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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
THE SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to ______
Commission file number _______
JERRY'S FAMOUS DELI, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
California 5812 95-3302338
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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12711 Ventura Boulevard
Suite 400
Studio City, California 91604
(818) 766-8311
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
YES X NO _____ .
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ____ .
The number of shares of common stock of the Registrant outstanding as
of March 11, 1998: 14,210,155 shares.
The aggregate market value of the outstanding common stock of the
Registrant held by non-affiliates of the Registrant, based on the market price
at March 11, 1998, was approximately $8,440,160.
Documents Incorporated by Reference
Certain portions of the following documents are incorporated by
reference into Part III of this Form 10-K: The Registrant's Proxy Statement for
the Annual Meeting of Shareholders to be held May 27, 1998.
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JERRY'S FAMOUS DELI, INC.
PART I
ITEM 1. BUSINESS
THE COMPANY
Jerry's Famous Deli, Inc. (the "Company" or "JFD") is an operator of
New York deli-style restaurants. The Company currently operates 10 restaurants,
including eight in Southern California operating under the name "Jerry's Famous
Deli," one in Southern California operating under the name "Solley's" and one in
Miami, Florida, the venerable "Wolfie Cohen's Rascal House." The Company
recently acquired an existing location in Boca Raton, Florida, and is currently
renovating the location as a Rascal House. In addition, the Company expects to
complete its acquisition of The Epicure Market, a well-known gourmet food market
in Miami, Florida in April 1998.
In Southern California, the eight Jerry's Famous Deli restaurants have
the look and high energy feel of a New York deli-style restaurant, with Broadway
as the theme, and posters and colored klieg lighting creating the setting. The
Solley's restaurant in Sherman Oaks, California retains the smaller, family
atmosphere its patrons enjoyed for years before it was acquired by the Company
in 1996. The Rascal House, in Miami Beach, Florida, has its own unique character
that has been popular for over 40 years. However, the true strength of all of
the Company's restaurants is in the execution of the extraordinary menus at all
of the restaurants. At Jerry's Famous Deli restaurants, customers can choose
from a menu of over 600 items, while at Solley's and Rascal House, customers can
enjoy their old favorites, along with many of the Jerry's Famous Deli menu
items, all prepared with consistency and quality at every location. People come
to a Jerry's, Solley's or Rascal House for the food, and they expect their
favorite item the same way every time at each location. The Company depends
heavily on repeat customers, and it emphasizes consistency, quality and
cleanliness in an atmosphere acceptable to the whole family, and appealing to
the very different demographics in the clientele at different times of the day.
Each of the Company's restaurants offer moderately priced, high quality food for
in-store eating, take-out, delivery or catering services, seven days a week
operation, and high energy ambiance.
All of the eight Jerry's Famous Deli restaurants in operation at
December 31, 1997 had average annualized sales of approximately $5.8 million per
location for the year ended December 31, 1997. Solley's had sales of
approximately $3.7 million, and the Rascal House restaurant had sales of
approximately $9.5 million for 1997. In the September 1997 issue of The Los
Angeles Business Journal, six Jerry's Famous Deli restaurants were listed among
the top 25 highest grossing restaurants in Los Angeles County.
The Company's current objectives are to continue to expand its Southern
California and Southern Florida operations, where it can take advantage of its
well-known brand names and operational style. In addition, the Company seeks to
enter new areas with the acquisition of other well-established deli-style
restaurants and markets in larger metropolitan areas. The Company intends to
establish clusters of operations within specific regions to maximize brand name
recognition and benefit from operating and marketing efficiencies. See "Business
- -- Market Niche" and "Business --Future Development Strategy." Management may
consider additional public or private offerings of its common stock and
preferred stock as well as additional debt financing to fund its future
expansion efforts. There is no assurance that the Company's financial or growth
objectives can be achieved or that additional capital will be available to
finance the Company's business plan. See "Risk Factors."
The Company is organized under the laws of the State of California. The
Company's offices are located at 12711 Ventura Boulevard, Suite 400, Studio
City, California 91604. Its telephone number is (818) 766-8311.
HISTORY AND BACKGROUND
The Company was established in 1978 to develop the Jerry's Famous Deli
restaurant in Studio City, California. Three additional Jerry's Famous Deli
restaurants were opened prior to 1995 in Encino, California (July 1989), Marina
del Rey, California (July 1991) and West Hollywood, California (January 1994).
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In October 1995, the Company completed its initial public offering of
1,955,000 shares of Common Stock (the "Public Offering"), which resulted in net
proceeds of approximately $9.2 million. The proceeds of the Public Offering were
used to finance the opening of new restaurants in 1996.
The Company opened two new Jerry's Famous Deli restaurants in the first
half of 1996, in Pasadena, California (February 1996) and Westwood, California
(June 1996). The Company purchased two existing restaurants and an adjoining
bakery in Sherman Oaks, California, and Woodland Hills, California, in July
1996. The Sherman Oaks restaurant has continued to operate under the name
"Solley's," and the Woodland Hills restaurant was closed for renovation and
reopened in December 1996 as a Jerry's Famous Deli.
In August and November of 1996, the Company sold 12,000 convertible
preferred shares to affiliates of Waterton Management, LLC ("Waterton"), raising
approximately $11 million. The proceeds of these issuances, together with bank
borrowings, were used in connection with the Company's acquisition, renovation
and opening of new restaurants. In December 1996 and March 1997, all of the
outstanding preferred shares were converted into a total of 3,656,405 shares of
Common Stock. Concurrently with the conversion, the Company entered into a
consulting agreement with Kenneth J. Abdalla, a director of the Company and
managing member of Waterton, to act as the Company's President and to provide
advice and consultation with respect to sites to be leased or purchased or other
assets or entities to be acquired by the Company through December 31, 1998.
In September 1996, the Company purchased the real property, building
and restaurant business of "Wolfie Cohen's Rascal House," a well known
deli-style restaurant in Miami Beach, Florida, which the Company has operated
and intends to continue to operate under the name "Wolfie Cohen's Rascal House".
The Company has substantially retained and expanded upon the menu and operating
format of the restaurant, but the hours of operation of the restaurant have been
expanded, and the restaurant has begun delivery service, taking call-in orders
for take out, and taking charge cards, all of which were not previously done at
Rascal House.
RECENT DEVELOPMENTS
In August 1997, the Company opened its newest Jerry's Famous Deli
restaurant in Costa Mesa, California. The restaurant is a 9,400 square foot
facility located adjacent to the South Coast Plaza shopping mall in Orange
County, California.
In December 1997, the Company entered into an agreement to purchase The
Epicure Market of Miami Beach, Florida, a family-owned specialty gourmet food
store which has been in operation for more than 50 years. The acquisition is
scheduled to close in April 1998. The total purchase price for the business is
$7.1 million in cash and 934,509 shares of the Company's common stock.
Concurrently with the purchase, the Company entered into a 20-year term lease
agreement with additional options to renew with affiliates of the seller and
five-year term employment agreements with the two family members who, together
with their family, have managed the market for over 50 years. The Company plans
to increase the interior sales area of the market, install seating for in-house
dining, increase store operating hours, and expand into delivery, catering and
home meal replacement.
On January 21, 1998, the Company entered into an agreement to acquire a
long-term ground lease on an 11,000 square foot restaurant property located in
Boca Raton, Florida. The acquisition closed on February 18, 1998. Under the
agreement, the Company acquired the restaurant equipment and other personal
property located on the premises, and the seller's liquor license for the
restaurant, for a total purchase price of approximately $1.8 million. The
Company has closed the restaurant until approximately June 1998 for
refurbishment and conversion to a Rascal House restaurant.
EXISTING RESTAURANTS
The Company operates eight Jerry's Famous Deli restaurants in Southern
California, each of which features a Broadway New York theme, with an array of
lighting, posters and decor giving a "theatrical" setting. Each of the Jerry's
restaurants has a large deli style take-out counter displaying a wide range of
deli meats, salads and other prepared foods, along with a bakery display. Most
of the Southern California restaurants, including Solley's, provide attractive
patio dining, where smoking is permitted, and strategically placed televisions,
generally showing sports events, all of which
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add to the casual atmosphere. The Company's nine Southern California restaurants
in operation at the end of 1997 averaged approximately 7,458 square feet of
dining and kitchen space and 323 seats.
The Rascal House features a traditional deli restaurant atmosphere
that has been popular with its patrons for over 40 years. When the Company
acquired the Rascal House, it substantially retained and expanded upon the
existing menu and operating format of the restaurant, but the hours of operation
of the restaurant were expanded, and the restaurant began delivery service,
taking call-in orders for take out, and taking charge cards, all of which were
not previously done at Rascal House. This led to a substantial increase in
sales. The Rascal House restaurant consists of over 12,000 square feet of dining
and kitchen space and 375 seats. The new Rascal House restaurant which the
Company is currently developing in Boca Raton will feature the traditional
atmosphere and menu of the Miami Beach original Rascal House, along with all of
the new services added when the Company acquired Rascal House.
All of the restaurants feature an extensive menu emphasizing
traditional deli type fare (such as pastrami, corned beef, roast beef and turkey
sandwiches, knishes, blintzes, chopped liver, lox and bagels, chicken soup,
knockwurst and hot dogs), as well as an extensive assortment of pastas, salads,
omelettes, fresh baked breads and desserts, burgers, chicken and steaks. Also
offered at most restaurants is a complete line of pizzas, ranging from
traditional to specialty items, such as lox pizza, chicken pizza and deli pizza.
Most items, other than smoked fish and meat, are prepared on site at each
restaurant. Each restaurant also provides bar service.
Annual sales for 1997 for each of the eight Jerry's Famous Deli
restaurants open during all of 1997 ranged from $3.3 million for the Pasadena
restaurant, with 295 seats, to $8.3 million for the West Hollywood restaurant,
with 375 seats. Annual sales at Solley's in Sherman Oaks, California totaled
$3.7 million, with 160 seats. Annual sales at Rascal House for 1997 totaled $9.5
million, with 375 seats. Annualized sales for the newest restaurant in Costa
Mesa, California which opened in August 1997, approximated $5.0 million, with
320 seats. Management believes that the Company's high sales volume per
restaurant coupled with efficient cost controls enable the Company to offer an
excellent value, while permitting the Company to maintain strong operating
margins. Based upon its ability to replicate the Jerry's Famous Deli concept in
Southern California and the Rascal House concept in Southern Florida, and
acquire The Epicure Market in Southern Florida, management believes that it can
acquire other famous brand name deli-style restaurants and markets in larger
metropolitan areas and achieve operating efficiencies through its management of
those operations. All of the Company's restaurants and markets will offer an
extensive menu of high quality food for moderate prices in a distinctive
environment with superior service.
INDUSTRY BACKGROUND
Trade magazines estimate that 1997 restaurant industry sales were
approximately $320 billion. Within the industry, the casual dining segment
includes restaurants with full table service, a variety of contemporary foods,
moderate prices and surroundings that appeal to families and a variety of
customers. According to the National Restaurant Association Survey for 1997,
full service restaurant sales exceeded $104 billion in 1997.
MARKET NICHE
Management's strategy has been to expand upon well-known brand name
restaurants in high profile sites within larger metropolitan areas. Management
believes that the Company's commitment to providing attractive locations that
stand out in major high traffic areas and a high level of customer service has
been its most effective approach to attracting customers. Accordingly, the
Company has historically relied primarily on word of mouth to attract new and
repeat customers. Management believes that this strategy has enabled its newer
restaurants to benefit from the name recognition and reputation for quality
developed by existing restaurants. With the acquisition of The Epicure Market
scheduled for April 1998, the Company plans to use many of its restaurant
operating techniques to enhance the operation of the market. In addition, the
Company may seek to acquire similar gourmet market operations in other
metropolitan areas in the future and also develop additional locations.
The Company seeks to distinguish itself from its competitors in the
moderately priced, casual dining market segment by offering the following:
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- an extensive menu at each of its restaurants emphasizing
traditional deli type fare (such as pastrami, corned beef,
roast beef and turkey sandwiches, knishes, blintzes, chopped
liver, lox and bagels, chicken soup, knockwurst and hot dogs),
as well as pastas, salads, omelettes, fresh baked breads and
desserts, burgers, chicken and steaks. All menu selections are
prepared with high quality fresh ingredients, attractively
presented in generous portions at moderate prices;
- a full selection of freshly baked breads, bagels and desserts
mainly from the Company's own bakeries;
- a comfortable and attractive setting, in which each of the
Company's brand name restaurant groups has its own distinctive
character; and
- take-out, delivery and catering service.
The Studio City, Marina del Rey, West Hollywood, Pasadena, Westwood,
Woodland Hills, Costa Mesa and Rascal House restaurants have alcoholic beverages
available at the table with meals and maintain a full-service bar at which all
menu selections are available. The Encino and Sherman Oaks locations offers wine
and beer service only. The availability of alcoholic beverages is intended to
complement the meal service and is not a primary focus of the restaurant
operations at any location. Sale of alcoholic beverages in 1997 accounted for
approximately 3% of the Company's revenues.
FUTURE DEVELOPMENT STRATEGY
The Company's growth strategy is to acquire and expand on well-known
brand name restaurants and markets located in major metropolitan areas
throughout the United States. With the opening of Jerry's Famous Deli in Costa
Mesa, California, the Company executed the initial phase of expansion strategy
for the Jerry's Famous Deli concept. With the acquisition of Solley's Deli in
1996, the acquisition of Rascal House in 1996 and the scheduled acquisition of
The Epicure Market in April 1998, the Company has executed the second phase of
its overall expansion strategy, which is to acquire and expand upon other
popular deli-style restaurants and markets, in addition to developing new
locations for each of its brand names.
Management believes there are many deli-style restaurants and gourmet
markets in cities around the country with excellent market presence, clientele
and staff, and a first or second generation ownership with no exit strategy. The
Company will seek to acquire locations with cash, and stock if appropriate, to
provide these owners with an exit. The Company will refurbish restaurants and
markets it acquires but will seek to retain their distinctive atmosphere. In
addition, the Company will consider the expansion of the restaurant's menu if
appropriate. The goal of each brand name restaurant acquisition will be to
maintain the existing clientele while attracting new business. The acquisition
of existing restaurants allows a shorter conversion time, immediate revenues, a
ready pool of staffing and penetration of a market with an initial clientele in
place that does not have to be lured away from a competitor. Management believes
it can acquire existing restaurants and immediately cut food costs by using its
national vendor contracts to cut prices, using its cash position to take
advantage of discounts and using its computer systems to cut waste in ordering
and from other losses. Management further believes it can enhance profitability
with its superior charge card processing arrangements, extended hours of
operation, expanding delivery and takeout if it is not already in place and by
attracting additional clientele with the broader menu.
In terms of choosing sites for development of new restaurants and
markets using one of the Company's brand names, the Company will consider many
factors, including demographic information, visibility, traffic patterns,
accessibility, proximity to shopping areas, office parks, tourist attractions,
residential and commercial development, and area growth prospects and trends.
Future anticipated capital needs, primarily for development of
restaurants, cannot be projected with certainty. The Company generally intends
to seek lease locations. Renovation cost for each restaurant will depend in
large part upon the style of restaurant being developed. Jerry's Famous Deli
restaurant refurbishment costs generally are between $2.0 million to $3.0
million per location, or $267 to $400 per square foot to build out, including
renovation, furniture, fixtures, equipment, and pre-opening costs.
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To date, the Company has relied upon bank borrowings, landlord
financing and equity contributions from its shareholder and the proceeds of
public and private offerings of common and preferred stock to fund growth. The
Company may consider additional public or private offerings of additional common
stock or preferred stock or debt to fund its future expansion plans.
Management believes that the Company's commitment to providing
attractive locations that stand out in major high traffic areas and a high level
of customer service has been the most effective approach to attracting
customers. Accordingly, the Company has historically relied primarily on word of
mouth to attract new and repeat customers. Management believes that this
strategy has enabled its newer restaurants to benefit from the name recognition
and reputation for quality developed by existing restaurants.
COMPETITION
The Company's competition includes all restaurant segments and take-out
dining establishments. General trends toward in-home or fast food dining
alternatives could adversely affect the Company. The Company's competition in
the casual dining segment includes numerous types of dining establishments,
including deli-style restaurants and a broad range of establishments emphasizing
ethnic food, such as Chinese, Italian, and Mexican, as well as a broad range of
restaurants serving general American fare, including steakhouses, seafood
restaurants and broad general menus such as those served at publicly-held
restaurant chains such as The Cheesecake Factory and the Daily Grill. The
competition includes numerous single-facility restaurants as well as numerous
restaurant chains seeking to use a common name and identity and the management
efficiencies that may come with larger size restaurant chains for competitive
purposes.
Many casual dining restaurant chains in addition to the Company have
become public entities, thereby allowing them greater access to capital for
expansion. Large public companies which own restaurant chains provide these
chains with advantages in the cost of and access to capital. An enhanced capital
position and size can allow a restaurant chain to obtain access to favorable
locations and better lease terms in regard to facilities and equipment, thereby
enhancing its competitive position.
OPERATIONS
RESTAURANT OPERATIONS AND MANAGEMENT
The Company has developed and implemented systems which enable
management to execute its broad menu and effectively manage its high volume
restaurants. Operational procedures, controls, food line management systems and
cooking styles and processes, as well as a centralized computer system at each
location, have been implemented to accommodate the Company's extensive menu and
high volume sales in an attempt to retain as much consistency among the
restaurants as possible.
The Company believes that its relatively high sales volume and gross
margins allow it to attract and compensate high quality, experienced restaurant
management and staff. Each restaurant is managed by one general manager, two
managers and up to three assistant managers. Each restaurant also has one
kitchen manager and one to two assistant kitchen managers. The general manager
of each restaurant possesses approximately twelve years of experience in
restaurant management and reports directly to the Director of Operations who, in
turn, reports directly to the Chief Executive Officer.
The Company's overall restaurant operating concept incorporates
efficient, attentive, and friendly service. New servers participate in at least
one week of training during which the employee works under the close supervision
of the restaurant's operational management. The Company provides a comprehensive
training period for its management personnel.
The Company has a decentralized system of management for individual
restaurants and a training system that promotes, even requires, growth. Each of
the Company's restaurants are run on site by managers who place orders and
handle all on site issues except those noted below. All managers have cash
incentive plans based on performance of their restaurant and generally also
receive stock options. The Company's high volume operation provides for the
training of new floor and kitchen managers in every restaurant, so that each
location is constantly training assistant and alternative
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shift managers who expect to move up as new locations are opened. In addition,
when expanding through acquisitions, the Company obtains experienced staff. Key
staff acquired in acquisitions are given intensive training in the restaurants's
menu while the computerized point of sale system and oversight is put in place.
The Company's main office, and a satellite headquarters to be
established in Florida, retain functions that provide oversight and control.
Contracts and pricing with national vendors are negotiated by the main office
and invoices are paid at the main office. The main office also maintains
responsibility for monitoring compliance with all labor laws and maintaining all
insurance coverage.
The Company intends to apply many of its operating systems to the
operation of The Epicure Market upon completion of its acquisition scheduled for
April 1998. In addition, the Company will retain the expertise of its current
owner-operators, Harry and Mitchell Thal, who, together with their family, have
operated The Epicure Market for over 50 years.
TAKE-OUT AND DELIVERY OPERATIONS
The Company's take-out and delivery service is a significant and
popular feature of each restaurant and is estimated by management to currently
account for approximately 15% to 20% of JFD's total revenue. The take-out
counters, with their displays of deli meats, salads, other prepared foods and
bakery items, are located in close proximity to the entrance of each restaurant.
Therefore, upon entering the restaurant the customer can view a full array of
appetizers, deli meats, salads, fish, and freshly baked breads and desserts. All
menu items are available for take-out and delivery. Take-out service is
available at each restaurant and delivery service is typically available from
6:00 a.m. to 1:00 a.m. daily.
PURCHASING OPERATIONS
Key food products and related restaurant supplies are purchased from
specified food producers, independent wholesale food distributors and
manufacturers. The Company is not materially dependent upon any particular
supplier. Each restaurant manager orders supplies directly from an approved list
of vendors on an as-needed basis. This process enables the Company to take
advantage of volume discounts and ensures the consistent quality of its products
and supplies while enabling individual restaurant managers to be efficient in
their purchasing procedures, tailored to each specific restaurant. Many supplies
are purchased in an unprocessed state, since each restaurant prepares most of
its own salads and cooked items, except smoked fish and meat and other prepared
foods. This system also allows the restaurants to maintain low inventory levels
and ensures freshness.
The Company believes that the quantities of food and supplies it
purchases on a centralized basis enables it to obtain and maintain the desired
high quality products at the best available prices. In light of the Company's
historical negative working capital, the Company was not able to take advantage
of all prompt payment discounts offered by vendors until the completion of the
Public Offering. Since the completion of the Public Offering, the Company has
been taking advantage of those discounts, and has reduced its costs of sales as
a result. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."
GOVERNMENT REGULATIONS
The Company is subject to various federal, state and local laws, rules
and regulations affecting its business. Each of the Company's restaurants is
subject to licensing and regulation by a number of governmental authorities,
which may include alcoholic beverage control, building, land use, access for
disabled patrons, health and safety and fire agencies in the state or
municipality in which the restaurant is located. Difficulties in obtaining or
failures to obtain the required licenses or approvals could delay or prevent the
development of a new restaurant in a particular area or adversely affect the
operation of an existing restaurant or limit, as with the inability to obtain a
liquor or restaurant license, its products and services available at a given
restaurant. However, management believes the Company is in compliance in all
material respects with all relevant laws, rules, and regulations, and the
Company has never experienced abnormal difficulties or delays in obtaining the
required licenses or approvals required to open a new restaurant or continue the
operation of its existing restaurants. Management is not aware of any
environmental regulations that have had or that it believes will have a material
adverse effect on the operations of the Company.
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Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a federal and state authority and, in certain locations,
municipal authorities for a license and permit to sell alcoholic beverages on
the premises. Typically, licenses must be renewed annually and may be revoked or
suspended for cause by such authority at any time. Alcoholic beverage control
regulations relate to numerous aspects of the daily operations of the Company's
restaurants, including minimum age of patrons and employees, hours of operation,
advertising, wholesale purchasing, inventory control and handling, and storage
and dispensing of alcoholic beverages. The Company has not encountered any
material problems relating to alcoholic beverage licenses or permits to date and
does not expect to encounter any material problems going forward. The failure to
receive or retain, or a delay in obtaining, a liquor license in a particular
location could adversely affect the Company's ability to obtain such a license
elsewhere.
The Company is subject to "dram-shop" statutes in California (and
possibly in other states in the future as it expands) which generally provide a
person injured by an intoxicated person the right to recover damages from an
establishment which wrongfully served alcoholic beverages to such person. The
Company carries liquor liability coverage as part of its existing comprehensive
general liability insurance which it believes is consistent with coverage
carried by other entities in the restaurant industry and should protect the
Company from possible claims. Even though the Company carries liquor liability
insurance, a judgment against the Company under a dram-shop statute in excess of
the Company's liability coverage could have a material adverse effect on the
Company. The Company has never been the subject of a "dram-shop" claim.
Various federal and state labor laws, rules and regulations govern the
Company's relationship with its employees, including such matters as minimum
wage requirements, overtime and working conditions. Significant additional
government-imposed increases in minimum wages, paid leaves of absence and
mandated health benefits, or increased tax reporting and tax payment
requirements for employees who receive gratuities, could negatively impact the
Company's restaurants.
EMPLOYEES
As of March 1, 1998, the Company employed approximately 1,530 employees
at its ten restaurants. The Company also employs approximately 20 persons at its
corporate administrative office. Historically, the Company has experienced
relatively low turnover of key management employees. The Company believes that
it maintains favorable relations with its employees. There are no unions or
collective bargaining arrangements.
INSURANCE
The Company maintains worker's compensation insurance and general
liability insurance coverage which it believes will be adequate to protect the
Company, its business, assets, and operations. There is no assurance that any
insurance coverage maintained by the Company will be adequate, that it can
continue to obtain and maintain such insurance at all or that the premium costs
will not rise to an extent that they adversely affect the Company or the
Company's ability to economically obtain or maintain such insurance. In
addition, punitive damage awards are generally not covered by such insurance.
The Company has obtained $1,000,000 of key man life insurance on the Chief
Executive Officer, Isaac Starkman.
TRADEMARKS AND COPYRIGHTS
The Company has little, if any, trademark protection for the name
"Jerry's Famous Deli," although it has a trademark with respect to the initials
"JFD." A company unaffiliated with JFD, Jerrico, Inc. ("Jerrico"), registered
the service mark "JERRY'S" for use in connection with restaurants prior to its
use by JFD. Another company unaffiliated with JFD, Jerry's Systems, Inc.
("Jerry's Systems"), uses the service mark in connection with submarine sandwich
shops. Jerry's Systems is currently in litigation with Jerrico seeking to limit
Jerrico's registration to the territories of Kentucky and Indiana. JFD and
Jerry's Systems have an agreement allowing concurrent use of the service mark,
with certain restrictions, for their respective businesses. Therefore, if
Jerry's Systems is successful in its litigation with Jerrico, JFD should be able
to proceed with its use of the service mark except in Kentucky and Indiana.
However, should Jerrico prevail in the litigation, it could challenge JFD's use
of the service mark.
The Company has applications pending for registration of the trademarks
"Rascal House" and "Wolfie Cohen's Rascal House."
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The Company has not filed for registration of the Solley's trademark.
ITEM 2. PROPERTIES
Leased Properties. The Company's Sherman Oaks (Solley's), Studio City,
Encino, West Hollywood, Westwood, Woodland Hills and Costa Mesa restaurants are
all on leased premises. The Company owns the furnishings, fixtures and equipment
in each of its restaurants. Existing restaurant leases have expirations ranging
from 2003 through 2014 (excluding renewal options). Leases typically provide for
minimum base rents plus a percentage of gross sales above the minimum base
rents, plus payment of certain operating expenses. See Note 7 of Notes to
Consolidated Financial Statements for information regarding aggregate minimum
rents paid by the Company for recent periods and information regarding the
Company's obligation to pay minimum rents in future years. The Westwood
restaurant property, as well as the Guy's Place property adjacent to the West
Hollywood restaurant and three parking lots which service the West Hollywood
restaurant, are leased from The Starkman Family Partnership, which is owned by
the Starkman family, principally Isaac Starkman, the controlling beneficial
shareholder of the Company. See "Certain Relationships and Related
Transactions."
The Epicure Market and the future restaurant site in Boca Raton will
also be held under long-term leases. The Epicure Market lease will be for a 20
year term with four five-year options to renew and an option to purchase.
Concurrently with the completion of the acquisition of the Market, the Company
will acquire title to an adjacent parking lot. The Boca Raton lease is for a 15
year term, ending in 2013, with five five-year options to renew.
Purchased Restaurant Properties. The Company owns the land and
buildings of its Pasadena and Marina del Rey Jerry's Famous Deli restaurants and
the Rascal House restaurant in Miami Beach. In April 1995, the Company purchased
the Pasadena restaurant site located at 42 South Delacey Street for $1,675,000.
The Company completed construction of a 7,400 square foot building at a cost of
approximately $2,894,000, and the new restaurant opened on February 20, 1996. In
March 1996, the Company purchased the Marina del Rey property including the
9,300 square foot, 405 seat Jerry's Famous Deli restaurant which has been in
operation since 1991, for a total purchase price of $3,963,510, paid $713,510 in
cash and $3,250,000 in the form of a collateralized promissory note payable to
the Marina Landlord. The note payable to the Marina Landlord provides for
interest only payments for five years at 9% per annum, and for principal and
accrued interest to be paid in full on March 27, 2001. In September 1996, as
part of the purchase of Wolfie Cohen's Rascal House in Miami, Florida, the
Company purchased 2.21 acres of land and the 23,000 square foot two story
restaurant building. The total purchase price of the real estate, fixtures and
equipment of $4,750,000 was paid in full at closing.
Leased Corporate Offices. The Company leases 7,750 square feet for its
corporate offices at Suites 400 and 490, 12711 Ventura Boulevard, Studio City,
California.
Future Facilities. In the future, the Company will not lease new
restaurant sites or facilities from The Starkman Family Partnership or other
affiliated persons or entities unless the terms of the lease have been approved
by the Company's independent directors and reviewed by an independent national
or regional real estate evaluation firm or commercial leasing firm and deemed,
in a written opinion, as favorable as would be available from a non-affiliated
third party. The Starkman Family Partnership has the ability to sell the
properties it owns which are leased to the Company, and could do so at a
substantial profit.
The cost of opening a new Jerry's Famous Deli restaurant in a leased
building, depending upon the location and condition of the premises, has ranged
from approximately $2.0 to $3.0 million, or $267 to $400 per square foot,
including renovation, furniture, fixtures, equipment, and pre-opening costs and
depending in part upon tenant improvement allowances. To date, the Company has
relied upon bank borrowings, landlord financing and sale of its common and
preferred stock to finance new restaurants. The Company intends to rely upon
financing raised in possible future debt or equity offerings, real estate
financing transactions and additional lines of credit as available, to fund
future expansion plans.
9
<PAGE> 10
ITEM 3. LEGAL PROCEEDINGS
Restaurants such as those operated by the Company are subject to
litigation in the ordinary course of business, most of which the Company expects
to be covered by its general liability insurance. However, punitive damages
awards are not covered by general liability insurance. Punitive damages are
routinely claimed in litigation actions against the Company. To date the Company
has not paid punitive damages in respect to any of such claims. However, there
can be no assurance that punitive damages will not be given with respect to any
of such claims or in any other actions which may arise in any future action.
Based upon current information, management, after consultation with legal
counsel defending the Company's interests in the cases, believes the ultimate
disposition thereof will not have a material effect upon either the Company's
results of operations or its financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders in the fourth
quarter of 1997.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
Company's executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Isaac Starkman 60 Director, Chief Executive Officer, Secretary and
Chairman of the Board
Kenneth Abdalla 34 President and Director
Christina Sterling 53 Chief Financial Officer
Guy Starkman 27 Director, Director of Operations, and Vice-President
Jason Starkman 23 Director, Management Information Systems Director,
Vice-President
Ami Saffron 40 Director of Development, Vice-President
</TABLE>
Mr. Isaac Starkman founded Jerry's Famous Deli in 1978 with his then
partner, Jerry Seidman, whose interest Mr. Starkman purchased in 1984. Mr.
Starkman has been Chief Executive Officer of the Company since February 1984. He
has been the Chairman of the Board of Directors of the Company since the
creation of the position in January 1995 and a Director of the Company since
1978. Mr. Starkman maintains a direct involvement in the day-to-day operations
of the Company and is the primary architect of the Company's expansion program.
In 1971, Mr. Starkman founded Aquarius Concession Co., a national theater
concessionaire (whose headquarters are in New York) which he still partially
owns. Mr. Starkman began his career in the food services industry in 1965 as a
field manager for Ogden Foods. Mr. Starkman was born and raised in Israel where
he served as a Lieutenant in the Israeli Defense Force.
Mr. Kenneth Abdalla became a director of the Company in December 1996
and President of the Company on March 27, 1997. As President of the Company, Mr.
Abdalla provides limited services to the Company in connection with restaurant
acquisitions through December 1, 1998. Mr. Abdalla is the founder and managing
member of Waterton Management, LLC, a private investment firm established in
July 1995. Mr. Abdalla was a Vice President at Salomon Brothers, Inc., where he
managed a team of professionals in the private investment department. Mr.
Abdalla obtained a Bachelor of Science degree from the University of the Pacific
in 1986.
Ms. Christina Sterling has been with the Company since its inception in
1978 acting as the Controller until her promotion in November 1993 to Chief
Financial Officer. Ms. Sterling reports to Mr. Starkman and heads the Company's
accounting and finance departments. Between 1974 and her joining the Company,
Ms. Sterling was the Controller for
10
<PAGE> 11
FACIT AB, a Swedish distributor of office machines. Prior to that Ms. Sterling
served as the Controller of Fasson AB, an affiliate of Avery International
Company, in Sweden. Ms. Sterling holds a B.S. degree in accounting and
engineering from The National College in Sweden.
Mr. Guy Starkman has been involved with the general operations of the
Company since 1987. He became employed by the Company on a full-time basis in
1989, and has been a Director of the Company since January 1995. He has been a
Director of Operations since 1989 and Vice-President of the Company since
January 1995. Mr. Starkman is generally responsible for the overall
operations of the restaurants. Specifically, Mr. Starkman negotiates with
vendors, reviews purchases at each restaurant, oversees the delivery fleet and
participates in major personnel decisions. Mr. Starkman studied Business
Administration at the University of Southern California, and is the son
of Isaac Starkman.
Mr. Jason Starkman has been involved with the general operations of the
Company since 1989. He became employed by the Company on a full-time basis as
Director of Management Information Systems in June 1992, in which position he
has been directly responsible for the automation of the Company's restaurant
information systems. He has been a Director and Vice-President of the Company
since January 1995, and is the son of Isaac Starkman.
Mr. Ami Saffron was appointed Vice President and Director of
Development of the Company in June 1995. He was 50% owner and supervisor of
Pizza By the Pound, Inc., dba Jerry's Famous Pizza, from 1989 to June 1995.
Since May 1991 Mr. Saffron has supervised restaurant food purchases and food
quality for all of the Company's restaurants.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since October 22, 1995, the Company's Common Stock has been traded on
the Nasdaq National Market. The high and low sales prices for the Common Stock
for each of the quarters beginning with the fourth quarter of 1995, as reported
on the Nasdaq National Market, are as follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
December 31, 1995 $ 8.50 $7.00
March 31, 1996 $ 8.63 $7.88
June 30, 1996 $ 8.63 $7.00
September 30, 1996 $10.38 $5.63
December 31, 1996 $ 9.38 $4.13
March 31, 1997 $ 5.38 $3.38
June 30, 1997 $ 3.75 $2.06
September 30, 1997 $ 4.63 $2.06
December 31, 1997 $ 4.00 $2.00
</TABLE>
On March 11, 1998, the closing sale price for the Common Stock reported
on the Nasdaq National Market was $2.31 per share.
As of March 11, 1998, there were 129 shareholders of the Common Stock.
DIVIDEND POLICY FOR COMMON STOCK
The Company has not paid any dividends since its inception, except for
the distribution to the principal shareholder of the Company prior to and upon
the termination of the Company's S Corporation status in January 1995. It is the
current policy of the Company that it will retain earnings, if any, for
expansion of its operations, remodeling of existing restaurants and other
general corporate purposes and that it will not pay any cash dividends in
respect of the Common Stock in the foreseeable future. In addition, the
Company's line of credit with Bank of America requires the Bank's consent before
the payment of any dividends, which consent may not be unreasonably withheld.
12
<PAGE> 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data presented below for the years ended
December 31, 1997, 1996 and 1995 are derived from the consolidated December 31
(1997, 1996 and 1995) and combined (1994 and 1993) financial statements
(hereafter "consolidated financial statements") of the Company.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
Description 1997 1996 1995 1994 1993
----------- ---- ---- ---- ---- ----
(Dollars in thousands except Earnings Per Share and Restaurant
Operating Data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $ 56,418 $ 40,160 $ 28,030 $ 28,649 $ 20,620
Cost of sales 17,508 12,480 $ 9,168 10,019 7,263
-------- -------- -------- -------- --------
Gross profit 38,910 27,680 18,862 18,630 13,357
Operating expenses 28,769 19,951 13,634 13,689 10,267
General and administrative expenses 4,839 4,180 2,924 2,494 1,917
Restaurant concept discontinuation costs -- -- 137 -- --
Depreciation and amortization expenses 3,870 2,114 977 1,152 778
-------- -------- -------- -------- --------
Income from operations 1,432 1,435 1,190 1,295 395
Interest income (expense), net (600) (366) (110) (222) (117)
Other income (expense), net (135) (206) (111) (138) 77
-------- -------- -------- -------- --------
Income before income taxes 697 863 969 935 355
Income tax provision (134) (284) (187) (22) (19)
-------- -------- -------- -------- --------
Net income $ 563 $ 579 $ 782 $ 913 $ 336
======== ======== ======== ======== ========
Preferred stock
Cash dividends paid or accrued $ (227)
Accounting deemed dividend(4) (5,000)
-------
(5,227)
Net loss applicable to common stock $(4,648)
=======
Net income (loss) per share
Net income - Basic $0.06
-------
Net income - Diluted $0.05
-------
Preferred stock:
Cash dividends paid or accrued $ (0.02)
Accounting deemed dividend(4) (0.48)
-------
$ (0.50)
-------
Net income (loss) per share, applicable to
common stock - Basic(5) $0.04 $(0.44)
Net income (loss) per share, applicable to
common stock - Diluted(5) $0.04 $(0.44)
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
Description 1997 1996 1995 1994 1993
----------- ---- ---- ---- ---- ----
(Dollars in thousands except Earnings Per Share and Restaurant
Operating Data)
<S> <C> <C> <C> <C> <C>
Weighted average common shares
outstanding - Basic(5) 13,369,998 10,412,062
Weighted average common shares
outstanding - Diluted(5) 13,419,095 10,525,521
PRO FORMA DATA(1):
Pro forma net income per common $ 0.08
share - Basic
Pro forma common shares outstanding
- Basic 10,386,250
RESTAURANT OPERATING DATA(2):
For restaurants open for the full year:
Average sales per restaurant $ 6,040,515 $ 6,842,542 $ 6,922,618 $ 7,027,555 $ 6,699,991
Average sales per seat $ 18,373 $ 19,221 $ 19,494 $ 20,104 $ 19,659
Average sales per square foot $ 780 $ 939 $ 922 $ 951 $ 893
Total number of restaurants open
for the full year 9 4 4 4 3
Total restaurants open at end of year 10 9 4 4 3
BALANCE SHEET DATA (END OF YEAR):
Working capital (deficit) $ 208 $ 103 $ 3,845 $ (4,911) $ (4,215)
Total assets $ 37,978 $ 36,563 $ 18,782 $ 7,541 $ 7,080
Total debt (including current portion) $ 8,442 $ 6,559 $ 2,430 $ 2,275 $ 2,815
Minority interest(3) $ 480 $ 441 $ 263 $ 188 $ 192
Equity $ 24,576 $ 23,624 $ 12,766 $ 147 $ 172
</TABLE>
Net income per share is not presented for fiscal years ended 1994 and 1993 as
the Company was privately held. The unaudited pro forma basic net income per
share is presented as if the Company was publicly traded for the entire fiscal
year ended 1995.
(1) Pro forma net income per common basic share was calculated using net
income and based on as if the 10,386,250 shares of common stock were
outstanding for all of fiscal year 1995. The pro forma shares
outstanding are based on (i) 7,460,000 shares outstanding at December
31, 1994, (ii) 40,000 shares issued on January 9, 1995, per the terms of
a consulting agreement, (iii) 931,250 shares sold through a private
placement completed in March 1995 and (iv) an additional 1,955,000
shares sold in the Public Offering in October 1995.
(2) Determined as total sales divided by the number of all restaurants open
for the full period, total seats, and total square feet. Three
restaurants were open for the full year in 1993 and 1994, four for
the full year in 1995 and 1996, and nine for the full year 1997.
However, the West Hollywood restaurant, which opened on January 18,
1994, has been included in the Restaurant Operating Data for 1994 as if
it were open for the entire year. Total seats is based upon the typical
seating configuration of each restaurant. Seating configurations in each
restaurant are subject to change. Square foot data for 1997 is based on
approximate square feet for the kitchen and dining room area.
(3) The minority interest represents the other limited partners and the
other general partner's interest in the Encino restaurant. The minority
interest share represents the other limited partners' 67.45% share and
the other general partner's 5% share of accumulated net income or loss
and dividends.
14
<PAGE> 15
(4) In 1996, in accordance with the recent Securities and Exchange
Commission position regarding accounting for Preferred Stock which is
convertible at a discount from market price for Common Stock, the
Company has reflected an accounting "deemed dividend." This accounting
deemed dividend, which relates to the issuance of the Preferred Stock
which has been reflected in the third and fourth quarters, is a
non-cash, non-recurring accounting entry for determining income (loss)
applicable to common stock and income (loss) per share.
(5) Net income per share and weighted average shares outstanding for each of
the two years ended December 31, 1997 have been restated in accordance
with SFAS No. 128 (See Note 1 to the Consolidated Financial Statements).
There was no impact to the year ended December 31, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's consolidated
financial condition and results of operations for the fiscal years ended
December 31, 1997, 1996 and 1995 should be read in conjunction with the
Company's consolidated financial statements and related notes thereto included
elsewhere in this report.
GENERAL
Statements contained herein that are not historical facts are forward
looking statements. Important factors which could cause the Company's actual
results to differ materially from those projected in, or inferred by, forward
looking statements are (but are not necessarily limited to) the following: the
impact of increasing competition in the moderately priced, casual dining segment
of the restaurant industry; changes in general economic conditions which impact
consumer spending for restaurant occasions; unforeseen events which increase the
cost to develop and/or delay the development and opening of new restaurants;
unexpected increases in the cost of raw materials, labor and other resources
necessary to operate the restaurants, including without limitation the recent
increase in the minimum wage; the amount and rate of growth of general and
administrative expenses associated with building a strengthened corporate
infrastructure to support the development and operation of new restaurants; the
availability, amount, type and cost of financing for the Company and any changes
to that financing; the revaluation of any of the Company's assets (and related
expenses); and the amount of, and any changes to, tax rates. See "Risk Factors"
below for further information on these considerations, and see the Company's
Prospectus dated October 20, 1995 and periodic and other reports filed by the
Company with the Securities and Exchange Commission.
The Company's revenues are derived primarily from food and beverage
sales at its ten restaurants. In the latter part of 1996 the Company began
marketing its catering business in many of its restaurants which made a
significant contribution to overall revenues and should grow in future quarters.
As of December 31, 1997, the Company owned the following restaurants, except the
Encino restaurant in which it owns a general partner's and a limited partner's
interest:
<TABLE>
<CAPTION>
Location Date Opened or Acquired
-------- -----------------------
<S> <C>
Studio City, CA November 1, 1978
Encino, CA July 25, 1989
Marina del Rey, CA July 23, 1991
West Hollywood, CA January 18, 1994
Pasadena, CA February 20, 1996
Westwood, CA June 18, 1996
Woodland Hills, CA July 1, 1996 *
Sherman Oaks, CA (Solley's) July 1, 1996
Miami Beach, Fl. (Rascal House) September 9, 1996
Costa Mesa, CA August 19, 1997
</TABLE>
* Closed for renovation in October and November and reopened in
December 1996 as a Jerry's Famous Deli.
The Company's expenses consist primarily of food and beverage costs,
operating costs (consisting of salaries, rent and occupancy expenses), general
and administrative expenses, and depreciation and amortization expenses.
15
<PAGE> 16
Certain preopening costs, including direct and incremental costs
associated with the opening of a new restaurant, are amortized over a period of
one year from the opening date of such restaurant. These costs include primarily
those incurred to train a new restaurant management team and the food, beverage
and supply costs incurred to perform testing of all equipment, concept systems
and recipes. As of December 31, 1997, 1996 and 1995, unamortized preopening
costs incurred in connection with the opening or remodeling of restaurants were
approximately $105,000, $550,000 and $83,000, respectively.
The Company owns both the land and the building for its restaurants
located in Marina del Rey, Pasadena and Miami Beach; all other restaurant
locations are leased. All the Company's restaurants except the Encino restaurant
are wholly-owned. The Encino restaurant is owned and operated through
JFD-Encino, a limited partnership of which a wholly-owned subsidiary of the
Company is the 80% co-general partner and a 7.55% limited partner. The general
partners of JFD-Encino are entitled to 25% of the net income, loss or dividends
of the Encino restaurant and the limited partners are entitled to the remaining
75% until the limited partners have received a return of 100% of their capital
plus a cumulative return of 10% per annum. After payout of the limited partners'
initial contributed capital, the general partners are entitled to 65% of the net
income or loss of the Encino restaurant and the limited partners are entitled to
the remaining 35%. The Company consolidated the financial statements of the
Encino restaurant and separately stated the effect of minority interests in the
Consolidated Balance Sheets and Consolidated Statements of Operations based upon
the Company's current operating control of the Encino restaurant.
The Company ceased operations of its Jerry's Famous Pizza restaurant on
June 25, 1995. As a result, the Company recorded a charge of approximately
$137,000 for disposal of related assets. Included in the Consolidated Statements
of Operations for the year ended December 31, 1995 are revenues from Jerry's
Famous Pizza of $236,000 and a net operating loss of $259,000, which includes
the restaurant concept discontinuation costs.
16
<PAGE> 17
RESULTS OF OPERATIONS
The following table presents for the last three fiscal years the
Consolidated Statements of Operations of the Company expressed as percentages of
total revenue.
