-----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, KT2FANa5buynvrv5dj/OGh99VKbsmt1xEyFQSyg+qhunMX14lhg70oUbc0r7O5TB EYHpvtzTdRHrJZ/TeN2vSw== 0001144204-04-003729.txt : 20040329 0001144204-04-003729.hdr.sgml : 20040329 20040329165409 ACCESSION NUMBER: 0001144204-04-003729 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTH EXPRESS USA INC CENTRAL INDEX KEY: 0001070050 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 650847995 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-27569 FILM NUMBER: 04696846 BUSINESS ADDRESS: STREET 1: 1761 WEST HILLSBORO BLVD STREET 2: SUITE 203 CITY: DEERFIELD BEACH STATE: FL ZIP: 33442 BUSINESS PHONE: 954-570-5900 MAIL ADDRESS: STREET 1: 1761 WEST HILLSBORO BLVD STREET 2: SUITE 203 CITY: DEERFIELD BEACH STATE: FL ZIP: 33442 10KSB 1 v02253_10ksb.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED COMMISSION FILE NO. DECEMBER 28, 2003 02-27569 HEALTH EXPRESS USA, INC. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) FLORIDA 65-0847995 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1761 WEST HILLSBORO BLVD., SUITE 203 DEERFIELD BEACH, FLORIDA 33442 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Issuer's telephone number: (954) 570-5900 Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $0.001 PER SHARE (TITLE OF CLASS) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that Health Express was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Health Express' knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for its most recent fiscal year. $749,450 Based on the closing sale price on March 26, 2004, the aggregate market value of the voting common stock held by non-affiliates of Health Express is $1,687,879. As of March 24, 2004, Health Express had 13,387,055 shares of common stock outstanding. FORM 10-KSB FOR THE YEAR ENDED DECEMBER 28, 2003 TABLE OF CONTENTS PART I.........................................................................1 FORWARD-LOOKING STATEMENTS..................................................1 ITEM 1. DESCRIPTION OF BUSINESS DEVELOPMENT................................1 ITEM 2. DESCRIPTION OF PROPERTY............................................6 ITEM 3. LEGAL PROCEEDINGS..................................................6 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................7 PART II........................................................................7 ITEM 5. MARKET FOR HEALTH EXPRESS USA, INC.'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................................7 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................11 ITEM 7. FINANCIAL STATEMENTS..............................................19 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................19 ITEM 8A. CONTROLS AND PROCEDURES...........................................19 PART III......................................................................20 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT ............. 20 ITEM 10. EXECUTIVE COMPENSATION............................................21 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....24 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................26 PART IV.......................................................................28 ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K............28 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................31 FINANCIAL STATEMENTS.........................................................F-1 i PART I INTRODUCTORY NOTE FORWARD-LOOKING STATEMENTS This Form 10-KSB contains "forward-looking statements" relating to Health Express USA, Inc. ("Health Express") which represent Health Express' current expectations or beliefs including, but not limited to, statements concerning Health Express' operations, performance, financial condition and growth. For this purpose, any statements contained in this Form 10-KSB that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "anticipation", "intend", "could", "estimate", or "continue" or the negative or other comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, and the ability of Health Express to continue its growth strategy and competition, certain of which are beyond Health Express' control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. Any forward-looking statement speaks only as of the date on which such statement is made, and Health Express undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. ITEM 1. DESCRIPTION OF BUSINESS DEVELOPMENT Health Express was incorporated in Florida on July 2, 1998 for the purpose of developing a health and gourmet fast food restaurant for franchising. On April 10, 2000, Health Express began operations of its first restaurant, Healthy Bites Grill, in Fort Lauderdale, Florida. Health Express operated the restaurant through a wholly owned subsidiary, Healthy Bites Grill, Inc. ("HBG"), incorporated in Florida on January 26, 1999. The restaurant equipment and supplies were sold on September 23, 2002 to an unaffiliated third party buyer. The lease between Health Express and the landlord, which expired on January 31, 2004, was assigned to the buyer, but Health Express remained as a guarantor until January 31, 2004. As of the date of this filing, the obligation related to this lease has been satisfied. HBG is currently an active corporation but has not conducted business since the sale of the assets on September 23, 2002. Its activity was shown as discontinued operations in the accompanying financial statements for the year ending December 29, 2002. On May 7, 2001, Health Express entered into a lease agreement for a second restaurant in Boca Raton, Florida (the "Boca Restaurant"). The Boca Restaurant started operations on June 24, 2002. Health Express also completed a Uniform Franchise Offering Circular ("UFOC") to launch the franchise program on October 1, 2002. Health Express operates the second restaurant through a wholly owned subsidiary, Healthy Bites Grill of Boca, Inc. ("HBGB") and franchise operations are conducted through a wholly owned subsidiary, Health Express Franchise Company ("HEFC"). Both HBGB and HEFC were incorporated in Florida on May 7, 2001. INDUSTRY OVERVIEW Health Express' vision is to merge three industries: fast food, quick casual operations and health food restaurants. The fast food industry, a staple of the American consumer, is a multi- billion-dollar industry of which Health Express is a part. We believe this industry is dominated by hamburger chains, followed by chicken, Mexican and Italian food segments. Dining out and dining fast are not the only trends when it comes to food. An increasing number of Americans are developing a healthy appetite for healthy eating, and that trend is growing(1). As the millennium began, Americans were spending a combined $32.1 billion a year on natural and organic products(2), up 14% from 1999 and up dramatically from the $4.2 billion in sales in 1990(3). Forty-eight percent of consumers use organic products at least occasionally, and retail sales of organic products- about $9 billion in 2001 are expected to grow by about 20% a year, reaching $20 billion by 2005(4). We believe that the trend toward a lifestyle balanced by proper exercise and nutrition naturally leads the health 1 conscious consumer to look for a place to eat that will provide healthy and tasty foods at a reasonable price, without sacrificing convenience. Health Express seeks to fill this current void in the fast food industry. 1. NUTRITION AND YOU: TRENDS 2000 AMERICAN DIETETIC ASSOCIATION, JANUARY 2000. 2. NATURAL PRODUCTS RESEARCH REPORT, GOURMET RETAILER, OCT. 2001, P72. 3. NATURAL PRODUCTS SALES CONTINUE TO RISE IN 2000, FOOD INSTITUTE REPORT, OCT 8, 2001, P4. 4. NATURAL PRODUCTS RESEARCH REPORT, GOURMET RETAILER, OCT. 2001, P.72. OPERATIONS OF FLAGSHIP RESTAURANT LOCATION AND PRODUCTS Health Express began operations of its first restaurant on April 10, 2000. The restaurant was a free standing building on a corner lot adjacent to a major thoroughfare in Fort Lauderdale, Florida. This location provided Health Express with a testing ground to survey consumer appeal to a developing menu based on healthy and good tasting items. This menu, which is being used in the Boca restaurant, is comprised, in part, by burgers, wraps and pockets, solo pizzas and salads. A juice bar offers smoothies, juices and power drinks. Burgers and wraps include the "Healthy Bites Burger", grilled turkey burger and chicken breast, lean buffalo burgers and HB Philly (a grilled Portobello mushroom) and various pocket sandwiches. All pizzas are made with homemade tomato sauce and served with soy cheese or mozzarella with a variety of fresh toppings. Salads are prepared daily with fresh greens and are served with a variety of signature dressings. Oven baked fries, vegetarian chili and pasta salads are included in the a la carte selections. The restaurant equipment and supplies were sold on September 23, 2002 to an unaffiliated third party buyer, Richard A. Weitz and his assignee, Roll-A-Round Real Roast Beef, Inc., a closely-held Florida corporation. The assets purchased by Weitz included equipment and supplies which Health Express used at its restaurant operation located 1538-A East Commercial Blvd., Fort Lauderdale, Florida. The sales price was $120,000 cash paid by Weitz at closing, less credits for repairs, taxes, broker commissions, attorney's fees and costs, and an escrow of $12,500 of the sales price for any outstanding sales taxes or other liabilities for the 90 days following the closing of the transaction. The balance of the escrow funds have been forfeited by Health Express. The sales price was determined through arms'-length negotiation between Health Express and Weitz. There was no relationship, material or otherwise, between Health Express or any of its affiliates, officers or directors, or any associate of any such directors or officers and Weitz or Roll-A-Round. The lease between Health Express and the landlord which expired on January 31, 2004 was assigned to Roll-A-Round and Health Express agreed to remain as a guarantor on the lease until January 31, 2004. As of the date of this filing, the obligation related to this lease has been satisfied. Health Express opened the Boca Restaurant in June 2002, which is located adjacent to the only major shopping mall in Boca Raton, Florida. Boca Raton's population density is centralized in a relatively small area, close to the main north/south highway and includes a major university, a large financial and service business district and several strip malls. Surrounding these urban centers is a community of primarily higher income households, singles and a thriving "yuppie" community with discriminating taste and buying power. Management believes that Health Express' future success lies in building customer relationships, pursuing new customers and improving the buying and warehousing of inventory to increase gross margins. Management believes that a significant customer base can be built by implementing an expansion program of additional restaurants, whether company-owned or franchised, and by designing sales and marketing programs to target South Florida areas. We believe that new emphasis on consumer eating habits toward more healthy and nutritious foods, a robust retail market and a commercial and residential construction boom combine to create a dynamic business climate in South Florida. We believe that South Florida offers business a prime geographic location in areas that are quickly becoming "the place" for high tech companies-with global communications facilities, breathtaking views, art and culture, good higher education, first- rate housing, parks and open space, and unrivaled shopping and nightlife. 2 SERVICES AND DISTRIBUTION All foods are prepared in the on-site kitchen. Customers can choose to eat inside our restaurant, within very pleasant and clean surroundings, or order meals for take-out or via our drive-thru facility. Food products are delivered directly to the restaurant from the various suppliers on a regular basis. COMPETITIVE BUSINESS CONDITIONS Health Express has substantial competition from the several existing fast food chains offering conventional fast food near our present location. However, they offer only a limited selection of health food items. In fact, these competitors are the ones that offer the type of fast food that we believe the health conscious American consumer is now avoiding. The food service industry as a whole is intensely competitive with respect to food quality, concept, location, service, and price. In addition, there are many well-established food service competitors with substantially greater financial and other resources than Health Express and with substantially longer operating histories. Health Express believes that it competes with national, regional, and local take-out food service companies, quick service restaurants, casual full-service dine-in restaurants, delicatessens, cafeteria-style buffets, and prepared food stores, as well as with supermarkets and convenience stores. Management anticipates that it also may have competition from established health food stores and small single proprietary health food restaurants. Management believes that there are limited direct competitors in the area of healthy fast food in South Florida. It is also the opinion of management, although no assurances can be given, that Health Express has a competitive edge which is based on a combination of consumer demands for a reasonably priced healthy meal in less time and with consistently good taste. Competitors in the health food market, such as Wild Oats or Whole Foods Market, are currently successful but do not offer fast food with the convenience of a drive-thru. There are numerous companies engaged in fast food operations and there are a growing number of health food restaurants. The principal competitive factor in the fast food industry is customer convenience and reasonable prices. The principal competitive factor in the emerging industry of health food restaurants is nutritious and tasty food at a reasonable price without sacrificing convenience. Many of these companies are larger and have greater access to experienced management and capital resources and, accordingly, Health Express may not be able to maintain a competitive position in the market place. Failure to maintain a competitive market position would have a detrimental effect on Health Express' operations and its business. SOURCES AND AVAILABILITY OF PRODUCTS AND SUPPLIES Health Express has selected to carry and use several products with national brand name recognition, which we believe consumers already identify with as high quality products in the health food industry. The products include meal supplements such as Met-Rx protein shakes, Myoplex protein shakes, and numerous other recognized supplements. Food distributors include US Foods for bulk service ingredients, J&B Produce for greens and sprouts, Spiegel for buffalo and sirloin meats and Elite for various produce. Health Express does not have contracts with the above suppliers but has established wholesale purchase arrangements for bulk purchases, as is industry practice. Management believes that there are ample additional sources of supplies should one of the above vendors be unable to serve our restaurants. INTELLECTUAL PROPERTY Health Express filed a federal registration for the trademark name "Healthy Bites Grill" for use by all future restaurant locations, whether Company owned or franchised, and on October 4, 2002 received approval and ownership from the U.S. Patent and Trademark Office for its exclusive use. Health Express does not own any patents. GOVERNMENTAL REGULATIONS AND APPROVALS As a marketer and distributor of food products, Health Express is subject to the Federal Food and Drug and Cosmetic Act and the regulations promulgated thereunder by the U.S. Food and Drug Administration ("FDA"). The FDA regulates manufacturing and holding requirements for food through its current good manufacturing practice regulations, specifies the standard of identity for certain foods and prescribes the format and content of certain information required to appear on food labels. In addition, Health Express is subject to the Perishable Agricultural Commodities Act and regulations 3 promulgated thereunder by the U.S. Department of Agriculture ("USDA"). The USDA imposes standards for product quality and sanitation and the grading and commercial acceptance of produce shipments from Health Express' suppliers. Health Express, its products and facilities are also subject to state and local regulations through such measures as the licensing of its facilities and enforcement by state and local health agencies. CONSUMER RESEARCH Health Express has conducted internally generated surveys through the use of consumer response cards collected at its restaurants where they are available at the counter for voluntary use by customers. The responses generated by these cards have provided management with valuable information concerning consumer preferences and demands. Health Express has been able to make menu changes to keep pace with these preferences. As a result, Health Express has developed a healthy broad-based menu, which is currently incorporated in its UFOC. FACILITIES AND EMPLOYEES Health Express leases corporate headquarters in Deerfield Beach, Florida for management, accounting, and administrative services. The Boca restaurant is on a leased property located approximately three miles from the corporate office. There are currently six employees at the corporate level and approximately 20 employees at the Boca Restaurant, of which 10 are full time and 10 are part time. None of the present employees are represented by a labor union. Health Express considers its employee relations to be good. We believe that each additional restaurant location, whether company-owned or franchised, will require approximately 12 to 20 employees. Health Express will require accounting on a regular basis from all locations for centralized management reporting of results of operations, accomplished through the use of a standard point-of-sale system by all restaurant operations. Health Express, presently, does not own or plan to own any real estate. RISKS RELATED TO OUR BUSINESS We are subject to various risks that may materially harm our business, financial condition and results of operations. You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially harmed. In that case, the trading price of our common stock could decline. HEALTH EXPRESS HAS HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE, WHICH MAY CAUSE US TO CURTAIL OPERATIONS Since our inception we have not been profitable and have lost money on both a cash and non-cash basis. For the year ended December 28, 2003, we lost $2,046,340. Health Express has not been profitable since inception. Our accumulated deficit was $9,921,024 as at the end of December 28, 2003. Future losses are likely to occur, as we are dependent on spending money to pay for operation of our restaurant and development and marketing of our franchise program. No assurances can be given that we will be successful in reaching or maintaining profitable operations. Accordingly, we may experience liquidity and cash flow problems despite the closing of our Fort Lauderdale restaurant and the signing of our first two franchisees. If our losses continue, our ability to operate may be severely impacted. HEALTH EXPRESS MAY NEED TO RAISE ADDITIONAL CAPITAL OR DEBT FUNDING TO SUSTAIN OPERATIONS Unless Health Express can become profitable with the existing sources of funds we have available and our current restaurant and franchising program, we will require additional capital to sustain operations and we may need access to additional capital or additional debt financing to grow our sales. In addition, to the extent that we have a working capital deficit and cannot offset the deficit from profitable sales we may have to raise capital to repay the deficit and provide more working capital to permit growth in revenues. We cannot assure you that financing whether from external sources or related parties will be available if needed or on favorable terms. Our inability to obtain adequate financing will result in the need to reduce the pace of business operations. Any of these events could be materially harmful to our business and may result in a lower stock price. 4 WE HAVE BEEN THE SUBJECT OF A GOING CONCERN OPINION FROM DECEMBER 28, 2003 AND DECEMBER 29, 2002 FROM OUR INDEPENDENT AUDITORS, WHICH MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS UNLESS WE CAN BECOME PROFITABLE OR OBTAIN ADDITIONAL FUNDING Our independent auditors have added an explanatory paragraph to their audit opinions issued in connection with our financial statements for the years ended December 28, 2003 and December 29, 2002, which states that the financial statements raise substantial doubt as to Health Express' ability to continue as a going concern. Our ability to make operations profitable or obtain additional funding will determine our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. We expect to be able to continue operations for 12 months with the cash currently on hand, anticipated from our operations and from the equity line of credit agreement provided by Cornell Capital Partners LP ("Cornell Capital Partners"), which was signed in March 2003. Based on our current budget assessment, and excluding any acquisitions which may occur in 2004, we believe that we may need to obtain approximately $1.3 million in additional debt or equity capital from one or more sources to fund operations for the next 12 months. These funds are expected to be obtained from the sale of securities, including the sale of stock under the equity line of credit. WE ARE SUBJECT TO A WORKING CAPITAL DEFICIT, WHICH MEANS THAT OUR CURRENT ASSETS ON DECEMBER 28, 2003 WERE NOT SUFFICIENT TO SATISFY OUR CURRENT LIABILITIES AND, THEREFORE, OUR ABILITY TO CONTINUE OPERATIONS IS AT RISK We had a working capital deficit of $683,306 at December 28, 2003, which means that our current liabilities as of that date exceeded our current assets on December 28, 2003 by $683,306. Current assets are assets that are expected to be converted to cash within one year and, therefore, may be used to pay current liabilities as they become due. Our working capital deficit means that our current assets on December 28, 2003 were not sufficient to satisfy all of our current liabilities on that date. If our ongoing operations do not begin to provide sufficient profitability to offset the working capital deficit we may have to raise capital or debt to fund the deficit or curtail future plans. OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY AFFECT SHAREHOLDERS' ABILITY TO SELL SHARES OF OUR COMMON STOCK Prior to this filing, there has been a limited public market for our common stock and there can be no assurance that a more active trading market for our common stock will develop. An absence of an active trading market could adversely affect our shareholders' ability to sell our common stock in short time periods, or possibly at all. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to enter the market from time to time in the belief that Health Express will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our stock will be stable or appreciate over time. The factors may negatively impact shareholders' ability to sell shares of the Company's common stock. OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS Our common stock is deemed to be "penny stock" as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline. Penny stocks are stock: o With a price of less than $5.00 per share; o That are not traded on a "recognized" national exchange; o Whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ listed stock must still have a price of not less than $5.00 per share); or o In issuers with net tangible assets less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $10.0 million (if in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years. 5 Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL, WHICH COULD BE DETRIMENTAL TO OUR OPERATIONS Our success largely depends on the efforts and abilities of key executives, including Douglas Baker, our Chief Executive Officer, Ray Nevin, our President, and Marco D'Alonzo, our Chief Operating Officer and Secretary. The loss of the services of Mr. Baker, Mr. Nevin or Mr. D'Alonzo could materially harm our business because of the cost and time necessary to replace and train a replacement. Such a loss would also divert management attention away from operational issues. We do not presently maintain key-man life insurance policies on Mr. Baker, Mr. Nevin or Mr. D'Alonzo. We also have other key employees that manage our operations and if we were to lose their services, senior management would be required to expend time and energy to replace and train replacements. To the extent that we are smaller than our competitors and have fewer resources we may not be able to attract the sufficient number and quality of staff. OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT OR IMPOSSIBLE TO EVALUATE OUR PERFORMANCE AND MAKE PREDICTIONS ABOUT OUR FUTURE Health Express has had operations for less than five years and has just signed an agreement with its first two franchisees. Based on this limited operating history and the infancy or our franchising program, it is difficult or impossible for us to evaluate our operational and financial performance, or to make accurate predictions about our future performance. While we believe that we have refined our operational systems so that we can offer a true turn-key program to a franchisee, there is no assurance that our franchisee program will be successful or well received by potential franchisees. ITEM 2. DESCRIPTION OF PROPERTY Health Express leases approximately 1,400 square feet for its corporate headquarters located at 1761 W. Hillsboro Blvd, Suite 203, Deerfield Beach, Florida. The lease commenced on May 15, 2002 for a term of three years. The monthly rent is $1,400. Additional rent of $816.67 plus sales tax is adjusted annually as set forth in the lease. The Boca Restaurant, located at 21300 St. Andrews Boulevard, opened on June 24, 2002 and is adjacent to the city's major shopping mall which is approximately two miles from the north/south interstate. The Boca Restaurant is a freestanding building, previously used as a fast food restaurant with an existing drive-thru facility. On May 7, 2001, Health Express entered into a five-year lease, with two five-year options. Initial monthly rental payments are $8,333 plus common area maintenance of $1,900 and real estate taxes of $1,400. During the third quarter of 2003, the total amount of the monthly payments has been reduced, as the common area maintenance payments have been deferred due to a re-negotiation of the lease. If there have been no defaults by the Company under the lease and on the last day of the lease term, all sums due to the landlord have been paid by the Company, then the deferred amount will be forgiven by the landlord. The amount of deferred costs contingently due by the Company totaled $12,381 at December 28,2003. The Company believes there have been no defaults under the lease. If a default were to occur, the Company would immediately record the deferred costs as a liability. This restaurant is approximately 4,000 square feet with a capacity of inside seating for approximately 98 customers. Located within a strip mall, it offers ample parking and easy access for both northbound and southbound traffic. In December 2003, the Company recognized an impairment loss on the Boca Raton restaurant fixed assets pursuant to the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The restaurant has had recurring losses from operations since its June 2002 inception, which has caused the carrying amount of the fixed assets to be deemed impaired. Management estimates the assets' fair value at approximately $50,000 based on current sales of similar operations and current market conditions. The net book value (the carrying value) of the fixed assets have been written down by $403,411 to $50,000 and an impairment loss has been recorded in the statement of operations for the year ending December 28, 2003. ITEM 3. LEGAL PROCEEDINGS Health Express is not involved, nor has been involved in any legal proceedings since its inception. 6 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote during the fiscal year ended December 28, 2003. PART II ITEM 5. MARKET FOR HEALTH EXPRESS USA, INC.'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Health Express' common stock currently trades on the Over-The-Counter Bulletin Board (OTC:BB) under the trading symbol "HEXS". The following table sets forth the highest and lowest bid prices for the common stock for each calendar quarter and subsequent interim period since January 1, 2002, as reported by the National Quotation Bureau, and represent interdealer quotations, without retail markup, markdown or commission and may not be reflective of actual transactions. BID PRICES ------------------ HIGH LOW ----- ----- 2002 ---- First Quarter $1.25 $0.95 Second Quarter $1.97 $0.85 Third Quarter $1.40 $0.30 Fourth Quarter $1.50 $0.43 2003 ---- First Quarter $1.25 $0.65 Second Quarter $1.00 $0.40 Third Quarter $0.85 $0.40 Fourth Quarter $0.67 $0.35 2004 ---- First Quarter $0.37 $0.14 Health Express presently is authorized to issue 50,000,000 shares of Common Stock with $ 0.001 par value. As of March 24, 2004, there were 106 holders of record of Health Express' common stock and 13,387,055 shares issued and outstanding. Health Express is authorized to issue 10,000,000 shares of $0.01 par value preferred stock, none of which is outstanding. The preferred stock, which is commonly known as "blank check preferred", may be issued by the Board of Directors with rights, designations, preferences and other terms, as may be determined by the Directors in their sole discretion, at the time of issuance. DIVIDENDS Health Express has not declared or paid cash dividends on its Common Stock since its inception and does not anticipate paying such dividends in the foreseeable future. The payment of dividends may be made at the discretion of the Board of Directors and will depend upon, among other factors, on Health Express' operations, its capital requirements, and its overall financial condition. 7 CHANGES IN SECURITIES During the years ended December 30, 2001, December 29, 2002 and December 28, 2003, Health Express issued the following unregistered securities:
SHARES COMMON STOCK DATE ISSUED TOTAL ($) - ------------------------------------------------------------------------- -------- -------- ------------- Conversion of 3,600 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 01/01/01 3,600 $ 1,260.00 Issuance of 100,000 restricted shares at $0.75 per share - Doug Baker 01/11/01 100,000 $ 75,000.00 Issuance of 100,000 restricted shares at $0.75 per share - Bruno Sartori 01/11/01 100,000 $ 75,000.00 Issuance of 6,000 restricted shares at $0.75 per share - to unaffiliated third party for Advertising and Marketing Relations 01/26/01 6,000 $ 4,500.00 Issuance of 1,000 restricted shares at $0.75 per share - Restaurant Manager at Health Express 01/26/01 1,000 $ 750.00 Issuance of 500 restricted shares at $0.75 per share - Restaurant Manager at Health Express 01/26/01 500 $ 375.00 Issuance of 6,000 restricted shares at $0.75 per share for - Bruno Sartori 01/26/01 6,000 $ 4,500.00 Conversion of 57,200 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 01/30/01 57,200 $ 20,020.00 Options exercised - 7,634 shares at $1.31 per share to Bruno Sartori 01/31/01 7,634 $ 10,000.54 Conversion of 28,600 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 01/31/01 28,600 $ 10,010.54 Issuance of 29,000 restricted shares at $0.35 per share private placement to accredited investors, unaffiliated to Health Express 02/22/01 29,000 $ 10,150.00 Issuance of 500 restricted shares at $0.75 per share to restaurant Manager for Health Express 03/03/01 500 $ 375.00 Issuance of 1,000 restricted shares at $0.75 per share to restaurant Manager for Health Express 03/03/01 1,000 $ 750.00 Options exercised - 3,500 shares at $0.35 per share to Douglas Baker 03/03/01 3,500 $ 1,225.00 Conversion of 23,000 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 03/05/01 23,000 $ 8,050.00 Options exercised - 3,500 shares at $0.35 per share to Marco D'Alonzo 03/07/01 3,500 $ 1,225.00 Options exercised - 14,500 shares at $0.35 per share to Marco D'Alonzo 03/20/01 14,500 $ 5,075.00 Issuance of 6,000 restricted shares at $0.75 per share - to unaffiliated third party for Advertising and Marketing Relations 03/20/01 6,000 $ 4,500.00 Conversion of 14,500 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 03/20/01 14,500 $ 5,075.00 Issuance of 40,000 shares of restricted stock at $0.75 per share-Marco D'Alonzo 04/06/01 40,000 $ 30,000.00 Issuance of 40,000 shares of restricted stock at $0.75 per share-Douglas Baker 04/06/01 40,000 $ 30,000.00 Issuance of 20,000 shares of restricted stock at $0.75 per share-Bruno Sartori 04/06/01 20,000 $ 15,000.00 Issuance of 500 restricted shares at $0.75 per share to restaurant Manager for Health Express 04/06/01 500 $ 375.00 Issuance of 1,000 restricted shares at $0.75 per share to restaurant Manager for Health Express 04/06/01 1,000 $ 750.00 Options exercised - 17,200 shares at $0.35 per share to Marco D'Alonzo 04/10/01 17,200 $ 6,020.00
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SHARES COMMON STOCK DATE ISSUED TOTAL ($) - ------------------------------------------------------------------------- -------- -------- ------------- Issuance of 2,000 shares of restricted share at $0.75 per share-Edward Meyer 04/10/01 2,000 $ 1,500.00 Issuance of 6,000 shares of restricted stock at $0.75 per share - to unaffiliated third party for Advertising and Marketing Relations 04/10/01 6,000 $ 4,500.00 Conversion of 17,200 warrants at $0.35 per share by accredited investors, unaffiliated to Health Express 04/10/01 17,200 $ 6,020.00 Issuance of 1,666,667 shares at $0.60 per share private placement to Rider Insuranc Company 05/04/01 1,666,667 $ 1,000.00 Issuance of 15,000 restricted shares at $0.75 per share - to unaffiliated third party for Advertising and Marketing Relations 06/28/01 15,000 $ 11,250.00 Issuance of 37,400 restricted shares at $1.00 per share - For Franchise to Francorp 07/23/01 37,400 $ 37,400.00 Issuance of 2,000 restricted shares at $1.00 per share - to unaffiliated third party contractor 07/23/01 2,000 $ 2,000.00 Issuance of 15,000 restricted shares at $1.00 per share - to unaffiliated third party Attorney 11/20/01 15,000 $ 15,000.00 Issuance of 500 restricted shares at $0.25 per share - to employee 01/24/02 500 $ 125.00 Issuance of 2,000 restricted shares at $0.25 per share - to Restaurant Managers 01/24/02 2,000 $ 500.00 Issuance of 16,700 restricted shares at $0.25 per share - to Bruno Sartori 01/24/02 16,700 $ 4,175.00 Issuance of 1,008,000 restricted stock at $0.25 per share - private offering to accredited investors, unaffiliated with Health Express, and Susan Greenfield, who purchased 336,000 shares 02/15/02 008,000 $ 252,000.00 Issuance of 129,000 restricted stock at $0.75 per share - private offering(a) 05/06/02 129,000 $ 96,750.00 Issuance of 24,000 restricted stock at $0.75 per share - private offering(a) 05/13/02 24,000 $ 18,000.00 Issuance of 16,000 restricted stock at $0.75 per share - private offering(a) 05/20/02 16,000 $ 12,000.00 Issuance of 25,000 restricted stock at $1.50 per share - Bruno Sartori 05/28/02 25,000 $ 37,500.00 Issuance of 25,000 restricted stock at $1.50 per share - to employee 05/28/02 25,000 $ 37,500.00 Issuance of 96,000 restricted stock at $0.75 per share - private offering(a) 06/03/02 96,000 $ 72,000.00 Issuance of 64,000 restricted stock at $0.75 per share - private offering(a) 06/21/02 64,000 $ 48,000.00 Issuance of 16,000 restricted stock at $0.75 per share - private offering(a) 07/10/02 16,000 $ 12,000.00 Issuance of 300,000 restricted stock at $0.35 per share - private offering(b) 09/06/02 300,000 $ 105,000.00 Issuance of 142,858 restricted stock at $0.35 per share - private offering(b) 10/18/02 142,858 $ 50,000.00 Issuance of 200,000 restricted stock at $0.35 per share - private offering(b) 10/23/02 200,000 $ 70,000.00 Issuance of 5,000 restricted stock at $0.35 per share - interest expense to Daniel Sartori trust, Bruno Sartori trustee 11/21/02 5,000 $ 1,750.00 Issuance of 25,000 restricted stock at $0.35 per share - to Bruno Sartori 12/05/02 25,000 $ 8,750.00 Issuance of 10,000 restricted stock at $0.35 per share - to Patricia Durante 12/05/02 10,000 $ 3,500.00 Issuance of 142,858 shares of restricted stock at $0.35 per share - Section 4(2) - to Susan Greenfield, a director of Health Express 03/30/03 142,858 $ 50,000.00 Issuance of 9,524 restricted stock at $0.35 per share - to unaffiliated third party contractor 3/31/03 9,524 $ 3,333.00
9
SHARES COMMON STOCK DATE ISSUED TOTAL ($) - ------------------------------------------------------------------------- -------- -------- ------------- Issuance of 10,000 restricted stock at $0.35 per share - interest expense to Daniel Sartori trust, Bruno Sartori trustee 4/04/03 10,000 $ 3,500.00 Issuance of 250,000 restricted stock at $0.35 per share - to unaffiliated third party contractor 9/12/03 250,000 $ 87,500.00
- ---------- (a) Health Express sold 345,000 shares of common stock and warrants to accredited investors, unaffiliated with Health Express, under Rule 505 of Regulation D of the Securities Act, for total proceeds of $258,750. The offering was terminated on July 17, 2002. (b) During 2002, Health Express sold 642,858 shares of common stock to accredited investors under Section 4(2) of the Securities Act at $.35 per share for total proceeds of $225,000. On January 17, 2003, the Company sold $250,000 of convertible debentures to Cornell Capital Partners. These debentures accrue interest at a rate of 5% per year and mature three years from the issuance date. The debentures are convertible into the Company's common stock at the holders' option any time up to maturity at a conversion price equal to the lower of (i) 120% of the closing bid price of the common stock as of the closing date or (ii) 80% of the average closing bid price of the common stock for the three lowest trading days of the five trading days immediately preceding the conversion date. At maturity, the Company has the option to either pay the holder the outstanding principal balance and accrued interest or to convert the debentures into shares of common stock at a conversion price similar to the terms described above. In accordance with applicable accounting standards for such issuances, the Company recorded an interest charge of $62,500 at issuance to account for the imbedded beneficial conversion feature. In addition, the Company recorded these other charges at issuance: $37,500 in professional fees, $20,000 in commissions, and (as described below) $75,000 for the Equity Line of Credit commitment fee (recorded as interest expense); these amounts were withheld from the proceeds of the debenture at closing. The Company has the right to redeem the debentures upon thirty days notice for 120% of the amount redeemed. Upon such redemption, the holder shall receive warrants equal to 10,000 shares of common stock for each $100,000 redeemed with an exercise price equal to 120% of the closing bid price of the common stock on the closing date. $50,000 of the debenture was acquired and effectively redeemed by Charles D. Bleiwise for $60,000 on behalf of the Company, and $100,000 of the debenture was converted into 283,804 shares of common stock in fiscal year 2003. The Company, in August 2003, issued a convertible debenture to Mr. Bleiwise for $60,000 in consideration of the redemption described above. The debenture has the same features as the debenture to Cornell Capital Partners except that when the debenture is converted, the shares will be restricted shares. The Company recorded an interest charge of $15,000 at issuance to account for the imbedded beneficial conversion feature in the new $60,000 debenture. In August 2003, Mr. Bleiwise converted the $50,000 debenture acquired from Cornell into 151,515 shares of the Company's common stock. Outstanding convertible debentures at December 28, 2003 totaled $160,000. On March 13, 2003, Health Express entered into an Equity Line of Credit Agreement with Cornell Capital Partners, L.P. This agreement also terminated an Equity Line of Credit Agreement dated January 16, 2003, with substantially identical terms except that the January agreement contained an impermissible condition relating to the requirement that an active bid exist for Health Express to make draws under the Equity Line of Credit. In addition, the warrant in the January agreement was terminated. The March 2003 agreement eliminated the impermissible condition. Under the March agreement, Health Express may issue and sell to Cornell Capital Partners common stock for a total purchase price of up to $5.0 million. Subject to certain conditions, the Company is entitled to draw down on the Equity Line of Credit now that the common stock to be issued under the Equity Line of Credit is registered with the Securities and Exchange Commission and the registration statement was declared effective on July 24, 2003 and for two years thereafter. The purchase price for the shares is equal to 95% of, or a 5% discount to, the market price, which is defined as the lowest closing bid price of the common stock during the five trading days following the notice date. The amount of each advance is subject to an aggregate maximum advance amount of $100,000, with no advance occurring within seven trading days of a prior advance. In addition, in each advance notice Health Express shall establish a minimum acceptable price, whereby the amount requested in the advance notice shall automatically decrease by 20% for each day of the five succeeding trading days that the closing bid price is below the minimum acceptable price. Cornell Capital Partners received a one-time commitment fee of $90,000, of which $75,000 was paid in cash on January 23, 2003, from the proceeds of the convertible debentures and the balance was paid from the proceeds of the initial advance under the Equity Line of Credit. Cornell Capital Partners is entitled to retain a fee of 5% of each advance. The net effect of the 5% discount at the 5% retainage is that Cornell Capital will pay 90.25% of the applicable closing bid price. In addition, Health Express entered into a placement agent agreement with TN Capital Equities, Ltd., a 10 registered broker-dealer. Pursuant to the placement agent agreement, Health Express paid a one-time placement agent fee of 9,524 shares of common stock equal to approximately $10,000 based on Health Express' stock price on January 24, 2003. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements, and the Notes thereto included herein. The information contained below includes statements of Health Express' or management's beliefs, expectations, hopes, goals and plans that, if not historical, are forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. For a discussion on forward-looking statements, see the information set forth in the Introductory Note to this Annual Report under the caption "Forward Looking Statements", which information is incorporated herein by reference. DISCONTINUED OPERATIONS AND RESTATEMENT OF CERTAIN ITEMS ON HEALTH EXPRESS' FINANCIAL STATEMENTS In response to the filing of a Form SB-2 Registration Statement on April 4, 2003, the SEC requested that Health Express' financial statements for fiscal year 2002 be restated to account for the closure of the Fort Lauderdale restaurant in September 2002 as "discontinued operations" beginning with the period ended September 29, 2002, pursuant to Statement of Financial Accounting Standards ("SFAS") No. 144. This restatement was filed in July 2003. The result of the application of SFAS No. 144 is to consolidate a significant portion of Health Express' operations, assets and liabilities into "discontinued operations" beginning with the three month period ended September 29, 2002. This change effects the comparison between the year ended December 28, 2003 to the year ended December 29, 2002, as Health Express will no longer show revenues or costs from the operation of the Fort Lauderdale restaurant in continuing operations. Quantitatively, the net loss and stockholders' equity for Health Express in the restatement did not change from what was previously reported. GOING CONCERN As reflected in Health Express' financial statements for the twelve months ended December 28, 2003, Health Express' accumulated deficit of $9,921,024 and its working capital deficiency of $683,306 raise substantial doubt about its ability to continue as a going concern. The ability of Health Express to continue as a going concern is dependent on Health Express' ability to raise additional debt or capital, including the ability to raise capital under the Equity Line of Credit. The financial statements for December 28, 2003 do not include any adjustments that might be necessary if Health Express is unable to continue as a going concern. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. At each balance sheet date, management evaluates its estimates, including but not limited to, those related to inventories, accrued liabilities, and the valuation allowance offsetting deferred income taxes. The Company also reviews its property for possible impairment whenever events indicate that its carrying value may not be recoverable; such an impairment was determined to exist in December 2003, and certain fixed assets were written down to their estimated fair value. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The estimates and critical accounting policies that are most important in fully understanding and evaluating our financial condition and results of operations include those listed above, as well as our valuation of equity securities used in transactions and for compensation, and our revenue recognition methods for restaurant operations and franchising. REVENUE RECOGNITION Revenue from restaurant sales is recognized at the time of the transaction with the customer, and since all sales are for cash or by credit cards, there are no trade receivables. Revenues are shown net of customer discounts or allowances taken at the time of the sale. The accounting for initial franchise fees is to defer the revenue recognition until the franchisee's restaurant operations commence. Once franchise activities begin, the Company will record revenues from franchise activities in accordance with applicable accounting standards for franchisors. 11 PROPERTY AND EQUIPMENT Property and equipment are recorded at acquisition cost and depreciated using the straight-line method over the estimated useful lives of the assets. Useful lives range from three to five years. Expenditures for routine maintenance and repairs are charged to expense as incurred. The Company reviews its property for possible impairment whenever events indicate that its carrying value may not be recoverable. Impairment is determined to exist when the carrying amount of property exceeds the sum of future net undiscounted cash flows. If an impairment exists, the property is written down to its estimated fair value. See note 2 in the accompanying financial statements for a description of an impairment write-down recorded in 2003. STOCK BASED COMPENSATION The Company accounts for stock based compensation under the provisions of SFAS No. 123, "Accounting for Stock Based Compensation". For stock and options issued to employees, and for transactions with non-employees in which services were performed in exchange for the Company's common stock, the transactions are recorded on the basis of fair value of the services received or the fair value of the equity instruments issued, whichever was more readily measurable. In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," was issued. This pronouncement amends SFAS No. 123, "Accounting for Stock-Based Compensation," and provides guidance to companies that wish to voluntarily change to the fair value based method of accounting for stock-based employee compensation, among other provisions. The Company has historically accounted for, and will continue to account for, its employee stock based compensation under the fair value based method provisions of SFAS No. 123, therefore, the issuance of SFAS No. 148 did not have any impact on the Company's financial position, results of operations or cash flows. SEGMENT REPORTING Under SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," the Company's operations are now defined as consisting of two operating segments, restaurant operations and franchising. During the quarter ended June 30, 2001, the Company began its franchising efforts, but has yet to generate any revenues from this activity. Franchising operations reported an operating loss for the years ended December 28, 2003 and December 29, 2002 of $3,152 and $7,758, respectively. The remainder of the Company's loss is attributable to its restaurant operations. The franchising segment has no depreciation or amortization, and the only asset is a minimal amount of cash. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 28, 2003, COMPARED TO THE YEAR ENDED DECEMBER 29, 2002 REVENUES Health Express reported net revenues of $749,450 and $470,059 for the years ended December 28, 2003 and December 29, 2002, respectively. This increase in net revenues of $279,391 was primarily attributable to a full year of sales at Health Express' Boca Raton, Florida restaurant, which opened June 24, 2002 and the reclassification of the Fort Lauderdale restaurant as discontinued operations. Accordingly, the comparison between the two years is not indicative of growth in our operations. The sales at Health Express' Fort Lauderdale, Florida restaurant decreased over the comparable period in the prior year. On September 23, 2002, Health Express sold the restaurant equipment and supplies of its Fort Lauderdale, Florida restaurant to an unrelated party. As a result, Health Express currently has one restaurant location: the Boca Raton, Florida restaurant. On February 20 and September 30, 2003, Health Express sold its first and second franchises to one of Health Express' directors. Both of the franchised restaurants should open in the second quarter of 2004. 12 COST OF COMPANY RESTAURANT SALES Health Express reported cost of company restaurant sales of $844,120, or 113% of net revenues, for the year ended December 28, 2003. In the comparable period in the prior year, Health Express reported cost of sales of $616,546. This increase in cost of company restaurant sales of $227,574 was primarily attributable to cost of company restaurant sales at Health Express' new Boca Raton, Florida restaurant, which opened June 24, 2002, and the reclassification of the Fort Lauderdale restaurant as discontinued operations. Accordingly, the comparison between the two years is not indicative of a manifest change in our cost of company restaurant sales. Cost of sales consists primarily of food and paper costs, labor and occupancy costs. EXPENSES 2003 2002 ---------------------------------------- ---------- ---------- Food and paper $ 273,795 $ 171,097 Labor 281,912 196,976 Occupancy 131,333 68,562 Marketing 53,708 33,643 Repairs 12,306 8,722 Pre-Opening expenses - 98,136 Other 91,066 39,410 The increase in these expenses was primarily attributable to a full year of expenses in 2003 in the Boca Raton, Florida restaurant which opened in June 2002. OTHER EXPENSES Other expenses consisted of the following expenses: EXPENSES 2003 2002 ---------------------------------------- ---------- ---------- Compensation $ 467,690 $ 321,593 Depreciation 127,266 65,026 General and administrative 774,990 305,183 Impairment loss on restaurant fixed assets 403,411 -- Compensation expense increased by $146,097 to $467,690 in the year ended December 28, 2003 from $321,593 in the comparable period in the prior year. This increase was primarily attributable to the hiring of a full-time president. Depreciation expense increased by $62,240 to $127,266 from $65,026 in the comparable period in the prior year. This increase was primarily attributable to a full year of depreciation for the Boca Raton restaurant. General and administrative expenses increased to $774,990 in the year ended December 28, 2003 from $305,183 in the comparable period in the prior year. This increase of $469,807 was primarily attributable to increased insurance and professional fees in 2003. General and administrative expenses consisted primarily of the following expenses: professional fees, advertising and insurance. The Company recorded an impairment loss on restaurant fixed assets of $403,411 in the year ended December 28, 2003 due to recurring cash flow losses at the restaurant. The fixed assets were written down to fair value per SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. NET LOSS Health Express reported a consolidated net loss of $2,046,340 or $(0.19) per basic and diluted common share for the year ended December 28, 2003, compared to a loss of $1,069,054 or $(0.11) per basic and diluted common share for the year ended December 29, 2002. Health Express began restaurant operations on April 10, 2000 and reported revenues in 2003 of $749,450 compared to revenues for 2002 of $470,059. Restaurant operations reported a total loss of $94,670 for 2003 compared to $146,487 for 2002. The Fort Lauderdale restaurant is shown as discontinued operations on the financial statements. The decrease in the loss is attributed to the absence of pre-opening expenses where no revenues were generated (see Restaurant Operations below). Non-cash expenses, principally stock, warrants and stock options compensation are included in the consolidated loss for the year 2003 and 2002. The following summary sets forth cash and non-cash expenses for the year 2003 and 2002. 13 2003 2002 ----------- ----------- Restaurant revenues $ 749,450 $ 470,059 Food, labor, controllable and other restaurant expenses 844,120 616,546 Loss from restaurant operations (94,670) (146,487) Other cash expense: General and administrative (1,175,069) (486,820) Franchise operations (3,152) (7,758) Discontinued operations, including the loss on the disposal of property and equipment in 2002 -- (222,794) Non-cash expenses: Depreciation (127,266) (65,026) Stock and stock options compensation (242,772) (140,169) Impairment loss on restaurant fixed assets (403,411) -- Franchise operations-stock compensation -- -- ----------- ----------- Consolidated Loss $(2,046,340) $(1,069,054) =========== =========== RESTAURANT OPERATIONS Restaurant operations reported sales, food, beverage and paper costs, labor, and controllable and other expenses for the year 2003 and 2002 as follows: 2003 % 2002 % --------- ------- --------- ------- Sales $ 749,450 $ 470,059 Food, beverage and paper cost 273,795 36% 171,097 36% Labor 281,912 38% 196,976 42% Controllable and other expenses 288,413 38% 248,473 53% --------- ------- --------- ------- Loss from restaurant operations $ (94,670) $(146,487) ========= ========= Restaurant operations for 2003 reported the following on a quarterly basis:
FOURTH THIRD SECOND FIRST TOTAL --------- --------- --------- --------- --------- Sales $ 172,085 $ 171,276 $ 196,998 $ 209,091 $ 749,450 Food and paper cost 69,263 63,995 69,057 71,480 273,795 % 40% 37% 35% 34% -- Labor 57,678 57,621 80,603 86,010 281,912 % 34% 34% 41% 41% -- Controllable and other 68,873 71,063 77,610 70,867 288,413 % 40% 41% 39% 34% -- --------- --------- --------- --------- --------- Loss from restaurant operations $ (23,729) $ (21,403) $ (30,272) $ (19,266) $ (94,670) ========= ========= ========= ========= =========
DEMOGRAPHICS - CENSUS ANALYSIS A study of the demographics of the population based on Florida Census data as reported by the Federal Financial Institutions Examinations Council ("FFIEC") for the Boca Raton location reflects the following. The statistics are based on zip code and tract and represent census data from population within the location's zip code or tract. 14 BOCA RATON INCOME LEVEL UPPER ------------------------- ---------- 2001 Median Family Income $ 90,024 Tract Population 4,572 Median age of housing 7 Minority 7% Management believes that Boca Raton area provides the ideal demographics for the restaurant's quality foods. FRANCHISING OPERATIONS On July 10, 2001, Health Express entered into an agreement with Francorp, Inc., a franchise consulting group, to develop and implement a comprehensive franchise program. Under the Franchise Development Agreement, Francorp was paid $60,000 in cash, 37,400 shares of our common stock, and warrants to purchase 38,000 shares of our common stock. The Franchise Development Agreement requires Francorp to complete all of its work within one year. This program provides assistance in various phases including: o Strategic planning and program structure o Franchise documentation o Franchise operations manuals o Franchise marketing plan o Franchise sales consulting o One year consulting services Francorp, with the assistance of Health Express, has completed a review draft of the Operations Manuals and a Recipe and Prep Book. The Operations Manuals and Recipe and Prep book outline specific operational procedures with recommended guidelines for menu item pricing and labor costs. These recommended guidelines have been strictly implemented at the new Boca Raton restaurant, which will serve as the prototype for future franchisee operations. Health Express began franchising efforts on October 1, 2002. The initial expenditure to Francorp was expensed and paid in the fiscal year 2001 to enable Health Express to complete all the necessary documents to enable them to move forward as a franchise operation. Expenses in 2002 were minimal because of the upfront fees paid to Francorp to cover the completion of this project. Because Health Express did not begin selling franchises until October 2002, Health Express did not incur any marketing and advertising expense for that year. Health Express does expect to incur operational, marketing and advertising expenses going forward as the necessary funds become available. The current marketing program provides the opportunity for an interested party to visit Health Express' website, submit an inquiry, and then upon pre-qualification, to receive more specific and detailed information based on their state of residence and level of qualification. Health Express believes that prior industry experience is not required, but is desirable, as the technical skills required to learn the business can be taught during the training period. However, all franchise candidates must possess certain personal qualities such as: service and people oriented, positive can-do attitude, results driven action-oriented, higher than average attention to detail, assertive, with strong communication and planning skills. On February 20, 2003, Health Express sold its first franchise to one of Health Express' directors. The franchisee has started construction on a location in South Florida. The Franchise Agreement was entered into February 14, 2003 between Healthy Express Franchise Company and The Junie Corp. Under the Franchise Agreement, The Junie Corp. has the right to operate one Healthy Bites Grill restaurant, was obligated to pay an initial franchise fee of $30,000 and a grand-opening advertising fee of $5,000 at the time of signing of the agreement, and is obligated to pay continuing fees comprised of a royalty fee of 4% of gross revenue of the restaurant and an advertising fee of 3% of gross revenues of the restaurant. On September 30, 2003, the second franchise was sold to the same director of Health Express. The Franchise Agreement was 15 entered into September 30, 2003 between Healthy Express Franchise Company and The Myrick Corporation with the same terms as the first franchise. LIQUIDITY AND CAPITAL RESOURCES Health Express' financial statements have been prepared on a going concern basis that contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. Health Express incurred a net loss of $2,046,340 and $1,069,054 for the years ended December 28, 2003 and December 29, 2002, respectively, and has an accumulated deficit of $9,921,024 at December 28, 2003. Management recognizes that Health Express must generate additional resources to enable it to continue operations. Management is planning to obtain additional capital principally through the sale of equity securities. The realization of assets and satisfaction of liabilities in the normal course of business is dependent upon Health Express obtaining additional equity capital and ultimately obtaining profitable operations. However, no assurances can be given that Health Express will be successful in these activities. Should any of these events not occur, the accompanying consolidated financial statements will be materially affected. Health Express is at present meeting its current obligations from its monthly cash flows, which during 2002, 2003 and to date in 2004 has included cash from operations, investor capital, and loans from related parties. However, due to insufficient cash generated from operations, Health Express currently does not internally generated cash sufficient to pay all of its incurred expenses and other liabilities. As a result, Health Express is dependent on investor capital and loans to meet its expenses and obligations. Although investor funds and related party loans have allowed Health Express to meet its obligations in the recent past, there can be no assurances that Health Express' present methods of generating cash flow will be sufficient to meet future obligations. Historically, Health Express has, from time to time, been able to raise additional capital from sales of its capital stock, but there can be no assurances that Health Express will be able to raise additional capital in this manner. Health Express also received $155,750 in 2003 and $66,660 in 2002 of financing from three directors of Health Express. The notes payable bear interest at 5.5% per annum and are payable on December 31, 2004. The Company received $70,000 in financing from a related party on May 20, 2002. The note was payable on September 20,2002 and included interest at 5.5% per annum. On November 8, 2002, the $50,000 note payable, after repayment of $20,000 principal, was extended through March 31, 2003 at an interest rate of 7% per annum and the issuance of 5,000 shares of the Company's restricted common stock to the note holder. The shares issued were valued at $1,750, and this amount was recorded as interest expense. The $50,000 note payable was extended through July 31, 2003 at an interest rate of 7% per annum and the issuance of 10,000 shares of the Company's restricted common stock to the note holder. The shares issued were valued at $3,500 and were recorded as interest expense in the financial statements. On August 4, 2003, the $50,000 note payable was paid in full. There is no assurance that these individuals would be willing to make such loans in the future, or if such loans were available, that they would be at terms acceptable to Health Express. Management realizes that Health Express must ultimately be able to generate sufficient cash flows from the profitable operation of the business to allow it to successfully sustain itself independent of outside capital and loans. Health Express' 2003 capital raising activities are described below. Cash used in operating activities was $878,472 for the year ended December 28, 2003 compared to $642,214 for 2002. The increase in cash used was due primarily to the increased loss from continuing operations of $1,200,080, increased depreciation expense of $62,240 and an increase in accounts payable and accrued liabilities of $128,337. There were also increases in non-cash expenses of $240,103 relating to stock and convertible debt issuances, charges for options and warrants and the beneficial conversion charges on the convertible debenture, plus an increase in non-cash expenses of $403,411 for impairment loss on restaurant fixed assets. Cash used in investing activities was $3,520 in 2003 compared to $398,575 in 2002. This decrease was principally due to the purchase of property and equipment for the Boca Raton restaurant in 2002 of $518,607, which was partially offset by the sale of restaurant assets of $120,000 (which was the Fort Lauderdale, Florida restaurant). Cash provided by financing activities was $933,504 during fiscal year 2003 compared to $837,184 during the same period in 2002. This increase was mainly due to higher proceeds from the issuance of debentures and promissory notes in 2003, partially offset by lower sales of equity securities in 2003. The restaurant operations have incurred losses since inception. Management believes that it will require approximately $158,000 in additional capital to fund restaurant operations, and a total of $1.3 million to fund overall company operations, for the next twelve months. Health Express has currently approximately $365,508 in cash and cash equivalents as of March 25, 2004. 16 The original flagship restaurant in Fort Lauderdale, Florida lost approximately $267,000 for the year ending December 29, 2002. The restaurant equipment and supplies were sold on September 23, 2002 to an unaffiliated third party buyer. This restaurant is reported as discontinued operations in the accompanying year 2002 financial statements. On January 17, 2003, the Company sold $250,000 of convertible debentures to Cornell Capital Partners. These debentures accrue interest at a rate of 5% per year and mature three years from the issuance date. The debentures are convertible into the Company's common stock at the holders' option any time up to maturity at a conversion price equal to the lower of (i) 120% of the closing bid price of the common stock as of the closing date or (ii) 80% of the average closing bid price of the common stock for the three lowest trading days of the five trading days immediately preceding the conversion date. At maturity, the Company has the option to either pay the holder the outstanding principal balance and accrued interest or to convert the debentures into shares of common stock at a conversion price similar to the terms described above. In accordance with applicable accounting standards for such issuances, the Company recorded an interest charge of $62,500 at issuance to account for the imbedded beneficial conversion feature. In addition, the Company recorded these other charges at issuance: $37,500 in professional fees, $20,000 in commissions, and (as described below) $75,000 for the Equity Line of Credit commitment fee (recorded as interest expense); these amounts were withheld from the proceeds of the debenture at closing. The Company has the right to redeem the debentures upon thirty days notice for 120% of the amount redeemed. Upon such redemption, the holder shall receive warrants equal to 10,000 shares of common stock for each $100,000 redeemed with an exercise price equal to 120% of the closing bid price of the common stock on the closing date. $50,000 of the debenture was acquired and effectively redeemed by Charles D. Bleiwise for $60,000 on behalf of the Company, and $100,000 of the debenture was converted into 283,804 shares of common stock in fiscal year 2003. The Company, in August 2003, issued a convertible debenture to Mr. Bleiwise for $60,000 in consideration of the redemption described above. The debenture has the same features as the debenture to Cornell Capital Partners except that when the debenture is converted, the shares will be restricted shares. The Company recorded an interest charge of $15,000 at issuance to account for the imbedded beneficial conversion feature in the new $60,000 debenture. In August 2003, Mr. Bleiwise converted the $50,000 debenture acquired from Cornell into 151,515 shares of the Company's common stock. Outstanding convertible debentures at December 28, 2003 totaled $160,000. On March 13, 2003, Health Express entered into an Equity Line of Credit Agreement with Cornell Capital Partners. Under this agreement, Health Express may issue and sell to Cornell Capital Partners common stock for a total purchase price of up to $5.0 million. Subject to certain conditions, the Company is entitled to draw down on the Equity Line of Credit now that the common stock to be issued under the Equity Line of Credit is registered with the Securities and Exchange Commission and the registration statement was declared effective on July 24, 2003 and for two years thereafter. The purchase price for the shares is equal to 95% of, or a 5% discount to, the market price, which is defined as the lowest closing bid price of the common stock during the five trading days following the notice date. The amount of each advance is subject to an aggregate maximum advance amount of $100,000, with no advance occurring within seven trading days of a prior advance. In addition, in each advance notice Health Express shall establish a minimum acceptable price, whereby the amount requested in the advance notice shall automatically decrease by 20% for each day of the five succeeding trading days that the closing bid price is below the minimum acceptable price. Cornell Capital Partners received a one-time commitment fee of $90,000, of which $75,000 was paid in cash from the proceeds of the convertible debentures on January 23, 2003, and the balance was paid from the proceeds of the initial advance under the Equity Line of Credit. Cornell Capital Partners is entitled to retain a fee of 5.0% of each advance. The net effect of the 5% discount and the 5% retainage of each advance is that Cornell Capital Partners shall pay 90.25% of the applicable closing bid price for each share of Health Express' common stock. In addition, Health Express entered into a placement agent agreement with TN Capital Equities, Ltd., a registered broker-dealer. Pursuant to the placement agent agreement, Health Express will pay a one-time placement agent fee of 9,524 shares of common stock equal to approximately $10,000 based on Health Express' stock price on January 24, 2003, the date Health Express agreed to engage the placement agent. During fiscal year 2003, Health Express made draws totaling $425,000 under the Equity Line of Credit, selling 950,878 shares of common stock to Cornell Capital Partners. Of this amount, $400,000 was directed to and held by an escrow agent and was used by the escrow agent to repay $400,000 of the promissory notes issued to Cornell described in the following three paragraphs. The remaining $25,000 of proceeds was used by the Company for general working capital. On July 25, 2003, the Company executed a promissory note in favor of Cornell Capital Partners in the face amount of $300,000. This note had a 90-day term and was repaid by the due date. The Company recorded commissions of $30,000 and professional fees of $57,315 on this transaction. At December 28, 2003, the promissory note was paid in full through the proceeds received under the Equity Line of Credit. 17 On October 31, 2003, the Company executed a promissory note with Cornell Capital Partners in the face amount of $100,000. At December 28, 2003, the promissory note was paid in full through the proceeds received under the Equity Line of Credit. On December 9, 2003, the Company executed a promissory note with Cornell in the face amount of $100,000. At December 28, 2003, the promissory note balance was $100,000. Subsequent to December 28, 2003, on January 12, 2004, the Company executed a promissory note with Cornell in the face amount of $100,000. The note has a 59-day term and was repaid by the due date. On February 13, 2004, the Company raised additional cash through the execution of a promissory note with Cornell in the face amount of $500,000. The note has a 178-day term. Health Express expects to raise sufficient cash through these means to meet its short-term capital requirements. However, no assurance is given that Health Express will be able to raise sufficient funds to meet long-term capital needs. The Health Express' directors, officers and employees also may provide additional funds by exercising their stock options, however, they are under no obligation to do so and they have made no commitment to exercise. If 2,038,000 outstanding warrants at exercise prices of $1.00 and $2.00, and 3,556,800 options held by the directors are exercised at an exercise price of $0.35, Health Express will receive $2,076,000 and $1,244,880, respectively. However, none of the warrant holders are required to, nor have they committed to, exercise their respective warrants. Health Express may also seek alternative sources of financing, including from more conventional sources such as bank loans and credit lines. However, no assurances can be given that Health Express will be able to meet its needs through the sale of securities or otherwise. Further, the availability of any future financing may not be on terms that are satisfactory to Health Express. From time to time, Health Express may evaluate potential acquisitions involving complementary businesses, content, products or technologies. Health Express' future capital requirements will depend on many factors, including growth of Health Express' restaurants business, the success of its franchising operations, economic conditions and other factors including the results of future operations. If Health Express is unable to raise sufficient funds to meet its long-term capital needs, there is a risk that Health Express will be required to cease operations. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following chart sets forth Health Express' contractual obligations and commercial commitments and the time frames for which such commitments and obligations come due as of December 28, 2003.
PAYMENTS DUE BY PERIOD ------------------------------------------------------------ TOTAL ------------------------------------------------------------ CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS 6 YEARS - ----------------------------- ---------- ---------- ---------- ---------- -------- Debenture (1) $ 160,000 $ -- $ 160,000 $ -- $ -- Lease Obligations (2) 324,418 150,125 174,293 -- -- Notes Payable-Related Parties 222,410 222,410 -- -- -- Promissory Note 100,000 100,000 -- -- -- Employment Contracts (3) 860,000 340,000 430,000 90,000 -- Advertising (4) 10,000 10,000 -- -- -- ---------- ---------- ---------- ---------- -------- Total Contractual Cash Obligations $1,676,828 $ 822,535 $ 764,293 $ 90,000 $ -- ========== ========== ========== ========== ========
(1) Long Term Debt Obligations include principal amount of $160,000 debenture, excluding interest and assuming debenture is redeemed in cash rather than through the issuance of common stock. (2) Health Express leased two properties; one in Deerfield Beach, Florida, for administrative offices and one in Boca Raton, Florida, for its restaurant operations. These amounts represent the future minimum lease payments due under these leases. (3) These represent the minimum contractual obligations to Messrs. Baker, D'Alonzo and Nevin under their current employment agreements. (4) Represents grand opening advertising fees of $5,000 paid by the franchisees of two locations. CURRENT ACCOUNTING PRONOUNCEMENTS In April 2003, the Financial Accounting Standards Board issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This SFAS amends and clarifies financial accounting and reporting for 18 derivative securities and hedging activities. This SFAS is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have any impact on the Company's financial position, results of operations or cash flows. In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS 150 was issued to establish standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. A financial instrument issued in the form of shares that is mandatorily redeemable by the issuer will have to be classified as a liability. This SFAS is effective for financial instruments entered into or modified after May 31, 2003. For financial instruments created before the issuance date of the SFAS, transition will be reported as the cumulative effect of a change in an accounting principle by initially measuring the financial instruments at fair value or other measurement attribute, as required by the SFAS. The adoption of SFAS No. 150 did not have any impact on the Company's financial position, results of operations or cash flows. ITEM 7. FINANCIAL STATEMENTS The consolidated financial statements of Health Express required by Regulation S-B are attached to this report. Reference is made to Item 13 below for an index to the financial statements. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in accountants or any disagreements with our accountants on accounting and financial disclosures. ITEM 8A. CONTROLS AND PROCEDURES (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's Principal Executive Officer and Principal Financial Officer of the effectiveness of the design and operation of the Company's disclosure controls and procedures. The Company's disclosure controls and procedures are designed to provide a reasonable level of assurance of achieving the Company's disclosure control objectives. The Company's Principal Executive Officer and Principal Accounting Officer have concluded that the Company's disclosure controls and procedures are, in fact, effective at this reasonable assurance level as of the of period covered. The Company's auditors have advised the Company that, in the auditor's view, the Company's controls over (1) non-accounting documents to the extent this information is communicated to the Chief Financial Officer, and (2) the internal accounting controls regarding segregation of duties, each have material weakness. The Company believes that its overall internal controls are, in fact, effective, and the Company strives to continue to make improvements in its internal controls. (B) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING In connection with the evaluation of the Company's internal controls during the Company's fourth fiscal quarter ended December 28, 2003, the Company's Principal Executive Officer and Principal Financial Officer have determined that there are no changes to the Company's internal controls over financial reporting that has materially affected, or is reasonably likely to materially effect, the Company's internal controls over financial reporting. 19 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT As of March 24, 2004, the directors and executive officers of Health Express, their age, positions in Health Express, the dates of their initial election or appointment as directors or executive officers, and the expiration of the terms are as follows:
NAME OF DIRECTOR/ EXECUTIVE OFFICER AGE POSITION PERIOD SERVED - ----------------- ----- ----------------------------- ------------------------ Douglas Baker 41 Director and Chief Executive July 2, 1998 to date Officer Raymond W. Nevin 57 President February 3, 2003 to date Marco D'Alonzo 38 Director, Secretary and Chief July 2, 1998 to date Operating Officer Susan Greenfield 39 Director May 7, 2001 to date Patricia Durante 43 Chief Financial Officer February 18, 2003 to date
There are no family relationships between or among the directors, executive officers or any other person. None of Health Express' directors or executive officers is a director of any company that files reports with the SEC. None of Health Express' current directors have been involved in legal proceedings. Health Express' directors are elected at the annual meeting of stockholders and hold office until their successors are elected. Health Express' officers are appointed by the Board of Directors and serve at the pleasure of the Board and are subject to employment agreements, if any, approved and ratified by the Board. DOUGLAS BAKER Mr. Baker has more than 10 years of sales experience in the competitive financial service industry. He has been actively involved in the financial public relations industry since 1994. He has been a licensed stockbroker, 220 insurance agent and mortgage broker. From 1994 to 1998 he was Vice President and co-owner with Marco D'Alonzo of First Equity Group, Inc. a financial public relations company, where he was in charge of company operations including cash flow management, budgeting, public relations and human resources. Thereafter, Mr. Baker founded Health Express. MARCO D'ALONZO Mr. D'Alonzo is experienced in corporate, financial and business affairs. He has owned and operated two financial related businesses. From 1994 to 1998 he was also co-owner with Mr. Baker of First Equity Group, Inc., where he acted as President, with duties including marketing, business development and client relations. Thereafter, Mr. D'Alonzo founded Health Express. RAYMOND W. NEVIN Mr. Nevin has more than 30 years of senior leadership experience in the restaurant industry, with an emphasis on growth management. From July 1988 to May 1992, he served as president and CEO of Damon's The Place for Ribs. Mr. Nevin grew Damon's from $38 million to over $100 million in 4 years. From August 1992 to January 2002, he served as president and COO of Pizza U.S.A. Management. Mr. Nevin managed operations and national growth, implemented numerous operational improvements, and initiated the franchise program. From February 2002 to January 2003, he served as V.P. of Sales for TurboChef Technologies, Inc., a manufacturer of high speed commercial cooking equipment; Mr. Nevin managed senior level consultative selling. Mr. Nevin joined Health Express initially as a consultant, and was appointed president in February of 2003. 20 SUSAN GREENFIELD From 1987 to the present, Ms. Greenfield has served as Treasurer of Rider Insurance Company, which specializes and leads the industry in insuring motorcycles within the state of New Jersey. Rider Insurance is a principal shareholder of Health Express. Ms. Greenfield has served on the Board of Trustees for the June Bleiwise Supporting Foundation since 1996. Ms. Greenfield received her Bachelor of Science degree in Education from the University of Miami in 1987. PATRICIA DURANTE Ms. Durante is a Certified Public Accountant with a background in both public and private businesses. Ms. Durante has worked for a large international CPA firm and has owned her own CPA firm. Ms. Durante has also worked as controller for various public companies from 1985 to 1991 when she started her own CPA firm. From 2000 to April 30, 2003, Ms. Durante has worked for Mackenzie Investment Management Inc., a mutual fund company, as Tax and Financial Reporting Manager. Prior to that, from 1991 through 1999, Ms. Durante had her own CPA firm, Patricia M. Durante, CPA, P.A., where she prepared tax returns, financial statements and SEC reporting for several small public companies. Based on personal reasons having no relation to Health Express, Edward Meyers resigned as a director of the Company on March 24, 2004. Mr. Meyers was the sole member of the audit committee. Mr. Meyers had served as a director and the sole member of the audit committee since June 6, 2000. Health Express is beginning the search for a new independent director to serve on the audit committee. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 and the rules thereunder require Health Express' officers and directors, and persons who beneficially own more than ten percent of a registered class of Health Express' equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and to furnish Health Express with copies. Based on its reviews of the copies of the Section 16(a) forms received by it, or written representations from certain reporting persons, Health Express believes that, during the last fiscal year, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with and filed timely. CODE OF ETHICS On March 26, 2004, the Board of Directors of the Company adopted a written Code of Ethics designed to deter wrongdoing and promote honest and ethical conduct, full, fair and accurate disclosure, compliance with laws, prompt internal reporting and accountability to adherence to the Code of Ethics. This Code of Ethics has been filed with the Securities and Exchange Commission as an Exhibit to this Form 10-KSB. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth, for the fiscal year ended December 28, 2003 and December 29, 2002 and December 30, 2001 certain information regarding the compensation earned by Health Express' Chief Executive Officer and each of Health Express' most highly compensated executive officers whose aggregate annual salary and bonus for fiscal 2003 exceeds $100,000, (the "Named Executive Officers"), with respect to services rendered by such persons to Health Express and its subsidiaries. 21 SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION ----------------------------------------- ------------------------------------------ NAME AND PRINCIPAL OTHER RESTRICTED UNDERLYING OTHER POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS COMPENSATION - ------------------ ---- ------- ----- ------------ ------------ ---------- ------------ Douglas Baker, 2003 $35,358 none none none none none CEO and 2002 $28,014 none none none none none President 2001 $18,955 none none $105,000 none none Marco D'Alonzo, 2003 $35,308 none none none none none COO and 2002 $28,335 none none none none none Secretary 2001 $18,553 none none $ 30,000 none none Bruno Sartori, 2003 none none none none none none CFO(1) 2002 $ 500 none none $ 50,425 none none 2001 $16,596 none none $ 90,000 none none Ray Nevin, 2003 $79,615 none none none none none President Russ Lo Bello(2) 2002 $20,000 none none none none none President
(1) Mr. Sartori's employment agreement expired on August 31, 2002. The exercise period for the balance of 142,366 unexercised options to purchase shares of Health Express' common stock was extended to expire on August 31, 2007, unless sooner exercised in accordance with their terms. (2) Mr. Lo Bello was employed as President of a subsidiary from May 5, 2002 through August 23, 2002. OPTION GRANTS No stock options were granted for the fiscal years ended December 28, 2003 or December 29, 2002. No stock appreciation rights were granted to these individuals during any year.
INDIVIDUAL GRANTS NUMBER OF % OF TOTAL SECURITIES OPTIONS GRANTED UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE PRICE NAME YEAR OF GRANT GRANTED CALENDAR YEAR ($/SH) (1) EXPIRATION DATE - -------------- -------------- ------------------ ----------------- -------------- --------------- Douglas Baker 1999 2,000,000 47.62 $0.35 (2) Marco D'Alonzo 1999 2,000,000 47.62 $0.35 (2) Bruno Sartori 2000 150,000 65.22 $1.31 (3)
(1) The exercise price is to be paid in cash. (2) The options are exercisable in whole or in part at any time until the earlier to occur of (i) the exercise of all options;(ii) he is no longer employed by Health Express; and (iii) the expiration of ten years from the date of grant. (3) The options, as originally issued, were exercisable in whole or in part at any time until the earlier to occur of (i) the exercise of all options: (ii) he is no longer employed by Health Express; and (iii) the expiration of the two years and three months from the date of the grant. The exercise period for the unexercised options was extended by the Board to expire on August 31, 2007, and the employment requirement waived. 22 FISCAL YEAR-END OPTION VALUES The following table sets forth information regarding each exercise of stock options and the value realized and the number and values of unexercised options held by each of the Named Executive Officers as of December 28, 2003.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ACQUIRED ON VALUED AT 12/28/03 AT 12/28/03 NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------- ----------- -------- ----------- ------------- ----------- ------------- Douglas Baker -- $ -- 1,840,000 -0-(1) $ 110,400 -0- Marco D'Alonzo -- $ -- 1,716,800 -0-(1) $ 103,008 -0- Bruno Sartori -- $ -- 142,366 -0-(2) $ -0- -0-
(1) Equal to the fair market value of securities underlying the option at the fiscal year end ($0.41) minus the exercise price ($ 0.35) payable for those securities. (2) No value is recognized on outstanding options exercisable at 12/28/03 because the value of the underlying securities $0.41 per share of common stock is less than the exercise price for those securities ($1.31). As of December 28, 2003, Health Express has not entered into any Long-Term Incentive Plan Awards since inception. COMPENSATION OF DIRECTORS Health Express did not issue any shares of common stock as compensation to any director in 2003 or 2002. EMPLOYMENT AGREEMENTS On December 6, 2002, Health Express entered into employment agreements with Douglas Baker and Marco D'Alonzo for a one-year term expiring on December 5, 2003. Unless either party shall give to the other written notice of termination on or before October 31, 2003, the term of this Agreement shall, on December 6, 2003, be extended for a period of one year, commencing as of December 6, 2003 and expiring on December 5, 2004. The contracts automatically renewed and will now expire on December 5, 2005. The salaries for both officers will be equal to an annual amount of $125,000 and will be accrued if Health Express is unable to pay any or all of the salary. If either executive shall die during the term of the agreement, the Company will pay (no more than 30 days after the executive's death) an amount in cash equal to the executive's compensation determined as of the date of the executive's death. If the executive becomes disabled, the Company is obligated to pay him in the ordinary course of business. If the Company terminates the agreement, the Company is obligated to pay the executive his salary only, in the ordinary course of business. If the executive terminates the agreement for "good reason" as defined in the agreement, the Company shall pay him in cash, an amount equal to twice the executive's compensation. If there is a change in control of the Company, the Company shall pay the executive in cash, his base amount multiplied by 2.99. Any and all stock options shall vest on the termination date. On August 31, 2002, the employment agreement for Bruno Sartori as Chief Financial Officer of Health Express expired and Mr. Sartori notified the Board of Directors that he would not seek to extend the agreement. On August 30, 2002, the Board approved an extension of the exercise period for the unexercised options granted to Mr. Sartori under his employment agreement for a five-year period ending August 31, 2007. On February 3, 2003, Health Express entered into an employment agreement with Raymond Nevin as its President, after a 90-day probationary period, for a period of five (5) years from the date of the agreement. The initial salary is an annual amount of $90,000, which will increase to an annual amount of $110,000 after the sale of three (3) Healthy Bites Grill Franchises. Mr. Nevin will also be granted cash and stock bonuses based on achieving certain milestones as spelled out in the employment agreement. If Mr. Nevin should become ill or incapacitated, the Company has the right to terminate the agreement within 10 days and pay his compensation up to the date of termination. If the Company terminates Mr. Nevin for cause, he will be paid any unpaid portion of his annual salary and accrued benefits up to the date of termination. 23 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The table below sets forth information with respect of the beneficial ownership as of March 24, 2004 for any person who is known to Health Express to be the beneficial owner of more than 5% of Health Express' common stock.
