S. Trademark
Registration No. 1,922,629, issued September 26, 1995. The registration includes
the statement that the Company does not claim exclusive rights to use of the
term "BACKRUB" alone, apart from the trademark as shown. The trademark
registration will remain in full force and effect for a term of ten years from
the date of issue. However, a declaration of continued use must be filed in the
Trademark Office no earlier than the fifth anniversary and no later than the
sixth anniversary of the registration in order to avoid cancellation of the
registration. The registration gives the company prima facie nationwide
exclusivity to the mark THE GREAT AMERICAN BACKRUB as against any third party
adopting a confusingly similar mark after the date of issue.
RECENT AND PROPOSED FINANCING TRANSACTIONS
On December 27, 1996, the Company consummated a bridge financing (the
net proceeds of which were approximately $175,000), consisting of five and
one-third investment units, each such unit comprising a promissory note in the
principal amount of $49,250 and 750,000 warrants (the "Bridge Warrants"). Each
such note bears interest at the rate of 10% per annum and is payable one year
from the date of issue or upon an earlier public offering of equity securities
of the Company. Each Bridge Warrant entitles the holder thereof to purchase one
share of the Company's Series A Convertible Preferred Stock (the "Series A
Preferred Stock") for a price of $5.00, subject to adjustment in certain
circumstances, at any time during the three-year period commencing on the first
anniversary of the date of issuance of the Bridge Warrants. Each share of Series
A Preferred Stock pays a cumulative dividend of $.35 per annum, has a
liquidation preference of $5.00 and is convertible on or after December 27, 1997
into the greater of (i) two shares of Common Stock of the Company or (ii) a
number of shares of Common Stock equal to $8.00 divided by the average of the
closing prices of the Common Stock for the ten trading days ending on the third
trading day preceding the date of conversion (the "Closing Price") subject to
further adjustment under certain circumstances. In the bridge financing, William
Zanker, President of the Company, Terrance C. Murray, Chief Executive Officer of
the Company, and Keith R. Dee, Chief Financial Officer of the Company, purchased
an aggregate of one and one-third of the investment units. On January 27, 1997,
Mr. Zanker and the Company entered into an agreement whereby Mr. Zanker
rescinded his investment in the Bridge Financing, consisting of .73387
investment units, and an equal number of units were sold by the Company to
another investor.
On February 5, 1997, the Company filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form SB-2 (the
"Registration Statement") for the sale in an underwritten offering of 270,000
shares of Series B Convertible Preferred Stock of the Company (the "Series B
Preferred Stock") at an anticipated public offering price of $10.00 per share.
The terms of the proposed offering and of the Series B Preferred Stock are
currently under discussion between the Company and the underwriter but are
expected to provide that each share of Series B Preferred Stock will have a
cumulative dividend of $.70 per annum and a liquidation preference of $10.00 and
will be convertible on and after the first anniversary of the effective date of
the Registration Statement into the greater of (i) four shares of Common Stock
or (ii) a number of shares of Common Stock equal to $16.00 divided by the
Closing Price, up to a maximum number of shares which has yet to be determined,
subject to further adjustment in certain circumstances.
Under the terms of the Bridge Warrants, upon the effectiveness of the
Registration Statement described above, each Warrant shall be automatically
converted into one-half of a warrant (a "Series B Warrant") each of which will
entitle the holder thereof to purchase one share of Series B Convertible
Preferred Stock for an initial price of $8.00 per share, subject to adjustment
in certain circumstances, at any time during the three-year period commencing on
the first anniversary of the effective date of such Registration Statement, and
the holders of the Series B Warrants are entitled to have such Warrants and the
Preferred Stock and Common Stock underlying such Warrants registered for public
sale. On February 7, 1997, the Company filed a second registration statement
with the Commission with respect to the sale by the holders thereof of the
Series B Warrants and the Preferred Stock and Common Stock underlying such
Warrants.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company currently has 11 New York City Great American BackRub Store
locations, one location in The Westchester mall in White Plains, New York and
one location in the Woodfield Mall in Schaumberg, Illinois near Chicago.
Together, these stores employ a total of approximately 127 full and part-time
employees. See Item 1 (Description of Business--Employees; Employee Training).
The location and lease expiration date of each of the Company's stores
are summarized below:
LOCATION LEASE EXPIRATION DATE
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958 Third Avenue August 31, 2003
New York, New York
323-5 Bleecker Street May 31, 2005
New York, New York
527 Third Avenue January 31, 2002
New York, New York
160 Spring Street February 28, 2005
New York, New York
1573 Second Avenue July 31, 2005
New York, New York
514 Columbus Avenue December 31, 2004
New York, New York
2265 Broadway October 31, 2005
New York, New York
Westchester-Store Mall July 14, 2005
White Plains, New York
138 7th Avenue May 11, 2003
Brooklyn, New York
171 West 71st Street June 30, 2006
New York, New York
250 West 91st Street October 31, 2006
New York, New York
2195 Broadway October 31, 2006
New York, New York
Woodfield Mall December 30, 2004
Schaumberg, Illinois
The Company's corporate office is leased and is located at 425 Madison
Avenue, New York, New York. The Company believes that this office is adequate
for its current and presently foreseeable needs or that adequate replacement
space is available.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material threatened or pending
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On February 28, 1995, the Common Stock was listed for quotation on
Nasdaq under the symbol "RUBB." Prior to such listing, the Common Stock had been
traded on the OTC Bulletin Board since October 18, 1993. The following table
sets forth, for the periods indicated, the high and low bid for the Common Stock
as reported by the OTC Bulletin Board (as adjusted to reflect the 1 for 8
reverse stock split effected on February 23, 1995), as well as the high and low
bid for the Common Stock on Nasdaq. Quotations reflect prices between dealers,
without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
High Bid Low Bid
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1995
1st Quarter........................ $ 9.00 $ 2.75
2nd Quarter........................ $ 3.94 $ 1.84
3rd Quarter........................ $ 2.94 $ 1.88
4th Quarter........................ $ 4.00 $ 1.75
1996
1st Quarter........................ $ 4.125 $ 3.06
2nd Quarter........................ $ 6.63 $ 3.25
3rd Quarter........................ $ 4.88 $ 2.50
4th Quarter........................ $ 4.625 $ 3.25
The Company has not declared or paid any dividends on the
Common Stock and does not intend to declare or pay any dividends on the Common
Stock in the foreseeable future. The Company currently intends to reinvest
earnings, if any, in development and expansion of its business. The declaration
of dividends in the future will be at the election of the Board of Directors and
will depend upon earnings, capital requirements and financial position of the
Company, general economic conditions and other relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
The Company's revenues are derived primarily from the services of
seated fully clothed back rubs and the sale of back related products. The
Company began operations in August 1993, and opened its first store for business
in October 1993. The Company currently owns and operates 11 retail stores in New
York City, one in The Westchester mall in White Plains, New York, and one at the
Woodfield Mall in the Chicago metropolitan area. In addition, the Company has
entered into franchise agreements for two locations, one at the Roosevelt Field
Mall on Long Island, New York and the other at the Cherry Creek Mall in Denver,
Colorado.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
For the year ended December 31, 1996, revenues from services, products
and franchising operations increased to $3,045,937 compared to $1,201,941 for
the comparable period in the prior year. The net increase of $1,843,996 (153%)
was primarily attributable to increased traffic and the opening of five new
stores. Operating expenses were $5,957,568 for the year ended December 31, 1996
as compared to $3,685,191 for the comparable period in the prior year, an
increase of $2,272,377 (62%). This increase was primarily due to the development
of a management team, operational systems, and marketing and design plans in the
implementation of the Company's expansion plans and non cash charges relating to
the issuance of options of approximately $481,000.
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As a result of the increased operating expenses, net loss for the year ended
December 31, 1995 increased to $2,825,312 compared to $2,647,255 for the
comparable period in the prior year. No provision for income taxes was required
during either period due to the Company's incurrence of net operating loss
carryforwards.
While general and administrative expenses are expected to increase due
to the need for additional management and administrative support for the
Company's expanding operations, these expenses as a percentage of total revenue
are expected to decline as total revenue increases. Other expense items, such as
advertising and promotion, salaries and wages, costs of products, however, are
related to retail operations themselves and their relative percentage of total
revenue are likely to remain fairly constant in the near term but should decease
as the Company streamlines its operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $251,565 in working capital as of December 31, 1996,
compared with a working capital of $1,759,595 as of December 31, 1995. The
decrease is primarily due to amounts spent on property, equipment and leasehold
improvements to fund the Company's expansion and amounts spent on operations in
the development of a corporate infrastructure in anticipation of the Company's
growth strategy.
From inception to December 31, 1996, the Company has used cash for
operating activities of $4,535,866 and spent an additional $1,577,724 for the
purchase of property, equipment, purchased leases, leasehold improvements and
investments. These expenditures have been offset by the net cash provided by
financing activities, principally from the Company's October 1993 private
placement of common stock, aggregating $870,000, bridge notes and short-term
financings in the principal amount of $867,667, the Company's March 1995 public
offering of common stock resulting in net proceeds of approximately $5,000,000
and the issuance of common stock to warrant and option holders of approximately
$1,000,000. See "Statement of Cash Flows" included in the Company's audited
financial statements.
Inasmuch as the Company continues to have a high level of operating
expenses and will be required to make significant up-front expenditures in
connection with its proposed expansion, the Company anticipates that losses will
continue for at least the next 12 months and until such time, if ever, as the
Company is able to generate significant revenues or achieve profitable
operations. As a result, in their report on the Company's Financial Statements
as of December 31, 1996, the Company's independent certified public accountants
have included an explanatory paragraph that describes factors raising
substantial doubt about the Company's ability to continue as a going concern.
In accordance with management's plans, the Company has retained an
investment banking advisor to advise it on the possible sale of equity
securities, as well to as introduce and assist in the evaluation of potential
merger and partnership opportunities. Management expects that these efforts will
result in either an additional equity infusion or an introduction to other
parties with interests and resources which may be compatible with that of the
Company. However, no assurances can be given that the Company will be successful
in raising additional capital or entering into a business alliance. Further,
there is no assurance, assuming the Company successfully raises additional funds
or enters into a business alliance, that the Company will achieve profitability
or positive cash flow. On February 5, 1997, the Company filed a registration
statement to offer 270,000 shares of preferred stock for approximately
$2,700,000, which, if successful, after commissions and fees, would provide the
Company with net proceeds of approximately $2,000,000. See Item 1 (Description
of Businesss--Recent and Proposed Financing Transactions).
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<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSON;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their positions
with the Company are set forth below.
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
William Zanker 42 Chairman of the Board and President
Terrance C. Murray 48 Chief Executive Officer and Director
Keith Dee 39 Chief Financial Officer and Secretary
Stephen Seligman 42 Director
Edward E. Faber 63 Director
Andrew L. Hyams 42 Director
Donald R. Fleischer 42 Director
Peter Hanelt 51 Director
All directors of the Company hold office until the next annual meeting
of the shareholders and until their successors have been elected and qualified.
The officers of the Company are elected by the Board of Directors at the first
meeting after each annual meeting of the Company's shareholders, and hold office
until their death, until they resign or until they have been removed from
office.
The following is a brief summary of the background of each director and
executive officer of the Company:
WILLIAM ZANKER founded the Company in December 1992 and has served as
the Chairman of the Board of Directors and President since that time. Prior to
founding the Company, Mr. Zanker was the founder and from 1980 to December 1991
the Chairman of the Board of Directors and Chief Executive Officer of The
Learning Annex, Inc., a national chain offering short, inexpensive educational
programs in a variety of subjects. In December 1991, an involuntary petition in
bankruptcy was filed against The Learning Annex, Inc. (Case No. 91-B-12582
(SDNY). From December 1991 to December 1992, Mr. Zanker was a consultant to The
Learning Annex, Inc.
TERRANCE C. MURRAY has been a director and Chief Executive Officer of
the Company since December 1993. From February 1993 through November 1993, Mr.
Murray was a management consultant. From May 1991 through January 1993, Mr.
Murray was Executive Vice President, Operations of Supercuts, Inc., a national
chain of company-owned and franchised hair care salons with headquarters in San
Francisco, California. From July 1985 through April 1991, Mr. Murray was an
attorney with the law firm Foley, McIntosh & Foley located in Albany,
California.
KEITH R. DEE has been the Company's Chief Financial Officer since July
1995. From January 1988 to June 1995, Mr. Dee was a partner in the certified
public accounting firm of Elwell, Cangiano, Zdon & Dee LLC. Prior to forming his
partnership, Mr. Dee was employed as a Certified Public Accountant at both
national and regional accounting firms.
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<PAGE>
STEPHEN SELIGMAN has been a director of the Company since February
1994. He has been Chief Executive Officer of The Learning Annex - California
from January 1991 to the present. From October 1989 through December 1990, Mr.
Seligman was Chief Executive Officer of The Learning Annex - New York. From 1986
through September 1989, Mr. Seligman was Chief Operating Officer of Hema Systems
Limited, a blood service management company located in New York, New York.
EDWARD E. FABER became a director of the Company on March 7, 1995. Mr.
Faber was the President, Chief Executive Officer and Deputy Chairman of the
Board of Directors of Supercuts, Inc. from June 1991 until he retired from
active management in December 1992. During his tenure at Supercuts, Mr. Faber
had primary responsibility for franchise development and marketing. From 1976
through January 1990, he held various executive positions with ComputerLand,
including President from 1976 to 1983, President and Chief Executive Officer
from 1985 to 1986, Chairman and Chief Executive Officer from 1986 until
Computerland was sold in 1987, and Vice Chairman from 1987 to January 1990. From
February 1990 to April 1991, he was Chairman and Chief Executive Officer of
Dataphaz, a ComputerLand franchisee, which was sold to ComputerLand.
Additionally, from 1957 to 1969, Mr. Faber held various positions with
International Business Machines. Mr. Faber also served as an officer in the
United States Marine Corps.
ANDREW L. HYAMS became a director of the Company on March 7, 1995. Mr.
Hyams has been a strategic planner for the Boston Department of Health and
Hospitals since September 1992 and since June 1991 has been in private law
practice in health law and policy in Massachusetts. From September 1990 to May
1991, he attended the Harvard School of Public Health. From 1985 to August 1990,
he served as general counsel to the Massachusetts Board of Registration in
Medicine. Mr. Hyams has practiced law in New York and Massachusetts in both the
public and private sectors, specializing in health law and regulation and has
written and lectured in this field. Mr. Hyams is also a visiting lecturer at the
Harvard School of Public Health. Mr. Hyams holds law and public health degrees
from Harvard Law School and Harvard School of Public Health, respectively.
DONALD R. FLEISCHER became a director of the Company on March 7, 1995.
In 1981, Mr. Fleischer co-founded First Moments, Inc., an advertising firm which
is a leader in the marketing and delivery of sample kits to targeted groups, and
has served as its Executive Vice President since then. Mr. Fleischer is also
President of Additions, Inc., which specializes in direct marketing, contract
packaging and product fulfillment.
PETER HANELT became a director of the Company on March 7, 1995. Mr.
Hanelt has been Chief Operating Officer and Chief Financial Officer of Esprit de
Corp., an international women's apparel manufacturer and retailer, since October
1993, and was a consultant in the development of Esprit's turnaround strategy
between April and October 1993. During his nineteen-year career in operations
and finance, Mr. Hanelt has held a number of Chief Operating Officer and Chief
Financial Officer positions with such companies as Post Tool, Inc., a
multi-store, multi-state retail chain (from September 1990 to December 1992);
Sam & Libby, Inc., retailer and wholesaler of women's shoes (from February 1990
to August 1990); and Manetti-Farrow, Inc., the exclusive U.S. wholesaler for
Gucci, Fendi and Mark Cross accessories and leather goods (from 1983 to January
1990). In addition, Mr. Hanelt held executive financial positions at various San
Francisco hospitals, where he was responsible for a public bond refinancing and
negotiation of a hospital affiliation. He was a certified public accountant with
Deloitte & Touche in San Francisco from 1975 to 1979. Mr. Hanelt received his
undergraduate degree from the U.S. Military Academy at West Point in 1967, and
his M.B.A. from the University of California at Berkeley in 1975.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than 10% of the Common Stock, to file with the Commission
initial reports of beneficial ownership ("Forms 3") and reports of changes in
beneficial ownership of Common Stock and other equity securities of the Company
("Forms 4"). Officers, directors, and greater than 10% shareholders of the
Company are required by Commission regulations to furnish to the Company copies
of all Section 16(a) reports that they file. To the Company's knowledge, based
solely on a
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review of the copies of such reports furnished to the Company and written
representations that no other reports were required, all Section 16(a) filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with for the fiscal year ended December 31,
1996, other than as follows: during fiscal 1996, William Zanker, an officer and
director of the Company, reported one transaction in a late Form 4 filing and
another transaction in a second late Form 4 filing, Terrance Murray, an officer
and director of the Company, reported one transaction in a late Form 4 filing,
and Keith Dee, an officer of the Company, reported one transaction in a late
Form 4 filing.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual
compensation of the Company's chief executive officer and the other executive
officers of the Company for services in all capacities to the Company during the
Company's last three fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation
-----------------------------------
YEAR SALARY
---- ------
William Zanker 1994 *
Chairman of the Board 1995 $108,308
1996 $177,000
Terrance C. Murray 1994 *
Chief Executive Officer 1995 $108,308
1996 $150,000
Keith R. Dee 1995 $ 6,000
Chief Financial Officer 1996 $116,539
- -------------------
* Mr. Zanker and Mr. Murray did not receive any compensation for the
fiscal year 1994.
OPTIONS GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-----------------
None
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table provides information on options/SAR exercises in
1996 by the named executive officers and the value of such officers' unexercised
options/SARs at December 31, 1996.
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AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUE TABLE
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised Unexercised
Options/SARs at Fiscal Year in-the-Money Options/SARs
Shares Acquired on End Exercisable/ Exercisable/
Name Exercise (#) Value Realized ($) Unexercisable Unexercisable
- ---- -------------------- --------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
William Zanker 100,000 175,500 120,000/0 $0/0
Terrance C. Murray 100,000 175,500 120,000/0 $0/0
Keith R. Dee 0 0 5,000/5,000 $5,000/5,000
</TABLE>
COMPENSATION OF DIRECTORS
Each Director who is not an employee of the Company receives $1,000 for
each Board or committee meeting attended. Employees of the Company receive no
additional compensation for service as a director. All directors are reimbursed
for their reasonable out-of-pocket expenses incurred in connection with their
duties to the Company.
The Company granted options to purchase 10,000 shares of Common Stock
to each of Messrs. Seligman, Faber, Hyams, Fleischer and Hanelt on March 7,
1995. The options have a per share exercise price of $5.00 and vest one-third
upon issuance, one-third on March 7, 1996 and one-third on March 7, 1997.
COMMITTEES OF THE BOARD
The Board of Directors has authorized three standing committees:
Executive Committee, Audit Committee, and Compensation Committee (which shall
also function as the Stock Option Committee). The Audit Committee members are
Donald Fleischer, Peter Hanelt (Chairman) and Stephen Seligman. The Compensation
Committee members are Andrew Hyams (Chairman) and Edward Faber. The Executive
Committee members are William Zanker, Terrance Murray and Stephen Seligman. Only
independent directors will be appointed to the Audit and Compensation
Committees.
1994 EMPLOYEE STOCK OPTION PLAN
At the Company's 1994 annual meeting of shareholders held on July 18,
1994, the Company's shareholders approved the Employee Plan. The purpose of the
Employee Plan is to promote the success of the Company by providing a method
whereby eligible employees of the Company and its subsidiaries, as defined
therein, may be awarded additional remuneration for services rendered, thereby
increasing their personal interest in the Company. The Employee Plan is also
intended to aid in attracting persons of suitable ability to become employees of
the Company and its subsidiaries.
The Employee Plan provides that the maximum number of shares of Common
Stock reserved for awards thereunder shall be 75,000. As of December 31, 1996,
options to purchase 8,500 shares of Common Stock were outstanding under the
Employee Plan at a weighted average exercise price of $3.50 per share. The
Employee Plan provides for the grant of (i) options that are intended to qualify
as incentive stock options ("Incentive Stock Options") within the meaning of
Section 422A of the Internal Revenue Code of 1986, as amended, and (ii) options
not intended to so qualify. The exercise price of options granted under the
Employee Plan may be more than or equal to the fair market value of such shares
on the date of grant; provided, however, that the exercise price of an Incentive
Stock Option at the time of grant thereof shall (i), if such Incentive Stock
Option is being granted to a 10% shareholder, be at least 110% of the fair
market value on the date of grant and (ii), if such Incentive Stock Option is
being granted to any other person, be at least 100% of the fair market value on
the date of grant. The Company agreed with the underwriters of its initial
public offering not to grant or issue options to purchase more than 37,500
shares of Common Stock prior to February 28, 1997. Any options granted
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under the Employee Plan that shall expire, terminate or otherwise be annulled
for any reason without having been exercised shall again be available for
purposes of the Employee Plan.
The Employee Plan is to be administered by a committee comprised of not
less than two persons. Each member of the committee shall be a member of the
Company's Board of Directors who during the one year period prior to service on
the committee was not, and during such service is not, granted or awarded any
equity securities pursuant to the Employee Plan or any other plan of the Company
if such grant or award or participation in such Employee Plan would prevent such
member from being a "disinterested person" with respect to the Employee Plan for
purposes of Rule 16b-3 under the Exchange Act. The committee will have the power
and authority to grant to eligible persons options to purchase shares of the
Company's Common Stock under the Employee Plan and to determine the
restrictions, terms and conditions of all such options granted as well as to
interpret the provisions of the Employee Plan, any agreements relating to awards
granted under the Employee Plan, and to supervise the administration of the
Employee Plan.
No Incentive Stock Options may be granted to any person for which the
"fair market value," as defined within the Employee Plan, determined as of the
time an Incentive Stock Option is granted to such person, of the Common Stock
with respect to which Incentive Stock Options are exercisable for the first time
by such person during any calendar year under all plans of the Company and its
subsidiaries, shall exceed $100,000.
Subject to the provisions of the Employee Plan with respect to death,
retirement and termination of employment, the term of each option shall be for
such period as the committee shall determine as set forth in the applicable
option agreement, but not more than (i) five years from the date of grant in the
case of Incentive Stock Options held by 10% or greater shareholders and (ii) ten
years from the date of grant in the case of all other Incentive Stock Options.
The Employee Plan is intended to comply in all respects with Rule 16b-3
under the Exchange Act. Option grants with respect to 8,500 shares of Common
Stock have been awarded under the Employee Plan as of December 31, 1996.
It is currently contemplated that approval of an amendment to the
Employee Plan increasing the number of shares of Common Stock available for
issuance thereunder will be sought at the Company's next annual Shareholders'
Meeting which is expected to occur in May 1997.
NONQUALIFIED STOCK OPTIONS
In December 1994, the Company granted ten year options to purchase
120,000 shares of Common Stock to each of Messrs. Zanker, Murray and Steven
Thompson, then the Company's Chief Financial Officer. Such options are
exercisable at a price of $3.75 per share. One-third of such options became
exercisable in March 1995, one-third became exercisable in December 1995 and
one-third became exercisable in December 1996. In July 1995, the Company granted
five-year options to purchase 100,000 shares of Common Stock to each of Messrs.
Zanker and Murray, each exercisable at a price of $1.875 per share. All such
options have been exercised. In July 1995, the Company granted options to
purchase 10,000 shares of Common Stock to Mr. Dee. Such options are exercisable
at a price of $2.5625 per share. Options to purchase 5,000 shares vested and
became exercisable in July 1996 and options to purchase an additional 5,000
shares vest and become exercisable in July 1997. All such options expire on the
day before the 5-year anniversary of vesting. In March 1995, the Company granted
ten year options to purchase 100,000 shares of Common Stock to a consultant to
the Company. Such options are exercisable at a price of $5.00 per share. All
such options are currently exercisable. In July 1995, the Company granted
five-year options to purchase 65,000 shares of Common Stock to consultants to
the Company. Such options are exercisable at a price of $4.00 per share. All
such options are currently exercisable. In August 1995, the Company granted
three-year options to purchase 100,000 shares of Common Stock to a consultant to
the Company of which options to purchase 76,500 shares have been exercised. Such
options are exercisable at a price of $2.375 per share. All such options are
currently exercisable. In February 1996, the Company granted warrants to
purchase 300,000 shares of Common Stock to a consultant to the Company, 100,000
of which were exercisable at a price of $1.00 per share, 200,000 of which were
exercisable at a price of $2.50 per share, and all of which have been exercised.
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<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into an agreement with Mr. Zanker pursuant to
which he is employed full-time as the President of the Company for a term of
three years, commencing as of November 1, 1994. Mr. Zanker will be required to
devote substantially all of his business time and attention to the affairs of
the Company. Under the agreement, Mr. Zanker is entitled to receive an annual
base salary of $120,000 for the first two years of the agreement and the salary
for the third year is to be set by the Compensation Committee of the Company's
Board of Directors. Mr. Zanker is also entitled to receive an annual bonus, if,
when and as may be determined by the Company's Board of Directors. In addition,
Mr. Zanker is entitled to receive a bonus ("Performance Bonus") of $100,000
payable anytime during the initial term of the employment agreement upon (i) the
opening of an aggregate of 40 Company-owned and/or franchised stores or (ii) the
Common Stock trading at $10.00 per share for 30 consecutive trading days at any
time after August 28, 1995, or (iii) the Company's revenues for any of the years
ended December 31, 1995, 1996 or 1997 equalling or exceeding $12.5 million,
exclusive of revenues from acquired companies. The employment agreement contains
a non-compete provision during the term of the agreement and for two years
thereafter. In addition, Mr. Zanker is entitled to receive such benefits as are
generally provided from time to time by the Company to its senior management
employees, as well as to participate in the Company's stock option plan as may
from time to time be in effect.
The Company has entered into a three-year employment agreement with Mr.
Murray similar to that of Mr. Zanker, commencing November 1, 1994, containing
generally the same terms and conditions as provided for above; provided,
however, that Mr. Murray is entitled to receive a Performance Bonus of $130,000
payable on the achievement of the same performance criteria as described above.
Mr. Murray's employment agreement provides for Mr. Murray to be employed as
Chief Executive Officer.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 28, 1997 with
respect to the beneficial ownership of the Common Stock by (i) each person known
by the Company to be the beneficial owner of more than 5% of the Company's
outstanding Common Stock, (ii) each Director of the Company, (iii) each
executive officer of the Company, and (iv) all Directors and executive officers
as a group.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial
Name and Address(1) Ownership(2) Percent of Class(3)
------------------- -------------- -------------------
<S> <C> <C>
Laidlaw Holdings, Inc.............................. 157,652(4) 6.2
Laidlaw Equities, Inc.............................. 149,564(4) 5.9
Debbie Dworkin..................................... 63,562(5) 2.6
William Zanker..................................... 183,562(6) 7.2
Terrance C. Murray................................. 179,375(7) 7.1
Stephen Seligman................................... 15,000(8) *
Andrew L. Hyams.................................... 11,875(9) *
Edward E. Faber.................................... 10,000(10) *
Donald R. Fleischer................................ 25,625(11) 1.0
Peter Hanelt....................................... 10,000(10) *
Keith Dee.......................................... 26,875(12) 1.1
Cumberland Associates.............................. 130,000(13) 5.4
All executive officers and directors as a
group (8 persons)................................. 462,312(14) 17.0
</TABLE>
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<PAGE>
- ----------------------
*
Less than 1%
(1) Unless otherwise indicated, the address of each beneficial owner is c/o
the Company, 425 Madison Avenue, New York, New York 10017.
(2) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Exchange Act ("Rule 13d-3") and unless otherwise indicated,
represents shares for which the beneficial owner has sole voting and
investment power.
(3) The percentage of class is calculated in accordance with Rule 13d-3 and
assumes that the beneficial owner has exercised any options or other
rights to subscribe which are exercisable within sixty (60) days and
that no other options or rights to subscribe have been exercised by
anyone else.
(4) These shares consist of (i) 8,088 shares held by Laidlaw Holdings, Inc.
and (ii) 24,564 shares held by, and 125,000 shares issuable upon the
exercise of warrants held by, its subsidiary Laidlaw Equities, Inc. The
address for each of Laidlaw Equities, Inc. and Laidlaw Holdings, Inc.
is 100 Park Avenue, 28th Floor, New York, New York 10017.
(5) Debbie Dworkin is the wife of William Zanker, the Company's Chairman of
the Board and President.
(6) These shares consist of (i) 63,562 shares held by Debbie Dworkin, Mr.
Zanker's wife, and (ii) 120,000 shares issuable upon the exercise of
options. Mr. Zanker disclaims any beneficial ownership of the shares
held by Ms. Dworkin.
(7) Includes 120,000 shares issuable upon the exercise of options.
(8) These shares consist of (i) 5,000 shares held by Stephen Seligman and
his wife, Beth Greer, as joint tenants with right of survivorship and
(ii) 10,000 shares issuable upon the exercise of options.
(9) These shares consist of (i) 1,875 shares held by Mr. Hyams and his
wife, Tracey Hyams, as joint tenants with right of survivorship and
(ii) 10,000 shares issuable upon the exercise of options.
(10) Represents 10,000 shares issuable upon the exercise of options.
(11) These shares consist of (i) 3,125 shares held by Mr. Fleischer, (ii)
10,000 shares issuable upon the exercise of options and (iii) 12,500
shares issuable upon the exercise of certain warrants purchased by Mr.
Fleischer.
(12) Includes 5,000 shares issuable upon the exercise of options.
(13) The address for Cumberland Associates is 1114 Avenue of the Americas,
New York, New York 10036.
(14) Includes 307,500 shares issuable upon the exercise of options and
warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1993, the Company issued to Debbie Dworkin, the wife of the
Company's Chairman of the Board, William Zanker, 187,500 shares of Common Stock
for nominal consideration upon the founding of the Company. Ms. Dworkin has
transferred an aggregate of 105,188 of such shares to certain individuals,
including 34,375 shares sold to Terrance Murray and 21,875 shares sold to Steven
Thompson.
In December 1994, each of Messrs. Zanker and Murray waived their
respective salaries which had accrued since January 1994 in the aggregate amount
of $220,000 as of December 31, 1994 and worked without salary until March 1,
1995. Each has been subsequently compensated in accordance with the terms of
their respective employment agreements. See Item 10 (Executive
Compensation--Employment Agreements).
On March 9, 1995, the Company entered into a consulting agreement with
A. Clinton Allen (the "Consulting Agreement"), pursuant to which Mr. Allen was
paid $3,000 per month, plus expenses. In addition, the Company granted to Mr.
Allen options to purchase 100,000 shares of Common Stock exercisable for a
period of 10 years at a price of $5.00 per share and was to grant to Mr. Allen
an option to purchase 25,000 shares of Common Stock at the beginning of each
calendar year during the term of the Consulting Agreement. Mr. Allen became a
director of the Company on March 9, 1995. On December 18, 1995, Mr. Allen
resigned from his position as a member of the Board of Directors of the Company
and the Consulting Agreement was terminated.
On December 7, 1995, the Company entered into an option agreement with
Laidlaw Equities, Inc. and Laidlaw Holdings, Inc. (collectively, "Laidlaw")
pursuant to which Laidlaw granted the Company options (the
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"Options") to purchase an aggregate of 475,000 shares (the "Option Shares").
Such options were exercisable at any time or from time to time prior to
September 7, 1996 at an exercise price of $4.00 per share.
On April 9, 1996, Laidlaw granted to Investors Associates, Inc.
("IAI"), the underwriter for the proposed public offering of the Company's
securities (the "Offering") described in Item 1 (Description of Business -
Recent and Proposed Financing Transactions), an option to purchase 100,000 of
the Option Shares, exercisable at any time to and including May 9, 1996, for an
exercise price of $3.00 per share and the Company simultaneously released
Laidlaw from the Options with respect to such shares. IAI exercised such option.
On April 24, 1996, the Company granted certain individuals unaffiliated
with the Company (the "Grantees") the right (the "Right") to cause the Company
to assign the Options with respect to 375,000 of the Option Shares to them at
any time prior to June 7, 1996 (subsequently extended to September 7, 1996);
provided, however, that the exercise price with respect to such shares would be
$5.00 per share. IAI purchased 50,000 of such shares from Laidlaw and
simultaneously therewith the Company released Laidlaw from the Options as to
such 50,000 shares and the Grantees released the Company from the Right as to
such 50,000 shares.
Except as described above, the Options expired unexercised on September
7, 1996.
On February 1, 1996, the Company engaged Horatio Management Services
Corp., an affiliate of IAI, as the Company's management consultant for a period
of 24 months commencing February 1, 1996, at a fee of $5,000 per month
(exclusive of any accountable out-of-pocket expenses), $60,000 of which is
payable on the closing of the Offering and $60,000 of which is payable on the
first anniversary thereof.
In February 1996, the Company entered into a Financial Advisory and
Consulting Agreement (the "Financial Advisory Agreement") with IAI. The
Financial Advisory Agreement expired on January 31, 1997. As compensation for
the services to be performed by IAI for the Company pursuant to the Financial
Advisory Agreement, the Company paid to IAI a financial consulting fee of
$100,000, and issued warrants to purchase 100,000 shares of Common Stock at an
exercise price of $1.00 per share, exercisable to and including January 31,
1997, and warrants to purchase 200,000 shares of Common Stock at an exercise
price of $2.50 per share, exercisable to and including January 31, 1998. These
warrants have been exercised.
On November 15, 1996, the Company entered into a franchise agreement
with Roosevelt Field Partners. Certain executive officers and directors of the
Company own, collectively, an approximately 40% equity interest in Roosevelt
Field Partners.
Certain executive officers of the Company participated in a bridge
financing by the Company which was consummated on December 27, 1996, as more
fully described in Item 1 (Description of Business - Recent and Proposed
Financing Transactions).
All future and ongoing transactions and loans with officers, directors
and principal shareholders of the Company will be on terms no less favorable
than could be obtained from independent third parties and will be approved by a
majority of the disinterested directors of the Company.
-19-
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
**3.1 Certificate of Incorporation of the Company, as amended.
*3.2 Amendment of Certificate of Incorporation of the Company
(designating Series A Convertible Preferred Stock).
**3.3 Amended and Restated By-Laws of the Company.
**4.1 Specimen Certificate of the Company's Common Stock.
**4.2 1994 Employee Stock Option Plan.
**4.3 Nonqualified Option Agreement of Mr. Zanker.
**4.4 Nonqualified Option Agreement of Mr. Murray.
**4.5 Nonqualified Option Agreement of Mr. Thompson.
**4.6 Form of Option Agreement for Options to be issued to outside
directors upon completion of the Offering.
**10.1 Employment Agreement dated November 1, 1994 between the Company and
William Zanker.
**10.1.1 Amendment dated February 1, 1995 to the Employment Agreement dated
November 1, 1994 between the Company and William Zanker.
**10.1.2 Amendment No. 2 dated February 27, 1995 to the Employment Agreement
dated November 1, 1994 between the Company and William Zanker.
**10.2 Employment Agreement dated November 1, 1994 between the Company and
Terrance C. Murray.
**10.2.1 Amendment dated February 1, 1995 to the Employment Agreement dated
November 1, 1994 between the Company and Terrance C. Murray.
**10.2.2 Amendment No. 2 dated February 27, 1995 to the Employment Agreement
dated November 1, 1994 between the Company and Terrance C. Murray.
**10.3 Employment Agreement dated November 1, 1994 between the Company and
Steven J. Thompson.
**10.3.1 Amendment dated February 1, 1995 to the Employment Agreement dated
November 1, 1994 between the Company and Steven J. Thompson.
**10.3.2 Amendment No. 2 dated February 27, 1995 to the Employment Agreement
dated November 1, 1994 between the Company and Steven J. Thompson.
**10.4 Franchise Agreement dated May 14, 1994 between Emerald Desert Rub
and the Company.
-20-
<PAGE>
**10.5 Lease Agreement dated August 25, 1993 between 175 East 57th Street,
Inc. and the Company concerning the Third Avenue Store.
**10.6 Lease Agreement dated February 1994 between Town Sports
International, Inc. and the Company concerning the East 86th Street
Store.
