DEBT CONVERSION AGREEMENT

 

 

TABLE OF CONTENTS

 

				Page
ARTICLE I.		DEFINITIONS		1
1.1		Definitions		1
ARTICLE II.		PURCHASE AND SALE		5
2.1		Authorization of Issuance and Sale of Shares		5
2.2		Agreements to Sell and Purchase		5
2.3		Payment and Delivery		5
2.4		Certificate for Shares		6
2.5		Repurchase Right		6
ARTICLE III.		REPRESENTATIONS AND WARRANTIES		7
3.1		Representations and Warranties of the Company		7
3.2		Representations and Warranties of DHW		13
ARTICLE IV.		OTHER AGREEMENTS AND ACKNOWLEDGMENTS OF THE PARTIES		15
4.1		General		16
4.2		Deferred and Reduced Rent Payments		16
4.3		Access		16
4.4		Litigation		17
4.5		Notice of Developments		17
4.6		Waiver of Approval by Company Shareholders		17
4.7		Alternative Transaction		17
4.8		Deliveries to be Made at the Closing		18
4.9		Securities Laws Matters		20
4.10		Participation Rights		20
4.11		Board Composition; Board Observers		21
4.12		Employment Agreement Amendments		22
ARTICLE V.				22
5.1		Conditions to Obligations of Each Party Under this Agreement		22
5.2		Conditions Precedent to the Obligations of DHW		22
5.3		Conditions Precedent to the Obligations of the Company		23

 

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TABLE OF CONTENTS

(continued)

 

				Page
ARTICLE VI.		TERMINATION		24
6.1		Termination of Agreement		24
6.2		Effect of Termination		25
ARTICLE VII.		MISCELLANEOUS		25
7.1		Fees and Expenses		25
7.2		Entire Agreement		25
7.3		Notices		25
7.4		Amendments; Waivers; No Additional Consideration		26
7.5		Successors and Assigns		27
7.6		No Third-Party Beneficiaries		27
7.7		Governing Law		27
7.8		Dispute Resolution		27
7.9		Survival		28
7.10		Execution		29
7.11		Severability		29
7.12		Construction		29
7.13		Incorporation of Recitals, Exhibits and Schedules		29
7.14		Specific Performance		29

 

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TABLE OF CONTENTS

(continued)

 

				Page
EXHIBIT A		FORM OF AMENDMENT NO. 1 TO MASTER AGREEMENT		A-1
EXHIBIT B		FORM OF TERMINATION OF EQUIPMENT LEASE AND BILL OF SALE		B-1
EXHIBIT C		FORM OF REGISTRATION RIGHTS AGREEMENT		C-1
EXHIBIT D		RESTAURANT LEASES		D-1
EXHIBIT E		FORM OF AMENDMENT TO EMPLOYMENT AGREEMENT OF STEVEN J. WAGENHEIM		E-1
EXHIBIT F		FORM OF AMENDMENT TO EMPLOYMENT AGREEMENT OF JAMES G. GILBERTSON		F-1
EXHIBIT G		FORM OF AMENDMENT TO EMPLOYMENT AGREEMENT OF DARIUS GILANFAR		G-1
EXHIBIT H		FORM OF WAIVER OF DEFAULT AND CERTAIN COVENANTS FROM HARMONY EQUITY INCOME FUND L.L.C. AND HARMONY EQUITY INCOME FUND L.L.C. II DATED                    , 2009.		H-1
EXHIBIT I		DHW THIRD-PARTY CONSENTS AND AGREEMENTS		I-1
EXHIBIT J		FORM OF MASTER AMENDMENT TO LEASES		J-1

 

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DEBT CONVERSION AGREEMENT

 

This Debt Conversion Agreement (this “Agreement” ) is dated September 21, 2009, by and between Granite City Food & Brewery Ltd., a Minnesota corporation (the “Company” ), and DHW Leasing, L.L.C., a South Dakota limited liability company ( “DHW” ).

 

WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(2) of the Securities Act (as defined below) and Rule 506 promulgated thereunder, the Company desires to issue and sell to DHW, and DHW desires to acquire from the Company Common Stock of the Company, as more fully described in this Agreement.

 

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and DHW agree as follows:

 

ARTICLE I.

DEFINITIONS

 

1.1           Definitions .  In addition to the terms defined elsewhere in this Agreement, for all purposes of this Agreement, the following terms shall have the meanings indicated in this Section 1.1:

 

“AAA Rules” has the meaning set forth in Section 7.8(b) below.

 

“Action” means any action, suit, inquiry, notice of violation, proceeding (including any partial proceeding such as a deposition) or investigation pending or threatened in writing against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency, regulatory authority (federal, state, county, local or foreign), stock market, stock exchange or trading facility.

 

“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144.  For the purposes of Section 2.5 of this Agreement, “Affiliate” includes Dunham Capital Management, L.L.C. and Dunham Equity Management, L.L.C. and their respective directors, managers, officers, employees and equity holders.

 

“Alternative Proposal” has the meaning set forth in Section 4.7 below.

 

“Amendment to Master Agreement” means the Amendment to Master Agreement between the Company and Dunham Capital Management, L.L.C., DHW Leasing, L.L.C., and Dunham Equity Management, L.L.C. in the form of Exhibit A hereto.

 

“Applicable Law” or “Applicable Laws” means any and all laws (including the common law), ordinances, constitutions, regulations, statutes, treaties, rules, codes, licenses, certificates, franchises, Permits, requirements and injunctions adopted, enacted, implemented, promulgated, issued, entered or deemed applicable by or under the authority of any Governmental Authority having jurisdiction over a specified Person or any of such Person’s properties or assets, including NASDAQ Listing Rules.

 

 

“Business Day” means any day except Saturday, Sunday and any day which is a federal legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

 

“Closing” means the Closing as defined in Section 2.3.

 

“Closing Conditions” means the Closing Conditions described in Sections 5.1, 5.2 and 5.3 below.

 

“Closing Date” means the time and date of the Closing, as defined in Section 2.3.

 

“Commission” means the United States Securities and Exchange Commission.

 

“Common Stock” means the Common Stock of the Company, par value $.01 per share, and any shares into which such Common Stock may hereafter be reclassified, converted or exchanged.

 

“Company Deliverables” has the meaning set forth in Section 4.8(a).