<TABLE>
<CAPTION>
Percentage of Total Revenues
----------------------------
Years Ended December 31,
------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of sales
Food 28.5 28.2 30.1
Other 2.5 2.9 2.6
------ ------ ------
Total cost of sales 31.0 31.1 32.7
------ ------ ------
Gross profit 69.0 68.9 67.3
Operating expenses
Labor 36.7 36.0 33.4
Occupancy and other 14.3 13.6 15.2
------ ------ ------
Total operating expenses 51.0 49.6 48.6
General and administrative expenses 8.6 10.4 10.4
Depreciation and amortization 6.9 5.3 3.5
Restaurant concept discontinuation costs -- -- 0.5
------ ------ ------
Total expenses 66.5 65.3 63.0
------ ------ ------
Income from operations 2.5 3.6 4.3
Interest income 0.2 0.3 0.2
Interest expense (1.2) (1.3) (0.6)
Gain on sale of assets and other 0.0 0.2 0.2
------ ------ ------
Income before provision for income taxes and minority
interest 1.5 2.8 4.1
Provision for income taxes (0.3) (0.7) (0.7)
Minority interest (0.2) (0.7) (0.6)
------ ------ ------
Net income 1.0% 1.4% 2.8%
====== ====== ======
</TABLE>
Fiscal Year 1997 Compared to Fiscal Year 1996
Total revenues increased $16,258,000, or 40.5%, to $56,418,000 for 1997
from $40,160,000 for 1996. Contributing to this increase are full year revenues
of approximately $27,900,000 from the five new restaurants and bakery opened or
purchased during 1996 as compared to approximately $12,400,000 for 1996. Also,
the Costa Mesa restaurant, which opened in August 1997, contributed
approximately $1,880,000 to the increase in revenues. Same store
17
<PAGE> 18
sales decreased approximately $1,220,000, due mainly to the opening of the
Westwood and Woodland Hills restaurants, as described below. In addition, the
Company also reduced the hours of operation from 24 hours a day in several
locations during 1997.
Net income decreased approximately $16,000, or 3%, for 1997, to
approximately $563,000 from approximately $579,000 in 1996. The implementation
of the Company's expansion plan during 1996, which resulted in more than
doubling the number of restaurants from four to nine in one year, in addition to
the opening of the Company's tenth restaurant in August 1997, continued to
impact the Company's earnings for 1997. This was due to three factors which
generally impact the first year of each new restaurant operations. First, when a
new restaurant opens, it takes several months for a customer use pattern to
develop during which time the Company incurs relatively higher labor and food
costs; after customer use patterns are developed, the restaurant can be staffed
and food supply prepared, consistent with these patterns. Second, all preopening
expenses, such as training and food supply costs to perform testing of
equipment, are amortized over the first twelve months after opening each new
restaurant. Third, Jerry's Famous Deli restaurants have relatively high fixture
and restaurant equipment costs, which are necessary to create the atmosphere and
expansive menu which are the highlights of the Jerry's Famous Deli concept.
Notwithstanding the temporary effect of new restaurant openings on
earnings, management believes that, if the proper locations have been selected,
the new restaurant openings will create significant opportunities for increasing
operating cash flow and future earnings. Management believes that the new
restaurant locations opened in 1996, along with the Costa Mesa restaurant opened
in August 1997, present very attractive opportunities for growth in the
Company's core market of Southern California. Although the opening of two of the
new locations (Woodland Hills and Westwood) had some impact on same store sales
of two existing locations (Encino and West Hollywood), management believes that
the opportunities presented in the new locations will outweigh the negative
impact on existing stores.
Cost of sales, which includes the cost of food, beverages and supplies
increased $5,028,000, or 40.3%, to $17,508,000 in 1997 from $12,480,000 in 1996,
primarily from full year sales at the new restaurants, but, as a percentage of
revenues, remained relatively consistent. Most significantly, the cost of food,
which comprises over 90% of cost of sales, increased as a percentage of sales to
28.5% from 28.2% in 1996. Management attributes this increase in food costs
primarily to slight increases in certain of its primary menu ingredients during
1997. In addition, the Company has not been able to take full advantage of its
program of more effective large-quantity buying with its Florida restaurant,
Rascal House, in which many food items are purchased locally.
Operating expenses, which include all restaurant level operating costs,
including, but not limited to, labor, rent, laundry, maintenance, utilities and
repairs, increased $8,819,000, or 44.2%, to approximately $28,769,000 in 1997
from $19,951,000 in 1996. As a percentage of revenues, operating expenses
increased 1.4 percentage points to 51.0% in 1997 from 49.6% in 1996. Labor
costs, the largest component of operating expenses, increased .7 percentage
points to 36.7% of revenues in 1997 from 36.0% in 1996. After Rascal House
restaurant experienced a 1997 second quarter seasonal decline in revenue without
a comparable decrease in labor costs, management's corrective action in June
1997, as discussed in the Company's June 30, 1997 Form 10-Q, brought about, as a
percentage of revenues for that restaurant, a 1.5% decrease in labor expense for
the 1997 third quarter and an additional 1.1% decrease in labor expense for the
1997 fourth quarter. Management believes that the minimum wage increases on
October 1, 1996, March 1, 1997 (California only) and September 1, 1997 to $5.15
from $4.25 an hour, which affected approximately 50% of the employees in each
restaurant, have not had a significant impact on labor expense for the 1997
period. Although rent expense, the next largest component of operating expenses,
increased $717,000 in 1997, as a percentage of revenues, it decreased .2%
points, to 4.7% from 4.9%. The opening of the Pasadena and Miami Beach
restaurants, where the Company owns the real property and the purchase of the
Marina del Rey restaurant property, which the Company formerly rented, have
decreased rent expense while increasing depreciation expense for 1997 and 1996.
General and administrative expenses increased approximately $660,000,
or 15.8%, to approximately $4,840,000 in 1997 from approximately $4,180,000 in
1996. As a percentage of revenues, general and administrative expenses decreased
1.8% points, to 8.6% points from 10.4% points. A portion of the increase related
to $190,000 of additional costs incurred in 1997 related to the Company's legal
settlement with the Company's previous workers' compensation carrier in a
lawsuit involving the appropriate charge for premiums due for a period prior to
a change in carriers in a previous year. The Company also had a full year of
liability coverage and related expenses in 1997 for the five restaurants opened
during 1996, which increased when compared to 1996.
18
<PAGE> 19
Depreciation expense increased $1,291,000, or 75.5%, to approximately
$3,000,000 or 5.3% of revenues in 1997, from $1,709,000 or 4.3% of revenues in
1996. The increase in depreciation during 1997 was primarily due to the
acquisition or opening of three restaurants, whose property is owned by the
Company, and to the full year's effect of depreciation for leasehold
improvements and equipment for all five new restaurants opened in 1996.
Amortization expense increased approximately $466,000, or 115%, to $871,000 in
1997 from $405,000 in 1996, which included a full year of amortization charge of
$592,000 from the amortization of preopening costs of the new restaurants and
$262,000 from the amortization of goodwill and covenants not to compete arising
from the acquisition of the Sherman Oaks, Woodland Hills and Rascal House
restaurants.
The $65,000 decrease in interest income in 1997 over 1996, arose
primarily as a result of the utilization of cash for new restaurants, and the
corresponding reduction in cash and cash equivalents in 1997. Interest expense
increased approximately $170,000, due mainly to the Rascal House mortgage and
Bank of America term loan. Minority interests, which decreased $146,000 in
1997, represents the interests of the limited partners and the co-general
partner in the Encino restaurant.
Fiscal Year 1996 Compared to Fiscal Year 1995
Income before provision for income taxes and minority interest
decreased approximately $8,000, or 0.7%, to approximately $1,141,000 for 1996
from approximately $1,149,000 for 1995 while net income decreased approximately
$204,000, or 26.0% for 1996. The implementation of the Company's expansion plan
during 1996, which resulted in more than double of the number of restaurants
from four to nine in one year, had a significant temporary impact on the
Company's earnings for 1996. This impact was due to three factors which impact
the first year of each new restaurant's operations, as described in the
comparison of fiscal year 1997 to 1996.
Total revenues increased $12,130,000, or 43.3%, to $40,160,000 for 1996
from $28,030,000 for 1995. Included in this increase are revenues of
approximately $12,440,000 from the five new restaurants and the bakery opened or
purchased in 1996. Also Guy's Place, a private bar and cigar lounge adjoining
and operated as a part of the West Hollywood restaurant, which opened at the end
of September 1995, contributed additional revenues of $182,000 in 1996 over
1995. Comparable restaurant sales decreased approximately $390,000 or 1.4% for
1996. Generally, the decrease was due to increased competition.
Cost of sales, which includes the cost of food, beverages and supplies
increased $3,312,000, or 36.1%, to $12,480,000 in 1996 from $9,168,000 in 1995,
primarily from sales at the new restaurants, but, as a percentage of revenues,
decreased 1.6 percentage points to 31.1% in 1996 from 32.7% in 1995. Most
significantly, the cost of food, which comprises over 90% of cost of sales,
decreased in 1996 as a percentage of sales to 28.2% from 30.1% in 1995.
Management attributes this decrease in food costs primarily to its continuing
program of more effective buying, improved cost control and better financial
liquidity since the Company's October 1995 initial public offering, which allows
the Company to take advantage of vendor discounts for prompt or early payments.
As a result of decreased cost of sales, gross profits improved 1.6 percentage
points, to 68.9% of revenues in 1996 from 67.3% of revenues in 1995.
Operating expenses, which include all restaurant level operating costs,
including, but not limited to, labor, rent, laundry, maintenance, utilities and
repairs, increased approximately $6,316,000, or 46.3%, to approximately
$19,951,000 in 1996 from approximately $13,634,000 in 1995. As a percentage of
revenues, total operating expenses increased 1.0 percentage point to 49.6% of
revenues in 1996 from 48.6% of revenues in 1995. Labor costs, the largest
component of operating expenses, increased 2.6 percentage points to 36.0% of
revenues in 1996 from 33.4% of revenues in 1995, primarily due to temporary
increases in labor costs at the five new restaurants opened or acquired in 1996.
Labor expenses for the five new restaurants (excluding the bakery) were
approximately 38.8% of revenues for these new locations, compared to labor
expenses of 33.5% of revenues for the four existing restaurants. Although rent
expense, the next largest component of operating expenses, increased by
approximately $311,000 in 1996, as a percentage of revenues, it decreased 1.0
percentage point, to 4.9% in 1996 from 5.9% in 1995. The opening of the Pasadena
and Miami Beach restaurants, where the Company owns the real property, and the
purchase of the Marina del Rey restaurant property which the Company formerly
rented, have decreased rent expense while increasing depreciation expense for
1996.
General and administrative expenses increased approximately $1,256,000,
or 43.0%, to approximately $4,180,000 in 1996 from approximately $2,924,000 in
1995, but showed no change as a percentage of revenues. Major
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components of the increase included approximately $364,000 of additional costs
related to the Company's change in status from a private to a public company,
including the audit and legal fees, public relations and other costs of the
Company's first Annual Report on Form 10-K, first Annual Report to Shareholders,
first Proxy Statement, first annual meeting and Quarterly Reports on Form 10-Q;
additional labor expense of approximately $269,000 resulting from the addition
of several new positions necessary to support the Company's expanded restaurant
operations and public reporting; performance incentive bonus of approximately
$230,000 paid to Isaac Starkman, Guy Starkman and Jason Starkman; and a
approximate $226,000 increase in insurance expense, due primarily to increased
liability coverage on the new and existing restaurants and on key officers and
directors. The $137,000 restaurant concept discontinuation costs in 1995 arose
from the closure of Jerry's Famous Pizza restaurant in June 1995, as mentioned
earlier in this discussion.
Depreciation and amortization expense increased $1,138,000, or 116.5%,
to approximately $2,114,000, or 5.3% of revenues, in 1996 from $977,000, or 3.5%
of revenues, in 1995 primarily due to the acquisition or opening of Pasadena,
Marina del Rey and Miami Beach restaurants where the Company owns the real
property, and the purchase of leasehold improvements and equipment for all five
new restaurants opened in 1996. Amortization expense increased approximately
$389,000, to approximately $405,000 in 1996 from approximately $16,000 in 1995,
which includes approximately $283,000 from the amortization of preopening costs
of the new restaurants and approximately $108,000 from the amortization of
goodwill and covenants not to compete in connection with the acquisition of the
Sherman Oaks, Woodland Hills and Rascal House restaurants.
The $77,000 increase in interest income in 1996 over 1995, arose mostly
from temporary investments of the proceeds from the 1995 Public Offering.
Minority interests, which increased approximately $99,000 in 1996, represent the
interests of the limited partners and the co-general partner in the Encino
restaurant.
Effect of Termination of Subchapter S Election
As an S corporation until January 11, 1995, the Company's shareholder,
not the Company, paid federal income taxes. In addition, the Company's
shareholder paid California state income taxes on the profits of the Company and
the Company paid California state income taxes on its profits at a significantly
reduced rate. On January 11, 1995, the Company became a C corporation, liable
for federal income taxes and California state income taxes at a significantly
higher rate. If the Company had been subject to federal income tax for 1994, for
example, management estimates that earnings would have been reduced by
approximately $383,000 as a result of a provision for such federal and
California State income taxes. Taxation as a C corporation will generally
decrease net income as a result of the tax expense on a going forward basis.
Business Outlook
The Company does not believe that its existing restaurants can show
substantial growth in per restaurant revenues. Therefore, management believes
that any significant sales growth will have to come from additional restaurants.
The Company continues to search for prime locations appropriate for its
customer base and to develop them into restaurants, both in the Southern
California and Southern Florida areas, as well as new areas, while continuing to
provide quality food and service in its existing restaurants.
LIQUIDITY AND CAPITAL RESOURCES
As is typical in the restaurant industry, the Company historically has
operated with little or no working capital, but it does not have significant
inventory or trade receivables and customarily receives several weeks of trade
credit in purchasing food and supplies.
Since the completion of the 1995 Public Offering, the policy of the
Company has been to reinvest positive cash flow for restaurant development and
general working capital. Net cash flow from operating activities decreased to
approximately $1,679,000 for 1997 from approximately $3,437,000 for 1996 and
approximately $141,000 for 1995. In 1997, additions of approximately $3,870,000
in depreciation and amortization expense was the major component of net cash
provided by operations. In contrast, in 1996 the Company used approximately
$2,372,000 to pay down certain
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accounts payable and accrued expenses, while it added $2,114,000 in depreciation
and amortization expense. In the future, the Company intends to use any positive
cash flow for restaurant development and general working capital. Because funds
available from cash sales are not needed immediately to pay for food and
supplies or to finance receivables or inventory, they could be used for capital
expenditures.
Prior to the Public Offering, the Company financed its expansion from
bank borrowings, cash flow and a private placement in January 1995 which was
primarily used to pay off a bank debt and trade payables. The Company has used
the additional capital raised in the Public Offering primarily for the
development and construction of new restaurants.
The purchase and renovation of the Pasadena restaurant property, which
opened in February 1996, was funded through proceeds from a $1,219,000 loan from
United Mizrahi Bank. This loan, which has been reduced to a balance of $775,000
at December 31, 1997 as a result of monthly payments of principal and a paydown
with proceeds from the sale of preferred stock, bears interest at the bank's
reference rate plus 1.5% (with a minimum rate of 10% per annum) and matures in
April 1998. The Company is currently in negotiations to extend the term of this
loan.
The March 1996 purchase of the Marina del Rey restaurant property from
the Company's landlord was funded primarily through a $3,250,000 note from the
landlord. It is collateralized by the property, requires interest only payments
at 9% per annum until maturity, and is due in March 2001.
The purchase of the two Solley's Deli restaurants in Sherman Oaks and
Woodland Hills was funded from a $2,500,000 draw down by the Company on its line
of credit with Bank of America. In September 1996, this $2,500,000 was converted
into a term loan, which currently bears interest at the bank's reference rate
plus 1.5% (9.75% per annum at December 31, 1997) and is due in March 2002.
In August and November of 1996, the Company issued a total of 12,000
Preferred Shares, resulting in net proceeds of approximately $10,992,000. A
substantial majority of the proceeds from the sale of the Preferred Shares was
used for the acquisition of Rascal House and for the renovation of the Woodland
Hills restaurant, the construction of the Costa Mesa restaurant and a paydown of
the United Mizrahi Bank loan.
The Company also has an unutilized revolving line of credit in the
aggregate amount of $965,000 from United Mizrahi Bank, which terminates in April
1998. The line bears interest at the bank's reference rate plus 1.50%, with a
minimum rate of 10.0% (currently 10% per annum). Interest on the credit line is
payable monthly. Prepayments are permitted at any time without penalty.
Borrowings under the credit line are collateralized by the fixtures and
equipment of the Pasadena restaurant.
In July 1997, the Company obtained a $2,500,000 term loan
collateralized by certain real and personal property of the Rascal House
restaurant. The loan bears interest at the LIBOR rate for one-, two- or
three-month periods plus 2.5% up to a maximum rate of 11.0% and will mature on
August 1, 2004. Approximately $750,000 of the loan was used to complete
renovation of the Costa Mesa restaurant, and the balance is intended to be used
primarily for the development and acquisition of new restaurants.
The Company entered into a $4,000,000 revolving line of credit
agreement with Bank Leumi USA in October 1997. The line bears interest at the
bank's reference rate plus 1.25%. Any borrowings between the agreement date and
January 1, 1999 shall be subject to interest repayment only. On January 1, 1999,
the line automatically converts to a term loan with principal and interest
payable in equal monthly installments until maturity on September 1, 2002.
The Company also entered into a $2,000,000 non-revolving line of credit
with Bank of America, NTSA in October 1997, collateralized by the machinery,
equipment and inventory of the Company. The line bears interest at the bank's
reference rate plus 1.25% and is available for draw down until April 1, 1998.
Principal and interest are thereafter payable in equal monthly installments,
ending on October 1, 2002, with prepayments permitted at any time.
Management believes that cash on hand, cash flow from operations and
its available lines of credit will be sufficient to finance the purchase of The
Epicure Market, renovation of the Boca Raton facility, and operation of the
Company's existing restaurants. Future anticipated capital needs, primarily for
development or acquisition of new restaurants, cannot be projected with
certainty. Additional capital expenditures will be required as new locations are
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added. The Company generally intends to seek leased locations. The cost of
renovation will depend upon the style of restaurant being converted. Renovation
of Jerry's Famous Deli restaurants have cost between $2.0 million and $3.0
million per location, or $267 to $400 per square foot, while renovation of the
new Rascal House restaurant is anticipated to cost approximately $600,000.
YEAR 2000 COMPLIANCE
The Year 2000 issue is a result of computer programs being written
using two digits, e.g., "98" to define a year. Date-sensitive software may
recognize the year "00" as the year 1900 rather than the year 2000. This would
result in errors and miscalculations or even system failure causing disruptions
in everyday business activities and transactions. Software is termed "Year 2000"
compliant when it is capable of performing transactions correctly in the year
2000 and beyond.
Based on a recent assessment of the Company's computer systems
software, it has been determined that more than 75% of the Company's hardware
and software systems are either currently Year 2000 compliant or have an
existing upgrade available from the software vendor that is Year 2000 compliant.
All systems that are not currently Year 2000 compliant will either be upgraded
to be Year 2000 compliant or replaced with alternative systems that are Year
2000 compliant over the next eighteen months. While achieving Year 2000
compliance will be a major task, it is not expected to have a material impact on
the Company's financial condition or results of operations.
IMPACT OF INFLATION
Impact of inflation on food, labor and occupancy costs can
significantly affect the Company's operations. Many of the Company's employees
are paid hourly rates related to the federal minimum wage which has been
increased numerous times and remains subject to increase. Management believes
that food costs as a percentage of revenues have been essentially stable due to,
among other things, procurement efficiencies and menu price adjustments.
Building costs, taxes, maintenance and insurance costs which continue to
increase all have an impact on the Company's operating expenses and occupancy
costs. Management believes the current practice of maintaining operating margins
through, among other things, a combination of cost controls, careful evaluation
of property and equipment needs, efficient purchasing practices and menu price
increases is its most effective tool for coping with inflation.
SEASONALITY
The Rascal House restaurant traditionally experiences higher revenues
in the first and fourth quarters of each year, consistent with the tourist
season in Florida. In addition, management has noted that certain of the
Company's Jerry's Famous Deli locations may have experienced a seasonal
influence, with higher revenues in the first and fourth quarters of each year,
although this has not clearly been established as a recurring trend.
RECENT ACCOUNTING STANDARDS
SFAS 130, Reporting Comprehensive Income
Although this Statement is applicable to the Company for the
year ended December 31, 1997, there is no financial statement
impact or reporting requirement.
SFAS 131, Disclosures about Segments of an Enterprise and Related
Information
Currently, although this Statement is applicable to the Company for
the year ended December 31, 1997, there is no financial statement
impact or reporting requirement as bakery operations are not
considered significant.
SFAS 132, Employers' Disclosure about Pensions and Other Post-
Retirement Benefits
This Statement is not applicable to the Company for the year ended
December 31, 1997.
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Statement of Position Reporting on the Costs of Start-Up Activities
In April 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued a draft Statement of
Position (SOP) entitled "Reporting on the Costs of Start-Up Activities." The
proposed SOP would require entities to expense as incurred all start-up and
preopening costs that are not otherwise capitalizable as long-lived assets. In
March 1998, the Financial Accounting Standards Board cleared the SOP for final
issuance, provided that certain changes were made to the SOP. The Company
believes the final SOP will be issued during the second quarter of fiscal 1998
and will be effective for fiscal years beginning after December 15, 1998.
Restatement of previously issued financial statements is not permitted by the
draft SOP, and entities are not permitted to report the pro forma effects of the
retroactive application of the new accounting standard.
The Company's adoption of the new accounting standard proposed by the
SOP will involve the recognition of the cumulative effect of the change in
accounting principle required by the SOP as a one-time charge against earnings,
net of any related income tax effect, retroactive to the beginning of the fiscal
year of adoption.
RISK FACTORS
The discussion in this Report contains certain forward-looking
statements relating to anticipated financial performance, business prospects and
business plans. Actual future results could differ materially from those
described in the forward-looking statements as a result of factors discussed
below. The Company cautions the reader, however, that this list of risk factors
may not be exhaustive. The Company undertakes no obligation to publicly release
the results of any revisions to these forward-looking statements that may be
made to reflect any future events or circumstances.
LIMITED OPERATING HISTORY WITH MULTIPLE RESTAURANTS. The Company was
founded in 1978 with the opening of its Studio City restaurant. Three additional
restaurants were opened in 1989, 1991 and 1994, respectively, and have each been
in operation for over two years. Two additional restaurants were opened in
February and June 1996, respectively, two additional restaurants (Solley's) were
acquired as of June 30, 1996, and one additional restaurant (Rascal House) was
acquired September 9, 1996. The newest restaurant was opened in August 1997.
Accordingly, the Company has a limited operating history in its current size and
configuration, and there is no assurance that such restaurants, or the Company
as a whole, will be profitable in the future.
LACK OF DIVERSIFICATION. At the present time, the Company intends to
invest only in deli-style restaurants and gourmet markets. As a result,
changes in consumer preferences, including a change in consumer preferences for
restaurants of the type operated by the Company, may have a disproportionate and
materially adverse impact on the Company's business and its operating results.
NEED FOR ADDITIONAL FINANCING. The expansion of the Company's
restaurant operations in 1996 and 1997 has been funded with the proceeds of the
October 1995 Public Offering and the August and November 1996 sales of preferred
shares, along with bank financing. Management believes that the Company has
sufficient funds to complete the renovation of the Boca Raton restaurant and the
acquisition of The Epicure Market, but additional funds will be needed for
future acquisitions and development of new locations. There is no assurance that
the Company will be able to obtain such additional financing, or that such
additional financing will be available on terms acceptable to the Company and at
the times required by the Company. Failure to obtain such financing may
adversely impact the growth, development or general operations of the Company.
If, on the other hand, such financing can be obtained, it will most likely
result in additional leverage or dilution of existing shareholders.
UNCERTAIN ABILITY TO MANAGE GROWTH AND EXPANSION. In order to achieve
growth, Management believes that the Company must develop new restaurants. The
Company's expansion plan calls for the addition of several new restaurants per
year. Management has limited experience opening restaurants at the current
expansion plan rate. The Company's ability to successfully expand will depend on
a number of factors, including without limitation, the selection and
availability of suitable locations, the hiring and training of sufficiently
skilled management and personnel, the availability of adequate financing,
distributors and suppliers, the obtaining of necessary governmental permits and
authorizations, and contracting with appropriate development and construction
firms, some of which are beyond the control of the Company. There is no
assurance that the Company will be able to open any new restaurants, or that any
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new restaurants will be opened at budgeted costs or in a timely manner, or that
such restaurants can be operated profitably.
LIMITATIONS AND VULNERABILITY AS A RESULT OF GEOGRAPHIC CONCENTRATION.
Because all of the Company's existing restaurants (other than Rascal House in
Florida) are located in Southern California, the Company is vulnerable to the
Southern California economy, which has experienced adverse results in past
years. In addition, the Company's experience with construction and development
outside the Los Angeles metropolitan area is limited, which may increase
associated risks of development and construction as the Company expands outside
this area. Expansion to other geographic areas may require substantially more
funds for advertising and marketing since the Company will not initially have
name recognition or word of mouth advertising available to it in areas outside
of Southern California. The centralization of the Company's management in
Southern California may be a problem in terms of expansion to new geographic
areas, since the Company may suffer from lack of experience with local
distributors, suppliers and consumer factors and from other issues as a result
of the distance between the Company's main headquarters and its restaurant
sites. These factors could impede the growth of the Company.
SIGNIFICANT RESTAURANT INDUSTRY COMPETITION. The restaurant industry is
intensely competitive with respect to price, service, location, ambiance and
quality, both within the casual dining field and in general. As a result, the
rate of failure for restaurants is very high and the business of owning and
operating restaurants involves greater risks than for businesses generally.
There are many competitors of the Company in the casual dining segment that have
substantially greater financial and other resources than the Company and may be
better established in those markets where the Company has opened or intends to
open restaurants. There is no assurance that the Company will be able to compete
in these markets.
DEPENDENCE UPON CONSUMER TRENDS. The Company's restaurants are, by
their nature, dependent upon consumer trends with respect to the public's
tastes, eating habits (including increased awareness of nutrition), and
discretionary spending priorities, all of which can shift rapidly. In general,
such trends are significantly affected by many factors, including the national,
regional or local economy, changes in area demographics, increases in regional
competition, food, liquor and labor costs, traffic patterns, weather, natural
disasters, and the availability and relative cost of automobile fuel. Any
negative change in any of the above factors could negatively affect the Company
and its operations.
DEPENDENCE ON KEY PERSONNEL. The Company believes that the development
of its business has been, and will continue to be, highly dependent on Isaac
Starkman, the Chairman of the Board and Chief Executive Officer of the Company.
In addition, any outstanding balances under the Company's credit facility with
Bank of America become immediately due and payable upon the death of any
principal officer or majority shareholder. Isaac Starkman is currently 60 years
old. Mr. Starkman has an employment agreement which requires that he devote a
substantial majority of his time to the Company; however, he does have, and will
continue to have, limited involvement with certain concession and souvenir
businesses in New York, and other business ventures, each unrelated to the
Company and its business. Guy and Jason Starkman, Vice Presidents of the
Company, are currently 27 and 23 years old, respectively. The Company has
obtained key man life insurance of $1,000,000 face amount on Isaac Starkman.
However, if Isaac Starkman's services become unavailable for any reason, it
could affect the Company's business and operations adversely.
POSSIBLE HIGHER COSTS UNDER EXISTING RELATED PARTY LEASES. The Company
currently leases its Westwood restaurant building and eight adjacent parking
spaces, along with three parking lots and a 1,200 square foot building adjacent
to its West Hollywood restaurant, from the Starkman Family Partnership ("The
Starkman Family Partnership"), an entity controlled by Isaac Starkman, the
controlling beneficial shareholder of the Company. There is no assurance that
the leases between The Starkman Family Partnership and the Company are as
favorable as the Company could have obtained from an unaffiliated third party.
These leases were not negotiated at arm's length and Isaac Starkman, the
controlling beneficial shareholder and the Chief Executive Officer of the
Company, had a conflict of interest in negotiating these transactions. In
addition, several of the leases are subject to renewal at their then fair market
value, which could involve substantial increases, depending upon the real estate
leasing market at the time of renewal of each of such leases. In the future, the
Company will not lease new restaurant sites or facilities or renew existing
leases from The Starkman Family Partnership or other affiliated persons or
entities unless the terms of the lease have been approved by the Company's
independent directors and deemed at least as favorable as would be available
from a non-affiliated third party by an independent national or regional real
estate evaluation firm or commercial leasing firm in a written opinion.
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CERTAIN DISCONTINUED RESTAURANT CONCEPTS HAVE BEEN UNSUCCESSFUL.
Certain other restaurant operations established by Isaac Starkman, the
controlling beneficial shareholder of the Company, have not met with success. In
November 1984, Isaac Starkman established a casual dining restaurant named
Starky's, which combined a deli operation with pizza parlor and arcade at the
top of the Beverly Center, a large shopping mall in Los Angeles, California.
Starky's had no street visibility, and due to its location in an enclosed mall,
had restricted hours of operation and problems with hygienic conditions at the
mall which were outside of Management's control. A lawsuit was filed by Starky's
primarily related to the landlord's property maintenance which resulted in a
settlement subject to a confidentiality agreement and the closing of the
restaurant in December 1992. In addition, Jerry's Famous Pizza, a 2,300 square
foot pizza restaurant in Sherman Oaks, California ("Jerry's Famous Pizza"),
operated by Pizza by the Pound, Inc., a wholly-owned subsidiary acquired by the
Company in January, 1995, was not profitable. Management determined that it was
in the interest of shareholder value that the Company focus on its core business
of high volume deli style restaurants rather than confuse the financial markets'
perception of the Company by developing comparatively low volume restaurants in
the fast food pizza segment. As a result, the Company ceased operations of
Jerry's Famous Pizza.
INCREASES IN FOOD COSTS. Among various other factors, the Company's
profitability is highly sensitive to changes in food costs, which sensitivity
requires Management to be able to anticipate and react to such changes. Various
factors beyond the Company's control, including adverse weather, labor strikes
and delays in any of the restaurants' frequent deliveries, may negatively affect
food costs, quality and availability. While in the past, Management has been
able to anticipate and react to increasing food costs through, among other
things, purchasing practices, menu changes and price adjustments, there can be
no assurance that it will be able to do so in the future.
INCREASE IN MINIMUM WAGE. The federal minimum wage increased from $4.25
an hour to $4.75 effective October 1, 1996, and again to $5.15 effective
September 1, 1997. In addition, the California minimum wage will increase to
$5.75 on April 1, 1998. President Clinton has proposed an additional increase in
the federal minimum wage to $6.15 an hour, which will be subject to
congressional approval. Approximately one-third of employees working in
restaurants operated by the Company receive salaries equal to the federal
minimum wage.
SECURITY CONCERNS AND EXPENSES AT RESTAURANT SITES. In light of, among
other things, the 24-hour operation of some of the Company's restaurants,
security for patrons and workers at restaurant locations is an ongoing and
increasing concern and expense. The Company has previously had criminal
incidents at its restaurants, some of which have resulted in lawsuits. There is
no assurance that there will not be any additional problems at any of the
locations. The Company maintains its own security personnel at each location.
The Company also maintains general liability insurance.
POTENTIAL UNINSURED LOSSES. The Company has comprehensive insurance,
including general liability, fire and extended coverage, which the Company
considers adequate. However, there are certain types of losses which may be
uninsurable or not economically insurable. Such hazards may include earthquake,
hurricane and flood losses. While the Company currently maintains limited
earthquake coverage, it may not be economically feasible to do so in the future.
Since the Company's operations are currently concentrated in one area of
Southern California, the Company has had temporary interruptions in its
operations due to such hazards in the past. Punitive damage awards are generally
not covered by insurance; thus, any awards of punitive damages as to which the
Company may be liable could adversely affect the ability of the Company to
continue to conduct its business, to expand its operations or to develop
additional restaurants. If such a loss should occur, the Company would, to the
extent that it is not covered for such loss by insurance, suffer a loss of the
capital invested in, as well as anticipated profits and/or cash flow from, such
damaged or destroyed properties. There is no assurance that any insurance
coverage maintained by the Company will be adequate, that it can continue to
obtain and maintain such insurance at all or that the premium costs will not
rise to an extent that they adversely affect the Company or the Company's
ability to economically obtain or maintain such insurance.
POTENTIAL "DRAM SHOP" LIABILITY. Restaurants in California and most
other states are subject to "dram shop" laws, rules and regulations, which
impose liability on licensed alcoholic beverage servers for injuries or damages
caused by their negligent service of alcoholic beverages to a visibly
intoxicated person or to a minor, if such service is the proximate cause of the
injury or damage and such injury or damage is reasonably foreseeable. While the
Company has limited amounts of liquor liability insurance and intends to
maintain liquor liability insurance as part of its comprehensive general
liability insurance which it believes should be adequate to protect against such
liability, there is no assurance that it will not be subject to a judgment in
excess of such insurance coverage or that it will be able to obtain or continue
to
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maintain such insurance coverage at reasonable costs, or at all. The imposition
of a judgment substantially in excess of the Company's current insurance
coverage would have a materially adverse effect on the Company and its
operations. The failure or inability of the Company to maintain or increase
insurance coverage could materially and adversely affect the Company and its
operations. In addition, punitive damage awards are generally not covered by
such insurance. Thus, any awards of punitive damages as to which the Company may
be liable could adversely affect the ability of the Company to continue to
conduct its business, to expand its operations or to develop additional
restaurants.
TRADEMARK AND SERVICE MARK RISKS. The Company has not had a challenge
to its use of the "Jerry's" service mark as of this time. However, to date, the
Company has used the service mark only in Southern California. In addition, the
Company has not secured clear rights to the use of the "Jerry's" service mark or
any other name, service mark or trademark used in the Company's business
operations, other than "JFD," in connection with restaurants. There are other
restaurants using the name "Jerry's" throughout the United States, and use of
the service mark or any other name, service mark or trademark in the Company's
business operations, other than "JFD," may be subject to challenge.
EFFECTS OF COMPLIANCE WITH GOVERNMENT REGULATION. The Company is
subject to various federal, state and local laws, rules and regulations
affecting its businesses and operations. Each of the Company's restaurants is
and shall be subject to licensing regulation and reporting requirements by
numerous governmental authorities, which may include alcoholic beverage control,
building, land use, health and safety and fire agencies in the state or
municipality in which the restaurant is located. Difficulties in obtaining or
failures to obtain the necessary licenses or approvals could delay or prevent
the development or operation of a given restaurant or limit, as with the
inability to obtain a liquor or restaurant license, its products and services
available at a given restaurant. Any problems which the Company may encounter in
renewing such licenses in one jurisdiction may adversely affect its licensing
status on a federal, state or municipal level in other relevant jurisdictions.
LIMITED CONTROL AND INFLUENCE ON THE COMPANY. The current officers and
directors of the Company in the aggregate, directly or beneficially, currently
own a majority of the total outstanding Common Stock. In addition, three out of
six directors are members of the Starkman family. As a result, these individuals
are in a position to materially influence, if not control the outcome of all
matters requiring shareholder or board approval, including the election of
directors. Such influence and control is likely to continue for the foreseeable
future and significantly diminishes control and influence which future
shareholders may have on the Company.
NO DIVIDENDS. It is the current policy of the Company that it will
retain earnings, if any, for expansion of its operations, remodeling of existing
restaurants and other corporate purposes, and it will not pay any cash dividends
in respect of the Common Stock in the foreseeable future.
POSSIBLE ADVERSE IMPACT ON POTENTIAL BIDS TO ACQUIRE SHARES DUE TO
ISSUANCE OF PREFERRED OR COMMON STOCK. The Board of Directors of the Company has
authority to issue up to 5,000,000 shares of preferred stock of the Company (the
"preferred stock") and to fix the rights, preferences, privileges and
restrictions of such shares without any further vote or action by the
shareholders. In addition, the Company has authorized 60,000,000 shares of
Common Stock. Only 14,210,155 shares of Common Stock are currently outstanding,
and no preferred shares are currently outstanding. The potential issuance of
authorized and unissued preferred shares or Common Stock of the Company may
result in special rights and privileges, including voting rights, to individuals
designated by the Company and have the effect of delaying, deferring or
preventing a change in control of the Company. As a result, such potential
issuance may adversely affect the marketability and potential market price of
the shares. As additional acquisition opportunities become available, Management
may determine to issue and sell additional Common Stock or preferred shares at
any time in the future.
RECENT CHANGES IN LOCAL ENFORCEMENT OF HEALTH CODE AND NEGATIVE
PUBLICITY. As a result of a November 1997 series of investigative reports on
local television regarding restaurant health code violations, the Los Angeles
County Health Department has instigated stricter monitoring and enforcement of
health code provisions. The Company's Studio City restaurant was one of several
prominent restaurants mentioned in the November 1997 report, which resulted in
negative publicity to the Company. Management believes that this may have
contributed to reduced revenues from the Southern California restaurants in the
fourth quarter of 1997. The Health Department's current policy is to grade every
restaurant "A," "B" or "C," with A being best, B being acceptable and C being
grounds for closing the restaurant. Four of the Company's six restaurants in the
Los Angeles County Health Department jurisdiction have been inspected to date,
26
<PAGE> 27
and those have all received "A" ratings from the Health Department under the new
policy. The Company expects that the other two of its Los Angeles County
restaurants will be inspected within the next six months, and that they will
also receive "A" ratings. The Company's Orange County and Pasadena restaurants
have also been inspected recently by the appropriate local health department
authorities and received "no violations observed" ratings, which are comparable
to an "A" rating.
NEGATIVE PUBLICITY FROM PRIVATE DAMAGE CLAIMS. Restaurants such as
those operated by the Company are subject to litigation in the ordinary course
of business, most of which the Company expects to be covered by its general
liability insurance. In 1994, after the Company catered a private function for
cast, crew and guests of the "Frasier" television show, several persons
complained of food poisoning symptoms, and filed claims against the Company. The
Company believes that the claims made against it have no merit, and its
insurance carrier has contested the action. In February 1998, as the case neared
trial, the suit received newspaper and television publicity due to the celebrity
status of the claimants, which may have a negative impact on revenues on the
Company's Southern California restaurants.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE AND MARKET RISK.
Not applicable.
27
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants ............................................................................ 29
Consolidated Balance Sheets as of December 31, 1997 and 1996.................................................. 30
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995................................................................... 31
Consolidated Statements of Equity for the years
ended December 31, 1997, 1996 and 1995................................................................... 32
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995................................................................... 33
Notes to Consolidated Financial Statements.................................................................... 34
</TABLE>
28
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
---------
To the Stockholders
and Board of Directors of
Jerry's Famous Deli, Inc.
We have audited the accompanying consolidated balance sheets of Jerry's Famous
Deli, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Jerry's
Famous Deli, Inc. as of December 31, 1997 and 1996 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 25, 1998
29
<PAGE> 30
JERRY'S FAMOUS DELI, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
---- ----
ASSETS
Currents assets
<S> <C> <C>
Cash and cash equivalents $ 2,264,308 $ 4,145,265
Accounts receivable, net 272,511 347,148
Inventory 525,200 420,819
Prepaid expenses 1,729,687 471,202
Preopening costs 105,318 549,607
Deferred income taxes 63,063 --
Prepaid income taxes 24,605 210,153
----------- -----------
Total current assets 4,984,692 6,144,194
Property and equipment, net 29,835,529 25,694,476
Organization costs 92,143 104,483
Deferred income taxes 725,983 322,056
Goodwill and covenants not to compete 1,757,342 3,868,909
Other assets 581,917 428,867
----------- -----------
Total assets $37,977,606 $36,562,985
=========== ===========
LIABILITIES AND EQUITY
Current liabilities
Accounts payable $ 2,195,980 $ 3,350,099
Accrued expenses 1,426,073 1,641,784
Sales tax payable 402,220 434,379
Current portion of long-term debt 752,063 578,739
Current portion of obligations under capital leases -- 20,722
Deferred income taxes -- 15,699
----------- -----------
Total current liabilities 4,776,336 6,041,422
Long-term debt 7,690,219 5,959,959
Deferred rent 455,129 496,578
----------- -----------
Total liabilities 12,921,684 12,497,959
Minority interest 480,379 440,998
Commitments and contingencies (Note 7)
Equity
Preferred stock Series A , no par, 5,000,000 shares authorized,
10,000 shares issued and outstanding at December 31,1996 -- 9,153,078
Common stock, no par value, 60,000,000 shares authorized, 14,210,155
and 10,838,062 shares issued and outstanding in 1997 and 1996, respectively 23,724,484 14,175,109
Equity 851,059 295,841
----------- -----------
Total equity 24,575,543 23,624,028
----------- -----------
Total liabilities and equity $37,977,606 $36,562,985
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 31
JERRY'S FAMOUS DELI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues $ 56,418,387 $ 40,159,715 $ 28,030,135
Cost of sales 17,507,824 12,480,215 9,167,992
------------ ------------ ------------
Gross profit 38,910,563 27,679,500 18,862,143
Operating expenses
Labor 20,714,670 14,481,675 9,364,437
Occupancy and other 7,402,068 5,059,545 3,799,774
Occupancy -- related party 652,067 409,167 469,936
General and administrative expenses 4,839,537 4,179,939 2,383,597
General and administrative expenses -- related party -- -- 540,106
Depreciation expense 2,999,517 1,708,720 976,553
Amortization expense 871,004 405,457 --
Restaurant concept discontinuation costs -- -- 137,396
------------ ------------ ------------
Total expenses 37,478,863 26,244,503 17,671,799
------------ ------------ ------------
Income from operations 1,431,700 1,434,997 1,190,344
Other income (expense)
Interest income 83,822 148,525 71,758
Interest expense (684,118) (514,118) (182,264)
Other income (expense), net (1,627) 71,939 69,277
------------ ------------ ------------
Income before provision for income taxes and
minority interest 829,777 1,141,343 1,149,115
Provision for income taxes (134,005) (284,184) (187,051)
Minority interest (132,602) (278,446) (179,830)
------------ ------------ ------------
Net income $ 563,170 $ 578,713 $ 782,234
------------ ------------ ------------
Preferred stock:
Cash dividends paid or accrued $ (226,648)
------------
Accounting deemed dividend (5,000,000)
(5,226,648)
------------
Net loss applicable to common stock $ (4,647,935)
------------
Net income (loss) per share:
Net income - Basic $ 0.06
------------
Net income - Diluted $ 0.05
------------
Preferred stock
Cash dividends paid or accrued (0.02)
Accounting deemed dividend (0.48)
------------
$ (0.50)
------------
Net (income) loss per share applicable to common stock - Basic $ 0.04 $ (0.44)
------------ ------------
Net (income) loss per share applicable to common stock - Diluted $ 0.04 $ (0.44)
------------ ------------
Weighted average common shares outstanding - Basic 13,369,998 10,412,062
Weighted average common shares outstanding - Diluted 13,419,095 10,525,521
Pro forma data
Pro forma net income per common share - Basic $ 0.08
------------
Pro forma common shares outstanding - Basic 10,386,250
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 32
JERRY'S FAMOUS DELI, INC.