- --------------------------------------------------------------------------------------------------------------------------- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS - --------------------------------------------------------------------------------------------------------------------------- NAME AND ADDRESS AMOUNT AND NATURE OF PERCENTAGE TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS (3) - -------------- --------------------------------------- -------------------- ------------ Common Douglas Baker 3,984,820(1) 26.2% 5206 NW 28 St. Margate, Florida 33063 Common Marco D'Alonzo 3,581,593(1) 23.7% 4892 N. Citation Drive, No. 106 Delray Beach, Florida 33445 Common Rider Insurance Company 3,666,667(2) 23.8% 120 Mountain Avenue Springfield, New Jersey 07081 - --------------------------------------------------------------------------------------------------------------------------- SECURITY OWNERSHIP OF MANAGEMENT - --------------------------------------------------------------------------------------------------------------------------- NAME AND ADDRESS AMOUNT AND NATURE OF TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENTAGE OF CLASS (3) - -------------- -------------------------------------- -------------------- ----------------------- Common Douglas Baker 3,984,820(1) 26.2% 5206 NW 28 St. Margate, Florida 33063 Common Marco D'Alonzo 3,581,593(1) 23.7% 4892 N. Citation Drive, No. 106 Delray Beach, Florida 33445 Common Susan Greenfield 478,858 2.6% 19277 Natures View Court Boca Raton, Florida 33498 Common Raymond Nevin 0 * 650 Canistel Lane Boca Raton, Florida 33486
24
- --------------------------------------------------------------------------------------------------------------------------- SECURITY OWNERSHIP OF MANAGEMENT - --------------------------------------------------------------------------------------------------------------------------- NAME AND ADDRESS AMOUNT AND NATURE OF TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENTAGE OF CLASS (3) - -------------- -------------------------------------- -------------------- ----------------------- Common Patricia Durante 35,600 * 6620 Marbletree Lane Lake Worth, Florida 33467 ALL OFFICERS AND DIRECTORS AS A GROUP (6) PERSONS 8,082,871 37.2%
* Less than 1%. (1) Mr. D'Alonzo and Mr. Baker have options to purchase 1,716,800 and 1,840,000 shares, respectively, of common stock at an exercise price of $0.35 per share. The options are exercisable for a period of ten years from June 15, 1999 and are included in the calculation of ownership in accordance with Rule 13(d) of the Securities Act. (2) Rider Insurance Company has warrants to purchase 2,000,000 shares of Health Express' common stock at an exercise price of $1.00. The warrants are exercisable for a period of ten years from May 2, 2001. (3) Applicable percentage of ownership is based on 13,387,055 shares of common stock outstanding as of March 24, 2004 for each stockholder. Beneficial ownership is determined in accordance within the rules of the Commission and generally includes voting of investment power with respect to securities. Shares of common stock subject to securities exercisable or convertible into shares of common stock that are currently exercisable or exercisable within 60 days of March 24, 2004 are deemed to be beneficially owned by the person holding such options for the purpose of computing the percentage of ownership of such persons, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN The following table sets forth the securities that have been authorized under equity compensation plans as of December 28, 2003.
NUMBER OF SECURITIES REMAINING AVAILABLE FOR NUMBER OF FUTURE ISSUANCE SECURITIES TO UNDER EQUITY BE ISSUED UPON WEIGHTED-AVERAGE COMPENSATION EXERCISE OF EXERCISE PRICE PLANS OUTSTANDING OF OUTSTANDING (EXCLUDING OPTIONS, OPTIONS, SECURITIES WARRANTS AND WARRANTS AND REFLECTED IN RIGHTS RIGHTS COLUMN (a)) (a) (b) (c) -------------- ---------------- --------------- Equity compensation plans approved by security holders 0 $ -- 0 Equity compensation plans not approved by security holders 3,699,166 0.39 0 --------- ----------- ---- TOTAL 3,699,166 $ 0.39 0 ========= =========== ====
25 On April 21, 2003, the Company adopted the 2003 Stock Incentive Plan for a total of 400,000 shares of common stock. As of March 24, 2004, 219,501 shares have been issued under this plan to the following individuals: NUMBER NAME OF SHARES ------------------- --------- Geoffrey Eiten 50,000 Allen Freed 20,001 Michelle Kain 20,000 Keith Kanouse 10,000 Patricia Durante 60,000 Irwin Furman 54,000 Douglas Colassante 2,000 Carrie Fletcher 2,000 Stephen Bauer 1,500 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the past two (2) years, Health Express has not entered into a transaction with a value in excess of $60,000 with a director, officer or beneficial owner of 5% or more of Health Express' Common Stock, except as disclosed in the following paragraphs. Health Express received $155,750 in 2003 and $66,660 in 2002 of financing from three directors of Health Express, Mr. Baker, Mr. D'Alonzo, Ms. Greenfield. The notes payable bear interest at 5.5% per annum and have been renegotiated to be payable on December 31, 2004. The Company received $70,000 in financing from an entity related to Mr. Sartori on May 20, 2002. The note was payable on September 20,2002 and included interest at 5.5% per annum. On November 8, 2002, the $50,000 note payable, after repayment of $20,000 principal, was extended through March 31, 2003 at an interest rate of 7% per annum and the issuance of 5,000 shares of the Company's restricted common stock to the note holder. The shares issued were valued at $1,750, and this amount was recorded as interest expense. The $50,000 note payable was extended through July 31, 2003 at an interest rate of 7% per annum and the issuance of 10,000 shares of the Company's restricted common stock to the note holder. The shares issued were valued at $3,500 and were recorded as interest expense in the financial statements. On August 4, 2003, the $50,000 note payable was paid in full. On December 6, 2002, Health Express entered into employment agreements with Douglas Baker and Marco D'Alonzo for a one-year term expiring on December 5, 2003, renewable for a second year. The term of this Agreement was extended for a period of one year, commencing as of December 6, 2003 and expiring on December 5, 2004. The salaries for both officers will be equal to an annual amount of $125,000 and will be accrued if Health Express is unable to pay any or all of the salary. On February 3, 2003, Health Express hired Raymond Nevin to be the new president of Health Express and entered into a five-year employment agreement with him. His initial salary was $90,000 per year and will increase to an amount of $110,000 after the sale of the first three franchises. On February 20, 2003, Health Express sold its first franchise to one of Health Express' directors, Susan Greenfield. The franchisee has started construction on a location in South Florida. The terms of this franchise agreement are based on the standard franchise agreement with no special consideration. The franchise fee paid was $30,000 with an additional $5,000 advertising fee. On October 7, 2003, Health Express sold its second franchise to the same director of Health Express, Susan Greenfield. The franchisee has identified a location and is currently finalizing a lease located in South Florida. The terms of this franchise agreement are based on the standard franchise agreement with no special consideration. The franchise fee paid was $30,000 with an additional $5,000 advertising fee. Mr. Bruno Sartori was employed as Health Express' Chief Financial Officer pursuant to an employment agreement entered into on May 30, 2000 that expired on August 31, 2002. He was compensated a total of 66,700 shares of Health Express' Common Stock for the year 2002, 126,000 shares of Health Express' restricted common stock for the year 2001 and 26 35,000 shares of Health Express' restricted common stock for the year 2000. The agreement also granted Mr. Sartori options to acquire 150,000 shares of Health Express' restricted common stock at a purchase price of $1.31 per share of which 7,634 were exercised. The exercise period of the remaining 142,366 options was extended in August 2002 until August 31, 2007. Health Express did not give anything of value to, or receive anything of value from, any promoter during fiscal year 2003 or 2002. 27 PART IV ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT: See Index to Consolidated Financial Statements attached, which are filed as part of this report. (b) REPORTS ON FORM 8-K: No Form 8-K (or amendment to Form 8-K) was filed during the 4th quarter of the fiscal year.
EXHIBIT NO. - ---------------------------------------------------------------------------------------------------------------------- 2.1 Articles of Incorporation, as amended Incorporated by reference to Exhibit 2 to Form 10-SB filed on October 6, 1999 3.1 By-laws Incorporated by reference to Exhibit 3(a) to Form 10-SB filed on October 6, 1999 3.2 Articles of Incorporation of Healthy Bites Grill Incorporated by reference to Exhibit 3(b) to Form of Boca, Inc. 10-QSB filed on August 13,2001 3.3 Articles of Incorporation for Health Express Incorporated by reference to Exhibit 3(b) to Form Franchise Company 10-QSB filed on August 13, 2001 4.1 Warrants for 38,000 shares issued to Francorp, Incorporated by reference to Exhibit 4 to Form 10-QSB Inc. filed on August 13, 2001 4.2 Warrants for 2,000,000 shares issued to Rider Incorporated by reference to Exhibit 4 to Form 10- QSB Insurance Company filed on August 13, 2001 10.1 Lease between Health Express USA, Inc. and Saul Incorporated by reference to Exhibit 10(a) to Form Strachman 10-SB filed on October 6, 1999 10.2 Lease - Healthy Bites Grill of Boca, Inc. Incorporated by reference to Exhibit 10 to Form 10-QSB filed on May 14, 2001 10.3 Employment agreement of Bruno Sartori Incorporated by reference to Exhibit 10 to Form 10-QSB on November 14, 2000 and incorporated herein by such reference. 10.4 Employment Agreement of Douglas Baker Incorporated by reference to Exhibit 10.4 to Form 10-KSB filed on March 26, 2003 10.5 Employment Agreement of Marco D'Alonzo Incorporated by reference to Exhibit 10.5 to Form 10-KSB filed on March 26, 2003 10.6 Employment Agreement of Raymond Nevin Incorporated by reference to Exhibit 10.6 to Form 10-KSB filed on March 26, 2003
28
EXHIBIT NO. - ---------------------------------------------------------------------------------------------------------------------- 10.7 Franchise Development Agreement with Francorp, Incorporated by reference to Exhibit 10(c) to Form Inc. 10-QSB filed on August 13, 2001 10.9 Franchise agreement between Health Express and Incorporated by reference to Exhibit 10.9 to Form The Junie Corp. 10-KSB filed on March 26, 2003 10.10 Lease between Crown Diversified Industries and Incorporated by reference to Exhibit 10 to Form Health Express, Inc. dated May 2, 2002 10-QSB filed on May 15, 2002 10.11 Standard Asset Purchase Contract and Receipt Incorporated by reference to Exhibit 99.2 to Form 8-K filed on October 9, 2002 10.12 Fourth Addendum to Standard Asset Purchase Incorporated by reference to Exhibit 99.3 to Form 8-K filed on October 9, 2002 10.13 Addendum to Fourth Addendum to Standard Asset Incorporated by reference to Exhibit 99.4 to Form 8-K Purchase Contract and Receipt dated September 23, filed on October 9, 2002 2002 10.14 Agreement between Health Express, Inc. and Incorporated by reference to Exhibit 99.5 to Form 8-K Roll-A-Round Real Roast Beef, Inc. dated filed on October 9, 2002 September 23, 2002 10.15 Lease Amendment and Assignment Agreement Incorporated by reference to Exhibit 99.5 to Form dated September 18, 2002 8-K filed on October 9, 2002 10.16 Addendum to Lease Amendment and Assignment Incorporated by reference to Exhibit 99.7 to Form Agreement dated September 23, 2002 8K filed on October 9, 2002 10.17 Escrow Agreement dated September 23, 2002 Incorporated by reference to Exhibit 99.8 to Form 8K filed on October 9, 2002 10.19 Equity Line of Credit Agreement dated March 13, Incorporated by reference to Exhibit 10.19 to 2003 between Health Express and Cornell Capital Amendment No. 1 to Form 10-KSB filed on April 24, 2003 Partners, LP 10.20 Registration Rights Agreement dated March 13, Incorporated by reference to Exhibit 10.20 to 2003 between Health Express and Cornell Capital Form 10-KSB filed on March 26, 2003 Partners, 10.21 Escrow Agreement dated March 13, 2003 among Incorporated by reference to Exhibit 10.20 the Registrant, Cornell Capital Partners, LP, to Form 10-KSB filed on March 26, 2003 Butler 10.22 Securities Purchase Agreement dated January 17, Incorporated by reference to Exhibit 10.20 to 2003 among Health Express and the Buyers Form 10-KSB filed on March 26, 2003 10.23 Escrow Agreement dated January 17, 2003 among Incorporated by reference to Exhibit 10.20 to Health Express, the Buyers and Butler Gonzalez, LP to Form 10-KSB filed on March 26, 2003
29
EXHIBIT NO. - ---------------------------------------------------------------------------------------------------------------------- 10.24 Debenture Agreement dated January 17, 2003 Incorporated by reference to Exhibit 10.20 between Health Express and Cornell to Form 10-KSB filed on March 26, 2003 Capital Partners LP 10.25 Investors Registration Rights Agreement dated Incorporated by reference to Exhibit 10.20 March 13, 2003 between Health Express and the to Form 10-KSB filed on March 26, 2003 Investors 10.26 Placement Agent Agreement dated March 13, 2003 Incorporated by reference to Exhibit 10.20 to Form among Health Express NT Capital Equities, Ltd. 10-KSB filed on March 26, 2003 and Cornell Partners LP 10.27 Lease Modification - Health Bites Grill of Boca, Provided herewith Inc. 10.28 Franchise Agreement between Health Express and Provided herewith Myrick Corporation 14.1 Code of Ethics Provided herewith 31.1 Certification by Chief Executive Officer pursuant Provided herewith to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification by Chief Financial Officer pursuant Provided herewith to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification by Chief Executive Officer and Provide herewith Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
30 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The Company paid Ahearn, Jasco + Company, P.A., $116,854 in fees for auditing work, services related to the SEC Registration Statement on Form SB-2, and quarterly reviews on SEC Forms 10-QSB. The Company paid Ahearn, Jasco + Company, P.A., $3,196 for tax work. The audit committee had pre-approved all work to be done by Ahearn, Jasco + Company, P.A., which included audit work, registration statement services, quarterly reviews on SEC Forms 10-QSB and tax work. On December 11, 2003, the Audit Committee of the Board of Directors ratified the appointment of Ahearn, Jasco & Company, P.A., as independent public accountants of Health Express for the fiscal year ending December 28, 2003. 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Health Express has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 26, 2004. March 29, 2004 HEALTH EXPRESS USA, INC. By: /s/ Douglas Baker ------------------------------------ Douglas Baker, Chief Executive Officer and Director By: /s/ Patricia Durante ------------------------------------ Patricia Durante, Chief Financial Officer Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been duly signed by the following persons on behalf of Health Express and in the capacities and on the dates indicated /s/ MARCO D' ALONZO March 29, 2004 ------------------------------ Chief Operating Officer Secretary and Director /s/ RAYMOND NEVIN. March 29, 2004 ------------------------------ President /s/ SUSAN GREENFIELD March 29, 2004 ------------------------------ Director 32 HEALTH EXPRESS USA, INC. CONSOLIDATED FINANCIAL STATEMENTS Page(s) --------- Independent Auditor's Report F-2 Consolidated Balance Sheets as of December 28, 2003 and December 29, 2002 F-3 Consolidated Statements of Operations for the Years Ended December 28, 2003 and December 29, 2002 F-4 Consolidated Statements of Cash Flows for the Years Ended December 28, 2003 and December 29, 2002 F-5 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 28, 2003 and December 29, 2002 F-6 Notes to Consolidated Financial Statements F-7 - F-16 F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Health Express USA, Inc. We have audited the accompanying consolidated balance sheets of Health Express USA, Inc. and its subsidiaries (collectively, the "Company") as of December 28, 2003 and December 29, 2002, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Health Express USA, Inc. and its subsidiaries as of December 28, 2003 and December 29, 2002 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered cumulative losses from operations since inception. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plan in regard to these matters is also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Ahearn, Jasco + Company, P.A. - --------------------------------- AHEARN, JASCO + COMPANY, P.A. Certified Public Accountants Pompano Beach, Florida March 12, 2004 F-2 HEALTH EXPRESS USA, INC. CONSOLIDATED BALANCE SHEETS December 28, 2003 and December 29, 2002
ASSETS December 28, December 29, 2003 2002 ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 59,076 $ 7,564 Inventory 10,898 18,907 Prepaid expenses and other 12,978 6,188 ----------- ----------- TOTAL CURRENT ASSETS 82,952 32,659 PROPERTY AND EQUIPMENT, net 52,791 567,323 DEPOSITS 49,853 62,478 ----------- ----------- TOTAL $ 185,596 $ 662,460 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable $ 128,378 $ 111,906 Accrued payroll and related amounts 182,363 31,571 Accrued liabilities 63,107 41,084 Deferred franchise revenue 70,000 -- Notes payable - related parties 222,410 116,660 Promissory note 100,000 -- Liabilities of discontinued operations -- 3,587 ----------- ----------- TOTAL CURRENT LIABILITIES 766,258 304,808 ----------- ----------- LONG TERM DEBT - Convertible debentures 160,000 -- ----------- ----------- STOCKHOLDERS ' EQUITY (DEFICIT) Preferred stock, $0.01 par value;10,000,000 shares authorized zero shares issued and outstanding Common stock, $0.001 par value; 50,000,000 shares authorized 12,386,261 and 10,368,181 issued and outstanding at December 28, 2003 and December 29, 2002 respectively 12,386 10,368 Additional paid-in capital 9,167,976 8,221,968 Accumulated deficit (9,921,024) (7,874,684) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (740,662) 357,652 ----------- ----------- TOTAL $ 185,596 $ 662,460 =========== ===========
See notes to consolidated financial statements F-3 HEALTH EXPRESS USA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 28, 2003 AND DECEMBER 29, 2002
Year Ended Year Ended December 28, 2003 December 29, 2002 ----------------- ----------------- REVENUES, net $ 749,450 $ 470,059 COST OF COMPANY RESTAURANT SALES Food and paper 273,795 171,097 Labor 281,912 196,976 Occupancy 131,333 68,562 Marketing 53,708 33,643 Repairs 12,306 8,722 Pre-opening expenses -- 98,136 Other direct costs 91,066 39,410 ------------ ------------ Total Cost of Company Restaurant Sales 844,120 616,546 ------------ ------------ OTHER EXPENSES Compensation 467,690 321,593 Depreciation 127,266 65,026 General and administrative 774,990 305,183 Impairment loss on restaurant fixed assets 403,411 -- ------------ ------------ TOTAL OTHER EXPENSES 1,773,357 691,802 ------------ ------------ TOTAL EXPENSES 2,617,477 1,308,348 ------------ ------------ LOSS FROM OPERATIONS (1,868,027) (838,289) OTHER NON-OPERATING INCOME (EXPENSE) Interest income 224 495 Interest expense (178,537) (8,466) ------------ ------------ TOTAL OTHER NON-OPERATING (EXPENSE), net (178,313) (7,971) LOSS BEFORE PROVISION FOR INCOME TAXES (2,046,340) (846,260) PROVISION FOR INCOME TAXES -- -- ------------ ------------ LOSS FROM CONTINUING OPERATIONS (2,046,340) (846,260) DISCONTINUED OPERATIONS Loss from operations of discontinued Fort Lauderdale restaurant, net of taxes (including loss on disposal of $0 and $30,970) -- (222,794) ------------ ------------ LOSS ON DISCONTINUED OPERATIONS -- (222,794) ------------ ------------ NET LOSS $ (2,046,340) $ (1,069,054) ============ ============ LOSS PER COMMON SHARE: From continuing operations, basic and diluted $ (0.19) $ (0.09) ============ ============ From discontinued operations, basic and diluted $ -- $ (0.02) ============ ============ Net loss per common share, basic and diluted $ (0.19) $ (0.11) ============ ============ Weighted average common shares outstanding 11,049,481 9,576,062 ============ ============
See notes to consoliated financial statements F-4 HEALTH EXPRESS USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 28, 2003 AND DECEMBER 29, 2002
Year Ended Year Ended December 28, 2003 December 29, 2002 ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(2,046,340) $(1,069,054) Loss from discontinued operations -- 222,794 ----------- ----------- Loss from continuing operations (2,046,340) (846,260) Adjustments to reconcile net loss from continuing operations to net cash used in operating activities Depreciation 127,266 65,026 Beneficial conversion feature on convertible debentures 77,500 -- Common stock issued for compensation and interest 212,076 93,800 Convertible debt issued for compensation 60,000 -- Issuance of warrants and stock options 30,696 46,369 Impairment loss on restaurant fixed assets 403,411 -- Changes in certain assets and liabilities Inventory, prepaid expenses and other assets 1,219 (6,874) Accounts payable, accrued liabilities and deferred franchise revenue 255,700 127,363 ----------- ----------- Net cash used in continuing operations (878,472) (520,576) Net cash used in discontinued operations -- (121,638) ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES (878,472) (642,214) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (16,145) (518,607) Changes in deposits 12,625 32 Net cash used in continuing operations (3,520) (518,575) Net cash provided by discontinued operations -- 120,000 ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (3,520) (398,575) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of convertible debentures 250,000 -- Proceeds from issuance of promissory notes 500,000 -- Proceeds from notes payable - related parties 155,750 136,660 Repayment of note payable - related party (50,000) (20,000) Net proceeds from issuance of common stock 77,754 735,750 ----------- ----------- Net cash provided by continuing operations 933,504 852,410 Net cash used in discontinued operations -- (15,226) ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 933,504 837,184 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 51,512 (203,605) CASH AND CASH EQUIVALENTS, Beginning of the period 7,564 211,169 ----------- ----------- CASH AND CASH EQUIVALENTS, End of the period $ 59,076 $ 7,564 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 83,388 $ 5,806 =========== =========== Cash paid during the period for income taxes $ -- $ -- =========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: See Note 6 for a description of 2003 stock issuances used to (1) reduce convertible debentures and (2) proceeds used to reduce promissory notes. During the quarter ending March 31, 2002, a shareholder made a capital contribution to the Company in the form of the Company's common stock with the value of approximately $71,500. See notes to consolidated financial statements F-5 HEALTH EXPRESS USA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 28, 2003 AND DECEMBER 29, 2002
Common Stock ------------------------- Additional Shares at Par Paid-In Accumulated Issued Value Capital Deficit Total ----------- ----------- ----------- ----------- ----------- STOCKHOLDERS' EQUITY, December 31, 2001 8,550,123 $ 8,550 $ 7,347,867 $(6,805,630) $ 550,787 Issuance of 1,008,000 shares of restricted stock at $0.25 private offering 1,008,000 1,008 250,992 -- 252,000 Issuance of 345,000 shares of restricted stock at $0.75 private offering 345,000 345 258,405 -- 258,750 Issuance of 642,858 shares of restricted stock at $0.35 private offering 642,858 643 224,357 -- 225,000 Shares contributed and cancelled (287,000) (287) 287 -- -- Issuance of 109,200 shares of restricted stock for compensation and interest 109,200 109 93,691 -- 93,800 Modification of terms of stock options -- -- 46,369 -- 46,369 Net loss for the year ended December 29, 2002 -- -- -- (1,069,054) (1,069,054) ----------- ----------- ----------- ----------- ----------- STOCKHOLDERS' EQUITY, December 29, 2002 10,368,181 $ 10,368 $ 8,221,968 $(7,874,684) $ 357,652 Issuance of 142,858 shares of restricted stock at $0.35 in a private offering 142,858 142 49,858 -- 50,000 Issuance of 435,319 shares of free trading stock to reduce the convertible debentures 435,319 435 227,065 -- 227,500 Issuance of 950,878 shares of free trading stock under Equity Line of Cedit 950,878 951 424,049 -- 425,000 Issuance of 269,524 shares of restricted stock for compensation and interest, net of 200,000 restricted shares subsequently cancelled 269,524 270 94,063 -- 94,333 Issuance of 219,501 shares of free trading stock for compensation and services rendered 219,501 220 117,523 -- 117,743 Warrants issued for services rendered -- -- 30,696 -- 30,696 Short swing profit recapture from an officer -- -- 2,754 -- 2,754 Net loss for the year ended December 28, 2003 -- -- -- (2,046,340) (2,046,340) ----------- ----------- ----------- ----------- ----------- STOCKHOLDERS' EQUITY (DEFICIT), December 28, 2003 12,386,261 $ 12,386 $ 9,167,976 $(9,921,024) $ (740,662) =========== =========== =========== =========== ===========
See notes to consolidated financial statements F-6 HEALTH EXPRESS USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 28, 2003 AND DECEMBER 29, 2002 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Health Express USA, Inc. was incorporated in the State of Florida on July 2, 1998. Its wholly owned subsidiaries, organized in Florida, are Healthy Bites Grill, Inc., which was incorporated on January 26, 1999 and Healthy Bites Grill of Boca, Inc. and Health Express Franchise Company, which were incorporated on May 7, 2001. The consolidated financial statements are presented following the elimination of any inter-company balances and transactions. Health Express USA, Inc. and its subsidiaries are collectively referred to herein as the "Company" or "Health Express". The Company is primarily engaged in operating a gourmet, fast-food health and nutrition restaurant, which began operations in Fort Lauderdale, Florida on April 10, 2000 through its wholly owned subsidiary, Healthy Bites Grill, Inc. The Fort Lauderdale restaurant equipment and supplies were sold on September 23, 2002, and is reported as discontinued operations on the 2002 financial statements. On June 24, 2002, the Company began operations at a second restaurant in Boca Raton, Florida through its wholly owned subsidiary, Healthy Bites Grill of Boca, Inc. The Company plans to expand through franchising. Franchise operations will be conducted through its wholly owned subsidiary, Health Express Franchise Company. The financial statements and notes are the representation of the Company's management, which is responsible for their integrity and objectivity. The accounting policies and the financial statements of the Company are in accordance with accounting principles generally accepted in the United States of America ("GAAP"). FRANCHISE OPERATIONS The Company conducts franchise operations through a wholly owned subsidiary, Health Express Franchise Company, incorporated in Florida on May 7, 2001. The initial franchise fee is $30,000 and is payable to the Company upon signing the franchise agreement. The initial franchise fee is fully earned and non-refundable unless the Company doesn't accept the franchisee at its home office within 30 days of the signed agreement. If the franchisee fails to find an approved site within 6 months of the signed agreement, the Company can elect to terminate the agreement while retaining the initial franchise fee. An advertising fee of $5,000 is due upon signing the franchise agreement to fund the grand opening advertising. This advertising fee will be refunded if any portion of the initial franchise fee is refunded. The initial franchise fee and advertising fee will be recognized as revenue when the franchisee's restaurant operations commence. The Company will provide initial training and materials for up to 3 trainees for no additional cost. Continuing fees from franchised restaurants are recorded as revenue when earned. On February 20, 2003, the Company sold its first franchise to one of the Company's directors. The franchisee has identified a location and is currently building out a restaurant located in South Florida, with an expected opening in the second quarter of 2004. The terms of this franchise agreement are based on the standard franchise agreement with no special consideration. On October 1, 2003, the Company sold its second franchise to the same director of the Company. The franchisee has identified a location and is currently building out the second restaurant also located in South Florida which should open in the second quarter of 2004. The terms of this franchise agreement are based on the standard franchise agreement with no special consideration. Initial franchise fees of $60,000 were received during the year ended December 28, 2003 from the sale of two franchises, and is recorded as deferred franchise revenue in the accompanying financial statements. The Company also received $10,000 for grand opening advertising, and it is included with deferred franchise revenue in the accompanying financial statements. GOING CONCERN CONSIDERATIONS The Company's financial statements have been prepared on a going concern basis that contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred a net loss of $2,046,340 and $1,069,054 for the years ended December 28, 2003 and December 29, 2002, respectively, has an accumulated deficit of $9,921,024 at December 28, 2003, and has deficit equity of $740,662 at December 28, 2003. The Company has incurred cumulative losses since inception, has funded operations primarily through related-party loans and investor capital, and has yet to generate sufficient revenues from its operating activities to cover its expenses. Management recognizes that the Company must generate additional resources to enable it to continue operations. Management is planning F-7 to obtain additional capital principally through the sale of equity securities. The realization of assets and satisfaction of liabilities in the normal course of business is dependent upon the Company obtaining additional equity capital and ultimately obtaining profitable operations. However, no assurances can be given that the Company will be successful in these activities. Should any of these events not occur, the accompanying consolidated financial statements will be materially affected. USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates. REVENUE RECOGNITION Revenue from restaurant sales is recognized at the time of the transaction with the customer, and since all sales are for cash or by credit cards, there are no trade receivables. Revenues are shown net of customer discounts or allowances taken at the time of the sale. See above for a description of the accounting for initial franchise fees. Once franchise activities begin, the Company will record revenues from franchise activities in accordance with applicable accounting standards for franchisors. INVENTORY Inventory, consisting of food, beverages and supplies, is carried at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventory of paper products held in storage by a supplier is stated at cost on a specific identification basis. PROPERTY AND EQUIPMENT Property and equipment are recorded at acquisition cost and depreciated using the straight-line method over the estimated useful lives of the assets. Useful lives range from three to five years. Expenditures for routine maintenance and repairs are charged to expense as incurred. The Company reviews its property for possible impairment whenever events indicate that its carrying value may not be recoverable. Impairment is determined to exist when the carrying amount of property exceeds the sum of future net undiscounted cash flows. If an impairment exists, the property is written down to its estimated fair value. See note 2 for a description of an impairment write-down recorded in 2003. ADVERTISING The Company expenses advertising costs to operations in the year incurred. Advertising expense was $80,131 and $33,643 for the years ended December 28, 2003 and December 29, 2002, respectively. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, net operating loss carry forwards and tax credit carry forwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets may not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax rates when such changes occur. NET LOSS PER SHARE The Company follows the provisions of SFAS No. 128, "Earnings per Share," which requires companies with complex capital structures or common stock equivalents to present both basic and diluted earnings per share ("EPS") on the face of the income statement. Basic EPS is calculated as income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated using the "if converted" method for convertible securities and the treasury stock method for options and warrants. F-8 STOCK BASED COMPENSATION The Company accounts for stock based compensation under the provisions of SFAS No. 123, "Accounting for Stock Based Compensation". For stock and options issued to employees, and for transactions with non-employees in which services were performed in exchange for the Company's common stock, the transactions are recorded on the basis of fair value of the services received or the fair value of the equity instruments issued, whichever was more readily measurable. In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," was issued. This pronouncement amends SFAS No. 123, "Accounting for Stock-Based Compensation," and provides guidance to companies that wish to voluntarily change to the fair value based method of accounting for stock-based employee compensation, among other provisions. The Company has historically accounted for, and will continue to account for, its employee stock based compensation under the fair value based method provisions of SFAS No. 123, therefore, the issuance of SFAS No. 148 did not have any impact on the Company's financial position, results of operations or cash flows. CASH AND CASH EQUIVALENTS Cash and cash equivalents, if any, include all highly liquid debt instruments with an original maturity of three months or less at the date of purchase. The Company occasionally maintains cash balances in financial institutions in excess of federally insured limits. FAIR VALUE OF FINANCIAL INSTRUMENTS Cash, accounts payable and accrued liabilities are reported in the financial statements at cost, which approximates fair value due to the short-term maturity of those instruments. The fair values of the Company's debt and capital lease obligations are the same as the reported amounts because rates and terms approximate current market conditions. STATEMENT OF COMPREHENSIVE INCOME In accordance with SFAS No. 130, "Reporting Comprehensive Income", the Company is required to report its comprehensive income. Other comprehensive income refers to revenue, expenses, and gains and losses that under generally accepted accounting principles are included in comprehensive income (loss) but are excluded from net income (loss), as these amounts are recorded directly as an adjustment to stockholders' equity. A statement of comprehensive income (loss) is not presented since the Company has no items of other comprehensive income. Comprehensive income (loss) is the same as net income for the periods presented herein. SEGMENT REPORTING Under SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," the Company's operations are now defined as consisting of two operating segments, restaurant operations and franchising. During the quarter ended June 30, 2001, the Company began its franchising efforts, but has yet to generate any revenues from this activity. Franchising operations reported an operating loss for the years ended December 28, 2003 and December 29, 2002 of $3,152 and $7,758, respectively. The remainder of the Company's loss is attributable to its restaurant operations. The franchising segment has no depreciation or amortization, and the only asset is a minimal amount of cash. RECENT ACCOUNTING PRONOUNCEMENTS In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" was issued. This SFAS amends and clarifies financial accounting and reporting for derivative securities and hedging activities. This SFAS is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have any impact on the Company's financial position, results of operations or cash flows. In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" was issued. SFAS 150 was issued to establish standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. A financial instrument issued in the form of shares that is mandatorily redeemable by the issuer will have to be classified as a liability. This SFAS is effective for financial instruments entered into or modified after May 31, 2003. For financial instruments created before the issuance date of the SFAS, transition will be reported as the cumulative effect of a change in an accounting principle by initially measuring the financial F-9 instruments at fair value or other measurement attribute, as required by the SFAS. The adoption of SFAS No. 150 did not have any impact on the Company's financial position, results of operations or cash flows. RESTATEMENT The Company, during July 2003, restated its 2002 financial statements to correct a mistake in the application of an accounting principle related to the accounting and disclosure for a discontinued operation pursuant to SFAS No. 144. As a result of a comment letter issued by the Securities and Exchange Commission on May 2, 2003, the Company restated its 2002 annual and third quarter interim financial statements to reflect the closure of the Fort Lauderdale restaurant in September 2002 as a discontinued operation. The SEC has determined that the discontinued operations provisions included in SFAS No. 144 must be applied to the closing of the Fort Lauderdale restaurant. The Company had previously accounted for the closure of the Fort Lauderdale restaurant as part of the process of relocating to the new Boca Raton facility, and therefore included its activities in continuing operations. The financial statement impact of the application of the restatement is to reclassify and consolidate a significant portion of the Company's operations, assets and liabilities beginning with the interim period ended September 29, 2002. The Company's net loss, the related per share amounts, and stockholders' equity in the restatement did not change from what was previously reported. OTHER Certain 2002 amounts have been reclassified to conform to the presentation used for the 2003 financial statements. The Company's interim accounting periods end on the last Sunday of each calendar quarter, and the fiscal year ends on the last Sunday in December. NOTE 2 - PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 28, 2003 and December 29, 2002: 2003 2002 -------- --------- Construction costs and leasehold improvements - restaurant $ 38,833 $ 486,521 Restaurant equipment 11,167 143,243 Office equipment 3,626 3,536 -------- --------- Total cost 53,626 633,300 Less: Accumulated Depreciation 835 65,977 -------- --------- Property and equipment, net $ 52,791 $ 567,323 ======== ========= Depreciation expense (including amortization of leases) totaled $127,266 and $65,026 for the years ended December 28, 2003 and December 29, 2002, respectively. In December 2003, the Company recognized an impairment loss on the Boca Raton restaurant fixed assets pursuant to the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The restaurant has had recurring losses from operations since its June 2002 inception, which has caused the carrying amount of the fixed assets to be deemed impaired. Management estimates the assets' fair value at approximately $50,000 based on current sales of similar operations and current market conditions. The net book value (the carrying value) of the fixed assets have been written down by $403,411 to $50,000 and an impairment loss has been recorded in the statement of operations for the year ending December 28, 2003. F-10 NOTE 3 - ACCRUED LIABILITIES Accrued liabilities consist of the following: DECEMBER 28, DECEMBER 29, 2003 2002 ----------- ----------- Accrued rent $ 21,761 $ 31,087 Accrued interest on notes payable - related parties 9,277 453 Other accrued interest 8,469 -- Accrued property taxes 6,878 -- Other accruals 16,722 9,544 ----------- ----------- Total accrued liabilities $ 63,107 $ 41,084 =========== =========== NOTE 4 - CAPITAL LEASE OBLIGATIONS The Company acquired certain restaurant equipment under the provisions of various long-term leases and has capitalized the minimum lease payments. The equipment was returned and the lease terminated after the sale of the Fort Lauderdale restaurant equipment and supplies on September 23, 2002. As of December 28, 2003 and December 29, 2002 the Company has no property held under a capital lease. Depreciation expense was $9,000 for the year ended December 29, 2002, and is recorded in discontinued operations. NOTE 5 - OTHER DEBT AND EQUITY TRANSACTIONS CONVERTIBLE DEBENTURES On January 17, 2003, the Company sold $250,000 of convertible debentures to Cornell Capital Partners, L.P. ("Cornell"). These debentures accrue interest at a rate of 5% per year and mature three years from the issuance date. The debentures are convertible into the Company's common stock at the holders' option any time up to maturity at a conversion price equal to the lower of (i) 120% of the closing bid price of the common stock as of the closing date or (ii) 80% of the average closing bid price of the common stock for the three lowest trading days of the five trading days immediately preceding the conversion date. At maturity, the Company has the option to either pay the holder the outstanding principal balance and accrued interest or to convert the debentures into shares of common stock at a conversion price similar to the terms described above. In accordance with applicable accounting standards for such issuances, the Company recorded an interest charge of $62,500 at issuance to account for the imbedded beneficial conversion feature. In addition, the Company recorded these other charges at issuance: $37,500 in professional fees, $20,000 in commissions, and (as described below) $75,000 for the Equity Line of Credit commitment fee (recorded as interest expense); these amounts were withheld from the proceeds of the debenture at closing. The Company has the right to redeem the debentures upon thirty days notice for 120% of the amount redeemed. Upon such redemption, the holder shall receive warrants equal to 10,000 shares of common stock for each $100,000 redeemed with an exercise price equal to 120% of the closing bid price of the common stock on the closing date. $50,000 of the debenture was acquired and effectively redeemed by Charles D. Bleiwise for $60,000 on behalf of the Company, and $100,000 of the debenture was converted into 283,804 shares of common stock in fiscal year 2003. The Company, in August 2003, issued a convertible debenture to Mr. Bleiwise for $60,000 in consideration of the redemption described above. This amount was charged for compensation in 2003. The debenture has the same features as the debenture to Cornell Capital Partners except that when the debenture is converted, the shares will be restricted shares. The Company recorded an interest charge of $15,000 at issuance to account for the imbedded beneficial conversion feature in the new $60,000 debenture. In August 2003, Mr. Bleiwise converted the $50,000 debenture acquired from Cornell into 151,515 shares of the Company's common stock. Outstanding convertible debentures at December 28, 2003 totaled $160,000. EQUITY LINE OF CREDIT During fiscal year 2003, the Company made advances totaling $425,000 under the Equity Line of Credit, selling 950,878 shares of common stock to Cornell. Of this amount, $400,000 was directed to and held by an escrow agent and was used by the escrow agent to repay $400,000 of the promissory notes issued to Cornell described in the section "promissory notes" below. The remaining $25,000 of proceeds was used by the Company for general working capital. F-11 On March 13, 2003, the Company entered into an Equity Line of Credit Agreement with Cornell. Under this agreement, the Company may issue and sell to Cornell common stock for a total purchase price of up to $5.0 million. Subject to certain conditions, the Company is entitled to draw down on the Equity Line of Credit now that the common stock to be issued under the Equity Line of Credit is registered with the Securities and Exchange Commission and the registration statement was declared effective on July 24, 2003 and for two years thereafter. The purchase price for the shares is equal to 95% of the market price, which is defined as the lowest closing bid price of the common stock during the five trading days following the notice date. The amount of each advance is subject to an aggregate maximum advance amount of $100,000, with no advance occurring within seven trading days of a prior advance. In addition, in each advance notice the Company shall establish a minimum acceptable price, whereby the amount requested in the advance notice shall automatically decrease by 20% for each day of the five succeeding trading days that the closing bid price is below the minimum acceptable price. Cornell received a one-time commitment fee of $90,000, of which $75,000 was withheld from the January 2003 closing of the convertible debenture, and the balance was paid from the proceeds of the initial advance under the Equity Line of Credit. Cornell is entitled to retain a fee of 5% of each advance. In addition, the Company entered into a placement agent agreement with TN Capital Equities, Ltd., a registered broker-dealer. Pursuant to the placement agent agreement, Health Express paid a one-time placement agent fee of 9,524 shares of common stock equal to approximately $10,000 based on the Company's stock price on January 24, 2003. PROMISSORY NOTES On July 25, 2003, the Company executed a promissory note in favor of Cornell in the face amount of $300,000. This note had a 90-day term and was repaid by the due date. The Company recorded commissions of $30,000 and professional fees of $57,315 on this transaction. During