 

“Confidential Information” means any information or compilation of information not generally known to the public or the industry or which the Company or any of its Subsidiaries has not disclosed to third parties without a written obligation of confidentiality, which is proprietary to the Company or any of its Subsidiaries, relating to the Company’s or any of its Subsidiaries’ procedures, techniques, methods, concepts, ideas, affairs, products, processes and services, including, but not limited to, information relating to distribution, marketing, merchandising, selling, research, development, manufacturing, purchasing, accounting, engineering, financing, costs, pricing and pricing strategies and methods, customers, suppliers, creditors, employees, contractors, agents, consultants, plans, billing, needs of customers and products and services used by customers, all lists of suppliers, distributors and customers and their addresses, prospects, sales calls, products, services, prices and the like as well as any specifications, formulas, plans, drawings, accounts or sales records, sales brochures, catalogs, code books, manuals, trade secrets, knowledge, know-how, operating costs, sales margins, methods of operations, invoices or statements and the like; provided , however , that the term “Confidential Information” shall not be deemed to include (i) information which becomes generally available to the public without any fault of the Company or any of its Subsidiaries, (ii) becomes available to the applicable party on a non-confidential basis and without any breach of an agreement of confidentiality from a source other than the Company or any of its Subsidiaries, or (iii) information that is disclosed to a Governmental Authority pursuant to Applicable Law, and is therefore publicly available.

 

“Consents” means the consents and other authorization of third parties or governmental authorities required pursuant to Section 3.1(e).

 

“Disclosure Materials” has the meaning set forth in Section 3.1(h).

 

“Dunham Landlords” means Dunham Capital Management, L.L.C., Dunham Equity Management, L.L.C. and their following affiliated entities: GC Rosedale, LLC — Roseville, MN; GC Lincoln LP — Lincoln, NE; GC Omaha LP — Omaha, NE; GC Olathe LP —

 

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Olathe, KS; GC Holdings LP — Zona Rosa, Kansas City; GC Eagan LP — Eagan, MN; GC Des Moines LP — Des Moines, IA; GC Cedar Rapids/Davenport — Davenport, IA; GC Wichita LP — Wichita, KS.

 

“Equipment Lease” means, collectively, that Master Equipment Finance Lease made and entered into September 19, 2006 and that Equipment Lease Commitment dated December 6, 2007, by and between DHW and the Company, and includes, whether or not referred to therein, all subsequent leases of and finance agreements for, furniture, fixtures and equipment leased or financed by, DHW, prior to the Closing, whether or not referred to in such Master Equipment Finance Lease or Equipment Lease Commitment and Master Equipment Lease.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

“FF&E” means furniture, fixtures and equipment leased by DHW to the Company.

 

“Final Order” means an action or decision of a Governmental Authority as to which (i) no request for a stay is pending, no order of stay is in effect, and any deadline for filing such request that may be designated by Applicable Law has passed, (ii) no petition for rehearing or reconsideration or application for review is pending and time for filing of such petition or application has passed, (iii) the Governmental Authority does not have the action or decision under reconsideration on its own motion and the time within which it may effect such reconsideration has passed, and (iv) no judicial appeal is pending or in effect and any deadline for filing any such appeal that may be designated by statute or rule has passed.

 

“GAAP” means U.S. generally accepted accounting principles.

 

“Governmental Authority” means any (i) nation, state, county, city, town, village, district or other jurisdiction of any nature; (ii) federal, state, local, municipal, foreign or other government; (iii) governmental or quasi-Governmental Authority of any nature (including any governmental agency, branch, board, commission, department, instrumentality, office or other entity, and any court or other tribunal); and/or (iv) any body exercising, or entitled or purporting to exercise, any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power of any nature.

 

“Indebtedness” means all of the Company’s indebtedness and financial obligations to DHW through the Closing Date, whether arising out of the Equipment Lease or otherwise.

 

“Knowledge” means that an individual will be deemed to have “Knowledge” or “knowledge” of a particular fact or other matter if such individual is actually (not constructively or imputably) aware of such fact or other matter; provided , however , that Knowledge by the Company of a particular fact or other matter shall mean the actual (and not constructive or imputed) awareness of Steven J. Wagenheim, James G. Gilbertson and Monica Underwood.

 

“Lien” means any lien, charge, encumbrance, security interest, right of first refusal or other restrictions of any kind.

 

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“Master Amendment to Leases” means the Master Amendment to Leases in the form of Exhibit J hereto.

 

“Material Adverse Effect” means, in connection with any Person, any event, change or effect that is materially adverse, individually or in the aggregate, to the condition (financial or otherwise), properties, assets, liabilities, revenues, income, business, operations, results of operations of such Person, taken as a whole; provided , however , the foregoing shall not be deemed to include any event, change or effect which arises with respect to (i) conditions of change that are primarily the result of the national economy whereby the effect or change is generally universal upon businesses as a whole or within an industry as a whole, or (ii) uniformly applied legislative or judicial Applicable Laws or Final Orders that have general applicability to business as a whole or an industry as a whole; and provided, further, the parties agree that, notwithstanding any Delaware case law to the contrary, this definition shall apply to short-term as well as long-term effects.

 

“NASDAQ” means The NASDAQ Stock Market LLC.

 

“Permits” means all right, title and interest in and to any Permits, licenses, certificates, filings, authorizations, approvals, or other indicia of authority (and any pending applications for approval or renewal of a Permit), to own, construct, operate, sell, inventory, disburse or maintain any asset or conduct any business as issued by any Governmental Authority.

 

“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

 

“Proceeding” means any suit, litigation, arbitration, hearing, audit, investigation or other action (whether civil, criminal, administrative or investigative) commenced, brought, conducted or heard by or before, or otherwise involving, any Governmental Authority or agency.

 

“Registration Rights Agreement” means the Registration Rights Agreement, dated as of the date of this Agreement, among the Company and DHW, in the form of Exhibit B hereto.

 

“Registration Statement” means a registration statement meeting the requirements set forth in the Registration Rights Agreement and covering the resale by DHW of the Shares.

 

“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

 

“SEC Reports” has the meaning set forth in Section 3.1(h).

 

“Securities Act” means the Securities Act of 1933, as amended.

 

“Shares” means the shares of Common Stock issued or issuable to DHW pursuant to Section 2.1 of this Agreement.

 

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notify each other in writing on September 28, 2009 and on each Business Day thereafter of the status of their satisfaction or performance of closing conditions (the “Closing Date”) .  The Closing shall take place at the office of Briggs and Morgan, P.A., 80 South Eighth Street, 22 nd  Floor, Minneapolis, Minnesota 55402 at 9:00 a.m. local time on the Closing Date.

 

2.4            Certificate for Shares .  A certificate for the Shares shall be registered in the name of DHW or if so indicated on the signature page hereto, in the name of a nominee designated by DHW.  Upon written request of DHW, a facsimile copy of the certificate evidencing the Shares shall be delivered to DHW on the Closing Date and the original certificate evidencing the Shares shall be delivered to DHW by overnight courier one trading day following the Closing Date, except where alternative settlement arrangements have been agreed to with DHW, with any transfer taxes payable in connection with the issuance of the Shares duly paid by or on behalf of the Company, against cancellation of the Indebtedness.