CONSOLIDATED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
Jerry's Famous Deli, Incorporated
-----------------------------------------------------
Common Stock Preferred Stock
-----------------------------------------------------
Shares Shares
Issued and Issued and
Outstanding Amount Outstanding Amount
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 7,460,000 $10,000 - -
Net income
Noncash distributions to shareholder
Reclassification of deficit due to
termination of sub-S election
Distributions to shareholders
Issuance of common stock for services
rendered 40,000 130,000
Private sale of common stock, net 931,250 3,288,952
Initial public offering of stock, net 1,955,000 9,235,800
Contributed stock of merged entities
Contribution of general partner's
interest
---------- ---------- --------- ----------
Balance, December 31, 1995 10,386,250 12,664,752 - -
Net income
Issuance of preferred stock 12,000 10,992,694
Preferred stock converted to common stock 516,812 1,839,616 (2,000) (1,839,616)
Purchase and retirement of Company's common stock (65,000) (329,259)
Purchase of limited partners' interest
Distributions to preferred shareholders
---------- ---------- --------- ----------
Balance, December 31, 1996 10,838,062 14,175,109 10,000 9,153,078
Net income
Common stock issued on exercise of warrants 65,000 65,000
Preferred stock converted to common stock 3,139,593 9,153,078 (10,000) (9,153,078)
Purchase and retirement of Company's common stock (32,500) (103,203)
Common shares issued for consulting services 200,000 434,500
---------- ---------- --------- ----------
Balance, December 31, 1997 14,210,155 23,724,484 - -
---------- ---------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
Jerry's Famous Pizza
Common Stock JFD-Encino
----------------------
Shares Contributed Retained Partners'
Issued and Capital Earnings Capital
Outstanding Amount (Deficit) (Deficit) Total
---------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 70,000 $70,000 $ - $257,570 $(190,529) $147,041
Net income 737,277 44,957 782,234
Noncash distributions to shareholder (795,054) (795,054)
Reclassification of deficit due to
termination of sub-S election (537,484) 537,484 -
Distributions to shareholders (26,137) (26,137)
Issuance of common stock for services
rendered 130,000
Private sale of common stock, net 3,288,952
Initial public offering of stock, net 9,235,800
Contributed stock of merged entities (70,000) (70,000) 70,000 -
Contribution of general partner's
interest (213,277) 44,957 171,709 3,389
--------- --------- --------- ---------- ---------- ----------
Balance, December 31, 1995 - - (680,761) 782,234 - 12,766,225
Net income 578,713 - 578,713
Issuance of preferred stock - - 10,992,694
Preferred stock converted to common stock - - -
Purchase and retirement of Company's common stock (329,259)
Purchase of limited partners' interest (157,696) - - (157,696)
Distributions to preferred shareholders (226,649) (226,649)
--------- --------- --------- ---------- ---------- ----------
Balance, December 31, 1996 - - (838,457) 1,134,298 - 23,624,028
Net income 563,170 - 563,170
Common stock issued on exercise of warrants 65,000
Preferred stock converted to common stock (7,952) - - (7,952)
Purchase and retirement of Company's common stock (103,203)
Common shares issued for consulting services 434,500
--------- --------- --------- ---------- ---------- ----------
Balance, December 31, 1997 - - (846,409) 1,697,468 - 24,575,543
--------- --------- --------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
32
<PAGE> 33
JERRY'S FAMOUS DELI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 563,170 $ 578,713 $ 782,234
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation 2,999,517 1,708,720 976,553
Amortization 871,004 405,457
(Gain) loss on sale of assets (2,756) 4,106 149,164
Minority interest 132,602 278,446 179,830
Deferred income taxes (63,063) (158,360) (147,997)
Shares issued for services provided -- -- 17,500
Changes in assets and liabilities
Accounts receivable -- related party -- 16,020 (1,860)
Accounts receivable 74,637 (131,223) (73,002)
Inventory (104,381) (227,437) (6,854)
Prepaid expenses (808,485) (248,552) (32,529)
Preopening costs (148,011) (737,041) 8,569
Other assets (157,847) (206,089) (15,793)
Organization costs -- (50,478) (22,286)
Accounts payable (1,154,119) 1,487,112 (1,178,360)
Accrued expenses (215,711) 884,787 (559,338)
Sales tax payable (32,159) 202,329 (5,202)
Deferred rent and prepaid income taxes (275,527) (369,134) 70,712
----------- ------------ ------------
Total adjustments 1,115,701 2,858,663 (640,893)
----------- ------------ ------------
Net cash provided by operating activities 1,678,871 3,437,376 141,341
----------- ------------ ------------
Cash flows from investing activities:
Acquisitions of restaurants -- (7,722,964) --
Additions to equipment (2,413,169) (4,547,960) (928,779)
Additions to improvements--land, building and leasehold (2,958,726) (8,472,807) --
Deductions (additions) to construction-in-progress 115,602 3,720,918 (3,213,629)
Purchase of land -- (2,642) (883,032)
Purchase of building and related purchase option payments -- (744,137) (12,000)
Proceeds from sales of fixed assets 7,000 20,151 24,139
----------- ------------ ------------
Net cash used in investing activities (5,249,293) (17,749,441) (5,013,301)
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net -- 10,992,694 --
Borrowings from credit facility -- 1,080,525 3,044,475
Payments on credit facility -- (1,385,000) (1,845,000)
Borrowings on long-term debt 2,500,000 2,500,000 30,000
Payments on long-term debt (634,937) (118,428) (1,488,232)
Payments and advances to related parties, net -- (1,154,036) (375,145)
Capital lease payments (20,722) (43,140) (43,734)
Distribution paid to shareholder -- -- (26,137)
Dividends paid to minority shareholders (93,221) (100,660) (104,532)
Dividends paid to preferred stock shareholders -- (42,082) --
Proceeds from exercise of 65,000 warrants, net of related costs 57,048 -- --
Registration costs of the Company's common stock (15,500) -- --
Purchase of Company's common stock (103,203) (329,259) --
Purchase of limited partner interest -- (157,696) --
Proceeds from common stock issuance, net -- -- 12,604,252
----------- ------------ ------------
Net cash provided by financing activities 1,689,465 11,242,918 11,795,947
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,880,957) (3,069,147) 6,923,987
Cash and cash equivalents, beginning of year 4,145,265 7,214,412 290,425
----------- ------------ ------------
Cash and cash equivalents, end of year $ 2,264,308 $ 4,145,265 $ 7,214,412
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 34
JERRY'S FAMOUS DELI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
The accompanying financial statements are comprised of the consolidated
financial statements ("consolidated statements") which consist of Jerry's Famous
Deli, Incorporated ("JFD--Inc."), a California corporation; JFD--Encino
("JFD--Encino"), a California limited partnership; and Pizza By The Pound, dba
Jerry's Famous Pizza ("Jerry's Famous Pizza"), a California corporation.
JFD--Inc., JFD--Encino and Jerry's Famous Pizza operate or operated family
oriented, full-service restaurants. These entities are collectively referred to
as "Jerry's Famous Deli, Inc." or the "Company."
JFD--Inc. includes nine Southern California restaurant locations:
Studio City (established in 1978), Encino (established in 1989), Marina del Rey
(established in 1991), West Hollywood (established in 1994), Pasadena
(established in February 1996), Westwood (established in June 1996), Sherman
Oaks, Woodland Hills (purchased in July 1996) and Costa Mesa (established in
August 1997). JFD-Inc. also includes one Florida location in Miami called The
Rascal House (purchased in September 1996).
From its inception on April 15, 1981 and through December 31, 1994, Mr.
Isaac Starkman owned Jerry's Famous Deli, L.A., Inc. ("JFDLA"), the co-general
partner of JFD--Encino. On January 12, 1995, Mr. Starkman contributed the shares
of JFDLA to JFD--Inc. for no additional consideration. JFDLA owns 80% of the
general partner interest which represents a 20% interest in JFD--Encino. The
general partners receive a management fee equal to 3% of the gross revenues of
the Encino restaurant. The general partners are also allocated 25% of net
profits, net gains and distributions of JFD--Encino until such time as the
limited partners have received cash distributions equal to 100% of their
contributed capital plus an amount equal to 10% per annum of their capital
contribution (the "Preferred Return"). After the limited partners have received
repayment of their initial capital contribution, the general partners will be
allocated 65% of net profits, net gains and distributions. The other co-general
Partner is Valley Deli, Inc., an unrelated California corporation.
JFD--Encino has been presented on a consolidated basis due to the
operating and financial control of JFDLA, which as the co-general partner has
the ability to exert day to day control over the operations. A tender offer by
JFDLA to purchase the interests of the limited partners resulted in the May 1,
1996 purchase of one limited partner's share from Isaac Starkman, who is also
the Chief Executive Officer and the beneficial controlling shareholder of the
Company, for approximately $158,000. This resulted in a change in minority
interest to 72.45% from 80.00%.
Jerry's Famous Pizza, which operated a 2,300 square foot pizza
restaurant in Sherman Oaks, California, was owned by Mr. Starkman and an
employee of that company. Mr. Starkman owned 50% of Jerry's Famous Pizza and had
the ability to exert control over the operations. On January 12, 1995, Mr.
Starkman and the employee contributed all of the stock of Jerry's Famous Pizza
to JFD -- Inc. for no additional consideration to Mr. Starkman and $100 to the
employee. Jerry's Famous Pizza ceased operations on June 25, 1995.
The Company operates primarily in the restaurant business, exclusively
in the United States. All significant intercompany transactions and balances
have been eliminated.
Reclassifications
Certain amounts in the previously presented consolidated financial
statements have been reclassified to conform with the current period's
presentation.
Significant Accounting Policies
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with an original
maturity of three months or less when purchased and are carried at cost which
approximates fair value.
INVENTORY
Inventory primarily consists of food products and is stated at the
lower of cost (first-in, first-out) or market.
34
<PAGE> 35
PREOPENING COSTS
Capitalized preopening costs include the direct incremental costs
associated with the opening of a new restaurant. These are primarily costs
incurred to develop new restaurant management teams and the food, beverage and
supply costs incurred to perform testing of all equipment, concept systems and
recipes. The amortization period is one year from the restaurant's opening date.
Accumulated amortization at December 31, 1997 and 1996 was approximately
$592,000 and $283,000, respectively. A new accounting standard has recently been
adopted by the American Institute of Certified Public Accountants ("AICPA")
which would require preopening costs to be expensed as incurred for fiscal years
beginning after December 15, 1998.
GOODWILL (EXCESS OF COSTS OVER NET ASSETS ACQUIRED)
The excess of costs over net assets acquired, relating to the purchase
of the Sherman Oaks, Woodland Hills and Rascal House restaurants, is amortized
utilizing the straight-line method over 30 years for the owned Rascal House and
over the lives of the leases for Woodland Hills (15 years) and Sherman Oaks (18
years). The accumulated amortization at December 31, 1997 and 1996 was
approximately $142,000 and $52,000, respectively.
COVENANTS NOT TO COMPETE
Covenants not to compete are amortized utilizing the straight-line
method over the life of the agreement. For the purchase of the Sherman Oaks and
Woodland Hills restaurants, the agreement life is five years and for the
purchase of the Rascal House restaurant, the agreement life is two years.
Accumulated amortization at December 31, 1997 and 1996 was approximately
$240,000 and $68,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Expenditures for normal
maintenance and repairs are charged to operations as incurred; additions,
renewals, and betterments are capitalized. When an item is sold or retired, the
accounts are relieved of both the cost and the related accumulated depreciation
and the resulting gain or loss, if any, is recognized.
Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the related assets or, for leasehold
improvements, over the total of the initial term of the lease and the first
option period, if less. The following are the estimated useful lives:
Land improvements.......................... 15 years
Buildings and improvements................. 30 years
Capital leases -- computers................ 4 years
Computer equipment......................... 3-4 years
Transportation equipment................... 5 years
Fixtures and equipment..................... 4-5 years
Leasehold improvements..................... 4-20 years
ORGANIZATION COSTS
Capitalized organization costs are amortized on a straight-line basis
over five years. Accumulated amortization at December 31, 1997 and 1996 was
approximately $31,000 and $29,000, respectively.
INCOME TAXES
Prior to January 11, 1995, the Company and its shareholder elected to
be taxed under Section 1361 of the Internal Revenue Code as an S corporation.
Under these provisions, the Company did not pay federal corporate income taxes
on its taxable income. Instead, the principal shareholder was individually
liable for federal income taxes based on the Company's taxable income. This
election was also valid for state income tax reporting. On January 10, 1995, the
Company's status as an S corporation terminated, resulting in the Company
becoming a C corporation on January 11, 1995.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes."
SFAS No. 109 prescribes the use of the liability method to compute the
differences between the tax bases of assets and liabilities and related
financial reporting amounts using currently enacted future tax laws and rates.
Under SFAS No. 109 the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
DEFERRED RENT
Deferred rent represent the excess of rent expense charged to
operations as compared to the actual cash payments made since inception of the
lease, which include increases over the term of the agreements. These credits
will be recognized on a straight-line basis over the lives of the leases.
35
<PAGE> 36
MINORITY INTEREST
Minority interest represents the limited partners' and the other
general partner's interests in the Encino restaurant, not owned directly or
indirectly by the Company. For 1997, the minority interest represents the
limited partners' 67.45% share and the other co-general partner's 5% share of
net income or loss and equity. For May 1, 1996 to December 31, 1996, the
minority interest represents the limited partners' 67.45% share and the other
co-general partner's 5% share of net income or loss and equity. For January 1,
1996 to April 30, 1996, the minority interest represents the limited partners'
75% share and the other co-general partner's 5% share of net income or loss and
equity.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 1997, 1996 and 1995 was approximately $135,000,
$189,000 and $129,000, respectively.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash, investments in money
market accounts and trade receivables. At times, cash balances may be in excess
of FDIC insurance limits. In addition, money market accounts at times maintained
balances which were in excess of insured limits. The concentrations of credit
risk for trade receivables may be affected by changes in economic or other
conditions affecting Southern California and Southern Florida. However,
management believes that receivables are well diversified and the allowances for
doubtful accounts are sufficient to absorb estimated losses.
FINANCIAL INSTRUMENTS
Fair values were estimated based on quoted market prices, where
available, or on current rates offered to the Company for debt with similar
terms and maturities. At December 31, 1997 and 1996, the fair value of the
Company's financial instruments approximates carrying value.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued two statements -- SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information ",
which are effective for the Company in fiscal year 1998. In addition, in
February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure About
Pensions and Other Postretirement Benefits" which will also be effective for the
Company in fiscal year 1998. Presently these standards have no impact on the
Company's consolidated financial statements.
In April 1997, the Accounting Standards Executive Committee of the
AICPA issued a draft Statement of Position ("SOP") entitled "Reporting on the
Costs of Start-Up Activities." The proposed SOP would require entities to
expense as incurred all start-up and preopening costs that are not otherwise
capitalizable as long-lived assets. In March 1998, the FASB cleared the SOP for
final issuance, subject to certain changes. The Company believes the final SOP
will be issued during the second quarter of fiscal year 1998 and will be
effective for fiscal years beginning after December 15, 1998. Restatement of
previously issued financial statements is not permitted by the draft SOP, and
entities are not permitted to report the pro forma effects of the retroactive
application of the new accounting standard.
The Company's adoption of the new accounting standard proposed by the
SOP will involve the recognition of the cumulative effect of the change in
accounting principle required by the SOP as a one-time charge against earnings,
net of any related income tax effect, retroactive to the beginning of the fiscal
year of adoption.
NET INCOME PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
SFAS No. 128 supersedes and simplifies the previous computational guidelines
under Accounting Principles Board Opinion ("APB") No. 15, "Earnings Per Share."
Among other changes, SFAS No. 128 eliminates the presentation of primary EPS and
replaces it with basic EPS for which common stock equivalents are not considered
in the computation. It also revises the computation of diluted EPS.
Basic net income per share is computed by dividing the net income
attributable to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted net income per common share is
computed by dividing the net income attributable to common shareholders by the
weighted average number of
36
<PAGE> 37
common and common share equivalents outstanding during the period. Common share
equivalents included in the diluted computation represent shares issuable upon
assumed exercise of stock options using the treasury stock method. Net income
per share and weighted average shares outstanding for all prior periods have
been restated in accordance with SFAS No. 128.
2. ACQUISITIONS
On July 1, 1996, the Company acquired two delicatessen restaurants
operated under the name "Solley's" and located in Woodland Hills and Sherman
Oaks, California for $2,325,000 cash. The Company purchased certain assets along
with the operations of the restaurants. Also included in the purchase was a
limited five-year covenant not to compete of one of the sellers and former owner
of Solley's Inc.
Also, on September 9, 1996, the Company purchased for $4,934,000 cash
Wolfie Cohen's Rascal House ("Rascal House"), a delicatessen restaurant located
in Miami Beach, Florida. The purchase included the real estate, fixtures and
equipment and other costs associated with the closing. The restaurant continues
to operate under the same name.
Both acquisitions were accounted for using the purchase method of
accounting. Accordingly, portions of the purchase prices were allocated to the
net assets acquired based on their estimated fair values with the balances of
the purchase prices, approximately $3,406,000, recorded as excess of cost over
net assets acquired and amortized on a straight-line basis over 30 years for
Rascal House and over the remaining lives of their leases for Woodland Hills (15
years) and Sherman Oaks (18 years).
Subsequent to the Rascal House acquisition and upon completion (in May
1997) of the related appraisal of the land and building, a purchase price
reallocation was recorded. The purchase price reallocation resulted in an
increase of $1,950,000 to the value of the land and a decrease of $100,000 to
the value of the building, with a corresponding decrease of $1,850,000 to
goodwill. The cumulative financial statement impact of the purchase price
reallocation was reflected in the 1997 third quarter resulting in a decrease in
depreciation and amortization expense of approximately $30,000.
The following summarized, unaudited pro forma results of operations for
the years ended December 31, 1996 and 1995 assume the acquisition of Solley's
and Rascal House occurred as of the beginning of the respective periods:
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------- -----------------
(in thousands, except per common share data)
<S> <C> <C>
Revenues $ 47,952 $ 43,265
Net income $ 731 $ 1,219
Net income per common share - Basic $ 0.06 $ 0.12
</TABLE>
3. STOCK OFFERINGS AND EQUITY
Common Stock
On January 11, 1995, the Company terminated its election to be taxed as
a subchapter S corporation and became a C corporation. As a result of the
termination of the subchapter S corporation election, the accumulated deficit on
that date of $537,000 was reclassified as required by accounting rules which
resulted in a deficit in contributed capital. The sole shareholder was
responsible for the Company's federal income tax liability based on earnings for
the first ten days of 1995 prior to termination of this election. The Company
was taxed as a C corporation for the remainder of 1995.
In March 1995, the Company and the shareholder completed a private
placement, issuing 1,056,250 shares of common stock, at a price of $4.00 per
share. From the above 1,056,250 shares of common stock, the shareholder sold
125,000 shares. The net proceeds to the Company of $3,289,000 (net of issuance
costs of $436,000) were used to pay down certain debt and current operating
liabilities.
On October 20, 1995, an initial public offering of common stock of the
Company (the "common stock") was completed. Of the shares of common stock
offered thereby, 1,700,000 shares were sold by the Company and 400,000 shares
were sold by the The Starkman Family Trust (the "Selling Shareholder"). An
additional 1,096,250 shares of common stock owned by certain non-affiliated
shareholders (the "Non-Affiliated Selling Security Holders") and one independent
director of the Company (the "Selling Director") were concurrently registered
with the above referenced shares offered by the Company and the Selling
Shareholder, but not through the underwriters, and were also eligible for sale
following the offering.
37
<PAGE> 38
The 1,700,000 shares of common stock sold by the Company generated
approximately $8,030,000 in proceeds, net of underwriting commissions and other
related expenses of approximately $2,170,000. The Company did not receive any of
the proceeds from the Selling Shareholder, Selling Director or Non-Affiliated
Selling Security Holder shares.
On November 17, 1995, the underwriters exercised in full the
over-allotment option to purchase up to an additional aggregate of 255,000
shares from the Company and an additional aggregate of 60,000 shares from the
Selling Shareholder. The over-allotment shares sold by the Company generated
approximately $1,206,000 in proceeds, net of underwriting commissions and other
related expenses of approximately $324,000. The Company did not receive any of
the proceeds from the Selling Shareholder shares. Also, the underwriters have
not exercised their warrant for the Company to issue and sell an additional
170,000 shares of common stock at the exercise price of $7.80 per share.
The Company has used the proceeds from the public offering primarily to
pay off certain indebtedness and for certain improvements and equipment for
additional restaurant sites.
The Company is authorized to issue 60,000,000 shares of Common Stock.
The holders of common stock are entitled to cast one vote for each share held of
record on all matters presented to shareholders, other than with respect to the
election of directors, for which cumulative voting is currently required under
certain circumstances by applicable provisions of California law. The effect of
cumulative voting is that the holders of a majority of the outstanding shares of
common stock may not be able to elect all of the Company's directors.
In December 1996, 516,812 shares of common stock were issued upon
conversion of 2,000 shares of preferred stock. From December 13 through December
20, 1996, the Company purchased and subsequently retired 65,000 shares of its
own stock for market prices ranging from $4.52 to $5.38 per share.
In March 1997, 3,139,593 shares of common stock were issued upon
conversion of 10,000 shares of preferred stock. In April 1997, the Company
purchased and subsequently retired 32,500 shares of its own stock for market
prices ranging from $3.06 to $3.56 per share.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock.
The Company's Board of Directors is authorized to issue the preferred stock in
one or more series and, with respect to each series, to determine the
preferences and rights and the qualifications, limitations or restrictions
thereof, including the dividends rights, conversion rights, voting rights,
redemption rights and terms, liquidation preferences, sinking fund provisions,
the number of shares constituting the series and the designation of such series.
On August 22, 1996, the Company entered into an agreement with Waterton
Management LLC ("Waterton") for the purpose of raising additional capital to
support further growth. Under the agreement with Waterton, the Company granted
Waterton an option, subject to certain conditions, to purchase, directly or
through one or more of its affiliates, a maximum of 19,000 Series A Preferred
Shares of the Company ("Series A Preferred Shares") at a purchase price of
$1,000 per share and a maximum 205,833 common stock purchase warrants (the
"Warrants") for nominal consideration. The Company completed the sale to Yucaipa
Waterton Deli Investors, LLC ("Yucaipa") of 6,000 Series A Preferred Shares and
a Warrant for 65,000 shares on August 30,1996, resulting in net proceeds of
approximately $5,537,000. On November 8, 1996, Waterton designated Jerry's
Investors, LLC ("JILLC") to exercise its right to purchase an additional 6,000
Preferred Shares and a warrant for 65,000 shares of common stock (as to which
JILLC designated Waterton as holder), resulting in net proceeds of approximately
$5,455,000. A substantial majority of the proceeds of the sale of Series A
Preferred Shares was used for the acquisition of "Wolfie Cohen's Rascal House,"
and to renovate the Woodland Hills and Costa Mesa restaurant properties.
Each Series A Preferred Share had a right to dividends of $80.00 per
share per year, payable quarterly in arrears, in cash or shares of common stock.
Each Series A Preferred Share has a liquidation preference of $1,000 per share,
and is convertible at the option of the holder, at any time commencing ninety
days following the initial issuance of shares, or is automatically converted on
August 30, 1999, into common stock, at a conversion price equal to a 17%
discount from the average market price of the common stock for the five days
preceding the conversion, provided that the maximum conversion price is $6.00
per share and the minimum conversion price is $3.00 per share. The holders of
Series A Preferred Shares had no voting rights except as required by law.
However, the Company agreed to seek, and ultimately did obtain approval from
Nasdaq to issue a new class of Series B Preferred Shares, into which the Series
A Preferred Shares were converted in January 1997. The Series B Preferred Shares
are substantially identical to the Series A Preferred Shares, except that each
Series B Preferred Share has voting rights equal to 109 shares of common stock.
The Warrants are exercisable at any time for a period of three years from
issuance at an exercise price of $1.00 per share.
In December 1996, Yucaipa converted 2,000 shares at a conversion price
of $3.87 per share into 516,812 shares of common stock.
On March 27, 1997, the holders of the Series B Preferred Shares
converted all remaining 10,000 shares outstanding to 3,139,593 shares of common
stock at a conversion price of approximately $3.19 per share.
38
<PAGE> 39
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation
The Company has adopted the disclosure-only provision of SFAS No. 123
and will continue to use the intrinsic value based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, since options were granted with an
option price equal to the grant date market value of the Company's common stock,
no compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plans been determined based on
the fair value of the option at the grant dates in 1996 and 1995 consistent with
the provisions of SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts provided below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income, as reported .......................... $ 563,170 $ 578,713
Net income, pro forma ............................ 60,922 23,320
Net income per share - basic, as reported ........ -- 0.06
Net income per share - basic, pro forma .......... -- 0.00
Net income per share - diluted, as reported ...... -- 0.05
Net income per share - diluted, pro forma ........ -- 0.00
Net income applicable to common stock, as reported 563,170 (4,647,935)
Net income applicable to common stock, pro forma . 60,922 (5,203,328)
Net income per common share - basic, as reported . 0.04 (0.44)
Net income per common share - basic, pro forma ... 0.00 (0.50)
Net income per common share - diluted, as reported 0.04 (0.44)
Net income per common share - diluted, pro forma . 0.00 (0.50)
</TABLE>
The fair value of each option grant issued in 1997 and 1996 is
estimated at the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions: (a) exercise prices were equal to
the fair market value on the grant date or the day before; (b) a risk-free
interest rate based on US Zero Coupon Bonds; (c) no dividend yield on the
Company's stock; (d) expected option lives vary from four to ten years; and (e)
an expected volatility of 83.27% and 65.01%, respectively, of the Company's
stock.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Land improvements .............................. $ 59,508 $ 24,877
Buildings and improvements ..................... 6,984,415 6,847,607
Leasehold improvements ......................... 13,343,547 10,642,517
Fixtures and equipment ......................... 11,754,738 9,421,063
Transportation equipment ....................... 91,655 47,480
Capital leases --- computers ................... -- 213,749
------------ ------------
32,233,863 27,197,293
Less: Accumulated depreciation and amortization (8,542,556) (5,811,941)
Land ........................................... 5,925,089 3,974,389
Construction-in-progress ....................... 219,133 334,735
------------ ------------
$ 29,835,529 $ 25,694,476
============ ============
</TABLE>
The Company capitalized interest expense related to the construction of
its restaurant locations in Pasadena, Westwood, West Hollywood and Costa Mesa
totaling approximately $4,000 and $20,000 for the years ended December 31, 1997
and 1996, respectively.
39
<PAGE> 40
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Note payable to a bank; collateralized by the Pasadena
property; interest rate at bank's reference rate plus
1.5%, (minimum rate
is 10%), 10% at December 31, 1997; due April 1998 $ 775,000 $ 895,000
Note payable to a bank; collateralized by machinery, equipment,
inventory and receivables; interest rate at bank's
reference rate
plus 1.5%; 9.75% at December 31, 1997; due March 2002 1,931,815 2,386,363
Note payable to a bank; collateralized by real property;
interest rate at the LIBOR rate plus 2.5%, 8.46% at
December 31, 1997, due August 2004 2,444,444 --
Note collateralized by transportation vehicles and guaranteed by the
principal shareholder; interest rate at 9%; due September 1998 3,143 7,335
Notes collateralized by transportation vehicles, interest rate 37,880 --
at 5.9%, due November 2002
Notes collateralized by real property; monthly interest payments at
interest rate of 9%; principal due March 2001
3,250,000 3,250,000
---------- ----------
8,442,282 6,538,698
Less: current maturities 752,063 578,739
---------- ----------
Total long-term debt $7,690,219 $5,959,959
========== ==========
</TABLE>
Of the Company's aggregate $2,800,000 revolving line of credit from
Bank of America available at December 31, 1995, $2,500,000 was converted in
September 1996 to a term loan and the remaining $300,000 was paid off in August
1996. Currently, the Company has a $965,000 revolving line of credit with United
Mizrahi Bank. There are no restrictions on the use of funds drawn on this line
and at December 31, 1997, there was no outstanding balance.
The Company entered into a $4,000,000 line of credit agreement with
Bank Leumi USA in October 1997. There are no restrictions on the use of the
funds drawn on this line and at December 31, 1997, there was no outstanding
balance.
The Company also entered into a $2,000,000 line of credit agreement
with Bank of America in October 1997. There was no outstanding balance at
December 31, 1997.
The following are future maturities of long-term debt for each of the remaining
five years ending December 31 and in total thereafter:
<TABLE>
<S> <C>
1998 ......... $ 752,063
1999 ......... 748,919
2000 ......... 1,163,919
2001 ......... 3,878,919
2002 ......... 287,352
Thereafter ... 1,611,110
----------
Total $8,442,282
==========
</TABLE>
The term loans require the Company to maintain certain financial
covenants, the most restrictive including the maintenance of (a) a minimum
tangible net worth, (b) a maximum ratio of total liabilities not subordinated to
tangible net worth, and (c) a minimum debt service coverage ratio.
40
<PAGE> 41
6. CAPITAL LEASES
The Company leased certain computer equipment under non-cancelable
capital lease arrangements which expired in December 1997. The Company purchased
the equipment at an agreed upon price which equaled the fair market value at the
end of the relevant leases, whereby payments totaling $3,834, including
interest, were due monthly. Certain of these leases were guaranteed by the
principal shareholder. The obligations under capital leases had interest rates
ranging from 5.5% to 8.1% and matured at various dates through 1997.
Depreciation charged to expense on this equipment was approximately $18,000,
$38,000 and $52,000 for the fiscal years 1997, 1996 and 1995, respectively.
7. COMMITMENTS AND CONTINGENCIES
The Company leases seven of its facilities and its corporate offices
under non-cancelable operating leases, of which certain leases are guaranteed by
the principal shareholder. Rental expense for the fiscal years 1997, 1996 and
1995 was $2,671,479, $1,954,837 and $1,623,641, respectively. Certain leases
contain fixed escalation clauses and rent under these leases is charged ratably
over the term of the lease. A number of leases also provide for percentage rent
on sales above a specified minimum. The following are the future minimum base
rental payments under operating leases for each of the next five years ending
December 31 and in total thereafter:
<TABLE>
<S> <C>
1998 .......... $ 2,478,363
1999 .......... 2,470,263
2000 .......... 2,432,671
2001 .......... 2,447,063
2002 .......... 2,456,963
Thereafter .... 9,263,737
-----------
Total $21,549,060
===========
</TABLE>
Rental payments made to related parties for the years ended December
31, 1997, 1996 and 1995 were approximately $652,000, $604,000 and $470,000,
respectively. At December 31, 1997, the Company had future minimum payments due
to related parties of $2,941,000.
The Company has four operating leases which contain provision for
specified annual increases. Rent expense for these locations has been calculated
on a straight-line basis over the term of the leases. A deferred credit has been
established at December 31, 1997 and 1996 for the difference between the amount
charged to expense and the amount paid. The deferred credit will be amortized on
a straight-line basis over the lives of the leases.
The Company is a defendant in a number of cases currently in
litigation, which are being vigorously defended. Based upon current information,
management, after consultation with legal counsel defending the Company's
interests in the cases, believes the ultimate disposition thereof will have no
material effect upon either the Company's results of operations or the
consolidated financial position.
8. INCOME TAXES
The significant components of income tax provision (benefit)
attributable to operations are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Federal:
<S> <C> <C> <C>
Current tax provision $ 503,551 $ 325,429 $ 248,000
Deferred tax benefit
(443,431) (120,292) (120,587)
--------- --------- ---------
60,120 205,137 127,413
State:
Current tax provision 113,143 117,115 87,049
Deferred tax benefit (39,258) (38,068) (27,411)
--------- --------- ---------
73,885 79,047 59,638
--------- --------- ---------
Total ...... $ 134,005 $ 284,184 $ 187,051
========= ========= =========
</TABLE>
Upon termination of the subchapter S election on January 11, 1995,
deferred income taxes became an asset of the Company and was recorded in the
balance sheet with a corresponding credit to the Consolidated Statement of
Operations. The estimated deferred tax asset, principally resulting from
temporary differences in the recognition of
41
<PAGE> 42
depreciation expense for financial statement and tax reporting purposes as of
January 11, 1995, was approximately $241,000.
The effects of temporary differences and other items that give rise to
deferred tax assets and deferred tax liabilities as of December 31, 1997 and
1996, respectively, are comprised of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
Current deferred tax assets
<S> <C> <C>
State tax current year provision ....................... $ 36,613 $ 1,492
Accounts receivable .................................... 3,652 3.692
Vacation accrual ....................................... 26,477 14,146
Accrued compensation ................................... -- 208,006
Accrued workers' compensation and other ................ 113,526 --
Deferred tax liabilities ...................... (117,205) (243,035)
--------- ---------
Current deferred tax assets (liabilities), net $ 63,063 $ (15,699)
========= =========
Non-current deferred tax assets
Property and Equipment ................................. 411,019 388,133
Intangible assets ...................................... 70,102 --
FICA Tip Credit ........................................ 278,617 --
Deferred tax liabilities ...................... (33,755) (66,077)
--------- ---------
Non-current deferred tax assets, net .......... $ 725,983 $ 322,056
========= =========
</TABLE>
The balance of the deferred tax assets should be realized through
future operating results, the reversal of taxable temporary differences and tax
planning strategies.
The provision for income taxes at the Company's effective rate differed
from the provision for income taxes at the statutory rate as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal income tax expense at the statutory rate $ 237,040 $ 293,385 $ 329,557
State income taxes, net
of federal income tax benefit ............ 48,764 52,171 57,452
Effect of subchapter S tax status .............. -- -- --
Tax rate change from S corp to C corp status ... -- -- (147,997)
FICA credit .................................... (150,801) (61,849) (42,206)
Permanent differences .......................... 2,930 477 3,898
Other .......................................... (3,928) -- (13,653)
--------- --------- ---------
Provision for income taxes ..................... $ 134,005 $ 284,184 $ 187,051
========= ========= =========
</TABLE>
9. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- --------
Supplemental cash flow information:
Cash paid for:
<S> <C> <C> <C>
Interest ........................................................ $ 650,580 $ 489,734 $177,373
Income taxes .................................................... $ 432,500 $ 732,603 $256,300
Supplemental information on noncash investing and financing activities:
Preferred Stock converted into common stock ..................... $9,153,000 -- --
Building purchase under a collateralized note ................... -- $3,250,000 --
Increase in loan payable -- related party as a result of
distributions ............................................. -- -- $795,054
Increase in deferred costs capitalized to construction-in-
progress or leasehold improvements ........................ $ 57,031 $ 82,537
Issuance of common stock for services rendered .................. -- $130,000
Issuance of 200,000 common shares in connection
with a consulting agreement ............................... $ 450,000 -- --
Reallocation of purchase price on Florida ....................... $1,950,000 -- --
property and land
</TABLE>
42
<PAGE> 43
<TABLE>
<S> <C> <C>
Write-off of fully depreciated capital leases, equipment
and leasehold improvements ......................... $268,000 -- --
Accrual of preferred stock dividends ................... $ -- $184,566 --
Lease options paid in 1995 and exercised in 1996
in conjunction with purchase of restaurant .......... $ -- $ 55,000 --
</TABLE>
10. STOCK OPTION PLAN
On June 28, 1995, the shareholders of the Company adopted the Company's
1995 Stock Option Plan (the "Plan"). The Plan is designed to attract, retain and
reward managerial and other key employees and non-employee directors and
strengthen the mutuality of interests between the Plan's participants and the
Company's stockholders. Stock options generally are granted at an exercise price
equal to the fair market value of the shares on the date of grant and are
exercisable at the rate of one-third per year beginning one year from the date
of grant. Stock options generally expire ten years from the date of grant. From
October 20, 1995 through December 31, 1997, incentive stock option grants under
the Plan, to acquire 639,900 shares, were made to certain officers, directors
and key employees at exercise prices ranging from $2.28 to $8.00 per option. In
January 1997, the Company under its stock option plan canceled 173,500 options
previously issued at $9.00 and $8.50 per share and reissued replacement options
exercisable at $4.50 and $4.95 per share. All these options were outstanding at
December 31, 1997 and 280,568 were exercisable.
The Plan also provides for the grant of stock options to non-employee
directors of the Company without any action on the part of the Board or the
Board Committee. Each non-employee director shall automatically receive
non-qualified options to acquire 5,000 shares of common stock upon appointment
and shall receive options to acquire an additional 2,000 shares of common stock
for each additional year that such director continues to serve on the Board of
Directors. Each option becomes 50% exercisable on each of the first and second
anniversary dates of the grant and expires ten years from the date of the grant.
Accordingly, on October 20, 1995, options for 5,000 shares were granted to each
of the Company's two non-employee directors at an exercise price of $6.00 per
share. Furthermore, on May 27, 1997, an additional 2,000 options were granted to
these directors at an exercise price of $2.50 per share. All these options were
outstanding at December 31, 1997 and 10,000 options were exercisable.
<TABLE>
<CAPTION>
Shares Under Option Shares Exercise Price
------------------- ------ --------------
<S> <C> <C>
Outstanding at
December 31, 1994 -- --
Granted 407,000 $6.00 - $6.60
Exercised
Terminated
Outstanding at
December 31, 1995 407,000 $6.00 - $6.60
-------
Granted 242,700 $4.69 - $9.00
Exercised
Terminated
Outstanding at
December 31, 1996 649,700 $4.69 - $9.00
-------
Granted 375,200 $2.28 - $4.95
Exercised
Terminated 191,000 $6.00 - $9.00
Outstanding at
December 31, 1997 833,900 $2.28 - $8.00
-------
</TABLE>
11. RELATED-PARTY TRANSACTIONS
During 1995 and 1994 the principal shareholder's family partnership,
the Starkman Family Partnership, ("family partnership") purchased properties in
Westwood, California for the construction of a new restaurant. The Company has
been paying lease payments of approximately $35,000 per month in 1997 and 1996,
respectively, to the family partnership. The Company has a two-year option to
purchase the Westwood properties at the then current fair market value and a
seven-year right of first refusal on either or both of these properties.
The Company pays monthly rental payments in the amount of $16,000 to
the family partnership for use of three properties adjacent to the West
Hollywood restaurant. Two of these properties are used as parking lots and the
third property has additional parking and a building used as a private bar and
lounge.
43
<PAGE> 44
On March 28, 1997, the Company announced that Kenneth Abdalla had
assumed the office of President on an interim basis with the specific objective
of assisting in the execution of the Company's acquisition and expansion
strategy. In connection therewith, the Company entered into a consulting
agreement with Kenneth Abdalla and a company affiliated with him for services to
be provided to the Company through December 1998 in consideration for 200,000
shares of common stock to Kenneth Abdalla and $600,000 to his affiliated company
12. RESTAURANT CONCEPT DISCONTINUATION COSTS
During fiscal 1995 the Company incurred $137,000 of costs related to
the discontinuation of the Jerry's Famous Pizza concept and restaurant.
Abandonment of leasehold improvements, abandonment of fixtures and equipment and
leasehold termination costs and other related costs accounted for approximately
$96,000, $34,000 and $7,000, respectively, of this amount. The operating loss up
to the close of business on June 25, 1995, totaled approximately $259,000.
Included in 1995 total revenues in the Consolidated Statements of Operations are
sales of $236,000 from Jerry's Famous Pizza. Operating losses of approximately
$162,000 and $178,000 are included in the Company's operating income for fiscal
years 1994 and 1993, respectively.
13. PRO FORMA DATA (UNAUDITED)
Pro forma net income per common share for 1995 was calculated using net
income and based on, as if, 10,386,250 shares of common stock were outstanding
for all of the fiscal year. The pro forma shares outstanding are based on (i)
7,460,000 shares outstanding for the Company at December 31, 1994, (ii) 40,000
shares issued on January 9, 1995, per the terms of a consulting agreement, (iii)
931,250 shares sold through a private placement which was completed in March
1995 and (iv) an additional 1,955,000 shares sold through an initial public
offering in October 1995.
14. SUBSEQUENT EVENTS
In December 1997, the Company entered into an agreement to purchase The
Epicure Market of Miami Beach, Florida, a family-owned gourmet food store which
has been in operation over 50 years. The total purchase price for the business
is $7.1 million in cash and 934,509 shares of the Company's common stock.
Concurrently with the purchase, the Company entered into a 20-year term lease
agreement with additional options to renew with affiliates of the seller and
five-year term employment agreements with the two family members who, together
with their family, have managed the market for over 50 years. The company plans
to increase the interior sales area of the market, install seating for in-house
dining, increase store operating hours, and expand into delivery, catering and
home meal replacement. The acquisition is scheduled to close in April 1998,
subject to due diligence and other requirements of the purchase agreement.
On, January 21, 1998, the Company entered into an agreement to acquire
a long-term ground lease on an 11,000 square foot restaurant property located in
Boca Raton, Florida. The acquisition closed on February 18, 1998. Under the
agreement, the Company acquired the restaurant equipment and other personal
property located on the premises, and the seller's liquor license for the
restaurant, for a total purchase price of approximately $1.8 million. The
Company has closed the restaurant until approximately June 1998 for
refurbishment and conversion to a Rascal House restaurant.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected, summarized quarterly financial data for the four quarters of
fiscal years 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 (in thousands, except per share data) First Second Third Fourth
- ------------ ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $14,812 $13,026 $13,797 $ 14,784
Gross Profit 10,433 8,991 9,394 10,087
Net Income 406 154 104 (101)
Net Income (Loss) Per Share -
Basic $ 0.04 $ 0.01 $ 0.00 $ (0.01)
Net Income (Loss) Per Share -
Diluted $ 0.04 $ 0.01 $ 0.00 $ (0.01)
</TABLE>
44
<PAGE> 45
<TABLE>
<CAPTION>
1996 (in thousands, except per share data) First Second Third Fourth
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 7,735 $ 8,001 $ 10,923 $ 13,501
Gross Profit 5,388 5,465 7,514 9,312
Net Income 320 91 9 159
Net Income per Common Share 320 91 (1,199) (3,860)
Net Income (Loss) Per Share -
Basic $ 0.03 $ 0.01 $ 0.00 $ 0.02
Net Income (Loss) Per Share -
Diluted $ 0.03 $ 0.01 $ 0.00 $ 0.01
Net Income (Loss) Per Common Share-
Basic $ 0.03 $ 0.01 $ (0.11)(1) $ (0.37)
Net Income (Loss) Per Common Share -
Diluted $ 0.03 $ 0.01 $ (0.11)(1) $ (0.37)
</TABLE>
COMMON STOCK DATA
<TABLE>
<CAPTION>
1997 First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Price range:
High $ 5 3/8 $ 3 3/4 $ 4 5/8 $ 4
Low $ 3 3/8 $ 2 1/16 $ 2 1/16 $ 2
1996 First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------------
Price range:
High $ 8 5/8 $ 8 5/8 $ 10 3/8 $ 9 3/8
Low $ 7 7/8 $ 7 $ 5 5/8 $ 4 1/8
</TABLE>
(1) The Company has restated its third quarter net income (loss)
applicable to common shares and net income (loss) per share in
accordance with the recent position of the Securities and Exchange
Commission regarding accounting for Preferred Stock which is
convertible at a discount from market price for common shares. The
Company has reflected an accounting "deemed dividend." This
accounting deemed dividend, which has been reflected in the third and
fourth quarters, is a non-cash, non-recurring accounting entry for
determining income (loss) applicable to common stock and income
(loss) per share.
45
<PAGE> 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors
and compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated herein by reference to the information contained in the Proxy
Statement relating to the Annual Meeting of Shareholders to be held on May 27,
1998 which will be filed with the Securities and Exchange Commission no later
than 120 days after the close of the year ended December 31, 1997. Information
with respect to executive officers is included in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the information contained in the Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 27, 1998, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference to the information contained in the Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 27, 1998, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the information contained in the Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 27, 1998, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) List of Financial Statements
The consolidated financial statements are filed as
Item 8 of Part II of this Form 10-K.
(a)(2) List of Financial Statement Schedules
None.
(a)(3) List of Exhibits
46
<PAGE> 47
Exhibit
Number Description
3.1 Articles of Incorporation, as amended (including Second Amended and
Restated Certificate of Determination of Rights of Series A Preferred
Shares and Certificate of Determination of Rights of Series B Preferred
Shares), incorporated by reference to Exhibit 3.1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, as
filed with the Securities and Exchange Commission on March 31, 1997
(the "1996 10-K").
3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement on Form S-1, as filed on July 18, 1995
(Registration No. 33-94724), and declared effective by the Securities
and Exchange Commission on October 20, 1995 (referred to herein as the
"1995 Registration Statement").
4.1 Specimen Common Stock Certificate of the Company, incorporated by
reference to Exhibit 4.1 of the 1995 Registration Statement.
4.2 Specimen Series A Stock Certificate of the Company, incorporated by
reference to Exhibit 4.2 of the 1996 10-K.
4.3 Specimen Series B Stock Certificate of the Company, incorporated by
reference to Exhibit 4.3 of the 1996 10-K.
4.4 Specimen Common Stock Purchase Warrant, incorporated by reference to
Exhibit 10.2 of the Company's Report on Form 8-K for August 22, 1996
(the "Waterton 8-K").
4.5 Form of Underwriter's Warrant, incorporated by reference to Exhibit 4.2
of the 1995 Registration Statement.
10.1 Form of Employment Agreement of Isaac Starkman, dated June 1, 1995,
incorporated by reference to Exhibit 10.1 of the 1995 Registration
Statement.
10.2 Form of Employment Agreement of Guy Starkman, dated June 1, 1995,
incorporated by reference to Exhibit 10.2 of the 1995 Registration
Statement.
10.3 Form of Employment Agreement of Jason Starkman, dated June 1, 1995,
incorporated by reference to Exhibit 10.3 of the 1995 Registration
Statement.
10.4 Amendment and Extension of Employment Agreement of Isaac Starkman,
dated as of July 1, 1997.
10.5 Amendment and Extension of Employment Agreement of Guy Starkman, dated
as of July 1, 1997.
10.6 Amendment and Extension of Employment Agreement of Jason Starkman,
dated as of July 1, 1997.
10.7 Form of Indemnification Agreement with officers and directors,
incorporated by reference to Exhibit 10.5 of the Registration
Statement.
10.8 Jerry's Famous Deli, Inc. Stock Option Plan, incorporated by reference
to Exhibit 10.6 of the Registration Statement.
47
<PAGE> 48
Exhibit
Number Description
10.9 Lease Agreement, Encino, incorporated by reference to Exhibit 10.8 of
the Registration Statement.
10.10 Lease Agreement, Marina del Rey, incorporated by reference to Exhibit
10.9 of the Registration Statement.
10.11 Lease Agreement, West Hollywood, incorporated by reference to Exhibit
10.10 of the Registration Statement.
10.12 Lease Agreement, West Hollywood - Parking Lot #1, incorporated by
reference to Exhibit 10.11 of the Registration Statement.
10.13 Lease Agreement, West Hollywood - Parking Lot #2, incorporated by
reference to Exhibit 10.12 of the Registration Statement.
10.14 Lease Agreement, West Hollywood Adjacent, incorporated by reference to
Exhibit 10.13 of the Registration Statement.
10.15 Lease Agreement, Westwood, incorporated by reference to Exhibit 10.14
of the Registration Statement.
10.16 Lease Agreement, Studio City, incorporated by reference to Exhibit
10.15 of the Registration Statement.
10.17 Lease Agreements, Corporate Offices, incorporated by reference to
Exhibit 10.16 of the Registration Statement.
10.18 JFD-Encino Agreement of Limited Partnership, incorporated by reference
to Exhibit 10.17 of the Registration Statement.
10.19 Purchase Agreement, Pasadena, incorporated by reference to Exhibit
10.18 of the Registration Statement.
10.20 Bank of America Loan Agreement dated October 28, 1997.
10.21 United Mizrahi Bank Loan Agreement, incorporated by reference to
Exhibit 10.20 of the Registration Statement.