**10.7 Notice of Town Sports International, Inc. to the Company terminating
the East 86th Street Store lease.
**10.7.1 Lease Extension dated February 27, 1995 relating to the 86th Street
Store Lease.
**10.8 Lease Agreement dated May 15, 1994 between Martin Cable and the
Company.
**10.9 Sublease Agreement dated May 31, 1994 between the Company and
Emerald Desert Rub.
**10.10 Commercial Lease and Deposit Receipt dated December 31, 1994 for the
Company's San Rafael, California office.
**10.11 Promissory Note dated April 5, 1994 issued to Colonial Capital Corp.
for $165,000.
**10.12 Substitute Promissory Note dated November 1, 1994 issued to Colonial
Capital Corp. for $165,000.
**10.13 Letter Agreement dated December 23, 1994 between the Company and
Colonial Capital, Inc.
**10.14 Promissory Note dated April 5, 1994 issued to Gary D. Lipson for
$50,000.
**10.15 Substitute Promissory Note dated November 1, 1994 issued to Gary D.
Lipson for $50,000.
**10.16 Promissory Note dated April 5, 1994 issued to Kipnis Tescher Lippman
Valinsky and Kain for $115,000.
**10.17 Substitute Promissory Note dated November 1, 1994 issued to Kipnis
Tescher Lippman Valinsky & Kain for $115,000.
**10.18 Letter Agreement dated December 28, 1994 between the Company and
Kipnis Tescher Lippman Valinsky and Kain.
**10.19 Letter of Understanding dated December 16, 1994 from the Company to
Colonial Capital, Inc.
**10.20 Purchase Agreement dated June 10, 1993 by and among the Company,
Michael Schub, Linda Amori, Ron Rodriguez, Debbie Dworkin and
William Zanker.
**10.21 Mutual Termination Agreement dated November 15, 1994 by and among
the Company, Michael Schub, Linda Amori, Ron Rodriguez, Debbie
Dworkin and William Zanker.
**10.22 Option Agreement dated June 20, 1994 between Bay Area Backs I and
the Company relating to a potential franchise agreement.
**10.23 Option Agreement dated June 21, 1994 between Bay Area Backs I and
the Company relating to a potential franchise agreement.
**10.24 Letter dated October 19, 1994 from the Company to Bay Area Backs I
extending the term of the Option Agreements.
-21-
<PAGE>
**10.24.1 Letter dated February 13, 1995 from the Company to Bay Area Backs I
extending the term of the Option Agreements.
**10.25 Form of Bridge Note relating to December 1994 private placement
securities offering.
**10.26 The Company's Uniform Franchise Offering Circular dated April 1,
1994.
**10.27 Letter of Intent dated June 9, 1994 between Brookstone, Inc. and the
Company.
**10.28 Letter of Intent dated October 6, 1994 between Brookstone, Inc. and
the Company.
**10.29 Assignment of Patent Rights dated December 23, 1994 from William
Zanker to the Company.
**10.30 Consulting Agreement dated March 9, 1995 between the Company and A.
Clinton Allen.
**10.31 Option Agreement dated March 9, 1995 between the Company and A.
Clinton Allen.
**10.32 Indemnification Letter dated March 9, 1995 from the Company to A.
Clinton Allen.
***10.33 Option Agreement dated December 7, 1995, by and among Laidlaw
Holdings, Inc., Laidlaw Equities, Inc. and the Company.
***10.34 Franchise Termination Agreement dated as of May 30, 1995, by and
between the Company and Emerald Desert Rub.
***10.35 Option Termination Agreement dated as of May 30, 1995, by and
between the Company and Bay Area Backs I.
***10.36 Financial Advisory and Consulting Agreement between the Company and
Investors Associates, Inc.
*10.37 Consulting agreement dated February 1, 1996 between the Company and
Horatio Management Services Corp.
10.38 Franchise Agreement dated November 19, 1996 between the Company and
Roosevelt Field Partners, LLC.
10.39 Franchise Agreement dated November 20, 1996 between the Company and
Marion Holdings, Inc.
10.40 Option Agreement dated November 21, 1996 between the Company and
Marylou Garcia.
10.41 Agency Agreement dated November 22, 1996 between the Company and
Investors Associates, Inc., as amended December 20, 1997
10.42 Form of Note relating to December 1996 private placement.
10.43 Form of Warrant relating to December 1996 private placement, as
amended.
***11.1 Statement regarding Computation of Per Share Earnings.
**16.1 Letter from Elwell, Cangiano, Zdon & Dee relating to change in
accountants.
***21.1 Subsidiaries of the Company.
-22-
<PAGE>
- ---------------
* Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File No. 333-21203).
** Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File No. 33-88052).
*** Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended December 31, 1995 (File No. 0-25334).
(B) REPORTS ON FORM 8-K. No reports were filed on Form 8-K in the
quarter ended December 31, 1996.
-23-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the requirements of the
Exchange Act, the registrant has duly caused the report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of New York,
State of New York, on the 27th day of March, 1997.
THE GREAT AMERICAN BACKRUB STORE, INC.
By: /s/ William Zanker
-----------------------------------
William Zanker
Chairman of the Board and President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ William Zanker Chairman of the Board, President March 27, 1997
- ------------------------- and Director
William Zanker
/s/Terrance C. Murray Chief Executive Officer and March 27, 1997
- ------------------------- Director (principal executive
Terrance C. Murray officer)
/s/ Keith Dee Chief Financial Officer and March 27, 1997
- ------------------------- Secretary (principal financial
Keith Dee and accounting officer)
/s/ Stephen Seligman Director March 27, 1997
- -------------------------
Stephen Seligman
/s/ Edward E. Faber Director March 27, 1997
- -------------------------
Edward E. Faber
/s/ Peter Hanelt Director March 27, 1997
- -------------------------
Peter Hanelt
/s/ Donald R. Fleischer Director March 27, 1997
- -------------------------
Donald R. Fleischer
/s/ Andrew L. Hyams Director March 27, 1997
- --------------------------
Andrew L. Hyams
-24-
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants F-2
Balance Sheet as of December 31, 1996 F-3
Statements of Operations for the years ended December 31, 1996
and 1995 and December 18, 1992 (Inception) to December 31, 1996 F-4
Statement of Changes in Stockholders' Equity for the years
ended December 31, 1996 and 1995 and December 18, 1992
(Inception) to December 31, 1996 F-5
Statements of Cash Flows for the years ended December 31, 1996
and 1995 and December 18, 1992 (Inception) to December 31, 1996 F-6
Summary of Accounting Policies F-7
Notes to Financial Statements F-10
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
The Great American BackRub Store, Inc.
(A Development Stage Company)
New York, New York
We have audited the accompanying balance sheet of The Great American BackRub
Store, Inc. as of December 31, 1996 and the related statements of operations,
changes in stockholders' equity (capital deficit) and cash flows for the years
ended December 31, 1995 and 1996, and for the period from December 18, 1992
(date of inception) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
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
misstatements. 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 uses 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 financial statements referred to above present fairly, in
all material respects, the financial position of The Great American BackRub
Store, Inc. as of December 31, 1996, and the results of its operations and its
cash flows for the years ended December 31, 1995 and 1996, and for the period
from December 18, 1992 (date of inception) to December 31, 1996, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses since its
inception and has an accumulated deficit of $7,001,507, which raises substantial
doubt about its ability to continue as a going concern. Management's plans
regarding those matters also are described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
BDO Seidman, LLP
----------------
BDO Seidman, LLP
New York, New York
January 31, 1997
F-2
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
AS OF DECEMBER 31, 1996
ASSETS
Current assets:
Cash $ 1,188,038
Receivables - other 215,060
Prepaid expenses 50,690
Inventory 329,269
------------
Total current assets 1,783,057
Property and equipment:
Furniture and fixtures 462,180
Leasehold improvements 951,238
Purchased lease 120,000
Computer equipment 44,306
-----------
1,577,724
Less, Accumulated depreciation ( 190,072)
-----------
1,387,652
Other assets:
Deferred offering costs 68,800
Note receivable 50,000
Lease and equipment deposits 289,152
------------
Total other assets 407,952
------------
Total assets $ 3,578,661
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 576,857
Accrued expenses 421,276
Accrued payroll and related 197,749
Bridge notes 7,348
Deferred revenue 328,262
------------
Total current liabilities 1,531,492
Deferred rent 240,740
Commitments and contingencies
Stockholders' equity:
Series B convertible preferred stock, $.001 par value
15,000,000 shares authorized, none issued
Common stock, par value $0.001 per share,
20,000,000 shares authorized, 2,393,354 shares
issued and outstanding 2,293
Additional paid in capital 8,805,543
Deficit accumulated during the development stage ( 7,001,507)
-----------
1,806,429
Total liabilities and stockholders' equity $ 3,578,661
===========
See accompanying summary of accounting policies and notes to financial
statements.
F-3
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 18, 1992
December 31, (Inception) to
1996 1995 December 31, 1996
---- ---- -----------------
<S> <C> <C> <C>
Revenues:
Services $ 2,140,304 $ 874,320 $ 3,607,103
Products 868,214 326,012 1,370,168
Royalties, franchise fees and other 37,419 1,609 83,977
----------- ----------- -----------
Total 3,045,937 1,201,941 5,061,248
----------- ----------- -----------
Operating expenses:
Salaries and wages 1,495,274 1,230,531 3,239,905
Cost of products sold, buying and occupancy 611,919 269,261 989,483
Rental expense 734,588 409,850 1,406,392
Advertising and promotion 210,754 158,657 506,426
Options granted as financial advisory fees 481,250 -- 481,250
General and administrative 2,294,907 1,521,672 4,685,149
Depreciation 128,876 65,220 219,464
Waived salaries -- 30,000 350,000
---------- --------- ----------
Total 5,957,568 3,685,191 11,877,069
---------- --------- ----------
Net loss from operations ( 2,911,631) ( 2,483,250) ( 6,815,821)
---------- ---------- ----------
Other income (expense):
Interest income 93,667 149,691 243,358
Interest expense ( 7,348) ( 313,696) ( 429,044)
---------- ---------- ----------
Total 86,319 (164,005) (185,686)
---------- ---------- ----------
Net loss ($2,825,312) ($2,647,255) ($7,001,507)
========== ========== ==========
Weighted average number of shares outstanding
during the period 2,005,573 1,582,250
========== ===========
Net loss per common share and equivalents $ (1.41) $ (1.67)
========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements
F-4
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional during the
Paid-in Development
Shares Amount Capital Stage
------ ------ ------- -----
<S> <C> <C> <C> <C>
Balance, December 18, 1992 (Inception) - $ - $ - $ -
Initial issuance of common stock for services, 375,000 375 2,625 -
June 1993
Issuance of common stock in private placement, 125,000 125 869,875 -
October 1993, for cash at $8 per share, net of
issuance costs
Net loss, year ended December 31, 1993 - - - (409,965)
-------- ------ --------- ---------
Balance, December 31, 1993 500,000 500 872,500 (409,965)
Issuance of Warrants to Bridge Note Investors - - 106,000 -
Waived salaries - - 320,000 -
Net loss, year ended December 31, 1994 - - - (1,118,975)
--------- ------- --------- -----------
Balance, December 31, 1994 500,000 500 1,298,500 (1,528,940)
Issuance of common stock in public offering, 1,250,000 1,250 5,029,771 -
March 1995, for $5 per share, net of issuance
costs
Issuance of warrants to Bridge Note Investors - - 306,500 -
Waived salaries - - 30,000 -
Issuance of common stock for additional costs in 10,500 11 10,489 -
connection with the March 7, 1995 public offering
Options granted as compensation - - 106,830 -
Issuance of common stock to former franchisee 24,766 25 66,890 -
and consultant
Net loss, year ended December 31, 1995 - - - (2,647,255)
---------- ------ ------------- -----------
Balance, December 31, 1995 1,785,266 1,786 6,848,980 (4,176,195)
Exercise of stock options and bridge warrants 604,000 603 1,225,112 -
Options granted as financial advisory fees - - 525,000 -
Issuance of common stock to former consultants 4,088 4 31,527 -
Issuance of warrants to bridge note investors, net of cost - - 174,924 -
Net loss, year ended December 31, 1996 - - - (2,825,312)
---------- ------- ------------ -----------
Balance, December 31, 1996 2,393,354 $2,393 $,8,805,543 ($7,001,507)
========= ====== ============ ==============
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements
F-5
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
December 31, December 18, 1992
(Inception) to
1996 1995 December 31, 1996
---- ---- ------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss ($2,825,312) ($2,647,255) ($7,001,507)
---------- ---------- ----------
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 136,244 65,220 210,920
Salaries waived by officers -- 30,000 350,000
Warrant financing costs -- 306,500 412,500
Options granted as financial advisory fees 525,000 106,830 631,830
Common stock issued to former franchisee and consultant 31,531 66,915 98,478
(Increase) decrease in:
Accounts receivable (206,006) 37,742 ( 215,060)
Prepaid expenses 58,998 ( 109,688) ( 50,690)
Inventory ( 111,560) ( 204,515) ( 329,269)
Other assets ( 243,139) 191,122 ( 407,952)
Increase (decrease) in:
Accounts payable and accrued expenses 454,525 244,439 998,133
Accrued payroll and related 102,957 251,310 197,749
Deferred revenues and rent 293,081 177,442 569,002
Accrued officer expenses -- ( 67,040) --
--------- --------- ----------
Total adjustments 1,041,611 1,096,277 2,465,641
--------- --------- ----------
Net cash used by operating activities (1,783,701) (1,550,978) (4,535,866)
---------- --------- ---------
Cash flows from investing activities:
Purchase of certificate of deposit -- 1,000,000) ( 1,000,000)
Maturity of certificate of deposit 1,000,000 -- 1,000,000
Purchased lease -- (120,000) ( 120,000)
Purchase of property and equipment 650,637) (599,350) ( 1,457,724)
---------- ---------- ----------
Net cash used in investing activities 349,363 1,719,350) ( 1,557,724)
----------- ---------- ----------
Cash flows from financing activities:
Net cash proceeds from the issuance of common stock 1,225,715 5,031,021 7,126,704
Net proceeds from the issuance of bridge warrants 4,000 -- 4,000
Proceeds from issuance of bridge notes and short-term debt 262,667 -- 687,667
Payment of bridge notes and short-term debt -- ( 605,000) ( 605,000)
Bridge financing costs ( 91,743) -- ( 91,743)
Payment of officer loan payable -- ( 15,000) --
---------- ---------- ----------
Net cash provided by financing activities 1,400,639 4,411,021 7,301,628
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ( 33,699) 1,140,693 1,188,038
Cash and cash equivalents, beginning of period 1,221,737 81,044 --
---------- ---------- ----------
Cash and cash equivalents, end of period $1,188,038 $1,221,737 $1,188,038
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ -- $ 7,196 $ 20,892
========== ========== ==========
Income taxes $ 5,500 $ 1,500 $ 8,375
========== ========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-6
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
( A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Great American Backrub Store, Inc. (the "Company"), formally American
Pleasure, Inc., is an owner/operator and franchisor of retail stores which
provide seated, fully clothed back rubs and sell back and stress related
products. The Company, incorporated on December 28, 1992, began operations in
August, 1993 and opened its first store for business in October, 1993. As of
December 31, 1996, the Company has thirteen retail stores in operation and two
franchised store locations.
Management believes that the Company's planned principal operations, the
establishment of company-owned and franchised stores throughout the country,
have not yet commenced. The initial eight stores have been used to continue to
develop and modify the Company's retail concept. Accordingly, the accompanying
financial statements have been prepared as a development stage company, in
accordance with Statement of Financial Accounting Standards (SFAS) No. 7.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent all amounts held in banks and money market
accounts and short term investments such as United States Treasury bills with
original maturities of less than three months.
DEFERRED OFFERING COSTS
The Company has deferred offering costs related to a proposed offering (Note 8).
The deferred offering costs will be charged to equity upon completion of the
proposed offering. Should the proposed offering prove to be unsuccessful, the
deferred costs, as well as additional expenses to be incurred, will be charged
to operations.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to significant
concentration of credit risk consist primarily of $529,000 of cash in a money
market account at December 31, 1996.
INVENTORY
Inventories, consisting of merchandise held for resale, are valued at the lower
of cost or market. The Company uses the retail inventory method.
F-7
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
( A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Expenditures from maintenance and repairs are charged to expense as incurred.
Depreciation is provided using the straight-line method over the estimated
useful life's of the assets as follows:
Leasehold improvements The lesser of 10 years, or the remaining life of the
lease
Purchased lease The lesser of 10 years, or the remaining life of the
lease
Furniture and fixtures 5 - 10 years
Computer equipment 5 years
REVENUE RECOGNITION
The Company-owned store revenues are recognized when services are provided or
upon the sale of products. Sales of gift certificates are recognized when
redeemed or upon expiration. Royalties are recognized as income in the month in
which franchisee services are rendered or products are sold by franchisees. The
Company recognizes franchise revenue in accordance with SFAS No. 45. Deferred
revenues represent unredeemed and unexpired gift certificates.
PER SHARE DATA
Net loss per common share for the year ended December 31, 1996 and 1995 is
computed by dividing net loss by the weighted average common shares outstanding
during the year. The assumed exercise of common share equivalents was not
utilized since the effect was anti-dilutive.
REVERSE STOCK SPLIT
In conjunction with the Public offering, on March 7, 1995(see Note 2), the Board
of Directors declared a 1 for 8 reverse stock split effective as of the business
on February 23, 1995(see Note 2). The accompanying financial statements and all
common shares and equivalents and per share data included in the accompanying
financial statements and footnotes have been restated to reflect the reverse
stock split as if it occurred on January 1, 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of financial instruments including cash, accounts
receivable, inventory, accounts payable, accrued expenses, and deferred revenues
approximate fair value at December 31, 1996 and December 31, 1995 because of the
relative short maturities of these instruments.
LONG-LIVED ASSETS
During 1995, Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed
Of" ("SFAS 121"), was issued. SFAS 121 requires the Company to review long-lived
assets and certain identifiable assets related to those assets for impairment
whenever circumstances and situations change such that there is an indication
that the carrying amounts may not be recoverable. If the undiscounted future
cash flows of the enterprise are less than their carrying amounts, their
carrying amounts are reduced to fair value and an impairment loss is recognized.
The adoption of this pronouncement in 1996 did not have a significant impact on
the Company's financial statements.
F-8
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
( A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
STOCK OPTIONS
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows
companies to choose whether to account for stock-based compensation on the fair
value method or to continue to account for stock-based compensation under the
current Intrinsic value method as prescribed by APB Opinion No. 25, " Accounting
for Stock Issued to Employees." The Company has adopted disclosure alternative
under SFAS 123 during 1996 and will continue to follow the provisions of APB
Opinion No. 25.
F-9
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE 1 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern; they do not include adjustments
relating to the recoverability of recorded asset amounts and classification of
recorded assets and liabilities. The Company has incurred losses since its
inception and has accumulated a deficit of $7,001,507 at December 31, 1996.
Insomuch as the Company continues to have a high level of operating expenses and
will be required to make significant up-front expenditures in connection with
its proposed expansion, the Company anticipates that losses will continue for at
least 12 months and until such time, if ever, as the Company is able to generate
sufficient revenues to finance its operations and the costs of continued
expansion. Since inception, the Company's operations have generated negative
cash flow, as its expenses have exceeded revenues, and the Company's ability to
continue its operations is dependent upon additional debt or equity financing.
There can be no assurance that the Company will be able to generate significant
revenues or achieve profitable operations or that its operations will generate
positive cash flow. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
In accordance with management's plans, the Company has retained investment
banking counsel to advise it on the possible sale of equity securities, as well
to as introduce and assist in the evaluation of potential merger and partnership
opportunities. Management expects that these efforts will result in either an
additional equity infusion or an introduction to other parties with interests
and resources which may be compatible with that of the Company. However, no
assurances can be given that the Company will be successful in raising
additional capital or entering into a business alliance. Further, there is no
assurance, assuming the Company successfully raises additional funds or enters
into a business alliance, that the Company will achieve profitability or
positive cash flow. On February 5, 1997, the Company filed a registration
statement to offer 270,000 shares of preferred stock for approximately
$2,700,000, which, if successful, after commissions and fees, would provide the
Company with net proceeds of approximately $2,000,000. (See Note 8 - Subsequent
Events)
If the Company is unable to obtain adequate additional financing or enter into a
business alliance, or if the operating stores do not meet projections,
management will be required to sharply curtail its expansion plans and
operations.
NOTE 2 - INITIAL PUBLIC OFFERING
In an initial public offering completed on March 7, 1995, the Company sold
1,250,000 shares of common stock for approximately $6,250,000 which, after
commissions and fees, provided the Company with net proceeds of approximately
$5,000,000.
On January 4, 1995, the Board of Directors authorized a 1 for 8 reverse stock
split of the Company's common stock immediately prior to the completion of the
public offering. This action was approved at the shareholders meeting on January
31, 1995. The reverse stock split was effected on February 23, 1995.
F-10
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE 3 - BRIDGE NOTES
As of December 31, 1996, short-term debt consisted of the following:
Bridge notes $262,667
Original issue discount (255,319)
---------
Total short-term debt $ 7,348
==========
On December 27, 1996, the Company issued 10% Bridge Notes in the principal
amount of $262,667, payable as to principal and interest at the earlier of the
closing of a public offering through the sale of equity securities or December
27, 1997. In connection with these notes, the Company also sold 4,000,000
warrants, each warrant representing the right to purchase one share of Series A
preferred stock at an exercise price of $5.00 per share. Upon consummation of
the offering, each bridge warrant shall automatically, without any action by the
bridge note holders, be converted into half of a redeemable warrant which
entitles the holder to purchase one-half share of Series B preferred stock at an
exercise price of $8.00 per share. The warrants are exercisable at anytime
during the three-year period commencing on the first anniversary of the date of
the warrant or December 27, 1997. Original issue discount of $262,667 has been
recorded and is being amortized over the expected term of the notes ( 3 months),
along with $91,743 of financing expenses. Interest expense amortization of the
original issue discount of $7,348 for the year ended December 31, 1996 reflects
non-cash financing costs related to such warrants. Additional non-cash financing
costs of approximately $255,000 will be incurred during the first quarter of
1997.
NOTE 4 - OPTIONS, STOCK PLANS AND MANAGEMENT COMPENSATION
The Company has employment agreements with two executive officers which provide
for a minimum aggregate annual compensation of $240,000 and expire on October
31, 1997. These agreements also provide for annual bonuses if, when and as may
be determined by the Company's Board of Directors. In addition, these agreements
provide for bonuses aggregating $230,000 upon achievement of certain Company
performance.
At the Company's 1994 annual meeting of shareholders held on July 18, 1994, the
Company's shareholders approved the Employee Plan under which 75,000 shares of
common stock are authorized for issuance. To date, 8,500 have been granted. The
purpose of the Employee Plan is to promote the success of the Company by
providing a method whereby eligible employees of the Company and its
subsidiaries, as defined therein, may be awarded additional remuneration for
services rendered, thereby increasing their personal interest in the Company.
The Employee Plan is also intended to aid in attracting persons of suitable
ability to become employees of the Company and its subsidiaries.
F-11
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE 4 - OPTIONS, STOCK PLANS AND MANAGEMENT COMPENSATION(CONT'D)
In December 1994, the Company granted ten year options to purchase 360,000
shares of Common Stock to executive officers of the Company. Such options are
exercisable at a price of $3.75 per share. One-third of such options became
exercisable in March, 1995, one-third became exercisable in December 1995 and
one-third became exercisable in December 1996. In July 1995, the Company granted
five-year options to purchase 100,000 shares of Common Stock to executive
officers of the Company. Such options are exercisable at a price of $1.875 per
share. All such options have been exercised. In July 1995, the Company granted
options to purchase 10,000 shares of Common Stock to an executive officer of the
Company. Such options are exercisable at a price of $2.5625 per share. Options
to purchase 5,000 shares vest and became exercisable in July 1996 and options to
purchase an additional 5,000 shares vest and become exercisable in July 1997.
All options expire on the day before the 5-year anniversary of vesting. In March
1995, the Company granted ten year options to purchase 100,000 shares of Common
Stock to a consultant to the Company. Such options are exercisable at a price of
$5.00 per share. All such options are currently exercisable. In July 1995, the
Company granted five year options to purchase 25,000 and 40,000 shares of Common
Stock to consultants to the Company. Such options are exercisable at a price of
$4 per share. All options are currently exercisable. In August 1995, the Company
granted three year options to purchase 100,000 shares of Common Stock to a
consultant to the Company, of which options to purchase 76,500 shares have been
exercised to date. Such options are exercisable at a price of $2.375 per share.
All such options are currently exercisable.
FASB Statement 123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock option plans had been
determined in accordance with the fair value-based method prescribed in FASB
Statement 123.
Under the accounting provisions of FASB Statement 123, the Company's, net income
and earnings per share would have been reduced to the pro forma amounts
indicated below.
1996 1995
---- ----
Net Loss
As reported $ 2,825,312 $ 2,647,255
Pro forma 3,114,162 3,386,455
Net loss per common share
As reported $ (1.41) $ (1.67)
Pro forma (1.55) (2.14)
Net loss per share
As reported $ (1.41) $ (1.67)
Pro forma (1.55) (2.14)
F-12
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE 4 - OPTIONS, STOCK PLANS AND MANAGEMENT COMPENSATION(CONT'D)
Non-qualified stock option transactions during the years ended December 31, 1996
and 1995 are summarized below:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
Weighted Weighted
Exercise price average Exercise price average
range per exercise range per exercise
Shares share price Shares share price
------ ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding
options at
beginning of year 925,000 $1.875 - $5.00 $3.20 360,000 $3.75 $3.75
Options
granted 300,000 $1.00 - $2.50 $2.00 565,000 $1.875 - $5.00 $2.85
Options
exercised 576,500 $1.00 - $2.375 $2.01 - - -
Options
forfeited 90,000 $2.375 $2.375 - - -
------ ------ ------ - - -
Outstanding
options at
end of year 558,500 $2.375 - $5.00 $3.93 925,000 $1.875 - $5.00 $3.20
======= ===== ===== ===== ======= ===== ==== =====
Exerciseable
options at
end of year 553,500 $2.375 - $5.00 $3.94 345,000 $1.875 - $5.00 $3.20
======= ===== ==== ===== ======= ===== ==== =====
</TABLE>
NOTE 5 - INCOME TAXES
Income taxes are provided based on the liability method of accounting pursuant
to Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Deferred income taxes are recorded to reflect the tax
consequences on future years differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end. Valuation
allowances have been established for all income tax benefits since their
realizability is uncertain.
F-13
<PAGE>
NOTE 5 - INCOME TAXES(CONT'D)
Reconciliation of the difference between income taxes computed at the Federal
statutory tax rates and the Company's effective tax rate are as follows.
Years Ended December 31,
1996 1995
---- ----
Income tax benefit computed at Federal
statutory tax rates (34.0)% (34.0)%
Other .1 .1
Valuation allowance of net deferred tax asset 33.9 33.9
---- ----
Provision for income taxes -% -%
===== =====
Deferred tax assets and liabilities are comprised of the following:
December 31,
1996
Net operating loss carryforward $2,176,000
Other, net (7,000)
-----------
Net deferred tax asset 2,169,000
Valuation allowance (2,169,000)
-----------
$ -
===========
For Federal tax purposes, the Company had available, at December 31, 1996, net
operating loss carryforwards of approximately $6,400,000, which expire through
2011 subject to certain annual limitations.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company reimbursed expenses paid personally by a stockholder, amounting to
$50,000 for the period from December 18, 1992 (date of inception) to December
31, 1995.
At December 31, 1996, the Company had a receivable due from one of its
franchisee's totaling $151,004. Revenue earned from this franchise totaled
approximately $21,000 for the year ended December 31, 1996. Certain officers and
directors of the Company own an interest of approximately 40% in this franchise.
This receivable is due on demand and is non-interest bearing.
F-14
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE 7 - COMMITMENTS
The Company leases retail stores and office equipment. All of the retail stores
are leased under noncancellable agreements which expire at various dates through
the year 2006. The agreements, which have been classified as operating leases,
require the Company to pay insurance, taxes and other maintenance costs.
The following is a schedule of future minimum rental payments which are required
under operating leases that have initial or remaining noncancellable lease terms
in excess of one year as of December 31, 1996.
Year ending
December 31, Ner Minimun Rentals
1997 $1,113,000
1998 1,114,000
1999 1,107,000
2000 1,085,000
2001 1,086,000
Thereafter 3,860,000
----------
Total $9,365,000
=========
The rental expense, including deferred rent, under operating leases was
$409,850, $734,588 and $1,406,392 for the years ended December 31, 1995 and 1996
and the period from December 18, 1992 (date of inception) to December 31, 1996.
Deferred rent results as the Company recognizes the cost of leases with free
rent periods and accelerating lease payments on a straight-line basis over the
term of the lease.
NOTE 8 - FINANCIAL ADVISORY AND CONSULTING AGREEMENT
In February 1996, the Company entered into a financial advisory and consulting
agreement with an investment banking firm to advise it on the possible sale of
additional equity securities, as well as to introduce and assist in the
evaluation of potential merger and partnering opportunities.
The agreement is for a period of one year commencing on February 1, 1996 and
included a $100,000 retainer paid on the execution of the agreement and warrants
to purchase 100,000 shares of the Company's common stock at an exercise price of
$1.00 per share exercisable from the date of the agreement to and including
January 31, 1997, all of which have been exercised and warrants to purchase
200,000 shares of common stock of the Company at an exercise price of $2.50 per
share exercisable from the date of the agreement to and including January 31,
1998, of which all have been exercised.
Such warrants resulted in a non-cash charge of $481,250 for the year ended
December 31, 1996 and will result in a non-cash charge of approximately $50,000
for the year ended December 31, 1997.
F-15
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE 9 - SUBSEQUENT EVENTS
On February 5, 1997, the Company filed a registration statement to offer 270,000
shares of Series B convertible Preferred Stock for approximately $2,700,000,
which, if successful, after commissions and fees, would provide the Company with
net proceeds of approximately $2,000,000. There is no assurance that this
offering will be successful.
Dividends on the shares of the Preferred Stock offered would accrue and be
cumulative from the date of original issue and would be payable semi-annually in
arrears on April 1 and October 1 of each year in an amount equal to $.70 per
share per annum payable at the Company's option in cash or shares of Common
Stock based on the average reported closing price of the Common Stock.
Each share of Preferred Stock would be convertible at the option of the holder
thereof at any time from and after twelve months from the date of the closing of
this offering, unless previously redeemed, into the greater of four shares of
Common Stock or a number of shares of Common Stock equal to $16.00 divided by
the average of the last reported sales price of the Common Stock up to a maximum
number of shares which has yet to be determined, subject to further adjustment
in certain circumstances.
The Preferred Stock would be redeemable two years from the closing of this
offering with the consent of the Underwriter or upon the closing of a public
offering of the Company or five years from the closing of this offering. The
Preferred Stock may be redeemed at the option of the Company in whole or part at
105% of the public offering price per share of Preferred Stock, plus in each
case accrued and unpaid dividends to the redemption date.
The holders of Preferred Stock would not be entitled to vote on any matter
except as required by law.
F-16
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
**3.1 Certificate of Incorporation of the Company, as amended.
*3.2 Amendment of Certificate of Incorporation of the Company
(designating Series A Convertible Preferred Stock).
**3.3 Amended and Restated By-Laws of the Company.
**4.1 Specimen Certificate of the Company's Common Stock.
**4.2 1994 Employee Stock Option Plan.
**4.3 Nonqualified Option Agreement of Mr. Zanker.
**4.4 Nonqualified Option Agreement of Mr. Murray.
**4.5 Nonqualified Option Agreement of Mr. Thompson.
**4.6 Form of Option Agreement for Options to be issued to outside
directors upon completion of the Offering.
**10.1 Employment Agreement dated November 1, 1994 between the Company and
William Zanker.
**10.1.1 Amendment dated February 1, 1995 to the Employment Agreement dated
November 1, 1994 between the Company and William Zanker.
**10.1.2 Amendment No. 2 dated February 27, 1995 to the Employment Agreement
dated November 1, 1994 between the Company and William Zanker.
**10.2 Employment Agreement dated November 1, 1994 between the Company and
Terrance C. Murray.
**10.2.1 Amendment dated February 1, 1995 to the Employment Agreement dated
November 1, 1994 between the Company and Terrance C. Murray.
**10.2.2 Amendment No. 2 dated February 27, 1995 to the Employment Agreement
dated November 1, 1994 between the Company and Terrance C. Murray.
**10.3 Employment Agreement dated November 1, 1994 between the Company and
Steven J. Thompson.
**10.3.1 Amendment dated February 1, 1995 to the Employment Agreement dated
November 1, 1994 between the Company and Steven J. Thompson.
**10.3.2 Amendment No. 2 dated February 27, 1995 to the Employment Agreement
dated November 1, 1994 between the Company and Steven J. Thompson.
**10.4 Franchise Agreement dated May 14, 1994 between Emerald Desert Rub
and the Company.
**10.5 Lease Agreement dated August 25, 1993 between 175 East 57th Street,
Inc. and the Company concerning the Third Avenue Store.
<PAGE>
**10.6 Lease Agreement dated February 1994 between Town Sports
International, Inc. and the Company concerning the East 86th Street
Store.
**10.7 Notice of Town Sports International, Inc. to the Company
terminating the East 86th Street Store lease.
**10.7.1 Lease Extension dated February 27, 1995 relating to the 86th Street
Store Lease.
**10.8 Lease Agreement dated May 15, 1994 between Martin Cable and the
Company.
**10.9 Sublease Agreement dated May 31, 1994 between the Company and
Emerald Desert Rub.
**10.10 Commercial Lease and Deposit Receipt dated December 31, 1994 for
the Company's San Rafael, California office.
**10.11 Promissory Note dated April 5, 1994 issued to Colonial Capital
Corp. for $165,000.
**10.12 Substitute Promissory Note dated November 1, 1994 issued to
Colonial Capital Corp. for $165,000.
**10.13 Letter Agreement dated December 23, 1994 between the Company and
Colonial Capital, Inc.
**10.14 Promissory Note dated April 5, 1994 issued to Gary D. Lipson for
$50,000.
**10.15 Substitute Promissory Note dated November 1, 1994 issued to Gary D.
Lipson for $50,000.
**10.16 Promissory Note dated April 5, 1994 issued to Kipnis Tescher
Lippman Valinsky and Kain for $115,000.
**10.17 Substitute Promissory Note dated November 1, 1994 issued to Kipnis
Tescher Lippman Valinsky & Kain for $115,000.
**10.18 Letter Agreement dated December 28, 1994 between the Company and
Kipnis Tescher Lippman Valinsky and Kain.
**10.19 Letter of Understanding dated December 16, 1994 from the Company to
Colonial Capital, Inc.
**10.20 Purchase Agreement dated June 10, 1993 by and among the Company,
Michael Schub, Linda Amori, Ron Rodriguez, Debbie Dworkin and
William Zanker.
**10.21 Mutual Termination Agreement dated November 15, 1994 by and among
the Company, Michael Schub, Linda Amori, Ron Rodriguez, Debbie
Dworkin and William Zanker.
**10.22 Option Agreement dated June 20, 1994 between Bay Area Backs I and
the Company relating to a potential franchise agreement.
**10.23 Option Agreement dated June 21, 1994 between Bay Area Backs I and
the Company relating to a potential franchise agreement.
**10.24 Letter dated October 19, 1994 from the Company to Bay Area Backs I
extending the term of the Option Agreements.
**10.24.1 Letter dated February 13, 1995 from the Company to Bay Area Backs I
extending the term of the Option Agreements.
<PAGE>
**10.25 Form of Bridge Note relating to December 1994 private placement
securities offering.
**10.26 The Company's Uniform Franchise Offering Circular dated April 1,
1994.
**10.27 Letter of Intent dated June 9, 1994 between Brookstone, Inc. and
the Company.
**10.28 Letter of Intent dated October 6, 1994 between Brookstone, Inc. and
the Company.
**10.29 Assignment of Patent Rights dated December 23, 1994 from William
Zanker to the Company.
