-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HXvtDJHedBiFc6QxKduoFFEE0j9JZoQ5nfnpFgxsUSuSdEdcjmG/0gJQXrHiZX6T PtxXyK5Nv0nB0OyZrpkMpQ== 0000950148-98-000737.txt : 19980401 0000950148-98-000737.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950148-98-000737 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: JERRYS FAMOUS DELI INC CENTRAL INDEX KEY: 0000948308 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 953302338 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26956 FILM NUMBER: 98582668 BUSINESS ADDRESS: STREET 1: 12711 VENTURA BLVD STREET 2: STE 400 CITY: STUDIO CITY STATE: CA ZIP: 91604 BUSINESS PHONE: 8187668311 MAIL ADDRESS: STREET 1: 12711 VENTURA BLVD STREET 2: STE 400 CITY: STUDIO CITY STATE: CA ZIP: 91604 10-K405 1 FORM 10-K405 1 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) California 5812 95-3302338 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
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. 2 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). 2 3 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 3 4 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: 4 5 - 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. 5 6 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 6 7 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. 7 8 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." 8 9 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 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.
NAME AGE POSITION 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
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 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 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:
High Low ---- --- 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
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 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.
Year Ended December 31, ----------------------- Description 1997 1996 1995 1994 1993 ----------- ---- ---- ---- ---- ---- (Dollars in thousands except Earnings Per Share and Restaurant Operating Data) 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)
13 14
Year Ended December 31, ----------------------- Description 1997 1996 1995 1994 1993 ----------- ---- ---- ---- ---- ---- (Dollars in thousands except Earnings Per Share and Restaurant Operating Data) 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
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 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:
Location Date Opened or Acquired -------- ----------------------- 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
* 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 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 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.
Percentage of Total Revenues ---------------------------- Years Ended December 31, ------------------------ 1997 1996 1995 ------ ------ ------ 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% ====== ====== ======
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 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 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 19 20 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 20 21 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 21 22 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. 22 23 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 23 24 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. 24 25 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 25 26 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 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 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
Page 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
28 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 30 JERRY'S FAMOUS DELI, INC. CONSOLIDATED BALANCE SHEETS
December 31, ---------------------- 1997 1996 ---- ---- ASSETS Currents assets 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 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 30 31 JERRY'S FAMOUS DELI, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, -------------------------------------------- 1997 1996 1995 ---- ---- ---- 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
The accompanying notes are an integral part of these consolidated financial statements. 31 32 JERRY'S FAMOUS DELI, INC. CONSOLIDATED STATEMENTS OF EQUITY
Jerry's Famous Deli, Incorporated ----------------------------------------------------- Common Stock Preferred Stock ----------------------------------------------------- Shares Shares Issued and Issued and Outstanding Amount Outstanding Amount ----------- ---------- ---------- ---------- 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 - - ---------- ---------- --------- ----------
Jerry's Famous Pizza Common Stock JFD-Encino ---------------------- Shares Contributed Retained Partners' Issued and Capital Earnings Capital Outstanding Amount (Deficit) (Deficit) Total ---------- --------- --------- ---------- ---------- ---------- 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 --------- --------- --------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. 32 33 JERRY'S FAMOUS DELI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, -------------------------------------------- 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: 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 =========== ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 33 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 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 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 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:
Pro Forma Pro Forma Year Ended Year Ended December 31, 1996 December 31, 1995 ----------------- ----------------- (in thousands, except per common share data) Revenues $ 47,952 $ 43,265 Net income $ 731 $ 1,219 Net income per common share - Basic $ 0.06 $ 0.12
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 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 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:
1997 1996 ---- ---- 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)
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:
December 31, 1997 1996 ---- ---- 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 ============ ============
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 40 5. LONG-TERM DEBT Long-term debt consists of the following:
December 31, ------------ 1997 1996 ---- ---- 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 ========== ==========
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: 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 ==========
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 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: 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 ===========
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:
1997 1996 1995 ---- ---- ---- Federal: 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 ========= ========= =========
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 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:
1997 1996 --------- --------- Current deferred tax assets 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 ========= =========
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:
Years Ended December 31, ------------------------------------------- 1997 1996 1995 --------- --------- --------- 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 ========= ========= =========
9. SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended December 31, ------------------------------------------ 1997 1996 1995 ---------- ---------- -------- Supplemental cash flow information: Cash paid for: 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
42 43 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 --
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.