10.22 Corporate Office Leases, incorporated by reference to Exhibit 10.21 of
the Registration Statement.
10.23 Amendment to the Corporate Offices Lease, incorporated by reference to
Exhibit 10.22 of the Registration Statement.
10.24 Intentionally omitted.
10.25 Amendment to United Mizrahi Bank Loan Agreement dated March 1, 1996,
incorporated by reference to Exhibit 10.26 of the 1995 10-K.
10.26 Agreement of Purchase and Sale of Marina del Rey property dated March
25, 1996, incorporated by reference to Exhibit 10.27 of the 1995 10-K.
10.27 Lease Agreement dated as of March 28, 1996 for the Costa Mesa,
California property, incorporated by reference to Exhibit 10.28 of the
1995 10-K.
48
<PAGE> 49
Exhibit
Number Description
10.28 Asset Purchase Agreement, dated June 11, 1996, among the Company,
Solley's, Inc. and Sol Zide, incorporated by reference to Exhibit 10.1
of the Company's 10-K for June 30, 1996 ("Solley's 8-K").
10.29 Lease - Shopping Center Form, dated August 31, 1993, between Sol Zide
and Plaza International, incorporated by reference to Exhibit 10.2 of
the Solley's 8-K.
10.30 Amendment to Lease, dated April 4, 1996, between Sol Zide and Plaza
International, incorporated by reference to Exhibit 10.3 of the
Solley's 8-K.
10.31 Landlord Consent and Amendment to Lease, dated April 4, 1996, between
the Company and Plaza International, incorporated by reference to
Exhibit 10.4 of the Solley's 8-K.
10.32 Shopping Center Lease, dated April 2, 1984, between Solley's Inc. and
WRAM Development Company, incorporated by reference to Exhibit 10.5 of
the Solley's 8-K.
10.33 First Amendment to Shopping Center Lease, dated March 6, 1992, between
Solley's, Inc. and WRAM Development Company, incorporated by reference
to Exhibit 10.6 of the Solley's 8-K.
10.34 Landlord Consent and Amendment to Lease, dated May 6, 1996, among the
Company, Solley's, Inc. and WRAM Development Company, incorporated by
reference to Exhibit 10.7 of the Solley's 8-K.
10.35 Private Securities Subscription Agreement and Registration Rights
Agreement, incorporated by reference to Exhibit 10.1 of the Waterton
8-K.
10.36 Letter Agreements dated August 22, 1996 between the Company and
Waterton Management, L.L.C., incorporated by reference to Exhibit 10.2
of the Waterton 8-K.
10.37 Letter Agreement dated August 22, 1996 between The Starkman Family
Trust and Waterton Management, L.L.C., incorporated by reference to
Exhibit 10.3 of the Waterton 8-K.
10.38 Amendment to Lease Agreement dated August 1, 1995 for Westwood
property, incorporated by reference to Exhibit 10.29 of the 1995 10-K.
10.39 Asset Purchase Agreement, dated August 2, 1996, among the Company, One
Hundred Seventy-Second Collins Corp., L. Jules Arkin, as Trustee of the
L. Jules Arkin Living Trust, Rosalie Arkin and Stanley H. Arkin, as
Trustees of The Norman Arkin Living Trust, Stanley H. Arkin, Lewis
Zachary Cohen, Barbara R. Rodriguez, Robin Sherwood f/k/a Robyn
Sherwood, Susan Spatzer and Steven Stamler, incorporated by reference
to Exhibit 10.1 of the Company's Report on Form 8-K for September 9,
1996.
10.40 Consulting Agreement dated March 27, 1997 between Kenneth J. Abdalla,
Waterton Management, LLC and Jerry's Famous Deli, incorporated by
reference to Exhibit 10.39 of the 1996 10-K.
10.41 Revolving Credit and Term Loan Agreement, dated as of October 27, 1997,
by and between Jerry's Famous Deli, Inc. and Bank Leumi USA.
49
<PAGE> 50
Exhibit
Number Description
10.42 Asset Purchase Agreement, dated January 21, 1998, by and between the
company and California Pizza Kitchen, Inc. relating to Boca Raton
restaurant acquisition.
10.43 Standard Form Ground Lease Agreement, dated April 7, 1993, as amended
by the First Amendment to Lease dated April 23, 1993, by and between
Erwin and Erwin and California Pizza Kitchen, Inc., together with
Second Amendment to Lease, dated February 19, 1998, by and between
Erwin and Erwin and the Company.
21.1 Subsidiaries
23.0 Consent of Coopers & Lybrand, LLP
27.0 Financial Data Schedule
(b) The Company filed no Reports on Form 8-K during the last
quarter of 1997.
50
<PAGE> 51
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on March 30, 1998.
JERRY'S FAMOUS DELI, INC.
By: /s/ Isaac Starkman
---------------------------------------
Isaac Starkman, Chief Executive Officer
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Isaac Starkman
- ---------------------------- Director, Chief Executive Officer March 30, 1998
Isaac Starkman and Chairman of the Board
/s/ Kenneth Abdalla
- ---------------------------- President and Director March 30, 1998
Kenneth Abdalla
/s/ Guy Starkman
- --------------------------- Vice President and Director March 30, 1998
Guy Starkman
/s/ Jason Starkman
- --------------------------- Vice President and Director March 30, 1998
Jason Starkman
/s/ Christina Sterling
- -------------------------- Chief Financial Officer and March 30, 1998
Christina Sterling Principal Accounting Officer
/s/ Paul Gray
- -------------------------- Director March 30, 1998
Paul Gray
/s/ Stanley Schneider
- -------------------------- Director March 30, 1998
Stanley Schneider
</TABLE>
<PAGE> 1
EXHIBIT 10.4
JERRY'S FAMOUS DELI, INC.
Amendment and Extension of
Employment Agreement of
Isaac Starkman
THIS AMENDMENT AND EXTENSION OF EMPLOYMENT AGREEMENT (the "Amendment")
is made as of July 1, 1997, by and between Jerry's Famous Deli, Inc., a
California corporation (the "Company") and Isaac Starkman ("Executive"), with
reference to the following:
A. The Company and Executive entered an Employment Agreement (the
"Agreement") as of June 1, 1995, pursuant to which the Company agreed to employ
Executive as Chief Executive Officer of the Company for a term of two years.
B. The Company desires to continue the employment of Executive as Chief
Executive Officer, and Executive desires to continue his employment with the
Company, upon the terms described in this Amendment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Term. The term of Executive's employment is hereby extended until
December 31, 2000 (the "Term"). The Term may be extended by mutual agreement of
the parties for successive one year terms.
2. Base Salary. Section 5.1 of the Employment Agreement is hereby
amended by the addition of the following sentence:
"Effective as of October 1, 1997, Executive's Base Salary shall be
reduced to $335,000 year, payable in accordance with the Company's
general payroll procedures."
3. Bonus. Section 5.2 of the Employment Agreement is hereby amended by
the addition of the following provisions:
"The bonus earned by Executive based on EBITDA shall be effective
through June 30, 1997, and the Company shall make a final determination
of the amount earned by Executive for the six months ended June 30,
1997 based upon the annualized growth of the Company's EBITDA as
determined by the Company's unaudited financial statements for the six
months periods ended June 30, 1997, as reported in the Company's
Quarterly Report on Form 10-Q. The bonus amount
1
<PAGE> 2
based upon this formula shall be payable by the Company following
receipt by the Company of the report of its independent public
accountants on the financial statements of the Company for the year
ended December 31, 1997. Effective as of July 1, 1997, Executive shall
waive the bonus amounts earned for all periods after June 30, 1997, and
lieu of such bonus shall receive an annual bonus equal to 10.0% of the
Net After-tax Profits of the Company (as defined below) for the six
month period from July 1, 1997 through December 31, 1997, and 10.0% of
the annual Net After-tax Profits of the Company for each year after
1997 during the term of this Agreement. Executive shall receive
quarterly installment payments of the bonus during the applicable year
for which the bonus is earned, determined by annualizing the quarterly
Net After-tax Profits of the Company for each of the first three
quarters of the year. In the event that the quarterly payments of bonus
installments results in an overpayment to Executive based on the Annual
Net After-tax Profits of the Company, as determined by the Company in
its annual audited financial statements, the excess amount shall be
deducted from future payments owed to Executive. As used herein, the
Company's "Net After-tax Profits" shall be calculated in accordance
with generally accepted accounting principles, except that: (1) the
amount of the bonus earned under this Agreement shall be excluded from
the calculation of expenses; (2) the amount of any after-tax net
interest income earned on the unexpended portion of the net proceeds of
any future offering of securities by the Company (the "Net Proceeds")
will be excluded from the calculation of income; and (3) as the Net
Proceeds are expended by the Company, the amount of Net After-tax
Profits shall be reduced annually by an amount equal to the product of:
(i) the amount of Net Proceeds expended by the Company; times (ii) the
Company's average annual cost (on an after-tax basis) of borrowed
funds, expressed as an annual percentage rate, for the preceding
calendar year divided by 365; times (iii) the number of days beginning
on the later of: (x) the date on which the business in which the Net
Proceeds are invested becomes operational (such as the opening date of
a new restaurant or the re-opening date of an existing restaurant which
is closed for refurbishment) or (y) January 1 of the applicable year.
4. Options. On July 1, 1997, the Stock Option Committee approved the
grant to Executive of a Non-Qualified Option for 125,000 shares of Common Stock
of the Company under the Company's 1995 Amended and Restated Stock Option Plan
(the "Option Plan"), at an exercise price of $2.50 per share (110% of the fair
market value of the common stock on June 30, 1997.) On January 2, 1998, the
Company shall grant to Executive an additional Non-Qualified Option for 125,000
shares of Common Stock of the Company under the Option Plan, at an exercise
price equal to 101% of the fair market value of the Common Stock on the date of
grant, and on January 2, 1999, the Company shall grant to Executive an
additional Non-Qualified Option for 125,000 shares of Common Stock of the
Company under the Option Plan, at an exercise price equal to 101% of the fair
market value of the Common Stock on the date of such grant. All of such options
shall have a term of ten years, and shall be exercisable at any time during the
term beginning six months after the date of grant. Executive shall have the
2
<PAGE> 3
unconditional right to exercise such Options using one of the cashless exercise
methods provided for in the Option Plan. In the event the Agreement is
terminated by the Company for any reason except for the occurrence of any of the
events specified in Sections 8.1(i), (ii) or (iii) of the Agreement, any Options
which the Company has committed to grant under this paragraph which have not
been granted for any reason, including that the date for grant of the Options
has not yet occurred, shall be immediately granted upon the date of termination
at an exercise price equal to the fair market value of the common stock on the
date of grant. Any Options which cannot be granted under the Option Plan shall
be granted outside of the Option Plan. All of such Options, together with all
Options previously granted which have not become exercisable, shall become
exercisable immediately upon the date of termination for a period of three
months following the date of Executive's termination, including upon a
termination of employment by Executive or the Company within one year following
the occurrence of a "Corporate Change," as defined in Paragraph 5 hereof.
5. Change in Control Payment. In the event of a termination of
Executive's employment, whether by Executive or the Company, at any time within
one year following the occurrence of a "Corporate Change" (as defined herein),
Executive shall receive a lump sum payment equal to the sum of (i) his full
annual Base Salary for the remaining term of the Agreement, as provided in this
Amendment, (ii) an amount equal to the higher of the annual Bonus compensation
earned by Executive for the last completed fiscal year or the annualized Bonus
compensation that would be earned by Executive based upon the annualized net
earnings of the Company from the beginning of the current year through the last
completed month of the current year; and (iii) the immediate grant of any stock
options which the Company has agreed to grant to Executive under Section 2
hereof, but which have not been granted as of the date of termination of
Executive's employment, whether because the date on which such Options are to be
granted has not occurred or otherwise, all of which Options shall be exercisable
at an exercise price equal to the fair market value of the common stock on the
date of grant, and which, together with all Options previously granted which
have not become exercisable, shall become exercisable immediately upon the date
of termination for a period of one year following the date of Executive's
termination. Any Options which cannot be granted under the Option Plan shall be
granted outside of the Option Plan. For purposes of this Section 5, a "Corporate
Change" shall be deemed to have occurred upon the occurrence of any one (or
more) of the following events: (a) a transaction in which the Company ceases to
be an independent publicly owned corporation that is required to file quarterly
and annual reports under the Securities Exchange Act of 1934, (b) a sale or
other disposition of all or substantially all of the assets, or a majority of
the outstanding capital stock, of the Company (including but not limited to the
assets or stock of the Company's subsidiaries that results in all or
substantially all of the assets or stock of the Company on a consolidated basis
being sold), (c) as a result of, or in connection with, any cash tender offer,
exchange offer, merger or other business combination, sale of assets, or
contested election for the Board, or combination of the foregoing, persons who
were directors of the Company just prior to such event(s) shall cease to
constitute a majority of the Board (d) any person, including a group as defined
in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, becomes
the beneficial owner of shares of the Company with respect to which twenty
percent (20%) or more of the total number of votes for the election of the Board
may be
3
<PAGE> 4
cast, (e) the Company's stockholders cause a change in the majority of the
members of the Board within a twelve (12) month period, provided, however, that
the election of one or more new directors shall not be deemed to be a change in
the membership of the Board if the nomination of the newly elected directors was
approved by the vote of three-fourths of the directors then still in office who
were directors at the beginning of such twelve (12) month period, or (f) a
tender offer or exchange offer is made for shares of the Company's common stock
(other than one made by the Company) and shares of common stock are acquired
thereunder.
6. Continuation of Other Terms of Agreement. Except as provided herein,
all other terms and conditions of the Agreement shall continue in full force
during the Term provided in this Amendment, and the general terms specified in
Sections 10 and 11 of the Agreement shall apply to this Amendment.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
JERRY'S FAMOUS DELI, INC., Executive:
a California corporation
By: /s/ Guy Starkman /s/ Isaac Starkman
---------------------------- ------------------
Guy Starkman, Vice President Isaac Starkman
4
<PAGE> 1
EXHIBIT 10.5
JERRY'S FAMOUS DELI, INC.
Amendment and Extension of
Employment Agreement of
Guy Starkman
THIS AMENDMENT AND EXTENSION OF EMPLOYMENT AGREEMENT (the "Amendment")
is made as of July 1, 1997, by and between Jerry's Famous Deli, Inc., a
California corporation (the "Company") and Guy Starkman ("Executive"), with
reference to the following:
A. The Company and Executive entered an Employment Agreement (the
"Agreement") as of June 1, 1995, pursuant to which the Company agreed to employ
Executive as Vice President and Director of Operations of the Company for a term
of three years.
B. The Company desires to continue the employment of Executive as Vice
President and Director of Operations, and Executive desires to continue his
employment with the Company, upon the terms described in this Amendment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Term. The term of Executive's employment is hereby extended until
December 31, 2000 (the "Term"). The Term may be extended by mutual agreement of
the parties for successive one year terms.
2. Base Salary. Section 5.1 of the Employment Agreement is hereby
amended by the addition of the following sentence:
"Effective as of October 1, 1997, Executive's Base Salary shall be
reduced to $112,500 per year, payable in accordance with the Company's
general payroll procedures."
3. Bonus. Section 5.2 of the Employment Agreement is hereby amended by
the addition of the following provisions:
"The bonus earned by Executive based on EBITDA shall be effective
through June 30, 1997, and the Company shall make a final determination
of the amount earned by Executive for the six months ended June 30,
1997 based upon the annualized growth of the Company's EBITDA as
determined by the Company's unaudited financial statements for the six
months periods ended June 30, 1997, as reported in the Company's
Quarterly Report on Form 10-Q. The bonus amount
1
<PAGE> 2
based upon this formula shall be payable by the Company following
receipt by the Company of the report of its independent public
accountants on the financial statements of the Company for the year
ended December 31, 1997. Effective as of July 1, 1997, Executive shall
waive the bonus amounts earned for all periods after June 30, 1997, and
lieu of such bonus shall receive an annual bonus equal to 2.0% of the
Net After-tax Profits of the Company (as defined below) for the six
month period from July 1, 1997 through December 31, 1997, and 2.0% of
the annual Net After-tax Profits of the Company for each year after
1997 during the term of this Agreement. Executive shall receive
quarterly installment payments of the bonus during the applicable year
for which the bonus is earned, determined by annualizing the quarterly
Net After-tax Profits of the Company for each of the first three
quarters of the year. In the event that the quarterly payments of bonus
installments results in an overpayment to Executive based on the Annual
Net After-tax Profits of the Company, as determined by the Company in
its annual audited financial statements, the excess amount shall be
deducted from future payments owed to Executive. As used herein, the
Company's "Net After-tax Profits" shall be calculated in accordance
with generally accepted accounting principles, except that: (1) the
amount of the bonus earned under this Agreement shall be excluded from
the calculation of expenses; (2) the amount of any after-tax net
interest income earned on the unexpended portion of the net proceeds of
any future offering of securities by the Company (the "Net Proceeds")
will be excluded from the calculation of income; and (3) as the Net
Proceeds are expended by the Company, the amount of Net After-tax
Profits shall be reduced annually by an amount equal to the product of:
(i) the amount of Net Proceeds expended by the Company; times (ii) the
Company's average annual cost of borrowed funds for the preceding
calendar year divided by 365; times (iii) the number of days beginning
on the later of: (x) the date on which the business in which the Net
Proceeds are invested becomes operational (such as the opening date of
a new restaurant or the re-opening date of an existing restaurant which
is closed for refurbishment) or (y) January 1 of the applicable year.
4. Options. On July 1, 1997, the Stock Option Committee approved the
grant to Executive of a Non-Qualified Option for 25,000 shares of Common Stock
of the Company under the Company's 1995 Amended and Restated Stock Option Plan
(the "Option Plan"), at an exercise price of $2.50 per share (110% of the fair
market value of the common stock on June 30, 1997.) On January 2, 1998,
Executive shall receive an additional Non-Qualified Option for 25,000 shares of
Common Stock of the Company under the Option Plan, at an exercise price equal to
101% of the fair market value of the Common Stock on the date of grant, and on
January 2, 1999, Executive shall receive an additional Non-Qualified Option for
25,000 shares of Common Stock of the Company under the Option Plan, at an
exercise price equal to 101% of the fair market value of the Common Stock on the
date of such grant. All of such options shall have a term of ten years, and
shall be exercisable at any time during the term beginning six months after the
date of grant. Executive shall have the unconditional right to exercise such
Options using one of the cashless exercise methods provided for in the Option
Plan. In the event the Agreement is terminated by the Company for any reason
except for the
2
<PAGE> 3
occurrence of any of the events specified in Sections 8.1(i), (ii) or (iii) of
the Agreement, any Options which the Company has committed to grant under this
paragraph which have not been granted for any reason, including that the date
for grant of the Options has not yet occurred, shall be immediately granted upon
the date of termination at an exercise price equal to the fair market value of
the common stock on the date of grant. Any Options which cannot be granted under
the Option Plan shall be granted outside of the Option Plan. All of such
Options, together with all Options previously granted which have not become
exercisable, shall become exercisable immediately upon the date of termination
for a period of three months following the date of Executive's termination,
including upon a termination of employment by Executive or the Company within
one year following the occurrence of a "Corporate Change," as defined in
Paragraph 5 hereof.
5. Change in Control Payment. In the event of a termination of
Executive's employment, whether by Executive or the Company, at any time within
one year following the occurrence of a "Corporate Change" (as defined herein),
Executive shall receive a lump sum payment equal to the sum of (i) his full
annual Base Salary for the remaining term of the Agreement, as provided in this
Amendment and (ii) an amount equal to the higher of the annual Bonus
compensation earned by Executive for the last completed fiscal year or the
annualized Bonus compensation that would be earned by Executive based upon the
annualized net earnings of the Company from the beginning of the current year
through the last completed month of the current year. For purposes of this
Section 5, a "Corporate Change" shall be deemed to have occurred upon the
occurrence of any one (or more) of the following events: (a) a transaction in
which the Company ceases to be an independent publicly owned corporation that is
required to file quarterly and annual reports under the Securities Exchange Act
of 1934, (b) a sale or other disposition of all or substantially all of the
assets, or a majority of the outstanding capital stock, of the Company
(including but not limited to the assets or stock of the Company's subsidiaries
that results in all or substantially all of the assets or stock of the Company
on a consolidated basis being sold), (c) as a result of, or in connection with,
any cash tender offer, exchange offer, merger or other business combination,
sale of assets, or contested election for the Board, or combination of the
foregoing, persons who were directors of the Company just prior to such event(s)
shall cease to constitute a majority of the Board (d) any person, including a
group as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended, becomes the beneficial owner of shares of the Company with respect to
which twenty percent (20%) or more of the total number of votes for the election
of the Board may be cast, (e) the Company's stockholders cause a change in the
majority of the members of the Board within a twelve (12) month period,
provided, however, that the election of one or more new directors shall not be
deemed to be a change in the membership of the Board if the nomination of the
newly elected directors was approved by the vote of three-fourths of the
directors then still in office who were directors at the beginning of such
twelve (12) month period, or (f) a tender offer or exchange offer is made for
shares of the Company's common stock (other than one made by the Company) and
shares of common stock are acquired thereunder.
6. Continuation of Other Terms of Agreement. Except as provided herein,
all other terms and conditions of the Agreement shall continue in full force
during the Term
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<PAGE> 4
provided in this Amendment, and the general terms specified in Sections 10 and
11 of the Agreement shall apply to this Amendment.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
JERRY'S FAMOUS DELI, INC., Executive:
a California corporation
By: /s/ Isaac Starkman /s/ Guy Starkman
----------------------- ----------------
Isaac Starkman, Guy Starkman
Chief Executive Officer
4
<PAGE> 1
EXHIBIT 10.6
JERRY'S FAMOUS DELI, INC.
Amendment and Extension of
Employment Agreement of
Jason Starkman
THIS AMENDMENT AND EXTENSION OF EMPLOYMENT AGREEMENT (the "Amendment")
is made as of July 1, 1997, by and between Jerry's Famous Deli, Inc., a
California corporation (the "Company") and Jason Starkman ("Executive"), with
reference to the following:
A. The Company and Executive entered an Employment Agreement (the
"Agreement") as of June 1, 1995, pursuant to which the Company agreed to employ
Executive as Vice President and Director of Management Information Systems of
the Company for a term of three years.
B. The Company desires to continue the employment of Executive as Vice
President and Director of Management Information Systems, and Executive desires
to continue his employment with the Company, upon the terms described in this
Amendment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Term. The term of Executive's employment is hereby extended until
December 31, 2000 (the "Term"). The Term may be extended by mutual agreement of
the parties for successive one year terms.
2. Base Salary. Section 5.1 of the Employment Agreement is hereby
amended by the addition of the following sentence:
"Effective as of October 1, 1997, Executive's Base Salary shall be
reduced to $81,000 per year, payable in accordance with the Company's
general payroll procedures."
3. Bonus. Section 5.2 of the Employment Agreement is hereby amended by
the addition of the following provisions:
"The bonus earned by Executive based on EBITDA shall be effective
through June 30, 1997, and the Company shall make a final determination
of the amount earned by Executive for the six months ended June 30,
1997 based upon the annualized growth of the Company's EBITDA as
determined by the Company's unaudited financial statements for the six
months periods ended June 30, 1997,
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<PAGE> 2
as reported in the Company's Quarterly Report on Form 10-Q. The bonus
amount based upon this formula shall be payable by the Company
following receipt by the Company of the report of its independent
public accountants on the financial statements of the Company for the
year ended December 31, 1997. Effective as of July 1, 1997, no bonus
will be payable to Executive pursuant to the terms of this Agreement,
but the Board of Directors may, in its sole discretion, grant bonuses
to Executive in such amounts and at such times at it determines."
4. Change in Control Payment. In the event of a termination of
Executive's employment, whether by Executive or the Company, at any time within
one year following the occurrence of a "Corporate Change" (as defined herein),
Executive shall receive a lump sum payment equal to the sum of (i) his full
annual Base Salary for the remaining term of the Agreement, as provided in this
Amendment and (ii) an amount equal to the higher of the annual Bonus
compensation earned by Executive for the last completed fiscal year or the
annualized Bonus compensation that would be earned by Executive based upon the
annualized net earnings of the Company from the beginning of the current year
through the last completed month of the current year. For purposes of this
Section 4, a "Corporate Change" shall be deemed to have occurred upon the
occurrence of any one (or more) of the following events: (a) a transaction in
which the Company ceases to be an independent publicly owned corporation that is
required to file quarterly and annual reports under the Securities Exchange Act
of 1934, (b) a sale or other disposition of all or substantially all of the
assets, or a majority of the outstanding capital stock, of the Company
(including but not limited to the assets or stock of the Company's subsidiaries
that results in all or substantially all of the assets or stock of the Company
on a consolidated basis being sold), (c) as a result of, or in connection with,
any cash tender offer, exchange offer, merger or other business combination,
sale of assets, or contested election for the Board, or combination of the
foregoing, persons who were directors of the Company just prior to such event(s)
shall cease to constitute a majority of the Board (d) any person, including a
group as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended, becomes the beneficial owner of shares of the Company with respect to
which twenty percent (20%) or more of the total number of votes for the election
of the Board may be cast, (e) the Company's stockholders cause a change in the
majority of the members of the Board within a twelve (12) month period,
provided, however, that the election of one or more new directors shall not be
deemed to be a change in the membership of the Board if the nomination of the
newly elected directors was approved by the vote of three-fourths of the
directors then still in office who were directors at the beginning of such
twelve (12) month period, or (f) a tender offer or exchange offer is made for
shares of the Company's common stock (other than one made by the Company) and
shares of common stock are acquired thereunder.
6. Continuation of Other Terms of Agreement. Except as provided herein,
all other terms and conditions of the Agreement shall continue in full force
during the Term provided in this Amendment, and the general terms specified in
Sections 10 and 11 of the Agreement shall apply to this Amendment.
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<PAGE> 3
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
JERRY'S FAMOUS DELI, INC., Executive:
a California corporation
By: /s/ Isaac Starkman /s/ Jason Starkman
----------------------- ------------------
Isaac Starkman, Jason Starkman
Chief Executive Officer
3
<PAGE> 1
Exhibit 10.20
================================================================================
[LOGO]
BANK OF AMERICA LETTERHEAD BUSINESS LOAN AGREEMENT
NATIONAL TRUST AND SAVINGS ASSOCIATION
- --------------------------------------------------------------------------------
This Agreement dated as of _______________, 1997, is between BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank") and JERRY'S FAMOUS DELI,
INC. (the "Borrower").
1. FACILITY NO. 1: LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide a
line of credit ("Facility No. 1") to the Borrower. The amount of the
line of credit (the "Facility No. 1 Commitment") is Two Million Dollars
($2,000,000).
(b) This is a non-revolving line of credit with a term repayment option,
and providing for cash advances. Any amount borrowed, even if repaid
before the end of the availability period, permanently reduces the
remaining available line of credit.
(c) The Borrower agrees not to permit the outstanding principal balance of
advances under the line of credit to exceed the Facility No. 1
Commitment.
1.2 AVAILABILITY PERIOD. The line of credit is available between the date
of this Agreement and April 1, 1998 (the "Facility No. 1 Expiration Date")
unless the Borrower is in default.
1.3 INTEREST RATE.
(a) The interest rate is the Bank's Reference Rate plus one and one-quarter
(1.25) percentage points.
(b) The Reference Rate is the rate of interest publicly announced from time
to time by the Bank in San Francisco, California, as its Reference
Rate. The Reference Rate is set by the Bank based on various factors,
including the Bank's costs and desired return, general economic
conditions and other factors, and is used as a reference point for
pricing some loans. The Bank may price loans to its customers at,
above, or below the Reference Rate. Any change in the Reference Rate
shall take effect at the opening of business on the day specified in
the public announcement of a change in the Bank's Reference Rate.
1.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on November 1, 1997, and then monthly
thereafter until payment in full of any principal outstanding under
this line of credit.
(b) The Borrower will repay principal in 53 successive monthly installments
of Thirty-Seven Thousand Thirty-Seven Dollars ($37,037) starting May 1,
1998. On October 1, 2002, the Borrower will repay the remaining
principal balance plus any interest then due.
(c) The Borrower may prepay the loan in full or in part at any time. The
prepayment will be applied to the most remote payment of principal due
under this Agreement.
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2. FACILITY NO. 2: TERM LOAN AMOUNT AND TERMS
2.1 OUTSTANDING TERM LOAN. There is outstanding from the Bank to the
Borrower a term loan in the original principal amount of Two Million Five
Hundred Thousand Dollars ($2,500,000). The principal balance outstanding as of
September 30, 1997, was Two Million Forty-Five Thousand Four Hundred Fifty-Two
Dollars ($2,045,452). This term loan is currently subject to the terms and
conditions of Facility No. 1 of the Business Loan Agreement dated March 28,
1995. As of the date of this Agreement, the term loan shall be deemed to be
outstanding as Facility No. 2 under this Agreement, and shall be subject to all
the terms and conditions stated in this Agreement.
2.2 INTEREST RATE. The interest rate is the Bank's Reference Rate plus one
and one-quarter (1.25) percentage points.
2.3 REPAYMENT TERMS.
(a) The Borrower will pay all accrued but unpaid interest on November 1,
1997, and then monthly thereafter and upon payment in full of the
principal of the loan.
(b) The Borrower will repay principal in successive monthly installments of
Thirty-Seven Thousand Eight Hundred Seventy-Nine Dollars ($37,879). On
March 1, 2002, the Borrower will repay the remaining principal balance
plus any interest then due.
(c) The Borrower may prepay the loan in full or in part at any time. The
prepayment will be applied to the most remote payment of principal due
under this Agreement.
3. FEES AND EXPENSES
3.1 LOAN FEE. The Borrower agrees to pay a Fifteen Thousand Dollar
($15,000) fee due on the date of this Agreement.
3.2 EXPENSES. The Borrower agrees to immediately repay the Bank for
expenses that include, but are not limited to, filing, recording and search
fees, appraisal fees, title report fees and documentation fees.
3.3 REIMBURSEMENT COSTS.
(a) The Borrower agrees to reimburse the Bank for any expenses it incurs in
the preparation of this Agreement and any agreement or instrument
required by this Agreement. Expenses include, but are not limited to,
reasonable attorneys' fees, including any allocated costs of the Bank's
in-house counsel.
(b) The Borrower agrees that the Bank may conduct periodic audits and
appraisals of personal property collateral securing this Agreement, at
such intervals as the Bank may reasonably require. The audits and
appraisals may be performed by employees of the Bank or by independent
appraisers. With respect to such audits and appraisals conducted while
a default under this Agreement has occurred or is continuing, the
Borrower agrees to reimburse the Bank, on demand, for the costs and
expenses thereof; otherwise, the Bank will bear the costs and expenses
associated with such audits and appraisals.
4. COLLATERAL
4.1 PERSONAL PROPERTY. The Borrower's obligations to the Bank under this
Agreement will be secured by personal property the Borrower now owns or will own
in the future as listed below. The collateral is further defined in security
agreement(s) executed by the Borrower.
(a) Machinery and equipment.
(b) Inventory.
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<PAGE> 3
(c) Receivables.
In addition, all personal property collateral securing this Agreement shall also
secure all other present and future obligations of the Borrower to the Bank
(excluding any consumer credit covered by the federal Truth in Lending law,
unless the Borrower has otherwise agreed in writing). All personal property
collateral securing any other present or future obligations of the Borrower to
the Bank shall also secure this Agreement.
4.2 PERSONAL PROPERTY SUPPORTING GUARANTY. The obligations of the
guarantors, Jerry's Famous Deli L.A., Inc. and JFD, Inc., to the Bank will be
secured by personal property the guarantors now own or will own in the future as
listed below. The collateral is further defined in security agreements executed
by the guarantors.
(a) Machinery and equipment.
(b) Inventory.
(c) Receivables.
5. DISBURSEMENTS, PAYMENTS AND COSTS
5.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be
made in writing in a manner acceptable to the Bank, or by another means
acceptable to the Bank.
5.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each
payment by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from
time to time;
(c) made in immediately available funds, or such other type of funds
selected by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at
its discretion, require the Borrower to sign one or more promissory
notes.
5.3 TELEPHONE AND TELEFAX AUTHORIZATION.
(a) The Bank may honor telephone or telefax instructions for advances or
repayments or for the designation of optional interest rates given by
any one of the individuals authorized to sign loan agreements on behalf
of the Borrower, or any other individual designated by any one of such
authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account number 14656-00915, or such other of the Borrower's
accounts with the Bank as designated in writing by the Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in
connection with any act resulting from telephone or telefax
instructions it reasonably believes are made by any individual
authorized by the Borrower to give such instructions. This indemnity
and excuse will survive this Agreement's termination.
5.4 DIRECT DEBIT (PRE-BILLING).
(a) The Borrower agrees that the Bank will debit the Borrower's deposit
account number 14656-00915, or such other of the Borrower's accounts
with the Bank as designated in writing by the Borrower (the "Designated
Account") on the date each payment of principal and interest and any
fees from the Borrower becomes due (the "Due Date"). If the Due Date is
not a banking day, the Designated Account will be debited on the next
banking day.
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<PAGE> 4
(b) Approximately 10 days prior to each Due Date, the Bank will mail to the
Borrower a statement of the amounts that will be due on that Due Date
(the "Billed Amount"). The calculation will be made on the assumption
that no new extensions of credit or payments will be made between the
date of the billing statement and the Due Date, and that there will be
no changes in the applicable interest rate.
(c) The Bank will debit the Designated Account for the Billed Amount,
regardless of the actual amount due on that date (the "Accrued
Amount"). If the Billed Amount debited to the Designated Account
differs from the Accrued Amount, the discrepancy will be treated as
follows:
(i) If the Billed Amount is less than the Accrued Amount, the
Billed Amount for the following Due Date will be increased by
the amount of the discrepancy. The Borrower will not be in
default by reason of any such discrepancy.
(ii) If the Billed Amount is more than the Accrued Amount, the
Billed Amount for the following Due Date will be decreased by
the amount of the discrepancy.
Regardless of any such discrepancy, interest will continue to accrue
based on the actual amount of principal outstanding without
compounding. The Bank will not pay the Borrower interest on any
overpayment.
(d) The Borrower will maintain sufficient funds in the Designated Account
to cover each debit. If there are insufficient funds in the Designated
Account on the date the Bank enters any debit authorized by this
Agreement, the debit will be reversed.
5.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banking
day is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. All payments and disbursements which would be due on a
day which is not a banking day will be due on the next banking day. All payments
received on a day which is not a banking day will be applied to the credit on
the next banking day.
5.6 TAXES.
(a) If any payments to the Bank under this Agreement are made from outside
the United States, the Borrower will not deduct any foreign taxes from
any payments it makes to the Bank. If any such taxes are imposed on any
payments made by the Borrower (including payments under this
paragraph), the Borrower will pay the taxes and will also pay to the
Bank, at the time interest is paid, any additional amount which the
Bank specifies as necessary to preserve the after-tax yield the Bank
would have received if such taxes had not been imposed. The Borrower
will confirm that it has paid the taxes by giving the Bank official tax
receipts (or notarized copies) within 30 days after the due date.
(b) Payments made by the Borrower to the Bank will be made without
deduction of United States withholding or similar taxes. If the
Borrower is required to pay U. S. withholding taxes, the Borrower will
pay such taxes in addition to the amounts due to the Bank under this
Agreement. If the Borrower fails to make such tax payments when due,
the Borrower indemnifies the Bank against any liability for such taxes,
as well as for any related interest, expenses, additions to tax, or
penalties asserted against or suffered by the Bank with respect to such
taxes.
5.7 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the
Bank's costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments
for credit.
5.8 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest
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<PAGE> 5
or a higher fee than if a 365-day year is used. Installments of principal which
are not paid when due under this Agreement shall continue to bear interest until
paid.
5.9 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, principal amounts outstanding under this Agreement
will at the option of the Bank bear interest at a rate which is two (2.00)
percentage points higher than the rate of interest otherwise provided under this
Agreement. This will not constitute a waiver of any default.
5.10 INTEREST COMPOUNDING. At the Bank's sole option in each instance, any
interest, fees or costs which are not paid when due under this Agreement shall
bear interest from the due date at the Bank's Reference Rate plus two (2.00)
percentage points. This may result in compounding of interest.
6. CONDITIONS
The Bank must receive the following items, in form and content acceptable to the
Bank, before it is required to extend any credit to the Borrower under this
Agreement:
6.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance
by the Borrower (and any guarantor) of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.
6.2 GOVERNING DOCUMENTS. A copy of the Borrower's articles of
incorporation.
6.3 SECURITY AGREEMENTS. Signed original security agreements, assignments,
financing statements and fixture filings (together with collateral in which the
Bank requires a possessory security interest), which the Bank requires.
6.4 EVIDENCE OF PRIORITY. Evidence that security interests and liens in
favor of the Bank are valid, enforceable, and prior to all others' rights and
interests, except those the Bank consents to in writing.
6.5 INSURANCE. Evidence of insurance coverage, as required in the
"Covenants" section of this Agreement.
6.6 GUARANTIES. Guaranties signed by Jerry's Famous Deli L.A., Inc. and
JFD, Inc., each in the amount of Four Million Fifty Thousand Dollars
($4,050,000).
6.7 COMMITMENT LETTER FROM BANK LEUMI. A copy of the Bank Leumi's
commitment letter providing for Four Million Dollars ($4,000,000) in term loans.
6.8 INTERCREDITOR AGREEMENT. Signed original intercreditor agreement with
Bank Leumi specifying shared collateral, tangible and intangible, on a pro-rata
basis of loans outstanding.
6.9 OTHER ITEMS. Any other items that the Bank reasonably requires.
7. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation.
7.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
7.2 AUTHORIZATION. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
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7.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
7.4 GOOD STANDING. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
7.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement,
or obligation by which the Borrower is bound.
7.6 FINANCIAL INFORMATION. All financial and other information that has
been or will be supplied to the Bank, including the Borrower's financial
statement dated as of June 30, 1997, is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrower's (and any guarantor's) financial condition.
(b) in compliance with all government regulations that apply.
Since the date of the financial statement specified above, there has been no
material adverse change in the business condition (financial or otherwise),
operations, properties or prospects of the Borrower (or any guarantor).
7.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower, which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank.
7.8 COLLATERAL. All collateral required in this Agreement is owned by the
grantor of the security interest free of any title defects or any liens or
interests of others.
7.9 PERMITS, FRANCHISES. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
7.10 OTHER OBLIGATIONS. The Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
7.11 INCOME TAX MATTERS. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year.
7.12 NO TAX AVOIDANCE PLAN. The Borrower's obtaining of credit from the Bank
under this Agreement does not have as a principal purpose the avoidance of U. S.
withholding taxes.
7.13 NO EVENT OF DEFAULT. There is no event which is, or with notice or
lapse of time or both would be, a default under this Agreement.
7.14 LOCATION OF BORROWER. The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement.
8. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
8.1 USE OF PROCEEDS (FACILITY NO. 1). To use the proceeds of the credit
only to finance new store openings.
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8.2 FINANCIAL INFORMATION. To provide the following financial information
and statements in form and content acceptable to the Bank, and such additional
information as requested by the Bank from time to time:
(a) Within 120 days of the Borrower's fiscal year end, the Borrower's
annual financial statements. These financial statements must be audited
by a Certified Public Accountant ("CPA") acceptable to the Bank. The
statements shall be prepared on a consolidated basis.
(b) Within 120 days of the Borrower's fiscal year end, copies of the
Borrower's Form 10-K Annual Report filed with the Securities and
Exchange Commission.
(c) Within 45 days of the period's end, copies of the Borrower's Form 10-Q
Quarterly Report filed with the Securities and Exchange Commission.
(d) Within 45 days of the period's end, the Borrower's quarterly
year-to-date income statements by store, with comparison to budget and
the equivalent prior year period.
(e) Within 120 days of the Borrower's fiscal year end, the Borrower's
annual store-by-store and company projections by quarter.
8.3 BOOK NET WORTH. To maintain on a consolidated basis net worth equal to
at least the sum of the following:
(a) Twenty-Three Million Six Hundred Thousand Dollars ($23,600,000); plus
(b) 75% of net profit after income taxes and new equity raised.
8.4 TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. To maintain on a
consolidated basis a ratio of total liabilities to tangible net worth not
exceeding 1.20:1. "Tangible net worth" means the gross book value of the
Borrower's assets (excluding goodwill, patents, trademarks, trade names,
organization expense, treasury stock, unamortized debt discount and expense,
capitalized or deferred research and development costs, deferred marketing
expenses, deferred receivables, and other like intangibles) less total
liabilities, including but not limited to accrued and deferred income taxes, and
any reserves against assets. "Total liabilities" means the sum of current
liabilities plus long term liabilities.
8.5 FIXED CHARGE COVERAGE RATIO. To maintain on a consolidated basis a
Fixed Charge Coverage Ratio of at least 1.65:1. "Fixed Charge Coverage Ratio" is
defined as Net Cash Flow divided by Fixed Charge. Net Cash Flow is defined as
the sum of net profit after taxes, plus depreciation and amortization, plus
interest expense, plus minimum operating lease expense less dividends. Fixed
Charge is defined as the sum of the current portion of long term debt, plus
interest expense, plus minimum operating lease expense. This ratio will be
calculated at the end of each fiscal quarter, using fiscal year-to-date results
on an annualized basis. The current portion of long term liabilities will be
measured as of the most recent balance sheet figure.
8.6 MINIMUM NET INCOME. To earn on a consolidated basis net income after
taxes and extraordinary items of at least Five Hundred Thousand Dollars
($500,000). This covenant will be calculated at the end of each fiscal quarter,
using the results of that quarter and each of the 3 immediately preceding
quarters.
8.7 LIMITATION ON LOSSES. Not to incur on a consolidated basis a net loss
before taxes and extraordinary items in any two consecutive quarterly accounting
periods.
8.8 OTHER DEBTS. Not to have outstanding or incur any direct or contingent
liabilities (other than those to the Bank), or become liable for the liabilities
of others without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
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<PAGE> 8
(d) Liabilities and lines of credit in existence on the date of this
Agreement disclosed in writing to the Bank in the Borrower's financial
statement dated August 31, 1997.
(e) Additional debts to Bank of Leumi which do not exceed a total principal
amount of Four Million Dollars ($4,000,000).
8.9 OTHER LIENS. Not to create, assume, or allow any security interest or
lien (including judicial liens) on property the Borrower now or later owns,
except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to
the Bank.
8.10 CAPITAL EXPENDITURES. Not to spend more than the amounts indicated for
each period specified below to acquire fixed or capital assets.
<TABLE>
<CAPTION>
Fiscal Year Amounts
----------- -------
<S> <C>
1997 and 1998 $21,000,000 (in aggregate)
1999 $ 4,000,000
2000 $ 4,000,000
</TABLE>
Capital expenditures, whether tangible or intangible, may only be used for the
acquisition and construction of new restaurant sites.
8.11 DIVIDENDS. Not to declare or pay any dividends on any of its shares
except dividends payable in capital stock of the Borrower, and not to purchase,
redeem or otherwise acquire for value any of its shares, or create any sinking
fund in relation thereto.
8.12 LOANS TO OFFICERS. Not to make any loans, advances or other extensions
of credit to any of the Borrower's executives, officers, directors or
shareholders (or any relatives of any of the foregoing).
8.13 LOANS AND INVESTMENTS. Not to make any loans other extensions of credit
to, or make any investments in, or make any capital contributions or other
transfers of assets to, any individual or entity, except for extensions of
credit in the nature of accounts receivable or notes receivable arising from the
sale or lease of goods or services in the ordinary course of business.
8.14 ASSIGNMENT OF TRADE NAMES. To make assignment of trade names as
applicable including but not limited to Jerry's Famous Deli, Solley's and Rascal
House.
8.15 MIZRAHI BANK LINE OF CREDIT. To ensure the Mizrahi bank line of credit
remains secured by real property and no new covenants are added.
8.16 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit over One Million Dollars ($1,000,000) against the Borrower
(or any guarantor).
(b) any substantial dispute between the Borrower (or any guarantor) and any
government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's (or any guarantor's)
business condition (financial or otherwise), operations, properties or
prospects, or ability to repay the credit.
(e) any change in the Borrower's name, legal structure, place of business,
or chief executive office if the Borrower has more than one place of
business.
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<PAGE> 9
(f) any plans describing development and acquisition projects of new
restaurants, on a case by case basis.
8.17 BOOKS AND RECORDS. To maintain adequate books and records.
8.18 AUDITS. To allow the Bank and its agents to inspect the Borrower's
properties (including taking and removing samples for environmental testing) and
examine, audit and make copies of books and records at any reasonable time. If
any of the Borrower's properties, books or records are in the possession of a
third party, the Borrower authorizes that third party to permit the Bank or its
agents to have access to perform inspections or audits and to respond to the
Bank's requests for information concerning such properties, books and records.
The Bank has no duty to inspect the Borrower's properties or to examine, audit
or copy books and records and the Bank shall not incur any obligation or
liability by reason of not making any such inspection or inquiry. In the event
that the Bank inspects the Borrower's properties or examines, audits or copies
books and records, the Bank will be acting solely for the purposes of protecting
the Bank's security and preserving the Bank's rights under this Agreement.