fiscal 2003, the promissory note was paid in full through an escrow agent with proceeds received under the Equity Line of Credit. On October 31, 2003, the Company executed a promissory note with Cornell in the face amount of $100,000. During fiscal 2003, the promissory note was paid in full through an escrow agent with proceeds received under the Equity Line of Credit. On December 9, 2003, the Company executed a promissory note with Cornell in the face amount of $100,000. At December 28, 2003, the promissory note balance was $100,000. Subsequent to December 28, 2003, on January 12, 2004, the Company executed a promissory note with Cornell in the face amount of $100,000. The note had a 59-day term and was repaid by the due date. On February 13, 2004, the Company executed a promissory note with Cornell in the face amount of $500,000. The note has a 178-day term. RELATED PARTY DEBT See note 11 for a description of debt transactions with related parties. NOTE 6 - STOCKHOLDERS' EQUITY PREFERRED STOCK On June 10, 1999, the shareholders and directors voted to amend the Company's articles of incorporation to create a class of preferred stock comprised of 10,000,000 shares with a par value of $0.01. The preferred stock may be issued from time to time in one or more series and with such designations, rights, preferences, privileges, qualifications, limitations, and restrictions as shall be stated and expressed in a resolution of the Board of Directors providing for the creation and issuance of such preferred stock. No shares have been issued under this class of preferred stock. COMMON STOCK The Company was originally incorporated with 7,500 shares of $1 par value common stock. On July 24, 1998, the shareholders and directors voted to amend the Company's articles of incorporation to change the number of authorized shares to 15,000,000 with a par value of $0.001. There were no prior outstanding shares of common stock. On June 10, 1999, the articles of incorporation were further amended to increase the authorized shares from 15,000,000 to 50,000,000. F-12 ISSUANCE OF COMMON STOCK During the year ended December 28, 2003, the Company sold 142,858 shares of common stock to a director of the Company that resulted in net proceeds to the Company of $50,000. The Company issued 435,319 shares of free trading stock to reduce convertible debentures in the amount of $227,500, and 950,878 shares were issued to raise funds under the equity Line of Credit in the amount of $425,000. Of this amounts, $400,000 was directed to and held by an escrow agent and was used by the escrow agent to repay $400,000 of the promissory notes issued to Cornell described in Note 5. The remaining $25,000 of proceeds was used by the Company for general working capital. The Company issued 269,524 shares of restricted stock for compensation and interest, net of 200,000 restricted shares subsequently cancelled, in the net amount of $94,333. Additionally, the Company issued 219,501 shares of free trading stock for compensation and services rendered placing a value of $117,743 on the shares issued and recording a compensation charge for the same amount under a Stock Incentive Plan. The value was the fair value of the shares at issuance. On April 21, 2003, the Company adopted the 2003 Stock Incentive Plan for a total of 400,000 shares of common stock. As of March 24, 2004, 219,501 shares have been issued under this plan to the following individuals: NUMBER NAME OF SHARES ------------------- --------- Geoffrey Eiten 50,000 Allen Freed 20,001 Michelle Kain 20,000 Keith Kanouse 10,000 Patricia Durante 60,000 Irwin Furman 54,000 Douglas Colassante 2,000 Carrie Fletcher 2,000 Stephen Bauer 1,500 During the year ended December 29, 2002, the Company sold 1,995,858 shares of common stock thorough private offerings that resulted in net proceeds of $735,750. The Company issued 345,000 stock purchase warrants pursuant to an offering for sale to accredited investors under Regulation D of the Securities Act of up to 250 units at $6,000 per unit. The offering was terminated on July 17, 2002. Additionally, the Company issued 104,200 shares of restricted stock for compensation placing a value of $92,050 on the shares issued and recording a compensation charge for the same amount. The value was the fair value of the restricted shares at issuance. The Company issued 5,000 shares as consideration to a note holder for extending the note's maturity date. Management of the Company placed a value of $1,750 on the shares issued and recorded this amount as interest expense. The value was the fair value of the restricted shares at issuance. During 2002, there were 287,000 shares of common stock contributed and cancelled by the Company. OTHER WARRANTS On July 28, 2003, warrants for the purchase of 100,000 shares of common stock were issued to Hawk Associates, Inc. which have an exercise price of $0.55 and a term of 5 years. A charge of $30,696 was recorded to professional fees in the third quarter for the issuance of these warrants. These warrants were immediately exercisable and non-forfeitable upon issuance, and were valued following the applicable provisions of SFAS No. 123. As described above, the Company issued 345,000 warrants during 2002 as part of a private offering to accredited investors. These warrants expire 36 months from the date of issuance, and are exercisable at a price of $1.50 per share. On July 31, 2001 the Company issued warrants to Francorp, Inc. for the purchase of 38,000 shares of the Company's common stock at an exercise price of $2.00 per share. These warrants were immediately exercisable and non-forfeitable upon issuance, and the exercise period expires on July 31, 2006. On May 2, 2001 the Company issued warrants to Rider Insurance Company for the purchase of 2,000,000 shares of the Company's common stock at an exercise price of $1.00 per share. The issuance was in conjunction with their purchase of common stock in the Company. The exercise period of the warrants expires on May 2, 2011. STOCK OPTIONS During the year ended December 29, 2002, the Company modified the expiration date of 142,366 stock options by extending the expiration date from August 31, 2002 to August 31, 2007. In accordance with SFAS No. 123, the modification of these stock options resulted in compensation expense of $46,368. The fair value impact for the modification of these options was estimated at the modification of grant using a Black-Scholes option pricing model with the following weighted average assumptions: a risk free interest rate of 3.0%, zero dividend yield, volatility of 98% and a weighted average expected life of the options of five years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock volatility. Because the Company's employees stock options have characteristics different from those traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-13 On April 21, 2003, the Company adopted the 2003 Stock Incentive Plan for a total of 400,000 shares of common stock. As of March 24, 2004, 219,501 shares have been issued under this plan to the following individuals: NUMBER NAME OF SHARES ------------------- --------- Geoffrey Eiten 50,000 Allen Freed 20,001 Michelle Kain 20,000 Keith Kanouse 10,000 Patricia Durante 60,000 Irwin Furman 54,000 Douglas Colassante 2,000 Carrie Fletcher 2,000 Stephen Bauer 1,500 The following table represents the Company's stock option activity for the years ended December 28, 2003 and December 29, 2002: OPTIONED SHARES WEIGHTED AVERAGE EXERCISE PRICE WEIGHTED OPTIONED AVERAGE SHARES EXERCISE PRICE ---------- -------------- Options outstanding at December 30, 2001 3,949,166 $ 0.47 Forfeited during 2002 (250,000) $ (1.71) ---------- ---------- Options outstanding at December 29, 2002 3,699,166 $ 0.39 Activity during 2003 -- $ -- ---------- ---------- Options outstanding at December 28, 2003 3,699,166 $ 0.39 ========== ========== At December 28, 2003, all of the outstanding options are currently exercisable. Of this total, 142,366 options are exercisable at $1.31 each through August 31, 2007, and the balance at $0.35 each through June 14, 2009. NOTE 7 - INCOME TAXES A summary of the provision for income taxes for the period ended December 28, 2003 and December 29, 2002 is as follows: 2003 2002 ----------- ----------- Currently payable $ -- $ -- Deferred benefit 777,600 404,300 less: Valuation allowance (777,600) (404,300) ----------- ----------- Provision for income taxs $ -- $ -- =========== =========== F-14 The deferred benefit, prior to the reduction for the valuation allowance, differs from the amount computed using the federal tax rate primarily due to the effects of state taxes and permanent differences. Of the deferred benefit before the allowance, approximately $84,000 in 2002 relates to discontinued operations; however, after the application of the valuation allowance, there is no tax benefit in either year attributable to discontinued operations. Net deferred tax assets at December 28, 2003 and December 29, 2002 are as follows: 2003 2002 ------------ ------------ Available net operating loss carryovers $ 1,785,300 $ 1,027,100 Stock option/compensation charges 1,808,800 1,893,900 Other deferred tax assets 209,300 69,400 Less: Valuation allowance (3,803,400) (2,990,400) ------------ ------------ Net deferred tax assets $ -- $ -- ============ ============ The Company has used an estimated federal tax rate of 34% and a net effective state rate of 4% for all deferred tax computations. There are no significant deferred tax liabilities. Net adjustments of $35,400 were made in 2003 to the deferred tax assets and the valuation allowance to adjust for tax changes in the treatment of stock options. The Company has recorded a valuation allowance in accordance with the provisions of SFAS No. 109 to reflect the estimated amount of deferred tax assets that may not be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income using the periods in which temporary differences and/or carryforward losses become deductible. The Company has available tax net operating carryovers ("NOLs") as of December 28, 2003 of approximately $4.7 million. The NOLs will expire beginning in 2018. Certain provisions of the tax law may limit NOL carryforwards available for use in any given year in the event of a significant change in ownership interest. There have already been significant changes in stock ownership, however, management believes that an ownership change has not yet occurred which would cause the NOL carryover to be limited. NOTE 8 - LEASE COMMITMENTS The Company leases two properties: one in Deerfield Beach, Florida for administrative offices and one in Boca Raton, Florida for its restaurant operations with scheduled annual rental increases. The total rental payments are being amortized over the lives of the leases on a straight-line basis in accordance with applicable accounting rules. The Deerfield Beach office lease commenced on May 15, 2002 and is for a three year period terminating on May 31, 2005. The Boca Raton lease commenced on May 7, 2001 (as modified on June 27, 2003) and is for a five-year period terminating on April 30, 2006. Future annual minimum rental payments subsequent to December 28, 2003 are as follows: YEAR ENDING DECEMBER, ----------- 2004 $ 150,125 2005 133,660 2006 40,633 ---------- Total $ 324,418 ========== The Boca Raton lease was modified on June 27, 2003 by the landlord and the Company. The modification was to defer specified operating costs included in the Boca Raton lease until the end of the lease term. If there have been no defaults by the Company under the lease and on the last day of the lease term, all sums due to the landlord have been paid by the Company, then the deferred amount will be forgiven by the landlord. The amount of deferred costs contingently due by the Company totaled $12,381 at December 28,2003. The Company believes there have been no defaults under the lease. If a default were to occur, the Company would immediately record the deferred costs as a liability. F-15 Total rent expense for the years December 28, 2003 and December 29, 2002 was $164,362 and $142,171, respectively. The rent for the Fort Lauderdale restaurant has been included in discontinued operations. NOTE 9 - COMMITMENTS AND CONTINGENCIES OTHER AGREEMENTS The Company has established vendor relationships with various food and supplies distributors. No contracts or commitments have been entered into and purchases are on terms or on a COD basis. There were no purchase commitments as of December 28, 2003. LITIGATION, CLAIMS, AND ASSESSMENTS In the ordinary course of business, the Company is exposed to various claims, threats, and legal proceedings. In management's opinion, the outcome of any such matters will not have a material impact upon the Company's financial position and results of operations. GUARANTEE The Fort Lauderdale restaurant equipment and supplies were sold on September 23, 2002. The lease between the Company and the landlord, which expired on January 31, 2004, was assigned to the Buyer, but the Company remained as a guarantor until January 31, 2004. No claim has been made against the Company under the guarantee. As of the date of this filing, the obligation related to this lease has been satisfied. NOTE 10 - NET LOSS PER COMMON SHARE For the periods ended December 28, 2003 and December 29, 2002, basic and diluted weighted average common shares include only common shares outstanding, as the inclusion of common share equivalents would be anti-dilutive. The Company's common stock equivalents consist of options, warrants, and convertible debentures. However, the common stock equivalents, if converted, would have increased common shares outstanding at December 28, 2003 and December 29, 2002 by approximately 6,713,139 shares and 6,082,166 shares, respectively. A reconciliation of the number of common shares shown as outstanding in the consolidated financial statements with the number of shares used in the computation of weighted average common shares outstanding is shown below: 2003 2002 ----------- ----------- Common shares outstanding at December 28th and December 29th 12,386,261 10,368,181 Effect of weighting (1,336,780) (792,119) ----------- ----------- Weighted average common shares outstanding 11,049,481 9,576,062 =========== =========== NOTE 11 - RELATED PARTY TRANSACTIONS The Company received $70,000 in financing from a related party on May 20, 2002. The note was payable on September 20, 2002 and included interest at 5.5% per annum. On November 8, 2002, $50,000 of the note payable, after repayment of $20,000 principal, was extended through March 31, 2003 at an interest rate of 7% per annum and the issuance of 5,000 shares of the Company's restricted common stock to the note holder. The shares issued were valued at $1,750, and this amount was recorded as interest expense. The $50,000 note payable was extended through July 31, 2003 at an interest rate of 7% per annum and the issuance of 10,000 shares of the Company's restricted common stock to the note holder. The shares issued were valued at $3,500 and were recorded as interest expense in the financial statements. On August 4, 2003, the $50,000 note payable was paid in full. The Company received $155,750 in 2003, and $66,660 in 2002, in financing from three directors of the Company. The notes payable bear interest at 5.5% per annum and were renegotiated in December 2003 to be payable in December 2004. As of December 28, 2003 and December 29, 2002, the Company owed accrued interest to the three directors in the amount of F-16 $9,277 and $453, respectively. For the year ended December 28, 2003 and December 29, 2002, interest expense on shareholder notes was $13,733 and $4,131, respectively. On February 20, 2003, Health Express sold its first franchise to one of Health Express' directors, Susan Greenfield. The franchisee has started construction on a location in South Florida. The terms of this franchise agreement are based on the standard franchise agreement with no special consideration. The franchise fee paid was $30,000 with an additional $5,000 advertising fee. On October 7, 2003, Health Express sold its second franchise to the same director of Health Express, Susan Greenfield. The franchisee has identified a location and is currently finalizing a lease located in South Florida. The terms of this franchise agreement are based on the standard franchise agreement with no special consideration. The franchise fee paid was $30,000 with an additional $5,000 advertising fee. During the years ended December 28, 2003, the Company sold 142,858 shares of common stock to Susan Greenfield, a director of the Company at $0.35 per share. NOTE 12 - DISCONTINUED OPERATIONS During the third quarter of 2002, the Company committed to a plan to sell its interests in the Fort Lauderdale restaurant, and on September 23, 2002, closed on the sale. In accordance with SFAS No. 144, the results of operations for the year 2002 of the Fort Lauderdale restaurant are included in discontinued operations, as follows: DECEMBER 29, FOR THE FISCAL YEAR ENDED 2002 - --------------------------------------------- ------------ Revenue $ 200,427 Cost of Company Restaurant Sales (287,571) Other Expenses (104,690) ------------ Loss from Operations (191,834) Interest Income 10 Loss on disposal of restaurant (30,970) ------------ Loss from discontinued operations, net of tax $ (222,794) ============ NOTE 13 - SEGMENT INFORMATION The Company is organized into two reportable operating segments, restaurant operations and franchising. Restaurant operations previously included the operations of the Company's restaurant in Fort Lauderdale, Florida, which ceased its operations on September 23, 2002. The amounts below were revised to exclude amounts related to the discontinued operations. Franchise operations consists primarily of legal fees and costs associated with the preparation of the Uniform Franchise Offering Circular. See Note 1 - Organization.
RESTAURANT CONSOLIDATED OPERATIONS FRANCHISING TOTAL ---------- ----------- ------------ REVENUES Year ended December 28, 2003 $ 749,450 $ 0 $ 749,450 Year ended December 29, 2002 $ 470,059 $ 0 $ 470,059 OPERATING LOSS FROM CONTINUING OPERATIONS Year ended December 28, 2003 $1,864,875 $ 3,152 $1,868,027 Year ended December 29, 2002 $ 830,531 $ 7,758 $ 838,289 SEGMENT ASSETS Year ended December 28, 2003 $ 175,065 $ 10,531 $ 185,596 Year ended December 29, 2002 $ 662,356 $ 104 $ 662,460 DEPRECIATION Year ended December 28, 2003 $ 127,266 $ 0 $ 127,266 Year ended December 29, 2002 $ 65,026 $ 0 $ 65,026
F-17 NOTE 14 - SUBSEQUENT EVENTS Subsequent to December 28, 2003, on January 12, 2004, the Company entered into a promissory note with Cornell in the face amount of $100,000. The note had a 59-day term and was repaid by the due date. On February 13, 2004, the Company raised additional cash through the execution of a promissory note with Cornell Capital Partners in the face amount of $500,000. The note has a 178-day term. Since December 28, 2003, the Company has issued 19,999 shares to Allen Freed and 20,000 shares to Irwin Forman under the Stock Incentive Plan. Since December 28, 2003 through March 24, 2004, the Company has issued 960,795 shares of common stock under the Equity Line of Credit. F-18 EX-10.27 3 v02253_ex10-27.txt Exhibit 10.27 _______________ ,ESTER M. ENTIN ASSOCIATES BUILDER AND DEVELOPER OF CRTSLDSITUA4 EOMINCTCI4` & FFNDUSTTIAR SPTO#ETTIU 1033 CLIFTON AVENUE - P. O. BOX 21 89 EXECUTIVE OFFICES June 27, 2003 CLIFTON,NEW JERSEY 0701 5 Raymond W. Nevin, President Healthy Bites Grill of Boca, Inc. 1761 West Hillsboro Boulevard - Suite 203 Deerfield Beach, Florida 33442 Re: Lease dated May 7, 2003 between Lester M. Entin Associates as Landlord and Healthy Bites Grill of Boca, Inc. as Tenant (the "Lease") You have requested that we modify the Lease so as to defer a portion of the Rent due from you pursuant to the Lease until the end of the Term. (terms not otherwise defined herein shall have the same meaning as set forth in the Lease). We agree, on your behalf, to make payment of operating costs for the Townsquare Shopping Center (which are a part of Rent) described in the second full paragraph on page 2 of the Lease. These amounts will be deferred until the end of the Term and will be due and payable the last day of the Term. Those amounts are not forgiven but are deferred provided however in the event, that on the last day of the Term, there are no defaults under the Lease, and all sums due have been paid, then, and only then, will- the deferred amount be forgiven. In the event of any default before the end of the Term; the deferred amount(s) will be immediately due and payable as past due Rent. Please indicate your agreement to the above by signing a copy of this letter and returning it to me. Very truly yours, LESTER M. ENTIN ASSOCIATES BY: /s/ MA c J. Lenne ------------------------------ MA c J. Lenne /s/ Raymond W. Nevin - ------------------------ Raymond W. Nevin EX-10.28 4 v02253_ex10-28.txt Exhibit 10.28 ================================================================================ HEALTHY BITES GRILL FRANCHISE AGREEMENT BETWEEN HEALTH EXPRESS FRANCHISE COMPANY, A FLORIDA CORPORATION AND THE MYRICK CORP. DATED: SEPTEMBER 30, 2003 LOCATION: OR ---------------------------- ---------------------------- RESERVED AREA: ================================================================================ TABLE OF CONTENTS -----------------
ARTICLE 1 - APPOINTMENT..........................................................................................1 SECTION 1.1 GRANT OF FRANCHISE................................................................................1 SECTION 1.2 LOCATION OF YOUR HEALTHY BITES GRILL FRANCHISE....................................................2 SECTION 1.3 PROTECTED TERRITORY...............................................................................2 SECTION 1.4 RELOCATION OF YOUR HEALTHY BITES GRILL FRANCHISE..................................................2 ARTICLE 2 - OUR DUTIES...........................................................................................3 SECTION 2.1 SITE SELECTION ASSISTANCE.........................................................................3 SECTION 2.2 LEASE ASSISTANCE..................................................................................3 SECTION 2.3 PLANS AND SPECIFICATIONS..........................................................................4 SECTION 2.4 ACCOUNTING, COST CONTROL, PORTION CONTROL.........................................................4 AND INVENTORY CONTROL SYSTEMS..................................................................................4 SECTION 2.5 LISTS, FORMS AND SCHEDULES........................................................................4 SECTION 2.6 EMPLOYEE INFORMATION AND ASSISTANCE...............................................................5 SECTION 2.7 INITIAL TRAINING..................................................................................5 SECTION 2.8 LOAN OF THE MANUALS...............................................................................5 SECTION 2.9 PRE-OPENING INSPECTION............................................................................5 SECTION 2.10 PRE-OPENING ON-SITE TRAINING.....................................................................5 SECTION 2.11 GRAND OPENING ASSISTANCE.........................................................................6 SECTION 2.12 CONTINUED ASSISTANCE AND SUPPORT.................................................................6 SECTION 2.13 LICENSE OF INTELLECTUAL PROPERTY.................................................................7 SECTION 2.15 DUTIES SOLELY TO YOU.............................................................................8 SECTION 2.16 OUR RIGHT TO DELEGATE DUTIES.....................................................................8 ARTICLE 3 - FEES AND PAYMENTS...................................................................................8 SECTION 3.1 TYPES OF FEES.....................................................................................8 SECTION 3.2 PAYMENT SCHEDULE..................................................................................9 SECTION 3.3 PAYMENT SYSTEM....................................................................................9 SECTION 3.4 INTEREST ON LATE PAYMENTS; LATE CHARGE...........................................................10 SECTION 3.5 APPLICATION OF PAYMENTS..........................................................................10 SECTION 3.6 SECURITY INTEREST................................................................................10 SECTION 3.7 NO WITHHOLDING...................................................................................11 ARTICLE 4 - YOUR DUTIES.........................................................................................11 SECTION 4.1 ACQUISITION OF THE SITE..........................................................................11 SECTION 4.2 CONSTRUCTION PLANS AND PERMITS...................................................................12 SECTION 4.3 CONSTRUCTION REQUIREMENTS........................................................................12 SECTION 4.4 OPENING..........................................................................................13 SECTION 4.5 USE OF THE PREMISES..............................................................................13 SECTION 4.6 MAINTENANCE AND REPAIRS..........................................................................13 SECTION 4.7 OPERATIONAL REQUIREMENTS.........................................................................14 SECTION 4.8 P.O.S. SYSTEM; E-MAIL............................................................................15 SECTION 4.9 HIRING, TRAINING AND APPEARANCE OF EMPLOYEES.....................................................16 SECTION 4.10 MANAGEMENT OF YOUR HEALTHY BITES GRILL FRANCHISE................................................16
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SECTION 4.11 APPROVED SPECIFICATIONS AND SOURCES OF SUPPLY...................................................17 SECTION 4.12 SECRET RECIPE PRODUCTS..........................................................................17 SECTION 4.13 CREDIT CARDS AND OTHER METHODS OF PAYMENT.......................................................18 SECTION 4.14 TELEPHONES AND ANSWERING SERVICE................................................................18 SECTION 4.15 COMPLIANCE WITH LAWS, RULES AND REGULATIONS.....................................................18 SECTION 4.16 TAX PAYMENTS; CONTESTED ASSESSMENTS.............................................................18 SECTION 4.17 CUSTOMER SURVEYS................................................................................19 SECTION 4.18 INSPECTIONS.....................................................................................19 SECTION 4.19 NOTICES TO US...................................................................................19 SECTION 4.20 OPERATIONAL SUGGESTIONS.........................................................................20 SECTION 4.21 RENOVATION AND UPGRADING........................................................................20 SECTION 4.22 LIQUIDATED DAMAGES FOR SALE OF PROHIBITED.......................................................20 SECTION 4.23 PUBLICITY.......................................................................................21 ARTICLE 5 - INTELLECTUAL PROPERTY...............................................................................21 SECTION 5.1 OUR REPRESENTATIONS AS TO THE INTELLECTUAL PROPERTY..............................................21 SECTION 5.2 YOUR USE OF THE INTELLECTUAL PROPERTY............................................................21 SECTION 5.3 INFRINGEMENT BY YOU..............................................................................22 SECTION 5.4 CLAIMS AGAINST THE INTELLECTUAL PROPERTY.........................................................22 SECTION 5.5 YOUR INDEMNIFICATION.............................................................................23 SECTION 5.6 OUR RIGHT TO MODIFY THE INTELLECTUAL PROPERTY....................................................23 SECTION 5.7 OUR RESERVATION OF RIGHTS........................................................................23 SECTION 5.8 OWNERSHIP; INUREMENT SOLELY TO US................................................................24 ARTICLE 6 - THE MANUALS AND OTHER CONFIDENTIAL INFORMATION......................................................24 SECTION 6.1 IN GENERAL ......................................................................................24 SECTION 6.2 CONFIDENTIAL USE.................................................................................24 SECTION 6.3 PERIODIC REVISIONS...............................................................................25 ARTICLE 7 - ADVERTISING.........................................................................................25 SECTION 7.1 LOCAL ADVERTISING................................................................................25 SECTION 7.2 GRAND OPENING ADVERTISING PROGRAM................................................................26 SECTION 7.3 REGIONAL COOPERATIVE ADVERTISING.................................................................26 SECTION 7.4 SPECIAL ADVERTISING EXPENDITURES.................................................................28 SECTION 7.5 MARKETING FUND...................................................................................28 SECTION 7.6 CONTENT AND CONCEPTS.............................................................................28 SECTION 7.7 TERMINATION OF EXPENDITURES......................................................................29 SECTION 7.8 ADVERTISING CONTRIBUTIONS BY US..................................................................29 ARTICLE 8 - ACCOUNTING AND RECORDS..............................................................................29 SECTION 8.1 RECORDS..........................................................................................29 SECTION 8.2 REPORTS AND STATEMENTS; CONFIDENTIALITY..........................................................29 SECTION 8.3 REVIEW AND AUDIT.................................................................................30 SECTION 8.4 YOUR NAME, ADDRESS AND TELEPHONE NUMBER..........................................................30 ARTICLE 9 - INSURANCE..........................................................................................31 SECTION 9.1 TYPES AND AMOUNTS OF COVERAGE....................................................................31
ii SECTION 9.2 EVIDENCE OF INSURANCE............................................................................31 SECTION 9.3 REQUIREMENTS FOR CONSTRUCTION AND RENOVATION.....................................................31 SECTION 9.4 OUR RIGHT TO PARTICIPATE IN CLAIMS PROCEDURE.....................................................31 SECTION 9.5 WAIVER OF SUBROGATION............................................................................32 SECTION 9.6 EFFECT OF OUR INSURANCE..........................................................................32 SECTION 9.7 FAILURE TO MAINTAIN INSURANCE....................................................................32 SECTION 9.8 GROUP INSURANCE..................................................................................32 ARTICLE 10 - INDEPENDENT ASSOCIATION OF HEALTHY BITES GRILL FRANCHISEES.........................................32 SECTION 10.1 YOUR RIGHT TO JOIN THE INDEPENDENT ASSOCIATION OF HEALTHY BITES GRILL FRANCHISEES...............32 SECTION 10.2 OUR DEALINGS WITH THE FRANCHISEE ASSOCIATION....................................................32 ARTICLE 11 - TRANSFER OF INTEREST..............................................................................33 SECTION 11.1 TRANSFER BY US...........................................................................33 SECTION 11.2 TRANSFER BY YOU..........................................................................33 SECTION 11.3 TRANSFER UPON DIVORCE OR PARTNERSHIP DISSOLUTION................................................35 SECTION 11.4 TRANSFER UPON DEATH OR DISABILITY...............................................................35 SECTION 11.5 OUR RIGHT OF FIRST PURCHASE.....................................................................36 ARTICLE 12 - DEFAULT AND TERMINATION............................................................................38 SECTION 12.1 TERMINATION BY YOU..............................................................................38 SECTION 12.2 TERMINATION BY US - WITHOUT NOTICE..............................................................38 SECTION 12.3 TERMINATION BY US - AFTER NOTICE................................................................38 SECTION 12.4 TERMINATION BY US - AFTER NOTICE AND RIGHT TO CURE..............................................40 ARTICLE 13 - YOUR OBLIGATIONS UPON TERMINATION DUE TO YOUR DEFAULT OR ON NONRENEWAL............................40 SECTION 13.1 CEASE OPERATIONS................................................................................40 SECTION 13.2 PAYMENT OF OUTSTANDING AMOUNTS..................................................................40 SECTION 13.3 DISCONTINUANCE OF USE OF TRADE NAME.............................................................41 SECTION 13.4 OUR OPTION TO PURCHASE YOUR HEALTHY BITES GRILL FRANCHISE.......................................41 SECTION 13.5 DISTINGUISHING OPERATIONS.......................................................................42 SECTION 13.6 UNFAIR COMPETITION..............................................................................43 SECTION 13.7 RETURN OF MATERIALS.............................................................................43 SECTION 13.8 OUR PURCHASE RIGHTS OF ITEMS BEARING INTELLECTUAL PROPERTY......................................43 SECTION 13.9 LIQUIDATED DAMAGES FOR PREMATURE TERMINATION....................................................44 ARTICLE 14 - YOUR INDEPENDENT COVENANTS.........................................................................44 SECTION 14.1 DIVERSION OF BUSINESS; COMPETITION ANDINTERFERENCE WITH US......................................44 SECTION 14.2 INDEPENDENT COVENANTS; THIRD PARTY BENEFICIARIES................................................46 ARTICLE 15 - INDEPENDENT CONTRACTOR AND INDEMNIFICATION.........................................................46 SECTION 15.1 INDEPENDENT STATUS..............................................................................46 SECTION 15.2 INDEMNIFICATION.................................................................................46
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ARTICLE 16 - REPRESENTATIONS AND WARRANTIES.....................................................................47 SECTION 16.1 OUR REPRESENTATIONS.............................................................................47 SECTION 16.2 YOUR REPRESENTATIONS............................................................................47 SECTION 16.3 RECEIPT OF FOC..................................................................................48 SECTION 16.4 RECEIPT OF COMPLETED FRANCHISE AGREEMENT........................................................48 SECTION 16.5 ACKNOWLEDGMENT OF RISK..........................................................................48 ARTICLE 17 - TERM...............................................................................................49 SECTION 17.1 TERM............................................................................................49 SECTION 17.2 OPTION TO OBTAIN SUCCESSOR HEALTHY BITES GRILL FRANCHISE AGREEMENT..............................49 SECTION 17.3 REINSTATEMENTS AND EXTENSIONS...................................................................50 ARTICLE 18 - DISPUTE RESOLUTION.................................................................................50 SECTION 18.1 MEDIATION.......................................................................................50 SECTION 18.2 ARBITRATION.....................................................................................50 SECTION 18.3 EXCEPTIONS TO MEDIATION AND ARBITRATION; EQUITABLE RELIEF.......................................52 SECTION 18.4 JURISDICTION AND VENUE..........................................................................52 SECTION 18.5 ENFORCEMENT COSTS...............................................................................53 SECTION 18.6 GOVERNING LAW...................................................................................53 ARTICLE 19 - DEFINITIONS.......................................................................................53 SECTION 19.1 DEFINITIONS.....................................................................................53 SECTION 19.2 OTHER DEFINITIONAL PROVISIONS...................................................................58 ARTICLE 20 - GENERAL PROVISIONS.................................................................................59 SECTION 20.1 AMENDMENTS......................................................................................59 SECTION 20.2 MODIFICATION OF THE SYSTEM......................................................................59 SECTION 20.3 BINDING EFFECT..................................................................................59 SECTION 20.4 NOTICES.........................................................................................59 SECTION 20.5 HEADINGS........................................................................................60 SECTION 20.6 SEVERABILITY....................................................................................60 SECTION 20.7 WAIVERS.........................................................................................60 SECTION 20.8 REMEDIES CUMULATIVE.............................................................................61 SECTION 20.9 EFFECTIVENESS; COUNTERPARTS.....................................................................61 SECTION 20.10 REASONABLENESS.................................................................................61 SECTION 20.11 SURVIVAL.......................................................................................61 SECTION 20.12 FORCE MAJEURE..................................................................................61 SECTION 20.13 THIRD PARTIES..................................................................................62 SECTION 20.14 ENTIRE AGREEMENT...............................................................................62
iv HEALTHY BITES GRILL FRANCHISE AGREEMENT --------------------------------------- THIS HEALTHY BITES GRILL FRANCHISE AGREEMENT is signed on September 30, 2003 between Health Express Franchise Company, a Florida corporation and The Myrick Corp. This Agreement is written in an informal style to make it easy to read and to help you become thoroughly familiar with all of the important rights and obligations that the Agreement covers before you sign it. In this Agreement, Health Express Franchise Company is referred to as the "Franchisor," "we," us" or "our." You are referred to as the "Franchisee," "you" or "your." BACKGROUND ---------- A. We have developed and own a special system under the trade name "Healthy Bites Grill(R)" that offers a full menu of healthy and natural food combined with a quick casual service restaurant format. B. The distinguishing characteristics of the System include: Secret Recipe Products; uniform standards and procedures for business operations; special graphics package; training in the operation, management and promotion of the Healthy Bites Grill Franchise; promotional programs; customer development and service techniques; and other technical assistance. C. You recognize the benefits from receiving a Healthy Bites Grill Franchise and desire to enter into this Agreement subject to the terms of this Agreement and to receive the benefits provided by us under this Agreement. D. We have reviewed your application and have decided to award a Healthy Bites Grill Franchise to you evidenced by this Agreement. TERMS ----- The parties agree as follows: ARTICLE 1 - APPOINTMENT SECTION 1.1 GRANT OF FRANCHISE We grant to you, subject to the terms of this Agreement, the right and you undertake the obligation, to operate 1 Healthy Bites Grill Franchise under the System only at the location described in Section 1.2. You may also engage in home delivery within the Protected Territory provided you comply with the home delivery requirements set forth in the Manuals. __________ ALL CAPITALIZED TERMS ARE DEFINED IN ARTICLE 19. 