Einstein Bros 2002 Annual Report Download - page 83

http://www.sec.gov/Archives/edgar/data/949373/000104746903027186/a2116520z10-ka.htm[9/11/2014 10:14:22 AM]
thirty days from the date of the filing of the second amended complaint to refile the demurrer.
In July 2002, the New Jersey Division of Taxation entered judgment in the amount of $5,744,902, plus costs, against Manhattan Bagel
Construction Company, a wholly owned subsidiary of Manhattan Bagel Company. This judgment represents amounts for corporate income taxes
for the period from 1996 to 2000, and sales and use taxes for the period from 1995 to 1997. At that same time, the Division of Taxation provided
Manhattan Bagel Construction Company with a Notice and Demand for Payment of Tax in the additional amount of $130,200, for corporate
income taxes and sales and use taxes for the period from October 2001 through June 2002. Manhattan Bagel Construction Company ceased
operations in or about early 1997 and has existed since that time only as a non-operating entity with no assets. Therefore, the Company is currently
working with the New Jersey Division of Taxation to have all tax assessments for the period after Manhattan Bagel Construction Company ceased
operations removed, and that portion of the judgment deemed satisfied. With regard to taxes imposed for the period prior to early 1997, the
Company believes those amounts are barred from being asserted against Manhattan Bagel Company, to the extent they otherwise could have been,
because they were not asserted in Manhattan Bagel Company's November 1997 bankruptcy proceeding.
On February 23, 2000, New World Coffee of Forest Hills, Inc., a franchisee, filed a demand for arbitration with the American Arbitration
Association (American Arbitration Association, New York, New York, Case No. 13-114-237-00) against the Company alleging fraudulent
inducement and violations of New York General Business Law Article 33. The franchisee seeks damages in the amount of $750,000. New World
has asserted a counterclaim in the arbitration seeking amounts owed under the franchisee's franchise agreement and monies owed for goods
purchased by the franchisee in the amount of $200,000. An arbitrator has been selected and document exchange is complete. Hearings were
scheduled for June 2002 but have been postponed by order of the arbitrator.
On October 28, 2002, Sansim Patel, Inc., a subfranchisee of Manhattan Bagel Company, filed suit against Manhattan Bagel Company, the
master franchisee, and others in Orange County (Orlando, Florida). The plaintiff alleges claims of civil conspiracy and unjust enrichment against
Manhattan Bagel Company and seeks rescission of its franchise agreement with Manhattan Bagel Company. The plaintiff also seeks damages in an
unspecified amount. In December 2002, the Company filed a motion to dismiss all of the claims asserted against it by the plaintiff, based in part on
a general release the plaintiff had previously executed in favor of Manhattan Bagel Company. That motion remains pending
F-53
with the Court. However, on March 18, 2003, default judgments were obtained against the other named defendants.
On March 17, 2003, Jason and Andrew Gennusa, former employees of the Company and founders of Manhattan Bagel Company, filed suit
against the Company in the Superior Court of New Jersey, Monmouth County. As the founders of Manhattan Bagel Company, the plaintiffs claim
to be reproducing the "original formula" Manhattan Bagel dough, and selling it to franchisees at a competitive price. Their complaint seeks a
judgment declaring that their production and sale of this bagel dough to franchisees does not violate various non-competition covenants and
confidentiality agreements they previously entered into with the Company. Furthermore, the plaintiffs seek a declaration that the "original recipe"
bagel dough they manufacture is not a trade secret of the Company and that their manufacture and sale of the dough is not in violation of
intellectual property law. The Company has not yet answered or otherwise responded to plaintiffs' complaint.
On December 28, 2001, Robert Higgs, a franchisee, filed a complaint against the Company and its officers and agents in New Jersey (Superior
Court of New Jersey, Case No. OCN-L-2153-99) alleging breach of contract, breach of fiduciary duties and tortuous interference with contract and
business opportunities. The complaint was subsequently withdrawn by the franchisee without prejudice. In February 2002, the franchisee filed a
new complaint against the Company and its officers and agents alleging breach of contract, breach of fiduciary duties, tortuous interference with
contract and business opportunities, and violations of New Jersey's franchise law. The franchisee seeks damages in an unspecified amount, punitive
damages, costs and attorneys' fees. The Company moved to dismiss all of the claims in the new complaint. The court dismissed the breach of
fiduciary duty claims and one of the breach of contract claims. Discovery requests have been served by the Company.
Given the early stage of these matters, the Company cannot predict their outcome. However, there can be no assurance that the Company will
not be subject to regulatory sanctions, civil penalties and/or claims for monetary damages or other relief.
Special Situations, holders of Series F preferred stock, had notified the Company that they believe that material misrepresentations were made
to them in June 2001 in connection with their purchase of the stock. Special Situations filed a complaint in the United States District Court for the
Southern District of New York regarding this claim. Special Situations alleged various contractual and tort claims against the Company, as well as
Ramin Kamfar, the former Chairman of the Board of Directors, Jerold Novack, the former Chief Financial Officer, and Greenlight Capital, another
holder of the Series F preferred stock. Special Situations sought, among other relief, damages in the amount of at least $5,166,000 and the equitable
remedy of rescission of its purchase of stock. These claims are still pending.
On February 28, 2003, the Company's former insurance broker of record filed suit in Superior Court of the State of California, County of
Orange, against the Company and its subsidiaries, alleging wrongful termination of the Company's brokerage contract with plaintiff, Pension &