Neither the Borrower nor any other party is entitled to rely on any inspection
or other inquiry by the Bank. The Bank owes no duty of care to protect the
Borrower or any other party against, or to inform the Borrower or any other
party of, any adverse condition that may be observed as affecting the Borrower's
properties or premises, or the Borrower's business. The Bank may in its
discretion disclose to the Borrower or any other party any findings made as a
result of, or in connection with, any inspection of the Borrower's properties.
8.19 COMPLIANCE WITH LAWS. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
8.20 PRESERVATION OF RIGHTS. To maintain and preserve all rights,
privileges, and franchises the Borrower now has.
8.21 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or
replacements to keep the Borrower's properties in good working condition.
8.22 PERFECTION OF LIENS. To help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect its
security interests and liens.
8.23 COOPERATION. To take any action reasonably requested by the Bank to
carry out the intent of this Agreement.
8.24 INSURANCE.
(a) INSURANCE COVERING COLLATERAL. To maintain all risk property damage
insurance policies covering the tangible property comprising the
collateral. Each insurance policy must be in an amount acceptable to
the Bank. The insurance must be issued by an insurance company
acceptable to the Bank and must include a lender's loss payable
endorsement in favor of the Bank in a form acceptable to the Bank.
(b) GENERAL BUSINESS INSURANCE. To maintain insurance satisfactory to the
Bank as to amount, nature and carrier covering property damage
(including loss of use and occupancy) to any of the Borrower's
properties, public liability insurance including coverage for
contractual liability, product liability and workers' compensation, and
any other insurance which is usual for the Borrower's business.
(c) EVIDENCE OF INSURANCE. Upon the request of the Bank, to deliver to the
Bank a copy of each insurance policy, or, if permitted by the Bank, a
certificate of insurance listing all insurance in force.
8.25 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written
consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
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<PAGE> 10
(c) enter into any consolidation, merger, or other combination, or become a
partner in a partnership, a member of a joint venture, or a member of a
limited liability company.
(d) sell, assign, lease, transfer or otherwise dispose of any assets for
less than fair market value, or enter into any agreement to do so.
(e) sell, assign, lease, transfer or otherwise dispose of all or a
substantial part of the Borrower's business or the Borrower's assets.
(f) enter into any sale and leaseback agreement covering any of its fixed
or capital assets.
(g) acquire or purchase a business or its assets not in the same line of
business.
(h) acquire additional real property.
(i) voluntarily suspend its business for more than 7 consecutive days in
any 30 day period.
9. DEFAULT
If any of the following events occurs, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to the Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
9.1 FAILURE TO PAY. The Borrower fails to make a payment under this
Agreement when due.
9.2 LIEN PRIORITY. The Bank fails to have an enforceable first lien (except
for any prior liens to which the Bank has consented in writing) on or security
interest in any property given as security for this loan.
9.3 FALSE INFORMATION. The Borrower (or any guarantor) has given the Bank
false or misleading information or representations.
9.4 BANKRUPTCY. The Borrower (or any guarantor) files a bankruptcy
petition, a bankruptcy petition is filed against the Borrower (or any guarantor)
or the Borrower (or any guarantor) makes a general assignment for the benefit of
creditors.
9.5 RECEIVERS. A receiver or similar official is appointed for the
Borrower's (or any guarantor's) business, or the business is terminated.
9.6 LAWSUITS. Any lawsuit or lawsuits are filed on behalf of one or more
trade creditors against the Borrower in an aggregate amount of One Million
Dollars ($1,000,000) or more in excess of any insurance coverage.
9.7 JUDGMENTS. Any judgments or arbitration awards are entered against the
Borrower (or any guarantor), or the Borrower (or any guarantor) enters into any
settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of One Million Dollars ($1,000,000) or more in excess of any
insurance coverage.
9.8 GOVERNMENT ACTION. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's (or any guarantor's)
financial condition or ability to repay.
9.9 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the
Borrower's (or any guarantor's) business condition (financial or otherwise),
operations, properties or prospects, or ability to repay the credit.
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<PAGE> 11
9.10 CROSS-DEFAULT. Any default occurs under any agreement in connection
with any credit the Borrower (or any guarantor) or any of the Borrower's related
entities or affiliates has obtained from anyone else or which the Borrower (or
any guarantor) or any of the Borrower's related entities or affiliates has
guaranteed.
9.11 DEFAULT UNDER RELATED DOCUMENTS. Any guaranty, subordination agreement,
security agreement or other document required by this Agreement is violated or
no longer in effect.
9.12 OTHER BANK AGREEMENTS. The Borrower (or any guarantor) fails to meet
the conditions of, or fails to perform any obligation under any other agreement
the Borrower (or any guarantor) has with the Bank or any affiliate of the Bank.
9.13 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article. This includes any failure or
anticipated failure by the Borrower to comply with any financial covenants set
forth in this Agreement, whether such failure is evidenced by financial
statements delivered to the Bank or is otherwise known to the Borrower or the
Bank.
10. ENFORCING THIS AGREEMENT; MISCELLANEOUS
10.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
10.2 CALIFORNIA LAW. This Agreement is governed by California law.
10.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the right
of set-off against the Borrower.
10.4 ARBITRATION.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those
that arise from:
(i) This Agreement (including any renewals, extensions or
modifications of this Agreement);
(ii) Any document, agreement or procedure related to or delivered
in connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted
between the Borrower and the Bank, including claims for injury
to persons, property or business interests (torts).
(b) At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United
States Arbitration Act. The United States Arbitration Act will apply
even though this Agreement provides that it is governed by California
law.
(c) Arbitration proceedings will be administered by the American
Arbitration Association and will be subject to its commercial rules of
arbitration.
(d) For purposes of the application of the statute of limitations, the
filing of an arbitration pursuant to this paragraph is the equivalent
of the filing of a lawsuit, and any claim or controversy which may be
arbitrated under this paragraph is subject to any applicable statute of
limitations. The arbitrators will have the authority to decide whether
any such claim or controversy is barred by the statute of limitations
and, if so, to dismiss the arbitration on that basis.
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<PAGE> 12
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be
submitted to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or
claim, at the time of the proposed submission to arbitration, arises
from or relates to an obligation to the Bank secured by real property
located in California. In this case, both the Borrower and the Bank
must consent to submission of the claim or controversy to arbitration.
If both parties do not consent to arbitration, the controversy or claim
will be settled as follows:
(i) The Borrower and the Bank will designate a referee (or a panel
of referees) selected under the auspices of the American
Arbitration Association in the same manner as arbitrators are
selected in Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be
appointed by a court as provided in California Code of Civil
Procedure Section 638 and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be an
active attorney or a retired judge; and
(iv) The award that results from the decision of the referee (or
the panel) will be entered as a judgment in the court that
appointed the referee, in accordance with the provisions of
California Code of Civil Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property
collateral; or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank, including
the suing party, to submit the controversy or claim to arbitration if
the other party contests the lawsuit. However, if the controversy or
claim arises from or relates to an obligation to the Bank which is
secured by real property located in California at the time of the
proposed submission to arbitration, this right is limited according to
the provision above requiring the consent of both the Borrower and the
Bank to seek resolution through arbitration.
(j) If the Bank forecloses against any real property securing this
Agreement, the Bank has the option to exercise the power of sale under
the deed of trust or mortgage, or to proceed by judicial foreclosure.
10.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes a loan after default. If the Bank waives a default, it
may enforce a later default. Any consent or waiver under this Agreement must be
in writing.
10.6 ADMINISTRATION COSTS. The Borrower shall pay the Bank for all
reasonable costs incurred by the Bank in connection with administering this
Agreement.
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<PAGE> 13
10.7 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any
reasonable costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and including
any amendment, waiver, "workout" or restructuring under this Agreement. In the
event of a lawsuit or arbitration proceeding, the prevailing party is entitled
to recover costs and reasonable attorneys' fees incurred in connection with the
lawsuit or arbitration proceeding, as determined by the court or arbitrator. In
the event that any case is commenced by or against the Borrower under the
Bankruptcy Code (Title 11, United States Code) or any similar or successor
statute, the Bank is entitled to recover costs and reasonable attorneys' fees
incurred by the Bank related to the preservation, protection, or enforcement of
any rights of the Bank in such a case. As used in this paragraph, "attorneys'
fees" includes the allocated costs of in-house counsel.
10.8 ONE AGREEMENT. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank
and the Borrower concerning this credit; and
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
10.9 INDEMNIFICATION. The Borrower will indemnify and hold the Bank harmless
from any loss, liability, damages, judgments, and costs of any kind relating to
or arising directly or indirectly out of (a) this Agreement or any document
required hereunder, (b) any credit extended or committed by the Bank to the
Borrower hereunder, and (c) any litigation or proceeding related to or arising
out of this Agreement, any such document, or any such credit. This indemnity
includes but is not limited to attorneys' fees (including the allocated cost of
in-house counsel). This indemnity extends to the Bank, its parent, subsidiaries
and all of their directors, officers, employees, agents, successors, attorneys,
and assigns. This indemnity will survive repayment of the Borrower's obligations
to the Bank. All sums due to the Bank hereunder shall be obligations of the
Borrower, due and payable immediately without demand.
10.10 NOTICES. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrower may specify from time to time in writing.
10.11 HEADINGS. Article and paragraph headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.
10.12 COUNTERPARTS. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.
10.13 PRIOR AGREEMENT SUPERSEDED. This Agreement supersedes the Business Loan
Agreement entered into as of March 28, 1995, between the Bank and the Borrower,
and any credit outstanding thereunder shall be deemed to be outstanding under
this Agreement.
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<PAGE> 14
This Agreement is executed as of the date stated at the top of the first page.
[LOGO]
BANK OF AMERICA LETTERHEAD
NATIONAL TRUST AND SAVINGS ASSOCIATION JERRY'S FAMOUS DELI, INC.
X /s/ GREGORY P. COHN X /s/ ISAAC STARKMAN
-------------------- -----------------------
BY: GREGORY P. COHN BY: ISAAC STARKMAN
TITLE: RELATIONSHIP MANAGER TITLE: CHIEF EXECUTIVE OFFICER
X /s/ THOMAS VENT
--------------------
BY: THOMAS VENT
TITLE: VICE PRESIDENT
<TABLE>
<S> <C>
ADDRESS WHERE NOTICES TO THE BANK ADDRESS WHERE NOTICES TO THE BORROWER
ARE TO BE SENT: ARE TO BE SENT:
Warner Center Regional Commercial Banking Office #1465
5945 Canoga Avenue 12711 Ventura Boulevard
Woodland Hills, CA 91367 Studio City, CA 91604
</TABLE>
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<PAGE> 1
EXHIBIT 10.41
BANK LEUMI USA
================================================================================
REVOLVING CREDIT AND TERM LOAN AGREEMENT
This Revolving Credit and Term Loan Agreement (the
"Agreement"), dated October 27, 1997 for reference purposes only, is executed by
and between Jerry's Famous Deli, Inc., a California corporation ("Borrower"),
and Bank Leumi USA, a New York State chartered bank (the "Bank"), with reference
to the following facts:
A. Borrower has requested a revolving credit and term loan
facility in the aggregate principal amount of $4,000,000.00 (collectively, the
"Loan") from the Bank. The Loan will be evidenced by Borrower's Promissory Note
dated October 27, 1997 in the principal amount of $4,000,000.00 (the "Note").
The Note and all of Borrower's other obligations to the Bank in connection with
the Loan shall be secured by all of Borrower's tangible and intangible personal
property pursuant to a Security Agreement dated October 27, 1997 (the "Security
Agreement") executed by Borrower, as debtor, in favor of the Bank, as secured
party. The Note and all of Borrower's other obligations to the Bank in
connection with the Loan will be guaranteed by Borrower's wholly-owned
subsidiaries, JFD, Inc., a California corporation ("JFD"), and Jerry's Famous
Deli L.A., Inc., a California corporation ("JFD-LA"), pursuant to two separate
Continuing Guaranties, each dated October 27, 1997 (referred to individually as
a "Continuing Guaranty" and collectively as the "Continuing Guaranties"). The
Continuing Guaranty executed by JFD will be secured by all of JFD's tangible and
intangible personal property pursuant to a Security Agreement dated October 27,
1997 (the "JFD Security Agreement"), and the Continuing Guaranty executed by
JFD-LA will be secured by all of JFD-LA's tangible and intangible personal
property pursuant to a Security Agreement dated October 27, 1997 (the "JFD-LA
Security Agreement").
B. Borrower desires to enter into this Agreement to set forth
certain terms and conditions of the Loan.
THEREFORE, for valuable consideration, Borrower and the Bank
agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following
terms shall have the following definitions:
1.1 ADVANCES. "Advances" means all advances of the principal
amount of the Revolving Credit Facility during the Commitment Period.
1.2 BANK OF AMERICA. "Bank of America" means Bank of America,
National Trust and Savings Association.
<PAGE> 2
1.3 BANK OF AMERICA CREDIT FACILITY EFFECTIVE DATE. "Bank of
America Credit Facility Effective Date" means the date on which Bank of America
first becomes required to extend credit to Borrower under the terms of the Bank
of America Loan Agreement.
1.4 BANK OF AMERICA LOAN AGREEMENT. "Bank of America Loan
Agreement" means that certain Business Loan Agreement dated as of October __,
1997 between Bank of America and Borrower pursuant to which Bank of America has
extended the following two credit facilities to Borrower (collectively, the
"Bank of America Credit Facilities"): (a) A non-revolving line of credit
facility in the principal amount of $2,000,000.00 ("Bank of America Credit
Facility No. 1"); and (b) a term loan facility having an outstanding principal
balance of $2,045,452.00 as of September 30, 1997 ("Bank of America Credit
Facility No. 2").
1.5 BOOK NET WORTH. "Book Net Worth" means the total book
value of all assets appearing on a balance sheet prepared in accordance with
generally accepted accounting principles consistently applied, after deducting
the following, without duplication: (a) any write-up in the book value of any
asset resulting from a revaluation thereof subsequent to December 31, 1996; (b)
all reserves, including reserves for liabilities, fixed or contingent, deferred
income taxes, obsolescence, depletion, insurance, and inventory valuation, which
are not deducted from assets; (c) the amount, if any, at which shares of stock
of the Borrower appear on the asset side of such balance sheet; and (d) all
Indebtedness.
1.6 COMMITMENT PERIOD. "Commitment Period" means the period
commencing on the Effective Date and expiring on December 31, 1998, representing
the period during which Advances under the Revolving Credit Facility shall be
made available by the Bank to Borrower, subject to the terms and conditions of
this Agreement.
1.7 CONSOLIDATED CURRENT ASSETS. "Consolidated Current
Assets" means the Current Assets of Borrower and its Subsidiaries on a
consolidated basis.
1.8 CONSOLIDATED CURRENT LIABILITIES. "Consolidated Current
Liabilities" means the Current Liabilities of Borrower and its Subsidiaries on a
consolidated basis.
1.9 CURRENT ASSETS. "Current Assets" means current assets
determined in accordance with generally accepted accounting principles applied
on a consistent basis.
1.10 CURRENT LIABILITIES. "Current Liabilities" means current
liabilities determined in accordance with generally accepted accounting
principles applied on a consistent basis.
1.11 CONSOLIDATED FUNDED INDEBTEDNESS. "Consolidated Funded
Indebtedness" means the Funded Indebtedness of the Borrower and its Subsidiaries
on a consolidated basis.
1.12 CONSOLIDATED BOOK NET WORTH. "Consolidated Book Net
Worth" means the Book Net Worth of the Borrower and its Subsidiaries on a
consolidated basis.
1.13 CONSOLIDATED TANGIBLE NET WORTH. "Consolidated Tangible
Net Worth" means the Tangible Net Worth of the Borrower and its Subsidiaries on
a consolidated basis.
2
<PAGE> 3
1.14 EVENT OF DEFAULT. "Event of Default" means any of the
events specified in Section 7 of this Agreement.
1.15 EXISTING RESTAURANT FACILITIES. "Existing Restaurant
Facilities" means, collectively, the existing restaurant facilities currently
operated by Borrower, as disclosed in the Preliminary Representation and
Warranty Questionnaire.
1.16 EXISTING SUBSIDIARIES. "Existing Subsidiaries" means JFD
and JFD-LA, collectively.
1.17 FIXED CHARGE COVERAGE RATIO. "Fixed Charge Coverage
Ratio" means, on a consolidated basis with respect to Borrower and its
Subsidiaries, Net Cash Flow divided by Fixed Charges. For purposes of this
Section, (a) the term "Net Cash Flow" means the sum of NPAT, plus depreciation
and amortization, plus interest expense, plus minimum operating lease expense,
less dividends permitted under this Agreement; and (b) the term "Fixed Charges"
means the sum of the current portion of Funded Indebtedness, plus interest
expense, plus minimum operating lease expense. The Fixed Charge Coverage Ratio
shall be calculated at the end of each fiscal quarter of Borrower, using fiscal
year-to-date results on an annualized basis. The current portion of Funded
Indebtedness will be measured as of the most recent balance sheet figure.
1.18 FUNDED INDEBTEDNESS. "Funded Indebtedness" means (a) all
Indebtedness which by its terms matures more than one year from the date as of
which any calculation of Funded Indebtedness is made; and (b) all Indebtedness
maturing within one year from such date which is renewable or extendable at the
option of the obligor to a date beyond one year from such date, including any
Indebtedness renewable or extendable (whether or not theretofore renewed or
extended) under, or payable from the proceeds of any other Indebtedness which
may be incurred pursuant to the provisions of, any revolving credit agreement or
other similar agreement.
1.19 INDEBTEDNESS. "Indebtedness" means and includes, without
duplication, (a) all items which, in accordance with generally accepted
accounting principles, would be included on the liability side of a balance
sheet as at the date as of which Indebtedness is to be determined, excluding
shareholders equity (which includes capital stock, surplus, capital and earned
surplus); (b) all indebtedness secured by any mortgage, pledge, security
interest or lien existing on property owned subject to such mortgage, pledge,
security interest or lien, whether or not the indebtedness secured thereby shall
have been assumed; (c) all amounts representing the capitalization of rentals in
accordance with generally accepted accounting principles; and (d) all
guaranties, endorsements and other contingent obligations, including all
indebtedness guaranteed, directly or indirectly, in any manner, or in effect
guaranteed or supported, directly or indirectly, through an agreement,
contingent or otherwise, (i) to purchase or sell services at prices or in
amounts designed to enable a third party debtor (the "Debtor") to make payment
of the indebtedness or to assure the owner of the indebtedness against loss; or
(ii) to supply or advance funds to or in any other manner invest in the Debtor;
provided, however, that such term shall not mean or include any indebtedness in
respect of which monies sufficient to pay and discharge the same in full (either
on the express date of maturity of or on such earlier date as such indebtedness
may be duly called for redemption and payment) shall be deposited with a
depository, agency or trustee in trust for the payment thereof.
3
<PAGE> 4
1.20 LOAN DOCUMENTS. "Loan Documents" means the Note, this
Agreement, and all other documents executed by Borrower and the Existing
Subsidiaries, respectively, and delivered to the Bank at the Bank's request in
connection with the Loan.
1.21 MINIMUM ADVANCE AMOUNT. "Minimum Advance Amount" means
(a) with respect to the first Notice of Borrowing under the Revolving Credit
Facility (the "First Notice of Borrowing"), the sum of $2,000,000, representing
the minimum Advance which may be requested by Borrower under the First Notice of
Borrowing; and (b) with respect to each Notice of Borrowing after the First
Notice of Borrowing, the principal sum of $250,000, representing the minimum
Advance which may be requested by Borrower under the Revolving Credit Facility
after the First Notice of Borrowing.
1.22 NEW RESTAURANT FACILITIES. "New Restaurant Facilities"
means, collectively, new restaurant facilities which are acquired and developed
by Borrower or its Existing Subsidiaries which are substantially similar in
character to the Existing Restaurant Facilities.
1.23 NPAT. "NPAT" means net profit after taxes, determined in
accordance with generally accepted accounting principles applied on a consistent
basis.
1.24 OBLIGATIONS. "Obligations" means (a) payment of
Borrower's indebtedness evidenced by or arising under the Note, and all
extensions, renewals and modifications thereof; (b) performance of all
obligations of Borrower under this Agreement, including payment to the Bank of
all sums of money, together with interest thereon at the rate specified in the
Note, which may be advanced or expended by the Bank under any provision of this
Agreement; and (c) payment of all other indebtedness and performance of all
other obligations of Borrower to the Bank under the other Loan Documents, and
all extensions, renewals and modifications thereof.
1.25 PERMITTED CAPITAL EXPENDITURES. "Permitted Capital
Expenditures" means capital expenditures incurred by Borrower and its
Subsidiaries in connection with (a) the maintenance of the Existing Restaurant
Facilities; or (b) the acquisition, development, and maintenance of New
Restaurant Facilities.
1.26 PERMITTED INDEBTEDNESS. "Permitted Indebtedness" means,
collectively, (a) trade debt incurred in connection with the acquisition of
goods, supplies, or merchandise in the ordinary course of business; (b)
liabilities incurred in connection with the endorsement of negotiable
instruments in the ordinary course of business; (c) liabilities incurred in
connection with obtaining surety bonds in the ordinary course of business; (d)
liabilities and lines of credit in existence as of the date of this Agreement
disclosed in writing to the Bank in Borrower's financial statement dated August
31, 1997; and (e) indebtedness to Bank of America (i) in an aggregate principal
amount not to exceed Two Million Dollars ($2,000,000) in accordance with the
terms of Bank of America Credit Facility No. 1; and (ii) in an aggregate
principal amount not to exceed Two Million Forty-Five Thousand Four Hundred
Fifty-Two and No/100 Dollars ($2,045,452.00) in in accordance with the terms of
Bank of America Credit Facility No. 2, as the terms of such credit facilities
have been disclosed by Borrower in writing to the Bank as of the date of the
Bank's execution of this Agreement.
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1.27 PRELIMINARY REPRESENTATION AND WARRANTY QUESTIONNAIRE.
"Preliminary Representation and Warranty Questionnaire" means the Representation
and Warranty questionnaire dated October 1, 1997 signed by Borrower and
delivered to the Bank in connection with the Loan, including all attachments
thereto.
1.28 REVOLVING CREDIT FACILITY. "Revolving Credit Facility"
means the revolving credit facility up to the principal amount of $4,000,000
provided by the Bank to Borrower under the terms of this Agreement during the
Commitment Period.
1.29 REVOLVING CREDIT LIMIT. "Revolving Credit Limit" means
(a) during the Commitment Period and prior to the Bank of America Credit
Facility Effective Date, the principal sum of $2,000,000.00; and (b) following
the Bank of America Credit Facility Effective Date and during the remainder of
the Commitment Period, the principal sum of $4,000,000.00.
1.30 SUBSIDIARIES. "Subsidiaries" means the Existing
Subsidiaries and all entities in which Borrower, with the Bank's consent, owns
more than fifty percent (50%) of the outstanding ownership interests.
1.31 TANGIBLE NET WORTH. "Tangible Net Worth" means the total
book value of all assets appearing on a balance sheet prepared in accordance
with generally accepted accounting principles consistently applied, after
deducting the following, without duplication: (a) any write-up in the book value
of any asset resulting from a revaluation thereof subsequent to December 31,
1996; (b) all reserves, including reserves for liabilities, fixed or contingent,
deferred income taxes, obsolescence, depletion, insurance, and inventory
valuation, which are not deducted from assets; (c) the amount, if any, at which
shares of stock of the Borrower appear on the asset side of such balance sheet;
(d) all goodwill, research and development, trademarks, trade names, capitalized
software and organizational costs, licenses and franchises, patents, copyrights,
and other intangible items of any kind appearing on the asset side of such
balance sheet; and (e) all Indebtedness.
2. EFFECTIVE DATE. For purposes of this Agreement, the term
"Effective Date" shall mean the date upon which all of the following conditions
have been satisfied:
2.1 LOAN DOCUMENTS. There shall have been delivered to the
Bank each of the following, in form and substance satisfactory to the Bank and
its outside counsel in their discretion, duly executed and acknowledged by
Borrower and the JFD and JFD-LA (collectively, the "Guarantors"), as
appropriate:
(a) This Agreement;
(b) The Note;
(c) The Security Agreement and such UCC-1 financing
statements as may be required by the Bank;
(d) The Continuing Guaranties;
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(e) The JFD Security Agreement and the JFD-LA Security
Agreement and such UCC-1 financing statements as may be required by the Bank;
(f) A corporate resolution to borrow by Borrower;
(g) Corporate resolutions to guarantee by JFD and JFD-LA;
(h) Such other documents and agreements as the Bank may
determine to be necessary or appropriate to grant and assign to the Bank a
perfected first-priority lien on and security interest in all tangible and
intangible property of Borrower and the Existing Subsidiaries (collectively, the
"Collateral") pursuant to and in compliance with all applicable laws, including
the Uniform Commercial Code of the respective states in which the Collateral is
located;
2.2 INTERCREDITOR AGREEMENT. The Bank and Bank of America
shall have entered into an intercreditor agreement regarding the Loan and the
Bank of America Credit Facilities;
2.3 ARTICLES OF INCORPORATION. The Bank shall have received
and approved copies of the articles of incorporation of Borrower and the
Existing Subsidiaries certified by the California Secretary of State;
2.4 BY-LAWS. The Bank shall have received and approved copies
of the by-laws of Borrower and the Existing Subsidiaries certified by the
respective corporate secretaries of such entities;
2.5 INSURANCE. The Bank shall have received evidence
acceptable to the Bank that Borrower has obtained all insurance coverage
relating to the Collateral required under the terms of the Loan Documents;
2.6 PERFECTION OF SECURITY INTEREST. The Bank shall have
received evidence acceptable to the Bank that the Bank's security interest in
the Collateral represents and first and prior lien on the Collateral, subject
only to such exceptions as shall be acceptable to the Bank in its discretion.
2.7 OTHER REQUIREMENTS. The Bank shall have received evidence
acceptable to the Bank that all other conditions, requirements, and approvals
required by the Bank in connection with the closing of the Loan have been
satisfied; and
2.8 CLOSING COSTS. Borrower shall have paid the fees and
expenses of the Bank's outside counsel, as described in Section 28 below, as
well as any other fees, costs and expenses incurred or payable by the Bank in
connection with this Agreement and the transactions contemplated by this
Agreement.
If the foregoing conditions and any other conditions set forth in this Agreement
shall not have been satisfied and all other covenants and agreements by Borrower
set forth herein shall not have been performed on or before November 28, 1997,
the Bank, in its sole discretion, shall have the right at any time thereafter to
terminate this Agreement by giving Borrower written
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<PAGE> 7
notice of such termination. Upon the giving of such notice, this Agreement shall
terminate and the agreements of the Bank contained herein shall be null and
void.
3. REVOLVING CREDIT FACILITY.
3.1 ADVANCES DURING COMMITMENT PERIOD. During the Commitment
Period, Borrower may from time to time request that the Bank make one or more
Advances under the Revolving Credit Facility, provided that the aggregate
principal balance of all such Advances made by the Bank and requested by
Borrower shall at no time exceed the applicable Revolving Credit Limit. At no
time after the First Notice of Borrowing and during the remainder of the
Commitment Period shall the outstanding principal balance of the Revolving
Credit Facility be less than $2,000,000.
3.2 MANNER OF BORROWING DURING COMMITMENT PERIOD. Borrower
shall give the Bank prior written notice (a "Notice of Borrowing") of each
requested Advance specifying (a) the total amount of the requested Advance; and
(b) the requested date of disbursement by the Bank of the Advance (which date
shall be a business day and shall not be sooner that two (2) business days after
the Bank's receipt of the Notice of Borrowing). Each of Notice of Borrowing
shall be satisfactory to the Bank in form and substance and shall be signed by
Borrower. Each Notice of Borrowing shall be irrevocable and binding on Borrower.
Following the Bank's receipt of a Notice of Borrowing, and subject to the terms
and conditions of this Agreement, the Bank shall disburse to or for the account
of Borrower the amount of the requested Advance. Such disbursements shall be
made by deposit into an account in Borrower's name established or to be
established at one of the Bank's offices located in Los Angeles, California or
by such other method as may be acceptable to the Lender, in its discretion. Each
Notice of Borrowing shall be for an Advance in an amount not less the Minimum
Advance Amount. Within the limits of the applicable Revolving Credit Limit, and
subject to the terms and conditions of this Agreement, Borrower may borrow,
prepay pursuant to the Note, and re-borrow the principal amount of the Loan up
to the applicable Revolving Credit Limit.
3.3 RECORDS OF ADVANCES. Borrower authorizes the Bank to
endorse the Note and to make such other entries as the Bank may determine to be
appropriate in the Bank's records to reflect all Advances made to the Borrower
and all payments of principal in respect of the Loan, which endorsements and
entries shall, in the absence of manifest error, be conclusive as to the
outstanding principal amount of the Loan; provided, however, that the Bank's
failure to make any such notation with respect to any Advance or payment shall
not limit or otherwise affect the Obligations of Borrower under this Agreement,
the Note, or the other Loan Documents.
3.4 RELIANCE BY BANK. The Bank may conclusively presume that
all requests, statements, information, certifications, and representations,
whether written or oral, submitted or made by Borrower or any of its agents to
the Bank in connection with the Loan are true and correct, and the Bank shall be
entitled to rely thereon, without investigation or inquiry of any kind by the
Bank, in disbursing the Loan proceeds or taking or refraining from taking any
other action in connection with the Loan.
4. TERM LOAN CREDIT FACILITY. Upon the expiration of the
Commitment Period, the Revolving Credit Facility shall automatically convert to
a term loan repayable in accordance with the terms and conditions of the Note,
the maturity date of which term loan shall be that date which is forty-five (45)
calendar months after the expiration of the Commitment Period.
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<PAGE> 8
5. BORROWER'S COVENANTS.
5.1 CORPORATE EXISTENCE. Borrower shall and shall cause the
Subsidiaries to maintain their corporate existence in good standing under the
laws of the respective states in which they are incorporated and maintain their
qualification as a foreign corporation in good standing in each jurisdiction in
which the nature of their respective businesses requires qualification as a
foreign corporation and where the failure to qualify would have a material
adverse effect on Borrower's or any Subsidiary's business.
5.2 BOOKS AND RECORDS. Borrower shall and shall cause each of
the Subsidiaries to maintain complete and accurate books and records which
contain full and correct entries of all transactions relating to the respective
businesses of Borrower and the Subsidiaries in accordance with generally
accepted accounting principles consistently applied. All such books and records
shall be kept at Borrower's or the Subsidiary's chief executive office located
in Los Angeles County, California, and Borrower shall not remove and shall cause
the Subsidiaries to not remove such books and records without the Bank's prior
written consent other than to the office of Borrower's accountants in Los
Angeles County, California for a period of no more than ten (10) consecutive
days in any three (3) month period.
5.3 INSPECTION. The Bank shall have access to all of
Borrower's and the Subsidiaries' respective books and records during normal
business hours for the purposes of examination, inspection, verification, audit,
copying and for any other reasonable purpose. The Bank shall have the right
during normal business hours to discuss the respective affairs, finances, books
and records of Borrower and the Subsidiaries with their respective officers,
employees and independent public accountants, and Borrower on behalf of itself
and each of the Subsidiaries authorizes such officers, employees and accountants
to discuss such matters with the Bank during normal business hours as the Bank
may request.
5.4 FINANCIAL STATEMENTS. Borrower shall deliver to the Bank a
copy of all financial statements prepared with respect to Borrower and the
Subsidiaries, respectively, within thirty (30) days after the preparation of
each such statement. As soon as practicable and in any event within ninety (90)
days after the end of Borrower's fiscal year, Borrower shall cause to be
prepared and shall deliver to the Bank complete financial statements of Borrower
and the Subsidiaries on a consolidated basis (and complete financial statements
of Borrower and the Existing Subsidiaries on an unconsolidated basis) for such
fiscal year, including balance sheets and profit and loss statements. As soon as
practicable and in any event within forty-five (45) days after the end of each
of the first three quarters of Borrower's fiscal year, Borrower shall cause to
be prepared and shall deliver to the Bank complete financial statements of
Borrower and the Subsidiaries on a consolidated basis (and complete financial
statements of Borrower and the Existing Subsidiaries on an unconsolidated basis)
for such quarter, including balance sheets and profit and loss statements. All
such annual consolidated financial statements (a) shall be audited by an
independent certified public accountant selected by Borrower and reasonably
acceptable to the Bank; (b) shall be prepared in accordance with generally
accepted accounting principles consistently applied; and (c) shall be
accompanied by the officers' certificates described in Section 5.6 below. All
such annual and quarterly unconsolidated and quarterly consolidated financial
statements (i) shall be prepared in accordance with generally accepted
accounting principles consistently applied; (ii) shall be certified as complete
and correct by the chief financial officer of Borrower; and (iii) shall be
accompanied by the officers' certificates described in Section 5.6 below. The
Bank acknowledges that, as of the date of this Agreement, the accounting firm of
Coopers and Lybrand LLP is acceptable to the Bank.
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<PAGE> 9
5.5 REPORTS. From time to time upon the Bank's request,
Borrower shall deliver to the Bank such reports and information available to
Borrower's management concerning the business and affairs of Borrower and its
Subsidiaries, respectively, as the Bank may reasonably request. Such reports
shall be in such form, for such periods, contain such information, and shall be
rendered with such frequency as the Bank may reasonably designate. All reports
and information provided to the Bank by Borrower or any Subsidiary shall be
complete and accurate in all material respects at the time provided. Borrower
shall deliver to the Bank as soon as available one copy of (a) each financial
statement, report, notice or proxy statement given by Borrower or any Subsidiary
to shareholders generally; (b) each regular or periodic report and any
registration statement, prospectus, or material written communication in respect
thereto filed by Borrower or any Subsidiary with, or received from, any
securities exchange or the Securities and Exchange Commission or any successor
agency (including Borrower's 10-Q Quarterly Report); and (c) each report
submitted to Borrower or any Subsidiary by independent accountants in connection
with any annual, interim or special audit made by such accountants of the books
of Borrower or any Subsidiary.
5.6 OFFICERS' CERTIFICATES. From time to time upon the Bank's
request and when required by Section 5.4 above, Borrower shall and shall cause
each of the Subsidiaries to deliver to the Bank certificates signed by the
president or vice president and chief financial officer or assistant treasurer
of Borrower and each Subsidiary, as applicable, (a) stating that (i) such
officers have reviewed this Agreement and have made or caused to be made under
their supervision a review of the transactions and condition of Borrower or such
Subsidiary, as applicable, for the preceding twelve-month period; and (ii) that
such review has not disclosed the existence during such period of any event or
condition which constitutes an Event of Default under this Agreement, or if such
event or condition exists or existed, specifying the nature of the Event of
Default and the action which Borrower or such Subsidiary has taken or proposes
to take with respect thereto; and (b) setting forth such information as may
reasonably be required by the Bank in order to establish whether Borrower and
the Subsidiaries were in compliance with the requirements of this Agreement
during the preceding twelve-month period, including without limitation
calculations demonstrating compliance with the requirements of Section 5.22
below.
5.7 PAYMENT OF OBLIGATIONS. Borrower shall pay all of its
indebtedness and perform all of its other obligations under the Loan Documents,
including all indebtedness evidenced by the Note, as and when the same become
due.
5.8 NOTICE OF ADVERSE CLAIMS. Borrower shall and shall cause
the Subsidiaries to immediately notify the Bank in writing of (a) the
commencement of any litigation, including arbitrations, and of any proceedings
before any governmental agency which would, if successful, materially affect the
Borrower or any Subsidiary, or where the amount involved exceeds $100,000.00 and
is not acknowledged by Borrower's or such Subsidiary's insurance carrier to be
covered in full by insurance; (b) any material adverse change in Borrower's or
any Subsidiary's financial condition, business, or properties or in Borrower's
ability to perform its obligations under the Loan Documents; (c) any event or
condition which constitutes an Event of Default under this Agreement; (d) any
change in the officers, directors or key employees of Borrower or any of the
Subsidiaries; and (e) the death of any officer, director or key employee of
Borrower or any of the Subsidiaries.
5.9 FURTHER ASSURANCES. Upon the Bank's request, Borrower
shall and shall cause the Subsidiaries to execute and deliver to the Bank such
further documents and
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agreements, in form and substance satisfactory to the Bank, as the Bank may
reasonably require to effectuate this Agreement.
5.10 CLAIMS. Borrower shall and shall cause the Subsidiaries
to pay when due all claims which, if unpaid, might become a lien or charge on
any or all of the properties or assets of Borrower or any Subsidiary.
5.11 TAXES. Borrower shall and shall cause the Subsidiaries to
pay when due all foreign, federal, state, and local taxes, assessments, and
governmental charges now or hereafter levied upon or against Borrower or any
Subsidiary or their respective properties or assets, including all income,
franchise, personal property, real property, excise, withholding, sales and use
taxes.
5.12 CONTEST. Borrower and the Subsidiaries shall have the
right to contest payment of any tax, assessment, charge or claim referred to in
Section 5.10 or 5.11 above, provided that (a) appropriate contest proceedings
are promptly and in good faith commenced and diligently prosecuted by Borrower
or the Subsidiary, as applicable; and (b) a bond is posted or other appropriate
action is taken to prevent such tax, assessment, charge or claim from becoming a
lien on the respective properties and assets of Borrower and the Subsidiaries.
5.13 PENSION PLANS. Borrower shall and shall cause the
Subsidiaries to pay all amounts necessary to fund all of their present and
future respective employee benefit plans in accordance with their terms, and
Borrower shall not permit and shall cause its Subsidiaries to not permit the
occurrence of any event with respect to any such plan which would result in any
liability of Borrower or any Subsidiary, including any liability to the Pension
Benefit Guaranty Corporation or any other governmental agency.
5.14 INSURANCE. Borrower shall and shall cause each of the
Subsidiaries to maintain insurance against such risks and liabilities, in such
forms, and for such amounts as are customarily maintained by entities engaged in
the same or similar businesses and similarly situated (collectively, the
"Insurance Policies"). Each of the Insurance Policies shall be maintained with
financially sound and reputable insurers. Upon the Bank's request, Borrower
shall and shall cause the Subsidiaries to provide the Bank with evidence
satisfactory to the Bank regarding the maintenance of the insurance required by
this Section, including proof of premium payments and originals or copies of
insurance policies, certificates of insurance, and endorsements. Without
limiting the generality of this Section, Borrower shall at all times maintain in
full force (a) all risk insurance covering all tangible property of Borrower and
its Subsidiaries; (b) commercial general liability insurance; (c) business
interruption insurance and workers' compensation insurance; and (d) such other
types of insurance as may from time to time be reasonably required by the Bank.
Each of the Insurance Policies, including the amounts, form, coverage,
deductibles, insurer and loss payable and cancellation provisions, shall be
reasonably acceptable to the Bank. Without limiting any of the terms of this
Section, (i) each of the Insurance Policies shall provide that it may be
cancelled or modified only upon not less than thirty (30) days prior written
notice to the Bank; and (ii) the all risk and other casualty insurance policies
which Borrower maintains under this Agreement shall contain a lender's loss
payable endorsement acceptable to the Bank naming the Bank as loss payee.
5.15 MAINTENANCE OF PROPERTIES. Borrower shall and shall cause
the Subsidiaries to maintain their respective properties in good condition and
repair.
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5.16 LICENSES. Borrower shall and shall cause the Subsidiaries
to maintain all licenses, permits, franchises and other governmental
authorizations necessary for the ownership of their respective properties and
the conduct of their respective businesses.
5.17 COMPLIANCE WITH LAW. Borrower shall,and shall cause the
Subsidiaries to comply in all material respects with all applicable provisions
of all foreign, federal, state and local laws, ordinances, rules, and
regulations, including those relating to the ownership of real or personal
property, the conduct and licensing of their respective businesses, the
employment of their respective personnel, and the filing of tax returns and
reports.
5.18 PLACE OF BUSINESS. Borrower shall give the Bank at least
thirty (30) days prior written notice of any change in the location of
Borrower's or any Subsidiary's chief executive office.
5.19 NEGATIVE COVENANTS. Without the Bank's prior written
consent, Borrower shall not and shall not allow any Subsidiary to take any of
the following actions: (a) merge into, consolidate with, or acquire any other
corporation, or permit any other corporation to merge into or consolidate with
Borrower or any Subsidiary; (b) guarantee or otherwise become in any way liable
with respect to the obligations of another person, except by endorsement of
negotiable instruments for deposit or collection in the ordinary course of
business; (c) pay or declare any dividend or other distribution on Borrower's or
any Subsidiaries' stock; (d) redeem, retire, repurchase or otherwise acquire,
directly or indirectly, any of Borrower's or any Subsidiary's stock or any
warrants, rights, or other options to purchase such stock; (e) make any change
in Borrower's or any Subsidiary's corporate or capital structure other than the
offering of Borrower's common stock for cash; (f) make any change in Borrower's
or any Subsidiary's business objectives, purposes, operations, or financial
structure or key management personnel in such manner as to adversely affect the
ability of Borrower to pay or perform any of the Obligations; (g) make any loan
or extension of credit or incur any debt, obligation, or liability, except for
Permitted Indebtedness; (h) without limiting the generality of clause (g) of
this Section, and notwithstanding anything to the contrary contained in Section
5.20 below, make any loan or extension of credit to any Subsidiary or to any
Affiliate; (i) sell, lease, transfer, assign, pledge, mortgage, encumber,
hypothecate or otherwise dispose of or abandon any assets of Borrower or any
Subsidiary having a fair market value in excess of $200,000.00 in the aggregate
during any period of twelve (12) consecutive months, except for the sale or
lease of finished inventory in the ordinary course of business and except for
the following (collectively the "Permitted Liens"): the liens shown on Schedule
"A" attached hereto listing liens in existence on the date of this Agreement;
(j) cause or permit in the future any of Borrower's or any Subsidiary's
property, whether now owned or hereafter acquired, to be subject to any lien,
security interest, mortgage, pledge, or encumbrance, except for the Permitted
Liens; or (k) enter into any transaction not in the ordinary course of business;
provided, however, that a transaction shall not be deemed to be outside the
ordinary course of business based solely on the fact that the transaction is not
engaged in on a frequent periodic basis.
5.20 TRANSACTIONS WITH AFFILIATES. Borrower shall not enter
into and shall cause its Subsidiaries to not enter into any transaction,
including the purchase, sale or exchange of property or the rendering of any
services, with (a) any shareholder, officer, director or agent of Borrower or
any Subsidiary or any relative of any such person, (b) Borrower or any
Subsidiary, or (c) any entity in which any one or more of the persons described
in clause (a) of this Section own, directly or indirectly, more than a five
percent (5%) beneficial interest (each of the foregoing persons and entities is
referred to individually as an "Affiliate"), except in the ordinary course of
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business and on fair and reasonable terms no less favorable to Borrower or its
Subsidiary, as applicable, than would be obtainable in a comparable arm's-length
transaction with a party who is not an Affiliate.
5.21 NO LIABILITY BY BANK. Nothing contained in this Agreement
shall render the Bank directly or indirectly liable or responsible to Borrower
or any other party for the control, operation, or management of Borrower's or
any Subsidiary's business.
5.22 FINANCIAL COVENANTS.
(a) CONSOLIDATED BOOK NET WORTH. Borrower shall not
permit the Consolidated Book Net Worth to be at any time less than the sum of
the following:
(i) Twenty Three Million Six Hundred Thousand and
No/100 Dollars ($23,600,000.00); plus
(ii) An amount equal to (A) seventy-five percent
(75%) of NPAT; plus (B) new equity which has been raised by Borrower and its
Subsidiaries.
(b) RATIO OF INDEBTEDNESS TO CONSOLIDATED TANGIBLE NET
WORTH. Borrower shall not permit the ratio of the Indebtedness of Borrower and
its Subsidiaries to Consolidated Tangible Net Worth at the end of any fiscal
quarter to exceed 1.20 to 1.00.
(c) FIXED CHARGE COVERAGE RATIO. Borrower shall not
permit the Fixed Charge Coverage Ratio to be less than 1.65 at the end of any
fiscal quarter.
(d) LIMITATION ON LOSSES. Borrower shall not incur, on a
consolidated basis, a net loss before taxes and extraordinary items in any two
(2) consecutive quarterly accounting periods.
(e) MINIMUM NET INCOME. Borrower shall earn, on a
consolidated basis, net income after taxes and extraordinary items of at least
Five Hundred Thousand and No/100 Dollars ($500,000.00), calculated at the end of
each fiscal quarter, using the results of that quarter and each of the 3
immediately preceding quarters.
(f) CAPITAL EXPENDITURES. Borrower shall not and shall
not allow any Subsidiary to make or become in any way liable to make capital
expenditures, except for Permitted Capital Expenditures which do not exceed the
amounts specified below during the respective periods specified below:
<TABLE>
<CAPTION>
FISCAL YEAR: AMOUNTS:
------------ --------
<S> <C>
1997 and 1998 $21,000,000
1999 $ 4,000,000
2000 $ 4,000,000
</TABLE>
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5.23 REPORTING WITH RESPECT TO EXISTING AND NEW RESTAURANT
FACILITIES. Without limiting the generality of Section 5.5 above:
(a) NEW RESTAURANT FACILITIES. Borrower shall provide the
Bank with information which is sufficient to keep the Bank reasonably informed
on a timely basis regarding the status of each proposed New Restaurant Facility
which Borrower proposes to acquire or develop, including (b) a description of
the location, character, and size of each such New Restaurant Facility; (c) the
proposed timetable for the acquisition, development and opening of each New
Restaurant Facility; and (d) all material financial and other information
relating to each New Restaurant Facility, including total acquisition and
development cost estimates and financial projections for the operation of each
New Restaurant Facility.