 

2.5            Repurchase Right .  As further consideration for the issuance of the Shares by the Company, DHW agrees that from the date hereof through the first anniversary of the Closing Date, the Company will have the right to repurchase and redeem certain of the Shares if the average bid price of the Company’s Common Stock exceeds $0.714 per share for any period of 20 consecutive trading days (the “Trigger”) .  If and whenever the Trigger is met, the Company may at any time during the first year following the Closing Date, but within 20 trading days of any given Trigger, repurchase from DHW, for the consideration of $0.001 per share, up to a maximum of such number of the Shares as would enable DHW to retain (assuming no sales of Shares by DHW during the first year following the Closing Date) Shares having a market value of Twenty Million and No/100 Dollars ($20,000,000) following such repurchase (calculated using the closing price per share of Common Stock on the trading day immediately prior to the date of repurchase).  The one year period provided in this Section shall be extended for the number of days that the Company is prevented from exercising its repurchase right due to an automatic stay or other action by a federal or state court, but only to the extent that the Company is so prevented.  The repurchase shall be deemed made effective upon the giving of notice to DHW and the sole obligation of the Company to DHW thereafter shall be the payment of the price for repurchased Shares.  The repurchase price shall be deliverable only to DHW, unless another payee is designated in writing by DHW.  Upon the Company’s exercise of the repurchase right and tender of the repurchase price, the repurchased shares shall, without further action by the Company, DHW or any other party, cease to be outstanding and shall be deemed cancelled by the Company. Any sales of Shares by DHW during the first year following Closing will reduce such $20,000,000 threshold by the gross dollar amount of such sales.

 

DHW agrees that (i) it will not sell or dispose of any of the Shares for the period from the Closing Date through January 31, 2010; and (ii) for a period of one year following the Closing Date, it will not sell, transfer or assign, or contract to sell, transfer or assign, by operation of law or otherwise, more than 6,500,000 of the Shares.  Although the repurchase right herein may be triggered multiple times during the one year period following the Closing, the Company may only exercise its repurchase right once.  Such repurchase right may be exercised by action of not less than a majority of disinterested directors.  The Shares are subject to the foregoing repurchase right, which shall be binding upon DHW’s successors and assigns, including any transferee, assignee or pledgee of the Shares; provided, however, that upon exercise of the repurchase right herein, all of the Shares remaining after the repurchase shall cease to be subject to the repurchase right herein, and the Company will, upon request of DHW, cause the second restrictive legend

 

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set forth in Section 3.2(h) pertaining to the repurchase right to be removed from any share certificate; and provided further, that if any of the Shares shall, following January 31, 2010, be sold on an exchange or in the over-the-counter market, the Company shall, upon request of DHW, remove the foregoing legend from certificates for up to 6,500,000 Shares which shall have been sold in the over-the-counter market.  DHW and each transferee, assignee and pledgee of the Shares shall at all times provide the Company with the following:  the full name and current residence address and business office of such party; the contact person or persons with respect to such party; the telephone number of such party; and an acknowledgement from any assignee or pledgee that Shares remain subject to the repurchase right.  The Shares shall bear the restrictive legends set forth in Section 3.2(h) and shall be subject to a stop transfer order on the Company’s stock records and instructions to the Company’s transfer agent necessary to enforce the forgoing repurchase right and the representations and warranties set forth in Section 3.2(b).  Upon exercise of the repurchase right pursuant to this Section 2.5, DHW and any transferee, assignee or pledge hereby designates the Chief Financial Officer or the Secretary of the Company or their successors, as their attorneys-in-fact to execute such documents and instruments, and give such orders and instructions as shall be necessary or required to effect the transfer and cancellation of repurchased shares on the stock records of the Company.  The per share dollar amounts referred to in this Section 2.5, including the Triggers, shall be proportionately decreased or increased to reflect changes in the capitalization of the Company resulting from any stock split, combination, dividend or action having similar effect.

 

ARTICLE III.

REPRESENTATIONS AND WARRANTIES

 

3.1            Representations and Warranties of the Company .  Except as set forth in the Disclosure Schedule delivered to DHW on the date of this Agreement (it being agreed that disclosure of any item on the Disclosure Schedule shall be deemed disclosure with respect to any other section or subsection of this Agreement), the Company represents and warrants to DHW as follows:

 

(a)            Subsidiaries .  The Company has no direct or indirect Subsidiaries other than as specified in the SEC Reports.  Except as disclosed in the SEC Reports, the Company owns, directly or indirectly, all of the capital stock of each Subsidiary free and clear of any and all Liens, and all the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights.

 

(b)            Organization and Qualification .  The Company and each Subsidiary are duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted.  Neither the Company nor any Subsidiary is in violation of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents.  The Company and each Subsidiary are duly qualified to conduct its respective businesses and are in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect.

 

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(c)            Authorization; Enforcement .  The Company has the requisite corporate power and authority to enter into and to consummate the Transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations thereunder.  The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the Transactions contemplated thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company in connection therewith.  Each Transaction Document has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application.

 

(d)            No Conflicts .  The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the Transactions contemplated thereby do not and will not (i) conflict with or violate any provision of the Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter documents, or (ii) except as provided in Schedule 3.1(d)  of the Disclosure Schedule, conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, license, franchise, lease, Permits (including, but not limited to, any consents or Permits, approvals or authorizations of any Governmental Authority), credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) except as provided in Schedule 3.1(d)  of the Disclosure Schedule, result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or Governmental Authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect.

 

(e)            Filings, Consents and Approvals .  Except as provided in Schedule 3.1(e)  of the Disclosure Schedule, the Company is not required to obtain any Consent, waiver, authorization, Permit or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other Governmental Authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than (i) the filing with the Commission of one or more Registration Statements in accordance with the requirements of the Registration Rights Agreement, (ii) filings required under the Exchange Act or by state securities laws, (iii) the filing of a Notice of Sale of Securities on Form D with the Commission under Regulation D of the Securities Act, (iv) the Company obtaining a waiver from NASDAQ of the shareholder approval requirement pursuant to NASDAQ Listing Rule 5635(f), (v) the filing of a Notification of Listing of Additional Shares with NASDAQ, and (vi) those that have been made or obtained prior to the date of this Agreement, all such consents, waivers, authorizations, waivers or notices hereinafter referred to “Consents.”

 

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(f)             Issuance of the Shares .  The Shares shall be duly authorized and, when issued for in accordance with the Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens.

 

(g)            Capitalization .  The number of shares and type of all authorized, issued and outstanding capital stock of the Company, and all shares of Common Stock reserved for issuance under the Company’s various option and incentive plans, is specified in the SEC Reports or on Schedule 3.1(g)  of the Disclosure Schedule.   Except as specified in the SEC Reports or on Schedule 3.1(g) of the Disclosure Schedule, no shares of the Company are entitled to preemptive or similar rights, and no Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the Transactions contemplated by the Transaction Documents.  Except as specified in the SEC Reports or on Schedule 3.1(g)  of the Disclosure Schedule, there are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of capital stock of the Company, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of capital stock of the Company, or securities or rights convertible or exchangeable into shares of capital stock of the Company.