**10.30 Consulting Agreement dated March 9, 1995 between the Company and A.
Clinton Allen.
**10.31 Option Agreement dated March 9, 1995 between the Company and A.
Clinton Allen.
**10.32 Indemnification Letter dated March 9, 1995 from the Company to A.
Clinton Allen.
***10.33 Option Agreement dated December 7, 1995, by and among Laidlaw
Holdings, Inc., Laidlaw Equities, Inc. and the Company.
***10.34 Franchise Termination Agreement dated as of May 30, 1995, by and
between the Company and Emerald Desert Rub.
***10.35 Option Termination Agreement dated as of May 30, 1995, by and
between the Company and Bay Area Backs I.
***10.36 Financial Advisory and Consulting Agreement between the Company and
Investors Associates, Inc.
*10.37 Consulting agreement dated February 1, 1996 between the Company and
Horatio Management Services Corp.
10.38 Franchise Agreement dated November 19, 1996 between the Company and
Roosevelt Field Partners, LLC.
10.39 Franchise Agreement dated November 20, 1996 between the Company and
Marion Holdings, Inc., as amended December 20, 1996
10.40 Option Agreement dated November 21, 1996 between the Company and
Marylou Garcia.
10.41 Agency Agreement dated November 22, 1996 between the Company and
Investors Associates, Inc., as amended December 20, 1996.
10.42 Form of Note relating to December 1996 private placement.
10.43 Form of Warrant relating to December 1996 private placement, as
amended.
***11.1 Statement regarding Computation of Per Share Earnings.
**16.1 Letter from Elwell, Cangiano, Zdon & Dee relating to change in
accountants.
***21.1 Subsidiaries of the Company.
<PAGE>
- -----------------
* Incorporated by reference to the Company's Registration Statement
on Form SB-2 (File No. 333-21203).
** Incorporated by reference to the Company's Registration Statement
on Form SB-2 (File No. 33-88052).
*** Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended December 31, 1995 (File No. 0-25334).
EXHIBIT 10.38
FRANCHISE AGREEMENT
THE GREAT AMERICAN BACKRUB STORE, INC., a New York Corporation,
hereinafter sometimes referred to as "Franchisor," and Roosevelt Field Partners,
LLC, hereinafter referred to as "Franchisee," in consideration of the premises,
covenants, and promises herein, agree as follows:
RECITALS
ARTICLE 1
SECTION 1.01. Franchisor is a corporation duly organized, validly
existing, and in good standing under the laws of the State of New York.
Franchisor's principal office is located at 425 Madison Avenue, Suite 605, New
York, NY 10017.
SECTION 1.02. Franchisee's principal address is:
10241 S.W. 136th Street
Miami, FL 33176
SECTION 1.03. Franchisor possesses rights under various registered and
unregistered trademarks, service marks, trade names and styles relating to the
trade name "The Great American BackRub," including distinctive logos, and also
certain copyrighted material embodying the use of such marks and Franchisee
specifically acknowledges Franchisor's exclusive right to said trademarks,
service marks, trade names, and copyrighted material.
SECTION 1.04. As the result of the expenditure of time, effort and
money in research and development, Franchisor has developed a system and
acquired experience and knowledge with respect to a system for the operation of
businesses offering back rub services and products in a specially designed and
decorated building with distinctive fixtures, accessories and color scheme, all
known as "The Great American BackRub". In addition, through its advertising
programs and the quality of its service, Franchisor has established a
reputation, demand and goodwill for back rub services and products under the
name of "The Great American BackRub".
SECTION 1.05. Franchisor is also engaged in the business of granting to
others, by means of non-exclusive franchise agreements, special limited licenses
to utilize the name The Great American BackRub, the related proprietary marks
and the associated concepts in connection with the operation by such persons of
stores and the sale, distribution, and marketing of back rub services and
products.
<PAGE>
SECTION 1.06. All of the foregoing have a valuable significance to the
public, and Franchisee, being cognizant thereof, desires to obtain from
Franchisor, and Franchisor desires to grant to Franchisee, pursuant to the terms
of this Agreement, a franchise to operate one The Great American BackRub store
at the location hereinafter specified.
SECTION 1.07. Franchisor expressly disclaims the making of, and
Franchisee acknowledges that he has not received or relied upon, any warranty or
guaranty, express or implied, as to the revenues, profits or success of the
business venture contemplated by this Agreement. Franchisee acknowledges that he
has not received or relied on any representations about the franchise by
Franchisor, or its officers, directors, employees or agents, that are contrary
to the statements made in Franchisor's Uniform Franchise Offering Circular or to
the terms herein, and further represents to Franchisor, as an inducement to its
entry into this Agreement, that Franchisee has made no misrepresentations in
obtaining the Franchise. Franchisee has applied for a franchise to own and
operate a The Great American BackRub at the premises identified in Section 2.01
hereof, and such application has been approved by Franchisor in reliance upon
all of the representations made therein.
SECTION 1.08. The parties hereto, in consideration of the mutual
agreements herein contained and promises herein expressed, and for other good
consideration, acknowledged by each of them to be satisfactory and adequate, do
hereby agree as follows:
TERMS AND CONDITIONS
ARTICLE 2
SECTION 2.01. Franchisor hereby grants to Franchisee and Franchisee
hereby accepts subject to the terms and conditions of this Agreement the limited
right and license to operate one The Great American BackRub store located at
Roosevelt Field Mall, Long Island, New York (hereinafter sometimes referred to
as the "Subject Location"), together with the limited right and license to
utilize the related proprietary marks and Franchisor's system for the operation
of one The Great American BackRub store. Termination or expiration of this
Agreement shall constitute a termination or expiration of said Franchise.
SECTION 2.02. Franchisee acknowledges Franchisor's exclusive right to
the name The Great American BackRub, and the programs, including all bulletins,
procedures, supplements, forms, advertising matter, devices, marks, service
marks, trademarks, trade names, logos and slogans, and goodwill associated
therewith, whether currently being used or hereafter applied for or put to use,
in connection with, or applicable to, The Great American BackRub program.
Franchisee agrees that he will not use or attempt to use any of said names,
marks, or logos, in his own name or that of any other partnership, person,
corporation or other business entity and that he will use said names, marks, or
logos exclusively for, and in connection with, the promotion and conduct of the
business herein described.
SECTION 2.03. Subject to the terms and conditions hereof, and further
provided that Franchisee has not breached any of the terms and conditions of
this agreement,
-2-
<PAGE>
Franchisor grants to Franchisee during the term of this Agreement, the right to
use in connection with Franchisee's The Great American BackRub franchise
Franchisor's marks, service marks, trademarks, trade names, logos and slogans,
whether currently being used or hereafter applied for or put into use.
SECTION 2.04. The rights herein granted to Franchisee by Franchisor are
specifically restricted to the operation by Franchisee of a The Great American
BackRub at the Subject Location. The right and license herein granted to
Franchisee shall be effective only with respect to the franchise located at the
Subject Location. No branches or second locations shall be permitted under this
Agreement, and Franchisee hereby acknowledges that no representations or
warranties have been made by Franchisor with respect to the grant of any other
franchises or permission to operate the franchise from an additional or any
other location.
SECTION 2.05. The nature of the right and license herein granted to
Franchisee is non-transferable. Franchisee may not directly or indirectly
sublicense or subfranchise any other person, firm or corporation to own or
operate a The Great American BackRub store, to utilize in any way the
proprietary marks of Franchisor, or to utilize in any way all or any part of
Franchisor's program. Further, without the prior written consent of Franchisor,
Franchisee shall not sell, assign, or transfer said license or right, or any
interest therein, except through an assignment of this Agreement in it entirety,
and then subject to the provisions of and only to the extent permitted by
Article 9 hereof.
SECTION 2.06. The license herein granted to Franchisee is
non-exclusive. Franchisor reserves all rights to grant and sell similar
franchises and licenses to others to operate, and to own or operate for its own
account or with others, other The Great American BackRub stores at any location
whatsoever.
SECTION 2.07. Franchisee acknowledges and agrees that Franchisor would
be unable to protect its trade secrets against unauthorized use or disclosure
and would be unable to encourage a free exchange of ideas and information among
its franchisees if franchised owners of The Great American BackRub stores were
permitted to hold interests in any other business which is in direct or indirect
competition with Franchisee's The Great American BackRub. Therefore, during the
term of the Franchise, neither Franchisee, any shareholder or partner (in the
event Franchisee is a corporation or partnership), nor any member of his or
their immediate families (including, but not limited to, spouse, child, spouse
of a child, brother, sister or parent) shall have any interest as an owner,
investor, partner, director, officer, employee, consultant, representative or
agent, or in any other capacity, in any other business (a "Competing Business")
which is in the business of selling back rub services, massages, or any related
services or products. In the event this restriction is unenforceable under the
provisions of any applicable law governing this Agreement, said restriction
shall be modified such that the geographic limitations of said restriction shall
prohibit the direct or indirect ownership or operation of a Competing Business
within (i) a radius of ten (10) miles of the Subject Location, or (ii) a radius
of three (3) miles from any other operating The Great
-3-
<PAGE>
American BackRub store. This restriction shall not be applicable to any other
The Great American BackRub store operated under Franchise Agreements granted by
Franchisor nor the ownership of securities listed on a stock exchange or traded
on the over-the-counter market that represent one percent (1%) or less of that
class of securities. Franchisee shall not at any time directly or indirectly
furnish any information to any person as to Franchisor's methods of operation,
techniques or methods, advertising, publicity, promotions, or any other
information relating to Franchisee's or Franchisor's business.
SECTION 2.08. If this Agreement expires prior to its expiration and the
franchise is terminated by Franchisor in accordance with the provision of this
Agreement, or, in the event this Agreement is terminated by Franchisee without
cause, then Franchisee agrees that for a period of two (2) years, commencing on
the effective date of termination, or the date on which Franchisee ceases to
conduct business at the Subject Location, whichever is later, Franchisee will
not have any interest as an owner, partner, director, officer, employee,
consultant, representative or agent, or in any other capacity, in any store
located or operating within (i) a radius of ten (10) miles of the Subject
Location or, (ii) a radius of three (3) miles of any other The Great American
BackRub in operation as of the effective date of said expiration or termination.
This restriction shall not be applicable to any other The Great American BackRub
operated under Franchise Agreements granted by Franchisor nor the ownership of
securities listed on a stock exchange or traded on the over-the-counter market
that represent one percent (1%) or less of that class of securities.
TERM/RENEWAL RIGHTS
ARTICLE 3
SECTION 3.01. The initial term (the "Initial Term") of the franchise
and license herein granted shall expire, unless sooner terminated in accordance
with the terms and conditions of this Agreement upon the EARLIER of:
A. The expiration of a five (5) year term commencing December 1, 1996
(hereinafter referred to as "the effective date") and ending November 30, 2001;
or
B. The expiration or termination of Franchisee's lease or sublease or
his right to possession of the Subject Location (for whatever reason, including
the termination of Franchisor's lease) provided neither Franchisee nor
Franchisor have any right to renew such lease or sublease, as the case may be,
or Franchisee fails or refuses to exercise any right to renew said lease;
provided, however, in the event Franchisee desires to relocate said franchise
location to a location acceptable to Franchisor, and provided further that said
location is completed within sixty (60) days after termination of Franchisee's
right to occupy the Subject Location, Franchisee shall be allowed to complete
the Initial Term at said new location.
SECTION 3.02. Provided Franchisee shall have substantially complied
with all of the terms and conditions of this Agreement and any other agreements
between Franchisor and
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Franchisee, and further provided Franchisee shall have substantially complied
with the operating standards and criteria established by Franchisor, Franchisee
shall have the right and option to extend the Initial Term of the franchise and
license herein granted for one additional five (5) year term (the "Extension
Term") terminating on the EARLIER of:
A. Five (5) years following the commencement of said Extension Term, or
B. The expiration or termination of Franchisee's lease or sublease or
his right to possession of the Subject Location or Franchisee fails or refuses
to exercise any right to sublease the Subject Premises from Franchisor.
SECTION 3.03. In order to exercise the right and option to extend the
Initial Term, Franchisee must give Franchisor written notice (the "Extension
Notice") of Franchisee's election to do so not more than twelve (12) months and
not less than nine (9) months prior to the expiration of the Initial Term.
Provided, however, Franchisor may, if it so elects, nullify and treat as null
and void, any such option or the exercise thereof, if:
A. At the time of the exercise of any such option or of the
commencement of the Extension Term, Franchisee is in default hereunder or under
Franchisee's lease or sublease of the Subject Location; or
B. Franchisee's lease or sublease or his right to possession of the
Subject Location has terminated, and Franchisee has no right to renew such lease
or sublease, or chooses not to renew; or
C. Franchisor is sublessor of the Subject Location and cannot renew its
lease on terms deemed reasonable by Franchisor; or
D. Franchisee does not, prior to the commencement of said Extension
Term, make, at Franchisee's own expense, such capital expenditures as may be
required by Franchisor to renovate and modernize the Subject Location,
including, but not limited to, signs, point of sale/computerized cash
register(s), equipment and leasehold improvements, so as-to reflect the then
current operating systems and image of other The Great American BackRub
locations; or
E. Franchisee does not pay to Franchisor, contemporaneously with giving
the Extension Notice, the renewal fee specified in Section 4.08 hereof.
SECTION 3.04. In the event Franchisee exercises his option to extend
the Initial Term pursuant to the terms of Sections 3.02 and 3.03 hereof, the
Franchisee (and the owners of Franchisee, if Franchisee is a corporation) and
Franchisor shall execute the then current form of Franchise Agreement and such
ancillary agreements as are then customarily used by Franchisor in the grant of
franchises for the ownership and operation of The Great American
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BackRubs, but which shall provide for the same royalties and other fees and
contributions as required in this Agreement. In addition, Franchisee and its
owners shall execute general releases, in form and substance satisfactory to
Franchisor, of any and all claims against Franchisor and its affiliates,
officers, directors, employees and agents. Failure by Franchisee and its owners
to sign such agreement(s) and releases within thirty (30) days after delivery
thereof to Franchisee shall be deemed an election by Franchisee not to renew the
Franchise.
SECTION 3.05. The franchise herein granted is for the Initial Term of
five (5) years and, at the option of Franchisee, the five (5) year Extension
Term described above. Franchisor may offer to Franchisee an option to extend the
term of the franchise herein granted for an additional term, in addition to the
Extension Term, of not less than five (5) nor more than ten (10) years,
commencing upon the expiration of the Extension Term. Franchisor's decision to
offer, or not offer, said option to Franchisee shall be based upon Franchisor's
analysis of Franchisee's past performance and the future potential of the
Subject Location. Franchisor shall not unreasonably withhold the offering of
said option.
Franchisor's decision to offer, or not offer, said option shall be
based upon all information available to Franchisor, including, but not limited
to, the operating history of the franchise, the quality of operations, the level
of Franchisee's involvement in the management of the franchise, Franchisee's
operational proficiency and commitment to operational excellence, Franchisee's
participation and cooperation with other franchisees and programs adopted by
other franchisees, Franchisee's proficiency and commitment with respect to the
marketing of the franchise, Franchisee's efforts to develop effective management
personnel, the physical condition of the Subject Location, Franchisee's history
of maintenance and capital improvements with respect to the Subject Location,
Franchisee's participation in conventions and optional training programs offered
by Franchisor, Franchisee's payment history to Franchisor and vendors, and the
overall financial condition of Franchisee.
Franchisor shall notify Franchisee of Franchisor's decision to offer,
or not offer, said additional term in writing not less than eighteen (18) months
prior to the expiration of the Extension Term. Said offer to extend may be
conditional and subject to Franchisee complying with specified conditions prior
to the effective date of said option term. In the event that said offer to
extend the term hereof is subject to specified conditions, Franchisee shall have
a period of thirty (30) days within which to notify Franchisor in writing of
Franchisee's acceptance, or rejection, of said conditions.
In the event that Franchisor does offer Franchisee an option to extend
the term of the franchise, Franchisee shall be required to pay to Franchisor a
renewal fee pursuant to the terms of Section 4.08 hereof and shall be required
to execute and be bound by the then current form of franchise agreement used by
Franchisor in the grant of The Great American BackRub franchises, but which
shall provide for the same royalties and other fees and contributions as
required in this Agreement.
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In the event that Franchisor notifies Franchisee that Franchisor has
elected not to offer Franchisee an option to extended the term hereof, or if
Franchisee elects not to comply with the conditions set forth in Franchisor's
offer of said option, Franchisee shall have the right to sell the franchise
herein granted pursuant to the terms and conditions of Article 9 hereof,
including, but not limited to, the provisions of Section 9.06. In addition,
notwithstanding any provisions of Article 9 to the contrary, said buyer shall be
required to sign and be bound by the then current form of franchise agreement
used by Franchisor in the grant of a The Great American BackRub franchise.
FEES
ARTICLE 4
SECTION 4.01. Franchisee shall pay Franchisor an initial,
non-recurring, non-refundable (except as provided in Sections 4.02 and 13.01
hereof) franchise fee of Twelve Thousand Five Hundred Dollars ($12,500).
Provided, however, if Franchisee has executed an "Option Agreement" with
Franchisor and Franchisee has complied with all terms thereof, Franchisee shall
be given a credit for all amounts paid to Franchisor pursuant to said Option
Agreement. Said franchise fee shall be payable upon the execution and delivery
of this Agreement. Except as provided in Sections 4.02 and 13.01 hereof, the
initial franchise fee shall be deemed fully earned by Franchisor upon the
execution and delivery of this Agreement and full payment of said initial
franchise fee shall be in addition to the monthly royalty fees payable to
Franchisor by Franchisee pursuant to Section 4.05 hereof and shall be in
addition to any and all other sums required to be paid to Franchisor by
Franchisee pursuant to any other term or provision of this Agreement whether for
advertising contributions, training fees, or for any other reason or purpose.
Except as provided in Sections 4.02 and 13.01 hereof, said initial franchise fee
is not refundable under any circumstances, in full or in part including any
termination of this Agreement nor at any other time nor under any other
circumstances whatsoever.
SECTION 4.02. Franchisee agrees that if Franchisor determines, pursuant
to the terms of Section 6.03 hereof, that Franchisee has not successfully
completed Franchisor's initial training course relating to the operation of a
The Great American BackRub franchise, Franchisor shall return to Franchisee the
initial franchise fee paid to Franchisor by Franchisee pursuant to Section 4.01
hereof and this Agreement shall be deemed to be null and void and without
further effect.
SECTION 4.03. Upon the request of Franchisee, any sums paid to
Franchisor pursuant to Section 4.01 hereof shall be deposited with an escrow
agent, mutually acceptable to both parties, who shall hold said sums until the
earlier of (1) notification from Franchisor that Franchisee did not successfully
completed the initial training course as specified in Section 6.03 hereof in
which event said deposited sum shall be paid to Franchisee, or (2) Franchisee
has commenced operation of the franchise at the Subject Location in which event
said deposited sum shall be paid to Franchisor. Any costs associated with said
escrow shall
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be paid by Franchisee and all interest, if any, earned on said deposit while
held in said escrow agent shall inure to the party to whom said deposit is
ultimately paid.
SECTION 4.04. A Franchisee who has not previously attended and
successfully completed Franchisor's initial franchisee training course shall pay
to Franchisor a non-refundable fee of Two Thousand Five Hundred Dollars ($2,500)
for Franchisee's attendance at Franchisor's initial training course relating to
the operation of a The Great American BackRub franchise. Said fee shall be
subject to all of the terms and conditions of Section 6.03 hereof. Said sum
shall be paid to Franchisor upon execution and delivery of this Agreement.
SECTION 4.05. In addition to the initial payment set forth in Section
4.01 hereof, Franchisee agrees to pay to Franchisor a monthly royalty fee equal
to Six Percent (6%) of Franchisee's gross monthly revenues (as said term is
hereinafter defined) derived from the operation of the franchise for each month
or any portion thereof during the term of this Agreement. Said fee shall be paid
on or before the tenth (10th) day of each month and shall be based upon gross
revenues for the preceding calendar month. Along with said payment Franchisee
shall furnish Franchisor with written reports on forms specified by Franchisor
for this purpose signed by Franchisee stating gross revenues for the preceding
calendar month as designated and classified on Franchisor's forms. In addition,
provided said function is an available feature of any computerized point of sale
or accounting system specified by Franchisor, Franchisor may require Franchisee
to electronically transfer said information or data to Franchisor.
SECTION 4.06. In addition to any other payment herein required, at any
time during the initial term of this Agreement, or any extension hereof,
Franchisor may establish an Advertising Fund. In such event, Franchisor shall
give Franchisee written notice of the establishment of said Advertising Fund not
less than thirty (30) days prior to any date that payment to said Advertising
Fund shall be payable pursuant to this Agreement. In the event that an
Advertising fund is established, Franchisee shall pay to Franchisor, as an
advertising and sales promotion fee, an amount equal to the GREATER of (i) Three
Percent (3%) of Franchisee's gross monthly revenues, as said term is hereinafter
defined, for each month (or any portion thereof) during the term of this
Agreement, or (ii) Five Hundred Dollars ($500.00). Said fee shall be paid in the
same manner as the monthly royalty fee specified in Section 4.05 hereof.
Franchisor shall retain said sums in a properly segregated fund.
Franchisor shall supply Franchisee with a semi-annual statement for said fund
indicating the gross amount of advertising and sales promotion fees collected
from all franchisees, the total amount expended for advertising and sales
promotion, and the balance of said fund. Franchisor shall have responsibility
for disbursement of said funds. Provided, however, that not less than
seventy-five percent (75%) of said fees shall be used for advertising and
promotions in the general geographic area of the respective Great American
BackRub stores which generated said fees. The manner, media and cost of such
advertising or promotion shall be decided by Franchisor at its sole discretion.
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SECTION 4.07. The term "gross monthly revenues" is defined as the total
gross revenue derived by Franchisee in accordance with such accounting practices
and procedures as shall be determined and required by Franchisor with respect to
the operations of the franchise, whether from sales for cash or credit, and
without regard to the source of payment thereof or the collection thereof, or
the cost of collection, including therein the sales of all merchandise and
services, but exclusive of all sales taxes, use taxes, gross receipt taxes and
other similar taxes added to the sales price and collected from the customer by
Franchisee, and less any bona fide refunds. The term "sales of all merchandise
and services" shall be determined and construed in its most comprehensive sense.
SECTION 4.08. In the event Franchisee should exercise its option to
extend the Initial Term of the franchise and license herein granted pursuant to
the terms and conditions of Sections 3.02, 3.03 and 3.04 hereof, Franchise shall
pay to Franchisor a renewal fee of Five Thousand Dollars ($5,000).
SECTION 4.09. All royalty and service fees, advertising contributions,
amounts due for purchases by Franchisee from Franchisor or its affiliates and
other amounts which Franchisee owes to Franchisor or its affiliates shall bear
interest after due date at the lesser of (i) eighteen percent (18%) per annum,
or (ii) the highest applicable legal rate for open account business credit in
the state in which the Subject Location is located. Franchisee acknowledges that
this provision of this Agreement shall not constitute Franchisor's agreement to
accept such payments after same are due or a commitment by Franchisor to extend
credit to, or otherwise finance Franchisee's operation of, the franchise herein
granted. Further, Franchisee acknowledges that his failure to pay all amounts
when due shall constitute grounds for termination of this Agreement, as provided
in Article 12, notwithstanding the provisions of this Section 4.09.
SECTION 4.10. Franchisee agrees to execute and deliver to Franchisor,
within ten (10) days of receipt of Franchisor's written request, the appropriate
preauthorized check and electronic funds transfer forms from Franchisee's
checking account so that Franchisor will be able to electronically deposit any
fees payable to Franchisor under the term of this Agreement on a timely basis.
LEASEHOLD RIGHTS AND OBLIGATIONS
ARTICLE 5
SECTION 5.01. Franchisee shall lease/sublease the Subject Location
under the terms and conditions of that certain lease/sublease agreement dated as
of the date of this Agreement.
SECTION 5.02. Franchisee, at Franchisee's sole expense, shall add such
leasehold improvements to the Subject Location as may be required by Franchisor.
Said leasehold improvements shall be constructed in strict conformity with
designs, plans and specifications approved in writing by Franchisor prior to the
commencement of any construction. Franchisee, at Franchisee's sole expense,
shall equip and furnish the Subject Location with
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such equipment, furniture, fixtures and signs as Franchisor may reasonably
require in order to ensure a uniform appearance of all The Great American
BackRub locations. Unless agreed to in a writing executed by Franchisor, all
such improvements and furnishings shall be completed within sixty (60) days
after the execution of this Agreement.
SECTION 5.03. Franchisee agrees to comply with all terms and conditions
of the lease/sublease referred to in Section 5.01 hereof. Upon receipt of any
notice of default or breach of the terms of said lease/sublease, Franchisee
agrees to forthwith take all reasonable steps necessary to cure said default or
breach. In the event Franchisee does not forthwith act to cure said default or
breach, Franchisor, or its agents or employees, may, in addition to any other
remedy available to Franchisor under the terms and conditions of this Agreement,
and with impunity, take all reasonable steps including, but not limited to,
entering the Subject Location for the purpose of operating the franchise,
necessary to cure said default or breach. Franchisee shall immediately reimburse
Franchisor for any costs incurred by Franchisor incidental to Franchisor's cure
of said default or breach.
SECTION 5.04. Franchisee agrees to maintain all improvements,
furniture, fixtures and equipment located in the Subject Location in good and
safe working order and to replace (at Franchisee's expense) all worn, damaged or
unsafe improvements, furniture, fixtures and equipment with new replacement
items of equal or better quality which shall conform in appearance and design to
the then current plans and specifications of Franchisor. In addition, Franchisor
may from time to time require Franchisee to modify the appearance of the Subject
Location to conform to the current design and appearance standards adopted by
Franchisor. Franchisee shall, within a reasonable time after notice from
Franchisor of such standards, take all steps, including remodeling or other
substantial changes, necessary to comply with said standards at Franchisee's
cost. In all events, Franchisee shall install and use only such furnishings,
fixtures and equipment as shall conform to specifications of design, color,
quality, performance and utility designated or approved in writing by
Franchisor.
SECTION 5.05. Franchisee shall, at Franchisee's expense, maintain the
interior and exterior of the Subject Location in a clean, orderly, safe, and
sanitary condition satisfactory to Franchisor and shall make such repairs as are
necessary to maintain an aesthetically pleasing appearance. All repairs,
modifications, and remodeling of the Subject Location shall be made only after
Franchisee has received the prior written consent of Franchisor.
SECTION 5.06. Franchisee agrees to indemnify, defend, and hold
Franchisor harmless from any claim, action, proceeding or demand arising from or
pertaining to Franchisee's improvements to, or modifications of, the Subject
Location.
SECTION 5.07. Franchisee shall not install or use any sign, whether on
the exterior or in the interior of the Subject Location, which has not received
the prior written approval of Franchisor. As used herein the term "sign" shall
be interpreted in its broadest sense and shall include all displays, cards,
window advertising and promotional material.
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SECTION 5.08. Franchisor shall have the right to place in a conspicuous
location in the Subject Location a sign of reasonable proportions, along with
written material, which shall advise the public that Franchisee's business is a
franchise, provide information to prospective franchisees, and a method for
prospective franchisee to contact Franchisor.
SECTION 5.09. If Franchisee should fail to comply with any of the terms
and conditions of this Article 5, in addition to any other relief available to
Franchisor, Franchisor or any persons authorized by Franchisor, without
liability to Franchisee, shall have the right, in addition to any rights
Franchisor may have under the lease/sublease, to enter at any time upon the
Subject Location and perform any act deemed necessary by Franchisor to remedy
such failure and Franchisee shall immediately reimburse Franchisor for any costs
incurred by Franchisor incidental thereto.
TRAINING
ARTICLE 6
SECTION 6.01. Franchisor shall make available to Franchisee
Franchisor's customary initial training course concerning the operation of a The
Great American BackRub location. Prior to the opening of the Subject Location,
and as a condition precedent to Franchisee's rights hereunder, Franchisee shall
attend and complete said course to the satisfaction of Franchisor.
SECTION 6.02. Franchisee shall be entitled to have one additional
person attend Franchisor's customary initial training course, provided however,
said additional person shall attend said training course at the same time as
Franchisee. There shall be no additional training fee for said person's
concurrent attendance at said training course.
SECTION 6.03. As provided in Section 4.04 hereof, Franchisee shall pay
to Franchisor the sum of Two Thousand Five Hundred Dollars ($2,500.00)
representing a non-refundable fee for Franchisee's attendance at said initial
training course. Franchisee acknowledges that in the event Franchisee does not
complete said training course to the satisfaction of Franchisor, no portion of
said fee shall be returned to Franchisee. NOTWITHSTANDING ANY CONTRARY PROVISION
IN THIS AGREEMENT, THE DETERMINATION OF WHETHER OR NOT FRANCHISEE HAS
SUCCESSFULLY COMPLETED SAID INITIAL TRAINING COURSE SHALL BE MADE AT THE SOLE
DISCRETION OF FRANCHISOR.
SECTION 6.04. In the event Franchisor determines that Franchisee has
not successfully completed Franchisor's initial training course pursuant to
Section 6.03 hereof, such decision shall render this Agreement null and void and
without further effect,.
SECTION 6.05. All new employees of Franchisee shall be required to
attend an initial training course conducted by Franchisor at a location
designated by Franchisor, at the
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option of Franchisor, by Franchisee using personnel and curriculum approved by
Franchisor. No person shall provide any services in the Subject Location who has
not completed said training course to the satisfaction of Franchisor. Franchisee
shall be responsible for all salaries and wages, if any, due said employees
during said training course. Franchisee shall pay Franchisor a basic training
fee for each employee who participates in said training course. The current
amount of said fee is set forth in Franchisor's Uniform Offering Circular. Said
fee may increase during the term of this Agreement.
SECTION 6.06. Franchisor shall have the right to require Franchisee,
and any employee of Franchisee, to attend, and successfully complete, advanced
training courses related to the operations and services of the Subject Location.
Franchisee shall not be required to attend more than one (1) such training class
per calendar year. Franchisee shall be responsible for all wages due any
employees during said training and all additional costs incurred by said
employee. Franchisee shall pay Franchisor a fee for each employee who
participates in any such training course. The current amount of said fee is set
forth in Franchisor's Uniform Offering Circular. Said fee may increase during
the term of this Agreement. Franchisor shall not charge any fee for Franchisee's
attendance at any such training course.
SECTION 6.07. All expenses of travel, lodging, meals, and other living
expenses, incurred by Franchisee, and/or any employees of Franchisee, in
attending any initial or subsequent training program or programs shall be borne
and paid by Franchisee.
OBLIGATIONS OF FRANCHISEE
ARTICLE 7
SECTION 7.01. Franchisee shall, beginning on the effective date of this
Agreement and continuing during the remaining term of this Agreement,
continuously operate a store at the Subject Location (except if prevented by an
act of God or other causes beyond the control of Franchisee), using Franchisee's
best efforts, skills and diligence in the conduct thereof, and regulating and
controlling Franchisee's employees so that said employees maintain a high
standard of professional competency and quality of service.
SECTION 7.02. Franchisee shall not operate, directly or indirectly, nor
allow the operation of, any other business within or in connection with the
Subject Location.
SECTION 7.03. Franchisee shall operate the Subject Location in strict
conformity with such reasonable standards, specifications, requirements and
instructions as Franchisor may hereafter adopt. Such standards, specifications,
requirements and instructions shall include but not be limited to a computerized
point of sale cash register and telephone modem specified by Franchisor.
Franchisee agrees to provide Franchisor telephonic access to the information
stored on the point of sale computerized cash register at such reasonable times
as Franchisor shall designate. In addition, Franchisor may request Franchisee to
electronically transfer information and/or data available from said computerized
point of sale cash register to
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Franchisor. Franchisee agrees to comply with said request in a timely manner.
Franchisor shall have the right from time to time to make reasonable changes,
modifications, or additions to any standards, specifications or requirements
whenever Franchisor deems that such changes, modifications or additions are
reasonably necessary to improve the standards of quality, service, repair and
maintenance of the Subject Location or to protect any mark, trademark, service
mark or trade name of Franchisor. Any such changes, modifications or additions
shall automatically be binding upon Franchisee upon the giving of notice of same
to Franchisee by Franchisor.
SECTION 7.04. Franchisee agrees that no employee of Franchisee whose
professional competency or quality of service does not meet the standards
established by Franchisor shall be allowed to work in the Subject Location.
SECTION 7.05. Franchisee shall display and sell in the Subject Location
a limited line of retail products approved in advance by Franchisor. Prior to
the sale of any product Franchisee shall obtain Franchisor's prior written
consent to the sale of said product. Any such product shall strictly conform to
standards and specifications determined by Franchisor for products sold in The
Great American BackRub locations.
SECTION 7.06. Franchisee shall offer all services and products which
Franchisor may uniformly require of all The Great American BackRub franchises.
Franchisee shall perform all such services in strict conformity with
Franchisor's standards and specifications and, in addition, Franchisee shall
comply with all applicable laws and regulations relating to such services.
Franchisee shall not offer any services which have not been previously approved,
in writing, by Franchisor or which is prohibited by law or applicable
regulation.
SECTION 7.07. All advertising or promotional materials to be used by
Franchisee, including signs or displays on or in the Subject Location, must be
approved in writing by Franchisor prior to any use thereof by Franchisee. Said
prior approval requirement shall not apply to any advertising or promotional
material supplied to Franchisee by Franchisor.
SECTION 7.08. Franchisee shall conform to all Federal, State and local
health and building regulations and shall make prompt and timely payments of all
taxes related to or arising from Franchisee's operation of the franchise.
Franchisee shall keep in force and effect all local, State and national license
which may be required for the lawful operation of the franchise.
SECTION 7.09. Franchisee shall immediately notify Franchisor of any
apparent infringement of, or challenge to, Franchisee's use of any name, mark or
logo used in connection with the franchise herein granted, or the claim by any
person or entity of any right to any such name, mark or logo. Franchisee shall
not communicate with any person other than Franchisor and its counsel in
connection with any such alleged infringement, challenge or claim. Franchisor
shall have sole discretion to take such action as it deems appropriate in
connection with said alleged infringement, challenge or claim, and shall have
the exclusive
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right to control any litigation or administrative proceedings associated
therewith. Franchisee agrees to execute any and all instruments and documents,
render such assistance, and do such acts and things as may be reasonable,
necessary or advisable to protect and maintain the interest of Franchisor in any
litigation or other proceeding, or to otherwise protect and maintain the
interest of Franchisor in said names, marks or logos.
ACCOUNTING PROCEDURES
ARTICLE 8
SECTION 8.01. Franchisee shall maintain a bookkeeping system in
conformity with the accounting methods prescribed by Franchisor, and shall use
such cash registers, books of accounts, reporting systems and methods which meet
the requirements of Franchisor.
SECTION 8.02. Upon the written request of Franchisor, Franchisee agrees
to furnish to Franchisor copies of designated sales tax returns, State, Federal
and local payroll tax returns, and Federal and State income tax returns within
thirty (30) days after receipt of said request.
SECTION 8.03. Franchisee shall furnish to Franchisor a copy of
Franchisee's report of gross revenues, gross sales, or other data which
Franchisee may be required to submit to any lessor/sublessor of the Subject
Location within five (5) days after said reports are required to be submitted.
SECTION 8.04. Franchisor shall at all times be entitled to audit
Franchisee's gross monthly revenues (as defined in Section 4.09 hereof) by
Franchisor, its employees, agents or representatives. Such audit shall be
limited to the determination of gross monthly revenues and shall be conducted
during normal business hours and either at the Subject Location or the principal
place of business of Franchisee. Franchisee agrees to supply Franchisor or its
designated agent with all information, data and records reasonably necessary to
complete said audit. If it is determined as a result of such audit that there
has been a deficiency in the payments made to Franchisor, then such deficiency
shall become immediately due and payable with interest at the highest rate
allowable under applicable State and/or Federal law from the date when said
payments should have been made not to exceed eighteen percent (18%) per annum.