Shares Under Option Shares Exercise Price ------------------- ------ -------------- 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 -------
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 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:
1997 (in thousands, except per share data) First Second Third Fourth - ------------ --------------------------------------------------------------------------------- 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)
44 45
1996 (in thousands, except per share data) First Second Third Fourth - --------------------------------------------------------------------------------------------------------------- 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)
COMMON STOCK DATA
1997 First Second Third Fourth - ------------------------------------------------------------------------------------------------------------------ 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
(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 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 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 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 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 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 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
Signature Capacity Date --------- -------- ---- /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
EX-10.4 2 FORM 10.4 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 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 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 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 EX-10.5 3 EXHIBIT 10.5 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 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 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 3 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 EX-10.6 4 EXHIBIT 10.6 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, 1 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. 2 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 EX-10.20 5 EXHIBIT 10.20 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. -1- 2 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. -2- 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. -3- 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 -4- 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. -5- 6 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. -6- 7 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. -7- 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.
Fiscal Year Amounts ----------- ------- 1997 and 1998 $21,000,000 (in aggregate) 1999 $ 4,000,000 2000 $ 4,000,000
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. -8- 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. -9- 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. -10- 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. -11- 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. -12- 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. -13- 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 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
-14- EX-10.41 6 EXHIBIT 10.41 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. 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 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 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. 4 5 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; 5 6 (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 6 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. 7 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. 8 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 9 10 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. 10 11 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 11 12 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:
FISCAL YEAR: AMOUNTS: ------------ -------- 1997 and 1998 $21,000,000 1999 $ 4,000,000 2000 $ 4,000,000
12 13 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 13 14 any event which, with the passage of time or giving of notice (or both), may become an Event of Default. 14 15 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 15 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 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; 17 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; 18 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 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 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 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 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. 23 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 EX-10.42 7 EXHIBIT 10.42 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, 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- 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 -3- 4 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 -4- 5 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 -5- 6 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. -6- 7 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: -7- 8 (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 -8- 9 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, -9- 10 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 -10- 11 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- -11- 12 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. -12- 13 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. -13- 14 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. -14- 15 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. -15- 16 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 -16- 17 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: -17- 18 (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. -18- 19 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 -19- 20 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 ----------------------------- -20- EX-10.43 8 EXHIBIT 10.43 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 -1- 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: -2- 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, -3- 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 -4- 5 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 -5- 6 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. -6- 7 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. -7- 8 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 -8- 9 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. -9- 10 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 -10- 11 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. -11- 12 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- EX-21.1 9 EXHIBIT 21.1 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 EX-23.0 10 EXHIBIT 23.0 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 EX-27 11 EXHIBIT 27
5 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. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 2,264,308 0 290,675 18,164 525,200 5,046,850 38,378,085 8,542,556 38,100,304 4,905,250 7,690,219 0 0 23,724,484 844,843 38,100,304 56,418,387 56,418,387 17,507,824 17,507,824 37,478,863 0 684,118 697,175 140,221 556,954 0 0 0 556,954 0.04 0.04
EX-27.1 12 EXHIBIT 27.1
5 12-MOS DEC-31-1996 DEC-31-1996 4,145,265 0 357,149 (10,001) 420,819 6,144,194 31,506,417 (5,811,941) 36,562,985 6,041,422 5,959,959 9,153,078 0 14,175,109 295,841 36,562,985 40,159,715 40,159,715 12,480,215 12,480,215 26,244,503 5,280 514,118 862,697 284,184 578,713 0 0 0 578,713 (0.44) (0.44)
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