 

(h)            SEC Reports; Financial Statements .  The Company has filed all reports, forms or other information required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the twelve months preceding the date hereof (or such shorter period as the Company was required by law to file such reports) (the foregoing materials being collectively referred to herein as the “ SEC Reports ” and, together with the Disclosure Schedules, the “ Disclosure Materials ”) on a timely basis or has timely filed a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension.  As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.  The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing.  Such financial statements have been prepared in accordance with GAAP applied on a consistent basis during the periods involved, except as may be otherwise specified in such financial statements or the notes thereto, and fairly present in all material respects the financial position of the Company and its consolidated Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.

 

(i)             [Reserved.]

 

(j)             Material Changes .  Except as set forth in Schedule 3.1(j)  of the Disclosure Schedule, and except as incident to this Agreement and the Transactions contemplated hereby, since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed in the SEC Reports, (i) there has been no event, occurrence or

 

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development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables, accrued expenses and other liabilities incurred in the ordinary course of business consistent with past practice and (B) liabilities (not to exceed $100,000) not required to be reflected in the Company’s financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (iii) the Company has not altered its method of accounting or the identity of its auditors, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its shareholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, and (v) the Company has not issued any equity securities, except pursuant to existing Company stock option and incentive plans and consistent with past practice.

 

(k)            Litigation .  There is no Action which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Shares or (ii) except as specifically disclosed in the SEC Reports, could, if there were an unfavorable decision, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect.  Neither the Company nor any Subsidiary, nor any director or officer thereof (in his or her capacity as such), is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty, except as specifically disclosed in the SEC Reports.  There has not been, and to the Knowledge of the Company, there is not pending any investigation by the Commission involving the Company or any current or former director or officer of the Company (in his or her capacity as such).  The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary under the Exchange Act or the Securities Act.

 

(l)             Labor Relations .  No material labor dispute exists or, to the Knowledge of the Company, is imminent with respect to any of the employees of the Company.

 

(m)           Compliance .  Except as specified on Schedule 3.1(m)  of the Disclosure Schedule, neither the Company nor any Subsidiary (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is in violation of any statute, rule or regulation of any Governmental Authority, including without limitation all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety, product quality and safety and employment and labor matters, except in each case as could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect.  To its Knowledge, the Company is in material compliance with all applicable requirements of the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations thereunder, that are applicable to it, except where such noncompliance could not have or reasonably be expected to result in a Material Adverse Effect.  Except as provided in Schedule 3.1(m)  of the Disclosure Schedule all defaults under leases to which the Company is a party have been cured; there are no outstanding notices of default; and the Company is not in default under any of its leases.

 

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(n)            Regulatory Permits .  Except as specified on Schedule 3.1(n)  of the Disclosure Schedule, the Company and the Subsidiaries possess all certificates, authorizations and Permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such Permits could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, and neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any such Permits.

 

(o)            Patents and Trademarks .  The Company and the Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights that are necessary or material for use in connection with their respective businesses as described in the SEC Reports and which the failure to so have could, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect (collectively, the “ Intellectual Property Rights ”).  Except as set forth in the SEC Reports, to the Knowledge of the Company, all such Intellectual Property Rights are enforceable (except for rights subject to pending patent applications and trademark applications as to which no representation is made) and there is no existing infringement or claim of infringement by another Person of any of the Intellectual Property Rights.

 

(p)            Insurance .  The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged.  To the Company’s knowledge, it will be able to renew its and the Subsidiaries’ existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business on terms consistent with market for the Company’s and such Subsidiaries’ respective lines of business.

 

(q)            Transactions with Affiliates and Employees .  Except as set forth in the SEC Reports, none of the officers or directors of the Company and, to the Knowledge of the Company, none of the employees of the Company is presently a party to any material transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the Knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, of the nature or amount that would require disclosure in the SEC Reports.

 

(r)             Internal Accounting Controls .  The Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) Transactions are executed in accordance with management’s general or specific authorizations, (ii) Transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.  The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) for the Company and designed such disclosure controls and procedures to ensure that material

 

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information relating to the Company, including its Subsidiaries, is made known to the certifying officers by others within those entities, particularly during the period in which the Company’s Form 10-K or Form 10-Q, as the case may be, is being prepared.  The Company’s certifying officers have evaluated the effectiveness of the Company’s controls and procedures as of the last day of the period covered by the Form 10-Q for the Company’s most recently ended fiscal quarter (such date, the “ Evaluation Date ”).  The Company presented in its most recently filed Form 10-K or Form 10-Q the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date.  Since the Evaluation Date, there have been no significant changes in the Company’s internal controls (as described in Item 308(c) of Regulation S-K under the Exchange Act) or, to the Company’s Knowledge in other factors that could significantly and adversely affect the Company’s internal controls.  The Company’s auditors have not identified any control deficiency, significant deficiency or material weakness in the Company’s system of internal controls for the 2007 and 2008 fiscal years.

 

(s)            Certain Fees .  Except as described in Schedule 3.1(s)  of the Disclosure Schedule, no brokerage or finder’s fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the Transactions contemplated by this Agreement.  DHW shall have no obligation with respect to any fees or with respect to any claims (other than such fees or commissions owed by DHW pursuant to written agreements executed by DHW, which fees or commissions shall be the sole responsibility of DHW) made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the Transaction.

 

(t)             Certain Registration Matters .  Assuming the accuracy of DHW’s representations and warranties set forth in Section 3.2(b)-(e), no registration under the Securities Act is required for the offer and sale of the Shares by the Company to DHW under the Transaction Documents.  As of the date of this Agreement, the Company is eligible to register the resale of its Common Stock by DHW on Form S-3 promulgated under the Securities Act.  Except as specified in Schedule 3.1(t)  of the Disclosure Schedule, the Company has not granted or agreed to grant to any Person any rights (including “piggy-back” registration rights) to have any securities of the Company registered with the Commission or any other Governmental Authority that have not been satisfied or exercised.

 

(u)            Listing and Maintenance Requirements .  Except as specified in Schedule 3.1(u)  of the Disclosure Schedule or in the SEC Reports, the Company has not, in the two years preceding the date hereof, received notice from any trading market to the effect that the Company is not in compliance with the listing or maintenance requirements thereof.  The Company makes no representation that it will be in compliance with the listing and maintenance requirements for continued listing of the Common Stock on the trading market on which the Common Stock is currently listed or quoted.  Subject to NASDAQ’s approval of an exception to shareholder approval requirements for the Transaction, and assuming no withdrawal thereof, the issuance and sale of the Shares under the Transaction Documents at the Closing does not contravene the NASDAQ Listing Rules.