In addition, if any of Franchisee's reports shall be found to have understated
gross monthly revenue by more than two percent (2%), in addition to any
royalties due Franchisor, Franchisee shall pay all of Franchisor's reasonable
costs and expenses connected with said audit. Further, in the event that any of
said reports are found to have understated gross monthly revenues by more than
five percent (5%), such understatement shall be deemed to be a breach of this
Agreement by Franchisee. Any information gained from such audit shall be
confidential and shall not be disclosed except to carry out the purposes hereof.
SECTION 8.05. The term "records" as used in Section 8.04 shall include,
but shall not be limited to, cash register recordings, purchase records, bank
statements, sales journals,
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payroll tax returns, sales receipts, employment records, financial statements
and other records normally maintained by such a business.
ASSIGNMENT
ARTICLE 9
SECTION 9.01. This Agreement and the franchise granted thereunder are
fully assignable by Franchisor and shall inure to the benefit of any assignee(s)
or other legal successor(s) to the interest of Franchisor herein, subject only
to the condition that the Assignee of Franchisor shall, subsequent to any such
assignment, remain liable, primarily and/or secondarily, for the performance of
all obligations of Franchisor under this Agreement.
SECTION 9.02. Franchisee understands and acknowledges that the rights
and duties created by this Agreement are personal to Franchisee or its owners
and that Franchisor has granted the franchise in reliance upon the individual or
collective character, skill, aptitude, business ability and financial capacity
of Franchisee or its owners. Therefore, except as hereinafter provided with
respect to an assignment to a corporation, neither the franchise nor the
franchised business or any interest therein nor any part or all of the ownership
of Franchisee may be voluntarily, involuntarily, directly or indirectly,
assigned, sold, subdivided, sub franchised or otherwise transferred by
Franchisee, or its owners, including without limitation by merger or
consolidation, or issuance of additional securities representing ownership in
Franchisee nor in the event of the death of Franchisee or an owner of
Franchisee, by will, declaration of or transfer in trust or the laws of
intestate succession without the prior written approval of Franchisor, and any
such assignment or transfer without such approval shall constitute a breach
hereof and conveys no rights to or interests in the franchise, franchised
business or Franchisee.
SECTION 9.03. If Franchisee or its owners are in full compliance with
this Agreement, Franchisor shall not unreasonably withhold its approval of an
assignment, provided that the proposed assignee(s) is, in the opinion of
Franchisor, of good moral character and has sufficient business experience,
aptitude and financial resources to own and operate the franchised business and
otherwise meets Franchisor's then applicable standards for Franchisees, and
further provided that the following conditions are met prior to, or concurrently
with, the effective date of the assignment:
(1) all obligations of Franchisee and its owners incurred in connection
with this Agreement have been assumed by the assignee(s);
(2) Franchisee shall have paid such franchise fees, advertising
contributions, amounts owed for purchases by Franchisee from Franchisor or its
affiliates and any other amounts owed to Franchisor or its affiliates which are
then due and unpaid;
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(3) the assignee(s) completes the training program required of new
Franchisees prior to the effective date of the assignment and pays Franchisor
the sum of Two Thousand Five Hundred ($2,500.00) as a fee for said course;
(4) if required, the owner/lessor of the Subject Location business has
consented to Franchisee's assignment or sublease of said premises to the
proposed assignee(s);
(5) the assignee(s) and if a corporation or partnership, its owners,
shall, at Franchisor's option, have executed and agreed to be bound by:
(i) a Guaranty agreement, satisfactory in form and content to
Franchisor, whereby the assignee assumes the obligation of Franchisee under this
Agreement and the sublease described in Section 5.01 hereof; and
(ii) the then current form of franchise agreement and such
ancillary agreements as are then customarily used by Franchisor in the grant of
The Great American BackRub franchises, but which shall provide for the same
royalties and other franchise fees and advertising contributions required
hereunder and be a term equal to the remaining term of this franchise agreement;
(6) Franchisee or assignee(s) shall have paid to Franchisor
Franchisor's standard assignment fee of Two Thousand Five Hundred Dollars
($2,500) to defray expenses incurred by Franchisor in connection with the
assignment, including, without limitation, training of assignee(s), legal and
accounting fees, credit and other investigation charges and evaluation of the
assignee(s) and the terms of the assignment.
(7) except to the extent limited or prohibited by applicable law,
Franchisee and each of its owners if Franchisee is a corporation or partnership
shall have executed a general release, in form satisfactory to Franchisor, of
any and all claims against Franchisor and its affiliate, officers, directors,
employees and agents;
(8) Franchisor shall have approved the material terms and conditions of
such assignment and shall have determined that the price and terms of payment
are not so burdensome as to adversely affect the future operations of the
franchised business by the assignee(s);
(9) Franchisee and each of its owners if Franchisee is a corporation or
partnership shall have executed a non-competition covenant in favor of
Franchisor and the assignee(s), agreeing that for a period of not less than two
(2) years, commencing on the effective date of the assignment, he will not have
any direct or indirect interest as an owner, investor, partner, director,
officer, employee, consultant, representative or agent, or in any other
capacity, in any business that (i) sells services or products substantially the
same as a The Great American BackRub , and (ii) which is located or operates
within a radius of ten (10) miles of the
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Subject Location or within a three (3) mile radius of any other The Great
American BackRub in operation at the time of such transfer; and
(10) Franchisee shall have entered into an agreement with Franchisor
agreeing to subordinate to such assignee's obligations to Franchisor, including,
without limitation, any franchise fees and advertising contributions, any
obligations of such assignee(s) to make installment payments of the purchase
price to Franchisee.
(11) Adequate provisions have been made by Franchisee, and approved by
Franchisor, to assure that assignee has the financial capability to fulfill any
and all contractual obligations to any existing customer/patron of the Subject
Location arising from, or related to, any back rub services or products to be
provided by Franchisee.
The Franchisor's consent to an assignment of any interest subject to
the restrictions of Sections 9.02 and 9.03 of this Agreement shall not
constitute a waiver of any claims it may have against the Franchisee, nor shall
it be deemed a waiver of Franchisor's right to demand exact compliance with any
of the terms or conditions of the franchise by the assignee.
SECTION 9.04. Within sixty (60) days from the date of this Agreement,
the franchise and the assets and liabilities of the franchised business may be
assigned to a newly organized corporation that conducts no business other than
the franchised business, which is actively managed by Franchisee and in which
Franchisee owns and controls all of the equity and voting power of all issued
and outstanding capital stock. Such an assignment shall not relieve Franchisee
of his obligations hereunder, and Franchisee and said corporation shall remain
jointly and severally liable for all obligations hereunder. The articles of
incorporation, by-laws and other organizational documents of such corporation
shall recite that the issuance and assignment of any interest therein is
restricted by the terms of Sections 9.02 and 9.03 of this Agreement and all
issued and outstanding stock certificates of such corporation shall bear a
legend reflecting or referring to the restrictions of said Sections 9.02 and
9.03.
SECTION 9.05. The assignment of the rights, duties and obligations of
Franchisee pursuant to Section 9.03 hereof shall not relieve Franchisee of the
duties and obligations herein imposed on Franchisee. Provided, however, if at
the expiration of six (6) months after the effective date of any transfer, the
transferee has not defaulted or breached any of the terms or conditions of the
then current agreement, subject only to the exception set forth in this Section
9.05, Franchisor shall release Franchisee from all obligations or liabilities
imposed on Franchisee pursuant to this agreement. During said six (6) month
period, Franchisor shall give Franchisee written notice of any default or breach
by said transferee. Notwithstanding the foregoing, said release shall not be
effective with respect to any liability of Franchisee under the provisions of
Section 7.09 hereof, nor for any liability of Franchisee with respect to the
unexpired term, exclusive of any renewal terms, under the sublease referred to
in Section 5.01.
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SECTION 9.06. In the event that Franchisee seeks the approval of
Franchisor to an assignment pursuant to the terms of this Article 9, Franchisee
shall include with such request a copy of any agreement relating to the proposed
sale or assignment of the franchise herein granted. Franchisor shall have no
obligation to consider any request for consent to any transferee if said
agreement is not included with said request. Upon receipt of such offer from
Franchisee, Franchisor shall have the option of purchasing or otherwise
acquiring such of Franchisee's rights under this agreement and all such other
property and rights of the Franchisee as may be embraced within said offer, upon
the same terms and conditions as those set forth therein. Franchisor may
exercise its option at any time within thirty (30) days after receipt of said
offer from Franchisee by giving written notice of its acceptance to Franchisee.
This Section shall not be applicable to any transfer made pursuant to Sections
9.04 hereof.
SECTION 9.07. In the event Franchisee (or any of its owners) shall,
subject to the restrictions and conditions of transfer contained in this Section
9.07, attempt to raise or secure funds by the sale of securities (including,
without limitation, common or preferred stock, bonds, debentures or general or
limited partnership interests) in Franchisee or any affiliate of Franchisee,
Franchisee acknowledges that the written information used with respect thereto
may reflect upon Franchisor. No information respecting Franchisor or any of its
affiliates shall be included in any securities disclosure document, unless such
information has been furnished by Franchisor, in writing, pursuant to the
written request of the Franchisee, in which the Franchisee states the specific
purpose for which the information is to be used. Should Franchisor, in its sole
discretion, object to any reference to Franchisor or any of it affiliates or to
any of their businesses in such offering literature or prospectus, such
literature or prospectus shall not be used unless and until the objections of
Franchisor are withdrawn. The Franchisor assumes no responsibility for the
offering whatsoever. The prospectus or other literature utilized in any such
offering shall contain the following language in bold-face type on the first
textual page thereof:
"NEITHER THE GREAT AMERICAN BACKRUB STORE, INC. NOR ANY OF ITS AFFILIATES IS
DIRECTLY OR INDIRECTLY THE ISSUER OF THE SECURITIES OFFERED HEREBY. NEITHER THE
GREAT AMERICAN BACKRUB STORE, INC. NOR ANY OF ITS AFFILIATES ASSUMES ANY
RESPONSIBILITY WITH RESPECT TO THIS OFFERING AND/OR THE ADEQUACY OR ACCURACY OF
THE INFORMATION SET FORTH HEREIN, INCLUDING ANY STATEMENTS MADE WITH RESPECT TO
ANY OF THEM. NEITHER THE GREAT AMERICAN BACKRUB STORE, INC. NOR ANY OF ITS
AFFILIATES ENDORSES OR MAKES ANY RECOMMENDATION WITH RESPECT TO THE INVESTMENT
CONTEMPLATED BY THIS OFFERING."
Franchisee and each of its owners agrees to indemnify, defend and hold
harmless Franchisor and its affiliates, and their respective officers,
directors, employees and agents, from any and all claims, demands, liabilities,
and all costs and expenses (including, without limitation, reasonable attorneys'
fee) incurred in the defense of such claims, demands or
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liabilities, arising from the offer or sale of such securities whether asserted
by a purchaser of any such security or by a governmental agency. Franchisor
shall have the right (but not the obligation) to defend any claims, demands or
liabilities and/or to participate in the defense of any action to which
Franchisor or any of its affiliates or any of their respective officers,
directors, employees or agents is named as a party.
SECTION 9.08. Any attempt by the Franchisee to transfer any rights or
interests under this Agreement without having received the prior written consent
of Franchisor shall constitute a material breach of this Agreement and
Franchisor shall have the right to terminate this Agreement upon written notice
to Franchisee.
INSURANCE/INDEMNIFICATION
ARTICLE 10
SECTION 10.01. In addition to any insurance required of Franchisee
pursuant to any lease relating to the Subject Location, Franchisee shall
purchase and maintain in effect at all times during the term of this Agreement
policies of insurance, naming Franchisor and all employees of Franchisee as
additional insureds, at Franchisee's sole cost and expense. Initially, said
insurance will conform to the following specifications:
A. Combined single limit, liability and property insurance including,
but not limited to, "all risk" buildings and contents insurance (including
replacement cost and plate glass provisions) for all leased or owned property,
general liability insurance (including premise operations, products,
professional malpractice, and personal injury) and automobile insurance
(including owned, hired or leased, non-ownership, medical payments and uninsured
motorist) with policy limits of at least $1,000,000.
B. An all inclusive standard umbrella policy of at least $1,000,000.
C. Worker's compensation insurance as required by State law.
Franchisor shall have the right, upon thirty (30) days written notice,
to require either an increase in said policy limits or additional coverage if
Franchisor, in its sole discretion, deems such increase or additional coverage
necessary. Franchisee shall supply Franchisor with current certificates of
coverage indicating full payment of insurance policies in conformity with the
then current requirements and copies of all applicable policies. Said policies
shall contain endorsements requiring the insurer to give Franchisor thirty (30)
days advance written notice in the event of any cancellation or change in the
coverage, scope, or amount of such policy.
SECTION 10.02. Franchisee agrees, during and after the term of this
Agreement, to indemnify, defend, and hold Franchisor harmless from and against
any and all loss, damage, claims, whether or not properly founded, liability and
attorneys' fees and other costs and expenses incurred by Franchisor as the
result of any violation of this Agreement by, or any
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act of omission or commission on the part of the Franchisee, or any of it
agents, servants or employees, and from all claims, damages, causes of action,
suits or rights of any persons, firm or corporations arising from the operation
of the franchise herein discussed. The Franchisor shall have the right (but not
the obligation) to defend any such claims, demands, or liabilities and/or to
participate in the defense of any action to which Franchisor or any of its
affiliates or any of their respective officers, directors, employees or agents
is named as a party.
RELATIONSHIPS OF PARTIES/REPRESENTATIONS
ARTICLE 11
SECTION 11.01. It is specifically recognized and acknowledged by
Franchisee that the success of the business venture to be undertaken by
Franchisee by virtue of this Agreement depends to a great extent upon the
ability of Franchisee as an independent party and entrepreneur as well as on
market conditions beyond the control of either Franchisor or Franchisee.
Franchisee acknowledges that Franchisee has entered into this Agreement after
making an independent investigation of Franchisor's operations and programs and
not upon any representation as to the profits, success, or other benefits which
Franchisee will realize. Franchisee acknowledges that there have been no
representations or warranties not expressly stated in this Agreement, or
Franchisor's Uniform Offering Circular, made by Franchisor or any representative
thereof or any other person on its behalf with respect to the potential success
of Franchisee's business or otherwise.
SECTION 11.02. Franchisee is not and shall not hold itself out as an
agent, legal representative, partner subsidiary, joint venturer or employee of
Franchisor. Franchisee shall have no right or power to, and shall not bind or
obligate Franchisor in any way, manner or thing whatsoever, nor represent that
it has any right to do so. In all public records and in its relationship with
other persons, on letterheads, and business forms, Franchisee shall indicate its
independent ownership of said business, and that it is only a franchisee of
Franchisor. Notwithstanding any other provision of this Agreement, Franchisor
and Franchisee shall not, under any circumstances, be deemed to be a joint
employer of any employee of Franchisee.
TERMINATION
ARTICLE 12
SECTION 12.01. Provided Franchisee is not in default of any of the
terms and conditions of this Agreement, or any other agreement between
Franchisee and Franchisor, Franchisee shall have the right to terminate this
Agreement by giving Franchisor notice at least one hundred twenty (120) days
prior to any intended termination date. During said period Franchisee shall
continue to maintain complete operations as if said notice had not been given.
Franchisee shall fully cooperate with Franchisor to expedite the transfer or
closing of said business. Such notice of termination shall not entitle
Franchisee to the return of any fees paid to Franchisor nor shall Franchisee be
relieved of any debt, duty or obligation owing to Franchisor arising from, or
related to, this Agreement, including, but not limited to, the obligation of
Franchisee pursuant to the sublease described in Section 5.01 hereof.
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SECTION 12.02. In addition to any other rights Franchisor may have to
terminate this Agreement, Franchisor shall have the right and option to
terminate this Agreement upon the occurrence of any of the following:
A. Failure of Franchisee to cure any breach or default of the terms and
conditions of this Agreement within five (5) days after Franchisor gives
Franchisee written notice of said breach or default. Provided, however, if cure
of said default or breach cannot be reasonably accomplished within five (5)
days, Franchisee shall be allowed such additional time, not to exceed twenty
(20) days, as reasonably necessary to accomplish said cure.
B. The third written notice within any period of twenty-four (24)
months to Franchisee by Franchisor of any breach or default, whether
subsequently cured or not, of the terms and conditions of this Agreement.
C. Unless otherwise prohibited by applicable law, if Franchisee becomes
insolvent or commits an act of bankruptcy, or makes a general assignment for the
benefit of creditors, or to an agent authorized to liquidate his property or
assets, or becomes or is adjudicated a bankrupt, or voluntarily files a petition
in bankruptcy or reorganization, or to effect a plan or other arrangement with
creditors, or files an answer to the creditor's petition or other petitions
filed against him (admitting the material allegations thereof) for an
adjudication, or for reorganization, or to effect a plan or other arrangement
with creditors, or applies for or suffers the appointment of a receiver or
trustee of any of his assets and property, or such receiver or trustee is
appointed for any of his property or assets, and such trustee or receiver so
appointed is not discharged within fifteen (15) days after the date of his
appointment, or all or substantially all of the property of the Franchisee is
attached by the United States or any officer or instrumentality thereof, and so
remains and continues for a period of fifteen (15) days, or a writ or warrant of
attachment, or any similar process is issued by any court against all or any
substantial portion of the property or assets of the Franchisee and such writ,
warrant of attachment, or any similar process is not released or bonded within
fifteen (15) days after entry or levy.
D. Upon the closing of the Franchisee's business for a period of five
(5) or more consecutive days without prior approval in writing of Franchisor
except for acts of God and other circumstances clearly beyond Franchisee's
control.
E. In the event of any material breach by Franchisee of any other
written agreement between Franchisor and Franchisee.
F. In the event that Franchisee, or any employee of Franchisee, is
convicted of a criminal offense relating to any act committed on, or relating
to, the Subject Location.
SECTION 12.03. If this Agreement is terminated for any reason
whatsoever, Franchisor shall have the right, without obligation and at the
expense of Franchisee, to
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remove from the Subject Location all identification to an extent and in a manner
sufficient to remove therefrom all similarities to the appearance of a The Great
American BackRub location; and, in addition:
A. All Franchisee's rights as a franchisee shall terminate and
Franchisee will immediately thereafter cease to use by advertising or otherwise,
The Great American BackRub programs or any part thereof, or any forms, systems,
slogans, signs, marks, symbols, or devices used in connection with The Great
American BackRub program, including the name The Great American BackRub, or any
variation thereof, in any manner whatsoever,
B. Franchisee will assist Franchisor in every way possible to bring
about a complete and effective transfer of the business, its customers,
facilities, and services to Franchisor or its designee.
C. Franchisee will pay all debts owing to Franchisor, including but not
limited to fees and rents, immediately upon termination.
D. Franchisee will pay all creditors immediately upon termination.
E. Franchisee will return immediately to Franchisor in good condition
all manuals furnished by Franchisor, all advertising material, stationery,
printed forms, and all other materials relating to the operation of this
franchise in his possession at the time of such termination.
F. Franchisee shall relinquish and take all steps necessary to transfer
all telephone numbers, listings and directory advertising relating to the
Subject Location or Franchisee's business into Franchisor's name.
G. Franchisee will comply with all the provisions of this Agreement
relative to termination.
SECTION 12.04. In the event of the termination of this Agreement for
any reason, Franchisor shall repurchase from Franchisee, and Franchisee shall
sell to Franchisor, all usable merchandise bearing Franchisor's name or the name
"The Great American BackRub," or any variation thereof. Said merchandise shall
be purchased at the then current wholesale price.
SECTION 12.05. Written notice of any breach or default of this
Agreement shall be personally served on Franchisee or sent, certified mail,
return receipt requested to the address set forth in Section 14.07 hereof, or
such address as Franchisee may hereafter designate in writing to Franchisor. If
said notice is served by mail, it shall be deemed served on the earlier of the
date delivered to the intended address or three (3) days after mailing.
Notwithstanding the above, all written notices and reports permitted or
required to be delivered by the provisions of this Agreement shall be deemed so
delivered at the time
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delivered by hand, or one (1) business day after sending by facsimile or
comparable electronic system or two (2) business days after deposited with
Federal Express or a comparable overnight courier company or three (3) business
days after being placed in the U.S. mail by Registered or Certified Mail, return
receipt requested, postage prepaid, and addressed to the party to be notified at
its most current principal business address of which the notifying party has
been notified.
SECTION 12.06. In the event said notice specifies that Franchisee's
default or breach constitutes a non-curable breach under the terms and
conditions hereof, this Agreement, and Franchisee's rights hereunder, shall
terminate ten (10) days following service of said notice.
SECTION 12.07. Except as provided in Section 12.08 of this Article, all
controversies, disputes or claims arising between Franchisor and Franchisee in
connection with, arising from, or with respect to: (1) any provision of this
Agreement or any other related agreement; (2) the relationship of the parties
hereto; (3) the validity of this Agreement or any other related agreement, or
any provision thereof; or (4) any specification, standard or operating procedure
relating to the establishment or operation of the franchised business which
shall not be resolved within fifteen (15) days after either party shall notify
the other in writing of such controversy, dispute or claim, shall be submitted
for arbitration to the New York, New York office of the American Arbitration
Association on demand of either party. Such arbitration proceedings shall be
conducted in New York, New York, except that for Franchisees located outside New
York, arbitration will be conducted in the state where the Subject Location is
located. Except as otherwise provided in this Agreement, arbitration proceedings
shall be conducted in accordance with the then current Commercial Arbitration
Rules of the American Arbitration Association. The arbitrator shall have the
right to award or include in his award any relief which he deems proper in the
circumstances, including without limitation, money damages (with interest on
unpaid amounts from date due), specific performance and injunctive relief. The
award and decision of the arbitrator shall be conclusive and binding upon all
parties hereto and judgment upon the award may be entered in any court of
competent jurisdiction. The parties acknowledge and agree that any arbitration
award may be enforced against either or both of them in a court of competent
jurisdiction and each waives any right to contest the validity or enforceability
of such award. The parties further agree to be bound by the provision of any
statute of limitations which would be otherwise applicable to the controversy,
dispute or claim which is the subject of any arbitration proceeding initiated
hereunder. Without limiting the foregoing, the parties shall be entitled in any
such arbitration proceeding to the entry of an order by a court of competent
jurisdiction pursuant to an opinion of the arbitrator for specific performance
of any of the requirements of this Agreement. This provision shall continue in
full force and effect subsequent to and notwithstanding expiration or
termination of this Agreement.
SECTION 12.08. The rights of Franchisor and Franchisee hereunder are
cumulative and no exercise or enforcement by Franchisor or Franchisee of any
right or remedy hereunder shall preclude the exercise or enforcement by
Franchisor or Franchisee of any other right or remedy hereunder or which
Franchisor or Franchisee is entitled by law to enforce.
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SECTION 12.09. Notwithstanding the provisions of Section 12.07 above,
Franchisor shall have the right to enforce by judicial process any rights it may
have to possession of the Subject Location under any lease or sublease with
Franchisee. Further, Franchisee agrees that Franchisor shall have the right to
seek preliminary injunctive relief to restrain conduct by Franchisee in the
development or operation of the franchise herein granted that could materially
damage the goodwill associated with any of Franchisor's proprietary rights
and/or marks or any The Great American BackRub location, provided that
Franchisor agrees to arbitrate any such dispute concurrently with and subsequent
to the grant or denial of such preliminary injunctive relief, and the sole
remedy of Franchisee, in the event of entry of a preliminary injunction, shall
be the dissolution of such injunction, if warranted upon hearing duly had (all
claims for damages by reason of the wrongful issuance of any such injunction
being expressly waived hereby).
SECTION 12.10. If a claim for amounts owed by Franchisee to Franchisor
or any of its affiliates is asserted in any judicial or arbitration proceeding,
or if Franchisor or Franchisee is required to enforce this Agreement in a
judicial or arbitration proceeding, the party prevailing in such proceeding
shall be entitled to reimbursement of its costs and expenses, including, but not
limited to, reasonable accounting fees, attorneys fees and arbitrator's fees.
Attorneys' fees shall include, without limitation, reasonable legal fees,
whether incurred prior to, or in preparation for or contemplation of the filing
of any written demand or any claim, action, hearing or proceeding to enforce the
obligations of Franchisor under this Agreement or any other related agreement
between the parties.
SECTION 12.11. Pending a decision of said arbitration proceeding, the
franchise herein granted shall, at the sole option of Franchisor, be operated by
Franchisor, who shall have sole authority as to the operation of said business.
Franchisor shall deposit all revenues from the operation of said business, less
normal operating expenses, including but not limited to rent, employee wages and
benefits, reasonable merchandise purchases, utilities, taxes and insurance, in a
separate account. The balance of said trust account shall be subject to the
decision of said arbitration proceeding and, if said balance, or any portion
thereof, is awarded to Franchisee, Franchisee shall be entitled to an accounting
of all funds received and disbursed.
LICENSES
ARTICLE 13
SECTION 13.01. In the event that any license, permit or similar
governmental approval is required by the appropriate authorities of the state,
county or city in which the franchise herein granted will be operated, then this
Agreement is contingent upon the Franchisee securing such license. Franchisee
agrees to make due and diligent application for such license and shall cooperate
with the authorities in connection with such license application. In the event
after such due and diligent application the Franchisee is unable to secure said
license(s) within thirty (30) days following the effective date hereof,
Franchisee shall give written notice to Franchisor by certified mail of his
inability to secure such a
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license. Upon expiration of ten (10) days from date of receipt of such notice,
this Agreement shall be deemed null and void and have no further effect. Except
for such training fees paid pursuant to Section 4.04, all moneys paid hereunder
by the Franchisee to Franchisor shall be refunded. All sums due to the
Franchisee after deducting appropriate charges, shall be returned within ten
(10) days after receipt of such termination notice. Franchisee agrees that he
will make immediate application to the proper authorities of the State in which
the Subject Location is located to obtain such licenses and shall diligently and
in good faith do all such things as may be necessary for that purpose.
Franchisee represents that he has no knowledge or reason to believe that a
license would not be granted to him on proper application.
SECTION 13.02. In the event that during the term of this Agreement any
license, permit or other approval described in Section 13.01 immediately above
is revoked, suspended, or terminated, or Franchisee's right to operate the
franchise is terminated or suspended, Franchisor shall have the right to
terminate this Agreement upon ten (10) days written notice to Franchisee.
MISCELLANEOUS
ARTICLE 14
SECTION 14.01. The waiver of Franchisor of any breach or default by the
Franchisee shall not affect or impair Franchisor's right in respect to any
subsequent default of the same or a different kind. Nor shall any delay or
omission of Franchisor to exercise any right arising from any default affect or
impair Franchisor's right as to the same or any future default.
SECTION 14.02. This Agreement shall be governed by and construed in
accordance with the laws of or applicable to the State of New York, as amended;
except that for franchises located outside of New York, the laws of the state in
which the Subject Location is located will apply.
SECTION 14.03. All terms and words used in this Agreement, regardless
of the number and gender in which they are used, shall be deemed and construed
to include any other number, singular or plural, and any other gender,
masculine, feminine or neuter, as the context or sense of this Agreement or any
paragraph or clause herein may require, the same as if such words had been fully
and properly written in the number and gender.
SECTION 14.04. This Agreement and the lease/sublease referred to in
Section 5.01 hereof, contains the entire agreement of the parties and supersedes
all prior negotiations, representations, inducements, promises, or agreements,
oral or otherwise. Franchisee acknowledges that Franchisor has not made any
representations, promises, or inducements, not embodied herein.
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SECTION 14.05. Should any part of this Agreement for any reason be
declared invalid, such decision shall not affect the validity of any remaining
portion, which remaining portion shall remain in force and effect as if this
agreement had been executed with the individual portion thereof eliminated, and
it is hereby declared the intention of the parties hereto that they would have
entered into this agreement notwithstanding the invalid portion hereof.
SECTION 14.06. Should either party to this Agreement institute legal
action for the enforcement of any provision of this Agreement, the prevailing
party in said action shall be entitled to, in addition to any other relief,
reasonable attorneys' fees and costs.
SECTION 14.07. All notices and reports to Franchisor or Franchisee, if
not personally served, shall be deemed so delivered one (1) business day after
sending by facsimile or comparable electronic system, or two (2) business days
after deposit with Federal Express or a comparable overnight courier company, or
three (3) business days after being placed in the U.S. mail by Registered or
Certified Mail, return receipt requested. All notices shall be sent postage
prepaid and addressed to the respective party as follows, or as either party may
from time to time designate in writing.
Franchisor: Franchisee:
The Great American BackRub Store, Inc. 10241 S.W. 136th St.
425 Madison Avenue, Suite 605 Miami, FL 33176
New York, NY 10017
SECTION 14.08. This Agreement may be modified or amended only by a
written document of equal dignity.
SECTION 14.09. This Agreement shall be binding on the parties, their
heirs, executors, personal representatives, successors or assigns.
SECTION 14.10. To the extent that Section 2.06, Section 2.08, or
Section 9.03(9) is deemed unenforceable by virtue of its scope in terms of area,
business activity prohibited, or length of time, but may be made enforceable by
reductions of any or all thereof, Franchisee and Franchisor agree that same
shall be enforced to the fullest extent permissible under the laws and public
policies applied in the jurisdiction in which enforcement is sought.
SECTION 14.11. This Agreement is executed in duplicate originals, any
one of which may be introduced into evidence as conclusive of the content
thereof.
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IN WITNESS WHEREOF the parties hereto have entered into this Agreement
this 19th day of November, 1996, at New York, New York.
"Franchisor" "Franchisee"
THE GREAT AMERICAN BACKRUB STORE, INC. ROOSEVELT FIELD PARTNERS, LLC
a New York Corporation
By: /s/ Terrance C. Murray By: /s/ Illegible
---------------------- ------------------
Terrance C. Murray Illegible
Title: CEO
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<PAGE>
STATE OF NEW YORK
ADDENDUM ATTACHED TO AND FORMING A PART OF THE
FRANCHISE AGREEMENT
BETWEEN THE GREAT AMERICAN BACKRUB STORE, INC. AS FRANCHISOR, AND
ROOSEVELT FIELD PARTNERS, LLC, AS FRANCHISEE,
DATED NOVEMBER 19, 1996
1. Section 3.04 of the Franchise Agreement is the same as written with the
following addition:
provided, however, that all rights enjoyed by the Franchisee and any
causes of action arising in its favor from the provisions of Article 33
of the General Business Law of New York State and the regulations
issued thereunder shall remain in force; it being the intent of this
proviso that the non-waiver provisions of Sections 687.4 and 687.5 of
the General Business Law of New York State be satisfied.
2. Section 9.03(7) of the Franchise Agreement is the same as written with
the following addition:
provided, however, that all rights enjoyed by the Franchisee and any
causes of action arising in its favor from the provisions of Article 33
of the General Business Law of New York State and the regulations
issued thereunder shall remain in force; it being the intent of this
proviso that the non-waiver provisions of Sections 687.4 and 687.5 of
the General Business Law of New York State be satisfied.
Except as specifically modified herein, the Agreement shall remain in
full force and effect as written.
IN WITNESS WHEREOF, the parties hereto have executed this Rider to the
Franchise Agreement on the date stated.
THE GREAT AMERICAN BACKRUB STORE, INC.
By: /s/ Terrance C. Murray
----------------------------
Terrance C. Murray
Title: CEO
/s/ Illegible
-------------------------------
Franchisee
-------------------------------
Franchisee
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EXHIBIT 10.39
FRANCHISE AGREEMENT
THE GREAT AMERICAN BACKRUB STORE, INC., a New York Corporation,
hereinafter sometimes referred to as "Franchisor," and Marion Holding, Inc.,
hereinafter referred to as "Franchisee," in consideration of the premises,
covenants, and promises herein, agree as follows:
RECITALS
ARTICLE 1
SECTION 1.01. Franchisor is a corporation duly organized, validly
existing, and in good standing under the laws of the State of New York.
Franchisor's principal office is located at 425 Madison Avenue, Suite 605, New
York, NY 10017.0
SECTION 1.02. Franchisee's principal address is:
7575 E. ARKANSAS AVENUE #11-207
DENVER, CO 80231
SECTION 1.03. Franchisor possesses rights under various registered and
unregistered trademarks, service marks, trade names and styles relating to the
trade name "The Great American BackRub," including distinctive logos, and also
certain copyrighted material embodying the use of such marks and Franchisee
specifically acknowledges Franchisor's exclusive right to said trademarks,
service marks, trade names, and copyrighted material.
SECTION 1.04. As the result of the expenditure of time, effort and
money in research and development, Franchisor has developed a system and
acquired experience and knowledge with respect to a system for the operation of
businesses offering back rub services and products in a specially designed and
decorated building with distinctive fixtures, accessories and color scheme, all
known as "The Great American BackRub". In addition, through its advertising
programs and the quality of its service, Franchisor has established a
reputation, demand and goodwill for back rub services and products under the
name of "The Great American BackRub".
SECTION 1.05. Franchisor is also engaged in the business of granting to
others, by means of non-exclusive franchise agreements, special limited licenses
to utilize the name The Great American BackRub, the related proprietary marks
and the associated concepts in connection with the operation by such persons of
stores and the sale, distribution, and marketing of back rub services and
products.
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SECTION 1.06. All of the foregoing have a valuable significance to the
public, and Franchisee, being cognizant thereof, desires to obtain from
Franchisor, and Franchisor desires to grant to Franchisee, pursuant to the terms
of this Agreement, a franchise to operate one The Great American BackRub store
at the location hereinafter specified.
SECTION 1.07. Franchisor expressly disclaims the making of, and
Franchisee acknowledges that he has not received or relied upon, any warranty or
guaranty, express or implied, as to the revenues, profits or success of the
business venture contemplated by this Agreement. Franchisee acknowledges that he
has not received or relied on any representations about the franchise by
Franchisor, or its officers, directors, employees or agents, that are contrary
to the statements made in Franchisor's Uniform Franchise Offering Circular or to
the terms herein, and further represents to Franchisor, as an inducement to its
entry into this Agreement, that Franchisee has made no misrepresentations in
obtaining the Franchise. Franchisee has applied for a franchise to own and
operate a The Great American BackRub at the premises identified in Section 2.01
hereof, and such application has been approved by Franchisor in reliance upon
all of the representations made therein.
SECTION 1.08. The parties hereto, in consideration of the mutual
agreements herein contained and promises herein expressed, and for other good
consideration, acknowledged by each of them to be satisfactory and adequate, do
hereby agree as follows:
TERMS AND CONDITIONS
ARTICLE 2
SECTION 2.01. Franchisor hereby grants to Franchisee and Franchisee
hereby accepts subject to the terms and conditions of this Agreement the limited
right and license to operate one The Great American BackRub store located at
Cherry Creek Mall, Denver, Colorado (hereinafter sometimes referred to as the
"Subject Location"), together with the limited right and license to utilize the
related proprietary marks and Franchisor's system for the operation of one The
Great American BackRub store. Termination or expiration of this Agreement shall
constitute a termination or expiration of said Franchise.
SECTION 2.02. Franchisee acknowledges Franchisor's exclusive right to
the name The Great American BackRub, and the programs, including all bulletins,
procedures, supplements, forms, advertising matter, devices, marks, service
marks, trademarks, trade names, logos and slogans, and goodwill associated
therewith, whether currently being used or hereafter applied for or put to use,
in connection with, or applicable to, The Great American BackRub program.
Franchisee agrees that he will not use or attempt to use any of said names,
marks, or logos, in his own name or that of any other partnership, person,
corporation or other business entity and that he will use said names, marks, or
logos exclusively for, and in connection with, the promotion and conduct of the
business herein described.
SECTION 2.03. Subject to the terms and conditions hereof, and further
provided that Franchisee has not breached any of the terms and conditions of
this agreement,
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Franchisor grants to Franchisee during the term of this Agreement, the right to
use in connection with Franchisee's The Great American BackRub franchise
Franchisor's marks, service marks, trademarks, trade names, logos and slogans,
whether currently being used or hereafter applied for or put into use.
SECTION 2.04. The rights herein granted to Franchisee by Franchisor are
specifically restricted to the operation by Franchisee of a The Great American
BackRub at the Subject Location. The right and license herein granted to
Franchisee shall be effective only with respect to the franchise located at the
Subject Location. No branches or second locations shall be permitted under this
Agreement, and Franchisee hereby acknowledges that no representations or
warranties have been made by Franchisor with respect to the grant of any other
franchises or permission to operate the franchise from an additional or any
other location.