(e) EXISTING RESTAURANT FACILITIES. Borrower shall
provide the Bank, within forty-five (45) days after the end of each fiscal
quarter, with reasonably detailed operating statements for each Existing
Restaurant Facility and each New Restaurant Facility which has commenced
operations.
5.24 INITIAL LOAN FEE. Concurrently with Borrower's execution
of this Agreement, Borrower shall pay to the Bank an initial Loan fee equal to
three quarters of one percent (0.75%) of the principal amount of the Loan (the
"Initial Loan Fee"). The Initial Loan Fee shall be non-refundable, whether or
not the Loan is prepaid prior to maturity, and shall be deemed fully earned by
the Bank upon the Bank's execution of this Agreement.
5.25 UNUSED REVOLVING CREDIT FACILITY FEE. With respect to
each fiscal quarter or portion thereof during the Commitment Period, Borrower
shall unconditionally pay to the Bank a fee equal to one-half of one percent
(0.50%) per annum of the difference between the Revolving Credit Limit and the
average daily outstanding principal balance of the Loan during such quarter, or
portion thereof ("Unused Line Fee"), which fee shall be calculated and payable
quarterly, in arrears, and shall be due and payable commencing on the first
(1st) business day of Borrower's first fiscal quarter following the Effective
Date and continuing on the first business day of each fiscal quarter thereafter
to and including the first (1st) business day of the first (1st) fiscal quarter
after the Commitment Period expires.
5.26 DEPOSIT ACCOUNT BALANCES. Borrower acknowledges and
agrees that the terms of the Loan have been established by the Bank in
consideration of, among other factors, the prospective and continuing deposit
relationship to be established by Borrower with the Bank. Consequently, Borrower
covenants and agrees that Borrower shall at all times maintain funds in one or
more demand deposit accounts established with the Bank which, during each
calendar month and measured as of the last day of such calendar month, have
average balances which are equal to not less than five percent (5%) of the
average outstanding principal balance of the Loan during such calendar month.
5.27 ADVANCES UNDER REVOLVING CREDIT FACILITY; USE OF
PROCEEDS. All Advances which the Bank makes under the Revolving Credit Facility
shall be deemed to be evidenced by the Note and shall be used by Borrower solely
for working capital in the ordinary course of Borrower's business.
Notwithstanding anything to the contrary contained in the Loan Documents, the
Bank, in its discretion, may decline to make any Advance requested by Borrower
under the Revolving Credit Facility if there is a continuing Event of Default or
the occurrence of
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any event which, with the passage of time or giving of notice (or both), may
become an Event of Default.
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5.28 PREPAYMENT.
(a) PERMITTED PREPAYMENT OF LOAN. Subject to the
Borrower's satisfaction of the condition contained in Section 5.28(c) below,
Borrower shall have the right to prepay all or part of the outstanding principal
balance of the Loan at any time without prepayment charge of any kind, provided
that Borrower has given the Bank not less than ten (10) Business Days prior
written notice of such prepayment. No such prepayment by Borrower shall extend,
postpone or otherwise modify the due date of any subsequent monthly installment
payment under the Note.
(b) PREPAYMENTS UNDER BANK OF AMERICA CREDIT FACILITIES.
If Borrower prepays all or any part of the outstanding principal balance owing
under the Bank of America Credit Facilities (the amount of each such prepayment
is referred to as the "Bank of America Prepayment Amount"), then concurrently
with Borrower's payment of each Bank of America Prepayment Amount to Bank of
America, Borrower shall pay to the Bank as a required prepayment of principal
under the Loan an amount equal to (i) the then outstanding principal balance of
the Loan, multiplied by (ii) a fraction, the numerator of which is the Bank of
America Prepayment Amount, and the denominator of which is the outstanding
principal balance of the Bank of America Credit Facilities immediately prior to
the payment of the Bank of America Prepayment Amount.
(c) PREPAYMENTS UNDER LOAN. As a condition to Borrower's
right to prepay all or any part of the outstanding principal balance of the Loan
(the amount of each such prepayment is referred to as the "Loan Prepayment
Amount"), concurrently with Borrower's prepayment of the Loan Prepayment Amount
to the Bank, Borrower shall also make a prepayment under the Bank of America
Credit Facilities in an amount equal to (i) the then outstanding principal
balance of the Bank of America Credit Facilities, multiplied by (ii) a fraction,
the numerator of which is the Loan Prepayment Amount, and the denominator of
which is the outstanding principal balance of the Loan immediately prior to the
payment of the Loan Prepayment Amount. Concurrently with Borrower's prepayment
of each Loan Prepayment Amount to the Bank, Borrower shall provide the Bank with
evidence reasonably acceptable to the Bank that Borrower has concurrently made
the prepayment to Bank of America required by this Section 5.28(c).
6. WARRANTIES AND REPRESENTATIONS BY BORROWER.
6.1 WARRANTIES AND REPRESENTATIONS. As a material inducement
to the Bank's extension of credit to Borrower in connection with the Loan,
Borrower warrants and represents to the Bank that:
(a) Borrower is a California corporation, duly organized,
validly existing, and in good standing under the laws of the State of
California;
(b) Borrower has the full corporate power and authority to
own its assets and to transact the business in which it is now engaged;
(c) Borrower is duly qualified as a foreign corporation in
good standing in each jurisdiction in which the ownership of its assets or the
conduct of its business requires
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<PAGE> 16
qualification as a foreign corporation and where the failure to so qualify would
have a material adverse effect on the Borrower's business;
(d) JFD is a California corporation, duly organized,
validly existing, and in good standing under the laws of the state of
California;
(e) JFD has the full corporate power and authority to own
its assets and to transact the business in which it is now engaged;
(f) JFD is duly qualified as a foreign corporation in good
standing in each jurisdiction in which the ownership of its assets or the
conduct of its business requires qualification as a foreign corporation and
where the failure to so qualify would have a material adverse effect on JFD's
business;
(g) JFD-LA is a California corporation, duly organized,
validly existing, and in good standing under the laws of the State of
California;
(h) JFD-LA has the full corporate power and authority to
own its assets and to transact the business in which it is now engaged;
(i) JFD-LA is duly qualified as a foreign corporation in
good standing in each jurisdiction in which the ownership of its assets or the
conduct of its business requires qualification a foreign corporation and where
the failure to so qualify would have a material adverse effect on JFD-LA's
business;
(j) Borrower has the full power and authority to execute,
deliver and perform its obligations under the Loan Documents;
(k) The execution, delivery and performance of the Loan
Documents and the consummation of the transactions contemplated thereby have
been duly authorized by all requisite action on the part of Borrower;
(l) Isaac Starkman, as Chief Executive Officer of
Borrower, is duly authorized to execute the Loan Documents and all other
documents necessary to consummate the Loan on behalf of Borrower;
(m) The Loan Documents are legal, valid and binding
obligations of Borrower, enforceable in accordance with their terms;
(n) No consent of any other party and no consent,
approval, authorization or other action by or filing with any governmental
authority, bureau or agency is required in connection with the execution,
delivery and performance of the Loan Documents by Borrower;
(o) Borrower's chief executive office is located at the
address set forth in Section 15 below;
16
<PAGE> 17
(p) Borrower has set forth above its full and correct
name, and Borrower does not use any other names or tradenames, except for the
tradenames "Solley's Deli" and "Wolfie Cohen's Rascal House."
(q) The execution, delivery and performance of the Loan
Documents and compliance with their respective terms, will not:
(i) conflict with or result in a violation or breach
of any of the terms or conditions of, or
(ii) result in the imposition of any lien, charge or
encumbrance upon any properties of Borrower (other than in favor of Bank)
pursuant to, or
(iii) constitute a default, with due notice or lapse
of time (or both) under, or
(iv) result in the occurrence of any event pursuant to
which any holder or holders of any debt of Borrower may declare the same due and
payable under,
any indenture, agreement, order or judgment of any court or governmental
authority, or any other instrument evidencing a material obligation of Borrower.
(r) Borrower's execution, delivery and performance of the
Loan Documents and Borrower's compliance with their respective terms (i) will
not violate any federal or state law or regulation applicable to Borrower; and
(ii) will not result in a violation of Borrower's articles of incorporation or
bylaws;
(s) Borrower is unaware of any claims or adjustments
proposed by any taxing authority for any of Borrower's or any Subsidiary's prior
tax years which could result in additional taxes becoming due and payable by
Borrower or any Subsidiary;
(t) There are no actions, suits, proceedings or
investigations pending, or to the best of Borrower's knowledge threatened,
against or affecting Borrower or any Subsidiary in any court or before any other
governmental authority which may result, either separately or in the aggregate,
in any material adverse change in the assets, properties, business, prospects,
profits, or condition of Borrower or any Subsidiary, nor does Borrower know of
any basis for any such action, suit, proceeding or investigation;
(u) The December 31, 1995 and December 31, 1996 audited
financial statements of Borrower, including balance sheets and profit and loss
statements, (i) are accurate and complete in all material respects as of the
dates appearing thereon; (ii) present fairly the financial condition and results
of operations of the party to whom the financial statement applies as of the
dates and for the periods shown on such statements; and (iii) disclose all
contingent liabilities affecting the party to whom the financial statement
applies to the extent that such disclosure is required by generally accepted
accounting principles. Since the last date covered by any such statement, there
has been no material adverse change in the financial condition of Borrower or
any Subsidiary;
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<PAGE> 18
(v) All audited financial statements, including balance
sheets and profit and loss statements, hereafter delivered to the Bank by
Borrower or any Subsidiary shall satisfy the requirements of clauses (i) through
(iii) of Section 6.1(u) above. All unaudited quarterly and annual financial
statements, including balance sheets and profit and loss statements, hereafter
delivered to the Bank by Borrower or any Subsidiary shall satisfy the
requirements of clauses (i) through (iii) of Section 6.1(u) to the best
knowledge of Borrower and its Subsidiaries. Borrower and each of the
Subsidiaries is now and at all times hereafter shall continue to be solvent;
(w) Neither Borrower nor any Subsidiary is engaged in the
business of extending credit for the purpose of purchasing or carrying any
"margin stock" (as defined in Regulation G of the Board of Governors of the
Federal Reserve System), and no part of the proceeds of the Loan shall be used
to purchase or carry any margin stock or to extend credit to others for the
purpose of purchasing or carrying any margin stock;
(x) Neither Borrower nor any Subsidiary (i) is in
violation in any material respect of any law, ordinance, governmental rule or
regulation to which it is subject; or (ii) has failed to obtain any license,
permit, franchise or other governmental authorization necessary for the
ownership of its properties or the conduct of its business;
(y) Borrower is the sole record and beneficial owner of
all of the outstanding stock of the Existing Subsidiaries;
(z) Borrower has not guaranteed or become in any way
liable for any obligations of or attributable to the business of JFD or JFD-LA;
and
(aa) There is no fact which Borrower has failed to
disclose to the Bank in writing which (i) may materially and adversely affect
the assets, properties, business, prospects, profits, or condition of Borrower
or any Subsidiary; or (ii) may be necessary to disclose in order to keep the
representations and warranties contained in this Section 6.1 from being
misleading.
6.2 BORROWER'S WARRANTIES. Borrower's warranties and
representations set forth in Section 6.1 above shall be true and correct at the
time of execution of this Agreement by Borrower and shall constitute continuing
representations and warranties as long as any of the Obligations remain
outstanding.
7. EVENTS OF DEFAULT. Each of the following events shall
constitute an "Event of Default" under this Agreement:
7.1 Borrower's failure to pay any of its indebtedness under
the Note when due;
7.2 Borrower's failure to pay any of its other indebtedness or
to perform any of its other obligations to the Bank under any of the Loan
Documents when due, including Borrower's breach of any of the financial
covenants contained in Section 5.22 above;
7.3 Borrower's failure to pay any of its indebtedness or to
perform any of its obligations under any other agreement between Borrower and
the Bank when due;
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<PAGE> 19
7.4 If at any time any warranty contained in the Loan
Documents is breached or any written or oral representation (provided such oral
representation is made by an officer or director of Borrower or a Subsidiary or
a member of Borrower's or any Subsidiary's key management), statement, report or
certificate submitted or made to the Bank by Borrower or any Subsidiary in
connection with the Loan or any other extension of credit by the Bank to
Borrower or any Subsidiary is (or in the case of any continuing warranty
becomes) false or misleading;
7.5 The occurrence of any "Event of Default" under the Bank
of America Loan Agreement;
7.6 The occurrence of any "Event of Default" under the JFD
Security Agreement or the JFD-LA Security Agreement;
7.7 Any lawsuit or lawsuits are filed on behalf of one or
more trade creditors against the Borrower in an aggregate amount of One Million
Dollars ($1,000,000) or more in excess of any insurance coverage;
7.8 Any judgments or arbitration awards are entered against
the Borrower (or any Guarantor), or the Borrower (or any Guarantor) enters into
any settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of One Million Dollars ($1,000,000) or more in excess of any
insurance coverage;
7.9 Any government authority takes action that the Bank
believes materially adversely affects the Borrower's (or any Guarantor's)
financial condition or ability to repay;
7.10 A material adverse change occurs in the Borrower's (or
any Guarantor's) business condition (financial or otherwise), operations,
properties or prospects, or ability to repay the credit;
7.11 Any default occurs under any agreement in connection with
any credit the Borrower (or any Guarantor) or any of the Borrower's related
entities or affiliates has obtained from anyone else or which the Borrower (or
any Guarantor) or any of the Borrower's related entities or affiliates has
guaranteed;
7.12 If all or any part of the assets of Borrower or any
Subsidiary are attached, seized, subjected to a writ or levied upon by any court
process (unless discharged by payment, released, or fully bonded against not
more than ten (10) days after such event has occurred);
7.13 If (a) a petition is filed by or against Borrower or any
Subsidiary under the federal bankruptcy laws or any other applicable federal or
state bankruptcy, insolvency or similar law; (b) a receiver, liquidator,
trustee, custodian, sequestrator or other similar official is appointed to take
possession of Borrower or any Subsidiary or of any part of Borrower's or any
Subsidiary's property, or Borrower or any Subsidiary consents to such
appointment; (c) Borrower or any Subsidiary makes an assignment for the benefit
of creditors or fails generally to pay its debts as they become due; or (d)
Borrower or any Subsidiary takes any action in furtherance of any of the
foregoing;
7.14 If a court order is entered against Borrower or any
Subsidiary enjoining the conduct of all or a material part of Borrower's or any
Subsidiary's business;
19
<PAGE> 20
7.15 If the maturity date of any material indebtedness of
Borrower or any of Subsidiary to any other party is accelerated; or
7.16 If Borrower or any subsidiary is dissolved or terminates
its existence.
Notwithstanding anything to the contrary contained in this Section 7, an Event
of Default shall not be deemed to exist based on Borrower's failure to pay any
of its monetary obligations under the Loan Documents when due if Borrower cures
such failure within five (5) days after notice from the Bank to Borrower, except
that Borrower shall be permitted only two (2) such cure periods within any
consecutive twelve (12) month period.
8. REMEDIES UPON DEFAULT. Upon the occurrence of any Event of
Default, the Bank shall have the following rights and remedies:
8.1 The Bank may declare any or all of the Obligations to be
immediately due and payable, including the indebtedness evidenced by the Note;
8.2 The Bank may exercise.any or all of its rights, remedies
or powers under the Loan Documents and under all applicable laws; and
8.3 The Bank may discontinue advancing money or extending
credit to or for the benefit of Borrower or any Subsidiary under this Agreement
and any other document or agreement between the Bank and Borrower or such
Subsidiary.
9. WAIVERS. Borrower hereby waives presentment, demand for
payment, protest, notice of demand, dishonor, protest and nonpayment,and all
other notices and demands in connection with the delivery, acceptance,
performance, default under, and enforcement of the Obligations. Borrower waives
the right to assert any statute of limitations as a defense to the enforcement
of any of the obligations to the fullest extent permitted by law.
10. CUMULATIVE REMEDIES. The Bank's rights and remedies under this
Agreement are cumulative with and in addition to all other rights and remedies
which the Bank may have in connection with the Loan. The Bank may exercise any
one or more of its rights and remedies under this Agreement at the Bank's option
and in such order as the Bank may determine in its sole and absolute discretion.
11. ACTIONS. The Bank shall have the right, but not the
obligation, to commence, appear in, or defend any action or proceeding which
affects or which the Bank determines may affect (a) Borrower's or the Bank's
rights or obligations under the Loan Documents; or (b) the Loan. Whether or not
Borrower is in default under the Loan Documents, the Bank shall at all times
have the right to take any and all reasonable actions which the Bank determines
in good faith to be necessary or appropriate to protect the Bank's interest in
connection with the Loan.
12. RELATIONSHIP OF PARTIES. Nothing contained in this Agreement
constitutes or shall be construed as (a) the formation of a partnership or joint
venture between the Bank and Borrower or any other party; or (b) the creation of
any confidential or fiduciary relationship of any kind between the Bank and
Borrower or any other party. The Bank shall not be deemed to be a partner, joint
venturer, trustee, or fiduciary with respect to Borrower or any other party as a
result of this Agreement or the transactions contemplated hereby. Borrower
acknowledges and agrees
20
<PAGE> 21
that Bank has at all times acted only as a lender to Borrower in connection with
the transactions contemplated by the Loan Documents, and that in exercising its
rights and remedies under the Loan Documents, the Bank shall at all times be
acting only as a lender within the normal and usual scope of activities of a
lender. Borrower shall at all times have the right to determine and follow its
own policies and practices in the conduct of its business, subject to the terms
and conditions of this Agreement.
13. INDEMNIFICATION. Borrower shall indemnify and hold the Bank
and its officers, directors, agents, employees, representatives, shareholders,
affiliates, participating lenders, successors and assigns harmless from and
against any and all claims, demands, damages, liabilities, actions, causes of
action, suits, costs and expenses, including attorney's fees and costs, arising
out of or relating to any or all of the following: (a) Borrower's breach of any
of its obligations or warranties under the Loan Documents; (b) any other act or
omission by Borrower directly or indirectly relating to the Loan or the Loan
Documents; or (c) the Bank's exercise of its rights or remedies under and
pursuant to the terms and conditions of the Loan Documents or under and pursuant
to applicable law.
14. ATTORNEYS' FEES. Upon the Bank's demand, Borrower shall
reimburse the Bank for all costs and expenses, including attorneys' fees and
costs, which are incurred by the Bank, whether before or after the commencement
of any action or proceeding by the Bank following an Event of Default under the
Loan Documents, in connection with any or all of the following: (a) the exercise
of any or all of the Bank's rights and,remedies under the Loan Documents based
on an Event of Default or the enforcement of any obligation of any party liable
to the Bank in connection with the Loan, whether or not any legal proceedings
are instituted by the Bank; (b) the commencement and prosecution of any suit,
action, or proceeding with respect to any or all of the foregoing matters,
including an action for relief from the automatic stay arising under Bankruptcy
Code Section 362(a), 11 U.S.C. Section 362(a); or (c) the defense of any suit,
action or proceeding by Borrower or any other party relating to the Loan.
Borrower's obligation to reimburse the Bank under this Section shall include
payment of interest on all amounts expended by the Bank from the date of
expenditure at the rate of interest specified in the Note.
15. NOTICES. All notices under this Agreement shall be in writing
and shall be effective only (a) when delivered in person to the recipient; or
(b) two days after deposit in a sealed envelope in the United States mail,
postage prepaid, by certified mail, return receipt requested, addressed to the
recipient as set forth below, whichever is earlier:
All notices to the Bank shall be sent to:
Bank Leumi USA
8383 Wilshire Boulevard, Suite 400
Beverly Hills, CA 90211
Attention: Jacques Delvoye, Vice President
21
<PAGE> 22
All notices to Borrower shall be sent to:
Jerry's Famous Deli, Inc.
12711 Ventura Boulevard, Suite 400
Los Angeles, California 91604
Attention: Isaac Starkman,
Chief Executive Officer
The addresses provided for in this Section may be changed by notice given to the
other party in accordance with this Section.
16. GOVERNING LAW. This Agreement shall be construed in accordance
with and governed by the laws of the State of California. No conflicts of law
rules, including California conflicts of law rules, shall be applied to result
in the application of the substantive or procedural laws of any jurisdiction
other than California. Borrower consents to personal jurisdiction by the courts
of the State of California in connection with any controversy or claim arising
under the Loan Documents and to service of process on it by any means authorized
by California law. All controversies and claims arising under or in connection
with the Loan Documents shall be adjudicated by the courts of the State of
California.
17. TIME OF ESSENCE. Time is of the essence of each provision of
this Agreement.
18. DESCRIPTIVE HEADINGS; INTERPRETATION. The headings to sections
of this Agreement are for convenient reference only, and they do not in any way
limit or amplify any of the terms of this Agreement and shall not he used in
interpreting this Agreement. For purposes of this Agreement, (a) the term
"person" means any natural person or any entity, including any corporation,
partnership, joint venture, limited liability company, trust, unincorporated
organization or trustee; (b) the term "including" means "including without
limitation;" and (c) the term "discretion" means "sole and absolute discretion."
Whenever the context of this Agreement reasonably requires, all words used in
the singular shall be deemed to have been used in the plural, and the neuter
gender shall be deemed to include the masculine and feminine gender, and vice
versa.
19. ENTIRE AGREEMENT. The Loan Documents contain the entire
agreement between the Bank and Borrower concerning the subject matter of the
Loan Documents and supersede all prior and contemporaneous agreements,
statements, understandings, terms, conditions, representations and warranties,
whether oral or written, made by the Bank or Borrower concerning the Loan.
20. SEVERABILITY. If any provision of the Loan Documents shall be
held by any court of competent jurisdiction to be unlawful, void, voidable, or
unenforceable for any reason, such provision shall be deemed severable from and
shall in no way affect the validity or enforceability of the remaining
provisions of the Loan Documents.
21. NO THIRD PARTY BENEFICIARIES. The Loan Documents are entered
into for the sole protection and benefit of the Bank and Borrower and their
respective permitted successors and assigns. No other person shall have any
right of action under the Loan Documents.
22
<PAGE> 23
22. DOCUMENTS. All documents and instruments which Borrower is
required to deliver to the Bank under this Agreement shall be acceptable in form
and substance to the Bank acting in good faith.
23. PERFORMANCE OF COVENANTS. Borrower shall perform all of its
covenants under this Agreement at its sole cost and expense.
24. NO WAIVER BY BANK. No waiver by the Bank of any of its rights
or remedies in connection with the Loan or of any of the terms or conditions of
the Loan Documents shall be effective unless such waiver is in writing and
signed by the Bank. Without limiting the generality of the preceding sentence,
(a) no delay or omission by the Bank in exercising any of its rights or remedies
in connection with the Loan shall constitute or be construed as a waiver of such
rights and remedies; (b) no waiver by the Bank of any default by Borrower under
the Loan Documents or consent by the Bank to any act or omission by Borrower
shall constitute or be construed as a waiver of or consent to any other or
subsequent default, act, or omission by Borrower; and (c) the Bank's acceptance
of any partial payment on account of the Obligations shall not constitute or be
construed as a waiver by the Bank of any default by Borrower under this
Agreement or any other agreement between the Bank and Borrower.
25. TERM. This Agreement shall continue in full force and effect
as long as any of the Obligations are outstanding and until terminated by
written agreement of the Bank.
26. AMENDMENT. This Agreement may be modified only by a written
agreement signed by Borrower and the Bank.
27. INDEPENDENT COUNSEL. Borrower acknowledges that it has been
represented by independent counsel in connection with the Loan Documents and
that it has executed the Loan Documents with the advice of such counsel.
28. EXPENSES. Concurrently with the execution of this Agreement,
Borrower shall pay all expenses relating to the documentation and closing of the
Loan, including filing and search fees of the California Secretary of State and
all attorneys' fees and costs incurred by the Bank.
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<PAGE> 24
29. SUCCESSORS. This Agreement shall be binding upon and inure to
the benefit of Borrower and the Bank and their respective successors and
assigns.
Dated: October 27, 1997
BORROWER:
JERRY'S FAMOUS DELI, INC.,
A CALIFORNIA CORPORATION
BY: /S/ ISAAC STARKMAN
---------------------------
ISAAC STARKMAN, CHIEF EXECUTIVE
OFFICER
BANK:
BANK LEUMI USA, A NEW YORK STATE
CHARTERED BANK
BY: /S/ JACQUES DELVOYE
---------------------------
TITLE: VICE PRESIDENT
------------------------
24
<PAGE> 1
EXHIBIT 10.42
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement is made as of January 21, 1998, by
California Pizza Kitchen, Inc., a California corporation ("Seller"), and Jerry's
Famous Deli, Inc., a California corporation ("Buyer").
RECITALS
A. Seller is the tenant under a Ground Lease (the "Lease") covering
certain premises (the "Premises") including a building and other improvements
located at 2006 Executive Center Drive, N.W., Boca Raton, Florida. The legal
description of the Premises is attached hereto as Exhibit A and incorporated
herein by this reference. Seller operates a restaurant in the Premises (the
"Existing Restaurant").
B. Seller desires to sell and assign to Buyer, and Buyer desires to
purchase from Seller, Seller's interest as tenant under the Lease, together with
certain furniture, fixtures, equipment and other tangible personal property used
in connection with the operation of the Premises and Existing Restaurant.
C. Seller also desires to sell and assign to Buyer, and Buyer desires
to purchase, the liquor license relating to the Premises and the Existing
Restaurant.
D. For valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Seller and Buyer agree as follows.
1. DEFINITIONS. For the purposes of this Agreement, the following terms
shall have the meanings set forth in this Article.
1.1 "Title Company" means First American Title Insurance Company, at
its office at 3001 S.W. 3th Avenue, Miami, Florida 33129.
1.2 "Closing Date" means the date upon which the closing hereunder
(the "Closing") shall occur as specified in Section 2.7 hereof.
1.3 "Excluded Assets" means (a) all items of personal property
located in the Existing Restaurant which are part of the perishable food and
beverage inventory (including but not limited to alcoholic beverages) and (b)
such other personal property, equipment or fixtures, including trade fixtures,
which contain any trademark, trade name, trade style, design or other symbol
which is used by Seller to identify its restaurant services or products
(including but not limited to china, glassware, printed or embossed paper
products,
<PAGE> 2
flatware and other smallwares) and (c) any of Seller's computer software,
signage, books and records, menus and recipes.
1.4 "Lease" means the Standard Form Ground Lease Agreement dated
April 7, 1993, as amended by the First Amendment to Lease, dated April 29, 1993,
by and between Erwin and Erwin, an Ohio limited partnership, as landlord
("Landlord"), and Seller, as tenant. Seller represents that a true, correct and
complete copy of the Lease is attached hereto as Exhibit B.
1.5 "Liquor License" means Seller's existing license to sell
alcoholic beverages for on premises" consumption under the laws of the State of
Florida which was issued by the appropriate state and/or local agencies
permitted by law to issue such licenses (such state and/or local agencies being
hereinafter collectively referred to as the "Licensing Authorities").
1.6 "Tangible Personal Property" means all of Seller's furniture,
fixtures, equipment and other tangible personal property located on or about the
Premises on the date hereof, including but not limited to the items listed on
Exhibit F, attached hereto and made a part hereof, except for the Excluded
Assets. The parties shall make a mutual inspection and inventory of the Tangible
Personal Property during the inspection period set forth in Section 2.5.6.
1.7 "Effective Date" shall mean the date on which this Agreement has
been signed by both parties, and shall be further deemed to be the date on which
the Agreement is signed by the last party signing this Agreement, provided that
a fully executed original of this Agreement is delivered to the other party
within three (3) business days thereafter.
1.8 "Escrow Agent" shall mean Thomas J. Galvin, in accordance with
and subject to the terms of the Escrow Agreement of even date herewith.
2. CONSIDERATION AND SALE OF ASSETS.
2.1 Tangible Personal Property. Seller agrees to sell to Buyer, and
Buyer agrees to purchase, the Tangible Personal Property. At closing, Seller
shall deliver to Buyer the Tangible Personal Property, in place at the Premises,
and Buyer agrees to accept delivery of the Tangible Personal Property in "as is"
condition as of the Closing Date and all express or implied warranties
(including any implied warranties of merchantability or fitness for a particular
purpose) are specifically excluded by mutual agreement of Buyer and Seller.
Unless prohibited by the terms of the Lease, Seller shall have the right, at any
time prior to the Closing, to remove the Excluded Assets from the Premises. Any
Excluded Assets that Seller does not remove from the Premises prior to Closing
shall be deemed abandoned in favor of, and conveyed for no additional
consideration to, Buyer as part of the Tangible Personal Property, and Buyer may
retain and use (or dispose of) such Excluded Assets without any
-2-
<PAGE> 3
payment to Seller, provided however, Buyer shall have no right to use, sell or
display to the public any such abandoned property which contains any trademarks,
trade name or other insignia of Seller, without the express further written
consent of Seller. Seller shall not remove or allow to be removed any of the
Tangible Personal Property from the Premises after the Effective Date. Prior to
the Closing Date, Seller shall repair any damage to the Tangible Personal
Property and/or the Premises caused by the removal of the Excluded Assets.
Seller shall be responsible for repair or replacement of any Tangible Personal
Property which is removed from the Premises or is damaged (except for ordinary
wear and tear) between the Effective Date and the Closing Date.
2.2 Leasehold Interest. Seller agrees to sell and assign to Buyer,
and Buyer agrees to purchase and assume from Seller, all of the tenant's
interest under the Lease, which shall include all right, tide, and interest of
Seller in the Premises and all appurtenances thereto (including, without
limitation, Seller's right, if any, to use, in common with others so entitled
from time to time, the driveways, parking spaces, sidewalks, landscaped areas,
pipes, wires and utilities servicing the Premises).
2.3 Liquor License.
2.3.1 Promptly after the Effective Date and within the Due
Diligence Period described below, Buyer shall take the customary actions to
apply for, seek and use all reasonable efforts, at Buyer's expense, to obtain
the approval and consent of all appropriate Licensing Authorities, as well as
any other governmental agency or authority having jurisdiction over such
matters, to the transfer of the Liquor License from Seller to Buyer (or the
issuance of a new license in lieu of transferring the Liquor License). Seller
shall cooperate with Buyer to apply for and secure the approval of such
transfers, including the execution of such applications, forms and other
documents as may be required by the Licensing Authorities in order to effectuate
the transfer of the Liquor License, but Buyer shall be solely responsible for
the payment of any and all costs and fees required for such transfer, including
any of its attorney's or other legal fees required (but Buyer shall not be
responsible for payment of any of Seller's attorneys fees).
2.3.2 If this Agreement is terminated, then Buyer shall have the
obligation to either withdraw and terminate any pending application for transfer
of the Liquor License to Buyer, in accordance with the Licensing Authorities'
procedure for such withdrawal and termination, or in the event the transfer has
been completed prior to such termination, Buyer shall take all action necessary
to transfer the Liquor License back to Seller. If this Agreement is terminated
because of the default of Seller, then Seller shall bear all costs related to
the retransfer of the Liquor License.
2.3.3 At the time of execution of this Agreement by all parties,
or promptly thereafter upon written request, Seller shall execute and deliver to
Buyer and/or Buyer's counsel all documents necessary and/or required by law for
the transfer of the Liquor License to Buyer. Buyer shall pay all filing fees and
other costs and expenses involved
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in filing and prosecuting the Liquor License transfer application with the
Licensing Authorities (but Buyer shall not be responsible for Seller's attorneys
fees). The parties hereto agree to cooperate fully and diligently in a
commercially reasonable manner in the performance of their respective duties
under this Agreement in order to secure the approval of the transfer of the
Liquor License to Buyer.
2.4 Miscellaneous. Seller shall also assign to Buyer all of its
right, title and interest in and to any permits, certificates, variances,
consents and approvals, and plans and specifications pertaining to the Premises,
including but not limited to the existing certificate of occupancy (or other
certificate permitting occupancy of the Premises) to the extent the same may
lawfully and without violation of the terms thereof be so transferred and
assigned. Buyer acknowledges that Seller makes no representation or warranty
regarding such permits, certificates, variances, consents and approvals, plans
and specifications except as set forth in Section 3. The sale, assignment and
transfer of the tenant's leasehold interest under the Lease, and the Liquor
License and the Tangible Personal Property, shall effectively vest Buyer with
good, clear, record and marketable title thereto, free and clear of all liens,
security interests and encumbrances, subject only to easements, covenants,
restrictions and encumbrances which do not materially interfere with Buyer's
intended use of the Premises and which are reasonably acceptable to Buyer, and
those exceptions set forth in Exhibit C. The leasehold interest under the Lease
is to be insurable by Buyer under a leasehold title insurance policy in
accordance with the provisions of Section 2.5.5 hereof.
2.5 Conditions Precedent; Due Diligence Period. At Buyer's option
(and with respect to Section 2.5.1, at Seller's option also), the obligations of
Seller and Buyer to conclude the transactions contemplated by this Agreement
shall be contingent upon the satisfaction of each of the following conditions at
Buyer's expense (unless otherwise expressly provided), within thirty (30) days
after the Effective Date (the "Due Diligence Period"), except as such Due
Diligence Period may be extended, at Buyer's option, for the reasons and in the
manner described below.
2.5.1 Consent and Release from Landlord. Buyer and Seller shall
execute an assignment and assumption of lease in the form attached hereto as
Exhibit D, or in such form as may be acceptable to Buyer and Seller. Buyer shall
obtain from Landlord an estoppel letter regarding the Lease in a form
satisfactory to Buyer, Landlord's consent to Exhibit D and such further consents
from the Landlord under the Lease, and any other necessary or appropriate third
parties, with respect to such matters as: Buyer's intended restaurant use of the
Premises, Buyer's proposed signage, Buyer's proposed remodeling, alterations or
improvements to the Premises, as the same may be appropriate or required
pursuant to the Lease or otherwise, and a Non-Disturbance Agreement from
Landlord in a form acceptable to Buyer. As used in this Section, the term
"Landlord" shall include any and all underlying ground lessors and mortgagees.
In addition thereto, this transaction shall be expressly contingent upon Buyer
obtaining from the Landlord, Landlord's agreement to fully and completely
release Seller from any and all liability to the Landlord arising under the
Lease
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for matters accruing from and after the Closing Date (the "Release"). Such
Release shall be in a form and substance reasonably satisfactory to Seller.
2.5.2 Zoning. Buyer obtaining satisfactory evidence that the
Premises are properly zoned to permit the construction and operation of a 24
hours per day restaurant at the Premises, as intended by Buyer.
2.5.3 Utilities. Buyer obtaining satisfactory evidence that all
utilities, including natural gas, serve the Premises in such quantity as is
necessary for Buyer's intended business activities, without payment of any costs
by Buyer, other than costs and charges imposed by the utility companies for
changing the service over to Buyer from Seller or for any modifications to such
utility services or equipment required by Buyer's intended use in the Premises.
2.5.4 Hazardous Substances. Buyer obtaining satisfactory
evidence that the Premises are free and clear of all hazardous substances.
2.5.5 Leasehold Title Policy. Buyer obtaining a leasehold title
insurance policy commitment in favor of and in form satisfactory to Buyer, and
issued by the Title Company, providing a firm commitment to insure Buyer's
leasehold estate under the Lease and to provide affirmative coverages, in such
form as Buyer shall reasonably require (including deletion of the "gap"
exception, survey exception and all pre-printed standard exceptions), over all
exceptions to tide (other than easements, covenants, restrictions and
encumbrances which do not unreasonably interfere with Buyer's intended use of
the Premises, which are reasonably acceptable to Buyer, and the matters listed
on Exhibit C, except for any easement exception contained in Exhibit C, if the
Survey shows that such easement lies under the Building or other structure on
the Premises in a manner so as to unreasonably interfere with Buyer's intended
use of the Premises) which are not satisfactory to Buyer. The cost for such
title insurance policy shall be home by Seller (up to a policy amount of
$1,775,000) in the event this transaction shall be completed, but otherwise
Buyer shall be responsible for any expense relating thereto. Buyer, at its cost,
may procure a survey (the "Survey") of the Premises (and the appurtenant
easement areas) prepared by a surveyor licensed to practice in the State of
Florida. In the event the title insurance commitment (or the Survey, if Buyer
has one prepared) shall contain exceptions (or survey matters), other than the
exceptions shown on Exhibit C (except for any easement exception contained in
Exhibit C, if the Survey shows that such easement lies under the Building or
other structure on the Premises in a manner so as to unreasonably interfere with
Buyer's intended use of the Premises ), which in Buyer's reasonable opinion,
shall unreasonably interfere with Buyer's intended use, construction or
operations on the Premises, then within ten (10) days after receipt of both the
title commitment and the Survey, but in any event prior to the expiration of the
initial thirty (30) day period of the Due Diligence Period, Buyer shall notify
Seller in writing of Buyer's objections thereto. With regard to any existing
liens (except public improvement liens to be assumed by Buyer), which are
defined and ascertainable in amount, Seller agrees to pay such liens at or prior
to Closing. In the event Buyer shall object to any other title or survey matter,
then Seller shall
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give written notice to Buyer, within thirty (30) days after receipt of Buyer's
notice, whether or not Seller will be able to remove such exception to the title
or Survey prior to Closing. Except for ascertainable liens, as provided for
above, Seller shall be under no obligation to remove or modify any title or
Survey matter in a manner acceptable to Buyer, and shall not be required to
commence any litigation or otherwise incur any costs or expense to remedy any
title or survey matter objected to by Buyer in so doing. In the event Seller
shall notify Buyer that Seller is unwilling or unable to remedy any such
objection by Buyer then such failure may be treated by Buyer as a failure of the
condition of title contingency contained in this Section. Seller agrees that
Seller shall not enter into, or record in the public records, any agreement,
covenant, restriction or other documents affecting the Premises, or consent to
any lien or encumbrance affecting the Premises, between the Effective Date and
the Closing Date, without the prior consent of Buyer.
2.5.6 Inspection. Buyer's approval of its inspection of the
Premises and the Tangible Personal Property, pursuant to Section 2.8 of this
Agreement.
2.5.7 Building Permit. If required by law, Buyer obtaining
issuance of a building permit based on plans and specifications prepared by
Buyer and approved by Landlord, together with any related permits for Buyer's
intended improvements on the Premises. If required by the Lease or as a
condition to Landlord's consent to this transaction, Buyer agrees to submit its
preliminary plans and specifications to Landlord for approval. Buyer also agrees
to submit its application for such permit to the appropriate governmental
authorities promptly upon receipt of Landlord's approval, if required, of the
plans and specifications. After obtaining all Landlord and third party approvals
necessary, Buyer shall diligently pursue obtaining its building permit and shall
use commercially reasonable efforts to expedite the preparation and approval of
the plans by the Landlord.
2.5.8 Liquor Licenses. Buyer obtaining the transfer of the
Liquor License authorizing sale of alcoholic beverages, for "on premises"
consumption, in and from Buyer's restaurant. Buyer shall diligently pursue
obtaining such transfer.
2.5.9 Representations. Seller's representations shall be true
on and as of the Closing Date with the same force and effect as if made on and
as of the Closing Date. Seller shall have performed, observed and complied with
all of the covenants, agreements and conditions required by this Agreement to be
performed, observed and complied with by it prior to and as of the Closing Date.
2.5.10 Condition of Property. As of the Closing Date, the
Premises and the Tangible Personal Property shall be kept and maintained in
substantially the same condition (ordinary wear and tear excepted) as the same
were in as of the Effective Date, or Seller shall have repaired or replaced
same, and Seller shall be in sole and exclusive possession of the Premises and
Tangible Personal Property.
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With the exception of the conditions contained in Sections 2.5.9 and
2.5.10 (which shall continue until Closing), Buyer shall satisfy or waive all of
the remaining conditions contained in this Section 2.5 prior to the expiration
of the Due Diligence period, and if Buyer fails to do so then Buyer may
terminate this Agreement upon written notice given to Seller prior to the
expiration of the Due Diligence Period, in which event this Agreement shall
terminate. In the event the conditions contained in Sections 2.5.1 or 2.5.8 have
not been satisfied within the thirty (30) day Due Diligence Period, then Buyer,
upon written notice (the "Extension Notice") to Seller prior to the expiration
of the Due Diligence Period, shall have the option to extend the Due Diligence
Period for one additional period of thirty (30) days. Such Extension Notice
shall specify which of the conditions, either Section 2.5.1 or 2.5.8 has not
been satisfied or waived by Buyer, and shall expressly state that all other
conditions contained in this Section 2.5 have been either satisfied by Buyer or
waived by Buyer (except Sections 2.5.9 and 2.5.10 which shall continue as
conditions until Closing). In the event at the end of the Due Diligence Period,
as so extended, if Buyer has not satisfied or is not willing to waive the
condition relied on for the extension of time in the Extension Notice then Buyer
may thereafter terminate this Agreement, in which event this Agreement shall
have no further force or effect, except as otherwise provided herein. If Seller
is unwilling to waive the condition of obtaining the Release of its obligations
under the Lease from the Landlord provided for in Section 2.5.1 above (which
waiver shall be solely at the option of Seller and may be given or denied in
Seller's sole and absolute discretion), or in the event Buyer has failed to
notify Seller in writing by 5 p.m. Eastern Standard Time on the last day of the
Due Diligence Period, as may have been extended by Buyer, in accordance with the
terms hereof, that all of the conditions contained in Section 2.5 of this
Agreement have been satisfied or waived (except for Sections 2.5.9 and 2.5.10
which shall remain until Closing), and absent a default under this Agreement by
Seller, that Buyer is prepared to close this transaction, as provided for
herein, then Seller may, in Seller's discretion, either grant a further
extension of the Due Diligence Period, upon such conditions as may be mutually
acceptable to Buyer and Seller, or Seller may at any time thereafter terminate
this Agreement, in which event this Agreement shall have no further force or
effect, except as otherwise provided herein. Notwithstanding anything contained
herein, the conditions contained in Sections 2.5.9 and 2.5.10 shall continue up
to and including the Closing Date, and in the event of a failure of either of
said conditions subsequent to the end of the Due Diligence Period and prior to
Closing, Buyer shall be permitted to terminate this Agreement. In the event the
Deposit has been paid by Buyer at the time of termination by either Buyer or
Seller, and Buyer is not in default, then the Deposit shall be returned to
Buyer. Seller agrees to cooperate with Buyer in a commercially reasonable manner
for the purpose of satisfying the foregoing conditions, provided Seller shall
not be required to incur any expense to outside persons or governmental agencies
in so doing (however, Buyer shall not be responsible for any internal expense
for Seller's employees' time or Seller's attorneys fees incurred in connection
with this transaction).
2.6 Purchase Price. The purchase price (the "Purchase Price") to
be paid by Buyer to Seller for the leasehold interests of Seller in the
Premises, the Tangible Personal Property and the Liquor License is One Million
Seven Hundred Seventy Five Thousand Dollars (U.S.) ($1,775,000.00). The Purchase
Price shall be allocated as follows:
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(i) $1,420,000.00 for the Lease and leasehold improvements, and (ii) $355,000.00
for the Tangible Personal Property and the Liquor License. The Purchase Price
shall be paid, subject to prorations, adjustments and credits, as follows:
2.6.1 Payment at Closing. At Closing, Buyer shall pay to Seller
the sum of One Million Seven Hundred Seventy Five Thousand Dollars (U.S.)
($1,775,000.00), as adjusted in accordance with the terms hereof, in cash by
wire transfer to the account of Seller, in accordance with wire transfer
instructions provided by Seller. Such funds shall be delivered to the Title
Company by certified check or cash wired to the Title Company's account at the
time set for the Closing. Buyer shall receive a credit at closing in the amount
of the Deposit (as described in Section 2.7), if the Deposit has been paid in
accordance with the terms of Section 2.7.
2.6.2 (Intentionally Omitted)
2.6.3 Default. If Seller shall default under this Agreement,
then Buyer may elect to either (a) bring an action against Seller for specific
performance of this Agreement, or (b) declare this Agreement terminated, in
which event Buyer shall be entitled to the return of the Deposit (if made), and
may pursue all remedies available to Buyer under the laws of the State of
Florida, including without limitation, an action for damages and/or such other
relief as may be awarded by a court. If Buyer shall default under this
Agreement, then Seller may elect to retain the Deposit (if made), may terminate
this Agreement and thereafter pursue all remedies available to Seller under the
laws of the State of Florida, including without limitation, an action for
damages and/or such other relief as may be awarded by a court. In the event of
any breach of this Agreement by either party, the non-breaching party shall give
the breaching party written notice thereof, specifying the reasons therefore,
and such party shall have ten (10) days after receipt of such notice to remedy
such breach. In the event the breaching party shall fail to remedy such breach
within the ten (10) day period, then such party shall be in default hereunder.
No delay or omission in the exercise of any right or remedy accruing to one
party upon a default by the other party under this Agreement shall impair such
right or remedy, or be construed as a waiver of any such default theretofore or
thereafter occurring.