 

(v)            Investment Company .  The Company is not, and is not an Affiliate of, and immediately following the Closing will not have become, an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

 

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(w)           Application of Takeover Protections .  The Company has not adopted any poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s Articles of Incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to DHW or shareholders of the Company prior to the Closing Date as a result of DHW and the Company fulfilling their obligations or exercising their rights under the Transaction Documents.

 

3.2            Representations and Warranties of DHW .  DHW hereby, for itself, and on behalf of its members, represents and warrants to the Company as follows:

 

(a)            Organization; Authority .  DHW is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite corporate or partnership power and authority to enter into and to consummate the Transactions contemplated by the Transaction Documents and otherwise to carry out its obligations thereunder.  The execution, delivery and performance by DHW of the Transactions contemplated by the Transaction Documents has been duly authorized by all necessary corporate or, if DHW is not a corporation, such partnership, limited liability company or other applicable like action, on the part of DHW.  Each of the Transaction Documents has been duly executed by DHW, and when delivered by DHW in accordance with terms hereof, will constitute the valid and legally binding obligation of DHW, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application.

 

(b)            Investment Intent .  DHW is acquiring the Shares as principal for its own account for investment purposes only and not with a view to or for distributing or reselling such Shares or any part thereof, without prejudice, however, to DHW’s right at all times to sell or otherwise dispose of all or any part of such Shares in compliance with applicable federal and state securities laws.  Except as provided in Section 2.5, nothing contained herein shall be deemed a representation or warranty by DHW to hold the Shares for any period of time.  DHW does not have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Shares.

 

(c)            DHW Status .  At the time DHW was offered the Shares, it was, and at the date hereof it is, an “accredited investor” as defined in Rule 501(a) under the Securities Act.  Neither DHW nor any of its members is a registered broker-dealer or agent thereof under Section 15 of the Exchange Act.

 

(d)            General Solicitation .  DHW is not purchasing the Shares as a result of any advertisement, article, notice or other communication regarding the Shares published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.

 

(e)            Access to Information .  DHW acknowledges that it has reviewed the Disclosure Materials and has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Shares and the merits and risks of investing in the Shares; (ii) access to information about the Company and the Subsidiaries and their respective financial

 

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condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information that the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment.

 

(f)             Certain Trading Activities .  Neither DHW nor any of its members has directly or indirectly, nor has any Person acting on behalf of or pursuant to any understanding with DHW, engaged in any trading in any securities of the Company (including, without limitations, any Short Sales (defined below) involving the Company’s securities) during the 20 trading days prior to the time that the Transactions contemplated by this Agreement are to be publicly disclosed by the Company.  For purposes of this Section, “Short Sales” include, without limitation, all “Short Sales” under Regulation SHO of the Exchange Act and include all types of direct and indirect stock pledges, forward sale contracts, options, puts, calls, short sales, swaps and similar arrangements (including on a total return basis), and sales and other Transactions through non-US broker dealers or foreign regulated brokers having the effect of hedging the Shares.  As of the date of this Agreement, neither DHW nor any of its members or Affiliates has an open short position in the Common Stock, and covenants that neither it nor any Person acting on its behalf or pursuant to any understanding with it will engage in any Short Sales prior to the public disclosure of the material terms of this transaction by the Company.  For a period of one year following the date of this Agreement, neither DHW nor any of its Affiliates shall effect any Short Sale of any security of the Company; provided , however , that such restriction shall cease following any repurchase by the Company of its Shares from DHW pursuant to Section 2.5 hereof.

 

(g)            Independent Investment Decision .  DHW has independently evaluated the merits of its decision to purchase Shares pursuant to this Agreement, and confirms that it has not relied on the advice of the Company or any of its advisors.

 

(h)            DHW acknowledges that the certificates evidencing the Shares will be imprinted with a legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for the Shares):

 

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION TO THE COMPANY FROM COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

 

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4.1            General .  Each of the parties will use its reasonable commercial efforts to take all action and to do all things necessary, proper, or advisable in order to consummate and make effective the Transaction (including satisfaction of their respective Closing Conditions set forth in Sections 5.2 and 5.3 hereof).

 

4.2            Deferred and Reduced Rent Payments .  One of the Dunham Landlords is the “Landlord” under each of the leases as described on Exhibit D (collectively, the “ Restaurant Leases ”).

 

(a)            For all rent payments due on and after June 1, 2009 and until the earlier of the Financing Date (defined below), or the first anniversary of the Closing Date under the Restaurant Leases, the Dunham Landlords agree to defer each payment of rent once for one month (the “ Deferred Rent System ”).  For example, each rent payment due on October 1, 2009 shall be payable on November 1, 2009.

 

(b)            For all rent payments due on and after June 1, 2009 under the Restaurant Leases, the Dunham Landlords agree to reduce each rent payment by thirty percent (30%) (the “ Reduced Rent System ”).  The total amount of rent reductions granted under this Section 4.2 shall be payable by the Company as described in subsection (c) below.

 

(c)            The Deferred Rent System and the Reduced Rent System shall be in effect until the earlier of: (i) the date on which the Company has obtained aggregate net proceeds of at least $2,000,000, from any combination of debt or equity financings (the “ Financing Date ”) or (ii) the first anniversary of the Closing Date.  At the earlier of the Financing Date or the first anniversary of the Closing Date, the Company shall (i) pay the Dunham Landlords the total amount of rent reductions granted in Section 4.2(b) above in one lump sum, without any accrued interest.

 

4.3            Access .

 

(a)            The Company will permit, and will cause each of its Subsidiaries to permit, representatives of DHW (including legal counsel and accountants) to have, upon prior written notice, reasonable access during normal business hours and under reasonable circumstances, and in a manner so as not to interfere with the normal business operations of the Company and its Subsidiaries, to the premises, personnel, books, records (including tax records), contracts, and documents of or pertaining to the Company and each of its Subsidiaries.  DHW agrees that it shall not use or disclose, or permit access to, Confidential Information of the Company other than for the purposes related to this Agreement and shall cause its respective representatives and other recipients of Confidential Information to comply with this Agreement with respect to the Confidential Information disclosed pursuant to this Section 4.3, which agreement and obligation will remain in full force and effect until the Confidential Information has been publicly disclosed by the Company or ceases to be deemed by the Company to be Confidential Information.  Notwithstanding the foregoing, DHW may share Confidential Information with its bankers, potential lenders and potential investors in DHW; provided that such persons are informed by DHW of the confidential nature of the Confidential Information and DHW believes in good faith that such persons will maintain the confidentiality of the Confidential Information.