SECTION 2.05. The nature of the right and license herein granted to
Franchisee is non-transferable. Franchisee may not directly or indirectly
sublicense or subfranchise any other person, firm or corporation to own or
operate a The Great American BackRub store, to utilize in any way the
proprietary marks of Franchisor, or to utilize in any way all or any part of
Franchisor's program. Further, without the prior written consent of Franchisor,
Franchisee shall not sell, assign, or transfer said license or right, or any
interest therein, except through an assignment of this Agreement in it entirety,
and then subject to the provisions of and only to the extent permitted by
Article 9 hereof.
SECTION 2.06. The license herein granted to Franchisee is
non-exclusive. Franchisor reserves all rights to grant and sell similar
franchises and licenses to others to operate, and to own or operate for its own
account or with others, other The Great American BackRub stores at any location
whatsoever.
SECTION 2.07. Franchisee acknowledges and agrees that Franchisor would
be unable to protect its trade secrets against unauthorized use or disclosure
and would be unable to encourage a free exchange of ideas and information among
its franchisees if franchised owners of The Great American BackRub stores were
permitted to hold interests in any other business which is in direct or indirect
competition with Franchisee's The Great American BackRub. Therefore, during the
term of the Franchise, neither Franchisee, any shareholder or partner (in the
event Franchisee is a corporation or partnership), nor any member of his or
their immediate families (including, but not limited to, spouse, child, spouse
of a child, brother, sister or parent) shall have any interest as an owner,
investor, partner, director, officer, employee, consultant, representative or
agent, or in any other capacity, in any other business (a "Competing Business")
which is in the business of selling back rub services, massages, or any related
services or products. In the event this restriction is unenforceable under the
provisions of any applicable law governing this Agreement, said restriction
shall be modified such that the geographic limitations of said restriction shall
prohibit the direct or indirect ownership or operation of a Competing Business
within (i) a radius of ten (10) miles of the Subject Location, or (ii) a radius
of three (3) miles from any other operating The Great
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American BackRub store. This restriction shall not be applicable to any other
The Great American BackRub store operated under Franchise Agreements granted by
Franchisor nor the ownership of securities listed on a stock exchange or traded
on the over-the-counter market that represent one percent (1%) or less of that
class of securities. Franchisee shall not at any time directly or indirectly
furnish any information to any person as to Franchisor's methods of operation,
techniques or methods, advertising, publicity, promotions, or any other
information relating to Franchisee's or Franchisor's business.
SECTION 2.08. If this Agreement expires prior to its expiration and the
franchise is terminated by Franchisor in accordance with the provision of this
Agreement, or, in the event this Agreement is terminated by Franchisee without
cause, then Franchisee agrees that for a period of two (2) years, commencing on
the effective date of termination, or the date on which Franchisee ceases to
conduct business at the Subject Location, whichever is later, Franchisee will
not have any interest as an owner, partner, director, officer, employee,
consultant, representative or agent, or in any other capacity, in any store
located or operating within (i) a radius of ten (10) miles of the Subject
Location or, (ii) a radius of three (3) miles of any other The Great American
BackRub in operation as of the effective date of said expiration or termination.
This restriction shall not be applicable to any other The Great American BackRub
operated under Franchise Agreements granted by Franchisor nor the ownership of
securities listed on a stock exchange or traded on the over-the-counter market
that represent one percent (1%) or less of that class of securities.
TERM/RENEWAL RIGHTS
ARTICLE 3
SECTION 3.01. The initial term (the "Initial Term") of the franchise
and license herein granted shall expire, unless sooner terminated in accordance
with the terms and conditions of this Agreement upon the EARLIER of:
A. The expiration of a five (5) year term commencing November 30, 1996
(hereinafter referred to as "the effective date") and ending November 29, 2001;
or
B. The expiration or termination of Franchisee's lease or sublease or
his right to possession of the Subject Location (for whatever reason, including
the termination of Franchisor's lease) provided neither Franchisee nor
Franchisor have any right to renew such lease or sublease, as the case may be,
or Franchisee fails or refuses to exercise any right to renew said lease;
provided, however, in the event Franchisee desires to relocate said franchise
location to a location acceptable to Franchisor, and provided further that said
location is completed within sixty (60) days after termination of Franchisee's
right to occupy the Subject Location, Franchisee shall be allowed to complete
the Initial Term at said new location.
SECTION 3.02. Provided Franchisee shall have substantially complied
with all of the terms and conditions of this Agreement and any other agreements
between Franchisor and
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<PAGE>
Franchisee, and further provided Franchisee shall have substantially complied
with the operating standards and criteria established by Franchisor, Franchisee
shall have the right and option to extend the Initial Term of the franchise and
license herein granted for one additional five (5) year term (the "Extension
Term") terminating on the EARLIER of:
A. Five (5) years following the commencement of said Extension Term, or
B. The expiration or termination of Franchisee's lease or sublease or
his right to possession of the Subject Location or Franchisee fails or refuses
to exercise any right to sublease the Subject Premises from Franchisor.
SECTION 3.03. In order to exercise the right and option to extend the
Initial Term, Franchisee must give Franchisor written notice (the "Extension
Notice") of Franchisee's election to do so not more than twelve (12) months and
not less than nine (9) months prior to the expiration of the Initial Term.
Provided, however, Franchisor may, if it so elects, nullify and treat as null
and void, any such option or the exercise thereof, if:
A. At the time of the exercise of any such option or of the
commencement of the Extension Term, Franchisee is in default hereunder or under
Franchisee's lease or sublease of the Subject Location; or
B. Franchisee's lease or sublease or his right to possession of the
Subject Location has terminated, and Franchisee has no right to renew such lease
or sublease, or chooses not to renew; or
C. Franchisor is sublessor of the Subject Location and cannot renew its
lease on terms deemed reasonable by Franchisor; or
D. Franchisee does not, prior to the commencement of said Extension
Term, make, at Franchisee's own expense, such capital expenditures as may be
required by Franchisor to renovate and modernize the Subject Location,
including, but not limited to, signs, point of sale/computerized cash
register(s), equipment and leasehold improvements, so as-to reflect the then
current operating systems and image of other The Great American BackRub
locations; or
E. Franchisee does not pay to Franchisor, contemporaneously with giving
the Extension Notice, the renewal fee specified in Section 4.08 hereof.
SECTION 3.04. In the event Franchisee exercises his option to extend
the Initial Term pursuant to the terms of Sections 3.02 and 3.03 hereof, the
Franchisee (and the owners of Franchisee, if Franchisee is a corporation) and
Franchisor shall execute the then current form of Franchise Agreement and such
ancillary agreements as are then customarily used by Franchisor in the grant of
franchises for the ownership and operation of The Great American
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BackRubs, but which shall provide for the same royalties and other fees and
contributions as required in this Agreement. In addition, Franchisee and its
owners shall execute general releases, in form and substance satisfactory to
Franchisor, of any and all claims against Franchisor and its affiliates,
officers, directors, employees and agents. Failure by Franchisee and its owners
to sign such agreement(s) and releases within thirty (30) days after delivery
thereof to Franchisee shall be deemed an election by Franchisee not to renew the
Franchise.
SECTION 3.05. The franchise herein granted is for the Initial Term of
five (5) years and, at the option of Franchisee, the five (5) year Extension
Term described above. Franchisor may offer to Franchisee an option to extend the
term of the franchise herein granted for an additional term, in addition to the
Extension Term, of not less than five (5) nor more than ten (10) years,
commencing upon the expiration of the Extension Term. Franchisor's decision to
offer, or not offer, said option to Franchisee shall be based upon Franchisor's
analysis of Franchisee's past performance and the future potential of the
Subject Location. Franchisor shall not unreasonably withhold the offering of
said option.
Franchisor's decision to offer, or not offer, said option shall be
based upon all information available to Franchisor, including, but not limited
to, the operating history of the franchise, the quality of operations, the level
of Franchisee's involvement in the management of the franchise, Franchisee's
operational proficiency and commitment to operational excellence, Franchisee's
participation and cooperation with other franchisees and programs adopted by
other franchisees, Franchisee's proficiency and commitment with respect to the
marketing of the franchise, Franchisee's efforts to develop effective management
personnel, the physical condition of the Subject Location, Franchisee's history
of maintenance and capital improvements with respect to the Subject Location,
Franchisee's participation in conventions and optional training programs offered
by Franchisor, Franchisee's payment history to Franchisor and vendors, and the
overall financial condition of Franchisee.
Franchisor shall notify Franchisee of Franchisor's decision to offer,
or not offer, said additional term in writing not less than eighteen (18) months
prior to the expiration of the Extension Term. Said offer to extend may be
conditional and subject to Franchisee complying with specified conditions prior
to the effective date of said option term. In the event that said offer to
extend the term hereof is subject to specified conditions, Franchisee shall have
a period of thirty (30) days within which to notify Franchisor in writing of
Franchisee's acceptance, or rejection, of said conditions.
In the event that Franchisor does offer Franchisee an option to extend
the term of the franchise, Franchisee shall be required to pay to Franchisor a
renewal fee pursuant to the terms of Section 4.08 hereof and shall be required
to execute and be bound by the then current form of franchise agreement used by
Franchisor in the grant of The Great American BackRub franchises, but which
shall provide for the same royalties and other fees and contributions as
required in this Agreement.
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In the event that Franchisor notifies Franchisee that Franchisor has
elected not to offer Franchisee an option to extended the term hereof, or if
Franchisee elects not to comply with the conditions set forth in Franchisor's
offer of said option, Franchisee shall have the right to sell the franchise
herein granted pursuant to the terms and conditions of Article 9 hereof,
including, but not limited to, the provisions of Section 9.06. In addition,
notwithstanding any provisions of Article 9 to the contrary, said buyer shall be
required to sign and be bound by the then current form of franchise agreement
used by Franchisor in the grant of a The Great American BackRub franchise.
FEES
ARTICLE 4
SECTION 4.01. Franchisee shall pay Franchisor an initial,
non-recurring, non-refundable (except as provided in Sections 4.02 and 13.01
hereof) franchise fee of Twelve Thousand Five Hundred Dollars ($12,500).
Provided, however, if Franchisee has executed an "Option Agreement" with
Franchisor and Franchisee has complied with all terms thereof, Franchisee shall
be given a credit for all amounts paid to Franchisor pursuant to said Option
Agreement. Said franchise fee shall be payable upon the execution and delivery
of this Agreement. Except as provided in Sections 4.02 and 13.01 hereof, the
initial franchise fee shall be deemed fully earned by Franchisor upon the
execution and delivery of this Agreement and full payment of said initial
franchise fee shall be in addition to the monthly royalty fees payable to
Franchisor by Franchisee pursuant to Section 4.05 hereof and shall be in
addition to any and all other sums required to be paid to Franchisor by
Franchisee pursuant to any other term or provision of this Agreement whether for
advertising contributions, training fees, or for any other reason or purpose.
Except as provided in Sections 4.02 and 13.01 hereof, said initial franchise fee
is not refundable under any circumstances, in full or in part including any
termination of this Agreement nor at any other time nor under any other
circumstances whatsoever.
SECTION 4.02. Franchisee agrees that if Franchisor determines, pursuant
to the terms of Section 6.03 hereof, that Franchisee has not successfully
completed Franchisor's initial training course relating to the operation of a
The Great American BackRub franchise, Franchisor shall return to Franchisee the
initial franchise fee paid to Franchisor by Franchisee pursuant to Section 4.01
hereof and this Agreement shall be deemed to be null and void and without
further effect.
SECTION 4.03. Upon the request of Franchisee, any sums paid to
Franchisor pursuant to Section 4.01 hereof shall be deposited with an escrow
agent, mutually acceptable to both parties, who shall hold said sums until the
earlier of (1) notification from Franchisor that Franchisee did not successfully
completed the initial training course as specified in Section 6.03 hereof in
which event said deposited sum shall be paid to Franchisee, or (2) Franchisee
has commenced operation of the franchise at the Subject Location in which event
said deposited sum shall be paid to Franchisor. Any costs associated with said
escrow shall
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be paid by Franchisee and all interest, if any, earned on said deposit while
held in said escrow agent shall inure to the party to whom said deposit is
ultimately paid.
SECTION 4.04. A Franchisee who has not previously attended and
successfully completed Franchisor's initial franchisee training course shall pay
to Franchisor a non-refundable fee of Two Thousand Five Hundred Dollars ($2,500)
for Franchisee's attendance at Franchisor's initial training course relating to
the operation of a The Great American BackRub franchise. Said fee shall be
subject to all of the terms and conditions of Section 6.03 hereof. Said sum
shall be paid to Franchisor upon execution and delivery of this Agreement.
SECTION 4.05. In addition to the initial payment set forth in Section
4.01 hereof, Franchisee agrees to pay to Franchisor a monthly royalty fee equal
to Six Percent (6%) of Franchisee's gross monthly revenues (as said term is
hereinafter defined) derived from the operation of the franchise for each month
or any portion thereof during the term of this Agreement. Said fee shall be paid
on or before the tenth (10th) day of each month and shall be based upon gross
revenues for the preceding calendar month. Along with said payment Franchisee
shall furnish Franchisor with written reports on forms specified by Franchisor
for this purpose signed by Franchisee stating gross revenues for the preceding
calendar month as designated and classified on Franchisor's forms. In addition,
provided said function is an available feature of any computerized point of sale
or accounting system specified by Franchisor, Franchisor may require Franchisee
to electronically transfer said information or data to Franchisor.
SECTION 4.06. In addition to any other payment herein required, at any
time during the initial term of this Agreement, or any extension hereof,
Franchisor may establish an Advertising Fund. In such event, Franchisor shall
give Franchisee written notice of the establishment of said Advertising Fund not
less than thirty (30) days prior to any date that payment to said Advertising
Fund shall be payable pursuant to this Agreement. In the event that an
Advertising fund is established, Franchisee shall pay to Franchisor, as an
advertising and sales promotion fee, an amount equal to the GREATER of (i) Three
Percent (3%) of Franchisee's gross monthly revenues, as said term is hereinafter
defined, for each month (or any portion thereof) during the term of this
Agreement, or (ii) Five Hundred Dollars ($500.00). Said fee shall be paid in the
same manner as the monthly royalty fee specified in Section 4.05 hereof.
Franchisor shall retain said sums in a properly segregated fund.
Franchisor shall supply Franchisee with a semi-annual statement for said fund
indicating the gross amount of advertising and sales promotion fees collected
from all franchisees, the total amount expended for advertising and sales
promotion, and the balance of said fund. Franchisor shall have responsibility
for disbursement of said funds. Provided, however, that not less than
seventy-five percent (75%) of said fees shall be used for advertising and
promotions in the general geographic area of the respective Great American
BackRub stores which generated said fees. The manner, media and cost of such
advertising or promotion shall be decided by Franchisor at its sole discretion.
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SECTION 4.07. The term "gross monthly revenues" is defined as the total
gross revenue derived by Franchisee in accordance with such accounting practices
and procedures as shall be determined and required by Franchisor with respect to
the operations of the franchise, whether from sales for cash or credit, and
without regard to the source of payment thereof or the collection thereof, or
the cost of collection, including therein the sales of all merchandise and
services, but exclusive of all sales taxes, use taxes, gross receipt taxes and
other similar taxes added to the sales price and collected from the customer by
Franchisee, and less any bona fide refunds. The term "sales of all merchandise
and services" shall be determined and construed in its most comprehensive sense.
SECTION 4.08. In the event Franchisee should exercise its option to
extend the Initial Term of the franchise and license herein granted pursuant to
the terms and conditions of Sections 3.02, 3.03 and 3.04 hereof, Franchise shall
pay to Franchisor a renewal fee of Five Thousand Dollars ($5,000).
SECTION 4.09. All royalty and service fees, advertising contributions,
amounts due for purchases by Franchisee from Franchisor or its affiliates and
other amounts which Franchisee owes to Franchisor or its affiliates shall bear
interest after due date at the lesser of (i) eighteen percent (18%) per annum,
or (ii) the highest applicable legal rate for open account business credit in
the state in which the Subject Location is located. Franchisee acknowledges that
this provision of this Agreement shall not constitute Franchisor's agreement to
accept such payments after same are due or a commitment by Franchisor to extend
credit to, or otherwise finance Franchisee's operation of, the franchise herein
granted. Further, Franchisee acknowledges that his failure to pay all amounts
when due shall constitute grounds for termination of this Agreement, as provided
in Article 12, notwithstanding the provisions of this Section 4.09.
SECTION 4.10. Franchisee agrees to execute and deliver to Franchisor,
within ten (10) days of receipt of Franchisor's written request, the appropriate
preauthorized check and electronic funds transfer forms from Franchisee's
checking account so that Franchisor will be able to electronically deposit any
fees payable to Franchisor under the term of this Agreement on a timely basis.
LEASEHOLD RIGHTS AND OBLIGATIONS
ARTICLE 5
SECTION 5.01. Franchisee shall lease/sublease the Subject Location
under the terms and conditions of that certain lease/sublease agreement dated as
of the date of this Agreement.
SECTION 5.02. Franchisee, at Franchisee's sole expense, shall add such
leasehold improvements to the Subject Location as may be required by Franchisor.
Said leasehold improvements shall be constructed in strict conformity with
designs, plans and specifications approved in writing by Franchisor prior to the
commencement of any construction. Franchisee, at Franchisee's sole expense,
shall equip and furnish the Subject Location with
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such equipment, furniture, fixtures and signs as Franchisor may reasonably
require in order to ensure a uniform appearance of all The Great American
BackRub locations. Unless agreed to in a writing executed by Franchisor, all
such improvements and furnishings shall be completed within sixty (60) days
after the execution of this Agreement.
SECTION 5.03. Franchisee agrees to comply with all terms and conditions
of the lease/sublease referred to in Section 5.01 hereof. Upon receipt of any
notice of default or breach of the terms of said lease/sublease, Franchisee
agrees to forthwith take all reasonable steps necessary to cure said default or
breach. In the event Franchisee does not forthwith act to cure said default or
breach, Franchisor, or its agents or employees, may, in addition to any other
remedy available to Franchisor under the terms and conditions of this Agreement,
and with impunity, take all reasonable steps including, but not limited to,
entering the Subject Location for the purpose of operating the franchise,
necessary to cure said default or breach. Franchisee shall immediately reimburse
Franchisor for any costs incurred by Franchisor incidental to Franchisor's cure
of said default or breach.
SECTION 5.04. Franchisee agrees to maintain all improvements,
furniture, fixtures and equipment located in the Subject Location in good and
safe working order and to replace (at Franchisee's expense) all worn, damaged or
unsafe improvements, furniture, fixtures and equipment with new replacement
items of equal or better quality which shall conform in appearance and design to
the then current plans and specifications of Franchisor. In addition, Franchisor
may from time to time require Franchisee to modify the appearance of the Subject
Location to conform to the current design and appearance standards adopted by
Franchisor. Franchisee shall, within a reasonable time after notice from
Franchisor of such standards, take all steps, including remodeling or other
substantial changes, necessary to comply with said standards at Franchisee's
cost. In all events, Franchisee shall install and use only such furnishings,
fixtures and equipment as shall conform to specifications of design, color,
quality, performance and utility designated or approved in writing by
Franchisor.
SECTION 5.05. Franchisee shall, at Franchisee's expense, maintain the
interior and exterior of the Subject Location in a clean, orderly, safe, and
sanitary condition satisfactory to Franchisor and shall make such repairs as are
necessary to maintain an aesthetically pleasing appearance. All repairs,
modifications, and remodeling of the Subject Location shall be made only after
Franchisee has received the prior written consent of Franchisor.
SECTION 5.06. Franchisee agrees to indemnify, defend, and hold
Franchisor harmless from any claim, action, proceeding or demand arising from or
pertaining to Franchisee's improvements to, or modifications of, the Subject
Location.
SECTION 5.07. Franchisee shall not install or use any sign, whether on
the exterior or in the interior of the Subject Location, which has not received
the prior written approval of Franchisor. As used herein the term "sign" shall
be interpreted in its broadest sense and shall include all displays, cards,
window advertising and promotional material.
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SECTION 5.08. Franchisor shall have the right to place in a conspicuous
location in the Subject Location a sign of reasonable proportions, along with
written material, which shall advise the public that Franchisee's business is a
franchise, provide information to prospective franchisees, and a method for
prospective franchisee to contact Franchisor.
SECTION 5.09. If Franchisee should fail to comply with any of the terms
and conditions of this Article 5, in addition to any other relief available to
Franchisor, Franchisor or any persons authorized by Franchisor, without
liability to Franchisee, shall have the right, in addition to any rights
Franchisor may have under the lease/sublease, to enter at any time upon the
Subject Location and perform any act deemed necessary by Franchisor to remedy
such failure and Franchisee shall immediately reimburse Franchisor for any costs
incurred by Franchisor incidental thereto.
TRAINING
ARTICLE 6
SECTION 6.01. Franchisor shall make available to Franchisee
Franchisor's customary initial training course concerning the operation of a The
Great American BackRub location. Prior to the opening of the Subject Location,
and as a condition precedent to Franchisee's rights hereunder, Franchisee shall
attend and complete said course to the satisfaction of Franchisor.
SECTION 6.02. Franchisee shall be entitled to have one additional
person attend Franchisor's customary initial training course, provided however,
said additional person shall attend said training course at the same time as
Franchisee. There shall be no additional training fee for said person's
concurrent attendance at said training course.
SECTION 6.03. As provided in Section 4.04 hereof, Franchisee shall pay
to Franchisor the sum of Two Thousand Five Hundred Dollars ($2,500.00)
representing a non-refundable fee for Franchisee's attendance at said initial
training course. Franchisee acknowledges that in the event Franchisee does not
complete said training course to the satisfaction of Franchisor, no portion of
said fee shall be returned to Franchisee. NOTWITHSTANDING ANY CONTRARY PROVISION
IN THIS AGREEMENT, THE DETERMINATION OF WHETHER OR NOT FRANCHISEE HAS
SUCCESSFULLY COMPLETED SAID INITIAL TRAINING COURSE SHALL BE MADE AT THE SOLE
DISCRETION OF FRANCHISOR.
SECTION 6.04. In the event Franchisor determines that Franchisee has
not successfully completed Franchisor's initial training course pursuant to
Section 6.03 hereof, such decision shall render this Agreement null and void and
without further effect,.
SECTION 6.05. All new employees of Franchisee shall be required to
attend an initial training course conducted by Franchisor at a location
designated by Franchisor, at the
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option of Franchisor, by Franchisee using personnel and curriculum approved by
Franchisor. No person shall provide any services in the Subject Location who has
not completed said training course to the satisfaction of Franchisor. Franchisee
shall be responsible for all salaries and wages, if any, due said employees
during said training course. Franchisee shall pay Franchisor a basic training
fee for each employee who participates in said training course. The current
amount of said fee is set forth in Franchisor's Uniform Offering Circular. Said
fee may increase during the term of this Agreement.
SECTION 6.06. Franchisor shall have the right to require Franchisee,
and any employee of Franchisee, to attend, and successfully complete, advanced
training courses related to the operations and services of the Subject Location.
Franchisee shall not be required to attend more than one (1) such training class
per calendar year. Franchisee shall be responsible for all wages due any
employees during said training and all additional costs incurred by said
employee. Franchisee shall pay Franchisor a fee for each employee who
participates in any such training course. The current amount of said fee is set
forth in Franchisor's Uniform Offering Circular. Said fee may increase during
the term of this Agreement. Franchisor shall not charge any fee for Franchisee's
attendance at any such training course.
SECTION 6.07. All expenses of travel, lodging, meals, and other living
expenses, incurred by Franchisee, and/or any employees of Franchisee, in
attending any initial or subsequent training program or programs shall be borne
and paid by Franchisee.
OBLIGATIONS OF FRANCHISEE
ARTICLE 7
SECTION 7.01. Franchisee shall, beginning on the effective date of this
Agreement and continuing during the remaining term of this Agreement,
continuously operate a store at the Subject Location (except if prevented by an
act of God or other causes beyond the control of Franchisee), using Franchisee's
best efforts, skills and diligence in the conduct thereof, and regulating and
controlling Franchisee's employees so that said employees maintain a high
standard of professional competency and quality of service.
SECTION 7.02. Franchisee shall not operate, directly or indirectly, nor
allow the operation of, any other business within or in connection with the
Subject Location.
SECTION 7.03. Franchisee shall operate the Subject Location in strict
conformity with such reasonable standards, specifications, requirements and
instructions as Franchisor may hereafter adopt. Such standards, specifications,
requirements and instructions shall include but not be limited to a computerized
point of sale cash register and telephone modem specified by Franchisor.
Franchisee agrees to provide Franchisor telephonic access to the information
stored on the point of sale computerized cash register at such reasonable times
as Franchisor shall designate. In addition, Franchisor may request Franchisee to
electronically transfer information and/or data available from said computerized
point of sale cash register to
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Franchisor. Franchisee agrees to comply with said request in a timely manner.
Franchisor shall have the right from time to time to make reasonable changes,
modifications, or additions to any standards, specifications or requirements
whenever Franchisor deems that such changes, modifications or additions are
reasonably necessary to improve the standards of quality, service, repair and
maintenance of the Subject Location or to protect any mark, trademark, service
mark or trade name of Franchisor. Any such changes, modifications or additions
shall automatically be binding upon Franchisee upon the giving of notice of same
to Franchisee by Franchisor.
SECTION 7.04. Franchisee agrees that no employee of Franchisee whose
professional competency or quality of service does not meet the standards
established by Franchisor shall be allowed to work in the Subject Location.
SECTION 7.05. Franchisee shall display and sell in the Subject Location
a limited line of retail products approved in advance by Franchisor. Prior to
the sale of any product Franchisee shall obtain Franchisor's prior written
consent to the sale of said product. Any such product shall strictly conform to
standards and specifications determined by Franchisor for products sold in The
Great American BackRub locations.
SECTION 7.06. Franchisee shall offer all services and products which
Franchisor may uniformly require of all The Great American BackRub franchises.
Franchisee shall perform all such services in strict conformity with
Franchisor's standards and specifications and, in addition, Franchisee shall
comply with all applicable laws and regulations relating to such services.
Franchisee shall not offer any services which have not been previously approved,
in writing, by Franchisor or which is prohibited by law or applicable
regulation.
SECTION 7.07. All advertising or promotional materials to be used by
Franchisee, including signs or displays on or in the Subject Location, must be
approved in writing by Franchisor prior to any use thereof by Franchisee. Said
prior approval requirement shall not apply to any advertising or promotional
material supplied to Franchisee by Franchisor.
SECTION 7.08. Franchisee shall conform to all Federal, State and local
health and building regulations and shall make prompt and timely payments of all
taxes related to or arising from Franchisee's operation of the franchise.
Franchisee shall keep in force and effect all local, State and national license
which may be required for the lawful operation of the franchise.
SECTION 7.09. Franchisee shall immediately notify Franchisor of any
apparent infringement of, or challenge to, Franchisee's use of any name, mark or
logo used in connection with the franchise herein granted, or the claim by any
person or entity of any right to any such name, mark or logo. Franchisee shall
not communicate with any person other than Franchisor and its counsel in
connection with any such alleged infringement, challenge or claim. Franchisor
shall have sole discretion to take such action as it deems appropriate in
connection with said alleged infringement, challenge or claim, and shall have
the exclusive
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right to control any litigation or administrative proceedings associated
therewith. Franchisee agrees to execute any and all instruments and documents,
render such assistance, and do such acts and things as may be reasonable,
necessary or advisable to protect and maintain the interest of Franchisor in any
litigation or other proceeding, or to otherwise protect and maintain the
interest of Franchisor in said names, marks or logos.
ACCOUNTING PROCEDURES
ARTICLE 8
SECTION 8.01. Franchisee shall maintain a bookkeeping system in
conformity with the accounting methods prescribed by Franchisor, and shall use
such cash registers, books of accounts, reporting systems and methods which meet
the requirements of Franchisor.
SECTION 8.02. Upon the written request of Franchisor, Franchisee agrees
to furnish to Franchisor copies of designated sales tax returns, State, Federal
and local payroll tax returns, and Federal and State income tax returns within
thirty (30) days after receipt of said request.
SECTION 8.03. Franchisee shall furnish to Franchisor a copy of
Franchisee's report of gross revenues, gross sales, or other data which
Franchisee may be required to submit to any lessor/sublessor of the Subject
Location within five (5) days after said reports are required to be submitted.
SECTION 8.04. Franchisor shall at all times be entitled to audit
Franchisee's gross monthly revenues (as defined in Section 4.09 hereof) by
Franchisor, its employees, agents or representatives. Such audit shall be
limited to the determination of gross monthly revenues and shall be conducted
during normal business hours and either at the Subject Location or the principal
place of business of Franchisee. Franchisee agrees to supply Franchisor or its
designated agent with all information, data and records reasonably necessary to
complete said audit. If it is determined as a result of such audit that there
has been a deficiency in the payments made to Franchisor, then such deficiency
shall become immediately due and payable with interest at the highest rate
allowable under applicable State and/or Federal law from the date when said
payments should have been made not to exceed eighteen percent (18%) per annum.
In addition, if any of Franchisee's reports shall be found to have understated
gross monthly revenue by more than two percent (2%), in addition to any
royalties due Franchisor, Franchisee shall pay all of Franchisor's reasonable
costs and expenses connected with said audit. Further, in the event that any of
said reports are found to have understated gross monthly revenues by more than
five percent (5%), such understatement shall be deemed to be a breach of this
Agreement by Franchisee. Any information gained from such audit shall be
confidential and shall not be disclosed except to carry out the purposes hereof.
SECTION 8.05. The term "records" as used in Section 8.04 shall include,
but shall not be limited to, cash register recordings, purchase records, bank
statements, sales journals,
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payroll tax returns, sales receipts, employment records, financial statements
and other records normally maintained by such a business.
ASSIGNMENT
ARTICLE 9
SECTION 9.01. This Agreement and the franchise granted thereunder are
fully assignable by Franchisor and shall inure to the benefit of any assignee(s)
or other legal successor(s) to the interest of Franchisor herein, subject only
to the condition that the Assignee of Franchisor shall, subsequent to any such
assignment, remain liable, primarily and/or secondarily, for the performance of
all obligations of Franchisor under this Agreement.
SECTION 9.02. Franchisee understands and acknowledges that the rights
and duties created by this Agreement are personal to Franchisee or its owners
and that Franchisor has granted the franchise in reliance upon the individual or
collective character, skill, aptitude, business ability and financial capacity
of Franchisee or its owners. Therefore, except as hereinafter provided with
respect to an assignment to a corporation, neither the franchise nor the
franchised business or any interest therein nor any part or all of the ownership
of Franchisee may be voluntarily, involuntarily, directly or indirectly,
assigned, sold, subdivided, sub franchised or otherwise transferred by
Franchisee, or its owners, including without limitation by merger or
consolidation, or issuance of additional securities representing ownership in
Franchisee nor in the event of the death of Franchisee or an owner of
Franchisee, by will, declaration of or transfer in trust or the laws of
intestate succession without the prior written approval of Franchisor, and any
such assignment or transfer without such approval shall constitute a breach
hereof and conveys no rights to or interests in the franchise, franchised
business or Franchisee.
SECTION 9.03. If Franchisee or its owners are in full compliance with
this Agreement, Franchisor shall not unreasonably withhold its approval of an
assignment, provided that the proposed assignee(s) is, in the opinion of
Franchisor, of good moral character and has sufficient business experience,
aptitude and financial resources to own and operate the franchised business and
otherwise meets Franchisor's then applicable standards for Franchisees, and
further provided that the following conditions are met prior to, or concurrently
with, the effective date of the assignment:
(1) all obligations of Franchisee and its owners incurred in connection
with this Agreement have been assumed by the assignee(s);
(2) Franchisee shall have paid such franchise fees, advertising
contributions, amounts owed for purchases by Franchisee from Franchisor or its
affiliates and any other amounts owed to Franchisor or its affiliates which are
then due and unpaid;
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(3) the assignee(s) completes the training program required of new
Franchisees prior to the effective date of the assignment and pays Franchisor
the sum of Two Thousand Five Hundred ($2,500.00) as a fee for said course;
(4) if required, the owner/lessor of the Subject Location business has
consented to Franchisee's assignment or sublease of said premises to the
proposed assignee(s);
(5) the assignee(s) and if a corporation or partnership, its owners,
shall, at Franchisor's option, have executed and agreed to be bound by:
(i) a Guaranty agreement, satisfactory in form and content to
Franchisor, whereby the assignee assumes the obligation of Franchisee under this
Agreement and the sublease described in Section 5.01 hereof; and
(ii) the then current form of franchise agreement and such
ancillary agreements as are then customarily used by Franchisor in the grant of
The Great American BackRub franchises, but which shall provide for the same
royalties and other franchise fees and advertising contributions required
hereunder and be a term equal to the remaining term of this franchise agreement;
(6) Franchisee or assignee(s) shall have paid to Franchisor
Franchisor's standard assignment fee of Two Thousand Five Hundred Dollars
($2,500) to defray expenses incurred by Franchisor in connection with the
assignment, including, without limitation, training of assignee(s), legal and
accounting fees, credit and other investigation charges and evaluation of the
assignee(s) and the terms of the assignment.
(7) except to the extent limited or prohibited by applicable law,
Franchisee and each of its owners if Franchisee is a corporation or partnership
shall have executed a general release, in form satisfactory to Franchisor, of
any and all claims against Franchisor and its affiliate, officers, directors,
employees and agents;
(8) Franchisor shall have approved the material terms and conditions of
such assignment and shall have determined that the price and terms of payment
are not so burdensome as to adversely affect the future operations of the
franchised business by the assignee(s);
(9) Franchisee and each of its owners if Franchisee is a corporation or
partnership shall have executed a non-competition covenant in favor of
Franchisor and the assignee(s), agreeing that for a period of not less than two
(2) years, commencing on the effective date of the assignment, he will not have
any direct or indirect interest as an owner, investor, partner, director,
officer, employee, consultant, representative or agent, or in any other
capacity, in any business that (i) sells services or products substantially the
same as a The Great American BackRub , and (ii) which is located or operates
within a radius of ten (10) miles of the
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Subject Location or within a three (3) mile radius of any other The Great
American BackRub in operation at the time of such transfer; and
(10) Franchisee shall have entered into an agreement with Franchisor
agreeing to subordinate to such assignee's obligations to Franchisor, including,
without limitation, any franchise fees and advertising contributions, any
obligations of such assignee(s) to make installment payments of the purchase
price to Franchisee.
(11) Adequate provisions have been made by Franchisee, and approved by
Franchisor, to assure that assignee has the financial capability to fulfill any
and all contractual obligations to any existing customer/patron of the Subject
Location arising from, or related to, any back rub services or products to be
provided by Franchisee.
The Franchisor's consent to an assignment of any interest subject to
the restrictions of Sections 9.02 and 9.03 of this Agreement shall not
constitute a waiver of any claims it may have against the Franchisee, nor shall
it be deemed a waiver of Franchisor's right to demand exact compliance with any
of the terms or conditions of the franchise by the assignee.
SECTION 9.04. Within sixty (60) days from the date of this Agreement,
the franchise and the assets and liabilities of the franchised business may be
assigned to a newly organized corporation that conducts no business other than
the franchised business, which is actively managed by Franchisee and in which
Franchisee owns and controls all of the equity and voting power of all issued
and outstanding capital stock. Such an assignment shall not relieve Franchisee
of his obligations hereunder, and Franchisee and said corporation shall remain
jointly and severally liable for all obligations hereunder. The articles of
incorporation, by-laws and other organizational documents of such corporation
shall recite that the issuance and assignment of any interest therein is
restricted by the terms of Sections 9.02 and 9.03 of this Agreement and all
issued and outstanding stock certificates of such corporation shall bear a
legend reflecting or referring to the restrictions of said Sections 9.02 and
9.03.