1 SECTION 1.2 LOCATION OF YOUR HEALTHY BITES GRILL FRANCHISE You agree that you will operate your Healthy Bites Grill Franchise only at the location described on the cover page or, if none is stated, the Premises will be located with the Reserved Area and Exhibit A completed after you select a site in accordance with Section 4.1. The location cannot be changed without our written consent and compliance with our relocation procedures. You may engage in home delivery. You will not solicit business outside your ADI through the use of an 800 number, catalog, direct mail, Internet, Web Site or other advertising or solicitation method without our written consent. SECTION 1.3 PROTECTED TERRITORY During the Term, if you are not in default, we agree not to open a Company-Owned Unit or franchise another Healthy Bites Grill Franchise within your Protected Territory. However, we reserve for ourselves the rights stated in Section 5.7, which are superior to your rights under this Agreement. SECTION 1.4 RELOCATION OF YOUR HEALTHY BITES GRILL FRANCHISE (a) LOSS OF LEASE. If the Premises is leased by you and the lease or sublease expires or is terminated (provided termination is not due to your default) before the expiration or termination of this Agreement, you then have 90 days to secure a new location within your Protected Territory but not within the protected territory of a Company Unit or another Franchise Unit of the System whether operating or under development. We must approve the new location in writing. You have 90 days from the date of the new lease or new sublease is signed to open and begin full operation of the new Healthy Bites Grill Franchise in compliance with this Agreement unless we otherwise agree in writing. The failure to secure a new location and begin operation within the specified times is an Event of Default on your part. (b) CASUALTY. If the Premises is damaged or destroyed by fire or other casualty, or is required by any governmental authority, to be repaired or constructed you will, at your expense, repair or reconstruct the Premises within a reasonable time under the circumstances. The minimum acceptable appearance for the restored Premises will be as existed just before the casualty. However, every reasonable effort must be made to have the restored Premises reflect the then current Trade Dress of the newest Healthy Bites Grill Franchises within the System. If the Premises is substantially destroyed by fire or other casualty, you may, with our written agreement, terminate this Agreement instead of reconstructing the Premises or relocating your Healthy Bites Grill Franchise under the terms in Subsection 1.4(c). (c) CONDEMNATION. You will, as soon as possible, give us notice of any proposed taking by eminent domain. If we agree that your Healthy Bites Grill Franchise or a substantial portion is to be taken, we will give prompt consideration to transferring your Healthy Bites Grill Franchise to a nearby location you select within your Protected Territory but not within the protected territory of a Company Unit or another Franchise Unit whether operating or under development as quickly as reasonably possible, within 90 days of the taking. If 2 the new location is accepted and we authorize the transfer, and if you open a new Healthy Bites Grill Franchise at the new location in accordance with our specifications within 90 days after obtaining the new location, your new Healthy Bites Grill Franchise will be deemed to be your Healthy Bites Grill Franchise under this Agreement. If a condemnation takes place and a new Healthy Bites Grill Franchise does not, for any reason, become your Healthy Bites Grill Franchise under this Agreement, this is an Event of Default on your part. (d) SITE RELOCATION FEE. If you must relocate your Healthy Bites Grill Franchise, you will pay a site relocation fee to us sufficient to cover our reasonable and necessary direct costs associated with approving the relocation; for example, site location and/or lease negotiation assistance, legal and accounting fees, travel expenses and other out-of-pocket costs. ARTICLE 2 - OUR DUTIES We will provide you with the following initial and ongoing assistance and services, as long as you are not in default under this Agreement: SECTION 2.1 SITE SELECTION ASSISTANCE We must approve the proposed site for your Premises in writing before beginning any construction of improvements. We will provide one on-site evaluation in response to your request for site selection assistance and approval. However, we will not provide this on-site evaluation for any proposed site before receipt of the materials required in the Manuals. We will not unreasonably withhold approval of any site that meets our standards for demographic characteristics, traffic patterns, parking, the predominant character of the neighborhood, competition from other businesses providing similar services within the area, the proximity to other businesses, the nature of other businesses in proximity to the site and other commercial characteristics, the size, appearance and other physical characteristics of the site, and any other factors that we consider relevant in approving or disapproving a site. We will review site approval submissions on a first-in basis. If we do not approve the selected site, you have 30 days to submit a new site within the Reserved Area for our written approval. WE DO NOT REPRESENT THAT WE HAVE ANY SPECIAL EXPERTISE IN SELECTING SITES. OUR APPROVAL OF A SITE IS NOT A REPRESENTATION OR WARRANTY THAT THE HEALTHY BITES GRILL FRANCHISE WILL BE PROFITABLE OR THAT YOUR SALES WILL ATTAIN ANY PREDETERMINED LEVELS. APPROVAL IS INTENDED ONLY TO INDICATE THAT THE PROPOSED SITE MEETS OUR MINIMUM CRITERIA FOR IDENTIFYING SITES. YOU AGREE THAT OUR APPROVAL OR DISAPPROVAL OF A PROPOSED SITE DOES NOT IMPOSE ANY LIABILITY ON US. SECTION 2.2 LEASE ASSISTANCE If you intend to lease your Premises from a third party, we may assist you in your lease negotiations. Any lease must provide that it is subject to, and you must obtain, our written approval. The landlord, you and us must sign 3 our form of Agreement with Landlord set forth in Exhibit D to the Franchise Offering Circular. WE DO NOT REPRESENT THAT WE HAVE ANY SPECIAL EXPERTISE IN NEGOTIATING LEASES. YOU AGREE THAT OUR APPROVAL OR DISAPPROVAL OF A PROPOSED LEASE DOES NOT IMPOSE ANY LIABILITY ON US. APPROVAL IS INTENDED ONLY TO INDICATE THAT THE PROPOSED SITE MEETS OUR MINIMUM CRITERIA FOR IDENTIFYING SITES. YOU AGREE THAT OUR APPROVAL OR DISAPPROVAL OF A PROPOSED SITE DOES NOT IMPOSE ANY LIABILITY ON US. SECTION 2.3 PLANS AND SPECIFICATIONS (a) We will loan to you: (i) A sample set of standard building plans and specifications and/or standard recommended floor plans prepared by a licensed architect; (ii) Specifications of our requirements for design, decoration, layout, equipment, furniture, fixtures and signs for the Healthy Bites Grill Franchise (collectively, the "Design Specifications"); and (iii) Specifications for Healthy Bites Grill uniforms for your employees to be purchased directly from our approved suppliers. (b) On or before the Opening Date, you must return to us the plans and specifications described in Subsection 2.3(a). SECTION 2.4 ACCOUNTING, COST CONTROL, PORTION CONTROL AND INVENTORY CONTROL SYSTEMS. We will provide standardized accounting, cost control, portion control and inventory control systems. SECTION 2.5 LISTS, FORMS AND SCHEDULES We will loan to you: (a) A list of required equipment, supplies, materials, inventory and other items necessary to open and operate your Healthy Bites Grill Franchise and a list of approved suppliers of these items; (b) An initial set of forms, including the standard brochure and various operational forms, standardized periodic reporting forms for reporting accounting information, cost analysis and purchase order forms; (c) A schedule of items that must be purchased from us including inventory business forms, brochures and other items; and 4 (d) A schedule of recommended equipment and supplies that can be purchased from third-party suppliers. These forms and schedules are set forth in the Manuals. SECTION 2.6 EMPLOYEE INFORMATION AND ASSISTANCE We will give to you employee hiring information including pay scale guidelines. You are solely responsible for the hiring, disciplining, supervising, promoting and firing of your employees and the establishment of their salaries as further provided in Section 4.9. SECTION 2.7 INITIAL TRAINING (a) INITIAL TRAINING. We will provide up to 320 hours of Initial Training over 8 weeks for 3 Trainees at our training facilities in Boca Raton, Florida. Unless otherwise agreed in writing, at least 1 Trainee must be the Franchise Owner. All Trainees must be acceptable to us. Initial Training includes instruction in marketing, promotion and advertising, sales techniques and computer applications. Training programs may differ in content and length for you, your Manager, cook, prep cook and juice bar person. We will provide, at our expense, as Initial Training is included in the Initial Franchise Fee, instructors, facilities, training materials and technical training tools for Initial Training. You are responsible for all expenses of the Trainees in attending Initial Training including all travel, lodging and meal expenses. You will pay all expenses incurred to have your additional employees or agents attend Initial Training, including reasonable training fees. (b) FAILURE TO COMPLETE INITIAL TRAINING. If any Trainee fails to complete satisfactorily Initial Training, as reasonably determined by us, we may, at your expense and direction, retrain the Trainee or train another Trainee. SECTION 2.8 LOAN OF THE MANUALS We will loan to you one registered copy of each volume of the Manuals (with revisions as required). Our practice is to deliver the Manuals to you at or shortly before Initial Training. SECTION 2.9 PRE-OPENING INSPECTION We will provide periodic on-site assistance and inspection of the installation of the equipment and will generally inspect the Premises. We will provide you with advice, as we deem appropriate to insure that you conform to applicable standards before the Opening Date. SECTION 2.10 PRE-OPENING ON-SITE TRAINING We will provide you our opening supervisor to provide pre-opening, on-site training of 80 hours over 10 days, in most instances to be conducted at your Healthy Bites Grill Franchise shortly before the Opening Date, as we deem appropriate. The on-site training program will cover material aspects of the operation of the Healthy Bites Grill Franchise including financial control, 5 marketing techniques, maintenance of quality standards, employee hiring and motivation, inventory control, security standards, merchandising techniques, promotional techniques, operations, purchasing and sales. SECTION 2.11 GRAND OPENING ASSISTANCE In addition to the on-site training, we will coordinate the expenditure of the Grand Opening Advertising Fee. SECTION 2.12 CONTINUED ASSISTANCE AND SUPPORT Upon the opening of your Healthy Bites Grill Franchise, we will or may provide to you the following: (a) FIELD VISITS. We will provide assistance to you in the development and operation of your Healthy Bites Grill Franchise by means of periodic visits by one of our field representatives (not less than 12 times per year). (b) TELEPHONE ASSISTANCE. We will informational assistance by telephone including consultation on matters involving operations, advertising, promotion and business methods. (c) ADVERTISING AND PUBLIC RELATIONS CAMPAIGNS. We will generally promote our franchisees' business through advertising and public relations campaigns through the Marketing Fund. (d) LOCAL ADVERTISING. We will provide you advice on Local Advertising. (e) PROMOTIONAL METHODS AND MATERIALS. We will provide you with promotional methods and materials that we develop. (f) PERIODIC ASSISTANCE. We may provide advisory assistance in the operation and promotion of the Healthy Bites Grill Franchise, as we deem advisable. Advisory assistance may include additional training and assistance, communication of new developments, improvements in equipment and supplies, and new techniques in advertising, service and management relevant to the operation of the Healthy Bites Grill Franchise. (g) REFRESHER OR ADDITIONAL TRAINING. We will provide up to 2 days of refresher training programs per year at our principal training facility. We may also provide additional seminars or advanced management training for you and your employees at our principal training facility (or any other location we designate provided the other location is closer to your Healthy Bites Grill Franchise), which may be required at our option. However, if you receive an unsatisfactory inspection report from us and fail to promptly remedy the deficiencies, we may require your Manager and designated employees to attend refresher training as soon as reasonably possible. You are solely responsible for all expenses associated with these programs and all travel, meals and lodging costs of your attendees. 6 (h) SPECIAL ASSISTANCE. If you request, we will furnish non-routine guidance and assistance to address your unusual or unique operating problems at our reasonable per diem fees, charges and out-of-pocket expenses we establish. (i) RESEARCH AND DEVELOPMENT. We will continue to research and develop new products and services, introductions and techniques, as we deem appropriate in our sole discretion. We may conduct market research and testing to determine consumer trends and the salability of new products and services. If we choose you, and if you agree, you will participate in our market research programs, in test marketing new products and services in the Healthy Bites Grill Franchise and by providing us with timely reports and other relevant information regarding that market research. If you participate in any test marketing, you agree to purchase a reasonable quantity of the products or services being tested and to effectively promote and make a good faith effort to sell them. SECTION 2.13 LICENSE OF INTELLECTUAL PROPERTY Subject to this Agreement, we license to you the right to use the "Healthy Bites Grill(R)" trade name and the other Intellectual Property. SECTION 2.14 OUR TEMPORARY OPERATION OF YOUR UNIT At our option, if: (a) you fail to keep your Healthy Bites Grill Franchise open for business during normal business hours; (b) you are absent from your Healthy Bites Grill Franchise more than 5 days or abandon the Premises; (c) you or the Franchise Owner dies or becomes permanently incapacitated and the franchise or the ownership interest in the Franchisee is not assigned promptly under Section 11.4; (d) you materially breach any of our standards and specifications for the operation of your Healthy Bites Grill Franchise; or (e) your Healthy Bites Grill Franchise is terminated and we elect to purchase your business assets as provided in Section 13.4; then, we are entitled (but have no obligation) to enter your Premises and to operate and manage your Healthy Bites Grill Franchise for your (or your estate's) account until the Healthy Bites Grill Franchise is terminated, transferred to a party under Subsection 11.2(f), purchased by us, or until you resume control over your Healthy Bites Grill Franchise and operate it in accordance with this Agreement. Our operation and management will not continue for more than 90 days without your written consent or the consent of the representatives of your estate. If we operate your Healthy Bites Grill 7 Franchise, we will account to you or your estate for all net income from the operation less our reasonable expenses incurred in, and a reasonable management fee for, our operation of your Healthy Bites Grill Franchise. SECTION 2.15 DUTIES SOLELY TO YOU All of our obligations under this Agreement are only to you. No other party is entitled to rely on, enforce, or obtain relief for breach of the obligations either directly or by subrogation. SECTION 2.16 OUR RIGHT TO DELEGATE DUTIES You agree to our right to delegate our duties under this Agreement to a Designee. You must discharge your duties with the Designee to the extent we request, as you must do with us. We remain responsible for our obligations under this Agreement even if delegated to the Designee. ARTICLE 3 - FEES AND PAYMENTS SECTION 3.1 TYPES OF FEES In consideration of our signing this Agreement, you must pay to us the following fees, in addition to any others required under this Agreement, all payable in United States currency at our principal office: (a) INITIAL FRANCHISE FEE. You must pay to us an Initial Franchise Fee of $30,000; payable at the same time this Agreement is signed. The Initial Franchise Fee is fully earned by us on receipt and is non-refundable upon signing this Agreement. (b) ROYALTY FEE. You will pay a continuing non-refundable Royalty Fee during the Term equal to 4% of Gross Revenues payable weekly by electronic funds transfer. (c) GRAND OPENING ADVERTISING FEE. A Grand Opening Advertising Fee of $5,000 must be paid at the same time you sign this Agreement. The Grand Opening Advertising Fee is held for your benefit to fund special grand opening advertising expenditures. (d) ADVERTISING CONTRIBUTIONS. You must also pay a continuing monthly Advertising Contribution to the Marketing Fund during the Term in an amount equal to 2% of Gross Revenues payable weekly by electronic funds transfer. We have the sole right to enforce your obligations and all other franchisees that make Advertising Contributions. Neither you, nor any other franchisee obligated to make Advertising Contributions, is a third party beneficiary of the funds or has any right to enforce any obligation to contribute the funds. We reserve the right to increase the Advertising Contributions paid by you provided: (i) the increase is reasonably necessary to provide greater advertising and promotional assistance to the Chain; (ii) that we and a majority of the Franchise Units agree to the increase; (iii) that all other Franchise Units and Company Units are subject to the same relative percentage increase in the Advertising Contributions; and (iv) the increase is approved by a majority of the franchisees. 8 SECTION 3.2 PAYMENT SCHEDULE The Royalty Fee and Advertising Contribution must be paid to us, together with any required weekly reports, by the 5th day of each succeeding week during the Term for the previous week. All other amounts due to us from you will be paid as specified in this Agreement. If no time is specified, these amounts are due upon receipt of an invoice from us. Any payment or report not actually received by us on or before the due date is overdue. SECTION 3.3 PAYMENT SYSTEM (a) All payments by you to us, upon our request, will be effectuated by a Payment System by the use of pre-authorized transfers from your operating account through the use of special checks or electronic fund transfers, that we will process at the time any payment is due or through the use of any other payment system we designate. You will cooperate with us to implement the Payment System within 15 days before the Opening Date. You agree to cooperate with us in maintaining the efficient operation of the Payment System, including depositing all Gross Revenues you receive in your operating account accessed by the Payment System within 1 Business Day of receipt. (b) You will give your financial institution instructions in a form we provide or approve and will obtain the financial institution's agreement to follow these instructions. You will provide us with copies of these instructions and agreement. The financial institution's agreement may not be withdrawn or modified without our written approval and approval is within our sole discretion. You will also sign all other forms for funds transfer as the financial institution or we may request. (c) We may require your financial institution to send a monthly statement of all activity in the designated account to us at the same time as it sends these statements to you, and any other reports of the activity in the operating account as we reasonably determine and request. (d) If you maintain any other bank accounts for your Healthy Bites Grill Franchise, you must identify these accounts to us and provide to us copies of the monthly statements for all these accounts and the details of all deposits and withdrawals to them. (e) You will pay all charges imposed by your financial institution. We will pay the charges imposed by our financial institution for the Payment System. (f) You agree that your obligations to make payments under this Agreement and any other agreement entered into with us for your Healthy Bites Grill Franchise, and our rights and those of our Affiliates, if any, to receive these payments, are absolute and unconditional, and are not subject to any abatement, reduction, setoff, defense, counterclaim or recoupment due or alleged to be due to, or by reason of, any past, present or future claims that you have or may have against us for any reason. 9 SECTION 3.4 INTEREST ON LATE PAYMENTS; LATE CHARGE Although each failure to pay monies when due is an Event of Default, to encourage prompt payment and to cover the costs involved in processing late payments, if any payment under this Agreement or any other agreement between us and you for your Healthy Bites Grill Franchise is overdue for any reason, you must pay to us, on demand, in addition to the overdue amount, any insufficient funds (NSF) charges we incur and interest on the overdue amount from the date it was due until paid equal to the lesser of: (i) 18% per annum; or (ii) the maximum rate of interest permitted by law. You must also pay a late charge of $100 for each payment that is overdue. If we owe you money, we will pay the same interest and late charge, if we pay you late. SECTION 3.5 APPLICATION OF PAYMENTS We have sole discretion to apply any payments you make to your past due indebtedness including the Royalty Fee, Advertising Contributions, purchases from us, interest, insufficient funds (NSF) charges, or any other indebtedness of you to us in any manner we choose regardless of your designation. SECTION 3.6 SECURITY INTEREST (a) As security for the full, prompt and complete payment and performance by you of all of your obligations to the us under this Agreement or otherwise including all costs, expenses, advances and liabilities which may be incurred by us in connection with this Agreement, including reasonable attorneys' fees to enforce the rights of the Franchisor under this Agreement (the "Secured Obligations"), you grant to us a first priority security interest under the applicable Uniform Commercial Code in the state in which the Franchised Business is located and a security interest under any other applicable law in and to the Business Assets. You will: (i) sign any financing statements (including the form attached as Exhibit G to the FOC) or renewals, substitutions or corrections or other documents, or provide any document, and pay all connected costs necessary to perfect the security interest granted in this Section against the rights or interest of third parties and you appoint us as your true and lawful attorney, and in its name, place and stead, to make, sign, acknowledge and file all documents, instruments and forms, whether notarized or otherwise, which in the opinion of our counsel, are reasonably required to perfect the security interest granted in this Section; (ii) except in the ordinary course of its business, not sell, transfer, assign, mortgage, encumber or otherwise dispose of, or create, assume, or suffer to exist any security interest (other than as created under this Agreement) in any of the Business Assets; and (iii) at all times keep accurate and complete records of the Business Assets at its place of business and we or any of out agents have the right to call at your place of business at intervals we determine, and, without hindrance or delay, to inspect the Business Assets and to inspect, audit, check and make copies and extracts from the books, records, journals, orders, receipts, magnetic computer disks and records, correspondence and other data relating to the Business Assets. Upon the occurrence of any Event of Default, we may declare the Secured Obligations, or any of them immediately due and payable without demand or notice, and we may proceed to exercise any one or more of the rights or remedies afforded by the applicable Uniform Commercial 10 Code or other applicable law of any jurisdiction, and any other remedies or right provided in this Agreement, all of which may be exercised, cumulatively or consecutively in our sole discretion. (b) Upon an occurrence of an Event of Default, we will send you notice and, upon the sending of the notice, we have the right to notify all of your account debtors obligated on any or all of the accounts receivable to make payment thereof directly to us. Moreover, we have the right to enforce and collect all amounts due with respect to the accounts receivable for purposes of satisfying the Secured Obligations. You constitute and appoint us as your lawful attorney-in-fact, and in your place and stead, with full power of substitution either in our name (i) to ask for, demand, sue for, collect, receive, receipt and give acquittance for any of the accounts receivable; (ii) to endorse checks, drafts, orders and other instruments for payment of monies payable with respect to the accounts receivable; and (iii) to settle, compromise, extend the date for payment, prosecute or defend any action or proceeding with respect to the accounts receivable, all without notice or consent to you and without discharging or affecting your obligations under this Agreement. (c) We agree to subordinate our security interest to: (i) the landlord's lien; (ii) the security interest of a reputable institutional lender for a loan to you for working capital purposes; (iii) the purchase money security interest of an approved equipment vendor for any equipment you purchase or lease and use in the operation of your Healthy Bites Grill Franchise; or (iv) the purchase money security interest of a supplier of approved products sold at your Healthy Bites Grill Franchise. You pay all filing fees and costs for perfecting our security interest. SECTION 3.7 NO WITHHOLDING You agree that under no circumstances will you withhold or suspend payment of, or reduce the amount of the Royalty Fee or Advertising Contributions payable under this Agreement. Notwithstanding the foregoing, if you dispute in good faith the amount of an individual payment due under this Agreement, you may pay only the amount you believe is due, provided that you give us prompt notice of the reasons you dispute the amount of the payment and proceed to make good faith efforts to resolve the dispute. ARTICLE 4 - YOUR DUTIES SECTION 4.1 ACQUISITION OF THE SITE (a) SITE APPROVAL. You are solely responsible for selecting the site. If a site for your Healthy Bites Grill Franchise has not been selected on the Agreement Date, you must complete the acquisition or lease arrangements for your Premises located in the Reserved Area, at your expense within 3 months of the Agreement Date, after obtaining our written approval under Section 2.1. If a site has not been approved within 6 months of the Agreement Date, we may terminate this Agreement and retain the Initial Franchise Fee. (b) PURCHASE OF THE SITE. If you intend to purchase the site, the purchase agreement must be submitted to us for our written approval. You will be solely responsible for securing any necessary acquisition, construction, permanent or other financing of the site and the Premises. 11 (c) LEASE OF THE SITE. We must approve any lease of the Premises. You must deliver a copy of the proposed lease to us at least 15 days before it is signed by you. You and the landlord must sign our form of Agreement with Landlord, the form of which is attached as Exhibit D to the FOC. SECTION 4.2 CONSTRUCTION PLANS AND PERMITS For the construction of your Premises, you will do the following: (a) You must employ a qualified licensed architect or engineer with adequate errors and omissions insurance to prepare a site plan and plans and specifications adapting our standard plans and specifications to your approved location and to applicable laws, lease requirements and restrictions, and market conditions. The architect or engineer must be especially mindful of all zoning, signage, seating capacity, parking requirements and storage requirements. Any material modification to the standard plans and specifications must be sealed and stamped by the architect or engineer and approved by us. The modified plans and approvals, once approved by us, will not be materially changed or modified without our written approval; (b) You will employ professional supervision satisfactory to us over preparation of the site layout and plan and over construction of your Premises; and (c) You must obtain all permits and certifications required for the lawful construction and operation of your Healthy Bites Grill Franchise, together with certifications from all governmental authorities having jurisdiction over your Premises and your Healthy Bites Grill Franchise. You must provide us with evidence that all necessary permits have been obtained and that all requirements for construction and operation have been met, including zoning, access, sign, fire, health, environmental and safety requirements. SECTION 4.3 CONSTRUCTION REQUIREMENTS You must begin construction within 60 days after a site is obtained and provide written notice to us of the date construction of your Healthy Bites Grill Franchise begins. You will construct the Premises in accordance to the approved plans described in Section 4.2 and the Design Specifications. You must maintain continuous construction of the Premises and must complete construction, including all exterior and interior carpentry, electrical, painting and finishing work and installation of all with the approved fixtures, equipment and signs, in accordance with the site plans and Design Specifications, at your expense, within 12 months of the Agreement Date. You agree that our representatives and we have the right to inspect the construction at all reasonable times. You will within 10 days after completion of construction obtain a certificate of occupancy, and after obtaining our approval for opening, will open your Healthy Bites Grill Franchise within 7 days after the date of the certificate of occupancy. You and we agree that time is of the essence in constructing and opening your Healthy Bites Grill Franchise. 12 SECTION 4.4 OPENING You agree not to open your Healthy Bites Grill Franchise for business until: (a) all your obligations under Sections 4.1 through 4.3 have been fulfilled; (b) we determine that your Healthy Bites Grill Franchise has been constructed, furnished, equipped, and decorated in accordance with approved plans and specifications; (c) the training of the Trainees has been completed to our reasonable satisfaction; (d) the Initial Franchise Fee and all amounts due to us under this Agreement have been paid in full; (e) we have been furnished with certificates of insurance and copies of all insurance policies or all other evidence of insurance coverage as we reasonably request; (f) you have obtained a certificate of occupancy for your Premises; and (g) you have obtained all necessary licenses and permits to operate your Healthy Bites Grill Franchise. Final approval by us of the opening of your Healthy Bites Grill Franchise will be given in writing. You agree to comply with these conditions and be prepared to open your Healthy Bites Grill Franchise for business within 12 months after the Agreement Date. SECTION 4.5 USE OF THE PREMISES You must use your Premises only for the operation of your Healthy Bites Grill Franchise. You must keep your Healthy Bites Grill Franchise open for business and in normal operation for the minimum hours and days as we reasonably require in the Manuals or otherwise in writing except as may be limited by local law or the landlord's rules and regulations. You must refrain from using or permitting the use of the Premises for any other purpose or activity at any time without first obtaining our written consent. You may not locate or permit to be located on or about the Premises any pinball machines, electronic or video games, jukeboxes, or other types of amusements or vending machines without out written consent. SECTION 4.6 MAINTENANCE AND REPAIRS (a) You must maintain your Healthy Bites Grill Franchise in the highest and most uniform degree of sanitation, repair, appearance, condition and security as stated in the Manuals and as a modern, clean, adequately lighted and efficiently operated Healthy Bites Grill Franchise providing high quality products and services with efficient, courteous and friendly customer service as we require. You must make all additions, alterations, repairs and replacements to your Healthy Bites Grill Franchise (but no others without our written consent) as reasonably required for that purpose, including all periodic repainting, changes in appearance, repairs to impaired equipment and replacement of obsolete signs as we direct subject to Capital Expenditure Limitation stated in Section 4.21. You must meet and maintain the highest safety standards and ratings applicable to the operation of your Healthy Bites Grill Franchise, as we reasonably require, including the maintenance of the highest sanitation rating. (b) You must maintain contracts with reputable firms for the maintenance of the Premises and the machinery and equipment and, if we determine to be appropriate or necessary, for the landscaped areas of the Premises. Contracts for maintenance of the Premises and the machinery and equipment must provide for the performance of services, including preventative maintenance services, and be with financially responsible firms, that: (i) maintain adequate insurance and bonding; (ii) have personnel who are factory trained to service 13 equipment of the type in the Premises; and (iii) maintain an adequate supply of parts for the machinery, equipment and tools. Contracts for landscape maintenance must be with financially responsible firms. You will provide us, upon our request, with a copy of any contract for maintenance that you enter into with any outside maintenance firm. If you fail to keep these contracts in full effect, we may do so at your expense. SECTION 4.7 OPERATIONAL REQUIREMENTS You agree to operate your Healthy Bites Grill Franchise in conformity with all uniform methods, standards and specifications required in the Manuals or otherwise, to ensure that the highest degree of quality and service is uniformly maintained. You agree to: (a) Record all Gross Revenues on the approved P.O.S. System; (b) Comply with the procedures and systems we reasonably institute on a System-wide basis both now and in the future, including those on sales, good business practices, advertising and other obligations and restrictions; (c) Maintain in sufficient supply (as we may reasonably prescribe in the Manuals or otherwise in writing) and use at all times, only inventory, equipment, materials, advertising methods and formats, and supplies that conform with our standards and specifications, if any, at all times sufficient to meet the anticipated volume of business, and to refrain from deviating from these requirements without our written consent; (d) Use menu boards and menus that comply with our specifications for materials, finish, style, pattern and design; (e) Adhere to the highest standards of honesty, integrity, fair dealing and ethical conduct in all dealings with customers, suppliers, employees, independent contractors, us and the public; (f) Sell or offer for sale only the menu items that meet our reasonable uniform standards of quality and quantity; have been expressly approved for sale in the Manuals or otherwise in writing by us at retail to consumers only from your Healthy Bites Grill Franchise; not sell any items for redistribution or resale; sell or offer for sale all approved products and services; refrain from any deviation from our standards and specifications for providing or selling the products and services without our written consent; and discontinue selling and offering for sale any products and services that we reasonably disapprove on a System-wide basis in writing at any time; (g) Purchase and install, at your expense, all fixtures, furnishings, signs and equipment we reasonably specify. The equipment must be maintained in a condition that meets the operational standards specified in the Manuals. As equipment becomes obsolete or inoperable, you will replace the equipment with the equipment that is then approved for use in the Healthy Bites Grill Franchise. If we determine that additional or replacement equipment is needed on 14 a System-wide basis because of a change in menu items or method of preparation and service, a change in technology, customer concerns or health or safety considerations, you will install the additional equipment or replacement equipment within the time we specify, subject to the Capital Expenditure Limitation in Section 4.21. (h) The Premises will not be used for the handling, storage, transportation or disposal of hazardous or toxic materials contrary to any federal, state or local laws, rules and regulations. You agree to contract with a licensed waste hauler for the removal and disposal of all hazardous or toxic material utilized in the operation of the Franchise. You will provide to us a copy of all waste hauler agreements, EPA monitoring records and perchloroethylene purchase laws within 5 days of our request. You indemnify, defend and hold us harmless from any loss, costs, damages or payments (including attorneys' fees and court costs) we incur as a result of past, present or future use, handling, storage, transportation or disposal of hazardous or toxic materials. The indemnity in this Subsection survives the termination, expiration or transfer of this Agreement. SECTION 4.8 P.O.S. SYSTEM; E-MAIL (a) Before the Opening Date you must procure and install at your Healthy Bites Grill Franchise the P.O.S. System we specify in the Manuals or otherwise. You will provide any assistance we require to bring the P.O.S. System "on-line" with our computer. You agree that we have the right to retrieve all data and information from your P.O.S. System, as we, in our sole discretion, deem necessary, with the telephonic cost of retrieval to be paid by you. All of the specified items to be installed or purchased, or activities specified to be accomplished by you, and the delivery of all hardware and software, are at your sole expense. (b) You must install and maintain, at your own expense, an E-mail link with us and all other Healthy Bites Grill Franchisees. Reasonable minimum hardware and software standards for these connections will be set by us and may be periodically revised, and you will have reasonable time to upgrade when standards change. Standards will include current uniform communications software in use by the System; word processing and spreadsheet software that is either the same as that in use at our office or capable of reading and converting files created by our office; and a computer capable of running the software and containing reasonable minimums for memory and data storage and a modem connected via network links to our System. You will be responsible for all normal communications charges from the networks making connection to our System, for example, phone bills or bills from an on-line service. Information important to the Chain will be sent to your computer address electronically. In order to stay informed on developments affecting the System and your Healthy Bites Grill Franchise, you agree to check your electronic mailbox for system communications on a regular basis. (c) You agree that computer systems are designed to accommodate a certain maximum amount of data and terminals, and that, as limits are achieved, and/or as technology and/or software is developed in the future, we in our sole discretion may require you to add memory, ports and other accessories and/or peripheral equipment and/or additional, new or substitute software to the original P.O.S. System you purchased. You agree that at a certain point in time it may become necessary for you to replace or upgrade the entire P.O.S. System with a larger system capable of assuming and discharging all of those computer-related tasks and functions as we specify. You agree that computer 15 designs and functions change periodically and that we may be required to make substantial modifications to our computer specifications, or to require installation of entirely different systems, during the Term. To ensure full operational efficiency and communication capability between our computers and your computers, you will keep the P.O.S. System in good maintenance and repair and to install all additions, changes, modifications, substitutions and/or replacements to your computer hardware, software, telephone and power lines and other computer-related facilities as we direct on those dates and within those times we specify, in our sole discretion, in the Manuals or otherwise on a System-wide basis subject to the Capital Expenditure Limitation in Section 4.21. Upon termination or expiration of this Agreement, all software, disks, tapes and other magnetic storage media provided to you by us must be returned to us in good condition (reasonable wear and tear excepted). You will delete all software and applications from all memory and storage. SECTION 4.9 HIRING, TRAINING AND APPEARANCE OF EMPLOYEES You will maintain a competent, conscientious staff and employ the minimum number of employees necessary to meet the anticipated volume of business and to achieve the goals of the System. You will take all steps necessary to ensure that your employees meet the employment criteria and keep a neat appearance and comply with any dress code we require. You are solely responsible for the terms of their employment and compensation and, except for training required under this Agreement, for the proper training of the employees in the operation of your Healthy Bites Grill Franchise. You are solely responsible for all employment decisions and functions, including hiring, firing, establishing wage and hour requirements, disciplining, supervising and record keeping. You will not recruit or hire any employee of a Healthy Bites Grill Franchise operated by us or another franchisee within the System without obtaining the employer's written permission, which will not be unreasonably withheld, subject to any covenant not to compete, the provisions of which will be respected and not challenged. .. SECTION 4.10 MANAGEMENT OF YOUR HEALTHY BITES GRILL FRANCHISE (a) If this Agreement is signed by 2 or more individuals, you agree to designate in writing 1 individual as the Manager upon signing this Agreement. We have the right to rely solely on instructions of the Manager concerning the operation of the Healthy Bites Grill Franchise until we receive a duly signed written notice changing the designated Manager. (b) The Manager must devote his or her best full-time efforts to the management and operation of your Healthy Bites Grill Franchise. You agree that your Healthy Bites Grill Franchise requires the day-to-day supervision of the Manager at all times your Healthy Bites Grill Franchise is open for business. The Manager, and all successive Managers, if any, are required to complete Initial Training before managing your Healthy Bites Grill Franchise, unless we otherwise agree in writing. (c) If we have permitted the Manager to be an individual other than the Franchise Owner, and the Manager fails to satisfy his or her obligations provided in Subsection 4.10(b) due to death, disability, termination of employment or for any other reason, the Franchise Owner will satisfy these obligations until you designate a new Manager of your Healthy Bites Grill Franchise acceptable to us who has successfully completed Initial Training. You 16 are solely responsible for the expenses associated with Initial Training, including the then-prevailing standard training fee we charge (currently $1,500). SECTION 4.11 APPROVED SPECIFICATIONS AND SOURCES OF SUPPLY (a) AUTHORIZED SPECIFICATIONS AND SUPPLIERS. You must purchase or lease equipment, supplies, inventory, advertising materials, construction services and other products and services used for the operation of your Healthy Bites Grill Franchise solely from authorized manufacturers, contractors and other suppliers who demonstrate, to our continuing reasonable satisfaction: (i) the ability to meet our standards and specifications for these items; (ii) possess adequate quality controls and capacity to supply your needs promptly and reliably; and (iii) have been approved in writing by us and not later disapproved. We will use our best reasonable efforts to negotiate agreements with suppliers that, in our good faith belief, are in the best interest of all Healthy Bites Grill franchisees. We may approve a single supplier for any brand and may approve a supplier only as to a certain brand or brands. In approving suppliers for the System, we may take into consideration factors like the price and quality of the products or services and the supplier's reliability. We may concentrate purchases with 1 or more suppliers to obtain the lowest prices and/or the best advertising support and/or services for any group of Franchise Units or Company Units within the Chain. Approval of a supplier may be conditioned on requirements on the frequency of delivery, standards of service, warranty policies including prompt attention to complaints, and concentration of purchases, as stated above, and may be temporary, pending our additional evaluation of the supplier. We reserve the right to derive revenue as the result of your purchases from authorized suppliers and Secret Recipe Products. (b) APPROVAL OF NEW SPECIFICATIONS AND SUPPLIERS. If you propose to purchase or lease any equipment, supplies, inventory, advertising materials, construction services or other products or services from an unapproved supplier, you must submit to us a written request for approval, or request the supplier to do so. We will have the right to require, as a condition of our approval, that our representatives be permitted to inspect the supplier's facilities, and that samples from the supplier be delivered, at our option, either to us or to an independent, certified laboratory designated by us for testing. We are not liable for damage to any sample that results from the testing process. You will pay a charge not to exceed the reasonable cost of the inspection and the actual cost of the testing. We reserve the right, at our option, to reinspect the facilities and products of any approved supplier and continue to sample the products at the supplier's expense and to revoke approval upon the supplier's failure to continue to meet our standards and specifications. We may also require as a condition to our approval, that the supplier present satisfactory evidence of insurance, for example, product liability insurance, protecting us and our franchisees against all claims from the use of the item within the System. SECTION 4.12 SECRET RECIPE PRODUCTS You agree that we have already developed the Secret Recipe Products and may continue to develop for use in the System certain additional products that are all highly confidential, secret recipes and trade secrets. Due to the importance of quality control and uniformity of these products and the significance of the proprietary products to the System, it is to the mutual benefit of the parties that we closely control the production and distribution 17 of the Secret Recipe Products. Accordingly, you will use the Secret Recipe Products and will purchase from an approved source we designate and license all of your supplies of the Secret Recipe Products, all in accordance with our requirements then in effect. SECTION 4.13 CREDIT CARDS AND OTHER METHODS OF PAYMENT You will maintain credit card relationships with VISA and MasterCard and check verification services, financial center services, and electronic fund transfer systems as we designate in order that you may accept customers' credit and debit cards, checks, and other methods of payment. We reserve the right to require the addition or deletion of credit card relationships and other methods of payment if implemented on a System-wide basis. You will subscribe to an approved credit verification service. SECTION 4.14 TELEPHONES AND ANSWERING SERVICE You will: (a) Maintain continuously a sufficient number of operating telephone lines and telephone numbers to be used exclusively for the operation of your Healthy Bites Grill Franchise as we reasonably require, with sufficient staff to handle telephone calls in an efficient and courteous manner at all times during normal business hours; (b) Maintain continuously a dedicated operating telephone line and telephone number at your Healthy Bites Grill Franchise that only we can use, and that permits us to monitor accounting and operational information via a modem; and (d) Have a pay telephone installed in the public area of the Premises. SECTION 4.15 COMPLIANCE WITH LAWS, RULES AND REGULATIONS You will comply with all federal, state, and local laws, rules and regulations, and will timely obtain, maintain and renew when required all permits, certificates, licenses or franchises necessary for the proper conduct of your Healthy Bites Grill Franchise under this Agreement, including qualification to do business, fictitious, trade or assumed name registration, building and construction permits, occupational licenses, sales tax permits, health and sanitation permits and ratings, and fire clearances. SECTION 4.16 TAX PAYMENTS; CONTESTED ASSESSMENTS You will promptly pay when due all taxes required by any federal, state or local tax authority including unemployment taxes, withholding taxes, sales taxes, use taxes, income taxes, tangible commercial personal property taxes, real estate taxes, intangible taxes and all other indebtedness you incur in the conduct of your Healthy Bites Grill Franchise. You will pay to us an amount equal to any sales tax, goods and services taxes, gross receipts tax, or similar tax imposed on us for any payments to us required under this Agreement, unless the tax is measured by or involves the net income or our corporate status in a state. If we pay any tax for you, you will promptly reimburse us the amount 18 paid. If there is any bona fide dispute as to liability for taxes assessed or other indebtedness, you may contest the validity or the amount of the tax or indebtedness in accordance with procedures of the taxing authority or applicable law. However, you will not permit a tax sale or seizure by levy or execution or similar writ or warrant, or attachment by a creditor, to occur against the Premises or any assets used in your Healthy Bites Grill Franchise. SECTION 4.17 CUSTOMER SURVEYS You will present to customers any evaluation forms we require and will participate and/or request your customers to participate in any marketing surveys performed by or for us. SECTION 4.18 INSPECTIONS You will permit us and/or our representatives to enter your Premises or office at any time during normal business hours upon reasonable notice, for purposes of conducting inspections. You will cooperate fully with us and/or our representatives in inspections by rendering assistance as they may reasonably request and by permitting them, at their option, to observe how you are selling the products and rendering the services, to monitor sales volume, to conduct a physical inventory, to confer with your employees and customers and to remove samples of any products, supplies and materials in amounts reasonably necessary to return to our office for inspection and record-keeping. A portion of a sample we take will be given to you for safekeeping in a tamper-proof container. The inspections will be performed in a manner that minimizes interference with the operation of your Healthy Bites Grill Franchise. We and/or you may videotape the inspections. Upon notice from us, and without limiting our other rights under this Agreement, you will take all steps necessary to correct immediately any deficiencies detected during inspections, including immediately stopping use of any equipment, advertising, materials, products, supplies or other items that do not conform to our then-current requirements. If you fail or refuse to correct any deficiency, we have the right, without any claim to the contrary by you, to enter your Premises or office without being guilty of trespass or any other tort, for the purposes of making or causing to be made all corrections as required, at your expense, payable by you upon demand. SECTION 4.19 NOTICES TO US (a) You must notify us in writing and supply us copies of all relevant documents within 5 days of any of the following events: (i) The start of, any action, suit, implemented or other proceeding against you or any of your employees that may have a material adverse effect on the Franchise Business or the System; (ii) Any communication by any governmental entity relating to the conduct of your Healthy Bites Grill Franchise that indicates your material non-compliance with any applicable law, rule or regulation; or 19 (iii) The issuance of any order, writ, injunction, award or decree of any court, agency or other governmental instrumentality against you or any of your employees that may have a material adverse effect on the Franchise Business or the System. (d) You will provide us with any information we request, within 5 days of request, about the progress and outcome of these events. SECTION 4.20 OPERATIONAL SUGGESTIONS You are encouraged to submit suggestions in writing to us for improving elements of the System, including products, services, equipment, service format, advertising and any other relevant matters, that we consider adopting or modifying standards, specifications and procedures for the System. You agree that any suggestions you make are our exclusive property. We have no obligation to use any suggestions. If we implement any suggestion, we will negotiate with you on a reasonable fee for your suggestions based on its value to the System. You may not use any suggestions inconsistent with your obligations under this Agreement without our written consent. SECTION 4.21 RENOVATION AND UPGRADING You will abide by our requirements for alterations, remodeling, upgrading or other any improvements to your Healthy Bites Grill Franchise to achieve the strategic marketing goals of the System. Generally, the standards to comply satisfactorily will not exceed those applicable to new Franchise Units and new Company Units. These requirements will not impose an undue economic burden or occur more frequently than every 4 years. You will bear the entire cost of changes or additions, for any changes in, or additions of, equipment, furnishings, fixtures, lighting, carpeting, painting or the taking of other actions we specify to satisfy our then-current standards for image, positioning, marketing strategy, cleanliness or appearance but not to exceed total capital expenditures of $25,000 every 4 years (the "Capital Expenditure Limitation"). SECTION 4.22 LIQUIDATED DAMAGES FOR SALE OF PROHIBITED PRODUCTS OR SERVICES. The Franchisee agrees that the offer to sell or the sale of unauthorized or prohibited products and services will result in damages to the Franchisor. The Franchisee agrees these damages will be measured as $1,000 for each day of the prohibited offer or sale, payable to the Franchisor upon demand. These damages are in addition to the Franchisor's other rights or remedies, including the Franchisor's right strictly to enforce or terminate this Agreement as provided in this Agreement and obtain injunctive relief, except to the extent any other rights are excluded by law in light of this Section. The parties agree that a precise calculation of the full extent of the damages that the Franchisor will incur from the offer or sale of unauthorized products and services is difficult to determine and the Franchisor and the Franchisee desire certainty in this matter and agree that the liquidated damages are reasonable and are not a penalty. 