 

(b)            Notwithstanding anything herein to the contrary (including in the Confidentiality Agreement), any party to this Agreement (and each employee, representative, or other agent of such parties) may disclose to any and all Persons, without limitation of any kind, the U.S. “tax

 

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treatment” or “tax structure” (in each case, within the meaning of Treasury Regulation section 1.6011-4) of the Transaction and all materials of any kind (including opinions or other tax analysis) that are provided to such parties relating to such U.S. “tax treatment” and “tax structure” (in each case, within the meaning of Treasury Regulation section 1.6011-4); provided, that such disclosure may not be made (i) until the earlier of (x) the date of public announcement of discussions relating to the Transactions, (y) the date of the public announcement of the Transactions contemplated by this Agreement, or (z) the date of execution of this Agreement, and (ii) to the extent required to be kept confidential to comply with any federal or state securities law.  The intent of this provision is that the Transaction is not treated as having been offered under conditions of confidentiality for purposes of Treasury Regulation section 1.6011-4(b)(3) and shall be construed in a manner consistent with such purpose.

 

4.4            Litigation .  From the date hereof and through the Closing Date, the Company will notify DHW in writing of any material injunctions, orders or Proceedings that from the time hereafter are, to the Company’s Knowledge, threatened or commenced against the Company or any of its Subsidiaries or against any officer, director or employee of the Company or any of its Subsidiaries relating to the Company, any Subsidiary or their respective businesses.

 

4.5            Notice of Developments .  The Company shall promptly notify DHW of any event or occurrence that has as its basis an event or occurrence (a “Development” ) which would cause a breach at the Closing of any of the representations and warranties in Section 3.1 above.  The Company and DHW shall discuss in good faith for a period of five (5) Business Days whether to amend the material terms and provisions of this Agreement in light of such a Development.  If no agreement regarding an amendment is reached after said five (5) Business Days, DHW shall have the right to give notice of termination of this Agreement pursuant to Section 6.1(c)(i) below by reason of the Development (provided that the Development qualifies as grounds for termination pursuant to Section 6.1(c)(i) and delivers such notice within the period of five (5) Business Days of the expiration of the discussion period referred to above).  The Company will then have the thirty (30) day cure period specified in Section 6.1(c)(i).  In the event the Company elects not to cure, and DHW elects not to terminate this Agreement at the end of said cure period, the written notice pursuant to this Section 4.5 will be deemed to have amended the Disclosure Materials, to have qualified the representations and warranties contained in Article 4 above, and to have cured any misrepresentation or breach of warranty that otherwise might have existed hereunder by reason of the Development.

 

4.6            Waiver of Approval by Company Shareholders .

 

The Company has filed an application with NASDAQ for a financial viability exception pursuant to NASDAQ Listing Rule 5635(f) for a waiver of the requirement that the Company obtain shareholder approval for the sale of securities in excess of twenty percent (20%) of its outstanding Common Stock and for the sale of securities which would result in a change of control of the Company.  The Company was notified by NASDAQ by letter dated August 3, 2009, that the exception has been granted.

 

4.7            Alternative Transaction .  From the date hereof until the termination hereof, the Company and its officers, directors, employees, investment bankers, consultants and other agents, may take any action to solicit, initiate, encourage or facilitate the making of any Alternative Proposal (as defined below) or any inquiry with respect thereto or engage in

 

17

 

discussions or negotiations with any Person with respect thereto, or disclose any nonpublic information relating to the Company or any of its Subsidiaries or afford access to the properties, books or records of the Company or any of its Subsidiaries to, any Person that has made any Alternative Proposal.  The Company will promptly notify DHW (which notice shall be provided orally and in writing, shall identify the Person making such Alternative Proposal and shall include a copy of any written document setting forth the proposed terms of such Alternative Proposal provided to the Company by such Person) after receipt of any Alternative Proposal, but in no event more than forty-eight (48) hours after receipt of an Alternative Proposal, if the Company is prepared to provide such Person with access to such nonpublic information or properties, books or records.

 

If the Board of Directors of the Company shall determine that an Alternative Proposal is a Superior Proposal (as defined below), (a) the Company shall notify DHW in writing of such determination (prior to any communication of such fact to the Person making the Alternative Proposal), and (b) the Company shall provide DHW with copies of any written nonpublic information about the Company’s business provided by the Company to the Person making the Alternative Proposal and any written modifications to the initial Alternative Proposal provided by such Person to the Company.  If the Board of Directors of the Company shall determine, after consulting with its legal counsel and receiving the written opinion of its financial advisor, that the Alternative Proposal is a Superior Proposal, the Company may terminate this Agreement as provided in Section 6.1(d).

 

For purposes of this Agreement, “Alternative Proposal” means any written offer or proposal for, or any indication of interest in, a merger or other business combination involving the Company or any of its Subsidiaries or the acquisition of a majority of the equity in, or all or substantially all of the assets of, the Company, other than the Transaction.  For purposes of this Agreement, “Superior Proposal” means any bona fide Alternative Proposal on terms that the Board of Directors of the Company determines in its good faith judgment (based on the advice of the Company’s financial advisor and legal counsel, taking into account all the terms and conditions of the Alternative Proposal, including any break up fees, expense reimbursement provisions and conditions to consummation) are more favorable to the Company’s shareholders than this Agreement and the Transaction taken as a whole.

 

4.8            Deliveries to be Made at the Closing .

 

(a)            Company Deliverables .  At the Closing, the Company shall deliver to DHW the following Company Deliverables:

 

(i)             a certificate of the Company to the effect that each of the conditions specified in Sections 5.3 are satisfied in all respects;

 

(ii)            certificates (or copies thereof) evidencing the Shares, in such denominations as DHW informs the Company at least forty-eight (48) hours prior to the Closing, registered in the name of DHW or its nominee;

 

(iii)           certificates of good standing or their equivalent for the Company and each of its Subsidiaries, issued by the Secretary of State or similar official of the state of incorporation;

 

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(iv)           a certificate of the Secretary of the Company that the Company has received a waiver from NASDAQ of the shareholder approval requirement;

 

(v)            evidence that Steven J. Wagenheim, James G. Gilbertson and Darius H. Gilanfar have entered into the amendments to their employment agreements in the form of Exhibits E, F and G , respectively;

 

(vi)           the written consents and approvals set forth in Schedule 3.1(e);

 

(vii)          a waiver and consent from Harmony Equity Income Fund and Harmony Equity Income Fund II with respect to certain covenants, restrictions and provisions set forth in the Company’s Bridge Loan Agreement dated March 30, 2009;

 

(viii)         a certificate of the Chairman and Secretary of the Company certifying that:  (a) two of the Company’s incumbent directors have resigned from the Company’s Board of Directors effective upon the Closing of the Transaction; that the Company’s Board of Directors has been increased to seven persons; (b) that the Board of Directors has resolved to fill the vacancies resulting from such resignations and additional director positions with the DHW Nominees, as defined in Section 4.11, contingent upon Closing the Transaction; and (c) that the Company’s Board of Directors, or a committee thereof, have approved this Agreement and the execution and delivery thereof;

 

(ix)            Registration Rights Agreement in the form of Exhibit C hereto;

 

(x)             a certificate of the Chairman and Secretary of the Company to the effect that the Audit Committee of the Company’s Board of Directors has approved the Transaction pursuant to Minnesota Business Corporation Act and NASDAQ Marketplace Rules (if applicable); and

 

(xi)            An amendment to each Restaurant Lease reflecting the 2009 and 2010 rent concessions and the reduced Initial Term of each location; and

 

(xii)           Amendment to Master Agreement in the form attached hereto as Exhibit A .