2.7 Closing Notice; Deposit. The Closing shall occur in Miami,
Florida on a date set by mutual agreement of the parties in the manner set forth
below, after the expiration of the Due Diligence Period, as may be extended (the
"Closing Date"). Provided the Release has been obtained (or waived by Seller),
then Buyer shall have the option of waiving all of the remaining contingencies
set forth in Section 2.5 (other than the Landlord's and any other necessary
third party's consent to the Assignment) by written notice to Seller and the
Closing shall occur on a date prior to the expiration of the Due Diligence
Period, as extended, as specified by the Buyer which shall be at least five (5)
days after the date of Buyer's notice. Notwithstanding the foregoing, in the
event Seller is then conducting business from the Premises then the following
provisions shall apply. Buyer shall give Seller written notice of its
satisfaction or waiver of all the contingencies set forth in Section 2.5
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above (except for 2.5.9 and 2.5.10 which shall remain until Closing), in the
manner provided in Section 2.5, and deliver to Seller a copy of the proposed
Release (the "Closing Notice"). The Closing Notice shall include a proposed
Closing Date which shall be at least five (5) days after the date of such
notice. A copy of the Closing Notice shall be simultaneously delivered to Escrow
Agent, at the address given for such notices in Section 6.9 and shall be
accompanied by a cashier's check, certified check or wire transfer of funds in
the amount of One Hundred Fifty Thousand Dollars (U.S.) ($150,000.00) (the
"Deposit") payable to Escrow Agent, which shall be held by Escrow Agent, in
accordance with the provisions of the Escrow Agreement between Escrow Agent,
Seller and Buyer, of even date herewith. The Deposit shall be applied as a
credit to the Purchase Price at the Closing. Upon receipt of the Closing Notice
and Deposit, Seller shall proceed with due diligence to close down and cease its
business operations from the Existing Restaurant. Seller shall have the option
of extending the Closing Date contained in the Closing Notice for an additional
period of up to fourteen (14) days, if it is deemed necessary by Seller, in the
exercise of Seller's reasonable business judgment, in order to cease its
business operations from the Premises in a commercially reasonable manner (or
such longer period as shall be required to give notice to its employees in the
manner provided by applicable law). The Closing shall take place at the offices
of the Title Company on the Closing Date. At the Closing:
2.7.1 Seller shall deliver to Buyer exclusive possession of the
Premises and the Tangible Personal Property in the condition required herein, to
the Buyer at the Premises. Seller shall deliver an original of the Lease to
Buyer at the Closing.
2.7.2 Seller shall execute and deliver to the Buyer: a duly
executed and acknowledged assignment and assumption of the Lease (in the form
attached as Exhibit D, as may be modified by mutual agreement of the parties and
Landlord), a bill of sale for the Tangible Personal Property and other licenses
and permits to be assigned to Buyer under Section 2.4 (in the form attached as
Exhibit E), any further documents needed to assign the Liquor License to Buyer
or confirm that Buyer owns the Liquor License (but if no such documents are
necessary, then none shall be required at the Closing), and all other
instruments required hereunder to be delivered to Buyer by Seller, and such
other documents and instruments as may be reasonably requested by the Title
Company or Buyer, including but not limited to an Owner's Affidavit as to Liens
and Possession, a Gap affidavit, Seller's affidavit that the representations set
forth in Section 3 remain true as of the Closing Date, certification by the
State of Florida that no sales taxes are due under Florida Statute 212.10,
corporate resolutions approving the transaction and a certificate of Good
Standing from the State of Florida. Buyer, Seller and the Title Company shall
agree upon the form of such documents prior to Closing. To the extent
appropriate, such instruments shall be in recordable form, duly executed and
acknowledged by Seller. The assignment and assumption of Lease shall also be
duly executed and acknowledged by Buyer, and an original shall be delivered to
Seller at Closing, along with the Release signed by the Landlord. The parties
acknowledge that the assignment and assumption of the Lease is subject to
approval by Landlord, and that Landlord may require changes to the form attached
as Exhibit D. If the parties cannot agree on the form of the assignment and
assumption of the Lease within the time period set forth in Section 2.5,
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then either party may terminate this agreement by giving written notice to the
other. If the parties agree on a changed form for the assignment and assumption
of the Lease, then they shall amend this Agreement to attach the new form for
such document as Exhibit D.
2.7.3 Buyer shall pay the Purchase Price as set forth in Section
2.6 hereof.
2.7.4 Buyer shall execute, and deliver to Seller, Buyer's
affidavit that its representations set forth in Section 4 remain true as of the
Closing Date.
2.8 Inspection of Property. Buyer shall have the right to inspect
the Premises and Tangible Personal Property during the Due Diligence Period.
Buyer shall make such inspections during normal business hours, at a time which
is mutually agreeable to the parties and after at least 24 hours prior notice to
Seller. Buyer shall not during such inspections perform any testing which
involves a physical impact or invasion of the Premises (including but not
limited to soil borings or Phase II environmental testing) without the further
prior written consent of Seller. If Buyer shall obtain a Phase I environmental
report on the Premises then Buyer shall keep the results of any environmental
reports or tests confidential, subject to the provisions of Section 6.2 and
shall promptly deliver to Seller copies of any and all reports, materials and
results developed by any consultant or environmental engineering firm. If, prior
to the expiration of the Due Diligence Period, Buyer has identified any
condition related to the Premises or Tangible Personal Property that, in Buyer's
sole discretion, is unacceptable to Buyer, Buyer shall have the right to
terminate this Agreement by written notice to Seller, and thereupon neither
party shall have any further rights or liabilities to the other hereunder,
except as otherwise provided herein. Buyer shall be liable for all damage or
injury to any person or property resulting from any such inspection or testing,
whether occasioned by the acts of Buyer or any of its employees, agents,
representatives or contractors, and Buyer shall indemnify and hold harmless
Seller from any liability resulting therefrom. This indemnification by Buyer
shall survive the Closing or the termination of this Agreement.
2.9 Risk of Loss; Seller's Inability to Transfer.
(a) If the Lease is terminated pursuant to its provisions due to
the application of the casualty or condemnation provisions therein, then either
party may terminate this Agreement at any time before the Closing and neither
party shall be liable to the other hereunder (except as provided in Section
2.8). Provided Buyer is not in default hereunder, in the event Landlord is in
default under the Lease, Seller may exercise all of its rights and remedies
under the Lease and pursuant to law, but Seller shall not voluntarily terminate
the Lease prior to Closing, without Buyer's consent.
(b) The risk of loss or damage to the Premises and/or Tangible
Personal Property by casualty or by eminent domain shall be borne by Seller up
to Closing and any risk of loss or damage by casualty or by eminent domain after
the Closing shall
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be borne by Buyer. If at any time prior to Closing all or any portion of the
Premises or the building in which the Premises is located or the Tangible
Personal Property are damaged or destroyed as a result of fire or other
casualty, or by eminent domain, or in the event that Seller shall be unable to
deliver title to the Premises or Tangible Personal Property at Closing in
accordance herewith due to such events, Buyer shall have the option of
terminating this Agreement, and neither party shall have any further rights or
liabilities hereunder, except as otherwise provided for herein. Notwithstanding
the foregoing, provided the Lease has not been terminated pursuant to subsection
(a) above, Buyer shall have the right to waive any defect in title or any remedy
it is entitled to for any damage caused to the building, Premises and/or
Tangible Personal Property by casualty or by eminent domain and proceed to
Closing without any abatement of the Purchase Price; provided, however, and in
any such instance Seller will pay to Buyer, as the case may be, all insurance or
condemnation proceeds received by Seller or to which Seller is entitled with
respect to any such damage or condemnation, subject however to the provisions of
the Lease, and the rights of Landlord thereunder, requiring that such insurance
or condemnation proceeds be used for the reconstruction and repair of the
Premises. Prior to Closing, Seller shall maintain casualty insurance on the
Premises as required by the Lease.
3. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and
warrants to Buyer that:
3.1 Organization and Corporate Power. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State in
which it is incorporated. Seller has full power and authority (corporate and
other) to own and lease its assets and properties, and to execute and deliver
this Agreement and to carry out the transactions contemplated hereby, subject
only to obtaining the required approvals as may be required from the Landlord of
the Lease.
3.2 Broker or Finder. No person or persons, other than Greenfield
Katz Properties, Inc., assisted in or brought about the negotiation of this
Agreement in the capacity of broker or agent or finder and Seller shall be
responsible for the payment to said brokers or agents or finders of all
brokerage or finders fees due in respect of the matters set forth in this
Agreement and shall indemnify, defend and hold Buyer harmless from any liability
therefor.
3.3 Title to and Condition of Property. Seller has good and
insurable title to the Tangible Personal Property and the leasehold interest of
the tenant under the Lease, subject to all title matters of record, including
but not limited to the exceptions contained in Exhibit C. In the event either
the Lease, Liquor License or the Tangible Personal Property is currently subject
to any liens or encumbrances, due to any financing obtained by Seller, then
Seller agrees to obtain such releases as may be necessary to deliver clear and
unencumbered title to the Lease, Liquor License and Tangible Personal Property
to Buyer at the time of Closing. Seller is in sole and exclusive possession of
the Premises, except as to any non-
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exclusive easements benefiting the Premises, which Seller is in non-exclusive
possession along with all other persons having the right to use such easement.
3.4 Condemnation Proceedings. To the best of Seller's actual
knowledge without investigation, Seller has not been notified of contemplated
eminent domain proceedings affecting the Premises, Building or any areas
adjacent thereto.
3.5 Zoning, Legal Violations. To the best of Seller's actual
knowledge without investigation, (a) the Existing Restaurant and the Premises
are in full compliance with all applicable laws, ordinances and regulations, and
(b) the uses and operations that Seller conducted in the Existing Restaurant are
in full compliance with all applicable laws, ordinances and regulations, and (c)
Seller has received no notice from any governmental or quasi-governmental
authority having jurisdiction over the Premises asserting that the Premises or
the building thereon are in violation of any applicable zoning laws, ordinances
or regulations, or any legal or other requirements. To the best of Seller's
actual knowledge without investigation, neither the Premises or any portion
thereof is or has been designated as an "historical" site or otherwise has any
historical, unique or intrinsic value, such that may prevent, impair or delay
any construction on the Premises.
3.6 Status of Leases. The Lease is in full force and effect and
Seller has received no notice of any default thereunder, and is not aware of any
matters that could constitute a default under the Lease. Seller shall not enter
into any amendment of the Lease prior to Closing without Buyer's written
consent. Other than the Lease, there are no other real property leases affecting
the Premises, and Seller has not entered into any executory contracts which
would be binding on Buyer following the Closing.
3.7 Status of Licenses. To the best of Seller's actual knowledge
without investigation, Seller has received no notice of any violation, fine or
suspension relating to any permits or licenses issued with respect to the
Existing Restaurant or the Premises, and no notice asserting that the Existing
Restaurant or the Premises is being operated in violation of the terms and
provisions of any applicable licenses or permits.
3.8 Valid and Binding Obligations. The transfer documents to be
executed at the Closing will, when executed and delivered, constitute valid and
binding obligations of the Seller; enforceable in accordance with their terms.
3.9 Mechanic's Liens. No improvements made by or for Seller which
might form the basis of a mechanic's or materialmen's lien have or will have
been made to the Premises prior to the Closing Date which have not been paid in
full or will be so paid prior to Closing.
3.10 Litigation. Seller is not a party to, or otherwise involved in
any claim or litigation or any administrative or other proceedings or
investigations pertaining to the Lease or Premises.
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3.11 Hazardous Substances. To the best of Seller's actual knowledge
without investigation, Seller has not illegally generated, stored or disposed of
any hazardous substances on the Premises and is not aware of any generation,
storage or disposal of such substances (including asbestos containing materials)
on the Premises.
3.12 Liquor License.
3.12.1 To the best of Seller's actual knowledge, Seller owns
the Liquor License free of liens and other obligations or in the event such
License is subject to any financing liens, Seller agrees to have the same
released prior to Closing. Until closing, Seller shall keep the Liquor License
current, valid and transferable under this Agreement and in compliance with all
applicable laws and regulations.
3.12.2 To the best of Seller's actual knowledge, there are no
threatened or outstanding citations issued or to be issued by the Licensing
Authorities against the Liquor License and Seller has not received any notice(s)
of alleged violations (the "Violation Notice") regarding the Liquor License. In
the event that a Violation Notice or citation is issued against the Liquor
License prior to receipt of all approvals required for its transfer to Buyer,
Seller agrees to immediately notify Buyer and to provide Buyer with a copy
thereof. Seller agrees to dispose of said Violation Notice and any such citation
or citations in a diligent manner. In the even said Violation Notice and/or
citation(s) are not disposed of within 30 days from the date hereof, Buyer may,
as its option, terminate this Agreement by giving Seller at least 5 business
days prior written notice.
3.12.3 To the best of Seller's actual knowledge without
investigation, all federal, state and local taxes, assessments and other
governmental charges against the Liquor License, that are due and payable, have
been paid or provided for. No levy or assessment for federal, state or local
taxes has been made or threatened. All liens and other obligations claimed
against or incurred by Seller or affecting or relating to the Liquor License
have been, or, as of the Closing Date, will have been paid and/or satisfied
without recourse against Buyer and/or the Liquor License, and the licensee is
not or will not be on the delinquency list at the time of the transfer.
3.12.4 Seller has full right and title to sell and transfer the
Liquor License to Buyer and there are no other outstanding agreements of sale
for the Liquor License as of the effective date of this Agreement.
3.13 No Equipment Leases. Seller owns all of the personal property
and fixtures located in the Existing Restaurant, free and clear of any equipment
lease, other type of lease, lien or mortgage or in the event such equipment is
subject to any financing liens, the Seller will obtain a release of such liens
prior to Closing.
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3.14 Indemnification. Seller shall indemnify, defend and hold Buyer
harmless from and against any claim, loss, damage, cost or expense (including
reasonable attorneys' fees) resulting from or arising from any of the following:
(a) any and all liens against the Premises, Lease, Liquor License and/or
Tangible Personal Property arising out of events occurring prior to the Closing
Date except as to any lien resulting from actions of Buyer (i.e., during
inspections) or the Landlord under the Lease; and (b) any and all claims by
third parties as to obligations or liabilities of any nature whatsoever for or
with respect to events relating to the Premises, Lease, Liquor License or the
Tangible Personal Property occurring prior to the Closing Date except for those
claims that are due to acts of Landlord under the Lease or Buyer; and (c) any
liabilities with respect to which the so-called "Bulk Sales Act" or any other
law applicable to the Seller that may create remedies against any property
transferred to Buyer as contemplated herein.
3.15 Condition of Property. To the best of Seller's actual knowledge
without inspection, the structural improvements, mechanical systems, utility
systems, roof, and Tangible Personal Property are in good working condition, and
free from termites or other wood destroying organism infestation and damage.
Notwithstanding the foregoing, and subject to the provisions of Section 2.1, all
real and personal property being conveyed to Buyer pursuant to this Agreement is
being conveyed in "as is" condition without warranty of any kind and it shall be
the sole responsibility of Buyer to determine for itself during the Due
Diligence Period, the condition of the Premises, including all components
thereof, and the Tangible Personal Property.
4. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and
warrants to Seller that:
4.1 Organization and Corporate Power. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California and has full power and authority (corporate and other) to own, lease
and operate its assets and properties and to execute and deliver this Agreement,
and to carry out the transactions contemplated hereby.
4.2 Due Authorization; Effect of Transaction. No provision of
Buyer's certificate of incorporation or by-laws, or of any agreement, instrument
or understanding, or any judgment, decree, law, rule or regulation, to which
Buyer is a party or by which it is bound, has been or will be violated by the
execution by Buyer of this Agreement or the performance or satisfaction of any
agreement or condition herein contained upon its part to be performed or
satisfied, and all requisite corporate and other authorizations for such
execution, delivery, performance and satisfaction have been duly obtained. This
Agreement will upon execution and delivery, be a legal, valid and binding
obligation of Buyer, enforceable in accordance with its terms.
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4.3 Broker or Finder. No person or persons, other than Greenfield
Katz Properties, Inc., assisted in or brought about the negotiation of this
Agreement in the capacity of broker or agent or finder on behalf of Buyer
(Seller being responsible for the payment to said broker or agent or finder of
all brokerage or finders fees due with respect to the transactions set forth in
this Agreement). Buyer shall indemnify and save Seller harmless from and against
any and all claims by any broker or finder other than Greenfield Katz
Properties, Inc. which may claim a right to a brokerage or finder's fee as a
result of such broker's contact with Buyer.
5. PRORATIONS; CLOSING COSTS.
5.1 Rents, Taxes, Assessments, Etc. All rent, real estate and
personal property taxes, common area charges, and other charges and assessments
of any nature whatsoever payable by Seller under the Lease shall be prorated
between Seller and Buyer as of the Closing Date. Notwithstanding the preceding
sentence, Buyer shall be entitled to a credit at Closing in the amount of one
(1) month's rent (plus one half of the difference between one month's minimum
rent under the Lease as in effect on the Effective Date, and any new monthly
minimum rental for the first full month following Closing which may provided for
in an Amendment to the Lease between Landlord and Buyer which is executed in
furtherance of this transaction prior to Closing), real estate and personal
property taxes, common area charges, and other charges due and payable under the
Lease.
5.2 Utilities. Prior to the Closing Date, Buyer shall contact all
utility companies serving the Premises to request that all utilities be
transferred to Buyer's account as of the Closing Date. Buyer shall pay any
deposits or other transfer fees due in connection with the transfer of utilities
to Buyer's account. Buyer shall assume the obligations for all utility costs
incurred on and after the Closing Date and Seller shall be responsible for the
payment of all utility charges incurred prior to the Closing Date.
5.3 Closing Costs. Except for documentary stamps payable upon
recordation of the Assignment and Assumption Agreement, or transfer (or sales)
taxes payable with respect to the Tangible Personal Property, which shall be
paid for by the Seller, Seller and Buyer agree to divide evenly the costs of all
escrow fees, state and local recording fees, and all other customary settlement
charges. Buyer shall at its expense pay all transfer fees with respect to the
sale, transfer and/or assignment of the Liquor License. Seller agrees to pay the
cost of the title insurance commitment and the title insurance policy premium
(for a title policy with an insured amount of $1,775,000) and for any curative
endorsements to such policy to insure over any defects in Seller's title. Buyer
shall be responsible for any additional premiums due for such policy which are
attributable to any increase in the face amount of such policy requested by
Buyer or for any endorsements that Buyer desires to add to such policy, which
are not curative endorsements. Each party shall pay its own legal fees.
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5.4 Improvement Liens. Any governmental liens, assessments or
charges for improvements to the Premises or for any quasi-public or public
facilities or improvements, whether completed or pending, which are not included
in the real estate or personal property taxes payable by Seller pursuant to the
provisions of the Lease, shall assumed by Buyer at Closing, and shall be
pro-rated between the parties based upon the installments due for such liens
during the current tax year in the same manner as real estate and personal
property taxes due under the Lease are pro-rated pursuant to Section 5.1 above.
6. MISCELLANEOUS.
6.1 Entire Agreement. Buyer and Seller agree that this Agreement,
including the Schedules and Exhibits hereto, constitutes the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
prior understandings and agreements with respect thereto. The parties agree that
this Agreement is not intended to, nor shall it be construed to benefit, any
third party beneficiaries of any nature.
6.2 Confidentiality. Whether or not the transactions contemplated
hereby are consummated, the parties hereto agree to keep confidential and cause
their attorneys, bankers, brokers, consultants, accountants and other
representatives to keep confidential any and all information and data with
respect to the other party which it has received as a result of any
investigation made in connection with this Agreement and which is not otherwise
available to the patties; provided, however, that notwithstanding the foregoing,
each of the parties hereto shall be free to disclose any such information or
data (i) to the extent required by applicable law and (ii) during the course of
or in connection with any litigation, arbitration or other proceeding based upon
or in connection with the subject matter of this Agreement and (iii) in
connection with Buyer's inspections regarding the assets to be acquired hereby
and (iv) to such attorneys, bankers, brokers, consultants, accountants and other
representatives. Subject to the foregoing, prior to the Closing, each party
shall keep confidential and shall not publicize the existence or terms of this
Agreement. Buyer acknowledges that Seller is conducting an ongoing business from
the Premises and, subject to the provisions of this Section, Buyer agrees to
conduct its activities in respect to Section 2.5 in a confidential and
reasonable manner and to cooperate with Seller to keep this Agreement in
confidence until such time as Seller notifies Buyer that Seller has given notice
of the transaction contemplated herein to its employees at the Premises.
6.3 Possession. Possession of the Premises and the Tangible Personal
Property shall be delivered to Buyer at the Closing.
6.4 Waivers. Any waiver of any term or condition of this Agreement,
or of the breach of any covenant, representation or warranty contained herein,
in any one instance, shall not operate as or be deemed to be or construed as a
further or continuing waiver of any other breach of such term, condition,
covenant, representation or warranty or any other term, condition, covenant,
representation or warranty, nor shall any failure at any time or times to
enforce or require performance of any provision hereof operate
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as a waiver of or affect in any manner such party's right at a later time to
enforce or require performance of such provision or of any other provision
hereof.
6.5 Amendments. This Agreement may not be amended, nor shall any
waiver, change, modification, consent or discharge be effected, except by an
instrument in writing executed by or on behalf of the party against whom
enforcement of any amendment, waiver, change, modification, consent or discharge
is sought.
6.6 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns. Neither Buyer nor Seller shall be released from its obligations
hereunder due to an assignment. Buyer shall have the right to direct Seller to
assign and convey the Lease, Liquor License and the Tangible Personal Property
to any wholly owned subsidiary of Buyer at the Closing, upon prior written
notice to Seller, given no later than five (5) days prior to Closing.
6.7 Severability. If any provision of this Agreement shall be held
or deemed to be, or shall in fact be, invalid, inoperative or unenforceable as
applied to any particular case in any jurisdiction or jurisdictions, or in all
jurisdictions or in all cases because of the conflict of any provision with any
constitution, statute or rule of public policy or for any other reason, such
circumstance shall not have the effect of rendering the provision or provisions
in question invalid, inoperative or unenforceable in any other jurisdiction or
in any other case or circumstance or of rendering any other provision or
provisions herein contained invalid, inoperative or unenforceable to the extent
that such other provisions are not themselves actually in conflict with such
constitution, statute or rule of public policy, but this Agreement shall be
reformed and construed in any such jurisdiction or case as if such invalid,
inoperative or unenforceable provision had never been contained herein and such
provision reformed so that it would be valid, operative and enforceable to the
maximum extent permitted in such jurisdiction or in such case. However, this
Section shall not apply if the invalidity, inoperativeness or unenforceability
of such provision would materially change the basis on which the parties entered
into this transaction.
6.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, and in pleading or
proving any provision of this Agreement it shall not be necessary to produce
more than one such counterpart.
6.9 Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given when
received whether such notice is delivered personally or by commercial courier
service (such as Federal Express) or deposited in the U.S. mail, postage
prepaid, certified or registered mail, return receipt requested. In the event
any such delivery is refused, then the notice shall be deemed delivered on the
date of refusal to accept such delivery:
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(a) TO SELLER: If to Seller to:
California Pizza Kitchen
6053 West Century Boulevard
Suite 1100
Los Angeles, California 90045
Attention: Richard Stockinger
with a copy to:
Thomas J. Galvin
7825 Fay Avenue
Suite 200
La Jolla, CA 92037
(b) TO BUYER: If to Buyer to:
Jerry's Famous Deli, Inc.
12711 Ventura Boulevard, Suite 400
Studio City, California 91604
Attention: Isaac Starkman
with a copy to:
Katz, Barron, Squitero, Faust & Berman, P.A.
2699 South Bayshore Drive, 7th Floor
Miami, Florida 33133
Attention: Howard L. Friedberg
and/or to such other person(s) and addresses) as either party shall have
specified in writing to the other.
6.10 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the law (other than the law governing
conflict of law questions) of Florida.
6.11 No License to Use Seller's Name. Buyer hereby acknowledges that
it is not acquiring from Seller any right, title, or interest in or license to
use of the name California Pizza Kitchen or any of the names, marks, trade
names, service marks, trademarks, logos, symbols, indicia, or forms of
advertising used in connection therewith.
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6.12 Public Announcement. Buyer and Seller will consult with each
other before issuing any press release or otherwise making any public statements
or announcements with respect to the transactions contemplated by this Agreement
and will not issue any such press release or make any such public statement or
announcement prior to such consultation.
6.13 Legal Fees. If there is any litigation relating to this
Agreement, then the prevailing party shall be entitled to recover all of its
reasonable costs and expenses relating to the litigation, including legal fees
and costs. The term "litigation" as used herein shall mean every and all stages
of such litigation, in all court with jurisdiction over the matter.
6.14 Radon. Radon is a naturally occurring radioactive gas that,
when it has accumulated in a building in sufficient quantities, may present
health risks to persons who are exposed to it over time. Levels of radon that
exceed federal and state guidelines have been found in buildings in Florida.
Additional information regarding radon and radon testing may be obtained from
your County Public Health Unit.
Buyer, at Buyer's option, may during the Due Diligence Period
perform the necessary testing to determine that the Premises are free from radon
as part of the Buyer's inspection of the Premises pursuant to Sections 2.5.4 and
2.8. The presence of radon on the Premises, in excess of levels which are
required by law to be remediated, shall entitle the Buyer to terminate this
Agreement as provided in said Section,
6.15 Time. Except as otherwise expressly stated herein to the
contrary, any time period measured in days shall mean consecutive calendar days.
If the expiration of any time period measured in days occurs on a Saturday,
Sunday or legal holiday, then such time period shall be automatically extended
until the end of the next business day.
6.16 Survival. Except as otherwise expressly stated herein to the
contrary, all affirmative representations made by either party to the other
party and all indemnifications made by either party to the other party, shall
survive the closing of the transaction provided for herein.
6.17 Property Data. Within ten (10) days after the Effective Date,
to the extent Seller has the following in its possession, Seller shall deliver
or cause to be delivered to Buyer copies of: any plans and specifications for
the building on the Premises, any environmental reports concerning the Premises,
any building or zoning permits, and any soil boring or structural integrity
reports relating to the Premises.
6.18 Indemnification by Buyer. Buyer shall indemnify, defend and
hold Seller harmless from and against any claim, loss, damage, cost or expense
(including reasonable attorneys' fees) resulting from or arising from: (a) any
and all claims by third parties as to obligations or liabilities of any nature
whatsoever for or with respect to events relating to the Premises, Lease, Liquor
License or the Tangible Personal Property occurring
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after the Closing Date, except for those claims that are due to acts of Landlord
under the Lease or Seller, and (b) any and all claims loss, damage, cost or
expense (including reasonable attorneys' fees) resulting from Buyer permitting
any other person or entity (including any person or entity to whom Buyer may
direct Seller to convey or assign the Lease, Liquor License and Tangible
Personal Property to at closing) to perform any obligation of Buyer under this
Agreement. This indemnity shall survive the Closing.
SELLER:
CALIFORNIA PIZZA KITCHEN, INC.,
a California corporation
By: /s/ Richard Stockinger
-----------------------------
Name: Richard Stockinger
-----------------------------
Title: Vice President
-----------------------------
Date: January 21, 1998
-----------------------------
BUYER:
JERRY'S FAMOUS DELI, INC.,
a California corporation
By: /s/ Isaac Starkman
-----------------------------
Name: Isaac Starkman
-----------------------------
Title: CEO
-----------------------------
Date: January 19, 1998
-----------------------------
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<PAGE> 1
EXHIBIT 10.43
CALIFORNIA PIZZA KITCHEN, INC., A CALIFORNIA CORPORATION
STANDARD FORM GROUND LEASE AGREEMENT
THIS LEASE is made as of this 7th day of April, 1993, by and between
ERWIN and ERWIN, an Ohio limited partnership, hereinafter referred to as
"Landlord," and CALIFORNIA PIZZA KITCHEN, INC., a California corporation,
hereinafter referred to as "Tenant."
WHEREAS, on or about September 29, 1981, Arvida Corporation, a Delaware
corporation, entered into a Lease Agreement with Grace Restaurant Company, a
California corporation ("Prior Lease") for that certain property described on
Exhibit "A" attached hereto and incorporated herein by reference (" the
Premises"); and
WHEREAS, on or about November 1, 1988, Arvida Corporation assigned its
interest as landlord under the Prior Lease to Landlord; and
WHEREAS, on or about October 4, 1983, Grace Restaurant Company assigned
its interest as tenant under the Prior Lease El Torito-La Fiesta Restaurants,
Inc. El Torito Restaurants, Inc., a Delaware corporation ("El Torito") is the
successor in interest to El Torito-La Fiesta Restaurants, Inc., by way of
merger; and
WHEREAS, El Torito has, or is about to enter into an agreement with
Tenant for the purchase of El Torito's leasehold interest, furniture, equipment
and a liquor license ("Purchase Agreement"). The Purchase Agreement is
conditioned upon Landlord and Tenant entering into this Lease.
WHEREAS, Tenant will obtain possession of the Premises on the Closing
Date ("Closing Date") as that term is defined in the Purchase Agreement.
NOW, THEREFORE, in consideration of the premises, rent, and the
covenants and agreements herein contained, Landlord and Tenant herein covenant
and agree as follows:
1. Description of Demised Premises. Landlord hereby leases to Tenant,
and Tenant hereby leases from Landlord, on the terms and conditions hereinafter
set forth, that certain Premises located in the City of Boca Raton, County of
Palm Beach, State of Florida, legally described on Exhibit "A" attached hereto
and incorporated herein by reference, together with the building and
improvements constructed thereon and together with all appurtenances, easements,
and rights-of-way pertaining thereto (collectively the "Premises") and generally
shown in Exhibit "A" provided by Landlord and attached hereto and made a part
hereof.
2. Effective Date. The effective date ("Effective Date") of this Lease
shall be the date upon which all parties hereto have executed the document and
initialed all changes.
3. Term. The original term of this Lease (hereinafter sometimes
referred to as the "Term") shall commence on the Effective Date and shall expire
on the date which is twenty (20) years from the Closing Date (the "Expiration
Date"). Landlord agrees that so long as this Lease is not terminated prior to
the Closing Date, Landlord will release and discharge El Torito from any
obligations under the Prior Lease and the Prior Lease will become null and void
and of no force or effect as of the Closing Date. Landlord agrees to execute any
documentation necessary to effectuate such release. Similarly, Tenant agrees to
obtain from El Torito, an agreement releasing Landlord and discharging Landlord
from any obligations under the Prior Lease. In order to avoid any subsequent
controversy as to the exact Expiration Date, Landlord and Tenant agree, within
thirty (30) days after the Closing as defined in the Purchase Agreement, to
execute a Memorandum of Commencement Date setting forth the
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<PAGE> 2
Commencement and Expiration Dates of the Term, the form of which is attached
hereto as Exhibit B. In the event the Purchase Agreement is not consummated,
this Lease shall be terminated at Tenant's option, and shall become null and
void and both parties will be relieved of their obligations hereunder. The
twelve month period beginning on the first day of the first full calendar month
following the date that Tenant opens its restaurant for business to the public
shall be defined as the First Lease Year. Each twelve month period thereafter
will be defined as a "Lease Year."
4. Extensions. Provided that Tenant is not in default of its
obligations under this Lease (or if in default, has commenced the curing of that
default and thereafter diligently prosecutes such cure to completion), Tenant
shall have the option, upon six (6) months prior written notice, to extend the
Term of this Lease (hereinafter sometimes referred to as the "Extensions") upon
the same terms and conditions as herein contained for two (2) additional periods
of five (5) years each, commencing at midnight on the date on which the original
Term or any extended Term of this Lease expires.
5. Minimum Annual Rental. The Premises is hereby leased for the Term of
this Lease at the rental rate set forth below:
a. For the period from the Closing Date through the date which
Tenant opens its restaurant for business to the public on the Premises for One
Hundred Fifty Six Thousand Dollars ($156,000.00) per year;
b. For the period from the date which Tenant opens its restaurant
for business to the public on the Premises until the beginning of the sixth
(6th) Lease Year for One Hundred Eighty Thousand Dollars ($180,000.00) per year;
c. Commencing with the sixth Lease Year the Minimum Annual Rental
shall be adjusted annually on the basis of seventy-five percent (75%) of any
increase in the cost of living as reported in the Consumer Price Index, All
Items and major Group Figures for All Urban Consumer (1967 = 100) (the "Index"),
published by the Bureau of Labor Statistics (the "Bureau") of the United States
Department of Labor Index (Index equals 100) between the level in effect on
January 1, 1998 (the "Base Level") and the level in effect an the first day of
the sixth Lease Year and each Lease Year thereafter (the "Adjustment Level").
The Minimum Annual Rental shall be One Hundred Eighty Thousand Dollars
($180,000.00) plus seventy five percent (75%) of the difference of the product
of One Hundred Eighty Thousand Dollars multiplied by a fraction, the numerator
of which is the Adjustment Level and denominator of which is the Base Level less
One Hundred Eighty Thousand Dollars ($180,000.00). Stated as a mathematical
formula, the Minimum Annual Rental after the fifth Lease Year shall be computed
as follows:
$180,000.00 + .75 (Adjustment Level x $180,000.00) - $180,000.00
------------------------------
Base Level
d. Commencing with the twenty-first Lease Year (assuming Tenant
exercises the first Extension) the Minimum Annual Rental shall be adjusted
annually on the basis of ninety percent (90%) of any increase in the cost of
living as reported in the Consumer Price Index, All Items and major Group
Figures for All Urban Consumer (1967 = 100), (the "Index"), published by the
Bureau of Labor Statistics (the "Bureau") of the United States Department of
Labor Index (Index equals 100) between the level in effect on the anniversary of
the date that Tenant opens its restaurant for business to the public on the
Premises (the "Base Level") and the level in effect on the first day of the
twenty-first Lease Year and each Lease Year thereafter during the first
extension period (the "Adjustment Level"). The Minimum Annual Rental shall be
One Hundred Eighty Thousand Dollars ($180,000.00) plus ninety percent (90%) of
the difference of the product of One Hundred Eighty Thousand Dollars multiplied
by a fraction, the numerator of which is the Adjustment Level and denominator
of which is the Base Level less One Hundred Eighty Thousand Dollars
($180,000.00). Stated as a mathematical formula, the Minimum Annual Rental after
the twentieth Lease Year shall be computed as follows:
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<PAGE> 3
$180,000.00 + .90 (Adjustment Level x $180,000.00) - $180,000.00
------------------------------
Base Level
e. Commencing with the twenty-sixth Lease Year (assuming Tenant
exercises the second Extension) the Minimum Annual Rental shall be adjusted
annually on the basis of ninety percent (90%) of any increase in the cost of
living as reported in the Consumer Price Index, All Items and major Group
Figures for All Urban Consumer (1967 = 100), (the "Index"), published by the
Bureau of Labor Statistics (the "Bureau") of the United States Department of
Labor Index (Index equals 100) between the level in effect on anniversary of the
date that Tenant opens its restaurant for business to the public on the Premises
(the "Base Level") and the level in effect on the first day of the twenty-sixth
Lease Year and each Lease Year thereafter during the second extension period
(the "Adjustment Level"). The Minimum Annual Rental shall be One Hundred Eighty
Thousand Dollars ($180,000.00) plus ninety percent (90%) of the difference of
the product of One Hundred Eighty Thousand Dollars multiplied by a fraction, the
numerator of which is the Adjustment Level and denominator of which is the Base
Level less One Hundred Eighty Thousand Dollars ($180,000.00). Stated as a
mathematical formula, the Minimum Annual Rental after the twenty-fifth Lease
Year shall be computed as follows:
$180,000.00 + .90 (Adjustment Level x $180,000.00) - $180,000.00
------------------------------
Base Level
Minimum Annual Rental will be payable in equal monthly installments
including sales tax in advance on the first day of each calendar month of the
Lease Term. Minimum Annual Rental for any partial month will be pro-rated based
on the number of days in such partial month.
f. Percentage Rental. If the amount equal to five percent (5%) of
Tenant's Gross Sales (as defined below), during any Lease Year exceeds the
Minimum Annual Rental for such Lease Year, Tenant will pay Landlord the amount
of such excess, plus applicable sales tax subject to Tenant's recapture rights
as set out in Paragraph 5f(5) below. Stated as a formula:
(5% x Gross Sales) - Minimum Annual Rental = Percentage Rental
Estimated Percentage Rental shall be paid semi-annually and adjusted
annually.
(1) Fractional Lease Year. If the Tenant opens for business other
than on the first day of a calendar month, then the Minimum Annual Rental and
Percentage Rental for the ensuing partial month shall be included in the Minimum
Annual Rental and Percentage Rental for the First Lease Year.
(2) Definition of Gross Sales. For the purpose of determining the
Percentage Rental to be paid hereunder, Gross Sales shall mean the total amount
received from the sale of all goods, beverages, services and other merchandise
in and from the Premises, whether sold for consumption of or off said Premises,
but expressly excluding the following:
(i) Receipts from the operation of any public telephone
installed in the Premises;
(ii) The value of meals furnished Tenant's employees as an
incident to their employment;
(iii) Receipts from the sale of tobacco products or from vending
machines located on the Premises;
(iv) Sums representing so called sales taxes collected directly
from customers, based upon present or future laws of the State or local
government, collected by Tenant or any subtenant in the operation of its
business on the Premises and any other tax, excise or duty which is levied or
assessed against Tenant or any subtenant for any Federal,
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<PAGE> 4
State, Municipal or Local governmental authority, based on sales of specific
merchandise sold, or the privilege or license to sell or distribute specific
merchandise form the Premises, whether or not the amount thereof is passed on
to, or collected by Tenant or any subtenant, form any purchaser thereof.
Provided however, the cost of obtaining and maintaining liquor, occupational or
business licenses shall not be included in such calculation.
(v) The transfer of merchandise by Tenant, a subsidiary of
Tenant, or a subtenant, form the Premises to another place of business owned or
operated by Tenant, a subtenant or subsidiary of Tenant, shall not constitute a
sale;
(vi) Service charges paid directly by patrons of Tenant to
employees of Tenant or turned over to such employees directly by Tenant in lieu
of tips or gratuities;
(vii) Proceeds from the sale of gift certificates or like
vouchers, provided however, that when redeemed at the Premises, the retail price
thereof shall be included in Gross Sales;
(viii) non-edible promotional items sold or distributed at or
below Tenant's cost;
(ix) tip to the extent reported for Internal Revenue purposes;
(x) promotional or charitable meals provided without charge to
the customer/promotee;
(xi) non-payment of meals by customers ("walk-outs");
(xii) credit card charges;
(xiii) delivery charges.
(3) Tenant's Records. Tenant agrees to keep true and accurate
records of account showing all Receipts from Gross Sales on the Premises and on
a semi-annual basis to provide Landlord with such records along with the payment
of any Percentage Rental due for such period of time covered by the records. No
inadvertent mistake by Tenant in the preparation of such statements shall be
deemed to be a breach of any covenant of this Lease. Tenant shall use its
commercially reasonable best efforts to ensure that any such statements are
accurate. Upon receipt of such statements, Landlord may inspect personally, or
buy its authorized agent or representative, those books of account of Tenant
relating to records of sales made upon the Premises only (but not those of
general account or other records of Tenant covering sales from locations other
than the Premises) at any reasonable time during the usual business hours of
Tenant at Tenant's corporate headquarters for the purpose of determining the
amounts of rental due and payable hereunder. Tenant shall be required to
preserve its records on which any statement is based for a period of at least
two (2) years after such statement is rendered and no more. If Landlord fails to
object in writing to any statement within six months after the statement was
rendered, such statement shall be conclusively presumed to be correct. Landlord
agrees to keep all information relating to Tenant's gross sales confidential,
except that Landlord may disclose, to the extent and in the manner that is
reasonable and customary in the shopping center industry, such information to
prospective purchasers of the Premises.
(4) Audit. Any audit made by Landlord pursuant to this section shall
be a Landlord's sole expense, except that if Landlord makes any such audit for
any calendar year and if the gross sales shown by Tenant's statements for such
year ate found to be understated by more that 3%, Tenant shall pay to Landlord
the reasonable expenses of such audit.
(5) Recapture. Notwithstanding the foregoing, Tenant will have the
right to recapture up to One Million Dollars ($1,000,000.00) from any Percentage
Rent due to Landlord during the first five years following the date that Tenant
opens for business. Tenant
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will forego payment of any Percentage Rent during this five year period until
such recapture is completed. At the end of the five year period or upon
completion of the recapture of $1,000,000.00, Tenant will pay all Percentage
Rent due in accordance with the calculations set forth above whether or not
Tenant has recaptured the full One Million Dollars ($1,000,000.00).
6. Construction Permits and Plan Approvals. After the Effective Date
hereof, Tenant shall apply to the appropriate governmental authorities for such
licenses, permits, and any other administrative approvals (herein collectively
called "Permits") as may be necessary to remodel the existing building on the
Premises and operate a CALIFORNIA PIZZA KITCHEN restaurant together with signage
satisfactory to Tenant. Permits include, but are not limited to: (i) a license
to sell alcoholic beverages, (ii) a permit for use of a wood burning oven on the
Premises and, (iii) a building permit.
Landlord agrees to reasonably cooperate with Tenant for the purpose of
obtaining Permits.
In the event that Tenant, after diligent effort through such
administrative processes as are reasonably and normally required, is unable to
obtain said Permits in a form satisfactory to Tenant on or before the Closing
Date, Tenant shall have the right to terminate this Lease and declare same null
and void and of no further force and effect and without further liability to
either party thereafter arising therefrom.
Prior to submitting plans to the governmental authorities, and within
forth five (45) days of the Effective Date, Tenant will submit preliminary plans
to Landlord for Landlord's review and approval. Tenant will submit working
drawings to the Landlord within sixty (60) days of Landlord's approval of the
preliminary plans. Landlord will communicate either its approval of the Tenant's
plans and drawings or any reasonable objections to Tenant's plans or drawings in
writing to Tenant within ten (10) days of receipt thereof If Landlord fails to
communicate approval or disapproval within the ten (10) day period, Tenant's
plans or drawings will be deemed approved. Landlord will not unreasonably
withhold its approval of Tenant's plans or drawings. Tenant acknowledges that
any plans that alter the exterior of the building must be approved by Trail
Blades Property Owners Association, Inc. in accordance with a Declaration of
Covenants and Restrictions of record affecting the Real Property. Landlord and
Tenant will cooperate in obtaining any necessary approvals from Trail Blades
Property Owners Association.
7. Condition of the Premises. Landlord warrants that, to the best of
its knowledge, there are no physical or legal conditions and/or impediments
affecting the Premises that have the effect of impairing or prohibiting, in any
way, Tenant's intended use of the Premises. Such referenced conditions include,
but are not limited to, rights of any other party to the use or occupancy of the
Premises, enacted, pending or proposed condemnation proceedings, subsurface
soils conditions (which shall include, but not be limited to, percolating,
leaking and/or pooling of hydrocarbon, nuclear, hazardous and/or toxic wastes,
contaminants, pollutants and/or other effluent(s)), and current or proposed
plans to alter access to the Premises from any surrounding public thoroughfares
or private access ways.
Tenant will not be liable and this Lease is not an assumption of
liability for any subsurface soils conditions (which shall include, but not be
limited to, percolating, leaking and/or pooling of hydrocarbon, nuclear,
hazardous and/or toxic wastes, contaminants, pollutants and/or effluents) found
on the Premises which are not the result of Tenant's activities on the Premises
or Tenant's use of the Premises.
8. Intentionally Omitted.
9. Survey. Tenant shall order at Tenant's expense a survey of the
Premises by a licensed surveyor which shall show the location, area, boundaries
and dimensions of the Premises to be in conformity with the foregoing recitals,
their relative locations with respect to the streets or highways in the vicinity
of the Premises, the locations of all utility lines, the
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locations of any easements or reservations, the elevations of the comer and
center points of the Premises and that there are no encroachments of any
improvements adjoining the Premises.
At any time after the execution of this Lease, Tenant (or its agents,
representatives or designees) may enter upon the Premises to make a
topographical survey, perform engineering studies, and to procure soil tests and
make soil borings, conduct percolation and other soil and ground water tests
(including, but not limited to, testing for hydrocarbons, hazardous wastes,
toxic pollutants and other contaminants) to determine the suitability of the
Premises for Tenant's use and proposed improvements. If any such survey,
studies, tests or borings indicate conditions not satisfactory to Tenant for
such proposed improvements or Tenant's contemplated use, then Tenant may, on or
before the Closing Date, terminate this Lease and be forever fully released from
any further liability.
Landlord represents that all water, sanitary sewers, storm sewers,
electric, gas and telephone facilities are available for connection at the
property lines of the Premises.
10. Improvements and Alterations. After completion of Tenant's initial
improvements and subsequent to the Tenant's acquisition of all necessary
Permits, Tenant shall have the right to alter or renovate the improvements that
may then be existing upon the Premises and from time to time without Landlord's
consent so long as such alteration or renovation improves the value of the
Premises and does not reduce the square footage of the building.
11. Title Insurance. Within thirty (30) days after the Effective Date
of this Lease, Tenant shall order at Tenant's expense a commitment to issue an
ALTA Leasehold Owner's Policy of Title Insurance or other evidence of tide
acceptable to Tenant in an amount as determined by Tenant. Tenant reserves the
right, to be exercised prior to the Closing Date, to approve all liens,
encumbrances, easements, restrictions, reservations, rights and conditions of
record. Failure of Landlord to cure any such objection or defect to the
satisfaction of Tenant shall, at Tenant's sole election (which may be made at
any time after said thirty (30) days), render this Lease null and void and of no
force and effect, which in turn shall act to forever fully release Tenant from
any and all liability and obligations thereafter arising out of or from this
Lease.