20 SECTION 4.23 PUBLICITY You grant us the right to freely use, without your consent, any pictures, financial information, or biographical material relating to you or your Healthy Bites Grill Franchise for use in promotional literature or in any other way beneficial to the Healthy Bites Grill organization as a whole. You will cooperate in securing photographs, including obtaining consents from any persons appearing in photographs. If we publish anything you feel reflects unfairly or inaccurately on your Healthy Bites Grill Franchise or yourself, we will take all reasonable steps in our power to retract the material. ARTICLE 5 - INTELLECTUAL PROPERTY SECTION 5.1 OUR REPRESENTATIONS AS TO THE INTELLECTUAL PROPERTY We represent to you that: (a) Healthy Bites Grill, Inc. is the sole owner of the Intellectual Property; (b) Healthy Bites Grill, Inc. has licensed the Intellectual Property to us for sublicensing to Healthy Bites Grill Franchisees; and (c) We will take all steps necessary to preserve and protect the ownership and validity of the Intellectual Property. SECTION 5.2 YOUR USE OF THE INTELLECTUAL PROPERTY You may use the Intellectual Property only in accordance with standards and specifications we reasonably determine and implement on a System-wide basis. You agree that: (a) You will use the Intellectual Property only for the operation of your Healthy Bites Grill Franchise at the Premises; (b) You agree not to employ any of the Intellectual Property in signing any contract, check, purchase agreement, negotiable instrument or legal obligation, application for any license or permit, or in a manner that may result in liability to us for any indebtedness or obligation of yours; (c) You have no right to pre-package or sell pre-packaged food products or beverages using the Intellectual Property unless approved in writing by us; (d) You will use the Intellectual Property as the sole service mark identifications for your Healthy Bites Grill Franchise and will display prominently the Intellectual Property on and/or with all materials we designate and authorize, and in the manner we require; (e) You will not use any of the Intellectual Property as security for any obligation or indebtedness; 21 (f) You will comply in filing and maintaining any required fictitious, trade or assumed name registrations for the "Healthy Bites Grill" trade name, and will sign all documents we or our counsel deem reasonably necessary to obtain protection for the trademarks and our interest in the trademarks, for example, John Jones d/b/a "Healthy Bites Grill" or ABC, Inc. d/b/a "Healthy Bites Grill;" (g) You will maintain a suitable sign or graphics package on the Premises, on any pylon sign or other area identifying the Premises only as "Healthy Bites Grill." The signage must conform in all respects to our requirements except to the extent prohibited by local governmental restrictions or landlord regulations; (h) All materials including place mats, menus, matchbook covers, order books, plastic or paper products and other supplies and packaging materials used in the System will bear our Intellectual Property, as required by us; (i) Without our prior written approval, you will not use any of our trademarks as part of any e-mail address, Web Site, domain name or any other electronic media (including use with any prefix, suffix or other modifying words, term designs, or symbols), or in any other manner connected with a Web Site, advertisements on a Web Site, or other similar electronic media; and (j) You will exercise caution when using the Intellectual Property to ensure that the Intellectual Property is not jeopardized in any manner. SECTION 5.3 INFRINGEMENT BY YOU You acknowledge that the use of the Intellectual Property outside the scope of this Agreement, without our written consent, is an infringement of our rights in the Intellectual Property. You agree that during the Term, and after the expiration or termination of this Agreement, you will not, directly or indirectly, commit an act of infringement or contest or aid in contesting the validity of, or our right to, the Intellectual Property, or take any other action in derogation of our rights. SECTION 5.4 CLAIMS AGAINST THE INTELLECTUAL PROPERTY If there is any claim of infringement, unfair competition or other challenge to your right to use any Intellectual Property, or if you become aware of any use of, or claims to, any Intellectual Property by persons other than us or our franchisees, you will promptly (within 7 days) notify us in writing. You will not communicate with anyone except us and our counsel on any infringement, challenge or claim except under judicial process. We have sole discretion as to whether we take any action on any infringement, challenge or claim, and the sole right to control any litigation or other proceeding arising out of any infringement of, challenge or claim to any Intellectual Property. You must sign all documents, render all assistance, and do all acts that our attorneys deem necessary or advisable in order to protect and maintain our interest in any litigation or proceeding involving the Intellectual Property or otherwise to protect and maintain our interests in the Intellectual Property. 22 SECTION 5.5 YOUR INDEMNIFICATION. We indemnify you against and will reimburse you for all damages you are held liable in any proceeding from your use of any Intellectual Property in accordance with this Agreement, but only if you: (a) have timely notified us of the claim or proceeding in accordance with Section 5.4; (b) have otherwise complied with this Agreement; (c) allow us sole control of the defense and settlement of the action in accordance with Section 5.4; and (d) cooperate fully with us and our counsel in the defense of the action. SECTION 5.6 OUR RIGHT TO MODIFY THE INTELLECTUAL PROPERTY (a) If we deem it advisable to modify or discontinue the use of any of the Intellectual Property and/or use 1 or more additional or substitute names or marks, including due to the rejection of any pending registration or revocation of any existing registration of any of the Intellectual Property, due to the rights of senior users, due to our negligence or due to a radical change in direction of the System unilaterally caused or mandated by us, you are obligated to do so at your expense within 30 days of our request. We will only be liable to reimburse you for your reasonable direct printing and signage expenses in modifying or discontinuing the use of the Intellectual Property and substituting different Intellectual Property (these expenses will not include any expenditures made by you to promote the modified or substitute Intellectual Property). (b) If the modification or discontinuation of the use of any of the Intellectual Property is due to a continuing need to modernize the System, you will be liable for all expenses in substituting the modified or new Intellectual Property in your Healthy Bites Grill Franchise. SECTION 5.7 OUR RESERVATION OF RIGHTS You agree that the license of the Intellectual Property granted to you has limited exclusivity and that, in addition to our right to use and grant others the right to use the Intellectual Property outside the Protected Territory, all rights not expressly granted in this Agreement to you concerning the Intellectual Property or other matters are expressly reserved for us, including the right to: (a) Establish, develop, license or franchise other systems, different from the System licensed by this Agreement within or outside the Protected Territory, without offering or providing you any rights in, to, or under the other systems; and (b) Sell similar Healthy Bites Grill products and services authorized for the Healthy Bites Grill Franchise using our trademarks such as "Hip Pockets," Buffalo Burgers, and apple and key lime pies through dissimilar channels of distribution including supermarkets, grocery stores, mail order, Internet and institutional sales such as schools, hospitals, workplace cafeterias, etc., and under any terms that Healthy Bites Grill deems appropriate within or outside the Protected Territory, without offering or providing you the right to participate. 23 If we acquire a Competitive Business and units of the Competitive Business encroach upon your Protected Territory, we will have 1 year from the date of acquisition of the Competitive Business to sell the encroaching units without being in default under this Agreement. SECTION 5.8 OWNERSHIP; INUREMENT SOLELY TO US You agree that: (a) you have no ownership or other rights in the Intellectual Property, except as expressly granted in this Agreement; and (b) we are the owner or authorized licensor of the Intellectual Property. You agree that all good will associated with the Healthy Bites Grill Franchise inures directly and exclusively to our benefit and is our sole and exclusive property except through profit received from the operation or possible permitted sale of your Healthy Bites Grill Franchise during the Term. You will not in any manner prohibit, or do anything that would restrict, us or any existing or future franchisee of a business either similar or dissimilar to the Franchise Business from using the names or the Intellectual Property or from filing any trade name, assumed name or fictitious name registration with respect to any business to be conducted outside the Protected Territory or any business within the Protected Territory that is permitted by this Agreement. If you secure in any jurisdiction any rights to any of the Intellectual Property (or any other Intellectual Property) not expressly granted under this Agreement, you will immediately notify us and immediately assign to us all of your right, title and interest to the Intellectual Property (or any other Intellectual Property). ARTICLE 6 - THE MANUALS AND OTHER CONFIDENTIAL INFORMATION SECTION 6.1 IN GENERAL To protect our reputation and good will and to maintain uniform standards of operation under the Intellectual Property, you will conduct your Healthy Bites Grill Franchise in accordance with the Manuals. The Manuals are deemed an integral part of this Agreement with the same effect as if fully stated in this Agreement. SECTION 6.2 CONFIDENTIAL USE (a) You will treat and maintain the Confidential Information as our confidential trade secrets. The Manuals will be kept in a secure area within the Premises. You will strictly limit access to the Confidential Information to your employees, to the extent they have a "need to know" in order to perform their jobs. You will report the theft, loss or destruction of the Manuals immediately to us. Upon the theft, loss or destruction of the Manuals, we will loan to you a replacement copy at a fee of $200 for each Manual. A partial loss or failure to update any Manual is considered a complete loss. (b) You agree that, during and after the Term, you, your owners and employees will: (i) Not use the Confidential Information in any other business or capacity, including any derivative or spin-off of the Healthy Bites Grill concept; 24 (ii) Maintain the absolute secrecy and confidentiality of the Confidential Information during and after the Term; (iii) Not make unauthorized copies of any portion of the Confidential Information disclosed or recorded in written or other tangible form; and (iv) Adopt and implement all procedures that we prescribe to prevent unauthorized use or disclosure of, or access to, the Confidential Information. (c) All persons whom you permit to have access to the Manuals or any other Confidential Information must first be required by you to sign our form of confidentiality agreement set forth in the Manuals. SECTION 6.3 PERIODIC REVISIONS We may change the contents of the Manuals. You will comply with each new or changed provision beginning on the 30th day (or any longer time as we specify) after our written notice. Revisions to the Manuals will be based on what we, in our sole discretion, deem is in the best interests of the System, our interest and the interest of our Franchisees, including to promote quality, enhance good will, increase efficiency, decrease administrative burdens, or improve profitability subject to the Capital Expenditure Limitation stated in Section 4.21. You agree that because complete and detailed uniformity under many varying conditions may not be possible or practical, we reserve the right, in our sole discretion and as we may deem in the best interests of all concerned in any specific instance, to vary standards for any franchisee due to the peculiarities of the particular site or circumstances, density of population, business potential, population of trade area, existing business practices or any condition that we deem important to the successful operation of that franchisee's Healthy Bites Grill Franchise. You are not entitled to require us to grant to you a similar variation under this Agreement. You will ensure that your copy of the Manuals contains all updates you receive from us. In any dispute as to the contents of the Manuals, the terms contained in our master copy of each of the Manuals we maintain at our home office is controlling. ARTICLE 7 - ADVERTISING Recognizing the value of advertising, and the importance of the standardization of advertising programs to the good will and public image of the System, the parties agree: SECTION 7.1 LOCAL ADVERTISING (a) You must spend during each month during the Term, beginning on the Opening Date, at least 3% of monthly Gross Revenues for Local Advertising. You must submit to us, not later than October 31 of each year, a local store marketing plan for the following year. We will approve, disapprove, or provide comments and suggestions to the marketing plan within 30 days of receipt. You will implement any changes to the proposed marketing plan requested by us. 25 (b) You must submit to us for our approval, all materials to be used for Local Advertising, unless they have been approved before or they consist only of materials we provide. All materials containing the Intellectual Property must include the applicable designation - service mark sm, trademark (TM), registered (R) or copyright (C), or any other designation we specify. If you have not received the written approval of materials submitted, the materials are deemed disapproved. We may require you to withdraw and/or discontinue the use of any promotional materials or advertising, even if previously approved, if in our judgment, the materials or advertising may injure or be harmful to the System. We must make this requirement in writing, and you have 5 days after receipt of notice to withdraw and discontinue use of the materials or advertising, unless otherwise agreed in writing. The submission of advertising to us for our approval does not affect your right to determine the prices you sell your products or services. (c) Subject to any legal restrictions, you must include a sign (supplied by us) in a conspicuous place within the Premises as well as on all menus, containing substantially the following statement: "Healthy Bites Grill Franchise Opportunities Available." All responses must be immediately referred to us at (800) 575-4144 or any other number we designate and include our corporate address. You have no authority to act for us in franchise sales. (d) You must maintain a listing or listings in The Real Yellow Pages of the telephone directories servicing the location of the Healthy Bites Grill Franchise under the "Restaurants" section, in the form and size we specify in the Manuals or otherwise in writing. SECTION 7.2 GRAND OPENING ADVERTISING PROGRAM We will implement a grand opening advertising and promotional program for your Healthy Bites Grill Franchise sometime during the first 60 days after the opening of your Healthy Bites Grill Franchise using the Grand Opening Advertising Fee that will contain our standard opening activities and publicity, and advice and guidance with regard to staffing, decoration, and operation of your Healthy Bites Grill Franchise during the grand opening period. SECTION 7.3 REGIONAL COOPERATIVE ADVERTISING You agree that we have the right, in our discretion, to establish a regional advertising cooperative in any ADI. You will immediately upon our request become a member of the Cooperative for the ADI where some or all of the Protected Territory is located. Your Healthy Bites Grill Franchise is not required to be a member of more than 1 Cooperative. The Cooperative will be governed in the manner required by us. The Cooperative has the right to require each of its members to make contributions to the Cooperative, not to exceed 2% of that member's monthly Gross Revenues. All contributions to the Cooperative are credited against your Local Advertising requirement under Subsection 7.1(a). The following provisions apply to each Cooperative: (a) The Cooperative will be organized and governed in a form and manner, and will begin operation on a date, approved in advance by us in writing; 26 (i) The Cooperative will be organized for the exclusive purpose of administering advertising programs and developing, subject to our approval, standardized promotional materials for use by the members in Local Advertising in the Cooperative's ADI; (ii) The Cooperative may adopt its own rules and procedures, but the rules or procedures must be approved by us and will not restrict nor expand your rights or obligations under this Agreement. Except as otherwise provided in this Agreement, and subject to our approval, any lawful action of the Cooperative at a meeting attended by 2/3s of the members, including assessments for Local Advertising, is binding upon you if approved by 2/3s of the members present, with each Healthy Bites Grill Franchise and Company Unit having 1 vote; however no franchisee (or controlled group of franchisees) has more than 25% of the vote in the Cooperative regardless of the number of Healthy Bites Grill Franchises you own; (iii) No advertising or promotional plans or materials may be used by the Cooperative or furnished to its members without our written approval. All plans and materials must be submitted to us in accordance with the procedure stated in Section 7.1; (iv) The Cooperative has the right to require its members to make a contribution to the Cooperative in any amount the Cooperative determines. This amount will be credited against your obligation for Local Advertising as provided by Section 7.1; but you are not required to contribute to the Cooperative in excess of 2% of your monthly Gross Revenues; (v) Each member will submit to the Cooperative, no later than the 10th day of each month, for the preceding calendar month, his or her contribution as provided in Subsection 7.3(a)(iv), together with all other statements or reports required by us or by the Cooperative with our written approval; (vi) If an impasse occurs owing to the inability or failure of the Cooperative members to resolve within 45 days any issue affecting the establishment or effective functioning of the Cooperative, the issue will, upon request of a member of the Cooperative, be submitted to the Independent Association of Healthy Bites Grill Franchisees (or us, if the association does not exist) for consideration and its resolution of the issue will be final and binding on all members of the Cooperative; and (vii) The Cooperative will render quarterly reports to us of its advertising expenditures. (b) We, in our sole discretion, may grant to any franchisee an exemption for any length of time from the requirement of membership in the Cooperative, upon written request of the franchisee stating reasons supporting the exemption. Our decision concerning the request for exemption is final. If an exemption is granted to a franchisee, that franchisee must expend on Local Advertising the full amount provided in Section 7.1. 27 SECTION 7.4 SPECIAL ADVERTISING EXPENDITURES If you fail to meet your requirements for Local Advertising during any period specified in this Agreement, upon our request and in addition to our rights and remedies for failure of you to make the proper expenditures, you will contribute the amount that you failed to spend on Local Advertising directly to the Marketing Fund. SECTION 7.5 MARKETING FUND (a) We have created a special fund called the "Healthy Bites Grill Marketing Fund" (the "Marketing Fund"), into which the Advertising Contributions are deposited for the general benefit of all Franchise Units and Company Units who contribute to the Marketing Fund. (b) We administer the Marketing Fund. The Marketing Fund is maintained and operated by us and used to meet the costs of conducting regional and/or national advertising and promotional activities (including the cost of advertising campaigns, test marketing, marketing surveys, public relations activities and marketing materials) we deem beneficial to the System. We are authorized to charge the Marketing Fund fees at reasonable market rates for advertising, marketing or promotional services actually provided by us, in lieu of engaging third party agencies to provide these services. We will use none of the funds to offer to sell, or sell, Healthy Bites Grill Franchises to prospective franchisees. (c) All expenditures are at our sole discretion. We may spend in any calendar year more or less than the total Advertising Contributions to the Marketing Fund in that year. We may borrow from us or other lenders on behalf of the Marketing Fund to cover deficits of the Marketing Fund or cause the Marketing Fund to invest any surplus for future use by the Marketing Fund. (d) You authorize us to act as your sole agent to enter into contracts with parties offering promotion, discount or other programs whereby you would receive rebates or marketing allowances ("Rebates") from handling items offered for sale by the parties. All Rebates will be paid to us and we will contribute them to the Marketing Fund. By signing this Agreement, you assign all of your right, title and interest in all Rebates to us, and authorize us to furnish any proof of purchase evidence as may be required in accordance with the contracts. All Rebates received by us from our Company-Units will also be contributed to the Marketing Fund. (e) We will retain our independent certified public accountants to prepare an annual audit of the Marketing Fund, at the expense of the Marketing Fund, and send a copy of the audit to you and all other Franchisees within 90 days after the end of each fiscal year. SECTION 7.6 CONTENT AND CONCEPTS (a) We retain sole discretion over all advertising, marketing and public relations programs and activities financed by the Marketing Fund, including the creative concepts, materials and endorsements used and the geographic market, media placement and allocation. You agree that the Marketing 28 Fund may be used to pay the costs of preparing and producing associated materials and programs as we determine, including video, audio and written advertising materials employing advertising agencies; sponsorship of sporting, charitable or similar events, administering regional and multi-regional advertising programs including purchasing direct mail and other media advertising, and employing advertising agencies to assist with marketing efforts; and supporting public relations, market research and other advertising, promotional and marketing activities. (b) You acknowledge that the Advertising Contributions are intended to maximize general public recognition of and the acceptance of the Intellectual Property for the benefit of the System as a whole. The MFC undertakes no obligation, in administering the Marketing Fund, to make expenditures for you that are equivalent or proportionate to your contribution, or to insure that any particular franchisee or Company Unit benefits directly or pro rata from advertising or promotion conducted with the Advertising Contributions. SECTION 7.7 TERMINATION OF EXPENDITURES We maintain the right to terminate the collection and disbursement of the Advertising Contributions and the Marketing Fund. Upon termination, we will disburse the remaining funds for the purposes authorized under this Agreement. SECTION 7.8 ADVERTISING CONTRIBUTIONS BY US Company Units are required to contribute to the Marketing Fund and any Cooperative on the same basis, as you are required to contribute. ARTICLE 8 - ACCOUNTING AND RECORDS SECTION 8.1 RECORDS You will maintain complete and accurate records for the operations of your Healthy Bites Grill Franchise. Records must be segregated from all other records that do not concern your Healthy Bites Grill Franchise. You must preserve the records for at least 6 years from the dates of their preparation (including after the termination, transfer or expiration of this Agreement). SECTION 8.2 REPORTS AND STATEMENTS; CONFIDENTIALITY (a) WEEKLY REPORTS. You will submit to us by the 5th day of each succeeding week during the Term, in the form that we require, accurate records reflecting all Gross Revenues of the previous week and all other information we require. If you must collect and remit sales taxes, you must also supply to us copies of your sales tax returns. (b) ANNUAL FINANCIAL STATEMENTS. You must submit within 90 days of the end of your elected fiscal year: a balance sheet as of your fiscal year end, and annual statements of operations, owners' equity, and cash flows. These statements must be prepared in accordance with Generally Accepted Accounting Principles, but footnotes are not required. These statements must be accompanied by an Accountant's Compilation Report, prepared in accordance with Statements on 29 Standards for Accounting and Review services, and signed by a CPA acceptable to us. In addition, the financial statements must be signed by you or by your treasurer or chief financial officer attesting that the financial statements are true and correct and fairly present your financial position at and for the times indicated. You will also supply to us copies of your federal and state income tax returns at the time these returns are filed with the appropriate tax authorities. The financial statements and/or other periodic reports described above must be prepared to segregate the income and related expenses of your Healthy Bites Grill Franchise from those of any other business that you may conduct. (c) CONFIDENTIALITY. We agree to maintain the confidentiality of all financial information we obtain about your operations, and will not disclose this financial information to any third party who is not bound to maintain the confidentiality of the information; provided however, that: (i) we may use the information in preparing any earnings claims or other information required or permitted by federal or state franchise law; and (ii) we may prepare a composite list of financial performances by our franchisees for dissemination among the franchisees, identifying your Gross Revenues and advertising expenditures. This composite list will not include your identity nor will the information be presented in such a manner that your identity can be easily ascertained. SECTION 8.3 REVIEW AND AUDIT We and our representatives have the right at all reasonable times to examine and copy, at our expense, your records and inspect all cash control devices and systems and conduct a physical inventory. We have the right to access your P.O.S. System to determine, among other things, sales activity and Gross Revenues. We also have the right, at any time, to have an independent audit made of your records but no more frequently than 2 times a year, provided you are not in default. If an inspection reveals that any financial information reported to us (including Gross Revenues or payments owed to us) has been understated in any report to us, you must immediately pay to us, upon demand, the amount understated in addition to interest at the maximum rate permitted by law beginning from the time the required payment was due. If any inspection discloses an intentional understatement of 2% or more of Gross Revenues you must, in addition, reimburse us for the expenses for the inspection (including reasonable accounting and attorneys' fees and costs). In addition, we reserve the right to require that all your future year-end financial statements be audited by an independent certified public accountant reasonably acceptable to us at your expense. These remedies are in addition to any other remedies we have under this Agreement or under applicable law. If the audit discloses an overpayment in any amount you paid to us, we will promptly pay you the amount of the overpayment or offset the overpayment against any amounts owed to us. SECTION 8.4 YOUR NAME, ADDRESS AND TELEPHONE NUMBER Under federal and state franchise laws and other applicable laws, we are required to disclose your name, address and telephone number (home address and telephone number if you are no longer a franchisee) and you agree to the disclosure of your name, address and telephone number. You must notify us of any change in your name, address and telephone number within 10 days of the change. 30 You release us and our officers, directors, stockholders, agents and legal successors and assigns from all causes of action, suits, debts, covenants, agreements, damages, judgments, claims and demands, in law or in equity, that you ever had, now have, or that you later may have, from our disclosure of your name, address and telephone number. ARTICLE 9 - INSURANCE SECTION 9.1 TYPES AND AMOUNTS OF COVERAGE You must obtain and maintain the following insurance, at your expense, as we require, in addition to any other insurance that may be required by applicable law, your landlord, lender or otherwise. All policies must be written by an insurance company reasonably satisfactory to us with a Best rating of "A" or better and include the types and amounts of insurance as stated in the Manuals. We may periodically adjust the amounts of coverage required under the insurance policies and require different or additional kinds of insurance at any time, including excess liability insurance, to reflect inflation, identification of new risks, changes in law or standards of liability, higher damage awards, or other relevant changes in circumstances, if the changes are required throughout the System including any Company Units. SECTION 9.2 EVIDENCE OF INSURANCE At least: (i) 30 days before the date any construction is begun; (ii) 10 days from the Agreement Date if the Premises is constructed and presently owned or leased by you; or (iii) 10 days after a lease of the Premises is signed and you take occupancy, whichever is applicable, you must furnish to us a certificate of insurance issued by an approved insurance company showing compliance with these requirements and a paid receipt showing the policy number. The certificate of insurance must include a statement by the insurer that the policy will not be canceled, subject to nonrenewal or materially altered without at least 30 days' written notice to us. Copies of all insurance policies and proof of payment will be submitted promptly to us upon our request. You will send to us current certificates of insurance and copies of all insurance policies on an annual basis. SECTION 9.3 REQUIREMENTS FOR CONSTRUCTION AND RENOVATION For any construction, renovation, refurbishment, or remodeling of the Premises, you must require the general contractor to maintain with an approved insurer commercial general liability insurance (with comprehensive automobile liability coverage for both owned and non-owned vehicles, builder's risk, product liability, and independent contractor's coverage) for at least $1,000,000, with you and us as additional named insureds, as their interests may appear, together with workers' compensation and employer's liability insurance required by law. SECTION 9.4 OUR RIGHT TO PARTICIPATE IN CLAIMS PROCEDURE Our insurer or we have the right to participate in discussions with your insurance company or any claimant (with your insurance company) regarding any claim. You agree to adopt our reasonable recommendations to your insurance carrier regarding the settlement of any claims. 31 SECTION 9.5 WAIVER OF SUBROGATION The parties agree that, for any loss that is covered by insurance then being carried by them, their respective insurance companies have no right of subrogation against the other. SECTION 9.6 EFFECT OF OUR INSURANCE Your obligation to maintain the policies in the amounts required is not limited by reason of any insurance we maintain, nor will our performance of your obligations relieve you of liability under the indemnity provisions in this Agreement. SECTION 9.7 FAILURE TO MAINTAIN INSURANCE If either party fails to maintain the insurance required by this Agreement, the other party has the right and authority (without any obligation to do so) immediately to procure the insurance and to charge the cost of the insurance to the party obligated to maintain the insurance, plus interest at the maximum rate permitted by law, these charges, together with a reasonable fee for the party's expenses in so acting, the other party agrees to pay immediately upon notice. SECTION 9.8 GROUP INSURANCE If we make available to you insurance coverage through group or master policies we arrange including property and casualty, workers' compensation, liability and health, life and disability insurance, you may participate, at your expense, in this group insurance program. ARTICLE 10 - INDEPENDENT ASSOCIATION OF HEALTHY BITES GRILL FRANCHISEES SECTION 10.1 YOUR RIGHT TO JOIN THE INDEPENDENT ASSOCIATION OF HEALTHY BITES GRILL FRANCHISEES We recognize your right and the other franchisees' right to freely associate. You and the other franchisees have the right to create an independent franchise association to be known as the "Independent Association of Healthy Bites Grill Franchisees" (the "Franchisee Association"). The decision to join the Franchisee Association is solely your decision. SECTION 10.2 OUR DEALINGS WITH THE FRANCHISEE ASSOCIATION. Once at least 10 franchisees, representing at least 51% of the total franchisees within the System, are members of the Franchisee Association, we will recognize the Franchisee Association as the official body representing the franchisees as a group. Any material changes to the renewal form of this Agreement must be collectively negotiated with the Franchisee Association with both parties agreeing to negotiate in good faith. 32 ARTICLE 11 - TRANSFER OF INTEREST SECTION 11.1 TRANSFER BY US We have the right to assign this Agreement to any person without your consent provided the transfer is part of a merger or sale of the entire System and the transferee has sufficient business experience, aptitude and financial resources to competently assume our obligations under this Agreement. SECTION 11.2 TRANSFER BY YOU (a) PERSONAL RIGHTS. You agree that, unless otherwise expressly permitted by this ARTICLE, you will not sell, assign, transfer, convey or give voluntarily, involuntarily, directly or indirectly, by operation of law or otherwise (collectively "transfer") any direct or indirect interest in this Agreement, the Franchisee, or a major portion of the Business Assets without our written consent. Any sale of all or a substantial portion of the assets must include an assignment and assumption of this Agreement. However, our written consent is not required for: (i) a transfer of less than a 5% interest in a publicly held corporation; or (ii) a transfer of all or any part of any interest in you to one of your other original shareholders or partners. A transfer of 50% or more of the voting or ownership interests in your corporation, partnership or limited liability company, individually or in the aggregate, directly or indirectly, is, for all purposes of this Agreement, considered a transfer of an interest in this Agreement by you. Any purported transfer by you, by operation of law or otherwise in violation of this Agreement, is void and is an Event of Default on your part. (b) TRANSFER TO YOUR CORPORATION. This Agreement may be assigned to a corporation where you own a majority of the issued and outstanding capital stock if: (i) You or a Manager approved by us actively manages the corporation and continues to devote his or her best efforts and full and exclusive time to the day-to-day operation of your Healthy Bites Grill Franchise. You must advise us of the name of the Manager and the Manager must meet our standards including training; (ii) The corporation cannot use the trade name "Healthy Bites Grill" in any derivative or form in the corporate name; (iii) An authorized officer of the corporation signs a document in a form we approve, agreeing to become a party bound by all the provisions of this Agreement; and (iv) All stock certificates representing shares bear a legend that they are subject to this Agreement. You understand that, if you transfer this Agreement to your corporation, you remain personally liable for all the monetary and non-monetary obligations under this Agreement. 33 (c) NO SUBFRANCHISING RIGHTS. You have no right to grant a subfranchise. (d) NO ENCUMBRANCE OF FRANCHISE RIGHT AND CONTROLLING INTEREST. While you may encumber the assets comprising your Franchise Business subject to Section 3.6, you may not encumber your interest in this Agreement nor encumber a controlling interest in a business entity if this Agreement is assigned to a business entity. You agree that your rights under this Agreement and any voting or ownership interest of more than 50% in you (or any Franchise Owner) may not be pledged, mortgaged, hypothecated, given as security for an obligation or in any manner encumbered. Any attempted encumbrance is void and is an Event of Default on your part. (e) "FOR SALE" RESTRICTIONS. You will not permit to be placed upon the Premises a "Business For Sale" or "For Sale" sign, or any sign of a similar nature or purpose, nor in any manner use the Intellectual Property to advertise the sale of your Healthy Bites Grill Franchise or the sale or lease of the Premises. These prohibitions apply to any activities under a listing agreement that you may enter into with a real estate or business broker. (f) PERMITTED TRANSFER. We will consent to a transfer of this Agreement if the following requirements are satisfied or waived by us in our sole discretion: (i) We have not exercised our right of first purchase as provided in Section 11.5; (ii) You are not in default of any term of this Agreement or any other agreement between you and us or our Affiliates; (iii) The transferee interviews at our principal office without expense to us and demonstrates to our reasonable satisfaction that the transferee has the business and personal skills, reputation and financial capacity we require; (iv) The transferee satisfactorily completes our application procedures for new franchisees; (v) The transferee demonstrates to our reasonable satisfaction that he or she has properly assumed your obligations under this Agreement and will be able to comply with all of his or her obligations to the Healthy Bites Grill Franchise, including an assumption of the lease, if the Premises is leased. You will remain liable for all obligations to us under this Agreement before the effective date of the transfer and will sign all instruments we reasonably request to evidence these liabilities; (vi) At the transferee's expense, the transferee or transferee's Manager completes Initial Training then in effect for new franchisees upon all terms as we reasonably require; and (vii) You will reimburse us for our direct out-of-pocket costs in approving the transfer and in training the transferee. If the transferee is a wholly owned corporation, spouse or child of the transferor, or another Franchisee within the System, no transfer fee will be charged. 