 

(b)            DHW Deliverables .  At the Closing, DHW shall deliver to the Company the following:

 

(i)             a certificate of the Company to the effect that each of the conditions specified in Section 5.2 is satisfied in all respects;

 

(ii)            Termination of Equipment Lease and Bill of Sale in the form attached hereto as Exhibit B ; and other instruments of conveyance to the Company, free and clear of all Liens, good title, ownership to, and possession of, all tangible and intangible property that is subject to Equipment Lease;

 

(iii)           Registration Rights Agreement in the form attached hereto as Exhibit C ;

 

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(iv)           Amendment to Master Agreement in the form attached hereto as Exhibit A ;

 

(v)            An amendment to each Restaurant Lease reflecting the 2009 and 2010 rent concessions and the reduced Initial Term of each location; and

 

(vi)           Master Amendment to Leases in the form attached hereto as Exhibit J relating to the deferred and reduced rent payments under the Restaurant Leases and the waiver of any defaults under the Restaurant Leases.

 

4.9            Securities Laws Matters .

 

(a)            Resale of Shares .  Subject to the terms of this Agreement, the Shares may be disposed of in compliance with state and federal securities laws.  In connection with any transfer of the Shares other than pursuant to an effective registration statement, the Company may require the transferor thereof, at its expense, to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Shares under the Securities Act.

 

(b)            Furnishing of Information .  As long as DHW owns at least ten percent of the Company’s outstanding Common Stock, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act.  As long as DHW owns Shares, if the Company is not required to file reports pursuant to such laws, it will prepare and furnish to DHW and make publicly available in accordance with Rule 144(c) such information as is required for DHW to sell the Shares under Rule 144.  The Company further covenants that it will take such further action as any holder of Shares may reasonably request, all to the extent required from time to time to enable such Person to sell the Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144.

 

4.10          Participation Rights .  If at any time prior to the two-year anniversary of the Closing Date, the Company proposes to issue any Common Stock or securities convertible into or exercisable for Common Stock in a private placement transaction (collectively, “New Issue Shares” ), DHW shall have a right to purchase, at the time or times of the issuance of any New Issue Shares, up to that number of New Issue Shares which, when added to the number of Shares then held by DHW, on a post-issuance basis, shall constitute the same percentage of the Company’s outstanding shares of voting stock as the percentage held by DHW prior to the issuance of New Issue Shares  ( “DHW’s Proportionate Share” ).

 

(a)            The Company shall, on a confidential basis, give a written notice to DHW (the “ Notice ”) stating (i) its intention to issue the New Issue Shares, (ii) the number and description of the New Issue Shares proposed to be issued and (iii) the purchase price (calculated as of the proposed issuance date) and (iv) the other terms and conditions upon which the Company is offering the New Issue Shares.

 

(b)            For a period of ten (10) Business Days after receipt of the of the Notice, DHW shall have the option, exercisable by written notice to the Company, to purchase all or any part of

 

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DHW’s Proportionate Share of the New Issue Shares, in accordance with the terms and conditions of the Notice, and subject to the closing of the sale of the New Issue Shares.  If two or more types of New Issue Shares are to be issued or New Issue Shares are to be issued together with other types of securities, including, without limitation, debt, in a single transaction or related Transactions, the rights to purchase New Issue Shares granted to DHW under this Section must be exercised to purchase all types of New Issue Shares and such other securities in the same proportion as such New Issue Shares and other securities are to be issued by the Company.

 

(c)            The participation rights contained in this Section shall not apply to the issuance and sale by the Company of (i) New Issue Shares to employees, officers, or directors of the Company, as compensation for their services to the Company or any of its direct or indirect Subsidiaries pursuant to arrangements approved by the Board of Directors of the Company and consistent with past practice, (ii) New Issue Shares pursuant to the Transaction Documents, (iii) New Issue Shares issued as consideration for the acquisition of another company or business in which the shareholders of the Company do not have an ownership interest, which acquisition has been approved by the Board of Directors of the Company, or (iv) or the issuance of New Issue Shares pursuant to the exercise of conversion or purchase rights pursuant to issued and outstanding convertible securities, options or warrants.

 

4.11          Board Composition; Board Observers .  DHW has designated to the Company’s Corporate Governance and Nominating Committee (the “Committee”) four persons (the “DHW Nominees”) to serve on the Company’s Board of Directors, commencing upon the Closing Date.  No more than one of the DHW Nominees will be affiliated with DHW or its Affiliates and at least two of the DHW Nominees will be “independent directors” under NASDAQ Listing Rules.  As a condition to the Closing, two of the Company’s five incumbent directors shall resign from the Company’s Board of Directors, to be effective upon the Closing.  DHW agrees that it may exercise its nomination right only once, except that if any of the DHW Nominees resign from the Company’s Board of Directors before the Company’s 2010 annual meeting of shareholders, the Company agrees that DHW may designate a successor director for nomination by the Committee and appointment to the Company’s Board of Directors, and the Company will use reasonable commercial efforts to cause the Committee to recommend such successor to fill such vacancy and to cause its Board of Directors to elect such successor, all subject to the exercise of their fiduciary duties to the Company.

 

It shall be a condition to the obligations of DHW under this Agreement that the Committee shall approve the nomination of the DHW Nominees and the Board of Directors shall increase the number of directors of the Company from five to seven persons; two of the Company’s five incumbent directors shall have resigned; and subject to the Closing, the Board of Directors shall have elected the DHW Nominees to fill the vacancies on the Board of Directors.

 

The Company further agrees that for as long as DHW owns at least 25% of the Shares, it may designate up to two representatives of DHW who shall be invited to attend regularly scheduled Board meetings as observers.  Such observers may be excluded from all or any portion of a meeting where their presence could reasonably result in (i) the disclosure of trade secrets or other Confidential Information to a competitor; or (ii) the loss of the attorney-client privilege.  All such observers shall enter into a confidentiality agreement with the Company prior to exercising their observation rights.  Subject to the immediately preceding sentence, such

 

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observers shall be entitled to receive all materials provided to Board members and shall be invited to attend all Board training and education sessions.

 

4.12          Employment Agreement Amendments .  The Company will offer to Stephen J. Wagenheim, James G. Gilbertson and Darius Gilanfar one-year employment agreements in the form of amendments to their employment agreements attached hereto as Exhibits C, D and E, respectively, (the “Employment Agreement Amendments”) and enter into such agreements effective on the Closing Date.