SECTION 9.05. The assignment of the rights, duties and obligations of
Franchisee pursuant to Section 9.03 hereof shall not relieve Franchisee of the
duties and obligations herein imposed on Franchisee. Provided, however, if at
the expiration of six (6) months after the effective date of any transfer, the
transferee has not defaulted or breached any of the terms or conditions of the
then current agreement, subject only to the exception set forth in this Section
9.05, Franchisor shall release Franchisee from all obligations or liabilities
imposed on Franchisee pursuant to this agreement. During said six (6) month
period, Franchisor shall give Franchisee written notice of any default or breach
by said transferee. Notwithstanding the foregoing, said release shall not be
effective with respect to any liability of Franchisee under the provisions of
Section 7.09 hereof, nor for any liability of Franchisee with respect to the
unexpired term, exclusive of any renewal terms, under the sublease referred to
in Section 5.01.
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SECTION 9.06. In the event that Franchisee seeks the approval of
Franchisor to an assignment pursuant to the terms of this Article 9, Franchisee
shall include with such request a copy of any agreement relating to the proposed
sale or assignment of the franchise herein granted. Franchisor shall have no
obligation to consider any request for consent to any transferee if said
agreement is not included with said request. Upon receipt of such offer from
Franchisee, Franchisor shall have the option of purchasing or otherwise
acquiring such of Franchisee's rights under this agreement and all such other
property and rights of the Franchisee as may be embraced within said offer, upon
the same terms and conditions as those set forth therein. Franchisor may
exercise its option at any time within thirty (30) days after receipt of said
offer from Franchisee by giving written notice of its acceptance to Franchisee.
This Section shall not be applicable to any transfer made pursuant to Sections
9.04 hereof.
SECTION 9.07. In the event Franchisee (or any of its owners) shall,
subject to the restrictions and conditions of transfer contained in this Section
9.07, attempt to raise or secure funds by the sale of securities (including,
without limitation, common or preferred stock, bonds, debentures or general or
limited partnership interests) in Franchisee or any affiliate of Franchisee,
Franchisee acknowledges that the written information used with respect thereto
may reflect upon Franchisor. No information respecting Franchisor or any of its
affiliates shall be included in any securities disclosure document, unless such
information has been furnished by Franchisor, in writing, pursuant to the
written request of the Franchisee, in which the Franchisee states the specific
purpose for which the information is to be used. Should Franchisor, in its sole
discretion, object to any reference to Franchisor or any of it affiliates or to
any of their businesses in such offering literature or prospectus, such
literature or prospectus shall not be used unless and until the objections of
Franchisor are withdrawn. The Franchisor assumes no responsibility for the
offering whatsoever. The prospectus or other literature utilized in any such
offering shall contain the following language in bold-face type on the first
textual page thereof:
"NEITHER THE GREAT AMERICAN BACKRUB STORE, INC. NOR ANY OF ITS AFFILIATES IS
DIRECTLY OR INDIRECTLY THE ISSUER OF THE SECURITIES OFFERED HEREBY. NEITHER THE
GREAT AMERICAN BACKRUB STORE, INC. NOR ANY OF ITS AFFILIATES ASSUMES ANY
RESPONSIBILITY WITH RESPECT TO THIS OFFERING AND/OR THE ADEQUACY OR ACCURACY OF
THE INFORMATION SET FORTH HEREIN, INCLUDING ANY STATEMENTS MADE WITH RESPECT TO
ANY OF THEM. NEITHER THE GREAT AMERICAN BACKRUB STORE, INC. NOR ANY OF ITS
AFFILIATES ENDORSES OR MAKES ANY RECOMMENDATION WITH RESPECT TO THE INVESTMENT
CONTEMPLATED BY THIS OFFERING."
Franchisee and each of its owners agrees to indemnify, defend and hold
harmless Franchisor and its affiliates, and their respective officers,
directors, employees and agents, from any and all claims, demands, liabilities,
and all costs and expenses (including, without limitation, reasonable attorneys'
fee) incurred in the defense of such claims, demands or
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liabilities, arising from the offer or sale of such securities whether asserted
by a purchaser of any such security or by a governmental agency. Franchisor
shall have the right (but not the obligation) to defend any claims, demands or
liabilities and/or to participate in the defense of any action to which
Franchisor or any of its affiliates or any of their respective officers,
directors, employees or agents is named as a party.
SECTION 9.08. Any attempt by the Franchisee to transfer any rights or
interests under this Agreement without having received the prior written consent
of Franchisor shall constitute a material breach of this Agreement and
Franchisor shall have the right to terminate this Agreement upon written notice
to Franchisee.
INSURANCE/INDEMNIFICATION
ARTICLE 10
SECTION 10.01. In addition to any insurance required of Franchisee
pursuant to any lease relating to the Subject Location, Franchisee shall
purchase and maintain in effect at all times during the term of this Agreement
policies of insurance, naming Franchisor and all employees of Franchisee as
additional insureds, at Franchisee's sole cost and expense. Initially, said
insurance will conform to the following specifications:
A. Combined single limit, liability and property insurance including,
but not limited to, "all risk" buildings and contents insurance (including
replacement cost and plate glass provisions) for all leased or owned property,
general liability insurance (including premise operations, products,
professional malpractice, and personal injury) and automobile insurance
(including owned, hired or leased, non-ownership, medical payments and uninsured
motorist) with policy limits of at least $1,000,000.
B. An all inclusive standard umbrella policy of at least $1,000,000.
C. Worker's compensation insurance as required by State law.
Franchisor shall have the right, upon thirty (30) days written notice,
to require either an increase in said policy limits or additional coverage if
Franchisor, in its sole discretion, deems such increase or additional coverage
necessary. Franchisee shall supply Franchisor with current certificates of
coverage indicating full payment of insurance policies in conformity with the
then current requirements and copies of all applicable policies. Said policies
shall contain endorsements requiring the insurer to give Franchisor thirty (30)
days advance written notice in the event of any cancellation or change in the
coverage, scope, or amount of such policy.
SECTION 10.02. Franchisee agrees, during and after the term of this
Agreement, to indemnify, defend, and hold Franchisor harmless from and against
any and all loss, damage, claims, whether or not properly founded, liability and
attorneys' fees and other costs and expenses incurred by Franchisor as the
result of any violation of this Agreement by, or any
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act of omission or commission on the part of the Franchisee, or any of it
agents, servants or employees, and from all claims, damages, causes of action,
suits or rights of any persons, firm or corporations arising from the operation
of the franchise herein discussed. The Franchisor shall have the right (but not
the obligation) to defend any such claims, demands, or liabilities and/or to
participate in the defense of any action to which Franchisor or any of its
affiliates or any of their respective officers, directors, employees or agents
is named as a party.
RELATIONSHIPS OF PARTIES/REPRESENTATIONS
ARTICLE 11
SECTION 11.01. It is specifically recognized and acknowledged by
Franchisee that the success of the business venture to be undertaken by
Franchisee by virtue of this Agreement depends to a great extent upon the
ability of Franchisee as an independent party and entrepreneur as well as on
market conditions beyond the control of either Franchisor or Franchisee.
Franchisee acknowledges that Franchisee has entered into this Agreement after
making an independent investigation of Franchisor's operations and programs and
not upon any representation as to the profits, success, or other benefits which
Franchisee will realize. Franchisee acknowledges that there have been no
representations or warranties not expressly stated in this Agreement, or
Franchisor's Uniform Offering Circular, made by Franchisor or any representative
thereof or any other person on its behalf with respect to the potential success
of Franchisee's business or otherwise.
SECTION 11.02. Franchisee is not and shall not hold itself out as an
agent, legal representative, partner subsidiary, joint venturer or employee of
Franchisor. Franchisee shall have no right or power to, and shall not bind or
obligate Franchisor in any way, manner or thing whatsoever, nor represent that
it has any right to do so. In all public records and in its relationship with
other persons, on letterheads, and business forms, Franchisee shall indicate its
independent ownership of said business, and that it is only a franchisee of
Franchisor. Notwithstanding any other provision of this Agreement, Franchisor
and Franchisee shall not, under any circumstances, be deemed to be a joint
employer of any employee of Franchisee.
TERMINATION
ARTICLE 12
SECTION 12.01. Provided Franchisee is not in default of any of the
terms and conditions of this Agreement, or any other agreement between
Franchisee and Franchisor, Franchisee shall have the right to terminate this
Agreement by giving Franchisor notice at least one hundred twenty (120) days
prior to any intended termination date. During said period Franchisee shall
continue to maintain complete operations as if said notice had not been given.
Franchisee shall fully cooperate with Franchisor to expedite the transfer or
closing of said business. Such notice of termination shall not entitle
Franchisee to the return of any fees paid to Franchisor nor shall Franchisee be
relieved of any debt, duty or obligation owing to Franchisor arising from, or
related to, this Agreement, including, but not limited to, the obligation of
Franchisee pursuant to the sublease described in Section 5.01 hereof.
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SECTION 12.02. In addition to any other rights Franchisor may have to
terminate this Agreement, Franchisor shall have the right and option to
terminate this Agreement upon the occurrence of any of the following:
A. Failure of Franchisee to cure any breach or default of the terms and
conditions of this Agreement within five (5) days after Franchisor gives
Franchisee written notice of said breach or default. Provided, however, if cure
of said default or breach cannot be reasonably accomplished within five (5)
days, Franchisee shall be allowed such additional time, not to exceed twenty
(20) days, as reasonably necessary to accomplish said cure.
B. The third written notice within any period of twenty-four (24)
months to Franchisee by Franchisor of any breach or default, whether
subsequently cured or not, of the terms and conditions of this Agreement.
C. Unless otherwise prohibited by applicable law, if Franchisee becomes
insolvent or commits an act of bankruptcy, or makes a general assignment for the
benefit of creditors, or to an agent authorized to liquidate his property or
assets, or becomes or is adjudicated a bankrupt, or voluntarily files a petition
in bankruptcy or reorganization, or to effect a plan or other arrangement with
creditors, or files an answer to the creditor's petition or other petitions
filed against him (admitting the material allegations thereof) for an
adjudication, or for reorganization, or to effect a plan or other arrangement
with creditors, or applies for or suffers the appointment of a receiver or
trustee of any of his assets and property, or such receiver or trustee is
appointed for any of his property or assets, and such trustee or receiver so
appointed is not discharged within fifteen (15) days after the date of his
appointment, or all or substantially all of the property of the Franchisee is
attached by the United States or any officer or instrumentality thereof, and so
remains and continues for a period of fifteen (15) days, or a writ or warrant of
attachment, or any similar process is issued by any court against all or any
substantial portion of the property or assets of the Franchisee and such writ,
warrant of attachment, or any similar process is not released or bonded within
fifteen (15) days after entry or levy.
D. Upon the closing of the Franchisee's business for a period of five
(5) or more consecutive days without prior approval in writing of Franchisor
except for acts of God and other circumstances clearly beyond Franchisee's
control.
E. In the event of any material breach by Franchisee of any other
written agreement between Franchisor and Franchisee.
F. In the event that Franchisee, or any employee of Franchisee, is
convicted of a criminal offense relating to any act committed on, or relating
to, the Subject Location.
SECTION 12.03. If this Agreement is terminated for any reason
whatsoever, Franchisor shall have the right, without obligation and at the
expense of Franchisee, to
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<PAGE>
remove from the Subject Location all identification to an extent and in a manner
sufficient to remove therefrom all similarities to the appearance of a The Great
American BackRub location; and, in addition:
A. All Franchisee's rights as a franchisee shall terminate and
Franchisee will immediately thereafter cease to use by advertising or otherwise,
The Great American BackRub programs or any part thereof, or any forms, systems,
slogans, signs, marks, symbols, or devices used in connection with The Great
American BackRub program, including the name The Great American BackRub, or any
variation thereof, in any manner whatsoever,
B. Franchisee will assist Franchisor in every way possible to bring
about a complete and effective transfer of the business, its customers,
facilities, and services to Franchisor or its designee.
C. Franchisee will pay all debts owing to Franchisor, including but not
limited to fees and rents, immediately upon termination.
D. Franchisee will pay all creditors immediately upon termination.
E. Franchisee will return immediately to Franchisor in good condition
all manuals furnished by Franchisor, all advertising material, stationery,
printed forms, and all other materials relating to the operation of this
franchise in his possession at the time of such termination.
F. Franchisee shall relinquish and take all steps necessary to transfer
all telephone numbers, listings and directory advertising relating to the
Subject Location or Franchisee's business into Franchisor's name.
G. Franchisee will comply with all the provisions of this Agreement
relative to termination.
SECTION 12.04. In the event of the termination of this Agreement for
any reason, Franchisor shall repurchase from Franchisee, and Franchisee shall
sell to Franchisor, all usable merchandise bearing Franchisor's name or the name
"The Great American BackRub," or any variation thereof. Said merchandise shall
be purchased at the then current wholesale price.
SECTION 12.05. Written notice of any breach or default of this
Agreement shall be personally served on Franchisee or sent, certified mail,
return receipt requested to the address set forth in Section 14.07 hereof, or
such address as Franchisee may hereafter designate in writing to Franchisor. If
said notice is served by mail, it shall be deemed served on the earlier of the
date delivered to the intended address or three (3) days after mailing.
Notwithstanding the above, all written notices and reports permitted or
required to be delivered by the provisions of this Agreement shall be deemed so
delivered at the time
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<PAGE>
delivered by hand, or one (1) business day after sending by facsimile or
comparable electronic system or two (2) business days after deposited with
Federal Express or a comparable overnight courier company or three (3) business
days after being placed in the U.S. mail by Registered or Certified Mail, return
receipt requested, postage prepaid, and addressed to the party to be notified at
its most current principal business address of which the notifying party has
been notified.
SECTION 12.06. In the event said notice specifies that Franchisee's
default or breach constitutes a non-curable breach under the terms and
conditions hereof, this Agreement, and Franchisee's rights hereunder, shall
terminate ten (10) days following service of said notice.
SECTION 12.07. Except as provided in Section 12.08 of this Article, all
controversies, disputes or claims arising between Franchisor and Franchisee in
connection with, arising from, or with respect to: (1) any provision of this
Agreement or any other related agreement; (2) the relationship of the parties
hereto; (3) the validity of this Agreement or any other related agreement, or
any provision thereof; or (4) any specification, standard or operating procedure
relating to the establishment or operation of the franchised business which
shall not be resolved within fifteen (15) days after either party shall notify
the other in writing of such controversy, dispute or claim, shall be submitted
for arbitration to the New York, New York office of the American Arbitration
Association on demand of either party. Such arbitration proceedings shall be
conducted in New York, New York, except that for Franchisees located outside New
York, arbitration will be conducted in the state where the Subject Location is
located. Except as otherwise provided in this Agreement, arbitration proceedings
shall be conducted in accordance with the then current Commercial Arbitration
Rules of the American Arbitration Association. The arbitrator shall have the
right to award or include in his award any relief which he deems proper in the
circumstances, including without limitation, money damages (with interest on
unpaid amounts from date due), specific performance and injunctive relief. The
award and decision of the arbitrator shall be conclusive and binding upon all
parties hereto and judgment upon the award may be entered in any court of
competent jurisdiction. The parties acknowledge and agree that any arbitration
award may be enforced against either or both of them in a court of competent
jurisdiction and each waives any right to contest the validity or enforceability
of such award. The parties further agree to be bound by the provision of any
statute of limitations which would be otherwise applicable to the controversy,
dispute or claim which is the subject of any arbitration proceeding initiated
hereunder. Without limiting the foregoing, the parties shall be entitled in any
such arbitration proceeding to the entry of an order by a court of competent
jurisdiction pursuant to an opinion of the arbitrator for specific performance
of any of the requirements of this Agreement. This provision shall continue in
full force and effect subsequent to and notwithstanding expiration or
termination of this Agreement.
SECTION 12.08. The rights of Franchisor and Franchisee hereunder are
cumulative and no exercise or enforcement by Franchisor or Franchisee of any
right or remedy hereunder shall preclude the exercise or enforcement by
Franchisor or Franchisee of any other right or remedy hereunder or which
Franchisor or Franchisee is entitled by law to enforce.
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<PAGE>
SECTION 12.09. Notwithstanding the provisions of Section 12.07 above,
Franchisor shall have the right to enforce by judicial process any rights it may
have to possession of the Subject Location under any lease or sublease with
Franchisee. Further, Franchisee agrees that Franchisor shall have the right to
seek preliminary injunctive relief to restrain conduct by Franchisee in the
development or operation of the franchise herein granted that could materially
damage the goodwill associated with any of Franchisor's proprietary rights
and/or marks or any The Great American BackRub location, provided that
Franchisor agrees to arbitrate any such dispute concurrently with and subsequent
to the grant or denial of such preliminary injunctive relief, and the sole
remedy of Franchisee, in the event of entry of a preliminary injunction, shall
be the dissolution of such injunction, if warranted upon hearing duly had (all
claims for damages by reason of the wrongful issuance of any such injunction
being expressly waived hereby).
SECTION 12.10. If a claim for amounts owed by Franchisee to Franchisor
or any of its affiliates is asserted in any judicial or arbitration proceeding,
or if Franchisor or Franchisee is required to enforce this Agreement in a
judicial or arbitration proceeding, the party prevailing in such proceeding
shall be entitled to reimbursement of its costs and expenses, including, but not
limited to, reasonable accounting fees, attorneys fees and arbitrator's fees.
Attorneys' fees shall include, without limitation, reasonable legal fees,
whether incurred prior to, or in preparation for or contemplation of the filing
of any written demand or any claim, action, hearing or proceeding to enforce the
obligations of Franchisor under this Agreement or any other related agreement
between the parties.
SECTION 12.11. Pending a decision of said arbitration proceeding, the
franchise herein granted shall, at the sole option of Franchisor, be operated by
Franchisor, who shall have sole authority as to the operation of said business.
Franchisor shall deposit all revenues from the operation of said business, less
normal operating expenses, including but not limited to rent, employee wages and
benefits, reasonable merchandise purchases, utilities, taxes and insurance, in a
separate account. The balance of said trust account shall be subject to the
decision of said arbitration proceeding and, if said balance, or any portion
thereof, is awarded to Franchisee, Franchisee shall be entitled to an accounting
of all funds received and disbursed.
LICENSES
ARTICLE 13
SECTION 13.01 In the event that any license, permit or similar
governmental approval is required by the appropriate authorities of the state,
county or city in which the franchise herein granted will be operated, then this
Agreement is contingent upon the Franchisee securing such license. Franchisee
agrees to make due and diligent application for such license and shall cooperate
with the authorities in connection with such license application. In the event
after such due and diligent application the Franchisee is unable to secure said
license(s) within thirty (30) days following the effective date hereof,
Franchisee shall give written notice to Franchisor by certified mail of his
inability to secure such a
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<PAGE>
license. Upon expiration of ten (10) days from date of receipt of such notice,
this Agreement shall be deemed null and void and have no further effect. Except
for such training fees paid pursuant to Section 4.04, all moneys paid hereunder
by the Franchisee to Franchisor shall be refunded. All sums due to the
Franchisee after deducting appropriate charges, shall be returned within ten
(10) days after receipt of such termination notice. Franchisee agrees that he
will make immediate application to the proper authorities of the State in which
the Subject Location is located to obtain such licenses and shall diligently and
in good faith do all such things as may be necessary for that purpose.
Franchisee represents that he has no knowledge or reason to believe that a
license would not be granted to him on proper application.
SECTION 13.02. In the event that during the term of this Agreement any
license, permit or other approval described in Section 13.01 immediately above
is revoked, suspended, or terminated, or Franchisee's right to operate the
franchise is terminated or suspended, Franchisor shall have the right to
terminate this Agreement upon ten (10) days written notice to Franchisee.
MISCELLANEOUS
ARTICLE 14
SECTION 14.01. The waiver of Franchisor of any breach or default by the
Franchisee shall not affect or impair Franchisor's right in respect to any
subsequent default of the same or a different kind. Nor shall any delay or
omission of Franchisor to exercise any right arising from any default affect or
impair Franchisor's right as to the same or any future default.
SECTION 14.02. This Agreement shall be governed by and construed in
accordance with the laws of or applicable to the State of New York, as amended;
except that for franchises located outside of New York, the laws of the state in
which the Subject Location is located will apply.
SECTION 14.03. All terms and words used in this Agreement, regardless
of the number and gender in which they are used, shall be deemed and construed
to include any other number, singular or plural, and any other gender,
masculine, feminine or neuter, as the context or sense of this Agreement or any
paragraph or clause herein may require, the same as if such words had been fully
and properly written in the number and gender.
SECTION 14.04. This Agreement and the lease/sublease referred to in
Section 5.01 hereof, contains the entire agreement of the parties and supersedes
all prior negotiations, representations, inducements, promises, or agreements,
oral or otherwise. Franchisee acknowledges that Franchisor has not made any
representations, promises, or inducements, not embodied herein.
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<PAGE>
SECTION 14.05. Should any part of this Agreement for any reason be
declared invalid, such decision shall not affect the validity of any remaining
portion, which remaining portion shall remain in force and effect as if this
agreement had been executed with the individual portion thereof eliminated, and
it is hereby declared the intention of the parties hereto that they would have
entered into this agreement notwithstanding the invalid portion hereof.
SECTION 14.06. Should either party to this Agreement institute legal
action for the enforcement of any provision of this Agreement, the prevailing
party in said action shall be entitled to, in addition to any other relief,
reasonable attorneys' fees and costs.
SECTION 14.07. All notices and reports to Franchisor or Franchisee, if
not personally served, shall be deemed so delivered one (1) business day after
sending by facsimile or comparable electronic system, or two (2) business days
after deposit with Federal Express or a comparable overnight courier company, or
three (3) business days after being placed in the U.S. mail by Registered or
Certified Mail, return receipt requested. All notices shall be sent postage
prepaid and addressed to the respective party as follows, or as either party may
from time to time designate in writing.
Franchisor: Franchisee:
The Great American BackRub Store, Inc. 7575 E. Arkansas Ave. #11-207
425 Madison Avenue, Suite 605 Denver, CO 80231
New York, NY 10017
SECTION 14.08. This Agreement may be modified or amended only by a
written document of equal dignity.
SECTION 14.09. This Agreement shall be binding on the parties, their
heirs, executors, personal representatives, successors or assigns.
SECTION 14.10. To the extent that Section 2.06, Section 2.08, or
Section 9.03(9) is deemed unenforceable by virtue of its scope in terms of area,
business activity prohibited, or length of time, but may be made enforceable by
reductions of any or all thereof, Franchisee and Franchisor agree that same
shall be enforced to the fullest extent permissible under the laws and public
policies applied in the jurisdiction in which enforcement is sought.
SECTION 14.11. This Agreement is executed in duplicate originals, any
one of which may be introduced into evidence as conclusive of the content
thereof.
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<PAGE>
IN WITNESS WHEREOF the parties hereto have entered into this Agreement
this 20th day of November, 1996, at Denver, Colorado.
"Franchisee"
By: /s/ Illegible MARION HOLDINGS, INC.
-------------------
Illegible
Title: President
"Franchisor"
THE GREAT AMERICAN BACKRUB STORE, INC.
a New York Corporation
By: /s/ Terrance C. Murray
------------------
Terrance C. Murray
Title: CEO
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<PAGE>
STATE OF NEW YORK
ADDENDUM ATTACHED TO AND FORMING A PART OF THE
FRANCHISE AGREEMENT
BETWEEN THE GREAT AMERICAN BACKRUB STORE, INC. AS FRANCHISOR, AND
MARION HOLDING INC., AS FRANCHISEE,
DATED NOVEMBER 20, 1996
1. Section 3.04 of the Franchise Agreement is the same as written with the
following addition:
provided, however, that all rights enjoyed by the Franchisee and any
causes of action arising in its favor from the provisions of Article 33
of the General Business Law of New York State and the regulations
issued thereunder shall remain in force; it being the intent of this
proviso that the non-waiver provisions of Sections 687.4 and 687.5 of
the General Business Law of New York State be satisfied.
2. Section 9.03(7) of the Franchise Agreement is the same as written with
the following addition:
provided, however, that all rights enjoyed by the Franchisee and any
causes of action arising in its favor from the provisions of Article 33
of the General Business Law of New York State and the regulations
issued thereunder shall remain in force; it being the intent of this
proviso that the non-waiver provisions of Sections 687.4 and 687.5 of
the General Business Law of New York State be satisfied.
Except as specifically modified herein, the Agreement shall remain in
full force and effect as written.
IN WITNESS WHEREOF, the parties hereto have executed this Rider to the
Franchise Agreement on the date stated.
THE GREAT AMERICAN BACKRUB STORE, INC.
By: /s/ Terrance C. Murray
----------------------
Terrance C. Murray
Title: CEO
Marion Holdings, Inc. /s/ Illegible
-----------------------------------
Marion Holdings, Inc. /s/ Illegible
Franchisee
-----------------------------------
Franchisee
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EXHIBIT 10.40
OPTION AGREEMENT
This Option Agreement is entered into this _____ day of
___________________, 19___, by and between THE GREAT AMERICAN BACKRUB STORE,
INC. , a New York corporation, hereinafter referred to as "Franchisor," and
Marylou Garcia, hereinafter referred to as "Optionee."
RECITALS
ARTICLE I
SECTION 1.01 Franchisor is a corporation duly organized, validly
existing, and in good standing under the laws of the State of New York, with its
principal office located at 425 Madison Avenue, Suite 605, New York, New York,
10021.
SECTION 1.02. Optionee is an individual, whose principal place of
residence is located at 1568 Gramvia Altamira PVE, CA 90274.
SECTION 1.03. Franchisor is engaged in the business of granting to
others, by means of a non-exclusive franchise agreement (the "Franchise
Agreement"), limited licenses to utilize the name "The Great American BackRub,"
the related proprietary marks and the associated concepts in connection with the
operation of a "The Great American BackRub" store (the "Store") and the sale,
distribution, and marketing of back rub and massage services and products.
SECTION 1.04. The location within which the Store is located is leased
by Franchisor on terms and conditions acceptable to Franchisor, and then
subleased to franchisees on terms and conditions mutually agreement to
Franchisor and said franchisees.
SECTION 1.05. Optionee desires to acquire, pursuant to the terms and
conditions of the Franchise Agreement, a limited license to utilize the name
"The Great American BackRub," the proprietary marks and the associated concepts
in connection with Optionee's operation of a Store.
NOW, THEREFORE, in consideration of the mutual promises, premises and
covenants herein set forth, Franchisor and Optionee do hereby agree as follows:
TERMS AND CONDITIONS
ARTICLE II
SECTION 2.01. Upon execution of this Option Agreement, Optionee shall
pay to Franchisor the sum of Five Thousand Dollars ($5,000.00) (the "Payment").
In consideration of said payment, Franchisor hereby grants to Optionee, subject
to the terms and conditions of
<PAGE>
Section 2.02 hereof, the option to require Franchisor to enter into the
Franchise Agreement in the form of Exhibit "A," attached hereto and made a part
hereof.
SECTION 2.02. The option granted to Optionee in Section 2.01 hereof is
subject to the following conditions, all of which must be satisfied within one
hundred twenty (120) days (the "Term") following the date hereof:
(a) Optionee shall, at his sole expense, locate an "Acceptable
Location" (as said term is defined in Section 2.04 hereof) within the
geographic territory (the "Option Territory") described in Exhibit "B"
attached hereto and made a part hereof.
(b) Franchisor shall have entered into a written lease relating to said
Acceptable Location on such terms and conditions as Franchisor, in its
sole discretion, deems reasonable and appropriate.
(c) Optionee and Franchisor shall have entered into a written sublease,
in the form of that certain Sublease attached hereto as Exhibit " C,"
relating to said Acceptable Location.
SECTION 2.03. Upon satisfaction of the conditions of Section 2.02
hereof, Franchisor and Optionee shall execute the Franchise Agreement. The
Franchise Agreement shall supersede, and in all respects replace, this Option
Agreement. Upon execution of the Franchise Agreement, all rights, duties and
obligations of Franchisor and Optionee shall be governed and construed by the
terms and conditions of the Franchise Agreement.
SECTION 2.04. The term "Acceptable Location" as used herein shall be
defined as a location which (i) meets the specifications established from time
to time by Franchisor for the operation of a Store, (ii) is located within the
Option Territory in an area deemed by Franchisor to be appropriate for the
operation of a Store, and (iii) is available to rent on terms and conditions
deemed by Franchisor, in its sole discretion, to be reasonable and appropriate.
SECTION 2.05. During the Term Franchisor agrees not to grant any option
to acquire, or license to operate, or operate for its own benefit, a Store
within the Option Territory.
SECTION 2.06. In the event that Optionee has not satisfied all
conditions set forth in this Article II within the Term, all rights of Optionee
under this Option Agreement shall terminate, Franchisor shall be entitled to
retain the Payment, and Franchisor shall have no further obligation to Optionee
hereunder.
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<PAGE>
MISCELLANEOUS
ARTICLE III
SECTION 3.01. This Option Agreement contains the entire agreement of
the parties and supersedes all prior agreements, negotiations and
representations. Optionee acknowledges that Franchisor has not made any
representations, promises or inducements not embodied herein.
SECTION 3.02. In the event either party to this agreement should
institute legal action relating to the terms and conditions of this agreement,
or the enforcement of any provision hereof, the prevailing party in said action
shall be entitled to recover, in addition to any other relief or damages,
reasonable attorneys' fees and costs.
SECTION 3.03. This agreement shall be construed under the applicable
laws of the State of New York, as amended; except that for franchises located
outside of New York, the laws of the state in which the Subject Location is
located will apply.
SECTION 3.04. This agreement shall inure to the benefit of, and be
binding upon, the parties, their heirs, executors, personal representatives,
successors and assigns.
Executed as of the day and year first above written at Palos Verdes
Estates, California.
"Franchisor" "Optionee"
The Great American BackRub Store, Inc.,
A New York corporation /s/ Marylou Garcia
-----------------------
By: /s/ Terrance C. Murray NOVEMBER 21, 1996
----------------------------------
Terrance C. Murray
Its:CEO Marylou Garcia
-------------------------
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<PAGE>
EXHIBIT "B" TO OPTION AGREEMENT
DATED NOVEMBER 21, 1996 BETWEEN
THE GREAT AMERICAN BACKRUB STORE, INC. AND MARYLOU GARCIA
The Option Territory referred to in Section 2.20(a) shall consist of the
Counties of Los Angeles and Orange, California.
112296/4
THE GREAT AMERICAN BACKRUB STORE, INC.
425 MADISON AVENUE
NEW YORK, NEW YORK 10017
AGENCY AGREEMENT
November 22, 1996
Investors Associates, Inc.
411 Hackensack Avenue
Hackensack, NJ 07601
Attn: Mr. Herman Epstein
Ladies and Gentlemen:
THE GREAT AMERICAN BACKRUB STORE, INC., a New York corporation (the
"Company" or "GAB"), proposes to offer for sale in a private placement (the
"Offering"), four (4) units (the "Units") at a purchase price of $50,000 per
Unit, each Unit consisting of a $49,250 principal amount promissory note (the
"Note(s)"), and warrants (the "Warrants") to purchase an aggregate of 750,000
shares of preferred stock (the "Preferred Stock"), convertible into common stock
(the "Common Stock") of the Company, $0.001 par value per share. The minimum
purchase is one Unit, but you may accept subscriptions for fractional Units in
your discretion and with the Company's consent. Payment of the Notes will be
secured by a pledge of all the Common Stock legally or beneficially owned by
William Zanker and Terrance C. Murray which shall be evidenced by a Stock Pledge
Agreement (the "Security Agreement") to be entered into with you or your
affiliates as agent for the benefit of each purchaser of the Units. The Warrants
will be issued in the form of Exhibit A hereto. The Units will be offered to
"accredited investors" on a "best efforts" basis in accordance with Section 4(2)
and/or 3(b) of the Securities Act of 1933, as amended (the "Securities Act"),
and Regulation D promulgated thereunder, and to non-United States investors.
The Units, Notes and Warrants will contain the terms and conditions
set forth in the Company's Confidential Private Offering Memorandum to be
prepared by our counsel and delivered to each prospective purchaser of Units
(the "Memorandum"). The Memorandum, together with all exhibits thereto,
including the Subscription Agreement to be executed by each purchaser and the
Company, will be referred to herein as the "Offering Documents". Investors
Associates, Inc. is sometimes referred to herein as the "Placement Agent".
<PAGE>
1. APPOINTMENT OF PLACEMENT AGENT; THE OFFERING.
1.1. APPOINTMENT OF PLACEMENT AGENT. You are hereby appointed
exclusive placement agent (the "Placement Agent") of the Company during the
offering period herein specified (the "Offering Period") for the purpose of
assisting the Company in finding qualified investors (the "Subscribers"). The
Offering Period shall commence on the day the Offering Documents are first made
available to you by the Company and shall continue until the 30th day following
the date first written above, PROVIDED, the Offering Period may be extended for
an additional period not to exceed 10 days by the mutual agreement of the
Company and the Placement Agent, or may be terminated earlier if all $200,000 of
the Units offered hereby have been sold. The day that the Offering Period
terminates is hereinafter referred to as the "Termination Date." You hereby
accept such agency and agree to assist the Company in finding qualified
subscribers. Your agency hereunder is not terminable by the Company except upon
termination of the Offering. You shall have the right to enter into selling
agreements with members of your selling group, who shall be members of the NASD
(as hereunder defined).
1.2 OFFERING DOCUMENTS. The Company will provide the Placement
Agent with a sufficient number of copies of the Offering Documents for delivery
to potential Subscribers and such other information, documents and instruments
which the Placement Agent deems reasonably necessary to comply with the rules,
regulations and judicial and administrative interpretations respecting
compliance with state and Federal statutes applicable to the Offering.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants as set forth below. For purposes of this Article 2, the
term "Company" shall include the Subsidiaries (as defined below):
2.1. DUE INCORPORATION AND QUALIFICATION. The Company has been
duly incorporated, is validly existing and is in good standing under the laws of
its state of incorporation and is duly qualified as a foreign corporation
(except where the failure to so qualify would not have a material adverse effect
on the business of the Company) for the transaction of business and is in good
standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification. GAB has
no subsidiaries, other than those corporations (the "Subsidiaries") named on
Schedule A annexed hereto, each of which was formed solely to acquire a lease of
retail premises indicated opposite its name. The Company has all requisite
corporate power and authority necessary to own or hold its properties and
conduct its business as described in the Offering Documents.
2.2 AUTHORIZED CAPITAL. Immediately prior to the closing (the
"Closing") of this Offering, the Company will have an
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<PAGE>
authorized and outstanding capitalization as set forth on Schedule 2.2 hereto,
and all of the then issued and outstanding shares of capital stock of the
Company (the "Capital Stock") will have been duly and validly authorized and
issued and will be fully paid and non-assessable. None of the holders of such
outstanding shares of Capital Stock is subject to personal liability solely by
reason of being such a holder. Except as described on Schedule 2.2 hereto, the
offers and sales of such outstanding shares of Capital Stock were at all
relevant times either registered under the Securities Act and the applicable
state securities or blue sky laws, or exempt from such registration. Except as
described on Schedule 2.2 hereto, no holder of any of the Company's securities
has any rights, "demand", "piggyback" or otherwise, to have such securities
registered or to demand the filing of a registration statement. Immediately
prior to the Closing of the Offering, GAB will have reserved for issuance a
sufficient number of shares of Common Stock to be issued to the Subscribers upon
the exercise of the Warrants.
2.3 NO PREEMPTIVE RIGHTS; OPTIONS. Except as set forth on
Schedule 2.3 hereto, there are no preemptive or other rights to subscribe for or
purchase, or any restriction upon the voting or transfer of, any shares of
Capital Stock or other securities of the Company, under the articles or
certificates of incorporation or by-laws of the Company or under any agreement
or other outstanding instrument to which the Company is a party or by which it
is bound. Except as set forth in the Memorandum or on Schedule 2.3 hereto, the
Company does not have outstanding any option, warrant, convertible security, or
other right permitting or requiring it to issue, or otherwise to purchase or
convert any obligation into shares of Capital Stock or other securities of the
Company and the Company has not agreed to issue or sell any shares of Capital
Stock or other securities of the Company.
2.4 FINANCIAL STATEMENTS. The financial statements of GAB,
including the notes thereto, included in the Offering Documents fairly present
the financial position and results of operations of GAB at the dates thereof and
for the periods in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved.