12. Covenant of Title and Quiet Enjoyment. Landlord covenants that for
and during the Term of this Lease, and any Extensions thereof, Landlord will not
cause or suffer anything to be done which will impair Tenant's leasehold
interests and rights hereunder. Furthermore, Landlord shall defend Tenant in the
enjoyment and peaceful possession of the Premises during the Term of this Lease
and any Extensions thereof, and will indemnify Tenant against all damage and
expense which Tenant may suffer by reason of any lien, encumbrance, restriction,
or defect in the title or description herein of the Premises. If, at any time,
Landlord's title or right to receive Rent(s) hereunder is (or are) disputed, or
there is a change of ownership of Landlord's estate by act of the parties or
operation of law, Tenant may withhold Rent(s) thereafter accruing until Tenant
is furnished with satisfactory proof as to the party entitled thereto.
13. Use of Demised Premises. Tenant may use the Premises for the
purpose of conducting thereon the business of a CALIFORNIA PIZZA KITCHEN
restaurant including the sale of beer, wine and spirits, and for incidental
purposes related thereto, or for any other legally permissible business or
commercial venture; provided, however, that Tenant shall not use the Premises in
such a manner as to violate any applicable law, rule, ordinance or regulation of
any governmental body (or any covenant of record as of the Effective Date of
this Lease that runs with the Premises), Landlord represents and warrants that
use as a CALIFORNIA PIZZA KITCHEN restaurant is not prohibited or limited by
zoning or other restrictions. In the event use as a retail food outlet including
the sale of beer, wine and spirits, or the then current use of the Premises is
hereafter prohibited or restricted by any law, ordinance or order of any
governmental authority (or any covenant of record that runs with the Premises),
Tenant shall have the right to terminate this Lease by giving Landlord thirty
(30) days notice in writing, which if so chosen shall serve to forever fully
release Tenant from any and all obligations thereafter arising out of or under
this Lease.
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Notwithstanding the foregoing, Tenant shall initially operate a
restaurant and will not alter the use without Landlord's consent which will not
be unreasonably withheld.
In conducting the business herein, Tenant covenants to conform to all
applicable laws, regulations and licensing requirements. Tenant agrees at its
own expense, to maintain the Premises in a clean and sanitary condition at all
times and to remove all garbage and trash from the Premises and sidewalks
adjacent thereto.
14. Signs.
A) Tenant shall have the exclusive right, at its cost and
expense, at any time and from time to time during the Term and any
Extensions of the Lease, to erect, place and replace and/or maintain
upon the Premises its identification, directional and other signs
advertising the business of Tenant within the Premises, and to identify
and control the operation of vehicular traffic upon and within the
Premises, as well as any and all ingress thereto and egress therefrom,
as shall be set forth in a signing program established by Tenant and
approved by the duly constituted public authority having jurisdiction.
Tenant shall have the right to make changes in such signs and/or
signing program as may hereafter be implemented by Tenant, whether or
not such changes are required by (but always with the express approval
of) the duly constituted public authority.
B) Tenant shall be responsible for its own signs and shall pay
for all electrical energy utilized in connection with the lighting of
said signs installed by Tenant.
C) All of Tenant's signs shall at all times be and remain the
property of Tenant and may be removed at Tenant's election, cost and
expense at any time and from time to time, and/or at the expiration or
other termination of the Term or any Extensions of this Lease.
D) Nothing herein contained shall restrict or prohibit Tenant
from placing in or upon the walls, windows or any facia of the Premises
any advertising materials, banners, flags, poles, and/or similarly
related items, as well as its usual signs, logos, lettering, and
notices normally installed in its restaurants, including but not
limited to hours of operation, the name of other California Pizza
Kitchen locations, announcement of grand opening, "coming soon" signs
and "Now Hiring" signs, without the prior consent or approval of
Landlord so long as Tenant first obtains any necessary approvals from
the duly constituted public authority having jurisdiction.
15. Taxes and Assessments. Tenant will pay all real estate taxes
and assessments levied or assessed against the Premises during the Term and any
Extensions thereof. Such taxes payable during the first and last years of this
Lease shall be prorated based on the tax year of the taxing jurisdiction(s) and
the number of days within that taxing period in which the Term shall have run.
The term, "real estate taxes," as used herein, shall mean all "ad valorem" taxes
(or taxes in lieu thereof) and assessments imposed or assessed upon or against
the Premises by any appropriate municipality; provided that Landlord first
documents to Tenant the actual use of the funds thereby obtained being applied
to municipal services that typically are paid for through Premises tax revenues.
Landlord will provide to Tenant, or its agent, real estate tax bills and
assessments due on the Premises at least forty-five (45) days prior to the
delinquency date. If any tax or assessment can be paid in installments to the
taxing authority, Tenant may at its option elect to make such payments in
installments rather than in a single payment. In the event the Premises is part
of a larger parcel, Landlord shall make every effort to have Tenant's portion
separately assessed. Landlord grants Tenant or its agent the right to protest to
the governing authority any taxes or assessments it deems unreasonable or
improper, and further agrees to do those acts Tenant may deem necessary
(including, but not limited to, the execution of any documents and performance
of any acts) in order to perfect these rights of protest all at Tenant's sole
cost and expense.
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If any such taxes are levied, or if the assessed value of Landlord's
property is increased by inclusion of personal property and trade fixtures
placed by Tenant in the Demised Premises, Tenant shall pay to Landlord, upon
demand, that part of such taxes for which Tenant is primarily liable hereunder.
16. Indemnity, Public Liability and Builders Risk. Tenant shall save
Landlord harmless and indemnify Landlord from all injury, loss, claims or
damages to any person or property while on the Demised Premises, unless caused
by the negligence or default of Landlord, it employees, agents, licensees, or
contractors. Tenant shall maintain, with respect to the Premises, Public
Liability Insurance to afford protection to the limit of not less than a
combined single limit of One Million and No/100 Dollars ($1,000,000.00) per
occurrence in respect of personal injury or death and property damage, insuring
Tenant against injury to persons or damage to property as herein provided and
naming Landlord as an additional insured. This amount will be upwardly adjusted
each five (5) years during the term of this Lease, to an amount reasonably
determined by Tenant in accordance with sound commercial practice in Boca Raton,
Florida. All such insurance may be carried under a blanket policy covering the
Premises and any other stores and facilities of Tenant. A copy or a certificate
of insurance shall be delivered to Landlord on or before the Commencement Date
and no such policy shall be cancelable without thirty (30) days prior notice to
Landlord.
Tenant shall provide at all time during construction upon the Premises,
including initial construction of the Premises prior to the term of this Lease,
and during any alteration of the Premises, Builder's Risk Insurance with
reasonable limits, and any such policy of insurance shall name Tenant as the
insured thereunder and Landlord as an additional insured. Further, Tenant shall
maintain at all times during the term of this Lease, Workmen's Compensation
Insurance for the benefit of all employees entering upon the Premises as a
result of or in connection with their employment by Tenant.
17. Public Utilities. Tenant agrees to pay for all charges for
utilities and services used by it on the Premises, including but not limited to
gas, electricity, telephone, sanitary sewer, storm drainage, domestic water and
fire protection water.
18. Mechanic's Lien. Tenant agrees to keep the Premises free and clear
of any lien or encumbrance of any kind whatsoever created by Tenant's act or
omission. Likewise, Landlord agrees to keep the Premises free and clear of any
lien or encumbrance of any kind whatsoever created by Landlord's act or
omission, except as otherwise specifically provided herein.
19. Subletting and Assignment. Tenant shall not assign this Lease nor
any rights hereunder, nor let or sublet all or any part of the Premises, nor
suffer or permit any person or corporation to use any part of the Premises
without first obtaining the express prior written consent of Landlord. Landlord
shall not unreasonably withhold its consent to an assignment or sublet so long
as the assignee or sublessee shall have a minimum net worth of Ten Million and
No/100 Dollars ($10,000,000.00) and shall be of a use, character and reputation
compatible with other owners within the Arvida Executive Center of which the
Motor Inn is a part. Should Landlord consent to such assignment of this Lease,
or to a sublease of all or any part of the Premises, Tenant does hereby
guarantee payment of all rent herein reserved until the expiration of the term
hereof and no failure of Landlord to promptly collect from any assignee or
sublessee, or any extension of the time for the payment of such rents, shall
release or relieve Tenant from its guaranty or obligation of payment of such
rents.
Notwithstanding the foregoing, Tenant shall have the right, without
Landlord's consent, to assign this Lease or sublet the Premises or any part
thereof to any corporation into which or with which Tenant merges or
consolidates, and to any parent, subsidiary or affiliated corporation, including
CPK Acquisition Corp., PepsiCo, Inc., any corporation which is under common
control with Tenant, or pursuant to the sale to a single purchaser of all
restaurants operated by Tenant in the State of Florida; provided that any such
assignee shall deliver to Landlord, a copy of a document satisfactory to
Landlord under which such assignee agrees to assume and perform all of the terms
and conditions of this Lease on Tenant's part to be
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performed from and after the effective date of said assignment, and provided
further, that Tenant shall remain completely liable under the Lease during the
unexpired term.
20. Condemnation. If Tenant's operation or use of the Premises is
prevented, obstructed, limited or impaired, in whole or in part, by any act or
omission of any govern mental authority (or becomes illegal) and such condition
continues for thirty (30) days; or, if such operation or use is at any time
materially impaired by the closing, relocation, alteration, or improvement of
any street or parking area adjoining the Premises; (by any governmental
authority and such condition continues for thirty (30) days or more) or, if all
of the Premises is condemned for public or quasi-public use, Tenant may
terminate this Lease by giving Landlord at least thirty (30) days written notice
thereof and, if so terminated, shall be forever fully released from any and all
obligations thereafter arising out of or as a result of this Lease. In the event
Tenant does not exercise its right to terminate this Lease, the rent shall be
reduced proportionately to the resulting loss of business as determined by
Tenant and Landlord in their good faith business judgment.
The Proceeds of any condemnation award shall be divided between
Landlord and Tenant in accordance with the applicable laws of the state in which
the Premises is situated and as their respective interest may appear.
In the event of a partial taking which permits the Premises to be used
for the purposes contemplated in this Lease, the Landlord reserves unto itself,
and the Tenant assigns to Landlord, all right to damages and awards accruing on
account of any part of the Premises, or by reason of any act of any public or
quasi-public authority for which damages and awards are payable. Landlord agrees
to restore the Premises to a condition substantially similar to that which
existed prior to Tenant's finishing and furnishing. To the extent Tenant's
fixtures, furnishings and equipment are included, Landlord assigns to Tenant any
and all claims for such finishing, furnishings and equipment.
In the event of a complete taking, which shall be defined as a taking
which prevents the use of the Premises for the purposes contemplated in this
Lease, all right to damages accruing on account of the taking shall be disbursed
according to the following priority:
A. To the Landlord for its land value;
B. To the Tenant for its furnishings, fixtures and equipment; and
C. The balance to the Landlord and Tenant based upon its percentage
contribution in the construction and improvement of the Premises.
In the event the condemning authority does not separately determine a
land value, after request from Landlord, then Landlord shall select an M.A.I.
appraiser to value the land as if no improvements were erected thereon. If
Tenant does not accept such appraisal, then Tenant shall select its own M.A.I.
appraiser to value the land under the same criteria. If Landlord does not accept
Tenant's appraisal, then the two (2) appraisers shall select a third (3rd)
M.A.I. appraiser who shall value the land under the same criteria. The average
of the three (3) appraisals shall determine the land value. Each party shall
bear its own costs with respect to the appraisers and the cost of the third
(3rd) appraiser shall be shared equally between the parties.
In the event a fee mortgage is placed on the Premises, the fee
mortgagee shall be paid from the Landlord's share of damages. In the event the
Landlord's share is not adequate, then the Tenant's share may be used to make up
the difference. In the event that the mortgage encumbers more than the Premises,
the amount due the fee mortgagee under condemnation shall be separately
allocable for the Premises, if such is permitted by the mortgagee.
To the extent Tenant's fixtures, furnishings and equipment are
included, Landlord assigns to Tenant any and all claims for such finishing,
furnishings and equipment.
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Tenant agrees to execute such instruments of assignment as may be
required by Landlord, to join with Landlord in any petition for the recovery of
damages, if requested by Landlord, and to turn over to Landlord any such damages
that may be recovered in any such proceeding which may be due Landlord.
21. Holding Over. Any holding over after the expiration of the Term or
any Extensions of this lease, with or without the consent of Landlord, shall be
construed to be a tenancy from month to month on the same terms and conditions
as herein specified, so far as applicable, and at the rental provided for
herein.
22. Exclusive. Landlord agrees, during the Term of this Lease and any
Extensions thereof, to hold any land now or hereafter owned or controlled by
Landlord within a radius of one (1) mile of the Premises subject to the
following restrictions for the benefit of Tenant: (i) that no part of such land
shall be leased or used for a food outlet selling pasta or pizza; and (ii) no
improvements shall be erected on such land which will interfere with Tenant's
restaurant or the visibility of Tenant's signs to approaching automobile traffic
traveling on adjoining highways or streets. Landlord agrees to execute a
Declaration of Restrictive Covenant in the recordable form attached hereto as
Exhibit "D".
23. Short Form of Lease. A short form or Memorandum of this Lease, in a
form and content that shall be acceptable to Tenant, shall be fully executed by
the parties within ten (10) days of presentation to Landlord, and recorded by
the Tenant with the County Recorder in the county wherein the Premises is
located.
24. Destruction. In case the Premises or the building or buildings
situated thereon shall, at any time during the Term of this Lease, be damaged by
fire, flood, tornado, by the elements, or otherwise, Tenant shall, at Tenant's
expense, repair said damage and restore the Premises and such buildings to their
previous or like condition; provided, however, that in the event that the damage
shall occur during the last three (3) years or the Term or during any Extension
thereof and be such as to make it impractical or economically unreasonable to so
reconstruct, or to conduct the normal operation of business thereon, this Lease
shall thereupon cease and expire at the sole election of Tenant, as if the
actual expiration of the Term of this Lease (or any Extensions thereof) had in
fact occurred.
A. Fire Insurance. Tenant shall, at its sole expense, but for the
mutual benefit of the Landlord, Landlord's mortgagee and Tenant, as their
interests may appear, naming Landlord as additional insured, maintain fire and
extended coverage insurance on all buildings and improvements that are placed or
built upon the Premises. The amount of such insurance shall not be less than the
replacement cost of said buildings minus the cost of excavation, footings an
foundations for said buildings. All insurance maintained by Tenant shall provide
that no cancellation, reduction or other material changes therein shall be
effective until at least thirty (30) days after mailing of written notice
thereof to Landlord. Certificates of all insurance to be provided by Tenant
shall be delivered to Landlord. Any insurance to be provided by Tenant may be
carried under any blanket insurance policies of Tenant, and in such event an
appropriate certificate evidencing such coverage shall be delivered to Landlord
and Landlord's mortgagee, if any.
B. Insurance Proceeds. In the event of any damage to or destruction
of the Premises, and whether or not Tenant terminates this Lease in accordance
with this provision, Tenant shall adjust the loss and settle all claims with the
insurance companies issuing such policies and shall apply the proceeds to the
reconstruction of the improvements to a condition of equal or greater value
prior to the casualty, with any excess being paid to Tenant.
25. Default by Tenant. In the event Tenant shall fail (a) to make any
rental or other payment due hereunder within fifteen days of receipt of written
notice from Landlord to Tenant, or (b) be adjudged bankrupt, or make an
assignment for the benefit of its creditors, or (c) have its leasehold estate
taken upon execution against Tenant, or (d) abandon the Premises during the term
hereof, or (e) breach or fail to perform any of the agreements herein other than
the agreement to pay rent, and shall fail to commence curing such agreements
within
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thirty (30) days after written notice from Landlord, then Landlord and shall use
due diligence in completing the same, in any such event(s), shall have the
option, after use of appropriate summary process to:
A. Terminate this Lease, resume possession of the Premises for its
own account and recover from Tenant at the time each payment of rent becomes due
under this Lease, the difference between the rent for which provision is made in
this Lease and fair rental value of the Premises for such period, together with
any other damage occasioned by or resulting from the abandonment or a breach or
default, other than a default in the payment of rent;
B. Resume possession and re-lease or re-rent the Premises for the
remainder of the Lease term for the account of Tenant and recover from Tenant,
at the end of the Lease term of at the time each payment of rent becomes due
under this Lease, as the Landlord may elect, the difference between the rent for
which provision is made in this Lease and the rent received on the re-leasing or
re-renting, together with all costs and expenses of Landlord in connection with
re-leasing or re-rental and collection of rent and the cost of all repairs or
renovations reasonably necessary in connection with the re-leasing or
re-rental, and if the option is exercised, Landlord shall, in addition, be
entitled to recover from Tenant immediately any other damages occasioned by or
resulting from the abandonment or a breach or default other than a default in
the payment of rent.
The remedies for which provision is made in this Article 25 shall not
be exclusive, and in addition thereto, Landlord may pursue such other remedies
as are provided by law in the event of any breach, default or abandonment by
Tenant. Any and all sums due under this Lease from Tenant to Landlord and not
paid on the due date shall bear interest from the due date at the maximum rate
permitted by law.
26. Subordination.
A) If all or any portion of the Premises is now or hereafter
made subject to a lien, charge or encumbrance, Landlord shall, at its
sole cost and expense, obtain from the said holder an agreement
(hereinafter referred to as "Non-Disturbance Agreement"), in recordable
form and in a form and content satisfactory F.O. Tenant, providing that
said holder shall recognize all of Tenant's rights, benefits and
privileges provided in this Lease, and also covenanting that so long as
Tenant is not in default hereunder, Tenant's possession and use of the
Premises and the exercise of its rights hereunder shall not be
disturbed. Landlord shall deliver to Tenant such Subordination
Agreement or Non-Disturbance Agreement contemporaneously with the
execution of this Lease as to all existing liens, charges or
encumbrances, and prior to Tenant's obligation to execute any
documents related to a Non-Disturbance Agreement as to any future
liens, charges or encumbrances to be placed on the Premises by
Landlord.
B) Provided that Tenant shall have previously received a
Subordination or Non-Disturbance Agreement from the requesting party or
entity, at the written request of the Landlord or any lender
encumbering the Premises (and receipt of the same by Tenant) Tenant
shall execute and deliver in recordable form a Subordination Agreement
subordinating Tenant's leasehold estate and all of its rights hereunder
to the lien of any deed of trust or mortgage securing the repayment of
such loan, as long as such document does not modify or change the
terms and conditions of the Lease.
C) As a precondition to Tenant executing any Estoppel
Certificate, Attornment Agreement or any other document which will
alter (or has the potential of altering) its interest in this Lease or
in the use or occupancy of the Premises, Tenant shall be entitled to
receive a recordable Non-Disturbance Agreement in a form and content
acceptable to it.
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In the event Landlord is unable to obtain said Non-Disturbance
Agreement in any of the situations identified above, Tenant shall have the
option to terminate this Lease and, by so doing, Landlord hereby forever fully
releases Tenant from any and all obligations thereafter arising out of or in
relation to this Lease.
27. Waiver. Landlord's or Tenant's failure to take advantage of any
default under, or breach of any term, covenant, condition or agreement of this
Lease on the part of Tenant or Landlord to be performed, shall not be (or be
construed to be) a waiver thereof, nor shall any custom or practice which may
grow between the parties in the course of administering this Lease be construed
to waive or to lessen the right of Landlord or Tenant to insist upon the
performance by Tenant or Landlord of any term, covenant, condition or agreement
hereof, or to exercise any rights given to either of them on account of any such
default or breach. Waiver of a particular default under or breach of any term,
covenant, condition or agreement of this Lease, or any leniency shown by
Landlord or Tenant in respect thereto, shall not be construed as, or constitute,
a waiver of any other or subsequent defaults under this Lease, or breach of any
other term, covenant, condition or agreement of this Lease, or a waiver of the
right of either party to proceed against the other for the same or any other or
subsequent default under or breach of any other term, covenant, condition or
agreement of, this Lease. The payment and acceptance of Rent(s) hereunder shall
not be, nor be construed to be, a waiver of any default under, or breach of, any
term, covenant, condition or agreement of this Lease, other than the failure of
Tenant to pay the particular Rent(s) so accepted.
28. Excusable Delays. As used in this Lease, the term "Excusable
Delays" or "Excusable Delay" shall mean any acts of force majeure, including,
but not limited to, the prevention, delay, or stoppage encountered by either
party hereto due to fire or other casualty, bad weather, strikes or labor
disputes (over which said party has no direct or indirect bearing in the
resolution thereof, or, if either party hereto does have said bearing, said
dispute occurs despite either party's attempt to resolve same via good faith
bargaining) directly affecting the performance of the party's obligations under
this Lease, or acts of God, acts of the public enemy or other hostile
governmental action, civil commotion, governmental restrictions, regulations or
controls of the party obligated to perform (or of its contractors or
subcontractors). In the event of any Excusable Delays, the Excusable Delay shall
serve to extend performance by such party for a period of time equal to such
prevention, delay or stoppage, unless a shorter period is specifically provided
for in this Lease. However, in no event will an Excusable Delay extend or delay
Tenant's obligation to pay Rent hereunder.
29. Attorney's Fees. In the event that Landlord or Tenant commences an
action to enforce any of the provisions of this Lease, the prevailing party (as
is determined by a judgment in favor of one party or the other) shall be
entitled to recover from the other, as additional costs, its reasonable
attorney's fees and costs incurred in connection with such action.
30. Notices. All notices and demands of any kind which Landlord or
Tenant may require to be served upon the other shall be given by depositing one
copy of same in the United States mail, postage prepaid, certified or registered
mail, return receipt requested, addressed as follows, or by personal delivery or
a national overnight delivery service:
To Landlord: c/o Russ Weaver
P.O. Box 328
Catawba, NC 28609
To Tenant: CALIFORNIA PIZZA KITCHEN, INC.
1640 S. Sepulveda Boulevard, Suite 200
Los Angeles, California 90025
The place to which said notices shall be sent may be changed by written
notice given as herein above provided. All such mailed notices shall become
effective on the third (3rd) day after the date of postmark. Personally
delivered notices shall become effective immediately upon delivery.
-12-
<PAGE> 13
31. Removal of Fixtures and Personal Property. At any time during or at
the expiration or other termination of the Term of this Lease, or any Extensions
thereof, Tenant shall have the absolute and unrestricted right to remove from
the Premises any or all trademark items, trade fixtures, equipment (including
without limitation audiovisual units, walk-up audiovisual units, signs, safes,
kitchen machines, utensils and equipment, counterlines and removable
partitions), furniture and other personal property installed or paid for by
Tenant, howsoever affixed to the Premises. At Landlord's request, Tenant shall
repair any material damage to the Premises resulting from the removal of such
trade fixtures.
If said trademark items, trade fixtures, equipment, furniture and other
personal property are not removed within thirty (30) working days after the
expiration or other termination of the Lease, subject to any Excusable Delays as
defined in Section 28 (EXCUSABLE DELAYS), title thereto shall automatically vest
in Landlord.
32. Complete Agreement. It is expressly agreed that this Lease contains
all the terms, covenants, conditions and agreements of the parties hereto
relating in any manner to the rental, use and occupancy of the Premises, and
that no prior agreement or understanding pertaining to the same shall be valid
or of any force or effect, and that the terms, covenants, conditions and
agreements of this Lease cannot be altered, changed or modified or added to
except in writing and signed by the parties hereto.
33. Severability. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision of this Lease.
34. Section Headings. The section headings in this Lease are for the
purpose of convenience and heading only, and the words contained therein shall
in no way be held to explain, modify or aid in the interpretation, construction
or the meaning of the provisions thereof.
35. Landlord's Actions. Landlord shall act diligently, and in good
faith, to do all acts and sign all documentation (including, but not limited to,
providing Tenant with Landlord's Federal Taxpayer Identification Number in the
space provided below), as is necessary to effectuate the intent and purpose of
this Lease. In the event Tenant is required to obtain Landlord's consent,
determination or approval, such consent, determination or approval will not be
unreasonably withheld or delayed.
36. Brokers. Landlord and Tenant each represent and warrant to the
other that no broker has been engaged by it in connection with the transaction
contemplated hereby. Tenant acknowledges that Mr. Sam Calloway of Arvida Realty
initially showed the property to Mr. Robert Chais of California Pizza Kitchen,
Inc. Tenant shall indemnify, defend and hold Landlord harmless from and against
any and all cost, expense, or liability that may result from this showing.
Landlord and Tenant shall indemnify, defend and hold the other harmless from and
against any and all costs, expenses, or liability that may result from a breach
of these representations and warranties.
37. Grant of Easement and Right to Use. At all times during the initial
term of this Lease and during any extension thereof, Landlord shall continuously
and without interruption make available, and hereby grants and demises to Tenant
and Tenant's successors and assigns, a non-exclusive easement and the right for
Tenant and its subtenants, in common with Landlord and all persons, firms and
corporations conducting business within the Arvida Executive Center and their
respective customers, guests, licensees, invitees, subtenants, employees and
agents to use the common areas of the Arvida Executive Center including
automobile parking areas, pedestrian and vehicular accesses, sidewalks and
passageways and ingress and egress areas (which parking and common areas are
herein collectively referred to as "Common Area") for ingress, egress, parking
and all purposes for which such areas would customarily be utilized.
-13-
<PAGE> 14
Tenant acknowledges that the Premises are located within the Arvida
Executive Center and are subject to that certain Declaration of Covenants and
Restrictions and as may be from time to time amended. Landlord agrees that it
shall not consent to any amendment to such Declaration which shall limit the use
contemplated by Tenant under the terms of this Lease. Tenant acknowledges
receipt of such Declaration and agrees to comply with all applicable rules and
regulations as provided for and as may be provided for therein. Landlord agrees
to provide notice to Tenant of any rules and regulations which may be
promulgated. Tenant shall pay its prorata share of all assessments due to Trail
Blades Property Owner's Association, Inc. Tenant's occupancy of the Premises
shall in no manner divest Landlord of any voting rights it holds as Owner of the
Premises.
IN WITNESS WHEREOF, the parties have caused this Lease to be signed in
duplicate original as of the day and date first set forth above.
LANDLORD: TENANT:
CALIFORNIA PIZZA KITCHEN, INC.
By: /s/ Anna M. Erwin By: /s/ Neal Rosenfield
---------------------- --------------------------------------
Title: General Partner Title: Vice-President Real Estate Development
---------------------- --------------------------------------
Date: April 7, 1993 Date: March 31, 1993
---------------------- --------------------------------------
Federal Taxpayer Identification
Number: 31-0966987
-14-
<PAGE> 15
EXHIBIT A
A parcel of land lying in part of Parcel B, Arvida Executive Center - Plat No.
2, Boca Raton, Florida, as recorded in Plat Book 39, Page 188, Public Records of
Palm Beach County, Florida, being more particularly described as follows:
Commencing at the Permanent Reference Monument marking the intersection of the
West line of said Parcel B with the North right of way line of Executive Center
Circle Northwest as shown on the above mentioned Plat; thence North 89(degree)
42' 24" East (bearings shown are based on the West line of the Southeast
one-quarter of Section 14, Township 47 South, Range 42 East bearings South
00(degree) 06' 17" West), a distance of 135.00 feet to the Point of Beginning of
this description; thence North 00(degree) 17' 36" West, a distance of 65.30
feet; thence South 89(degree) 42' 24" West, a distance of 14.50 feet to the
beginning of a curve concave to the Northeast having a radius of 3.00 feet and a
central angle of 90(degree) 00' 00"; thence Westerly, North westerly and
Northerly along the arc of said curve, a distance of 4.71 feet; thence North
00(degree) 17' 36" West, along the tangent to said curve, a distance of 4.00
feet to the beginning of a curve concave to the Southwest having a radius of
3.00 feet and a central angle of 90(degree) 00' 00"; thence Northerly,
Northeasterly and Easterly along the arc of said curve, a distance of 4.71 feet;
thence North 89(degree) 42' 24" East along the tangent to said curve, a distance
of 14.50 feet; thence North 00(degree) 17' 36" West, a distance of 82.00 feet;
thence South 89(degree) 42' 24" West, a distance of 14.50 feet to the beginning
of a curve concave to the Northeast having a radius of 3.00 feet and a central
angle of 115(degree) 00' 28"; thence Westerly, Northwesterly and Northerly along
the arc of said curve, a distance of 6.02 feet to a point of compound curvature;
thence Northeasterly and Easterly along the arc of a curve concave to the
Southeast having a radius of 19.00 feet and a central angle of 64(degree) 59'
32", a distance of 21.55 feet; thence North 89(degree) 42' 24" East along the
tangent to said curve, a distance of 7.00 feet to the beginning of a curve
concave to the Southwest having a radius of 3.00 feet and a central angle of
90(degree) 00' 00"; thence Easterly, Southeasterly and Southerly along the arc
of said curve, a distance of 4.71 feet; thence South 00(degree) 17' 36" East
along the tangent to said curve, a distance of 14.50 feet; thence North
89(degree) 42' 24" East, a distance of 72.00 feet; thence North 00(degree) 17'
36" West, a distance of 14.50 feet to the beginning of a curve concave to the
Southeast having a radius of 3.00 feet and a central angle of 90(degree) 00'
00"; thence Northerly, Northeasterly and Easterly along the arc of said curve, a
distance of 4.71 feet; thence North 89(degree) 42' 24" East along the tangent to
said curve, a distance of 48.00 feet to the beginning of a curve concave to the
Southwest having a radius of 19.00 feet and a central angle of 64(degree) 59'
32"; thence Easterly and Southeasterly along the arc of said curve, a distance
of 21.55 feet to a point of compound curvature; thence Southeasterly, Southerly,
Southwesterly and Westerly along the arc of a curve concave to the Northwest
having a radius of 3.00 feet and a central angle of 115(degree) 00' 28", a
distance of 6.02 feet; thence South 89(degree) 42' 24" West along the tangent to
said curve, a distance of 14.50 feet; thence South 00(degree) 17' 36" East, a
distance of 102.00 feet; thence North 89(degree) 42' 24" East, a distance of
14.50 feet to the beginning of a curve concave to the Southwest having a radius
of 3.00 feet and a central angle of 90(degree) 00' 00"; thence Easterly,
Southeasterly and Southerly along the arc of said curve, a distance of 4.71
feet; thence South 00(degree) 17' 36" East along the tangent to said curve, a
distance of 4.00 feet to the beginning of a curve concave to the Northwest
having a radius of 3.00 feet and a central angle of 90(degree).
-15-
<PAGE> 16
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE ("Amendment"), dated as of April 29, 1993, hereby
amends that certain Standard Form Ground Lease Agreement ("Lease") dated April
7, 1993, by and between ERWIN AND ERWIN, an Ohio limited partnership, as
Landlord, and CALIFORNIA PIZZA KITCHEN, INC., a California corporation, as
Tenant, with respect to certain premises located in Boca Raton, Florida
("Premises"), as follows:
1. Maintenance and Repairs. Tenant covenants and agrees, at its sole cost and
expense, at all times during the term and any extensions of the Lease, to
maintain and keep the Premises in an orderly condition and in a state of good
repair, excepting normal wear and tear.
2. Effect. Except as set forth above, the Lease shall remain unmodified and in
full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the
date set forth above.
LANDLORD: TENANT:
ERWIN AND ERWIN, CALIFORNIA PIZZA KITCHEN, INC.,
an Ohio limited partnership a California corporation
By: /s/ Anna M Erwin By: /s/ Neal Rosenfield
---------------------- --------------------------------------
Title: General Partner Title: Vice-President Real Estate Development
--------------------------------------
Date: May 5, 1993 Date: May 10, 1993
---------------------- --------------------------------------
-16-
<PAGE> 17
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE ("Amendment") is made and entered into
as of the 19th day of February, 1998 ("Amendment Effective Date"), by and
between ERWIN AND ERWIN, an Ohio limited partnership ("Landlord") , whose
address is c/o Russ Weaver, 104 4th Avenue SW, Catawba, NC 28609 (or P.O. Box
328, Catawba, NC 28609), and JERRY'S FAMOUS DELI, INC., a California corporation
("Tenant"), whose address is 12711 Ventura Boulevard, Suite 400, Studio City,
California 91604, Attention: Isaac Starkman.
W I T N E S S E T H:
WHEREAS, Landlord and Tenant, are landlord and tenant, respectively,
pursuant to that certain Standard Form Ground Lease dated as of April 7, 1993,
containing 14 pages plus Exhibits A, B, C and D (collectively, the "Original
Lease"), originally by and between Landlord and Tenant's
predecessor-in-interest, California Pizza Kitchen, Inc., a California
corporation ("CPK"), as amended by First Amendment to Lease between Landlord and
CPK last signed May 10, 1993 ("First Amendment"), and as assigned by CPK to
Tenant by Assignment and Assumption Agreement, Landlord's Consent and Release of
Assignor of even date herewith ("Assignment") [the original Lease, as amended by
the First Amendment and as assigned pursuant to the Assignment, may be
collectively referenced as the "Lease"], respecting certain premises located in
the "Arvida Executive Center", City of Boca Raton, Palm Beach County, Florida
described on Exhibit A to the Original Lease ("Premises") and having an address
of 2006 N.W. Executive Drive, Boca Raton, Florida 33432; and
WHEREAS, the Lease expires by its terms on May 13, 2013, subject to two
(2) five (5) year renewal options; and
WHEREAS, the parties hereto wish to modify the Lease, subject to and in
accordance with the terms, provisions and conditions hereinafter set forth.
NOW, THEREFORE, for and in consideration of the sum of TEN ($10.00)
DOLLARS, the mutual promises herein contained, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, do hereby agree as follows:
1. RECITALS: The foregoing recitals are true and correct and are
incorporated herein by this reference.
2. MODIFICATIONS TO LEASE: Landlord and Tenant hereby agree to modify
the following referenced sections of the Lease, as of the Amendment Effective
Date, as follows:
4. Extensions. Section 4 of the original Lease is hereby
amended by the replacement of the words "two (2)" with the words "five
(5)", so that Tenant shall have five (5) renewal options of five (5)
years each.
5. Minimum Annual Rental.
a. Section 5a of the original Lease shall be of no further
force or effect.
b. Section 5b of the original Lease shall be of no further
force or effect.
c. Section 5c of the Original Lease shall be deleted in its
entirety and replaced as follows:
-17-
<PAGE> 18
Commencing as of January 1, 1999, the Minimum Annual Rental
shall be adjusted annually on the basis of seventy-five (75%)
percent of any increase in the cost of living as reported in
the Consumer Price Index for All Urban Consumers (1967 = 100),
"All Items" (the "Index"), published by the Bureau of Labor
Statistics of the United States Department of Labor between
the level in effect on January 1, 1998 (the "Base Level") and
the level in effect on the first day of each Lease Year
thereafter (the "Adjustment Level"). The Minimum Rental shall
be Two Hundred Thirty Thousand ($230,000) Dollars plus
seventy-five (75%) percent of the difference of the product of
Two Hundred Thirty Thousand ($230,000) Dollars multiplied by a
fraction, the numerator of which is the Adjustment Level and
denominator of which is the Base Level less Two Hundred Thirty
Thousand ($230,000) Dollars. Stated as a mathematical formula,
the Minimum Annual Rental as of the Amendment Effective Date
shall be computed as follows;
$230,000 + [75% x ([$230,000 x Adjustment Level/Base Level] - $230,000)]
Notwithstanding anything to the contrary, no annual increase
shall exceed three (3k) percent over the prior Lease Year.
d. Section 5d of the original Lease shall be deleted in its
entirety and replaced as follows:
Commencing as of the twenty-first (21st) Lease Year (so long
as the applicable Extension(s) are exercised), the Minimum
Annual Rental shall be adjusted annually on the basis of
ninety (90%) percent of any increase in the cost of living as
reported in the Consumer Price Index for All Urban Consumers
(1967 = 100), "All Items" (the "Index"), published by the
Bureau of Labor Statistics of the United States Department of
Labor between the level in effect on January 1, 1998 (the
"Base Level") and the level in effect on the first day of the
twenty-first (21st) Lease Year and each Lease Year thereafter
during the applicable Extension period (the "Adjustment
Level"). The Minimum Rental shall be Two Hundred Thirty
Thousand ($230,000) Dollars plus ninety (90%) percent of the
difference of the product of Two Hundred Thirty Thousand
($230,000) Dollars multiplied by a fraction, the numerator of
which is the Adjustment Level and denominator of which is the
Base Level less Two Hundred Thirty Thousand ($230,000)
Dollars. Stated as a mathematical formula, the Minimum Annual
Rental after the twentieth Lease Year shall be computed as
follows:
$230,000 + [90% x ([$230,000 x Adjustment Level/Base Level] - $230,000)]
Notwithstanding anything to the contrary, no annual increase
shall exceed three (3%) percent over the prior Lease Year.
e. Section 5e of the Original Lease shall be deleted in its
entirety.
f. Section 5f of the original Lease shall be modified by
deleting all parts thereof prior to subpart (1) thereof, and replacing
the same as follows:
Commencing as of the Amendment Effective Date, if the amount
equal to three (3%) percent of Tenant's Gross Sales (as
defined below), during any Lease Year exceeds the Minimum
Annual Rental for such Lease Year, Tenant shall pay Landlord
the amount of such excess, plus applicable sales tax, for the
first $10,000,000 of Gross Sales and two and one-half (2 1/2%)
percent of all Gross Sales over $10,000,000, plus applicable
sales tax. Tenant's Gross Sales shall be reported on an annual
basis within sixty (60) days after the end of each Lease Year,
and percentage rent, if any, shall be paid at the time such
annual statements are rendered by Tenant, along with
applicable sales taxes.
-18-
<PAGE> 19
9. Survey. Section 9 of the Original Lease is hereby
amended by the deletion of the last sentence in the second to last
paragraph thereof.
10. Improvements and Alterations. Without limiting Tenant's
rights pursuant to Section 10 of the Original Lease (and it being
recognized that Tenant's initial improvements have already been
completed), Tenant shall be permitted, without Landlord's consent, to
make any non-structural alterations and/or improvements up to $100,000
per alteration or improvement, at any time and from time to time.
11. Title Insurance. Section 11 of the original Lease shall
be of no further force or effect.
13. Use of Demised Premises. Section 13 and other
applicable provisions of the Original Lease shall be modified as
follows: (i) the use and any and all related clauses contained in the
Lease (including without limitation, those pertaining to construction,
signage, alterations, operation, etc.) are hereby modified to allow
Tenant (and its successors or assigns), without Landlord's consent but
subject to applicable laws and any deed restrictions existing as of the
Amendment Effective Date, to construct, identify, develop and operate,
at any time and from time to time, a "Jerry's Famous Deli", "Rascal
House" or other restaurant and/or other lawful purpose; and (ii) all
references to CPK (or "California Pizza Kitchen") contained in the
Lease shall be modified to refer to Tenant, unless the context clearly
otherwise requires; and (iii) the second to last paragraph of Section
13 of the original Lease is hereby deleted in its entirety.
15. Taxes and Assessments. Section 15 of the Original Lease
is clarified to provide that Tenant shall be obligated to pay to
Landlord sales tax on all amounts paid to or on behalf of Landlord
(including all taxes and assessments), as required by Florida law.
Landlord shall timely remit all such sales taxes to the State of
Florida, Department of Revenue.
22. Exclusive. Section 22 of the Original Lease is hereby
modified by the addition of the following words at the end of subpart
(i) thereof: "or any other 'non-tablecloth restaurant'".
24. Destruction.
C. Subpart C is hereby added as follows:
C. Other Insurance. Tenant, at its sole expense, but for
the mutual benefit of the Landlord, Landlord's mortgagee
and Tenant, as their interests may appear, naming Landlord
as loss payee, shall maintain General Liability in the
amount of $2,000,000 with $1,000,000.00 for each
occurrence. Tenant shall also maintain Liquor Liability in
the like amount.
25. Default by Tenant.
B. The last sentence of Subpart B is hereby modified
by the addition of the following words at the end thereof "unless
Tenant pays the same within ten (10) days after written notice that the
same is past due".
C. Subpart C is hereby added as follows:
C. If any payment due hereunder is not made within ten (10)
days after written notice of past due, Tenant shall pay to
Landlord a late charge equal to one (1%) percent of any
such late payment.
-19-
<PAGE> 20
46. Right of First Refusal. Section 46 is hereby added as
follows:
In the event Landlord decides to sell the Premises, it shall
notify Tenant of its intent along with the expected sale
price. If Tenant at such time does not desire to purchase
the Premises, then Landlord shall offer it to other parties.
Upon receiving a bona fide offer to purchase from a third
party, Tenant shall have the right of first refusal to
purchase the Premises on the same price, terms and
conditions as the acceptable offer. To exercise such right,
Tenant shall be obligated to forward an offer to purchase
with a ten percent (10%) deposit within twenty (20) business
days and close the purchase no later than the time for
closing set forth in such offer. Should the Tenant fail to
exercise this right of first refusal, or fail to close in a
timely manner, all of the rights of Tenant in this Section
46 shall be null and void and of no further effect.
Notwithstanding the foregoing, if the proposed sale is not
completed within the time contained in the purchaser's
offer, upon the terms and conditions contained in such
offer, then Tenant's right of first refusal under this
Section shall be fully restored and reinstated as if such
offer had never been made.
3. BROKERS: Landlord and Tenant each represent and warrant to
the other that no broker has been engaged by it in connection with the
transaction contemplated hereby. Landlord and Tenant each shall protect, defend,
indemnify and hold the other harmless from and against any claim made by a
broker for a commission claiming by, through or under such party.
Notwithstanding the foregoing, (i) Tenant has advised Landlord that it has dealt
with Sam Callaway of Greenfield Katz Properties, Inc. ("Disclosed Broker") , and
(ii) any commission due Disclosed Broker shall be paid by CPK.
4. MISCELLANEOUS: (i) The provisions hereof shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns; (ii) the Lease, together with
this Amendment, constitutes the entire understanding between the parties in
respect to the Premises, and the Lease has not been modified or amended, except
by this Amendment; (iii) Tenant shall not be liable for any default accruing
under the Lease prior to the Amendment Effective Date; (iv) Landlord represents
to Tenant that (a) Landlord owns and holds the fee simple interest in and to the
Premises, free and clear of any and all mortgages, deeds of trust, liens, claims
and encumbrances of whatsoever kind and nature, and (b) the person executing
this agreement on behalf of Landlord has full right, power and authority so to
do, and the same constitutes the legal, valid and binding obligation of Landlord
fully enforceable in accordance with the terms hereof.
5. RATIFICATION: Except as hereby modified, all of the terms
and provisions of the Lease are hereby ratified and confirmed and shall be and
remain in full force and effect in accordance with their terms. All terms used
in this Amendment which are defined in the Lease shall have the meanings
ascribed to them in the Lease, unless the context clearly otherwise requires.
6. MEMORANDUM OF LEASE: Simultaneously herewith, Landlord and
Tenant shall execute and deliver a memorandum of the Lease, as modified hereby,
in form and substance reasonably satisfactory to Landlord and Tenant
("Memorandum of Lease"). Tenant, at its expense, may record the Memorandum among
the Public Records of Palm Beach County, Florida.
-20-
<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals as of the day and year first above written.
WITNESSES: LANDLORD:
ERWIN AND ERWIN,
an Ohio limited partnership
- -------------------------------
By: /s/ Russ Weaver
- ------------------------------- ----------------------
Russ Weaver,
General Partner
TENANT:
JERRY'S FAMOUS DELI, INC.,
a California corporation
- -------------------------------
By: /s/ Isaac Starkman
- ------------------------------- ----------------------
-21-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
1. JFD, Inc., a California corporation
2. National Deli Corporation, a Florida corporation
3. Jerry's Famous Deli, L.A., Inc., a California corporation
<PAGE> 1
EXHIBIT 23.0
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration
statement on Form S-8 of our report dated March 25, 1998 on our audits of the
consolidated financial statements of Jerry's Famous Deli, Inc. as of December
31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, which report is included in the Company's Annual Report
on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, THE CONSOLIDATED STATEMENTS OF OPERATIONS, AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,264,308
<SECURITIES> 0
<RECEIVABLES> 290,675
<ALLOWANCES> 18,164
<INVENTORY> 525,200
<CURRENT-ASSETS> 5,046,850
<PP&E> 38,378,085
<DEPRECIATION> 8,542,556
<TOTAL-ASSETS> 38,100,304
<CURRENT-LIABILITIES> 4,905,250
<BONDS> 7,690,219
0
0
<COMMON> 23,724,484
<OTHER-SE> 844,843
<TOTAL-LIABILITY-AND-EQUITY> 38,100,304
<SALES> 56,418,387
<TOTAL-REVENUES> 56,418,387
<CGS> 17,507,824
<TOTAL-COSTS> 17,507,824
<OTHER-EXPENSES> 37,478,863
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 684,118
<INCOME-PRETAX> 697,175
<INCOME-TAX> 140,221
<INCOME-CONTINUING> 556,954
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 556,954
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,145,265
<SECURITIES> 0
<RECEIVABLES> 357,149
<ALLOWANCES> (10,001)
<INVENTORY> 420,819
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9,153,078
0
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<EPS-PRIMARY> (0.44)
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</TABLE>