34 No disapproval of the transferee for failure to satisfy the transfer conditions described in this Subsection, or of any other condition to transfer stated in this Agreement that causes any liability of us to the transferee. Our consent to a transfer is not a waiver of any claims we may have against you, nor is it a waiver of our right to demand the transferee's exact compliance with this Agreement. No transfer (even if we approve) relieves you of liability for your conduct before the transfer, including conduct in breach of this Agreement. SECTION 11.3 TRANSFER UPON DIVORCE OR PARTNERSHIP DISSOLUTION If this Agreement is in the name of two persons who are husband and wife or two or more persons who are partners as franchisees, this Section describes the policies to be applied upon divorce or dissolution of the partnership. During the period when a divorce or partnership dissolution action is pending, you must adopt one of the following methods of operation: (a) If one of the parties is willing to relinquish his or her right and interest in the Franchise, thereby leaving his or her spouse or partner(s) to carry on the Franchise Business, he or she may do so by assigning the interest to the spouse or to his or her partner(s) provided the remaining spouse or partner has successfully completed Initial Training. (b) If the parties to a divorce or dissolution action agree that, despite their difficulties, they can continue to operate the Franchise Business jointly on a "business-as-usual" basis during the proceeding, they may do so. (c) If the parties in a divorce action or in a partnership dissolution are not agreeable to operate under alternates (a) or (b) then they must make arrangements to have their Franchise Business operated by a third party as a Manager until the divorce or dissolution has been completed. The Manager must be approved by us and have satisfactorily completed Initial Training. (d) Divorcing parties may, after a final order or judgment, continue to operate their Franchise Business in the form of a partnership or other business entity even though they are no longer husband and wife. In such a case, however, they must enter a formal agreement, which defines their respective rights and obligations, file a signed copy with us, assign this Agreement to the new entity, and comply with all other requirements for establishing the Franchise Business as a partnership or other business entity. SECTION 11.4 TRANSFER UPON DEATH OR DISABILITY (a) If any Franchise Owner becomes disabled from any cause and is unable to perform his or her obligations under this Agreement for a continuous period in excess of 3 consecutive months, or on the death of the Franchise 35 Owner, you (or your legal representative) will within 30 days after the 3 months of disability or death, provide and maintain a replacement satisfactory to us to perform the obligations. If a replacement is not provided or maintained as required, we may hire and maintain your replacement. You will compensate the replacement for his or her services at the rate we establish in our reasonable discretion. For all purposes of this Agreement, any period of disability that is interrupted by a return to active work and proper performance of duties under this Agreement for 14 days or more is deemed continuous. (b) If: (i) any individual who holds a 50% or greater voting or ownership interest in the Franchisee (or in any Franchise Owner); or (ii) you die during the Term, your interests in the Franchisee (or in any Franchise Owner) or in this Agreement are required to be transferred within 12 months of the death to an approved transferee in accordance with the terms of this ARTICLE. SECTION 11.5 OUR RIGHT OF FIRST PURCHASE (a) If during the Term you or any person who owns at least a 50% ownership or voting interest in a corporation or other entity that owns your Healthy Bites Grill Franchise (or in any entity with an ownership interest in a corporation or other entity that owns your Healthy Bites Grill Franchise) desire to sell your Healthy Bites Grill Franchise, (whether as a sale of assets or a sale of stock or other equity interests), you must first approach us with a specific price and terms and offer us the opportunity to purchase your Healthy Bites Grill Franchise. We have 30 days to accept or reject your offer at the designated price. If we reject your offer and you and we cannot otherwise reach agreement within the 30-day period, you then have the right to list the Healthy Bites Grill Franchise and offer it for sale to third parties (either in or outside the System) at or above the designated price and on terms no less favorable than offered to us, for a period of 120 days, with a closing to take place within 60 days after the date of the purchase agreement. If a third party purchases your Healthy Bites Grill Franchise at a price or terms equal or more favorable (higher) to you than offered to and rejected by us; the sale can proceed, provided you and the third party comply with the terms of Subsection 11.2(f). (b) If you decide within the 120-day period to offer your Healthy Bites Grill Franchise or accept an offer from a third party (the "Offeror") at a lower price and/or terms less favorable to you (the "Offer") than offered to and rejected by us, you must then give us a right of first refusal. (c) If we give notice of acceptance of the Offer, then you will sell the Healthy Bites Grill Franchise to us and we will purchase the Healthy Bites Grill Franchise for the consideration and upon the terms stated in the Offer. Our creditworthiness is deemed at least equal to the creditworthiness of any proposed purchaser. If we are, or our Affiliate is, a public company at that time having shares traded on a national securities exchange, the Offeror must accept a quantity of stock at our then-current value or our, or our Affiliate's, registered shares in lieu of cash or Unique Consideration. (d) If an independent third party's written Offer (and the Offeror's corresponding offer to us) provides for the purchaser's payment of a Unique Consideration that is of a nature that cannot reasonably be duplicated by us, we may, in our notice of exercise, in lieu of the Unique Consideration, substitute 36 cash or stock (if a public company with registered shares) consideration determined by mutual agreement of you and us within 45 days after the Offer is made or, failing agreement, by an independent appraiser selected by us. (e) If the proposed sale includes assets of the Offeror that are not part of the operation of the Healthy Bites Grill Franchise, we may, at our option, elect to purchase only the assets that are part of the operation of the Healthy Bites Grill Franchise and an equitable purchase price will be determined in our reasonable discretion and allocated to each asset included in the sale. (f) We will purchase your Healthy Bites Grill Franchise subject to all customary warranties given by a seller of the assets of a business or voting stock of a corporation, as applicable, including warranties as to ownership, condition and title to the shares and/or assets, liens and encumbrances on the shares and/or assets, validity of contracts and liabilities of the corporation whose stock is purchased and affecting the assets, contingent or otherwise. (g) Unless otherwise agreed by you and us, the closing of the purchase of your Healthy Bites Grill Franchise will be held at our then principal office or other location designated by us, no later than the 60th day after the Offer is delivered to us. The closing of any purchase where a cash or stock consideration is determined in accordance with Subsection 11.5(d) will be held on the 15th day after the cash or stock consideration is finally determined. At any closing, the Offeror must deliver to us an assignment and other documents reasonably requested by us representing a transfer of ownership of your Healthy Bites Grill Franchise free and clear of all liens, claims, pledges, options, restrictions, charges and encumbrances, in proper form for transfer and with evidence of payment by the Offeror of all applicable transfer taxes. We will simultaneously make payment of any cash consideration for your Healthy Bites Grill Franchise by a cashier's check drawn on a bank or thrift doing business in the county of our principal place of business or payment by the issuance of our or our Affiliate's registered shares, after set off against the amount due to the Offeror for all amounts you owe us, if any. The remaining terms of the purchase and sale will be stated in the Offer. (h) If we do not accept the Offer, you are free, for 90 days after we have elected not to exercise our option, to sell your Healthy Bites Grill Franchise to the prospective purchaser for the consideration and upon the terms stated in the prospective purchaser written Offer, subject to full compliance with all terms of transfer required under this Agreement, including those in Section 11.2. Before any sale of the shares to a prospective purchaser, there must be delivered by the prospective purchaser an acknowledgment that the shares purchased by the prospective purchaser is subject to the terms of this Agreement and that the prospective purchaser agrees to be bound to the terms of this Section on transferring the shares, in the same manner as the Offeror. If you do not sell your Healthy Bites Grill Franchise within the 90-day period, then any transfer by you of your Healthy Bites Grill Franchise is again subject to the restrictions stated in this Agreement. (i) If a proposed transferee is to a corporation wholly owned by you or to your spouse or child, we will not have any right of first purchase. 37 (j) All transferees are subject to all of the restrictions on transfer of ownership imposed on you under this Agreement. ARTICLE 12 - DEFAULT AND TERMINATION SECTION 12.1 TERMINATION BY YOU If you have substantially complied with this Agreement and we materially breach this Agreement, you have the right to terminate this Agreement if we do not cure the breach within 30 days after we receive a written notice of default from you. However, if the breach cannot reasonably be cured within 30 days, you have the right to terminate this Agreement if, after our receipt of a written notice of default from you, we do not within 30 days undertake and continue efforts to cure the breach until completion. You may also terminate this Agreement upon the mutual written agreement with us. Any termination of this Agreement by you other than as stated above, is a wrongful termination by you. SECTION 12.2 TERMINATION BY US - WITHOUT NOTICE (a) Subject to applicable law, this Agreement automatically terminates without notice to you or your having an opportunity to cure on the date of the occurrence of any of the following Events of Default: if you damage the Healthy Bites Grill System through violation of federal, state or local environmental laws; if you make a general assignment for the benefit of creditors; a petition in bankruptcy is filed by you or a petition is filed against or consented to by you and the petition is not dismissed within 45 days; you are adjudicated as bankrupt; a bill in equity or other proceeding for the appointment of your receiver or other custodian for your business or assets is filed and consented to you; a receiver or other custodian (permanent or temporary) of your business or assets is appointed by any court of competent jurisdiction; proceedings for a composition with creditors under federal or any state law is begun by or against you; a final judgment in excess of $25,000 remains unsatisfied or of record for 30 days or longer (unless a supersedeas bond is filed); execution is levied against your operation or property, or suit to foreclose any lien or mortgage against the Premises or your assets is begun against you and not dismissed within 45 days; or a substantial portion of your real or personal property used in your Healthy Bites Grill Franchise is sold after levy by any sheriff, marshal or constable. (b) You will notify us within 3 days of the occurrence of any of the events described in Subsection 12.2(a). SECTION 12.3 TERMINATION BY US - AFTER NOTICE We may, at our option, terminate all rights granted to you under this Agreement, without affording you any opportunity to cure the default, effective immediately upon notice to you, upon the occurrence of any of the following Events of Default: (a) If you cease to do business at the Premises for more than 14 days in any calendar year or for more than 7 consecutive days, or lose the right to possession of the Premises after the expiration of all redemption periods and 38 have not satisfied the provisions of Section 1.4, if applicable, or otherwise forfeit the right to do or transact business in the jurisdiction where your Healthy Bites Grill Franchise is located; (b) If a serious or imminent threat or danger to public health or safety results from the construction, maintenance or operation of your Healthy Bites Grill Franchise and the threat or danger remains uncorrected for 5 days after your receipt of written notice from a governmental authority or us. If a cure cannot be reasonably completed in this time, then all reasonable steps to cure must begin within this time, but a cure must be completed promptly within 30 days after receipt of written notice; (c) If you fail or refuse to comply with any mandatory specification, standard or operating procedure required by us in this Agreement, in the Manuals or otherwise in writing, on the cleanliness or sanitation of your Healthy Bites Grill Franchise or violates any health, safety, or sanitation law, ordinance, or regulation and does not correct the failure or refusal within 3 days after written notice from us or a governmental authority. If a cure cannot be reasonably completed in this time, then all reasonable steps to cure must begin within this time, but a cure must be completed within 30 days after receipt of written notice; (d) If you, or your officer, director, owner or managerial employee are convicted of a felony, a crime of moral turpitude or any other crime or offense that we reasonably believe is likely to have a material adverse effect on the System, the Intellectual Property, the good will associated with the Intellectual Property, or our interest in any of the Intellectual Property, unless you immediately and legally terminate the individual as your officer, director, owner and employee; (e) If you deny us the right to inspect your Healthy Bites Grill Franchise or to audit your records; (f) If you engage in conduct that is deleterious to or reflects unfavorably on you or the System in that the conduct exhibits a reckless disregard for the physical or mental well being of employees, customers, our representatives or the public at large, including battery, assault, sexual harassment or discrimination, racial harassment or discrimination, alcohol or drug abuse or other forms of threatening, outrageous or unacceptable behavior as determined in our sole discretion; (g) If you, contrary to this Agreement, purport to encumber or transfer any rights or obligations under this Agreement (including transfers of any interest in a corporation or other entity which owns your Healthy Bites Grill Franchise), without our written consent; (h) If any breach occurs under Sections 6.2 or 14.1 concerning confidentiality and non-competition covenants; (i) If you knowingly maintain false records, or knowingly submit any false reports to us; or 39 (j) If you misuse or make any unauthorized use of the Intellectual Property or otherwise materially impairs the good will associated with the Intellectual Property or our rights in the Intellectual Property. SECTION 12.4 TERMINATION BY US - AFTER NOTICE AND RIGHT TO CURE Except as otherwise provided above, you have 30 days after delivery from us of a written Notice of Default specifying the nature of the default to remedy any default and provide evidence of cure satisfactory to us. If any default is not cured within that time, or any longer time as applicable law may require, an Event of Default has occurred by you and all your rights under this Agreement terminate without additional notice to you effective immediately upon the expiration of the 30 days or any longer time as applicable law may require. In addition to the Events of Default specified in Sections 12.2 and 12.3, an Event of Default by you occurs if you fail to comply with any of the requirements imposed by this Agreement, as it may be revised or supplemented by the Manuals, or to carry out this Agreement in good faith. You have the burden of proving that you properly and timely cured any default, to the extent a cure is permitted under this Agreement. ARTICLE 13 - YOUR OBLIGATIONS UPON TERMINATION DUE TO YOUR DEFAULT OR ON NONRENEWAL Upon the termination of this Agreement due to your default or upon expiration and nonrenewal of the Agreement, the Sections of this ARTICLE apply to the rights and obligations of the parties. SECTION 13.1 CEASE OPERATIONS You will immediately cease to operate your Healthy Bites Grill Franchise. You will not, directly or indirectly, use any of the Intellectual Property nor represent yourself as a present or former franchisee of us or in any other way affiliate yourself with the System. You will immediately cease using all stationery, signage and other materials containing the Intellectual Property. You will also immediately cease using all telephone numbers for the Healthy Bites Grill Franchise used at any time before termination or expiration, and empower us to take whatever actions are necessary to comply with this Section. You must cease using the URL and Internet addresses used for your business and immediately cause the URL and Internet addresses to be transferred to us. SECTION 13.2 PAYMENT OF OUTSTANDING AMOUNTS We may retain all fees paid under this Agreement except for refunds expressly required in this Agreement. In addition, within 10 days after the effective date of the termination or any later dates as we determine that amounts are due to us, you must pay to us all Royalty Fees, Advertising Contributions, amounts owed for products or services you purchased from us or our Affiliates, and all other amounts owed to us, our Affiliates and your other creditors that are then unpaid. 40 SECTION 13.3 DISCONTINUANCE OF USE OF TRADE NAME You will cancel any fictitious, trade or assumed name registration that contains our trademark, trade name or service mark or colorable imitation of our trademark, trade name or service mark. You will furnish us with evidence of compliance with this obligation to cancel the registration within 30 days after termination or expiration of this Agreement. If you fail to cancel, you appoint us as your attorney-in-fact to do so. SECTION 13.4 OUR OPTION TO PURCHASE YOUR HEALTHY BITES GRILL FRANCHISE (a) We have the option, exercisable by giving written notice within 30 days from the date of termination, to purchase from you all the assets used in your Healthy Bites Grill Franchise. As used in this Section, "assets" means leasehold improvements, equipment, vehicles, furnishings, fixtures, signs, inventory (non-perishable products, materials and supplies) and the lease or sublease for the Premises. We have the unrestricted right to assign this option to purchase. We or our assignee are entitled to all customary warranties given by a seller of a business, including: (i) ownership, condition and title to the assets; (ii) the absence of liens and encumbrances on the assets; and (iii) validity of contracts and liabilities, inuring to us or affecting the assets, contingent or otherwise. The purchase price for the assets of your Healthy Bites Grill Franchise is their fair market value, determined as of the effective date of purchase in a manner consistent with reasonable depreciation of your leasehold improvements and the equipment, vehicles, furnishings, fixtures, signs and inventory of your Healthy Bites Grill Franchise. The purchase price will take into account the termination of the Healthy Bites Grill Franchise granted under this Agreement and will not contain any factor or increment for any trademark, service mark or other commercial symbol used in the operation of your Healthy Bites Grill Franchise. (b) If the parties cannot agree on the fair market value of the assets within 30 days after your receipt of our notice exercising our option, the fair market value will be determined by an independent appraiser the parties selected. If they are unable to agree on an independent appraiser within 10 days after expiration of the 30-day period, the parties will each select one independent appraiser, who will select a third independent appraiser (the "Third Appraiser"), and the fair market value will be the value determined by the Third Appraiser. If either party fails to select an appraiser and give notice to the other of the identity of the appraiser within the 10-day period, the appraiser selected by the other party will select the Third Appraiser. The Third Appraiser will be given full access to your Healthy Bites Grill Franchise, the Premises and your records during customary business hours to conduct the appraisal and must value the leasehold improvements, equipment, furnishings, fixtures, signs and inventory in accordance with the standards of this Section. The Third Appraiser's costs will be paid equally by the parties. (c) The purchase price will be paid in cash equivalent, or our marketable securities or the marketable securities of an Affiliate of equivalent value at the closing of the purchase, which will take place no later than 90 days after your receipt of notice of exercise of the option to purchase. At the closing, you will deliver instruments transferring to us or our assignee: (i) good and merchantable title to the assets purchased, free and clear of all liens and encumbrances (other than liens and security interests acceptable to us or 41 our assignee), with all your sales and other transfer taxes paid; (ii) all licenses and permits of your Healthy Bites Grill Franchise that may be assigned or transferred; and (iii) the lease or sublease for the Premises. If you cannot deliver clear title to all of the purchased assets, or if there are other unresolved issues, the closing of the sale will be accomplished through an escrow. The parties will comply with all applicable legal requirements, including the bulk sales provisions of the Uniform Commercial Code of the state where your Healthy Bites Grill Franchise is located, if any, and the bulk sales provisions of any applicable tax laws and regulations. You will, before or simultaneously with the closing of the purchase, pay all tax liabilities incurred in the operation of your Healthy Bites Grill Franchise. We have the right to set off against and reduce the purchase price by all amounts you owe to us, and the amount of any encumbrances or liens against the assets or any obligations we assume. (d) If our assignee or we exercise the option to purchase, pending the closing of the purchase, we have the right to appoint a manager to maintain the operation of your Healthy Bites Grill Franchise under Section 2.14. Alternatively, we may require you to close your Healthy Bites Grill Franchise during this time period without removing any assets. You will maintain in force all insurance policies required in this Agreement until the date of closing. If the Premises is leased, we agree to use reasonable efforts to effect a termination of the existing lease for the Premises and enter into a new lease on reasonable terms with the landlord. If we are unable to enter into a new lease and your rights under the existing lease are assigned to us or we sublease the Premises from you, we indemnify you from any ongoing liability under the lease that occurs after the date we assume possession of the Premises. If you own the Premises, upon purchase of the assets, you, at your option, may enter into a new lease with us under a standard lease on terms comparable to those for similar commercial properties in the area that are then being leased, for a term of at least 10 years and for a rental equal to the fair market rental value of the Premises. If the parties cannot agree on the fair market rental value of the Premises, then the rental value will be determined by the Appraiser (selected in the manner described above). SECTION 13.5 DISTINGUISHING OPERATIONS (a) If we do not exercise our option under Section 13.4 and you desire to remain in possession of the Premises and operate a noncompetitive business, you must make all modifications or alterations to the Premises immediately upon termination of this Agreement as necessary to distinguish the appearance of the Premises from that of other Healthy Bites Grill Franchisees operating under the System. You will make all specific additional changes to the Premises as we reasonably request for that purpose including a change of use of the Premises. You agree to refrain from taking any direct or indirect action to reduce the good will of your customers or potential customers toward us, our franchisees or any other aspect of the System. (b) You must remove immediately all identifying architectural superstructure and signage on or about the Premises bearing the name or logos of Healthy Bites Grill (or any name or logo similar to Healthy Bites Grill), in the manner we specify. You will hold all property belonging to us for delivery to us, at our expense, upon request. Any signage that you are unable to remove within 1 Business Day of the termination of this Agreement must be completely covered by you until the time of its removal. If you fail or refuse to comply 42 with this obligation, we have the right to enter upon the Premises, without being guilty of trespass or any other tort for the purpose of removing the signage and storing it at another location, at a reasonable expense (for signage not owned by us) payable by you on demand. (c) Until all modifications and alterations required by this Section are completed, you must: (i) maintain a conspicuous sign at the Premises in a form specified by us stating that your business is no longer associated with our System; and (ii) advise all customers or prospective customers telephoning your business that the business is no longer associated with our System. (d) If you fail or refuse to comply with the requirements of this Section, we have the right to enter upon the Premises for the purpose of making or causing to be made, all changes as may be required, at a reasonable expense (this expense you must pay upon demand) and at your sole risk and expense, without responsibility for any actual or consequential damages to your property or others, and without liability for trespass or other tort or criminal act. You agree that your failure to make these alterations will cause irreparable injury to us. SECTION 13.6 UNFAIR COMPETITION You agree, if you continue to operate or later begin to operate any other business, not to use any reproduction or colorable imitation of the Intellectual Property, Trade Dress, methods of operation or undertake any other conduct either in any other business or the promotion of any other business, that is likely to cause confusion, mistake or deception, or that is likely to dilute our rights in and to the Intellectual Property. In addition, you agree not to utilize any designation of origin or description or representation that falsely suggests or represents an association or connection with us, or any of our Affiliates. This Section does not relieve, directly or indirectly, your obligations under ARTICLE 14. SECTION 13.7 RETURN OF MATERIALS You will immediately deliver to us all tangible Intellectual Property in your possession or control, and all copies and any other forms of reproductions of these materials. You agree that all these materials are our exclusive property. SECTION 13.8 OUR PURCHASE RIGHTS OF ITEMS BEARING INTELLECTUAL PROPERTY Even if we do not exercise our option under Section 13.4, we have the option (but not the obligation) to exercise by notice of intent to do so within 30 days after termination to purchase any items bearing the Intellectual Property owned by you including signs, advertising materials, supplies, inventory or other items at a price equal to the lesser of your cost or fair market value. If the parties cannot agree on fair market value within a reasonable time, we will designate an independent appraiser whose cost will be paid equally by the parties, and the appraiser's determination will be binding. The fair market value of tangible assets will be determined without reference to good will, going concern value, or other intangible assets. If we elect to exercise our option to purchase, we will have the right to set off all amounts due from you under this Agreement, and 1/2 the cost of the appraisal, if any, against any payment to you. If you fail to sign and deliver the necessary 43 documents to transfer good title to your assets to us or our nominee, we are entitled to apply to any court of competent jurisdiction for a mandatory injunction to compel you to comply with the rights granted in this Agreement. All expenses, including our reasonable attorneys' fees, you will pay to us and may be credited by us to the agreed purchase price. SECTION 13.9 LIQUIDATED DAMAGES FOR PREMATURE TERMINATION If termination is the result of your default, you will pay to us a lump sum payment (as liquidated damages for causing the premature termination of this Agreement and not as a penalty) equal to the total of all Royalty Fees for: (i) the 36 calendar months of operation of your Healthy Bites Grill Franchise preceding your default; (ii) the period of time your Healthy Bites Grill Franchise has been in operation preceding the notice, if less than 36 calendar months, projected on a 36-calendar month basis; or (iii) any shorter period as equals the unexpired Term at the time of termination. The parties agree that a precise calculation of the full extent of the damages that we will incur on termination of this Agreement as a result of your default is difficult and the parties desire certainty in this matter in the extreme, and agree that the lump sum payment provided under this Section is reasonable in light of the damages for premature termination that we will incur in this event. This payment is not exclusive of any other remedies that we have including attorney's fees and costs. ARTICLE 14 - YOUR INDEPENDENT COVENANTS SECTION 14.1 DIVERSION OF BUSINESS; COMPETITION AND INTERFERENCE WITH US. (A) COVENANT NOT TO COMPETE. You agree that we would be unable to protect the Confidential Information against unauthorized use or disclosure and would be unable to encourage a free exchange of ideas and information among the franchisees within the System if franchisees were permitted to hold interests in any Competitive Business. (i) IN-TERM. You covenant that during the Term, except as we otherwise approve in writing, you will not, directly or indirectly: A. Solicit or otherwise attempt to induce, by combining or conspiring with, or attempting to do so, or in any other manner influence any Business Associate to terminate or modify his, her or its business relationship with us or to compete against us; B. As owner, officer, director, employee, agent, lender, broker, consultant, franchisee or in any other capacity be connected with the ownership, management, operation, control or conduct of a Competitive Business (this restriction will not apply to a 5% or less beneficial interest in a publicly-held corporation); or C. Interfere with, disturb, disrupt, decrease or otherwise jeopardize our business or the business of any of our franchisees. 44 (ii) POST-TERM. You also covenant that, for 24 months after the termination of this Agreement due to your default, for 24 months after the expiration and non-renewal of this Agreement, or for 24 months after you transfer your Healthy Bites Grill Franchise, except as we otherwise approve in writing, you will not, directly or indirectly: A. Solicit or otherwise attempt to induce, by combining or conspiring with, or attempting to do so, or in any other manner influence any Business Associate to terminate or modify his, her or its business relationship with us or to compete against us; B As owner, officer, director, employee, agent, lender, broker, consultant, franchisee or in any other capacity be connected with the ownership, management, operation, control or conduct of a Competitive Business within the Protected Territory 10 miles of the Premises or within 10 miles of any Healthy Bites Grill Franchise or Company-Owned Unit then in operation; or C. Interfere with, disturb, disrupt, decrease or otherwise jeopardize our business or the business of any of our franchisees. If you violate this Subsection and compete with us, we have the right to require that all sales made by the Competitive Business be reported to us. You will also pay to us, on demand, a weekly fee of $1,000 without being deemed to revive or modify this Agreement. These payments are liquidated damages to compensate us for our damages from your violation of the covenant not to compete and are not a penalty. (b) REASONABLENESS OF COVENANT. You agree that the length of the term and geographical restrictions contained in this Section are fair and reasonable and not the result of overreaching, duress or coercion of any kind. You agree that your full, uninhibited and faithful observance of each of the covenants in this Section will not cause any undue hardship, financial or otherwise, and that enforcement of each of the covenants in this Section will not impair your ability to obtain employment commensurate with your abilities and on terms fully acceptable to you or otherwise to obtain income required for the comfortable support of yourself and your family, and the satisfaction of your creditors. You agree that your special knowledge of the business of a Healthy Bites Grill Franchise (and anyone acquiring this knowledge through you) would cause us and our franchisees serious injury and loss if you (or anyone acquiring this knowledge through you) were to use this knowledge to the benefit of a competitor or were to compete with us or any of our other franchisees. (c) COURT MODIFICATION. If any court finally holds that the time or territory or any other provision in this Section is an unreasonable restriction upon you, you agree that the provisions of this Agreement are not rendered void, but apply as to time and territory or to any other extent as the court may judicially determine or indicate is a reasonable restriction under the circumstances involved. 45 SECTION 14.2 INDEPENDENT COVENANTS; THIRD PARTY BENEFICIARIES (a) INDEPENDENT COVENANTS. The parties agree that the covenants in this ARTICLE are independent of any other provision of this Agreement. You agree that the existence of any claim you may have against us or any of our Affiliates, regardless of whether the claim is brought under this Agreement, is not a defense to our enforcement of these covenants. (b) THIRD PARTY BENEFICIARIES. The parties agree that all other franchisees are third party beneficiaries of the terms of Section 14.1 and have the right to separately enforce these covenants at their expense, if we are unwilling or unable to enforce these covenants. ARTICLE 15 - INDEPENDENT CONTRACTOR AND INDEMNIFICATION SECTION 15.1 INDEPENDENT STATUS You are an independent contractor and unless expressly provided to the contrary, nothing in this Agreement is intended to designate either party an agent, legal representative, subsidiary, joint venturer, partner, employee, affiliate or servant of the other party for any purpose. The parties agree that nothing in this Agreement authorizes either party to make any agreement, warranty or representation for the other party, nor to incur any debt or other obligation in the other party's name. You will take all affirmative action as we request to indicate that you are an independent contractor, including placing and maintaining a plaque in a conspicuous place within the Premises and a notice on all stationery, business cards, sales literature, contracts and similar documents that states that your Healthy Bites Grill Franchise is independently owned and operated by you. The content of any plaque and notice is subject to our written approval. SECTION 15.2 INDEMNIFICATION You are responsible for all losses or damages from contractual liabilities to third persons from the possession, ownership and operation of your Healthy Bites Grill Franchise and for all claims and demands for damages to property or for injury, illness or death of persons directly or indirectly resulting from your actions. You indemnify us from all costs, losses and damages (including reasonable attorneys' fees and costs, even if incident to appellate, post-judgment or bankruptcy proceedings) from claims brought by third parties involving the ownership or operation by you of your Healthy Bites Grill Franchise unless caused by our negligence or intentional misconduct. This indemnity obligation continues in full effect even after the expiration, transfer or termination of this Agreement. We will notify you of any claims and you will be given the opportunity to assume the defense of the matter. If you fail to assume the defense, we may defend the action in the manner we deem appropriate and you will pay to us all costs, including attorneys' fees, which we incur in effecting the defense, in addition to any sum that we may pay by reason of any settlement or judgment against us. Our right to indemnity under this Agreement arises and is valid regardless of any joint or concurrent liability that may be imposed on us by statute, ordinance, regulation or other law. 46 ARTICLE 16 - REPRESENTATIONS AND WARRANTIES SECTION 16.1 OUR REPRESENTATIONS We make the following representations and warranties to you that are true and correct upon the signing of this Agreement: (a) ORGANIZATION. We are a corporation duly organized, validly existing and in good standing under the laws of the State of Florida. (b) AUTHORIZATION. We have the corporate power to sign, deliver, and carry out the terms of this Agreement. We have taken all necessary action for proper authorization. This Agreement has been duly authorized, signed and delivered by us and is our valid, legal and binding agreement and obligation in accordance with this Agreement, except as may be limited by applicable bankruptcy, insolvency, reorganization and other laws and equitable principles affecting creditors' rights generally. (c) NO VIOLATION. Our performance of our obligations under this Agreement will not result in: (i) the breach of any term of any contract or agreement that we are a party to or bound by, or be an event that, with notice, lapse of time or both, would result in a breach or event of default; nor (ii) result in the violation by us of any statute, rule, regulation, ordinance, code, judgment, order, injunction or decree. SECTION 16.2 YOUR REPRESENTATIONS You make the following representations and warranties to us that are true and correct upon signing this Agreement and throughout the Term: (a) AUTHORIZATION. You have the power to sign, deliver, and carry out this Agreement. You have taken all necessary action for proper authorization. This Agreement has been duly authorized, signed and delivered by you and is your valid, legal and binding agreement and obligation in accordance with this Agreement, except as may be limited by applicable bankruptcy, insolvency, reorganization and other laws and equitable principles affecting creditors' rights generally. (b) NO VIOLATION. The performance by you of your obligations under this Agreement will not result in: (i) the breach of any term of, or be a default under, any term of any contract, agreement or other commitment that you are a party to or are bound by, or be an event that, with notice, lapse of time or both, would result in a breach or event of default; nor (ii) result in the violation by you of any statute, rule, regulation, ordinance, code, judgment, order, injunction or decree. (c) NO SPECULATIVE INTENT. You are not obtaining this Healthy Bites Grill Franchise for speculative or investment purposes and have no present intention to sell or transfer or attempt to sell or transfer any part of this Agreement or the Healthy Bites Grill Franchise. 47 (d) TRUE COPIES. Copies of all documents you are required to furnish to us are correct copies of the documents, including all amendments or modifications, and contain no misleading or incorrect statements or material omissions. SECTION 16.3 RECEIPT OF FOC You agree that you received from us a FOC for the state where your Healthy Bites Grill Franchise will be located and your state of residence, with all exhibits and supplements to the FOC, on or before the first personal meeting with our representatives and at least 10 Business Days before: (a) signing this Agreement and any other agreement imposing a binding obligation on you; and (b) any payment by you of any consideration for the sale or proposed sale, of a franchise. SECTION 16.4 RECEIPT OF COMPLETED FRANCHISE AGREEMENT You agree that you received from us a completed copy of this Agreement and all related agreements, containing all material terms, (except for the date, signatures and any minor matters not material to the agreements), with all blanks filled in, at least 5 Business Days before signing this Agreement. SECTION 16.5 ACKNOWLEDGMENT OF RISK You agree to the following: (A) YOUR SUCCESS IN OWNING AND OPERATING YOUR HEALTHY BITES GRILL FRANCHISE IS SPECULATIVE AND DEPENDS ON MANY FACTORS INCLUDING, TO A LARGE EXTENT, YOUR INDEPENDENT BUSINESS ABILITY. NO REPRESENTATIONS OR PROMISES, EXPRESS OR IMPLIED, HAVE BEEN MADE BY US OR ANY OF OUR EMPLOYEES, BROKERS OR REPRESENTATIVES, TO INDUCE YOU TO ENTER INTO THIS AGREEMENT EXCEPT AS INCLUDED IN THIS AGREEMENT. NO OFFICER, DIRECTOR, EMPLOYEE, BROKER OR OTHER REPRESENTATIVE IS AUTHORIZED TO DO OTHERWISE. (B) YOU AGREE THAT IN ALL OF YOUR DEALINGS WITH US, OUR OFFICERS, DIRECTORS, EMPLOYEES, BROKERS (IF ANY) AND OTHER REPRESENTATIVES ACT ONLY IN A REPRESENTATIVE CAPACITY AND NOT IN AN INDIVIDUAL CAPACITY. YOU AGREE THAT THIS AGREEMENT AND ALL BUSINESS DEALINGS BETWEEN YOU AND ANY INDIVIDUALS AS A RESULT OF THIS AGREEMENT, ARE ONLY BETWEEN YOU AND US. (C) IN ADDITION, WE MAKE NO WARRANTY AS TO YOUR ABILITY TO OPERATE THE HEALTHY BITES GRILL FRANCHISE IN THE JURISDICTION WHERE YOUR HEALTHY BITES GRILL FRANCHISE IS TO BE OPERATED. IT IS YOUR OBLIGATION TO SEEK OR OBTAIN ADVICE OF COUNSEL SPECIFICALLY ON THIS ISSUE. IF LEGISLATION ENACTED BY, OR REGULATION OF, ANY GOVERNMENTAL BODY PREVENTS YOU FROM OPERATING YOUR HEALTHY BITES GRILL FRANCHISE, WE ARE NOT LIABLE FOR DAMAGES NOR REQUIRED TO INDEMNIFY YOU OR TO RETURN ANY MONIES RECEIVED FROM YOU. 48 ARTICLE 17 - TERM SECTION 17.1 TERM The Term of this Agreement is 10 years from the Agreement Date, unless sooner terminated under ARTICLE 12. The conditions to obtain a Successor Healthy Bites Grill Franchise Agreement at the expiration of this Agreement are those stated in Section 17.2. SECTION 17.2 OPTION TO OBTAIN SUCCESSOR HEALTHY BITES GRILL FRANCHISE AGREEMENT (a) EVERGREEN RENEWAL. You are granted unlimited options to obtain a Successor Healthy Bites Grill Franchise Agreement for terms of 10 years each provided the following conditions are met at the time the option is exercised and immediately before the beginning of the Succeeding Term, unless another time is specified below: (i) You must give us written notice of your intention to exercise the option by submitting your application at least 6 months but not more than 12 months before the end of the Term; (ii) You cannot be in default of any provision of this Agreement or any other agreement between you and us or our Affiliates; (iii) You, within 10 days before the end of the Term, must sign and deliver to us a Successor Healthy Bites Grill Franchise Agreement, that agreement will not vary the material business terms reflected in this Agreement. However, you agree to sign our Successor Healthy Bites Grill Franchise Agreement, even if materially different from this Agreement, if the new Agreement was collectively negotiated and approved by 50% of the Franchisees in the System; (iv) You must comply with all other requirements imposed by us under the Successor Healthy Bites Grill Franchise Agreement upon signing, except that there will be no Initial Franchise Fee; and (v) You are entitled to continue to occupy the Premises for the entire Succeeding Term including, if you are then leasing the Premises from us or a third party, you are entitled to renew the lease or obtain our approval of a new location for the Healthy Bites Grill Franchise within the Protected Territory, but not within the protected territory of a Company Unit or Franchise Unit, in accordance with our relocation procedures. 49 (b) OUR RIGHT NOT TO RENEW. If you have not met all of the conditions stated in Subsection 17.2(a), we may elect not to enter into a Successor Healthy Bites Grill Franchise Agreement. If, within 5 days of notice from us that you have elected not to enter into a Successor Healthy Bites Grill Franchise Agreement, you request our permission for you to sell your Franchise Business, then for a 180-day period following this notice (this notice will extend the Term, as necessary, to the end of the 180-day period, unless we have grounds to otherwise terminate the Term), we will permit you to sell your Healthy Bites Grill Franchise to a purchaser subject to our right of first refusal. This transfer must be in compliance with the provisions of Subsection 11.2(f) and all the other applicable terms of this Agreement. During this period, you must continue to operate your Healthy Bites Grill Franchise. SECTION 17.3 REINSTATEMENTS AND EXTENSIONS If any termination or expiration of the Term would violate any applicable law, we may reinstate or extend the Term for the purpose of complying with the law, for the duration provided by us in a written notice to you, without waiving any of our rights under this Agreement or otherwise modifying this Agreement. ARTICLE 18 - DISPUTE RESOLUTION SECTION 18.1 MEDIATION For any dispute involving this Agreement, before any arbitration proceeding takes place, either party may, at his, her or its option, submit the controversy or claim to non-binding mediation before the Center for Public Resources -- National Franchise Mediation Program, the American Arbitration Association, or another mutually agreeable mediator. Both parties will sign a confidentiality agreement reasonably satisfactory to us. Upon submission, the obligation to attend mediation in the county and state where your principal place of business is then located is binding on both parties. Each party will bear his, her or its own costs for the mediation except the mediation fee and the fee for the mediator will be split equally. SECTION 18.2 ARBITRATION (a) Except as specifically modified by this ARTICLE and excepting matters involving remedies in Section 18.3, any controversy or claim under this Agreement, including any claim that this Agreement, or any part of this Agreement, is invalid, illegal or otherwise voidable or void, including any claim of fraud in the inducement, may be submitted to arbitration, if determined by the parties when the dispute arises, before the American Arbitration Association in accordance with its commercial arbitration rules, or any other mutually agreeable arbitration association by one arbitrator. (b) The provisions of this Section are independent of any other covenant or provision of this Agreement. If a court of competent jurisdiction determines that any provisions are unlawful in any way, that court will modify or interpret the provisions to the minimum extent necessary to have them comply with the law. All issues of the arbitrability or the enforcement of the agreement to arbitrate are governed by the United States Arbitration Act (9 U.S.C. ss.ss. 1 et seq.) and the federal common law of arbitration. 50 (c) All claimants with substantially similar claims may join the proceedings. (d) All parties who may be legally responsible agree to participate in the arbitration and all potential legal claims can be joined in the arbitration forum. (e) The rules governing the conduct of the arbitration proceedings are consistent with generally prevailing standards of due process. (f) The panel from which the arbitrator is chosen is comprised of persons knowledgeable in the franchise industry and who have demonstrated a capability for unbiased decision making consistent with the principles embodied in the Commercial Rules of the American Arbitration Association for appointment of neutral arbitrators. (g) Limited discovery is allowed, consistent with Rule 10 of the Commercial Rules of the American Arbitration Association and pursuant to a discovery plan approved by the arbitrator. (h) Actual hearing on the merits occurs within 6 months of the date of the filing of the arbitration proceeding. (i) The arbitrator must issue a reasoned written opinion on the merits within 30 days of the completion of the hearings on the merits. (j) Judgment on an arbitration award may be entered in any court having competent jurisdiction and is binding, final and non-appealable. If any party to arbitration wishes to appeal any final award (there will be no appeal of interim awards or other interim relief), the party may appeal, within 30 days of the final award, to a 3-arbitrator panel appointed by the same organization that conducted the arbitration. The issues on appeal will be limited to the proper application of the law to the facts found at the arbitration hearing and will not include any trial de novo or other fact-finding function. The party requesting the appeal must pay all expense charged by the arbitration appeal panel and/or arbitration organization in the appeal and must post any bond deemed appropriate by the arbitration organization or arbitration appeal panel. In addition, a party requesting appeal that does not prevail on the appeal will pay the other party's attorneys' fees and other costs of responding to the appeal. (k) Before any arbitration proceeding takes place, either party may, at his, her or its respective option, elect to have the arbitrator conduct, in a separate proceeding before the actual arbitration, a preliminary hearing, at this hearing testimony and other evidence may be presented and briefs may be submitted, including a brief stating the then applicable statutory or common law methods of measuring damages in respect of the controversy or claim being arbitrated. (l) This arbitration provision is self-executing and remains in full effect after the expiration, transfer or termination of this Agreement. If either party fails to appear at any properly noticed arbitration proceeding, an award may be entered against that party by default or otherwise. 