2.5. NO MATERIAL ADVERSE CHANGES. Except as otherwise stated in
the Offering Documents and/or Schedule 2.5 hereto, since the date of our last
report filed with the SEC (as below defined) (i) there has not been any change
in the condition, financial or otherwise, of the Company which could materially
adversely affect its ability to conduct its operations as described in the
Offering Documents, and (ii) the Company has not incurred any material
liabilities or obligations, direct or contingent, not in the ordinary course of
business and except as may be contemplated by the Offering Documents.
2.6. TAXES. Except as set forth on Schedule 2.6 hereto,
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<PAGE>
the Company has filed all Federal tax returns and all state and municipal and
local tax returns (whether relating to income, sales, franchise, real or
personal property or other types of taxes) required to be filed under the laws
of the United States and applicable states, and has paid in full all taxes which
have become due pursuant to such returns or claimed to be due by any taxing
authority or otherwise due and owing, PROVIDED, the Company has not paid any
tax, assessment, charge, levy or license fee that it contests in good faith and
by proper proceedings and adequate reserves for the accrual of same are
maintained if required by generally accepted accounting principles. Each of the
tax returns heretofore filed by the Company correctly and accurately reflects
the amount of its tax liability thereunder. The Company has withheld, collected
and paid all other levies, assessments, license fees and taxes to the extent
required and with respect to payments, to the extent that the same have become
due and payable.
2.7 FINDER'S FEES; OTHER UNDERWRITERS. The Company is not
obligated to pay a finder's fee to anyone in connection with the introduction of
the Company to the Placement Agent or the consummation of the offering
contemplated hereunder or the PO (as below defined) other than payments to the
Placement Agent. The Company has not paid or issued any monies, securities or
other compensation to any member of the National Association of Securities
Dealers, Inc. (the "NASD") or to any affiliate of such a member during the
previous 12 months, except payments made (i) to the Placement Agent hereunder;
(ii) to the Placement Agent under the Letter (as below defined); (iii) to the
Placement Agent under the Financial Advisory and Consulting Agreement dated
February 8, 1996, or (iv) to Horatio Management Services Corp. under a
consultative agreement dated February 1, 1996. The Letter and agreements
aforesaid are in full force and effect and Investors Associates, Inc. is in full
compliance with all of its obligations thereunder.
2.8 NO PENDING ACTIONS. Except as set forth on Schedule 2.8
hereto, or in the Memorandum, there are no actions, suits, proceedings, claims
or hearings of any kind or nature or, to the best of the knowledge of the
Company, any investigations or inquiries, before or by any court, governmental
authority, tribunal or instrumentality, pending or threatened against the
Company, or involving the properties of the Company which could result in any
material adverse change in the business, properties, financial position or
results of operations of the Company, or which could materially adversely affect
the transactions or other acts contemplated by this Agreement or the validity or
enforceability of this Agreement.
2.9 PRIVATE OFFERING EXEMPTION; OFFERING DOCUMENTS. Assuming
that each United States purchaser of Units in this Offering is an "accredited
investor" as defined in Rule 502 of Regulation D, or a foreign investor, the
Offering Documents conform
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in all material respects with the requirements of Section 4(2) and/or 3(b) of
the Securities Act and Rules 501-506 of Regulation D promulgated thereunder
("Reg D") and with the requirements of all other published rules and regulations
of the Securities and Exchange Commission (the "SEC" or the "Commission")
currently in effect relating to "private offerings". To the best knowledge of
the Company, the Memorandum, as supplemented by the information disclosed
pursuant hereto in the annexed schedules, does not contain an untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading. The Notes, Preferred Stock and Warrants conform to the
descriptions thereof contained in the Subscription Agreement and the Memorandum.
2.10 DUE AUTHORIZATION. GAB has full right, power and authority
to enter into this Agreement and the Security Agreement and issue the Units and
the securities contained therein and the securities underlying the same and to
perform all of its obligations hereunder and thereunder and as contemplated
hereby and thereby and pursuant to the terms of the securities comprising the
Units. The execution and delivery of this Agreement and the Security Agreement
have been duly authorized by all necessary corporate action and no further
corporate action or approval is required for such execution, delivery and
performance. This Agreement constitutes, and the Security Agreement and the
Warrants will, upon execution and delivery and payment therefor, as applicable,
constitute a valid and binding obligation of the Company, enforceable in
accordance with its respective terms (except (i) as the enforceability thereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally or by general principles of
equity, and (ii) that the enforceability of the indemnification and contribution
provisions of this Agreement may be limited by the Federal securities laws and
public policy), and no consent, approval, authorization, order of, or filing
with, any court or governmental authority or any other third party is required
to consummate the transactions contemplated by this Agreement, except that the
offer and sale of the Units in certain jurisdictions may be subject to the
provisions of the securities or Blue Sky Laws of such jurisdictions. No licenses
issued by the department of health or other authorities will be required in
order to become a Subscriber.
2.11 NON-DEFAULT; NON-CONTRAVENTION. The Company is not in
violation of its articles or certificate of incorporation or by-laws or, except
as described in the financial statements and on Schedule 2.11 hereto, in default
in the performance or observance of any material obligation, agreement, covenant
or condition contained in any material contract, lease or other instrument to
which it is a party, and GAB's execution and delivery of this Agreement, the
Security Agreement and/or the securities comprising
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the Units, and the incurrence of the obligations herein and therein set forth.
The consummation of the transactions contemplated herein will not immediately
prior to the Closing of the Offering (i) conflict with, or constitute a breach
of, or a default under the articles or certificate of incorporation or by-laws
of the Company, or any material contract, lease or other material agreement or
instrument to which the Company is a party or in which the Company has a
beneficial interest or by which the Company is bound; (ii) violate any existing
applicable law, rule, regulation, judgment, order or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Company or
any of its properties or business, or (iii) have any material adverse effect on
any permit, certification, registration, approval, consent, license or franchise
necessary for the Company to own or lease and operate any of its properties and
to conduct its business or the ability of the Company to make use thereof.
2.12 VALID ISSUANCES. The shares of Preferred Stock to be issued
upon exercise of the Warrants and underlying Common Stock have been duly and
validly authorized and, when issued and delivered and paid for in accordance
with the terms of the Offering Documents, this Agreement and the Warrants, as
applicable, will be duly and validly issued, fully paid and non-assessable. The
Notes and the Warrants included in the Units have been duly and validly
authorized and, when issued and delivered in accordance with the terms of the
Subscription Agreement and this Agreement, will be duly and validly issued.
2.13 NO ANTI-DILUTION ADJUSTMENT. The issuance of the Units in
the Offering will not give any holder of any of the Company's outstanding
options, warrants or other convertible securities or rights to purchase shares
of the Company's capital stock, the right to purchase any additional shares of
capital stock and/or the right to purchase shares at a reduced price.
2.14 NO REGULATORY ISSUES. The Company (i) has not filed a
registration statement which is the subject of any pending proceeding or
examination under Section 8 of the Securities Act, or is the subject of any
refusal order or stop order thereunder; (ii) is not subject to any pending
proceeding under Rule 261 of the Securities Act or any similar rule adopted
under Section 3(b) of the Securities Act, or to an order entered thereunder;
(iii) has not been convicted of any felony or misdemeanor in connection with the
purchase or sale of any security involving the making of any false filing with
the Commission; (iv) is not subject to any order, judgment, or decree of any
court of competent jurisdiction temporarily or preliminarily restraining or
enjoining the Company from engaging in or continuing any conduct or practice in
connection with the purchase or sale of any security or involving the making of
any false filing with the Commission; (v) is not subject to a United States
Postal Service false representation order entered under Section 3005 of Title
39, United States Code,
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or a temporary restraining order or preliminary injunction entered under Section
3007 of Title 39, with respect to conduct alleged to have violated Section 3005
of Title 39, United States Code, or (vi) has not been the subject of any
investigation or proceeding involving the suspension or cessation of the trading
or quotation of its securities on any exchange or quotation system. None of the
Company's directors or officers (i) has been convicted of any felony or
misdemeanor in connection with the purchase or sale of any security involving
the making of a false filing with the Commission, or arising out of the conduct
of the business of an underwriter, broker, dealer, municipal securities dealer,
or investment advisor; (ii) is subject to any order, judgment, or decree of any
court of competent jurisdiction temporarily or preliminarily enjoining or
restraining, or is subject to any order, judgment, or decree of any court of
competent jurisdiction permanently enjoining or restraining such person from
engaging in or continuing any conduct or practice in connection with the
purchase or sale of any security, or involving the making of a false filing with
the Commission, or arising out of the conduct of the business of an underwriter,
broker, dealer, municipal securities dealer, or investment advisor; (iii) is
subject to an order of the Commission entered pursuant to Section 15(b), 15B(a)
or 15B(c) of the Securities Exchange Act of 1934, as amended ("1934 Act"), or is
subject to an order of the Commission entered pursuant to Section 203(e) or (f)
of the Investment Advisors Act of 1940; (iv) is suspended or expelled from
membership in, or suspended or barred from association with a member of an
exchange registered as a national security exchange pursuant to Section 6 of the
1934 Act, an association registered as a national securities association under
Section 15A of the 1934 Act, or a Canadian securities exchange or association
for any act or omission to act constituting conduct inconsistent with just and
equitable principles of trade, or (v) is subject to a United States Postal
Service false representation order entered under Section 3005 of Title 39,
United States Code, or is subject to a restraining order or preliminary
injunction entered under Section 3007 of Title 39, United States Code, with
respect to conduct alleged to have violated Section 3005 of Title 39, United
States Code.
2.15 NO VIOLATIONS. Except as described in the Memorandum, the
Company is not in violation of any material franchise, license, permit,
applicable law, rule, regulation, judgment or decree of any governmental agency
or court, domestic or foreign, having jurisdiction over the Company or any of
its properties or business other than any violation which individually or in the
aggregate would not have a material adverse effect on the Company's business,
properties or operations.
2.16 CONDUCT OF BUSINESS. The Company has all necessary
authorizations, approvals, orders, licenses, certificates and permits
(collectively, the "Approvals") of and from all governmental regulatory
officials and bodies, to own or lease its
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properties and conduct its business as it is being presently conducted in the
Company's existing form as described in the Memorandum, and the Company is and
has been doing business in compliance with all such material Approvals, and all
Federal, state and local laws, rules and regulations, other than any such
Approvals, laws, rules and regulations, the failure to comply with which would
not have material adverse effect on the Company, its business, properties or
operations. All licenses and findings of suitability required to be obtained by
any affiliate of the Company have been obtained and are in full force and
effect.
2.17. TITLE TO PROPERTY; INSURANCE. The Company has good title to,
or valid and enforceable leasehold estates in, all items of real property owned
or leased by it, including, without limitation, the backrub centers referred to
in the Memorandum and has good title to, or valid and enforceable leases with
respect to, all items of personal property (tangible and intangible), free and
clear of all liens, encumbrances, claims, security interests, defects of title,
and restrictions of any material nature whatsoever, other than those contained
in the Memorandum and liens for real estate taxes not yet due and payable. The
Company has adequately insured its tangible and/or real properties against loss
or damage by fire or other casualty (other than earthquake and flood) and
maintains such insurance in adequate amounts, on terms generally offered by
reputable insurance carriers in the area.
2.18 INTANGIBLES. The Company owns or possesses the requisite
licenses or rights to use all trademarks, service marks, service names, trade
names, and other rights (collectively, the "Intangibles") described as owned or
used by it in the Memorandum. There is no proceeding or action by any person
pertaining to, or proceeding or claim pending or, to the best knowledge of the
Company, threatened and the Company has not received any notice of conflict with
the asserted rights of others which challenges the exclusive right of the
Company with respect to any Intangibles used in the conduct of the Company's
business except as described in the Memorandum. To the best knowledge of the
Company, the Intangibles and the Company's operations do not infringe on any
intangibles held by any third party.
2.19 SECURITY INTEREST. Assuming the Subscribers have taken
possession of the Pledged Shares (as defined below) in good faith and without
notice of any adverse claim and maintain physical possession of the certificates
representing the Pledged Shares in the State of New York, the Security Agreement
will create a valid first priority security interest in favor of the Subscribers
in and to the Pledged Shares, enforceable against the Company and all third
parties securing payment of the Obligations (as below defined) (PROVIDED, the
enforceability of the Security Agreement may be limited or affected by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights and by general principles of equity). No filings
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or recordings are required in order to perfect fully the security interest in
the Pledged Shares under the Security Agreement.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLACEMENT
AGENT. The Placement Agent represents, warrants and covenants as follows:
(a) The Placement Agent is duly incorporated and validly
existing and in good standing under the laws of the state of its incorporation.
(b) The Placement Agent is a broker-dealer registered as such
under the Securities Exchange Act of 1934 and is a member in good standing of
the NASD.
(c) Sales of Units by the Placement Agent or members of its
selling group will only be made in such jurisdictions in which the Placement
Agent is a registered broker-dealer or where an applicable exemption from such
registration exists.
(d) Offers and sales of Units by the Placement Agent or any
members of its selling group will be made solely to accredited investors in
compliance with the provisions of Rule 502(c) of Regulation D, and to non-U.S.
investors, and the Placement Agent will furnish to each investor a copy of the
Offering Documents prior to accepting any payments for Units.
(e) The Placement Agent has the necessary power to enter into
this Agreement and to consummate the transactions contemplated hereby.
(f) The execution and delivery by the Placement Agent of this
Agreement and the consummation of the transactions herein contemplated will not
result in any violation of, or be in conflict with, or constitute a default
under, any agreement or instrument to which the Placement Agent is a party or by
which the Placement Agent or its properties are bound, or any judgment, decree,
order or, to the Placement Agent's knowledge, any statute, rule or regulation
applicable to the Placement Agent. This Agreement, when executed and delivered
by the Placement Agent, will constitute the legal, valid and binding obligation
of the Placement Agent, enforceable in accordance with its terms, except to the
extent that (i) the enforceability hereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws from time to time in
effect and affecting the rights of creditors generally; (ii) the enforceability
hereof is subject to general principles of equity, or (iii) the indemnification
provisions hereof may be held to be violative of public policy.
(g) The Placement Agent will deliver to each purchaser, prior to
any submission by such person of a written offer to purchase any Units, a copy
of the Memorandum, as it may have been most recently amended or supplemented by
the Company.
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(h) Upon receipt of an executed Subscription Agreement and the
payments representing subscriptions for Units, the Placement Agent will promptly
forward copies of the subscription documents to the Company and shall forward
all consideration received for such Units to the escrow agent specified in the
Memorandum to be held in escrow.
4. CLOSING.
4.1 TIME AND PLACE. At any time prior to the Termination Date
and after the receipt of subscription agreements and related documentation, and
the receipt and clearance of funds representing the sale of four Units, a
Closing (the "Closing") shall take place at the office of the Placement Agent,
at its address above given or at the offices of its counsel, 545 Madison Avenue,
16th Floor, New York City. At the Closing, payment for the Units issued and sold
by the Company shall be recognized against delivery of the Notes and
certificates representing the Warrants comprising the Units.
4.2 DELIVERIES AT CLOSING.
(a) At the Closing, and as a condition to the Closing, the
Company shall deliver or cause to be delivered to the Placement Agent on behalf
of the Placement Agent and the Subscribers:
(i) the opinion of Olshan Grundman Frome & Rosenzweig LLP as at
the date of the Closing, substantially to the effect that:
(A) The Company has been duly organized and is validly existing
and in good standing under the laws of the jurisdiction of its incorporation,
has all requisite corporate power and authority necessary to own or hold its
properties and conduct its business as described in the Offering Documents and
is duly qualified as a foreign corporation for the transaction of business in
any state requiring such qualification where the failure to so qualify would
reasonably be expected to have a material adverse effect on the Company. In
giving such opinion counsel may rely solely on a certificate of an officer of
the Company as to the jurisdictions in which the Company conducts business.
(B) The Company has all requisite corporate power and authority
to enter into this Agreement and to perform all of its obligations hereunder;
the Company has all requisite corporate power and authority to issue and deliver
the Units, this Agreement, the Notes, the Warrants, the Preferred Stock
underlying the Warrants and the Common Stock underlying the Preferred Stock; and
this Agreement, the Notes and the Warrants have been duly authorized, executed
and delivered by the Company and are the valid and binding obligations of the
Company, each enforceable against the Company in accordance with its respective
terms except (I) as
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the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to or affecting creditors' rights generally, or by general principles
of equity, and (II) that the enforceability of the indemnification and
contribution provisions of this Agreement may be limited by the Federal
securities laws and public policy.
(C) The Preferred Stock to be issued upon exercise of the
Warrants, when issued and paid for in accordance with the terms of the Warrants,
and the Common Stock underlying the Preferred Stock, when issued upon conversion
of the Preferred Stock in accordance with the terms thereof and upon payment
therefor, will be duly and validly issued and fully paid and non-assessable. The
Preferred Stock, the Common Stock, the Warrants and the Notes conform to the
description thereof contained in the Offering Documents. To the best knowledge
of such counsel, except as described on Schedule 2.2 hereto or in the
Memorandum, no holder of any of the Company's securities has any rights,
"demand", "piggyback" or otherwise, to have such securities registered or to
demand the filing of a registration statement. Except as set forth on Schedule
2.3 hereto or in the Memorandum, to the best knowledge of such counsel following
due inquiry, there are no preemptive or other rights to subscribe for or
purchase, or any restriction upon the voting or transfer of, any shares of
Common Stock of the Company, under the articles or certificate of incorporation
or by-laws of the Company or under the business corporation law of the state of
the Company's incorporation or, to the best knowledge of such counsel, under any
agreement or other outstanding instrument to which the Company is a party or by
which it is bound.
(D) Neither the execution and delivery of this Agreement, the
certificates representing the Warrants or the Notes, nor compliance with the
terms hereof or thereof will (i) conflict with, result in a breach of, or
constitute a default under the articles or certificate of incorporation or
by-laws of the Company or, to the best of such counsel's knowledge, any
contract, instrument, agreement or document to which the Company is a party, or
by which the properties of the Company are bound; (ii) to the best knowledge of
counsel following due inquiry, violate any existing applicable law, rule,
regulation, judgment, order or decree of any governmental agency or court,
domestic or foreign, having jurisdiction over the Company or any of its
properties or business, or (iii) to the best knowledge of counsel following due
inquiry, have any material adverse effect on any permit, certification,
registration, approval, consent, license or franchise necessary for the Company
to own or lease and operate any of its properties.
(E) No approval, consent or finding of any court, board or
governmental agency, instrumentality or authority of the United States or of any
state having jurisdiction or authority over the
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Company or of any other third party, not duly obtained (other than any approval
or consent required under any state securities or Blue Sky Laws) is required for
the valid authorization, issuance, sale and delivery of the Units and the
consummation of the transactions contemplated by this Agreement.
(F) To the best of counsel's knowledge following due inquiry,
except as disclosed on Schedule 2.8 hereto, there are no claims, actions, suits,
hearings, investigations, inquiries or proceedings of any kind or nature, before
or by any court, governmental authority, tribunal or instrumentality pending or
threatened against or affecting the Company which could reasonably be
anticipated to materially and adversely affect the business, properties or
financial position of the Company, or the transactions or other acts
contemplated by this Agreement or the validity or enforceability of this
Agreement.
(G) To the best of counsel's knowledge following due inquiry,
there are no material licenses, permits, certificates, registrations, approvals
or consents of any governmental agency, commission, board, instrumentality or
department that are required to be obtained by the Company in order to conduct
its business as conducted at the date hereof which have not been so obtained and
as to which the failure to so obtain would reasonably be anticipated to have a
material adverse effect on the Company's business.
(H) To the best of counsel's knowledge following due inquiry,
the issuance of the Units in the Offering will not give any holder of any of the
Company's outstanding options, warrants or other convertible securities or
rights to purchase shares of the Company's capital stock, the right to purchase
any additional shares of capital stock or the right to purchase shares at a
reduced price.
(I) Assuming the Subscribers have taken possession of the shares
of Common Stock subject to the Security Agreement (the "Pledged Shares") in good
faith and without notice of any adverse claim and maintain physical possession
of the certificates representing the Pledged Shares in the State of New York,
the Security Agreement creates a valid and perfected first priority security
interest in favor of the Subscribers in the Pledged Shares that is subject to no
other security interest in favor of any other person, as security for the
Obligations (as defined in the Security Agreement). No filings or recordings are
required in order to perfect the security interest in the Pledged Shares created
under the Security Agreement.
Counsel's opinion shall be limited to the laws of the state of New
York and applicable federal law. Where opinions of counsel are stated to be to
Counsel's "knowledge" or "best knowledge" after due inquiry, or words to that
effect, such
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references shall mean that, after an examination of documents made available to
counsel by the Company and after inquiries of the Company, but without any
further independent factual investigation, counsels finds no reason to believe
that its opinions are factually incorrect, and the expression "to our knowledge"
or similar language with reference to matters of fact refers to the current
actual knowledge of attorneys at counsel's firm involved in the matter;
(ii) a certificate of the Company, signed by two executive
officers thereof stating that the representations and warranties contained in
Section 2 hereof are true and accurate in all material respects at the Closing,
with the same effect as though expressly made at the Closing;
(iii) the certificates representing the Warrants and the Notes to
be included in the Units;
(iv) the Security Agreement, the form of which shall be
reasonably satisfactory to Placement Agent's counsel, and the Pledged Shares,
and
(v) such other closing documents as shall be reasonably
requested by the Placement Agent or its counsel.
(b) The Law Offices of Mark Schwarz, will as a condition to the
Closing, deliver its opinion that assuming (i) a proper Form D is filed in
accordance with Rule 503 of Reg D; (ii) the offer and the sale of the Units by
the Placement Agent was made in compliance with Rule 502(c) of Reg D; (iii) the
Placement Agent's representations and warranties set forth in Section 3 hereof
are true and correct, and (iv) the representations of the Subscribers in the
Subscription Agreement signed by them are true and correct (which facts will not
be independently verified by such counsel), the sale of Units in the Offering is
exempt from registration under the Securities Act and is in compliance with Reg
D.
4.3 BLUE SKY SURVEY. Counsel for the Placement Agent shall
survey the blue sky laws of the states designated by the Placement Agent in
order to determine the extent to which and the conditions upon which offers and
sales of the Units may be made in such states. It is understood that such survey
(the "Blue Sky Survey"), which shall be delivered to the Company and the
Placement Agent, may be based on or may rely upon (i) the representations of
each Subscriber set forth in his or her Subscription Agreement, and (ii) the
representations, warranties and agreements of the Company and the Placement
Agent set forth in this Agreement.
4.4 PLACEMENT AGENT'S FEES AND EXPENSES. At the Closing, the
Company shall pay to the Placement Agent a commission equal to 10 percent of the
aggregate purchase price of the Units
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sold at the Closing. In order to reimburse the Placement Agent for its expenses
incurred in connection with the Offering, at the Closing, the Company also shall
pay to the Placement Agent a non-accountable expense allowance equal to three
percent (3%) of the aggregate purchase price of the Units sold at such Closing.
On or before the Closing, the Company shall pay the fees and disbursements of
counsel to the Placement Agent referred to in paragraph 5.3 below in connection
with the qualification of the Units under the securities or blue sky laws of the
states which the Placement Agent shall designate. All the foregoing amounts are
payable directly to the parties who are owed same by deduction from the
aggregate purchase price of the Units sold otherwise payable to the Company. If
the Offering is not consummated because the Placement Agent prevents its
completion (except if such prevention is based upon a breach by the Company of
any covenant, representation or warranty contained herein or upon a written
misstatement to the Placement Agent by the Company of a fact or omission by the
Company to state a fact relating to the business and financial condition of the
Company), then the Company shall not be liable to the Placement Agent or its
counsel for any of the foregoing expenses. If the Offering is not consummated
because the Company prevents its completion or because of a breach by the
Company of any such covenants, representations or warranties or because of any
such misstatements or omissions by the Company, then the Company's liability for
the Placement Agent's expenses shall be equal to the Placement Agent's actual
accountable expenses.
5. COVENANTS. The Company covenants and agrees that:
5.1 AMENDMENTS TO OFFERING DOCUMENTS. Until the Offering has
been completed or terminated, if there shall occur any event relating to or
affecting, among other things, the Company or any affiliate, or the proposed
operations of the Company as described in the Memorandum, as a result of which
it is necessary, in the opinion of counsel for the Placement Agent or counsel
for the Company, to amend or supplement the Offering Documents in order that the
Offering Documents will not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
the Company shall immediately prepare and furnish to the Placement Agent a
reasonable number of copies of any appropriate amendment or supplement to the
Offering Documents, in form and substance satisfactory to counsel for the
Placement Agent.
5.2 USE OF PROCEEDS. The net proceeds of the Offering will be
used by the Company only for the purposes stated in the Offering Documents.
5.3 EXPENSES OF OFFERING. The Company shall be responsible for,
and shall pay, all expenses directly and necessarily incurred in connection with
the proposed financing, including, but not limited to, the costs of preparing,
printing and filing, where necessary, the Offering Documents and all amendments
and supplements thereto, fees of Placement Agent's counsel for blue
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sky and other matters in the amount of $15,000 as provided in par. "E" of the
Letter, filing fees and disbursements of the Placement Agent's counsel in
connection with blue sky matters.
5.4. LETTER OF INTENT. The Company will use its best efforts to
expeditiously proceed to the consummation of the public offering (the "PO")
contemplated by the letter dated June 18, 1996, as extended, between you and us
(the "Letter"), including but not limited to, the preparation, execution and
filing with all necessary governmental authorities of the Registration Statement
on Form SB-2 (including the related prospectus and necessary exhibits), the
satisfaction of the obligations of the Company in connection therewith, the
cooperation with you in requesting effectiveness of the Registration Statement
at such time as the Commission is prepared to declare the Registration Statement
effective, complying with all applicable statutes, laws, rules and regulations
concerning the PO, and paying the necessary expenses to be incurred in
connection therewith to the extent provided in the Letter.
6. REGISTRATION RIGHTS. As more fully described in the
Subscription Agreement to be executed by the Company and each Subscriber, the
Company agrees to register for public sale, Warrants and shares of Common Stock
underlying the Warrants included in each Subscriber's Units pursuant to the
Company's Registration Statement to be filed in connection with the PO. The
Company shall use its best efforts with due diligence to keep the Registration
Statement current throughout the term of the Warrants.
7. INDEMNIFICATION AND CONTRIBUTION.
7.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless the Placement Agent and each person, if any, who
controls the Placement Agent within the meaning of the Securities Act and/or the
1934 Act against any losses, claims, damages or liabilities, joint or several,
to which the Placement Agent or such controlling person may become subject,
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out or are based upon (i)
any untrue statement or alleged untrue statement of a material fact contained
(A) in the Offering Documents, or (B) in any blue sky application or other
document executed by the Company specifically for blue sky purposes or any other
written information furnished by the Company or on its behalf to any state or
other jurisdiction in order to qualify any or all of the Units under the
securities laws thereof (any such application, document or information being
hereinafter called a "Blue Sky Application"), or (ii) the omission or alleged
omission by the Company to state in the Offering Documents or in any Blue Sky
Applications a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; and will reimburse the Placement Agent
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<PAGE>
and each such controlling person for any legal or other expenses reasonably
incurred by the Placement Agent or such controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action,
PROVIDED, the Company will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon (x) an
untrue statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with written information furnished to
the Company by the Placement Agent in the preparation of the Offering Documents
or any such Blue Sky Application; (y) any failure by the Placement Agent to be
registered or be in good standing as a broker-dealer in any jurisdiction in
which Units are sold or to comply with the terms of the Blue Sky Survey, or (z)
any misrepresentation made to a Subscriber by the Placement Agent or its agents
not included in the Offering Documents and made by means other than the mere
delivery of the Offering Documents to a Subscriber (collectively, (x), (y), and
(z) above are referred to as the "Non-Indemnity Events").
7.2 INDEMNIFICATION BY THE PLACEMENT AGENT. The Placement Agent
agrees to indemnify and hold harmless the Company and each person, if any, who
controls the Company within the meaning of the Securities Act and/or the 1934
Act against any losses, claims, damages or liabilities, joint or several, to
which the Company or such controlling person may become subject, under the
Securities Act or otherwise insofar as such losses, claims, damages or
liabilities(or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of a material fact contained
(A) in the Offering Documents, or (B) in any Blue Sky Application, or (ii) the
omission or alleged omission to state in the Offering Documents or in any Blue
Sky Application a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; but in each case, only if and to the extent that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by the Placement Agent specifically for use with reference to the
Placement Agent in the preparation of the Offering Documents or any such Blue
Sky Application, or (iii) any other Non-Indemnity Event; and will reimburse the
Company and each such controlling person for any legal or other expenses
reasonably incurred by the Company or such controlling person in connection with
investigating or defending any such loss, claim, damage or liability which is
found ultimately to arise out of or be based upon the circumstances described in
clauses (i), (ii) or (iii) of this Section 7.2.
7.3 PROCEDURE. Promptly after receipt by an indemnified party
under this Section 7 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against any
indemnifying party under this Section 7,
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<PAGE>
notify in writing the indemnifying party of the commencement thereof, PROVIDED,
that the omission to so notify the indemnifying party will not relieve the
indemnifying party from any liability under this Section 7. In case any such
action is brought against any indemnified party, and it notifies an indemnifying
party of the commencement thereof, the indemnifying party will be entitled to
participate therein, and to the extent that it may elect, jointly with any other
indemnifying party, similarly notified, to assume the defense thereof, with
counsel who shall be to the reasonable satisfaction of such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section 7 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. Any such
indemnifying party shall not be liable to any such indemnified party on account
of any settlement of any claim or action effected without the consent of such
indemnifying party.
7.4 CONTRIBUTION. If the indemnification provided for in this
Section 7 is unavailable to any indemnified party in respect to any losses,
claims, damages, liabilities or expenses referred to herein, then the
indemnifying party, in lieu of indemnifying such indemnified party, will
contribute to the amount paid or payable by such indemnified party, as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company on
the one hand, and the Placement Agent on the other hand, from the Offering, or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefit but also the relative fault of the Company on the one hand, and
of the Placement Agent on the other hand, in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Placement Agent on the
other hand, shall be deemed to be in the same proportion as the total proceeds
from the Offering (net of sales commissions, but before deducting expenses)
received by the Company, bear to the commissions received by the Placement
Agent. The relative fault of the Company on the one hand, and the Placement
Agent on the other hand, will be determined with reference to, among other
things, whether the untrue or alleged untrue statements of a material fact or
the omission to state a material fact relates to information supplied by the
Company, and its relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
7.5 EQUITABLE CONSIDERATIONS. The Company and the Placement
Agent agree that it would not be just and equitable if
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<PAGE>
contribution pursuant to this Section 7 were determined by pro rata allocation
or by any other method of allocation which does not take into account the
equitable considerations referred to in the immediately preceding subsection.
7.6 ATTORNEYS' FEES. The amount payable by a party under this
Section 7 as a result of the losses, claims, damages, liabilities or expenses
referred to above will be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim.
8. TERMINATION BY PLACEMENT AGENT. The Placement Agent will
have the right to terminate this Agreement by giving notice as herein specified,
at any time, at or prior to the Closing Date if (i) the Company shall have
failed, refused or been unable to perform any of its obligations hereunder, or
breached any of its representations or warranties hereunder, or (ii) if there
has occurred an event materially and adversely affecting the value of the
Warrants or Notes.
9. NOTICES. Any notice, election, demand or other communication
hereunder shall be in a signed writing and shall be deemed given or made when
actually received by personal delivery or by facsimile transmission, or two
business days following the date when mailed by certified mail, postage prepaid,
return receipt requested, to the appropriate party or parties, at the following
addresses: if to the Placement Agent, to Investors Associates, Inc., 411
Hackensack Avenue, Lobby Level, Hackensack, NJ 07601, Attention: Herman Epstein,
Chairman (Fax No. (201) 646-0093) with a copy to the Law Offices of Mark
Schwarz, 545 Madison Avenue, 16th Floor, New York, NY 10022, Attention: Mark
Schwarz, Esq. (Fax No. (212) 826-1046), and if to the Company, at its address
above given, Attention: William Zanker, President with a copy to Olshan Grundman
Frome & Rosenzweig LLP, Attention: Stephen Irwin, Esq., (Fax No. (212)755-1467)
or, in each case, to such other address as the parties may hereinafter designate
by like notice.
10. PARTIES. This Agreement will inure to the benefit of and be
binding upon the Placement Agent, the Company and their respective successors
and assigns. This Agreement is intended to be, and is for the sole and exclusive
benefit of the parties hereto and the persons described in subsections 7.1 and
7.2) hereof, and their respective successors and assigns, and no other person
will have any legal or equitable right, remedy or claim under or in respect of
this Agreement.
11. AMENDMENT AND/OR MODIFICATION. Neither this Agreement, nor
any term or provision hereof, may be changed, waived, discharged, amended,
modified or terminated orally or in any manner other than by an instrument in
writing signed by each of the parties hereto.
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<PAGE>
12. FURTHER ASSURANCES. Each party to this Agreement will
perform any and all acts and execute any and all documents as may be necessary
and proper under the circumstances in order to accomplish the intents and
purposes of this Agreement and to carry out its provisions.
13. VALIDITY. In case any term or provision of this Agreement
will be held invalid, illegal or unenforceable, in whole or in part, the
validity of the other terms of this Agreement will not in any way be affected
thereby.
14. WAIVER OF BREACH. The failure of any party hereto to insist
upon strict performance of any of the covenants and agreements herein contained,
or to exercise any option or right herein conferred in any one or more
instances, will not be construed to be a waiver or relinquishment of any such
option or right, or of any other covenants or agreements, and the same will be
and remain in full force and effect.
15. ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding of the parties with respect to the subject matter
hereof, and there are no representations, inducements, promises or agreements,
oral or otherwise, not embodied in this Agreement. Any and all prior
discussions, negotiations, commitments and understanding relating to the subject
matter of this Agreement are superseded by and merged into it.
16. COUNTERPARTS. This Agreement may be executed in counterpart
and each such counterpart will for all purposes be deemed to be an original, and
such counterparts will together constitute one and the same instrument.
17. LAW. This Agreement will be deemed to have been made and
delivered in the state of New York and will be governed as to validity,
interpretation, construction, effect and in all other respects by the internal
laws of the state of New York. The parties hereto consent to the jurisdiction
and venue of any state or Federal court located in New York for purposes of
resolving any disputes hereunder.
18. REPRESENTATIONS, WARRANTIES AND COVENANTS TO SURVIVE
DELIVERY. The respective representations, indemnities, agreements, covenants and
warranties of the Company and the Placement Agent shall survive execution of
this Agreement and delivery of the Units and/or the termination of this
Agreement prior thereto.
19. NO ASSIGNMENT. Neither this Agreement nor any rights or
obligations hereunder may be assigned by either party without the prior consent
of the other party, and any attempted assignment without such consent shall be
void and of no effect.
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<PAGE>
20. SCHEDULES. Any disclosure made on any schedule hereto shall
be deemed as also having been made on any other schedule hereto as to which such
disclosure is also responsive.
If you find the foregoing is in accordance with our understanding,
kindly sign and return to us a counterpart hereof, whereupon this instrument
along with all counterparts will become a binding agreement between us.
Very truly yours,
THE GREAT AMERICAN BACKRUB STORE INC.
By: /s/ Terrance C. Murray,
-----------------------
Terrance C. Murray,
Chief Executive Officer
ACCEPTED AND AGREED TO:
INVESTORS ASSOCIATES, INC.
By: /s/ Herman Epstein
----------------------
Herman Epstein, Chairman
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<PAGE>
December 20, 1996
The Great American BackRub Store, Inc.
425 Madison Avenue, Fifth Floor
New York, NY 10017
Attn: Mr. William Zanker
Re: Agency Agreement (the "Agreement")
Between us dated November 11, 1996
----------------------------------
Ladies and Gentlemen:
We refer to the Agency Agreement and your request to increase the
Offering by 1-1/3 (one and one-third) Units to 5-1/3 (five and one-third) Units
(or a total of $266,666.67). This letter will serve to confirm our mutual
understanding to amend the Agreement in accordance with the foregoing and
regarding related matters. Capitalized terms used herein shall have the meanings
ascribed to them in the Agreement unless otherwise defined herein:
1. The references to "four (4)" on page 1 and in Section 4.1 are
hereby changed to read "5-1/3 (five and one-third)". Further, an additional
sentence shall be inserted after the second sentence on page 1 to read in its
entirety as follows: "One and one-third (1-1/3) Units shall be reserved for
purchase by William Zanker, Keith Dee and Terrance C. Murray or their affiliates
in such proportion as shall be determined by them on notice to us".