 

ARTICLE V.

CONDITIONS PRECEDENT TO CLOSING

 

5.1            Conditions to Obligations of Each Party Under this Agreement .  The respective obligations of each party to this Agreement to effect the Transaction shall be subject to the satisfaction at or prior to the Closing Date of the following conditions, any or all of which may be waived, in whole or in part, to the extent permitted by Applicable Law.

 

(a)            Approval by NASDAQ .  NASDAQ shall have approved a financial viability exception under NASDAQ Listing Rule 5635(f) for the Transaction, which approval shall not have been revoked, and waived the requirement for shareholder approval of the Transaction.

 

(b)            Proceedings .  There shall not be any (i) Proceedings which have been commenced against any of the parties hereto by any Person involving or affecting in any way the consummation of the Transaction, or (ii) Applicable Laws, orders or injunctions restraining or enjoining the consummation of the Transaction.

 

(c)            Consents .  The Company and DHW shall have received evidence, in form and substance reasonably satisfactory to DHW and the Company, that all Consents, waivers, releases, authorizations, approvals, licenses, certificates, Permits and franchises of all Persons (including each and every applicable Governmental Authority) set forth in Schedule 3.1(e) have been obtained.  All consents of a Governmental Authority shall be by Final Order; provided , however , that if the parties hereto waive the condition of any Governmental Authority consent by Final Order, the parties shall consider the Governmental Authority consent without Final Order sufficient to proceed to Closing according to the other terms of this Agreement.

 

5.2            Conditions Precedent to the Obligations of DHW .  The obligations of DHW under this Agreement subject to the satisfaction or waiver by DHW, at or before the Closing, of each of the following conditions:

 

(a)            Representations and Warranties .  The representations and warranties of the Company contained herein shall be true and correct in all material respects as of the date when made and as of the Closing as though made on and as of such date;

 

(b)            Performance .  The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by it at or prior to the Closing;

 

(c)            No Injunction .  No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or

 

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Governmental Authority of competent jurisdiction that prohibits the consummation of any of the transactions contemplated by the Transaction Documents;

 

(d)            Adverse Changes .  Since the date of execution of this Agreement, no event or series of events shall have occurred that reasonably could have or result in a Material Adverse Effect;

 

(e)            No Suspensions of Trading in Common Stock; Listing .  Trading in the Common Stock shall not have been suspended by the Commission or any trading market (except for any suspensions of trading of not more than one trading day solely to permit dissemination of material information regarding the Company) at any time since the date of execution of this Agreement, and the Common Stock shall have been at all times since such date listed for trading on a trading market;

 

(f)             Company Deliverables .  The Company shall have delivered the Company Deliverables in accordance with Section 4.8(a);

 

(g)            Officer’s Closing Certificate .  The Company shall have delivered to DHW an officer’s certificate to the effect that each of the conditions specified in Sections 5.1(a) - 5.1(d) is satisfied in all respects; and

 

(h)            Third Party Consents and Agreements .  DHW shall have obtained the third party consents and agreements set forth in Exhibit I .

 

5.3            Conditions Precedent to the Obligations of the Company .  The obligation of the Company under this Agreement to sell Shares is subject to the satisfaction or waiver by the Company at or before the Closing, of each of the following conditions:

 

(a)            Representations and Warranties .  The representations and warranties of DHW contained herein shall be true and correct in all material respects as of the date when made and as of the Closing as though made on and as of such date;

 

(b)            Performance .  DHW shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by DHW at or prior to the Closing;

 

(c)            No Injunction .  No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or Governmental Authority of competent jurisdiction that prohibits the consummation of any of the transactions contemplated by the Transaction Documents;

 

(d)            Fairness Opinion .  Prior to the execution and delivery of this Agreement, the Company has received a written opinion of KeyBanc Capital Markets to the effect that as of the date of its opinion and based upon and subject to the matters set forth therein, the consideration to be received by the Company pursuant to this Agreement is fair from a financial point of view to the Company, and such opinion has not been withdrawn or revoked or otherwise modified in any material respect. The Company will provide to DHW a copy of the opinion promptly after the date of this Agreement solely for information purposes.

 

(e)            Cancellation of Indebtedness .  DHW shall have executed and delivered to the Company the Termination of Equipment Lease and Assignment and Bill of Sale and such

 

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additional agreements or other documentation as the Company may reasonably require to cause the cancellation of the Indebtedness in accordance with Section 2.3; and

 

(f)             DHW Deliverables .  DHW shall have delivered the DHW Deliverables in accordance with Section 4.8(b).

 

ARTICLE VI.

TERMINATION

 

6.1            Termination of Agreement .  The parties may terminate this Agreement as provided below:

 

(a)            DHW and the Company may terminate this Agreement by mutual written consent at any time prior to the Closing;

 

(b)            DHW or the Company may terminate this Agreement without liability by giving written notice to the other party prior to the Closing if (i) the consummation of the Transaction is permanently prohibited by any Applicable Law, injunction or order; provided that the party seeking to terminate this Agreement shall not have proximately contributed to the issuance of such injunction or order by breach of the terms of this Agreement or by a violation of Applicable Law, or (ii) the Closing shall not have occurred on or before November 30, 2009; provided , however , no such right of the terminating party shall exist in the event that the parties’ failure to consummate the Closing by November 30, 2009 results primarily from a breach of any representation, warranty or covenant contained in this Agreement by the terminating party;

 

(c)            DHW may terminate this Agreement by giving written notice to the Company at any time prior to the Closing in the event (i) the Company has breached any representation, warranty, or covenant contained in this Agreement in any material respect, DHW has notified the Company of the breach, and the breach has continued without cure (such cure to be to the reasonable satisfaction of DHW) for a period of thirty (30) days after the notice of breach and results in a Material Adverse Effect on the Company and its Subsidiaries, taken as a whole, or (ii) the Board of Directors of the Company shall have received an Alternative Proposal, and such Board of Directors:  (i) has determined that such Alternative Proposal is a Superior Proposal in accordance and in compliance with Section 4.7 of this Agreement; or (ii) has recommended to the Company’s Shareholders any Superior Proposal; and

 

(d)            The Company may terminate this Agreement by giving written notice to DHW at any time prior to the Closing in the event (i) DHW has breached any representation, warranty, or covenant contained in this Agreement in any material respect, the Company has notified DHW of the breach, and the breach has continued without cure (such cure to be to the reasonable satisfaction of the Company) for a period of thirty (30) days after the notice of breach, or (ii) the Board of Directors of the Company shall have received an Alternative Proposal which such Board of Directors has determined is a Superior Proposal in accordance and in compliance with Section 4.7 of this Agreement; provided , however , that, in the case of (ii) above, the Company shall have paid the Termination Fee and Termination Expense payments to DHW required by Section 6.2(b) in order for this Agreement to be fully and finally terminated.

 

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