51 SECTION 18.3 EXCEPTIONS TO MEDIATION AND ARBITRATION; EQUITABLE RELIEF (a) The obligation to mediate or arbitrate is not binding on either party for claims involving the Intellectual Property; claims involving any lease of real property between the parties or their related entities; the Franchisee's obligations upon the termination, transfer or expiration of this Agreement; any encumbrances or transfers restricted under this Agreement concerning interests in the Franchisee, the Healthy Bites Grill Franchise and this Agreement; matters involving actions that may impair the good will associated with the Intellectual Property; matters involving claims of danger, health or safety involving the Franchisee, the employees, customers or the public; or requests for restraining orders, injunctions or other procedures in a court of competent jurisdiction to obtain specific performance when deemed necessary by any court to preserve the status quo or prevent irreparable injury pending resolution by mediation or arbitration of the actual dispute between the parties. (b) The Franchisee recognizes that the Healthy Bites Grill Franchise is intended to be 1 of a large number of businesses identified by the Intellectual Property in selling to the public the products and services associated with the Intellectual Property, and that the failure on the part of a single franchisee to comply with the terms of his or her franchise agreement is likely to cause irreparable damage to the Franchisor and damages at law would be an inadequate remedy. The Franchisee agrees that upon the Franchisee's breach or threatened breach of any of the terms of this Agreement concerning any matters referenced in Subsection 18.3(a), the Franchisor is entitled to seek an injunction restraining the breach and/or to a decree of specific performance, without showing or proving any actual damage, together with recovery of reasonable attorneys' fees and costs incurred in obtaining equitable relief. This equitable remedy is in addition to all remedies that the Franchisor has by virtue of the Franchisee's breach of this Agreement. The Franchisor is entitled to seek this relief without the posting of any bond or security or, if a bond is nevertheless be required by a court of competent jurisdiction, the parties agree that the sum of $1,000 is a sufficient bond. SECTION 18.4 JURISDICTION AND VENUE (a) The parties irrevocably and unconditionally: (i) agree that any mediation, arbitration or suit, action or legal proceeding involving your Healthy Bites Grill Franchise or this Agreement and involving just you and us (and no other franchisees) will be conducted where the Franchise Business is located or may be brought in the District Court of the United States, in the district where the Franchise Business is located or, if this court lacks jurisdiction, the courts of record of the state and county where our principal place of business is then located; (ii) consent to the jurisdiction of each court in any suit, action or proceeding; (iii) waive any objection that he, she or it may have to the laying of venue of any suit, action or proceeding in any of these courts; and (iv) agree that service of any court paper may be effected on the party by mail at the last known address, as provided in this Agreement, or in any other manner as may be provided under applicable laws or court rules in the state where the Franchise Business is located. 52 (b) The parties irrevocably and unconditionally: (i) agree that any mediation, arbitration or suit, action or legal proceeding involving your Healthy Bites Grill Franchise or this Agreement and involving you and one or more other franchisees and us, will be conducted in the county where our principal place of business is then located or may be brought in the District Court of the United States, in the district where our principal place of business is then located or, if this court lacks jurisdiction, the courts of record of the state and county where our principal place of business is then located; (ii) consent to the jurisdiction of each court in any suit, action or proceeding; (iii) waive any objection that he, she or it may have to the laying of venue of any suit, action or proceeding in any of these courts; and (iv) agree that service of any court paper may be effected on the party by mail at the last known address, as provided in this Agreement, or in any other manner as may be provided under applicable laws or court rules in the state where our principal place of business is then located. SECTION 18.5 ENFORCEMENT COSTS Each party will bear his, her or its own costs in any mediation. If any arbitration, legal action or other proceeding is begun for the enforcement of this Agreement, or for an alleged dispute, breach, default or misrepresentation under any term of this Agreement, the prevailing party is entitled to recover reasonable pre-institution and post-institution attorneys' fees, court costs and all expenses even if not taxable as court costs (including all fees and expenses incident to arbitration, appellate, bankruptcy and post-judgment proceedings), incurred in the action or proceeding, in addition to any other relief that the party is entitled. Attorneys' fees include paralegal fees, administrative costs, investigative costs, costs of expert witnesses, court reporter fees, sales and use taxes, if any, and all other charges billed by the attorneys to the prevailing party. If we engage a collection agency or legal counsel for your failure to pay when due any monies owed under this Agreement or submit when due any reports, information or supporting records, or for any failure otherwise to comply with this Agreement, you must reimburse us on demand for all of the above-listed expenses we incur. SECTION 18.6 GOVERNING LAW Except to the extent governed by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. ss.ss. 1051 et seq. or the United States Arbitration Act, 9 U.S.C. ss.ss. 1 et seq.), this Agreement and any other agreement between the parties and all transactions contemplated by this Agreement and all disputes between the parties are governed by the laws of the State of Florida without regard to principles of conflicts of laws. If there exists state franchise laws in the state where the Franchise Business is located that provide you with greater protection than the laws of the state above, then that state's franchise laws will also govern and apply in the event of conflict. ARTICLE 19 - DEFINITIONS SECTION 19.1 DEFINITIONS As used in this Agreement, the Exhibits attached to this Agreement and any other document signed incidental to this Agreement and any exhibits to those documents, the following terms have the following meanings: 53 "ADI" means an Area of Dominant Influence, and is a geographic survey area created and defined by Arbitron based on measurable patterns of television viewing. "ADVERTISING CONTRIBUTIONS" means the payments described in Subsection 3.1(d). "AFFILIATE" means a company related to us as a parent corporation, brother/sister corporation or subsidiary corporation. "AGREEMENT" means this Healthy Bites Grill Franchise Agreement, as it may be amended, supplemented or otherwise modified by an agreement in writing signed by you and us under Section 20.1. "AGREEMENT DATE" means the date of signing this Agreement. "AGREEMENT YEAR" means the annual periods beginning on the Agreement Date. "BUSINESS ASSETS" means (a) all of your accounts receivable arising out of, or in connection with, the operation of the Franchise Business existing as of the date of this Agreement and which came into existence during the Term, including notes, negotiable instruments and contracts (the "Accounts Receivable"); (b) all books and records pertaining to the Accounts Receivable; (c) all equipment, furniture and fixtures located at the Premises or any other location owned or controlled by you; and (d) all proceeds upon sale or other disposition of any of the foregoing. "BUSINESS ASSOCIATE" means any of our employees, officers, directors, agents, consultants, representatives, contractors, suppliers, distributors, franchisees or other business contacts. "BUSINESS DAY" means a day other than Saturday, Sunday or a U.S. national holiday. Any time period ending on a Saturday, Sunday or U.S. national holiday will be extended until 5:00 p.m. on the next Business Day. "CHAIN" means the group of Company Units and Franchise Units each operating a Healthy Bites Grill. "COMPANY UNIT" means a Healthy Bites Grill operated under the System and owned by us or any Affiliate. "COMPETITIVE BUSINESS" means a business that is engaged, wholly or partially (more than 5% of its gross sales), directly or indirectly, in the sales of healthy or organic food or any other business in which we and our other franchisees are then engaged. "CONFIDENTIAL INFORMATION" means all information, knowledge, know-how and technologies that we designate as confidential, proprietary or trade secrets. Confidential Information includes the Manuals and Secret Recipe Products, instruction programs, videocassettes, and computer programs. 54 "COOPERATIVE" means the regional advertising cooperative described in Section 7.3. "DESIGNEE" means 1 or more of our representatives who are independent contractors and are appointed by us to perform certain of our duties under this Agreement as described in ARTICLE 2. "DESIGN SPECIFICATIONS" means the specifications described in Subsection 2.3(a)(ii). "ENFORCEMENT COSTS" means the costs described in Section 18.5. "EVENT OF DEFAULT" means a breach of this Agreement including those situations described in Sections 1.4(a), 1.4(c), 3.6, 11.2(a), 11.2(d), 12.2, 12.3 and 12.4, assuming any requirement for the giving of notice, the lapse of time, or both, or any other condition is satisfied. "FOC" means our current Franchise Offering Circular and all its exhibits and supplements. "FRANCHISE" means the rights granted to you under this Agreement. "FRANCHISEE" means you upon signing this Agreement, or another person who is a party with us under another Healthy Bites Grill Franchise Agreement. "FRANCHISE OWNER" means: (i) if you are an individual, it means you; (ii) if you are a privately held corporation, the individual who owns a majority of the voting and ownership interests in the corporation; (iii) if you are a partnership, the individual who is, or owns a majority of the voting and ownership interests in an entity that is a general partner of the partnership; and (iv) if you are a limited liability company, the individual who owns the majority of the membership interests in the company. "FRANCHISE UNIT" means a Healthy Bites Grill Franchise owned and operated under the System by a franchisee. "FRANCHISEE ASSOCIATION" means the Independent Association of Healthy Bites Grill Franchisees described in Section 10.1. "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" means those standards, conventions and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements. Generally accepted accounting principals derive, in order of importance, from: (i) issuances from an authoritative body designated by the American Institute of Certified Public Accountants ("AICPA") Council; other AICPA issuances including AICPA Industry Guides; (iii) industry practice; and (iv) accounting literature in the form of books and articles. "GRAND OPENING ADVERTISING FEE" means the fee described in Subsection 3.1(c). 55 "GROSS REVENUES" means the entire amount of all of your revenues from the ownership or operation of your Healthy Bites Grill Franchise or any business at or about the Premises including the proceeds of any business interruption insurance and any revenues received from the lease or sublease of a portion of the Premises, whether the revenues are evidenced by cash, credit, checks, gift certificates, scrip, food stamps, coupons and premiums (unless exempted by us) services, property or other means of exchange, excepting only the amount of any sales taxes that are collected and paid to the taxing authority (based on the cash method of accounting). Cash refunded and credit given to customers and receivables uncollectible from customers will be deducted in computing Gross Revenues to the extent that the cash, credit or receivables represent amounts previously included in Gross Revenues where Royalty Fees and Advertising Contributions were paid. Gross Revenues are deemed received by you at the time the goods, products, merchandise or services from which they derive are delivered or rendered or at the time the relevant sale takes place, whichever occurs first. Gross Revenues consisting of property or services (for example, "bartering" or "trade outs") are valued at the prices applicable, at the time the Gross Revenues are received, to the products or services exchanged for the Gross Revenues. "HEALTHY BITES GRILL FRANCHISE" means the restaurant you are authorized to establish and operate under this Agreement. "INITIAL ADVERTISING CONTRIBUTION" means the fee described in Subsection 3.1(d). "INITIAL FRANCHISE FEE" means the fee described in Subsection 3.1(a). "INITIAL TRAINING" means the training described in Subsection 2.7(a). "INTELLECTUAL PROPERTY" means our Trademarks, Patents, Confidential Information and copyrighted information that you are entitled to use under this Agreement as described in ITEMS 13 and 14 of the FOC. "LOCAL ADVERTISING" means advertising and promotion you undertake in media directed primarily in your local market area including television, radio, newspapers, magazines, billboards, posters, handbills, direct mail, yellow pages, sports program booklet advertising, church bulletins, collateral promotional and novelty items (for example, matchbooks, pens and pencils, bumper stickers, calendars) that prominently display the Intellectual Property, advertising on public vehicles including cabs and buses, the cost of producing materials necessary to participate in these media and agency commissions on the production of the advertising and amounts paid to an approved regional advertising cooperative or to a merchant's association for advertising where you are a member. Local Advertising does not include payments to the Marketing Fund nor payments for permanent on-premises signs, lighting, purchasing or maintaining vehicles even though the vehicles display in some manner the Intellectual Property (except the cost of the materials displayed are included), contributions, sponsorships (unless the Intellectual Property are prominently displayed by the group or activity receiving the contribution or sponsorship), premium or similar offers including discounts, price reductions, special offers, free offers and sweepstake offers (except that the media costs associated with promoting the premium offers are included), employee incentive programs and other similar payments that we may determine in our sole discretion should not be included in determining whether you have met your obligation for Local Advertising. 56 "MANAGER" means the Franchise Owner, unless we otherwise agree in writing. "MANUALS" means all manuals produced by, or for the benefit of, us and loaned to you and any revisions prepared for the internal use of the Healthy Bites Grill Franchise relating to the operation and management of the Franchise Business. The Manuals may consist of printed text, computer disks, other electronically stored media, and videotapes "MARKETING FUND" means the fund described in Section 7.5 that Advertising Contributions will be deposited for use in regional and national marketing activities to promote the System. "MFC" means the Marketing Fund Committee referred to in Subsection 7.5(b). "NOTICE OF DEFAULT" means the notices described in Section 12.4. "OPENING DATE" means the date your Healthy Bites Grill Franchise is first opened for business to the general public. "PAYMENT SYSTEM" means the system created by you to make payments to us as described in Section 3.3. "P.O.S. SYSTEM" means the computerized cash registers, printer and modem or other computer hardware you are required to purchase in accordance with our specifications contained in the Manuals. "PREMISES" means the entire real property, either owned or leased by you, where your Healthy Bites Grill Franchise will be located, as described in Exhibit A. "PROTECTED TERRITORY" means an area comprised as a 3-mile radius (approximately 28 square miles) of the Premises. "REBATES" means the payments described in Subsection 7.5(d). "RESERVED AREA" means the area where you will undertake your site selection process to submit proposed sites for our approval in accordance with our site approval process. The Reserved Area will be ______________________________________________ but excluding any protected territory of a Company Unit or another Franchise Unit within the Chain who already has a Healthy Bites Grill Franchise in operation or to be operated in the Reserved Area. "ROYALTY FEE" means the fee described in Subsection 3.1(b). 57 "SECRET RECIPE PRODUCTS" means signature sauces, seasonings, and certain menu items such as "Hip Pockets" and "Buffalo Burgers" and all other recipes and products created by us and deemed secret. "SECURED OBLIGATIONS" means the obligations referred to in Subsection 3.6(a). "SUCCEEDING TERM" means the term of the Successor Healthy Bites Grill Franchise Agreement. "SUCCESSOR HEALTHY BITES GRILL FRANCHISE AGREEMENT" means the form of franchise agreement for new Healthy Bites Grill franchisees at the time you elect to enter into an agreement in accordance with Section 17.2. "SYSTEM" means our business system for operating a Healthy Bites Grill. The System includes the Secret Recipe Products and recipes, specific standards and procedures and the Intellectual Property, that may be changed. "TERM" means the term of the Agreement described in Section 17.1. "TRADE DRESS" means the store design and image we developed and own for Healthy Bites Grill premises as it may be revised and developed by us. The Trade Dress currently includes the following features: use of colors resembling fruits and vegetables, cherry wood, and certain architectural features including Roman columns. "TRADEMARKS" means the service mark and logo "Healthy Bites Grill(R)" and all other trademarks, service marks, trade names, logos and commercial symbols authorized by us as part of the System. "TRAINEES" means the persons approved by us who attend Initial Training. "TRANSFER FEE" means the fee described in Subsection 11.2(f)(vii). "UNIQUE CONSIDERATION" means the consideration described in Subsection 11.5(d). "UNIT" means either a Company Unit or a Franchise Unit. SECTION 19.2 OTHER DEFINITIONAL PROVISIONS (a) All of the words or terms defined in this Agreement have these defined meanings when used in other documents issued under or delivered under this Agreement unless the context otherwise requires or unless specifically otherwise defined in the other document; and (b) The term "PERSON" includes any corporation, limited liability company, partnership, estate, trust, association, branch, bureau, subdivision, venture, associated group, individual, government, institution, instrumentality and other entity, enterprise, association or endeavor of every kind. 58 ARTICLE 20 - GENERAL PROVISIONS SECTION 20.1 AMENDMENTS Except as stated in this Agreement, the provisions of this Agreement cannot be amended, supplemented, waived or changed orally, except by a written document signed by the party against whom enforcement of any amendment, supplement, waiver or modification is sought and making specific reference to this Agreement. Only our President or Chief Operating Officer have the authority to sign an amendment for us. This Section is expressly limited by the terms of Sections 20.2 and 20.6. SECTION 20.2 MODIFICATION OF THE SYSTEM YOU AGREE THAT AFTER THE AGREEMENT DATE WE MAY MODIFY THE SYSTEM. YOU AGREE TO ACCEPT AND BE BOUND BY ANY MODIFICATIONS IN THE SYSTEM AS IF THEY WERE PART OF THIS AGREEMENT AT THE TIME OF SIGNING OF THIS AGREEMENT. YOU WILL MAKE ALL EXPENDITURES AND MODIFICATIONS OF THE SYSTEM, AS WE REQUIRE SUBJECT TO THE CAPITAL EXPENDITURE LIMITATION CONTAINED IN SECTION 4.21. SECTION 20.3 BINDING EFFECT The provisions of this Agreement are binding upon, benefit and are enforceable by the parties and their respective personal representatives, legal representatives, heirs, successors and permitted assigns. SECTION 20.4 NOTICES All notices, requests, consents and other communications required or permitted under this Agreement must be in writing (including telex, telecopied and telegraphic communication) and must be (as elected by the person giving the notice) hand delivered by messenger or courier service, telecopied, telecommunicated, or mailed (airmail if international) by registered or certified mail (postage prepaid), return receipt requested, addressed to: If to us: With a copy to: Health Express Franchise Company Keith J. Kanouse, Esquire 1761 W. Hillsboro Blvd. Kanouse & Walker, P.A. Suite 203 One Boca Place, Suite 324 Atrium Deerfield Beach, FL 33442 2255 Glades Road Attn: Raymond Nevin, President Boca Raton, FL 33431 59 If to you: With a copy to: The Myrick Corp. Morgan,Melhuish & Abrutyn 19277 Natures View Ct. 651 W. Mount Pleasant Ave. Boca Raton, Fl 33498 Livingston, NJ 07039 Attn: Susan Greenfield Atten: Elliott Abrutyn or to any other address any party designates by notice complying with the terms of this Section. Each notice is deemed delivered: (a) on the date delivered if by personal delivery; (b) on the date of transmission with confirmed answer back if by telex, telefax or other telegraphic method; and (c) on the date the return receipt is signed or delivery is refused or the notice is designated by the postal authorities as not deliverable if mailed. SECTION 20.5 HEADINGS The headings and subheadings in this Agreement are for convenience of reference only, are not to be considered a part of this Agreement and will not limit or otherwise affect in any way the meaning or interpretation of this Agreement. SECTION 20.6 SEVERABILITY (a) If any provision of this Agreement or any other agreement entered into under this Agreement is contrary to, prohibited by or invalid under applicable law or regulation, that term only will be inapplicable and omitted to the extent so contrary, prohibited or invalid, but the remainder of this Agreement will not be invalidated and will be given full effect so far as possible. If any provision of this Agreement may be construed in two or more ways, one that would render the term invalid or otherwise voidable or unenforceable and another that would render the term valid and enforceable, that provision has the meaning that renders it valid and enforceable. (b) If any applicable law of any jurisdiction requires a greater notice of the termination of or non-renewal of this Agreement (if permitted) than is required under this Agreement, or the taking of some other action not required under this Agreement, or if under any applicable law of any jurisdiction, any term of this Agreement or any of our requirements is invalid or unenforceable, the notice and/or other action required by that law will be substituted for the comparable provisions of this Agreement. We have the right, in our sole discretion, to modify any invalid or unenforceable requirement to the extent required to be valid and enforceable. Any modification to this Agreement will be effective only in that jurisdiction, unless we elect to give the modification greater applicability, and this Agreement will be enforced as originally made and entered into in all other jurisdictions. SECTION 20.7 WAIVERS The failure or delay of any party at any time to require performance by another party of any term of this Agreement, even if known, will not affect the right of that party to require performance of that provision or to exercise any 60 right or remedy under this Agreement. Any waiver by any party of any breach of any term of this Agreement is not a waiver of any continuing or later breach of that term, a waiver of the term itself, or a waiver of any right or remedy under this Agreement. No notice to or demand on any party in any case, of itself, entitles that party to any other notice or demand in similar or other circumstances. SECTION 20.8 REMEDIES CUMULATIVE Except as otherwise stated in this Agreement, no remedy in this Agreement for any party is intended to be exclusive of any other remedy. Each remedy is cumulative and is in addition to every other remedy given under this Agreement, now or later existing, at law, in equity, by statute or otherwise. No single or partial exercise by any party of any right or remedy under this Agreement precludes any other exercise of any other right or remedy. SECTION 20.9 EFFECTIVENESS; COUNTERPARTS This Agreement is not effective or binding and enforceable against us until it is accepted by us at our home office in Deerfield Beach, Florida and signed by our President. You are advised not to incur any expenses for opening your Healthy Bites Grill Franchise until you have received a final signed copy of this Agreement from our home office. This Agreement may be signed in counterparts, each is deemed an original, but together are the same instrument. Confirmation of signing by telex, telecopy, or telefax of a facsimile signature page is binding upon any party to the confirmation. SECTION 20.10 REASONABLENESS We both agree to act reasonably in all dealings with each other pursuant to this Agreement. Whenever the consent or approval of either party is required or contemplated under this Agreement, the party whose consent is required agrees not to unreasonably withhold or delay the consent. SECTION 20.11 SURVIVAL All of the parties' obligations that expressly or by their nature survive the expiration or termination of this Agreement continue in full force after the transfer, expiration or termination of this Agreement until they are satisfied or by their nature expire. SECTION 20.12 FORCE MAJEURE Neither party is liable for loss or damage or is in breach of this Agreement if the failure to perform the obligations results solely from the following causes beyond his, her or its reasonable control, specifically: (a) transportation shortages, inadequate supply of equipment, merchandise, supplies, labor, material, or energy; (b) compliance with any applicable law; or (c) war, strikes, natural disaster or acts of God. Any delay resulting from any of these causes extends performance accordingly or excuses performance as may be reasonable, except that these causes do not excuse payments of amounts owed to us for any reason. 61 SECTION 20.13 THIRD PARTIES Except as provided in this Agreement to the contrary for any Affiliates or other Healthy Bites Grill franchisees, nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under this Agreement on any persons (including other Healthy Bites Grill franchisees) other than the parties and their respective personal representatives, other legal representatives, heirs, successors and permitted assigns. Except as provided in this Agreement to the contrary for any Designee of us, nothing in this Agreement is intended to relieve or discharge the obligation or liability of any third persons to any party to this Agreement, nor will any provision give any third persons any right of subrogation or action over or against any party to this Agreement. SECTION 20.14 ENTIRE AGREEMENT This Agreement, its Exhibits and all other written agreements involving this Agreement and expressly referenced in this Agreement, represent the entire understanding and agreement between the parties on the subject matter of this Agreement and supersede all other negotiations, understandings and representations, if any, made between the parties. No representations, inducements, promises or agreements, oral or otherwise, if any, not embodied in this Agreement, its Exhibits and all other written agreements concerning this Agreement and expressly referenced in this Agreement are of any effect. IN WITNESS WHEREOF, the parties have duly signed this Agreement. YOU OR YOUR: The Myrick Corp. /s/ Susan D. Greenfield WE, US, OUR: Health Express Franchise Company By: /s/ Raymond Nevin Raymond Nevin, President 62 STATE OF Fl________________ COUNTY OF _____Broward_________ This instrument was acknowledged before me on ____Oct 7______, 2003 by _Susan D. Greenfield__________, who personally appeared before me at the time of notarization. NOTARY PUBLIC - STATE OF __Fl____________ My Commission Expires: 6/11/04 sign /s/ Susan D. Greenfield print Susan D. Greenfield______________ Personally Known ____ OR Produced Identification __X__ Type of Identification Produced: FL Driver's License ---------------------------- /s/ Joan S. Buler STATE OF FLORIDA COUNTY OF BROWARD This instrument was acknowledged before me on ____Oct 7, 2003 by Raymond Nevin as President of Health Express Franchise Company, a Florida corporation, for the corporation. He personally appeared before me at the time of notarization. NOTARY PUBLIC - STATE OF FLORIDA: sign /s/ Raymond W. Nevin print Raymond W. Nevin__________________ Personally Known __X___ OR Produced Identification _____ Type of Identification Produced: ________________________________ My Commission Expires: 6/11/04 /s/ Joan S. Buler 63 EX-14.1 5 v02253_ex14-1.txt EXHIBIT 14.1 CODE OF BUSINESS CONDUCT AND ETHICS FOR HEALTH EXPRESS USA, INC. INTRODUCTION Health Express USA, Inc. (the "Company") is committed to the highest standards of legal and ethical conduct. This Code of Business Conduct and Ethics (the "Code") sets forth the Company's policies with respect to the way we conduct ourselves individually and operate our business. The provisions of this Code are designed to deter wrongdoing and to promote honest and ethical conduct among our employees, officers and directors. In the course of performing our various roles in the Company, each of us will encounter ethical questions in different forms and under a variety of circumstances. Moments of ethical uncertainty may arise in our dealings with fellow employees of the Company, with customers, or with other parties such as government entities or members of our community. In achieving the high ground of ethical behavior, compliance with governmental laws is not enough. Our employees should never be content with simply obeying the letter of the law, but must also strive to comport themselves in an honest and ethical manner. This Code provides clear rules to assist our employees, directors and officers in taking the proper actions when faced with an ethical dilemma. The reputation of the Company is our greatest asset and its value relies on the character of its employees. In order to protect this asset, the Company will not tolerate unethical behavior by employees, officers or directors. Those who violate the standards in this Code will be subject to disciplinary action. If you are concerned about taking an action that may violate the Code or are aware of a violation by another employee, an officer or a director, follow the guidelines set forth in Sections 10 and 11 of this Code. This Code applies equally to all employees, officers and directors of the Company. All references to employees contained in this Code should be understood as referring to officers and directors as well. 1. COMPLIANCE WITH LAWS, RULES AND REGULATIONS Company policy requires that the Company, as well as all employees, officers and directors of the Company, comply fully with both the spirit and the letter of all laws, rules and regulations. Whenever an applicable law, rule or regulation is unclear or seems to conflict with either another law or any provision of this Code, all employees, officers and directors are urged to seek clarification from their supervisor, the appropriate compliance official or the Chief A-1 Executive Officer. See Section 11 for contact information. Beyond mere compliance with the law, we should always conduct our business with the highest standards of honesty and integrity - wherever we operate. 2. CONFLICTS OF INTEREST Every employee has a primary business responsibility to the Company and must avoid conflicts of interest. A conflict of interest arises when an employee takes actions or enters into relationships that oppose the interests of the Company, harm the Company's reputation or interfere with the employee's performance or independent judgment when carrying out any actions on behalf of the Company. The Company strictly prohibits its employees from taking any action or entering into any relationship, personal or professional, that creates, or even appears to create, a conflict of interest. A conflict situation can arise when a director, officer or employee takes actions or has interests that may make it difficult to perform his or her work for the Company objectively and effectively. Conflicts of interests may also arise when a director, officer or employee, or a member of his or her family, receives an improper personal benefit as a result of his or her position with the Company. It may be a conflict of interest for a director, officer or employee to work simultaneously for a competitor, customer or supplier. The best policy is to avoid any direct or indirect business connection with our customers, suppliers or competitors, except on our behalf. Employees must be sensitive to potential conflicts of interest that may arise and use their best efforts to avoid the conflict. In particular, except as provided below, no director, officer or employee shall: o be a consultant to, or a director, officer or employee of, or otherwise operate an outside business that: o markets products or services in competition with our current or potential products and services; o supplies products or services to the Company; or o purchases products or services from the Company; o accept any personal loan or guarantee of obligations from the Company, except to the extent such arrangements have been approved by the Chief Executive Officer and are legally permissible; or o conduct business on behalf of the Company with immediate family members, which include your spouse, children, parents, siblings and persons sharing your same home whether or not legal relatives. Directors, officers and employees must notify the Chief Executive Officer of the existence of any actual or potential conflict of interest. With respect to officers or directors, the Board may make a determination that a particular transaction or relationship will not result in a conflict of interest covered by this policy. With respect to all other employees or agents, the A-2 Chief Executive Officer, acting alone, or the Board may make such a determination. Any waivers of this policy as to an officer or director may only be approved by the Board of Directors. Any employee, officer or director who is aware of a transaction or relationship that could reasonably be expected to give rise to a conflict of interest in violation of this section must inform the appropriate personnel in accordance with the procedures set forth in Section 12 of this Code. If an employee has any questions regarding the Company's policy on conflicts of interest or needs assistance in avoiding a potential conflict of interest, he or she is urged to seek the advice of a supervisor or the Chief Executive Officer. 3. CORPORATE OPPORTUNITIES Employees, officers and directors are prohibited from taking for themselves personally opportunities that are discovered through the use of Company property, Company information or their position in the Company. Furthermore, employees may not use Company property, information or influence or their position in the Company for improper personal gain. Finally, employees have a duty to advance the Company's legitimate interests when the opportunity to do so arises. Consequently, employees are not permitted to compete with the Company. 4. CONFIDENTIALITY Employees must maintain the confidentiality of confidential information entrusted to them by the Company or its customers or suppliers, except when disclosure is authorized by the Company or required by applicable laws or regulations. Confidential information includes proprietary information of the Company, as well as all non-public information that might be of use to competitors, or harmful to the Company or its customers, if disclosed. This confidentiality requirements is in additional to any other obligations imposed by the Company to keep information confidential. 5. INSIDER TRADING Employees, officers and directors will frequently become aware of confidential non-public information concerning the Company and the parties with which the Company does business. As set forth in more detail in the Company's Insider Trading Policy, the Company prohibits employees from using such confidential information for personal financial gain, such as for purposes of stock trading, or for any other purpose other than the conduct of our business. Employees must maintain the confidentiality of such information and may not make disclosures to third parties, including members of the employee's family. All non-public information about the Company should be treated as confidential information. To use non-public information for personal financial benefit or to "tip" others who may make stock trades on the basis of this information is not only unethical but also illegal. This policy also applies to trading in the securities of any other company, including our customers or suppliers, if employees have material, non-public information about that company which the employee obtained in the course of their employment by the Company. In addition to possible legal sanctions, any employee, officer or director found to be in violation of the Company's insider trading policy will face A-3 decisive disciplinary action. Employees are encouraged to contact the Company's Chief Executive Officer with any questions concerning this policy. 6. PROTECTION AND PROPER USE OF COMPANY ASSETS All Company assets should be used for legitimate business purposes and all employees, officers and directors must make all reasonable efforts to protect the Company's assets and ensure their efficient use. Theft, carelessness, and waste have a direct impact on the Company's profitability and must therefore be avoided. The suspected occurrence of fraud or theft should be immediately reported to the appropriate person in accordance with the procedures set forth in Section 11 of this Code. An employee's obligation to protect the Company's assets extends to the Company's proprietary information. Proprietary information includes intellectual property such as patents, trademarks, copyrights and trade secrets. An employee who uses or distributes such proprietary information without the Company's authorization will be subject to disciplinary measures as well as potential legal sanctions. 7. FAIR DEALING Although the success of our Company depends on our ability to outperform our competitors, the Company is committed to achieving success by fair and ethical means. We seek to maintain a reputation for fair dealing among our competitors and the public alike. In light of this aim, the Company prohibits employees from engaging in any unethical or illegal business practices. An exhaustive list of unethical practices cannot be provided. Instead, the Company relies on the judgment of each individual employee to avoid such practices. Furthermore, each employee should endeavor to deal fairly with the Company's customers, suppliers, competitors and employees. No employee should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair business practice. 8. DISCLOSURES It is Company policy to make full, fair, accurate, timely and understandable disclosure in compliance with all applicable laws, rules and regulations in all reports and documents that the Company files with, or submits to, the Securities and Exchange Commission and in all other public communications made by the Company. Employees shall endeavor in good faith to assist the Company in such efforts. 9. WAIVERS The Company expects all employees, officers and directors to comply with the provisions of this Code. Any waiver of this Code for executive officers, directors or employees may be made only by the Board of Directors or a Board committee and will be promptly disclosed to the public as required by law and stock exchange regulations. A-4 10. COMPLIANCE GUIDELINES AND RESOURCES In some situations, our employees may not be certain how to proceed in compliance with this Code. This uncertainty may concern the ethical nature of the employee's own acts or the employee's duty to report the unethical acts of another. When faced with this uncertainty, the employee should carefully analyze the situation and make use of Company resources when determining the proper course of action. The Company also encourages employees to talk to their supervisors, or other personnel identified below, when in doubt about the best course of action. 1. GATHER ALL THE FACTS. Do not take any action that may violate the Code until you have gathered all the facts that are required to make a well-informed decision and, if necessary, you have consulted with your supervisor, or the Chief Executive Officer. 2. IS THE ACTION ILLEGAL OR CONTRARY TO POLICY? If the action is illegal or contrary to the provision of this Code, you should not carry out the act. If you believe that the Code has been violated by an employee, an officer or a director, you must promptly report the violation in accordance with the procedures set forth in Section 12. 3. DISCUSS THE PROBLEM WITH YOUR SUPERVISOR. It is your supervisor's duty to assist employees in complying with this Code. Feel free to discuss a situation that raises ethical issues with your supervisor if you have any questions. You will suffer no retaliation for seeking such guidance. 4. ADDITIONAL RESOURCES. The Chief Executive Officer is available to speak with you about problematic situations if you do not feel comfortable approaching your direct supervisor. If you prefer, you may request assistance in writing by sending a request to the Chief Executive Officer. 11. REPORTING PROCEDURES All employees have a duty to report any violations of this Code, as well as violations of any laws, rules, or regulations. The Company does not permit retaliation of any kind against employees for good faith reports of ethical violations. If you believe that the Code has been violated by an employee you must promptly report the violation to your direct supervisor or the Chief Executive Officer. If a report is made to a supervisor, the supervisor must in turn report the violation to the Chief Executive Officer. All violations by an officer or director of the Company must be reported directly to the entire Board of Directors. A-5 CONTACT INFORMATION Reports may be made in person, by telephone or in writing by sending a description of the violation and the names of the parties involved to the appropriate personnel mentioned in the preceding paragraph. The contact information is as follows: Douglas Baker Chief Executive Officer 1761 Hillsboro Boulevard, Suite 203 Deerfield Beach, Florida 33442 (954) 570-5900 bakerrk3@aol.com 12. DISCIPLINARY ACTION Employees, officers and directors of the Company will be held accountable for adherence to this Code. The penalty for a particular violation of this Code will be decided on a case-by-case basis and will depend on the nature and severity of the violation as well as the employee's history of non-compliance and cooperation in the disciplinary process. Significant penalties will be imposed for violations resulting from intentional or reckless behavior. Penalties may also be imposed when an employee fails to report a violation due to the employee's indifference, deliberate ignorance or reckless conduct. All violations of this Code will be treated seriously and will result in the prompt imposition of penalties which may include (1) an oral or written warning, (2) a reprimand, (3) suspension, (4) termination and/or (5) restitution. 13. NO RIGHTS CREATED This Code is a statement of certain fundamental principles, policies and procedures that govern the Company's officers, directors and employees in the conduct of the Company's business. It is not intended to and does not create any rights in any employee, supplier, competitor, shareholder or any other person or entity. A-6 EX-31.1 6 v02253_ex31-1.txt EXHIBIT 31.1 OFFICER'S CERTIFICATE PURSUANT TO SECTION 302* I, Douglas Baker, chief executive officer, certify that: 1. I have reviewed this form 10-KSB for the fiscal year ended December 28, 2003 of Health Express USA, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Omitted; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: March 29, 2004 By: /s/ Douglas Baker ----------------------- Name: Douglas Baker Title: Chief Executive Officer *The introductory portion of paragraph 4 of the Section 302 certification that refers to the certifying officers' responsibility for establishing and maintaining internal control over financial reporting for the company, as well as paragraph 4(b), have been omitted in accordance with Release No. 33-8238 (June 5, 2003) because the compliance period has been extended for small business issuers until the first fiscal year ending on or after April 15, 2005. EXHIBIT 31.1-1 EX-31.2 7 v02253_ex31-2.txt EXHIBIT 31.2 OFFICER'S CERTIFICATE PURSUANT TO SECTION 302* I, Patricia Durante, chief financial officer, certify that: 1. I have reviewed this form 10-KSB for the fiscal year ended December 28, 2003 of Health Express USA, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Omitted; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: March 29, 2004 By: /s/ Patricia Durante ----------------------- Name: Patricia Durante Title: Chief Financial Officer *The introductory portion of paragraph 4 of the Section 302 certification that refers to the certifying officers' responsibility for establishing and maintaining internal control over financial reporting for the company, as well as paragraph 4(b), have been omitted in accordance with Release No. 33-8238 (June 5, 2003) because the compliance period has been extended for small business issuers until the first fiscal year ending on or after April 15, 2005. EXHIBIT 31.2-1 EX-32.1 8 v02253_ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Health Express USA, Inc. (the "Company") on Form 10-KSB for the fiscal year ended December 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Date: March 29, 2004 By: /s/ Douglas Baker ----------------------- Name: Douglas Baker Title: Chief Executive Officer Date: March 29, 2004 By: /s/ Patricia Durante ----------------------- Name: Patricia Durante Title: Chief Financial Officer A signed original of this written statement required by Section 906, or other document authentications, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Health Express USA, Inc. and will be retained by Health Express USA, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EXHIBIT 31.1-1 -----END PRIVACY-ENHANCED MESSAGE-----