2. The reference to $200,000 in Section 1.1 shall be changed to read
"$266,666.67".
3. The second line on page 6 is hereby amended to read in its entirety
"set forth, and the consummation of the transactions contemplated".
4. After the word "to" in the second line of subparagraph "3(d)"
insert the language: "persons or entities who the Placement Agent has reason to
believe constitute".
In furtherance of the foregoing, the terms and conditions
of the letter of intent between us dated June 18, 1996 under the caption "Bridge
Financing" commencing on page 21 are hereby amended accordingly. Further, the
reference to page 23 to "24-month" shall be changed to "36-month".
<PAGE>
The Great American BackRub Store, Inc.
December 20, 1996
Page -2-
Additionally, it is understood that the investors who executed
documents to subscribe to the previous bridge financing shall have the option to
receive an immediate refund of their subscription funds or remain in the
enlarged bridge financing by so indicating on a simplified ratification form to
be circulated in substantially the form annexed hereto.
Kindly acknowledge receipt and acceptance of the foregoing by signing
where indicated at the foot of the duplicate hereof enclosed and returning the
same to this office.
Thank you for your courtesy and cooperation.
Very truly yours,
INVESTORS ASSOCIATES, INC.
By: /s/ Herman Epstein
-----------------------------
Vice President
Receipt and Acceptance Acknowledged:
THE GREAT AMERICAN BACKRUB STORE, INC.
By: /s/ William Zanker
-----------------------------
William Zanker
President
Note No. __________
Holder: _____________________
FORM OF NOTE
THE SECURITIES WHICH ARE REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND THEY
MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT
(i) PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACT WHICH HAS BECOME
EFFECTIVE AND IS CURRENT WITH RESPECT TO THESE SECURITIES, OR (ii) PURSUANT TO A
SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE ACT BUT ONLY UPON A HOLDER HEREOF
FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE CORPORATION, OR
OTHER COUNSEL REASONABLY ACCEPTABLE TO THE CORPORATION, THAT THE PROPOSED
DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE ACT AS WELL AS
ANY APPLICABLE "BLUE SKY" OR OTHER STATE SECURITIES LAW.
THE GREAT AMERICAN BACKRUB STORE, INC.
10% SECURED PROMISSORY NOTE
The Transferability of this Note
is Restricted as Provided in Section 3
$_____________ Dated: ______________, 1996
New York, New York
FOR VALUE RECEIVED, THE GREAT AMERICAN BACKRUB STORE, INC., a New York
corporation (the "Company"), promises to pay to __________________ or assigns
(the "Holder") the principal amount of ___________________ dollars ($_______)
(the "Principal Amount"), in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts, together with simple interest thereon at the rate of
ten percent (10%) per annum, at the principal office of the Company, upon the
earlier of (a) first anniversary of the date hereof or (b) the closing of a
public financing through the sale of equity securities by the Company through
Investors Associates, Inc. ("IAI") pursuant to that certain letter of intent
dated June 18, 1996 between the Company and IAI. No payments of principal and/or
interest shall be due until maturity.
<PAGE>
Notwithstanding anything to the contrary herein contained, the
Principal Amount of this Note or any interest hereon may be prepaid at any time
or from time to time, prior to the maturity of this Note, in whole or in part,
without prior notice and without penalty or premium. Prepayments shall be
applied first to interest due and then to principal.
1. THE NOTES: This Note is one of several secured promissory notes made
and issued by the Company in an aggregate principal amount of $_________
(individually, a "Note," and together, the "Notes"), pursuant to the terms and
subject to the conditions of Subscription Agreement and Investment
Representations (the "Subscription Agreements"), by and among the Company and
certain investors, providing for all of the terms and conditions set forth
herein. Reference is made to the Subscription Agreements for agreements of the
parties applicable to this Note, and to the Agency Agreement between the Company
and IAI dated November 22, 1996, as amended (the "Agency Agreement"). This Note
is entitled to the benefits of that certain Stock Pledge Agreement of even date
herewith between Debbie Dworkin, Terrance C. Murray, and the holders of the
Notes (the "Pledge Agreement").
2. COVENANTS: The Company covenants and agrees that, so long as any of
the Notes shall be outstanding and unpaid:
2.1 PAYMENT OF NOTES. The Company will punctually pay or cause to be
paid the Principal Amount and interest on this Note. Any sums required to be
withheld from any payment of Principal Amount, or interest on this Note by
operation of law or pursuant to any order, judgment, execution, treaty, rule or
regulation may be withheld by the Company and paid over in accordance therewith.
Nothing in this Note or in any other agreement between the Holder and
the Company shall require the Company to pay, or the Holder to accept, interest
in an amount which would subject the Holder to any penalty or forfeiture under
applicable law. In the event that the payment of any charges, fees or other sums
due under this Note, or provided for in any other agreement between the Company
and the Holder are or could be held to be in the nature of interest and would
subject the Holder to any penalty or forfeiture under applicable law, then IPSO
FACTO the obligations of the Company to make such payment to the Holder shall be
reduced to the highest rate authorized under applicable law and, in the event
that the Holder shall have ever received, collected, accepted or applied as
interest any amount in excess of the maximum rate of interest permitted to be
charged by applicable law, such amount which would be excess interest under
applicable law shall be applied first to the reduction of principal then
outstanding, and, second, if such principal amount is paid in full, any
remaining excess shall forthwith be returned to the Company.
2.2 MAINTENANCE OF CORPORATE EXISTENCE; MERGER AND CONSOLIDATION.
The Company will at all times cause to be done all things necessary to preserve
and keep in full force and effect its corporate existence and all of its rights
and franchises and shall not be consolidated with or merged into any other
corporation or transfer all or substantially all of its assets to any person
unless (i) the survivor of such merger or consolidation is the Company or
-2-
<PAGE>
(ii) the corporation formed by such corporation or into which the Company is
merged or to which the assets of the Company are transferred is a corporation
which expressly assumes all of the obligations of the Company under the Notes,
and (iii) after giving effect to such transaction, no Event of Default (as
hereinafter defined) and no event which, after notice or lapse of time, or both,
would become an Event of Default, shall have occurred and be continuing.
2.3 MAINTENANCE OF PROPERTIES. The Company will reasonably maintain
in good repair, working order and condition its properties and other assets, and
from time to time make all reasonably necessary or desirable repairs, renewals
and replacements thereto.
2.4 PAYMENT OF TAXES. The Company will pay or cause to be paid, set
aside for payment or discharged, before the same shall become delinquent, all
taxes, assessments and governmental charges levied or imposed upon the Company
or upon its income, profits or property; PROVIDED, HOWEVER, that the Company
shall not be required to pay or discharge or cause to be paid or discharged any
such tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings.
2.5 COMPLIANCE WITH STATUTES. The Company will comply in all
material respects with all applicable statutes and regulations of the United
States of America and of any state or municipality, and of any agency of any
thereof, in respect of the conduct of business and the ownership of property by
the Company; PROVIDED, HOWEVER, that nothing contained in this SECTION 2.5 shall
require the Company to comply with any such statute or regulation so long as its
legality or applicability shall be contested in good faith; and provided further
that an unintentional violation of this covenant done in good faith or
inadvertently shall not be deemed an Event of Default under SECTION 4 hereof.
3. RESTRICTIONS UPON TRANSFERABILITY. This Note has not been registered
under the Act, and may not be offered, sold, pledged, hypothecated, assigned or
transferred except (i) pursuant to a registration statement under the Act which
has become effective and is current with respect to this Note, or (ii) pursuant
to a specific exemption from registration under the Act but only upon a Holder
hereof first having obtained the written opinion of counsel to the Company, or
other counsel reasonably acceptable to the Company, that the proposed
disposition is consistent with all applicable provisions of the Act as well as
any applicable "blue sky" or other state securities law.
4. EVENTS OF DEFAULT AND REMEDIES. An "Event of Default" shall occur
if:
4.1 PAYMENT OF NOTES. The Company defaults in the payment of the
Principal Amount of or interest on this Note, when and as the same shall become
due and payable whether at maturity thereof, or by acceleration or otherwise,
which default shall continue uncured for a period of fifteen (15) days from the
date thereof; or
-3-
<PAGE>
4.2 PERFORMANCE OF COVENANTS, CONDITIONS OR AGREEMENTS. The Company
fails to comply with any of the covenants, conditions or agreements set forth in
this Note and such default shall continue uncured for a period of thirty (30)
days after receipt of written notice to the Company from any Holder stating the
specific default or defaults; or
4.3 BANKRUPTCY, INSOLVENCY, ETC. The Company shall file or consent
by answer or otherwise to the entry of an order for relief or approving a
petition for relief, reorganization or arrangement or any other petition in
bankruptcy for liquidation or to take advantage of any bankruptcy or insolvency
law of any jurisdiction, or shall make an assignment for the benefit of its
creditors, or shall consent to the appointment of a custodian, receiver, trustee
or other officer with similar powers of itself or of any substantial part of its
property, or shall be adjudicated a bankrupt or insolvent, or the Board of
Directors or shareholders of the Company shall authorize any of the foregoing,
or if a court or governmental authority of competent jurisdiction shall enter an
order appointing a custodian, receiver, trustee or other officer with similar
powers with respect to the Company or any substantial part of its property, or
an order for relief or approving a petition for relief or reorganization or any
other petition in bankruptcy or for liquidation or to take advantage of any
bankruptcy or insolvency law, or an order for the dissolution, winding up or
liquidation of the Company, or if any such petition shall be filed against the
Company and such petition shall not be dismissed within sixty (60) days; or
4.4 PLEDGE AND AGENCY AGREEMENTS. There shall occur an "Event of
Default" on the part of the Pledgor under the Pledge Agreement (as such term is
defined therein) or a default on the Company's obligations under the Agency
Agreement.
4.5 REMEDIES. In case an Event of Default (other than an Event of
Default resulting from the Company's failure to pay the Principal Amount of, or
interest upon, this Note when the same shall be due and payable in accordance
with the terms hereof and an Event of Default resulting from bankruptcy,
insolvency or reorganization) shall occur and be continuing (after giving affect
to applicable "cure" provisions provided for herein), the Holders of the Notes
representing at least fifty-one percent (51%) in the aggregate of the Principal
Amount of all Notes then outstanding, may declare by notice in writing to the
Company all unpaid Principal Amount and accrued interest on all of the Notes
then outstanding to be due and payable immediately. In case an Event of Default
resulting from the Company's non-payment of Principal Amount of, or interest
upon, this Note shall occur, the Holder may declare all unpaid Principal Amount
and accrued interest on this Note held by such Holder to be due and payable
immediately. In case an Event of Default resulting from bankruptcy, insolvency
or reorganization shall occur, all unpaid principal and accrued interest on the
Notes held by each Holder shall be due and payable immediately without any
declaration or other act on the part of such Holders. Any such acceleration may
be annulled and past defaults (except, unless theretofore cured, a default in
payment of Principal Amount or interest on the Notes) may be waived by the
Holders of a majority in Principal Amount of the Notes then outstanding.
-4-
<PAGE>
5. COSTS OF COLLECTION. Should the indebtedness represented by this
Note or any part thereof be collected in any proceeding, or this Note be placed
in the hands of attorneys for collection after default, the Company agrees to
pay as an additional obligation under this Note, in addition to the Principal
Amount and interest due and payable hereon, all costs of collecting this Note,
including reasonable attorneys' fees.
6. WAIVER AND AMENDMENTS. This Note may be amended, modified,
superseded, canceled, renewed or extended, and the terms hereof may be waived
(except as above provided in SECTION 4.5), only by a written instrument signed
by the Company and Holders of at least fifty-one percent (51%) in the aggregate
of the Principal Amount of all Notes at the time outstanding; PROVIDED, HOWEVER,
that the consent of a Holder shall be required to modify the terms of this Note
affecting the payment of Principal Amount of, or interest on, such Holder's Note
or the term of such Holder's Note. No delay on the part of any party in
exercising any right, power or privilege hereunder shall operate as a waiver
hereof, nor shall any waiver on the part of any party of any right, power or
privilege hereunder preclude any other or further exercise hereof or the
exercise of any other right, power or privilege hereunder. The rights and
remedies provided for herein are cumulative and are not exclusive of any rights
or remedies which any party may otherwise have at law or in equity.
7. LOSS, THEFT, DESTRUCTION OR MUTILATION OF NOTE. Upon receipt by the
Company of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Note, and of indemnity or security reasonably
satisfactory to the Company, and upon reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
this Note, if mutilated, the Company will make and deliver a new Note of like
tenor, in lieu of this Note. Any Note made and delivered in accordance with the
provisions of this SECTION 7 shall be dated as of the date to which interest has
been paid on this Note, or if no interest has theretofore been paid on this
Note, then dated the date hereof.
8. NOTICE. Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally, telegraphed or
sent by certified, registered, or express mail, postage prepaid, and shall be
deemed given when so delivered personally, telegraphed or, if mailed, five (5)
days after the date of deposit in the United States mails, as follows:
(i) if to the Company, to:
The Great American BackRub Store, Inc.
425 Madison Avenue, Suite 605
New York, NY 10017
Attn: William Zanker, President
-5-
<PAGE>
With a copy to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Attention: Stephen Irwin, Esq,
(ii) if to the Holder, to the address of such Holder as shown on the
books of the Company and to Investors Associates, Inc., 411 Hackensack Avenue,
Hackensack, NJ 07601, Attn: Herman Epstein.
9. GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to its
conflicts of law principles. The Company agrees that any dispute or controversy
arising out of this Note shall be adjudicated in a court located in New York
City, and hereby submits to the exclusive jurisdiction of the courts of the
State of New York located in New York, New York and of the federal courts in the
Southern District of New York, and irrevocably waives any objection it now or
hereafter may have respecting the venue of such action or proceeding brought in
such a court or respecting the fact that such court is an inconvenient forum,
and consents to the service of process in any such action or proceeding by means
of registered or certified mail, return receipt requested.
10. SUCCESSORS AND ASSIGNS. All the covenants, stipulations, promises
and agreements in this Note contained by or on behalf of the Company shall bind
its successors and assigns, whether or not so expressed.
IN WITNESS WHEREOF, the Company has caused this Note to be signed in
its corporate name by a duly authorized officer and to be dated as of the date
first above written.
THE GREAT AMERICAN BACKRUB STORE, INC.
By: __________________________________
Name:
Title:
-6-
FORM OF WARRANT
THE SECURITIES WHICH ARE REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES
ISSUABLE UPON EXERCISE OF THE SECURITIES WHICH ARE REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND THEY MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED,
ASSIGNED OR TRANSFERRED EXCEPT (i) PURSUANT TO A REGISTRATION STATEMENT UNDER
THE ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO SUCH
SECURITIES, OR (ii) PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE
ACT BUT ONLY UPON A HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF
COUNSEL TO THE CORPORATION, OR OTHER COUNSEL REASONABLY ACCEPTABLE TO THE
CORPORATION, THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE
PROVISIONS OF THE ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR OTHER STATE
SECURITIES LAW.
_____________, 1996
THE GREAT AMERICAN BACKRUB STORE, INC.
SERIES A PREFERRED STOCK
PURCHASE WARRANT
The Transferability of this Warrant is
Restricted as Provided in Section 3
Warrant to Purchase
________ Shares of Series A
Convertible Preferred Stock
Warrant No. _______ (subject to adjustment)
For good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged by THE GREAT AMERICAN BACKRUB STORE, INC., a New York
corporation (the "Company"), _________________ is hereby granted the right to
purchase, at the initial exercise price of $5.00 per share (subject to
adjustment as provided herein) at any time during the three-year period
commencing on the first anniversary of the date hereof, _____ shares
<PAGE>
(the "Shares") of Series A Convertible Preferred Stock of the Company (the
"Series A Preferred Stock"). Upon consummation of the Company's proposed public
offering (the "Public Offering"), the Warrants represented hereby will
automatically be converted into, and this Certificate will be exchanged for a
Warrant Certificate representing, the right to purchase the same number of
shares Series B Convertible Preferred Stock of the Company ("Series B Preferred
Stock"), as provided herein.
This Warrant is exercisable, for the three-year period commencing on the
first anniversary of the date of this Warrant, at a price of $5.00 per Share
payable in cash or by certified or official bank check in New York Clearing
House funds, subject to adjustments as provided in SECTION 5 hereof. Upon
surrender of this Warrant, with the annexed Subscription Form duly executed,
together with payment of the Purchase Price (as hereinafter defined) for the
Shares purchased at the offices of the Company, the registered holder of this
Warrant (the "Holder") shall be entitled to receive a certificate or
certificates for the Shares so purchased. Each Share will be convertible into
one share of the Company's common stock, $.001 par value, in accordance with the
terms of the Series A Preferred Stock.
1. EXERCISE OF WARRANT.
The purchase rights represented by this Warrant are exercisable at the
option of the Holder, in whole or in part (but not as to fractional Shares
underlying this Warrant), during the period in which this Warrant may be
exercised as set forth above. In the case of the purchase of less than all the
Shares purchasable under this Warrant, the Company shall cancel this Warrant
upon the surrender hereof and shall execute and deliver a new Warrant of like
tenor for the balance of the Shares purchasable hereunder.
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<PAGE>
2. ISSUANCE OF CERTIFICATES. Upon the exercise of this Warrant and
payment in full for the Shares, the issuance of certificates for Shares
underlying this Warrant shall be made forthwith (and in any event within five
(5) business days thereafter) without charge to the Holder, including, without
limitation, any tax which may be payable in respect of the issuance thereof, and
such certificates shall be issued in the name of, or (subject to the provisions
of SECTION 3.1 hereof) in such names as may be directed by, the Holder;
PROVIDED, HOWEVER, that the Company shall not be required to pay any tax which
may be payable in respect of any transfer involved in the issuance and delivery
of any such certificates in a name other than that of the Holder and the Company
shall not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid. The certificates representing the Shares
underlying this Warrant shall be executed on behalf of the Company by the manual
or facsimile signature of the Chairman or President and the Chief Financial
Officer, the Secretary or Assistant Secretary of the Company holding office at
the time such Shares are issued.
3. RESTRICTION ON TRANSFER; REGISTRATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED.
3.1 Neither the Warrants nor any Share issuable upon exercise hereof has
been registered under the Securities Act of 1933, as amended (the "Act"), and
none of such securities may be offered, sold, pledged, hypothecated, assigned or
transferred except (i) pursuant to a registration statement under the Act which
has become effective and is current with respect to such securities, or, (ii)
pursuant to a specific exemption from registration under the Act but only upon a
Holder hereof first having obtained the written opinion of counsel to the
Company, or
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<PAGE>
other counsel reasonably acceptable to the Company, that the proposed
disposition is consistent with all applicable provisions of the Act as well as
any applicable "Blue Sky" or other state securities law. Upon exercise, in part
or in whole, of this Warrant, each certificate issued representing the Shares
underlying this Warrant shall bear a legend to the foregoing effect.
3.2 If at any time after the date hereof and expiring two (2) years
thereafter, the Company proposes to register any of its securities under the Act
(other than in connection with a merger, acquisition or exchange offer on Form
S-4 or pursuant to Form S-8 or successor forms), it will give written notice by
registered mail, at least thirty (30) days prior to the filing of each such
registration statement to the Holder(s) of the Warrants and/or Shares of its
intention to do so. Upon the written request of any Holder of the Warrants
and/or Shares given within ten (10) days after receipt of any such notice of its
or their desire to include any such Warrants and/or Shares in such proposed
registration statement, the Company shall afford such Holder(s) of the Warrants
and/or Shares the opportunity to have any such Warrants and/or Shares registered
under such registration statement.
Notwithstanding the provisions of this SECTION 3.2, the Company shall have
the right at any time after it shall have given written notice pursuant to this
SECTION 3.2 (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
If any registration pursuant to this SECTION 3.2 shall be underwritten in
whole or in part, the Company may require that the Warrants and/or Shares
requested for inclusion in such
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<PAGE>
underwriting pursuant to this SECTION 3.2 be included in the underwriting on the
same terms and conditions as the securities otherwise being sold through the
underwriters.
Notwithstanding the provisions of this SECTION 3.2, if the managing
underwriter in an underwritten public offering of securities shall advise the
Company in writing that inclusion of some or all of the Warrants and/or Shares
would, in such managing underwriter's opinion, materially interfere with the
proposed distribution of the securities to be offered by the Company, in respect
of which registration was originally to be effected, then the number of Warrants
and/or Shares to be included in the registration statement may be reduced pro
rata (by number of shares) among any holders of securities requesting
registration or excluded in their entirety if so required by the underwriter
from the registration statement.
3.3 In connection with any registration under SECTIONS 3.2 or 6 hereof,
the Company -------- covenants and agrees as follows:
(a) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions or other charges
of any broker-dealer acting on behalf of Holder(s)), fees and expenses in
connection with all registration statements filed pursuant to SECTIONS 3.2 and 6
hereof including, without limitation, the Company's legal and accounting fees,
printing expenses and blue sky fees and expenses.
(b) The Company will take all necessary action which may be required in
qualifying or registering the Warrants and/or Shares included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to qualify as a foreign corporation to do business under
the laws of any such jurisdiction.
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<PAGE>
(c) The Company shall indemnify the Holder(s) of the Warrants and/or
Shares to be sold pursuant to any registration statement and each person, if
any, who controls such Holder(s) within the meaning of Section 15 of the Act or
Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), against all loss, claim, damage, expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or any other statute, common law or otherwise, arising out of or
based upon any untrue statement or alleged untrue statement of a material fact
contained in such registration statement executed by the Company or based upon
written information furnished by the Company filed in any jurisdiction in order
to qualify the Warrants and/or the Shares under the securities laws thereof or
filed with the Securities and Exchange Commission, any state securities
commission or agency, the National Association of Securities Dealers, Inc., the
Nasdaq SmallCap Market or any securities exchange, or the omission or alleged
omission therefrom of a material fact required to be stated therein or necessary
to make the statements contained therein not misleading, unless such statement
or omission was made in reliance upon and in conformity with written information
furnished to the Company by the Holder(s) expressly for use in such registration
statement, any amendment or supplement thereto or any application, as the case
may be. If any action is brought against the Holder(s) or any controlling person
of the Holder(s) in respect of which indemnity may be sought against the Company
pursuant to this SECTION 3.3(c), the Holder(s) or such controlling person shall,
within thirty (30) days after the receipt of a summons or complaint, notify the
Company in writing of the institution of such action and the Company shall
assume the defense of such action, including the employment and payment of
reasonable fees and
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<PAGE>
expenses of counsel (which counsel shall be reasonably satisfactory to the
Holder(s) or such controlling person), but the failure to give such notice shall
not affect such indemnified person's right to indemnification hereunder except
to the extent that the Company's defense of such action was materially adversely
affected thereby. The Holder(s) or such controlling person shall have the right
to employ its or their own counsel in any such case, but the fees and expenses
of such counsel shall be at the expense of the Holder(s) or such controlling
person unless the employment of such counsel shall have been authorized in
writing by the Company in connection with the defense of such action, the
Company shall not have employed counsel to have charge of the defense of such
action or such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them which are different from or
additional to those available to the Company (in which case the Company shall
not have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events the fees and expenses of
not more than one additional firm of attorneys for the Holder(s) and/or such
controlling person shall be borne by the Company. Except as expressly provided
in the previous sentence, in the event that the Company shall have assumed the
defense of any such action or claim, the Company shall not thereafter be liable
to the Holder(s) or such controlling person in investigating, preparing or
defending any such action or claim. The Company agrees promptly to notify the
Holder(s) of the commencement of any litigation or proceedings against the
Company or any of its officers, directors or controlling persons in connection
with the resale of the Warrants and/or the Shares or in connection with such
registration statement.
(d) The Holder(s) of the Warrants and/or Shares to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the
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<PAGE>
Company, its officers and directors and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against all loss, claim, damage, expense or liability (including
all expenses reasonably incurred in investigating, preparing or defending
against any claim whatsoever) to which they may become subject under the Act,
the Exchange Act or otherwise, arising from written information furnished by or
on behalf of such Holders, or their successors or assigns, expressly for use in
such registration statement.
(e) Nothing contained herein shall be construed as requiring the Holder(s)
to exercise their Warrants prior to the initial filing of any registration
statement or the effectiveness thereof.
3.4 In connection with any registration made pursuant to SECTIONS 3.2 or 6
hereof, the Holder(s) of the Warrants and/or Shares agree that any public sale
of the Warrants and/or Shares included in such registration statement shall be
effected through the underwriter for such registration and the Holder(s) shall
compensate the underwriter in accordance with its customary compensation
practices for such transactions.
4. PRICE.
4.1 INITIAL AND ADJUSTED PURCHASE PRICE. The initial purchase price shall
be $5.00 per Share. The adjusted purchase price shall be the price which shall
result from time to time from any and all adjustments of the initial purchase
price in accordance with the provisions of SECTION 5 hereof and subject to
SECTION 6 hereof.
4.2 PURCHASE PRICE. The term "Purchase Price" herein shall mean the
initial purchase price or the adjusted purchase price, depending upon the
context.
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<PAGE>
5. ADJUSTMENTS OF PURCHASE PRICE AND NUMBER OF SHARES.
In the event that, prior to the issuance by the Company of all the Shares
issuable upon exercise of this Warrant, there shall be any change in the
outstanding common stock of the Company by reason of the declaration of stock
dividends, or through a recapitalization resulting from stock splits or
combinations, without the payment to the Company of any compensation therefor in
money, services or property, the remaining Shares still subject to this Warrant
and the purchase price thereof shall be appropriately adjusted (but without
regard to fractions) by the Board of Directors of the Company to reflect such
change.
6. AUTOMATIC CONVERSION; CANCELLATION.
If the Company consummates a public offering of its securities prior to the
last day on which this Warrant may be exercised, which offering includes
warrants of the Company ("Redeemable Warrants") to purchase shares of Series B
Convertible Preferred Stock ("Series B Preferred Stock"), having terms
substantially the same as the Series A Preferred Stock, and this Warrant shall
not have been exercised in full, then the unexercised portion of this Warrant
shall automatically, without any action by the Holder, be converted into one or
more Redeemable Warrants (the "New Warrants") exercisable to purchase the number
of Shares of Series B Preferred Stock as shall equal the number of Shares that
are purchasable upon the exercise of the unexercised portion of this Warrant but
having terms identical to those of the Redeemable Warrants, including, but not
limited to, the anti-dilution and redemption provisions contained therein and an
exercise price per share equal to the exercise price per share of the Redeemable
Warrants offered in the public offering. The Company shall cause the New
Warrants and the underlying shares of Series B Preferred Stock of the Company to
be included in the registration
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<PAGE>
statement for such offering, provided, however, if the managing underwriter in
an underwritten public offering of securities shall advise the Company in
writing that inclusion of some or all of the New Warrants and the underlying
shares of Series B Preferred Stock of the Company would, in such managing
underwriter's reasonable opinion, materially or adversely affect the proposed
distribution of the securities to be offered by the Company, then the number of
New Warrants and the underlying shares of Series B Preferred Stock to be
included in the registration statement may be reduced pro rata (by number of
shares) among any holders of securities requesting registration if so required
by the underwriter from the registration statement. In the event that the
provisions of this SECTION 6 shall become applicable, the Holder shall be
required to return this Warrant to the Company for cancellation or, if this
Warrant cannot then be located, to execute and deliver to the Company a lost
security affidavit and indemnity agreement reasonably satisfactory to the
Company. In addition, in the event that the provisions of this SECTION 6 shall
become applicable, this Warrant shall no longer be of any force or effect and
the New Warrants shall set forth the respective rights and obligations of the
Holder and the Company.
7. MERGER OR CONSOLIDATION.
In case of any consolidation of the Company with, or merger of the Company
with or into, another corporation (other than a consolidation or merger which
does not result in any reclassification or change of the outstanding preferred
stock of the Company), the corporation formed by such consolidation or merger
shall execute and deliver to the Holder a supplemental warrant agreement
providing that the Holder shall have the right thereafter (until the expiration
of this Warrant) to receive, upon exercise of this Warrant, the kind and amount
of shares of stock and other securities and property receivable upon such
consolidation or merger by a holder of the
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<PAGE>
number of shares of preferred stock of the Company for which this Warrant might
have been exercised immediately prior to such consolidation, merger, sale or
transfer. Such supplemental warrant agreement shall provide for the automatic
conversion provision of SECTION 6 and adjustments which shall be identical to
the adjustments provided in SECTION 5. The above provisions of this SECTION 7
shall similarly apply to successive consolidations or mergers.
8. EXCHANGE AND REPLACEMENT OF WARRANT.
This Warrant is exchangeable without expense, upon the surrender hereof by
the registered Holder at the principal executive office of the Company for a new
Warrant of like tenor and date representing in the aggregate the right to
purchase the same number of Shares as are purchasable hereunder in such
denominations as shall be designated by the Holder hereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant, and, in case of
loss, theft or destruction, of indemnity or security reasonably satisfactory to
it, and reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new Warrant of like tenor, in lieu of this
Warrant.
9. ELIMINATION OF FRACTIONAL INTERESTS.
The Company shall not be required to issue certificates representing
fractions of Shares on the exercise of this Warrant, nor shall it be required to
issue scrip or pay cash in lieu of fractional interests, it being the intent of
the parties that all fractional interests shall be eliminated.
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<PAGE>
10. RESERVATION OF SECURITIES.
The Company shall at all times reserve and keep available out of its
authorized preferred stock, solely for the purpose of issuance upon the exercise
of this Warrant, such number of Shares as shall be issuable upon the exercise
hereof. The Company covenants and agrees that, upon exercise of this Warrant and
payment of the Purchase Price therefor, all Shares issuable upon such exercise
shall be duly and validly issued, fully paid and nonassessable.
11. NOTICES TO WARRANT HOLDERS.
Nothing contained in this Warrant shall be construed as conferring upon the
Holder hereof the right to vote or to consent or to receive notice as a
shareholder in respect of any meetings of shareholders for the election of
directors or any other matter, or as having any rights whatsoever as a
shareholder of the Company.
12. NOTICES.
All notices, requests, consents and other communications required or
permitted hereunder shall be in writing and shall be delivered personally,
telegraphed or sent by certified, registered, or express mail, postage prepaid,
and shall be deemed given when so delivered personally, telegraphed or, if
mailed, five days after the date of deposit in the United States mails, as
follows:
(a) If to the Company, to:
The Great American BackRub Store, Inc.
425 Madison Avenue, Suite 605
New York, New York 10017
Attn: William Zanker, President
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<PAGE>
With a copy to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Attn: Stephen Irwin, Esq.
(b) If to the registered Holder, to the address of such Holder as shown on
the books of the Company.
13. SUCCESSORS.
All the covenants, agreements, representations and warranties contained in
this Warrant shall bind the parties hereto and their respective heirs,
executors, administrators, distributees, successors and assigns.
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<PAGE>
14. HEADINGS.
The headings in this Warrant are inserted for purposes of convenience only
and shall have no substantive effect.
15. LAW GOVERNING.
This Warrant is delivered in the State of New York and shall be construed
and enforced in accordance with, and governed by, the laws of the State of New
York, without giving effect to conflicts of law principles.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its
corporate name by, and such signature to be attested to by, a duly authorized
officer and has caused its corporate seal to be affixed hereto on the date first
above written.
THE GREAT AMERICAN BACKRUB STORE, INC.
By: _________________________________
Name:
Title:
[SEAL]
Attest:
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<PAGE>
SUBSCRIPTION FORM
To: The Great American BackRub Store, Inc.
(1) The undersigned hereby elects to purchase __________ shares of Series
A Convertible Preferred Stock of The Great American BackRub Store, Inc.,
pursuant to the terms of the attached Warrant, and tenders herewith payment of
the purchase price for such shares in full.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of the Series A Convertible Preferred Stock to be
issued upon exercise thereof are being acquired solely for the account of the
undersigned and not as a nominee for any other party, and for investment, and
that the undersigned will not offer, sell or otherwise dispose of any such
shares except under circumstances that will not result in a violation of the
Securities Act of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said shares of
Series A Convertible Preferred Stock in the following name:
------------------------------
(Name)
(4) Please issue a new Warrant for the unexercised portion of the attached
Warrant in the following name:
------------------------------
Name)
Name of Holder (exactly as it appears in Warrant):
------------------------------
(Name)
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<PAGE>
------------------------------
Signature
------------------------------
Address
------------------------------
Dated: Social Security Number or
Taxpayer's Identification
Number
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<PAGE>
Amendment No. 1
to
Warrant
Dated as of January 27, 1997
Reference is made to Warrant No. ____ dated __________ 27, 199__ (the
"Warrant") issued to _______________ (the "Holder") with respect to
__________________ shares of Series A Convertible Preferred Stock of the Great
American BackRub Store, Inc.
1. Section 6 of the Warrant is hereby amended to read in its entirety as
follows:
"6. AUTOMATIC CONVERSION; CANCELLATION.
"If the Company consummates a public offering (the "Public Offering") of
its securities prior to the last day on which this Warrant may be exercised,
which offering includes shares of the Company's Series B Convertible Preferred
Stock ("Series B Preferred Stock"), and this Warrant shall not have been
exercised in full, then the unexercised portion of this Warrant shall
automatically, without any action by the Holder, be converted into one or more
Redeemable Warrants (the "New Warrants") exercisable to purchase the number of
Shares of Series B Preferred Stock as shall equal one half of the number of
Shares that are purchasable upon the exercise of the unexercised portion of this
Warrant and having such terms and provisions, including anti-dilution
provisions, as shall be contained in a warrant agreement between the Company and
a warrant agent for the New Warrants, and shall be (i) exercisable during the
three year period commencing one year after the effective date of the
registration statement for the Public Offering (the "Effective Date"), (ii)
exercisable at an exercise price of $8.00 per share of Series B Preferred Stock
and (iii) redeemable commencing 12 months after the Effective Date (subject to
the consent of the underwriter in the Public Offering if notice of redemption is
given prior to 24 months after the Effective Date), provided the Company redeems
all, but not less than all, of the then outstanding New Warrants, at a
redemption price of $.001 per Warrant, upon not less than 30 days' prior written
notice, provided that the closing price of the Common Stock for each of the 10
trading days ending on the third trading day immediately preceding the notice of
redemption equals or exceeds 120% of the then exercise price of the New
Warrants. The Company shall cause the New Warrants and the underlying shares of
Series B Preferred Stock of the Company to be included in the registration
statement for the Public Offering provided, however, if the managing underwriter
in an underwritten public offering of securities shall advise the Company in
writing that inclusion of some or all of the New Warrants and the underlying
shares of Series B
<PAGE>
Preferred Stock of the Company would, in such managing underwriter's reasonable
opinion, materially or adversely affect the proposed distribution of the
securities to be offered by the Company, then the number of New Warrants and the
underlying shares of Series B Preferred Stock to be included in the registration
statement may be reduced pro rata (by number of shares) among any holders of
securities requesting registration if so required by the underwriter from the
registration statement. In the event that the provisions of this SECTION 6 shall
become applicable, the Holder shall be required to return this Warrant to the
Company for cancellation or, if this Warrant cannot then be located, to execute
and deliver to the Company a lost security affidavit and indemnity agreement
reasonably satisfactory to the Company. In addition, in the event that the
provisions of this SECTION 6 shall become applicable, this Warrant shall no
longer be of any force or effect and the New Warrants shall set forth the
respective rights and obligations of the Holder and the Company."
2. The Warrant is amended hereby solely to the extent expressly set forth
herein and, as so amended, continues in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Amendment No. 1 to Warrant
to be signed in its corporate name by, and such signature to be attested to by,
a duly authorized officer and has caused its corporate seal to be affixed hereto
on the date first above written.
THE GREAT AMERICAN BACKRUB STORE,
INC.
By:
-----------------------------
William Zanker, President
[SEAL]
Attest:
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Keith R. Dee, Secretary
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